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 $36 billion of financing and leasing assets at September 30, 2014. CIT became a bank holding company (“BHC”) in December 2008 and a financial holding company 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 state chartered bank located in Salt Lake City, Utah, that offers commercial financing and leasing products as well as a suite of savings options and is subject to regulation by the Federal Depository Insurance Corporation (“FDIC”) and the Utah Department of Financial Institutions (“UDFI”).
On July 22, 2014, CIT announced that it had entered into a definitive agreement and plan of merger to acquire IMB Holdco LLC, the parent company of OneWest Bank N.A. for $3.4 billion in cash and stock. IMB Holdco is regulated by the FRB and OneWest is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury. The transaction is subject to certain customary closing conditions and regulatory approval by the Federal Reserve Board and the Office of the Comptroller of the Currency. Following the closing, based on current definitions and requirements at the time of the announcement, CIT will become subject to the enhanced regulatory mandates applicable to bank holding companies with $50 billion or more in total consolidated assets, commonly referred to as systemically important financial institutions, or SIFIs, including but not limited to submitting an annual capital plan, undergoing an annual supervisory stress test and two company-run stress tests, submitting a resolution plan, implementation of an enhanced compliance program under the Volcker Rule, and payment of additional FRB assessments. The date on which CIT becomes subject to each SIFI requirement will vary depending on the terms of the individual regulation.
The change in segment reporting does not affect CIT’s historical consolidated results of operations. The discussions below reflect the new reporting segments; all prior period comparisons have been conformed and are consistent with the presentation of financial information to management.
On April 25, 2014, the Company completed the sale of the $3.3 billion student lending business along with certain secured debt and servicing rights. Income from discontinued operation (net of taxes) was $54 million for the nine months ended September 30, 2014, which included a $283 million gain on sale, partially offset by the $229 million loss on discontinued operation. The gain on sale reflected proceeds received in excess of the net carrying value of assets and liabilities sold and amounts received for the sale of servicing rights, while the loss on discontinued operation was driven primarily by the acceleration of fresh start accounting (FSA) accretion of $224 million on extinguishment of the debt.
The business had previously been included in the NSP segment. Approximately $3.2 billion of debt was extinguished, including $0.8 billion that was repaid using a
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portion of the cash proceeds. The student lending business consisted of a portfolio of U.S. Government-guaranteed student loans that was in run-off and had been transferred to assets held for sale (“AHFS”) at the end of 2013. The Company had ceased offering private student loans in 2007 and government-guaranteed student loans in 2008. All prior period data has been adjusted to reflect the student lending business as a discontinued operation.
Unless specifically noted, the discussions throughout the following sections reflect CIT results on a continuing operations basis.
2014 FINANCIAL OVERVIEW
We grew commercial financing and leasing assets through solid new business activity and strategic acquisitions, and credit quality remained at cyclical lows.
Net income of $515 million, $2.76 per diluted share, for the third quarter of 2014, was up from $200 million, $0.99 per diluted share, for the year-ago quarter and $247 million, $1.29 per diluted share, in the prior quarter. Income from continuing operations (after taxes) for the third quarter was $515 million, $2.76 per diluted share, up from $193 million, $0.96 per diluted share, for the year-ago quarter and $195 million, $1.02 per diluted share, in the prior quarter. Net income for the three month period ended September 30, 2014 included a $375 million, $2.01 per diluted share, income tax benefit associated with the partial reversal of a valuation allowance related to the U.S. federal deferred tax asset. In addition to the benefit from the U.S. Federal tax valuation allowance reversal, the tax provision benefited by approximately $30 million related to the acquisition of Direct Capital. Net income also reflected $48 million of after tax impairment charges in NSP related to the progress we made exiting certain portfolios, $9 million of restructuring charges, as well as higher provision for credit losses and a negative mark-to-market on our TRS facility.
Net income for the nine months ended September 30, 2014 was $879 million, $4.59 per diluted share, up from $546 million, $2.70 per diluted share, for the 2013 period. Income from continuing operations for the nine months ended September 30, 2014 was $826 million, $4.31 per diluted share, up from $521 million, $2.58 per diluted share for the 2013 period. Net income for the nine month period ended September 30, 2014 also included the $375 million, $1.96 per diluted share, income tax benefit associated with the previously mentioned partial reversal of the tax related valuation allowance.
Income from continuing operations, before income taxes totaled $117 million for the third quarter of 2014, down from $206 million for the year-ago quarter and $219 million for the prior quarter. Third quarter pre-tax results were dampened by impairment charges on AHFS, mostly related to international assets in the NSP segment, and an increase in credit provision. The prior quarter income from continuing operations reflected benefits from higher loan prepayments, lower credit costs as well as the restructuring of an aircraft securitization in our TRS facility that positively impacted interest expense and other income. Pre-tax income from continuing operations was $458 million for the nine months ended September 30, 2014, down from $580 million for the 2013 period.
Net finance revenue(1)(“NFR”) was $365 million up from $347 million in the year-ago quarter and $361 million in the prior quarter, reflecting higher asset levels. Average earning assets were $34.3 billion in the current quarter, up from $30.4 billion in the year-ago quarter and $33.2 billion in the prior quarter. NFR as a percentage of average earning assets (“net finance margin”) was 4.26%, down from 4.56% in the year-ago quarter and 4.35% in the prior quarter (4.26% excluding the impact of debt redemptions(2)). NFM remained at the high-end of our near-term outlook benefitting from lower funding costs, which was offset by portfolio re-pricing. The reduction from the year-ago quarter primarily reflects portfolio re-pricing, the sale of higher-yielding Dell Europe assets, and declines in net FSA accretion, partially offset by lower funding costs. NFR was $1,048 million for the nine months ended September 30, 2014, down slightly from the 2013 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, 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 modestly from the year-ago quarter, as increased revenue earned on higher average assets and consistently high aircraft and railcar utilization rates offset higher depreciation expense and maintenance and other operating lease expenses and pressure on revenues from lower remarketing rates. Compared to the prior quarter, the modest increase in net operating lease revenue reflected higher revenues and slightly lower maintenance and other operating lease expenses.
Provision for credit losses was $38 million, up from $16 million in the year-ago quarter and $10 million in the prior quarter, reflecting higher non-specific reserves, primarily due to asset growth, and higher reserves on a small number of accounts. The provision for credit losses was $85 million for the nine months ended September 30, 2014, up from $51 million for the 2013 period.
Other income of $24 million decreased from $105 million in the year-ago quarter and from $94 million in the prior quarter. The current quarter includes total impairment charges of $54 million on AHFS, mostly on NSP international equipment finance portfolios, as well as a negative mark-to-market of $13 million on the TRS derivative, while the prior quarter included benefits from the acceleration of counterparty receivable accretion of $9 million related to the aircraft securitization restructuring and a positive mark-to-market of $11 million on the TRS derivative. Other income was $189 million for the nine months ended September 30, 2014, down from $254 million for the 2013 period, primarily from lower gains on asset sales.
(1) | | Net finance revenue and average earning assets are non-GAAP measures; see “Non-GAAP Financial Measurements” for reconciliation of non-GAAP to GAAP financial information. |
(2) | | Debt redemption impacts include accelerated FSA net discount/(premium) accretion and accelerated original issue discount. See “Non-GAAP Measurements” for reconciliation of non-GAAP to GAAP financial information. |
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Operating expenses were $235 million, up from $229 million in the year-ago quarter and $225 million in the prior quarter. Excluding restructuring costs(3), operating expenses were $225 million, essentially unchanged from $226 million in the year-ago quarter and up from $219 million in the prior quarter. The increase in operating expenses from the prior quarter is primarily due to the acquisition of Direct Capital and other integration costs, offset by the benefit from the sale of our Small Business Lending portfolio last quarter. The change from the year-ago quarter also reflected costs resulting from the acquisition of Nacco in the first quarter of 2014, offset by lower tax-related expenses and benefits from our cost reduction initiatives. Operating expenses were $693 million for the nine months ended September 30, 2014, up from $686 million for the 2013 period. Headcount at September 30, 2014 was approximately 3,330, which includes the addition of 250 Direct Capital employees, down from 3,380 a year ago and up from 3,170 at June 30, 2014.
Provision for income taxes was a benefit of $401 million in the current quarter reflecting a $375 million partial reversal of the U.S. Federal deferred tax asset valuation allowance, a $30 million benefit related to the acquisition of Direct Capital and net expenses on state and international earnings. Income tax expense was $13 million in the year-ago quarter and $18 million in the prior quarter, primarily reflecting the recognition of income tax expense on international earnings and state tax expense. The benefit for income taxes was $370 million for the nine months ended September 30, 2014, compared to a provision of $55 million for the 2013 period. The decline was mainly due to the reversal of the valuation allowance and the tax benefit from the Direct Capital acquisition.
Total assets from continuing operations(4) at September 30, 2014 were $46.5 billion, up from $44.2 billion at June 30, 2014, and $42.3 billion at September 30, 2013. Financing and leasing assets in North American Commercial Finance and Transportation & International Finance increased to $35.5 billion, an increase of $1.5 billion (4%) from June 30, 2014 and $5.2 billion (17%) from a year ago. The sequential quarter increase was driven by solid origination volumes and the acquisition of Direct Capital, which added $0.54 billion of financing and leasing assets. The increase from the year-ago quarter also included the acquisition of Nacco in the first quarter of 2014, which added approximately $0.65 billion of financing and leasing assets. The Non-Strategic Portfolios declined by approximately $0.1 billion from June 30, 2014, and by $1.2 billion from a year ago, to $0.6 billion, reflecting portfolio run off and asset sales including the completion of the sale of the Small Business Lending portfolio in June 2014. Total loans of $19.8 billion increased $1.2 billion from June 30, 2014 and by $1.4 billion from a year ago, reflecting new loan originations and the purchase of Direct Capital, partially offset by asset sales. Operating lease equipment increased $0.4 billion from June 30, 2014 and $2.6 billion from a year ago to $15.2 billion, reflecting the Nacco acquisition and other equipment purchases. Cash and securities of $7.7 billion were up $0.4 billion from June 30, 2014 and down $0.7 billion from September 30, 2013.
Credit metrics remained at or near cycle lows. Non-accrual loans were $201 million, or 1.02% of finance receivables, at September 30, 2014, compared to $190 million (1.02%) at June 30, 2014 and $258 million (1.41%) at September 30, 2013. The increase from the prior quarter was primarily in international portfolios, partially offset by a reduction in the aerospace portfolio. Net charge-offs were $19 million, or 0.39% of average finance receivables (AFR), versus $27 million (0.59%) in the year-ago quarter and $21 million (0.45%) in the prior quarter.
2014 PRIORITIES
Our priorities continue to be focused on achieving our profitability targets by growing earning assets and managing expenses, growing CIT Bank assets and deposits, and returning capital to our shareholders. Enhancing internal control functions and maintaining constructive relationships with our regulators also remain a priority.
We plan to grow earning assets, organically and through acquisitions, by focusing on existing products and markets as well as newer initiatives.
n | | Financing and leasing assets (“FLA”) totaled $36.1 billion, up from $34.7 billion at June 30, 2014 and $32.1 billion at September 30, 2013. TIF and NACF comprise the vast majority of the assets and totaled $35.5 billion, up $1.5 billion sequentially, driven by solid origination volumes in both segments and $0.54 billion of financing and leasing assets from an acquisition in NACF, and increased $5.2 billion from a year ago, which also included an acquisition in TIF in the 2014 first quarter. NSP makes up the remaining balance of FLA and is expected to decline as portfolios are sold or otherwise liquidated. |
| 2. | | Achieve Profit Targets |
The 2014 third quarter and nine months pre-tax return on AEA were 1.4% and 1.8%, respectively. While the consolidated CIT returns were below our near-term outlook of approximately 2.00%, the returns for both the quarter and year-to-date excluding NSP were in excess of the target.
n | | NFM for the third quarter, 4.26%, remained at the high end of our near term outlook range of 3.75%-4.25%, benefiting from lower funding costs, which was offset by portfolio re-pricing. |
n | | Excluding the impairments on the non-strategic portfolios, Other Income for the quarter was at the low end of our near-term outlook range of 0.75%-1.00%, consistent with the current middle market deal environment. |
n | | Operating expenses were $235 million, including restructuring charges of $9 million. Excluding restructuring charges, operating expenses were 2.63% of AEA, above the near-term outlook range of 2.00%-2.50, but improved by about 30 basis points from a year ago, reflecting progress on several initiatives. |
(3) | | Operating expenses excluding restructuring costs is a non-GAAP measure. See “Non-GAAP Measurements” for reconciliation of non-GAAP to GAAP financial information. |
(4) | | Total assets from continuing operations is a non-GAAP measure. See “Non-GAAP Measurements” for reconciliation of non-GAAP to GAAP financial information. |
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n | | We continue to make progress reducing NSP, and have exited all the sub-scale countries in Asia, and several in Latin America and Europe, as well as our Small Business Lending (“SBL”) portfolio. Our primary focus is now on exiting Brazil, Mexico and smaller portfolios in Europe. In October we entered into separate agreements to sell a TIF international loan portfolio (AHFS of $325 million), and certain NSP operations in Europe (AHFS of $100 million). In addition, we are in the advance stages of negotiating the sale of our NSP Mexico and Brazil portfolios. Upon completion of these exits, we expect to eliminate approximately $10 million from our quarterly expenses. |
| 3. | | Expand Bank Assets and Funding |
CIT Bank funds most of our U.S. lending and leasing volume and continues to expand on-line deposit offerings.
n | | Total assets were $20.3 billion at September 30, 2014, up from $18.3 billion at June 30, 2014, reflecting new business volume and the August 1, 2014 acquisition of Direct Capital, a provider of financing to small and mid-sized businesses. CIT Bank funded $2.2 billion of new business volume in the current quarter, up 34% from the year-ago quarter and up 8% sequentially. |
n | | Deposits at quarter-end were $14.4 billion, up from $13.9 billion at June 30, 2014. The weighted average rate on outstanding deposits was 1.57% at September 30, 2014. |
n | | On July 22, 2014, CIT announced that it entered into a definitive agreement and plan of merger with IMB Holdco LLC, the parent company of OneWest Bank N.A. (“OneWest Bank”), for $3.4 billion in cash and stock. At September 30, 2014, OneWest Bank had 73 branches in Southern California, with nearly $22 billion of assets and over $14 billion of deposits. |
| 4. | | Continue to Return Capital |
We continue to prudently deploy our capital, as well as return capital to our shareholders through share repurchases and dividends, which totaled approximately $135 million in the third quarter, while maintaining strong capital ratios.
n | | During the third quarter, we repurchased over 2.2 million of our shares for an aggregate purchase price of $106 million, bringing the total repurchases for 2014 to over 14.5 million shares at an average price of $45.20, or an aggregate of approximately $658 million. |
n | | On July 22, 2014, CIT announced that its Board of Directors approved the repurchase of up to an additional $500 million of common stock through June 30, 2015. Approximately $450 million of the authorized repurchase capacity remains at September 30, 2014. |
n | | On October 14, 2014, the Board approved CIT’s quarterly cash dividend of $0.15 per share, payable on November 26, 2014 to shareholders of record on November 12, 2014. |
The following tables present management’s view of consolidated NFR and NFM:
Net Finance Revenue(1) and Net Finance Margin (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Interest income | | | | $ | 308.3 | | | $ | 309.8 | | | $ | 306.4 | | | $ | 920.3 | | | $ | 948.0 | |
| Rental income on operating leases | | | | | 535.0 | | | | 519.6 | | | | 472.9 | | | | 1,546.5 | | | | 1,433.6 | |
| Finance revenue | | | | | 843.3 | | | | 829.4 | | | | 779.3 | | | | 2,466.8 | | | | 2,381.6 | |
| Interest expense | | | | | (275.2 | ) | | | (262.2 | ) | | | (256.7 | ) | | | (809.3 | ) | | | (793.4 | ) |
| Depreciation on operating lease equipment | | | | | (156.4 | ) | | | (157.3 | ) | | | (134.2 | ) | | | (462.5 | ) | | | (401.1 | ) |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (49.0 | ) | | | (41.4 | ) | | | (147.1 | ) | | | (124.1 | ) |
| Net finance revenue | | | | $ | 365.2 | | | $ | 360.9 | | | $ | 347.0 | | | $ | 1,047.9 | | | $ | 1,063.0 | |
Average Earning Assets(1)(2) (“AEA”) | | | | $ | 34,295.3 | | | $ | 33,186.7 | | | $ | 30,418.2 | | | $ | 33,128.3 | | | $ | 29,931.2 | |
As a % of AEA: | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | | 3.60 | % | | | 3.74 | % | | | 4.03 | % | | | 3.70 | % | | | 4.22 | % |
| Rental income on operating leases | | | | | 6.24 | % | | | 6.26 | % | | | 6.22 | % | | | 6.23 | % | | | 6.39 | % |
| Finance revenue | | | | | 9.84 | % | | | 10.00 | % | | | 10.25 | % | | | 9.93 | % | | | 10.61 | % |
| Interest expense | | | | | (3.21 | )% | | | (3.16 | )% | | | (3.38 | )% | | | (3.26 | )% | | | (3.53 | )% |
| Depreciation on operating lease equipment | | | | | (1.82 | )% | | | (1.90 | )% | | | (1.77 | )% | | | (1.86 | )% | | | (1.79 | )% |
| Maintenance and other operating lease expenses | | | | | (0.55 | )% | | | (0.59 | )% | | | (0.54 | )% | | | (0.59 | )% | | | (0.55 | )% |
| Net finance margin | | | | | 4.26 | % | | | 4.35 | % | | | 4.56 | % | | | 4.22 | % | | | 4.74 | % |
(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. |
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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 on our operating lease equipment and interest and dividend income on cash, investments and reverse repo securities, reduced by funding costs, depreciation from our operating lease equipment, and maintenance and other operating lease expenses. Since our asset composition includes a high level of operating lease equipment (44% of AEA for the quarter ended September 30, 2014), NFM is a more appropriate metric for CIT than net interest margin (“NIM”) (a common metric used by other financial institutions), 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 operating lease revenue (rental income less depreciation and maintenance and other operating lease expenses).
NFR increased from the year-ago quarter and prior quarter, as higher earning assets offset compression on portfolio yields across many of our businesses. The prior quarter also included a net benefit of $7 million related to accelerated FSA discount and original issue discount (“OID”) related to certain secured debt restructuring transactions.
Adjusted NFR ($) and Net Finance Margin (NFM) (%)(dollars in millions)
| | | | Quarters Ended
| |
|---|
| | | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| |
|---|
| NFR / NFM | | | | $ | 365.2 | | | | 4.26 | % | | $ | 360.9 | | | | 4.35 | % | | $ | 347.0 | | | | 4.56 | % |
| Accelerated FSA net discount/(premium) on debt extinguishments and repurchases | | | | | – | | | | – | | | | 34.7 | | | | 0.42 | % | | | – | | | | – | |
Accelerated OID on debt extinguishments related
to the GSI facility | | | | | – | | | | – | | | | (42.0 | ) | | | (0.51 | )% | | | – | | | | – | |
| Adjusted NFR / NFM | | | | $ | 365.2 | | | | 4.26 | % | | $ | 353.6 | | | | 4.26 | % | | $ | 347.0 | | | | 4.56 | % |
| | | | | | | | Nine Months Ended September 30,
| |
|---|
| | | | | | | | 2014
| | 2013
| |
|---|
| NFR / NFM | | | | | | | | | | | | $ | 1,047.9 | | | | 4.22 | % | | $ | 1,063.0 | | | | 4.74 | % |
| Accelerated FSA net discount/(premium) on debt extinguishments and repurchases | | | | | | | | | | | | | 34.7 | | | | 0.14 | % | | | 24.8 | | | | 0.11 | % |
Accelerated OID on debt extinguishments related to
the GSI facility | | | | | | | | | | | | | (42.0 | ) | | | (0.17 | )% | | | – | | | | – | |
| Adjusted NFR / NFM | | | | | | | | | | | | $ | 1,040.6 | | | | 4.19 | % | | $ | 1,087.8 | | | | 4.85 | % |
The accelerated debt FSA accretion and accelerated OID on debt extinguishment related to the GSI facility (“accelerated OID accretion”), when discussed in combination, is referred to as “accelerated debt FSA and OID accretion”.
Adjusted NFM was flat sequentially, and declined from the year-ago quarter and nine-months ended September 30, 2013 as margin compression and sales offset lower debt costs:
n | | Finance revenue, though up in 2014 on increased earning assets, reflected portfolio repricing, decline in benefits from FSA and the sale of higher-yielding Dell Europe portfolio (within NSP), which benefited 2013 yields primarily from suspended depreciation on operating leases. |
n | | Continued benefit from lower debt cost. Weighted average coupon rate of outstanding deposits and long-term borrowings of 3.16% at September 30, 2014 was down from 3.37% at September 30, 2013, as the portion of our funding derived from deposits increased to 43% from 40% at September 30, 2013. |
n | | NFM reflects the mentioned impacts to finance revenue and lower debt costs, and had a diminished benefit from suspended depreciation on operating lease equipment held for sale, as depreciation is not recorded while this equipment is held for sale (detailed further below). |
Interest expense increased from the 2013 periods, primarily due to higher deposit balances, commensurate with asset growth. Sequentially, the increase also reflects higher debt balances associated with the Direct Capital acquisition, while the 2014 second quarter had a net benefit of $7 million of debt FSA and OID accretion. At September 30, 2014, the remaining FSA discount on long-term borrowings and deposits of approximately $7 million is not significant.
The weighted average coupon rate of outstanding deposits and long-term borrowings was 3.16% at September 30, 2014, down from 3.20% at June 30, 2014 and 3.37% at September 30, 2013, benefiting from a continued high proportion of deposit funding and an increase in proportion to secured debt. Deposits represented 43% of the total deposits and long-term borrowings at September 30, 2014, while unsecured debt was 37% and secured debt was 20%. These proportions will fluctuate in the future depending upon our capital markets activities.
The weighted average coupon rate of long-term borrowings at September 30, 2014 was 4.32%, down from 4.44% at June 30, 2014 and 4.57% at September 30, 2013. Long-term
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borrowings consist of unsecured and secured debt. The weighted average coupon rate of unsecured long-term borrowings at September 30, 2014 was 4.99%, unchanged from June 30, 2014 and down from 5.11% at September 30, 2013. The weighted average coupon rate of secured long-term borrowings at September 30, 2014 was 3.11%, down from 3.17% at June 30, 2014 and 3.35% at September 30, 2013.
Deposits have increased, both in dollars and proportion of total CIT funding. The weighted average rate of total CIT deposits was 1.64%, unchanged from June 30, 2014 and up from 1.54% at September 30, 2014. Deposits and long-term borrowings are also discussed inFunding and Liquidity. SeeSelect Data and 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
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Transportation & International Finance | | | | | | | | | | | | | | | | | | | | | | |
| AEA | | | | $ | 18,724.2 | | | $ | 18,066.2 | | | $ | 15,417.8 | | | $ | 17,985.7 | | | $ | 15,255.8 | |
| Gross yield | | | | | 12.18 | % | | | 12.34 | % | | | 12.49 | % | | | 12.33 | % | | | 12.60 | % |
| NFM | | | | | 4.82 | % | | | 4.91 | % | | | 4.87 | % | | | 4.81 | % | | | 4.92 | % |
| Adjusted NFM | | | | | 4.82 | % | | | 4.75 | % | | | 4.87 | % | | | 4.76 | % | | | 5.05 | % |
AEA | | | | | | | | | | | | | | | | | | | | | | |
| Aerospace | | | | $ | 10,728.8 | | | $ | 10,260.7 | | | $ | 9,146.4 | | | $ | 10,264.9 | | | $ | 9,292.0 | |
| Rail | | | | $ | 5,783.4 | | | $ | 5,578.0 | | | $ | 4,339.9 | | | $ | 5,503.5 | | | $ | 4,269.3 | |
| Maritime Finance | | | | $ | 702.9 | | | $ | 576.2 | | | $ | 350.0 | | | $ | 589.5 | | | $ | 276.0 | |
| International Finance | | | | $ | 1,509.1 | | | $ | 1,651.3 | | | $ | 1,581.5 | | | $ | 1,627.8 | | | $ | 1,418.5 | |
Gross yield | | | | | | | | | | | | | | | | | | | | | | |
| Aerospace | | | | | 11.81 | % | | | 12.18 | % | | | 12.25 | % | | | 12.16 | % | | | 12.29 | % |
| Rail | | | | | 14.59 | % | | | 14.44 | % | | | 14.77 | % | | | 14.52 | % | | | 14.70 | % |
| Maritime Finance | | | | | 5.00 | % | | | 5.58 | % | | | 5.97 | % | | | 5.11 | % | | | 7.02 | % |
| International Finance | | | | | 9.00 | % | | | 8.59 | % | | | 9.13 | % | | | 8.69 | % | | | 9.47 | % |
North American Commercial Finance | | | | | | | | | | | | | | | | | | | | | | |
| AEA | | | | $ | 14,953.4 | | | $ | 14,132.4 | | | $ | 13,156.0 | | | $ | 14,203.9 | | | $ | 12,746.4 | |
| Gross yield | | | | | 6.43 | % | | | 6.62 | % | | | 6.90 | % | | | 6.48 | % | | | 7.38 | % |
| NFM | | | | | 3.91 | % | | | 4.13 | % | | | 4.26 | % | | | 3.92 | % | | | 4.54 | % |
| Adjusted NFM | | | | | 3.91 | % | | | 4.13 | % | | | 4.26 | % | | | 3.92 | % | | | 4.63 | % |
AEA | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Finance | | | | $ | 1,727.3 | | | $ | 1,668.5 | | | $ | 1,291.3 | | | $ | 1,660.2 | | | $ | 1,031.0 | |
| Corporate Finance | | | | $ | 7,298.8 | | | $ | 7,220.8 | | | $ | 6,767.7 | | | $ | 7,165.3 | | | $ | 6,647.4 | |
| Equipment Finance | | | | $ | 4,907.9 | | | $ | 4,269.2 | | | $ | 4,141.7 | | | $ | 4,400.2 | | | $ | 4,041.6 | |
| Commercial Services | | | | $ | 1,019.4 | | | $ | 973.9 | | | $ | 955.3 | | | $ | 978.2 | | | $ | 1,026.4 | |
Gross yield | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Finance | | | | | 4.30 | % | | | 4.10 | % | | | 4.22 | % | | | 4.14 | % | | | 4.25 | % |
| Corporate Finance | | | | | 5.25 | % | | | 5.71 | % | | | 5.38 | % | | | 5.33 | % | | | 5.95 | % |
| Equipment Finance | | | | | 9.06 | % | | | 9.52 | % | | | 10.53 | % | | | 9.51 | % | | | 11.01 | % |
| Commercial Services | | | | | 5.92 | % | | | 4.99 | % | | | 5.50 | % | | | 5.27 | % | | | 5.50 | % |
Non-Strategic Portfolios | | | | | | | | | | | | | | | | | | | | | | |
| AEA | | | | $ | 617.7 | | | $ | 988.1 | | | $ | 1,844.4 | | | $ | 938.7 | | | $ | 1,929.0 | |
| Gross yield | | | | | 18.97 | % | | | 14.17 | % | | | 14.57 | % | | | 14.52 | % | | | 15.47 | % |
| NFM | | | | | 4.66 | % | | | 2.55 | % | | | 6.29 | % | | | 3.03 | % | | | 6.78 | % |
| Adjusted NFM | | | | | 4.66 | % | | | 2.55 | % | | | 6.29 | % | | | 3.03 | % | | | 6.84 | % |
Compared to the 2013 quarter and nine month periods, gross yields (interest income plus rental income on operating leases as a % of AEA) and NFM in TIF were down, reflecting lower rental rates. Quarterly comparisons also reflect lower loan prepayment benefits. NACF gross yields and NFM reflect continued pressures on certain units of the business. NSP contains run-off portfolios, which can cause volatility in the gross yield due to the low AEA. The NSP year-to-date gross yield is down, generally reflecting sales of higher yielding portfolios.
46 CIT GROUP INC
Table of Contents
The following table sets forth the details on net operating lease revenue(5). We changed the presentation of net operating lease revenue in the first quarter of 2014 and have revised the 2013 periods for the new presentation. A new line item reflects maintenance and other operating lease expenses associated with our operating lease equipment. Previously, maintenance costs reduced rental income, while other operating lease expenses were included with depreciation. Total net operating lease revenue did not change with the new presentation.
Net Operating Lease Revenue as a % of Average Operating Leases(dollars in millions)
| | | | Quarters Ended
| |
|---|
| | | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| |
|---|
| Rental income on operating leases | | | | $ | 535.0 | | | | 14.28 | % | | $ | 519.6 | | | | 14.33 | % | | $ | 472.9 | | | | 15.28 | % |
| Depreciation on operating lease equipment | | | | | (156.4 | ) | | | (4.17 | )% | | | (157.3 | ) | | | (4.34 | )% | | | (134.2 | ) | | | (4.33 | )% |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (1.24 | )% | | | (49.0 | ) | | | (1.35 | )% | | | (41.4 | ) | | | (1.34 | )% |
| Net operating lease revenue | | | | $ | 332.1 | | | | 8.87 | % | | $ | 313.3 | | | | 8.64 | % | | $ | 297.3 | | | | 9.61 | % |
| Average Operating Lease Equipment (“AOL”) | | | | $ | 14,984.6 | | | | | | | $ | 14,505.9 | | | | | | | $ | 12,383.9 | | | | | |
| | | | | | | | Nine Months Ended September 30,
| |
|---|
| | | | | | 2014
| | 2013
| |
|---|
| Rental income on operating leases | | | | | | | | | | | | $ | 1,546.5 | | | | 14.31 | % | | $ | 1,433.6 | | | | 15.47 | % |
| Depreciation on operating lease equipment | | | | | | | | | | | | | (462.5 | ) | | | (4.28 | )% | | | (401.1 | ) | | | (4.33 | )% |
| Maintenance and other operating lease expenses | | | | | | | | | | | | | (147.1 | ) | | | (1.36 | )% | | | (124.1 | ) | | | (1.34 | )% |
| Net operating lease revenue | | | | | | | | | | | | $ | 936.9 | | | | 8.67 | % | | $ | 908.4 | | | | 9.80 | % |
| Average Operating Lease Equipment (“AOL”) | | | | | | | | | | | | $ | 14,410.9 | | | | | | | $ | 12,357.8 | | | | | |
Net operating lease revenue was primarily generated from the commercial aircraft and rail portfolios. Net operating lease revenue increased, as the benefit of increased assets from the growing aerospace and rail portfolios offset lower rental rates, and also when compared to the 2013 periods, higher depreciation expense and increased maintenance and other operating lease expenses. Rental income increased from the year-ago periods as did depreciation expense, reflecting the growing portfolio. Depreciation expense also includes amounts related to equipment impairments, of which the 2014 second quarter included a modest charge. The increase from 2013 in maintenance and other operating lease expenses reflects the growing rail portfolio. On average, lease renewal rates in the rail portfolio were re-pricing slightly higher, while the commercial aircraft portfolio has been re-pricing slightly lower, putting pressure on overall rental revenue, compared to the 2013 periods. These factors are also reflected in the net operating lease revenue as a percent of AOL. The sequential trends reflects higher AOL and slightly lower maintenance and operating lease expenses. The 2014 first quarter European rail acquisition also impacted net yields, as the acquired portfolio’s net yields were lower.
Utilization and asset levels remained strong in 2014. All but two of our commercial aircraft were leased or under a commitment. Including commitments, rail fleet utilization was 99% at September 30, 2014, up from the prior quarter and September 30, 2013.
All new aircraft deliveries scheduled for the next twelve months are placed. We expect delivery of approximately 4,800 railcars from our order book over the next twelve months, essentially all of which are placed.
Depreciation on operating lease equipment increased from the prior-year quarter, reflecting higher asset balances and lower suspended depreciation and was down slightly from the prior quarter, as lower impairments and suspended depreciation offset the impact of asset growth. The declines in depreciation as a % of AOL mostly reflects the continued growth of the aero and rail portfolios, which have longer-lived assets. Net operating lease revenue includes rental income on operating lease equipment classified as AHFS, but there is no related depreciation expense. Once a long-lived asset is classified as AHFS, depreciation expense is no longer recognized, but the asset is evaluated periodically for impairment with any such charge recorded in other income. (See“Non-interest Income — Impairment on assets held for sale” for discussion of impairment charges). As such, the year-ago quarter benefited from suspended depreciation, primarily in NSP as a result of certain operating lease equipment being recorded as AHFS. The amount of suspended depreciation on operating lease equipment in AHFS totaled $6 million for the third quarter of 2014, $19 million for the year-ago quarter and $4 million for the prior quarter. Year-to-date, the amount of suspended depreciation totaled $13 million, down from $69 million in 2013. The decreases from 2013 primarily reflect the sale of the Dell Europe portfolio in the second half of 2013.
Operating lease equipment in AHFS totaled $171 million at September 30, 2014, $223 million at June 30, 2014, and $237 million at September 30, 2013.
See“Non-interest Income — Impairment on assets held for sale”, “Expenses — Depreciation on operating lease equipment” and“Concentrations — Operating Leases” for additional information.
(5) | | Net operating lease revenue and average operating lease equipment are non-GAAP measures; see reconciliation of non-GAAP to GAAP financial information. |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 47
Table of Contents
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.
Net charge-offs were $19 million, or 0.39% of average finance receivables (AFR), versus $27 million (0.59%) in the year-ago quarter and $21 million (0.45%) in the prior quarter. Net charge-offs included $11 million, $12 million and $12 million related to the transfer of receivables to assets held for sale for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively. For the nine months ended September 30, 2014 net charge-offs were $76 million (0.53%), versus $66 million (0.48%) in the comparable year ago period. Year to date, net charge-offs include $36 million in 2014 and $35 million in 2013 related to the transfer of receivables to assets held for sale. Recoveries have continued to decline, totaling $6 million in the quarter as compared to $10 million a year ago and $8 million in the prior quarter. Recoveries for the nine month period ended September 30, 2014 of $23 million are down substantially from $43 million in the comparable year ago period, driven by the lower levels of charge-offs in recent periods.
Non-accrual loans totaled $201 million (1.02% of Finance receivables) at September 30 2014, down from $258 million (1.41%) at September 30, 2013 and $241 million (1.29%) at December 31, 2013. The decrease reflects the sale of the Small Business Lending unit, repayments, charge-offs, and returns to accrual status where appropriate.
The provision for credit losses was $38 million for the quarter, up from $16 million in the year-ago quarter and $10 million in the prior quarter, reflecting higher non-specific reserves, primarily due to asset growth, and higher reserves on a small number of accounts.
The allowance for loan losses as a percentage of total loans was 1.81% at September 30, 2014, compared to 1.83% at June 30, 2014 and 1.91% at December 31, 2013. The allowance for loan losses is intended to provide for losses inherent in the portfolio based on estimates of the ultimate outcome of collection efforts, realization of collateral values, and other pertinent factors, such as estimation risk related to performance in prospective periods. We may make adjustments to the allowance depending on general economic conditions and specific industry weakness or trends in our portfolio credit metrics, including non-accrual loans, charge-off levels, and realization rates on collateral.
Our allowance for loan losses includes: (1) specific reserves for impaired loans, (2) non-specific reserves for losses inherent in non-impaired loans utilizing the Company’s internal probability of default/loss given default ratings system, generally with a two year loss emergence period assumption, to determine estimated loss levels, and (3) a qualitative adjustment to the non-specific reserve for economic risks, industry and geographic concentrations, and other factors not adequately captured in our methodology. Our policy is to recognize losses through charge-offs when there is a high likelihood of loss after considering the borrower’s financial condition, underlying collateral and guarantees, and the finalization of collection activities.
For all presentation periods, qualitative adjustments largely related to instances where management believed that the Company’s current risk ratings in selected portfolios did not yet fully reflect the corresponding inherent risk. The qualitative adjustments did not exceed 10% of the total allowance for any of such periods and are recorded by class and included in the allowance for loan losses.
48 CIT GROUP INC
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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
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Allowance – beginning of period | | | | $ | 341.0 | | | $ | 352.6 | | | $ | 367.2 | | | $ | 356.1 | | | $ | 379.3 | |
Provision for credit losses(1) | | | | | 38.2 | | | | 10.2 | | | | 16.4 | | | | 85.1 | | | | 50.5 | |
Other(1) | | | | | (2.3 | ) | | | (0.6 | ) | | | (0.4 | ) | | | (7.5 | ) | | | (8.0 | ) |
| Net additions | | | | | 35.9 | | | | 9.6 | | | | 16.0 | | | | 77.6 | | | | 42.5 | |
Gross charge-offs(2) | | | | | (25.2 | ) | | | (29.1 | ) | | | (36.6 | ) | | | (98.7 | ) | | | (109.0 | ) |
| Recoveries | | | | | 6.0 | | | | 7.9 | | | | 9.5 | | | | 22.7 | | | | 43.3 | |
| Net Charge-offs | | | | | (19.2 | ) | | | (21.2 | ) | | | (27.1 | ) | | | (76.0 | ) | | | (65.7 | ) |
Allowance – end of period | | | | $ | 357.7 | | | $ | 341.0 | | | $ | 356.1 | | | $ | 357.7 | | | $ | 356.1 | |
Loans | | | | | | | | | | | | | | | | | | | | | | |
| Transportation & International Finance | | | | $ | 3,687.7 | | | $ | 3,228.3 | | | $ | 3,239.5 | | | | | | | | | |
| North American Commercial Finance | | | | | 16,098.0 | | | | 15,376.1 | | | | 14,454.2 | | | | | | | | | |
| Non-Strategic Portfolios | | | | | 0.1 | | | | – | | | | 677.3 | | | | | | | | | |
| Total loans | | | | $ | 19,785.8 | | | $ | 18,604.4 | | | $ | 18,371.0 | | | | | | | | | |
Allowance | | | | | | | | | | | | | | | | | | | | | | |
| Transportation & International Finance | | | | $ | 46.5 | | | $ | 39.7 | | | $ | 43.4 | | | | | | | | | |
| North American Commercial Finance | | | | | 311.2 | | | | 301.3 | | | | 303.5 | | | | | | | | | |
| Non-Strategic Portfolios | | | | | – | | | | – | | | | 9.2 | | | | | | | | | |
| Total allowance | | | | $ | 357.7 | | | $ | 341.0 | | | $ | 356.1 | | | | | | | | | |
Provision for Credit Losses(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Specific allowance – impaired loans | | | | $ | 3.3 | | | $ | (3.5 | ) | | $ | (9.0 | ) | | $ | (4.9 | ) | | $ | (11.3 | ) |
| Non-specific allowance | | | | | 15.7 | | | | (7.5 | ) | | | (1.7 | ) | | | 14.0 | | | | (3.9 | ) |
| Net charge-offs | | | | | 19.2 | | | | 21.2 | | | | 27.1 | | | | 76.0 | | | | 65.7 | |
| Total | | | | $ | 38.2 | | | $ | 10.2 | | | $ | 16.4 | | | $ | 85.1 | | | $ | 50.5 | |
Allowance for Loan Losses(dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Specific allowance – impaired loans | | | | $ | 25.5 | | | $ | 30.4 | |
| Non-specific allowance | | | | | 332.2 | | | | 325.7 | |
| Total | | | | $ | 357.7 | | | $ | 356.1 | |
| Allowance for loan losses as a percentage of total loans | | | | | 1.81 | % | | | 1.91 | % |
(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 related other liabilities totaled $33 million, $28 million and $29 million at September 30, 2014, December 31, 2013 and September 30, 2013, respectively. |
(2) | | Gross charge-offs included $11 million, $12 million and $12 million related to the transfer of receivables to assets held for sale for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively. Year to date, gross charge-offs include $36 million in 2014 and $35 million in 2013 related to the transfer of receivables to assets held for sale. |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 49
Table of Contents
The allowance rate reflects the relatively benign credit environment. The allowance in NACF increased, reflecting portfolio growth and higher reserves on certain accounts. NSP currently carries no reserves, as the portfolio almost entirely consists of AHFS. The decline in specific allowance is consistent with reduced non-accrual inflows and balances.
Segment Finance Receivables and Allowance for Loan Losses (dollars in millions)
| | | | Finance
Receivables
| | Allowance
for Loan
Losses
| | Net
Carrying
Value
|
|---|
September 30, 2014 | | | | | | | | | | | | | | |
| Transportation & International Finance | | | | $ | 3,687.7 | | | $ | (46.5 | ) | | $ | 3,641.2 | |
| North American Commercial Finance | | | | | 16,098.0 | | | | (311.2 | ) | | | 15,786.8 | |
| Non-Strategic Portfolios | | | | | 0.1 | | | | – | | | | 0.1 | |
| Total | | | | $ | 19,785.8 | | | $ | (357.7 | ) | | $ | 19,428.1 | |
December 31, 2013 | | | | | | | | | | | | | | |
| Transportation & International Finance | | | | $ | 3,494.4 | | | $ | (46.7 | ) | | $ | 3,447.7 | |
| North American Commercial Finance | | | | | 14,693.1 | | | | (303.8 | ) | | | 14,389.3 | |
| Non-Strategic Portfolios | | | | | 441.7 | | | | (5.6 | ) | | | 436.1 | |
| Total | | | | $ | 18,629.2 | | | $ | (356.1 | ) | | $ | 18,273.1 | |
50 CIT GROUP INC
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The following table presents charge-offs, by class. SeeResults by Business Segment for additional information.
Charge-offs as a Percentage of Average Finance Receivables by Class (dollars in millions)
| | | Quarters Ended
| | Nine Months Ended September 30,
|
| | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| | 2014
| | 2013
|
| Gross Charge-offs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transportation Finance | | $ | 0.7 | | | | 0.12 | % | | $ | – | | | | – | | | $ | – | | | | – | | | $ | 0.7 | | | | 0.04 | % | | $ | – | | | | – | |
| International Finance | | | 3.8 | | | | 1.39 | % | | | 15.9 | | | | 4.23 | % | | | 7.5 | | | | 1.90 | % | | | 34.0 | | | | 3.14 | % | | | 13.0 | | | | 1.23 | % |
Transportation &
International Finance(1) | | | 4.5 | | | | 0.52 | % | | | 15.9 | | | | 1.79 | % | | | 7.5 | | | | 0.93 | % | | | 34.7 | | | | 1.31 | % | | | 13.0 | | | | 0.58 | % |
| Corporate Finance | | | 12.0 | | | | 0.66 | % | | | 4.0 | | | | 0.22 | % | | | 8.3 | | | | 0.49 | % | | | 26.4 | | | | 0.50 | % | | | 21.0 | | | | 0.42 | % |
| Equipment Finance | | | 8.0 | | | | 0.69 | % | | | 8.3 | | | | 0.83 | % | | | 7.4 | | | | 0.75 | % | | | 25.5 | | | | 0.83 | % | | | 24.7 | | | | 0.85 | % |
| Commercial Services | | | 0.7 | | | | 0.11 | % | | | 0.9 | | | | 0.15 | % | | | 0.7 | | | | 0.13 | % | | | 4.6 | | | | 0.26 | % | | | 2.2 | | | | 0.13 | % |
| North American Commercial Finance(2) | | | 20.7 | | | | 0.52 | % | | | 13.2 | | | | 0.35 | % | | | 16.4 | | | | 0.46 | % | | | 56.5 | | | | 0.50 | % | | | 47.9 | | | | 0.46 | % |
| Non-Strategic Portfolios(3) | | | – | | | | – | | | | – | | | | – | | | | 12.7 | | | | 5.53 | % | | | 7.5 | | | | 5.04 | % | | | 48.1 | | | | 4.96 | % |
| Total | | $ | 25.2 | | | | 0.52 | % | | $ | 29.1 | | | | 0.62 | % | | $ | 36.6 | | | | 0.80 | % | | $ | 98.7 | | | | 0.69 | % | | $ | 109.0 | | | | 0.80 | % |
| Recoveries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transportation Finance | | $ | – | | | | – | | | $ | 0.2 | | | | 0.05 | % | | $ | 1.0 | | | | 0.25 | % | | $ | 0.2 | | | | 0.01 | % | | $ | 1.1 | | | | 0.09 | % |
| International Finance | | | 0.6 | | | | 0.25 | % | | | 2.6 | | | | 0.69 | % | | | 1.5 | | | | 0.37 | % | | | 4.5 | | | | 0.42 | % | | | 6.7 | | | | 0.64 | % |
| Transportation & International Finance | | | 0.6 | | | | 0.08 | % | | | 2.8 | | | | 0.31 | % | | | 2.5 | | | | 0.30 | % | | | 4.7 | | | | 0.18 | % | | | 7.8 | | | | 0.35 | % |
| Corporate Finance | | | – | | | | – | | | | 0.4 | | | | 0.02 | % | | | 0.1 | | | | – | | | | 0.5 | | | | 0.02 | % | | | 1.6 | | | | 0.03 | % |
| Equipment Finance | | | 4.4 | | | | 0.38 | % | | | 3.5 | | | | 0.36 | % | | | 4.2 | | | | 0.42 | % | | | 13.1 | | | | 0.43 | % | | | 20.3 | | | | 0.70 | % |
| Commercial Services | | | 0.3 | | | | 0.04 | % | | | 0.5 | | | | 0.07 | % | | | 1.4 | | | | 0.25 | % | | | 2.1 | | | | 0.11 | % | | | 5.2 | | | | 0.30 | % |
| North American Commercial Finance | | | 4.7 | | | | 0.12 | % | | | 4.4 | | | | 0.12 | % | | | 5.7 | | | | 0.16 | % | | | 15.7 | | | | 0.14 | % | | | 27.1 | | | | 0.26 | % |
| Non-Strategic Portfolios | | | 0.7 | | | | NM | | | | 0.7 | | | | 3.16 | % | | | 1.3 | | | | 0.58 | % | | | 2.3 | | | | 1.48 | % | | | 8.4 | | | | 0.86 | % |
| Total | | $ | 6.0 | | | | 0.13 | % | | $ | 7.9 | | | | 0.17 | % | | $ | 9.5 | | | | 0.21 | % | | $ | 22.7 | | | | 0.16 | % | | $ | 43.3 | | | | 0.32 | % |
| Net Charge-offs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transportation Finance | | $ | 0.7 | | | | 0.12 | % | | $ | (0.2 | ) | | | (0.05 | )% | | $ | (1.0 | ) | | | (0.25 | )% | | $ | 0.5 | | | | 0.03 | % | | $ | (1.1 | ) | | | (0.09 | )% |
| International Finance | | | 3.2 | | | | 1.14 | % | | | 13.3 | | | | 3.54 | % | | | 6.0 | | | | 1.53 | % | | | 29.5 | | | | 2.72 | % | | | 6.3 | | | | 0.59 | % |
| Transportation & International Finance(1) | | | 3.9 | | | | 0.44 | % | | | 13.1 | | | | 1.48 | % | | | 5.0 | | | | 0.63 | % | | | 30.0 | | | | 1.13 | % | | | 5.2 | | | | 0.23 | % |
| Corporate Finance | | | 12.0 | | | | 0.66 | % | | | 3.6 | | | | 0.20 | % | | | 8.2 | | | | 0.49 | % | | | 25.9 | | | | 0.48 | % | | | 19.4 | | | | 0.39 | % |
| Equipment Finance | | | 3.6 | | | | 0.31 | % | | | 4.8 | | | | 0.47 | % | | | 3.2 | | | | 0.33 | % | | | 12.4 | | | | 0.40 | % | | | 4.4 | | | | 0.15 | % |
| Commercial Services | | | 0.4 | | | | 0.07 | % | | | 0.4 | | | | 0.08 | % | | | (0.7 | ) | | | (0.12 | )% | | | 2.5 | | | | 0.15 | % | | | (3.0 | ) | | | (0.17 | )% |
| North American Commercial Finance(2) | | | 16.0 | | | | 0.40 | % | | | 8.8 | | | | 0.23 | % | | | 10.7 | | | | 0.30 | % | | | 40.8 | | | | 0.36 | % | | | 20.8 | | | | 0.20 | % |
| Non-Strategic Portfolios(3) | | | (0.7 | ) | | | NM | | | | (0.7 | ) | | | (3.16 | )% | | | 11.4 | | | | 4.95 | % | | | 5.2 | | | | 3.56 | % | | | 39.7 | | | | 4.10 | % |
| Total | | $ | 19.2 | | | | 0.39 | % | | $ | 21.2 | | | | 0.45 | % | | $ | 27.1 | | | | 0.59 | % | | $ | 76.0 | | | | 0.53 | % | | $ | 65.7 | | | | 0.48 | % |
(1) | | TIF charge-offs for the quarter ended June 30 and nine months ended September 30, 2014, included approximately $9 million and $12 million, respectively, related to the transfer of receivables to assets held for sale (none for the quarter ended September 30, 2014). The prior-year quarter and nine months ended September 30, 2013 included $1 million related to the transfer of receivables to assets held for sale. |
(2) | | NACF charge-offs for the quarters ended September 30 and June 30, 2014, included approximately $11 million and $3 million, respectively, ($17 million year to date) related to the transfer of receivables to assets held for sale. The respective amounts for the quarter and nine months ended September 30, 2013 were $3 million and $5 million. |
(3) | | NSP charge-offs for the nine months ended September 30, 2014, included $7 million related to the transfer of receivables to assets held for sale (none for the quarters ended June 30 and September 30, 2014). Charge-offs for the quarter and nine months ended September 30, 2013 were $8 million and $29 million related to the transfer of receivables to assets held for sale. |
NM — Not meaningful as the AFR for this segment is insignificant.
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 51
Table of Contents
Charge-offs remain at relatively low levels absent the amount related to assets transferred to AHFS. Recoveries are down in amount from prior periods and are expected to continue to decline as the low level of more recent 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.
The tables below present information on non-performing loans, which includes non-performing loans related to AHFS for each period:
Non-accrual and Accruing Past Due Loans (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
Non-accrual loans | | | | | | | | | | |
| U.S. | | | | $ | 117.1 | | | $ | 176.3 | |
| Foreign | | | | | 84.0 | | | | 64.4 | |
| Non-accrual loans | | | | $ | 201.1 | | | $ | 240.7 | |
Troubled Debt Restructurings | | | | | | | | | | |
| U.S. | | | | $ | 146.4 | | | $ | 218.0 | |
| Foreign | | | | | 4.5 | | | | 2.9 | |
| Restructured loans | | | | $ | 150.9 | | | $ | 220.9 | |
Accruing loans past due 90 days or more | | | | | | | | | | |
| Total accruing loans past due 90 days or more | | | | $ | 13.0 | | | $ | 9.9 | |
Non-accrual Loans as a Percentage of Finance Receivables by Class (dollars in millions)
| | | | | | September 30, 2014
| | December 31, 2013
| |
|---|
| Transportation Finance | | | | | | | | | | | | $ | 0.1 | | | | – | | | $ | 14.3 | | | | 0.81 | % |
| International Finance | | | | | | | | | | | | | 41.7 | | | | 3.92 | % | | | 21.0 | | | | 1.22 | % |
Transportation & International Finance | | | | | | | | | | | | | 41.8 | | | | 1.13 | % | | | 35.3 | | | | 1.01 | % |
| Corporate Finance | | | | | | | | | | | | | 52.9 | | | | 0.74 | % | | | 83.8 | | | | 1.23 | % |
| Equipment Finance | | | | | | | | | | | | | 73.4 | | | | 1.56 | % | | | 59.4 | | | | 1.47 | % |
| Commercial Services | | | | | | | | | | | | | 7.8 | | | | 0.31 | % | | | 4.2 | | | | 0.19 | % |
North American Commercial Finance | | | | | | | | | | | | | 134.1 | | | | 0.83 | % | | | 147.4 | | | | 1.00 | % |
Non-Strategic Portfolios | | | | | | | | | | | | | 25.2 | | | | (1 | ) | | | 58.0 | | | | 13.14 | % |
| Total | | | | | | | | | | | | $ | 201.1 | | | | 1.02 | % | | $ | 240.7 | | | | 1.29 | % |
(1) | | Non-accrual loans include loans held for sale. The September 2014 NSP amount reflected non-accrual loans held for sale; there were no portfolio loans, therefore no % is displayed. |
Non-accrual loans declined from year-end, both in amount and as a percentage of finance receivables. The improvements reflect the sale of the Small Business Lending unit in NSP, as well as low levels of new non-accruals.
Approximately 53% of our non-accrual accounts were paying currently at September 30, 2014, and our impaired loan carrying value (including specific reserves and charge-offs) to estimated outstanding contractual balances approximated 87%. 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 1.27% of finance receivables compared to 1.75% at June 30, 2014, primarily due to an improvement in non-credit (administrative) delinquencies in the Equipment Finance portfolio.
Foregone Interest on Non-accrual Loans and Troubled Debt Restructurings (dollars in millions)
| | | | Nine Months Ended September 30, 2014
| | Nine Months Ended September 30, 2013
| |
|---|
| | | | U.S.
| | Foreign
| | Total
| | U.S.
| | Foreign
| | Total
|
|---|
| Interest revenue that would have been earned at original terms | | | | $ | 26.9 | | | $ | 10.6 | | | $ | 37.5 | | | $ | 41.9 | | | $ | 9.3 | | | $ | 51.2 | |
| Less: Interest recorded | | | | | (9.4 | ) | | | (3.1 | ) | | | (12.5 | ) | | | (14.2 | ) | | | (2.5 | ) | | | (16.7 | ) |
| Foregone interest revenue | | | | $ | 17.5 | | | $ | 7.5 | | | $ | 25.0 | | | $ | 27.7 | | | $ | 6.8 | | | $ | 34.5 | |
52 CIT GROUP INC
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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 as of September 30, 2014 and December 31, 2013 of accounts that have been modified.
Troubled Debt Restructurings and Modifications (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
|
|---|
| | | | | | | %
Compliant
| |
| | %
Compliant
|
|---|
| Troubled Debt Restructurings(1) | | | | | | | | | | | | | |
| Deferral of principal and/or interest | | | $ | 138.6 | | 100 | % | | $ | 194.6 | | 99 | % |
| Debt forgiveness | | | �� | – | | – | | | 2.4 | | 77 | % |
| Covenant relief and other | | | | 12.3 | | 85 | % | | 23.9 | | 74 | % |
| Total TDRs | | | $ | 150.9 | | 99 | % | | $ | 220.9 | | 96 | % |
| Percent non-accrual | | | | 18% | | | | | 33% | | |
| | | | | | | | | | | | |
| | | | | | | %
Compliant
| | | | %
Compliant
|
|---|
| Modifications(1) | | | | | | | | | | | |
| Extended maturity | | | $ | 0.1 | | 100 | % | | $ | 14.9 | | 37 | % |
| Covenant relief | | | | 94.4 | | 100 | % | | 50.6 | | 100 | % |
| Interest rate increase/additional collateral | | | | 10.7 | | 100 | % | | 21.8 | | 100 | % |
| Other | | | | 23.2 | | 100 | % | | 62.6 | | 87 | % |
| Total Modifications | | | $ | 128.4 | | | | | $ | 149.9 | | 91 | % |
| Percent non-accrual | | | | 17% | | | | | 23% | | |
(1) | | Table depicts the predominant element of each modification, which may contain several of the characteristics listed. |
SeeNote 3 — Loans for additional information regarding TDRs and other credit quality information.
Non-interest Income(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Rental income on operating leases | | | | $ | 535.0 | | | $ | 519.6 | | | $ | 472.9 | | | $ | 1,546.5 | | | $ | 1,433.6 | |
| Other Income: | | | | | | | | | | | | | | | | | | | | | | |
| Factoring commissions | | | | $ | 31.1 | | | $ | 28.3 | | | $ | 32.3 | | | $ | 88.0 | | | $ | 91.3 | |
| Fee revenues | | | | | 23.6 | | | | 21.8 | | | | 25.3 | | | | 67.0 | | | | 73.1 | |
| Gains on sales of leasing equipment | | | | | 22.0 | | | | 16.0 | | | | 30.7 | | | | 46.4 | | | | 86.8 | |
| Gains on loan and portfolio sales | | | | | 9.8 | | | | 4.5 | | | | 23.5 | | | | 17.8 | | | | 24.5 | |
| Gains on investments | | | | | 5.3 | | | | 5.6 | | | | 1.0 | | | | 14.4 | | | | 4.6 | |
| Recoveries of loans charged off pre-emergence and loans charged off prior to transfer to held for sale | | | | | 3.6 | | | | 5.0 | | | | 6.3 | | | | 13.8 | | | | 16.8 | |
| Counterparty receivable accretion | | | | | – | | | | 8.7 | | | | 0.9 | | | | 10.7 | | | | 5.7 | |
| Gains (losses) on derivatives and foreign currency exchange | | | | | (22.8 | ) | | | 8.3 | | | | 0.9 | | | | (21.6 | ) | | | 2.7 | |
| Impairment on assets held for sale | | | | | (54.1 | ) | | | (14.3 | ) | | | (44.6 | ) | | | (69.5 | ) | | | (89.3 | ) |
| Other revenues | | | | | 5.7 | | | | 9.8 | | | | 28.2 | | | | 22.0 | | | | 37.5 | |
| Total other income | | | | | 24.2 | | | | 93.7 | | | | 104.5 | | | | 189.0 | | | | 253.7 | |
| Total non-interest income | | | | $ | 559.2 | | | $ | 613.3 | | | $ | 577.4 | | | $ | 1,735.5 | | | $ | 1,687.3 | |
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Non-interest Income includes Rental Income on Operating Leases and Other Income.
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”. See also“Concentrations — Operating Leases” for additional information on operating leases.
Other income decreased from the prior quarter and the year-ago quarter reflecting the following:
Factoring commissions were down from the year-ago quarter and year-to-date periods as changes in underlying portfolio mix offset increased factoring volume. The 10% commission increase from the prior quarter was largely driven by an increase in volume. Factoring volume was $6.7 billion, up 2% from the year-ago quarter, and up 7% sequentially reflecting normal seasonality.
Fee revenues include capital markets-related fees, agent and advisory fees, fees on lines of credit and letters of credit, and servicing fees for the loans we sell but retain servicing. Fee revenues are mainly driven by our NACF segment. The improvement from the prior quarter reflects higher capital markets fees, partially offset by the decline in SBL fees. The NSP segment SBL portfolio was sold in June 2014 and there are no SBL servicing fee revenues in the current quarter. SBL fee revenues were approximately $2 million in the prior quarter and $3 million for the year-ago quarter.
Gains on sales of leasing equipment resulted from $212 million of equipment sales in the third quarter of 2014, $125 million in the prior quarter and $409 million in the year-ago quarter. Gains as a percentage of equipment sold decreased from last quarter and increased from the year-ago quarter and will vary based on the type and age of equipment sold. The carrying amount of equipment sold for the current quarter 2014 included $130 million in TIF (which generated 77% of the gains), $79 million in NACF and $3 million in NSP. The carrying amount of equipment sold for the prior quarter consisted of approximately $35 million in TIF (which generated 51% of the gains), $82 million in NACF and $8 million in NSP. The carrying amount of equipment sold for the year-ago quarter consisted of approximately $325 million in TIF (which generated 78% of the gains in the quarter), $69 million in NACF and $15 million in NSP. Gains for the nine months ended September 30, 2014 and 2013 resulted from the sales of $593 million and $1,052 million of equipment, respectively.
Gains on loan and portfolio sales in the third quarter of 2014 reflected $224 million of sales, with $157 million in NACF, $64 million in TIF and $3 million in NSP. The prior quarter sales totaled $439 million of sales, which included $300 million in NSP, primarily as a result of the SBL sale (gains on which were minimal), $93 million in NACF, and $46 million in TIF. The year-ago quarter sales were $293 million, which consisted of $191 million in NSP, $52 million in TIF and $50 million in NACF. NSP gains were $21 million in the year ago quarter reflecting the sale of the first tranche of the Dell Europe portfolio. Gains for the nine months ended September 30, 2014 and 2013 resulted from the sales of $811 million and $413 million, respectively.
Gains on investments reflected sales of equity investments, primarily in NACF.
Recoveries of loans charged off pre-emergence and loans charged off prior to transfer to held for sale reflects repayments or other workout resolutions on loans charged off prior to emergence from bankruptcy and loans charged off prior to classification as held for sale. These recoveries are recorded as other income, unlike recoveries on loans charged off after our restructuring, which are recorded as a reduction to the provision for loan losses.
Counterparty receivable accretion relates to the FSA accretion of a fair value discount on the receivable from Goldman Sachs International (“GSI”) related to the GSI Facilities, which are total return swaps (as discussed in Funding and Liquidity andNote 7 — Long-term Borrowings andNote 8 — Derivative Financial Instruments). The discount is accreted into income over the expected term of the payout of the associated receivables. The prior quarter includes acceleration of accretion of the remaining balance of FSA discount on the counterparty receivable, reflecting the restructuring of two aircraft securitization facilities. There was no remaining FSA discount on the counterparty receivable since June 30, 2014.
Gains (losses) on derivatives and foreign currency exchange in the current quarter include losses of $13 million related to the valuation of the derivatives within the GSI facility, as compared to gains of $11 million last quarter and no gain or loss in the year-ago quarter. Activity also includes the impact of transactional foreign currency movements, which resulted in losses of $85 million in the third quarter of 2014, as the US dollar strengthened against other currency exposures and gains of $41 million and $61 million in the prior and year-ago quarters, respectively. The impact of these transactional foreign currency movements were partially offset by gains of $80 million in the current quarter and losses of $44 million and $60 million in the prior and year-ago quarters, respectively, on derivatives that economically hedge foreign currency movements and other exposures. There was a $4 million loss from realization of cumulative translation adjustment (CTA) in the current quarter related to NSP exits, and no significant CTA gains or losses in the prior or year-ago quarters. While the realization of CTA has an impact on earnings, there is no impact to Equity. For additional information on the impact of derivatives on the income statement, please refer toNote 8 — Derivative Financial Instruments.
Impairment on assets held for sale in the current quarter includes $49 million for NSP international equipment finance portfolios identified as subscale platforms during our international rationalization and $5 million from TIF, which largely related to commercial aircraft operating lease equipment held for sale. The prior quarter reflects $4 million from NSP and $10 million from TIF, with $5 million related to commercial aircraft operating leases and the remainder related to the transfer of an international portfolio to AHFS. The prior year quarter included $37 million of NSP charges and $8 million related to commercial aerospace. The prior year quarter NSP charges
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included $18 million related to Dell Europe portfolio operating lease equipment, for which there was a similar offsetting benefit in depreciation expense, $3 million for NSP loans, and the remaining impairment charges related mostly to the international platform rationalization. When a long-lived asset is classified as held for sale, depreciation expense is suspended and the asset is evaluated periodically for impairment, with any such charge recorded in other income. (SeeExpenses for related discussion ofDepreciation on operating lease equipment.)
Other revenues include items that are more episodic in nature, such as proceeds received in excess of carrying value on non-accrual accounts held for sale, which were repaid or had another workout resolution, and insurance proceeds in excess of carrying value on damaged leased equipment, and also includes income from joint ventures. The prior year quarter included a $13 million gain on the sale of a workout related claim in TIF plus approximately $6 million of revenues related to the Dell Europe portfolio.
Other Expenses(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Depreciation on operating lease equipment | | | | $ | (156.4 | ) | | $ | (157.3 | ) | | $ | (134.2 | ) | | $ | (462.5 | ) | | $ | (401.1 | ) |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (49.0 | ) | | | (41.4 | ) | | | (147.1 | ) | | | (124.1 | ) |
| Operating expenses: |
| Compensation and benefits | | | | $ | (130.3 | ) | | $ | (125.7 | ) | | $ | (133.0 | ) | | $ | (394.9 | ) �� | | $ | (405.6 | ) |
| Technology | | | | | (19.9 | ) | | | (20.8 | ) | | | (22.3 | ) | | | (61.8 | ) | | | (62.2 | ) |
| Professional fees | | | | | (22.0 | ) | | | (16.9 | ) | | | (19.5 | ) | | | (56.9 | ) | | | (50.0 | ) |
| Net occupancy expense | | | | | (9.1 | ) | | | (8.5 | ) | | | (9.0 | ) | | | (26.5 | ) | | | (27.0 | ) |
| Provision for severance and facilities exiting activities | | | | | (9.2 | ) | | | (5.6 | ) | | | (3.2 | ) | | | (24.7 | ) | | | (18.4 | ) |
| Advertising and marketing | | | | | (7.5 | ) | | | (8.3 | ) | | | (3.7 | ) | | | (23.7 | ) | | | (17.7 | ) |
| Other expenses | | | | | (36.5 | ) | | | (39.2 | ) | | | (38.1 | ) | | | (104.5 | ) | | | (104.9 | ) |
| Total operating expenses | | | | | (234.5 | ) | | | (225.0 | ) | | | (228.8 | ) | | | (693.0 | ) | | | (685.8 | ) |
| Loss on debt extinguishments | | | | | – | | | | (0.4 | ) | | | – | | | | (0.4 | ) | | | – | |
| Total other expenses | | | | $ | (437.4 | ) | | $ | (431.7 | ) | | $ | (404.4 | ) | | $ | (1,303.0 | ) | | $ | (1,211.0 | ) |
| Headcount | | | | | 3,330 | | | | 3,170 | | | | 3,380 | | | | | | | | | |
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. Prior to 2014 these maintenance expenses were included as a reduction to rental income on operating leases, while other operating lease expenses were recorded as an increase to depreciation expense on operating lease equipment. 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.
The increase in maintenance and other operating lease expenses from the prior year reflects the growing rail portfolio and aerospace remarketing expenses resulting from the elevated levels of aircraft re-leasing activity in 2014.
Operating expenses increased from the prior quarters, reflecting integration costs and additional employees related to the Direct Capital acquisition, and in addition from the year-ago quarter on increased provision for severance and facilities exiting activities. Operating expenses include Bank deposit-raising costs, which totaled $14 million in the current and prior quarter of 2014, compared to $8 million for the year-ago quarter. These 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 $42 million for 2014 and $25 million in 2013. Operating expenses reflect the following changes:
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 55
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n | | Compensation and benefits increased sequentially primarily due to increased costs related to the Direct Capital acquisition and decreased from the 2013 periods as we made progress on various expense initiatives. Headcount at September 30, 2014 was up from the prior quarter due to the addition of approximately 250 Direct Capital employees. |
n | | Professional fees include legal and other professional fees such as tax, audit, and consulting services and increased from prior periods reflecting costs associated with the acquisitions in the current quarter and in the first quarter of 2014. |
n | | Provision for severance and facilities exiting activities reflects employee termination charges and other costs associated with various organization efficiency initiatives. |
n | | Advertising and marketing expenses include CIT Bank advertising and marketing costs associated with raising deposits, which totaled $5 million in the current and prior quarter and $3 million in the prior year quarter. Year-to-date, CIT Bank advertising and marketing costs totaled $17 million in 2014 and $12 million in 2013. |
n | | Other expenses include items such as travel and entertainment, insurance, FDIC costs, office equipment and supply costs and taxes (other than income taxes). |
We continue to make progress reducing NSP, and have exited all the sub-scale countries in Asia, and several in Latin America and Europe, as well as our SBL portfolio. Our primary focus is now on exiting Brazil, Mexico and smaller portfolios in Europe. In October we entered into separate agreements to sell a TIF international loan portfolio (AHFS of $325 million), and certain NSP operations in Europe (AHFS of $100 million). In addition, we are in the advance stages of negotiating the sale of our NSP Mexico and Brazil portfolios. Upon completion of these exits, we expect to eliminate approximately $10 million from our quarterly expenses.
Upon emergence from bankruptcy in 2009, CIT applied Fresh Start Accounting (FSA) in accordance with 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 September 30, 2014, related to operating lease equipment ($1.3 billion related to rail operating lease equipment and $0.8 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.
At September 30, 2014 the remaining FSA balance was $3 million on loans and $7 million on borrowings and deposits.
Income Tax Data (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Provision (benefit) for income taxes, before discrete items | | | | $ | (0.6 | ) | | $ | 15.4 | | | $ | 17.4 | | | $ | 25.0 | | | $ | 43.1 | |
| Discrete items | | | | | (400.6 | ) | | | 2.7 | | | | (4.2 | ) | | | (394.6 | ) | | | 12.2 | |
| Provision (benefit) for income taxes | | | | $ | (401.2 | ) | | $ | 18.1 | | | $ | 13.2 | | | $ | (369.6 | ) | | $ | 55.3 | |
| Effective tax rate | | | | | (344.1 | )% | | | 8.3 | % | | | 6.4 | % | | | (80.6 | ) % | | | 9.5 | % |
The Company’s income tax benefit in the third quarter and nine months ended September 30, 2014 was $401.2 million and $369.6 million, respectively. This compares to income tax provision of $13.2 million in the year-ago third quarter, $55.3 million in the year-ago nine months period, and $18.1 million last quarter. Included in the discrete tax benefit of $400.6 million and $394.6 million for the current quarter and year to date, respectively, was a $375 million reduction to the U.S. net federal deferred tax asset valuation allowance and approximately $30 million tax benefit related to an adjustment to the U.S. federal and state valuation allowances due to the acquisition of Direct Capital, offset partially by other miscellaneous net tax expense items. Included in the year-ago nine months period
56 CIT GROUP INC
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income tax provision was approximately $12 million of net discrete tax expense that primarily related to the establishment of valuation allowances against certain international net deferred tax assets due to our international platform rationalizations, partially offset by incremental tax benefits associated with favorable settlements of prior year international tax audits. Excluding discrete items, the income tax provisions primarily reflected income tax expense on the earnings of certain international operations and state income tax expense in the U.S.
The change in the effective tax rate each period is impacted by a number of factors, including the relative mix of domestic and foreign earnings, adjustments to the valuation allowances, and discrete items. The actual year-end 2014 effective tax rate may vary from the currently projected tax rate due to changes in these factors.
As noted in our 2013 Annual Report on Form 10-K and most recently in our June 30, 2014 Form 10-Q, the Company has not previously recognized any tax benefit on its prior year U.S. federal and U.S. state net operating losses (“NOLs”) and certain prior year foreign NOLs due to uncertainties related to its ability to realize its net deferred tax assets in the future. Due to these uncertainties, combined with the three years of cumulative losses by certain domestic and foreign reporting entities, the Company had concluded that it did not meet the criteria to recognize its net deferred tax assets, inclusive of the deferred tax assets related to the NOLs in these entities. Accordingly, the Company maintained a valuation allowance of $1.5 billion against its net deferred tax assets at December 31, 2013. Of the $1.5 billion valuation allowance, approximately $1.3 billion related to domestic reporting entities ($0.9 billion U.S. federal and $0.4 billion U.S. state) and $211 million related to foreign reporting entities.
The determination of whether or not to maintain the valuation allowances on certain reporting entities’ net deferred tax assets requires significant judgment and an analysis of all positive and negative evidence to determine whether it is more likely than not that these future benefits will be realized. ASC 740-10-30-18 states that “future realization of the tax benefit of an existing deductible temporary difference or NOL carry-forward ultimately depends on the existence of sufficient taxable income within the carryback and carry-forward periods available under the tax law.” As such, the Company has considered the following potential sources of taxable income in its assessment of a reporting entity’s ability to recognize its net deferred tax asset:
n | | Taxable income in carryback years, |
n | | Future reversals of existing taxable temporary differences (deferred tax liabilities), |
n | | Prudent and feasible tax planning strategies, and |
n | | Future taxable income forecasts. |
During the third quarter, management concluded that it is more likely than not that the Company will generate sufficient future taxable income within the applicable carry-forward periods to realize $375 million of its $930 million U.S. net federal deferred tax assets. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence. No discrete reduction to the valuation allowance related to the U.S. net state deferred tax assets or the capital loss carry-forwards was recorded in the quarter. In the U.S., the Company files a U.S. consolidated federal tax return, combined unitary state tax returns, and separate state tax returns in various jurisdictions. Thus, the tax reporting entity for U.S. federal tax purposes and U.S. state combined filing purposes is the “U.S. Affiliated Group” while the reporting entities for the separate state income tax returns are select individual affiliated group members. The positive evidence supporting this conclusion is as follows:
n | | The U.S. Affiliated Group transitioned into a 3-year (12 quarter) cumulative normalized income position this quarter, resulting in the Company’s ability to significantly increase the reliance on future taxable income forecasts. |
n | | Management’s long-term forecast of future U.S. taxable income supports partial utilization of the U.S. federal NOLs prior to their expiration. |
n | | The federal NOLs will not expire until 2027 through 2033. |
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.
For the U.S. state valuation allowance, the Company analyzed the state net operating loss carry-forwards for each reporting entity to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the existing valuation allowance was still required on the U.S. state deferred tax assets on net operating loss carry-forwards. Accordingly, no discrete adjustment was made to the U.S. state valuation allowance this quarter. The negative evidence supporting this conclusion is as follows:
n | | Separate State filing entities remained in a three year cumulative loss. |
n | | State NOLs expiration periods vary in time and availability. |
Additionally, during the current year, the Company expects there will be other reductions of the U.S. federal and state valuation allowances in the normal course as the Company recognizes U.S. taxable income. This taxable income will reduce the deferred tax asset on NOLs, and, when combined with the increase in net deferred tax liabilities, which are mainly related to accelerated tax depreciation on the operating lease portfolios, will result in a reduction of the valuation allowances. However, the Company expects it will retain approximately $700 million of valuation allowances, exclusive of any resolutions of uncertain tax positions mentioned inNote 11 – Income Taxes, against our U.S. federal and state NOLs and capital loss carry-forwards at the end of the year. The Company currently believes these NOLs will expire unused without the implementation of effective tax planning strategies or other events.
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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 Company’s 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 and the announced definitive agreement and plan of merger to acquire IMB Holdco, LLC, the parent company of OneWest Bank N.A. (“OneWest Bank”).
The impact of the OneWest transaction on the utilization of the Company’s NOLs cannot be considered in the Company’s forecast of future taxable income until the acquisition is consummated. The acquisition is expected to accelerate the utilization of the Company’s NOLs and therefore management anticipates it will reverse the remaining U.S. federal valuation allowance after consummation of the acquisition. 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 income tax provision before discrete items for the remainder of 2014 is expected to remain similar to prior quarters, in the range of $10-$15 million. Beginning in 2015, income tax expense will be reported on earnings at the global effective tax rate, currently expected to be approximately 30-35%. However, there will be a minimal impact on cash taxes paid until the related NOL carry-forward is fully utilized. In addition, while GAAP equity increased as a result of the valuation allowance reversal and recognition of the net deferred tax asset, there was minimal benefit on regulatory capital.
In the evaluation process related to the net deferred tax assets of the Company’s 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.
SeeNote 11 – Income Taxes for additional information, including deferred tax assets.
RESULTS BY BUSINESS SEGMENTAs discussed in our 2014 first quarter Form 10-Q, we announced organization changes that became effective January 1, 2014. Management changed our operating segments to (i) realign and simplify its businesses and organizational structure, (ii) streamline and consolidate certain business processes to achieve greater operating efficiencies, and (iii) leverage CIT’s operational capabilities for the benefit of its clients and customers. Effective January 1, 2014, CIT manages its business and reports financial results in three operating segments: (1) TIF; (2) NACF; and (3) NSP. The change in segment reporting does not affect CIT’s historical consolidated results of operations.
On April 25, 2014, the Company completed the sale of the student lending business. The business had previously been included in the NSP segment.
The discussions below reflect the new reporting segments and reflect the student lending business as a discontinued operation. All prior period comparisons have been conformed and are consistent with the presentation of financial information to management.
SeeNote 15 — Business Segment Information for additional details.
Transportation & International Finance
TIF includes several divisions: aerospace (commercial aircraft and business aircraft), rail, and maritime finance, as well as international finance, which includes corporate lending and equipment financing businesses in China and the U.K. Revenues generated by TIF include rents collected on leased assets, interest on loans, fees, and gains from assets sold.
Aerospace—Commercial Air provides leasing and financing solutions — including operating leases, capital leases, loans and structuring and advisory services — for commercial airlines worldwide. We own and finance a fleet of more than 300 commercial aircraft and have about 100 customers in approximately 50 countries.
Aerospace—Business Air provides financing solutions to business jet operators. Serving clients around the globe, we provide financing that is tailored to our clients’ unique business requirements. Products include term loans, leases, predelivery financing, fractional share financing and vendor/manufacturer financing.
Rail offers customized leasing and financing solutions and a highly efficient, diversified fleet of railcar assets to freight shippers and carriers throughout North America and Europe. We expanded our operations to Europe through a 2014 acquisition. See“Concentrations — Leased Railcars” section.
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Maritime Finance offers senior secured loans, sale-leasebacks and bareboat charters to owners and operators of oceangoing cargo vessels, including tankers, bulkers, container ships, car carriers, and offshore vessels and drilling rigs.
International Finance offers corporate lending and advisory services as well as equipment financing and leasing to small and middle market businesses in China and the U.K.
Transportation & International Finance – Financial Data and Metrics(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Earnings Summary |
| Interest income | | | | $ | 68.8 | | | $ | 72.2 | | | $ | 66.1 | | | $ | 217.7 | | | $ | 185.3 | |
| Interest expense | | | | | (165.3 | ) | | | (155.1 | ) | | | (146.4 | ) | | | (481.1 | ) | | | (434.4 | ) |
| Provision for credit losses | | | | | (9.1 | ) | | | (8.3 | ) | | | (6.0 | ) | | | (29.8 | ) | | | (4.1 | ) |
| Rental income on operating leases | | | | | 501.4 | | | | 485.1 | | | | 415.5 | | | | 1,446.1 | | | | 1,256.7 | |
| Other income | | | | | 18.8 | | | | 10.4 | | | | 31.4 | | | | 36.4 | | | | 75.1 | |
| Depreciation on operating lease equipment | | | | | (132.8 | ) | | | (131.6 | ) | | | (106.1 | ) | | | (386.1 | ) | | | (320.3 | ) |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (49.0 | ) | | | (41.4 | ) | | | (147.1 | ) | | | (124.0 | ) |
| Operating expenses | | | | | (73.8 | ) | | | (75.5 | ) | | | (62.5 | ) | | | (228.8 | ) | | | (187.4 | ) |
| Income before benefit (provision) for income taxes | | | | $ | 161.5 | | | $ | 148.2 | | | $ | 150.6 | | | $ | 427.3 | | | $ | 446.9 | |
Select Average Balances |
| Average finance receivables (AFR) | | | | $ | 3,432.7 | | | $ | 3,547.0 | | | $ | 3,199.2 | | | $ | 3,535.8 | | | $ | 2,984.8 | |
| Average operating leases (AOL) | | | | $ | 14,712.7 | | | $ | 14,234.7 | | | $ | 12,098.4 | | | $ | 14,138.2 | | | $ | 12,090.5 | |
| Average earning assets (AEA) | | | | $ | 18,724.2 | | | $ | 18,066.2 | | | $ | 15,417.8 | | | $ | 17,985.7 | | | $ | 15,255.8 | |
Statistical Data |
| Net finance margin (NFM) – net finance revenue (interest and rental income, net of interest and depreciation and maintenance and other operating lease expenses) as a % of AEA | | | | | 4.82 | % | | | 4.91 | % | | | 4.87 | % | | | 4.81 | % | | | 4.92 | % |
| Operating lease margin (rental income less depreciation and maintenance and other operating lease expenses) as a % of AOL | | | | | 8.76 | % | | | 8.56 | % | | | 8.86 | % | | | 8.61 | % | | | 8.96 | % |
| New business volume | | | | $ | 1,326.8 | | | $ | 1,404.7 | | | $ | 982.0 | | | $ | 3,786.1 | | | $ | 2,312.3 | |
Pre-tax earnings for the quarter were up slightly from the year-ago quarter and sequentially. The quarter reflected solid earning asset growth of nearly 4% and continued strong asset utilization. Pre-tax earnings last quarter included a $5 million impairment upon the transfer to AHFS of an international loan portfolio of approximately $0.5 billion and a net benefit to interest expense of $7 million due to the refinancing of secured debt within the TRS. In October 2014, we agreed to sell the international loan portfolio, which is expected to close in the 2014 fourth quarter. Pre-tax earnings for the year-to-date period were down mostly due to higher operating expenses, in part reflecting the first quarter European rail acquisition, and lower gains on asset sales, partially offset by higher net finance revenue.
Financing and leasing assets grew to $19.1 billion at September 30, 2014, up sequentially from $18.4 billion and from $15.6 billion a year ago. The sequential increase reflected growth in all Transportation divisions, with Aerospace accounting for approximately 70% of the growth. The $3.5 billion, or 22% increase from September 2013 included growth of $1.8 billion in Aerospace, $1.4 billion in Rail, including the European rail acquisition in the 2014 first quarter, and $0.5 billion in Maritime. We entered the European rail leasing market with the January 31, 2014 acquisition of Nacco, an independent full service railcar lessor in Europe, which included more than 9,500 railcars, consisting of tank cars, flat cars, gondolas and hopper cars.
New business volume remained strong and asset utilization remained high. New business volume outpaced the year-ago quarter, while down modestly from the prior quarter and consisted of $0.6 billion of operating lease equipment, including the delivery of 7 aircraft and approximately 1,500 railcars and the funding of $0.7 billion of finance receivables.
Other highlights included:
n | | Net finance revenue was $226 million, up from $188 million in the year-ago quarter primarily due to asset growth, and from $222 million sequentially, which included a debt refinancing benefit. Year-to-date, NFR was $650 million, up from $563 million in 2013. NFM was down from the year-ago periods as lower yields offset lower funding costs. See <I>Net Finance Revenue</I> for table on segment gross yields. |
n | | Net operating lease revenue (rental income on operating leases less depreciation on operating lease equipment and maintenance and other operating lease expenses), which is a component of NFR, was $322 million, up from $268 million from the year-ago quarter and $305 million in the prior quarter. Increased rent from growth in the Aerospace and Rail portfolios and combined strong utilization offset an increase in depreciation, and maintenance and operating lease expense compared to the year-ago quarter. Net |
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| | | operating lease revenue was $913 million year-to-date in 2014, up from $812 million in 2013. The declines from 2013 in the net operating lease margin (as a % of average operating lease equipment) reflected pressure on renewal rents on certain aircraft, higher maintenance costs and operating lease expenses and higher depreciation rates. We entered 2014 with approximately 50 aircraft to remarket due to lease expirations, a level that was higher than in recent years, and have made solid progress placing these aircraft. Lease commitments have been renewed or entered into for approximately 90% of those aircraft. Most of these have been renewed with the existing carrier, which lowers the remarketing costs. |
| | | |
n | | At September 30, 2014, TIF had 285 commercial aircraft, and approximately 119,000 railcars and 390 locomotives on operating lease. |
n | | Utilization remained strong with all but two commercial aircraft and 99% of rail equipment on lease or under a commitment at September 30, 2014. |
n | | At September 30, 2014, we had 137 aircraft on order from manufacturers (down from 147 at December 31, 2013), with deliveries scheduled through 2020. In July, CIT placed an order with Boeing for the purchase of 10 787-9 Dreamliner aircraft, with deliveries beginning in 2018. In addition to the order book, CIT also signed memorandums of understanding with Airbus for the purchase of 15 A330-900neo (new engine option) aircraft and five A321-200ceo (current engine option) aircraft, which will be included in the order book count upon contract execution. Deliveries of the A330-900neo are scheduled to begin in 2018 and deliveries of the A321-200ceo are scheduled to begin in 2015. |
| | We had future purchase commitments for approximately 7,500 railcars, with scheduled deliveries through 2016. |
| | All aircraft scheduled for delivery in the next 12 months and approximately 80% of all railcars on order, have lease commitments. SeeItem 1. Consolidated Financial Statements, Note 13 — Commitments. |
n | | Other income primarily includes gains on equipment and receivable sales, partially offset by impairment charges. For the third quarter of 2014, gains totaled $18 million on $194 million of equipment and receivable sales, compared to $24 million of gains on $377 million of sales in the year-ago quarter and $11 million of gains on $81 million of sales last quarter. Year-to-date, gains totaled $34 million on $473 million of sales in 2014 and $66 million of gains on $851 million of sales in 2013. Gains can vary significantly quarter to quarter, depending on various factors, including types of equipment sold. Impairment charges totaled $5 million in the third quarter of 2014, primarily reflecting aircraft equipment held for sale, compared to $8 million in the year-ago quarter and $10 million last quarter. Year-to-date, impairment charges were $16 million in 2014 and $10 million in 2013. |
n | | Provision for credit losses was up slightly from the year-ago quarter and the prior quarter. The year-to-date increase over 2013 reflects fluctuations in the international portfolio charge-offs. Net charge-offs were $4 million (0.44% of average finance receivables) in the third quarter of 2014, down from the year-ago quarter and the prior quarter. TIF charge-offs for the quarter ended June 30 and the nine months ended September 30, 2014, included approximately $9 million and $12 million, respectively, related to the transfer of receivables to assets held for sale (none for the quarter ended September 30, 2014). The prior-year third quarter and nine months ended September 30, 2013 included $1 million related to the transfer of receivables to assets held for sale. Net charge-offs year-to-date were $30 million (1.13%) in 2014, compared to $5 million (0.23%) in 2013. Essentially all of the charge-offs for both years were concentrated in the International portfolio. Non-accrual loans were $42 million (1.13% of finance receivables) at September 30, 2014, essentially flat with June 30, 2014 and up from $23 million (0.70%) at September 30, 2013. |
n | | Operating expenses were $74 million and $229 million for the quarter and year-to-date 2014, up from the 2013 periods reflecting the European rail acquisition and our continued investment in growth initiatives. |
North American Commercial Finance
The NACF segment is comprised of four divisions: Corporate Finance, Equipment Finance, Real Estate Finance and Commercial Services. Revenue is generated from interest earned on loans, rents on leases, fees and other revenue from lending activities and capital markets transactions, and commissions earned on factoring and related activities.
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 & Industrial, Communications, Media & Entertainment, Energy and Healthcare.
Equipment Finance provides leasing and equipment loan solutions to small businesses and middle market companies in a wide range of industries. 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. 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.
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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.
North American Commercial Finance – Financial Data and Metrics (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Earnings Summary | | |
| Interest income | | | | $ | 215.8 | | | $ | 208.8 | | | $ | 199.6 | | | $ | 618.0 | | | $ | 628.9 | |
| Interest expense | | | | | (74.2 | ) | | | (68.1 | ) | | | (66.9 | ) | | | (211.2 | ) | | | (217.1 | ) |
| Provision for credit losses | | | | | (29.7 | ) | | | (2.6 | ) | | | (8.3 | ) | | | (55.5 | ) | | | (38.0 | ) |
| Rental income on operating leases | | | | | 24.7 | | | | 25.1 | | | | 27.2 | | | | 72.6 | | | | 76.8 | |
| Other income | | | | | 71.1 | | | | 69.7 | | | | 71.5 | | | | 202.6 | | | | 200.0 | |
| Depreciation on operating lease equipment | | | | | (20.1 | ) | | | (20.0 | ) | | | (19.8 | ) | | | (62.0 | ) | | | (54.7 | ) |
| Operating expenses | | | | | (125.9 | ) | | | (120.2 | ) | | | (119.7 | ) | | | (367.6 | ) | | | (366.2 | ) |
| Income before benefit (provision) for income taxes | | | | $ | 61.7 | | | $ | 92.7 | | | $ | 83.6 | | | $ | 196.9 | | | $ | 229.7 | |
Select Average Balances | | | | | | | | | | | | | | | | | | | | | | |
| Average finance receivables (AFR) | | | | $ | 16,009.3 | | | $ | 15,181.0 | | | $ | 14,274.3 | | | $ | 15,221.6 | | | $ | 13,860.6 | |
| Average earning assets (AEA) | | | | $ | 14,953.4 | | | $ | 14,132.4 | | | $ | 13,156.0 | | | $ | 14,203.9 | | | $ | 12,746.4 | |
Statistical Data | | |
| Net finance margin – net finance revenue (interest and rental income, net of interest and depreciation and maintenance and other operating lease expenses) as a % of AEA | | | | | 3.91 | % | | | 4.13 | % | | | 4.26 | % | | | 3.92 | % | | | 4.54 | % |
| New business volume | | | | $ | 1,608.0 | | | $ | 1,600.1 | | | $ | 1,423.8 | | | $ | 4,581.0 | | | $ | 4,466.2 | |
| Factoring volume | | | | $ | 6,746.7 | | | $ | 6,282.8 | | | $ | 6,600.8 | | | $ | 19,300.6 | | | $ | 18,910.9 | |
AEA is lower than AFR as it is reduced by the average credit balances for factoring clients.
Pre-tax earnings were down from both the year-ago and prior quarters, primarily due to higher credit costs. Year-to-date, pre-tax earnings declined due to higher credit costs and lower yields in certain portfolios, which offset the benefit from higher earning assets.
Financing and leasing assets grew 5% sequentially, to $16.4 billion, primarily reflecting the acquisition of approximately $540 million of financing and leasing assets in Direct Capital that are reflected in the Equipment Finance division. The 12% growth from a year ago also reflected strong growth in our Real Estate Finance and Corporate Finance divisions. Funded new business volume for the quarter was up 13% from the year-ago quarter, and flat with the prior quarter. The increase in new business volume from the prior quarters reflected increases in Real Estate Finance and Equipment Finance, partially offset by a decline in Corporate Finance.
CIT Bank originated the vast majority of the U.S. funded volume in each of the presented quarters. At September 30, 2014, over 75% of financing and leasing assets were in CIT Bank.
Other highlights included:
n | | Net finance revenue was $146 million, up from $140 million in the year-ago quarter reflecting higher earning assets, and unchanged from the prior quarter. Net finance margin (NFM) was 3.91%, down from the year-ago quarter primarily due to lower portfolio yields in Equipment Finance and Corporate Finance. The sequential quarter decline is largely due to benefits from higher prepayments in the prior quarter. The year-to-date decline in NFM from 2013 reflects the reduction of prepayment benefits, lower portfolio yields across all businesses, and a declining benefit from net FSA accretion. |
n | | Other income was essentially flat compared to the year-ago quarter and prior quarter, as well as on a year-to-date basis, and primarily consisted of the following items: |
| n | | Factoring commissions were $31 million, down slightly from the year-ago quarter as changes in underlying portfolio mix offset increased factoring volume, and up from $28 million in the prior quarter, largely driven by an increase in volume. Factoring volume was up 2% from the year-ago quarter, and up 7% sequentially reflecting normal seasonality. |
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n | | Fee revenue was $22 million, up from $20 million in the year-ago quarter, and $18 million in the prior quarter. Fee revenue is mainly driven by syndication fees, arranger fees, agent fees and fees from issuing letters of credit and on unused lines of credit. Year-to-date period, fee revenue totaled $57 million, down slightly from 2013. |
| | | |
n | | Gains on equipment, receivables and investments sales totaled $15 million, up from $7 million in the year-ago quarter and $13 million in the prior quarter. Equipment and receivables sold totaled $236 million, up from $118 million in the year-ago quarter and $175 million in the prior quarter. For the nine months ended September 30, 2014, gains totaled $38 million (on $549 million of equipment and receivables sold), up from $23 million (on $355 million of equipment and receivables sold) during the comparable period in 2013. |
n | | Credit metrics remained at or near cycle lows. Non-accrual loans were $134 million (0.83% of finance receivables), essentially unchanged from June 30, 2014 and down from $167 million (1.16%) a year ago. The current quarter provision for credit losses primarily reflects reserve build due to growth and higher reserves on a small number of accounts. Net charge-offs were $16 million (0.40% of average finance receivables), compared to $11 million (0.30%) in the year-ago quarter and $9 million (0.23%) last quarter. Net charge-offs for the current quarter included $11 million related to the transfer of receivables to AHFS, compared to $3 million in each of the year-ago and prior quarters. For the year-to-date periods, net charge-offs were $41 million (0.36%) in 2014 and included $17 million related to the transfer of receivables to AHFS compared to $21 million (0.20%) in 2013, which included $5 million related to the transfer of receivables to AHFS. |
n | | Operating expenses were up from the year-ago quarter due to operating costs related to Direct Capital. The nine month period largely reflected the benefits of operating efficiencies gained compared to 2013, offset by the additional costs related to Direct Capital. |
Non-Strategic Portfolios
NSP consists of portfolios that we no longer consider strategic. Included in NSP at September 30, 2014 are several international equipment finance portfolios, including Brazil, Mexico and smaller portfolios in Europe that we identified as subscale platforms during our international rationalization. On April 25, 2014, we completed the sale of the student lending business. Upon sale, the business was classified as a discontinued operation, and all prior period data has been adjusted.
Non-Strategic Portfolios – Financial Data and Metrics (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Earnings Summary |
| Interest income | | | | $ | 20.4 | | | $ | 25.6 | | | $ | 37.0 | | | $ | 74.4 | | | $ | 123.7 | |
| Interest expense | | | | | (18.6 | ) | | | (23.0 | ) | | | (29.9 | ) | | | (66.5 | ) | | | (99.5 | ) |
| Provision for credit losses | | | | | 0.7 | | | | 0.7 | | | | (2.2 | ) | | | 0.4 | | | | (8.6 | ) |
| Rental income on operating leases | | | | | 8.9 | | | | 9.4 | | | | 30.2 | | | | 27.8 | | | | 100.1 | |
| Other income | | | | | (47.1 | ) | | | 3.9 | | | | (1.1 | ) | | | (38.8 | ) | | | (27.0 | ) |
| Depreciation on operating lease equipment | | | | | (3.5 | ) | | | (5.7 | ) | | | (8.3 | ) | | | (14.4 | ) | | | (26.1 | ) |
| Maintenance and other operating lease expenses | | | | | – | | | | – | | | | – | | | | – | | | | (0.1 | ) |
| Operating expenses | | | | | (16.9 | ) | | | (20.5 | ) | | | (36.2 | ) | | | (56.6 | ) | | | (108.9 | ) |
| Loss before benefit (provision) for income taxes | | | | $ | (56.1 | ) | | $ | (9.6 | ) | | $ | (10.5 | ) | | $ | (73.7 | ) | | $ | (46.4 | ) |
Select Average Balances |
| Average finance receivables (AFR) | | | | $ | 0.1 | | | $ | 83.9 | | | $ | 921.4 | | | $ | 196.5 | | | $ | 1,293.5 | |
| Average earning assets (AEA) | | | | $ | 617.7 | | | $ | 988.1 | | | $ | 1,844.4 | | | $ | 938.7 | | | $ | 1,929.0 | |
Statistical Data | | | | | | | | | | | | | | | | | | | | | | |
| Net finance revenue as a % of AEA | | | | | 4.66 | % | | | 2.55 | % | | | 6.29 | % | | | 3.03 | % | | | 6.78 | % |
| New business volume | | | | $ | 64.7 | | | $ | 64.1 | | | $ | 169.6 | | | $ | 180.6 | | | $ | 614.9 | |
Pre-tax losses for the 2014 third quarter were elevated due to impairments on AHFS. Impairment charges on international equipment finance portfolios identified as subscale platforms during our international rationalization totaled $49 million for the quarter ended September 30, 2014. HFS impairment charges were $54 million for the nine months ended September 30, 2014 and $37 million and $80 million for the quarter and nine months ended September 30, 2013. The 2014 third quarter and year-to-date also reflected declining operating expenses offset by lower net revenues from lower assets levels compared to the 2013 periods.
Financing and leasing assets at September 30, 2014 totaled $0.6 billion in AHFS, primarily related to international small ticket platforms identified as subscale platforms during our international rationalization. The financing and leasing assets were down approximately $0.1 billion from June 30, 2014, primarily due to impairment charges, runoff and currency exchange.
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We have exited all the sub-scale countries in Asia, and several in Latin America and Europe, as well as our SBL portfolio, and continue to market the remaining non-strategic portfolios in Europe and Latin America. In October we entered into an agreement to sell certain operations in Europe (AHFS of $100 million). In addition, we are in the advance stages of negotiating the sale of our Mexico and Brazil portfolios.
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 – Financial Data (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Earnings Summary |
| Interest income | | | | $ | 3.3 | | | $ | 3.2 | | | $ | 3.7 | | | $ | 10.2 | | | $ | 10.1 | |
| Interest expense | | | | | (17.1 | ) | | | (16.0 | ) | | | (13.5 | ) | | | (50.5 | ) | | | (42.4 | ) |
| Provision for credit losses | | | | | (0.1 | ) | | | – | | | | 0.1 | | | | (0.2 | ) | | | 0.2 | |
| Other income | | | | | (18.6 | ) | | | 9.7 | | | | 2.7 | | | | (11.2 | ) | | | 5.6 | |
| Operating expenses, including loss on debt extinguishments | | | | | (17.9 | ) | | | (9.2 | ) | | | (10.4 | ) | | | (40.4 | ) | | | (23.3 | ) |
| Loss before benefit (provision) for income taxes | | | | $ | (50.4 | ) | | $ | (12.3 | ) | | $ | (17.4 | ) | | $ | (92.1 | ) | | $ | (49.8 | ) |
n | | Interest income consists of interest and dividend income, primarily from deposits held at other depository institutions and other investment securities. |
n | | Other income primarily reflects gains and (losses) on derivatives, including the GSI facilities, which drove the balances in the current and prior quarters, and foreign currency exchange. The GSI derivative has a negative mark-to-market of $13 million in the current quarter and an $11 million positive mark-to-market in the prior quarter. |
n | | Operating expenses reflects salary and general and administrative expenses in excess of amounts allocated to the business segments, litigation-related costs and provision for severance and facilities exiting activities. Restructuring charges totaled $9 million in the third quarter of 2014, compared to $3 million in the year-ago quarter and $6 million in the prior quarter. Year-to-date, restructuring charges totaled $25 million, up from $18 million in 2013. |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 63
Table of Contents
FINANCING AND LEASING ASSETSThe following table presents our financing and leasing assets by segment and divisions within these segments.
Financing and Leasing Asset Composition (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
| | %
Change
|
|---|
Transportation & International Finance |
Segment Total | | | | | | | | | | | | | | |
| Loans | | | | $ | 3,687.7 | | | $ | 3,494.4 | | | | 5.5 | % |
| Operating lease equipment, net | | | | | 14,931.2 | | | | 12,778.5 | | | | 16.8 | % |
| Assets held for sale | | | | | 464.7 | | | | 158.5 | | | | 193.2 | % |
| Financing and leasing assets | | | | | 19,083.6 | | | | 16,431.4 | | | | 16.1 | % |
Aerospace |
| Loans | | | | | 1,664.4 | | | | 1,247.7 | | | | 33.4 | % |
| Operating lease equipment, net | | | | | 9,216.6 | | | | 8,267.9 | | | | 11.5 | % |
| Assets held for sale | | | | | 109.9 | | | | 148.8 | | | | (26.1 | )% |
| Financing and leasing assets | | | | | 10,990.9 | | | | 9,664.4 | | | | 13.7 | % |
Rail | | | | | | | | | | | | | | |
| Loans | | | | | 120.1 | | | | 107.2 | | | | 12.0 | % |
| Operating lease equipment, net | | | | | 5,708.7 | | | | 4,503.9 | | | | 26.8 | % |
| Assets held for sale | | | | | 0.4 | | | | 3.3 | | | | (87.9 | )% |
| Financing and leasing assets | | | | | 5,829.2 | | | | 4,614.4 | | | | 26.3 | % |
Maritime Finance |
| Loans | | | | | 839.5 | | | | 412.6 | | | | 103.5 | % |
| Financing and leasing assets | | | | | 839.5 | | | | 412.6 | | | | 103.5 | % |
International Finance |
| Loans | | | | | 1,063.7 | | | | 1,726.9 | | | | (38.4 | )% |
| Operating lease equipment, net | | | | | 5.9 | | | | 6.7 | | | | (11.9 | )% |
| Assets held for sale | | | | | 354.4 | | | | 6.4 | | | | >100 | % |
| Financing and leasing assets | | | | | 1,424.0 | | | | 1,740.0 | | | | (18.2 | )% |
North American Commercial Finance | | | | | | | | | | | | | | |
Segment Total |
| Loans | | | | | 16,098.0 | | | | 14,693.1 | | | | 9.6 | % |
| Operating lease equipment, net | | | | | 252.6 | | | | 240.5 | | | | 5.0 | % |
| Assets held for sale | | | | | 85.3 | | | | 38.2 | | | | 123.3 | % |
| Financing and leasing assets | | | | | 16,435.9 | | | | 14,971.8 | | | | 9.8 | % |
Real Estate Finance | | | | | | | | | | | | | | |
| Loans | | | | | 1,751.7 | | | | 1,554.8 | | | | 12.7 | % |
| Financing and leasing assets | | | | | 1,751.7 | | | | 1,554.8 | | | | 12.7 | % |
Corporate Finance |
| Loans | | | | | 7,152.5 | | | | 6,831.8 | | | | 4.7 | % |
| Operating lease equipment, net | | | | | 8.5 | | | | 6.2 | | | | 37.1 | % |
| Assets held for sale | | | | | 85.3 | | | | 38.2 | | | | 123.3 | % |
| Financing and leasing assets | | | | | 7,246.3 | | | | 6,876.2 | | | | 5.4 | % |
Equipment Finance | | | | | | | | | | | | | | |
| Loans | | | | | 4,710.7 | | | | 4,044.1 | | | | 16.5 | % |
| Operating lease equipment, net | | | | | 244.1 | | | | 234.3 | | | | 4.2 | % |
| Financing and leasing assets | | | | | 4,954.8 | | | | 4,278.4 | | | | 15.8 | % |
Commercial Services | | | | | | | | | | | | | | |
| Loans and factoring receivables | | | | | 2,483.1 | | | | 2,262.4 | | | | 9.8 | % |
| Financing and leasing assets | | | | | 2,483.1 | | | | 2,262.4 | | | | 9.8 | % |
Non-Strategic Portfolios | | | | | | | | | | | | | | |
| Loans | | | | | 0.1 | | | | 441.7 | | | | (100 | )% |
| Operating lease equipment, net | | | | | – | | | | 16.4 | | | | (100 | )% |
| Assets held for sale | | | | | 552.7 | | | | 806.7 | | | | (31.5 | )% |
| Financing and leasing assets | | | | | 552.8 | | | | 1,264.8 | | | | (56.3 | )% |
Consolidated Totals: | | | | | | | | | | | | | | |
| Loans | | | | $ | 19,785.8 | | | $ | 18,629.2 | | | | 6.2 | % |
| Operating lease equipment, net | | | | | 15,183.8 | | | | 13,035.4 | | | | 16.5 | % |
| Assets held for sale | | | | | 1,102.7 | | | | 1,003.4 | | | | 9.9 | % |
Total financing and leasing assets | | | | $ | 36,072.3 | | | $ | 32,668.0 | | | | 10.4 | % |
64 CIT GROUP INC
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Growth in TIF was driven by Aerospace, Rail and Maritime Finance. The higher TIF financing and leasing assets reflects solid new business volume, which included the delivery of 29 commercial aircraft and approximately 5,400 railcars, the funding of $1.6 billion of loans, and was supplemented by the acquisition of a European railcar lessor of approximately $650 million of assets (operating lease equipment). NACF growth was led by Equipment Finance, which included the acquisition of Direct Capital that increased loans by approximately $540 million in the third quarter, Real Estate Finance, which had double-digit growth year-to-date, and Corporate Finance, which had strong activity in the commercial and industrial and energy industries. The decline in NSP primarily reflected sales in the first half of the year, and impairment charges and foreign currency fluctuations during the third quarter.
AHFS in TIF were mainly comprised of loans in the international portfolio and aircraft and related equipment in the aerospace division. Most of the remaining AHFS at September 30, 2014 were in NSP and included various equipment financing portfolios, primarily in Latin America.
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 Roll forward (dollars in millions)
| | | | Transportation &
International
Finance
| | North American
Commercial
Finance
| | Non-Strategic
Portfolios
| | Total
|
|---|
Balance at June 30, 2014 | | | | $ | 18,412.9 | | | $ | 15,650.0 | | | $ | 658.7 | | | $ | 34,721.6 | |
| New business volume | | | | | 1,326.8 | | | | 1,608.0 | | | | 64.7 | | | | 2,999.5 | |
| Portfolio / business acquisitions | | | | | – | | | | 536.6 | | | | – | | | | 536.6 | |
| Loan and portfolio sales | | | | | (64.2 | ) | | | (157.2 | ) | | | (2.9 | ) | | | (224.3 | ) |
| Equipment sales | | | | | (129.5 | ) | | | (79.0 | ) | | | (3.3 | ) | | | (211.8 | ) |
| Depreciation | | | | | (132.8 | ) | | | (20.1 | ) | | | (3.5 | ) | | | (156.4 | ) |
| Gross charge-offs | | | | | (4.5 | ) | | | (20.7 | ) | | | – | | | | (25.2 | ) |
| Collections, impairments and other | | | | | (325.1 | ) | | | (1,081.7 | ) | | | (160.9 | ) | | | (1,567.7 | ) |
Balance at September 30, 2014 | | | | $ | 19,083.6 | | | $ | 16,435.9 | | | $ | 552.8 | | | $ | 36,072.3 | |
Balance at December 31, 2013 | | | | $ | 16,431.4 | | | $ | 14,971.8 | | | $ | 1,264.8 | | | $ | 32,668.0 | |
| New business volume | | | | | 3,786.1 | | | | 4,581.0 | | | | 180.6 | | | | 8,547.7 | |
| Portfolio / business acquisitions | | | | | 649.2 | | | | 536.6 | | | | – | | | | 1,185.8 | |
| Loan and portfolio sales | | | | | (124.3 | ) | | | (319.9 | ) | | | (366.4 | ) | | | (810.6 | ) |
| Equipment sales | | | | | (349.0 | ) | | | (229.4 | ) | | | (14.6 | ) | | | (593.0 | ) |
| Depreciation | | | | | (386.1 | ) | | | (62.0 | ) | | | (14.4 | ) | | | (462.5 | ) |
| Gross charge-offs | | | | | (34.7 | ) | | | (56.5 | ) | | | (7.5 | ) | | | (98.7 | ) |
| Collections, impairments and other | | | | | (889.0 | ) | | | (2,985.7 | ) | | | (489.7 | ) | | | (4,364.4 | ) |
Balance at September 30, 2014 | | | | $ | 19,083.6 | | | $ | 16,435.9 | | | $ | 552.8 | | | $ | 36,072.3 | |
The following tables present our segment volumes and loan and equipment sales:
Total Business Volumes(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Transportation & International Finance | | | | $ | 1,326.8 | | | $ | 1,404.7 | | | $ | 982.0 | | | $ | 3,786.1 | | | $ | 2,312.3 | |
| North American Commercial Finance | | | | | 1,608.0 | | | | 1,600.1 | | | | 1,423.8 | | | | 4,581.0 | | | | 4,466.2 | |
| Non-Strategic Portfolios | | | | | 64.7 | | | | 64.1 | | | | 169.6 | | | | 180.6 | | | | 614.9 | |
| Total | | | | $ | 2,999.5 | | | $ | 3,068.9 | | | $ | 2,575.4 | | | $ | 8,547.7 | | | $ | 7,393.4 | |
| Factored Volume | | | | $ | 6,746.7 | | | $ | 6,282.8 | | | $ | 6,600.8 | | | $ | 19,300.6 | | | $ | 18,910.9 | |
Funded new business volume increased nearly 16% from the year-ago quarter and on a year-to-date basis, as increases in TIF and NACF activity offset the decline in the run-off portfolios in NSP.
Factoring volume was up from the year-ago quarter, and increased from the prior quarter, reflecting seasonal trends.
Business volumes are discussed in the respective segment descriptions in“Results by Business Segment”.
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 65
Table of Contents
Loan and Portfolio Sales (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Transportation & International Finance | | | | $ | 64.2 | | | $ | 45.9 | | | $ | 52.3 | | | $ | 124.3 | | | $ | 52.3 | |
| North American Commercial Finance | | | | | 157.2 | | | | 92.9 | | | | 49.7 | | | | 319.9 | | | | 133.4 | |
| Non-Strategic Portfolios | | | | | 2.9 | | | | 299.9 | | | | 191.2 | | | | 366.4 | | | | 227.7 | |
| Total | | | | $ | 224.3 | | | $ | 438.7 | | | $ | 293.2 | | | $ | 810.6 | | | $ | 413.4 | |
The prior quarter sales in NSP primarily consisted of small business portfolio loans, along with some international portfolios.
Equipment Sales (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Transportation & International Finance | | | | $ | 129.5 | | | $ | 35.2 | | | $ | 324.6 | | | $ | 349.0 | | | $ | 799.1 | |
| North American Commercial Finance | | | | | 79.0 | | | | 82.0 | | | | 68.6 | | | | 229.4 | | | | 221.5 | |
| Non-Strategic Portfolios | | | | | 3.3 | | | | 7.5 | | | | 15.3 | | | | 14.6 | | | | 31.0 | |
| Total | | | | $ | 211.8 | | | $ | 124.7 | | | $ | 408.5 | | | $ | 593.0 | | | $ | 1,051.6 | |
Asset sales in TIF primarily reflect aerospace and rail assets. Asset and loan and portfolio sales are discussed in Non-interest Income section, along with the related gains and losses.
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate represented 11.1% of our total financing and leasing assets at September 30, 2014 (the largest account was 2.0%). The largest accounts represent aerospace and rail assets.
The ten largest financing and leasing asset accounts were 9.8% at December 31, 2013.
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)
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
| Northeast | | | | $ | 6,361.9 | | | | 17.6 | % | | $ | 5,933.1 | | | | 18.2 | % |
| Southwest | | | | | 3,984.9 | | | | 11.1 | % | | | 3,606.9 | | | | 11.1 | % |
| Midwest | | | | | 3,894.0 | | | | 10.8 | % | | | 3,762.5 | | | | 11.5 | % |
| Southeast | | | | | 3,683.2 | | | | 10.2 | % | | | 2,690.2 | | | | 8.2 | % |
| West | | | | | 3,428.6 | | | | 9.5 | % | | | 3,238.6 | | | | 9.9 | % |
| Total U.S. | | | | | 21,352.6 | | | | 59.2 | % | | | 19,231.3 | | | | 58.9 | % |
| Asia / Pacific | | | | | 4,473.6 | | | | 12.4 | % | | | 4,017.9 | | | | 12.3 | % |
| Europe | | | | | 3,811.5 | | | | 10.6 | % | | | 3,692.4 | | | | 11.3 | % |
| Canada | | | | | 2,646.8 | | | | 7.3 | % | | | 2,287.0 | | | | 7.0 | % |
| Latin America | | | | | 1,733.3 | | | | 4.8 | % | | | 1,743.1 | | | | 5.3 | % |
| All other countries | | | | | 2,054.5 | | | | 5.7 | % | | | 1,696.3 | | | | 5.2 | % |
| Total | | | | $ | 36,072.3 | | | | 100.0 | % | | $ | 32,668.0 | | | | 100.0 | % |
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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)
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
State |
| Texas | | | | $ | 3,327.8 | | | | 9.2 | % | | $ | 3,022.4 | | | | 9.3 | % |
| New York | | | | | 2,404.7 | | | | 6.7 | % | | | 2,323.3 | | | | 7.1 | % |
| All other states | | | | | 15,620.1 | | | | 43.3 | % | | | 13,885.6 | | | | 42.5 | % |
| Total U.S. | | | | $ | 21,352.6 | | | | 59.2 | % | | $ | 19,231.3 | | | | 58.9 | % |
Country | | | | | | | | | | | | | | | | | | |
| Canada | | | | $ | 2,646.8 | | | | 7.3 | % | | $ | 2,287.0 | | | | 7.0 | % |
| England | | | | | 1,112.3 | | | | 3.1 | % | | | 1,166.5 | | | | 3.6 | % |
| Australia | | | | | 1,040.7 | | | | 2.9 | % | | | 974.4 | | | | 3.0 | % |
| China | | | | | 938.4 | | | | 2.6 | % | | | 969.1 | | | | 2.9 | % |
| Mexico | | | | | 699.6 | | | | 1.9 | % | | | 819.9 | | | | 2.5 | % |
| Brazil | | | | | 634.7 | | | | 1.8 | % | | | 710.3 | | | | 2.2 | % |
| Philippines | | | | | 440.6 | | | | 1.2 | % | | | 255.9 | | | | 0.8 | % |
| France | | | | | 425.9 | | | | 1.2 | % | | | 294.7 | | | | 0.9 | % |
| South Korea | | | | | 415.8 | | | | 1.1 | % | | | 459.9 | | | | 1.4 | % |
| Russia | | | | | 384.0 | | | | 1.1 | % | | | 355.9 | | | | 1.1 | % |
| Spain | | | | | 381.6 | | | | 1.1 | % | | | 450.7 | | | | 1.4 | % |
| Indonesia | | | | | 349.1 | | | | 1.0 | % | | | 285.9 | | | | 0.9 | % |
| All other countries | | | | | 5,250.2 | | | | 14.5 | % | | | 4,406.5 | | | | 13.4 | % |
| Total International | | | | $ | 14,719.7 | | | | 40.8 | % | | $ | 13,436.7 | | | | 41.1 | % |
Industry Concentrations
The following table represents financing and leasing assets by industry of obligor:
Financing and Leasing Assets by Obligor – Industry (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
Commercial airlines (including regional airlines)(1) | | | | $ | 10,296.1 | | | | 28.5 | % | | $ | 8,972.4 | | | | 27.5 | % |
Manufacturing(2) | | | | | 6,101.0 | | | | 16.9 | % | | | 5,542.1 | | | | 17.0 | % |
Retail(3) | | | | | 3,187.9 | | | | 8.8 | % | | | 3,063.1 | | | | 9.4 | % |
Transportation(4) | | | | | 2,784.9 | | | | 7.8 | % | | | 2,404.2 | | | | 7.4 | % |
| Service industries | | | | | 2,732.6 | | | | 7.6 | % | | | 3,144.3 | | | | 9.6 | % |
| Energy and utilities | | | | | 1,456.9 | | | | 4.0 | % | | | 1,256.7 | | | | 3.8 | % |
| Real Estate | | | | | 1,410.8 | | | | 3.9 | % | | | 1,351.4 | | | | 4.1 | % |
| Oil and gas extraction / services | | | | | 1,340.0 | | | | 3.8 | % | | | 1,018.7 | | | | 3.1 | % |
| Healthcare | | | | | 1,310.2 | | | | 3.6 | % | | | 1,393.1 | | | | 4.3 | % |
| Finance and insurance | | | | | 942.8 | | | | 2.6 | % | | | 760.1 | | | | 2.3 | % |
| Other (no industry greater than 2%) | | | | | 4,509.1 | | | | 12.5 | % | | | 3,761.9 | | | | 11.5 | % |
| Total | | | | $ | 36,072.3 | | | | 100.0 | % | | $ | 32,668.0 | | | | 100.0 | % |
(1) | | Includes the Commercial Aerospace Portfolio and additional financing and leasing assets that are not commercial aircraft. |
(2) | | At September 30, 2014, includes manufacturers of chemicals, including pharmaceuticals (3.6%), petroleum and coal, including refining (3.1%), and food (1.8%). |
(3) | | At September 30, 2014, includes retailers of apparel (4.2%) and general merchandise (1.5%). |
(4) | | At September 30, 2014, included rail (3.9%), maritime (1.7%) and trucking and shipping (1.6%). |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 67
Table of Contents
Commercial Aerospace
The following tables present details on our commercial and regional aerospace portfolio concentrations, which we call our Commercial Aerospace portfolio. The net investment in regional aerospace financing and leasing assets was $49.5 million and $52.1 million at September 30, 2014 and December 31, 2013, respectively, and was substantially comprised of loans and capital leases.
Commercial Aerospace Portfolio (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
| | | | Net Investment
| | Number
| | Net Investment
| | Number
|
|---|
By Product: |
Operating lease(1) | | | | $ | 9,293.7 | | | | 285 | | | $ | 8,379.3 | | | | 270 | |
Loan(2) | | | | | 582.3 | | | | 50 | | | | 505.3 | | | | 39 | |
| Capital lease | | | | | 315.2 | | | | 20 | | | | 31.7 | | | | 8 | |
| Total | | | | $ | 10,191.2 | | | | 355 | | | $ | 8,916.3 | | | | 317 | |
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 and substantially all of our owned fleet of leased aircraft at September 30, 2014.
Commercial Aerospace Operating Lease Portfolio(1) (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
| | | | Net Investment
| | Number
| | Net Investment
| | Number
|
|---|
By Region: |
| Asia / Pacific | | | | $ | 3,407.5 | | | | 85 | | | $ | 3,065.1 | | | | 81 | |
| Europe | | | | | 2,327.6 | | | | 88 | | | | 2,408.8 | | | | 91 | |
| U.S. and Canada | | | | | 1,942.5 | | | | 59 | | | | 1,276.5 | | | | 43 | |
| Latin America | | | | | 1,017.0 | | | | 38 | | | | 940.3 | | | | 38 | |
| Africa / Middle East | | | | | 599.1 | | | | 15 | | | | 688.6 | | | | 17 | |
| Total | | | | $ | 9,293.7 | | | | 285 | | | $ | 8,379.3 | | | | 270 | |
By Manufacturer: | | | | | | | | | | | | | | | | | | |
| Airbus | | | | $ | 6,184.0 | | | | 168 | | | $ | 5,899.1 | | | | 167 | |
| Boeing | | | | | 2,559.9 | | | | 98 | | | | 2,038.7 | | | | 87 | |
| Embraer | | | | | 521.8 | | | | 19 | | | | 441.5 | | | | 16 | |
| Other | | | | | 28.0 | | | | – | | | | – | | | | – | |
| Total | | | | $ | 9,293.7 | | | | 285 | | | $ | 8,379.3 | | | | 270 | |
By Body Type(3): | | | | | | | | | | | | | | | | | | |
| Narrow body | | | | $ | 6,662.9 | | | | 241 | | | $ | 6,080.6 | | | | 230 | |
| Intermediate | | | | | 2,601.6 | | | | 43 | | | | 2,297.3 | | | | 39 | |
| Regional and other | | | | | 29.2 | | | | 1 | | | | 1.4 | | | | 1 | |
| Total | | | | $ | 9,293.7 | | | | 285 | | | $ | 8,379.3 | | | | 270 | |
| Number of customers | | | | | | | | | 100 | | | | | | | | 98 | |
| Weighted average age of fleet (years) | | | | | | | | | 5 | | | | | | | | 5 | |
(1) | | Includes operating lease equipment held for sale. |
(2) | | Plane count excludes aircraft in which our net investment consists of syndicated financings against multiple aircraft. The net investment associated with such financings was $40 million at September 30, 2014 and $45 million at December 31, 2013. |
(3) | | 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 $2,602.2 million at September 30, 2014. The largest individual outstanding exposure, which was to a U.S. carrier, totaled $722.0 million at September 30, 2014. SeeNote 13 — Commitments for additional information regarding commitments to purchase additional aircraft.
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Leased Railcars
TIF’s Rail business has a fleet of approximately 119,000 railcars, including approximately 30,000 tank cars, of which approximately 19,000 are used in the transport of crude oil, ethanol and other flammable liquids (collectively, “Flammable Liquids”) in North America. TIF’s fleet of tank cars in Flammable Liquids service is comprised of legacy tank cars used to transport Flammable Liquids, and tank cars meeting the CPC-1232 design standards, which standards were voluntarily adopted by the rail industry in 2011 and include design enhancements intended to improve tank car safety. Of the approximately 19,000 tank cars in our North American fleet currently in Flammable Liquids service, approximately 10,500 were manufactured prior to adoption of the CPC-1232 standard and may be subject to higher costs to retrofit.
Following several highly-publicized derailments of tank cars since mid-2013, U.S. and Canadian government agencies and industry groups agreed to implement a number of operational changes, including requiring multiple crew members on all trains carrying hazardous materials, prohibiting unattended trains on main lines, increasing track inspections, reducing speeds in populated areas, redirecting trains around high-risk areas, and mandating the testing and classification of crude oil prior to shipment. In addition, in April, 2014, Transport Canada (“TC”) issued an order prohibiting the use of certain older tank cars in dangerous goods service in Canada effective immediately. We do not expect these operational changes and restrictions will have a material impact on our business or financial results.
On June 27, 2014, TC announced proposed amendments under the Transportation of Dangerous Goods Act, the Railway Safety Management System Regulations, and the Transportation Information Regulations that will, among other safety requirements for railways, formalize new DOT-111 tank car standards. On July 23, 2014, the U.S. Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued a Notice of Proposed Rulemaking (“NPRM”) on Enhanced Tank Car Standards and Operational Controls for High Hazard Flammable Trains seeking public comment on tank cars standards, braking systems, speed restrictions, rail routing and notifications to state emergency responders. The NPRM also requested comment on retrofit standards and schedule for existing tank cars in high-hazard flammable trains.
The NPRM is complex and will require extensive review. In addition, the PHMSA proposed three different options for new tank car standards in the NPRM and raised questions to which public comment and discussion is requested. Until PHMSA and TC release their proposed rules, we will be unable to assess how any final regulations may impact CIT and what changes may be required with respect to our tank cars in Flammable Liquids service, including the scope and cost to CIT of any retrofit program and the timing of required implementation of any retrofitting requirements. Since the average age of our affected fleet is relatively young, we expect to retrofit most, if not all, of our cars pursuant to the regulations and to amortize and recover the cost over the remaining asset life.
OTHER ASSETS / OTHER LIABILITIESThe following tables present components of other assets and other liabilities.
Other Assets (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
|
|---|
| Deposits on commercial aerospace equipment | | | | $ | 693.0 | | | $ | 831.3 | |
| Deferred federal and state tax assets | | | | | 352.6 | | | | 40.0 | |
| Deferred costs, including debt related costs | | | | | 153.4 | | | | 158.5 | |
| Furniture and fixtures | | | | | 127.8 | | | | 85.3 | |
| Fair value of derivative financial instruments | | | | | 120.8 | | | | 50.3 | |
| Tax receivables, other than income taxes | | | | | 114.3 | | | | 132.2 | |
Other(1) | | | | | 410.5 | | | | 396.5 | |
| Total other assets | | | | $ | 1,972.4 | | | $ | 1,694.1 | |
(1) | | Other includes items such as: accrued interest/dividends, fixed assets, prepaid expenses, investments in and receivables from non-consolidated entities, and other miscellaneous assets, none of which are individually in excess of $100 million. |
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Other Liabilities (dollars in millions)
| | | | September 30, 2014
| | December 31, 2013
|
|---|
| Equipment maintenance deposits | | | | $ | 941.2 | | | $ | 904.2 | |
| Accrued expenses and accounts payable | | | | | 437.4 | | | | 478.1 | |
| Security and other deposits | | | | | 299.5 | | | | 227.4 | |
| Current taxes payable and deferred taxes | | | | | 264.4 | | | | 179.8 | |
| Accrued interest payable | | | | | 179.5 | | | | 247.1 | |
| Valuation adjustment relating to aerospace commitments | | | | | 117.9 | | | | 137.5 | |
Other(1) | | | | | 397.3 | | | | 490.2 | |
| Total other liabilities | | | | $ | 2,637.2 | | | $ | 2,664.3 | |
(1) | | Other consist of other taxes, property tax liabilities and other miscellaneous liabilities; none of which are individually in excess of $100 million. |
CIT is subject to a variety of risks that may arise through the Company’s business activities, including the following principal forms of risk:
n | | Credit risk, which 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, which 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, which includes interest rate and foreign currency risk. Interest rate risk refers to the impact that fluctuations in interest rates will have on the Company’s NFR and on the market value of the Company’s assets, liabilities and derivatives. Foreign exchange risk refers to the economic impact that fluctuations in exchange rates between currencies will have on the Company’s non-dollar denominated assets and liabilities. |
n | | Liquidity risk, which is the risk that the Company has an inability to maintain adequate cash resources and funding capacity to meet its obligations, including under liquidity stress scenarios. |
n | | Legal, regulatory and compliance risk, which 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 Company’s reputation. Following the closing of the OneWest transaction, based on current definitions and requirements at the time of the announcement, CIT will become subject to the enhanced regulatory mandates applicable to bank holding companies with $50 billion or more in total consolidated assets, commonly referred to as systemically important financial institutions, or SIFIs, including but not limited to submitting an annual capital plan, undergoing an annual supervisory stress test and two company-run stress tests, submitting a resolution plan, implementation of an enhanced compliance program under the Volcker Rule, and payment of additional FRB assessments. The date on which CIT becomes subject to each SIFI requirement will vary depending on the terms of the individual regulation. |
n | | Operational risk, which is the risk of financial loss, damage to the Company’s reputation, or other adverse impacts resulting from inadequate or failed internal processes and systems, people or external events. |
In order to effectively manage risk, the Company has established a governance and oversight structure that includes defining the Company’s risk appetite, 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, 2013.
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 through two primary metrics.
n | | Net Interest Income Sensitivity (“NII Sensitivity”), which measures the impact of hypothetical changes in interest rates on net finance revenue; and |
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n | | Economic Value of Equity (“EVE”), which measures the net economic value of equity impact 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, and equity. Our leasing products are level/fixed payment transactions, whereas the interest rate on a majority of our commercial loan portfolio is based off of a floating rate index such as short-term Libor or Prime. Our investment portfolio, reverse repos and interest bearing deposits (cash) have short duration 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 are established based on the market environment and competition. The composition of our assets and liabilities results in a slight net asset-sensitive position at the shorter end of the 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 September 30, 2014, the Bank had over $14 billion in deposits, more than half of which were obtained through our direct channel while approximately 38% were sourced through brokers with the remainder from institutional and other sources. Fixed rate, term deposits represented over 61% 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. The majority of the Bank’s deposits are fixed-rate. 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, on a lagging basis. 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
| | | | September 30, 2014
| | December 31, 2013
| |
|---|
| | | | +100 bps
| | –100 bps
| | +100 bps
| | –100 bps
|
|---|
NII Sensitivity | | | | | 6.3 | % | | | (1.0 | )% | | | 6.1 | % | | | (0.9 | )% |
EVE | | | | | 1.8 | % | | | (1.6 | )% | | | 1.8 | % | | | (2.0 | )% |
A primary driver of the change in NII Sensitivity was the sale in April 2014 of the student lending business, which had, as of December 31, 2013, a portfolio of $3.4 billion of government-guaranteed student loans and associated $3.3 billion of floating rate debt that was extinguished upon sale. The December 31, 2013 amounts reflect the simulation results on our portfolio at that time, which included the student lending business.
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 commercial floating rate loan portfolio, which reprice frequently. On a net basis, we 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 Net Finance Revenue (NFR) may increase if short-term interest rates rise, or decrease if 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 bps 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
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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 management’s 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, such simulations do not represent our current view of expected future interest rate movements.
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. In addition to its unrestricted cash, short-term investments and portfolio cash inflows, liquidity sources include:
n | | a $1.5 billion multi-year committed revolving credit facility, of which $1.4 billion was available at September 30, 2014; and |
n | | committed securitization facilities and secured bank lines aggregating $4.9 billion, of which $2.4 billion was available at September 30, 2014, 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.
Cash and investment securities totaled $7.2 billion at September 30, 2014, and were comprised of $6.2 billion of cash, $0.7 billion of securities purchased under resale agreements (“reverse repurchase agreements”) and $0.3 billion of other short-term investment securities, compared to $6.8 billion at June 30, 2014 and $7.3 billion at September 30, 2013. Cash and investment securities at September 30, 2014 consisted of $2.0 billion related to the bank holding company and $3.2 billion at CIT Bank with the remainder comprised of cash at operating subsidiaries and in restricted balances.
During the third quarter, CIT entered into $650 million of reverse repurchase agreements in an effort to improve returns on excess liquidity. These are short-term securities that mature within 91 days, have a weighted average yield of over 50 bps and are secured by the underlying collateral, which is maintained at a third-party custodian. Interest earned on these securities is included in ‘Other interest and dividends’ in the statement of operations.
Reverse repurchase agreements are subject to counterparty credit risk, market risk and operational risk. These risks are reduced but not eliminated through various risk management tools, including the use of collateral and initial margins, daily marking to market, position limits with counterparties and concentration limits for specific securities. SeeNote 5 — Securities Purchased Under Resale Agreements for further details.
Short-term investment securities at September 30, 2014 consisted of Government Agency bonds that were classified as AFS and had maturity dates of 90 days or less.
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The weighted average coupon rates on outstanding deposits and long-term borrowings was 3.16% at September 30, 2014 compared to 3.20% at June 30, 2014 and 3.37% at September 30, 2013. The following table reflects our funding mix:
Funding Mix (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Deposits | | | | | 43 | % | | | 40 | % |
| Secured | | | | | 20 | % | | | 19 | % |
| Unsecured | | | | | 37 | % | | | 41 | % |
The percentage of secured funding at both September 30, 2014 and December 31, 2013 reflects debt related to the student lending business being reported in discontinued operation (i.e. not part of the funding mix at December 2013), and extinguishment of this debt in April 2014. In the second quarter, the Company restructured two aircraft securitization facilities, which resulted in the extinguishment of $300 million in secured debt, however, in the third quarter, management issued a $640 million aerospace securitization and drew down $540 million on an existing CIT Bank conduit facility. Also in the third quarter, total debt of $487 million was acquired with Direct Capital.
Deposits
We continued to grow deposits during 2014 to fund our bank lending and leasing activities. Deposits totaled $14.5 billion at September 30, 2014, up from $12.5 billion at December 31, 2013 and $11.8 billion at September 30, 2013. The weighted average interest rate on deposits was 1.64% at September 30, 2014, 1.65% at December 31, 2013 and 1.54% at September 30, 2013.
The following table details our deposits by type:
Deposits (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Online deposits | | | | $ | 7,991.6 | | | $ | 6,117.5 | |
| Brokered CDs / sweeps | | | | | 5,494.1 | | | | 5,365.4 | |
Other(1) | | | | | 997.5 | | | | 1,043.6 | |
| Total | | | | $ | 14,483.2 | | | $ | 12,526.5 | |
(1) | | Other primarily includes a deposit sweep arrangement related to Healthcare Savings Accounts and deposits at our Brazil bank. |
Long-term Borrowings – Unsecured
Revolving Credit Facility
There were no outstanding borrowings under the Revolving Credit Facility at September 30, 2014 and December 31, 2013. The amount available to draw upon at September 30, 2014 was approximately $1.4 billion, with the remaining amount of approximately $0.1 billion 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. Improvement in CIT’s long-term senior unsecured debt ratings to either BB by S&P or Ba2 by Moody’s 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 CIT’s long-term senior unsecured debt ratings to B+ by S&P and B1 by Moody’s would result in an 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 Company’s 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 Company’s long-term senior unsecured debt rating. At September 30, 2014, the last reported asset coverage ratio was 2.70x.
Senior Unsecured Notes and Series C Unsecured Notes
At September 30, 2014, we had outstanding $12.2 billion of unsecured notes, down slightly from $12.5 billion at December 31, 2013. On February 19, 2014, CIT issued, at par value, $1 billion aggregate principal amount of senior unsecured notes due 2019 that bear interest at a per annum rate of 3.875%. On April 1, 2014, we repaid $1.3 billion of maturing 5.25% unsecured notes.
SeeNote 7 — Long-term Borrowings for further detail.
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Long-term Borrowings – Secured
Secured borrowings totaled $6.7 billion at September 30, 2014 and $6.0 billion at December 31, 2013, which are secured by $10.7 billion and $9.7 billion of pledged assets at September 30, 2014 and December 31, 2013, respectively. Though up modestly from year end, the balance is up from $5.3 billion at June 30, 2014, primarily reflecting a $640 million aerospace securitization, $540 million draw down on an existing CIT Bank conduit facility and total debt of $487 million acquired with the Direct Capital acquisition.
Direct Capital debt included secured debt in 6 separate facilities representing $581 million in total commitments at the acquisition date. The outstanding balance for these acquired facilities totaled $486 million at the acquisition date consisting of four revolving facilities ($293 million), and two term asset-backed securitization facilities ($193 million).
The September 30, 2014 borrowings include $1.9 billion in CIT Bank, which were secured by $2.4 billion of assets, up from $1.0 billion of pledged assets and $0.8 billion of secured debt at December 31, 2013. Non-bank secured borrowings were $4.8 billion and $5.1 billion at September 30, 2014 and December 31, 2013, respectively, and were secured by assets of $8.4 billion and $8.6 billion, respectively.
As part of our liquidity management strategy, we may pledge assets to secure financing transactions (which include securitizations), to secure borrowings 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 for GAAP. The debt associated with these transactions is collateralized by receivables, leases and/or equipment. Certain related cash balances are restricted.
During the 2014 first quarter, CIT renewed a CAD 250 million committed multi-year conduit facility that allows the Canadian Equipment Finance business to fund both existing assets and new originations at attractive terms. In the second quarter, CIT Bank renewed and extended to 2016 an existing $1 billion committed multi-year equipment finance conduit facility.
The Bank is a member of the FHLB of Seattle and may borrow under a line of credit that is secured by collateral pledged to FHLB Seattle. CIT Bank has $160 million outstanding under the line and $204 million of commercial real estate assets were pledged as collateral at September 30, 2014. A subsidiary of the Bank is a member of FHLB Des Moines and may borrow under lines of credit that are secured by a blanket lien on the subsidiary’s assets and collateral pledged to FHLB Des Moines. At September 30, 2014, $148 million of collateral was pledged and $130 million of advances were outstanding with FHLB Des Moines.
SeeNote 7 — Long-Term Borrowings for a table displaying our 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 September 30, 2014, a total of $1,699.7 million of pledged assets and $1,238.5 million of secured debt issued to investors were outstanding under the GSI Facilities. Both amounts are up substantially from June 30, 2014, primarily due to the addition of the aerospace securitization. After adjustment to the amount of actual qualifying borrowing base under terms of the GSI Facilities, this secured debt provided for usage of $1,047.4 million of the maximum notional amount of the GSI Facilities. The remaining $1,077.6 million of the maximum notional amount represents the unused portion of the GSI Facilities and constitutes the notional amount of derivative financial instruments. An unsecured counterparty receivable of $580.1 million 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 at September 30, 2014. The counterparty receivable was up from $301.6 million at December 31, 2013 as the proportionate amount of the balance was allocated to discontinued operation, i.e. the former student lending business. Upon sale of the secured assets and repayment of the secured debt, the full capacity of the facility from a presentation perspective, reverted back to the continuing operations.
Based on the Company’s valuation, the liability related to the GSI facilities was $13.4 million at September 30, 2014, compared to zero at June 30, 2014 and $9.7 million at December 31, 2013. The change in value of $13.4 million was recognized as a reduction to Other Income in the third quarter, while the nine month amount was a reduction of $3.7 million.
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. |
SeeNote 8 — Derivative Financial Instruments for further information.
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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 Company’s liquidity and financial condition.
Our debt ratings at September 30, 2014 as rated by Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Dominion Bond Rating Service (“DBRS”) are presented in the following table and were unchanged from December 31, 2013.
Debt Ratings as of September 30, 2014
| | | | S&P Ratings
Services
| | Moody’s
Investors
Service
| | DBRS
|
|---|
| Issuer / Counterparty Credit Rating | | | | BB- | | Ba3 | | BB |
| Revolving Credit Facility Rating | | | | BB- | | Ba3 | | BBB (Low) |
| Series C Notes / Senior Unsecured Debt Rating | | | | BB- | | Ba3 | | BB |
| Outlook | | | | Positive | | Stable | | Positive |
After the July 22, 2014 announcement of our definitive agreement to acquire OneWest Bank, Moody’s affirmed its Ba3 corporate family rating and placed our Ba3 senior unsecured rating on review for possible downgrade; S&P affirmed its BB- rating and retained its positive outlook; and DBRS placed its BB rating under review with positive implications.
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 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 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 and short term investments held by foreign subsidiaries, including cash available to the BHC and restricted cash, totaled $1.9 billion at September 30, 2014, up slightly from $1.8 billion at December 31, 2013.
Other than in a limited number of jurisdictions, Management does not intend to indefinitely reinvest foreign earnings.
Contractual Payments and Commitments
The following tables summarize significant contractual payments and contractual commitment expirations at September 30, 2014. 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 FSA discounts, in order to better reflect projected contractual payments. Likewise, 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 September 30(1) (dollars in millions)
| | | | Total
| | 2015
| | 2016
| | 2017
| | 2018
| | 2019+
|
|---|
Secured borrowings(2) | | | | $ | 6,680.1 | | | $ | 1,745.8 | | | $ | 1,239.9 | | | $ | 954.7 | | | $ | 602.3 | | | $ | 2,137.4 | |
| Senior unsecured borrowings | | | | | 12,251.5 | | | | 1,500.1 | | | | – | | | | 3,000.0 | | | | 2,200.0 | | | | 5,551.4 | |
Total Long-term borrowings | | | | | 18,931.6 | | | | 3,245.9 | | | | 1,239.9 | | | | 3,954.7 | | | | 2,802.3 | | | | 7,688.8 | |
| Deposits | | | | | 14,484.7 | | | | 6,693.7 | | | | 1,721.4 | | | | 2,172.4 | | | | 839.9 | | | | 3,057.3 | |
| Credit balances of factoring clients | | | | | 1,433.2 | | | | 1,433.2 | | | | – | | | | – | | | | – | | | | – | |
| Lease rental expense | | | | | 170.2 | | | | 30.9 | | | | 29.0 | | | | 25.1 | | | | 23.1 | | | | 62.1 | |
Total contractual payments | | | | $ | 35,019.7 | | | $ | 11,403.7 | | | $ | 2,990.3 | | | $ | 6,152.2 | | | $ | 3,665.3 | | | $ | 10,808.2 | |
(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. |
The unsecured $1.5 billion principal balance with a coupon rate of 4.75% comes due in February 2015.
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Commitment Expiration by Twelve Month Periods Ended September 30 (dollars in millions)
| | | | Total
| | 2015
| | 2016
| | 2017
| | 2018
| | 2019+
|
|---|
| Financing commitments | | | | $ | 4,929.9 | | | $ | 1,033.0 | | | $ | 731.6 | | | $ | 918.4 | | | $ | 939.9 | | | $ | 1,307,0 | |
Aerospace equipment purchase commitments(1) | | | | | 9,592.3 | | | | 779.6 | | | | 618.9 | | | | 850.3 | | | | 1,716.7 | | | | 5,626.8 | |
| Rail and other equipment purchase commitments | | | | | 1,075.8 | | | | 695.1 | | | | 362.0 | | | | 18.7 | | | | – | | | | – | |
| Letters of credit | | | | | 401.5 | | | | 52.2 | | | | 35.3 | | | | 57.6 | | | | 79.5 | | | | 176.9 | |
| Deferred purchase agreements | | | | | 1,920.2 | | | | 1,920.2 | | | | – | | | | – | | | | – | | | | – | |
| Guarantees, acceptances and other recourse obligations | | | | | 3.2 | | | | 3.2 | | | | – | | | | – | | | | – | | | | – | |
Liabilities for unrecognized tax obligations(2) | | | | | 325.6 | | | | 280.0 | | | | 45.6 | | | | – | | | | – | | | | – | |
| Total contractual commitments | | | | $ | 18,248.5 | | | $ | 4,763.3 | | | $ | 1,793.4 | | | $ | 1,845.0 | | | $ | 2,736.1 | | | $ | 7,110.7 | |
(1) | | Aerospace commitments are net of amounts on deposit with manufacturers. The Company had announced it has entered into memorandums of understanding for 20 Airbus commercial aircraft in July 2014, which are not included in the above table as the contract has not been finalized. |
(2) | | The balance cannot be estimated past 2016; therefore the remaining balance is reflected in 2016. |
Financing commitments increased from $4.3 billion at December 31, 2013 to $4.9 billion at September 30, 2014. These include commitments that have been extended to and accepted by customers or agents, but on which the criteria for funding have not been completed of $789 million at September 30, 2014 and $548 million at December 31, 2013. Also included are 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 amount of receivables assigned to us, were $236 million at September 30, 2014 and $157 million at December 31, 2013.
At September 30, 2014, 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 Corporate Finance. The top ten undrawn commitments totaled $377 million at September 30, 2014.
The table above includes approximately $1.1 billion of undrawn financing commitments at September 30, 2014 and $0.9 billion at December 31, 2013 that were not in compliance with contractual obligations, and therefore CIT does not have the contractual obligation to lend.
Capital Management
CIT manages capital to ensure it is adequate to support and grow the businesses and return capital to its shareholders. CIT’s capital management is discussed in its Form 10-K for the year ended December 31, 2013.
Return of Capital
In January 2014, the Board of Directors approved the repurchase of up to $307 million of common stock through December 31, 2014, which included the amount that was not used from the 2013 share repurchase. In April 2014, the Board of Directors authorized an additional share repurchase of up to $300 million of common stock through December 31, 2014. On July 22, 2014, the Board of Directors approved an additional repurchase of up to $500 million of common stock through June 30, 2015. Approximately $450 million of the authorized repurchases remained at September 30, 2014.
During the 2014 first quarter, we repurchased over 2.9 million shares at an average price of $46.66 per share, totaling nearly $136 million. During the second quarter, we repurchased over 9.4 million shares at an average price of $44.24 per share, totaling $416 million. During the third quarter we repurchased over 2.2 million of our shares at an average price of $47.31 per share, totaling nearly $106 million, bringing the total repurchases for 2014 to over 14.5 million shares at an average price of $45.20, or an aggregate of approximately $658 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.
76 CIT GROUP INC
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Our 2014 common stock dividends are as follows:
Declaration Date
| | | Payment Date
| | | | Per Share Dividend
|
|---|
| January | | | February 28, 2014 | | | | $ | 0.10 | |
| April | | | May 30, 2014 | | | | $ | 0.10 | |
| July | | | August 29, 2014 | | | | $ | 0.15 | |
| October | | | November 26, 2014 | | | | $ | 0.15 | |
Capital Composition and Ratios
The Company is subject to various regulatory capital requirements. The regulatory capital guidelines currently applicable to the Company are based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I). We compute capital ratios in accordance with Federal Reserve capital guidelines for assessing adequacy of capital. To be well capitalized, a BHC generally must maintain Tier 1 and Total Capital Ratios of at least 6% and 10%, respectively. The Federal Reserve Board also has established minimum guidelines. The minimum ratios are: Tier 1 Capital Ratio of 4.0%, Total Capital Ratio of 8.0% and Tier 1 Leverage Ratio of 4.0%. In order to be considered a “well capitalized” depository institution under FDIC guidelines, the Bank must maintain a Tier 1 Capital Ratio of at least 6%, a Total Capital Ratio of at least 10%, and a Tier 1 Leverage Ratio of at least 5%.
Tier 1 Capital and Total Capital Components (dollars in millions)
Tier 1 Capital
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Common stockholders’ equity | | | | $ | 9,005.2 | | | $ | 8,838.8 | |
| Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests | | | | | 17.8 | | | | 24.2 | |
| Adjusted total equity | | | | | 9,023.0 | | | | 8,863.0 | |
| Less: Goodwill | | | | | (557.3 | ) | | | (338.3 | ) |
| Disallowed deferred tax assets | | | | | (333.9 | ) | | | (26.6 | ) |
| Disallowed intangible assets | | | | | (33.5 | ) | | | (20.3 | ) |
| Investment in certain subsidiaries | | | | | (30.6 | ) | | | (32.3 | ) |
Other Tier 1 components(1) | | | | | (6.0 | ) | | | (6.0 | ) |
| Tier 1 Capital | | | | | 8,061.7 | | | | 8,439.5 | |
Tier 2 Capital | | | | | | | | | | |
Qualifying reserve for credit losses and other reserves(2) | | | | | 391.3 | | | | 383.9 | |
| Less: Investment in certain subsidiaries | | | | | (30.6 | ) | | | (32.3 | ) |
Other Tier 2 components(3) | | | | | – | | | | 0.1 | |
| Total qualifying capital | | | | $ | 8,422.4 | | | $ | 8,791.2 | |
| Risk-weighted assets | | | | $ | 56,212.0 | | | $ | 50,571.2 | |
BHC Ratios | | | | | | | | | | |
| Tier 1 Capital Ratio | | | | | 14.3 | % | | | 16.7 | % |
| Total Capital Ratio | | | | | 15.0 | % | | | 17.4 | % |
| Tier 1 Leverage Ratio | | | | | 18.1 | % | | | 18.1 | % |
CIT Bank Ratios | | | | | | | | | | |
| Tier 1 Capital Ratio | | | | | 13.0 | % | | | 16.8 | % |
| Total Capital Ratio | | | | | 14.3 | % | | | 18.1 | % |
| Tier 1 Leverage Ratio | | | | | 13.2 | % | | | 16.9 | % |
(1) | | Includes the Tier 1 capital charge for nonfinancial equity investments and the Tier 1 capital deduction for net unrealized losses on available-for-sale marketable securities (net of tax). |
(2) | | “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. |
(3) | | Banking organizations are permitted to include in Tier 2 Capital up to 45% of net unrealized pre-tax gains on available for sale equity securities with readily determinable fair values. |
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The change in common stockholders’ equity from December 31, 2013 is primarily driven by Net Income of $879 million, including the benefit of the reversal of the valuation allowance on the U.S. Federal deferred tax asset of $375 million, less the impact of share repurchases, $658 million, and dividends paid, $68 million.
In addition to the changes in common stockholders’ equity, Regulatory Capital is also affected by certain adjustments. During the year the primary changes to these balances included:
n | | In the third quarter, we recorded a partial reversal ($375 million) of our U.S. Federal deferred tax asset valuation allowance. This reversal benefited net income and stockholders’ equity but had minimal impact on our regulatory capital ratios as the majority of the deferred tax asset balance is disallowed for regulatory capital purposes. |
n | | The increase in goodwill and intangible assets of $236 million, due to the acquisitions of Direct Capital in the third quarter and Nacco in the first quarter, also reduced the amount of regulatory capital. |
For a BHC, capital adequacy is based upon risk-weighted asset ratios calculated in accordance with quantitative measures established by the Federal Reserve. Under the Basel 1 guidelines, certain commitments and off-balance sheet transactions are assigned asset equivalent balances, and together with on-balance sheet assets, are divided into risk categories, each of which is assigned a risk weighting ranging from 0% (for example U.S. Treasury Bonds) to 100% (for example commercial loans). For a BHC, capital adequacy is based upon risk-weighted asset ratios calculated in accordance with quantitative measures established by the Federal Reserve. Under the Basel 1 guidelines, certain commitments and off-balance sheet transactions are assigned asset equivalent balances, and together with on-balance sheet assets, are divided into risk categories, each of which is assigned a risk weighting ranging from 0% (for example U.S. Treasury Bonds) to 100% (for example commercial loans).
The reconciliation of balance sheet assets to risk-weighted assets is presented below:
Risk-Weighted Assets (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Balance sheet assets | | | | $ | 46,481.0 | | | $ | 47,139.0 | |
| Risk weighting adjustments to balance sheet assets | | | | | (6,989.0 | ) | | | (10,328.1 | ) |
| Off balance sheet items | | | | | 16,720.0 | | | | 13,760.3 | |
| Risk-weighted assets | | | | $ | 56,212.0 | | | $ | 50,571.2 | |
The decline in the balance sheet assets and the risk weighting adjustments primarily reflects the sale of the student loan assets during the 2014 second quarter. The off balance sheet items for the current period primarily reflects commitments to purchase aircraft and railcars ($12.5 billion, which includes 20 Airbus aircraft under July 2014 memorandums of understanding), unused lines of credit ($1.8 billion credit equivalent, largely related to Corporate Finance division) and deferred purchase agreements ($1.9 billion related to Commercial Services division).
Future Regulatory Capital Guidelines
On April 15, 2014, the Basel Committee on Banking Supervision (“BCBS”) released the final standard of its “Supervisory Framework for Measuring and Controlling Large Exposures” (“SFLE”), which will take effect on January 1, 2019, and replace the BCBS 1991 standard on measuring and controlling large exposures. SFLE includes a general limit on all of a bank’s exposures to a single counterparty of 25% of a bank’s Tier 1 Capital. This limit also applies to identified groups of connected counterparties, which are interdependent and likely to fail simultaneously. A tighter limit of 15% of Tier 1 Capital will apply to exposures between banks that have been designated as global systemically important banks (GSIBs).
We described in detail in the “Regulation” section of Item 1 Business Overview in our 2013 Form 10-K details regarding Basel III and other regulatory matters. A brief summary follows:
In July 2013, the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation issued a final rule (“Basel III Final Rule”) implementing revised risk-based capital and leverage requirements for banking organizations proposed under Basel III. CIT, as well as the Bank, will be subject to the Basel III Final Rule as of January 1, 2015.
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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. CIT does not currently have either of these forms of capital outstanding.
The Basel III Final Rule also introduces a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios apart from the Tier 1 leverage ratio. 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.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on 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.
Per the Basel III final rule, 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
| | Leverage Ratio
|
|---|
| Stated minimum Ratio | | | | | 4.5 | % | | | 6.0 | % | | | 8.0 | % | | | 4.0 | % |
| Capital conservation buffer | | | | | 2.5 | % | | | 2.5 | % | | | 2.5 | % | | | NA | |
| Effective minimum ratio | | | | | 7.0 | % | | | 8.5 | % | | | 10.5 | % | | | 4.0 | % |
With respect to the 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.
At September 30, 2014, CIT’s and the Bank’s capital ratios, as displayed in a prior table, and capital composition exceed the post-transition minimum capital requirements at January 2019. CIT’s capital stock is substantially all Tier 1 Common equity and generally does not include non-qualifying capital instruments subject to transitional deductions. CIT and the Bank are subject to a minimum Tier 1 Leverage ratio of 4% and 5%, respectively. We continue to believe that, as of September 30, 2014, CIT and the Bank would meet all capital requirements under the Basel III Final Rule, including the capital conservation buffer, on a fully phased-in basis as if such requirements were currently effective. As non-advanced approaches banking organizations, CIT and the Bank will not be subject to the Countercyclical Buffer or the supplementary leverage ratio.
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Tangible Book Value and Tangible Book Value per Share
Tangible book value represents common equity less goodwill and other intangible assets. A reconciliation of CIT’s 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)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
| Total common stockholders’ equity | | | | $ | 9,005.2 | | | $ | 8,838.8 | |
| Less: Goodwill | | | | | (557.3 | ) | | | (334.6 | ) |
| Intangible assets | | | | | (33.5 | ) | | | (20.3 | ) |
| Tangible book value | | | | $ | 8,414.4 | | | $ | 8,483.9 | |
| Book value per share | | | | $ | 49.10 | | | $ | 44.78 | |
| |
| Tangible book value per share | | | | $ | 45.87 | | | $ | 42.98 | |
Book value was up as the year-to-date earnings exceeds the impact of share repurchases, the value of which reduces book value while held in treasury. Tangible book value (“TBV”) was down slightly and reflected the reduction for the goodwill recorded with the Direct Capital and Nacco acquisitions. Book value per share increased reflecting the decline in outstanding shares and higher common equity. TBV per share increased, as the decline in outstanding shares offset the slight decrease in TBV.
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. for CIT’s segments. Asset growth during 2014 reflected solid lending and leasing volume and its third quarter acquisition of Direct Capital, which added approximately $540 million of loans and $487 million of debt. Deposits grew in support of the increased organic business. The Bank’s capital and leverage ratios are included in the tables that follow and while remaining well above required levels, they are down reflecting growth activities, including the impact of goodwill and intangible assets associated with the Direct Capital acquisition.
As detailed in the following Consolidated Balance Sheet table, total assets increased to $20.3 billion, up $4.2 billion from December 31, 2013, related primarily to growth in financing and leasing assets. Cash and deposits with banks was $3.2 billion, up from December 31, 2013, reflecting increased deposits.
Commercial loans totaled $14.7 billion, up from $12.0 billion at December 31, 2013. The increase reflects solid new business activity during 2014 and the addition of $540 million from the third quarter acquisition of Direct Capital. The Bank funded $2.2 billion of new business volume during the third quarter of 2014, up 34% from the year-ago quarter and 8% sequentially. Most of the 2014 third quarter volume, $1.5 billion, related to NACF. Increases in Equipment Finance and Real Estate Finance divisions offset lower Corporate Finance activity. The remaining amount funded aerospace, maritime and rail transactions in TIF. Year-to-date, volume is up 18%. The Bank also expanded its portfolio of operating lease equipment, which totaled nearly $2.0 billion at September 30, 2014 and was comprised primarily of railcars and some aircraft.
CIT Bank deposits were $14.4 billion at September 30, 2014, up from $12.5 billion at December 31, 2013. The weighted average interest rate was 1.57% at September 30, 2014, up slightly from December 31, 2013.
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The following presents condensed financial information for CIT Bank.
Condensed Balance Sheets (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
|
|---|
ASSETS: |
| Cash and deposits with banks | | | | $ | 3,216.6 | | | $ | 2,528.6 | |
| Investment securities | | | | | 276.7 | | | | 234.6 | |
| Assets held for sale | | | | | 81.4 | | | | 104.5 | |
| Commercial loans | | | | | 14,671.3 | | | | 12,032.6 | |
| Allowance for loan losses | | | | | (253.7 | ) | | | (212.9 | ) |
| Operating lease equipment, net | | | | | 1,962.1 | | | | 1,248.9 | |
| Goodwill | | | | | 159.5 | | | | – | |
| Other assets | | | | | 214.4 | | | | 195.0 | |
Total Assets | | | | $ | 20,328.3 | | | $ | 16,131.3 | |
LIABILITIES AND EQUITY: |
| Deposits | | | | $ | 14,432.5 | | | $ | 12,496.2 | |
| Long-term borrowings | | | | | 1,867.6 | | | | 854.6 | |
| Other borrowings | | | | | 1,000.0 | | | | – | |
| Other liabilities | | | | | 345.6 | | | | 183.9 | |
Total Liabilities | | | | | 17,645.7 | | | | 13,534.7 | |
Total Equity | | | | | 2,682.6 | | | | 2,596.6 | |
Total Liabilities and Equity | | | | $ | 20,328.3 | | | $ | 16,131.3 | |
Capital Ratios |
| Tier 1 Capital Ratio | | | | | 13.0 | % | | | 16.8 | % |
| Total Capital Ratio | | | | | 14.3 | % | | | 18.1 | % |
| Tier 1 Leverage ratio | | | | | 13.2 | % | | | 16.9 | % |
Financing and Leasing Assets by Segment |
| North American Commercial Finance | | | | $ | 12,575.0 | | | $ | 10,701.1 | |
| Transportation & International Finance | | | | | 4,139.8 | | | | 2,606.8 | |
| Non-Strategic Portfolios | | | | | – | | | | 78.1 | |
| Total | | | | $ | 16,714.8 | | | $ | 13,386.0 | |
Condensed Statements of Operations (dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Interest income | | | | $ | 184.5 | | | $ | 169.8 | | | $ | 142.9 | | | $ | 512.1 | | | $ | 401.5 | |
| Interest expense | | | | | (65.1 | ) | | | (55.1 | ) | | | (42.6 | ) | | | (171.6 | ) | | | (124.7 | ) |
| Net interest revenue | | | | | 119.4 | | | | 114.7 | | | | 100.3 | | | | 340.5 | | | | 276.8 | |
| Provision for credit losses | | | | | (33.6 | ) | | | (14.6 | ) | | | (29.7 | ) | | | (73.0 | ) | | | (67.8 | ) |
| Net interest revenue, after credit provision | | | | | 85.8 | | | | 100.1 | | | | 70.6 | | | | 267.5 | | | | 209.0 | |
| Rental income on operating leases | | | | | 61.6 | | | | 53.9 | | | | 29.1 | | | | 161.3 | | | | 75.0 | |
| Other income | | | | | 23.6 | | | | 23.0 | | | | 32.8 | | | | 73.6 | | | | 90.0 | |
| Total net revenue, net of interest expense and credit provision | | | | | 171.0 | | | | 177.0 | | | | 132.5 | | | | 502.4 | | | | 374.0 | |
| Operating expenses (including maintenance and other operating lease expenses) | | | | | (119.5 | ) | | | (82.5 | ) | | | (78.9 | ) | | | (287.4 | ) | | | (223.6 | ) |
| Depreciation on operating lease equipment | | | | | (24.4 | ) | | | (22.7 | ) | | | (12.0 | ) | | | (65.3 | ) | | | (29.8 | ) |
| Income before provision for income taxes | | | | | 27.1 | | | | 71.8 | | | | 41.6 | | | | 149.7 | | | | 120.6 | |
| Provision for income taxes | | | | | (10.6 | ) | | | (30.4 | ) | | | (16.5 | ) | | | (58.8 | ) | | | (49.5 | ) |
Net income | | | | $ | 16.5 | | | $ | 41.4 | | | $ | 25.1 | | | $ | 90.9 | | | $ | 71.1 | |
| |
New business volume – funded | | | | $ | 2,207.4 | | | $ | 2,049.3 | | | $ | 1,651.5 | | | $ | 5,917.1 | | | $ | 5,006.3 | |
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The Bank’s 2014 results benefited from higher earning assets. The Bank’s provision for credit losses for the quarter ended September 30, 2014 reflects higher reserve build, including higher non-specific reserves, primarily due to asset growth including new business through Direct Capital, while credit metrics remain at or near cyclical lows. For the quarter ended September 30, 2014, net charge-offs as a percentage of average finance receivables were 0.30%, compared to 0.19% in the year-ago quarter and 0.21% last quarter.
Other income in 2014 was down from the 2013 periods, reflecting lower fee revenue. Operating expenses increased from the 2013 periods, reflecting the continued growth of both asset and deposits in the Bank, higher corporate expense allocations, the addition of 250 employees in the current quarter associated with the Direct Capital acquisition, and a charge related to the branch initiative.
Net Finance Revenue(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Interest income | | | | $ | 184.5 | | | $ | 169.8 | | | $ | 142.9 | | | $ | 512.1 | | | $ | 401.5 | |
| Rental income on operating leases | | | | | 61.6 | | | | 53.9 | | | | 29.1 | | | | 161.3 | | | | 75.0 | |
| Finance revenue | | | | | 246.1 | | | | 223.7 | | | | 172.0 | | | | 673.4 | | | | 476.5 | |
| Interest expense | | | | | (65.1 | ) | | | (55.1 | ) | | | (42.6 | ) | | | (171.6 | ) | | | (124.7 | ) |
| Depreciation on operating lease equipment | | | | | (24.4 | ) | | | (22.7 | ) | | | (12.0 | ) | | | (65.3 | ) | | | (29.8 | ) |
| Maintenance and other operating lease expenses* | | | | | (2.3 | ) | | | (1.8 | ) | | | (0.5 | ) | | | (5.9 | ) | | | (1.3 | ) |
| Net finance revenue | | | | $ | 154.3 | | | $ | 144.1 | | | $ | 116.9 | | | $ | 430.6 | | | $ | 320.7 | |
| |
| Average Earning Assets (“AEA”) | | | | $ | 16,224.0 | | | $ | 14,792.4 | | | $ | 11,598.1 | | | $ | 14,881.3 | | | $ | 10,549.7 | |
As a % of AEA: |
| Interest income | | | | | 4.55 | % | | | 4.59 | % | | | 4.93 | % | | | 4.59 | % | | | 5.07 | % |
| Rental income on operating leases | | | | | 1.52 | % | | | 1.46 | % | | | 1.00 | % | | | 1.45 | % | | | 0.95 | % |
| Finance revenue | | | | | 6.07 | % | | | 6.05 | % | | | 5.93 | % | | | 6.04 | % | | | 6.02 | % |
| Interest expense | | | | | (1.61 | )% | | | (1.49 | )% | | | (1.47 | )% | | | (1.54 | )% | | | (1.58 | )% |
| Depreciation on operating lease equipment | | | | | (0.60 | )% | | | (0.61 | )% | | | (0.41 | )% | | | (0.59 | )% | | | (0.38 | )% |
| Maintenance and other operating lease expenses* | | | | | (0.06 | )% | | | (0.05 | )% | | | (0.02 | )% | | | (0.05 | )% | | | (0.02 | )% |
| Net finance revenue | | | | | 3.80 | % | | | 3.90 | % | | | 4.03 | % | | | 3.86 | % | | | 4.04 | % |
* | | Amounts included in CIT Bank operating expenses. |
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 September 30, 2014), 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.
NFR and AEA increased on asset growth. NFM is down from the prior periods reflecting some pressure on loan yields, while higher funding costs impacted the current quarter reflecting the added debt. During 2014, the Bank grew its operating lease portfolio, by adding aircraft and railcars which contributed net operating lease revenue of $35 million, up from $17 million in the year-ago quarter and $29 million in the prior quarter. Year-to-date, net operating lease revenue totaled $90 million, up from $44 million in 2013.
82 CIT GROUP INC
Table of Contents
SELECT DATA AND AVERAGE BALANCESThe 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
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Select Statement of Operations Data |
| Net interest revenue | | | | $ | 33.1 | | | $ | 47.6 | | | $ | 49.7 | | | $ | 111.0 | | | $ | 154.6 | |
| Provision for credit losses | | | | | (38.2 | ) | | | (10.2 | ) | | | (16.4 | ) | | | (85.1 | ) | | | (50.5 | ) |
| Total non-interest income | | | | | 559.2 | | | | 613.3 | | | | 577.4 | | | | 1,735.5 | | | | 1,687.3 | |
| Total other expenses | | | | | 437.4 | | | | 431.7 | | | | 404.4 | | | | 1,303.0 | | | | 1,211.0 | |
| Income from continuing operations | | | | | 515.4 | | | | 195.2 | | | | 192.9 | | | | 825.5 | | | | 521.4 | |
| Net income | | | | | 514.9 | | | | 246.9 | | | | 199.6 | | | | 879.0 | | | | 545.8 | |
Per Common Share Data | | | | | | | | | | | | | | | | | | | | | | |
| Diluted income per common share from continuing operations | | | | $ | 2.76 | | | $ | 1.02 | | | $ | 0.96 | | | $ | 4.31 | | | $ | 2.58 | |
| Diluted income per common share | | | | $ | 2.76 | | | $ | 1.29 | | | $ | 0.99 | | | $ | 4.59 | | | $ | 2.70 | |
| Book value per common share | | | | $ | 49.10 | | | $ | 46.42 | | | $ | 44.16 | | | | | | | | | |
| Tangible book value per common share | | | | $ | 45.87 | | | $ | 44.16 | | | $ | 42.36 | | | | | | | | | |
| Dividends declared per common share | | | | $ | 0.15 | | | $ | 0.10 | | | $ | – | | | $ | 0.35 | | | $ | – | |
Performance Ratios | | | | | | | | | | | | | | | | | | | | | | |
| Return on average common stockholders’ equity | | | | | 23.6 | % | | | 9.0 | % | | | 8.8 | % | | | 12.6 | % | | | 8.1 | % |
| Net finance revenue as a percentage of average earning assets | | | | | 4.26 | % | | | 4.35 | % | | | 4.56 | % | | | 4.22 | % | | | 4.74 | % |
| Return on average total assets | | | | | 4.54 | % | | | 1.75 | % | | | 1.86 | % | | | 2.46 | % | | | 1.70 | % |
| Total ending equity to total ending assets | | | | | 19.4 | % | | | 19.5 | % | | | 19.2 | % | | | | | | | | |
Balance Sheet Data |
| Loans including receivables pledged | | | | $ | 19,785.8 | | | | 18,604.4 | | | | 18,371.0 | | | | | | | | | |
| Allowance for loan losses | | | | | (357.7 | ) | | | (341.0 | ) | | | (356.1 | ) | | | | | | | | |
| Operating lease equipment, net | | | | | 15,183.8 | | | | 14,788.3 | | | | 12,577.1 | | | | | | | | | |
| Goodwill | | | | | 557.3 | | | | 403.1 | | | | 338.3 | | | | | | | | | |
| Total cash and short-term investments | | | | | 6,543.5 | | | | 6,771.9 | | | | 7,296.1 | | | | | | | | | |
| Assets of discontinued operation | | | | | – | | | | 1.0 | | | | 3,888.3 | | | | | | | | | |
| Total assets | | | | | 46,481.0 | | | | 44,152.7 | | | | 46,224.0 | | | | | | | | | |
| Deposits | | | | | 14,483.2 | | | | 13,939.0 | | | | 11,806.1 | | | | | | | | | |
| Total long-term borrowings | | | | | 18,923.4 | | | | 17,545.5 | | | | 18,041.2 | | | | | | | | | |
| Liabilities of discontinued operation | | | | | – | | | | 0.9 | | | | 3,362.9 | | | | | | | | | |
| Total common stockholders’ equity | | | | | 9,005.2 | | | | 8,617.6 | | | | 8,845.0 | | | | | | | | | |
Credit Quality | | | | | | | | | | | | | | | | | | | | | | |
| Non-accrual loans as a percentage of finance receivables | | | | | 1.02 | % | | | 1.02 | % | | | 1.41 | % | | | | | | | | |
| Net charge-offs as a percentage of average finance receivables | | | | | 0.39 | % | | | 0.45 | % | | | 0.59 | % | | | 0.53 | % | | | 0.48 | % |
| Allowance for loan losses as a percentage of finance receivables | | | | | 1.81 | % | | | 1.83 | % | | | 1.94 | % | | | | | | | | |
Financial Ratios |
| Tier 1 Capital Ratio | | | | | 14.3 | % | | | 16.0 | % | | | 16.7 | % | | | | | | | | |
| Total Capital Ratio | | | | | 15.0 | % | | | 16.7 | % | | | 17.4 | % | |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 83
Table of Contents
Quarterly Average Balances(1) and Associated Income (dollars in millions)
| | | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| |
|---|
| | | | Average
Balance
| | Revenue /
Expense
| | Average
Rate (%)
| | Average
Balance
| | Revenue /
Expense
| | Average
Rate (%)
| | Average
Balance
| | Revenue /
Expense
| | Average
Rate (%)
|
|---|
| Interest bearing deposits | | | | $ | 5,517.4 | | | $ | 4.4 | | | | 0.32 | % | | $ | 4,620.9 | | | $ | 4.5 | | | | 0.39 | % | | $ | 5,188.7 | | | $ | 4.0 | | | | 0.31 | % |
Securities purchased under agreements to resell(6) | | | | | 275.0 | | | | 0.4 | | | | 0.58 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Investments | | | | | 860.9 | | | | 3.6 | | | | 1.67 | % | | | 2,035.8 | | | | 3.9 | | | | 0.77 | % | | | 2,041.3 | | | | 2.8 | | | | 0.55 | % |
Loans (including held for sale)(2)(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S.(2) | | | | | 17,002.0 | | | | 229.2 | | | | 5.85 | % | | | 16,339.2 | | | | 226.9 | | | | 6.03 | % | | | 14,943.2 | | | | 209.6 | | | | 6.13 | % |
| Non-U.S. | | | | | 3,186.7 | | | | 70.7 | | | | 8.87 | % | | | 3,510.0 | | | | 74.5 | | | | 8.49 | % | | | 4,189.3 | | | | 90.0 | | | | 8.59 | % |
Total loans(2) | | | | | 20,188.7 | | | | 299.9 | | | | 6.36 | % | | | 19,849.2 | | | | 301.4 | | | | 6.50 | % | | | 19,132.5 | | | | 299.6 | | | | 6.71 | % |
Total interest earning assets / interest income(2)(3) | | | | | 26,842.0 | | | | 308.3 | | | | 4.83 | % | | | 26,505.9 | | | | 309.8 | | | | 4.92 | % | | | 26,362.5 | | | | 306.4 | | | | 4.88 | % |
Operating lease equipment, net
(including held for sale)(4) |
U.S.(4) | | | | | 7,959.1 | | | | 176.2 | | | | 8.86 | % | | | 7,741.5 | | | | 172.5 | | | | 8.91 | % | | | 6,497.9 | | | | 148.2 | | | | 9.12 | % |
Non-U.S.(4) | | | | | 7,219.3 | | | | 155.9 | | | | 8.64 | % | | | 6,921.8 | | | | 140.8 | | | | 8.14 | % | | | 6,155.1 | | | | 149.1 | | | | 9.69 | % |
Total operating lease equipment, net(4) | | | | | 15,178.4 | | | | 332.1 | | | | 8.75 | % | | | 14,663.3 | | | | 313.3 | | | | 8.55 | % | | | 12,653.0 | | | | 297.3 | | | | 9.40 | % |
Total earning assets(2) | | | | | 42,020.4 | | | $ | 640.4 | | | | 6.29 | % | | | 41,169.2 | | | $ | 623.1 | | | | 6.25 | % | | | 39,015.5 | | | $ | 603.7 | | | | 6.40 | % |
| Non-interest earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | | | 968.1 | | | | | | | | | | | | 1,213.1 | | | | | | | | | | | | 672.8 | | | | | | | | | |
| Allowance for loan losses | | | | | (345.3 | ) | | | | | | | | | | | (350.4 | ) | | | | | | | | | | | (363.4 | ) | | | | | | | | |
| All other non-interest earning assets | | | | | 2,768.3 | | | | | | | | | | | | 2,546.5 | | | | | | | | | | | | 2,216.9 | | | | | | | | | |
| Assets of discontinued operation | | | | | 0.2 | | | | | | | | | | | | 931.2 | | | | | | | | | | | | 3,940.1 | | | | | | | | | |
Total Average Assets | | | | $ | 45,411.7 | | | | | | | | | | | $ | 45,509.6 | | | | | | | | | | | $ | 45,481.9 | | | | | | | | | |
| Borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | $ | 14,223.6 | | | $ | 59.2 | | | | 1.66 | % | | $ | 13,608.5 | | | $ | 56.1 | | | | 1.65 | % | | $ | 11,501.4 | | | $ | 44.3 | | | | 1.54 | % |
Long-term borrowings(5) | | | | | 18,430.3 | | | | 216.0 | | | | 4.69 | % | | | 18,226.2 | | | | 206.1 | | | | 4.52 | % | | | 17,808.3 | | | | 212.4 | | | | 4.77 | % |
| Total interest-bearing liabilities | | | | | 32,653.9 | | | $ | 275.2 | | | | 3.37 | % | | | 31,834.7 | | | $ | 262.2 | | | | 3.29 | % | | | 29,309.7 | | | | 256.7 | | | | 3.50 | % |
| Credit balances of factoring clients | | | | | 1,327.1 | | | | | | | | | | | | 1,301.7 | | | | | | | | | | | | 1,264.8 | | | | | | | | | |
| Other non-interest bearing liabilities | | | | | 2,674.4 | | | | | | | | | | | | 2,863.2 | | | | | | | | | | | | 2,699.6 | | | | | | | | | |
| Liabilities of discontinued operation | | | | | 0.2 | | | | | | | | | | | | 793.9 | | | | | | | | | | | | 3,418.1 | | | | | | | | | |
| Noncontrolling interests | | | | | 9.9 | | | | | | | | | | | | 8.4 | | | | | | | | | | | | 9.8 | | | | | | | | | |
| Stockholders’ equity | | | | | 8,746.2 | | | | | | | | | | | | 8,707.7 | | | | | | | | | | | | 8,779.9 | | | | | | | | | |
Total Average Liabilities and Stockholders’ Equity | | | | $ | 45,411.7 | | | | | | | | | | | $ | 45,509.6 | | | | | | | | | | | $ | 45,481.9 | | | | | | | | | |
| Net revenue spread | | | | | | | | | | | | | 2.92 | % | | | | | | | | | | | 2.96 | % | | | | | | | | | | | 2.90 | % |
| Impact of non-interest bearing sources | | | | | | | | | | | | | 0.67 | % | | | | | | | | | | | 0.66 | % | | | | | | | | | | | 0.78 | % |
Net revenue/yield on earning assets(2) | | | | | | | | $ | 365.2 | | | | 3.59 | % | | | | | | $ | 360.9 | | | | 3.62 | % | | | | | | $ | 347.0 | | | | 3.68 | % |
(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 periods 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. |
(6) | | The weighted average rate for the Securities purchased under agreements to resell is approximately 0.50% for the quarter ended September 30, 2014 based on interest income and average balances in whole dollars. |
84 CIT GROUP INC
Table of Contents
Year to Date Average Balances(1) and Associated Income (dollars in millions)
| | | | September 30, 2014
| | September 30, 2013
| |
|---|
| | | | Average
Balance
| | Revenue /
Expense
| | Average
Rate (%)
| | Average
Balance
| | Revenue /
Expense
| | Average
Rate (%)
|
|---|
| Interest bearing deposits | | | | $ | 5,138.7 | | | $ | 13.5 | | | | 0.35 | % | | $ | 5,478.3 | | | $ | 11.8 | | | | 0.29 | % |
| Securities purchased under agreements to resell | | | | | 110.0 | | | | 0.4 | | | | 0.48 | % | | | – | | | | – | | | | – | |
| Investments | | | | | 1,850.8 | | | | 11.7 | | | | 0.84 | % | | | 1,766.1 | | | | 8.5 | | | | 0.64 | % |
Loans (including held for sale)(2)(3) | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S.(2) | | | | | 16,430.3 | | | | 670.5 | | | | 5.91 | % | | | 14,384.9 | | | | 644.8 | | | | 6.53 | % |
| Non-U.S. | | | | | 3,471.3 | | | | 224.2 | | | | 8.61 | % | | | 4,182.7 | | | | 282.9 | | | | 9.02 | % |
Total loans(2) | | | | | 19,901.6 | | | | 894.7 | | | | 6.42 | % | | | 18,567.6 | | | | 927.7 | | | | 7.13 | % |
Total interest earning assets / interest income(2)(3) | | | | | 27,001.1 | | | | 920.3 | | | | 4.78 | % | | | 25,812.0 | | | | 948.0 | | | | 5.14 | % |
Operating lease equipment, net
(including held for sale)(4) |
U.S.(4) | | | | | 7,678.0 | | | | 504.9 | | | | 8.77 | % | | | 6,443.1 | | | | 452.4 | | | | 9.36 | % |
Non-U.S.(4) | | | | | 6,895.0 | | | | 432.0 | | | | 8.35 | % | | | 6,253.7 | | | | 456.0 | | | | 9.72 | % |
Total operating lease equipment, net(4) | | | | | 14,573.0 | | | | 936.9 | | | | 8.57 | % | | | 12,696.8 | | | | 908.4 | | | | 9.54 | % |
Total earning assets(2) | | | | | 41,574.1 | | | $ | 1,857.2 | | | | 6.15 | % | | | 38,508.8 | | | $ | 1,856.4 | | | | 6.64 | % |
| Non-interest earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | | | 974.5 | | | | | | | | | | | | 466.4 | | | | | | | | | |
| Allowance for loan losses | | | | | (352.0 | ) | | | | | | | | | | | (371.7 | ) | | | | | | | | |
| All other non-interest earning assets | | | | | 2,577.2 | | | | | | | | | | | | 2,200.5 | | | | | | | | | |
| Assets of discontinued operation | | | | | 1,517.3 | | | | | | | | | | | | 4,059.6 | | | | | | | | | |
Total Average Assets | | | | $ | 46,291.1 | | | | | | | | | | | $ | 44,863.6 | | | | | | | | | |
| Borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | $ | 13,544.9 | | | $ | 167.2 | | | | 1.65 | % | | $ | 10,897.0 | | | $ | 131.4 | | | | 1.61 | % |
Long-term borrowings(5) | | | | | 18,566.0 | | | | 642.1 | | | | 4.61 | % | | | 17,967.5 | | | | 662.0 | | | | 4.91 | % |
| Total interest-bearing liabilities | | | | | 32,110.9 | | | $ | 809.3 | | | | 3.36 | % | | | 28,864.5 | | | $ | 793.4 | | | | 3.66 | % |
| Credit balances of factoring clients | | | | | 1,311.0 | | | | | | | | | | | | 1,225.4 | | | | | | | | | |
| Other non-interest bearing liabilities | | | | | 2,799.5 | | | | | | | | | | | | 2,639.6 | | | | | | | | | |
| Liabilities of discontinued operation | | | | | 1,296.4 | | | | | | | | | | | | 3,519.4 | | | | | | | | | |
| Noncontrolling interests | | | | | 10.0 | | | | | | | | | | | | 8.7 | | | | | | | | | |
| Stockholders’ equity | | | | | 8,763.3 | | | | | | | | | | | | 8,606.0 | | | | | | | | | |
Total Average Liabilities and Stockholders’ Equity | | | | $ | 46,291.1 | | | | | | | | | | | $ | 44,863.6 | | | | | | | | | |
| Net revenue spread | | | | | | | | | | | | | 2.79 | % | | | | | | | | | | | 2.98 | % |
| Impact of non-interest bearing sources | | | | | | | | | | | | | 0.68 | % | | | | | | | | | | | 0.82 | % |
Net revenue/yield on earning assets(2) | | | | | | | | $ | 1,047.9 | | | | 3.47 | % | | | | | | $ | 1,063.0 | | | | 3.80 | % |
(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. |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 85
Table of Contents
Interest income on interest bearing deposits, securities purchased under agreements to resell and investment securities was not significant in any of the quarters presented. Average quarterly interest bearing deposits was up for the September 30, 2014 quarter, while year-to-date, the average was down reflecting the investment of cash in investment securities to earn a higher yield. 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 that typically mature in 91 days or less. Investments were down sequentially, reflecting maturities, and the subsequent usage of the proceeds to repay maturing debt. The sequential quarterly increase in average rate for investments reflects a reduction in lower-yielding investments, such as U.S. Treasuries.
Average rates on loans and operating lease equipment decreased from the year-ago quarter and year-to-date, as compression on portfolio yields across many of our businesses, sales of higher-yielding portfolios last year, suspended depreciation in the prior year, lower yield-related fees and lower FSA accretion offset the higher level of earning assets.
Net operating lease revenue was primarily generated from the commercial aircraft and rail portfolios. Net operating lease revenue increased, as the benefit of increased assets from the growing aerospace and rail portfolios offset lower rental rates, and also when compared to the 2013 periods, higher depreciation expense and increased maintenance and other operating lease expenses. Rental income increased from the year-ago periods as did depreciation expense, reflecting the growing portfolio. Depreciation expense also includes amounts related to equipment impairments, of which the 2014 second quarter included a modest charge. The increase from 2013 in maintenance and other operating lease expenses reflects the growing rail portfolio. On average, lease renewal rates in the rail portfolio were re-pricing slightly higher, while the commercial aircraft portfolio has been re-pricing slightly lower, putting pressure on overall rental revenue, compared to the 2013 periods. These factors are also reflected in the net operating lease revenue as a percent of AOL. The sequential trends reflects higher AOL and slightly lower maintenance and operating lease expenses. The 2014 first quarter European rail acquisition also impacted net yields, as the acquired portfolio’s net yields were lower.
Interest expense increased from the 2013 periods, primarily due to higher deposit balances, commensurate with asset growth. Sequentially, the increase also reflects higher debt balances associated with the Direct Capital acquisition, while the 2014 second quarter had a net benefit of $7 million of debt FSA and OID accretion. At September 30, 2014, the remaining FSA discount on long-term borrowings and deposits is not significant, approximately $7 million.
The weighted average coupon rate of outstanding deposits and long-term borrowings was 3.16% at September 30, 2014, down from 3.20% at June 30, 2014 and 3.37% at September 30, 2013, benefiting from a continued high proportion of deposit funding and an increase in proportion of secured debt. Deposits represented 43% of the total deposits and long-term borrowings at September 30, 2014, while unsecured debt was 37% and secured debt was 20%. These proportions will fluctuate in the future depending upon our capital markets activities.
The weighted average coupon rate of long-term borrowings at September 30, 2014 was 4.32%, down from 4.44% at June 30, 2014 and 4.57% at September 30, 2013. Long-term borrowings consist of unsecured and secured debt. The weighted average coupon rate of unsecured long-term borrowings at September 30, 2014 was 4.99%, unchanged from June 30, 2014 and down from 5.11% at September 30, 2013. The weighted average coupon rate of secured long-term borrowings at September 30, 2014 was 3.11%, down from 3.17% at June 30, 2014 and 3.35% at September 30, 2013.
Deposits have increased, both in dollars and proportion of total CIT funding. The weighted average rate of total CIT deposits was 1.64%, unchanged from June 30, 2014 and up from 1.54% at September 30, 2014. Deposits and long-term borrowings are also discussed inFunding and Liquidity.
86 CIT GROUP INC
Table of Contents
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. The average rates include FSA accretion, including amounts accelerated due to redemptions or extinguishments and prepayment costs.
Average Daily Long-term Borrowings Balances and Rates (dollars in millions)
| | | | Quarters Ended
| |
|---|
| | | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| |
|---|
| | | | Average
Balance
| | Interest
| | Average
Rate
| | Average
Balance
| | Interest
| | Average
Rate
| | Average
Balance
| | Interest
| | Average
Rate
|
|---|
Revolving Credit Facility(1) | | | | $ | – | | | $ | 3.3 | | | | – | | | $ | – | | | $ | 3.2 | | | | – | | | $ | – | | | $ | 3.9 | | | | – | |
| Senior Unsecured Notes | | | | | 12,232.1 | | | | 156.0 | | | | 5.10 | % | | | 12,231.9 | | | | 156.3 | | | | 5.11 | % | | | 12,283.8 | | | | 160.6 | | | | 5.23 | % |
| Secured borrowings | | | | | 6,400.5 | | | | 56.7 | | | | 3.54 | % | | | 5,686.2 | | | | 46.6 | | | | 3.28 | % | | | 5,618.3 | | | | 47.9 | | | | 3.41 | % |
Long-term Borrowings | | | | $ | 18,632.6 | | | $ | 216.0 | | | | 4.64 | % | | $ | 17,918.1 | | | $ | 206.1 | | | | 4.60 | % | | $ | 17,902.1 | | | $ | 212.4 | | | | 4.75 | % |
| | | | Nine Months Ended
| | | |
|---|
| | | | September 30, 2014
| | September 30, 2013
| | | |
|---|
| | | | Average
Balance
| | Interest
| | Average
Rate
| | Average
Balance
| | Interest
| | Average
Rate
| | | | | | |
|---|
Revolving Credit Facility(1) | | | | $ | – | | | $ | 10.8 | | | | – | | | $ | – | | | $ | 11.9 | | | | – | | | | | | | | | | | | | |
| Senior Unsecured Notes | | | | | 12,487.5 | | | | 481.0 | | | | 5.14 | % | | | 11,965.4 | | | | 496.0 | | | | 5.53 | % | | | | | | | | | | | | |
| Secured borrowings | | | | | 6,049.0 | | | | 150.3 | | | | 3.31 | % | | | 6,015.1 | | | | 154.1 | | | | 3.42 | % | | | | | | | | | | | | |
Long-term Borrowings | | | | $ | 18,536.5 | | | $ | 642.1 | | | | 4.62 | % | | $ | 17,980.5 | | | $ | 662.0 | | | | 4.91 | % | | | | | | | | | | | | |
(1) | | Interest expense and average rate includes Facility commitment fees and amortization of Facility deal costs. |
CRITICAL ACCOUNTING ESTIMATESThe 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 during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. We consider accounting estimates relating to the following to be critical in applying our accounting policies:
n | | Allowance for Loan Losses |
n | | Fair Value Determination |
n | | Liabilities for Uncertain Tax Positions |
n | | Realizability of Deferred Tax Assets |
Except as discussed in “Income Taxes” and inNote 11 — Income Taxes of Item 1. Consolidated Financial Statements relating to the partial reversal of the U.S. federal deferred tax asset valuation allowance, there have been no significant changes to the methodologies and processes used in developing estimates relating to these items from those described in our 2013 Annual Report on Form 10-K.
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 senior executives in Finance and the Chief Auditor. SeeItem 4. Controls and Procedures for more information.
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 87
Table of Contents
NON-GAAP FINANCIAL MEASUREMENTSThe SEC adopted regulations that apply to any public disclosure or release of material information that includes a non-GAAP financial measure. The accompanying Management’s 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, and the impact of FSA following our 2009 restructuring, 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
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
Total Net Revenue | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 308.3 | | | $ | 309.8 | | | $ | 306.4 | | | $ | 920.3 | | | $ | 948.0 | |
| Rental income on operating leases | | | | | 535.0 | | | | 519.6 | | | | 472.9 | | | | 1,546.5 | | | | 1,433.6 | |
| Finance revenue | | | | | 843.3 | | | | 829.4 | | | | 779.3 | | | | 2,466.8 | | | | 2,381.6 | |
| Interest expense | | | | | (275.2 | ) | | | (262.2 | ) | | | (256.7 | ) | | | (809.3 | ) | | | (793.4 | ) |
| Depreciation on operating lease equipment | | | | | (156.4 | ) | | | (157.3 | ) | | | (134.2 | ) | | | (462.5 | ) | | | (401.1 | ) |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (49.0 | ) | | | (41.4 | ) | | | (147.1 | ) | | | (124.1 | ) |
| Net finance revenue (NFR) | | | | | 365.2 | | | | 360.9 | | | | 347.0 | | | | 1,047.9 | | | | 1,063.0 | |
| Other income | | | | | 24.2 | | | | 93.7 | | | | 104.5 | | | | 189.0 | | | | 253.7 | |
Total net revenues | | | | $ | 389.4 | | | $ | 454.6 | | | $ | 451.5 | | | $ | 1,236.9 | | | $ | 1,316.7 | |
Net Operating Lease Revenue | | | | | | | | | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | $ | 535.0 | | | $ | 519.6 | | | $ | 472.9 | | | $ | 1,546.5 | | | $ | 1,433.6 | |
| Depreciation on operating lease equipment | | | | | (156.4 | ) | | | (157.3 | ) | | | (134.2 | ) | | | (462.5 | ) | | | (401.1 | ) |
| Maintenance and other operating lease expenses | | | | | (46.5 | ) | | | (49.0 | ) | | | (41.4 | ) | | | (147.1 | ) | | | (124.1 | ) |
Net operating lease revenue | | | | $ | 332.1 | | | $ | 313.3 | | | $ | 297.3 | | | $ | 936.9 | | | $ | 908.4 | |
Adjusted NFR ($) and NFM (%) (dollars in millions)
| | | | Quarters Ended
| |
|---|
| | | | September 30, 2014
| | June 30, 2014
| | September 30, 2013
| |
|---|
| NFR / NFM | | | | $ | 365.2 | | | | 4.26 | % | | $ | 360.9 | | | | 4.35 | % | | $ | 347.0 | | | | 4.56 | % |
| Accelerated FSA net discount/(premium) on debt extinguishments and repurchases | | | | | – | | | | – | | | | 34.7 | | | | 0.42 | % | | | – | | | | – | |
| Accelerated OID on debt extinguishments related to the GSI facility | | | | | – | | | | – | | | | (42.0 | ) | | | (0.51 | )% | | | – | | | | – | |
| Adjusted NFR / NFM | | | | $ | 365.2 | | | | 4.26 | % | | $ | 353.6 | | | | 4.26 | % | | $ | 347.0 | | | | 4.56 | % |
| | | | Nine Months Ended September 30,
| | | | | |
|---|
| | | | 2014
| | 2013
| |
|---|
| NFR / NFM | | | | $ | 1,047.9 | | | | 4.22 | % | | $ | 1,063.0 | | | | 4.74 | % | | | | | | | | |
| Accelerated FSA net discount/(premium) on debt extinguishments and repurchases | | | | | 34.7 | | | | 0.14 | % | | | 24.8 | | | | 0.11 | % | | | | | | | | |
| Accelerated OID on debt extinguishments related to the GSI facility | | | | | (42.0 | ) | | | (0.17 | )% | | | – | | | | – | | | | | | | | | |
| Adjusted NFR / NFM | | | | $ | 1,040.6 | | | | 4.19 | % | | $ | 1,087.8 | | | | 4.85 | % | | | | | | | | |
The accelerated debt FSA accretion and accelerated OID on debt extinguishment related to the GSI facility (“accelerated OID accretion”), when discussed in combination, is referred to as “accelerated debt FSA and OID accretion”.
88 CIT GROUP INC
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Operating Expenses Excluding Restructuring Costs(3)(dollars in millions)
| | | | Quarters Ended
| | Nine Months Ended | |
|---|
| | | | September 30, | | June 30, | | September 30, | | September 30,
| |
|---|
| | | | 2014
| | 2014
| | 2013
| | 2014
| | 2013
|
|---|
| Operating expenses | | | | $ | (234.5 | ) | | $ | (225.0 | ) | | $ | (228.8 | ) | | $ | (693.0 | ) | | $ | (685.8 | ) |
| Provision for severance and facilities exiting activities | | | | | 9.2 | | | | 5.6 | | | | 3.2 | | | | 24.7 | | | | 18.4 | |
| Operating expenses excluding restructuring costs | | | | $ | (225.3 | ) | | $ | (219.4 | ) | | $ | (225.6 | ) | | $ | (668.3 | ) | | $ | (667.4 | ) |
Earning Assets(4)(dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
| | September 30,
2013
|
|---|
| Loans | | | | $ | 19,785.8 | | | $ | 18,629.2 | | | $ | 18,371.0 | |
| Operating lease equipment, net | | | | | 15,183.8 | | | | 13,035.4 | | | | 12,577.1 | |
| Assets held for sale | | | | | 1,102.7 | | | | 1,003.4 | | | | 1,122.2 | |
| Credit balances of factoring clients | | | | | (1,433.2 | ) | | | (1,336.1 | ) | | | (1,278.4 | ) |
| Total earning assets | | | | $ | 34,639.1 | | | $ | 31,331.9 | | | $ | 30,791.9 | |
Continuing Operations Total Assets(5) (dollars in millions)
| | September 30,
2014
| | June 30,
2014
| | December 31,
2013
| | September 30,
2013
|
|---|
| Total Assets | | $ | 46,481.0 | | $ | 44,152.7 | | $ | 47,139.0 | | $46,224.0 |
| Assets of discontinued operation | | | – | | | (1.0 | ) | | (3,821.4 | ) | (3,888.3 | ) |
| Continuing operations total assets | | $ | 46,481.0 | | $ | 44,151.7 | | $ | 43,317.6 | | $42,335.7 |
Tangible Book Value(6) (dollars in millions)
| | | | September 30,
2014
| | December 31,
2013
| | September 30,
2013
|
|---|
| Total common stockholders’ equity | | | | $ | 9,005.2 | | | $ | 8,838.8 | | | $ | 8,845.0 | |
| Less: Goodwill | | | | | (557.3 | ) | | | (334.6 | ) | | | (338.3 | ) |
| Intangible assets | | | | | (33.5 | ) | | | (20.3 | ) | | | (22.4 | ) |
| Tangible book value | | | | $ | 8,414.4 | | | $ | 8,483.9 | | | $ | 8,484.3 | |
(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) | | Continuing operations total assets is a non-GAAP measure, which management uses for analytical purposes to compare balance sheet assets on a consistent basis. |
(6) | | 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. |
Item 2. Management’s Discussion and Analysis andItem 3.Quantitative and Qualitative Disclosures about Market Risk 89
Table of Contents
FORWARD-LOOKING STATEMENTSCertain 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, |
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 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 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 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 management’s 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 achieving 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 | | customer retention rates, |
n | | future acquisitions and dispositions of businesses or asset portfolios, 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 about our performance. We do not assume the obligation to update any forward-looking statement for any reason.
90 CIT GROUP INC
Table of Contents
Item 4. Controls and Procedures
(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 September 30, 2014. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s 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 September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 4. Controls and Procedures 91
Part Two—Other Information
ITEM 1. Legal Proceedings 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 inNote 14 – Contingencies ofItem 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 Company’s financial condition, but may be material to the Company’s operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved.
For more information about pending legal proceedings, including an estimate of certain reasonably possible losses in excess of reserved amounts, seeNote 14 – Contingencies ofItem 1. Consolidated Financial Statements.
For a discussion of certain risk factors affecting CIT, seePart I, Item 1A: Risk Factors, of CIT’s 2013 Annual Report on Form 10-K, and Forward-Looking Statements of this Form 10-Q.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
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) |
|---|
2013(1) | | | | | | | | | | | | | 4,006,941 | | | $ | 193.4 | | | $ | – | |
First Quarter Purchases(2) | | | | | | | | | | | | | 2,905,348 | | | $ | 135.6 | | | | | |
Second Quarter Purchases(2) | | | | | | | | | | | | | 9,409,798 | | | $ | 416.3 | | | | | |
Third Quarter Purchases(2)(3): | | | | | | | | | | | | | | | | | | | | | | |
| July 1–31, 2014 | | | | | – | | | $ | – | | | | – | | | $ | – | | | | | |
| August 1–31, 2014 | | | | | 717,716 | | | $ | 47.89 | | | | 717,716 | | | | 34.4 | | | | | |
| September 1–30, 2014 | | | | | 1,520,431 | | | $ | 47.04 | | | | 1,520,431 | | | | 71.5 | | | | | |
| | | | | | 2,238,147 | | | $ | 47.31 | | | | 2,238,147 | | | $ | 105.9 | | | | | |
September 30, 2014(3) | | | | | | | | | | | | | 14,553,293 | | | $ | 657.8 | | | $ | 449.2 | |
(1) | | Shares repurchases were subject to a $200 million total that expired on December 31, 2013. |
(2) | | Shares repurchases are subject to a $607 million total that expires on December 31, 2014. |
(3) | | Remaining share repurchases are subject to a $500 million total that expires on June 30, 2015. |
92 CIT GROUP INC
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In January 2014, the Board of Directors approved the repurchase of up to $307 million of common stock through December 31, 2014, which included the amount that was not used from the 2013 share repurchase. In April 2014, the Board of Directors authorized an additional share repurchase of up to $300 million of common stock through December 31, 2014. On July 22, 2014, the Board of Directors approved an additional repurchase of up to $500 million of common stock through June 30, 2015.
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 in the open market through derivative, accelerated repurchase and other negotiated 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 CIT’s employee stock plans.
ITEM 4. Mine Safety Disclosure
Not applicable.
| |
| 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). |
| |
| 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 | | | | First Supplemental Indenture dated as of February 13, 2007 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 4.1 to Form 8-K filed on February 13, 2007). |
| |
| 4.3 | | | | Third Supplemental Indenture dated as of October 1, 2009, between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) relating to senior debt securities (incorporated by reference to Exhibit 4.4 to Form 8-K filed on October 7, 2009). |
| |
| 4.4 | | | | Fourth Supplemental Indenture dated as of October 16, 2009 between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) relating to senior debt securities (incorporated by reference to Exhibit 4.1 to Form 8-K filed October 19, 2009). |
Item 6. Exhibits 93
Table of Contents
| 4.5 | | | | 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). |
| |
| 4.6 | | | | 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). |
| | | | | |
| 4.7 | | | | 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). |
| |
| 4.8 | | | | 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). |
| |
| 4.9 | | | | 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). |
| |
| 4.10 | | | | 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). |
94 CIT GROUP INC
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| 4.11 | | | | 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). |
| |
| 4.12 | | | | 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). |
| |
| 4.13 | | | | 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). |
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| 4.14 | | | | 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). |
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| 4.15 | | | | 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). |
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| 4.16 | | | | 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). |
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| 4.17 | | | | 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). |
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| 4.18 | | | | 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). |
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| 4.19 | | | | 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). |
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| 4.20 | | | | 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). |
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| 4.21 | | | | 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). |
Item 6. Exhibits 95
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| 4.22 | | | | 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). |
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| 4.23 | | | | 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). |
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| 4.24 | | | | 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 10.5* | | | | Letter Agreement, effective February 8, 2010, between CIT Group Inc. and John A. Thain (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 8, 2010). |
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| 10.6* | | | | Form of CIT Group Inc. Three Year Stock Salary Award Agreement, dated February 8, 2010 (incorporated by reference to Exhibit 10.2 to Form 8-K filed February 8, 2010). |
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| 10.7* | | | | Letter Agreement, dated June 2, 2010, between CIT Group Inc. and Scott T. Parker (incorporated by reference to Exhibit 99.3 to Form 8-K filed July 6, 2010). |
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| 10.8* | | | | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Retention Award Agreement (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 9, 2010). |
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| 10.9* | | | | 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). |
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| 10.10* | | | | 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). |
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| 10.11* | | | | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Award Agreement (Three Year Vesting) (incorporated by reference to Exhibit 10.38 to Form 10-Q filed August 9, 2010). |
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| 10.12* | | | | 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). |
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| 10.13* | | | | 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). |
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| 10.14* | | | | 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). |
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| 10.15* | | | | 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). |
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| 10.16* | | | | Letter Agreement, dated April 21, 2010, between CIT Group Inc. and Nelson J. Chai (incorporated by reference to Exhibit 10.31 of Form 10-Q filed August 9, 2011). |
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| 10.17* | | | | Letter Agreement, dated April 8, 2010, between CIT Group Inc. and Lisa K. Polsky (incorporated by reference to Exhibit 10.32 of Form 10-Q filed August 9, 2011). |
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| 10.18* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Good Reason) (incorporated by reference to Exhibit 10.33 of Form 10-Q filed August 9, 2011). |
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| 10.19* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (without Good Reason) (incorporated by reference to Exhibit 10.34 of Form 10-Q filed August 9, 2011). |
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| 10.20** | | | | 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). |
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| 10.21** | | | | 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). |
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| 10.22** | | | | 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). |
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| 10.23** | | | | 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). |
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| 10.24* | | | | Letter Agreement, dated February 24, 2012, between CIT Group Inc. and Andrew T. Brandman (incorporated by reference to Exhibit 99.2 of Form 8-K filed April 12, 2012). |
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| 10.25 | | | | 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). |
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| 10.26 | | | | 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). |
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| 10.27* | | | | 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). |
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| 10.28* | | | | 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). |
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| 10.29* | | | | 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). |
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| 10.30* | | | | 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). |
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| 10.31 | | | | 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). |
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| 10.32* | | | | 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). |
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| 10.33* | | | | 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). |
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| 12.1 | | | | CIT Group Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges. |
Item 6. Exhibits 97
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 101.INS | | | | XBRL Instance Document (Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Comprehensive Income (Loss), (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |
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| 101.SCH | | | | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL | | | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.LAB | | | | XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE | | | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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| 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. |
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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.
| November 7, 2014 | | | | CIT GROUP INC. |
| |
| | | | | /s/ Scott T. Parker |
| | | | | Scott T. Parker |
| | | | | Executive Vice President and Chief Financial Officer |
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| | | | | /s/ E. Carol Hayles |
| | | | | E. Carol Hayles |
| | | | | Executive Vice President and Controller |
99
