Attached files
file | filename |
---|---|
EX-12.1 - RATIO OF EARNINGS - CIT GROUP INC | e65375ex12.htm |
EX-32.1 - CERTIFICATIONS - CIT GROUP INC | e65375ex32-1.htm |
EX-31.1 - CERTIFICATIONS - CIT GROUP INC | e65375ex31-1.htm |
EX-32.2 - CERTIFICATIONS - CIT GROUP INC | e65375ex32-2.htm |
EX-31.2 - CERTIFICATIONS - CIT GROUP INC | e65375ex31-2.htm |
XML - IDEA: XBRL DOCUMENT - CIT GROUP INC | R9999.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2015 |
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-31369
CIT GROUP INC.
(Exact name of Registrant as specified in its
charter)
Delaware (State or other jurisdiction of incorporation or organization) |
65-1051192 (IRS Employer Identification Number) |
|||||
11 West 42nd
Street New York, New York (Address of Registrants principal executive offices) |
10036 (Zip Code) |
|||||
(212)
461-5200 (Registrants 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 |_|
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. See the definitions of ‘large accelerated
filer, ‘accelerated filer and ‘smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One): 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 31, 2015 there were 171,029,594 shares of the
registrants common stock outstanding.
2 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
41 | ||||||||
41 | ||||||||
87 | ||||||||
88 | ||||||||
88 | ||||||||
88 | ||||||||
89 | ||||||||
89 | ||||||||
95 |
Table of Contents 1
CIT GROUP INC. AND SUBSIDIARIES
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||
Cash and due
from banks, including restricted balances of $584.4 and $374.0 at June 30, 2015 and December 31, 2014(1), respectively |
$ | 1,240.5 | $ | 878.5 | ||||||
Interest
bearing deposits, including restricted balances of $212.3 and $590.2 at June 30, 2015 and December 31, 2014(1), respectively |
4,224.8 | 6,241.2 | ||||||||
Securities
purchased under agreements to resell |
750.0 | 650.0 | ||||||||
Investment
securities |
1,692.9 | 1,550.3 | ||||||||
Assets held for
sale(1) |
1,086.8 | 1,218.1 | ||||||||
Loans (see Note
7 for amounts pledged) |
19,649.3 | 19,495.0 | ||||||||
Allowance for
loan losses |
(350.9 | ) | (346.4 | ) | ||||||
Total loans,
net of allowance for loan losses(1) |
19,298.4 | 19,148.6 | ||||||||
Operating lease
equipment, net (see Note 7 for amounts pledged)(1) |
15,109.6 | 14,930.4 | ||||||||
Unsecured
counterparty receivable |
538.2 | 559.2 | ||||||||
Goodwill |
565.9 | 571.3 | ||||||||
Other assets,
including $101.5 and $168.0 at June 30, 2015 and December 31,
2014(1), respectively, at fair value |
2,150.1 | 2,132.4 | ||||||||
Total
Assets |
$ | 46,657.2 | $ | 47,880.0 | ||||||
Liabilities |
||||||||||
Deposits |
$ | 17,267.8 | $ | 15,849.8 | ||||||
Credit balances
of factoring clients |
1,373.3 | 1,622.1 | ||||||||
Other
liabilities, including $88.1 and $62.3 at June 30, 2015 and December 31, 2014, respectively, at fair value |
2,766.9 | 2,888.8 | ||||||||
Long-term
borrowings, including $1,811.8 and $3,053.3 contractually due within twelve months at June 30, 2015 and December 31, 2014, respectively |
16,441.6 | 18,455.8 | ||||||||
Total
Liabilities |
37,849.6 | 38,816.5 | ||||||||
Stockholders Equity |
||||||||||
Common stock:
$0.01 par value, 600,000,000 authorized |
||||||||||
Issued:
204,323,640 and 203,127,291 at June 30, 2015 and December 31, 2014, respectively |
2.0 | 2.0 | ||||||||
Outstanding:
172,998,363 and 180,920,575 at June 30, 2015 and December 31, 2014, respectively |
||||||||||
Paid-in
capital |
8,615.6 | 8,603.6 | ||||||||
Retained
earnings |
1,781.1 | 1,615.7 | ||||||||
Accumulated
other comprehensive loss |
(158.8 | ) | (133.9 | ) | ||||||
Treasury
stock: 31,325,277 and 22,206,716 shares at June 30, 2015 and December 31, 2014, respectively, at cost |
(1,432.8 | ) | (1,018.5 | ) | ||||||
Total Common
Stockholders Equity |
8,807.1 | 9,068.9 | ||||||||
Noncontrolling
minority interests |
0.5 | (5.4 | ) | |||||||
Total
Equity |
8,807.6 | 9,063.5 | ||||||||
Total
Liabilities and Equity |
$ | 46,657.2 | $ | 47,880.0 |
(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 VIE total assets and total liabilities represents the Companys interest 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 Companys interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT. |
Assets |
||||||||||
Cash and
interest bearing deposits, restricted |
$ | 353.8 | $ | 537.3 | ||||||
Assets held for
sale |
122.5 | | ||||||||
Total loans,
net of allowance for loan losses |
3,048.6 | 3,619.2 | ||||||||
Operating lease
equipment, net |
4,194.1 | 4,219.7 | ||||||||
Other |
5.9 | 10.0 | ||||||||
Total
Assets |
$ | 7,724.9 | $ | 8,386.2 | ||||||
Liabilities |
||||||||||
Beneficial
interests issued by consolidated VIEs (classified as long-term borrowings) |
$ | 4,724.1 | $ | 5,331.5 | ||||||
Total
Liabilities |
$ | 4,724.1 | $ | 5,331.5 |
The accompanying notes are an integral part of these
consolidated financial statements.
2 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES
Quarters Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
Interest
income |
||||||||||||||||
Interest and
fees on loans |
$ | 274.8 | $ | 301.4 | $ | 547.2 | $ | 594.8 | ||||||||
Interest and
dividends on interest bearing deposits and investments |
9.0 | 8.4 | 17.6 | 17.2 | ||||||||||||
Interest
income |
283.8 | 309.8 | 564.8 | 612.0 | ||||||||||||
Interest
expense |
||||||||||||||||
Interest on
long-term borrowings |
(193.0 | ) | (206.1 | ) | (395.3 | ) | (426.1 | ) | ||||||||
Interest on
deposits |
(72.2 | ) | (56.1 | ) | (141.2 | ) | (108.0 | ) | ||||||||
Interest
expense |
(265.2 | ) | (262.2 | ) | (536.5 | ) | (534.1 | ) | ||||||||
Net interest
revenue |
18.6 | 47.6 | 28.3 | 77.9 | ||||||||||||
Provision for
credit losses |
(18.4 | ) | (10.2 | ) | (53.0 | ) | (46.9 | ) | ||||||||
Net interest
revenue, after credit provision |
0.2 | 37.4 | (24.7 | ) | 31.0 | |||||||||||
Non-interest
income |
||||||||||||||||
Rental income
on operating leases |
531.7 | 519.6 | 1,062.3 | 1,011.5 | ||||||||||||
Other
income |
63.5 | 93.7 | 149.9 | 164.8 | ||||||||||||
Total
non-interest income |
595.2 | 613.3 | 1,212.2 | 1,176.3 | ||||||||||||
Total
revenue, net of interest expense and credit provision |
595.4 | 650.7 | 1,187.5 | 1,207.3 | ||||||||||||
Other
expenses |
||||||||||||||||
Depreciation
on operating lease equipment |
(157.8 | ) | (157.3 | ) | (314.6 | ) | (306.1 | ) | ||||||||
Maintenance
and other operating lease expenses |
(49.4 | ) | (49.0 | ) | (95.5 | ) | (100.6 | ) | ||||||||
Operating
expenses |
(235.0 | ) | (225.0 | ) | (476.6 | ) | (458.5 | ) | ||||||||
Loss on debt
extinguishment |
(0.1 | ) | (0.4 | ) | (0.1 | ) | (0.4 | ) | ||||||||
Total other
expenses |
(442.3 | ) | (431.7 | ) | (886.8 | ) | (865.6 | ) | ||||||||
Income from
continuing operations before provision for income taxes |
153.1 | 219.0 | 300.7 | 341.7 | ||||||||||||
Provision for
income taxes |
(37.8 | ) | (18.1 | ) | (81.8 | ) | (31.6 | ) | ||||||||
Income from
continuing operations, before attribution of noncontrolling interests |
115.3 | 200.9 | 218.9 | 310.1 | ||||||||||||
Net (income)
loss attributable to noncontrolling interests, after tax |
| (5.7 | ) | 0.1 | | |||||||||||
Income from
continuing operations |
115.3 | 195.2 | 219.0 | 310.1 | ||||||||||||
Discontinued
Operation |
||||||||||||||||
Loss from
discontinued operation, net of taxes |
| (231.1 | ) | | (228.8 | ) | ||||||||||
Gain on sale of
discontinued operation |
| 282.8 | | 282.8 | ||||||||||||
Income from
discontinued operation, net of tax |
| 51.7 | | 54.0 | ||||||||||||
Net
Income |
$ | 115.3 | $ | 246.9 | $ | 219.0 | $ | 364.1 | ||||||||
Basic income
per common share |
||||||||||||||||
Income from
continuing operations |
$ | 0.66 | $ | 1.03 | $ | 1.25 | $ | 1.61 | ||||||||
Income from
discontinued operation |
| 0.27 | | 0.28 | ||||||||||||
Basic income
per share |
$ | 0.66 | $ | 1.30 | $ | 1.25 | $ | 1.89 | ||||||||
Diluted
income per common share |
||||||||||||||||
Income from
continuing operations |
$ | 0.66 | $ | 1.02 | $ | 1.24 | $ | 1.60 | ||||||||
Income from
discontinued operation |
| 0.27 | | 0.28 | ||||||||||||
Diluted
income per share |
$ | 0.66 | $ | 1.29 | $ | 1.24 | $ | 1.88 | ||||||||
Average
number of common shares (thousands) |
||||||||||||||||
Basic |
173,785 | 190,231 | 175,019 | 193,134 | ||||||||||||
Diluted |
174,876 | 191,077 | 175,971 | 194,036 | ||||||||||||
Dividends
declared per common share |
$ | 0.15 | $ | 0.10 | $ | 0.30 | $ | 0.20 |
The accompanying notes are an integral part of these consolidated financial statements.
Item 1. Consolidated Financial Statements
3
CIT GROUP INC. AND SUBSIDIARIES
Quarters Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
Income from
continuing operations, before attribution of noncontrolling interests |
$ | 115.3 | $ | 200.9 | $ | 218.9 | $ | 310.1 | ||||||||
Other
comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign
currency translation adjustments |
3.7 | (3.0 | ) | (24.7 | ) | (7.3 | ) | |||||||||
Changes in
fair values of derivatives qualifying as cash flow hedges |
| (0.1 | ) | | (0.1 | ) | ||||||||||
Net
unrealized gains on available for sale securities |
0.5 | 0.1 | 0.1 | 0.3 | ||||||||||||
Changes in
benefit plans net gain (loss) and prior service (cost)/credit |
0.1 | 1.6 | (0.3 | ) | 3.2 | |||||||||||
Other
comprehensive income (loss), net of tax |
4.3 | (1.4 | ) | (24.9 | ) | (3.9 | ) | |||||||||
Comprehensive
income before noncontrolling interests and discontinued operation |
119.6 | 199.5 | 194.0 | 306.2 | ||||||||||||
Comprehensive
income attributable to noncontrolling interests |
| (5.7 | ) | 0.1 | | |||||||||||
Income from
discontinued operation, net of taxes |
| 51.7 | | 54.0 | ||||||||||||
Comprehensive
income |
$ | 119.6 | $ | 245.5 | $ | 194.1 | $ | 360.2 |
The accompanying notes are an integral part of these consolidated financial statements.
4 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES
Common Stock |
Paid-in Capital |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Loss |
Treasury Stock |
Noncontrolling Minority Interests |
Total Equity |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31,
2014 |
$ | 2.0 | $ | 8,603.6 | $ | 1,615.7 | $ | (133.9 | ) | $ | (1,018.5 | ) | $ | (5.4 | ) | $ | 9,063.5 | |||||||||||||
Net income
(loss) |
219.0 | (0.1 | ) | 218.9 | ||||||||||||||||||||||||||
Other
comprehensive loss, net of tax |
(24.9 | ) | (24.9 | ) | ||||||||||||||||||||||||||
Dividends
paid |
(53.6 | ) | (53.6 | ) | ||||||||||||||||||||||||||
Amortization of
restricted stock, stock option and performance shares expenses and shares withheld to cover taxes upon vesting |
37.5 | (21.6 | ) | 15.9 | ||||||||||||||||||||||||||
Repurchase of
common stock |
(392.7 | ) | (392.7 | ) | ||||||||||||||||||||||||||
Employee stock
purchase plan |
1.0 | 1.0 | ||||||||||||||||||||||||||||
Purchase of
noncontrolling interest and distribution of earnings and capital |
(26.5 | ) | 6.0 | (20.5 | ) | |||||||||||||||||||||||||
June 30,
2015 |
$ | 2.0 | $ | 8,615.6 | $ | 1,781.1 | $ | (158.8 | ) | $ | (1,432.8 | ) | $ | 0.5 | $ | 8,807.6 | ||||||||||||||
December 31,
2013 |
$ | 2.0 | $ | 8,555.4 | $ | 581.0 | $ | (73.6 | ) | $ | (226.0 | ) | $ | 11.2 | $ | 8,850.0 | ||||||||||||||
Net
income |
364.1 | 364.1 | ||||||||||||||||||||||||||||
Other
comprehensive loss, net of tax |
(3.9 | ) | (3.9 | ) | ||||||||||||||||||||||||||
Dividends
paid |
(39.3 | ) | (39.3 | ) | ||||||||||||||||||||||||||
Amortization of
restricted stock, stock option and performance shares expenses and shares withheld to cover taxes upon vesting |
25.9 | (16.6 | ) | 9.3 | ||||||||||||||||||||||||||
Repurchase of
common stock |
(552.1 | ) | (552.1 | ) | ||||||||||||||||||||||||||
Employee stock
purchase plan |
0.7 | 0.7 | ||||||||||||||||||||||||||||
Distribution of
earnings and capital |
0.5 | 0.5 | ||||||||||||||||||||||||||||
June 30,
2014 |
$ | 2.0 | $ | 8,582.0 | $ | 905.8 | $ | (77.5 | ) | $ | (794.7 | ) | $ | 11.7 | $ | 8,629.3 |
The accompanying notes are an integral part of these consolidated financial statements.
Item 1. Consolidated Financial Statements
5
CIT GROUP INC. AND SUBSIDIARIES
Six Months Ended June 30, |
||||||||
---|---|---|---|---|---|---|---|---|
2015 |
2014 |
|||||||
Cash Flows
From Operations |
||||||||
Net
income |
$ | 219.0 | $ | 364.1 | ||||
Adjustments to
reconcile net income to net cash flows from operations: |
||||||||
Provision for
credit losses |
53.0 | 46.9 | ||||||
Net
depreciation, amortization and (accretion) |
334.2 | 586.3 | ||||||
Net gains on
equipment, receivable and investment sales |
(45.6 | ) | (308.7 | ) | ||||
Provision for
deferred income taxes |
53.0 | 5.6 | ||||||
Increase in
finance receivables held for sale |
(134.8 | ) | (64.5 | ) | ||||
Decrease in
other assets |
30.9 | 148.1 | ||||||
(Decrease)
increase in accrued liabilities and payables |
(79.6 | ) | 27.9 | |||||
Net cash flows
provided by operations |
430.1 | 805.7 | ||||||
Cash Flows
From Investing Activities |
||||||||
Loans originated
and purchased |
(6,582.5 | ) | (7,839.8 | ) | ||||
Principal
collections of loans |
5,769.5 | 6,627.2 | ||||||
Purchases of
investment securities |
(5,071.4 | ) | (7,188.8 | ) | ||||
Proceeds from
maturities of investment securities |
4,835.9 | 9,007.5 | ||||||
Proceeds from
asset and receivable sales |
791.6 | 2,120.5 | ||||||
Purchases of
assets to be leased and other equipment |
(888.3 | ) | (1,725.7 | ) | ||||
Net decrease
(increase) in short-term factoring receivables |
91.7 | (15.8 | ) | |||||
Acquisitions,
net of cash received |
| (245.5 | ) | |||||
Change in
restricted cash |
167.4 | 255.5 | ||||||
Net cash flows
(used in) provided by investing activities |
(886.1 | ) | 995.1 | |||||
Cash Flows
From Financing Activities |
||||||||
Proceeds from
the issuance of term debt |
1,020.9 | 1,356.4 | ||||||
Repayments of
term debt |
(3,012.3 | ) | (3,475.0 | ) | ||||
Net increase in
deposits |
1,418.0 | 1,412.8 | ||||||
Collection of
security deposits and maintenance funds |
316.0 | 261.3 | ||||||
Use of security
deposits and maintenance funds |
(306.7 | ) | (221.0 | ) | ||||
Repurchase of
common stock |
(392.7 | ) | (552.1 | ) | ||||
Dividends
paid |
(53.6 | ) | (39.3 | ) | ||||
Purchase of
noncontrolling interest |
(20.5 | ) | | |||||
Net cash flows
used in financing activities |
(1,030.9 | ) | (1,256.9 | ) | ||||
(Decrease)
increase in unrestricted cash and cash equivalents |
(1,486.9 | ) | 543.9 | |||||
Unrestricted
cash and cash equivalents, beginning of period |
6,155.5 | 5,081.1 | ||||||
Unrestricted
cash and cash equivalents, end of period |
$ | 4,668.6 | $ | 5,625.0 | ||||
Supplementary
Cash Flow Disclosure |
||||||||
Interest
paid |
$ | (538.3 | ) | $ | (524.7 | ) | ||
Federal,
foreign, state and local income taxes paid, net |
$ | (17.7 | ) | $ | (16.3 | ) | ||
Supplementary
Non Cash Flow Disclosure |
||||||||
Transfer of
assets from held for investment to held for sale |
$ | 376.9 | $ | 1,213.9 | ||||
Transfer of
assets from held for sale to held for investment |
$ | 43.5 | $ | 31.0 |
The accompanying notes are an integral part of these consolidated financial statements.
6 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CIT Group Inc., together with its subsidiaries (collectively
CIT or the Company), has provided financial solutions to its clients since its formation in 1908. The Company provides
financing, leasing and advisory services principally to middle market companies in a wide variety of industries primarily in North America, and
equipment financing and leasing solutions to the transportation industry worldwide. CIT became a bank holding company (BHC) in December
2008 and a financial holding company (FHC) in July 2013. CIT is regulated by the Board of Governors of the Federal Reserve System
(FRB) and the Federal Reserve Bank of New York (FRBNY) under the U.S. Bank Holding Company Act of 1956. CIT Bank (the
Bank), a wholly-owned subsidiary, is a Utah state chartered bank located in Salt Lake City, and is regulated by the Federal Deposit
Insurance Corporation (FDIC) and the Utah Department of Financial Institutions (UDFI). The Company operates primarily in North
America, with locations in Europe and Asia.
On August 3, 2015, CIT acquired IMB Holdco LLC, the parent
company of OneWest Bank, N.A. (OneWest Bank). See Note 16 Subsequent Events for further information.
BASIS OF PRESENTATION
Principles of Consolidation
The accompanying consolidated financial statements include
financial information related to CIT Group Inc. and its majority-owned subsidiaries and those variable interest entities (VIEs) where the
Company is the primary beneficiary.
In preparing the consolidated financial statements, all
significant inter-company accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included in the
consolidated financial statements.
These consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q for interim financial information and accordingly do not include all information and note disclosures
required by generally accepted accounting principles in the United States of America (GAAP) for complete financial statements. The
financial statements in this Form 10-Q, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of CITs financial position, results of operations and cash flows in accordance with GAAP. These consolidated
financial statements should be read in conjunction with our current Form 10-K on file.
The accounting and financial reporting policies of CIT Group Inc.
conform to GAAP and the preparation of the consolidated financial statements 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: allowance
for loan losses, loan impairment, fair value determination, lease residual values, liabilities for uncertain tax positions, realizability of deferred
tax assets and goodwill assets. Additionally where applicable, the policies conform to accounting and reporting guidelines prescribed by bank
regulatory authorities.
Discontinued Operation
On April 25, 2014, the Company completed the sale of its student
lending business. As a result, the student lending business is reported as a discontinued operation for all periods. The business had been included in
the Non-Strategic Portfolios segment and consisted of a portfolio of U.S. Government-guaranteed student loans. The portfolio was in run-off and had
been transferred to assets held for sale (AHFS) at the end of 2013. See Note 2 Discontinued Operation.
Revision
In preparing the financial statements for the quarter ended March
31, 2015, the Company discovered and corrected an immaterial error impacting the disclosure of unearned income in the amount of approximately $170
million as of December 31, 2014.
NEW ACCOUNTING PRONOUNCEMENTS
Customers Accounting for Fees Paid in a Cloud Computing Arrangement
The FASB issued an amendment to U.S. GAAP on April 15, 2015, to
explain how businesses and other organizations should account for the fees for purchasing cloud computing services. The changes in Accounting Standards
Update (ASU) No. 2015-05, Intangibles: Goodwill and Other: Internal-Use Software (Subtopic 350-40): Customers Accounting for Fees
Paid in a Cloud Computing Arrangement, add to the guidance for intangible assets to help businesses and other organizations determine whether a
cloud computing agreement includes a software license or should be considered as a service agreement.
The amendments to FASB ASC 350-40, Intangibles: Goodwill and
Other: Internal-Use Software: Scope and Scope Exceptions, formerly AICPA Statement of Position (SOP) No. 98-1, state that the portion
of a cloud computing agreement that includes a software license should be accounted for in a manner that is consistent with other software licenses. An
arrangement that does not include a software license should be accounted for as a service contract.
Public companies have to apply the amendment for fiscal years
that start after December 15, 2015. Companies will have to apply the changes in their first-quarter reports for 2016, but can elect to early adopt
ahead of the effective date. CIT is currently evaluating the impact of adopting this amendment.
Item 1. Consolidated Financial Statements
7
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Debt Issuance Costs
On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the
Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the
carrying value of the associated debt liability, consistent with the presentation of a debt discount.
Debt issuance costs are specific incremental costs, other than
those paid to the lender, that are directly attributable to issuing a debt instrument (i.e., third party costs). Prior to the issuance of the standard,
debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset).
For public business entities, the standard is effective for
financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance will be
applied on a retrospective basis. The adoption of this guidance is not expected to have a significant impact on CITs financial statements or
disclosures.
Amendments to the Consolidation Analysis
The FASB issued ASU 2015-02, Amendments to the Consolidation
Analysis, in February 2015 to improve targeted areas of the consolidation standard and reduce the number of consolidation models. The new guidance
changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a
decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by
related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model
based on majority exposure to variability that applied to certain investment companies and similar entities.
The Board changed the way the voting rights characteristic in the
VIE scope determination is evaluated for corporations, which may significantly impact entities for which decision making rights are conveyed though a
contractual arrangement.
Under ASU 2015-02:
n |
More limited partnerships and similar entities will be evaluated for consolidation under the revised consolidation requirements that apply to VIEs. |
n |
Fees paid to a decision maker or service provider are less likely to be considered a variable interest in a VIE. |
n |
Variable interests in a VIE held by related parties of a reporting enterprise are less likely to require the reporting enterprise to consolidate the VIE. |
n |
There is a new approach for determining whether equity at-risk holders of entities that are not similar to limited partnerships have power to direct the entitys key activities when the entity has an outsourced manager whose fee is a variable interest. |
n |
The deferral of consolidation requirements for certain investment companies and similar entities of the VIE in ASU 2009-17 is eliminated. |
The anticipated impacts of the new update
include:
n |
A new consolidation analysis is required for VIEs, including many limited partnerships and similar entities that previously were not considered VIEs. |
n |
It is less likely that the general partner or managing member of limited partnerships and similar entities will be required to consolidate the entity when the other investors in the entity lack both participating rights and kick-out rights. |
n |
Limited partnerships and similar entities that are not VIEs will not be consolidated by the general partner. |
n |
It is less likely that decision makers or service providers involved with a VIE will be required to consolidate the VIE. |
n |
Entities for which decision making rights are conveyed through a contractual arrangement are less likely to be considered VIEs. |
n |
Reporting enterprises with interests in certain investment companies and similar entities that are considered VIEs will no longer evaluate those entities for consolidation based on majority exposure to variability. |
The guidance is effective for public business entities for annual
and interim periods in fiscal years beginning after December 15, 2015 (i.e. January 1, 2016). Early adoption is allowed, including early adoption in an
interim period. A reporting enterprise is permitted to apply either a modified retrospective approach or full retrospective application. CIT is
currently evaluating the impact of adopting this ASU.
Extraordinary and Unusual Items
The FASB issued ASU 2015-01, Extraordinary and Unusual
Items, in January 2015 as part of FASBs simplification initiative, which eliminates the concept of extraordinary item and the need for
entities to evaluate whether transactions or events are both unusual in nature and infrequently occurring.
The ASU precludes (1) segregating an extraordinary item from the
results of ordinary operations; (2) presenting separately an extraordinary item on the income statement, net of tax, after income from continuing
operations; and (3) disclosing income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the
reporting and disclosure requirements for an event or transaction that is unusual in nature or that occurs infrequently. So, although the Company will
no longer need to determine whether a transaction or event is both unusual
8 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
in nature and infrequently occurring, CIT will still need to assess whether items are unusual in nature or infrequent to determine if the additional presentation and disclosure requirements for these items apply.
For all entities, ASU 2015-01 is effective for annual periods
beginning after December 15, 2015 and interim periods within those annual periods. Adoption of this guidance is not expected to have a significant
impact on CITs financial statements or disclosures.
Revenue Recognition
The FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers, in June 2014, which will supersede virtually all of the revenue recognition guidance in GAAP, except as it relates to lease
accounting.
The core principle of the five-step model is that a company will
recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be
entitled in exchange for those goods or services. In doing so, many companies will have to make more estimates and use more judgment than they do under
current GAAP. The five-step analysis of transactions, to determine when and how revenue is recognized, includes:
1. |
Identify the contract with the customer. |
2. |
Identify the performance obligations in the contract. |
3. |
Determine the transaction price. |
4. |
Allocate the transaction price to the performance obligations. |
5. |
Recognize revenue when or as each performance obligation is satisfied. |
Companies can choose to apply the standard using either the full
retrospective approach or a modified retrospective approach. Under the modified approach, financial statements will be prepared for the year of
adoption using the new standard, but prior periods will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment to the
opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in
the year of adoption as if they were prepared under todays revenue guidance.
In July 2015, the FASB voted to defer the effective date one year
for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Public companies that
choose full retrospective application will need to apply the standard to amounts they report for 2016 and 2017 on the face of their full year 2018
financial statements. CIT is required to adopt the ASU and is currently reviewing the impact of adoption and has not determined the effect of the
standard on its ongoing financial reporting.
Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period
The FASB issued ASU No. 2014-12, Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, in June
2014.
The ASU directs that a performance target that affects vesting
and can be achieved after the requisite service period is a performance condition. That is, compensation cost would be recognized over the required
service period if it is probable that the performance condition would be achieved. The total amount of compensation cost recognized during and after
the requisite service period would reflect the number of awards that are expected to vest and would be adjusted to reflect those awards that ultimately
vest.
The ASU does not require additional disclosures. Entities may
apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all
awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all
new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the
earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that
date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation
cost.
The ASU is effective for annual periods beginning after December
15, 2015 and interim periods within those years. Early adoption is permitted. CIT is currently evaluating the impact of adopting this ASU and is
reviewing existing awards for applicability.
Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern
The FASB issued ASU 2014-15, Disclosure of Uncertainties about
an Entitys Ability to Continue as a Going Concern, in August 2014. This ASU describes how entities should assess their ability to meet their
obligations and sets disclosure requirements about how this information should be communicated. The standard will be used along with existing auditing
standards, and provides the following key guidance:
1. |
Entities must perform a going concern assessment by evaluating their ability to meet their obligations for a look-forward period of one year from the financial statement issuance date (or date the financial statements are available to be issued). |
2. |
Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is |
Item 1. Consolidated Financial Statements
9
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
required if the probability is not mitigated by managements plans. |
3. |
Pursuant to the ASU, substantial doubt about an entitys ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the annual or interim financial statements are issued or available to be issued (assessment date). |
The new standard applies to all entities for the first annual
period ending after December 15, 2016. Company management is responsible for assessing going concern uncertainties at each annual and interim reporting
period thereafter. The adoption of this guidance is not expected to have a significant impact on CITs financial statements or
disclosures.
NOTE 2 DISCONTINUED OPERATION
Student Lending
Business Disposition
On April 25, 2014, the Company completed the sale of its student
lending business, along with certain secured debt and servicing rights. As a result, the student lending business was reported as a discontinued
operation for 2014.
The operating results are presented separately in the
Companys Consolidated Financial Statements. There were no assets or liabilities related to the discontinued operation at June 30, 2015 or
December 31, 2014, and no impact on the Statement of Operations in 2015.
Interest expense allocated to the discontinued operation
corresponded to debt of approximately $3.2 billion, net of $224 million of Fresh Start Accounting (FSA) discount. Salaries and general
operating expenses included in discontinued operation consisted of direct expenses of the student lending business that were separate from ongoing CIT
operations and did not continue subsequent to disposal.
Summarized financial information for the discontinued business is
shown below.
Operating Results of Discontinued Operation (dollars in millions)
Quarter Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||
Interest income | $ | 5.8 | $ | 27.0 | ||||
Interest expense | (229.2 | ) | (248.2 | ) | ||||
Other income | (5.1 | ) | (2.1 | ) | ||||
Operating expenses | (1.3 | ) | (3.5 | ) | ||||
Loss from discontinued operation before provision for income taxes | (229.8 | ) | (226.8 | ) | ||||
Provision for income taxes | (1.3 | ) | (2.0 | ) | ||||
Loss from discontinued operation, net of taxes | (231.1 | ) | (228.8 | ) | ||||
Gain on sale of discontinued operation | 282.8 | 282.8 | ||||||
Income from discontinued operation, net of taxes | $ | 51.7 | $ | 54.0 |
NOTE 3 LOANS
Finance receivables consist of the following:
Finance Receivables by Product (dollars in millions)
June 30, 2015 | December 31, 2014 | |||||||
Loans | $ | 14,508.9 | $ | 14,398.2 | ||||
Direct financing leases and leveraged leases | 5,140.4 | 5,096.8 | ||||||
Finance receivables | 19,649.3 | 19,495.0 | ||||||
Finance receivables held for sale | 798.9 | 779.9 | ||||||
Finance receivables and held for sale receivables(1) | $ | 20,448.2 | $ | 20,274.9 |
(1) |
Assets held for sale on the Balance Sheet includes finance receivables and operating lease equipment. As discussed in subsequent tables, since the Company manages the credit risk and collections of finance receivables held for sale consistently with its finance receivables held for investment, the aggregate amount is presented in this table. |
10 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table presents finance receivables by segment,
based on obligor location:
Finance Receivables (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Domestic |
Foreign |
Total |
Domestic |
Foreign |
Total |
|||||||||||||||||||||
Transportation
& International Finance |
$ | 769.6 | $ | 2,947.5 | $ | 3,717.1 | $ | 812.6 | $ | 2,746.3 | $ | 3,558.9 | ||||||||||||||
North American
Commercial Finance |
14,760.2 | 1,172.0 | 15,932.2 | 14,645.1 | 1,290.9 | 15,936.0 | ||||||||||||||||||||
Non-Strategic
Portfolios |
| | | | 0.1 | 0.1 | ||||||||||||||||||||
Total |
$ | 15,529.8 | $ | 4,119.5 | $ | 19,649.3 | $ | 15,457.7 | $ | 4,037.3 | $ | 19,495.0 |
The following table presents selected components of the net
investment in finance receivables.
Components of Net Investment in Finance Receivables (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Unearned
income |
$ | (1,056.0 | ) | $ | (1,037.8 | ) | ||||
Unamortized
premiums/(discounts) |
(19.2 | ) | (22.0 | ) | ||||||
Net unamortized
deferred costs and (fees) |
52.4 | 48.5 |
Certain of the following tables present credit-related
information at the class level in accordance with ASC 310-10-50, 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. Customer risk
ratings are reviewed on a regular basis by Credit Risk Management and are adjusted as necessary for updated information affecting the borrowers
ability to fulfill their obligations.
The definitions of these ratings are as follows:
n |
Pass finance receivables in this category do not meet the criteria for classification in one of the categories below. |
n |
Special mention a special mention asset exhibits potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects. |
n |
Classified a classified asset ranges from: (1) assets that exhibit a well-defined weakness and are inadequately protected by the current sound worth and paying capacity of the borrower, and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected to (2) assets with weaknesses that make collection or liquidation in full unlikely on the basis of current facts, conditions, and values. Assets in this classification can be accruing or on non-accrual depending on the evaluation of these factors. |
Item 1. Consolidated Financial Statements
11
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Finance and Held for Sale Receivables By Risk Rating (dollars in millions)
Transportation & International Finance |
North American Commercial Finance |
|||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Grade: |
Transportation Finance |
International Finance |
Corporate Finance |
Equipment Finance |
Real Estate Finance |
Commercial Services |
Subtotal |
Non-Strategic Portfolios |
Total |
|||||||||||||||||||||||||||||
June 30,
2015 |
||||||||||||||||||||||||||||||||||||||
Pass |
$ | 2,923.5 | $ | 784.7 | $ | 6,127.8 | $ | 4,284.9 | $ | 1,897.9 | $ | 1,809.4 | $ | 17,828.2 | $ | 204.8 | $ | 18,033.0 | ||||||||||||||||||||
Special
mention |
198.1 | 78.1 | 634.0 | 305.7 | 43.5 | 266.0 | 1,525.4 | 15.3 | 1,540.7 | |||||||||||||||||||||||||||||
Classified
accruing |
68.8 | 60.6 | 270.6 | 143.3 | | 126.4 | 669.7 | 6.8 | 676.5 | |||||||||||||||||||||||||||||
Classified
non-accrual |
4.7 | 53.1 | 34.1 | 76.9 | | | 168.8 | 29.2 | 198.0 | |||||||||||||||||||||||||||||
Total |
$ | 3,195.1 | $ | 976.5 | $ | 7,066.5 | $ | 4,810.8 | $ | 1,941.4 | $ | 2,201.8 | $ | 20,192.1 | $ | 256.1 | $ | 20,448.2 | ||||||||||||||||||||
December 31,
2014 |
||||||||||||||||||||||||||||||||||||||
Pass |
$ | 2,895.9 | $ | 820.2 | $ | 6,199.0 | $ | 4,129.1 | $ | 1,692.0 | $ | 2,084.1 | $ | 17,820.3 | $ | 288.7 | $ | 18,109.0 | ||||||||||||||||||||
Special
mention |
12.8 | 107.9 | 561.0 | 337.8 | 76.6 | 278.8 | 1,374.9 | 18.4 | 1,393.3 | |||||||||||||||||||||||||||||
Classified
accruing |
44.1 | 58.0 | 121.8 | 180.4 | | 197.3 | 601.6 | 10.5 | 612.1 | |||||||||||||||||||||||||||||
Classified
non-accrual |
0.1 | 37.1 | 30.9 | 70.0 | | | 138.1 | 22.4 | 160.5 | |||||||||||||||||||||||||||||
Total |
$ | 2,952.9 | $ | 1,023.2 | $ | 6,912.7 | $ | 4,717.3 | $ | 1,768.6 | $ | 2,560.2 | $ | 19,934.9 | $ | 340.0 | $ | 20,274.9 |
Past Due and Non-accrual Loans
The table that follows presents portfolio delinquency status,
regardless of accrual/non-accrual classification:
Finance and Held for Sale Receivables Delinquency Status (dollars in millions)
3059 Days Past Due |
6089 Days Past Due |
90 Days or Greater |
Total Past Due 30 Days or Greater |
Current |
Total Finance Receivables |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30,
2015 |
||||||||||||||||||||||||||
Transportation
Finance |
$ | 3.6 | $ | 2.7 | $ | 7.9 | $ | 14.2 | $ | 3,180.9 | $ | 3,195.1 | ||||||||||||||
International
Finance |
27.3 | 11.0 | 40.1 | 78.4 | 898.1 | 976.5 | ||||||||||||||||||||
Corporate
Finance |
| | 11.1 | 11.1 | 7,055.4 | 7,066.5 | ||||||||||||||||||||
Equipment
Finance |
68.6 | 37.6 | 14.8 | 121.0 | 4,689.8 | 4,810.8 | ||||||||||||||||||||
Real Estate
Finance |
| | | | 1,941.4 | 1,941.4 | ||||||||||||||||||||
Commercial
Services |
36.3 | 1.7 | 0.7 | 38.7 | 2,163.1 | 2,201.8 | ||||||||||||||||||||
Sub-total |
135.8 | 53.0 | 74.6 | 263.4 | 19,928.7 | 20,192.1 | ||||||||||||||||||||
Non-Strategic
Portfolios |
7.9 | 4.8 | 19.0 | 31.7 | 224.4 | 256.1 | ||||||||||||||||||||
Total |
$ | 143.7 | $ | 57.8 | $ | 93.6 | $ | 295.1 | $ | 20,153.1 | $ | 20,448.2 | ||||||||||||||
December 31,
2014 |
||||||||||||||||||||||||||
Transportation
Finance |
$ | 5.2 | $ | 1.9 | $ | 4.3 | $ | 11.4 | $ | 2,941.5 | $ | 2,952.9 | ||||||||||||||
International
Finance |
43.9 | 7.0 | 21.6 | 72.5 | 950.7 | 1,023.2 | ||||||||||||||||||||
Corporate
Finance |
4.4 | | 0.5 | 4.9 | 6,907.8 | 6,912.7 | ||||||||||||||||||||
Equipment
Finance |
93.7 | 32.9 | 14.9 | 141.5 | 4,575.8 | 4,717.3 | ||||||||||||||||||||
Real Estate
Finance |
| | | | 1,768.6 | 1,768.6 | ||||||||||||||||||||
Commercial
Services |
62.2 | 3.3 | 0.9 | 66.4 | 2,493.8 | 2,560.2 | ||||||||||||||||||||
Sub-total |
209.4 | 45.1 | 42.2 | 296.7 | 19,638.2 | 19,934.9 | ||||||||||||||||||||
Non-Strategic
Portfolios |
16.4 | 6.9 | 9.6 | 32.9 | 307.1 | 340.0 | ||||||||||||||||||||
Total |
$ | 225.8 | $ | 52.0 | $ | 51.8 | $ | 329.6 | $ | 19,945.3 | $ | 20,274.9 |
12 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table sets forth non-accrual loans and assets
received in satisfaction of loans (repossessed assets). Non-accrual loans include loans that are individually evaluated and determined to be impaired
(generally loans with balances greater than $500,000), as well as other, smaller balance loans placed on non-accrual due to delinquency (generally 90
days or more).
Finance Receivables on Non-Accrual Status (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Held for Investment |
Held for Sale |
Total |
Held for Investment |
Held for Sale |
Total |
|||||||||||||||||||||
Transportation
Finance |
$ | 4.7 | $ | | $ | 4.7 | $ | 0.1 | $ | | $ | 0.1 | ||||||||||||||
International
Finance |
35.4 | 17.7 | 53.1 | 22.4 | 14.7 | 37.1 | ||||||||||||||||||||
Corporate
Finance |
32.6 | 1.5 | 34.1 | 30.9 | | 30.9 | ||||||||||||||||||||
Equipment
Finance |
76.9 | | 76.9 | 70.0 | | 70.0 | ||||||||||||||||||||
Sub-total |
149.6 | 19.2 | 168.8 | 123.4 | 14.7 | 138.1 | ||||||||||||||||||||
Non-Strategic
Portfolios |
| 29.2 | 29.2 | | 22.4 | 22.4 | ||||||||||||||||||||
Total |
$ | 149.6 | $ | 48.4 | $ | 198.0 | $ | 123.4 | $ | 37.1 | $ | 160.5 | ||||||||||||||
Repossessed
assets |
2.6 | 0.8 | ||||||||||||||||||||||||
Total
non-performing assets |
$ | 200.6 | $ | 161.3 | ||||||||||||||||||||||
Total Accruing
loans past due 90 days or more |
$ | 9.0 | $ | 10.3 |
Payments received on non-accrual financing receivables are
generally applied first against outstanding principal, though in certain instances where the remaining recorded investment is deemed fully collectible,
interest income is recognized on a cash basis.
Impaired Loans
The Companys policy is to review for impairment finance
receivables greater than $500,000 that are on non-accrual status. 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 90 150 days past due.
The following table contains information about impaired finance
receivables and the related allowance for loan 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.
Item 1. Consolidated Financial Statements
13
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Impaired Loans (dollars in millions)
Six Months Ended June 30, |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
2015 |
2014 |
||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Average Recorded Investment |
||||||||||||||||||
With no
related allowance recorded: |
||||||||||||||||||||||
International
Finance |
$ | 7.7 | $ | 11.0 | $ | | $ | 8.7 | $ | 8.5 | ||||||||||||
Corporate
Finance |
0.5 | 0.5 | | 0.8 | 131.1 | |||||||||||||||||
Equipment
Finance |
5.1 | 6.1 | | 5.0 | 6.1 | |||||||||||||||||
Commercial
Services |
3.8 | 3.8 | | 4.0 | 8.2 | |||||||||||||||||
Non-Strategic
Portfolios |
| | | | 5.6 | |||||||||||||||||
With an
allowance recorded: |
||||||||||||||||||||||
Transportation
Finance |
4.7 | 4.7 | 0.9 | 1.6 | 15.0 | |||||||||||||||||
International
Finance |
22.2 | 22.2 | 5.0 | 12.1 | 0.8 | |||||||||||||||||
Corporate
Finance |
25.9 | 43.3 | 9.5 | 32.7 | 48.9 | |||||||||||||||||
Equipment
Finance |
9.7 | 9.7 | 2.1 | 3.2 | 0.4 | |||||||||||||||||
Commercial
Services |
| | | | 2.0 | |||||||||||||||||
Total Impaired
Loans(1) |
79.6 | 101.3 | 17.5 | 68.1 | 226.6 | |||||||||||||||||
Total Loans
Impaired at Convenience Date(2) |
| 14.2 | | 0.4 | 43.2 | |||||||||||||||||
Total |
$ | 79.6 | $ | 115.5 | $ | 17.5 | $ | 68.5 | $ | 269.8 |
December 31, 2014 |
Year Ended December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
|||||||||||||||
With no
related allowance recorded: |
||||||||||||||||||
International
Finance |
$ | 10.2 | $ | 17.0 | $ | | $ | 10.1 | ||||||||||
Corporate
Finance |
1.2 | 1.2 | | 104.9 | ||||||||||||||
Equipment
Finance |
5.6 | 6.8 | | 5.8 | ||||||||||||||
Commercial
Services |
4.2 | 4.2 | | 6.9 | ||||||||||||||
Non-Strategic
Portfolios |
| | | 3.4 | ||||||||||||||
With an
allowance recorded: |
||||||||||||||||||
Transportation
Finance |
| | | 9.0 | ||||||||||||||
International
Finance |
6.0 | 6.0 | 1.0 | 3.4 | ||||||||||||||
Corporate
Finance |
29.6 | 34.3 | 11.4 | 43.5 | ||||||||||||||
Equipment
Finance |
| | | 0.8 | ||||||||||||||
Commercial
Services |
| | | 2.8 | ||||||||||||||
Total
Impaired Loans(1) |
56.8 | 69.5 | 12.4 | 190.6 | ||||||||||||||
Total
Loans Impaired at Convenience date(2) |
1.2 | 15.8 | 0.5 | 26.4 | ||||||||||||||
Total |
$ | 58.0 | $ | 85.3 | $ | 12.9 | $ | 217.0 |
(1) |
Interest income recorded for the six months ended June 30, 2015 and 2014 while the loans were impaired was $0.6 million and $6.2 million, respectively, of which $0 and $0.8 million was interest recognized using the cash-basis method of accounting. Interest income recorded for the year ended December 31, 2014 while the loans were impaired was $10.1 million, of which $0.7 million was interest recognized using the cash-basis method of accounting. |
(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. |
14 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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. Credit risk is captured and
analyzed based on the Companys 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:
n |
Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the loan document; |
n |
Lack of current financial data related to the borrower or guarantor; |
n |
Delinquency status of the loan; |
n |
Borrowers experiencing problems, such as operating losses, marginal working capital, inadequate cash flow, excessive financial leverage or business interruptions; |
n |
Loans secured by collateral that is not readily marketable or that has experienced or is susceptible to deterioration in realizable value; and |
n |
Loans to borrowers in industries or countries experiencing severe economic instability. |
Impairment is measured as the shortfall between estimated value
and recorded investment in the finance receivable. A specific allowance or charge-off 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, the present value of expected future cash flows discounted at the contracts effective
interest rate, or market price. A shortfall between the estimated value and recorded investment in the finance receivable is reported in the provision
for credit losses. In instances when the Company measures impairment based on the present value of expected future cash flows, the change in present
value is reported in the provision for credit losses.
The following summarizes key elements of the Companys
policy regarding the determination of collateral fair value in the measurement of impairment:
n |
Orderly liquidation value is the basis for collateral valuation; |
n |
Appraisals are updated annually or more often as market conditions warrant; and |
n |
Appraisal values are discounted in the determination of impairment if the: |
n |
appraisal does not reflect current market conditions; or |
n |
collateral consists of inventory, accounts receivable, or other forms of collateral that may become difficult to locate, or collect or may be subject to pilferage in a liquidation. |
Loans and Debt Securities Acquired with Deteriorated Credit
Quality
For purposes of this presentation, the Company is applying the
income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) to finance
receivables that were identified as impaired under FSA at the Convenience Date. At June 30, 2015 and December 31, 2014, the carrying amounts
approximated $0 and $1 million, respectively, and the outstanding balance approximated $14 million and $16 million, respectively. The outstanding
balance represents the sum of contractual principal, interest and fees earned at the reporting date, calculated as pre-FSA net investment plus
inception to date charge-offs. The allowance for loan losses on these loans was $0 at June 30, 2015 and $0.5 million at December 31, 2014. See Note
4 Allowance for Loan Losses.
Troubled Debt Restructurings
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).
CIT uses a consistent methodology across all loans to determine
if a modification is with a borrower that has been determined to be in financial difficulty and was granted a concession. Specifically, the
Companys policies on TDR identification include the following examples of indicators used to determine whether the borrower is in financial
difficulty:
n |
Borrower is in default with CIT or other material creditor |
n |
Borrower has declared bankruptcy |
n |
Growing doubt about the borrowers ability to continue as a going concern |
n |
Borrower has (or is expected to have) insufficient cash flow to service debt |
n |
Borrower is de-listing securities |
n |
Borrowers inability to obtain funds from other sources |
n |
Breach of financial covenants by the borrower. |
If the borrower is determined to be in financial difficulty, then
CIT utilizes the following criteria to determine whether a concession has been granted to the borrower:
n |
Assets used to satisfy debt are less than CITs recorded investment in the receivable |
n |
Modification of terms interest rate changed to below market rate |
Item 1. Consolidated Financial Statements
15
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
n |
Maturity date extension at an interest rate less than market rate |
n |
The borrower does not otherwise have access to funding for debt with similar risk characteristics in the market at the restructured rate and terms |
n |
Capitalization of interest |
n |
Increase in interest reserves |
n |
Conversion of credit to Payment-In-Kind (PIK) |
n |
Delaying principal and/or interest for a period of three months or more |
n |
Partial forgiveness of the balance. |
Modified loans that meet the definition of a TDR are subject to
the Companys standard impaired loan policy, namely that non-accrual loans in excess of $500,000 are individually reviewed for impairment, while
non-accrual loans less than $500,000 are considered as part of homogenous pools and are included in the determination of the non-specific
allowance.
The recorded investment of TDRs at June 30, 2015 and December 31,
2014 was $15.0 million and $17.2 million, of which 73% and 75%, respectively were on non-accrual. North American Commercial Finance receivables
accounted for 97% of the total TDRs at June 30, 2015 and 91% at December 31, 2014, and there were $0.2 million and $0.8 million, respectively, of
commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs.
Recorded investment in loans related to modifications qualifying
as TDRs that occurred during the quarters ended June 30, 2015 and 2014 were $1.7 million and $2.1 million, respectively, and $2.3 million and $10.7
million for the six month periods. The recorded investment of TDRs that experience a payment default (payment default is one missed payment) at the
time of default, during the quarters ended June 30, 2015 and 2014, and for which the payment default occurred within one year of the modification
totaled $0.1 million and $0.2 million, respectively, and $0.4 million and $0.5 million for the six month periods. The 2015 and 2014 defaults related to
Equipment Financing and Non-Strategic Portfolios.
The financial impact of the various modification strategies that
the Company employs in response to borrower difficulties is described below. While the discussion focuses on the 2015 amounts, the overall nature and
impact of modification programs were comparable in the prior year.
n |
The nature of modifications qualifying as TDRs based upon recorded investment at June 30, 2015 and December 31, 2014 was comprised of payment deferrals for 38% and 35%, respectively, and covenant relief and/or other for 62% and 65%, respectively. |
n |
Payment deferrals result in lower net present value of cash flows, if not accompanied by additional interest or fees, and increased provision for credit losses to the extent applicable. The financial impact of these modifications is not significant given the moderate length of deferral periods; |
n |
Interest rate reductions result in lower amounts of interest being charged to the customer, but are a relatively small part of the Companys restructuring programs. Additionally, in some instances, modifications improve the Companys economic return through increased interest rates and fees, but are reported as TDRs due to assessments regarding the borrowers ability to independently obtain similar funding in the market and assessments of the relationship between modified rates and terms and comparable market rates and terms. The weighted average change in interest rates for all TDRs occurring during the quarters ended June 30, 2015 and 2014 was not significant; |
n |
Debt forgiveness, or the reduction in amount owed by borrower, results in incremental provision for credit losses, in the form of higher charge-offs. While these types of modifications have the greatest individual impact on the allowance, the amounts of principal forgiveness for TDRs occurring during the quarters and six months ended June 30, 2015 and 2014 was not significant, as debt forgiveness is a relatively small component of the Companys modification programs; and |
n |
The other elements of the Companys modification programs that are not TDRs, do not have a significant impact on financial results given their relative size, or do not have a direct financial impact, as in the case of covenant changes. |
16 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4 ALLOWANCE FOR LOAN LOSSES
Allowance for Loan Losses and Recorded Investment in Finance Receivables (dollars in millions)
Quarter Ended June 30,
2015 |
Quarter Ended June 30,
2014 |
||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Transportation & International Finance |
North American Commercial Finance |
Non- Strategic Portfolios |
Corporate and Other |
Total |
Transportation & International Finance |
North American Commercial Finance |
Non- Strategic Portfolios |
Corporate and Other |
Total |
||||||||||||||||||||||||||||||||||
Beginning
balance |
$ | 55.5 | $ | 301.0 | $ | | $ | | $ | 356.5 | $ | 45.7 | $ | 306.9 | $ | | $ | | $ | 352.6 | |||||||||||||||||||||||
Provision
for credit losses |
(0.4 | ) | 18.8 | | | 18.4 | 8.3 | 2.6 | (0.7 | ) | | 10.2 | |||||||||||||||||||||||||||||||
Other(1) |
0.2 | (0.7 | ) | | | (0.5 | ) | (1.2 | ) | 0.6 | | | (0.6 | ) | |||||||||||||||||||||||||||||
Gross
charge-offs(2) |
(2.9 | ) | (31.3 | ) | | | (34.2 | ) | (15.9 | ) | (13.2 | ) | | | (29.1 | ) | |||||||||||||||||||||||||||
Recoveries |
5.6 | 5.1 | | | 10.7 | 2.8 | 4.4 | 0.7 | | 7.9 | |||||||||||||||||||||||||||||||||
Allowance
balance end of period |
$ | 58.0 | $ | 292.9 | $ | | $ | | $ | 350.9 | $ | 39.7 | $ | 301.3 | $ | | $ | | $ | 341.0 | |||||||||||||||||||||||
Six
Months Ended June 30, 2015 |
Six
Months Ended June 30, 2014 |
||||||||||||||||||||||||||||||||||||||||||
Beginning
balance |
$ | 46.8 | $ | 299.6 | $ | | $ | | $ | 346.4 | $ | 46.7 | $ | 303.8 | $ | 5.6 | $ | | $ | 356.1 | |||||||||||||||||||||||
Provision
for credit losses |
10.2 | 42.8 | | | 53.0 | 20.7 | 25.8 | 0.3 | 0.1 | 46.9 | |||||||||||||||||||||||||||||||||
Other(1) |
(0.2 | ) | (3.9 | ) | | | (4.1 | ) | (1.6 | ) | (3.5 | ) | | (0.1 | ) | (5.2 | ) | ||||||||||||||||||||||||||
Gross
charge-offs(2) |
(6.1 | ) | (54.7 | ) | | | (60.8 | ) | (30.2 | ) | (35.8 | ) | (7.5 | ) | | (73.5 | ) | ||||||||||||||||||||||||||
Recoveries |
7.3 | 9.1 | | | 16.4 | 4.1 | 11.0 | 1.6 | | 16.7 | |||||||||||||||||||||||||||||||||
Allowance
balance end of period |
$ | 58.0 | $ | 292.9 | $ | | $ | | $ | 350.9 | $ | 39.7 | $ | 301.3 | $ | | $ | | $ | 341.0 | |||||||||||||||||||||||
June
30, 2015 |
June
30, 2014 |
||||||||||||||||||||||||||||||||||||||||||
Allowance
balance: |
|||||||||||||||||||||||||||||||||||||||||||
Loans
individually evaluated for impairment |
$ | 5.9 | $ | 11.6 | $ | | $ | | $ | 17.5 | $ | 2.7 | $ | 19.5 | $ | | $ | | $ | 22.2 | |||||||||||||||||||||||
Loans
collectively evaluated for impairment |
52.1 | 281.3 | | | 333.4 | 37.0 | 281.2 | | | 318.2 | |||||||||||||||||||||||||||||||||
Loans
acquired with deteriorated credit quality(3) |
| | | | | | 0.6 | | | 0.6 | |||||||||||||||||||||||||||||||||
Allowance
balance end of period |
$ | 58.0 | $ | 292.9 | $ | | $ | | $ | 350.9 | $ | 39.7 | $ | 301.3 | $ | | $ | | $ | 341.0 | |||||||||||||||||||||||
Other
reserves(1) |
$ | 0.2 | $ | 37.8 | $ | | $ | | $ | 38.0 | $ | 0.5 | $ | 30.9 | $ | | $ | | $ | 31.4 | |||||||||||||||||||||||
Finance
receivables: |
|||||||||||||||||||||||||||||||||||||||||||
Loans
individually evaluated for impairment |
$ | 34.6 | $ | 45.0 | $ | | $ | | $ | 79.6 | $ | 31.1 | $ | 192.2 | $ | | $ | | $ | 223.3 | |||||||||||||||||||||||
Loans
collectively evaluated for impairment |
3,682.5 | 15,887.2 | | | 19,569.7 | 3,197.1 | 15,163.2 | | | 18,360.3 | |||||||||||||||||||||||||||||||||
Loans
acquired with deteriorated credit quality(3) |
| | | | | 0.1 | 20.7 | | | 20.8 | |||||||||||||||||||||||||||||||||
Ending
balance |
$ | 3,717.1 | $ | 15,932.2 | $ | | $ | | $ | 19,649.3 | $ | 3,228.3 | $ | 15,376.1 | $ | | $ | | $ | 18,604.4 | |||||||||||||||||||||||
Percent
of loans to total loans |
18.9 | % | 81.1 | % | | | 100.0 | % | 17.4 | % | 82.6 | % | | | 100.0 | % |
(1) |
Other reserves represents additional credit loss reserves for unfunded lending commitments, letters of credit and for deferred purchase agreements, all of which is recorded in Other Liabilities. Other also includes changes relating to sales and foreign currency translations. |
(2) |
Gross charge-offs include $5 million charged directly to the Allowance for loan losses for both the quarter and six months ended June 30, 2015, related to North American Commercial Finance. Gross charge-offs include $3 million and $9 million charged directly to the Allowance for loan losses for the quarter and six months ended June 30, 2014, respectively, related to North American Commercial 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). |
Item 1. Consolidated Financial Statements
17
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 5 SECURITIES PURCHASED UNDER RESALE
AGREEMENTS
At June 30, 2015 and December 31, 2014, the Company had $750
million and $650 million, respectively, of securities purchased under resale agreements. Securities purchased under agreements to resell (reverse
repos) generally do not constitute a sale or purchase of the underlying securities for accounting purposes and, therefore are treated as collateralized
financing transactions. These agreements are recorded at the amounts at which the securities were acquired. See Note 9 Fair Value for
discussion of fair value. These agreements are short-term securities that have maturity dates of predominately three months or less and are secured by
the underlying collateral, which, along with the cash investment, are maintained by a tri-party custodian.
NOTE 6 INVESTMENT SECURITIES
Investments include debt and equity securities. The
Companys debt securities primarily include U.S. Government Agency securities, U.S. Treasury securities, and supranational and foreign government
securities. Equity securities include common stock and warrants.
Investment Securities (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Debt securities
available-for-sale |
$ | 1,300.6 | $ | 1,116.5 | ||||||
Equity
securities available-for-sale |
14.3 | 14.0 | ||||||||
Debt securities
held-to-maturity(1) |
319.9 | 352.3 | ||||||||
Non-marketable
equity investments(2) |
58.1 | 67.5 | ||||||||
Total investment
securities |
$ | 1,692.9 | $ | 1,550.3 |
(1) |
Recorded at amortized cost. |
(2) |
Non-marketable equity investments include ownership interests greater than 3% in limited partnership investments that are accounted for under the equity method. Non-marketable equity investments include $18.4 million and $19.7 million in limited partnerships at June 30, 2015 and December 31, 2014, respectively, accounted for under the equity method. The remaining investments are carried at cost and include qualified Community Reinvestment Act (CRA) investments, equity fund holdings and shares issued by customers during loan work out situations or as part of an original loan investment. |
Realized investment gains totaled $3.8 million and $5.6 million
for the quarters and $4.5 million and $9.1 million for the six months ended June 30, 2015 and 2014, respectively, and exclude losses from other than
temporary impairments (OTTI). OTTI impairments on equity securities recognized in earnings were not material for the quarters and six
months ended June 30, 2015 and 2014. Impairment amounts in accumulated other comprehensive income (AOCI) were not material at June 30, 2015
or December 31, 2014.
In addition, the Company maintained $4.2 billion and $6.2 billion
of interest bearing deposits at June 30, 2015 and December 31, 2014, respectively, which are cash equivalents and are classified separately on the
balance sheet.
The following table presents interest and dividends on interest
bearing deposits, investments and reverse repurchase agreements:
Interest and Dividend Income (dollars in millions)
Quarters Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2015 |
2014 |
2015 |
2014 |
|||||||||||||||
Interest income
interest bearing deposits |
$ | 3.4 | $ | 4.5 | $ | 7.4 | $ | 9.1 | ||||||||||
Interest income
investments / reverse repos |
5.1 | 3.1 | 9.2 | 6.4 | ||||||||||||||
Dividends
investments |
0.5 | 0.8 | 1.0 | 1.7 | ||||||||||||||
Interest and
dividends on interest bearing deposits and investments |
$ | 9.0 | $ | 8.4 | $ | 17.6 | $ | 17.2 |
18 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Securities Available-for-Sale
(AFS)
The following table presents amortized cost and fair value of
securities AFS.
Securities Available for Sale Amortized Cost and Fair Value (dollars in millions)
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
|||||||||||||||||||
Debt securities
AFS |
|||||||||||||||||||
U.S. Treasury
securities |
$ | 600.0 | $ | | $ | | $ | 600.0 | |||||||||||
U.S.
government agency obligations |
599.8 | 0.3 | | 600.1 | |||||||||||||||
Supranational
and foreign government securities |
100.5 | | | 100.5 | |||||||||||||||
Total debt
securities AFS |
1,300.3 | 0.3 | | 1,300.6 | |||||||||||||||
Equity
securities AFS |
14.3 | 0.1 | (0.1 | ) | 14.3 | ||||||||||||||
Total securities
AFS |
$ | 1,314.6 | $ | 0.4 | $ | (0.1 | ) | $ | 1,314.9 | ||||||||||
December 31, 2014 |
|||||||||||||||||||
Debt securities
AFS |
|||||||||||||||||||
U.S. Treasury
securities |
$ | 200.0 | $ | | $ | | $ | 200.0 | |||||||||||
U.S.
government agency obligations |
904.2 | | | 904.2 | |||||||||||||||
Foreign
government securities |
12.3 | | | 12.3 | |||||||||||||||
Total debt
securities AFS |
1,116.5 | | | 1,116.5 | |||||||||||||||
Equity
securities AFS |
14.0 | 0.6 | (0.6 | ) | 14.0 | ||||||||||||||
Total securities
AFS |
$ | 1,130.5 | $ | 0.6 | $ | (0.6 | ) | $ | 1,130.5 |
Securities AFS Amortized Cost and Fair Value Maturities (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||||
U.S. Treasury
securities |
||||||||||||||||||
Due within 1
year |
$ | 600.0 | $ | 600.0 | $ | 200.0 | $ | 200.0 | ||||||||||
Total |
600.0 | 600.0 | 200.0 | 200.0 | ||||||||||||||
U.S.
government agency obligations |
||||||||||||||||||
Due within 1
year |
$ | 100.0 | $ | 100.0 | $ | 904.2 | $ | 904.2 | ||||||||||
After 1 but
within 5 years |
499.8 | 500.1 | | | ||||||||||||||
Total |
599.8 | 600.1 | 904.2 | 904.2 | ||||||||||||||
Supranational
and foreign government securities |
||||||||||||||||||
Due within 1
year |
100.5 | 100.5 | 12.3 | 12.3 | ||||||||||||||
Total |
100.5 | 100.5 | 12.3 | 12.3 | ||||||||||||||
Total debt
securities available-for-sale |
$ | 1,300.3 | $ | 1,300.6 | $ | 1,116.5 | $ | 1,116.5 |
Item 1. Consolidated Financial Statements
19
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Debt Securities Held-to-Maturity
(HTM)
The carrying value and fair value of securities HTM were as
follows:
Debt Securities HTM Carrying Value and Fair Value (dollars in millions)
Carrying Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
|||||||||||||||||||
Mortgage-backed
securities U.S. government owned and sponsored agencies |
$ | 161.1 | $ | 1.5 | $ | (3.5 | ) | $ | 159.1 | ||||||||||
State and
municipal |
43.8 | | (0.8 | ) | 43.0 | ||||||||||||||
Foreign
government |
8.4 | 0.1 | | 8.5 | |||||||||||||||
Corporate
foreign |
106.6 | 7.1 | | 113.7 | |||||||||||||||
Total debt
securities held-to-maturity |
$ | 319.9 | $ | 8.7 | $ | (4.3 | ) | $ | 324.3 | ||||||||||
December 31, 2014 |
|||||||||||||||||||
Mortgage-backed
securities U.S. government owned and sponsored agencies |
$ | 156.3 | $ | 2.5 | $ | (1.9 | ) | $ | 156.9 | ||||||||||
State and
municipal |
48.1 | 0.1 | (1.8 | ) | 46.4 | ||||||||||||||
Foreign
government |
37.9 | 0.1 | | 38.0 | |||||||||||||||
Corporate
Foreign |
110.0 | 9.0 | | 119.0 | |||||||||||||||
Total debt
securities held-to-maturity |
$ | 352.3 | $ | 11.7 | $ | (3.7 | ) | $ | 360.3 |
The following table presents the amortized cost and fair value of securities HTM by contractual maturity dates:
Securities HTM Amortized Cost and Fair Value Maturities (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||||||
Mortgage-backed securities |
|||||||||||||||||||
U.S.
government owned and sponsored agencies |
|||||||||||||||||||
Due after 5
but within 10 years |
$ | 1.3 | $ | 1.3 | $ | 1.3 | $ | 1.3 | |||||||||||
Due after 10
years(1) |
159.8 | 157.8 | 155.0 | 155.6 | |||||||||||||||
Total |
161.1 | 159.1 | 156.3 | 156.9 | |||||||||||||||
State and
municipal |
|||||||||||||||||||
Due within 1
year |
1.1 | 1.1 | 1.2 | 1.2 | |||||||||||||||
Due after 1
but within 5 years |
2.6 | 2.6 | 2.9 | 2.9 | |||||||||||||||
Due after 10
years(1) |
40.1 | 39.3 | 44.0 | 42.3 | |||||||||||||||
Total |
43.8 | 43.0 | 48.1 | 46.4 | |||||||||||||||
Foreign government |
|||||||||||||||||||
Due within 1
year |
5.9 | 5.9 | 10.8 | 10.8 | |||||||||||||||
Due after 1
but within 5 years |
2.5 | 2.6 | 27.1 | 27.2 | |||||||||||||||
Total |
8.4 | 8.5 | 37.9 | 38.0 | |||||||||||||||
Corporate Foreign |
|||||||||||||||||||
Due within 1
year |
0.9 | 0.9 | 0.9 | 0.9 | |||||||||||||||
Due after 1
but within 5 years |
66.0 | 72.1 | 43.7 | 49.8 | |||||||||||||||
Due after 5
but within 10 years |
39.7 | 40.7 | 65.4 | 68.3 | |||||||||||||||
Total |
106.6 | 113.7 | 110.0 | 119.0 | |||||||||||||||
Total debt
securities held-to-maturity |
$ | 319.9 | $ | 324.3 | $ | 352.3 | $ | 360.3 |
(1) |
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. |
20 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 7 LONG-TERM BORROWINGS
The following table presents the carrying value of outstanding
long-term borrowings:
Long-term Borrowings (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
CIT Group Inc. |
Subsidiaries |
Total |
Total |
|||||||||||||||
Senior
unsecured(1) |
$ | 10,732.8 | $ | | $ | 10,732.8 | $ | 11,932.4 | ||||||||||
Secured
borrowings |
| 5,708.8 | 5,708.8 | 6,523.4 | ||||||||||||||
Total
Long-term Borrowings |
$ | 10,732.8 | $ | 5,708.8 | $ | 16,441.6 | $ | 18,455.8 |
(1) |
Senior Unsecured Notes at June 30, 2015 were comprised of $8,243.8 million of Unsecured Notes, $2,450.0 million of Series C Notes and $39.0 million of other unsecured debt. |
Unsecured Borrowings
Revolving Credit Facility
There were no outstanding borrowings under the Revolving Credit
Facility at June 30, 2015 and December 31, 2014. The amount available to draw upon at June 30, 2015 was approximately $1.4 billion, with the remaining
amount of approximately $0.1 billion being utilized for issuance of letters of credit.
The Revolving Credit Facility has a total commitment amount of
$1.5 billion and the maturity date of the commitment is January 27, 2017. The total commitment amount consists of a $1.15 billion revolving loan
tranche and a $350 million revolving loan tranche that can also be utilized for issuance of letters of credit. The applicable margin charged under the
facility is 2.50% for LIBOR-based loans and 1.50% for Base Rate loans.
The Revolving Credit Facility may be drawn and prepaid at the
option of CIT. The unutilized portion of any commitment under the Revolving Credit Facility may be reduced permanently or terminated by CIT at any time
without penalty.
The Revolving Credit Facility is unsecured and is guaranteed by
eight of the Companys domestic operating subsidiaries. The facility was amended in January 2014 to modify the covenant requiring a minimum
guarantor asset coverage ratio and the criteria for calculating the ratio. The amended covenant requires a minimum guarantor asset coverage ratio
ranging from 1.25:1.0 to the current requirement of 1.5:1.0 depending on the Companys long-term senior unsecured debt rating.
The Revolving Credit Facility is subject to a $6 billion minimum
consolidated net worth covenant of the Company, tested quarterly, and also limits the Companys ability to create liens, merge or consolidate,
sell, transfer, lease or dispose of all or substantially all of its assets, grant a negative pledge or make certain restricted payments during the
occurrence and continuance of an event of default.
Senior Unsecured Notes
In January 2015, we filed a shelf registration that
expires in January 2018 that replaced an existing shelf. The notes issued under the shelf registration rank equal in right of payment with the Series C
Unsecured Notes and the Revolving Credit Facility.
The following tables present the principal amounts of Senior
Unsecured Notes issued under the Companys shelf registration and Series C Unsecured Notes by maturity date.
Senior Unsecured Notes (dollars in millions)
Maturity Date |
Rate (%) |
Date of Issuance |
Par Value |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May
2017 |
5.000 | % | May
2012 |
$ | 1,250.0 | |||||||||
August
2017 |
4.250 | % | August
2012 |
1,750.0 | ||||||||||
March
2018 |
5.250 | % | March
2012 |
1,500.0 | ||||||||||
April
2018* |
6.625 | % | March
2011 |
700.0 | ||||||||||
February
2019* |
5.500 | % | February
2012 |
1,750.0 | ||||||||||
February
2019 |
3.875 | % | February
2014 |
1,000.0 | ||||||||||
May
2020 |
5.375 | % | May
2012 |
750.0 | ||||||||||
August
2022 |
5.000 | % | August
2012 |
1,250.0 | ||||||||||
August
2023 |
5.000 | % | August
2013 |
750.0 | ||||||||||
Weighted average
rate and total |
5.02 | % | $ | 10,700.0 |
* |
Series C Unsecured Notes |
Item 1. Consolidated Financial Statements
21
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Indentures for the Senior Unsecured Notes and Series C
Unsecured Notes limit the Companys ability to create liens, merge or consolidate, or sell, transfer, lease or dispose of all or substantially all
of its assets. Upon a Change of Control Triggering Event as defined in the Indentures for the Senior Unsecured Notes and Series C Unsecured Notes,
holders of the Senior Unsecured Notes and Series C Unsecured Notes will have the right to require the Company, as applicable, to repurchase all or a
portion of the Senior Unsecured Notes and Series C Unsecured Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest to the date of such repurchase.
Secured Borrowings
Set forth below are borrowings and pledged assets, which are
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 until and unless
the related secured borrowings have been fully discharged. These transactions do not meet accounting requirements for sales treatment and are recorded
as secured borrowings.
Secured Borrowings and Pledged Assets Summary(1) (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Secured Borrowing |
Pledged Assets |
Secured Borrowing |
Pledged Assets |
|||||||||||||||
Rail(2) |
$ | 1,109.2 | $ | 1,512.9 | $ | 1,179.7 | $ | 1,575.7 | ||||||||||
Aerospace(2) |
2,283.7 | 3,389.8 | 2,411.7 | 3,914.4 | ||||||||||||||
International
Finance |
486.8 | 659.1 | 545.0 | 730.6 | ||||||||||||||
Subtotal
Transportation & International Finance |
3,879.7 | 5,561.8 | 4,136.4 | 6,220.7 | ||||||||||||||
Corporate
Finance |
147.4 | 161.1 | 129.7 | 141.6 | ||||||||||||||
Real Estate
Finance |
| | 125.0 | 168.0 | ||||||||||||||
Commercial
Services |
334.7 | 1,705.5 | 334.7 | 1,644.6 | ||||||||||||||
Equipment
Finance |
1,347.0 | 2,016.2 | 1,797.6 | 2,352.8 | ||||||||||||||
Subtotal
North American Commercial Finance |
1,829.1 | 3,882.8 | 2,387.0 | 4,307.0 | ||||||||||||||
Total |
$ | 5,708.8 | $ | 9,444.6 | $ | 6,523.4 | $ | 10,527.7 |
(1) |
As part of our liquidity management strategy, we pledge assets to secure financing transactions (which include securitizations), borrowings from the FHLB and FRB, and for other purposes as required or permitted by law. |
(2) |
At June 30, 2015 the GSI TRS related borrowings and pledged assets, respectively, of $1.2 billion and $1.8 billion were included in TIF. The GSI TRS is described in Note 8 Derivative Financial Instruments. |
CIT Bank is a member of the Federal Home Loan Banks
(FHLB) and may borrow under lines of credit that are secured by a blanket lien on the subsidiarys assets and collateral pledged,
including real estate assets. At June 30, 2015, $147 million of advances were outstanding and $161 million of collateral was pledged and included in
Corporate Finance in the table above. At December 31, 2014, $255 million of advances were outstanding and $310 million of collateral was pledged and
included in Corporate Finance and Real Estate Finance in the table above.
At June 30, 2015 we had pledged assets (including collateral for
the FRB discount window not in the table above) of $11.4 billion, which included $6.1 billion of loans (including amounts held for sale), $4.7 billion
of operating lease assets, $0.4 billion of cash and $0.2 billion of investment securities.
Variable Interest Entities
(VIEs)
The Company utilizes VIEs in the ordinary course of business to
support its own and its customers financing needs. Each VIE is a separate legal entity and maintains its own books and records.
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 where the Company is the primary beneficiary.
The Company originates pools of assets and sells these to special purpose entities, which, in turn, issue debt instruments backed by the asset pools or
sells 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 vehicles underlying asset portfolio and risk associated with the servicing of the underlying
assets.
Lenders typically have recourse to the assets in the VIEs and may
benefit from other credit enhancements, such as: (1) a reserve or cash collateral account that requires the Company to deposit cash in an account,
which will first be used to cover any defaulted obligor payments, (2) over-collateralization in the form of excess assets in the VIE, or (3)
subordination, whereby the Company retains a
22 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 the debt issued by the VIEs to match the underlying assets 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, the Company records an allowance for loan losses for the credit risks associated with the
underlying leases and loans. The VIE 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 VIEs 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 to pay only such liabilities.
NOTE 8 DERIVATIVE FINANCIAL
INSTRUMENTS
As part of managing economic risk and exposure to interest rate
and foreign currency risk, the Company primarily enters into derivative transactions in over-the-counter markets with other financial institutions. The
Company does not enter into derivative financial instruments for speculative purposes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Act) includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading
of certain derivatives, and imposing margin, reporting and registration requirements for certain market participants. Since the Company does not meet
the definition of a Swap Dealer or Major Swap Participant under the Act, the reporting and clearing obligations apply to a limited number of derivative
transactions executed with its lending customers in order to manage their interest rate risk.
See Note 1 Business and Summary of Significant
Accounting Policies in the Companys Annual Report on Form 10-K for the year ended December 31, 2014 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(1) (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Qualifying Hedges |
Notional Amount |
Asset Fair Value |
Liability Fair Value |
Notional Amount |
Asset Fair Value |
Liability Fair Value |
|||||||||||||||||||||
Foreign currency
forward contracts net investment hedges |
$ | 955.1 | $ | 41.0 | $ | (7.1 | ) | $ | 1,193.1 | $ | 74.7 | $ | | ||||||||||||||
Total Qualifying
Hedges |
955.1 | 41.0 | (7.1 | ) | 1,193.1 | 74.7 | | ||||||||||||||||||||
Non-Qualifying Hedges |
|||||||||||||||||||||||||||
Interest rate
swaps |
2,203.6 | 19.5 | (21.5 | ) | 1,902.0 | 15.2 | (23.1 | ) | |||||||||||||||||||
Written
options |
2,952.7 | | (2.7 | ) | 2,711.5 | | (2.7 | ) | |||||||||||||||||||
Purchased
options |
1,148.2 | 0.7 | | 948.4 | 0.8 | | |||||||||||||||||||||
Foreign currency
forward contracts |
1,799.8 | 40.1 | (24.9 | ) | 2,028.8 | 77.2 | (12.0 | ) | |||||||||||||||||||
Total Return
Swap (TRS) |
1,122.2 | | (31.9 | ) | 1,091.9 | | (24.5 | ) | |||||||||||||||||||
Equity
Warrants |
1.0 | 0.2 | | 1.0 | 0.1 | | |||||||||||||||||||||
Total
Non-qualifying Hedges |
9,227.5 | 60.5 | (81.0 | ) | 8,683.6 | 93.3 | (62.3 | ) | |||||||||||||||||||
Total
Hedges |
$ | 10,182.6 | $ | 101.5 | $ | (88.1 | ) | $ | 9,876.7 | $ | 168.0 | $ | (62.3 | ) |
(1) |
Presented on a gross basis. |
Total Return Swaps (TRS)
Two financing facilities between two wholly-owned subsidiaries of
CIT and Goldman Sachs International (GSI) are structured as total return swaps (TRS), under which amounts available for
advances are accounted for as derivatives.
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 size of the CIT Financial Ltd. (CFL)
facility is $1.5 billion and the CIT TRS Funding B.V. (BV) facility is $625 million.
The aggregate notional amounts of the total return
swaps of $1,122.2 million at June 30, 2015 and $1,091.9 million at December 31, 2014 represent the aggregate unused portions under the CFL and BV
facilities and constitute derivative financial instruments. These notional amounts are calculated as the maximum aggregate facility commitment amounts,
currently $2,125.0 million, less the aggregate actual adjusted qualifying borrowing base outstanding of $1,002.8 million at June 30, 2015 and $1,033.1
million at December 31, 2014 under the facilities. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base
decreases due to repayment of the underlying asset-backed securities (ABS) to investors. If
Item 1. Consolidated Financial Statements
23
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CIT funds additional ABS under the facilities, the aggregate adjusted qualifying borrowing base of the total return swaps will increase and the notional amount of the derivatives will decrease accordingly.
Valuation of the derivatives related to the GSI facilities is
based on several factors using a discounted cash flow (DCF) methodology, including:
n |
CITs funding costs for similar financings based on current market conditions; |
n |
Forecasted usage of the long-dated facilities through the final maturity date in 2028; and |
n |
Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. |
Based on the Companys valuation, a liability of $31.9
million and $24.5 million was recorded at June 30, 2015 and December 31, 2014, respectively. The increases in the liability of $6.4 million and $7.4
million were recognized as a reduction to Other Income for the quarter and six months ended June 30, 2015, respectively. The decreases in the liability
of $11.4 million and $9.7 million were recognized as a benefit to Other Income for the quarter and six months ended June 30, 2014,
respectively.
Impact of Collateral and Netting Arrangements on the Total
Derivative Portfolio
The following tables present a summary of our derivative
portfolio, which includes the gross amounts of recognized financial assets and liabilities; the amounts offset in the consolidated balance sheet; the
net amounts presented in the consolidated balance sheet; the amounts subject to an enforceable master netting arrangement or similar agreement that
were not included in the offset amount above, and the amount of cash collateral received or pledged. Substantially all of the derivative transactions
are under an International Swaps and Derivatives Association (ISDA) agreement.
Offsetting of Derivative Assets and Liabilities (dollars in millions)
Gross Amounts not offset in the Consolidated Balance Sheet |
|||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Gross Amount of Recognized Assets (Liabilities) |
Gross Amount Offset in the Consolidated Balance Sheet |
Net Amount Presented in the Consolidated Balance Sheet |
Derivative Financial Instruments(1) |
Cash Collateral Pledged/(Received)(1)(2) |
Net Amount |
||||||||||||||||||||||
June 30, 2015 |
|||||||||||||||||||||||||||
Derivative
assets |
$ | 101.5 | $ | | $ | 101.5 | $ | (34.5 | ) | $ | (46.0 | ) | $ | 21.0 | |||||||||||||
Derivative
liabilities |
(88.1 | ) | | (88.1 | ) | 34.5 | 10.6 | (43.0 | ) | ||||||||||||||||||
December 31,
2014 |
|||||||||||||||||||||||||||
Derivative
assets |
$ | 168.0 | $ | | $ | 168.0 | $ | (13.6 | ) | $ | (137.3 | ) | $ | 17.1 | |||||||||||||
Derivative
liabilities |
(62.3 | ) | | (62.3 | ) | 13.6 | 8.7 | (40.0 | ) |
(1) |
The Companys derivative transactions are governed by ISDA agreements that allow for net settlements of certain payments as well as offsetting of all contracts (Derivative Financial Instruments) with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. We believe our ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure. In conjunction with the ISDA agreements, the Company has entered into collateral arrangements with its counterparties which provide for the exchange of cash depending on the change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default by one of the counterparties. |
(2) |
Collateral pledged or received is included in Other assets or Other liabilities, respectively. |
24 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table presents the impact of derivatives on the
statements of operations.
Derivative Instrument Gains and Losses (dollars in millions)
Quarters Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivative Instruments |
Gain / (Loss) Recognized |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||
Qualifying
Hedges |
$ | | $ | | $ | | $ | | ||||||||||||
Non Qualifying
Hedges |
||||||||||||||||||||
Cross currency
swaps |
Other income |
$ | | $ | (1.0 | ) | $ | | $ | 4.1 | ||||||||||
Interest rate
swaps |
Other income |
6.4 | | 6.2 | 3.8 | |||||||||||||||
Interest rate
options |
Other income |
(0.6 | ) | (0.1 | ) | (0.1 | ) | (0.2 | ) | |||||||||||
Foreign currency
forward contracts |
Other income |
(45.5 | ) | (42.6 | ) | 40.7 | (13.5 | ) | ||||||||||||
Equity
warrants |
Other income |
0.1 | (0.3 | ) | 0.1 | (0.5 | ) | |||||||||||||
TRS |
Other income |
(6.4 | ) | 11.4 | (7.4 | ) | 9.7 | |||||||||||||
Total
derivatives income statement impact |
$ | (46.0 | ) | $ | (32.6 | ) | $ | 39.5 | $ | 3.4 |
The following table presents the changes in AOCI relating to derivatives:
Changes in AOCI Relating to Derivatives (dollars in millions)
Contract Type |
Derivatives effective portion reclassified from AOCI to income |
Hedge ineffectiveness recorded directly in income |
Total income statement impact |
Derivatives effective portion recorded in OCI |
Total change in OCI for period |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter Ended June 30, 2015 |
|||||||||||||||||||||||
Foreign currency
forward contracts net investment hedges |
$ | | $ | | $ | | $ | (21.5 | ) | $ | (21.5 | ) | |||||||||||
Total |
$ | | $ | | $ | | $ | (21.5 | ) | $ | (21.5 | ) | |||||||||||
Quarter Ended
June 30, 2014 |
|||||||||||||||||||||||
Foreign currency
forward contracts net investment hedges |
$ | (3.0 | ) | $ | | $ | (3.0 | ) | $ | (23.0 | ) | $ | (20.0 | ) | |||||||||
Cross currency
swaps net investment hedges |
| | | (0.7 | ) | (0.7 | ) | ||||||||||||||||
Total |
$ | (3.0 | ) | $ | | $ | (3.0 | ) | $ | (23.7 | ) | $ | (20.7 | ) | |||||||||
Six Months Ended June 30, 2015 |
|||||||||||||||||||||||
Foreign currency
forward contracts net investment hedges |
$ | 4.2 | $ | | $ | 4.2 | $ | 62.3 | $ | 58.1 | |||||||||||||
Total |
$ | 4.2 | $ | | $ | 4.2 | $ | 62.3 | $ | 58.1 | |||||||||||||
Six Months
Ended June 30, 2014 |
|||||||||||||||||||||||
Foreign currency
forward contracts cash flow hedges |
$ | | $ | | $ | | $ | (0.1 | ) | $ | (0.1 | ) | |||||||||||
Foreign currency
forward contracts net investment hedges |
(6.1 | ) | | (6.1 | ) | (18.5 | ) | (12.4 | ) | ||||||||||||||
Cross currency
swaps net investment hedges |
| | | 1.1 | 1.1 | ||||||||||||||||||
Total |
$ | (6.1 | ) | $ | | $ | (6.1 | ) | $ | (17.5 | ) | $ | (11.4 | ) |
Item 1. Consolidated Financial Statements
25
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 9 FAIR VALUE
Fair Value Hierarchy
The Company is required to report fair value measurements for
specified classes of assets and liabilities. See Note 1 Business and Summary of Significant Accounting Policies in the
Companys Annual Report on Form 10-K for the year ended December 31, 2014 for further description of its derivative transaction policies for 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 Companys 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, 2015 | Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||||||||||||
Debt Securities
AFS |
$ | 1,300.6 | $ | 600.5 | $ | 700.1 | $ | | |||||||||||
Equity
Securities AFS |
14.3 | 14.3 | | | |||||||||||||||
Derivative
assets at fair value non-qualifying hedges |
60.5 | | 60.5 | | |||||||||||||||
Derivative
assets at fair value qualifying hedges |
41.0 | | 41.0 | | |||||||||||||||
Total |
$ | 1,416.4 | $ | 614.8 | $ | 801.6 | $ | | |||||||||||
Liabilities |
|||||||||||||||||||
Derivative
liabilities at fair value non-qualifying hedges |
$ | (81.0 | ) | $ | | $ | (47.0 | ) | $ | (34.0 | ) | ||||||||
Derivative
liabilities at fair value qualifying hedges |
(7.1 | ) | | (7.1 | ) | | |||||||||||||
Total |
$ | (88.1 | ) | $ | | $ | (54.1 | ) | $ | (34.0 | ) | ||||||||
December 31, 2014 |
|||||||||||||||||||
Assets |
|||||||||||||||||||
Debt Securities
AFS |
$ | 1,116.5 | $ | 212.3 | $ | 904.2 | $ | | |||||||||||
Equity
Securities AFS |
14.0 | 14.0 | | | |||||||||||||||
Derivative
assets at fair value non-qualifying hedges |
93.3 | | 93.3 | | |||||||||||||||
Derivative
assets at fair value qualifying hedges |
74.7 | | 74.7 | | |||||||||||||||
Total |
$ | 1,298.5 | $ | 226.3 | $ | 1,072.2 | $ | | |||||||||||
Liabilities |
|||||||||||||||||||
Derivative
liabilities at fair value non-qualifying hedges |
$ | (62.3 | ) | $ | | $ | (35.7 | ) | $ | (26.6 | ) | ||||||||
Total |
$ | (62.3 | ) | $ | | $ | (35.7 | ) | $ | (26.6 | ) |
26 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table presents financial instruments for which a non-recurring change in fair value has been recorded in the current year:
Assets Measured at Fair Value on a Non-recurring Basis with a Change in Fair Value Recorded (dollars in millions)
Fair Value Measurements at Reporting Date Using: |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total |
Level 1 |
Level 2 |
Level 3 |
Total Gains and (Losses) |
|||||||||||||||||||
Assets |
|||||||||||||||||||||||
June 30,
2015 |
|||||||||||||||||||||||
Assets held for
sale |
$ | 388.7 | $ | | $ | | $ | 388.7 | $ | (21.5 | ) | ||||||||||||
Impaired
loans |
49.6 | | | 49.6 | (25.1 | ) | |||||||||||||||||
Total |
$ | 438.3 | $ | | $ | | $ | 438.3 | $ | (46.6 | ) | ||||||||||||
December 31,
2014 |
|||||||||||||||||||||||
Assets held for
sale |
$ | 949.6 | $ | | $ | | $ | 949.6 | $ | (73.6 | ) | ||||||||||||
Impaired
loans |
13.2 | | | 13.2 | (4.9 | ) | |||||||||||||||||
Total |
$ | 962.8 | $ | | $ | | $ | 962.8 | $ | (78.5 | ) |
Loans are transferred from held for investment (HFI)
to Assets held for sale (HFS) 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 HFS, the amount by which the carrying value exceeds fair value is recorded as a valuation
allowance.
Impaired finance receivables of $500,000 or greater that are
placed on non-accrual status are subject to periodic individual review in conjunction with the Companys 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 contracts effective interest rate.
Level 3 Gains and Losses
The tables below set forth a summary of changes in the estimated
fair value of the Companys Level 3 financial assets and liabilities measured on a recurring basis:
Changes in Fair Value of Level 3 Financial Assets and Liabilities Measured on a Recurring Basis (dollars in millions)
Total (all related to derivatives) |
||||
---|---|---|---|---|
December 31,
2014 |
$ | (26.6 | ) | |
Gains or losses
realized/unrealized included in Other Income(1) |
(7.4 | ) | ||
June 30,
2015 |
$ | (34.0 | ) | |
December 31,
2013 |
$ | (9.7 | ) | |
Gains or losses
realized/unrealized included in Other Income(1) |
9.7 | |||
June 30,
2014 |
$ | |
(1) |
Valuation of the derivatives related to the GSI facilities and written options on certain CIT Bank CDs. |
Item 1. Consolidated Financial Statements
27
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Fair Values of Financial Instruments
The carrying and estimated fair values of financial instruments
presented below exclude leases and certain other assets and liabilities, which are not required for disclosure.
Financial Instruments (dollars in millions)
Estimated Fair Value |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Carrying Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||||||||
June 30, 2015 |
||||||||||||||||||||||||||
Financial
Assets |
||||||||||||||||||||||||||
Derivative
assets at fair value non-qualifying hedges |
$ | 60.5 | $ | | $ | 60.5 | $ | | $ | 60.5 | ||||||||||||||||
Derivative
assets at fair value qualifying hedges |
41.0 | | 41.0 | | 41.0 | |||||||||||||||||||||
Assets held for
sale (excluding leases) |
168.4 | | 0.6 | 176.7 | 177.3 | |||||||||||||||||||||
Loans (excluding
leases) |
14,364.7 | | 1,467.9 | 12,630.5 | 14,098.4 | |||||||||||||||||||||
Securities
purchased under agreements to resell |
750.0 | | 750.0 | | 750.0 | |||||||||||||||||||||
Investment
securities |
1,692.9 | 822.8 | 748.2 | 126.3 | 1,697.3 | |||||||||||||||||||||
Other assets
subject to fair value disclosure and unsecured counterparty receivables (1) |
909.5 | | | 909.5 | 909.5 | |||||||||||||||||||||
Financial
Liabilities |
||||||||||||||||||||||||||
Deposits
(2) |
(17,311.0 | ) | | | (17,525.6 | ) | (17,525.6 | ) | ||||||||||||||||||
Derivative
liabilities at fair value non-qualifying hedges |
(81.0 | ) | | (47.0 | ) | (34.0 | ) | (81.0 | ) | |||||||||||||||||
Derivative
liabilities at fair value qualifying hedges |
(7.1 | ) | | (7.1 | ) | | (7.1 | ) | ||||||||||||||||||
Long-term
borrowings (2) |
(16,619.6 | ) | | (13,955.5 | ) | (3,115.1 | ) | (17,070.6 | ) | |||||||||||||||||
Credit balances
of factoring clients |
(1,373.3 | ) | | | (1,373.3 | ) | (1,373.3 | ) | ||||||||||||||||||
Other
liabilities subject to fair value disclosure (3) |
(1,921.8 | ) | | | (1,921.8 | ) | (1,921.8 | ) | ||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||
Financial
Assets |
||||||||||||||||||||||||||
Derivative
assets at fair value non-qualifying hedges |
$ | 93.3 | $ | | $ | 93.3 | $ | | $ | 93.3 | ||||||||||||||||
Derivative
assets at fair value qualifying hedges |
74.7 | | 74.7 | | 74.7 | |||||||||||||||||||||
Assets held for
sale (excluding leases) |
67.0 | | | 67.2 | 67.2 | |||||||||||||||||||||
Loans (excluding
leases) |
14,379.5 | | 1,585.4 | 12,490.8 | 14,076.2 | |||||||||||||||||||||
Securities
purchased under agreements to resell |
650.0 | | 650.0 | | 650.0 | |||||||||||||||||||||
Investment
securities |
1,550.3 | 464.9 | 956.0 | 137.4 | 1,558.3 | |||||||||||||||||||||
Other assets
subject to fair value disclosure and unsecured counterparty receivables (1) |
886.2 | | | 886.2 | 886.2 | |||||||||||||||||||||
Financial
Liabilities |
||||||||||||||||||||||||||
Deposits
(2) |
(15,891.4 | ) | | | (16,105.7 | ) | (16,105.7 | ) | ||||||||||||||||||
Derivative
liabilities at fair value non-qualifying hedges |
(62.3 | ) | | (35.7 | ) | (26.6 | ) | (62.3 | ) | |||||||||||||||||
Long-term
borrowings (2) |
(18,657.9 | ) | | (15,906.3 | ) | (3,338.1 | ) | (19,244.4 | ) | |||||||||||||||||
Credit balances
of factoring clients |
(1,622.1 | ) | | | (1,622.1 | ) | (1,622.1 | ) | ||||||||||||||||||
Other
liabilities subject to fair value disclosure (3) |
(2,066.8 | ) | | | (2,066.8 | ) | (2,066.8 | ) |
(1) |
Other assets subject to fair value disclosure primarily include accrued interest receivable and miscellaneous receivables. These assets have carrying values that approximate fair value generally due to the short-term nature and are classified as level 3. The unsecured counterparty receivables primarily consist of amounts owed to CIT from GSI for debt discount, return of collateral posted to GSI and settlements resulting from market value changes to asset-backed securities underlying the GSI Facilities. |
(2) |
Deposits and long-term borrowings include accrued interest, which is included in Other liabilities in the Balance Sheet. |
(3) |
Other liabilities subject to fair value disclosure include accounts payable, accrued liabilities, customer security and maintenance deposits and miscellaneous liabilities. The fair value of these approximate carrying value and are classified as level 3. |
Assumptions used to value financial instruments are set forth
below:
Derivatives The estimated fair values of
derivatives were calculated internally using observable market data and represent the net amount receivable or payable to terminate, taking into
account current market rates, which represent Level 2 inputs, except for the TRS derivative and written options on certain CIT Bank CDs that utilized
Level 3 inputs. Derivatives are included in Other Assets and Other
28 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Liabilities in the Consolidated Balance Sheets. See Note 8 Derivative Financial Instruments for notional principal amounts and fair values.
Assets held for sale Assets held for sale are
recorded at the lower of cost or fair value on the balance sheet. When there is no liquid secondary market for the other assets held for sale in the
Companys portfolio, the fair value is estimated based on a binding contract, current letter of intent or other third-party valuation, or using
internally generated valuations or discounted cash flow analysis, all of which are Level 3 inputs. Commercial loans are generally valued individually,
while small-ticket commercial loans are valued on an aggregate portfolio basis.
Loans Of the loan balance above, approximately $1.5
billion and $1.6 billion at June 30, 2015 and December 31, 2014, respectively, was valued using Level 2 inputs. As there is no liquid secondary market
for the other loans in the Companys portfolio, the fair value is estimated based on discounted cash flow analyses which use Level 3 inputs at
both June 30, 2015 and December 31, 2014. 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. As these Level 3 unobservable inputs are specific to individual
loans / collateral types, management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more
meaningfully assessed through the evaluation of aggregate carrying values of the loans. The fair value of loans at June 30, 2015 was $14.1 billion,
which was 98.1% of carrying value. The fair value of loans at December 31, 2014 was $14.1 billion, which is 97.9% of carrying value.
Impaired Loans The value of impaired loans is
estimated using the fair value of collateral (on an orderly liquidation basis) if the loan is collateralized, or the present value of expected cash
flows utilizing the current market rate for such loan. As these Level 3 unobservable inputs are specific to individual loans / collateral types,
management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more meaningfully assessed
through the evaluation of aggregate carrying values of impaired loans relative to contractual amounts owed (unpaid principal balance or
UPB) from customers. As of June 30, 2015, the UPB related to impaired loans, including loans 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), totaled $115.5 million.
Including related allowances, these loans are carried at $62.1 million, or 54% of UPB. Of these amounts, $21.4 million and $17.1 million of UPB and
carrying value, respectively, relate to loans with no specific allowance. As of December 31, 2014, the comparable UPB related to impaired loans totaled
$85.3 million and including related allowances, these loans were carried at $45.1 million, or 53% of UPB. Of these amounts, $29.2 million and $21.2
million of UPB and carrying value relate to loans with no specific allowance. The difference between UPB and carrying value reflects cumulative
charge-offs on accounts remaining in process of collection, FSA discounts and allowances. See Note 3 Loans for more
information.
Securities purchased under agreements to resell The
estimated fair values of securities purchased under agreements to resell were calculated internally based on discounted cash flows that utilize
observable market rates for the applicable maturity and which represent Level 2 inputs.
Investment Securities Debt and equity securities
classified as AFS are carried at fair value, as determined either by Level 1 or Level 2 inputs. Debt securities classified as AFS included investments
in U.S. Treasury and federal government agency securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Certain
equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets, while other equity securities used
Level 2 inputs, due to being less frequently traded or having limited quoted market prices. Debt securities classified as HTM are securities that the
Company has both the ability and the intent to hold until maturity and are carried at amortized cost and periodically assessed for OTTI, with the cost
basis reduced when impairment is deemed to be other-than-temporary. Non-marketable equity investments are generally recorded under the cost or equity
method of accounting and are periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary.
For investments in limited equity partnership interests, we use the net asset value provided by the fund manager as an appropriate measure of fair
value.
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 Companys average
current deposit rates for similar terms, which are Level 3 inputs.
Long-term borrowings Unsecured debt of
approximately $10.8 billion par value and secured borrowings of approximately $2.7 billion par value at June 30, 2015, and unsecured debt of
approximately $12.0 billion par value and secured borrowings of approximately $3.3 billion par value at December 31, 2014 were valued using market
inputs, which are Level 2 inputs. Where market estimates were not available for approximately $3.0 billion and $3.2 billion par value at June 30, 2015
and December 31, 2014, respectively, values were estimated using a discounted cash flow analysis with a discount rate approximating current market
rates for issuances by CIT of similar debt, which are Level 3 inputs.
Item 1. Consolidated Financial Statements
29
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 10 REGULATORY CAPITAL
The Company and the Bank are each subject to various regulatory
capital requirements administered by the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation
(FDIC).
Quantitative measures established by regulation to ensure capital
adequacy require that the Company and the Bank each maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. We compute capital ratios in accordance with Federal Reserve capital guidelines for
assessing adequacy of capital. At June 30, 2015, the regulatory capital guidelines applicable to the Company were based on the Basel III Final Rule. At
December 31, 2014, the regulatory capital guidelines that were applicable to the Company were based on the Capital Accord of the Basel Committee on
Banking Supervision (Basel I).
The calculation of the Companys regulatory capital ratios
are subject to review and consultation with the FRB, which may result in refinements to amounts reported at June 30, 2015.
30 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Tier 1 Capital and Total Capital Components(1) (dollars in millions)
CIT |
CIT Bank |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tier 1 Capital |
June 30, 2015 |
December 31, 2014 |
June 30, 2015 |
December 31, 2014 |
|||||||||||||||
Total
stockholders equity(2) |
$ | 8,807.1 | $ | 9,068.9 | $ | 2,779.6 | $ | 2,716.4 | |||||||||||
Effect of certain
items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interest |
59.2 | 53.0 | (0.2 | ) | (0.2 | ) | |||||||||||||
Adjusted total
equity |
8,866.3 | 9,121.9 | 2,779.4 | 2,716.2 | |||||||||||||||
Less:
Goodwill(3) |
(485.2 | ) | (571.3 | ) | (167.8 | ) | (167.8 | ) | |||||||||||
Disallowed
deferred tax assets |
(339.7 | ) | (416.8 | ) | | | |||||||||||||
Disallowed
intangible assets(3) |
(8.6 | ) | (25.7 | ) | (2.6 | ) | (12.1 | ) | |||||||||||
Investment in
certain subsidiaries |
NA | (36.7 | ) | NA | | ||||||||||||||
Other Tier 1
components(4) |
| (4.1 | ) | | | ||||||||||||||
Common Equity
Tier 1 Capital |
8,032.8 | 8,067.3 | 2,609.0 | 2,536.3 | |||||||||||||||
Tier 1
Capital |
8,032.8 | 8,067.3 | 2,609.0 | 2,536.3 | |||||||||||||||
Tier 2 Capital |
|||||||||||||||||||
Qualifying
allowance for credit losses and other reserves(5) |
389.0 | 381.8 | 260.3 | 245.1 | |||||||||||||||
Less: Investment
in certain subsidiaries |
NA | (36.7 | ) | NA | | ||||||||||||||
Other Tier 2
components(6) |
| | | 0.1 | |||||||||||||||
Total qualifying
capital |
$ | 8,421.8 | $ | 8,412.4 | $ | 2,869.3 | $ | 2,781.5 | |||||||||||
Risk-weighted
assets |
$ | 55,396.0 | $ | 55,480.9 | $ | 20,770.4 | $ | 19,552.3 | |||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets): |
|||||||||||||||||||
Actual |
14.5 | % | NA | 12.6 | % | NA | |||||||||||||
Effective minimum
ratios under Basel III guidelines(7) |
7.0 | % | NA | 7.0 | % | NA | |||||||||||||
Tier 1 Capital
(to risk-weighted assets): |
|||||||||||||||||||
Actual |
14.5 | % | 14.5 | % | 12.6 | % | 13.0 | % | |||||||||||
Effective minimum
ratios under Basel III and Basel I guidelines(7) |
8.5 | % | 6.0 | % | 8.5 | % | 6.0 | % | |||||||||||
Total Capital (to risk-weighted assets): |
|||||||||||||||||||
Actual |
15.2 | % | 15.2 | % | 13.8 | % | 14.2 | % | |||||||||||
Effective minimum
ratios under Basel III and Basel I guidelines(7) |
10.5 | % | 10.0 | % | 10.5 | % | 10.0 | % | |||||||||||
Tier 1
Leverage Ratio: |
|||||||||||||||||||
Actual |
17.7 | % | 17.4 | % | 12.2 | % | 12.2 | % | |||||||||||
Required minimum
ratio for capital adequacy purposes |
4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % |
(1) |
The June 30, 2015 presentation reflects the risk-based capital guidelines under Basel III, which became effective on January 1, 2015. The December 31, 2014 reflects the risk-based capital guidelines under then effective Basel I. |
(2) |
See Consolidated Balance Sheets for the components of Total stockholders equity. |
(3) |
Goodwill and disallowed intangible assets adjustments also reflect the portion included within assets held for sale. |
(4) |
Includes the Tier 1 capital charge for nonfinancial equity investments under Basel I. |
(5) |
Other reserves represents additional credit loss reserves for unfunded lending commitments, letters of credit, and deferred purchase agreements, all of which are recorded in Other Liabilities. |
(6) |
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. |
(7) |
Limits as of June 30, 2015 represent the required ratios under the fully phased-in Basel III Final Rule and include the post-transition minimum capital conservation buffer effective January 1, 2019. The limits as of December 31, 2014 represent the ratios under Basel I. |
NA Balance is not applicable under the respective
guidelines.
Effective January 1, 2015, CIT became subject to the risk-based
capital guidelines that are based upon the Basel Committees final framework for strengthening capital and liquidity regulation, Basel III. The
Company had been subject to the guidelines under Basel I. As it currently applies to CIT, the Basel III Final Rule: (i) introduces a new capital
measure called Common Equity Tier 1 (CET1) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specifies
that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments
Item 1. Consolidated Financial Statements
31
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
meeting certain revised requirements; (iii) mandates that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expands the scope of the deductions from and adjustments to capital as compared to the prior regulations.
The Basel III Final Rule also prescribed a new approach for risk
weightings that follow the Standardized approach, which applies to CIT. This approach expands the risk-weighting categories from the former four Basel
I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the exposure,
(ranging from 0% for U.S. government and agency securities, to as high as 1,250% for such exposures as credit-enhancing interest-only strips or
unsettled security/commodity transactions).
The Basel III Final Rule established new minimum capital ratios
for CET1, Tier 1 capital, and Total capital of 4.5%, 6.0% and 8.0%, respectively. In addition, the Basel III Final Rule also introduced a new
capital conservation buffer, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer
is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but
below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
This buffer will be implemented beginning January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches
2.5% on January 1, 2019.
NOTE 11 INCOME TAXES
The Companys global effective income tax rate for the
second quarter and six months ended June 30, 2015 was 25% and 27%, respectively, up from 8% in the year-ago quarter and 9% in the year-ago six months
ended period. The increase in the global effective tax rate is primarily the consequence of the partial release of the valuation allowance on the
Companys U.S. Federal and state net deferred tax assets in 2014 resulting in the current recognition of income tax expense on domestic earnings.
The second quarter and six months ended June 30, 2015 tax provision reflected federal and state income taxes in the U.S. as well as taxes on earnings
of certain international operations. The projected 2015 effective income tax rate is 29% before the impact of discrete tax items.
The quarterly income tax expense is based on an updated
projection of the Companys annual effective tax rate. This updated annual effective tax rate is applied to the year-to-date consolidated pre-tax
income to determine the interim provision for income taxes before discrete items. The impact of any change in the projected annual effective tax rate
from the prior quarter is reflected in the quarterly income tax expense. The change in the effective tax rate each period is impacted by a number of
factors, including the relative mix of domestic and international earnings, adjustments to the valuation allowances, and discrete items. The actual
year- end 2015 effective tax rate may vary from the currently projected tax rate due to changes in these factors.
As of December 31, 2014, CIT had cumulative U.S. federal net
operating loss carry-forwards (NOLs) of $5.7 billion, of which $3.0 billion was related to pre-emergence losses. These NOLs will expire
between 2027 and 2033. The Company generated a modest amount of domestic taxable income year-to-date, which marginally decreased the U.S. federal net
operating loss carry-forwards. Pursuant to Section 382 of the Internal Revenue Code, the Company is generally subject to a $264.7 million annual
limitation on the use of its $3.0 billion of pre-emergence NOLs, of which approximately $1.0 billion is no longer subject to the limitation. NOLs
arising in post-emergence years are not subject to this limitation absent an ownership change as defined by the Internal Revenue Service (IRS) for U.S.
tax purposes.
As noted in our 2014 Annual Report on Form 10-K, management
concluded that it was more likely than not that the Company will generate sufficient taxable income based on managements long-term forecast of
future U.S. taxable income within the applicable carry-forward periods to support partial utilization of the U.S. federal and U.S. state NOLs. The
forecast of future taxable income for the Company reflects a long-term view of growth and returns that management believes is more likely than not of
being realized.
However, the Company retained a valuation allowance of $1.0
billion against its U.S. net deferred tax assets at December 31, 2014. Of the $1.0 billion domestic valuation allowance, approximately $0.7 billion is
against the deferred tax asset on the U.S. federal NOLs and $0.3 billion is against the deferred tax asset on the U.S. state NOLs. No discrete
reduction to the valuation allowance related to the U.S. federal or state NOLs or the capital loss carry-forwards was recorded
year-to-date.
The ability to recognize the remaining valuation allowances
against the U.S. federal and state NOLs, and capital loss carry-forwards net deferred tax assets will be evaluated on a quarterly basis to determine if
there are any significant events that would affect our ability to utilize these deferred tax assets. If events are identified that affect our ability
to utilize our deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowances are required. Such events
may include acquisitions that support the Companys long-term business strategies while also enabling it to accelerate the utilization of its net
operating losses, as evidenced by the acquisition of Direct Capital Corporation in 2014 and the recently approved acquisition of OneWest
Bank.
The impact of the OneWest transaction on the utilization of the
Companys NOLs cannot be considered in the Companys forecast of future taxable income until the period in which the acquisition is
consummated. The acquisition is expected to accelerate the utilization of the Companys NOLs and therefore management anticipates it will reverse
the remaining U.S. federal valuation allowance after consummation of the acquisition in the quarter ended September 30, 2015. The Company is currently
evaluating
32 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
the impact of the acquisition on the U.S. state NOLs and expects the acquisition to utilize some portion of these amounts, which would cause a partial reduction to the U.S. state valuation allowance.
The Company maintained a valuation allowance of $141 million
against certain international reporting entities net deferred tax assets at December 31, 2014. In the evaluation process related to the net
deferred tax assets of the Companys foreign reporting entities, uncertainties surrounding the international business plans, the recent
international platform rationalizations, and the cumulative losses in recent years have made it challenging to reliably project future
taxable income. The primary inputs for the forecast of future taxable income will continue to be identified as the business plans for the international
operations evolve, and potential tax planning strategies are identified. Thus, as of this reporting period, the negative evidence continues to outweigh
the positive evidence, and the Company continues to maintain a full valuation allowance on these entities net deferred tax
assets.
Liabilities for Uncertain Tax Positions
The Companys potential liability for uncertain tax
positions totaled $41.8 million at June 30, 2015 and $53.7 million at December 31, 2014. The change in the balance since December 31, 2014 primarily
occurred this quarter and is mainly comprised of a reduction of $9 million resulting from receipt of a favorable tax ruling on an uncertain tax
position taken on the prior years tax returns. Management estimates the remaining liability may be reduced by up to $5 million within the next
twelve months. The Companys accrued liability for interest and penalties totaled $12.8 million at June 30, 2015 and $13.3 million at December 31,
2014. The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax expense.
NOTE 12 STOCKHOLDERS
EQUITY
Accumulated Other Comprehensive Income/(Loss)
The following table details the components of Accumulated Other
Comprehensive Loss, net of tax:
Components of Accumulated Other Comprehensive Income (Loss) (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Gross Unrealized |
Income Taxes |
Net Unrealized |
Gross Unrealized |
Income Taxes |
Net Unrealized |
||||||||||||||||||||||
Foreign currency
translation adjustments |
$ | (87.0 | ) | $ | (13.1 | ) | $ | (100.1 | ) | $ | (75.4 | ) | $ | | $ | (75.4 | ) | ||||||||||
Changes in
benefit plan net gain/(loss) and prior service (cost)/credit |
(59.3 | ) | 0.5 | (58.8 | ) | (58.7 | ) | 0.2 | (58.5 | ) | |||||||||||||||||
Unrealized net
gains (losses) on available for sale securities |
0.3 | (0.2 | ) | 0.1 | | | | ||||||||||||||||||||
Total
accumulated other comprehensive loss |
$ | (146.0 | ) | $ | (12.8 | ) | $ | (158.8 | ) | $ | (134.1 | ) | $ | 0.2 | $ | (133.9 | ) |
The following table details the changes in the components of
Accumulated Other Comprehensive Income (Loss), net of income taxes.
Changes in Accumulated Other Comprehensive Loss by Component (dollars in millions)
Foreign currency translation adjustments |
Changes in benefit plan net gain (loss) and prior service (cost) credit |
Changes in fair values of derivatives qualifying as cash flow hedges |
Unrealized net gains (losses) on available for sale securities |
Total AOCI |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of
December 31, 2014 |
$ | (75.4 | ) | $ | (58.5 | ) | $ | | $ | | $ | (133.9 | ) | |||||||||
AOCI activity
before reclassifications |
(28.1 | ) | (0.4 | ) | | 0.1 | (28.4 | ) | ||||||||||||||
Amounts
reclassified from AOCI |
3.4 | 0.1 | | | 3.5 | |||||||||||||||||
Net current
period AOCI |
(24.7 | ) | (0.3 | ) | | 0.1 | (24.9 | ) | ||||||||||||||
Balance as of
June 30, 2015 |
$ | (100.1 | ) | $ | (58.8 | ) | $ | | $ | 0.1 | $ | (158.8 | ) | |||||||||
Balance as of
December 31, 2013 |
$ | (49.4 | ) | $ | (24.1 | ) | $ | (0.2 | ) | $ | 0.1 | $ | (73.6 | ) | ||||||||
AOCI activity
before reclassifications |
(9.6 | ) | (0.1 | ) | (0.1 | ) | 0.1 | (9.7 | ) | |||||||||||||
Amounts
reclassified from AOCI |
2.3 | 3.3 | | 0.2 | 5.8 | |||||||||||||||||
Net current
period AOCI |
(7.3 | ) | 3.2 | (0.1 | ) | 0.3 | (3.9 | ) | ||||||||||||||
Balance as of
June 30, 2014 |
$ | (56.7 | ) | $ | (20.9 | ) | $ | (0.3 | ) | $ | 0.4 | $ | (77.5 | ) |
Item 1. Consolidated Financial Statements
33
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other Comprehensive Income/(Loss)
The amounts included in the Statement of Comprehensive Income
(Loss) are net of income taxes.
Foreign currency translation reclassification adjustments
impacting net income were insignificant and $0.5 million for the quarters ended June 30, 2015 and June 30, 2014, respectively and were $3.4 million and
$2.3 million for the corresponding year to date periods. The change in income taxes associated with foreign currency translation adjustments was $6.0
million and $(13.1) million for the quarter and six months ended June 30, 2015 and there were no income taxes associated with foreign currency
translation adjustments in the prior year period.
The changes in benefit plans net gain/(loss) and prior service
(cost)/credit reclassification adjustments impacting net income was $0.1 million for the quarter and six months ended June 30, 2015 and was $1.7
million and $3.3 million for the quarter and six months ended June 30, 2014. The change in income taxes associated with changes in benefit plans net
gain/(loss) and prior service (cost)/credit was insignificant and $0.3 million for the quarter and six months ended June 30, 2015 and was not
significant for the prior year periods.
There were no reclassification adjustments impacting net income
related to changes in fair value of derivatives qualifying as cash flow hedges for the quarters or six months ended June 30, 2015 and June 30, 2014.
There were no income taxes associated with changes in fair values of derivatives qualifying as cash flow hedges for the quarters or six months ended
June 30, 2015 and June 30, 2014.
There were no reclassification adjustments impacting net income
for unrealized gains (losses) on available for sale securities for the quarters or six months ended June 30, 2015 and was $0.2 million for the quarter
and six months ended June 30, 2014. The change in income taxes associated with net unrealized gains on available for sale securities was approximately
$(0.4) million and $(0.2) million for the quarter and six months ended June 30, 2015 and was insignificant and $(0.1) million for the quarter and six
months ended June 30, 2014.
The Company has operations in Canada and other countries. The
functional currency for foreign operations is generally the local currency. The value of assets and liabilities of these operations is translated into
U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates during
the year. The resulting foreign currency translation gains and losses, as well as offsetting gains and losses on hedges of net investments in foreign
operations, are reflected in AOCI. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other
than the functional currency are recorded in Other Income.
Reclassifications Out of Accumulated Other Comprehensive Income (dollars in millions)
Affected Income Statement Line Item |
Gross Amount |
Tax |
Net Amount |
Gross Amount |
Tax |
Net Amount |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarters Ended June 30, | 2015 |
2014 |
||||||||||||||||||||||||||
Foreign
currency translation adjustments gains (losses) |
Operating expenses | $ | | $ | | $ | | $ | 0.5 | $ | | $ | 0.5 | |||||||||||||||
Changes in
benefit plan net gain/(loss) and prior service (cost)/credit gains (losses) |
Other income | 0.1 | | 0.1 | 1.7 | | 1.7 | |||||||||||||||||||||
Unrealized net
gains (losses) on available for sale securities |
Other income | | | | 0.3 | (0.1 | ) | 0.2 | ||||||||||||||||||||
Total
Reclassifications out of AOCI |
$ | 0.1 | $ | | $ | 0.1 | $ | 2.5 | $ | (0.1 | ) | $ | 2.4 | |||||||||||||||
Six Months Ended June 30, | 2015 |
2014 |
||||||||||||||||||||||||||
Foreign
currency translation adjustments gains (losses) |
Operating expenses | $ | 3.4 | $ | | $ | 3.4 | $ | 2.3 | $ | | $ | 2.3 | |||||||||||||||
Changes in
benefit plan net gain/(loss) and prior service (cost)/credit gains (losses) |
Other income | 0.1 | | 0.1 | 3.3 | | 3.3 | |||||||||||||||||||||
Unrealized net
gains (losses) on available for sale securities |
Other income | | | | 0.3 | (0.1 | ) | 0.2 | ||||||||||||||||||||
Total
Reclassifications out of AOCI |
$ | 3.5 | $ | | $ | 3.5 | $ | 5.9 | $ | (0.1 | ) | $ | 5.8 |
34 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 13 COMMITMENTS
The accompanying table summarizes credit-related commitments, as
well as purchase and funding commitments:
Commitments (dollars in millions)
June 30, 2015 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Due to Expire |
December 31, 2014 |
||||||||||||||||||
Within One Year |
After One Year |
Total Outstanding |
Total Outstanding |
||||||||||||||||
Financing Commitments |
|||||||||||||||||||
Financing
assets |
$ | 1,082.1 | $ | 4,157.3 | $ | 5,239.4 | $ | 4,747.9 | |||||||||||
Letters of credit |
|||||||||||||||||||
Standby letters
of credit |
41.8 | 313.1 | 354.9 | 360.1 | |||||||||||||||
Other letters of
credit |
30.7 | | 30.7 | 28.3 | |||||||||||||||
Guarantees |
|||||||||||||||||||
Deferred
purchase agreements |
1,400.4 | | 1,400.4 | 1,854.4 | |||||||||||||||
Guarantees,
acceptances and other recourse obligations |
1.3 | | 1.3 | 2.8 | |||||||||||||||
Purchase and Funding Commitments |
|||||||||||||||||||
Aerospace
manufacturer purchase commitments |
1,033.4 | 9,606.1 | 10,639.5 | 10,820.4 | |||||||||||||||
Rail and other
manufacturer purchase commitments |
1,009.3 | 559.3 | 1,568.6 | 1,323.2 |
Financing Commitments
Financing commitments, referred to as loan commitments or lines
of credit, reflect CITs agreements to lend to its customers, subject to the customers compliance with contractual obligations. Included in
the table above are commitments that have been extended to and accepted by customers, clients or agents, but on which the criteria for funding have not
been completed of $751 million at June 30, 2015 and $355 million at December 31, 2014. Financing commitments also include credit line agreements to
Commercial Services clients that are cancellable by us only after a notice period. The notice period is typically 90 days or less. The amount available
under these credit lines, net of the amount of receivables assigned to us, was $394 million at June 30, 2015 and $112 million at December 31, 2014. As
financing commitments may not be fully drawn, may expire unused, may be reduced or cancelled at the customers request, and may require the
customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow
requirements.
The table above includes approximately $1.5 billion of undrawn
financing commitments at June 30, 2015 and $1.3 billion at December 31, 2014 for instances where the customer is not in compliance with contractual
obligations, and therefore CIT does not have the contractual obligation to lend.
At June 30, 2015, substantially all undrawn financing commitments
were senior facilities. Most of the Companys undrawn and available financing commitments are in the Corporate Finance division of
NACF.
The table above excludes uncommitted revolving credit facilities
extended by Commercial Services to its clients for working capital purposes. In connection with these facilities, Commercial Services has the sole
discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and
whether to honor any specific advance requests made by its clients under these credit facilities.
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
receivable terms are generally sixty days or less. If the clients 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 in the table above 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.
Item 1. Consolidated Financial Statements
35
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The table above includes $1,310 million and $1,775 million of DPA
credit protection at June 30, 2015 and December 31, 2014, respectively, related to receivables which have been presented to us for credit protection
after shipment of goods has occurred and the customer has been invoiced. The table also includes $90 million and $79 million available under DPA credit
line agreements, net of the amount of DPA credit protection provided at June 30, 2015 and December 31, 2014, respectively. The DPA credit line
agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period. The notice period is
typically 90 days or less.
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 the Companys internal customer and facility credit ratings. The liability recorded in Other
Liabilities related to the DPAs totaled $4.2 million and $5.2 million at June 30, 2015 and December 31, 2014, respectively.
Purchase and Funding Commitments
CITs purchase commitments relate primarily to purchases of
commercial aircraft and rail equipment. Commitments to purchase new commercial aircraft are predominantly with Airbus Industries (Airbus),
The Boeing Company (Boeing), and Embraer S.A. (Embraer). CIT may also commit to purchase an aircraft directly from 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,
151 aircraft remain to be purchased from Airbus, Boeing and Embraer at June 30, 2015. Aircraft deliveries are scheduled periodically through 2020.
Commitments exclude unexercised options to order additional aircraft. Aerospace purchase commitments also include $0.2 billion of equipment to be
purchased in 2015 pursuant to sale and lease-back agreements with airlines.
The Companys rail business entered into commitments to
purchase railcars from multiple manufacturers. At June 30, 2015, approximately 11,900 railcars remain to be purchased from manufacturers with
deliveries through 2017. Rail equipment purchase commitments are at fixed prices subject to price increases for certain materials.
Other vendor purchase commitments primarily relate to Equipment
Finance.
NOTE 14 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 will be, if any. 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 Companys financial condition, but may be material to the Companys 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 established reserves and insurance. For other matters for which a
loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation where losses are reasonably possible, management
currently estimates the aggregate range of reasonably possible losses as up to $75 million in excess of established reserves and insurance related to
those matters, if any. This estimate represents reasonably possible losses (in excess of established reserves and insurance) 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, 2015. 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 Companys maximum loss exposure.
The foregoing statements about CITs Litigation are based on
the Companys judgments, assumptions, and estimates and are necessarily subjective and uncertain. Several of the Companys Litigation matters
are described below.
36 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
LAC-MÉGANTIC, QUEBEC DERAILMENT
On July 6, 2013, a freight train including five locomotives and
seventy-two tank cars carrying crude oil derailed in the town of Lac-Mégantic, Quebec. Nine of the tank cars were owned by The CIT
Group/Equipment Financing, Inc. (CIT/EF) (a wholly-owned subsidiary of the Company) and leased to Western Petroleum Company
(WPC), a subsidiary of World Fuel Services Corp. (WFS). Two of the locomotives are owned by CIT/EF and were leased to Montreal,
Maine & Atlantic Railway, Ltd. (MMA), the railroad operating the freight train at the time of the derailment, a subsidiary of Rail
World, Inc.
The derailment was followed by explosions and fire, which
resulted in the deaths of over forty people and an unknown number of injuries, the destruction of more than thirty buildings in Lac-Mégantic,
and the release of crude oil on land and into the Chaudière River. The extent of the property and environmental damage has not yet been
determined. Twenty lawsuits have been filed in Illinois by representatives of the deceased in connection with the derailment. The Company is named as a
defendant in seven of the Illinois lawsuits, together with 13 other defendants, including WPC, MMA (who has since been dismissed without prejudice as a
result of its chapter 11 bankruptcy filing on August 7, 2013), and the lessors of the other locomotives and tank cars. Liability could be joint and
several among some or all of the defendants. All but two of these cases have been consolidated in the U.S. District Court in the Northern District of
Illinois and transferred to the U.S. District Court in Maine. The Company has been named as an additional defendant in a pending class action in the
Superior Court of Quebec, Canada. Other cases may be filed in U.S. and Canadian courts. The plaintiffs in the pending U.S. and Canadian actions assert
claims of negligence and strict liability based upon alleged design defect against the Company in connection with the CIT/EF tank cars. The Company has
rights of indemnification and defense against its lessees, WPC and MMA (a debtor in bankruptcy), and also has rights as an additional insured under
liability coverage maintained by the lessees. On July 28, 2014, the Company commenced a lawsuit against WPC in the U.S. District Court in the District
of Minnesota to enforce its rights of indemnification and defense. In addition to its indemnification and insurance rights against its lessees, the
Company and its subsidiaries maintain contingent and general liability insurance for claims of this nature, and the Company and its insurers are
working cooperatively with respect to these claims.
The Lac-Mégantic derailment triggered a number of
regulatory investigations and actions. The Transportation Safety Board of Canada issued its final report on the cause(s) of the derailment in September
2014. In addition, Quebecs Environment Ministry has issued an order to WFS, WPC, MMA, and Canadian Pacific Railway (which allegedly subcontracted
with MMA) to pay for the full cost of environmental clean-up and damage assessment related to the derailment.
The Company is vigorously defending the claims that have been
asserted, including pursuing its rights under indemnification agreements and insurance policies. MMAs U.S. bankruptcy trustee, together with its
Canadian bankruptcy monitor, has reached settlements with almost all of the defendants in the various pending lawsuits, including CIT. The settlements
remain subject to court approval in Canada and the U.S. CITs settlement, if approved, will not have a material adverse effect on the
Companys financial condition or results of operations.
BRAZILIAN TAX MATTERS
Banco Commercial Investment Trust do Brasil S.A. (Banco
CIT), CITs Brazilian bank subsidiary, is pursuing a number of tax appeals relating to disputed local tax assessments on leasing services
and importation of equipment. The disputes primarily involve questions of whether the correct taxing authorities were paid and whether the proper tax
rate was applied.
ISS Tax Appeals
Notices of infraction were received relating to the payment of
Imposto sobre Serviços (ISS), charged by municipalities in connection with services. The Brazilian municipalities of Itu and
Cascavel claim that Banco CIT should have paid them ISS tax on leasing services for tax years 2006 2011. Instead, Banco CIT paid the ISS tax to
Barueri, the municipality in which it is domiciled in São Paulo, Brazil. The disputed issue is whether the ISS tax should be paid to the
municipality in which the leasing company is located or the municipality in which the services were rendered or the customer is located. One of the
pending ISS tax matters was resolved in favor of Banco CIT in April 2014. The amounts claimed by the taxing authorities of Itu and Cascavel
collectively for open tax assessments and penalties are approximately 528,000 Reais (approximately $170,000). Favorable legal precedent in a similar
tax appeal has been issued by Brazils highest court resolving the conflict between municipalities.
ICMS Tax Appeals
Notices of infraction were received relating to the payment of
Imposto sobre Circulaco de Mercadorias e Servicos (ICMS) taxes charged by states in connection with the importation of equipment. The state
of São Paulo claims that Banco CIT should have paid it ICMS tax for tax years 2006 2009 because Banco CIT, the purchaser, is located in
São Paulo. Instead, Banco CIT paid ICMS tax to the states of Espirito Santo, Espirito Santa Caterina, and Alagoas, where the imported equipment
arrived. A regulation issued by São Paulo in December 2013 reaffirms a 2009 agreement by São Paulo to conditionally recognize ICMS tax
payments made to Espirito Santo. One of the pending notices of infraction against Banco CIT related to taxes paid to Espirito Santo was extinguished in
May 2014. Another assessment related to taxes paid to Espirito Santo in the amount of 66.7 million Reais ($21.5 million) was upheld in a ruling issued
by the administrative court in
Item 1. Consolidated Financial Statements
37
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
May 2014. That ruling has been appealed. Petitions seeking recognition of the taxes paid to Espirito Santo have been filed with respect to the pending notices of infraction. Petitions were filed in a general amnesty program regarding all but one of the assessments related to taxes paid to Santa Caterina and Alagoas. Those petitions have resulted in the extinguishment of all but one of the Santa Caterina and Alagoas assessments. The amounts claimed by São Paulo collectively for open tax assessments and penalties are approximately 73 million Reais (approximately $23.5 million) for goods imported into the state of Espirito Santo from 2006 2009 and the state of Alagoas in 2008.
A notice of infraction was received relating to São
Paulos challenge of the ICMS tax rate paid by Banco CIT for tax years 2004 2007. São Paulo alleges that Banco CIT paid a lower rate
of ICMS tax on imported equipment than was required (8.8% instead of 18%). Banco CIT challenged the notice of infraction and was partially successful
based upon the type of equipment imported. Banco CIT has commenced a judicial proceeding challenging the unfavorable portion of the administrative
ruling. The amount claimed by São Paulo for tax assessments and penalties is approximately 4 million Reais (approximately $1.3
million).
The current potential aggregate exposure in taxes, fines and
interest for the ISS and the ICMS tax matters is approximately 77.5 million Reais (approximately $25.0 million).
NOTE 15 BUSINESS SEGMENT INFORMATION
Managements Policy in Identifying Reportable Segments
Managements Policy in Identifying Reportable Segments
CITs reportable segments are comprised of divisions that
are aggregated into segments primarily based upon industry categories, geography, target markets and customers served, 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
TIF offers secured lending and leasing products to midsize and
larger companies across the aerospace, rail and maritime industries, as well as international finance, which includes equipment financing businesses in
U.K. and China. Revenues generated by TIF include rents collected on leased assets, interest on loans, fees, and gains from assets
sold.
NACF offers secured lending as well as other financial products
and services predominately to small and midsize companies in the U.S. and Canada. These include secured revolving lines of credit and term loans,
leases, accounts receivable credit protection, accounts receivable collection, import and export financing, factoring, debtor-in-possession and
turnaround financing and receivable advisory services. Revenues generated by NACF include interest earned on loans, rents collected on leased assets,
fees and other revenue from leasing activities and capital markets transactions, and commissions earned on factoring and related
activities.
NSP consists of portfolios that we no longer consider strategic.
At June 30, 2015 these consisted primarily of equipment financing portfolios in Mexico and Brazil, both of which were under separate contracts of
sale.
Segment Profit and Assets
Certain activities are not attributed to operating segments and
are included in Corporate & Other. Some of the more significant items include loss on debt extinguishments, costs associated with excess cash
liquidity (Interest Expense), mark-to-market adjustments on non-qualifying derivatives (Other Income) and restructuring charges for severance and
facilities exit activities (Operating Expenses).
38 CIT GROUP INC
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Segment Pre-tax Income (Loss) (dollars in millions)
For the quarter ended June 30, 2015 |
Transportation & International Finance |
North American Commercial Finance |
Non-Strategic Portfolios |
Corporate & Other |
Total CIT |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest
income |
$ | 69.9 | $ | 199.0 | $ | 10.2 | $ | 4.7 | $ | 283.8 | ||||||||||||
Interest
expense |
(164.9 | ) | (73.3 | ) | (9.2 | ) | (17.8 | ) | (265.2 | ) | ||||||||||||
Provision for
credit losses |
0.4 | (18.8 | ) | | | (18.4 | ) | |||||||||||||||
Rental income on
operating leases |
498.6 | 27.9 | 5.2 | | 531.7 | |||||||||||||||||
Other
income |
16.6 | 69.2 | (5.7 | ) | (16.6 | ) | 63.5 | |||||||||||||||
Depreciation on
operating lease equipment |
(136.7 | ) | (21.1 | ) | | | (157.8 | ) | ||||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | | | | (49.4 | ) | |||||||||||||||
Operating
expenses |
(77.6 | ) | (135.4 | ) | (10.9 | ) | (11.1 | ) | (235.0 | ) | ||||||||||||
Loss on debt
extinguishments |
| | | (0.1 | ) | (0.1 | ) | |||||||||||||||
Income (loss)
from continuing operations before (provision) benefit for income taxes |
$ | 156.9 | $ | 47.5 | $ | (10.4 | ) | $ | (40.9 | ) | $ | 153.1 | ||||||||||
For the
quarter ended June 30, 2014 |
||||||||||||||||||||||
Interest
income |
$ | 72.2 | $ | 208.8 | $ | 25.6 | $ | 3.2 | $ | 309.8 | ||||||||||||
Interest
expense |
(155.1 | ) | (68.1 | ) | (23.0 | ) | (16.0 | ) | (262.2 | ) | ||||||||||||
Provision for
credit losses |
(8.3 | ) | (2.6 | ) | 0.7 | | (10.2 | ) | ||||||||||||||
Rental income on
operating leases |
485.1 | 25.1 | 9.4 | | 519.6 | |||||||||||||||||
Other
income |
10.4 | 69.7 | 3.9 | 9.7 | 93.7 | |||||||||||||||||
Depreciation on
operating lease equipment |
(131.6 | ) | (20.0 | ) | (5.7 | ) | | (157.3 | ) | |||||||||||||
Maintenance and
other operating lease expenses |
(49.0 | ) | | | | (49.0 | ) | |||||||||||||||
Operating
expenses |
(75.5 | ) | (120.2 | ) | (20.5 | ) | (8.8 | ) | (225.0 | ) | ||||||||||||
Loss on debt
extinguishments |
| | | (0.4 | ) | (0.4 | ) | |||||||||||||||
Income (loss)
before benefit (provision) for income taxes |
$ | 148.2 | $ | 92.7 | $ | (9.6 | ) | $ | (12.3 | ) | $ | 219.0 | ||||||||||
Six Months
Ended June 30, 2015 |
||||||||||||||||||||||
Interest
income |
$ | 138.3 | $ | 395.1 | $ | 22.5 | $ | 8.9 | $ | 564.8 | ||||||||||||
Interest
expense |
(333.5 | ) | (147.4 | ) | (20.0 | ) | (35.6 | ) | (536.5 | ) | ||||||||||||
Provision for
credit losses |
(10.2 | ) | (42.8 | ) | | | (53.0 | ) | ||||||||||||||
Rental income on
operating leases |
996.1 | 55.1 | 11.1 | | 1,062.3 | |||||||||||||||||
Other
income |
50.9 | 135.5 | (13.5 | ) | (23.0 | ) | 149.9 | |||||||||||||||
Depreciation on
operating lease equipment |
(272.8 | ) | (41.8 | ) | | | (314.6 | ) | ||||||||||||||
Maintenance and
other operating lease costs |
(95.5 | ) | | | | (95.5 | ) | |||||||||||||||
Operating
expenses |
(159.4 | ) | (270.1 | ) | (23.3 | ) | (23.8 | ) | (476.6 | ) | ||||||||||||
Loss on debt
extinguishments |
| | | (0.1 | ) | (0.1 | ) | |||||||||||||||
Income (loss)
before benefit (provision) for income taxes |
$ | 313.9 | $ | 83.6 | $ | (23.2 | ) | $ | (73.6 | ) | $ | 300.7 | ||||||||||
Select Period
End Balances |
||||||||||||||||||||||
Loans |
3,717.1 | 15,932.2 | | | 19,649.3 | |||||||||||||||||
Credit balances
of factoring clients |
| (1,373.3 | ) | | | (1,373.3 | ) | |||||||||||||||
Assets held for
sale |
705.5 | 88.3 | 293.0 | | 1,086.8 | |||||||||||||||||
Operating lease
equipment, net |
14,827.9 | 281.7 | | | 15,109.6 |
Item 1. Consolidated Financial Statements
39
CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Segment Pre-tax Income (Loss) (dollars in millions) continued
Six Months Ended June 30, 2014 |
Transportation & International Finance |
North American Commercial Finance |
Non-Strategic Portfolios |
Corporate & Other |
Total CIT |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest
income |
$ | 148.9 | $ | 402.2 | $ | 54.0 | $ | 6.9 | $ | 612.0 | |||||||||||||
Interest
expense |
(315.8 | ) | (137.0 | ) | (47.9 | ) | (33.4 | ) | (534.1 | ) | |||||||||||||
Provision for
credit losses |
(20.7 | ) | (25.8 | ) | (0.3 | ) | (0.1 | ) | (46.9 | ) | |||||||||||||
Rental income on
operating leases |
944.7 | 47.9 | 18.9 | | 1,011.5 | ||||||||||||||||||
Other
income |
17.6 | 131.5 | 8.3 | 7.4 | 164.8 | ||||||||||||||||||
Depreciation on
operating lease equipment |
(253.3 | ) | (41.9 | ) | (10.9 | ) | | (306.1 | ) | ||||||||||||||
Maintenance and
other operating lease costs |
(100.6 | ) | | | | (100.6 | ) | ||||||||||||||||
Operating
expenses |
(155.0 | ) | (241.7 | ) | (39.7 | ) | (22.1 | ) | (458.5 | ) | |||||||||||||
Loss on debt
extinguishments |
| | | (0.4 | ) | (0.4 | ) | ||||||||||||||||
Income (loss)
before benefit (provision) for income taxes |
$ | 265.8 | $ | 135.2 | $ | (17.6 | ) | $ | (41.7 | ) | $ | 341.7 | |||||||||||
Select Period End Balances |
|||||||||||||||||||||||
Loans |
$ | 3,228.3 | $ | 15,376.1 | $ | | $ | | $ | 18,604.4 | |||||||||||||
Credit balances
of factoring clients |
| (1,296.5 | ) | | | (1,296.5 | ) | ||||||||||||||||
Assets held for
sale |
671.7 | 33.7 | 623.5 | | 1,328.9 | ||||||||||||||||||
Operating lease
equipment, net |
14,512.9 | 240.2 | 35.2 | | 14,788.3 |
NOTE 16 SUBSEQUENT EVENTS
OneWest Bank Acquisition
During July 2015, the FRB and OCC approved CITs application
to acquire IMB Holdco LLC, the parent company of OneWest Bank, N.A. (OneWest Bank), and the transaction closed on August 3, 2015 (the
OneWest Transaction). CIT paid approximately $3.4 billion as consideration, comprised of approximately $1.9 billion in cash proceeds,
approximately 30.9 million shares of CIT Group Inc. common stock (valued at approximately $1.5 billion at the time of closing), and approximately
168,000 restricted stock units of CIT (valued at approximately $8 million at the time of closing). Total consideration also included $116 million of
cash retained by CIT as a holdback for certain potential liabilities relating to IMB and $2 million of cash for expenses of the holders
representative. Based on OneWest Banks Call Report as of June 30, 2015, OneWest Banks total assets were in excess of $21 billion and
deposits were over $14 billion. Following the close of the OneWest Transaction, CIT Bank, CITs banking subsidiary, merged with and into OneWest
Bank and changed its name to the CIT Bank, National Association (CIT Bank, N.A.) name. CIT Bank, N.A., a wholly-owned
subsidiary of CIT, is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury (OCC). The acquisition
will be accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations. Due to the timing of the
acquisition, CIT is currently in the process of completing the purchase accounting and has not made all of the remaining disclosures required by ASC
805-10-50, such as the fair value of assets acquired and supplemental pro forma information, which will be disclosed in subsequent
filings.
Due to the timing of the transaction, balances and results of
operations of OneWest Bank are not included in CITs reported financial results in this Form 10-Q as of or for the quarter and six months ended
June 30, 2015, nor is any amount included in the Litigation estimate of reasonably possible losses.
Sale of Mexico Business
We received regulatory approval and sold the
Mexico business, which included approximately $0.2 billion of assets held for sale, in
August 2015. In conjunction with the closing of the transaction, we do not anticipate any gain on sale and CTA related to
the Mexico portfolio, currently pre-tax of $19 million at June 30, 2015, recorded in accumulated other
comprehensive loss within stockholders equity, will be recognized as a reduction to income, with the
pre-tax amount decreasing other income and the tax effect in the provision for income taxes.
40 CIT GROUP INC
Managements Discussion and Analysis of Financial Condition and Results of Operations |
and
Quantitative and Qualitative Disclosures about Market Risk |
BACKGROUND
CIT Group Inc., together with its subsidiaries (we,
our, CIT or the Company) has provided financial solutions to its clients since its formation in 1908. We provide
financing, leasing and advisory services principally to middle market companies in a wide variety of industries primarily in North America, and
equipment financing and leasing solutions to the transportation industry worldwide. We had over $35 billion of financing and leasing assets at June 30,
2015. CIT became a bank holding company (BHC) in December 2008 and a financial holding company (FHC) in July
2013.
CIT is regulated by the Board of Governors of the Federal Reserve
System (FRB) and the Federal Reserve Bank of New York (FRBNY) under the U.S. Bank Holding Company Act of 1956. CIT Bank (the
Bank), a wholly-owned subsidiary, was a Utah state chartered bank located in Salt Lake City that offers commercial financing and leasing
products as well as a suite of savings options and was subject to regulation by the Federal Depository Insurance Corporation (FDIC) and the
Utah Department of Financial Institutions (UDFI).
During July 2015, the FRB and OCC approved CITs application
to acquire IMB Holdco LLC, the parent company of OneWest Bank, N.A. (OneWest Bank), and the transaction closed on August 3, 2015 (the
OneWest Transaction). CIT paid approximately $3.4 billion as consideration, comprised of approximately $1.9 billion in cash proceeds,
approximately 30.9 million shares of CIT Group Inc. common stock (valued at approximately $1.5 billion at the time of closing), and approximately
168,000 restricted stock units of CIT (valued at approximately $8 million at the time of closing). Total consideration also included $116 million of
cash retained by CIT as a holdback for certain potential liabilities relating to IMB and $2 million of cash for expenses of the holders
representative. Following the close of the OneWest Transaction, CIT Bank, CITs banking subsidiary, merged with and into OneWest Bank under the
CIT Bank, National Association (CIT Bank, N.A.) name. CIT Bank, N.A., a wholly-owned subsidiary of CIT, is regulated by the
Office of the Comptroller of the Currency, U.S. Department of the Treasury (OCC). Due to the timing of the transaction, balances and
results of operations of OneWest Bank are not included in CITs reported financial results in this Form 10-Q as of or for the quarter and six
months ended June 30, 2015.
Following the closing of this transaction, CIT will become a
systemically important financial institution (a SIFI) as defined by the criteria of the Financial Stability Oversight Council
(FSOC), a council established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a SIFI, CIT, like all other SIFI
entities, is subject to enhanced prudential supervision by the FRB. These enhancements include, among other requirements, stringent reporting
standards, a capital plan and enhanced stress testing, and a recovery and resolution plan. These additional requirements will be phased in over time,
through March 2017. As a SIFI, we expect additional costs to be incurred due to the added requirements.
Managements 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 and a glossary of key terms used is included in Part I Item 1. Business Overview of our Annual Report on Form
10-K for the year ended December 31, 2014.
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 financial measures based on accounting principles generally accepted in the United States of America
(GAAP).
DISCONTINUED OPERATION
On April 25, 2014, the Company completed the sale of the student
lending business, which consisted of a portfolio of U.S. Government-guaranteed student loans that was in run-off, along with certain secured debt and
servicing rights. As a result, the student lending business is reported as a discontinued operation and all data included has been adjusted to reflect
this presentation. See Note 2 Discontinued Operation in Item 1. Consolidated Financial Statements for additional information and
financial data.
Unless specifically noted, the discussions and data presented
throughout the following sections reflect CIT balances on a continuing operations basis.
2015 FINANCIAL OVERVIEW
Our second quarter and year-to-date 2015 operating results
reflected:
Net income totaled $115 million, $0.66 per diluted
share, for the June 30, 2015 quarter, compared to $247 million, $1.29 per diluted share, for the year-ago quarter and
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
$104 million, $0.59 per diluted share, in the prior quarter. Income from continuing operations (after taxes) was $115 million, $0.66 per diluted share,
compared to $195 million, $1.02 per diluted share, for the year-ago quarter and $104 million, $0.59 per diluted share in the prior quarter. Net income
compared to the year-ago quarter reflected a higher provision for income taxes, margin compression due to lower yields and the absence of interest
recoveries, which offset the benefit of higher earning assets. Net income and income from continuing operations (after taxes) was $219 million, $1.24
per diluted share, for the six months ended June 30, 2015, compared to net income of $364 million, $1.88 per diluted share, and income from continuing
operations of $310 million, $1.60 per diluted share, for the six months ended June 30, 2014. The three and six month periods ended June 30, 2014
included $52 million, $0.27 per diluted share, and $54 million, $0.28 per diluted share, of income from a discontinued operation, respectively.
Income from continuing operations, before provision for
income taxes totaled $153 million for the June 30, 2015 quarter, compared to $219 million for the year-ago quarter and $148 million for the
prior quarter. Pre-tax income was down from last year, as pressure on yields in certain asset sectors and lower other income offset the benefit from
higher assets. Pre-tax income was up sequentially, as lower credit and funding costs helped offset lower other income. Income from continuing
operation, before provision for income taxes was $301 million for the six months ended June 30, 2015, down from $342 million for the year-ago
period.
Net finance revenue(1)
(NFR) was $343 million compared to $361 million in the year-ago quarter and $337 million
in the prior quarter. Average earning assets(1) were $34.1 billion in the current quarter, up
from $33.2 billion in the year-ago quarter and $33.8 billion in the prior quarter. NFR as a percentage of average
earning assets (net finance margin or NFM) was 4.02%, compared to 4.35% in the year-ago
quarter and 4.00% in the prior quarter. While assets grew from the prior year, pressure on yields and lower utilization
rates in Commercial Air impacted revenues. NFM was relatively constant from the prior quarter, while the decline
from the year-ago quarter reflected pressure on yields, the lack of interest recoveries and absence of FSA benefit
from accelerated debt redemption. NFR and NFM were $681 million and 4.01% for the six months ended June 30, 2015,
down from with $683 million and 4.18% for the year-ago period.
While other financial institutions may use net interest margin
(NIM) to measure earnings on interest bearing assets, defined as interest income less interest expense, we discuss NFR, which includes net
operating lease revenue (operating lease rental revenue, less depreciation expense and maintenance and other operating lease expenses), due to the
significant impact of operating lease equipment on revenue and expense. Net operating lease revenue was up from the year-ago quarter, as increased
revenue earned on higher average earning assets offset pressure on revenues from lower rates on new leases and lower utilization. Compared to the prior
quarter, the slight decrease in net operating lease revenue was driven by lower lease rates and higher maintenance costs, as equipment utilization
remained essentially flat.
Provision for credit losses was $18 million,
compared to $10 million in the year-ago quarter and $35 million in the prior quarter. The decline from the prior quarter is primarily due to a decrease
in the non-specific reserve. The provision for credit losses was $53 million for the six months ended June 30, 2015, up from $47 million for the 2014
period.
Credit metrics remain at or near cycle lows.
Non-accrual loans were $198 million, or 1.01% of finance receivables, at June 30, 2015 compared to $184 million (0.94%) at March 31, 2015 and $190
million (1.02%) at June 30, 2014. The increase was primarily in International Finance. Net charge-offs were $24 million, or 0.48% of average finance
receivables (AFR), up from $21 million (0.45%) in the year-ago quarter and $21 million (0.43%) in the prior quarter. Charge-offs in the quarter were
driven by one energy-related account in NACF whereas the prior quarter mostly reflected transfers of assets to held for sale. Net charge-offs include
$2 million, $11 million and $12 million for the quarters ended June 30 and March 31, 2015, and June 30, 2014, respectively, related to the transfer of
receivables to assets held for sale.
Other income of $64 million decreased from $94
million in the year-ago quarter and from $86 million in the prior quarter. The current quarter includes a $9 million charge, as the favorable
resolution of an uncertain tax position (also reflected as a benefit to the tax provision) resulted in the write-off of an associated other receivable,
and a $6 million negative mark-to-market on the TRS derivative. The year-ago quarter benefited from an $11 million positive mark on the TRS derivative
and $9 million of counterparty accretion. Other income was $150 million for the six months ended June 30, 2015, down from $165 million for the 2014
period.
Operating expenses were $235 million compared to
$225 million in the year-ago quarter and $242 million in the prior quarter. The increase from the year-ago quarter reflects higher compensation costs,
primarily related to the addition of Direct Capital, as well as costs related to the acquisition of OneWest Bank. The sequential quarter decline
reflects lower compensation costs. Restructuring costs were minimal in the current and prior quarters, while the year-ago quarter included $6 million.
Headcount at June 30, 2015 was approximately 3,360, up from 3,170 a year ago, driven by the Direct Capital acquisition, and unchanged from March 31,
2015. Operating expenses were $477 million for the six months ended June 30, 2015, up from $459 million for the 2014 period.
Provision for income taxes was $38 million compared
to cash taxes of $4 million. As a result of the partial reversal of the valuation allowance in 2014 on our Federal Net Deferred Tax Asset, the tax
provision for 2015 reflects a 35% statutory Federal tax rate on our U.S. income. The effective tax rate was approximately 25% in the current quarter,
including a $9 million benefit from a favorable resolution of an uncertain tax position, compared to 8% in the year-ago quarter and
30%
(1) |
Net finance revenue and average earning assets are non-GAAP measures; see Non-GAAP Financial Measurements for a reconciliation of non-GAAP to GAAP financial information. |
42 CIT GROUP INC
in the prior quarter. The provision for income taxes was $18
million in the year-ago quarter and $44 million in the prior quarter, and $82 million and $32 million for the six months ended June 30, 2015 and 2014,
respectively.
Total assets at June 30, 2015 were $46.7 billion,
compared to $46.4 billion at March 31, 2015, and $47.9 billion at December 31, 2014. Financing and leasing assets (FLA) in NACF and TIF
were up slightly to $35.6 billion from $35.0 million and $35.3 billion at March 31, 2015 and December 31, 2014, respectively. The growth trends reflect
origination volumes, which were mostly offset by collections and asset sales. Cash and investments of $7.9 billion were down from $8.1 billion at March
31, 2015 and from $9.3 billion at December 31, 2014, reflecting $1.2 billion used to repay maturing unsecured notes in the first
quarter.
Capital ratios remain well above required levels.
In July 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the Regulatory Capital
Rules). While the Regulatory Capital Rules became effective January 1, 2014, the mandatory compliance date for CIT as a standardized
approach banking organization began on January 1, 2015, subject to transitional provisions extending to January 1, 2019. Our estimated Common
Equity Tier 1 and Total Capital ratios at June 30, 2015 were 14.4% and 15.1%, as calculated under the fully phased-in Regulatory Capital Rules,
compared to 14.1% and 14.8% at March 31, 2015, respectively. The Tier 1 and Total Capital ratios of 14.5% and 15.2% as reported for December 31, 2014
were calculated in accordance with the previously effective regulatory capital rules; however, there was minimal impact on the ratios from the new
rules.
2015 PRIORITIES
During 2015, we are focused on continuing to create long term
value for shareholders. Specific business objectives established for 2015 include:
1. |
Expand Our Commercial Banking Franchise We will work to integrate the OneWest Bank acquisition and enhance our commercial banking operations. |
n |
We closed the OneWest Bank acquisition on August 3, 2015 and integration is progressing. At June 30, 2015, OneWest Bank had approximately 70 branches in Southern California, with over $21 billion of assets and over $14 billion of deposits. |
n |
CIT Bank funds most of our U.S. lending and leasing volume. Total assets were $21.9 billion at June 30, 2015, up from $21.1 billion at December 31, 2014. Deposits were $17.3 billion at June 30, 2015, up from $15.9 billion at December 31, 2014, as on-line deposits exceeded $10 billion. Deposits and earning assets in the Bank increased to over 50% of CITs respective totals. |
2. |
Maintain Strong Risk Management Practices We will continue to maintain credit discipline focused on appropriate risk-adjusted returns through the business cycle and continue enhancements in select areas to ensure SIFI Readiness. |
n |
The allowance for loan losses was 1.79% of average finance receivables at June 30, 2015. |
n |
We have maintained stable liquidity, with cash, investments, reverse repurchase agreements, and the unused portion of the revolving credit facility at 19% of assets. |
n |
Our capital ratios remained strong, with Common Equity Tier One Ratio at 14.4%, as estimated under the fully phased-in Basel III requirements. |
3. |
Grow Business Franchises We will concentrate our growth on building franchises that meet or exceed our risk adjusted return hurdles and improve profitability by exiting non-strategic portfolios, mainly Mexico and Brazil and the equipment finance business in the U.K. |
n |
Financing and leasing assets in TIF and NACF were up 1% year to date as growth was nearly offset by strategic asset sales, including aircraft to a joint venture, a reduction in factoring receivables in commercial services, and collections. |
n |
We have progressed exiting our remaining NSP businesses. We received regulatory approval and sold the Mexico business in August 2015, we expect to close the Brazil transaction in the second half of 2015 and the U.K. portfolio sale is progressing. Upon completion of our remaining planned exits, we expect to eliminate approximately $10 million from our quarterly expenses. |
4. |
Realize embedded value We will focus on enhancing our economic returns, including: |
n |
Improving the utilization of our U.S. net operating loss carryforwards (NOLs), thereby reducing the net deferred tax asset and increasing regulatory capital. The OneWest Bank acquisition will accelerate NOL utilization. |
n |
Total cash and investment portfolio is positioned to benefit from increased interest rates. |
n |
We intend to take additional actions to optimize the Bank Holding Company to improve our return on tangible common equity. These include: Transferring additional U.S.-based business platforms into the bank, improving the efficiency of our secured debt facilities, and generating incremental cash at the Bank Holding Company to pay down high cost debt. |
5. |
Return Excess Capital We plan to prudently return capital to our shareholders through share repurchases and dividends, while maintaining strong capital ratios. |
n |
We repurchased 1.3 million of our shares at an average price of $45.87 for an aggregate purchase price of $61 million during the quarter. At June 30, 2015, $139 million remains of the Board authorized $200 million share repurchase program in April 2015. We repurchased 8.6 million of our shares at an average |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
price of $45.50 for an aggregate purchase price of
$393 million for the six months ended June 30, 2015. During July 2015, we repurchased an additional 2 million shares for an
aggregate purchase price of $9 million.
n |
We paid dividends of $26 million during the quarter and $54 million during the six months ended June 30, 2015. |
n |
Regulatory capital ratios remain well above required levels on a fully phased-in Basel III basis. |
NET FINANCE REVENUE
The following tables present managements view of
consolidated NFR and NFM and includes revenues from loans and leased equipment, net of interest expense, depreciation, and maintenance and other
operating lease expenses, in dollars and as a percent of AEA.
Net Finance Revenue(1) and Net Finance Margin (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Interest
income |
$ | 283.8 | $ | 281.0 | $ | 309.8 | $ | 564.8 | $ | 612.0 | ||||||||||||
Rental income on
operating leases |
531.7 | 530.6 | 519.6 | 1,062.3 | 1,011.5 | |||||||||||||||||
Finance
revenue |
815.5 | 811.6 | 829.4 | 1,627.1 | 1,623.5 | |||||||||||||||||
Interest
expense |
(265.2 | ) | (271.3 | ) | (262.2 | ) | (536.5 | ) | (534.1 | ) | ||||||||||||
Depreciation on
operating lease equipment |
(157.8 | ) | (156.8 | ) | (157.3 | ) | (314.6 | ) | (306.1 | ) | ||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | (46.1 | ) | (49.0 | ) | (95.5 | ) | (100.6 | ) | ||||||||||||
Net finance
revenue |
$ | 343.1 | $ | 337.4 | $ | 360.9 | $ | 680.5 | $ | 682.7 | ||||||||||||
Average Earning
Assets(1)(2) (AEA) |
$ | 34,097.5 | $ | 33,772.0 | $ | 33,186.7 | $ | 33,966.9 | $ | 32,669.0 | ||||||||||||
As a % of
AEA: |
||||||||||||||||||||||
Interest
income |
3.33 | % | 3.33 | % | 3.74 | % | 3.33 | % | 3.75 | % | ||||||||||||
Rental income on
operating leases |
6.24 | % | 6.28 | % | 6.26 | % | 6.25 | % | 6.19 | % | ||||||||||||
Finance
revenue |
9.57 | % | 9.61 | % | 10.00 | % | 9.58 | % | 9.94 | % | ||||||||||||
Interest
expense |
(3.11 | )% | (3.21 | )% | (3.16 | )% | (3.16 | )% | (3.27 | )% | ||||||||||||
Depreciation on
operating lease equipment |
(1.86 | )% | (1.86 | )% | (1.90 | )% | (1.85 | )% | (1.87 | )% | ||||||||||||
Maintenance and
other operating lease expenses |
(0.58 | )% | (0.54 | )% | (0.59 | )% | (0.56 | )% | (0.62 | )% | ||||||||||||
Net finance
margin |
4.02 | % | 4.00 | % | 4.35 | % | 4.01 | % | 4.18 | % |
(1) |
NFR and AEA are non-GAAP measures; see reconciliation of non-GAAP to GAAP financial information. |
(2) |
AEA balances are less than comparable balances displayed in this document in ‘Select Data (Quarterly Average Balances) due to the exclusion of deposits with banks and other investments and the inclusion of credit balances of factoring clients. |
NFR and NFM are key metrics used by management to measure the
profitability of our lending and leasing assets. NFR includes interest and yield-related fee income on our loans and capital leases, rental income and
depreciation, maintenance and other operating lease expenses from our operating lease equipment, interest and dividend income on cash and investments,
as well as funding costs. Since our asset composition includes a high level of operating lease equipment (44% of AEA for the quarter ended June 30,
2015), NFM is a more appropriate metric for CIT than net interest margin (NIM) (a common metric used by other BHCs), as NIM does not fully
reflect the earnings of our portfolio because it includes the impact of debt costs on all our assets but excludes the net revenue (rental income less
depreciation and maintenance and other operating lease expenses) from operating leases.
NFR and NFM decreased from the year-ago quarter and were
essentially flat with the prior quarter. The decline in NFM from the year-ago quarter reflected pressure on yields, the lack of interest recoveries and
the absence of FSA benefit from accelerated debt redemption.
Finance revenue was down slightly from the year-ago quarter and
relatively flat sequentially and for the six months. Pressure on yields continued to offset the benefit of higher assets during the quarter. Loan
yields are down in many divisions compared to the prior year (as detailed in the table below), reflecting new business yields that are generally below
yields on maturing loans.
Interest expense was relatively flat and down relative to average
earning assets for the quarter and year to date periods. The weighted average coupon rate of outstanding deposits and long-term borrowings was 3.04% at
June 30, 2015, compared to 3.20% at June 30, 2014 and unchanged from March 31, 2015. Compared to the prior year, although rates were generally up, the
higher proportion of deposit funding decreased the total funding weighted average coupon rate.
44 CIT GROUP INC
Deposits have increased, both in dollars and proportion of total
CIT funding. The weighted average rate of total CIT deposits was 1.74%, 1.64% and 1.67% at June 30, 2015 and 2014 and March 31, 2015, respectively.
Deposits represented 51% of the total of deposits and long-term borrowing at June 30, 2015, while unsecured debt was 32% and secured debt was 17%,
reflecting the ongoing shift from unsecured borrowings to deposit funding. These proportions were fairly consistent with the prior quarter and compared
to 44%, 39% and 17%, respectively, at June 30, 2014. These proportions will fluctuate in the future depending upon our funding activities. Deposits and
long-term borrowings are also discussed in Funding and Liquidity.
The weighted average coupon rate of long-term borrowings at June
30, 2015 was 4.41%, compared to 4.44% at June 30, 2014 and 4.39% at March 31, 2015. Long-term borrowings consist of unsecured and secured debt. The
weighted average coupon rate of unsecured long-term borrowings at June 30, 2015 was 5.03%, up slightly from June 30, 2014, due to the 2015 first
quarter maturity, and flat with March 31, 2015. The weighted average coupon rate of secured long-term borrowings at June 30, 2015 was 3.23%, compared
to 3.17% at June 30, 2014 and flat with March 31, 2015.
See Select Data (Average Balances) section for more
information on long-term borrowing rates.
The following table depicts select yields and margin-related data
for our segments, plus select divisions within TIF and NACF.
Select Segment and Division Margin Metrics (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Transportation & International Finance |
||||||||||||||||||||||
AEA |
$ | 19,045.1 | $ | 18,821.7 | $ | 18,066.2 | $ | 18,952.8 | $ | 17,624.8 | ||||||||||||
Gross
yield |
11.94 | % | 12.03 | % | 12.34 | % | 11.97 | % | 12.41 | % | ||||||||||||
NFM |
4.57 | % | 4.57 | % | 4.91 | % | 4.57 | % | 4.81 | % | ||||||||||||
AEA |
||||||||||||||||||||||
Commercial
Aerospace |
$ | 10,803.8 | $ | 10,911.0 | $ | 10,260.7 | $ | 10,864.4 | $ | 10,038.7 | ||||||||||||
Rail |
$ | 6,039.9 | $ | 5,854.2 | $ | 5,578.0 | $ | 5,953.9 | $ | 5,373.8 | ||||||||||||
Maritime
Finance |
$ | 1,198.4 | $ | 1,049.2 | $ | 576.2 | $ | 1,129.3 | $ | 524.4 | ||||||||||||
International
Finance |
$ | 1,003.0 | $ | 1,007.3 | $ | 1,651.3 | $ | 1,005.2 | $ | 1,687.9 | ||||||||||||
Gross
yield |
||||||||||||||||||||||
Commercial
Aerospace |
11.22 | % | 11.36 | % | 12.18 | % | 11.28 | % | 12.34 | % | ||||||||||||
Rail |
14.83 | % | 14.81 | % | 14.44 | % | 14.80 | % | 14.46 | % | ||||||||||||
Maritime
Finance |
5.12 | % | 5.00 | % | 5.58 | % | 5.04 | % | 5.27 | % | ||||||||||||
International
Finance |
10.48 | % | 10.51 | % | 8.59 | % | 10.49 | % | 8.55 | % | ||||||||||||
North
American Commercial Finance |
||||||||||||||||||||||
AEA |
$ | 14,737.1 | $ | 14,590.3 | $ | 14,132.4 | $ | 14,675.3 | $ | 13,962.1 | ||||||||||||
Gross
yield |
6.16 | % | 6.12 | % | 6.62 | % | 6.14 | % | 6.45 | % | ||||||||||||
NFM |
3.60 | % | 3.52 | % | 4.13 | % | 3.56 | % | 3.88 | % | ||||||||||||
AEA |
||||||||||||||||||||||
Commercial Real
Estate |
$ | 1,860.6 | $ | 1,777.7 | $ | 1,668.5 | $ | 1,819.9 | $ | 1,632.9 | ||||||||||||
Corporate
Finance |
$ | 6,979.9 | $ | 6,910.7 | $ | 7,220.8 | $ | 6,953.8 | $ | 7,113.8 | ||||||||||||
Equipment
Finance |
$ | 5,015.1 | $ | 4,962.7 | $ | 4,269.2 | $ | 4,991.6 | $ | 4,258.0 | ||||||||||||
Commercial
Services |
$ | 881.5 | $ | 939.2 | $ | 973.9 | $ | 910.0 | $ | 957.4 | ||||||||||||
Gross
yield |
||||||||||||||||||||||
Real Estate
Finance |
4.00 | % | 3.94 | % | 4.10 | % | 3.97 | % | 4.04 | % | ||||||||||||
Corporate
Finance |
4.46 | % | 4.50 | % | 5.71 | % | 4.48 | % | 5.37 | % | ||||||||||||
Equipment
Finance |
9.56 | % | 9.45 | % | 9.52 | % | 9.50 | % | 9.52 | % | ||||||||||||
Commercial
Services |
4.81 | % | 4.56 | % | 4.99 | % | 4.68 | % | 4.93 | % | ||||||||||||
Non-Strategic Portfolios |
||||||||||||||||||||||
AEA |
$ | 315.3 | $ | 360.0 | $ | 988.1 | $ | 338.8 | $ | 1,082.1 | ||||||||||||
Gross
yield |
19.54 | % | 20.22 | % | 14.17 | % | 19.83 | % | 13.47 | % | ||||||||||||
NFM |
7.87 | % | 8.22 | % | 2.55 | % | 8.03 | % | 2.61 | % |
Gross yields (interest income plus rental income on operating
leases as a % of AEA) in TIF were down sequentially and from the year-ago quarter, as equipment utilization of aerospace assets, while essentially
unchanged from the prior quarter, were below the year-ago levels. TIF International Finance gross yields may be volatile over quarterly periods due to
strategic asset sales. NACF gross yields and NFM reflect continued market pressures and lack of interest recoveries within Corporate Finance. NSP
contains run-off portfolios, and as a result, gross yields vary due to asset sales and lower balances.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
The following table sets forth the details on net operating lease
revenues(2).
Net Operating Lease Revenue as a % of Average Operating Leases (dollars in millions)
Quarters Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
March 31, 2015 |
June 30, 2014 |
||||||||||||||||||||||||
Rental income on
operating leases |
$ | 531.7 | 14.19 | % | $ | 530.6 | 14.26 | % | $ | 519.6 | 14.33 | % | ||||||||||||||
Depreciation on
operating lease equipment |
(157.8 | ) | (4.21 | )% | (156.8 | ) | (4.21 | )% | (157.3 | ) | (4.34 | )% | ||||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | (1.32 | )% | (46.1 | ) | (1.24 | )% | (49.0 | ) | (1.35 | )% | ||||||||||||||
Net operating
lease revenue |
$ | 324.5 | 8.66 | % | $ | 327.7 | 8.81 | % | $ | 313.3 | 8.64 | % | ||||||||||||||
Average
Operating Lease Equipment (AOL) |
$ | 14,990.7 | $ | 14,881.1 | $ | 14,505.9 |
Six Months Ended June 30, |
||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2015 |
2014 |
|||||||||||||||||||||||||||||||||||||||||
Rental income on
operating leases |
$ | 1,062.3 | 14.21 | % | $ | 1,011.5 | 14.31 | % | ||||||||||||||||||||||||||||||||||
Depreciation on
operating lease equipment |
(314.6 | ) | (4.21 | )% | (306.1 | ) | (4.33 | )% | ||||||||||||||||||||||||||||||||||
Maintenance and
other operating lease expenses |
(95.5 | ) | (1.27 | )% | (100.6 | ) | (1.42 | )% | ||||||||||||||||||||||||||||||||||
Net operating
lease revenue |
$ | 652.2 | 8.73 | % | $ | 604.8 | 8.56 | % | ||||||||||||||||||||||||||||||||||
Average
Operating Lease Equipment (AOL) |
$ | 14,946.9 | $ | 14,137.0 |
Net operating lease revenue was primarily generated from the
commercial air and rail portfolios. Net operating lease revenue increased compared to the year-ago quarter, benefiting from higher assets and rail
yields. On average, lease renewal rates in the rail portfolio re-priced slightly higher than the prior year quarter, while the commercial aircraft
portfolio has been re-pricing slightly lower. The slight decline from the prior quarter resulted mostly from higher maintenance and other operating
lease expenses.
At June 30, 2015, slightly over 97% of our commercial aircraft
portfolio was leased or under a commitment to lease, down from the year-ago quarter, when all but one aircraft was leased or under commitment to lease,
and essentially flat with the prior quarter. Our rail fleet was 98% utilized, including commitments, at June 30, 2015, flat with June 30, 2014 and
March 31, 2015.
We have 20 new aircraft deliveries scheduled for the next twelve
months, all of which have lease commitments with customers. Approximately 60% of the rail order book of 11,900 railcars were under a
commitment.
Depreciation on operating lease equipment mostly reflects
transportation equipment balances. Depreciation expense also includes amounts related to equipment impairment. Once a long-lived asset is classified as
assets held for sale, depreciation expense is no longer recognized, and the asset is evaluated for impairment with any such charge recorded in other
income. (See Non-interest Income Impairment on assets held for sale for discussion on impairment charges). Consequently, net
operating lease revenue includes rental income on operating lease equipment classified as assets held for sale, but there is no related depreciation
expense. The amount of suspended depreciation on operating lease equipment in assets held for sale totaled $8 million, compared to $4 million for the
year-ago quarter and $8 million for the prior quarter. Year to date, the amount of suspended depreciation totaled $16 million in 2015 and $7 million in
2014. Operating lease equipment in assets held for sale totaled $288 million, $279 million and $223 million at June 30, 2015, March 31, 2015, and June
30, 2014, respectively.
Maintenance and other operating lease expenses, which primarily
relate to the rail portfolio and to a lesser extent aircraft re-leasing, was up slightly compared to the year-ago and prior quarters. We expect the
quarterly amount through year-end 2015 to approximate a level closer to the second quarter than the first quarter.
The factors previously noted affecting rental income,
depreciation, and maintenance and other operating lease expenses drove the net operating lease revenue as a percent of AOL.
See Other Expenses Depreciation on operating
lease equipment and Concentrations Operating Leases for additional information.
(2) |
Net operating lease revenue is a non-GAAP measure. See Non-GAAP Financial Measurements for a reconciliation of non-GAAP to GAAP financial information. |
CREDIT METRICS
Credit metrics remain at or near cyclical lows, and given current
levels, sequential quarterly movements in non-accrual loans and charge-offs are subject to volatility as individual larger accounts migrate in and out
of non-accrual status or get resolved.
Non-accrual loans were $198 million (1.01% of finance
receivables), up from $161 million (0.82%) at December 31, 2014. The increase was mostly driven by the International Finance division of
TIF.
46 CIT GROUP INC
The provision for credit losses was $18 million, compared to $10
million in the year-ago quarter and $35 million in the prior quarter. The increase over the year-ago quarter was mostly in NACF, reflecting a
charge-off of an energy account and changes in portfolio composition. The decline from the prior quarter is primarily due to a decrease in the
non-specific reserve. Year to date, the provision for credit losses totaled $53 million, up from $47 million in the 2014 period.
Net charge-offs were $24 million, or 0.48% of average finance
receivables (AFR), versus $21 million (0.45%) in the year-ago quarter and $21 million (0.43%) in the prior quarter. Net charge-offs include
$2 million, $12 million and $11 million for the quarters ended June 30, 2015 and 2014, and March 31, 2015, respectively, related to the transfer of
receivables to assets held for sale. Recoveries of $11 million were higher than the $8 million recorded in the year-ago quarter and $6 million in the
prior quarter, with the increase due to International Finance.
The following table presents detail on our allowance for loan
losses, including charge-offs and recoveries and provides summarized components of the provision and allowance:
Allowance for Loan Losses and Provision for Credit Losses (dollars in millions)
Quarters Ended |
Six Months Ended June 30, |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
|||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Allowance
beginning of period |
$ | 356.5 | $ | 346.4 | $ | 352.6 | $ | 346.4 | $ | 356.1 | |||||||||||||
Provision for
credit losses(1) |
18.4 | 34.6 | 10.2 | 53.0 | 46.9 | ||||||||||||||||||
Other(1) |
(0.5 | ) | (3.6 | ) | (0.6 | ) | (4.1 | ) | (5.2 | ) | |||||||||||||
Net
additions |
17.9 | 31.0 | 9.6 | 48.9 | 41.7 | ||||||||||||||||||
Gross
charge-offs(2) |
(34.2 | ) | (26.6 | ) | (29.1 | ) | (60.8 | ) | (73.5 | ) | |||||||||||||
Recoveries |
10.7 | 5.7 | 7.9 | 16.4 | 16.7 | ||||||||||||||||||
Net
Charge-offs |
(23.5 | ) | (20.9 | ) | (21.2 | ) | (44.4 | ) | (56.8 | ) | |||||||||||||
Allowance
end of period |
$ | 350.9 | $ | 356.5 | $ | 341.0 | $ | 350.9 | $ | 341.0 | |||||||||||||
Loans |
|||||||||||||||||||||||
Transportation
& International Finance |
$ | 3,717.1 | $ | 3,568.5 | $ | 3,228.3 | |||||||||||||||||
North American
Commercial Finance |
15,932.2 | 15,860.8 | 15,376.1 | ||||||||||||||||||||
Total
loans |
$ | 19,649.3 | $ | 19,429.3 | $ | 18,604.4 | |||||||||||||||||
Allowance |
|||||||||||||||||||||||
Transportation
& International Finance |
$ | 58.0 | $ | 55.5 | $ | 39.7 | |||||||||||||||||
North American
Commercial Finance |
292.9 | 301.0 | 301.3 | ||||||||||||||||||||
Total
allowance |
$ | 350.9 | $ | 356.5 | $ | 341.0 | |||||||||||||||||
Quarters Ended |
Six Months Ended June 30, |
||||||||||||||||||||||
Provision for Credit Losses | June 30, | March 31, | June 30, | ||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Specific
reserves on impaired loans |
$ | 2.7 | $ | 2.4 | $ | (3.5 | ) | $ | 5.1 | $ | (8.2 | ) | |||||||||||
Non-specific
reserves |
(7.8 | ) | 11.3 | (7.5 | ) | 3.5 | (1.7 | ) | |||||||||||||||
Net
charge-offs |
23.5 | 20.9 | 21.2 | 44.4 | 56.8 | ||||||||||||||||||
Total |
$ | 18.4 | $ | 34.6 | $ | 10.2 | $ | 53.0 | $ | 46.9 | |||||||||||||
Allowance for Loan Losses | June 30, | March 31, | December 31, | ||||||||||||||||||||
2015 |
2015 | 2014 |
|||||||||||||||||||||
Specific
reserves on impaired loans |
$ | 17.5 | $ | 14.8 | $ | 12.4 | |||||||||||||||||
Non-specific
reserves |
333.4 | 341.7 | 334.0 | ||||||||||||||||||||
Total |
$ | 350.9 | $ | 356.5 | $ | 346.4 | |||||||||||||||||
Ratio |
|||||||||||||||||||||||
Allowance for
loan losses as a percentage of total loans |
1.79 | % | 1.83 | % | 1.78 | % |
(1) |
Includes amounts related to reserves on unfunded loan commitments and letters of credit, and for deferred purchase agreements, which are reflected in Other Liabilities, as well as foreign currency translation adjustments. These Other Liabilities totaled $37 million, $35 million and $31 million at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. |
(2) |
Gross charge-offs of $2 million, $11 million and $12 million for the quarters ended June 30, 2015, March 31, 2015 and June 30, 2014, respectively, related to the transfer of receivables to assets held for sale. For the six months ended June 30, 2015 and 2014, gross charge-offs include $13 million and $26 million, respectively, related to the transfer of receivables to assets held for sale. |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
The allowance level continues to reflect the relatively benign
credit environment. NSP carries no reserves, as the portfolio consists entirely of AHFS. The decline at June 30, 2015 in the non-specific reserve
reflects stability in credit quality, along with changes in portfolio composition.
There were no significant changes to our reserving policies
during the quarter. See Note 1 Business and Summary of Significant Accounting Policies for discussion on policies relating to the
allowance for loan losses in Item 8 Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December
31, 2014.
The following table presents charge-offs, by class and business
segment. See Results by Business Segment for additional information.
Charge-offs as a Percentage of Average Finance Receivables by Class (dollars in millions)
Quarters Ended |
Six Months Ended June 30, |
|||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
March 31, 2015 |
June 30, 2014 |
2015 |
2014 |
||||||||||||||||||||||||||||||||||||
Gross
Charge-offs(1) |
||||||||||||||||||||||||||||||||||||||||
Transportation
Finance |
$ | 0.6 | 0.08 | % | $ | | | $ | | | $ | 0.6 | 0.04 | % | $ | | | |||||||||||||||||||||||
International
Finance |
2.3 | 1.52 | % | 3.2 | 2.05 | % | 15.9 | 4.23 | % | 5.5 | 1.80 | % | 30.2 | 3.78 | % | |||||||||||||||||||||||||
Transportation & International Finance |
2.9 | 0.32 | % | 3.2 | 0.36 | % | 15.9 | 1.79 | % | 6.1 | 0.34 | % | 30.2 | 1.70 | % | |||||||||||||||||||||||||
Corporate
Finance |
17.0 | 0.99 | % | 11.0 | 0.64 | % | 4.0 | 0.22 | % | 28.0 | 0.81 | % | 14.4 | 0.41 | % | |||||||||||||||||||||||||
Equipment
Finance |
10.6 | 0.89 | % | 11.8 | 1.01 | % | 8.3 | 0.83 | % | 22.4 | 0.95 | % | 17.5 | 0.88 | % | |||||||||||||||||||||||||
Commercial
Services |
3.7 | 0.62 | % | 0.6 | 0.09 | % | 0.9 | 0.15 | % | 4.3 | 0.35 | % | 3.9 | 0.34 | % | |||||||||||||||||||||||||
North
American Commercial Finance |
31.3 | 0.79 | % | 23.4 | 0.59 | % | 13.2 | 0.35 | % | 54.7 | 0.69 | % | 35.8 | 0.48 | % | |||||||||||||||||||||||||
Non-Strategic
Portfolios |
| | | | | | | | 7.5 | 5.29 | % | |||||||||||||||||||||||||||||
Total |
$ | 34.2 | 0.70 | % | $ | 26.6 | 0.55 | % | $ | 29.1 | 0.62 | % | $ | 60.8 | 0.63 | % | $ | 73.5 | 0.78 | % | ||||||||||||||||||||
Recoveries |
||||||||||||||||||||||||||||||||||||||||
Transportation
Finance |
$ | | | $ | | | $ | 0.2 | 0.05 | % | $ | | | $ | 0.2 | 0.03 | % | |||||||||||||||||||||||
International
Finance |
5.6 | 3.64 | % | 1.7 | 1.10 | % | 2.6 | 0.69 | % | 7.3 | 2.39 | % | 3.9 | 0.48 | % | |||||||||||||||||||||||||
Transportation & International Finance |
5.6 | 0.61 | % | 1.7 | 0.19 | % | 2.8 | 0.31 | % | 7.3 | 0.41 | % | 4.1 | 0.23 | % | |||||||||||||||||||||||||
Corporate
Finance |
1.2 | 0.07 | % | | | 0.4 | 0.02 | % | 1.2 | 0.03 | % | 0.5 | 0.02 | % | ||||||||||||||||||||||||||
Equipment
Finance |
3.5 | 0.30 | % | 3.6 | 0.31 | % | 3.5 | 0.36 | % | 7.1 | 0.30 | % | 8.7 | 0.44 | % | |||||||||||||||||||||||||
Commercial
Services |
0.4 | 0.05 | % | 0.4 | 0.06 | % | 0.5 | 0.07 | % | 0.8 | 0.06 | % | 1.8 | 0.15 | % | |||||||||||||||||||||||||
North
American Commercial Finance |
5.1 | 0.13 | % | 4.0 | 0.10 | % | 4.4 | 0.12 | % | 9.1 | 0.11 | % | 11.0 | 0.15 | % | |||||||||||||||||||||||||
Non-Strategic
Portfolios |
| | | | 0.7 | 3.16 | % | | | 1.6 | 1.07 | % | ||||||||||||||||||||||||||||
Total |
$ | 10.7 | 0.22 | % | $ | 5.7 | 0.12 | % | $ | 7.9 | 0.17 | % | $ | 16.4 | 0.17 | % | $ | 16.7 | 0.18 | % | ||||||||||||||||||||
Net
Charge-offs(1) |
||||||||||||||||||||||||||||||||||||||||
Transportation
Finance |
$ | 0.6 | 0.08 | % | $ | | | $ | (0.2 | ) | (0.05 | )% | $ | 0.6 | 0.04 | % | $ | (0.2 | ) | (0.03 | %) | |||||||||||||||||||
International
Finance |
(3.3 | ) | (2.12 | )% | 1.5 | 0.95 | % | 13.3 | 3.54 | % | (1.8 | ) | (0.59 | )% | 26.3 | 3.30 | % | |||||||||||||||||||||||
Transportation & International Finance |
(2.7 | ) | (0.29 | )% | 1.5 | 0.17 | % | 13.1 | 1.48 | % | (1.2 | ) | (0.07 | )% | 26.1 | 1.47 | % | |||||||||||||||||||||||
Corporate
Finance |
15.8 | 0.92 | % | 11.0 | 0.64 | % | 3.6 | 0.20 | % | 26.8 | 0.78 | % | 13.9 | 0.39 | % | |||||||||||||||||||||||||
Equipment
Finance |
7.1 | 0.59 | % | 8.2 | 0.70 | % | 4.8 | 0.47 | % | 15.3 | 0.65 | % | 8.8 | 0.44 | % | |||||||||||||||||||||||||
Commercial
Services |
3.3 | 0.57 | % | 0.2 | 0.03 | % | 0.4 | 0.08 | % | 3.5 | 0.29 | % | 2.1 | 0.19 | % | |||||||||||||||||||||||||
North
American Commercial Finance |
26.2 | 0.66 | % | 19.4 | 0.49 | % | 8.8 | 0.23 | % | 45.6 | 0.58 | % | 24.8 | 0.33 | % | |||||||||||||||||||||||||
Non-Strategic
Portfolios |
| | | | (0.7 | ) | (3.16 | )% | | | 5.9 | 4.22 | % | |||||||||||||||||||||||||||
Total |
$ | 23.5 | 0.48 | % | $ | 20.9 | 0.43 | % | $ | 21.2 | 0.45 | % | $ | 44.4 | 0.46 | % | $ | 56.8 | 0.60 | % |
(1) |
TIF charge-offs for the quarters ended June 30, 2015 and March 31, 2015 were less than $1 million each, and $9 million and $12 million for the quarter and six months ended June 30, 2014, respectively, related to the transfer of receivables to assets held for sale. NACF charge-offs for the quarters ended June 30, 2015 and March 31, 2015 included $1 million and $11 million, respectively, related to the transfer of receivables to assets held for sale. For the quarter and six months ended June 30, 2014, the respective amounts were $3 million and $7 million. NSP charge-offs for the quarter and six months ended June 30, 2014 included $7 million related to the transfer of receivables to assets held for sale. |
48 CIT GROUP INC
Net charge-offs for the quarter primarily reflect an energy
account in NACF, while the prior quarters were driven by amounts related to assets transferred to AHFS. Recoveries were up in the international
portfolio of TIF, but are expected to remain at low levels, as more recent levels of charge-offs afford fewer opportunities for recoveries.
Additionally, charge-offs associated with AHFS do not generate future recoveries as the loans are generally sold before recoveries can be realized and
any gains on sales are reported in Other Income.
The tables below present information on non-performing loans,
which includes non-performing loans related to assets held for sale for each period:
Non-accrual and Accruing Past Due Loans (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Non-accrual
loans |
||||||||||
U.S. |
$ | 98.2 | $ | 71.9 | ||||||
Foreign |
99.8 | 88.6 | ||||||||
Non-accrual
loans |
$ | 198.0 | $ | 160.5 | ||||||
Troubled Debt
Restructurings |
||||||||||
U.S. |
$ | 10.8 | $ | 13.8 | ||||||
Foreign |
4.2 | 3.4 | ||||||||
Restructured
loans |
$ | 15.0 | $ | 17.2 | ||||||
Accruing
loans past due 90 days or more |
||||||||||
Accruing loans
past due 90 days or more |
$ | 9.0 | $ | 10.3 |
Non-accrual Loans as a Percentage of Finance Receivables (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Transportation
Finance |
$ | 4.7 | 0.15 | % | $ | 0.1 | | |||||||||
International
Finance |
53.1 | 9.18 | % | 37.1 | 5.93 | % | ||||||||||
Transportation & International Finance |
57.8 | 1.55 | % | 37.2 | 1.05 | % | ||||||||||
Corporate
Finance |
34.1 | 0.49 | % | 30.9 | 0.45 | % | ||||||||||
Equipment
Finance |
76.9 | 1.60 | % | 70.0 | 1.48 | % | ||||||||||
North
American Commercial Finance |
111.0 | 0.70 | % | 100.9 | 0.63 | % | ||||||||||
Non-Strategic
Portfolios |
29.2 | NM | 22.4 | NM | ||||||||||||
Total |
$ | 198.0 | 1.01 | % | $ | 160.5 | 0.82 | % |
Non-accrual loans remained at low levels, but at June 30, 2015
was up mostly due to international accounts in the TIF portfolio. The entire NSP portfolio was classified as held for sale making the percentage of
finance receivables not meaningful (NM).
Approximately 40% of our non-accrual accounts were paying
currently; down from 54% at December 31, 2014, as certain new non-accrual accounts added during the second quarter, mostly in International Finance,
were not paying currently. Our impaired loan carrying value (including FSA discount, specific reserves and charge-offs) to estimated outstanding
contractual balances approximated 69%, essentially unchanged from 68% at December 31, 2014. For this purpose, impaired loans are comprised principally
of non-accrual loans over $500,000 and TDRs.
Total delinquency (30 days or more) improved to 1.5% of finance
receivables compared to 1.7% at December 31, 2014, primarily due to lower amounts in Commercial Services and Equipment Finance.
Foregone Interest on Non-accrual Loans and Troubled Debt Restructurings (dollars in millions)
Six Months Ended June 30, 2015 |
Six Months Ended June 30, 2014 |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
U.S. |
Foreign |
Total |
U.S. |
Foreign |
Total |
|||||||||||||||||||||
Interest revenue
that would have been earned at original terms |
$ | 11.7 | $ | 7.1 | $ | 18.8 | $ | 17.0 | $ | 6.3 | $ | 23.3 | ||||||||||||||
Less: Interest
recorded |
(1.1 | ) | (1.5 | ) | (2.6 | ) | (5.9 | ) | (0.6 | ) | (6.5 | ) | ||||||||||||||
Foregone
interest revenue |
$ | 10.6 | $ | 5.6 | $ | 16.2 | $ | 11.1 | $ | 5.7 | $ | 16.8 |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 49
The Company periodically modifies the terms of loans/finance
receivables in response to borrowers difficulties. Modifications that include a financial concession to the borrower, which otherwise would not
have been considered, are accounted for as troubled debt restructurings (TDRs). For those accounts that were modified but were not
considered to be TDRs, it was determined that no concessions had been granted by CIT to the borrower. Borrower compliance with the modified terms is
the primary measurement that we use to determine the success of these programs.
The tables that follow reflect loan carrying values of accounts
that have been modified.
Troubled Debt Restructurings and Modifications (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
% Compliant |
% Compliant |
||||||||||||||||||
Troubled Debt Restructurings(1) |
|||||||||||||||||||
Deferral of
principal and/or interest |
$ | 5.7 | 100 | % | $ | 6.0 | 96 | % | |||||||||||
Covenant relief
and other |
9.3 | 24 | % | 11.2 | 83 | % | |||||||||||||
Total
TDRs |
$ | 15.0 | 53 | % | $ | 17.2 | 88 | % | |||||||||||
Percent
non-accrual |
73 | % | 75 | % |
% Compliant |
% Compliant |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Modifications(1) |
|||||||||||||||||||
Extended
maturity |
$ | 0.2 | 100 | % | $ | 0.1 | 100 | % | |||||||||||
Covenant
relief |
68.1 | 100 | % | 70.9 | 100 | % | |||||||||||||
Interest rate
increase/additional collateral |
9.8 | 100 | % | 25.1 | 100 | % | |||||||||||||
Deferment of
principal |
2.6 | 100 | % | | | ||||||||||||||
Other |
101.3 | 97 | % | 58.3 | 100 | % | |||||||||||||
Total
Modifications |
$ | 182.0 | 98 | % | $ | 154.4 | 100 | % | |||||||||||
Percent
non-accrual |
11 | % | 10 | % |
(1) |
Table depicts the predominant element of each modification, which may contain several of the characteristics listed. |
The increase in modifications reflects the addition of a few
larger accounts, and the extension of additional funds to previously modified loans that were in compliance with the modified terms.
See Note 3 Loans in Item 1. Consolidated
Financial Statements for additional information regarding TDRs and other credit quality information.
NON-INTEREST INCOME
Non-interest Income (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Rental income on
operating leases |
$ | 531.7 | $ | 530.6 | $ | 519.6 | $ | 1,062.3 | $ | 1,011.5 | ||||||||||||
Other
Income: |
||||||||||||||||||||||
Gains on
sales of leasing equipment |
$ | 21.5 | $ | 32.0 | $ | 16.0 | $ | 53.5 | $ | 24.4 | ||||||||||||
Factoring
commissions |
27.0 | 29.5 | 28.3 | 56.5 | 56.9 | |||||||||||||||||
Fee
revenues |
25.3 | 22.6 | 21.8 | 47.9 | 43.4 | |||||||||||||||||
Gains on loan
and portfolio sales |
2.1 | 6.6 | 4.5 | 8.7 | 8.0 | |||||||||||||||||
Gain on
investments |
3.8 | 0.7 | 5.6 | 4.5 | 9.1 | |||||||||||||||||
(Losses)
gains on derivatives and foreign currency exchange |
(5.0 | ) | (9.7 | ) | 8.3 | (14.7 | ) | 1.2 | ||||||||||||||
Impairment on
assets held for sale |
(11.0 | ) | (10.1 | ) | (14.3 | ) | (21.1 | ) | (15.4 | ) | ||||||||||||
Other
revenues |
(0.2 | ) | 14.8 | 23.5 | 14.6 | 37.2 | ||||||||||||||||
Total other
income |
63.5 | 86.4 | 93.7 | 149.9 | 164.8 | |||||||||||||||||
Total
non-interest income |
$ | 595.2 | $ | 617.0 | $ | 613.3 | $ | 1,212.2 | $ | 1,176.3 |
50 CIT GROUP INC
Rental income on operating leases from equipment we lease
is recognized on a straight line basis over the lease term. Rental income is discussed in Net Finance Revenues and Results
by Business Segment.
Other income decreased from the year-ago and prior
quarters, reflecting the following:
Gains on sales of leasing equipment resulted from
approximately $155 million of equipment sales in the second quarter of 2015, $125 million in the year-ago quarter, and $435 million in the prior
quarter. Gains as a percentage of equipment sold, which will vary based on the type and age of equipment sold, increased from last quarter and were
modestly above the year-ago quarter. Equipment sales for the second quarter of 2015 included approximately $97 million in TIF, mostly aircraft, and $56
million in NACF. Equipment sales for the year-ago quarter mainly consisted of approximately $35 million in TIF, which generated about half of the
gains, and $80 million in NACF. Equipment sales for the prior quarter mainly consisted of approximately $375 million in TIF, mostly aircraft, and $60
million in NACF.
Factoring commissions were down, reflecting a higher
average factoring commission rate that was more than offset by lower factored volumes. Factoring volume was $5.8 billion in 2015, down from $6.3
billion in the year-ago quarter and from $6.5 billion for the prior quarter.
Fee revenues include fees on lines of credit and letters
of credit, capital markets-related fees, agent and advisory fees, and servicing fees for the assets we sell but retain servicing, including servicing
fees in the small business lending portfolio that was sold in the first half of 2014. Fee revenues are mainly driven by our NACF segment, and were up
on higher capital markets-related fees.
Gains on loan and portfolio sales in the first quarter of
2015 reflected approximately $37 million of sales, essentially all in NACF. The year-ago quarter sales reflected approximately $440 million of sales,
with approximately $300 million in NSP, primarily the result of selling the small business lending portfolio (gains on which were minimal), $95 million
in NACF, and $45 million in TIF. The prior quarter sales totaled approximately $95 million, with approximately $70 million in NACF and $25 million in
TIF.
Gains on investments primarily reflected sales of equity
investments that were received as part of a lending transaction or, in some cases, a workout situation. The gains were primarily in
NACF.
(Losses) gains on derivatives and foreign currency
exchange Transactional foreign currency movements resulted in gains of $30 million in the current quarter, driven by the weakening of the U.S.
currency against the Canadian dollar, Euro, and U.K. Pound Sterling, losses of $(83) million in the prior quarter and gains of $41 million in the
year-ago quarter. These were partially offset by losses of $(39) million in the current quarter of 2015, similarly impacted by the foreign currency
movements noted above, gains of $84 million in the prior quarter and losses on derivatives that economically hedge foreign currency movements and other
exposures of $(44) million in the year-ago quarter. Valuation of the derivatives within the GSI facility resulted in losses of $(6) million in the
current quarter and $(1) million in the prior quarter, respectively, and gains of $11 million in the year-ago quarter. In addition, there were gains of
$10 million in the current quarter, losses of $(10) million in the prior quarter, and losses of less than $(1) million in the year-ago quarter on the
realization of cumulative translation adjustment (CTA) amounts from accumulated other comprehensive loss due to translational adjustments related to
liquidating entities. As of June 30, 2015, of the aggregate pre-tax CTA losses included in accumulated other comprehensive loss of $87 million, there
was approximately $65 million related to the Brazil, Mexico, and U.K. portfolios in AHFS. In conjunction with the closing of the transactions, certain
currency translation adjustments will be recognized as a reduction to income, with the pre-tax amount charged to other income and the tax effect in the
provision for income taxes. The CTA amounts will fluctuate until the transactions are completed. For additional information on the impact of
derivatives on the income statement, refer to Note 8 Derivative Financial Instruments in Item 1. Consolidated Financial
Statements.
Impairment on assets held for sale in the current and
prior quarters primarily relates to the Mexico and Brazil portfolios held for sale in NSP, while the year-ago balance related mostly to aerospace
assets and international portfolios in TIF. When an operating lease asset is classified as held for sale, depreciation expense is suspended and the
asset is evaluated for impairment with any such charge recorded in other income. (See Other Expenses for related discussion on depreciation on
operating lease equipment.)
Other revenues included items that are more episodic in
nature, such as gains on work-out related claims, proceeds received in excess of carrying value on non-accrual accounts held for sale, which were
repaid or had another workout resolution, insurance proceeds in excess of carrying value on damaged leased equipment, and also includes income from
joint ventures. The current quarter includes a $9 million charge, as the favorable resolution of an uncertain tax position (reflected as a benefit to
the tax provision) resulted in the write-off an associated other receivable. The prior quarter includes a $5 million benefit on the termination of a
defaulted contract in TIF. The year-ago quarter and year to date included the remaining accretion of counterparty receivable of $9 million and $11
million, respectively.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
OTHER EXPENSES
Other Expenses (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Depreciation on
operating lease equipment |
$ | 157.8 | $ | 156.8 | $ | 157.3 | $ | 314.6 | $ | 306.1 | |||||||||||||
Maintenance and
other operating lease expenses |
49.4 | 46.1 | 49.0 | 95.5 | 100.6 | ||||||||||||||||||
Operating expenses: |
|||||||||||||||||||||||
Compensation
and benefits |
$ | 135.6 | $ | 146.5 | $ | 125.7 | $ | 282.1 | $ | 264.6 | |||||||||||||
Technology |
24.9 | 22.3 | 20.8 | 47.2 | 41.9 | ||||||||||||||||||
Professional
fees |
20.8 | 19.5 | 16.9 | 40.3 | 34.9 | ||||||||||||||||||
Net occupancy
expense |
8.6 | 9.4 | 8.5 | 18.0 | 17.4 | ||||||||||||||||||
Advertising
and marketing |
6.7 | 9.1 | 8.3 | 15.8 | 16.2 | ||||||||||||||||||
Provision for
severance and facilities exiting activities |
1.1 | (1.0 | ) | 5.6 | 0.1 | 15.5 | |||||||||||||||||
Other |
37.3 | 35.8 | 39.2 | 73.1 | 68.0 | ||||||||||||||||||
Total operating
expenses |
235.0 | 241.6 | 225.0 | 476.6 | 458.5 | ||||||||||||||||||
Loss on debt
extinguishments |
0.1 | | 0.4 | 0.1 | 0.4 | ||||||||||||||||||
Total other
expenses |
$ | 442.3 | $ | 444.5 | $ | 431.7 | $ | 886.8 | $ | 865.6 | |||||||||||||
Headcount |
3,360 | 3,360 | 3,170 |
Depreciation on operating lease equipment is recognized on
owned equipment over the lease term or estimated useful life of the asset. Depreciation expense is primarily driven by the TIF operating lease
equipment portfolio, which includes long-lived assets such as aircraft and railcars. To a lesser extent, depreciation expense includes amounts on
smaller ticket equipment, such as office equipment. Impairments recorded on equipment held in portfolio are reported as depreciation expense. AHFS also
impacts the balance, as depreciation expense is suspended on operating lease equipment once it is transferred to AHFS. Depreciation expense is
discussed further in Net Finance Revenues, as it is a component of our asset margin. See Non-interest Income for
impairment charges on operating lease equipment classified as held for sale.
Maintenance and other operating lease expenses relate to
the TIF operating lease portfolio. The majority of the maintenance expenses are railcar fleet related. CIT Rail provides railcars primarily pursuant to
full-service lease contracts under which CIT Rail as lessor is responsible for railcar maintenance and repair. Under our aircraft leases, the lessee is
generally responsible for normal maintenance and repairs, airframe and engine overhauls, compliance with airworthiness directives, and compliance with
return conditions of aircraft on lease. As a result, aircraft operating lease expenses primarily relate to transition costs incurred in connection with
re-leasing an aircraft.
Operating expenses increased compared to the year-ago
quarter, mostly reflecting higher compensation costs due to additional employees relating to the 2014 third quarter acquisition of Direct Capital and
costs related to the acquisition of OneWest Bank. The sequential decline generally reflects lower compensation costs. Operating expenses include Bank
deposit raising costs, which totaled $13 million in the second quarter of 2015, compared to $14 million for the year-ago quarter and $15 million for
the prior quarter, and are reflected across various expense categories, but mostly within advertising and marketing and in other expenses, reflecting
deposit insurance costs. Year-to-date, the deposit-raising costs were $28 million for 2015 and $27 million in 2014. The current quarter and prior
quarter also included $7 million and $5 million, respectively, of expenses related to the OneWest Bank acquisition. Operating expenses reflect the
following changes:
n |
Compensation and benefits increased from the year-ago quarter, reflecting the impact of the additional employees associated with last years Direct Capital acquisition. While the number of employees remained essentially unchanged from the prior quarter, the sequential decrease reflects the normalization of certain employee benefit costs that restart at the beginning of each year. |
n |
Professional fees include legal and other professional fees such as tax, audit, and consulting services and increased from the year-ago quarter reflecting costs associated with the OneWest Transaction and exits of our non-strategic portfolios. |
n |
Advertising and marketing expenses include costs associated with raising deposits. Bank advertising and marketing costs totaled $4 million, compared to $6 million in the year-ago quarter, and $7 million in the prior quarter. Year-to-date, CIT Bank advertising and marketing costs totaled $11 million in 2015 and $12 million in 2014. |
n |
Provision for severance and facilities exiting activities reflects costs associated with various efficiency initiatives. The prior quarter included a true-up for amounts previously recorded, but that will not be incurred. |
n |
Other expenses include items such as travel and entertainment, insurance, FDIC costs, office equipment and supplies costs and taxes other than income taxes. |
52 CIT GROUP INC
We are focused on exiting Brazil and closing several legal
entities in Europe and Asia. We have an agreement to sell the Brazil business, which is expected to close in the second half of 2015. In August 2015,
after receiving regulatory approval, we sold our Mexico business. Upon completion of our remaining planned exits, we expect to eliminate approximately
$10 million from our quarterly expenses.
FRESH START ACCOUNTING
The consolidated financial statements include the effects of
adopting Fresh Start Accounting (FSA) upon the Companys emergence from bankruptcy on December 10, 2009, based on a convenience date
of December 31, 2009, as required by U.S. GAAP. FSA had a significant impact on our operating results in prior years but the impact has significantly
lessened. NFR includes the accretion of the FSA adjustments to the loans, leases and debt, as well as to depreciation and, to a lesser extent rental
income related to operating lease equipment.
The most significant remaining discount at June 30, 2015, related
to operating lease equipment ($1.3 billion related to rail operating lease equipment and $0.6 billion to aircraft operating lease equipment). The
discount on the operating lease equipment was, in effect, an impairment of the operating lease equipment upon emergence from bankruptcy, as the assets
were recorded at their fair value, which was less than their carrying value. The recording of the FSA adjustment reduced the asset balances subject to
depreciation and thus decreases depreciation expense over the remaining useful life of the operating lease equipment or until it is
sold.
INCOME TAXES
Income Tax Data (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Provision for
income taxes, before discrete items |
$ | 44.8 | $ | 42.2 | $ | 15.4 | $ | 87.0 | $ | 25.6 | ||||||||||||
Discrete
items |
(7.0 | ) | 1.8 | 2.7 | (5.2 | ) | 6.0 | |||||||||||||||
Provision for
income taxes |
$ | 37.8 | $ | 44.0 | $ | 18.1 | $ | 81.8 | $ | 31.6 | ||||||||||||
Effective tax
rate |
24.7 | % | 29.8 | % | 8.3 | % | 27.2 | % | 9.2 | % |
The 2015 tax provisions reflected federal and state income taxes
in the U.S. as well as taxes on the earnings of certain international operations. The higher income tax provision in the quarter and prior quarter, as
compared to the year-ago quarter, was primarily driven by the recognition of federal and state income tax expense on domestic earnings. Due to the
partial release of the domestic valuation allowance on net deferred tax assets in 2014, the 2015 effective income tax rate of 29% before the impact of
discrete tax items includes the recognition of U.S. federal and state income taxes. Included in the discrete tax benefits for the current quarter and
six months ended June 30, 2015, was a reduction of $9 million resulting from receipt of a favorable tax ruling on an uncertain tax position taken on
prior years tax returns.
The quarterly income tax expense is based on an updated
projection of the Companys annual effective tax rate. This updated annual effective tax rate is applied to the year-to-date consolidated pre-tax
income to determine the interim provision for income taxes before discrete items. The impact of any change in the projected annual effective tax rate
from the prior quarter is reflected in the quarterly income tax expense. The change in the effective tax rate each period is impacted by a number of
factors, including the relative mix of domestic and international earnings, adjustments to the valuation allowances, and discrete items. The actual
year-end 2015 effective tax rate may vary from the currently projected tax rate due to changes in these factors.
As noted in our 2014 Annual Report on Form 10-K, management
concluded that it was more likely than not that the Company will generate sufficient taxable income based on managements long-term forecast of
future U.S. taxable income within the applicable carry-forward periods to support partial utilization of the U.S. federal and U.S. state NOLs. The
forecast of future taxable income for the Company reflects a long-term view of growth and returns that management believes is more likely than not to
be realized.
However, the Company retained a valuation allowance of $1.0
billion against its U.S. net deferred tax assets at December 31, 2014. Of the $1.0 billion domestic valuation allowance, approximately $0.7 billion is
against the deferred tax asset on the U.S. federal NOLs and $0.3 billion is against the deferred tax asset on the U.S. state NOLs. No
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 53
discrete reduction to the valuation allowance related to the U.S. federal or state NOLs or the capital loss carry-forwards was recorded year-to-date.
The ability to recognize the remaining valuation allowances
against the U.S. federal and state NOLs, and capital loss carry-forwards net deferred tax assets will be evaluated on a quarterly basis to determine if
there are any significant events that would affect our ability to utilize these deferred tax assets. If events are identified that affect our ability
to utilize our deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowances are required. Such events
may include acquisitions that support the Companys long-term business strategies while also enabling it to accelerate the utilization of its net
operating losses, as evidenced by the acquisition of Direct Capital Corporation in 2014 and the recently approved acquisition of OneWest
Bank.
The impact of the OneWest Transaction on the utilization of the
Companys NOLs cannot be considered in the Companys forecast of future taxable income until the period in which the acquisition is
consummated. The acquisition is expected to accelerate the utilization of the Companys NOLs and therefore management anticipates it will reverse
the remaining U.S. federal valuation allowance after consummation of the acquisition in the quarter ended September 30, 2015. The Company is currently
evaluating the impact of the acquisition on the U.S. state NOLs and expects the acquisition to utilize some portion of these amounts which would cause
a partial reduction to the U.S. state valuation allowance.
The Company maintained a valuation allowance of $141 million
against certain international reporting entities net deferred tax assets at December 31, 2014. In the evaluation process related to the net
deferred tax assets of the Companys foreign reporting entities, uncertainties surrounding the international business plans, the recent
international platform rationalizations, and the cumulative losses in recent years have made it challenging to reliably project future
taxable income. The primary inputs for the forecast of future taxable income will continue to be identified as the business plans for the international
operations evolve, and potential tax planning strategies are identified. Thus, as of this reporting period, the negative evidence continues to outweigh
the positive evidence, and the Company continues to maintain a full valuation allowance on these entities net deferred tax
assets.
See Note 11 Income Taxes in Item 1. Consolidated
Financial Statements for additional information, including deferred tax assets.
RESULTS BY BUSINESS SEGMENT
See Note 15 Business Segment Information in Item
1. Consolidated Financial Statements for additional information.
Transportation & International Finance
(TIF)
TIF includes several divisions: aerospace (commercial air and
business air), rail, maritime finance, and international finance. Revenues generated by TIF include rents collected on leased assets, interest on
loans, fees, and gains from assets sold.
AerospaceCommercial Air provides aircraft leasing,
lending, asset management, and advisory services for commercial and regional airlines around the world. We own and finance a fleet of 342 aircraft and
have about 100 clients in approximately 50 countries.
AerospaceBusiness Air offers financing and leasing
programs for corporate and private owners of business jets.
Rail leases railcars and locomotives to railroads and
shippers throughout North America, and Europe. Our operating lease fleet consists of approximately 123,000 railcars and 400 locomotives and we serve
over 650 customers.
Maritime Finance offers secured loans to owners and
operators of oceangoing and inland cargo vessels, as well as offshore vessels and drilling rigs.
International Finance offers equipment financing, secured
lending and leasing to small and middle-market businesses in China and the U.K. The U.K. portfolio is included in assets held-for-sale at June 30, 2015
and December 31, 2014.
54 CIT GROUP INC
Transportation & International Finance Financial Data and Metrics (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Earnings Summary |
|||||||||||||||||||||||
Interest
income |
$ | 69.9 | $ | 68.4 | $ | 72.2 | $ | 138.3 | $ | 148.9 | |||||||||||||
Interest
expense |
(164.9 | ) | (168.6 | ) | (155.1 | ) | (333.5 | ) | (315.8 | ) | |||||||||||||
Provision for
credit losses |
0.4 | (10.6 | ) | (8.3 | ) | (10.2 | ) | (20.7 | ) | ||||||||||||||
Rental income on
operating leases |
498.6 | 497.5 | 485.1 | 996.1 | 944.7 | ||||||||||||||||||
Other
income |
16.6 | 34.3 | 10.4 | 50.9 | 17.6 | ||||||||||||||||||
Depreciation on
operating lease equipment |
(136.7 | ) | (136.1 | ) | (131.6 | ) | (272.8 | ) | (253.3 | ) | |||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | (46.1 | ) | (49.0 | ) | (95.5 | ) | (100.6 | ) | |||||||||||||
Operating
expenses |
(77.6 | ) | (81.8 | ) | (75.5 | ) | (159.4 | ) | (155.0 | ) | |||||||||||||
Income before
provision for income taxes |
$ | 156.9 | $ | 157.0 | $ | 148.2 | $ | 313.9 | $ | 265.8 | |||||||||||||
Select Average Balances |
|||||||||||||||||||||||
Average finance
receivables (AFR) |
$ | 3,657.3 | $ | 3,546.0 | $ | 3,547.0 | $ | 3,606.4 | $ | 3,550.8 | |||||||||||||
Average
operating leases (AOL) |
$ | 14,720.1 | $ | 14,617.9 | $ | 14,234.7 | $ | 14,679.6 | $ | 13,863.4 | |||||||||||||
Average earning
assets (AEA) |
$ | 19,045.1 | $ | 18,821.7 | $ | 18,066.2 | $ | 18,952.8 | $ | 17,624.8 | |||||||||||||
Statistical Data |
|||||||||||||||||||||||
Net finance
revenue interest and rental income, net of interest and depreciation and maintenance and other operating lease expenses (NFR) |
$ | 217.5 | $ | 215.1 | $ | 221.6 | $ | 432.6 | $ | 423.9 | |||||||||||||
Net finance
margin NFR as a % of AEA |
4.57 | % | 4.57 | % | 4.91 | % | 4.57 | % | 4.81 | % | |||||||||||||
Net operating
lease revenue rental income, net of depreciation and maintenance and other operating lease expenses |
$ | 312.5 | $ | 315.3 | $ | 304.5 | $ | 627.8 | $ | 590.8 | |||||||||||||
Operating lease
margin as a % of AOL |
8.49 | % | 8.63 | % | 8.56 | % | 8.55 | % | 8.52 | % | |||||||||||||
Pretax return on
AEA |
3.30 | % | 3.34 | % | 3.28 | % | 3.31 | % | 3.02 | % | |||||||||||||
New business
volume |
$ | 825.8 | $ | 525.3 | $ | 1,404.7 | $ | 1,351.1 | $ | 2,459.3 |
Pre-tax earnings for the quarter were $157 million, up from $148
million in the year-ago quarter and flat with the prior quarter. The increase from the year-ago quarter primarily reflected higher gains on asset sales
and lower provision for credit losses. The sequential trend primarily reflects lower provision and operating expenses offset by reduced gains on asset
sales. Results are discussed further below.
Financing and leasing assets totaled $19.3 billion at June 30,
2015, up from $18.8 billion the prior quarter and from $19.0 billion at December 31, 2014 with the growth coming from the Maritime Finance and Rail
divisions.
Aerospace financing and leasing assets totaled $10.8
billion, unchanged for the quarter and down from $11.1 billion at December 31, 2014 as new business volume was offset by asset sales and depreciation.
Our owned operating lease commercial portfolio included 272 aircraft, essentially flat with the prior quarter and down slightly from December 31, 2014,
as deliveries of six new aircraft during the six months were offset by sales of 13 aircraft, including six aircraft to TC-CIT Aviation, our recently
formed joint venture. At June 30, 2015, we manage 15 aircraft for the joint venture. At June 30, 2015, we had 151 aircraft on order from manufacturers,
not including options for additional aircraft, with deliveries scheduled through 2020. See Note 13 Commitments in Item 1. Consolidated
Financial Statements and Concentrations for further aircraft data.
Rail financing and leasing assets grew slightly to $6.1
billion, up from $5.9 billion the prior quarter and from $5.8 billion at December 31, 2014. We expanded our owned operating lease portfolio by
approximately 3,200 railcars during the six months to over 123,000 at June 30, 2015, reflecting scheduled deliveries from our order book and a
portfolio acquisition of approximately 900 railcars in the U.K. in the prior quarter. At June 30, 2015, we had approximately 11,900 railcars on order
from manufacturers, with deliveries scheduled through 2017, which included an additional approximately 1,400 freight cars ordered during the quarter.
See Note 13 Commitments in Item 1. Financial Statements and Supplemental Data and Concentrations for further railcar
data.
Maritime Finance financing and leasing assets grew to $1.3
billion, up from $1.1 billion the prior quarter and $1.0 billion at December 31, 2014.
International Finance financing and leasing assets were
essentially flat at $1.0 billion compared to the prior quarter and December 31, 2014, and included approximately $0.4 billion of assets held for sale
related to our U.K. equipment finance business.
Highlights included:
n |
NFR was down from the year-ago quarter as overall asset growth and higher yields in Rail were offset by lower yields in Aerospace reflecting lower equipment utilization and lease repricings. NFR was up slightly from the prior quarter driven by asset growth as lower funding costs offset yield compression. See Select Segment and Division Margin Metrics table in Net Finance Revenue section. |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
n |
Gross yields (interest income plus rental income on operating leases as a percent of AEA) for the segment decreased from the year-ago and prior quarters. Gross yields in Aerospace decreased from 11.4% in the prior quarter to 11.2%, while gross yields in Rail of 14.8% were unchanged sequentially. |
n |
Net operating lease revenue, which is a component of NFR, increased from the year-ago quarter, as higher rental income from growth offset increased depreciation, and was down from the prior quarter on higher maintenance and other operating lease expense. Depreciation expense increased from the year-ago quarter, reflecting higher asset balances and was relatively flat with the prior quarter. Maintenance and other operating lease expense was up from the prior quarter and level with a year ago. Net operating lease revenue as a percentage of AOL decreased from both periods with strength in Rail offset by compression in Aerospace. |
n |
New business volume for the quarter was $0.8 billion and consisted of $0.4 billion of operating lease equipment, including the delivery of three new aircraft and approximately 1,900 new railcars, and the funding of $0.4 billion of finance receivables, the majority of which was from Maritime. Last quarter, new business volume included the delivery of three aircraft, approximately 800 railcars, and $0.2 billion of finance receivables. The first quarter 2015 volume was supplemented by a U.K. rail portfolio purchase, which added approximately 900 railcars and approximately $85 million of assets. |
n |
Equipment utilization was essentially unchanged from the prior quarter and down slightly from December 31, 2014, with over 97% of commercial air and 98% of rail equipment on lease or under a commitment at June 30, 2015. We have 20 new aircraft deliveries scheduled for the next twelve months, all of which have lease commitments with customers. Approximately 60% of all railcars on order have commitments with deliveries through 2017. |
n |
Other income primarily reflected the following: |
n |
Gains on asset sales totaled $11 million on approximately $100 million of equipment and receivable sales, compared to $11 million of gains on approximately $80 million of asset sales in the year-ago quarter and $28 million of gains on approximately $400 million of equipment and receivable sales in the prior quarter. Year-to-date, gains totaled $39 million on approximately $500 million of sales in 2015 and $15 million on $280 million of sales in 2014. |
n |
Impairment charges on AHFS totaled $2 million, compared to $10 million in the year-ago quarter and $1 million in the prior quarter and predominantly related to international portfolios and commercial aircraft. Year-to-date, impairment charges were $3 million in 2015 and $11 million in 2014. |
n |
Other income also includes a small amount of fees and other revenue derived from loan commitments, joint ventures and other business activities, as well as periodic items such as a benefit from the termination of a defaulted contract recognized in the prior quarter. |
n |
Non-accrual loans were $58 million (1.55% of finance receivables) at June 30, 2015, compared to $39 million (1.10%) at March 31, 2015, and $41 million (1.26%) at June 30, 2014, and largely consist of assets in the international portfolio. There was a slight net benefit in provision for credit losses compared to provisions of $8 million in the year-ago quarter and $11 million in the prior quarter, with the current quarter provision reflecting recoveries in China and minimal losses elsewhere. There was a net recovery of nearly $3 million during the quarter, compared to net charge-offs of $13 million (1.48% of average finance receivables) in the year-ago quarter and $1 million (0.17%) in the prior quarter. There was a net recovery of $1 million compared to net charge-offs of $26 million (1.47%) for the six months ended June 30, 2015 and 2014, respectively. Essentially all of the charge-offs and the recoveries were concentrated in the international portfolio. Charge-offs for the year-ago quarter and six months included $9 million and $12 million, respectively, related to the transfer of receivables to assets held for sale. The respective 2015 balances were not significant. |
n |
Operating expenses were up from the year-ago quarter and down sequentially reflecting lower employee costs. |
North American Commercial Finance (NACF)
The NACF segment consists of four divisions: Commercial Services,
Corporate Finance, Equipment Finance, and Real Estate Finance. Revenue is generated from interest earned on loans, rents on equipment leased, fees and
other revenue from lending and leasing activities and capital markets transactions, and commissions earned on factoring and related
activities.
Commercial Services provides factoring, receivable
management products, and secured financing to businesses (our clients, generally manufacturers or importers of goods) that operate in several
industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with
respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored
(i.e. sold or assigned to the factor). Although primarily U.S.-based, Commercial Services also conducts business with clients and their customers
internationally.
Corporate Finance provides a range of financing options
and offers advisory services to small and medium size companies. Its core products include both loan and fee-based products. Loans offered are
primarily senior secured loans collateralized by accounts receivable, inventory, machinery & equipment and/or intangibles that are often used for
working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the
nature and quality of the collateral, may be referred to as asset-based loans or cash flow loans. We provide financing to customers in a wide range of
industries, including Commercial &
56 CIT GROUP INC
Industrial, Communications, Media & Entertainment, Energy, and Healthcare.
Equipment Finance provides leasing and equipment financing
solutions to small businesses and middle market companies in a wide range of industries on both a private label and direct basis. We provide financing
solutions for our borrowers and lessees, and assist manufacturers and distributors in growing sales, profitability and customer loyalty by providing
customized, value-added finance solutions to their commercial clients. Our LendEdge platform allows small businesses to access financing through a
highly automated credit approval, documentation and funding process. We offer both capital and operating leases.
Real Estate Finance provides senior secured commercial
real estate loans to developers and other commercial real estate professionals. We focus on stable, cash flowing properties and originate construction
loans to highly experienced and well capitalized developers.
North American Commercial Finance Financial Data and Metrics (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Earnings Summary |
|||||||||||||||||||||||
Interest
income |
$ | 199.0 | $ | 196.1 | $ | 208.8 | $ | 395.1 | $ | 402.2 | |||||||||||||
Interest
expense |
(73.3 | ) | (74.1 | ) | (68.1 | ) | (147.4 | ) | (137.0 | ) | |||||||||||||
Provision for
credit losses |
(18.8 | ) | (24.0 | ) | (2.6 | ) | (42.8 | ) | (25.8 | ) | |||||||||||||
Rental income on
operating leases |
27.9 | 27.2 | 25.1 | 55.1 | 47.9 | ||||||||||||||||||
Other
income |
69.2 | 66.3 | 69.7 | 135.5 | 131.5 | ||||||||||||||||||
Depreciation on
operating lease equipment |
(21.1 | ) | (20.7 | ) | (20.0 | ) | (41.8 | ) | (41.9 | ) | |||||||||||||
Operating
expenses |
(135.4 | ) | (134.7 | ) | (120.2 | ) | (270.1 | ) | (241.7 | ) | |||||||||||||
Income before
provision for income taxes |
$ | 47.5 | $ | 36.1 | $ | 92.7 | $ | 83.6 | $ | 135.2 | |||||||||||||
Select
Average Balances |
|||||||||||||||||||||||
Average finance
receivables (AFR) |
$ | 15,854.4 | $ | 15,825.9 | $ | 15,181.0 | $ | 15,837.2 | $ | 14,952.2 | |||||||||||||
Average earning
assets (AEA)(1) |
$ | 14,737.1 | $ | 14,590.3 | $ | 14,132.4 | 14,675.3 | 13,962.1 | |||||||||||||||
Statistical Data |
|||||||||||||||||||||||
Net finance
revenue interest and rental income, net of interest and depreciation expense (NFR) |
$ | 132.5 | $ | 128.5 | $ | 145.8 | $ | 261.0 | $ | 271.2 | |||||||||||||
Net finance
margin NFR as a % of AEA |
3.60 | % | 3.52 | % | 4.13 | % | 3.56 | % | 3.88 | % | |||||||||||||
Pretax return on
AEA |
1.29 | % | 0.99 | % | 2.62 | % | 1.14 | % | 1.94 | % | |||||||||||||
New business
volume |
$ | 1,630.5 | $ | 1,354.1 | $ | 1,600.1 | $ | 2,984.6 | $ | 2,973.0 | |||||||||||||
Factoring
volume |
$ | 5,821.3 | $ | 6,495.6 | $ | 6,282.8 | $ | 12,316.9 | $ | 12,553.9 |
(1) |
AEA is lower than AFR as it is reduced by the average credit balances for factoring clients. |
Pre-tax income decreased from the year-ago quarter, reflecting
higher credit costs and operating expenses, lower interest recoveries, and the impact of portfolio re-pricing. The increase from the prior quarter
reflects lower credit costs, higher capital market fees, and higher net finance revenue.
Financing and leasing assets totaled $16.3 billion at June 30,
2015, up slightly from $16.2 billion at March 31, 2015, as new loan and lease volume was mostly offset by portfolio run-off and prepayments. At June
30, 2015, financing and leasing assets totaled $7.1 billion in Corporate Finance, $5.1 billion in Equipment Finance, $1.9 billion in Real Estate
Finance, all of which were up from the prior quarter, and $2.2 billion in Commercial Services, which were down from the prior quarter. Financing and
leasing assets rose approximately $650 million from June 30, 2014, reflecting the acquisition of Direct Capital in the third quarter of 2014 and growth
in Real Estate Finance. New loan and lease volume was up slightly from the year-ago quarter, as the increases in Equipment Finance and Real Estate
Finance offset the decline in Corporate Finance activity, and up sequentially in each of the divisions. Factored volume declined 7% from the year-ago
quarter and was down 2% year to date.
CIT Bank originated the vast majority of the U.S. loan and lease
volume in each of the periods presented. At June 30, 2015, over 80% of NACFs financing and leasing assets were in the Bank.
New business yields declined from the prior quarter, primarily
due to a greater proportion of new business volume in Corporate Finance, with lower yields, relative to higher yielding Equipment Finance leases. New
business yields were meaningfully higher than the year-ago level due to the acquisition of Direct Capital, whose assets have the highest yields in the
segment.
Highlights included:
n |
NFR declined from the year-ago quarter and six month periods ended June 30 2014 as the benefit of higher average earning assets was offset by lower portfolio yields and a lower level of loan prepayments and interest recoveries. NFR increased from the prior quarter due to both slightly higher average earning assets and yields, notably in Equipment Finance. NFM reflects similar trends. |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 57
n |
NACF gross yields declined from the three and six month periods ended June 30, 2014 reflecting continued pressures on yields, as new business yields are generally below maturing contracts, notably in Equipment Finance. The sequential quarter increase reflects yield stabilization in certain sectors. See Select Segment and Division Margin Metrics table in Net Finance Revenue section. |
n |
Other income was essentially unchanged from the year-ago quarter and increased from the prior quarter reflecting: |
n |
Factoring commissions of $27 million, which declined from the year-ago and prior quarters, reflecting a higher average factoring commission rate that was more than offset by lower factored volumes. |
n |
Gains on asset sales (including receivables, equipment and investments) of $13 million, which were essentially unchanged from the year-ago and prior quarters. Financing and leasing assets sold totaled $92 million, compared to $175 million in the year-ago quarter and $129 million in the prior quarter. Year-to-date, gains totaled $25 million on $221 million of sales in 2015 and $23 million on $313 million of sales in 2014. |
n |
Fee revenue (including capital market fees and other income) of $23 million, compared to $18 million in the year-ago quarter and $20 million in the prior quarter. Year-to-date, fee revenue totaled $43 million in 2015 and $35 million in 2014. |
n |
Non-accrual loans were $111 million (0.70% of finance receivables) at June 30, 2015, down from $116 million (0.73%) at March 31, 2015, and $132 million (0.86%) at June 30, 2014. The $19 million provision for credit losses, while down from the prior quarter level, rose meaningfully from the year-ago quarter. Year to date amounts also rose. The current quarter includes a large charge-off on one energy-related account that was partially offset by a decrease in non-specific reserves. Net charge-offs were $26 million (0.66% of average finance receivables) for the current quarter, compared to $9 million (0.23%) in the year-ago quarter and $19 million (0.49%) in the prior quarter. Net charge-offs were $46 million (0.58%) and $25 million (0.33%) for the six months ended June 30, 2015 and 2014, respectively. Net charge-offs include $1 million from assets transferred to held for sale in the current quarter and $11 million in the prior quarter. For the quarter and six months ended June 30, 2014, the respective amounts were $3 million and $7 million. |
n |
The increases in operating expenses from the year-ago quarter and year to date amounts are primarily due to the inclusion of costs related to Direct Capital. |
Non-Strategic Portfolios (NSP)
NSP consisted of portfolios that we no longer consider strategic.
At June 30, 2015, these consisted primarily of equipment financing portfolios in Mexico and Brazil, both of which were under definitive sale
agreements.
Non-Strategic Portfolios Financial Data and Metrics (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Earnings Summary |
|||||||||||||||||||||||
Interest
income |
$ | 10.2 | $ | 12.3 | $ | 25.6 | $ | 22.5 | $ | 54.0 | |||||||||||||
Interest
expense |
(9.2 | ) | (10.8 | ) | (23.0 | ) | (20.0 | ) | (47.9 | ) | |||||||||||||
Provision for
credit losses |
| | 0.7 | | (0.3 | ) | |||||||||||||||||
Rental income on
operating leases |
5.2 | 5.9 | 9.4 | 11.1 | 18.9 | ||||||||||||||||||
Other
income |
(5.7 | ) | (7.8 | ) | 3.9 | (13.5 | ) | 8.3 | |||||||||||||||
Depreciation on
operating lease equipment |
| | (5.7 | ) | | (10.9 | ) | ||||||||||||||||
Operating
expenses |
(10.9 | ) | (12.4 | ) | (20.5 | ) | (23.3 | ) | (39.7 | ) | |||||||||||||
Loss before
provision for income taxes |
$ | (10.4 | ) | $ | (12.8 | ) | $ | (9.6 | ) | $ | (23.2 | ) | $ | (17.6 | ) | ||||||||
Select
Average Balances |
|||||||||||||||||||||||
Average finance
receivables (AFR) |
$ | | $ | 0.1 | $ | 83.9 | $ | | $ | 280.7 | |||||||||||||
Average earning
assets (AEA) |
315.3 | 360.0 | 988.1 | 338.8 | 1,082.1 | ||||||||||||||||||
Statistical Data |
|||||||||||||||||||||||
Net finance
margin NFR as a % of AEA |
7.87 | % | 8.22 | % | 2.55 | % | 8.03 | % | 2.61 | % | |||||||||||||
New business
volume |
$ | 26.4 | $ | 37.7 | $ | 64.1 | $ | 64.1 | $ | 115.9 |
Pre-tax losses continued in 2015. The change from the year-ago
quarter includes lower operating expenses. Operating expenses were down due to the completion of platform exits, and we expect the majority of the
expenses will cease once all portfolios are sold. The sequential trend also reflected higher gains on sale of equipment, offset by higher impairment
charges on held-for-sale portfolios. The 2015 periods reflect no depreciation expense as a result of
58 CIT GROUP INC
operating lease equipment being recorded as held for sale, but had associated impairments of $4 million and $5 million recorded in other income in the June 30 and March 31, 2015 quarters, respectively.
Financing and leasing assets totaled $293 million at
June 30, 2015, down from $330 million at March 31, 2015, and from $380 million at December 31, 2014, reflecting portfolio
runoff and changes in currency rates. The remaining balance consists of the portfolios in Mexico and Brazil. We received
regulatory approval and sold the Mexico business in August 2015. We have entered
into a definitive agreement to sell the Brazil business, subject to customary regulatory approvals, and we expect to close
the transaction in the second half of 2015. In conjunction with the closing of the transactions, certain currency translation
adjustments (CTA) related to the Mexico and Brazil portfolios, currently $19 million and $44 million pre-tax at
June 30, 2015, respectively, recorded in accumulated other comprehensive loss within the stockholders equity, will be
recognized in income, with the pre-tax amount decreasing other income and the tax effect in the provision for income taxes.
The CTA amounts will fluctuate until the transactions are completed.
Corporate and Other
Certain items are not allocated to operating segments and are
included in Corporate and Other, including unallocated interest expense, primarily related to corporate liquidity costs (Interest Expense),
mark-to-market adjustments on non-qualifying derivatives (Other Income), restructuring charges for severance and facilities exit activities and certain
legal costs and unallocated expenses (Operating Expenses). Corporate and Other also reflects losses on debt extinguishments.
Corporate and Other Financial Data (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Earnings Summary |
|||||||||||||||||||||||
Interest
income |
$ | 4.7 | $ | 4.2 | $ | 3.2 | $ | 8.9 | $ | 6.9 | |||||||||||||
Interest
expense |
(17.8 | ) | (17.8 | ) | (16.0 | ) | (35.6 | ) | (33.4 | ) | |||||||||||||
Provision for
credit losses |
| | | | (0.1 | ) | |||||||||||||||||
Other
income |
(16.6 | ) | (6.4 | ) | 9.7 | (23.0 | ) | 7.4 | |||||||||||||||
Operating
expenses |
(11.1 | ) | (12.7 | ) | (8.8 | ) | (23.8 | ) | (22.1 | ) | |||||||||||||
Loss on debt
extinguishments |
(0.1 | ) | | (0.4 | ) | (0.1 | ) | (0.4 | ) | ||||||||||||||
Loss before
provision for income taxes |
$ | (40.9 | ) | $ | (32.7 | ) | $ | (12.3 | ) | $ | (73.6 | ) | $ | (41.7 | ) |
n |
Interest income consists of interest and dividend income primarily from deposits held at other depository institutions and other investment securities. |
n |
Interest expense generally is allocated to the segments. Interest expense held in Corporate represents amounts in excess of these allocations and amounts related to excess liquidity. |
n |
Other income primarily reflects gains and (losses) on derivatives, including the GSI facilities, and foreign currency exchange. The GSI derivative had a negative mark-to-market of $6 million for the current quarter, compared to $11 million favorable mark-to-market in the year-ago quarter and $1 million for the prior quarter. The current quarter also includes $9 million related to the previously mentioned write-off of other receivables in connection with the favorable resolution of an uncertain tax position. |
n |
Operating expenses reflects salary and general and administrative expenses in excess of amounts allocated to the business segments. Operating expenses include a provision for severance and facilities exiting activities, which reflected charges of $1 million and $6 million for the quarters ended June 30, 2015 and June 30, 2014, respectively, compared to a reversal of previously recorded provisions in the prior quarter. Year to date, restructuring charges were less than $1 million, compared to $16 million in 2014. |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 59
FINANCING AND LEASING ASSETS
The following table presents our financing and leasing assets by
segment.
Financing and Leasing Asset Composition (dollars in millions)
June 30, 2015 |
December 31, 2014 |
% Change |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Transportation & International Finance |
|||||||||||||||
Segment
Total |
|||||||||||||||
Loans |
$ | 3,717.1 | $ | 3,558.9 | 4.4 | % | |||||||||
Operating
lease equipment, net |
14,827.9 | 14,665.2 | 1.1 | % | |||||||||||
Assets held
for sale |
705.5 | 815.2 | (13.5 | )% | |||||||||||
Financing and
leasing assets |
19,250.5 | 19,039.3 | 1.1 | % | |||||||||||
Aerospace |
|||||||||||||||
Loans |
1,739.6 | 1,796.5 | (3.2 | )% | |||||||||||
Operating
lease equipment, net |
8,816.7 | 8,949.5 | (1.5 | )% | |||||||||||
Assets held
for sale |
243.8 | 391.6 | (37.7 | )% | |||||||||||
Financing and
leasing assets |
10,800.1 | 11,137.6 | (3.0 | )% | |||||||||||
Rail |
|||||||||||||||
Loans |
124.7 | 130.0 | (4.1 | )% | |||||||||||
Operating
lease equipment, net |
6,010.8 | 5,715.2 | 5.2 | % | |||||||||||
Assets held
for sale |
0.9 | 1.2 | (25.0 | )% | |||||||||||
Financing and
leasing assets |
6,136.4 | 5,846.4 | 5.0 | % | |||||||||||
Maritime Finance |
|||||||||||||||
Loans |
1,274.4 | 1,006.7 | 26.6 | % | |||||||||||
Assets held
for sale |
56.4 | 19.7 | 186.3 | % | |||||||||||
Financing and
leasing assets |
1,330.8 | 1,026.4 | 29.7 | % | |||||||||||
International Finance |
|||||||||||||||
Loans |
578.4 | 625.7 | (7.6 | )% | |||||||||||
Operating
lease equipment, net |
0.4 | 0.5 | (20.0 | )% | |||||||||||
Assets held
for sale |
404.4 | 402.7 | 0.4 | % | |||||||||||
Financing and
leasing assets |
983.2 | 1,028.9 | (4.4 | )% | |||||||||||
North American Commercial Finance |
|||||||||||||||
Segment Total |
|||||||||||||||
Loans |
15,932.2 | 15,936.0 | | ||||||||||||
Operating
lease equipment, net |
281.7 | 265.2 | 6.2 | % | |||||||||||
Assets held
for sale |
88.3 | 22.8 | 287.3 | % | |||||||||||
Financing and
leasing assets |
16,302.2 | 16,224.0 | 0.5 | % | |||||||||||
Real
Estate Finance |
|||||||||||||||
Loans |
1,941.4 | 1,768.6 | 9.8 | % | |||||||||||
Financing and
leasing assets |
1,941.4 | 1,768.6 | 9.8 | % | |||||||||||
Corporate Finance |
|||||||||||||||
Loans |
6,978.2 | 6,889.9 | 1.3 | % | |||||||||||
Assets held
for sale |
88.3 | 22.8 | 287.3 | % | |||||||||||
Financing and
leasing assets |
7,066.5 | 6,912.7 | 2.2 | % | |||||||||||
Equipment Finance |
|||||||||||||||
Loans |
4,810.8 | 4,717.3 | 2.0 | % | |||||||||||
Operating
lease equipment, net |
281.7 | 265.2 | 6.2 | % | |||||||||||
Financing and
leasing assets |
5,092.5 | 4,982.5 | 2.2 | % | |||||||||||
Commercial Services |
|||||||||||||||
Loans and
factoring receivables |
2,201.8 | 2,560.2 | (14.0 | )% | |||||||||||
Financing and
leasing assets |
2,201.8 | 2,560.2 | (14.0 | )% | |||||||||||
Non-Strategic
Portfolios |
|||||||||||||||
Loans |
| 0.1 | | ||||||||||||
Assets held
for sale |
293.0 | 380.1 | (22.9 | )% | |||||||||||
Financing and
leasing assets |
293.0 | 380.2 | (22.9 | )% | |||||||||||
Consolidated
Totals: |
|||||||||||||||
Loans |
$ | 19,649.3 | $ | 19,495.0 | 0.8 | % | |||||||||
Operating
lease equipment, net |
15,109.6 | 14,930.4 | 1.2 | % | |||||||||||
Assets held
for sale |
1,086.8 | 1,218.1 | (10.8 | )% | |||||||||||
Total
financing and leasing assets |
$ | 35,845.7 | $ | 35,643.5 | 0.6 | % |
60 CIT GROUP INC
Financing and leasing assets were up slightly, reflecting the
following:
TIF growth in Rail and Maritime was partially offset by asset
sales, mostly in Aerospace in the first quarter, and lower financing and leasing assets in International Finance, as collections outpaced new business
originations. Assets held for sale totaled $0.7 billion and largely consists of the U.K. equipment finance portfolio and aircraft.
In NACF, new business originations exceeded portfolio
collections, sales, prepayments, and a decline in factoring receivables, resulting in growth in most of the divisions.
The decline in NSP primarily reflected portfolio runoff and
foreign exchange rates. The remaining AHFS reflected the Mexico business, which was sold in August 2015, and the Brazil business, which is subject to
a sales agreement.
Financing and leasing asset trends are also discussed in the
respective segment descriptions in Results by Business Segment.
The following table presents the changes to our financing and
leasing assets:
Financing and Leasing Assets Rollforward (dollars in millions)
Transportation & International Finance |
North American Commercial Finance |
Non-Strategic Portfolios |
Total |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at
March 31, 2015 |
$ | 18,826.3 | $ | 16,212.8 | $ | 329.9 | $ | 35,369.0 | ||||||||||
New business
volume |
825.8 | 1,630.5 | 26.4 | 2,482.7 | ||||||||||||||
Loan
sales |
| (36.3 | ) | (0.3 | ) | (36.6 | ) | |||||||||||
Equipment
sales |
(97.1 | ) | (55.6 | ) | (1.9 | ) | (154.6 | ) | ||||||||||
Depreciation |
(136.7 | ) | (21.1 | ) | | (157.8 | ) | |||||||||||
Gross
charge-offs |
(2.9 | ) | (31.3 | ) | | (34.2 | ) | |||||||||||
Collections and
other |
(164.9 | ) | (1,396.8 | ) | (61.1 | ) | (1,622.8 | ) | ||||||||||
Balance at
June 30, 2015 |
$ | 19,250.5 | $ | 16,302.2 | $ | 293.0 | $ | 35,845.7 | ||||||||||
Balance at
December 31, 2014 |
$ | 19,039.3 | $ | 16,224.0 | $ | 380.2 | $ | 35,643.5 | ||||||||||
New business
volume |
1,351.1 | 2,984.6 | 64.1 | 4,399.8 | ||||||||||||||
Portfolio /
business acquisitions |
84.4 | | | 84.4 | ||||||||||||||
Loan
sales |
(23.4 | ) | (107.4 | ) | (0.3 | ) | (131.1 | ) | ||||||||||
Equipment
sales |
(474.1 | ) | (113.4 | ) | (4.6 | ) | (592.1 | ) | ||||||||||
Depreciation |
(272.8 | ) | (41.8 | ) | | (314.6 | ) | |||||||||||
Gross
charge-offs |
(6.1 | ) | (54.7 | ) | | (60.8 | ) | |||||||||||
Collections and
other |
(447.9 | ) | (2,589.1 | ) | (146.4 | ) | (3,183.4 | ) | ||||||||||
Balance at
June 30, 2015 |
$ | 19,250.5 | $ | 16,302.2 | $ | 293.0 | $ | 35,845.7 |
New Business Volumes and Factored Volumes (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Transportation
& International Finance |
$ | 825.8 | $ | 525.3 | $ | 1,404.7 | $ | 1,351.1 | $ | 2,459.3 | ||||||||||||
North American
Commercial Finance |
1,630.5 | 1,354.1 | 1,600.1 | 2,984.6 | 2,973.0 | |||||||||||||||||
Non-Strategic
Portfolios |
26.4 | 37.7 | 64.1 | 64.1 | 115.9 | |||||||||||||||||
Total new
business volumes |
$ | 2,482.7 | $ | 1,917.1 | $ | 3,068.9 | $ | 4,399.8 | $ | 5,548.2 | ||||||||||||
Factored
volumes |
$ | 5,821.3 | $ | 6,495.6 | $ | 6,282.8 | $ | 12,316.9 | $ | 12,553.9 |
New business volume in 2015 decreased in TIF from the
year-ago, mostly driven by fewer scheduled aircraft deliveries. The sequential increase was mostly driven by Maritime Finance and Rail. Although
essentially flat with the year-ago quarter, NACF new business volumes in Direct Capital in the Equipment Finance division helped offset lower volume in
Corporate Finance. The sequential increase was driven by higher Corporate Finance volume.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 61
Loan Sales (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Transportation
& International Finance |
$ | | $ | 23.4 | $ | 45.9 | $ | 23.4 | $ | 60.1 | ||||||||||||
North American
Commercial Finance |
36.3 | 71.1 | 92.9 | 107.4 | 162.7 | |||||||||||||||||
Non-Strategic
Portfolios |
0.3 | | 299.9 | 0.3 | 363.5 | |||||||||||||||||
Total |
$ | 36.6 | $ | 94.5 | $ | 438.7 | $ | 131.1 | $ | 586.3 |
Loan and portfolio sales in the 2015 second quarter
remained light. The NSP 2014 amounts included the sale of the small business loan portfolio.
Equipment Sales (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, |
June 30, |
June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Transportation
& International Finance |
$ | 97.1 | $ | 377.0 | $ | 35.2 | $ | 474.1 | $ | 219.5 | ||||||||||||
North American
Commercial Finance |
55.6 | 57.8 | 82.0 | 113.4 | 150.4 | |||||||||||||||||
Non-Strategic
Portfolios |
1.9 | 2.7 | 7.5 | 4.6 | 11.3 | |||||||||||||||||
Total |
$ | 154.6 | $ | 437.5 | $ | 124.7 | $ | 592.1 | $ | 381.2 |
Equipment sales in TIF consisted of aerospace and rail
assets in conjunction with its portfolio management activities. The elevated balances in the prior quarter reflect higher aerospace asset sales,
including amounts sold to a joint venture. NACF sales reflect assets within Equipment Finance and Corporate Finance.
Portfolio activities are also discussed in the respective segment
descriptions in Results by Business Segment.
CONCENTRATIONS
Ten Largest Accounts
Our ten largest financing and leasing asset accounts, the vast
majority of which are lessors of air and rail assets, in the aggregate represented 10.4% of our total financing and leasing assets at June 30, 2015
(the largest account was less than 2.0%) and 11.1% at December 31, 2014.
Geographic Concentrations
The following table represents the financing and leasing assets
by obligor geography:
Financing and Leasing Assets by Obligor Geographic Region (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Northeast |
$ | 6,954.9 | 19.4 | % | $ | 6,552.0 | 18.4 | % | ||||||||||
Midwest |
3,954.6 | 11.0 | % | 3,821.6 | 10.7 | % | ||||||||||||
Southeast |
3,823.2 | 10.7 | % | 3,732.9 | 10.5 | % | ||||||||||||
Southwest |
3,768.1 | 10.5 | % | 3,852.8 | 10.8 | % | ||||||||||||
West |
3,249.9 | 9.1 | % | 3,183.1 | 8.9 | % | ||||||||||||
Total
U.S. |
21,750.7 | 60.7 | % | 21,142.4 | 59.3 | % | ||||||||||||
Asia /
Pacific |
4,548.9 | 12.7 | % | 4,712.8 | 13.2 | % | ||||||||||||
Europe |
3,079.0 | 8.6 | % | 3,192.4 | 9.0 | % | ||||||||||||
Canada |
2,441.8 | 6.8 | % | 2,520.6 | 7.1 | % | ||||||||||||
Latin
America |
1,517.0 | 4.2 | % | 1,651.7 | 4.6 | % | ||||||||||||
All other
countries |
2,508.3 | 7.0 | % | 2,423.6 | 6.8 | % | ||||||||||||
Total |
$ | 35,845.7 | 100.0 | % | $ | 35,643.5 | 100.0 | % |
62 CIT GROUP INC
The following table summarizes both state concentrations greater
than 5.0% and international country concentrations in excess of 1.0% of our financing and leasing assets:
Financing and Leasing Assets by Obligor State and Country (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
State |
|||||||||||||||||||
Texas |
$ | 3,179.2 | 8.9 | % | $ | 3,261.4 | 9.1 | % | |||||||||||
New
York |
2,239.4 | 6.2 | % | 2,492.3 | 7.0 | % | |||||||||||||
All other
states |
16,332.1 | 45.6 | % | 15,388.7 | 43.2 | % | |||||||||||||
Total
U.S. |
$ | 21,750.7 | 60.7 | % | $ | 21,142.4 | 59.3 | % | |||||||||||
Country |
|||||||||||||||||||
Canada |
$ | 2,441.8 | 6.8 | % | $ | 2,520.6 | 7.1 | % | |||||||||||
England |
1,011.1 | 2.8 | % | 855.3 | 2.4 | % | |||||||||||||
Australia |
1,007.2 | 2.8 | % | 1,029.1 | 2.9 | % | |||||||||||||
China |
992.1 | 2.8 | % | 1,043.7 | 2.9 | % | |||||||||||||
Mexico |
613.7 | 1.7 | % | 670.7 | 1.9 | % | |||||||||||||
Brazil |
535.5 | 1.5 | % | 579.5 | 1.6 | % | |||||||||||||
Philippines |
501.1 | 1.4 | % | 511.3 | 1.4 | % | |||||||||||||
Indonesia |
415.0 | 1.2 | % | 424.4 | 1.2 | % | |||||||||||||
Russia(1) |
410.2 | 1.1 | % | 400.0 | 1.1 | % | |||||||||||||
All other
countries |
6,167.3 | 17.2 | % | 6,466.5 | 18.2 | % | |||||||||||||
Total
International |
$ | 14,095.0 | 39.3 | % | $ | 14,501.1 | 40.7 | % |
(1) |
Most of the balance represents operating lease equipment. |
Industry Concentrations
The following table represents financing and leasing assets by
industry of obligor:
Financing and Leasing Assets by Obligor Industry (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial
airlines (including regional airlines)(1) |
$ | 9,994.5 | 27.9 | % | $ | 10,313.7 | 28.9 | % | ||||||||||
Manufacturing(2) |
4,649.7 | 13.0 | % | 4,702.6 | 13.2 | % | ||||||||||||
Transportation(3) |
3,901.2 | 10.9 | % | 3,361.7 | 9.5 | % | ||||||||||||
Retail(4) |
2,945.9 | 8.2 | % | 3,187.8 | 8.9 | % | ||||||||||||
Service
industries |
2,645.5 | 7.4 | % | 2,553.6 | 7.2 | % | ||||||||||||
Real
Estate |
1,727.4 | 4.8 | % | 1,590.5 | 4.5 | % | ||||||||||||
Wholesale |
1,616.7 | 4.5 | % | 1,710.3 | 4.8 | % | ||||||||||||
Oil and gas
extraction / services |
1,517.9 | 4.2 | % | 1,483.4 | 4.2 | % | ||||||||||||
Energy and
utilities |
1,494.4 | 4.2 | % | 1,513.2 | 4.2 | % | ||||||||||||
Healthcare |
1,250.9 | 3.5 | % | 1,159.7 | 3.3 | % | ||||||||||||
Finance and
insurance |
807.2 | 2.2 | % | 782.9 | 2.2 | % | ||||||||||||
Other (no
industry greater than 2%) |
3,294.4 | 9.2 | % | 3,284.1 | 9.1 | % | ||||||||||||
Total |
$ | 35,845.7 | 100.0 | % | $ | 35,643.5 | 100.0 | % |
(1) |
Includes the Commercial Aerospace Portfolio and additional financing and leasing assets that are not commercial aircraft. |
(2) |
At June 30, 2015, includes manufacturers of chemicals, including pharmaceuticals (3.1%), petroleum and coal, including refining (1.6%), and stone, clay, glass and concrete (1.1%). |
(3) |
At June 30, 2015, included rail (4.2%), maritime (4.0%), and trucking and shipping (1.6%). |
(4) |
At June 30, 2015, includes retailers of apparel (3.7%) and general merchandise (1.2%). |
Direct exposure to customers in the energy industry includes $1.5
billion in energy and utilities and $1.5 billion in the oil and gas extraction/services industries at June 30, 2015. Energy and utilities primarily
consists of project finance transactions supporting unregulated power generation plants, mostly fueled by natural gas. Approximately $1.1 billion of
the exposure to oil and gas extraction/services includes railcars, primarily tank and sand railcars, leased to companies in these industries. There is
also approximately $0.4 billion of loans that are exposed to
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 63
oil (the majority in energy services and the remaining in exploration and production), a majority of which is secured by equipment and working capital assets.
Operating Lease Equipment Rail
TIFs global Rail business has a fleet of approximately
123,000 railcars and locomotives, including approximately 32,000 tank cars. The North American fleet has approximately 21,000 tank cars used in the
transport of crude oil, ethanol and other flammable liquids (collectively, Flammable Liquids). Of the 21,000 tank cars, approximately
13,000 tank cars are leased directly to railroads and other diversified shippers for the transportation of crude by rail. The owned fleet also contains
approximately 10,000 sand cars (covered hoppers) leased to customers to support crude oil and natural gas production.
On May 1, 2015, the U.S. Pipeline and Hazardous Materials Safety
Administration (PHMSA) and Transport Canada (TC) each released their final rules (the Final Rules), which were
generally aligned in recognition that many railcars are used in both countries. The Final U.S. Rules apply to all High Hazard Flammable Trains
(HHFT), which is defined as trains with a continuous block of 20 or more tank cars loaded with a flammable liquid or 35 or more tank cars
loaded with a flammable liquid dispersed through a train. The Final US Rules (i) establish enhanced DOT Specification 117 design and performance
criteria applicable to tank cars constructed after October 1, 2015 for use in an HHFT and (ii) require retrofitting existing tank cars in accordance
with DOT-prescribed retrofit design or performance standard for use in a HHFT. The retrofit timeline is based on two risk factors, the packing group of
the flammable liquid and the differing types of DOT-111 and CPC-1232 tank cars. The Final US Rules also established new braking standards, requiring
HHFTs to have in place a functioning two-way end-of-train device or a distributive power braking system. Any high-hazard flammable unit train
(HHFUT) (a single train traveling over 30 MPH with 70 or more tank cars loaded with Class 3 flammable liquids), with at least one tank car
with Packing Group I materials, must be operated with an electronically controlled pneumatic (ECP) braking system by January 1, 2021. All
other HHFUTs must have ECP braking systems installed by May 1, 2023. In addition, the Final U.S. Rules establish speed restrictions for HHFTs,
establish standards for rail routing analysis, require improved information sharing with state and local officials, and require more accurate
classification of unrefined petroleum-based products, including developing and carrying out sampling and testing programs.
As noted above, CIT has approximately 21,000 tank cars in its
North American fleet used in the transport of Flammable Liquids, of which less than half were manufactured prior to the adoption of the CPC-1232
standard. Based on our preliminary analysis of the Final U.S. Rules, approximately 1,000 cars in our current tank car fleet require retrofitting by
March 2018. Approximately 75% of the cars in our flammable tank car fleet have a deadline of 2023 or later for modification, although we may decide to
retrofit them sooner. Current tank cars on order are being configured to meet the Final U.S. Rules, except for the installation of ECP braking systems.
CIT is currently evaluating how the Final U.S. Rules will impact its business and customers. However, based on our preliminary analysis, we expect to
retrofit most, if not all, of our cars impacted by the Final U.S. Rules and to amortize the cost over the remaining asset life of the
cars.
Commercial Aerospace
The following tables present details on our commercial and
regional aerospace portfolio (Commercial Aerospace). The net investment in regional aerospace financing and leasing assets was $47 million
at June 30, 2015 and December 31, 2014, and was substantially comprised of loans and capital leases. The information presented below by region,
manufacturer, and body type, is based on our operating lease aircraft portfolio, which comprises 91% of our total commercial aerospace portfolio net
investment at June 30, 2015.
Commercial Aerospace Portfolio (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Investment |
Number |
Net Investment |
Number |
||||||||||||||||
By
Product: |
|||||||||||||||||||
Operating
lease(1) |
$ | 9,030.7 | 272 | $ | 9,309.3 | 279 | |||||||||||||
Loan |
591.1 | 49 | 635.0 | 50 | |||||||||||||||
Capital
lease |
328.1 | 21 | 335.6 | 21 | |||||||||||||||
Total |
$ | 9,949.9 | 342 | $ | 10,279.9 | 350 |
(1) – See following page for footnote explanation. |
64 CIT GROUP INC
Commercial Aerospace Operating Lease Portfolio (continued) (dollars in millions)(1)
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Investment |
Number |
Net Investment |
Number |
||||||||||||||||
By
Region: |
|||||||||||||||||||
Asia /
Pacific |
$ | 3,422.8 | 87 | $ | 3,610.0 | 88 | |||||||||||||
U.S. and
Canada |
2,037.0 | 60 | 1,802.6 | 57 | |||||||||||||||
Europe |
1,946.4 | 76 | 2,135.4 | 82 | |||||||||||||||
Latin
America |
951.2 | 35 | 994.9 | 37 | |||||||||||||||
Africa /
Middle East |
673.3 | 14 | 766.4 | 15 | |||||||||||||||
Total |
$ | 9,030.7 | 272 | $ | 9,309.3 | 279 | |||||||||||||
By
Manufacturer: |
|||||||||||||||||||
Airbus |
$ | 5,846.0 | 156 | $ | 5,985.5 | 160 | |||||||||||||
Boeing |
2,558.2 | 94 | 2,711.6 | 98 | |||||||||||||||
Embraer |
566.5 | 21 | 547.2 | 20 | |||||||||||||||
Other |
60.0 | 1 | 65.0 | 1 | |||||||||||||||
Total |
$ | 9,030.7 | 272 | $ | 9,309.3 | 279 | |||||||||||||
By Body Type(2): | |||||||||||||||||||
Narrow
body |
$ | 5,962.6 | 223 | $ | 6,287.8 | 230 | |||||||||||||
Intermediate |
3,007.0 | 47 | 2,955.3 | 47 | |||||||||||||||
Regional and
other |
61.1 | 2 | 66.2 | 2 | |||||||||||||||
Total |
$ | 9,030.7 | 272 | $ | 9,309.3 | 279 | |||||||||||||
Number of
customers |
94 | 98 | |||||||||||||||||
Weighted average
age of fleet (years) |
6 | 5 |
(1) |
Includes operating lease equipment held for sale. |
(2) |
Narrow body are single aisle design and consist primarily of Boeing 737 and 757 series, Airbus A320 series, and Embraer E170 and E190 aircraft. Intermediate body are smaller twin aisle design and consist primarily of Boeing 767 series and Airbus A330 series aircraft. Regional and Other includes aircraft and related equipment, such as engines. |
Our top five commercial aerospace outstanding exposures totaled
$2,449.7 million at June 30, 2015. The largest individual outstanding exposure totaled $700.3 million at June 30, 2015, which was to a U.S. carrier.
See Note 13 Commitments in Item 1. Consolidated Financial Statements for additional information regarding commitments to purchase
additional aircraft.
OTHER ASSETS / OTHER LIABILITIES
The following tables present components of other assets and other
liabilities.
Other Assets (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Deposits on
commercial aerospace equipment |
$ | 816.9 | $ | 736.3 | ||||||
Deferred federal
and state tax assets |
376.5 | 422.5 | ||||||||
Furniture and
fixtures |
144.4 | 126.4 | ||||||||
Deferred costs,
including debt related costs |
126.8 | 148.1 | ||||||||
Tax receivables,
other than income taxes |
103.0 | 102.0 | ||||||||
Fair value of
derivative financial instruments |
101.5 | 168.0 | ||||||||
Executive
retirement plan and deferred compensation |
95.9 | 96.7 | ||||||||
Other |
385.1 | 332.4 | ||||||||
Total other
assets |
$ | 2,150.1 | $ | 2,132.4 |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 65
Other Liabilities (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Equipment
maintenance reserves |
$ | 982.5 | $ | 960.4 | ||||||
Accrued expenses
and accounts payable |
439.2 | 478.3 | ||||||||
Current taxes
payable and deferred taxes |
345.6 | 319.1 | ||||||||
Security and
other deposits |
265.9 | 368.0 | ||||||||
Accrued interest
payable |
221.2 | 243.7 | ||||||||
Valuation
adjustment relating to aerospace commitments |
117.1 | 121.2 | ||||||||
Other
liabilities |
395.4 | 398.1 | ||||||||
Total other
liabilities |
$ | 2,766.9 | $ | 2,888.8 |
RISK MANAGEMENT
CIT is subject to a variety of risks that may arise through the
Companys business activities, including the following principal forms of risk:
n |
Strategic risk is the impact on earnings or capital arising from adverse strategic business decisions, improper implementation of strategic decisions, or lack of responsiveness to changes in the industry, including changes in the financial services industry as well as fundamental changes in the businesses in which our customers and our firm engages. |
n |
Credit risk is the risk of loss (including the incurrence of additional expenses) when a borrower does not meet its financial obligations to the Company. Credit risk may arise from lending, leasing, and/or counterparty activities. |
n |
Asset risk is the equipment valuation and residual risk of lease equipment owned by the Company that arises from fluctuations in the supply and demand for the underlying leased equipment. The Company is exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, resulting in either reduced future lease income over the remaining life of the asset or a lower sale value. |
n |
Market risk includes interest rate and foreign currency risk. Interest rate risk is the impact that fluctuations in interest rates will have on the Companys net finance revenue and on the market value of the Companys assets, liabilities and derivatives. Foreign exchange risk is the economic impact that fluctuations in exchange rates between currencies can have on the Companys non-dollar denominated assets and liabilities. |
n |
Liquidity risk is the risk that the Company has an inability to maintain adequate cash resources and funding capacity to meet its obligations, including under stress scenarios. |
n |
Capital risk is the risk that the Company does not have adequate capital to cover its risks and to support its growth and strategic objectives. |
n |
Operational risk is the risk of financial loss, damage to the Companys reputation, or other adverse impacts resulting from inadequate or failed internal processes and systems, people or external events. |
n |
Information Technology Risk is the risk of financial loss, damage to the companys reputation or other adverse impacts resulting from unauthorized (malicious or accidental) disclosure, modification, or destruction of information, including cyber-crime, unintentional errors and omissions, IT disruptions due to natural or man-made disasters, or failure to exercise due care and diligence in the implementation and operation of an IT system. |
n |
Legal and Regulatory Risk is the risk that the Company is not in compliance with applicable laws and regulations, which may result in fines, regulatory criticism or business restrictions, or damage to the Companys reputation. |
n |
Reputational Risk is the potential that negative publicity, whether true or not, will cause a decline in the value of the Company due to changes in the customer base, costly litigation, or other revenue reductions. |
In order to effectively manage risk, the Company has established
a governance and oversight structure that includes defining the Companys risk appetite and setting limits, underwriting standards and target
performance metrics that are aligned with the risk appetite, and establishing credit approval authorities. The Company ensures effective risk
governance and oversight through the establishment and enforcement of policies and procedures, risk governance committees, management information
systems, models and analytics, staffing and training to ensure appropriate expertise, and the identification, monitoring and reporting of risks so that
they are proactively managed.
Our policies and procedures relating to Risk Management are
detailed in our Form 10-K for the year ended December 31, 2014.
66 CIT GROUP INC
Interest Rate Risk
Interest rate risk arises from lending, leasing, investments,
deposit taking and funding, as assets and liabilities reprice at different times and by different amounts as interest rates change. We evaluate and
monitor interest rate risk primarily through two metrics.
n |
Net Interest Income Sensitivity (NII Sensitivity), which measures the net impact of hypothetical changes in interest rates on net finance revenue, which includes revenues from loans and leased equipment, net of interest expense, depreciation and maintenance and other operating lease expenses; and |
n |
Economic Value of Equity (EVE), which measures the net impact of these hypothetical changes on the value of equity by assessing the market value of assets, liabilities and derivatives. |
Interest rate risk and sensitivity is influenced primarily by the
composition of the balance sheet, driven by the type of products offered (fixed/floating rate loans and deposits), investments, funding and hedging
activities. Our assets are primarily comprised of commercial loans, operating leases, cash and investments. We use a variety of funding sources,
including retail and brokered CDs, savings accounts, secured and unsecured debt. Our leasing products are level/fixed payment transactions, whereas the
interest rate on the majority of our commercial loan portfolio is based off of a floating rate index such as short-term Libor or Prime. Our debt
securities within the investment portfolio, securities purchased under agreements to resell and interest bearing deposits (cash) have generally short
durations and reprice frequently. With respect to liabilities, CDs and unsecured debt are fixed rate, secured debt is a mix of fixed and floating rate,
and the rates on savings accounts vary based on the market environment and competition. The composition of our assets and liabilities generally results
in a net asset-sensitive position at the shorter end of the yield curve, mostly to moves in LIBOR, whereby our assets will reprice faster than our
liabilities.
Deposits continued to grow as a percent of total funding. CIT
Bank sources deposits primarily through direct-to-consumer (via the internet) and brokered channels. At June 30, 2015, the Bank had approximately $17
billion in deposits, more than half of which were obtained through our direct channel while approximately one-third were sourced through brokers with
the remainder from institutional and other sources. Fixed rate, term deposits represented 66% of our deposit portfolio. The deposit rates we offer can
be influenced by market conditions and competitive factors. Changes in interest rates can affect our pricing and potentially impact our ability to
gather and retain deposits. Rates offered by competitors also can influence our rates and our ability to attract and hold deposits. In a rising rate
environment, the Bank may need to increase rates to renew maturing deposits and attract new deposits. Rates on our savings account deposits may
fluctuate due to pricing competition and may also move with short-term interest rates. In general, retail deposits represent a low-cost source of funds
and are less sensitive to interest rate changes than many non-deposit funding sources. Our ability to gather brokered deposits may be more sensitive to
rate changes than other types of deposits. We manage this risk by limiting maturity concentration and emphasizing new issuance in long-dated maturities
of up to ten years. We regularly stress test the effect of deposit rate changes on our margins and seek to achieve optimal alignment between assets and
liabilities from an interest rate risk management perspective.
The table below summarizes the results of simulation modeling
produced by our asset/liability management system. The results reflect the percentage change in the EVE and NII Sensitivity over the next twelve months
assuming an immediate 100 basis point parallel increase or decrease in interest rates. NII sensitivity is based on a static balance sheet projection.
Change to NII Sensitivity and EVE
June 30, 2015 | March 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||
+100 bps | 100 bps | +100 bps | 100 bps | +100 bps | 100 bps | |||||||||||||||||||||||||||
NII Sensitivity | 6.3 | % | (2.2 | )% | 6.5 | % | (1.8 | )% | 6.4 | % | (0.8 | )% | ||||||||||||||||||||
EVE | 2.3 | % | (2.3 | )% | 2.6 | % | (2.5 | )% | 1.9 | % | (1.6 | )% |
The changes to the interest rate risk metrics from year-end 2014
reflect the repayment of $1.2 billion of unsecured debt that matured in the first quarter, and to a certain extent by an increase in fixed rate CD
issuances, which extended the duration of liabilities resulting in increased EVE impact. As of June 30, 2015, the changes in sensitivities compared to
March 31, 2015 reflect primarily the decrease in sensitivity due to cash and investments as we continued purchase of callable agency bonds during the
quarter. As of March 31, 2015, for NII Sensitivity, the positive rate shock scenario compared to December 31, 2014 reflected an increase in net asset
sensitivity due to the unsecured debt maturity, which was partially offset by a decrease in sensitivity from lower cash and investment balances. The
NII sensitivity in the negative rate scenario was primarily impacted by the unsecured debt maturity.
As detailed in the above table, NII sensitivity is positive to an
increase in interest rates. This is primarily driven by our cash and investment securities position, and floating rate commercial loan portfolio (of
which approximately $3.8 billion are subject to LIBOR floors), which reprice frequently. On a net basis, we generally have more floating/repricing
assets than liabilities in the near term. As a result, our current portfolio is more sensitive to moves in short-term interest rates in the near term.
Therefore, our NFR may increase if short-term interest rates rise, or decrease if
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 67
short-term interest rates decline. Market implied forward rates over the subsequent future twelve months are used to determine a base interest rate scenario for the net interest income projection for the base case. This base projection is compared with those calculated under varying interest rate scenarios such as 100 basis point parallel rate shift to arrive at NII Sensitivity.
EVE complements net interest income simulation and sensitivity
analysis as it estimates risk exposures beyond a twelve month horizon. EVE modeling measures the extent to which the economic value of assets,
liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance
sheet to different rate shocks, measuring the net value of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the
base case of an unchanged interest rate environment. The duration of our liabilities is greater than that of our assets, in that we have more fixed
rate liabilities than assets in the longer term, causing EVE to increase under increasing rates and decrease under decreasing rates. The methodology
with which the operating lease assets are assessed in the results table above reflects the existing contractual rental cash flows and the expected
residual value at the end of the existing contract term. The simulation modeling for both NII Sensitivity and EVE assumes we take no action in response
to the changes in interest rates.
A wide variety of potential interest rate scenarios are simulated
within our asset/liability management system. All interest sensitive assets and liabilities are evaluated using discounted cash flow analysis. Rates
are shocked up and down via a set of scenarios that include both parallel and non-parallel interest rate movements. Scenarios are also run to capture
our sensitivity to changes in the shape of the yield curve. Furthermore, we evaluate the sensitivity of these results to a number of key assumptions,
such as credit quality, spreads, and prepayments. Various holding periods of the operating lease assets are also considered. These range from the
current existing lease term to longer terms which assume lease renewals consistent with managements expected holding period of a particular
asset. NII Sensitivity and EVE limits have been set and are monitored for certain of the key scenarios. We manage the exposure to changes in NII
Sensitivity and EVE in accordance with our risk appetite and within Board approved policy limits.
We use results of our various interest rate risk analyses to
formulate asset and liability management (ALM) strategies in order to achieve the desired risk profile, while managing our objectives for
capital adequacy and liquidity risk exposures. Specifically, we manage our interest rate risk position through certain pricing strategies for loans and
deposits, our investment strategy, issuing term debt with floating or fixed interest rates, and using derivatives such as interest rate swaps, which
modify the interest rate characteristics of certain assets or liabilities.
These measurements provide an estimate of our interest rate
sensitivity, however, they do not account for potential changes in credit quality, size, and prepayment characteristics of our balance sheet. They also
do not account for other business developments that could affect net income, or for management actions that could affect net income or that could be
taken to change our risk profile. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of
our simulations. Further, the range of such simulations does not represent our current view of the expected range of future interest rate
movements.
FUNDING AND LIQUIDITY
CIT actively manages and monitors its funding and liquidity
sources against relevant limits and targets. These sources satisfy funding and other operating obligations, while also providing protection against
unforeseen stress events like unanticipated funding obligations, such as customer line draws, or disruptions to capital markets or other funding
sources. As a result of the acquisition of OWB, the Company is evaluating its sources of funding, which may result in changes to the mix and/or
structure of its liabilities. Primary liquidity sources at June 30, 2015 include:
n |
Cash totaled $5.5 billion at June 30, 2015, compared to $7.1 billion at December 31, 2014. Cash at June 30, 2015 consisted of $1.1 billion related to the bank holding company, and $2.9 billion at CIT Bank (excluding $0.1 billion of restricted cash), with the remainder comprised of cash at operating subsidiaries and other restricted balances. |
n |
Securities purchased under agreements to resell (reverse repurchase agreements) totaled $750 million at June 30, 2015, up from $650 million at December 31, 2014. CIT enters into reverse repurchase agreements in an effort to improve returns on excess liquidity. These agreements are mostly short-term securities that mature predominately within three months, and are secured by the underlying collateral, which is maintained at a third-party custodian. Interest earned on these securities is included in ‘Interest and dividends on interest bearing deposits and investments in the statement of operations. See Note 5 Securities Purchased Under Resale Agreements in Item 1. Consolidated Financial Statements for further details. |
n |
Other short-term investment securities totaled $0.8 billion at June 30, 2015, which consisted of U.S. Treasury Bills and Government Agency discount notes and supranational securities that were classified as AFS and had remaining maturity dates of 90 days or less, compared to $1.1 billion at December 31, 2014. The current quarter balance does not include callable U.S. Government Agency securities of approximately |
68 CIT GROUP INC
$500 million, which have stated maturity horizons of more than a year, and are callable by the issuer in less than a year. | ||
n |
A $1.5 billion multi-year committed revolving credit facility, of which $1.4 billion was unused at June 30, 2015; and |
n |
Committed securitization facilities and secured bank lines that totaled $4.7 billion, of which $2.8 billion was unused at June 30, 2015, provided that eligible assets are available that can be funded through these facilities. |
Asset liquidity is further enhanced by our ability to sell or
syndicate portfolio assets in secondary markets, which also enables us to manage credit exposure, and to pledge assets to access secured borrowing
facilities through the Federal Home Loan Banks (FHLB) and FRB.
The acquisition price of the OneWest Transaction included a cash
portion of $1.9 billion, which was paid from available liquidity at the BHC on August 3, 2015.
As a result of our continued funding and liability management
initiatives, the weighted average coupon rates on outstanding deposits and long-term borrowings was 3.04% at June 30, 2015, down from 3.11% at December
31, 2014, reflecting a higher proportion of deposits to total funding sources. The following table reflects our funding mix:
Funding Mix (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Deposits |
51 | % | 46 | % | ||||||
Secured |
17 | % | 19 | % | ||||||
Unsecured |
32 | % | 35 | % |
The higher deposit base is reflective of the growth in CIT Bank
assets. The unsecured notes outstanding in dollar amount declined compared to December 31, 2014, reflecting the $1.2 billion February 2015 debt
maturity. The percentage of secured funding declined compared to December 31, 2014 reflecting amortization of secured transactions as well as reduced
utilization of FHLB facilities. These proportions will fluctuate in the future depending upon our funding activities.
Deposits
We continued to grow deposits during 2015 to fund our bank
lending and leasing activities. The weighted average coupon rate of total deposits was 1.74%, up from 1.69% at December 31, 2014. The following table
details our deposits by type:
Deposits (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Online
deposits |
$ | 10,119.7 | $ | 8,858.5 | ||||||
Brokered CDs /
sweeps |
6,162.7 | 5,986.0 | ||||||||
Other(1) |
985.4 | 1,005.3 | ||||||||
Total |
$ | 17,267.8 | $ | 15,849.8 |
(1) |
Other primarily includes a deposit sweep arrangement related to Healthcare Savings Accounts and deposits at our Brazil bank. |
Long-term Borrowings
Long-term borrowings consist of unsecured and secured debt and
totaled $16.4 billion at June 30, 2015, down from $18.5 billion at December 31, 2014, reflecting the repayment of $1.2 billion of maturing unsecured
notes in the first quarter of 2015. The remaining decline was due to net repayments of secured borrowings. The weighted average coupon rate of
long-term borrowings at June 30, 2015 was 4.41%, up from 4.32% at December 31, 2014, reflecting the change in mix.
Unsecured
Revolving Credit Facility
There were no borrowings outstanding under the Revolving Credit
Facility at either June 30, 2015 or December 31, 2014. The amount available to draw upon was approximately $1.4 billion at June 30, 2015, with the
remaining amount of approximately $0.1 billion utilized for issuance of letters of credit.
The Revolving Credit Facility has a $1.5 billion total commitment
amount that matures on January 27, 2017. The total commitment amount consists of a $1.15 billion revolving loan tranche and a $350 million revolving
loan tranche that can also be utilized for issuance of letters of credit. The applicable margin charged under the facility is 2.50% for LIBOR-based
loans and 1.50% for Base Rate loans. Improvement in CITs long-term senior unsecured debt ratings to either BB by S&P or Ba2 by Moodys
would result in a reduction in the applicable margin to 2.25% for LIBOR-based loans and to 1.25% for Base Rate loans. A downgrade in CITs
long-term senior unsecured debt ratings to B+ by S&P and B1 by Moodys would result in an
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 69
increase in the applicable margin to 2.75% for LIBOR-based loans and to 1.75% for Base Rate loans. In the event of a one notch downgrade by only one of the agencies, no change to the margin charged under the facility would occur.
The Revolving Credit Facility is unsecured and is guaranteed by
eight of the Companys domestic operating subsidiaries. The facility was amended to modify the covenant requiring a minimum guarantor asset
coverage ratio and the criteria for calculating the ratio. The amended covenant requires a minimum guarantor asset coverage ratio ranging from 1.25:1.0
to the current requirement of 1.5:1.0 depending on the Companys long-term senior unsecured debt rating. As of June 30, 2015, the last reported
asset coverage ratio was 2.63x.
Senior Unsecured Notes
At June 30, 2015, unsecured notes outstanding totaled $10.7
billion, compared to $11.9 billion at December 31, 2014. The weighted average coupon rate of unsecured long-term borrowings at June 30, 2015 was 5.03%,
up slightly from 5.00% at December 31, 2014. The decline in outstanding balance and slight increase in rate reflect the repayment of $1.2 billion of
maturing 4.75% notes.
See Note 7 Long-term Borrowings in Item 1.
Consolidated Financial Statements for further detail.
Secured
Secured borrowings totaled $5.7 billion at June 30, 2015,
compared to $6.5 billion at December 31, 2014. The weighted average coupon rate of secured long-term borrowings at June 30, 2015 was 3.23%, up from
3.09% at December 31, 2014, reflecting lower FHLB borrowings.
As part of our liquidity management strategy, we may pledge
assets to secure financing transactions (which include securitizations), to secure advances from the FHLB or for other purposes as required or
permitted by law. Our secured financing transactions do not meet accounting requirements for sale treatment and are recorded as secured borrowings,
with the assets remaining on-balance sheet pursuant to GAAP. The debt associated with these transactions is collateralized by receivables, leases,
investment securities and/or equipment. Certain related cash balances are restricted.
CIT Bank secured borrowings totaled $1.4 billion and $1.9 billion
at June 30, 2015 and December 31, 2014, respectively, which were secured by $2.0 billion and $2.4 billion of pledged assets at June 30, 2015 and
December 31, 2014. Non-bank secured borrowings were $4.3 billion and $4.7 billion at June 30, 2015 and December 31, 2014, respectively, and were
secured by assets of $7.4 billion and $8.3 billion, respectively.
FHLB Advances
CIT Bank is a member of the FHLB and may borrow under lines of
credit that are secured by a blanket lien on the subsidiarys assets and collateral pledged, including real estate assets. At June 30, 2015, $147
million of advances were outstanding and $161 million of collateral was pledged. The outstanding amounts were repaid and collateral was released in
July 2015. At December 31, 2014, $255 million of advances were outstanding and $310 million of collateral was pledged.
See Note 7 Long-Term Borrowings in Item 1.
Consolidated Financial Statements for a table displaying our consolidated secured financings and pledged assets.
GSI Facilities
Two financing facilities between two wholly-owned subsidiaries of
CIT and Goldman Sachs International (GSI) are structured as total return swaps (TRS), under which amounts available for
advances are accounted for as derivatives. 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 size of the CIT Financial Ltd. (CFL) facility is $1.5 billion and the CIT TRS
Funding B.V. (BV) facility is $625 million.
At June 30, 2015, a total of $1,783.3 million of assets and
secured debt totaling $1,185.5 million issued to investors was outstanding under the GSI Facilities. After adjustment to the amount of actual
qualifying borrowing base under terms of the GSI Facilities, this secured debt provided for usage of $1,002.8 million of the maximum notional amount of
the GSI Facilities. The remaining $1,122.2 million of the maximum notional amount represents the unused portion of the GSI Facilities and constitutes
the notional amount of derivative financial instruments. Unsecured counterparty receivable of $538 million at June 30, 2015 is owed to CIT from GSI for
debt discount, return of collateral posted to GSI and settlements resulting from market value changes to asset-backed securities underlying the
structures.
The CFL Facility was structured as a TRS to satisfy the specific
requirements to obtain this funding commitment from GSI. Under the terms of the GSI Facilities, CIT raises cash from the issuance of ABS to investors
designated by GSI under the total return swap, equivalent to the face amount of the ABS less an adjustment for any original issue discount
(OID) which equals the market price of the ABS. CIT is also required to deposit a portion of the face amount of the ABS with GSI as
additional collateral prior to funding ABS through the GSI Facilities.
Amounts deposited with GSI can increase or decrease over time
depending on the market value of the ABS and / or changes in the ratings of the ABS. CIT and GSI engage in periodic settlements based on the timing and
amount of coupon, principal and any other payments actually made by CIT on the ABS. Pursuant to the terms of the TRS, GSI is obligated to return those
same amounts to CIT plus a proportionate amount of the initial deposit. Simultaneously, CIT is obligated to pay GSI (1) principal in an amount equal to
the contractual market price times the amount of principal reduction on the ABS and (2) interest equal to LIBOR times the adjusted qualifying borrowing
base of the ABS. On a quarterly basis, CIT pays the fixed facility fee of
70 CIT GROUP INC
2.85% per annum times the maximum facility commitment amount.
Valuation of the derivatives related to the GSI Facilities is
based on several factors using a discounted cash flow (DCF) methodology, including:
n |
CITs funding costs for similar financings based on the current market environment; |
n |
Forecasted usage of the long-dated GSI Facilities through the final maturity date in 2028; and |
n |
Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. |
Based on the Companys valuation, a liability of $31.9
million and $24.5 million was recorded at June 30, 2015 and December 31, 2014, respectively. The change in value of $6.4 million and $7.4 million was
recognized as a reduction to Other Income for the quarter and six months ended June 30, 2015, respectively. The change in value of $11.4 million and
$9.7 million was recognized as a benefit to Other Income for the quarter and six months ended June 30, 2014, respectively.
Interest expense related to the GSI Facilities is affected by the
following:
n |
A fixed facility fee of 2.85% per annum times the maximum facility commitment amount, |
n |
A variable amount based on one-month or three-month USD LIBOR times the utilized amount (effectively the adjusted qualifying borrowing base) of the total return swap, and |
n |
A reduction in interest expense due to the recognition of the payment of any OID from GSI on the various asset-backed securities. |
See Note 8 Derivative Financial Instruments in
Item 1. Consolidated Financial Statements for further information.
Debt Ratings
Debt ratings can influence the cost and availability of short-and
long-term funding, the terms and conditions on which such funding may be available, the collateral requirements, if any, for borrowings and certain
derivative instruments, the acceptability of our letters of credit, and the number of investors and counterparties willing to lend to the Company. A
decrease, or potential decrease, in credit ratings could impact access to the capital markets and/or increase the cost of debt, and thereby adversely
affect the Companys liquidity and financial condition.
Our debt ratings at June 30, 2015, as rated by Standard &
Poors Ratings Services (S&P), Fitch Ratings, Inc. (Fitch), Moodys Investors Service (Moodys)
and Dominion Bond Rating Service (DBRS) are presented in the following table.
Debt Ratings as of June 30, 2015
S&P |
Fitch |
Moodys |
DBRS |
|||||
---|---|---|---|---|---|---|---|---|
Issuer /
Counterparty Credit Rating |
BB- |
BB+ |
NR |
BB |
||||
Revolving Credit
Facility Rating |
BB- |
BB+ |
B1 |
BBB (Low) |
||||
Series C Notes /
Senior Unsecured Debt Rating |
BB- |
BB+ |
B1 |
BB |
||||
Outlook |
Positive |
Stable |
Stable |
Positive |
NR Not Rated
In March 2015, Moodys affirmed CIT Groups Ba3
corporate family rating but downgraded the senior unsecured rating from Ba3 to B1 with a stable ratings outlook. Concurrently, Moodys
transitioned its ratings analysis of CIT Group to Moodys bank methodology from Moodys finance company rating methodology. Because
Moodys does not assign corporate family ratings under the bank rating framework, CITs Ba3 corporate family rating was
withdrawn.
Rating agencies indicate that they base their ratings on many
quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the
current operating, legislative and regulatory environment, including implied government support. In addition, rating agencies themselves have been
subject to scrutiny arising from the financial crisis and could make or be required to make substantial changes to their ratings policies and
practices, particularly in response to legislative and regulatory changes, including as a result of provisions in Dodd-Frank. Potential changes in
rating methodology as well as in the legislative and regulatory environment and the timing of those changes could impact our ratings, which as noted
above could impact our liquidity and financial condition.
A debt rating is not a recommendation to buy, sell or hold
securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated
independently of any other rating.
Tax Implications of Cash in Foreign
Subsidiaries
Cash held by foreign subsidiaries totaled $1.3 billion, including
cash available to the BHC and restricted cash, at June 30, 2015, compared to $1.8 billion at December 31, 2014.
Other than in a limited number of jurisdictions, Management does
not intend to indefinitely reinvest foreign earnings.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 71
Contractual Payments and Commitments
The following tables summarize significant contractual payments
and contractual commitment expirations at June 30, 2015. Certain amounts in the payments table are not the same as the respective balance sheet totals,
because this table is based on contractual amounts and excludes items such as issue discounts and FSA discounts. Actual cash flows could vary
materially from those depicted in the payments table as further explained in the table footnotes.
Payments for the Twelve Months Ended June 30(1) (dollars in millions)
Total |
2016 |
2017 |
2018 |
2019 |
2020+ |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Secured
borrowings(2) |
$ | 5,700.1 | $ | 1,811.8 | $ | 966.2 | $ | 714.6 | $ | 505.5 | $ | 1,702.0 | ||||||||||||||
Senior
unsecured |
10,751.4 | | 1,250.0 | 3,950.0 | 2,750.0 | 2,801.4 | ||||||||||||||||||||
Total
Long-term borrowings |
16,451.5 | 1,811.8 | 2,216.2 | 4,664.6 | 3,255.5 | 4,503.4 | ||||||||||||||||||||
Deposits |
17,268.9 | 7,252.5 | 1,949.0 | 2,494.8 | 1,296.1 | 4,276.5 | ||||||||||||||||||||
Credit balances
of factoring clients |
1,373.3 | 1,373.3 | | | | | ||||||||||||||||||||
Lease rental
expense |
161.9 | 30.5 | 28.9 | 26.0 | 24.4 | 52.1 | ||||||||||||||||||||
Total
contractual payments |
$ | 35,255.6 | $ | 10,468.1 | $ | 4,194.1 | $ | 7,185.4 | $ | 4,576.0 | $ | 8,832.0 |
(1) |
Projected payments of debt interest expense and obligations relating to postretirement programs are excluded. |
(2) |
Includes non-recourse secured borrowings, which are generally repaid in conjunction with the pledged receivable maturities. |
Commitment Expiration by Twelve Month Periods Ended June 30 (dollars in millions)
Total |
2016 |
2017 |
2018 |
2019 |
2020+ |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financing
commitments |
$ | 5,239.4 | $ | 1,082.1 | $ | 675.8 | $ | 1,044.6 | $ | 1,043.5 | $ | 1,393.4 | ||||||||||||||
Aerospace
equipment purchase commitments(1) |
10,639.5 | 1,033.4 | 755.6 | 1,479.6 | 2,462.3 | 4,908.6 | ||||||||||||||||||||
Rail and other
equipment purchase commitments |
1,568.6 | 1,009.3 | 559.3 | | | | ||||||||||||||||||||
Letters of
credit |
385.6 | 72.5 | 47.1 | 36.9 | 173.9 | 55.2 | ||||||||||||||||||||
Deferred
purchase agreements |
1,400.4 | 1,400.4 | | | | | ||||||||||||||||||||
Guarantees,
acceptances and other recourse obligations |
1.3 | 1.3 | | | | | ||||||||||||||||||||
Liabilities for
unrecognized tax obligations(2) |
41.8 | 5.0 | 36.8 | | | | ||||||||||||||||||||
Total
contractual commitments |
$ | 19,276.6 | $ | 4,604.0 | $ | 2,074.6 | $ | 2,561.1 | $ | 3,679.7 | $ | 6,357.2 |
(1) |
Aerospace commitments are net of amounts on deposit with manufacturers. |
(2) |
The balance cannot be estimated past 2017; therefore the remaining balance is reflected in 2017. |
Financing commitments increased from $4.7 billion at December 31,
2014 to $5.2 billion at June 30, 2015. This includes commitments that have been extended to and accepted by customers or agents, but on which the
criteria for funding have not been completed of $751 million at June 30, 2015. Also included are Commercial Services credit line agreements, with an
amount available at June 30, 2015 of $394 million, net of amount of receivables assigned to us. These are cancellable by CIT only after a notice
period.
At June 30, 2015, substantially all our undrawn financing
commitments were senior facilities, with approximately 80% secured by equipment or other assets and the remainder comprised of cash flow or enterprise
value facilities. Most of our undrawn and available financing commitments are in the Corporate Finance division of NACF. The top ten undrawn
commitments totaled $380 million at June 30, 2015.
The table above includes approximately $1.5 billion of undrawn
financing commitments at June 30, 2015 that were not in compliance with contractual obligations, and therefore CIT does not have the contractual
obligation to lend.
See Note 13 Commitments in Item 1. Consolidated
Financial Statements for further detail.
CAPITAL
Capital Management
CIT manages its capital position to ensure that it is sufficient
to: (i) support the risks of its businesses, (ii) maintain a well-capitalized status under regulatory requirements, and (iii) provide
flexibility to take advantage of future investment opportunities. Capital in excess of these requirements is available to distribute to
shareholders.
CIT uses a complement of capital metrics and related thresholds
to measure capital adequacy and takes into account the existing regulatory capital framework. CIT
72 CIT GROUP INC
further evaluates capital adequacy through the enterprise stress testing and economic capital (ECAP) approaches, which constitute our internal capital adequacy assessment process (ICAAP).
Beginning January 1, 2015, CIT reports regulatory capital ratios
in accordance with the Basel III Final Rule and determines risk weighted assets under the Standardized Approach. CITs capital management is
discussed in more detail in its Form 10-K for the year ended December 31, 2014, see the Regulation section of Item 1. Business
Overview for further detail regarding regulatory matters, including Basel III, Capital Requirements and
Leverage Requirements and Capital Management section in Part Two, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Return of Capital
Capital returned during the six months ended June 30, 2015
totaled $446 million, including repurchases of $393 million of our common stock and over $53 million in dividends.
The Board authorized an additional $200 million share repurchase
program in April 2015, of which $139 million remained at June 30, 2015. During the quarter, we repurchased 1.3 million of our shares at an average
price of $45.87 for an aggregate purchase price of $61 million. For the six months ended June 30, 2015, we repurchased 8.6 million of our shares at an
average price of $45.50 for an aggregate purchase price of $393 million. During July 2015, we repurchased an additional 2 million shares for an
aggregate purchase price of $91 million. The repurchases were effected via open market purchases and through plans designed to comply with Rule
10b5-1(c) under the Securities Exchange Act of 1934, as amended.
Our 2015 common stock dividends were as follows:
2015 Dividends
Declaration Date |
Payment Date |
Per Share
Dividend |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
January |
February 28,
2015 |
$ | 0.15 | |||||||
April |
May 29,
2015 |
$ | 0.15 | |||||||
July |
August 28,
2015 |
$ | 0.15 |
Regulatory Capital Guidelines
Basel III and the New Standardized Risk-based Approach.
The Company, as well as the Bank, became subject to the Basel III Final Rule effective January 1, 2015.
Among other matters, the Basel III Final Rule: (i) introduces a
new capital measure called Common Equity Tier 1 (CET1) and related regulatory capital ratio of CET1 to risk-weighted assets;
(ii) specifies that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting certain revised requirements; (iii)
mandates that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expands
the scope of the deductions from and adjustments to capital as compared to existing regulations. For most banking organizations, the most common form
of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes, which will
be subject to the Basel III Final Rule specific requirements. The Company does not currently have either of these forms of capital
outstanding.
The Basel III Final Rule provides for a number of deductions from
and adjustments to CET1. These include, for example, goodwill, other intangible assets, and deferred tax assets (DTAs) that arise from net
operating loss and tax credit carryforwards net of any related valuation allowance. Also, mortgage servicing rights, DTAs arising from temporary
differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial institutions
must be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. The
non-DTA related deductions (goodwill, intangibles, etc.) may be reduced by netting with any associated deferred tax liabilities (DTLs). As
for the DTA deductions, the netting of any remaining DTL must be allocated in proportion to the DTAs arising from net operating losses and tax credit
carryforwards and those arising from temporary differences.
Implementation of some of these deductions to CET1 began on
January 1, 2015, and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and adding 20% per year thereafter until January 1,
2018).
In addition, under the Basel I general risk-based capital rules,
the effects of certain components of accumulated other comprehensive income (AOCI) included in shareholders equity (for example,
mark-to-market of securities held in the available-for-sale (AFS) portfolio) under U.S. GAAP are reversed for the purpose of determining
regulatory capital ratios. Pursuant to the Basel III Final Rule, the effects of these AOCI items are not excluded; however, non-advanced approaches
banking organizations, including the Company and CIT Bank, may make a one-time permanent election to continue to exclude the AOCI items currently
excluded under Basel I. Both the Company and CIT Bank have elected to exclude AOCI items from regulatory capital ratios. The Basel III Final Rule also
precludes certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies Tier 1 capital. The Company
does not have any hybrid securities outstanding at June 30, 2015.
The Basel III Final Rule prescribed a new approach for risk
weightings for BHCs and banks that follow the
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 73
Standardized approach, which applies to CIT. This approach expands the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. government and agency securities, to as high as 1,250% for such exposures as credit-enhancing interest-only strips or unsettled security/commodity transactions.
Per the Basel III Final Rule, the minimum capital ratios for
CET1, Tier 1 capital, and Total capital are 4.5%, 6.0% and 8.0%, respectively. In addition, the Basel III Final Rule introduces a new capital
conservation buffer, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed
to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the
capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. This buffer
will be implemented beginning January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January
1, 2019.
CIT will be required to maintain risk-based capital ratios at
January 1, 2019 as follows:
Minimum Capital Requirements January 1, 2019 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tier 1 Common Equity |
Tier 1 Capital |
Total Capital |
||||||||||||
Stated minimum
ratios |
4.5 | % | 6.0 | % | 8.0 | % | ||||||||
Capital
conservation buffer |
2.5 | % | 2.5 | % | 2.5 | % | ||||||||
Effective
minimum ratios |
7.0 | % | 8.5 | % | 10.5 | % |
With respect to CIT Bank, the Basel III Final Rule revises the
prompt corrective action (PCA) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i)
introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for
well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for
well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a
composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Final Rule does not change the total
risk-based capital requirement for any PCA category. Both the Company and CIT Bank are subject to a minimum Tier 1 Leverage ratio of
4%.
As non-advanced approaches banking organizations, the Company and
CIT Bank will not be subject to the Basel III Final Rules countercyclical buffer or the supplementary leverage ratio.
The Company and CIT Bank have met all capital requirements under
the Basel III Final Rule, including the capital conservation buffer, as if such requirements were currently effective. The following table presents
CITs and CIT Banks estimated capital ratios as of June 30, 2015 calculated under the fully phased-in Basel III Final Rule
Standardized approach.
Preliminary Basel III Capital Ratios Fully Phased-in Standardized Approach(1) As of June 30, 2015 (dollars in millions)
CIT |
CIT Bank |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Estimated |
Requirement |
Estimated |
Requirement |
||||||||||||||||
CIT |
|||||||||||||||||||
Capital |
|||||||||||||||||||
CET1 |
$ | 8,019.9 | $ | 2,605.2 | |||||||||||||||
Tier
1 |
8,019.9 | 2,605.2 | |||||||||||||||||
Total |
8,408.9 | 2,865.5 | |||||||||||||||||
Risk-weighted assets |
55,665.3 | 20,766.6 | |||||||||||||||||
Adjusted
quarterly average assets |
45,352.6 | 21,312.2 | |||||||||||||||||
Capital
ratios |
|||||||||||||||||||
CET1 |
14.4 | % | 7.0 | %(2) | 12.5 | % | 7.0 | %(2) | |||||||||||
Tier
1 |
14.4 | % | 8.5 | %(2) | 12.5 | % | 8.5 | %(2) | |||||||||||
Total |
15.1 | % | 10.5 | %(2) | 13.8 | % | 10.5 | %(2) | |||||||||||
Leverage |
17.7 | % | 4.0 | % | 12.2 | % | 4.0 | % |
(1) |
Basel III Final Rule calculated under the Standardized Approach on a fully phased-in basis that will be required effective January 1, 2019. |
(2) |
Required ratios under the Basel III Final Rule include the post-transition minimum capital conservation buffer effective January 1, 2019. |
74 CIT GROUP INC
Capital Composition and Ratios
The Company is subject to various regulatory capital
requirements. We compute capital ratios in accordance with Federal Reserve capital guidelines for assessing adequacy of capital. At June 30, 2015, the
regulatory capital guidelines applicable to the Company were based on the Basel III Final Rule. The ratios presented in the following table for June
30, 2015 are calculated under the current rules. At December 31, 2014, the regulatory capital guidelines that were applicable to the Company were based
on the Capital Accord of the Basel Committee on Banking Supervision (Basel I). The ratios were not significantly impacted by the change.
Tier 1 Capital and Total Capital Components(1) (dollars in millions)
Tier 1 Capital | Partially Phased-in Basis June 30, 2015 | Fully Phased-in Basis June 30, 2015 | December 31, 2014 | |||||||||
Total stockholders’ equity | $ | 8,807.1 | $ | 8,807.1 | $ | 9,068.9 | ||||||
Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests | 59.2 | 59.2 | 53.0 | |||||||||
Adjusted total equity | 8,866.3 | 8,866.3 | 9,121.9 | |||||||||
Less: Goodwill(1) | (485.2 | ) | (485.2 | ) | (571.3 | ) | ||||||
Disallowed deferred tax assets | (339.7 | ) | (339.7 | ) | (416.8 | ) | ||||||
Disallowed intangible assets(2) | (8.6 | ) | (21.5 | ) | (25.7 | ) | ||||||
Investment in certain subsidiaries | NA | NA | (36.7 | ) | ||||||||
Other Tier 1 components(3) | – | – | (4.1 | ) | ||||||||
Common Equity Tier 1 Capital | 8,032.8 | 8,019.9 | 8,067.3 | |||||||||
Tier 1 Capital | 8,032.8 | 8,019.9 | 8,067.3 | |||||||||
Tier 2 Capital | ||||||||||||
Qualifying reserve for credit losses and other reserves(4) | 389.0 | 389.0 | 381.8 | |||||||||
Less: Investment in certain subsidiaries | NA | NA | (36.7 | ) | ||||||||
Total qualifying capital | $ | 8,421.8 | $ | 8,408.9 | $ | 8,412.4 | ||||||
Risk-weighted assets | $ | 55,396.0 | $ | 55,665.3 | $ | 55,480.9 | ||||||
BHC Ratios | ||||||||||||
Common Equity Tier 1 Capital Ratio | 14.5 | % | 14.4 | % | NA | |||||||
Tier 1 Capital Ratio | 14.5 | % | 14.4 | % | 14.5 | % | ||||||
Total Capital Ratio | 15.2 | % | 15.1 | % | 15.2 | % | ||||||
Tier 1 Leverage Ratio | 17.7 | % | 17.7 | % | 17.4 | % | ||||||
CIT Bank Ratios | ||||||||||||
Common Equity Tier 1 Capital Ratio | 12.6 | % | 12.5 | % | NA | |||||||
Tier 1 Capital Ratio | 12.6 | % | 12.5 | % | 13.0 | % | ||||||
Total Capital Ratio | 13.8 | % | 13.8 | % | 14.2 | % | ||||||
Tier 1 Leverage Ratio | 12.2 | % | 12.2 | % | 12.2 | % |
(1) |
The June 30, 2015 presentations reflects the risk-based capital guidelines under Basel III, which became effective on January 1, 2015, on a partially phased-in basis, and under the fully phased-in basis. The December 31, 2014 reflects the risk-based capital guidelines under then effective Basel I. |
(2) |
Goodwill and disallowed intangible assets adjustments also reflect the portion included within assets held for sale. |
(3) |
Includes the Tier 1 capital charge for nonfinancial equity investments under Basel I. |
(4) |
Other reserves represents additional credit loss reserves for unfunded lending commitments, letters of credit, and deferred purchase agreements, all of which are recorded in Other Liabilities. |
NA Balance is not applicable under the respective
guidelines.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 75
The change in common stockholders equity from December 31,
2014 was primarily driven by net income, less the impact of share repurchases and dividends.
The reconciliation of balance sheet assets to risk-weighted
assets is presented below:
Risk-Weighted Assets (dollars in millions)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance sheet
assets |
$ | 46,657.2 | $ | 47,880.0 | ||||||
Risk weighting
adjustments to balance sheet assets |
(7,260.7 | ) | (8,647.8 | ) | ||||||
Off balance
sheet items |
15,999.5 | 16,248.7 | ||||||||
Risk-weighted
assets |
$ | 55,396.0 | $ | 55,480.9 |
The risk weighting adjustments at June 30, 2015, reflect Basel
III guidelines, whereas the December 31, 2014 risk weighting adjustments followed Basel I guidelines. The 2015 off balance sheet items primarily
reflect commitments to purchase aircraft and railcars ($10.5 billion related to aircraft and $1.4 billion related to railcars), unused lines of credit
($2.0 billion credit equivalent, largely related to Corporate Finance division) and deferred purchase agreements ($1.4 billion related to the
Commercial Services division). See Note 13 Commitments in Item 1. Consolidated Financial Statements for further detail on
commitments.
Tangible Book Value and Tangible Book Value per
Share(1)
Tangible book value represents common equity less goodwill and
other intangible assets. A reconciliation of CITs total common stockholders equity to tangible book value, a non-GAAP measure, follows:
Tangible Book Value and per Share Amounts (dollars in millions, except per share amounts)
June 30, 2015 |
December 31, 2014 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Total common
stockholders equity |
$ | 8,807.1 | $ | 9,068.9 | ||||||
Less:
Goodwill |
(565.9 | ) | (571.3 | ) | ||||||
Intangible
assets |
(21.4 | ) | (25.7 | ) | ||||||
Tangible book
value |
$ | 8,219.8 | $ | 8,471.9 | ||||||
Book value per
share |
$ | 50.91 | $ | 50.13 | ||||||
Tangible book
value per share |
$ | 47.51 | $ | 46.83 |
(1) |
Tangible book value and tangible book value per share are non-GAAP measures. |
Book value and Tangible book value (TBV) were down as
the 2015 earnings were offset by the impact of share repurchases, the value of which reduces book value while held in treasury. Book value per share
and TBV per share increased reflecting the decline in outstanding shares.
CIT BANK
The Bank is a state-chartered commercial bank headquartered in
Salt Lake City, Utah, that is subject to regulation and examination by the FDIC and the UDFI and is our principal bank subsidiary. The Bank originates
and funds lending and leasing activity in the U.S. Asset growth during the quarter reflected lending and leasing volume. Deposits grew in support of
the increased business and investment activities. The Banks capital and leverage ratios are included in the tables that follow and remained well
above required levels.
As noted earlier in the Overview section, on August 3, 2015, CIT
Bank merged with and into OneWest Bank under the CIT Bank, N.A. name. CIT Bank, N.A., is regulated by the OCC.
As detailed in the following Condensed Balance Sheet table, total
assets increased about 4% to $21.9 billion from December 31, 2014. Cash and deposits with banks was down as balances were used to invest in higher
earning securities, consisting of approximately $500 million of U.S. Government Agency notes.
Commercial loans totaled $15.7 billion at June 30, 2015, up 5%
from December 31, 2014, as new business volumes, which represented nearly all of the new U.S. volumes for NACF and TIF, were partially offset by
collections. The portfolio of operating lease equipment, which totaled $2.2 billion, was comprised primarily of railcars and some
aircraft.
76 CIT GROUP INC
CIT Bank deposits were $17.3 billion at June 30, 2015, up 9% from
December 31, 2014, supporting the asset growth and other debt reduction. Deposits continued to grow and online deposits exceeded $10 billion during the
quarter. The weighted average interest rate was 1.69%, compared to 1.63% at December 31, 2014.
Borrowings at June 30, 2015 mainly consisted of debt related to
secured borrowing transactions, the 2014 acquisition of Direct Capital and FHLB advances. Borrowings declined 25% from Dec 31, 2014 as deposits
replaced maturities and paydowns.
The following presents condensed financial information for CIT
Bank.
Condensed Balance Sheets (dollars in millions)
June 30, 2015 |
December 31, 2014 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS: |
|||||||||||
Cash and
deposits with banks |
$ | 2,978.6 | $ | 3,684.9 | |||||||
Investment
securities |
785.4 | 285.2 | |||||||||
Assets held for
sale |
132.4 | 22.8 | |||||||||
Commercial
loans |
15,711.9 | 14,982.8 | |||||||||
Allowance for
loan losses |
(283.8 | ) | (269.5 | ) | |||||||
Operating lease
equipment, net |
2,163.6 | 2,026.3 | |||||||||
Goodwill |
167.8 | 167.8 | |||||||||
Other
assets |
247.4 | 215.7 | |||||||||
Total
Assets |
$ | 21,903.3 | $ | 21,116.0 | |||||||
LIABILITIES
AND EQUITY: |
|||||||||||
Deposits |
$ | 17,318.7 | $ | 15,877.9 | |||||||
Long-term
borrowings |
1,391.9 | 1,862.5 | |||||||||
Other
borrowings |
| 303.1 | |||||||||
Other
liabilities |
413.1 | 356.1 | |||||||||
Total
Liabilities |
19,123.7 | 18,399.6 | |||||||||
Total
Equity |
2,779.6 | 2,716.4 | |||||||||
Total
Liabilities and Equity |
$ | 21,903.3 | $ | 21,116.0 | |||||||
Capital Ratios |
|||||||||||
Common Equity
Tier 1 Capital |
12.6 | % | NA | ||||||||
Tier 1
Capital Ratio |
12.6 | % | 13.0 | % | |||||||
Total Capital
Ratio |
13.8 | % | 14.2 | % | |||||||
Tier 1
Leverage ratio |
12.2 | % | 12.2 | % | |||||||
NA Not
applicable under Basel I guidelines. |
|||||||||||
Financing and Leasing Assets by Segment (dollars in millions) |
|||||||||||
North
American Commercial Finance |
$ | 13,116.6 | $ | 12,518.8 | |||||||
Transportation & International Finance |
4,891.3 | 4,513.1 | |||||||||
Total |
$ | 18,007.9 | $ | 17,031.9 |
We compute capital ratios in accordance with Federal Reserve
capital guidelines for assessing adequacy of capital. At June 30, 2015, the regulatory capital guidelines applicable to the Bank were based on the
Basel III Final Rule. The ratios presented in the previous table for June 30, 2015 are calculated under the current rules. At December 31, 2014, the
regulatory capital guidelines that were applicable to the Bank were based on the Capital Accord of the Basel Committee on Banking Supervision (Basel
I). The ratios were not significantly impacted by the change.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 77
Condensed Statements of Operations (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Interest
income |
$ | 203.3 | $ | 197.5 | $ | 169.8 | $ | 400.8 | $ | 327.6 | ||||||||||||
Interest
expense |
(76.9 | ) | (74.1 | ) | (55.1 | ) | (151.0 | ) | (106.5 | ) | ||||||||||||
Net interest
revenue |
126.4 | 123.4 | 114.7 | 249.8 | 221.1 | |||||||||||||||||
Provision for
credit losses |
(21.9 | ) | (32.1 | ) | (14.6 | ) | (54.0 | ) | (39.4 | ) | ||||||||||||
Net interest
revenue, after credit provision |
104.5 | 91.3 | 100.1 | 195.8 | 181.7 | |||||||||||||||||
Rental income on
operating leases |
69.1 | 70.1 | 53.9 | 139.2 | 99.7 | |||||||||||||||||
Other
income |
23.8 | 28.7 | 23.0 | 52.5 | 50.0 | |||||||||||||||||
Total net
revenue, net of interest expense and credit provision |
197.4 | 190.1 | 177.0 | 387.5 | 331.4 | |||||||||||||||||
Operating
expenses |
(118.6 | ) | (101.4 | ) | (82.5 | ) | (220.0 | ) | (167.9 | ) | ||||||||||||
Depreciation on
operating lease equipment |
(29.1 | ) | (28.6 | ) | (22.7 | ) | (57.7 | ) | (40.9 | ) | ||||||||||||
Income before
provision for income taxes |
49.7 | 60.1 | 71.8 | 109.8 | 122.6 | |||||||||||||||||
Provision for
income taxes |
(12.1 | ) | (25.0 | ) | (30.4 | ) | (37.1 | ) | (48.2 | ) | ||||||||||||
Net
income |
$ | 37.6 | $ | 35.1 | $ | 41.4 | $ | 72.7 | $ | 74.4 | ||||||||||||
New business
volume |
$ | 1,995.7 | $ | 1,450.2 | $ | 2,049.3 | $ | 3,445.9 | $ | 3,709.7 |
The Banks results benefited from growth in AEA. The
provision for credit losses for 2015 reflects higher reserve build due to increased assets and asset composition. The decline from the prior quarter is
primarily due to a decrease in the non-specific reserve, as credit metrics remain at or near cyclical lows. Net charge-offs as a percentage of average
finance receivables were 0.63%, compared to 0.21% in the year-ago quarter and 0.41% in the prior quarter. Year to date, net charge-offs were 0.52%,
compared to 0.33% in 2014.
Other income was down from the year-ago and prior quarters,
reflecting lower gains on asset sales and fee revenue. Operating expenses increased from the year-ago and prior quarters, reflecting the continued
growth of both assets and deposits in the Bank, along with the additional employee costs associated with the third quarter 2014 acquisition of Direct
Capital. As a % of AEA, operating expenses were 2.67%, up from 2.18% in the year-ago quarter and 2.34% in the prior quarter.
The provision for income taxes decreased in the quarter due to
the previously mentioned favorable resolution of an uncertain tax position.
Net Finance Revenue (dollars in millions)
Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Interest
income |
$ | 203.3 | $ | 197.5 | $ | 169.8 | $ | 400.8 | $ | 327.6 | |||||||||||||
Rental income on
operating leases |
69.1 | 70.1 | 53.9 | 139.2 | 99.7 | ||||||||||||||||||
Finance
revenue |
272.4 | 267.6 | 223.7 | 540.0 | 427.3 | ||||||||||||||||||
Interest
expense |
(76.9 | ) | (74.1 | ) | (55.1 | ) | (151.0 | ) | (106.5 | ) | |||||||||||||
Depreciation on
operating lease equipment |
(29.1 | ) | (28.6 | ) | (22.7 | ) | (57.7 | ) | (40.9 | ) | |||||||||||||
Maintenance and
other operating lease expenses* |
(1.3 | ) | (1.2 | ) | (1.8 | ) | (2.5 | ) | (3.6 | ) | |||||||||||||
Net finance
revenue |
$ | 165.1 | $ | 163.7 | $ | 144.1 | $ | 328.8 | $ | 276.3 | |||||||||||||
Average Earning
Assets (AEA) |
$ | 17,571.4 | $ | 17,108.8 | $ | 14,792.4 | $ | 17,358.8 | $ | 14,329.9 | |||||||||||||
As
a % of AEA: |
|||||||||||||||||||||||
Interest
income |
4.63 | % | 4.62 | % | 4.59 | % | 4.62 | % | 4.57 | % | |||||||||||||
Rental income on
operating leases |
1.57 | % | 1.64 | % | 1.46 | % | 1.60 | % | 1.39 | % | |||||||||||||
Finance
revenue |
6.20 | % | 6.26 | % | 6.05 | % | 6.22 | % | 5.96 | % | |||||||||||||
Interest
expense |
(1.75 | )% | (1.73 | )% | (1.49 | )% | (1.74 | )% | (1.49 | )% | |||||||||||||
Depreciation on
operating lease equipment |
(0.66 | )% | (0.67 | )% | (0.61 | )% | (0.66 | )% | (0.57 | )% | |||||||||||||
Maintenance and
other operating lease expenses* |
(0.03 | )% | (0.03 | )% | (0.05 | )% | (0.03 | )% | (0.05 | )% | |||||||||||||
Net finance
revenue |
3.76 | % | 3.83 | % | 3.90 | % | 3.79 | % | 3.85 | % |
* |
Amounts included in CIT Bank operating expenses. |
78 CIT GROUP INC
NFR increased from the year-ago period, reflecting the growth in
financing and leasing assets, and was flat sequentially. NFM was down slightly from the year-ago and prior quarter, reflecting some pressure on loan
yields. The operating lease portfolio contributed $39 million to NFR in the second quarter of 2015, down from $40 million in the prior quarter and up
from $29 million in the year-ago quarter.
NFR and NFM are key metrics used by management to measure the
profitability of our lending and leasing assets. NFR includes interest and fee income on our loans and capital leases, interest and dividend income on
cash and investments, rental revenue from our leased equipment, depreciation and maintenance and other operating lease expenses, as well as funding
costs. Since our asset composition includes an increasing level of operating lease equipment (12% of AEA for the quarter ended June 30, 2015), NFM is a
more appropriate metric for the Bank than net interest margin (NIM) (a common metric used by other banks), as NIM does not fully reflect
the earnings of our portfolio because it includes the impact of debt costs on all our assets but excludes the net revenue (rental income less
depreciation and maintenance and other operating lease expenses) from operating leases.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 79
SELECT DATA AND AVERAGE BALANCES
The following table sets forth selected consolidated financial
information regarding our results of operations, balance sheets and certain ratios.
Select Data (dollars in millions)
At or for the Quarters Ended |
Six Months Ended | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
|||||||||||||||||||
Select Statement of Operations Data |
|||||||||||||||||||||||
Net interest
revenue |
$ | 18.6 | $ | 9.7 | $ | 47.6 | $ | 28.3 | $ | 77.9 | |||||||||||||
Provision for
credit losses |
(18.4 | ) | (34.6 | ) | (10.2 | ) | (53.0 | ) | (46.9 | ) | |||||||||||||
Total
non-interest income |
595.2 | 617.0 | 613.3 | 1,212.2 | 1,176.3 | ||||||||||||||||||
Total other
expenses |
(442.3 | ) | (444.5 | ) | (431.7 | ) | (886.8 | ) | (865.6 | ) | |||||||||||||
Income from
continuing operations |
115.3 | 103.7 | 195.2 | 219.0 | 310.1 | ||||||||||||||||||
Net
income |
115.3 | 103.7 | 246.9 | 219.0 | 364.1 | ||||||||||||||||||
Per Common
Share Data |
|||||||||||||||||||||||
Diluted income
per common share continuing operations |
$ | 0.66 | $ | 0.59 | $ | 1.02 | $ | 1.24 | $ | 1.60 | |||||||||||||
Diluted income
per common share |
$ | 0.66 | $ | 0.59 | $ | 1.29 | $ | 1.24 | $ | 1.88 | |||||||||||||
Book value per
common share |
$ | 50.91 | $ | 50.26 | $ | 46.42 | |||||||||||||||||
Tangible book
value per common share |
$ | 47.51 | $ | 46.89 | $ | 44.16 | |||||||||||||||||
Dividends
declared per common share |
$ | 0.15 | $ | 0.15 | $ | 0.10 | $ | 0.30 | $ | 0.20 | |||||||||||||
Dividend payout
ratio |
22.8 | % | 25.6 | % | 7.7 | % | 24.1 | % | 10.7 | % | |||||||||||||
Performance Ratios |
|||||||||||||||||||||||
Return on
average common stockholders equity |
5.2 | % | 4.7 | % | 11.3 | % | 5.0 | % | 8.3 | % | |||||||||||||
Net finance
revenue as a percentage of average earning assets |
4.02 | % | 4.00 | % | 4.35 | % | 4.01 | % | 4.18 | % | |||||||||||||
Return on
average continuing operations total assets |
0.99 | % | 0.88 | % | 1.75 | % | 0.93 | % | 1.40 | % | |||||||||||||
Total ending
equity to total ending assets |
18.9 | % | 18.9 | % | 19.5 | % | |||||||||||||||||
Balance Sheet Data |
|||||||||||||||||||||||
Loans including
receivables pledged |
$ | 19,649.3 | $ | 19,429.3 | $ | 18,604.4 | |||||||||||||||||
Allowance for
loan losses |
(350.9 | ) | (356.5 | ) | (341.0 | ) | |||||||||||||||||
Operating lease
equipment, net |
15,109.6 | 14,887.8 | 14,788.3 | ||||||||||||||||||||
Goodwill |
565.9 | 563.6 | 403.1 | ||||||||||||||||||||
Total cash and
interest bearing deposits |
5,465.3 | 6,306.9 | 6,427.6 | ||||||||||||||||||||
Investments
securities and securities purchased under agreements to resell |
2,442.9 | 1,797.4 | 823.1 | ||||||||||||||||||||
Assets of
discontinued operation |
| | 1.0 | ||||||||||||||||||||
Total
assets |
46,657.2 | 46,416.0 | 44,152.7 | ||||||||||||||||||||
Deposits |
17,267.8 | 16,758.1 | 13,939.0 | ||||||||||||||||||||
Long-term
borrowings |
16,441.6 | 16,658.3 | 17,545.5 | ||||||||||||||||||||
Liabilities of
discontinued operation |
| | 0.9 | ||||||||||||||||||||
Total common
stockholders equity |
8,807.1 | 8,758.6 | 8,617.6 | ||||||||||||||||||||
Credit Quality |
|||||||||||||||||||||||
Non-accrual
loans as a percentage of finance receivables |
1.01 | % | 0.94 | % | 1.02 | % | |||||||||||||||||
Net charge-offs
as a percentage of average finance receivables |
0.48 | % | 0.43 | % | 0.45 | % | 0.46 | % | 0.60 | % | |||||||||||||
Allowance for
loan losses as a percentage of finance receivables |
1.79 | % | 1.83 | % | 1.83 | % | |||||||||||||||||
Financial Ratios |
|||||||||||||||||||||||
Common Equity
Tier 1 Capital Ratio |
14.5 | % | 14.2 | % | NA | ||||||||||||||||||
Tier 1 Capital
Ratio |
14.5 | % | 14.2 | % | 16.0 | % | |||||||||||||||||
Total Capital
Ratio |
15.2 | % | 14.9 | % | 16.7 | % |
NA Not applicable under Basel I
guidelines.
80 CIT GROUP INC
Quarterly Average Balances(1) and Associated Income (dollars in millions)
June 30, 2015 |
March 31, 2015 |
June 30, 2014 |
|||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Average Balance |
Revenue / Expense |
Average Rate (%) |
Average Balance |
Revenue / Expense |
Average Rate (%) |
Average Balance |
Revenue / Expense |
Average Rate (%) |
|||||||||||||||||||||||||||||||||
Interest
bearing deposits |
$ | 4,829.4 | $ | 3.4 | 0.28 | % | $ | 5,951.6 | $ | 4.0 | 0.27 | % | $ | 4,620.9 | $ | 4.5 | 0.39 | % | |||||||||||||||||||||||
Securities purchased under agreements to resell |
675.0 | 1.0 | 0.59 | % | 575.0 | 0.7 | 0.49 | % | | | | ||||||||||||||||||||||||||||||
Investments |
1,510.6 | 4.6 | 1.22 | % | 1,497.2 | 3.9 | 1.04 | % | 2,035.8 | 3.9 | 0.77 | % | |||||||||||||||||||||||||||||
Loans
(including held for sale)(2)(3) |
|||||||||||||||||||||||||||||||||||||||||
U.S. |
18,130.4 | 226.1 | 5.41 | % | 17,908.2 | 220.0 | 5.36 | % | 16,339.2 | 226.9 | 6.03 | % | |||||||||||||||||||||||||||||
Non-U.S. |
2,161.3 | 48.7 | 9.01 | % | 2,235.3 | 52.4 | 9.38 | % | 3,510.0 | 74.5 | 8.49 | % | |||||||||||||||||||||||||||||
Total
loans(2) |
20,291.7 | 274.8 | 5.83 | % | 20,143.5 | 272.4 | 5.84 | % | 19,849.2 | 301.4 | 6.50 | % | |||||||||||||||||||||||||||||
Total
interest earning assets / interest income(2)(3) |
27,306.7 | 283.8 | 4.39 | % | 28,167.3 | 281.0 | 4.22 | % | 26,505.9 | 309.8 | 4.92 | % | |||||||||||||||||||||||||||||
Operating lease equipment, net (including held for sale)(4) |
|||||||||||||||||||||||||||||||||||||||||
U.S.(4) |
7,859.0 | 175.4 | 8.93 | % | 7,769.5 | 177.8 | 9.15 | % | 7,741.5 | 172.5 | 8.91 | % | |||||||||||||||||||||||||||||
Non-U.S.(4) |
7,422.2 | 149.1 | 8.04 | % | 7,420.0 | 149.9 | 8.08 | % | 6,921.8 | 140.8 | 8.14 | % | |||||||||||||||||||||||||||||
Total
operating lease equipment, net(4) |
15,281.2 | 324.5 | 8.49 | % | 15,189.5 | 327.7 | 8.63 | % | 14,663.3 | 313.3 | 8.55 | % | |||||||||||||||||||||||||||||
Total
earning assets(2) |
42,587.9 | 608.3 | 5.91 | % | 43,356.8 | 608.7 | 5.82 | % | 41,169.2 | 623.1 | 6.25 | % | |||||||||||||||||||||||||||||
Non-interest earning assets |
|||||||||||||||||||||||||||||||||||||||||
Cash
due from banks |
952.7 | 903.6 | 1,213.1 | ||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(358.0 | ) | (347.7 | ) | (350.4 | ) | |||||||||||||||||||||||||||||||||||
All
other non-interest earning assets |
3,285.5 | 3,317.1 | 2,546.5 | ||||||||||||||||||||||||||||||||||||||
Assets
of discontinued operation |
| | 931.2 | ||||||||||||||||||||||||||||||||||||||
Total
Average Assets |
$ | 46,468.1 | $ | 47,229.8 | $ | 45,509.6 | |||||||||||||||||||||||||||||||||||
Borrowings |
|||||||||||||||||||||||||||||||||||||||||
Deposits |
$ | 16,934.9 | $ | 72.2 | 1.71 | % | $ | 16,382.2 | $ | 69.0 | 1.68 | % | $ | 13,608.5 | $ | 56.1 | 1.65 | % | |||||||||||||||||||||||
Long-term
borrowings(5) |
16,540.3 | 193.0 | 4.67 | % | 17,603.9 | 202.3 | 4.60 | % | 18,226.2 | 206.1 | 4.52 | % | |||||||||||||||||||||||||||||
Total
interest-bearing liabilities |
33,475.2 | 265.2 | 3.17 | % | 33,986.1 | 271.3 | 3.19 | % | 31,834.7 | 262.2 | 3.29 | % | |||||||||||||||||||||||||||||
Credit
balances of factoring clients |
1,428.6 | 1,501.4 | 1,301.7 | ||||||||||||||||||||||||||||||||||||||
Other
non-interest bearing liabilities |
2,776.7 | 2,870.6 | 2,863.2 | ||||||||||||||||||||||||||||||||||||||
Liabilities of discontinued operation |
| | 793.9 | ||||||||||||||||||||||||||||||||||||||
Noncontrolling interests |
0.5 | (3.9 | ) | 8.4 | |||||||||||||||||||||||||||||||||||||
Stockholders equity |
8,787.1 | 8,875.6 | 8,707.7 | ||||||||||||||||||||||||||||||||||||||
Total
Average Liabilities and Stockholders Equity |
$ | 46,468.1 | $ | 47,229.8 | $ | 45,509.6 | |||||||||||||||||||||||||||||||||||
Net
revenue spread |
2.74 | % | 2.63 | % | 2.96 | % | |||||||||||||||||||||||||||||||||||
Impact of
non-interest bearing sources |
0.59 | % | 0.59 | % | 0.66 | % | |||||||||||||||||||||||||||||||||||
Net
revenue/yield on earning assets(2) |
$ | 343.1 | 3.33 | % | $ | 337.4 | 3.22 | % | $ | 360.9 | 3.62 | % |
(1) – (5) – |
See following page for footnote explanation. |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 81
Year to Date Average Balances(1) and Associated Income (dollars in millions)
June 30, 2015 |
June 30, 2014 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Average Balance |
Revenue / Expense |
Average Rate (%) |
Average Balance |
Revenue / Expense |
Average Rate (%) |
||||||||||||||||||||||
Interest
bearing deposits |
$ | 5,390.1 | $ | 7.4 | 0.27 | % | $ | 4,955.8 | $ | 9.1 | 0.37 | % | |||||||||||||||
Securities purchased under agreements to resell |
650.0 | 1.7 | 0.52 | % | | | | ||||||||||||||||||||
Investments |
1,526.2 | 8.5 | 1.11 | % | 2,269.6 | 8.1 | 0.71 | % | |||||||||||||||||||
Loans
(including held for sale)(2)(3) |
|||||||||||||||||||||||||||
U.S. |
18,016.6 | 446.1 | 5.39 | % | 16,087.1 | 441.3 | 5.97 | % | |||||||||||||||||||
Non-U.S. |
2,203.2 | 101.1 | 9.18 | % | 3,622.5 | 153.5 | 8.47 | % | |||||||||||||||||||
Total
loans(2) |
20,219.8 | 547.2 | 5.83 | % | 19,709.6 | 594.8 | 6.46 | % | |||||||||||||||||||
Total
interest earning assets / interest income(2)(3) |
27,786.1 | 564.8 | 4.29 | % | 26,935.0 | 612.0 | 4.77 | % | |||||||||||||||||||
Operating lease equipment, net (including held for sale)(4) |
|||||||||||||||||||||||||||
U.S.(4) |
7,821.1 | 353.2 | 9.03 | % | 7,556.7 | 328.7 | 8.70 | % | |||||||||||||||||||
Non-U.S.(4) |
7,424.1 | 299.0 | 8.05 | % | 6,733.0 | 276.1 | 8.20 | % | |||||||||||||||||||
Total
operating lease equipment, net(4) |
15,245.2 | 652.2 | 8.56 | % | 14,289.7 | 604.8 | 8.46 | % | |||||||||||||||||||
Total
earning assets(2) |
43,031.3 | 1,217.0 | 5.85 | % | 41,224.7 | 1,216.8 | 6.10 | % | |||||||||||||||||||
Non-interest earning assets |
|||||||||||||||||||||||||||
Cash
due from banks |
930.3 | 989.6 | |||||||||||||||||||||||||
Allowance for loan losses |
(352.3 | ) | (354.3 | ) | |||||||||||||||||||||||
All
other non-interest earning assets |
3,301.5 | 2,460.5 | |||||||||||||||||||||||||
Assets
of discontinued operation |
| 2,167.6 | |||||||||||||||||||||||||
Total
Average Assets |
$ | 46,910.8 | $ | 46,488.1 | |||||||||||||||||||||||
Borrowings |
|||||||||||||||||||||||||||
Deposits |
$ | 16,644.3 | $ | 141.2 | 1.70 | % | $ | 13,213.3 | $ | 108.0 | 1.63 | % | |||||||||||||||
Long-term
borrowings(5) |
17,131.2 | 395.3 | 4.61 | % | 18,497.8 | 426.1 | 4.61 | % | |||||||||||||||||||
Total
interest-bearing liabilities |
33,775.5 | 536.5 | 3.18 | % | 31,711.1 | 534.1 | 3.37 | % | |||||||||||||||||||
Credit
balances of factoring clients |
1,459.2 | 1,299.8 | |||||||||||||||||||||||||
Other
non-interest bearing liabilities |
2,836.4 | 2,862.6 | |||||||||||||||||||||||||
Liabilities of discontinued operation |
| 1,852.0 | |||||||||||||||||||||||||
Noncontrolling interests |
(2.0 | ) | 10.3 | ||||||||||||||||||||||||
Stockholders equity |
8,841.7 | 8,752.3 | |||||||||||||||||||||||||
Total
Average Liabilities and Stockholders Equity |
$ | 46,910.8 | $ | 46,488.1 | |||||||||||||||||||||||
Net
revenue spread |
2.67 | % | 2.73 | % | |||||||||||||||||||||||
Impact of
non-interest bearing sources |
0.60 | % | 0.69 | % | |||||||||||||||||||||||
Net
revenue/yield on earning assets(2) |
$ | 680.5 | 3.27 | % | $ | 682.7 | 3.42 | % |
(1) |
The average balances presented are derived based on month end balances during the year. Tax exempt income was not significant in any of the years presented. Average rates are impacted by FSA accretion and amortization. |
(2) |
The rate presented is calculated net of average credit balances for factoring clients. |
(3) |
Non-accrual loans and related income are included in the respective categories. |
(4) |
Operating lease rental income is a significant source of revenue; therefore, we have presented the rental revenues net of depreciation and net of Maintenance and other operating lease expenses. |
(5) |
Interest and average rates include FSA accretion, including amounts accelerated due to redemptions or extinguishments, and accelerated original issue discount on debt extinguishment related to the GSI facility. |
Interest income on interest bearing deposits, securities
purchased under agreements to resell and investment securities was not significant in any of the quarters presented. Investments are typically a
combination of high quality debt, primarily U.S. Treasury securities, U.S. Government Agency securities, and supranational and foreign government
securities. Revenues were up reflecting a change in investment composition.
82 CIT GROUP INC
Finance revenue was down slightly from the year-ago quarter and
relatively flat for the six months. Pressure on yields continued to offset the benefit of higher assets during the quarter. Loan yields are down in
most divisions, reflecting new business yields that are generally below yields on maturing loans.
Net operating lease revenue was primarily generated from the
commercial air and rail portfolios. Net operating lease revenue increased compared to the year-ago quarter, benefiting from higher assets and rail
yields. On average, lease renewal rates in the rail portfolio re-priced slightly higher than the prior year quarter, while the commercial aircraft
portfolio has been re-pricing slightly lower. The slight decline from the prior quarter resulted mostly from lower rental rates.
Interest expense was relatively flat and down relative to average
earning assets for the quarter and year to date periods. The weighted average coupon rate of outstanding deposits and long-term borrowings was 3.04%
at June 30, 2015, compared to 3.20% at June 30, 2014 and unchanged from March 31, 2015. Compared to the prior year, although rates were generally up,
the higher proportion of deposit funding decreased the total funding weighted average coupon rate.
Deposits have increased, both in dollars and proportion of total
CIT funding. The weighted average rate of total CIT deposits was 1.74%, 1.64% and 1.67% at June 30, 2015 and 2014 and March 31, 2015, respectively.
Deposits represented 51% of the total deposits and long-term borrowing at June 30, 2015, while unsecured debt was 32% and secured debt was 17%. These
proportions were fairly consistent with the prior quarter and compared to 44%, 39% and 17%, respectively, at June 30, 2014. These proportions will
fluctuate in the future depending upon our funding activities. Deposits and long-term borrowings are also discussed in Funding and
Liquidity.
The weighted average coupon rate of long-term borrowings at June
30, 2015 was 4.41%, compared to 4.44% at June 30, 2014 and 4.39% at March 31, 2015. Long-term borrowings consist of unsecured and secured debt. The
weighted average coupon rate of unsecured long-term borrowings at June 30, 2015 was 5.03%, up slightly from June 30, 2014, due to the 2015 first
quarter maturity, and flat with March 31, 2015. The weighted average coupon rate of secured long-term borrowings at June 30, 2015 was 3.23%, compared
to 3.17% at June 30, 2014 and flat with March 31, 2015.
The average long-term borrowings balances presented below were
derived based on daily balances and the average rates are based on a 30 days per month day count convention.
Average Daily Long-term Borrowings Balances and Rates (dollars in millions)
Quarters Ended |
||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
March 31, 2015 |
June 30, 2014 |
||||||||||||||||||||||||||||||||||||
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
||||||||||||||||||||||||||||||
Revolving
Credit Facility(1) |
$ | | $ | 3.2 | | $ | | $ | 3.2 | | $ | | $ | 3.2 | | |||||||||||||||||||||||
Senior
Unsecured Notes |
10,732.7 | 138.1 | 5.15 | % | 11,332.5 | 145.1 | 5.12 | % | 12,231.9 | 156.3 | 5.11 | % | ||||||||||||||||||||||||||
Secured
borrowings |
5,810.4 | 51.7 | 3.56 | % | 6,277.5 | 54.0 | 3.44 | % | 5,686.2 | 46.6 | 3.28 | % | ||||||||||||||||||||||||||
Long-term Borrowings |
$ | 16,543.1 | $ | 193.0 | 4.67 | % | $ | 17,610.0 | $ | 202.3 | 4.60 | % | $ | 17,918.1 | $ | 206.1 | 4.60 | % |
Six Months Ended |
||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2015 |
June 30, 2014 |
|||||||||||||||||||||||||||||||||||||
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
|||||||||||||||||||||||||||||||||
Revolving
Credit Facility(1) |
$ | | $ | 6.4 | | $ | | $ | 7.5 | | ||||||||||||||||||||||||||||
Senior
Unsecured Notes |
11,032.6 | 283.2 | 5.13 | % | 12,615.2 | 325.0 | 5.15 | % | ||||||||||||||||||||||||||||||
Secured
borrowings |
6,043.9 | 105.7 | 3.50 | % | 5,872.7 | 93.6 | 3.19 | % | ||||||||||||||||||||||||||||||
Long-term Borrowings |
$ | 17,076.5 | $ | 395.3 | 4.63 | % | $ | 18,487.9 | $ | 426.1 | 4.61 | % |
(1) |
Interest expense and average rate includes Facility commitment fees and amortization of Facility deal costs. |
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, reported amounts of
income and expense and the disclosure of contingent assets and liabilities. The following estimates, which are based on relevant information available
at the end of each period, include inherent risks and uncertainties related to judgments and assumptions made. We consider the estimates to be critical
in applying our accounting policies, due to the existence of uncertainty at the time the estimate is made,
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 83
the likelihood of changes in estimates from period to period and the potential impact on the financial statements.
Management believes that the judgments and estimates utilized in
the following critical accounting estimates are reasonable. We do not believe that different assumptions are more likely than those utilized, although
actual events may differ from such assumptions. Consequently, our estimates could prove inaccurate, and we may be exposed to charges to earnings that
could be material.
n |
Allowance for Loan Losses |
n |
Loan Impairment |
n |
Fair Value Determination |
n |
Lease Residual Values |
n |
Liabilities for Uncertain Tax Positions |
n |
Realizability of Deferred Tax Assets |
n |
Goodwill Assets |
There have been no significant changes to the methodologies and
processes used in developing estimates relating to these items from those described in our 2014 Annual Report on Form 10-K.
INTERNAL CONTROLS WORKING GROUP
The Internal Controls Working Group (ICWG), which
reports to the Disclosure Committee, is responsible for monitoring and improving internal controls over external financial reporting. The ICWG is
chaired by the Controller and is comprised of executives in Finance, Risk, Operations, Human Resources, Information Technology and Internal Audit. See
Item 4. Controls and Procedures for more information.
NON-GAAP FINANCIAL MEASUREMENTS
The SEC adopted regulations that apply to any public disclosure
or release of material information that includes a non-GAAP financial measure. The accompanying Managements Discussion and Analysis of Financial
Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk contain certain non-GAAP financial measures. Due to
the nature of our financing and leasing assets, which include a higher proportion of operating lease equipment than most BHCs, certain financial
measures commonly used by other BHCs are not as meaningful for our Company. Therefore, management uses certain non-GAAP financial measures to evaluate
our performance. We intend our non-GAAP financial measures to provide additional information and insight regarding operating results and financial
position of the business and in certain cases to provide financial information that is presented to rating agencies and other users of financial
information. These measures are not in accordance with, or a substitute for, GAAP and may be different from or inconsistent with non-GAAP financial
measures used by other companies. See footnotes below the tables for additional explanation of non-GAAP measurements.
Total Net Revenues(1) and Net Operating Lease Revenues(2) (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
|||||||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||||||
Total Net Revenue |
||||||||||||||||||||||||||
Interest
income |
$ | 283.8 | $ | 281.0 | $ | 309.8 | $ | 564.8 | $ | 612.0 | ||||||||||||||||
Rental income on
operating leases |
531.7 | 530.6 | 519.6 | 1,062.3 | 1,011.5 | |||||||||||||||||||||
Finance
revenue |
815.5 | 811.6 | 829.4 | 1,627.1 | 1,623.5 | |||||||||||||||||||||
Interest
expense |
(265.2 | ) | (271.3 | ) | (262.2 | ) | (536.5 | ) | (534.1 | ) | ||||||||||||||||
Depreciation on
operating lease equipment |
(157.8 | ) | (156.8 | ) | (157.3 | ) | (314.6 | ) | (306.1 | ) | ||||||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | (46.1 | ) | (49.0 | ) | (95.5 | ) | (100.6 | ) | ||||||||||||||||
Net finance
revenue |
343.1 | 337.4 | 360.9 | 680.5 | 682.7 | |||||||||||||||||||||
Other
income |
63.5 | 86.4 | 93.7 | 149.9 | 164.8 | |||||||||||||||||||||
Total net
revenues |
$ | 406.6 | $ | 423.8 | $ | 454.6 | $ | 830.4 | $ | 847.5 | ||||||||||||||||
Net Operating
Lease Revenue |
||||||||||||||||||||||||||
Rental income on
operating leases |
$ | 531.7 | $ | 530.6 | $ | 519.6 | $ | 1,062.3 | $ | 1,011.5 | ||||||||||||||||
Depreciation on
operating lease equipment |
(157.8 | ) | (156.8 | ) | (157.3 | ) | (314.6 | ) | (306.1 | ) | ||||||||||||||||
Maintenance and
other operating lease expenses |
(49.4 | ) | (46.1 | ) | (49.0 | ) | (95.5 | ) | (100.6 | ) | ||||||||||||||||
Net operating
lease revenue |
$ | 324.5 | $ | 327.7 | $ | 313.3 | $ | 652.2 | $ | 604.8 |
(1) – (2) – |
See following page for footnote explanation. |
84 CIT GROUP INC
Operating Expenses Excluding Restructuring Costs(3) (dollars in millions)
Quarters Ended |
Six Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | March 31, | June 30, | June 30, |
|||||||||||||||||||
2015 |
2015 |
2014 |
2015 |
2014 |
||||||||||||||||||
Operating
expenses |
$ | (235.0 | ) | $ | (241.6 | ) | $ | (225.0 | ) | $ | (476.6 | ) | $ | (458.5 | ) | |||||||
Provision for
severance and facilities exiting activities |
1.1 | (1.0 | ) | 5.6 | 0.1 | 15.5 | ||||||||||||||||
Operating
expenses excluding restructuring costs |
$ | (233.9 | ) | $ | (242.6 | ) | $ | (219.4 | ) | $ | (476.5 | ) | $ | (443.0 | ) | |||||||
Operating
expenses excluding restructuring costs as a % of AEA |
(2.74 | )% | (2.87 | )% | (2.64 | )% | (2.81 | )% | (2.71 | )% |
Earning Assets(4) (dollars in millions)
June 30, 2015 |
December 31, 2014 |
June 30, 2014 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Loans |
$ | 19,649.3 | $ | 19,495.0 | $ | 18,604.4 | ||||||||
Operating lease
equipment, net |
15,109.6 | 14,930.4 | 14,788.3 | |||||||||||
Assets held for
sale |
1,086.8 | 1,218.1 | 1,328.9 | |||||||||||
Credit balances
of factoring clients |
(1,373.3 | ) | (1,622.1 | ) | (1,296.5 | ) | ||||||||
Total earning
assets |
$ | 34,472.4 | $ | 34,021.4 | $ | 33,425.1 |
Tangible Book Value(5) (dollars in millions)
June 30, 2015 |
December 31, 2014 |
June 30, 2014 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total common
stockholders equity |
$ | 8,807.1 | $ | 9,068.9 | $ | 8,617.6 | ||||||||
Less:
Goodwill |
(565.9 | ) | (571.3 | ) | (403.1 | ) | ||||||||
Intangible
assets |
(21.4 | ) | (25.7 | ) | (16.6 | ) | ||||||||
Tangible book
value |
$ | 8,219.8 | $ | 8,471.9 | $ | 8,197.9 |
(1) |
Total net revenues is a non-GAAP measure that represents the combination of net finance revenue and other income and is an aggregation of all sources of revenue for the Company. Total net revenues is used by management to monitor business performance. Given our asset composition includes a high level of operating lease equipment, NFM is a more appropriate metric than net interest margin (NIM) (a common metric used by other bank holding companies), as NIM does not fully reflect the earnings of our portfolio because it includes the impact of debt costs of all our assets but excludes the net revenue (rental revenue less depreciation and maintenance and other operating lease expenses) from operating leases. |
(2) |
Net operating lease revenue is a non-GAAP measure that represents the combination of rental income on operating leases less depreciation on operating lease equipment and maintenance and other operating lease expenses. Net operating lease revenues is used by management to monitor portfolio performance. |
(3) |
Operating expenses excluding restructuring costs is a non-GAAP measure used by management to compare period over period expenses. |
(4) |
Earning assets is a non-GAAP measure and are utilized in certain revenue and earnings ratios. Earning assets are net of credit balances of factoring clients. This net amount represents the amounts we fund. |
(5) |
Tangible book value is a non-GAAP measure, which represents an adjusted common shareholders equity balance that has been reduced by goodwill and intangible assets. Tangible book value is used to compute a per common share amount, which is used to evaluate our use of equity. Other companies may define or calculate this measure differently. |
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document are
forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements contained herein
that are not clearly historical in nature are forward-looking and the words anticipate, believe, could,
expect, estimate, forecast, intend, plan, potential, project,
target and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statements contained
herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions
with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, concerning our operations,
economic performance and financial condition are subject to known and unknown risks, uncertainties and contingencies. Forward-looking statements are
included, for example, in the discussions about:
n |
our liquidity risk and capital management, including our capital plan, leverage, capital ratios, and credit ratings, our liquidity plan, and our plans and the potential transactions designed to enhance our liquidity and capital, and for a return of capital, |
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 85
n |
our plans to change our funding mix and to access new sources of funding to broaden our use of deposit taking capabilities, |
n |
our pending or potential acquisitions plans and the integration risks inherent in such plans, including our acquisition of OneWest Bank, |
n |
our credit risk management and credit quality, |
n |
our asset/liability risk management, |
n |
our funding, borrowing costs and net finance revenue, |
n |
our operational risks, including success of systems enhancements and expansion of risk management and control functions, |
n |
our mix of portfolio asset classes, including changes resulting from growth initiatives, new business initiatives, new products, acquisitions and divestitures, new business and customer retention, |
n |
legal risks, including related to the enforceability of our agreements and to changes in laws and regulations, |
n |
our growth rates, |
n |
our commitments to extend credit or purchase equipment, and |
n |
how we may be affected by legal proceedings. |
All forward-looking statements involve
risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from
anticipated results, performance or achievements. Also, forward-looking statements are based upon managements estimates of fair values and of
future costs, using currently available information.
Therefore, actual results may differ
materially from those expressed or implied in those statements. Factors, in addition to those disclosed in Risk Factors, that could
cause such differences include, but are not limited to:
n |
capital markets liquidity, |
n |
risks of and/or actual economic slowdown, downturn or recession, |
n |
industry cycles and trends, |
n |
uncertainties associated with risk management, including credit, prepayment, asset/liability, interest rate and currency risks, |
n |
adequacy of reserves for credit losses, |
n |
risks inherent in changes in market interest rates and quality spreads, |
n |
funding opportunities, deposit taking capabilities and borrowing costs, |
n |
conditions and/or changes in funding markets and our access to such markets, including secured and unsecured term debt and the asset-backed securitization markets, |
n |
risks of implementing new processes, procedures, and systems, |
n |
risks associated with the value and recoverability of leased equipment and lease residual values, |
n |
risks of failing to achieve the projected revenue growth from new business initiatives or the projected expense reductions from efficiency improvements, |
n |
application of fair value accounting in volatile markets, |
n |
application of goodwill accounting in a recessionary economy, |
n |
changes in laws or regulations governing our business and operations, or affecting our assets, including our operating lease equipment, |
n |
changes in competitive factors, |
n |
demographic trends, |
n |
customer retention rates, |
n |
the risks associated with dispositions of businesses or asset portfolios, including how to replace the income associated with such businesses or portfolios and the risk of residual liabilities from such businesses or portfolios, |
n |
the risks associated with acquisitions of businesses or asset portfolios and the risks of integrating such acquisitions, including the acquisition of OneWest Bank, and |
n |
regulatory changes and/or developments. |
Any or all of our forward-looking statements here or in other
publications may turn out to be wrong, and there are no guarantees regarding our performance. We do not assume any obligation to update any
forward-looking statement for any reason.
86 CIT GROUP INC
(a) Evaluation of Disclosure Controls and
Procedures
Under the supervision of and with the participation of
management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the
Exchange Act) as of June 30, 2015. Based on such evaluation, the principal executive officer and the principal financial officer have
concluded that the Companys disclosure controls and procedures were effective.
(b) Changes In Internal Control Over Financial
Reporting
There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2015 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 2. Managements Discussion and Analysis and
Item 3. Quantitative and Qualitative Disclosures about Market Risk 87
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), certain of which Litigation matters are described in Note 14 Contingencies of Item 1.
Consolidated Financial Statements. 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, if any. 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 Companys financial condition, but may be material to the Companys 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 more information about pending
legal proceedings, including an estimate of certain reasonably possible losses in excess of reserved amounts,
see Note 14 Contingencies of Item 1. Consolidated Financial Statements.
For a discussion of certain risk factors affecting CIT, see
Part I, Item 1A: Risk Factors, of CITs 2014 Annual Report on Form 10-K, and Forward-Looking Statements of this Form 10-Q.
The following table provides information related to purchases by
the Company of its common shares.
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of the Publicly Announced Program |
Total Dollar Amount Purchased Under the Program |
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions) | (dollars in millions) | |||||||||||||||||||||
First Quarter
Purchases |
$ | 45.43 | 7,298,793 | $ | 331.6 | |||||||||||||||||
Second Quarter
Purchases |
||||||||||||||||||||||
April 1
30, 2015(1) |
250,000 | $ | 44.85 | 250,000 | $ | 11.2 | ||||||||||||||||
May 1 31,
2015(1) |
537,570 | $ | 45.73 | 537,570 | $ | 24.6 | ||||||||||||||||
June 1
30, 2015(1) |
541,582 | $ | 46.48 | 541,582 | $ | 25.2 | ||||||||||||||||
1,329,152 | $ | 45.87 | 1,329,152 | $ | 61.0 | |||||||||||||||||
June 30,
2015(1) |
1,329,152 | $ | 61.0 | $ | 139.0 |
(1) |
Share repurchased are subject to a $200 million total. |
In 2014, the Board authorized the repurchase of approximately
$1.1 billion of the Companys common shares, which was completed in the first quarter of 2015. In April 2015, the Board authorized an additional
$200 million share repurchase program. Management will determine the timing and amount of any share repurchases under the share repurchase
authorizations based on market conditions and other considerations. The repurchases may be effected through open market purchases, through derivative,
accelerated repurchase and other negotiated
88 CIT GROUP INC
transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The repurchased common stock is held as treasury shares and may be used for the issuance of shares under CITs employee stock plans or for other purposes.
Not applicable.
(a) Exhibits
2.1 | Agreement and Plan of Merger, by and among CIT Group Inc., IMB Holdco LLC, Carbon Merger Sub LLC and JCF III HoldCo I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 25, 2014). | |
2.2 | Amendment No. 1, dated as of July 21, 2015, to the Agreement and Plan of Merger, by and among CIT Group Inc., IMB Holdco LLC, Carbon Merger Sub LLC, and JCF III Holdco I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 27, 2015). | |
3.1 | Third Amended and Restated Certificate of Incorporation of the Company, dated December 8, 2009 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 9, 2009). | |
3.2 | Amended and Restated By-laws of the Company, as amended through July 15, 2014 (incorporated by reference to Exhibit 99.1 to Form 8-K filed July 16, 2014). | |
4.1 | Indenture dated as of January 20, 2006 between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) for the issuance of senior debt securities (incorporated by reference to Exhibit 4.3 to Form S-3 filed January 20, 2006). | |
4.2 | Framework Agreement, dated July 11, 2008, among ABN AMRO Bank N.V., as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as amended by the Deed of Amendment, dated July 19, 2010, among The Royal Bank of Scotland N.V. (f/k/a ABN AMRO Bank N.V.), as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as supplemented by Letter Agreement No. 1 of 2010, dated July 19, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, as amended and supplemented by the Accession Deed, dated July 21, 2010, among The Royal Bank of Scotland N.V., as arranger, Madeleine Leasing Limited, as original borrower, and Jessica Leasing Limited, as acceding party, as supplemented by Letter Agreement No. 2 of 2010, dated July 29, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets (incorporated by reference to Exhibit 4.11 to Form 10-K filed March 10, 2011). |
Item 6. Exhibits
89
4.3 | Form of All Parties Agreement among CIT Aerospace International, as head lessee, Madeleine Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.12 to Form 10-K filed March 10, 2011). | |
4.4 | Form of ECA Loan Agreement among Madeleine Leasing Limited, as borrower, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.13 to Form 10-K filed March 10, 2011). | |
4.5 | Form of Aircraft Head Lease between Madeleine Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.14 to Form 10-K filed March 10, 2011). | |
4.6 | Form of Proceeds and Intercreditor Deed among Madeleine Leasing Limited, as borrower and lessor, various financial institutions, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.15 to Form 10-K filed March 10, 2011). | |
4.7 | Form of All Parties Agreement among CIT Aerospace International, as head lessee, Jessica Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, CIT Aerospace International, as servicing agent, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.16 to Form 10-K filed March 10, 2011). | |
4.8 | Form of ECA Loan Agreement among Jessica Leasing Limited, as borrower, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.17 to Form 10-K filed March 10, 2011). | |
4.9 | Form of Aircraft Head Lease between Jessica Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.18 to Form 10-K filed March 10, 2011). | |
4.10 | Form of Proceeds and Intercreditor Deed among Jessica Leasing Limited, as borrower and lessor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.19 to Form 10-K filed March 10, 2011). |
90 CIT GROUP INC
4.11 | Indenture, dated as of March 30, 2011, between CIT Group Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed June 30, 2011). | ||
4.12 | First Supplemental Indenture, dated as of March 30, 2011, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of 5.250% Note due 2014 and the Form of 6.625% Note due 2018) (incorporated by reference to Exhibit 4.2 to Form 8-K filed June 30, 2011). | ||
4.13 | Third Supplemental Indenture, dated as of February 7, 2012, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of Notes) (incorporated by reference to Exhibit 4.4 of Form 8-K dated February 13, 2012). | ||
4.14 | Registration Rights Agreement, dated as of February 7, 2012, among CIT Group Inc., the Guarantors named therein, and JP Morgan Securities LLC, as representative for the initial purchasers named therein (incorporated by reference to Exhibit 10.1 of Form 8-K dated February 13, 2012). | ||
4.15 | Amended and Restated Revolving Credit and Guaranty Agreement, dated as of January 27, 2014 among CIT Group Inc., certain subsidiaries of CIT Group Inc., as Guarantors, the Lenders party thereto from time to time and Bank of America, N.A., as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 28, 2014). | ||
4.16 | Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (incorporated by reference to Exhibit 4.1 of Form 8-K filed March 16, 2012). | ||
4.17 | First Supplemental Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.25% Senior Unsecured Note due 2018) (incorporated by reference to Exhibit 4.2 of Form 8-K filed March 16, 2012). | ||
4.18 | Second Supplemental Indenture, dated as of May 4, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.000% Senior Unsecured Note due 2017 and the Form of 5.375% Senior Unsecured Note due 2020) (incorporated by reference to Exhibit 4.2 of Form 8-K filed May 4, 2012). | ||
4.19 | Third Supplemental Indenture, dated as of August 3, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 4.25% Senior Unsecured Note due 2017 and the Form of 5.00% Senior Unsecured Note due 2022) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 3, 2012). | ||
4.20 | Fourth Supplemental Indenture, dated as of August 1, 2013, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.00% Senior Unsecured Note due 2023) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 1, 2013). | ||
4.21 | Fifth Supplemental Indenture, dated as of February 19, 2014, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 3.875% Senior Unsecured Note due 2019) (incorporated by reference to Exhibit 4.2 to Form 8-K filed February 19, 2014). | ||
10.1 | * | Amended and Restated CIT Group Inc. Long-Term Incentive Plan (as amended and restated effective December 10, 2009) (incorporated by reference to Exhibit 4.1 to Form S-8 filed January 11, 2010). | |
10.2 | * | CIT Group Inc. Supplemental Retirement Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.27 to Form 10-Q filed May 12, 2008). | |
10.3 | * | CIT Group Inc. Supplemental Savings Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.28 to Form 10-Q filed May 12, 2008). | |
10.4 | * | New Executive Retirement Plan of CIT Group Inc. (As Amended and Restated as of January 1, 2008) (incorporated by reference to Exhibit 10.29 to Form 10-Q filed May 12, 2008). |
Item 6. Exhibits
91
10.5 | * | Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (One Year Vesting) (incorporated by reference to Exhibit 10.35 to Form 10-Q filed August 9, 2010). | |
10.6 | * | Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (Three Year Vesting) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed August 9, 2010). | |
10.7 | * | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Initial Grant) (incorporated by reference to Exhibit 10.39 to Form 10-Q filed August 9, 2010). | |
10.8 | * | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Annual Grant) (incorporated by reference to Exhibit 10.40 to Form 10-Q filed August 9, 2010). | |
10.9 | * | Amended and Restated Employment Agreement, dated as of May 7, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.35 to Form 10-K filed March 2, 2009). | |
10.10 | * | Amendment to Employment Agreement, dated December 22, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 2, 2009). | |
10.11 | ** | Airbus A320 NEO Family Aircraft Purchase Agreement, dated as of July 28, 2011, between Airbus S.A.S. and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.35 of Form 10-Q/A filed February 1, 2012). | |
10.12 | ** | Amended and Restated Confirmation, dated June 28, 2012, between CIT TRS Funding B.V. and Goldman Sachs International, and Credit Support Annex and ISDA Master Agreement and Schedule, each dated October 26, 2011, between CIT TRS Funding B.V. and Goldman Sachs International, evidencing a $625 billion securities based financing facility (incorporated by reference to Exhibit 10.32 to Form 10-Q filed August 9, 2012). | |
10.13 | ** | Third Amended and Restated Confirmation, dated June 28, 2012, between CIT Financial Ltd. and Goldman Sachs International, and Amended and Restated ISDA Master Agreement Schedule, dated October 26, 2011 between CIT Financial Ltd. and Goldman Sachs International, evidencing a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 9, 2012). | |
10.14 | ** | ISDA Master Agreement and Credit Support Annex, each dated June 6, 2008, between CIT Financial Ltd. and Goldman Sachs International related to a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 11, 2008). | |
10.15 | Form of CIT Group Inc. Long-Term Incentive Plan Performance Stock Unit Award Agreement (with Good Reason) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed May 10, 2012). | ||
10.16 | Form of CIT Group Inc. Long-Term Incentive Plan Performance Stock Unit Award Agreement (without Good Reason) (incorporated by reference to Exhibit 10.37 to Form 10-Q filed May 10, 2012). | ||
10.17 | * | Assignment and Extension of Employment Agreement, dated February 6, 2013, by and among CIT Group Inc., C. Jeffrey Knittel and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.34 to Form 10-Q filed November 6, 2013). | |
10.18 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.36 to Form 10-K filed March 1, 2013). | |
10.19 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 1, 2013). | |
10.20 | * | CIT Employee Severance Plan (Effective as of November 6, 2013) (incorporated by reference to Exhibit 10.37 in Form 10-Q filed November 6, 2013). | |
10.21 | Stockholders Agreement, by and among CIT Group Inc. and the parties listed on the signature pages thereto, dated as of July 21, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 25, 2014). | ||
10.22 | * | Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Nelson Chai and Attached Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to Form 8-K filed July 25, 2014). | |
10.23 | * | Extension to Term of Employment Agreement, dated January 2, 2014, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 6, 2014). | |
10.24 | * | Amendment to Employment Agreement, dated July 14, 2014, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Form 8-K filed July 16, 2014). |
92 CIT GROUP INC
10.25 | * | Extension to Employment Agreement, dated January 16, 2015, between C.I.T. Leasing Corporation and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.29 to Form 10-K filed February 20, 2015). | |
10.26 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2013) (incorporated by reference to Exhibit 10.30 to Form 10-K filed February 20, 2015). | |
10.27 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance-Based Vesting) (2013) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.31 to Form 10-K filed February 20, 2015). | |
10.28 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2014) (incorporated by reference to Exhibit 10.32 to Form 10-K filed February 20, 2015). | |
10.29 | * | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2014) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.33 to Form 8-K filed February 20, 2015). | |
10.30 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (filed herein). | |
10.31 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (Executives with Employment Agreements) (filed herein). | |
10.32 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (Executives with Employment Agreements) (filed herein). | |
10.33 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (filed herein). | |
10.34 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (filed herein). | |
10.35 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (Executives with Employment Agreements) (filed herein). | |
10.36 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (filed herein). | |
10.37 | * | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (Executives with Employment Agreements)(filed herein). | |
10.40 | Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Steven T. Mnuchin (incorporated by reference to Exhibit 10.2 to Form 8-K filed July 25, 2014). | ||
10.41 | Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Joseph Otting and Attached Restricted Stock Unit Award Agreements (incorporated by reference to Exhibit 10.3 to Form 8-K filed July 27, 2015). | ||
12.1 | CIT Group Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges. | ||
31.1 | Certification of John A. Thain pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Scott T. Parker pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1* | ** | Certification of John A. Thain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | ** | Certification of Scott T. Parker pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.I | NS | XBRL Instance Document (Includes the following financial information included in the Companys Annual Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.) |
Item 6. Exhibits
93
101. | SCH | XBRL Taxonomy Extension Schema Document. | |
101. | CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101. | LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101. | PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
101. | DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
* |
Indicates a management contract or compensatory plan or arrangement. | |
** |
Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for granting confidential treatment pursuant to the Securities Exchange Act of 1934, as amended. | |
*** |
This information is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not incorporated by reference into any filing under the Securities Act of 1933. |
94 CIT GROUP INC
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
August 5,
2015 |
CIT
GROUP INC. |
|
/s/ Scott T. Parker |
||
Scott T. Parker |
||
Executive Vice President and Chief Financial Officer |
||
/s/ E. Carol Hayles |
||
E.
Carol Hayles |
||
Executive Vice President and Controller |
95