| Loans | NOTE 3 — LOANS
The following tables and data as of June 30, 2016 include the loan balances acquired in the OneWest Transaction, which were recorded at fair value at the time of the acquisition ( August 3, 2015 ). See Note 2 — Acquisition and Disposition Activities in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015 for details of the OneWest Transaction.
Finance receivables, excluding those reflected as discontinued operations, consist of the following:
Finance Receivables by Product (dollars in millions)
June 30,
December 31,
2016
2015
Commercial loans
$ 20,538.2
$ 21,380.9
Direct financing leases and leveraged leases
3,154.4
3,427.5
Total commercial
23,692.6
24,808.4
Consumer loans
6,764.2
6,863.3
Total finance receivables
30,456.8
31,671.7
Finance receivables held for sale (1)
2,223.6
1,985.1
Finance receivables and held for sale receivables (1)
$ 32,680.4
$ 33,656.8
(1)
Assets held for sale on the Balance Sheet at June 30, 2016 includes finance receivables and operating lease equipment primarily related to portfolios in Canada, China, and Business Air. As discussed in subsequent tables, since the Company manages the credit risk and collections of finance receivables held for sale consistently with its finance receivables held for investment, the aggregate amount is presented in this table.
The following table presents finance receivables by segment, based on obligor location:
Finance Receivables (dollars in millions)
June 30, 2016
December 31, 2015
Domestic
Foreign
Total
Domestic
Foreign
Total
Transportation Finance
$ 653.3
$ 1,959.8
$ 2,613.1
$ 815.1
$ 2,727.0
$ 3,542.1
Commercial Banking
20,374.3
335.5
20,709.8
20,607.9
321.3
20,929.2
Consumer and Community Banking (1)
7,133.9
–
7,133.9
7,200.4
–
7,200.4
Total
$ 28,161.5
$ 2,295.3
$ 30,456.8
$ 28,623.4
$ 3,048.3
$ 31,671.7
(1)
The Consumer and Community Banking segment includes certain commercial loans, primarily consisting of a portfolio of Small Business Administration (SBA) loans. These loans are excluded from the Consumer loan balance and included in the Commercial loan balances in the tables throughout this note.
The following table presents selected components of the net investment in finance receivables:
Components of Net Investment in Finance Receivables (dollars in millions)
(1)
June 30,
December 31,
2016
2015
Unearned income
$ (841.2)
$ (870.4)
Unamortized premiums / (discounts)
(44.9)
(34.0)
Accretable yield on Purchased Credit-Impaired ("PCI") loans
1,274.8
1,294.0
Net unamortized deferred costs and (fees) (1)
46.6
42.9
(1)
Balance relates to Commercial Banking and Transportation Finance segments.
Certain of the following tables present credit-related information at the “class” level in accordance with ASC 310-10-50, Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses . A class is generally a disaggregation of a portfolio segment. In determining the classes, CIT considered the finance receivable characteristics and methods it applies in monitoring and assessing credit risk and performance.
Credit Quality Information
Commercial obligor risk ratings are reviewed on a regular basis by Credit Risk Management and are adjusted as necessary for updated information affecting the borrowers’ ability to fulfill their obligations.
The definitions of the commercial loan ratings are as follows:
Pass – finance receivables in this category do not meet the criteria for classification in one of the categories below.
Special mention – a special mention asset exhibits potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects.
Classified – a classified asset ranges from: (1) assets that exhibit a well-defined weakness and are inadequately protected by the current sound worth and paying capacity of the borrower, and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected to (2) assets with weaknesses that make collection or liquidation in full unlikely on the basis of current facts, conditions, and values. Assets in this classification can be accruing or on non-accrual depending on the evaluation of these factors.
The following table summarizes commercial finance receivables by the risk ratings that bank regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. The consumer loan risk profiles are different from commercial loans, and use loan-to-value (“LTV”) ratios in rating the credit quality, and therefore are presented separately below.
Commercial Finance and Held for Sale Receivables – Risk Rating by Class / Segment (dollars in millions)
Grade:
Pass
Special Mention
Classified- accruing
Classified- non-accrual
PCI Loans
Total
June 30, 2016
Transportation Finance
Aerospace
$ 1,363.4
$ 134.0
$ 32.9
$ 18.2
$
–
$ 1,548.5
Rail
105.4
1.2
0.3
–
–
106.9
Maritime Finance
891.0
374.7
365.7
–
–
1,631.4
Total Transportation
2,359.8
509.9
398.9
18.2
–
3,286.8
Commercial Banking
Commercial Finance
7,460.3
703.8
619.6
145.1
45.4
8,974.2
Real Estate Finance
5,231.6
177.3
70.3
7.1
79.8
5,566.1
Business Capital
5,833.9
488.0
263.7
55.6
–
6,641.2
Total Commercial Banking
18,525.8
1,369.1
953.6
207.8
125.2
21,181.5
Consumer & Community Banking
Other Consumer Banking (1)
334.1
12.4
18.9
–
4.4
369.8
Non- Strategic Portfolios
872.1
57.2
65.9
45.1
–
1,040.3
Total
$ 22,091.8
$ 1,948.6
$ 1,437.3
$ 271.1
$ 129.6
$ 25,878.4
December 31, 2015
Transportation Finance
Aerospace
$ 1,635.7
$ 65.0
$ 46.2
$ 15.4
$
–
$ 1,762.3
Rail
118.9
1.4
0.6
–
–
120.9
Maritime Finance
1,309.0
162.0
207.4
–
–
1,678.4
Total Transportation Finance
3,063.6
228.4
254.2
15.4
–
3,561.6
Commercial Banking
Commercial Finance
8,215.0
626.4
389.9
131.5
69.4
9,432.2
Real Estate Finance
5,143.2
97.6
18.6
3.6
94.6
5,357.6
Business Capital
5,649.0
517.0
320.1
56.0
–
6,542.1
Total Commercial Banking
19,007.2
1,241.0
728.6
191.1
164.0
21,331.9
Consumer & Community Banking
Other Consumer Banking (1)
300.6
12.1
18.3
–
5.3
336.3
Non- Strategic Portfolios
1,286.3
115.4
60.1
56.0
–
1,517.8
Total
$ 23,657.7
$ 1,596.9
$ 1,061.2
$ 262.5
$ 169.3
$ 26,747.6
(1)
The Consumer and Community Banking segment includes certain commercial loans, primarily consisting of a portfolio of Small Business Administration (SBA) loans. These loans are excluded from the Consumer loan balance and included in the Commercial loan balances.
For consumer loans, the Company monitors credit risk based on indicators such as delinquencies and LTV, which the Company believes are relevant credit quality indicators.
LTV refers to the ratio comparing the loan’s unpaid principal balance to the property’s collateral value. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.
The following table provides a summary of the consumer portfolio credit quality. The amounts represent the carrying value, which differ from unpaid principal balances, and include the premiums or discounts and the accretable yield and non-accretable difference for PCI loans recorded in purchase accounting. Included in the consumer finance receivables are “covered loans” for which the Company can be reimbursed for a substantial portion of future losses under the terms of loss sharing agreements with the FDIC if losses occur within the indemnification period . Covered loans are discussed further in Note 5 – Indemnif ication Assets .
Included in the consumer loan balances as of June 30, 2016 and December 31, 2015, were loans with terms that permitted negative amortization with an unpaid principal balance of $849 million and $966 million, respectively.
Consumer Loan LTV Distribution (dollars in millions)
Single Family Residential
Reverse Mortgage
Covered Loans
Non-covered Loans
Total Single Family
Covered Loans
Non-covered loans
Total Reverse
Total Consumer
LTV Range
Non- PCI
PCI
Non- PCI
PCI
Residential
Non- PCI
Non- PCI
PCI
Mortgages
Loans
June 30, 2016
Greater than 125%
$ 0.8
$ 320.6
$ 14.3
$
–
$ 335.7
$ 0.8
$ 6.7
$ 35.5
$ 43.0
$ 378.7
101% - 125%
2.4
536.5
10.2
–
549.1
1.2
9.8
11.5
22.5
571.6
80% - 100%
321.6
565.6
25.5
–
912.7
26.9
38.8
8.3
74.0
986.7
Less than 80%
1,601.6
861.5
1,607.6
9.0
4,079.7
424.1
311.8
10.3
746.2
4,825.9
Not Applicable (1)
–
–
1.3
–
1.3
–
–
–
–
1.3
Total
$ 1,926.4
$ 2,284.2
$ 1,658.9
$ 9.0
$ 5,878.5
$ 453.0
$ 367.1
$ 65.6
$ 885.7
$ 6,764.2
December 31, 2015
Greater than 125%
$ 1.1
$ 395.6
$ 0.8
$ 15.7
$ 413.2
$ 1.0
$ 3.9
$ 39.3
$ 44.2
$ 457.4
101% - 125%
3.6
619.9
0.2
14.9
638.6
2.5
6.5
17.0
26.0
664.6
80% - 100%
449.3
552.1
14.3
11.4
1,027.1
26.5
37.4
7.0
70.9
1,098.0
Less than 80%
1,621.0
829.3
1,416.1
12.9
3,879.3
432.6
312.5
11.1
756.2
4,635.5
Not Applicable (1)
–
–
7.8
–
7.8
–
–
–
–
7.8
Total
$ 2,075.0
$ 2,396.9
$ 1,439.2
$ 54.9
$ 5,966.0
$ 462.6
$ 360.3
$ 74.4
$ 897.3
$ 6,863.3
(1)
Certain Consumer Loans do not have LTV’s, including the Credit Card portfolio.
Covered loans are l imited to the Consumer and Community Ban king segment. The following table summarizes the covered loans (single family residential and reverse mortgages) as of June 30, 2016 :
Covered Loans (dollars in millions)
PCI
Non-PCI
Total
Consumer and Community Banking loans HFI at carrying value
$ 2,284.2
$ 2,379.4
$ 4,663.6
Past Due and Non-accrual Loans
The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification:
Past Due Finance and Held for Sale Receivables (dollars in millions)
Past Due
30–59 Days
60–89 Days
90 Days or
Total
PCI Loans
Past Due
Past Due
Greater
Past Due
Current (1)
(2)
Total Finance Receivables
June 30, 2016
Transportation Finance
Aerospace
$
–
$ 0.5
$ 18.2
$ 18.7
$ 1,529.8
$
–
$ 1,548.5
Rail
0.3
1.2
2.0
3.5
103.4
–
106.9
Maritime Finance
–
–
–
–
1,631.4
–
1,631.4
Total Transportation Finance
0.3
1.7
20.2
22.2
3,264.6
–
3,286.8
Commercial Banking
Commercial Finance
15.7
45.7
20.3
81.7
8,847.1
45.4
8,974.2
Real Estate Finance
1.5
–
–
1.5
5,484.8
79.8
5,566.1
Business Capital
97.4
32.9
20.4
150.7
6,490.5
–
6,641.2
Total Commercial Banking
114.6
78.6
40.7
233.9
20,822.4
125.2
21,181.5
Consumer & Community Banking
Legacy Consumer Mortgages
19.9
7.1
38.1
65.1
2,767.5
2,358.8
5,191.4
Other Consumer Banking
8.2
1.4
0.9
10.5
1,965.5
4.4
1,980.4
Total Consumer & Community Banking
28.1
8.5
39.0
75.6
4,733.0
2,363.2
7,171.8
Non-Strategic Portfolios
15.7
6.8
16.1
38.6
1,001.7
–
1,040.3
Total
$ 158.7
$ 95.6
$ 116.0
$ 370.3
$ 29,821.7
$ 2,488.4
$ 32,680.4
December 31, 2015
Transportation Finance
Aerospace
$ 1.4
$
–
$ 15.4
$ 16.8
$ 1,745.5
$
–
$ 1,762.3
Rail
8.5
2.0
2.1
12.6
108.3
–
120.9
Maritime Finance
–
–
–
–
1,678.4
–
1,678.4
Total Transportation Finance
9.9
2.0
17.5
29.4
3,532.2
–
3,561.6
Commercial Banking
Commercial Finance
–
–
20.5
20.5
9,342.3
69.4
9,432.2
Real Estate Finance
1.9
–
0.7
2.6
5,260.4
94.6
5,357.6
Business Capital
131.1
32.8
26.8
190.7
6,351.4
–
6,542.1
Total Commercial Banking
133.0
32.8
48.0
213.8
20,954.1
164.0
21,331.9
Consumer & Community Banking
Legacy Consumer Mortgages
15.8
1.7
4.1
21.6
2,923.8
2,526.2
5,471.6
Other Consumer Banking
2.7
0.3
0.4
3.4
1,765.2
5.3
1,773.9
Total Consumer & Community Banking
18.5
2.0
4.5
25.0
4,689.0
2,531.5
7,245.5
Non-Strategic Portfolios
18.7
22.1
33.7
74.5
1,443.3
–
1,517.8
Total
$ 180.1
$ 58.9
$ 103.7
$ 342.7
$ 30,618.6
$ 2,695.5
$ 33,656.8
(1)
Due to their nature, reverse mortgage loans are included in Current, as they do not have contractual payments due at a specified time.
(2)
PCI loans are written down at acquisition to their fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as past due or non-accrual even though they may be contractually past due as we expect to fully collect the new carrying values of these loans.
Non-accrual loans include loans that are individually evaluated and determined to be impaired (generally loans with balances greater than $500,000 ), as well as other, smaller balance loans placed on non-accrual due to delinquency (generally 90 days or more for smaller commercial loans and 120 or more days regarding real estate mortgage loans).
Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due.
The following table sets forth non-accrual loans, assets received in satisfaction of loans (OREO and repossessed assets ) and loans 90 days or more past due and still accruing.
Finance Receivables on Non-Accrual Status (dollars in millions)
June 30, 2016
December 31, 2015
Held for Investment
Held for Sale
Total
Held for Investment
Held for Sale
Total
Transportation Finance
Aerospace
$
–
$ 18.2
$ 18.2
$ 15.4
$
–
$ 15.4
Total Transportation Finance
–
18.2
18.2
15.4
–
15.4
Commercial Banking
Commercial Finance
135.6
9.5
145.1
120.5
11.0
131.5
Real Estate Finance
7.1
–
7.1
3.6
–
3.6
Business Capital
55.6
–
55.6
56.0
–
56.0
Total Commercial Banking
198.3
9.5
207.8
180.1
11.0
191.1
Consumer & Community Banking
Legacy Consumer Mortgages
11.7
–
11.7
4.2
0.6
4.8
Other Consumer Banking
–
–
–
–
0.4
0.4
Total Consumer & Community Banking
11.7
–
11.7
4.2
1.0
5.2
Non-Strategic Portfolios
–
45.1
45.1
–
56.0
56.0
Total
$ 210.0
$ 72.8
$ 282.8
$ 199.7
$ 68.0
$ 267.7
OREO and repossessed assets
91.6
127.3
Total non-performing assets
$ 374.4
$ 395.0
Commercial loans past due 90 days or more accruing
$ 7.9
$ 15.6
Consumer loans past due 90 days or more accruing
27.3
0.2
Total Accruing loans past due 90 days or more
$ 35.2
$ 15.8
Payments received on non-accrual financing receivables are generally applied first against outstanding principal, though in certain instances where the remaining recorded investment is deemed fully collectible, interest income is recognized on a cash basis. Reverse mortgages are not included in the non-accrual balances.
The table below summarizes the residential mortgage loans in the process of foreclosure and OREO :
Loans in Process of Foreclosure (dollars in millions)
(dollars in millions)
June 30, 2016
December 31, 2015
PCI
$ 241.4
$ 320.0
Non-PCI
111.5
71.0
Loans in process of foreclosure
$ 352.9
$ 391.0
OREO
$ 86.4
$ 118.0
Impaired Loans
The Company’s policy is to review for impairment finance receivables greater than $500,000 that are on non-accrual status. Consumer and small-ticket loan and lease receivables t hat have not been modified in a restructuring, as well as short-term factoring receivables, are included (if appropriate) in the reported non-accrual balances above, but are excluded from the impaired finance receivables disclosure below as charge-offs are typically determined and recorded for such loans when they are more than 90 – 150 days past due.
The following table contains information about impaired finance receivables and the related allowance for loan losses by class, exclusive of finance receivables that were identified as impaired at the date of the OneWest Transaction (the “ Acquisition Date ”) for which the Company is applying the income recognition and disclosure guidance in ASC 310-30 ( Loans and Debt Securities Acquired with Deteriorated Credit Quality ), which are disclosed further below in this note. Impaired loans exclude PCI loans.
Impaired Loans (dollars in millions)
Average Recorded Investment
Unpaid
Three Months Ended
Six Months Ended
Recorded
Principal
Related
June 30,
June 30,
Investment
Balance
Allowance
2016
2015
2016
2015
June 30, 2016
With no related allowance recorded:
Transportation Finance
Aerospace
$
–
$
–
$
–
$ 0.5
$
–
$ 0.3
$
–
Commercial Banking
Commercial Finance
9.8
23.9
–
10.0
0.5
11.8
0.8
Business Capital
9.0
22.1
–
8.3
4.9
7.7
5.5
Real Estate Finance
0.8
0.9
–
2.5
–
1.7
–
Non-Strategic Portfolios
–
–
–
–
11.7
–
12.2
With an allowance recorded:
Transportation Finance
Aerospace
–
–
–
–
2.4
5.1
1.6
Commercial Banking
Commercial Finance
126.7
134.6
25.0
132.6
34.2
122.6
32.7
Business Capital
7.8
7.8
4.0
10.4
4.8
10.2
3.2
Real Estate Finance
3.2
3.2
0.4
3.2
–
2.1
–
Non-Strategic Portfolios
–
–
–
–
15.2
–
12.1
Total Impaired Loans (1)
157.3
192.5
29.4
167.5
73.7
161.5
68.1
Total Loans Impaired at Acquisition Date and Convenience Date (2)
2,488.4
3,649.4
7.7
2,524.7
0.1
2,581.6
0.4
Total
$ 2,645.7
$ 3,841.9
$ 37.1
$ 2,692.2
$ 73.8
$ 2,743.1
$ 68.5
Unpaid
Average
Recorded
Principal
Related
Recorded
Investment
Balance
Allowance
Investment (3)
December 31, 2015
With no related allowance recorded:
Commercial Banking
Commercial Finance
$ 15.4
$ 22.8
$
–
$ 6.5
Business Capital
6.3
9.7
–
5.9
Real Estate Finance
0.2
0.8
–
0.7
Non-Strategic Portfolios
–
–
–
7.3
With an allowance recorded:
Transportation Finance
Aerospace
15.4
15.4
0.4
5.0
Commercial Banking
Commercial Finance
102.6
112.1
22.7
53.2
Business Capital
9.7
11.7
4.7
5.4
Non-Strategic Portfolios
–
–
–
7.3
Total Impaired Loans (1)
149.6
172.5
27.8
91.3
Total Loans Impaired at Acquisition Date and Convenience Date(2)
2,695.5
3,977.3
4.9
1,108.0
Total
$ 2,845.1
$ 4,149.8
$ 32.7
$ 1,199.3
(1) Interest income recorded for the three and six months ended June 30, 2016 and the year ended December 31, 2015 while the loans were impaired were $0.5 millio n, $0.9 million and $1. 5 million of which $0.2 mil lion, $0.4 million and $0.5 million was interest recognized using cash-basis method of accounting, respectively. Interest income recorded for the three and six months ended June 30, 201 5 while the loans were impaired were $0.2 million and $0.6 million of which $0 wa s interest recognized using cash-basis method of accounting, respectively.
(2) Details of finance receivables that were identified as impaired at the Acquisition Date are presented under Loans Acquired with Deteriorated Credit Quality .
(3) Average recorded investment for the year ended December 31, 2015.
Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. For commercial loans, the Company has established review and monitoring procedures designed to identify, as early as possible, customers that are experiencing financial difficulty. Credit risk is captured and analyzed based on the Company’s internal probability of obligor default (PD) a nd loss given default (LGD) ratings. A PD rating is determined by evaluating borrower credit-worthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. An LGD rating is predicated on transaction structure, collateral valuation and related guarantees or recourse. Further, related considerations in determining probability of collection include the following:
Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the related loan document;
Lack of current financial data related to the borrower or guarantor;
Delinquency status of the loan;
Borrowers experiencing problems, such as operating losses, marginal working capital, inadequate cash flow, excessive financial leverage or business interruptions;
Loans secured by collateral that is not readily marketable or that has experienced or is susceptible to deterioration in realizable value; and
Loans to borrowers in industries or countries experiencing severe economic instability.
Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable. A specific allowance or charge-off is recorded for the shortfall. In instances where the estimated value exceeds the recorded investment, no specific allowance is recorded. The estimated value is determined using fair value of collateral and other cash flows if the finance receivable is collateralized, the present value of expected future cash flows discounted at the contract’s effective interest rate, or market price. A shortfall between the estimated value and recorded investment in the finance receivable is reported in the provision for credit losses. In instances when the Company measures impairment based on the present value of expected future cash flows, the change in present value is reported in the provision for credit losses.
The following summarizes key elements of the Company’s policy regarding the determination of collateral fair value in the measurement of impairment:
“Orderly liquidation value” is the basis for collateral valuation;
Appraisals are updated annually or more often as market conditions warrant; and
Appraisal values are discounted in the determination of impairment if the:
appraisal does not reflect current market conditions; or
collateral consists of inventory, accounts receivable, or other forms of collateral that may become difficult to locate, or collect or may be subject to pilferage in a liquidation.
Loans Acquired with Deteriorated Credit Quality
For purposes of this presentation, the Company is applying the income recognition and disclosure guidance in ASC 310-30 ( Loans and Debt Securities Acquired with Deteriorated Credit Quality ) to loans that were identified as impaired as of the Acquisition Date . PCI loans were initially recorded at estimated fair value with no allowance for loan losses carried over, since the initial fair values reflected credit losses expected to be incurred over the remaining lives of the loans. The acquired loans are subject to the Company’s internal credit review. See Note 4 — Allowance for Loan Losses.
Purchased Credit Impaired Loans (1) (dollars in millions)
(1)
June 30, 2016
Unpaid Principal Balance
Carrying Value
Allowance for Loan Losses
Commercial Banking
Commercial Finance
$ 76.2
$ 45.4
$ 0.3
Real Estate Finance
132.6
79.8
2.3
Consumer & Community Banking
Other Consumer Banking
5.7
4.4
–
Legacy Consumer Mortgages
3,434.9
2,358.8
5.1
$ 3,649.4
$ 2,488.4
$ 7.7
December 31, 2015
Unpaid Principal Balance
Carrying Value
Allowance for Loan Losses
Commercial Banking
Commercial Finance
$ 115.5
$ 69.4
$ 2.5
Real Estate Finance
161.1
94.6
0.6
Consumer & Community Banking
Other Consumer Banking
6.8
5.3
–
Legacy Consumer Mortgages
3,693.9
2,526.2
1.8
$ 3,977.3
$ 2,695.5
$ 4.9
(1)
PCI loans from prior transactions were not significant and are not included.
The following table summarizes commercial PCI loans within Commercial Banking , which are monitored for credit quality based on internal risk classifications. See previous table Consumer Loan LTV Distributions for credit quality metrics on consumer PCI loans.
June 30, 2016
(dollars in millions)
Non- criticized
Criticized
Total
Commercial Finance
$ 4.9
$ 40.5
$ 45.4
Real Estate Finance
34.3
45.5
79.8
Total
$ 39.2
$ 86.0
$ 125.2
December 31, 2015
Non- criticized
Criticized
Total
Commercial Finance
$ 5.3
$ 64.1
$ 69.4
Real Estate Finance
33.2
61.4
94.6
Total
$ 38.5
$ 125.5
$ 164.0
Non-criticized loans generally include loans that are expected to be repaid in accordance with contractual loan terms. Criticized loans are risk rated as special mention or classified.
Accretable Yield
The excess of cash flows expected to be collected over the recorded investment (estimated fair value at acquisition) of the PCI loans represents the accretable yield and is reco gnized in interest income on an effective yield basis over the remaining life of the loan, or pools of loans. The accretable yield is adjusted for changes in interest rate indices for variable rate PCI loans, changes in prepayment assumptions and changes in expected principal and interest payments and collateral values. Further, if a loan within a pool of loans is modified, the modified loan remains part of the pool of loans. The difference between the cash flows contractually required to be paid, measured as of the Acquisition D ate, over the expected cash flows is referred to as the non-accretable difference.
Subsequent to acquisition, we evaluate our estimates of the cash flows expected to be collected on a quarterly basis. Probable and significant d ecreases in expected cash flows as a result of further credit deterioration result in a charge to the provision for credit losses and a corresponding increase to the allowance for credit losses. Probable and significant i ncreases in expected cash flows due to improved credit quality result in re versal of any previously recorded allowance for loan losses, to the extent applicable, and an increase in the accretable yield applied prospectively for any remaining increase. Changes in expected cash flows caused by changes in market interest rates or by prepayments are recognized as adjustments to the accretable yield on a prospective basis.
Changes in the accretable yield for PCI loans are summarized below for the quarter and six months ended June 30, 2016 :
(dollars in millions)
June 30, 2016
Quarter Ended
Six Months Ended
Beginning Balance
$ 1,279.7
$ 1,294.0
Accretion into interest income
(51.3)
(100.9)
Reclassification from non-accretable difference
51.1
96.1
Disposals and Other
(4.7)
(14.4)
Balance at June 30, 2016
$ 1,274.8
$ 1,274.8
Troubled Debt Restructurings
The Company periodically modifies the terms of finance receivables in response to borrowers’ difficulties. Modifications that include a financial concession to the borrower are accounted for as troubled debt restructurings (TDRs).
CIT uses a consistent methodology across all loans to determine if a modification is with a borrower that has been determined to be in financial difficulty and was granted a concession. Specifically, the Company’s policies on TDR identification include the following examples of indicators used to determine whether the borrower is in financial difficulty:
Borrower is in default with CIT or other material creditor
Borrower has declared bankruptcy
Growing doubt about the borrower’s ability to continue as a going concern
Borrower has (or is expected to have) insufficient cash flow to service debt
Borrower is de-listing its securities
Borrower’s inability to obtain funds from other sources
Breach of financial covenants by the borrower.
If the borrower is determined to be in financial difficulty, then CIT utilizes the following criteria to determine whether a concession has been granted to the borrower:
Assets used to satisfy debt are less than CIT’s recorded investment in the receivable
Modification of terms – interest rate changed to below market rate
Maturity date extension at an interest rate less than market rate
The borrower does not otherwise have access to funding for debt with similar risk characteristics in the market at the restructured rate and terms
Capitalization of interest
Increase in interest reserves
Conversion of credit to Payment-In-Kind (PIK)
Delaying principal and/or interest for a period of three months or more
Partial forgiveness of the balance.
Modified loans that meet the definition of a TDR are subject to the Company’s standard impaired loan policy, namely that non-accrual loans in excess of $500,000 are individually reviewed for impairment, while non-accrual loans less than $500,000 are considered as part of homogenous pools and are included in the determination of the non-specific allowance.
We may require some consumer borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to the terms of a planned permanent modification, to determine if they can perform according to those terms. These arrangements represent trial modifications, which we classify and account for as TDRs. While loans are in trial payment programs, their original terms are not considered modified and they continue to advance through delinquency status and accrue interest according to their original terms. The planned modifications for these arrangements predominantly involve interest rate reductions or other interest rate concessions; however, the exact concession type and resulting financial effect are usually not finalized and do not take effect until the loan is permanently modified. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasury’s Making Homes Affordable programs for real estate 1-4 family first lien ( i.e. , Home Affordable Modification Program – HAMP) and junior lien ( i.e. , Second Lien Modification Program – 2MP) mortgage loans.
At June 30 , 2016, the loans in trial modification period were $67.5 million under HAMP, $0.1 million under 2MP and $6.1 million under proprietary programs. Trial modifications with a recorded investment of $71.3 million at June 30 , 2016 were accruing loans and $2.5 million were non-accruing loans. Our experience is that substantially all of the mortgages that enter a trial payment period program are successful in completing the program requirements and are then permanently modified at the end of the trial period. Our allowance process considers the impact of those modifications that are probable to occur.
The recorded investment of TDRs, excluding those classified as PCI, at June 30, 2016 and December 31, 2015 was $45.9 million and $40.2 million, of which 81% and 63% , respectively, were on non-accrual. Commercial Banking , NSP and Consumer and Community Banking receivables accounted for 73% , 12% and 15% of the total TDRs, respectively, at June 30, 2016. Commercial Banking and Transportation Finance receivables accounted for 61% and 26% of the total TDRs, respectively at December 31, 2015 . T here were $2.3 million and $1.4 million as of June 30, 2016 and December 31, 2015 , respectively, of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs.
The recorded investment related to modifications qualifying as TDRs that occurred during the quarters ended June 30, 2016 and 2015 were $6.1 million and $1.7 million, respectively , and $19.8 million and $2.3 million for the six month periods, respectively . The recorded investment at the time of default of TDRs that experience a payment default (payment default is one missed payment), during the quarters ended June 30, 2016 and 2015, and for which the payment default occurred within one year of the modification totaled $2.0 million and $0.1 million, respectively , and $4.1 million and $0.4 million for the six month periods, respectively . The June 30, 2016 defaults related to Commercial Banking, Consumer and Community Banking and Non-Strategic Portfolios and the June 30, 2015 defaults related to Non-Strategic Portfolios .
The financial impact of the various modification strategies that the Company employs in response to borrower difficulties is described below. While the discussion focuses on the 201 6 amounts, the overall nature and impact of modification programs were comparable in the prior year.
•
The nature of modifications qualifying as TDR’s based upon recorded investment at June 30 , 2016 was com prised of payment deferrals for 6% and covenant relief and/or other for 94% . December 31, 2015 TDR recorded investment was comprised of payment deferrals for 1 3% and covenant relief and/or other for 87% .
•
Payment deferrals result in lower net present value of cash flows, if not accompanied by additional interest or fees, and increased provision for credit losses to the extent applicable. The financial impact of these modifications is not significant given the moderate length of deferral periods;
•
Interest rate reductions result in lower amounts of interest being charged to the customer, but are a relatively small part of the Company’s restructuring programs. Additionally, in some instances, modifications improve the Company’s economic return through increased interest rates and fees, but are reported as TDRs due to assessments regarding the borrowers’ ability to independently obtain similar f |
