Funding sources include deposits and borrowings. As we execute on our strategic initiatives, we plan to continue to increase the proportion of deposits in our funding mix. The following table reflects our funding mix:
The following sections on deposits and borrowings provide further detail on the acquired amounts and the effect on existing balances.
CIT offers its deposits through various channels. At December 31, 2016, our branch deposits totaled $11.8 billion, online deposits totaled $11.0 billion, brokered deposits were $5.1 billion and commercial deposits were $4.4 billion. The following table details our ending deposit balances by type:
Borrowings consist of senior unsecured notes and secured borrowings (structured financings and FHLB advances), which totaled $14.9 billion in aggregate at December 31, 2016, down from $16.4 billion at December 31, 2015 and $16.0 billion at December 31, 2014. This decline primarily relates to payments on and redemptions of structured financings and a reduction in FHLB Advances from 2015 year end. The weighted average coupon rate of borrowings at December 31, 2016 was 4.20%, compared to 3.93% and 4.42% at December 31, 2015 and 2014, respectively. The increase in the weighted average coupon rate in 2016 reflected the repayment of lower cost secured borrowings, while the declines from 2014 reflected the increase in FHLB advances, which have lower rates.
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78 CIT ANNUAL REPORT 2016
Included in liabilities of discontinued operations at December 31, 2016 is $1.6 billion of secured debt, mostly related to the Commercial Air business. SeeNote 2 — Acquisitions and Discontinued Operations inItem 8. Financial Statements and Supplementary Data.
In conjunction with the pending sale of our Commercial Air business, we expect to repay or repurchase certain of our secured and unsecured debt, which could result in significant debt-related costs. Debt balances that we expect to repay and/or transfer in connection with the sale of the Commercial Air business totaled approximately $7.0 billion as of December 31, 2016, comprised of approximately $5.8 billion of unsecured debt and $1.2 billion of secured debt of which approximately $1 billion was repaid in February of 2017.
SeeNote 10 — Borrowings inItem 8. Financial Statements and Supplementary Data for further detail on borrowings.
Unsecured Borrowings
Second Amended and Restated Revolving Credit Facility
As discussed above, in February 2017, the Revolving Credit Facility was amended . See Note 31 — Subsequent Events inItem 8. Financial Statements and Supplementary Data for further discussion.
The following was in effect as of December 31, 2016:
There were no borrowings outstanding under the Revolving Credit Facility at December 31, 2016, and the amount available to draw upon was approximately $1.4 billion, with the remaining amount of approximately $0.1 billion utilized for issuance of letters of credit.
At December 31, 2016, the Revolving Credit Facility had a $1.5 billion total commitment that consisted 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 based on our debt ratings. Currently, the applicable margin is 2.25% for LIBOR Rate loans and 1.25% for Base Rate loans. Improvement in CIT’s long-term senior unsecured debt ratings to Ba2 by Moody’s would result in a reduction in the applicable margin to 2.00% for LIBOR Rate loans and to 1.00% for Base Rate loans. A downgrade in CIT’s long-term senior unsecured debt ratings to B+ by S&P or Fitch would result in an increase in the applicable margin for LIBOR Rate and 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 nine of the Company’s domestic operating subsidiaries. The facility contains a covenant requiring a minimum guarantor asset coverage ratio, including the criteria for calculating the ratio. The required minimum guarantor asset coverage ratio ranges from 1.0:1.0 to 1.50:1.0 depending on the Company’s long-term senior unsecured debt rating. The requirement at December 31, 2016, was 1.375:1.0. As of December 31, 2016, the last reported asset coverage ratio was 3.03x.
Senior Unsecured Borrowings
At December 31, 2016, unsecured borrowings outstanding totaled $10.6 billion, essentially unchanged from December 31, 2015 and down from $11.9 billion at December 31, 2014. The weighted average coupon rate of unsecured borrowings at December 31, 2016, was 5.03%, unchanged from December 31, 2015 and up slightly from 5.00% at December 31, 2014. The decline in the 2015 outstanding balance and slight increase in rate reflect the repayment of $1.2 billion of maturing 4.75% notes and modest debt repurchases during 2015.
In December 2016, nearly $956 million of the aggregate principal amount of outstanding 5.00% Notes due May 2017 (“Old Notes”), were exchanged to new 5.00% Senior Unsecured Notes due May 2018 (the “New Notes”). The New Notes mature on May 15, 2018, which is one year later than the maturity of the Old Notes. The New Notes have the same interest rate, ranking and covenants as the Old Notes. Commencing on May 15, 2017, the New Notes will be redeemable at the Company’s option at 100.50% of the principal amount of the New Notes. While we target the sale of Commercial Air to be completed by the end of the first quarter of 2017, extending the maturity of the notes due in May 2017 provided financial flexibility and enables CIT to better manage its liquidity profile in the event of an unexpected delay in the sale.
As detailed in “Contractual Commitments and Payments” below, there are scheduled maturities of approximately $2.0 billion in 2017, reflecting $1.7 billion due in August 2017 and the remaining Old Notes.
Secured Borrowings
As part of our funding strategy, we may pledge assets for secured financing transactions (which include structured financings), to borrow from the FHLB, or for other purposes as required or permitted by law. Our secured financing transactions do not meet accounting requirements for sale treatment and are recorded as secured borrowings, with the assets remaining on-balance sheet pursuant to GAAP. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, loans, leases and/or underlying equipment. Certain related cash balances are restricted.
FHLB Advances
FHLB advances have become a larger source of funding since the OneWest Transaction. CIT Bank is a member of the FHLB of San Francisco and may borrow under a line of credit that is secured by pledged collateral. The Bank makes decisions regarding utilization of advances based upon a number of factors including liquidity needs, cost of funds and alternative sources of funding. CIT Bank, N.A. had $2.4 billion and $3.1 billion outstanding under the line and $6.4 billion and $6.8 billion of assets pledged as collateral, at December 31, 2016 and 2015, respectively. The decrease in advances during 2016 was the result of management’s decision to utilize excess cash balances to reduce these borrowings.
Prior to the OneWest Transaction, at December 31, 2014, CIT Bank was a member of the FHLB of Seattle (before its merger into FHLB Des Moines on June 1, 2015) and had $125 million outstanding under a line of credit and $168 million of commercial real estate assets were pledged as collateral. At December 31,
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CIT ANNUAL REPORT 2016 79
2014, a subsidiary of CIT Bank was a member of FHLB Des Moines and had $130 million of advances outstanding and $142 million of collateral pledged.
Structured Financings
Structured Financings totaled approximately $1.9 billion at December 31, 2016, compared to $2.6 billion and $3.9 billion at December 31, 2015 and 2014, respectively. The decreases in secured borrowings during 2016 and 2015 reflect net repayments. The weighted average coupon rate of structured financings at December 31, 2016 was 3.39%, up from 3.11% and 2.88% at December 31, 2015 and 2014, respectively. The increase in the weighted average rate in 2015 mostly reflects the repayments on lower coupon financings.
During the fourth quarter of 2016, CIT completed the following notable transactions:
| - | | Established a $1 billion, three-year asset-based lending (“ABL”) facility in support of our factoring business in the Business Capital division, and |
| - | | Amended our $1.5 billion Canadian TRS facility as noted in theTRS Transactions section below. |
Structured financings in CIT Bank totaled $0.2 billion, $0.8 billion and $1.6 billion at December 31, 2016, 2015 and 2014, respectively, which were secured by $0.3 billion, $1.1 billion and $2.1 billion of pledged assets at December 31, 2016, 2015 and 2014, respectively. Non-bank structured financings were $1.7 billion, $1.8 billion and $2.3 billion at December 31, 2016, 2015 and 2014, respectively, and were secured by assets of $3.8 billion, $3.5 billion and $4.2 billion, at December 31, 2016, 2015 and 2014, respectively.
SeeNote 10 — Borrowings inItem 8. Financial Statements and Supplementary Data for a table displaying our consolidated secured financings and pledged assets.
FRB
The Company has a borrowing facility with the FRB Discount Window that can be used for short-term, typically overnight, borrowings. The borrowing capacity is determined by the FRB based on the collateral pledged.
There were no outstanding borrowings with the FRB Discount Window as of December 31, 2016, 2015 or 2014. SeeNote 10 — Borrowings inItem 8. Financial Statements and Supplementary Data for balances pledged, including amounts to the FRB.
TRS Transactions
Two financing facilities between two wholly-owned subsidiaries of CIT, one Canadian (“CFL”) and one Dutch, and Goldman Sachs International (“GSI”), respectively, are structured as total return swaps (“TRS”), under which amounts available for advances (otherwise known as the unused portion) are accounted for as derivatives and recorded at its estimated fair value. The total facility capacity available under the Canadian TRS was $437 million and the Dutch TRS was $625 million at December 31, 2016. The utilized portion reflects the borrowing.
On December 7, 2016, CFL entered into a Fourth Amended and Restated Confirmation (the “Termination Agreement”) with GSI to terminate the Canadian TRS. Under the Termination Agreement, the Canadian TRS terminates on March 31, 2017, or such earlier date designated by CFL upon five business days’ prior notice delivered to GSI on or after January 2, 2017. The Termination Agreement required payment by CFL to GSI on December 7, 2016, of the present value of the remaining facility fee in an amount equal to approximately $280 million.
In order to prepare for the previously announced sale of the Company’s commercial aircraft leasing business to Avolon Holdings Limited, CIT redeemed in December 2016 the commercial aircraft securitization transaction utilized as a reference obligation in the Canadian TRS, causing the Canadian TRS to become fully unutilized. As a result, the Company and its Board of Directors decided to terminate the Canadian TRS in order to further simplify the Company’s business model and reduce earnings volatility resulting from the mark-to-market of the Canadian TRS derivative. On January 9, 2017, CFL provided notice to GSI designating January 17, 2017, as the termination date for the Canadian TRS.
The aggregate “notional amounts” of the TRS Transactions of $587.5 million at December 31, 2016 and $1,152.8 million at December 31, 2015, represent the aggregate unused portions under the Canadian TRS and Dutch TRS, respectively, and constitute derivative financial instruments. These notional amounts are calculated as the maximum aggregate facility commitment amounts, $1,062.3 million at December 31, 2016 and $2,125.0 at December 31, 2015, less the aggregate actual adjusted qualifying borrowing base outstanding of $474.8 million at December 31, 2016 and $972.2 million at December 31, 2015, under the Canadian TRS and Dutch TRS. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying ABS to investors. If CIT funds additional ABS under the Dutch TRS, the aggregate adjusted qualifying borrowing base of the total return swaps will increase and the notional amount of the derivatives will decrease accordingly.
Based on the Company’s valuation, a liability of $11.3 million and $54.9 million was recorded at December 31, 2016, and December 31, 2015, respectively on the aggregate unused portion. The decrease in the liability of $43.6 million and increase in the liability of $30.4 million for the years ended December 31, 2016, and 2015, respectively, were recognized in Other Income. The termination fee on the financing facility, mentioned above, and the reduction of the liability associated with the TRS Transactions of approximately $37 million, resulted in a net pretax charge for the Company of approximately $245 million in the fourth quarter of 2016. As a result of the Termination Agreement, the unsecured counterparty receivable held by GSI under the Canadian TRS was also released.
We continue to utilize the Dutch TRS to fund our rail operations. The terms and conditions of the Dutch TRS allow CIT to terminate all, but not part, of the transaction upon payment of the present value of the facility fee that would accrue through the termination date of the facility. As of December 31, 2016 that amount was approximately $120 million. At December 31, 2016, a total of $838 million of pledged assets backed $529 million of debt issued to investors.
SeeNote 11 — Derivative Financial Instruments inItem 8. Financial Statements and Supplementary Data for further information.
Item 7: Management’s Discussion and Analysis
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80 CIT ANNUAL REPORT 2016
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.
CIT and CIT Bank debt ratings at December 31, 2016, as rated by Standard & Poor’s Ratings Services (“S&P”), Fitch Ratings, Inc. (“Fitch”), Moody’s Investors Service (“Moody’s”) and DBRS Inc. (“DBRS”) are presented in the following table.
Debt Ratings as of December 31, 2016
| | | | S&P
| | Fitch
| | Moody’s
| | DBRS
|
|---|
CIT Group Inc. |
| Issuer / Counterparty Credit Rating | | | | | BB+ | | | | BB+ | | | | Ba3 | | | | BB (High) | |
| Revolving Credit Facility Rating | | | | | BB+ | | | | BB+ | | | | Ba3 | | | | BBB (Low) | |
| Series C Notes / Senior Unsecured Debt Rating | | | | | BB+ | | | | BB+ | | | | Ba3 | | | | BB (High) | |
| Outlook | | | | | Stable | | | | Stable | | | | Review – Positive | | | | Stable | |
CIT Bank, N.A. | | | | | | | | | | | | | | | | | | |
| Deposit Rating (LT/ST) | | | | | NR | | | | BBB-/F3 | | | | Baa3/Prime 3 | | | | BB (High)/R-4 | |
| Long-term Senior Unsecured Debt Rating | | | | | BBB- | | | | BB+ | | | | Ba3 | | | | BB (High) | |
| Outlook | | | | | Stable | | | | Stable | | | | Review – Positive | | | | Positive | |
In October 2016, Moody’s placed the ratings of CIT Group Inc. and CIT Bank, N.A. on review for possible upgrade. In June 2016, Moody’s assigned an issuer rating to CIT Group Inc. of Ba3, upgraded the Revolving Credit Facility and unsecured debt ratings to Ba3 and changed its outlook to stable from positive. Moody’s also issued ratings for CIT Bank, NA, which they previously did not rate. In January 2016, S&P assigned a long-term issuer credit rating of BBB- to CIT Bank, N.A.
Rating agencies indicate that they base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current operating, legislative and regulatory environment, including implied government support. In addition, rating agencies themselves have been subject to scrutiny arising from the financial crisis and could make or be required to make substantial changes to their ratings policies and practices, particularly in response to legislative and regulatory changes, including as a result of provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Potential changes in rating methodology as well as in the legislative and regulatory environment and the timing of those changes could impact our ratings, which as noted above could impact our liquidity and financial condition.
A debt rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
Contractual Payments and Commitments
Payments for the Twelve Months Ended December 31(1)(dollars in millions)
| | | | Total
| | 2017
| | 2018
| | 2019
| | 2020
| | 2021+
|
|---|
Structured financings(2) | | | | $ | 1,938.4 | | | $ | 328.1 | | | $ | 281.4 | | | $ | 787.2 | | | $ | 68.8 | | | $ | 472.9 | |
| FHLB advances | | | | | 2,410.6 | | | | 15.0 | | | | 1,150.0 | | | | 1,245.6 | | | | – | | | | – | |
| Senior unsecured | | | | | 10,645.9 | | | | 1,978.6 | | | | 3,115.9 | | | | 2,750.0 | | | | 750.0 | | | | 2,051.4 | |
Total Long-term borrowings | | | | | 14,994.9 | | | | 2,321.7 | | | | 4,547.3 | | | | 4,782.8 | | | | 818.8 | | | | 2,524.3 | |
| Deposits | | | | | 32,294.8 | | | | 24,225.4 | | | | 2,673.2 | | | | 2,072.3 | | | | 1,555.8 | | | | 1,768.1 | |
| Credit balances of factoring clients | | | | | 1,292.0 | | | | 1,292.0 | | | | – | | | | – | | | | – | | | | – | |
| Lease rental expense | | | | | 283.8 | | | | 49.3 | | | | 46.6 | | | | 44.8 | | | | 38.7 | | | | 104.4 | |
Total contractual payments | | | | $ | 48,865.5 | | | $ | 27,888.4 | | | $ | 7,267.1 | | | $ | 6,899.9 | | | $ | 2,413.3 | | | $ | 4,396.8 | |
(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. |
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CIT ANNUAL REPORT 2016 81
Commitment Expiration by Years Ended December 31 (dollars in millions)
| | | | Total
| | 2017
| | 2018
| | 2019
| | 2020
| | 2021+
|
|---|
| Financing commitments | | | | $ | 6,008.1 | | | $ | 1,003.6 | | | | 902.2 | | | | 1,490.9 | | | | 1,213.4 | | | | 1,398.0 | |
Aerospace purchase commitments(1) | | | | | 8,683.5 | | | | 607.9 | | | | 2,009.2 | | | | 3,274.5 | | | | 2,791.9 | | | | – | |
| Rail and other purchase commitments | | | | | 300.7 | | | | 272.9 | | | | 27.8 | | | | – | | | | – | | | | – | |
| Letters of credit | | | | | 246.2 | | | | 51.2 | | | | 36.3 | | | | 53.4 | | | | 32.2 | | | | 73.1 | |
| Deferred purchase agreements | | | | | 2,060.5 | | | | 2,060.5 | | | | – | | | | – | | | | – | | | | – | |
| Guarantees, acceptances and other recourse obligations | | | | | 1.6 | | | | 1.6 | | | | – | | | | – | | | | – | | | | – | |
Liabilities for unrecognized tax
obligations(2) | | | | | 36.4 | | | | 5.0 | | | | 31.4 | | | | – | | | | – | | | | – | |
| Total contractual commitments | | | | $ | 17,337.0 | | | $ | 4,002.7 | | | $ | 3,006.9 | | | $ | 4,818.8 | | | $ | 4,037.5 | | | $ | 1,471.1 | |
(1) | | Aerospace purchase commitments are associated with Aerospace discontinued operations. These commitments are net of amounts on deposit with manufacturers. |
(2) | | The balance cannot be estimated past 2018; therefore the remaining balance is reflected in 2018. |
Financing commitments decreased from $7.4 billion at December 31, 2015, to $6.0 billion at December 31, 2016. Financing commitments 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 $572 million at December 31, 2016. Also included are Business Capital credit line agreements, with an amount available of $335 million, net of the amount of receivables assigned to us. These are cancellable by CIT only after a notice period.
At December 31, 2016, substantially all our undrawn financing commitments were senior facilities, with approximately 80% secured by equipment or other assets and the remainder comprised of cash flow or enterprise value facilities. Most of our undrawn and available financing commitments are in the Commercial Finance division of Commercial Banking. The top ten undrawn commitments totaled $352 million at December 31, 2016. The table above includes approximately $1.7 billion of undrawn financing commitments at December 31, 2016, that were not in compliance with contractual obligations, and therefore CIT does not have the contractual obligation to lend.
SeeNote 21 — Commitments inItem 8. Financial Statements and Supplementary Data for further detail.
Discontinued operations
The Aerospace purchase commitments in the table above are associated with Aerospace discontinued operations. Financing Commitments include HECM reverse mortgage loan commitments associated with Financial Freedom discontinued operations of $42 million at December 31, 2016. Financing Commitments also include a commitment associated with the TC-CIT Aviation joint venture in Aerospace discontinued operations of $3 million at December 31, 2016.
Capital Management
CIT manages its capital position to ensure that it is sufficient to: (i) support the risks of its businesses, (ii) maintain a “well-capitalized” status under regulatory requirements, and (iii) provide flexibility to take advantage of future investment opportunities. Capital in excess of these requirements is available to distribute to shareholders, subject to a “non-objection” to our capital plan from the FRB.
CIT uses a complement of capital metrics and related thresholds to measure capital adequacy and takes into account the existing regulatory capital framework. CIT further evaluates capital adequacy through the enterprise stress testing and economic capital (“ECAP”) approaches, which constitutes our capital adequacy process.
As a BHC in excess of $50 billion of assets, CIT is subject to enhanced prudential regulation under the Dodd-Frank Act. Among other requirements, CIT is subject to capital planning and stress testing requirements under the FRB’s Comprehensive Capital Analysis and Review (“CCAR”) process, which requires CIT to submit an annual capital plan and demonstrate that it can meet required capital levels over a nine quarter planning horizon, after taking into account the impact of stresses based on both supervisory and company-specific scenarios.
CIT submitted its first CCAR capital plan to the FRB in April 2016. As this filing was a private submission, the FRB did not publish its findings but informed CIT that we received a qualitative objection to the plan. We are actively remediating the gaps identified by the FRB. Notwithstanding the qualitative objection, the Federal Reserve did approve the continuation of our dividend and share repurchases at an amount consistent with 2015. In July 2016, CIT submitted its Amended Capital Plan to the FRB to include the expected capital impacts resulting from the pending Commercial Air sale, and revised our requested capital actions accordingly. CIT received a “non-objection” from the Federal Reserve Bank of New York for its Amended Capital Plan, subject to the closing of the transaction. SeeCapital Returns section below for details on permissible capital returns.
The Basel III Final Rule requires banks and BHCs to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon under an acute liquidity stress scenario. Implementation for Modified LCR banking organizations, which CIT is considered, began on January 1, 2016, with a minimum requirement of 90% coverage. Beginning January 1, 2017, the minimum requirement increased to 100%. At December 31, 2016, our modified LCR was above 100% at both the Bank and on a consolidated basis.
Item 7: Management’s Discussion and Analysis
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82 CIT ANNUAL REPORT 2016
CIT’s capital management is discussed further in the “Regulation” section ofItem 1. Business Overview with respect to capital and regulatory matters, including“Capital Requirements” and“Stress Test and Capital Plan Requirements”.
Capital Issuance
In connection with the OneWest Transaction, on August 3, 2015, CIT paid approximately $3.4 billion as consideration, which included 30.9 million shares of CIT Group common stock that was valued at approximately $1.5 billion at the time of closing. There were no other stock issuances in 2016 and 2015, other than related to compensation plans.
Capital Returns
Capital returned during the year ended December 31, 2016 totaled $123 million, reflecting dividend payments. Capital returned during 2015 totaled $647 million, including repurchases of approximately $532 million of our common stock and $115 million in dividends.
CIT received a “non-objection” from the FRB for its Amended Capital Plan, subject to the closing of the Commercial Air sale. The Amended Capital Plan authorizes CIT to return $2.975 billion of common equity to shareholders from the net proceeds of the Commercial Air sale; return up to an additional $0.325 billion of common equity contingent upon the issuance of a similar amount of Tier 1 qualifying preferred stock; and pay common dividends totaling $64 million per year after the transaction is completed, subject to quarterly approval by the CIT Board of Directors.
Our 2016 common stock dividends were as follows:
2016 Dividends
Declaration Date
| | | | Payment Date
| | Per Share
Dividend
|
|---|
| January | | | | February 26, 2016 | | $ | 0.15 | |
| April | | | | May 27, 2016 | | $ | 0.15 | |
| July | | | | August 26, 2016 | | $ | 0.15 | |
| October | | | | November 25, 2016 | | $ | 0.15 | |
Capital Composition and Ratios
The Company is subject to various regulatory capital requirements. We compute capital ratios in accordance with Federal Reserve capital guidelines for assessing adequacy of capital.
At December 31, 2016 and 2015, the regulatory capital guidelines applicable to the Company were based on the Basel III Final Rule.
Tier 1 Capital and Total Capital Components(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| Tier 1 Capital | | | | Transition
Basis
| | Fully
Phased-in
Basis
| | Transition
Basis
| | Fully
Phased-in
Basis
|
|---|
| Total common stockholders’ equity | | | | $ | 10,002.7 | | | $ | 10,002.7 | | | $ | 10,944.7 | | | $ | 10,944.7 | |
| Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests | | | | | 79.1 | | | | 79.1 | | | | 76.9 | | | | 76.9 | |
| Adjusted total equity | | | | | 10,081.8 | | | | 10,081.8 | | | | 11,021.6 | | | | 11,021.6 | |
Less: Goodwill(1)(2) | | | | | (733.1 | ) | | | (733.1 | ) | | | (1,130.8 | ) | | | (1,130.8 | ) |
| Disallowed deferred tax assets | | | | | (213.7 | ) | | | (213.7 | ) | | | (908.3 | ) | | | (908.3 | ) |
Disallowed intangible assets(1)(2) | | | | | (68.3 | ) | | | (113.8 | ) | | | (53.6 | ) | | | (134.0 | ) |
| Other Tier 1 components | | | | | (7.8 | ) | | | (17.5 | ) | | | (0.1 | ) | | | (0.1 | ) |
| CET 1 Capital | | | | | 9,058.9 | | | | 9,003.7 | | | | 8,928.8 | | | | 8,848.4 | |
| Tier 1 Capital | | | | | 9,058.9 | | | | 9,003.7 | | | | 8,928.8 | | | | 8,848.4 | |
Tier 2 Capital | | | | | | | | | | | | | | | | | | |
Qualifying reserve for credit losses and other reserves(3) | | | | | 476.3 | | | | 476.3 | | | | 403.3 | | | | 403.3 | |
| Total qualifying capital | | | | $ | 9,535.2 | | | $ | 9,480.0 | | | $ | 9,332.1 | | | $ | 9,251.7 | |
| Risk-weighted assets | | | | $ | 64,586.3 | | | $ | 65,068.2 | | | $ | 69,552.3 | | | $ | 70,238.0 | |
BHC Ratios | | | | | | | | | | | | | | | | | | |
| CET 1 Capital Ratio | | | | | 14.0 | % | | | 13.8 | % | | | 12.8 | % | | | 12.6 | % |
| Tier 1 Capital Ratio | | | | | 14.0 | % | | | 13.8 | % | | | 12.8 | % | | | 12.6 | % |
| Total Capital Ratio | | | | | 14.8 | % | | | 14.6 | % | | | 13.4 | % | | | 13.2 | % |
| Tier 1 Leverage Ratio | | | | | 13.9 | % | | | 13.9 | % | | | 13.4 | % | | | 13.3 | % |
CIT Bank, N.A. Ratios |
| CET 1 Capital Ratio | | | | | 13.4 | % | | | 13.2 | % | | | 12.8 | % | | | 12.6 | % |
| Tier 1 Capital Ratio | | | | | 13.4 | % | | | 13.2 | % | | | 12.8 | % | | | 12.6 | % |
| Total Capital Ratio | | | | | 14.7 | % | | | 14.4 | % | | | 13.8 | % | | | 13.6 | % |
| Tier 1 Leverage Ratio | | | | | 10.9 | % | | | 10.8 | % | | | 10.9 | % | | | 10.7 | % |
(1) | | Goodwill and disallowed intangible assets adjustments include the respective portion of deferred tax liability in accordance with guidelines under Basel III. |
(2) | | Goodwill and intangible assets adjustments also reflect the portion included within assets of discontinued operations. |
(3) | | “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. |
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CIT ANNUAL REPORT 2016 83
Driving the increase in capital ratios in 2016 was the lower risk-weighted assets, as well as higher capital. RWA includes assets of discontinued operations, along with the related off-balance sheet items. RWA is discussed in a following table.
During 2016, the total common stockholders’ equity was reduced by several significant transactions previously noted, including the recording of a deferred tax liability related to the Commercial Air sale transaction (seeIncome Taxes section), goodwill impairment charges (seeNote 26 — Goodwill and Intangible Assets inItem 8. Financial Statements and Supplementary Data andCritical Accounting Estimates), a net charge related to the termination of the Canadian total return swap, a charge related to an increase in the interest curtailment reserve related to Financial Freedom (seeDiscontinued Operations section), and various charges associated with strategic initiatives. While the deferred tax liability adjustment and the goodwill impairment charges negatively impacted stockholders’ equity, they had a minimal impact on regulatory capital ratios as the majority of the deferred tax liability adjustment was disallowed for regulatory capital purposes and the goodwill impairment is excluded from the calculations.
During 2015, our capital was impacted by the acquisition of OneWest Bank and the reversal of our Federal deferred tax asset valuation allowance. The acquisition increased equity, primarily reflected by the issuance of common shares out of treasury. CET 1 and Tier 1 Capital increased by approximately $900 million, while Total Capital increased slightly higher, both net of an increase in goodwill, intangible assets and disallowed deferred tax deductions of $1.1 billion. While the deferred tax asset valuation allowance reversal benefited stockholders’ equity, it had minimal impact on regulatory capital ratios as the majority of the deferred tax asset balance was disallowed for regulatory capital purposes.
The Leverage ratio increased in 2016, reflecting the impact of the lower average assets, along with the noted impacts to capital. The 2015 Leverage ratio was affected by the acquisition, as the impact of the increase to average assets was not offset by the impact of the increase to capital.
The reconciliation of balance sheet assets to risk-weighted assets is presented below:
Risk-Weighted Assets(dollars in millions)
| | | | December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Balance sheet assets | | | | $ | 64,170.2 | | | $ | 67,391.9 | | | $ | 47,755.5 | |
| Risk weighting adjustments to balance sheet assets | | | | | (13,241.6 | ) | | | (13,724.7 | ) | | | (8,523.3 | ) |
| Off balance sheet items | | | | | 13,657.7 | | | | 15,885.1 | | | | 16,248.7 | |
| Risk-weighted assets | | | | $ | 64,586.3 | | | $ | 69,552.3 | | | $ | 55,480.9 | |
The risk weighting adjustments at December 31, 2016 and 2015 reflect Basel III guidelines, whereas the December 31, 2014 risk weighting adjustments followed Basel I guidelines. The Basel III Final Rule prescribed new approaches for risk weightings. Of these, CIT will calculate risk weightings using the Standardized Approach. This approach expands the risk-weighting categories from the former four Basel I-derived categories to a larger and more risk-sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. government and agency securities to as high as 1,250% for such exposures as MBS.
The 2016 off balance sheet items primarily reflect unused lines of credit ($2.3 billion credit equivalent, largely related to the Commercial Finance division), deferred purchase agreements ($2.1 billion related to the Business Capital division) and $8.9 billion of commitments to purchase aircraft and railcars. Included in the balances in the preceding table are assets of discontinued operations, along with the impact of risk weighting and the related off balance sheet items. Discontinued operations items in risk weighted assets related to Commercial Air include approximately $13 billion of on balance sheet assets and $8.7 billion of off balance sheet items related to commitments to purchase aircraft.
The increased balances in 2015 were primarily the result of acquiring OneWest Bank.
SeeNote 21 — Commitments inItem 8. Financial Statements and Supplementary Data for further detail on commitments.
Item 7: Management’s Discussion and Analysis
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84 CIT ANNUAL REPORT 2016
Tangible Book Value and Tangible Book Value per Share(1)
Tangible book value represents common equity less goodwill and other intangible assets. A reconciliation of 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)
| | | | December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Total common stockholders’ equity | | | | $ | 10,002.7 | | | $ | 10,944.7 | | | $ | 9,057.9 | |
| Less: Goodwill | | | | | (685.4 | ) | | | (1,063.2 | ) | | | (432.3 | ) |
| Intangible assets | | | | | (140.7 | ) | | | (166.1 | ) | | | (16.3 | ) |
| Tangible book value | | | | $ | 9,176.6 | | | $ | 9,715.4 | | | $ | 8,609.3 | |
| Book value per share | | | | $ | 49.50 | | | $ | 54.45 | | | $ | 50.07 | |
| Tangible book value per share | | | | $ | 45.41 | | | $ | 48.33 | | | $ | 47.59 | |
(1) | | Tangible book value and tangible book value per share are non-GAAP measures. |
Book value (“BV”) and Tangible book value (“TBV”) along with the respective per share amounts decreased from December 31, 2015, reflecting the net noteworthy charges, which included goodwill impairment and loss on discontinued operations and other items.
2015 BV and TBV per share increased from December 31, 2014 reflecting the net income recorded during 2015 and the issuance of approximately 30.9 million shares ($1.5 billion) related to the OneWest Transaction payment, offset by the impact of additional goodwill and intangible assets recorded related to the OneWest Transaction. BV per share grew during 2015 as the increase in equity, impacted mostly from the issuance of common shares out of treasury for the acquisition and earnings, including the reversal of the federal valuation allowance, outpaced the impact of higher shares outstanding. Tangible book value per share increased modestly from December 31, 2014, as the equity increase was partially offset by the goodwill and intangible assets recorded related to the acquisition, and higher outstanding shares.
CIT Bank, N.A. (“CIT Bank” or the “Bank”), a wholly-owned subsidiary, is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury (“OCC”) and is also subject to regulation and examination by the FDIC. The Bank originates and provides funding for lending and leasing activity in the U.S., primarily by raising deposits through its 70 branch network, from retail and institutional customers through its commercial channels, as well as its online banking platform, commercial and broker channels. Its existing suite of deposit products includes checking and savings accounts, Individual Retirement Accounts and Certificates of Deposit. The Bank’s primary location is in Pasadena, CA.
Total assets for the bank were down compared to December 31, 2015. Financing and leasing assets were down slightly (2.5%), as growth from new business volumes was offset by portfolio runoff, collections and sales. Loans were down 7.2% from December 31, 2015, reflecting transfers to assets held for sale primarily related to Business Air loans ($723 million) and the sale of aircraft loans to the Bank Holding Company ($277 million) in support of CIT’s plan to sell our commercial aircraft business to Avolon. Operating lease equipment was up 28.7% from December 31, 2015, attributable to leasing volumes in Rail of approximately $580 million and approximately $445 million of purchases of Rail operating lease equipment from the BHC partially offset by $325 million in sales of aircraft to the BHC. The portfolio of operating lease equipment, of $3.6 billion, is comprised mostly of railcars.
Total cash and investment securities, of $8.7 billion at December 31, 2016, was comparable to December 31, 2015 amounts however, the mix has shifted with an increase in investments to $4.0 billion from $2.6 billion. The investment securities are mostly mortgage-backed and federal agency securities. As part of our 2016 business strategy, CIT Bank is redeploying cash into higher-yielding “High Quality Liquid Assets,” some of which qualify for Community Reinvestment Act (CRA) credit.
Goodwill and intangibles decreased during 2016, reflecting an impairment of $319 million related to the Consumer Banking segment.
CIT Bank deposits at December 31, 2016 were down from December 31, 2015. The weighted average interest rate at December 31, 2016 was 1.19%, down from 1.26% at December 31, 2015 as we continue to shift from brokered deposits to more stable lower cost retail and commercial deposits.
FHLB advances provide a consistent source of funding for the Bank, which is a member of the FHLB of San Francisco. The decrease in the FHLB balance from December 2015 is a result of management’s decision to utilize excess cash balances to reduce these borrowings. The Bank can borrow under a line of credit that is secured by collateral pledged from its portfolio to the FHLB San Francisco. Other borrowings, consisting of secured debt instruments, decreased from December 31, 2015 through expected pay-down and run-off activity.
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CIT ANNUAL REPORT 2016 85
The 2016 increase in liabilities of discontinued operations reflects additional reserves, including to the Home Equity Conversion Mortgage (HECM) interest curtailment reserve of approximately $260 million. Total equity was down due to the loss from discontinued operation and dividends paid to the BHC ($223.0 million for 2016).
The Bank’s capital and leverage ratios are included in the tables that follow and remained well above required levels. Although the Bank experienced a net loss, $319 million was related to the goodwill impairment, which did not result in a reduction to regulatory capital coupled with a decline in Risk Weighted Assets, caused the capital ratios to increase. CIT Bank reports regulatory capital ratios in accordance with the Basel III Final Rule and determines risk weighted assets under the Standardized Approach.
The following presents condensed financial information for CIT Bank, N.A.
Condensed Balance Sheets(dollars in millions)
| | | | At December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
ASSETS: |
| Cash and deposits with banks | | | | $ | 4,647.2 | | | $ | 6,073.5 | | | $ | 3,684.9 | |
| Investment securities | | | | | 4,035.6 | | | | 2,577.4 | | | | 300.5 | |
| Assets held for sale | | | | | 927.3 | | | | 444.2 | | | | 22.8 | |
| Loans | | | | | 27,246.2 | | | | 29,346.6 | | | | 14,988.5 | |
| Allowance for loan losses | | | | | (406.6 | ) | | | (337.5 | ) | | | (269.5 | ) |
| Operating lease equipment, net | | | | | 3,575.8 | | | | 2,777.8 | | | | 2,025.7 | |
| Indemnification Assets | | | | | 341.4 | | | | 409.1 | | | | – | |
| Goodwill | | | | | 490.9 | | | | 830.8 | | | | 167.8 | |
| Intangible assets | | | | | 144.0 | | | | 163.2 | | | | 12.1 | |
| Other assets | | | | | 780.6 | | | | 1,010.4 | | | | 181.2 | |
| Assets of discontinued operations | | | | | 448.1 | | | | 500.5 | | | | – | |
Total Assets | | | | $ | 42,230.5 | | | $ | 43,796.0 | | | $ | 21,114.0 | |
LIABILITIES AND EQUITY: | | | | | | | | | | | | | | |
| Deposits | | | | $ | 32,309.1 | | | $ | 32,782.2 | | | $ | 15,785.1 | |
| FHLB advances | | | | | 2,410.8 | | | | 3,117.6 | | | | 254.7 | |
| Borrowings | | | | | 241.4 | | | | 798.3 | | | | 1,595.8 | |
| Other liabilities | | | | | 1,145.6 | | | | 819.5 | | | | 769.3 | |
| Liabilities of discontinued operations | | | | | 935.8 | | | | 696.2 | | | | – | |
Total Liabilities | | | | | 37,042.7 | | | | 38,213.8 | | | | 18,404.9 | |
Total Equity | | | | | 5,187.8 | | | | 5,582.2 | | | | 2,709.1 | |
Total Liabilities and Equity | | | | $ | 42,230.5 | | | $ | 43,796.0 | | | $ | 21,114.0 | |
Capital Ratios*
| | | | At December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Common Equity Tier 1 Capital | | | | | 13.2 | % | | | 12.6 | % | | | NA | |
| Tier 1 Capital Ratio | | | | | 13.2 | % | | | 12.6 | % | | | 12.9 | % |
| Total Capital Ratio | | | | | 14.4 | % | | | 13.6 | % | | | 14.2 | % |
| Tier 1 Leverage ratio | | | | | 10.8 | % | | | 10.7 | % | | | 12.1 | % |
NA – Not applicable under Basel I guidelines.
* | | The capital ratios presented above for December 31, 2016 and 2015 are reflective of the fully-phased in Basel III approach. |
Item 7: Management’s Discussion and Analysis
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86 CIT ANNUAL REPORT 2016
Financing and Leasing Assets by Segment(dollars in millions)
| | | | At December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Commercial Banking | | | | $ | 24,707.5 | | | $ | 25,337.2 | | | $ | 17,037.0 | |
| Commercial Finance | | | | | 10,753.3 | | | | 13,067.0 | | | | 9,498.9 | |
| Real Estate Finance | | | | | 5,566.6 | | | | 5,368.5 | | | | 1,766.5 | |
| Business Capital | | | | | 5,146.9 | | | | 4,692.1 | | | | 4,198.9 | |
| Rail | | | | | 3,240.7 | | | | 2,209.6 | | | | 1,572.7 | |
Consumer Banking | | | | $ | 7,041.8 | | | $ | 7,231.4 | | | $ | – | |
| Legacy Consumer Mortgages | | | | | 4,862.7 | | | | 5,468.4 | | | | – | |
| Other Consumer Banking | | | | | 2,179.1 | | | | 1,763.0 | | | | – | |
Total | | | | $ | 31,749.3 | | | $ | 32,568.6 | | | $ | 17,037.0 | |
Condensed Statements of Income(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Interest income | | | | $ | 1,787.9 | | | $ | 1,214.1 | | | $ | 716.1 | |
| Interest expense | | | | | (439.3 | ) | | | (358.7 | ) | | | (248.5 | ) |
| Net interest revenue | | | | | 1,348.6 | | | | 855.4 | | | | 467.6 | |
| Provision for credit losses | | | | | (199.0 | ) | | | (164.1 | ) | | | (113.5 | ) |
| Net interest revenue, after credit provision | | | | | 1,149.6 | | | | 691.3 | | | | 354.1 | |
| Rental income on operating leases | | | | | 391.9 | | | | 299.5 | | | | 227.2 | |
| Other income | | | | | 309.3 | | | | 125.0 | | | | 122.8 | |
| Total net revenue, net of interest expense and credit provision | | | | | 1,850.8 | | | | 1,115.8 | | | | 704.1 | |
| Operating expenses | | | | | (1,069.3 | ) | | | (711.1 | ) | | | (415.8 | ) |
| Goodwill impairment | | | | | (319.4 | ) | | | – | | | | – | |
| Depreciation on operating lease equipment | | | | | (161.1 | ) | | | (123.3 | ) | | | (96.2 | ) |
| Maintenance and other operating lease expenses | | | | | (22.2 | ) | | | (8.1 | ) | | | (8.2 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (10.6 | ) | | | – | | | | (0.4 | ) |
| Income before provision for income taxes | | | | | 268.2 | | | | 273.3 | | | | 183.5 | |
| Provision for income taxes | | | | | (209.3 | ) | | | (81.5 | ) | | | (73.3 | ) |
| Income from continuing operations | | | | | 58.9 | | | | 191.8 | | | | 110.2 | |
| Loss from discontinued operations, net of taxes | | | | | (210.1 | ) | | | (10.4 | ) | | | – | |
Net (loss) income | | | | $ | (151.2 | ) | | $ | 181.4 | | | $ | 110.2 | |
New business volume — funded | | | | $ | 9,065.5 | | | $ | 9,016.0 | | | $ | 7,845.7 | |
The Bank’s results for 2016 include a full year of activity related to the acquisition of OneWest Bank compared to only five months for 2015. As a result, line item results have changed significantly year over year, as an increase in operating expenses partially offset higher net revenue. Additional variances are attributable to the gain on the sale of planes to the BHC, purchases of railcars from the BHC contributing to higher net operating lease revenues, and the goodwill impairment recorded in the fourth quarter of 2016 (See Note 26 — Goodwill and Intangible Assets in Item 8. Financial Statements and Supplementary Data. ).
The decrease in income from continuing operations for 2016 was mainly attributed to the goodwill impairment, partially offset by higher net interest revenue and net rental income, and an increase in other income, reflecting a gain of $51 million related to the sale of aircraft to the BHC. The provision for credit losses for 2016 reflects higher net charge-offs and specific reserves in the energy and maritime portfolios, partially offset by slightly lower general reserves. Net charge-offs as a percentage of average finance receivables were 0.47% and 0.42%, for 2016 and 2015, respectively.
Operating expenses increased from the prior year, reflecting a full year of expenses for the additional OneWest Bank employees, as well as the transition of BHC personnel into the Bank, in line with our strategy to transition more of CITs business into the Bank. The current year also includes the previously mentioned goodwill impairment associated with the Consumer Banking segment, which was recorded in the fourth quarter of 2016, as well as the resolution of legacy items assumed with the OneWest Transaction (servicing-related contingent reserves and resolution of a pre-acquisition litigation matter). The current year includes slightly lower restructuring charges and resulted in an efficiency ratio of 55.9%.
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CIT ANNUAL REPORT 2016 87
The current year loss on discontinued operation included a $19 million impairment charge related to Reverse Mortgage Servicing Rights and the noted HECM interest curtailment reserve. Discontinued Operations is discussed in an earlier section inManagement’s Discussion and Analysis of Financial Condition and Results of Operations andNote 2 — Acquisitions and Disposition Activities inItem 1. Consolidated Financial Statements.
Net Finance Revenue(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Interest income | | | | $ | 1,787.9 | | | $ | 1,214.1 | | | $ | 716.1 | |
| Rental income on operating leases | | | | | 391.9 | | | | 299.5 | | | | 227.2 | |
| Finance revenue | | | | | 2,179.8 | | | | 1,513.6 | | | | 943.3 | |
| Interest expense | | | | | (439.3 | ) | | | (358.7 | ) | | | (248.5 | ) |
| Depreciation on operating lease equipment | | | | | (161.1 | ) | | | (123.3 | ) | | | (96.2 | ) |
| Maintenance and other operating lease expenses | | | | | (22.2 | ) | | | (8.1 | ) | | | (8.2 | ) |
| Net finance revenue | | | | $ | 1,557.2 | | | $ | 1,023.5 | | | $ | 590.4 | |
| Average Earning Assets (“AEA”) | | | | $ | 41,137.5 | | | $ | 29,627.3 | | | $ | 18,383.1 | |
As a % of AEA: |
| Interest income | | | | | 4.35 | % | | | 4.10 | % | | | 3.90 | % |
| Rental income on operating leases | | | | | 0.95 | % | | | 1.01 | % | | | 1.24 | % |
| Finance revenue | | | | | 5.30 | % | | | 5.11 | % | | | 5.14 | % |
| Interest expense | | | | | (1.07 | )% | | | (1.21 | )% | | | (1.36 | )% |
| Depreciation on operating lease equipment | | | | | (0.39 | )% | | | (0.42 | )% | | | (0.53 | )% |
| Maintenance and other operating lease expenses | | | | | (0.05 | )% | | | (0.03 | )% | | | (0.04 | )% |
| Net finance revenue | | | | | 3.79 | % | | | 3.45 | % | | | 3.21 | % |
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, depreciation and maintenance and other lease expenses associated with our operating lease portfolio, as well as funding costs. Since our asset composition includes operating lease equipment (8% of AEA as of December 31, 2016), the company believes that NFM is a more appropriate metric for the Bank as opposed to net interest margin (“NIM”) (a common metric used by other banks), as NIM does not reflect the net revenue from 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.
Operating leases contributed $209 million to NFR during 2016, compared to $168 million in 2015 and $123 million in 2014. The increase was driven in rail assets acquired from the BHC.
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 and the disclosure of contingent assets and liabilities. The following estimates, which are based on relevant information available at the end of each period, include inherent risks and uncertainties related to judgments and assumptions made. We consider the estimates to be critical in applying our accounting policies, due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact on the financial statements.
Management believes that the judgments and estimates utilized in the following critical accounting estimates are reasonable. We do not believe that different assumptions are more likely than those utilized, although actual events may differ from such assumptions. Consequently, our estimates could prove inaccurate, and we may be exposed to charges to earnings that could be material.
Allowance for Loan Losses — The allowance for loan losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including charge-off experience, levels of past due loans and non-performing assets, and evaluation of portfolio diversification and concentration, as well as economic conditions to determine the need for a qualitative adjustment. We review finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third party credit enhancements such as guarantees and recourse to manufacturers. This information is reviewed on a quarterly basis with senior management, including the Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, Chief Financial Officer and Controller, among others, as well as the Audit and Risk Management Committees, in order to set the reserve for credit losses.
Item 7: Management’s Discussion and Analysis
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88 CIT ANNUAL REPORT 2016
As of December 31, 2016, the allowance was comprised of non-specific reserves of $385.3 million, specific reserves of $33.7 million and reserves related to PCI loans of $13.6 million. The allowance is sensitive to the risk ratings assigned to loans and leases in our portfolio. Assuming a one level PD downgrade across the 14 grade internal scale for all non-impaired loans and leases, the allowance would have increased by $253 million to $686 million at December 31, 2016. Assuming a one level LGD downgrade across the 11 grade internal scale for all non-impaired loans and leases, the allowance would have increased by $135 million to $568 million at December 31, 2016. As a percentage of finance receivables, the allowance would be 2.32% under the hypothetical PD stress scenario and 1.92% under the hypothetical LGD stress scenario, compared to the reported 1.46%.
These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings, or the increases in allowance and loss rates, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan losses to changes in key inputs. We believe the risk ratings utilized in the allowance calculations are appropriate and that the probability of the sensitivity scenarios above occurring within a short period of time is remote. The process of determining the level of the allowance for loan losses requires a high degree of judgment. Others given the same information could reach different reasonable conclusions.
SeeNote 1 —Business and Summary of Significant Accounting Policies for discussion on policies relating to the allowance for loan losses, andNote 4 —Allowance for Loan Losses for segment related data inItem 8. Financial Statements and Supplementary Data andCredit Metrics for further information on the allowance for credit losses.
Loan Impairment — Loan impairment is measured based upon the difference between the recorded investment in each loan and either the present value of the expected future cash flows discounted at each loan’s effective interest rate (the loan’s contractual interest rate adjusted for any deferred fees / costs or discount / premium at the date of origination/acquisition) or if a loan is collateral dependent, the collateral’s fair value. When foreclosure or impairment is determined to be probable, the measurement will be based on the fair value of the collateral less costs to sell. The determination of impairment involves management’s judgment and the use of market and third party estimates regarding collateral values. Valuations of impaired loans and corresponding impairment affect the level of the reserve for credit losses. SeeNote 1 —Business and Summary of Significant Accounting Policies for discussion on policies relating to the allowance for loan losses, andNote 3 —Loans for further discussion inItem 8. Financial Statements and Supplementary Data.
Lease Residual Values — Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Direct financing leases are recorded at the aggregated future minimum lease payments plus estimated residual values less unearned finance income. We generally bear greater residual risk in operating lease transactions (versus finance lease transactions) as the duration of an operating lease is shorter relative to the equipment useful life than a finance lease. Management reviews the estimated residual value of a leased property at least annually. If the review results in a lower estimate than had been previously established, we determine whether the decline in estimated residual value is other than temporary. If the decline in estimated residual value is other than temporary, the resulting reduction in the net investment is recognized as a loss in the period in which the estimate is changed, as an increase to depreciation expense for operating lease residual impairment, or as an adjustment to yield for value adjustments on finance leases. Data regarding current equipment values, including appraisals, and historical residual realization experience are among the factors considered in evaluating estimated residual values. As of December 31, 2016, our direct financing lease residual balance was $0.6 billion and our total operating lease equipment balance totaled $7.5 billion.
Indemnification Assets and related contingent obligations — As part of the OneWest Transaction, CIT is party to loss share agreements with the FDIC, which provide for the indemnification of certain losses within the terms of these agreements. These loss share agreements are related to OneWest Bank’s previous acquisitions of IndyMac, First Federal and La Jolla. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modification, charge-off of loan balance or liquidation of collateral). The loss share agreements cover SFR loans acquired from IndyMac, First Federal, and La Jolla. In addition, the IndyMac loss share agreement covers reverse mortgage loans. These agreements are accounted for as indemnification assets using the same assumptions used to measure the indemnified item subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. As of December 31, 2016, the indemnification asset of $341 million was limited to the IndyMac loss share agreement. No indemnification asset was recognized in connection with the First Federal Transaction and an insignificant indemnification asset balance was associated with the La Jolla Transaction. The First Federal and La Jolla loss share agreements also include certain true-up provisions for amounts due to the FDIC if actual and estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses originally estimated at the time of OneWest Bank’s acquisition of the covered loans. As of December 31, 2016, CIT recognized a separate liability for these amounts due to the FDIC associated with the La Jolla loss share agreement at approximately $62 million.
As a mortgage servicer of residential reverse mortgage loans, the Company is exposed to contingent obligations for breaches of servicer obligations as set forth in industry regulations established by HUD and FHA and in servicing agreements with the applicable counterparties, such as Fannie Mae and other investors. Under these agreements, the servicer may be liable for failure to perform its servicing obligations, which could include fees imposed for failure to comply with foreclosure timeframe requirements established by servicing guides and agreements to which CIT is a party as the servicer of the loans. The Company recorded additional reserves for contingent servicing-related liabilities in discontinued operations of approximately $260 million in 2016.
Separately, a corresponding indemnification receivable from the FDIC of $108 million was recognized for the loans covered by indemnification agreements with the FDIC reported in continuing
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operations as of December 31, 2016. The indemnification receivable is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount.
SeeNote 1 — Business and Summary of Significant Accounting Policies,Note 2 — Acquisition and Discontinued Operations andNote 5 — Indemnification Assets inItem 8. Financial Statements and Supplementary Data for additional information.
Fair Value Determination — At December 31, 2016, only selected assets (certain debt and equity securities, trading derivatives and derivative counterparty assets, and select FDIC receivable acquired in the OneWest Transaction) and liabilities (trading derivatives and derivative counterparty liabilities) were measured at fair value. The fair value of assets related to net employee projected benefit obligations was determined largely via a level 2 methodology.
Liabilities for Uncertain Tax Positions — The Company has open tax years in the U.S., Canada, and other international jurisdictions that are currently under examination, or may be subject to examination in the future, by the applicable taxing authorities. We evaluate the adequacy of our income tax reserves in accordance with accounting standards on uncertain tax positions, taking into account open tax return positions, tax assessments received, and tax law changes. The process of evaluating liabilities and tax reserves involves the use of estimates and a high degree of management judgment. The final determination of tax audits could affect our tax reserves.
Realizability of Deferred Tax Assets — The recognition of certain net deferred tax assets of the Company’s reporting entities is dependent upon, but not limited to, the future profitability of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, Management’s judgment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets relating to net operating loss carry forwards (“NOLs”) as most of these assets are subject to limited carry-forward periods some of which began to expire in 2016. In addition, the domestic NOLs are subject to annual use limitations under the Internal Revenue Code and certain state laws. Management utilizes historical and projected data in evaluating positive and negative evidence regarding recognition of deferred tax assets. SeeNote 1 — Business and Summary of Significant Accounting Policies andNote 19 — Income Taxes inItem 8 Financial Statements and Supplementary Data for additional information regarding income taxes.
Goodwill — The consolidated goodwill balance totaled $685.4 million at December 31, 2016, or approximately 1.1% of total assets. CIT acquired OneWest Bank on August 3, 2015, which resulted in the recording of $643 million of goodwill, including the effects of the measurement period adjustments through the end of the measurement period in the third quarter of 2016. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future events that are highly subjective in nature. During 2014, CIT acquired Paris-based Nacco, and Direct Capital, resulting in the addition of $77 million and approximately $170 million of goodwill, respectively. The remaining amount of goodwill represented the excess reorganization value over the fair value of tangible and identified intangible assets, net of liabilities, recorded in conjunction with FSA in 2009.
Goodwill is assessed for impairment at least annually, or more often if events or circumstances have changed significantly from the annual test date that would indicate a potential reduction in the fair value of the reporting unit below its carrying value. We performed the goodwill impairment test during the fourth quarter of 2016, utilizing data as of September 30, 2016 to perform the test, at which time CIT’s share price was $36.30 and tangible book value (“TBV”) per share was $49.56.
Impairment exists when the carrying amount of goodwill exceeds its implied fair value. The ASC requires a two-step impairment test to be used to identify potential goodwill impairment and to measure the amount of goodwill impairment. Companies can also choose to perform qualitative assessments to conclude on whether it is more likely or not that a company’s carrying amount including goodwill is greater than its fair value, commonly referred to as Step 0, before applying the two-step approach.
Based on our annual assessment, the Company recorded an impairment in the fourth quarter of 2016 of the Consumer Banking and Commercial Services RUs of $319.4 million and $34.8 million, respectively. The determination of the impairment charge requires significant judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments. There is risk that if the Company does not meet forecasted financial results, there could be incremental goodwill impairment.
SeeNote 26 — Goodwill and Intangible Assets inItem 8 Financial Statements and Supplementary Data for more detailed information regarding the goodwill impairment test, including details regarding the fair value methodology employed and significant assumptions used.
Item 7: Management’s Discussion and Analysis
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CIT is subject to a variety of risks that may arise through the Company’s business activities, including the following principal forms of risk:
| - | | Strategic risk is the risk of the impact on earnings or capital arising from adverse strategic business decisions, improper implementation of strategic decisions, or lack of responsiveness to changes in the industry, including changes in the financial services industry as well as fundamental changes in the businesses in which our customers and our firm engages. |
| - | | Credit risk is the risk of loss and provisioning when a borrower or series of borrowers do not meet their financial obligations to the Company or their performance weakens and reserving is required. Credit risk may arise from lending, leasing, the purchase of accounts receivable in factoring and/or counterparty activities. |
| - | | Asset risk is the equipment valuation and residual risk of lease equipment owned by the Company that arises from fluctuations in the supply and demand for the underlying leased equipment. The Company is exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, resulting in either reduced future lease income over the remaining life of the asset or a lower sale value. |
| - | | Market risk includes interest rate and foreign currency risk. Interest rate risk is the risk that fluctuations in interest rates will have an impact on the Company’s net finance revenue and on the market value of the Company’s assets, liabilities and derivatives. Foreign exchange risk is the risk that fluctuations in exchange rates between currencies can have an economic impact on the Company’s non-dollar denominated assets, liabilities and cash flows. |
| - | | Liquidity risk is the risk that the Company has an inability to maintain adequate cash resources and funding capacity to meet its obligations, including under stress scenarios. |
| - | | Capital risk is the risk that the Company does not have adequate capital to cover its risks and to support its growth and strategic objectives. |
| - | | Operational risk 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. |
| - | | Information Technology Risk is the risk of financial loss, damage to the Company’s reputation or other adverse impacts resulting from unauthorized (malicious or accidental) disclosure, modification, or destruction of information, including cyber-crime, unintentional errors and omissions, IT disruptions due to natural or man-made disasters, or failure to exercise due care and diligence in the implementation and operation of an IT system. |
| - | | Legal and Regulatory Risk is the risk that the Company is not in compliance with applicable laws and regulations, which may result in fines, regulatory criticism or business restrictions, or damage to the Company’s reputation. |
| - | | Reputational Risk is the potential that negative publicity, whether true or not, will cause a decline in the value of the Company due to changes in the customer base, costly litigation, or other revenue reductions. |
GOVERNANCE AND SUPERVISION
CIT’s Risk Management Group (“RMG”) has established a Risk Governance Framework that is designed to promote appropriate risk identification, measurement, monitoring, management and control. The Risk Governance Framework is focused on:
| - | | the major risks inherent to CIT’s business activities, as defined above; |
| - | | the Enterprise Risk Framework, which includes the policies, procedures, practices and resources used to manage and assess these risks, and the decision-making governance structure that supports it; |
| - | | the Risk Appetite and Risk Tolerance Framework, which defines the level and type of risk CIT is willing to assume in its exposures and business activities, given its business objectives, and sets limits, credit authorities, target performance metrics, underwriting standards and risk acceptance criteria used to define and guide the decision-making processes; and |
| - | | management information systems, including data, models, analytics and risk reporting, to enable adequate identification, monitoring and reporting of risks for proactive management. |
The Risk Management Committee (“RMC”) of the Board oversees the risk management functions that address the major risks inherent in CIT’s business activities and the control processes with respect to such risks. The Chief Risk Officer (“CRO”) supervises CIT’s risk management functions through the RMG, chairs the Enterprise Risk Committee (“ERC”), and reports regularly to the RMC of the Board on the status of CIT’s risk management program. The ERC provides a forum for structured, cross-functional review, assessment and management of CIT’s enterprise-wide risks. Within the RMG, officers with reporting lines to the CRO supervise and manage groups and departments with specific risk management responsibilities.
The Credit Risk Management group manages and approves all credit risk throughout CIT. This group is led by the Chief Credit Officer (“CCO”), and includes the heads of credit for each business, the head of Problem Loan Management, and Credit Administration. The CCO chairs several key governance committees, including the Corporate Credit Committee (“CCC”).
The Enterprise Risk Management (“ERM”) group is responsible for oversight of asset risk, market risk, liquidity risk, capital risk, operational risk, model development, analytics, risk data and reporting.
The Chief Model Risk Officer reports directly to the CRO, and is responsible for model governance, validation and monitoring.
The Chief Information Security Officer reports to the CRO and is responsible for IT Risk, Business Continuity Planning and Disaster Recovery.
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The Risk Framework, Risk Policy & Governance are also managed through the CRO.
Credit Review is an independent oversight function that is responsible for performing internal credit-related reviews for the Company as well as the ongoing monitoring, testing, and measurement of credit quality and credit process risk in enterprise-wide lending and leasing activities. Credit Review reports to the RMC of the Board and administratively to the CRO.
The Compliance function reports to the Audit Committee of the Board and administratively to the CRO.
Regulatory Relations reports to the Chief Compliance Officer. The Audit Committee and the Regulatory Compliance Committee of the Board oversee financial, legal, compliance, regulatory and audit risk management practices.
STRATEGIC RISK
Strategic risk management starts with analyzing the short and medium term business and strategic plans established by the Company. This includes the evaluation of the industry, opportunities and risks, market factors and the competitive environment, as well as internal constraints, such as CIT’s risk appetite and control environment. The business plan and strategic plan are linked to the Risk Appetite and Risk Tolerance Frameworks, including the limit structure. RMG is responsible for the New Product and Strategic Initiative process. This process is intended to enable new activities that are consistent with CIT’s expertise and risk appetite, and ensure that appropriate due diligence is completed on new opportunities before approval and implementation. Changes in the business environment and in the industry are evaluated periodically through scenario development and analytics, and discussed with the business leaders, CEO and RMC.
Strategic risk management includes the effective implementation of new products and strategic initiatives. The New Product and Strategic Initiative process requires tracking and review of all approved new initiatives. In the case of acquisitions, such as Direct Capital and OneWest Bank, integration planning and management covers the implementation process across affected businesses and functions. As a result of the OneWest Transaction, CIT became a SIFI. SIFI planning and implementation is a cross functional effort, led by RMG and coordinated with the integration planning processes.
Oversight of strategic risk management is provided by the RMC, the ERC and the Risk Control Committee, a sub-committee of the ERC.
CREDIT RISK
Lending and Leasing Risk
The extension of credit through our lending and leasing activities is core to our businesses. As such, CIT’s credit risk management process is centralized in the RMG, reporting into the CRO through the CCO. This group approves the Company’s underwriting standards, new business, extensions of credit and material amendments to existing credits, and is responsible to ensure the portfolio credit grading, and regulatory ratings are correct. Additionally, problem loan management reports into the CCO. RMG reviews and monitors credit exposures with the goal of identifying, as early as possible, customers and industries that are experiencing declining creditworthiness or financial difficulty. The CCO and CRO evaluate reserves through our ALLL process for performing and non-performing loans, as well as establishing qualitative reserves to cover potential losses, which may be inherent in the portfolio. Once a loan or lease is deemed to be Non-Accrual, we evaluate our collateral and test for asset impairment based upon collateral value and projected cash flows and relevant market data with any impairment in value charged to earnings, via a specific reserve or charge off.
CIT’s portfolio is governed by Risk Tolerance Limits based on individual loan amounts by borrower as well as product, industry and geography. RMG sets or modifies the Underwriting standards as conditions warrant, based on borrower risk, collateral, industry risk, portfolio size and concentrations, credit concentrations and risk of substantial credit loss. Using our underwriting policies, procedures and practices, combined with credit judgment and quantitative tools, we evaluate financing and leasing assets for credit and collateral risk during the credit decision-making process and after the advancement of funds. We set forth our underwriting parameters based on: (1) Target Market Definitions, which delineate risk by market, industry, geography and product, (2) Credit Standards, which detail acceptable structures, credit profiles and risk-adjusted returns, and (3) through our corporate credit policies and procedures. We capture and analyze credit risk based on the probability of obligor default (“PD”) and loss given default (“LGD”). PD is determined by evaluating borrower creditworthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. LGD ratings, which estimate loss if an account goes into default, are predicated on transaction structure, collateral valuation and related guarantees. The PD and LGD of our borrowers is the framework for our ALLL process.
We execute derivative transactions with our customers in order to help them mitigate their interest rate and currency risks. We typically enter into offsetting derivative transactions with third parties in order to neutralize CIT’s interest rate and currency exposure to these customer related derivative transactions. The counterparty credit exposure related to these transactions is monitored and evaluated as part of our credit risk management process.
Commercial Lending and Leasing. Commercial credit management begins with the initial evaluation of credit risk and underlying collateral at the time of origination and continues over the life of the finance receivable or operating lease, including normal collection, evaluation of the performance, recovery of past due balances and liquidating underlying collateral.
Prior to extending an initial loan or lease, credit personnel review potential borrowers’ financial condition, results of operations, management, industry, business model, customer base, operations, collateral and other data, such as third party credit reports, to evaluate the potential customer’s borrowing and repayment ability. Transactions are graded by PD and LGD ratings, as described above. Credit facilities are subject to our overall credit approval process and underwriting guidelines and are issued commensurate with the credit evaluation performed on each prospective borrower, as well as portfolio concentrations. Credit personnel continue to review the PD and LGD ratings periodically. Decisions on continued creditworthiness or impairment of borrowers are determined through these periodic reviews.
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Small-Ticket Lending and Leasing. For small-ticket lending and leasing transactions, largely in Business Capital, we employ automated credit scoring models for origination (scorecards) and re-grading (auto re-grade algorithms). These are supplemented by business rules and expert judgment. The models evaluate, among other things, financial performance metrics, length of time in business, industry category and geography, and are used to assess a potential borrower’s credit standing and repayment ability, including the value of collateral. We utilize external credit bureau scoring, when available, and behavioral models, as well as judgment in the credit adjudication, evaluation and collection processes.
We evaluate the small-ticket leasing portfolio using delinquency vintage curves and other tools to analyze trends and credit performance by transaction type, including analysis of specific credit characteristics and selected subsets of the portfolios. Adjustments to credit scorecards, auto re-grading algorithms, business rules and lending programs are made periodically based on these evaluations. Individual underwriters are assigned credit authority based upon experience, performance and understanding of underwriting policies of small-ticket leasing operations. A credit approval hierarchy is enforced to ensure that an underwriter with the appropriate level of authority reviews applications.
Consumer Lending. Consumer lending begins with an evaluation of a consumer’s credit profile against published standards. Loans could be originated HFI or HFS. A loan that is originated as HFS must meet both the credit criteria of the Bank and the investor. At this time, agency eligible loans are originated for sale (Fannie Mae and Freddie Mac). Jumbo loans are considered a HFI product. All loan requests are reviewed by underwriters. Credit decisions are made after reviewing qualitative factors and considering the transaction from a judgmental perspective.
Single family residential mortgage loans are originated through retail originations and closed loan purchases.
Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Concentration limits are established by the Board and credit standards follow industry standard documentation requirements. Performance is largely based on an acceptable pay history along with a quarterly assessment, which incorporates an assessment using current market conditions. Non-traditional loans are also monitored by way of a quarterly review of the borrower’s refreshed credit score. When warranted an additional review of the underlying collateral may be conducted.
Counterparty Risk
We enter into interest rate and currency swaps and foreign exchange forward contracts as part of our overall risk management practices. We establish limits and evaluate and manage the counterparty risk associated with these derivative instruments through our RMG.
The primary risk of derivative instruments is counterparty credit exposure, which is defined as the ability of a counterparty to perform financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures.
The CCC, in conjunction with ERM, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements entered into for our own risk management purposes are generally entered into with major financial institutions or clearing exchanges rated investment grade by nationally recognized rating agencies.
We also monitor and manage counterparty credit risk, for example, through the use of exposure limits, related to our cash and investment portfolio.
ASSET RISK
Asset risk in our leasing business is evaluated and managed in the business units and overseen by RMG. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and product, are reviewed as part of our quarterly financial and asset quality review. Reviews for impairment are performed at least annually.
The RMG teams review the air and rail markets, monitor traffic flows, measure supply and demand trends, and evaluate the impact of new technology or regulatory requirements on supply and demand for different types of equipment. Commercial air is more global, while the rail market is regional, mainly North America and Europe. Demand for both passenger and freight equipment is correlated with GDP growth trends for the markets the equipment serves as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in travel and trade flows due to specific events (e.g., natural disasters, conflicts, political upheaval, disease, and terrorism) represent risks to the earnings that can be realized by these businesses. CIT seeks to mitigate these risks by maintaining relatively young fleets of assets with wide operator bases, which can facilitate attractive lease and utilization rates.
MARKET RISK
CIT is exposed to interest rate and currency risk as a result of its business activities. CIT does not pro-actively assume these risks as a way to make a return, as it does with credit and asset risk. RMG measures, monitors and sets limits on these exposures, by analyzing the impact of potential interest rate and foreign exchange rate changes on financial performance. We consider factors such as customer prepayment trends, maturity, and repricing characteristics of assets and liabilities. Our asset-liability management system provides analytical capabilities to assess and measure the effects of various market rate scenarios upon the Company’s financial performance.
Interest rate risk
Interest rate risk arises from lending, leasing, investments, deposit taking and funding, as assets and liabilities reprice at different times and by different amounts as interest rates change. We evaluate and monitor interest rate risk primarily through two metrics.
| - | | Net Interest Income Sensitivity (“NII Sensitivity”), which measures the net impact of hypothetical changes in interest rates on forecasted net interest revenue and rental income assuming a static balance sheet over a twelve month period; and |
| - | | Economic Value of Equity (“EVE”), which measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and derivatives. |
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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, consumer loans, leased equipment, cash and investments. Our leasing products are level/fixed payment transactions, whereas the interest rate on the majority of our commercial loan portfolio is based on a floating rate index such as short-term Libor or Prime. Our commercial portfolio includes approximately $22.7 billion of fixed-rate and $15.4 billion of floating rate assets, including assets of discontinued operations. Our consumer loan portfolio is based on both floating rate and level/fixed payment transactions. Our interest bearing deposits (cash) have generally short durations and reprice frequently. We use a variety of funding sources, including certificates of deposit (CDs), money market, savings and checking accounts and secured and unsecured debt. With respect to liabilities, CDs and unsecured debt are fixed-rate, secured debt is a mix of fixed and floating rate, and the rates on savings accounts vary based on the market environment and competition. The composition of our assets and liabilities generally results in a net asset-sensitive position at the shorter end of the yield curve, mostly related 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, N.A. sources deposits primarily through a retail branch network in Southern California, direct-to-consumer (via the Internet) and brokered channels. At December 31, 2016, the Bank had over $32 billion in deposits. Certificates of deposit represented approximately $17 billion, 52% of the total, most of which were sourced through direct channels. The deposit rates we offer can be influenced by market conditions and competitive factors. We model a rate sensitivity to market price changes on our non-maturity deposits of approximately 60% for a +100 bps rate increase over the next 12 months. Changes in interest rates can affect our pricing and potentially impact our ability to gather and retain deposits. Rates offered by competitors also can influence our rates and our ability to attract and hold deposits. In a rising rate environment, the Bank may need to increase rates to renew maturing deposits and attract new deposits. Rates on our savings account deposits may fluctuate due to pricing competition and may also move with short-term interest rates. In general, retail deposits represent a low-cost source of funds and are less sensitive to interest rate changes than many non-deposit funding sources. 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 (1.0)% parallel increase or decrease in interest rates from the market-based forward curve. NII sensitivity is based on a static balance sheet projection.
Change to NII Sensitivity and EVE
| | | | December 31, 2016
| | December 31, 2015
| | December 31, 2014
| |
|---|
| | | | +100 bps
| | -100 bps
| | +100 bps
| | -100 bps
| | +100 bps
| | -100 bps
|
|---|
| NII Sensitivity | | | | | 3.2 | % | | | (2.4 | )% | | | 3.5 | % | | | (2.1 | )% | | | 6.4 | % | | | (0.8 | )% |
| EVE | | | | | (2.1 | )% | | | 2.3 | % | | | 0.5 | % | | | (0.5 | )% | | | 1.9 | % | | | (1.6 | )% |
As of December 31, 2016, we ran a range of scenarios, including a 200 basis point (2.0)% parallel increase scenario, which resulted in an NII Sensitivity of 6.0% and an EVE of (4.0)%, while a 200 basis point (2.0)% decline scenario was not run as the current low rate environment makes the scenario less relevant. Regarding the negative scenarios, we have an assumed rate floor. Overall lower sensitivity on income is primarily driven by the move from cash to securities and secondarily from lower loan balances and passage of time on fixed rate liabilities.
Year to date, +100bps EVE sensitivity went from 0.5% in Dec 2015 to -2.1% in Dec 2016. This is primarily driven by lengthening of asset duration due to continued purchases of fixed rate mortgage-backed securities, shortening of liability duration due to reduction in callable brokered CDs, and pay down of debt.
As of December 31, 2015, the NII sensitivity and EVE declined from 2014 due to several factors, including the OneWest Transaction in the measurement assessment, the reduction of CIT’s cash balance relative to the overall balance sheet and refinement in the calculations.
As of December 31, 2016, the estimated pro forma sensitivity ratios assuming the sale of Commercial Air and the associated liability management and capital actions for a +/-100 bps scenarios for NII and EVE were as follows:
| NII post sale estimate | | | | EVE post sale estimate | |
|---|
| +100 = 4.4% | | | | +100 = 0.8% | | | | | | | | |
| -100 = (3.3)% | | | | -100 = (0.8)% | | | | | | | | |
As detailed above, NII sensitivity is positive with respect to an increase in interest rates. This is primarily driven by our floating rate loan portfolio, which reprice frequently, and cash and investment securities. Our floating rate loan portfolio includes approximately $8.5 billion of loans ($5.2 billion of commercial loans and $3.3 billion of consumer loans) that are subject to interest rate floors, of which approximately $2.7 billion are still below their floors. On a net basis, we generally have more floating/repricing assets than liabilities in the near term. As a result, our current portfolio is more sensitive to moves in short-term interest rates in the near term. Therefore, our net interest income may increase if short-term interest rates rise, or decrease if short-term
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interest rates decline. Market-implied forward rates over the 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 a 100 basis point (1.0)% 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 a fluctuation 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 EVE sensitivity base case calculated using a market-based forward interest rate curve. The methodology with which the operating lease assets are assessed in the results table above reflects the existing contractual rental cash flows and the expected residual value at the end of the existing contract term.
The simulation modeling for both NII Sensitivity and EVE assumes we take no action in response to the changes in interest rates, while NII Sensitivity generally assumes cash flow from portfolio run-off is reinvested in similar products.
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 limits.
We use results of our various interest rate risk analyses to formulate asset and liability management (“ALM”) strategies, in coordination with the Asset Liability Committee, in order to achieve the desired risk profile, while managing our objectives for capital adequacy and liquidity risk exposures. Specifically, we may 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 income, or for management actions that could affect income or that could be taken to change our risk profile. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations does not represent our current view of the expected range of future interest rate movements.
Foreign Currency Risk
We seek to hedge transactional exposure of our non-dollar denominated activities, which are comprised of foreign currency loans and leases in foreign entities, through local currency borrowings. To the extent such borrowings were unavailable, we have utilized derivative instruments (foreign currency exchange forward contracts) to hedge our non-dollar denominated activities. Additionally, we have utilized derivative instruments to hedge the translation exposure of our net investments in foreign operations.
Currently, a portion of our non-dollar denominated loans and leases are funded with U.S. dollar denominated debt and equity which, if unhedged, would cause foreign currency transactional and translational exposures. For the most part, we hedge these exposures through derivative instruments. RMG sets limits and monitors usage to ensure that currency positions are appropriately hedged, as unhedged exposures may cause changes in earnings or the equity account.
LIQUIDITY RISK
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure ample liquidity to meet expected and contingent funding needs under both normal and stress environments. Consistent with this strategy, we maintain large pools of cash and highly liquid investments. Additional sources of liquidity include the Second Amended and Restated Revolving Credit and Guaranty Agreement (the “Revolving Credit Facility”), other committed financing facilities and cash collections generated by portfolio assets originated in the normal course of business.
We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. The primary tool is a cash forecast designed to identify movements in cash flows. Stress scenarios are applied to measure the resiliency of the liquidity position and to identify stress points requiring remedial action. Also included among our liquidity measurement tools is an early warning system (summarized on an Early Warning Indicator report) that monitors key macro-environmental and company specific metrics that serve as early warning signals of potential impending liquidity stress events. Event triggers are categorized by severity into a three-level stress monitoring system: Moderately Enhanced Crisis, Heightened Crisis, and Maximum Crisis. Assessments outside defined thresholds trigger contingency funding actions, which are detailed in the Company’s Contingency Funding Plan (“CFP”).
Integral to our liquidity management practices is our CFP, which outlines actions and protocols under liquidity stress conditions, whether they are idiosyncratic or systemic in nature and defines the thresholds that trigger contingency funding actions. The objective of the CFP is to ensure an adequately sustained level of liquidity under certain stress conditions.
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CAPITAL RISK
Capital risk is the risk that the Company does not have adequate capital to cover its risks and to support its growth and strategic objectives. CIT establishes internal capital risk limits and warning thresholds, using both Economic and Risk-Based Capital calculations, as well as the FRB’s Comprehensive Capital Analysis and Review (“CCAR”) process and the Dodd-Frank Act Stress Testing (“DFAST”), to evaluate the Company’s capital adequacy for multiple types of risk in both normal and stressed environments. Economic capital includes credit risk, asset risk, market risk, operational risk and model risk. CCAR and DFAST are a forward-looking methodologies that look at FRB adverse and severely adverse scenarios as well as internally generated scenarios. The capital risk framework requires contingency plans for stress results that would breach the established capital thresholds.
OPERATIONAL RISK
Operational risk is the risk of financial loss or other adverse impacts resulting from inadequate or failed internal processes and systems, people or external events. Operational risk may result from fraud by employees or persons outside the Company, transaction processing errors, employment practices and workplace safety issues, unintentional or negligent failure to meet professional obligations to clients, business interruption due to system failures, or other external events.
Operational risk is managed within individual business units. The head of each business and functional area is responsible for maintaining an effective system of internal controls to mitigate operational risks. The business segment chief operating officers designate operational risk managers responsible for implementation of the operational risk framework programs. The enterprise operational risk function provides oversight in managing operational risk, designs and supports the enterprise-wide operational risk framework programs, and promotes awareness by providing training to employees and operational risk managers within business units and functional areas. Additionally, enterprise operational risk maintains the loss data collection and risk assessment programs. Oversight of the operational risk management function is provided by the RMG, the RMC, the ERC and the Risk Control Committee, a sub-committee of the ERC.
INFORMATION TECHNOLOGY RISK
Information Technology (“IT”) risks are risks around information security, cyber-security, and business disruption from systems implementation or downtime, that could adversely impact the organization’s business or business processes, including loss or legal liability due to unauthorized (malicious or accidental) disclosure, modification, or destruction of information, unintentional errors and omissions, IT disruptions due to natural or man-made disasters, or failure to exercise due care and diligence in the implementation and operation of an IT system.
The Information Risk function provides oversight of the Information Security and Business Continuity Management (“BCM”) programs. Information Security provides oversight and guidance across the organization intended to preserve and protect the confidentiality, integrity, and availability of CIT information and information systems. BCM provides oversight and guidance of global business continuity and disaster recovery procedures through planning and implementation of proactive, preventive, and corrective actions intended to enable continuous business operations in the event of a disaster, including technology recovery. Information Risk is also responsible for crisis management and incident response and performs ongoing IT risk assessments of applications, infrastructure systems and third party vendors, as well as information security and BCM training and awareness for employees, contingent workers and consultants.
Oversight of the Information Risk function is provided by the RMG, the RMC, the ERC and the Risk Control Committee, a sub-committee of the ERC.
LEGAL AND REGULATORY RISK
CIT is subject to a number of laws, regulations, regulatory standards, and guidance, both in the U.S. and in other countries in which it does business, some of which are applicable primarily to financial services and others of which are generally applicable to all businesses. Any failure to comply with applicable laws, regulations, standards, and guidance in the conduct of our business, including but not limited to funding our business, originating new business, purchasing and selling assets, and servicing our portfolios or the portfolios of third parties may result in governmental investigations and inquiries, legal proceedings, including both private and governmental plaintiffs, significant monetary damages, fines, or penalties, restrictions on the way in which we conduct our business, or reputational harm. To reduce these risks, the Company consults regularly with legal counsel, both internal and external, on significant legal and regulatory issues and has established a compliance function to facilitate maintaining compliance with applicable laws and regulations.
Corporate Compliance is an independent function responsible for maintaining an enterprise-wide compliance risk management program commensurate with the size, scope and complexity of our businesses, operations, and the countries in which we operate. The Compliance function (1) oversees programs and processes to evaluate and monitor compliance with laws and regulations pertaining to our business, (2) tests the adequacy of the compliance control environment in each business, and (3) monitors and promotes compliance with the Company’s ethical standards as set forth in our Code of Business Conduct and compliance policies. Corporate Compliance, led by the Chief Ethics and Compliance Officer, is responsible for setting the overall global compliance framework and standards, using a risk based approach to identify and manage key compliance obligations and risks. The head of each business and staff function is responsible for ensuring compliance within their respective areas of authority. Corporate Compliance, through the Chief Ethics and Compliance Officer, reports administratively and to the CRO and to the Chairperson of the Audit Committee of the Board of Directors.
The global compliance risk management program includes training (in collaboration with a centralized Learning and Development team within Human Resources), testing, monitoring, risk assessment, and other disciplines necessary to effectively manage compliance and regulatory risks. The Company consults with subject matter experts in the areas of privacy, sanctions, anti-money laundering, anti-corruption compliance and other areas.
Corporate Compliance has implemented comprehensive compliance policies and procedures and employs Business Unit
Item 7: Management’s Discussion and Analysis
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96 CIT ANNUAL REPORT 2016
Compliance Officers (each, a “BUCO”) and Regional Compliance Officers (each, an “RCO”) who work with each business to advise business staff and leadership in the prudent conduct of business within a regulated environment and within the requirements of law, rule, regulation and the control environment we maintain to reduce the risk of violations or other adverse outcomes. They advise business leadership and staff with respect to the implementation of procedures to operationalize compliance policies and other requirements.
Oversight of legal and regulatory risk is provided by the Audit and Regulatory Compliance Committees of the Board of Directors, the ERC and the Risk Control Committee, a sub-committee of the ERC.
REPUTATIONAL RISK
Reputational risk is the potential that negative publicity, whether true or not, will cause a decline in the value of the Company due to changes in the customer base, costly litigation, or other revenue reductions. Protecting CIT, its shareholders, employees and brand against reputational risk is of paramount importance to the Company. To address this priority, CIT has established corporate governance standards relating to its Code of Business Conduct and ethics. The Chief Compliance Officer’s responsibilities also include the role of Chief Ethics Officer. In this combined role, his responsibilities also extend to encompass compliance not only with laws and regulations, but also with CIT’s values and its Code of Business Conduct.
The Company has adopted, and our Board of Directors has approved, a Code of Business Conduct applicable to all directors, officers and employees, which details acceptable behaviors in conducting the Company’s business and acting on the Company’s behalf. The Code of Business Conduct covers conflicts of interest, corporate opportunities, confidentiality, fair dealing (with respect to customers, suppliers, competitors and employees), protection and proper use of Company assets, compliance with laws, and encourages reporting of unethical or illegal behavior, including through a Company hotline. Annually, each employee is trained on the Code of Business Conduct’s requirements, and provides an attestation as to their understanding of the requirements and their responsibility to comply.
CIT’s Executive Management Committee (“EMC”) has established, and approved, the charter of a Global Ethics Committee. The Global Ethics Committee is chaired by CIT’s General Counsel and Corporate Secretary. Its members include the Chief Ethics and Compliance Officer, Chief Auditor, Head of Human Resources and the Head of Communications, Marketing & Government Relations. The Global Ethics Committee is charged with (a) oversight of the Code of Business Conduct and Company Values, (b) seeing that CIT’s ethical standards are communicated, upheld and enforced in a consistent manner, and (c) periodic reporting to the EMC and Audit Committee of the Board of Directors of employee misconduct and related disciplinary action.
Oversight of reputational risk management is provided by the Audit Committee of the Board of Directors, the RMC, the ERC, Compliance Committee and the Risk Control Committee, a sub-committee of the ERC. In addition, CIT’s IAS monitors and tests the overall effectiveness of internal control and operational systems on an ongoing basis and reports results to senior management and to the Audit Committee of the Board.
INTERNAL CONTROLS WORKING GROUPThe 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 our Controller and is comprised of executives in Finance, Risk, Operations, Human Resources, Information Technology and Internal Audit. SeeItem 9A. Controls and Procedures for more information.
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. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance or financial position that may either exclude or include amounts, or is adjusted in some way to the effect of including or excluding, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements.
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. 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.
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CIT ANNUAL REPORT 2016 97
These non-GAAP 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.
1. Total Net Revenue, Net Finance Revenue, and Net Operating Lease Revenue
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. The source of the data is various statement of income line items, arranged in a different order, and with different subtotals than included in the statement of income, therefore considered non-GAAP. Total net revenue is used by management to monitor business performance.
Net finance revenue is a non-GAAP measure that represents the level of revenue earned on our financing and leasing assets. NFR is another key performance measure used by management to monitor portfolio performance. NFR is also used to calculate a performance margin, NFM.
Due to the nature of our financing and leasing assets, which include a higher proportion of operating lease equipment than most BHCs, certain financial measures commonly used by other BHCs are not as meaningful for our Company. As such, given our asset composition includes a high level of operating lease equipment, net finance margin as calculated below is used by management, compared to net interest margin (“NIM”) (a common metric used by other bank holding companies), which 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 operating lease revenue.
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. The net operating lease revenues measurement is used by management to monitor portfolio performance and returns on its purchased equipment.
Total Net Revenue and Net Operating Lease Revenue(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Total Net Revenue |
Interest income(1) | | | | $ | 1,911.5 | | | $ | 1,445.2 | | | $ | 1,155.6 | |
Rental income on operating leases(1) | | | | | 1,031.6 | | | | 1,018.1 | | | | 949.6 | |
| Finance revenue | | | | | 2,943.1 | | | | 2,463.3 | | | | 2,105.2 | |
Interest expense(1) | | | | | (753.2 | ) | | | (731.4 | ) | | | (715.1 | ) |
Depreciation on operating lease equipment(1) | | | | | (261.1 | ) | | | (229.2 | ) | | | (229.8 | ) |
Maintenance and other operating lease expenses(1) | | | | | (213.6 | ) | | | (185.1 | ) | | | (171.7 | ) |
| Net finance revenue | | | | | 1,715.2 | | | | 1,317.6 | | | | 988.6 | |
Other income(1) | | | | | 150.6 | | | | 149.6 | | | | 263.9 | |
Total net revenue | | | | $ | 1,865.8 | | | $ | 1,467.2 | | | $ | 1,252.5 | |
Net Finance Margin (NFR as a % of AEA) | | | | | 3.60 | % | | | 3.47 | % | | | 3.30 | % |
Net Operating Lease Revenue | | | | | | | | | | | | | | |
Rental income on operating leases(1) | | | | $ | 1,031.6 | | | $ | 1,018.1 | | | $ | 949.6 | |
Depreciation on operating lease equipment(1) | | | | | (261.1 | ) | | | (229.2 | ) | | | (229.8 | ) |
Maintenance and other operating lease expenses(1) | | | | | (213.6 | ) | | | (185.1 | ) | | | (171.7 | ) |
Net operating lease revenue | | | | $ | 556.9 | | | $ | 603.8 | | | $ | 548.1 | |
(1) | | Balances agree directly to the statement of income in Item 8 Financial Statements. |
2. Operating Expenses and Net Efficiency Ratio Excluding Certain Costs
One key performance metric the company uses to gauge the level of expenses is in comparison to the average earning assets. A decline in this metric could show improvement, i.e. expenses not going up at the same rate of asset growth, or decreasing at a rate in excess of asset decline. Operating expenses excluding restructuring costs and intangible asset amortization is a non-GAAP measure used by management to compare period over period expenses. Another key performance metric gauges our expense usage via our net efficiency calculation. This calculation compares the level of expenses to the level of net revenues. A lower result reflects a more efficient use of our expenses to generate revenue. Net efficiency ratio is a non-GAAP measurement used by management to measure operating expenses (before restructuring costs and intangible amortization) to total net revenues. Due to the exclusions of the noted items, these are considered non-GAAP measures, as presented in the reconciliation below. We exclude these recurring items from these calculations as they are charges resulting from our strategic initiatives and not our operating activity.
Item 7: Management’s Discussion and Analysis
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Operating Expenses Excluding Certain Costs(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Operating expenses(1) | | | | $ | 1,283.5 | | | $ | 1,121.1 | | | $ | 900.1 | |
| Provision for severance and facilities exiting activities | | | | | (36.2 | ) | | | (58.3 | ) | | | (31.4 | ) |
| Intangible asset amortization | | | | | (25.6 | ) | | | (13.3 | ) | | | (1.4 | ) |
| Operating expenses excluding restructuring costs and intangible asset amortization | | | | $ | 1,221.7 | | | $ | 1,049.5 | | | $ | 867.3 | |
| Operating expenses excluding restructuring costs as a % of AEA | | | | | 2.69 | % | | | 2.95 | % | | | 3.00 | % |
| Operating expenses exclusive of restructuring costs and intangible amortization | | | | | 2.56 | % | | | 2.76 | % | | | 2.89 | % |
Total Net Revenue | | | | $ | 1,865.8 | | | $ | 1,467.2 | | | $ | 1,252.5 | |
| Net Efficiency Ratio | | | | | 65.5 | % | | | 71.5 | % | | | 69.2 | % |
(1) | | Balances agree directly to the statement of income in Item 8 Financial Statements. |
3. Earning Assets and Average Earning Assets (“AEA”)
Earning asset balances displayed in the table below are directly derived from the respective line items in the balance sheet. These represent revenue generating assets, and the average of which (AEA) provides a basis for management performance calculations such as NFM and operating expenses as a % of AEA. The average is derived using month end balances for the respective period. Because the balances are used in aggregate, as well the average, there are no direct comparative balances on the balance sheet, therefore these are considered non-GAAP measures.
Earning Assets(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | | | 2016 | | | | 2015 | | | | 2014 | |
Loans(1) | | | | $ | 29,535.9 | | | $ | 30,518.7 | | | $ | 18,260.6 | |
Operating lease equipment, net(1) | | | | | 7,486.1 | | | | 6,851.7 | | | | 5,980.9 | |
Interest bearing cash(1) | | | | | 5,608.5 | | | | 6,652.0 | | | | 5,542.1 | |
Investment securities(1) | | | | | 4,491.1 | | | | 2,953.7 | | | | 1,550.3 | |
Assets held for sale(1) | | | | | 636.0 | | | | 2,057.7 | | | | 826.5 | |
Indemnification assets(1) | | | | | 341.4 | | | | 409.1 | | | | – | |
Securities purchased under agreements to resell(1) | | | | | – | | | | – | | | | 650.0 | |
Credit balances of factoring clients(1) | | | | | (1,292.0 | ) | | | (1,344.0 | ) | | | (1,622.1 | ) |
| Total earning assets | | | | $ | 46,807.0 | | | $ | 48,098.9 | | | $ | 31,188.3 | |
Average Earning Assets (for the respective years) | | | | $ | 47,664.2 | | | $ | 38,019.8 | | | $ | 29,959.3 | |
(1) | | Balances agree directly to the balance sheet for 2016 and 2015 in Item 8 Financial Statements. |
4. Tangible Book Value, ROTCE and Tangible Book Value per Share
Tangible book value (TBV, also referred to as tangible common equity), return on tangible common equity (ROTCE), and TBV per share are considered key financial performance measures by management, and are used by other financial institutions. TBV, as calculated and used by management, represents CIT’s common stockholders’ equity, less goodwill and intangible assets. ROTCE measures CIT’s net income applicable to common shareholders as a percentage of average tangible common equity. This measure is useful for evaluating the performance of CIT as it calculates the return available to common shareholders without the impact of intangible assets and deferred tax assets. The average adjusted tangible common equity is derived using averages of balances presented, based on month end balances for the period. TBV per share is calculated dividing TBV by the outstanding number of common shares. TBV, ROTCE and TBV per share are measurements used by management and users of CIT’s financial data in assessing CIT’s use of equity. We believe the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
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CIT management believes TBV, ROTCE and TBV per share are important measures for comparative purposes with other institutions, but are not defined under U.S. GAAP, and therefore considered non-GAAP financial measures.
Tangible Book Value(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Total common stockholders’ equity(1) | | | | $ | 10,002.7 | | | $ | 10,944.7 | | | $ | 9,057.9 | |
Less: Goodwill(1) | | | | | (685.4 | ) | | | (1,063.2 | ) | | | (432.3 | ) |
Intangible assets(1) | | | | | (140.7 | ) | | | (166.1 | ) | | | (16.3 | ) |
| Tangible book value | | | | | 9,176.6 | | | | 9,715.4 | | | | 8,609.3 | |
| Less: Disallowed deferred tax asset for regulatory capital | | | | | (213.7 | ) | | | (908.3 | ) | | | (375.0 | ) |
| Adjusted tangible common equity | | | | $ | 8,962.9 | | | $ | 8,807.1 | | | $ | 8,234.3 | |
| Average adjusted tangible common equity | | | | $ | 9,172.3 | | | $ | 8,318.7 | | | $ | 8,313.5 | |
| Non-GAAP net income (reconciled below) | | | | $ | 709.9 | | | $ | 606.4 | | | $ | 703.9 | |
| Intangible asset amortization, after tax | | | | | 15.7 | | | | 9.8 | | | | 1.3 | |
| Non-GAAP net income for ROTCE calculation | | | | $ | 725.6 | | | $ | 616.2 | | | $ | 705.2 | |
| Return on average tangible common equity, after noteworthy items | | | | | 7.91 | % | | | 7.41 | % | | | 8.48 | % |
(1) | | Balances agree directly to the balance sheet for 2016 and 2015 in Item 8 Financial Statements. |
5. | | Net income excluding noteworthy items and income from continuing operations excluding noteworthy items |
Net income excluding noteworthy items and income from continuing operations excluding noteworthy items are non-GAAP measures used by management as each excludes items from the respective line item in the GAAP statement of income. Due to volume and size of noteworthy items in 2016, the Company believes that adjusting for these items provides the user of CIT’s financial information a measure of the underlying performance of the Company and of continuing operations specific. The non-GAAP noteworthy items are summarized in the following categories: significant due to the magnitude of the transaction; transactions pertaining to items no longer considered core to CIT’s on-going operations (i.e. sales of Non-Strategic Portfolios); legacy OneWest Bank issues prior to CIT’s ownership; and recurring items consistently noted in other non-GAAP measures, even though balance may not have been significant.
Item 7: Management’s Discussion and Analysis
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| | | | Description
|
| Year Ended
December 31,
2016
|
| Year Ended
December 31,
2015
|
| Year Ended
December 31,
2014
|
|
|---|
Net (loss) income | | | | | | $ | (848 | ) | | $ | (4.20 | ) | | $ | 1,034 | | | $ | 5.55 | | | $ | 1,119 | | | $ | 5.91 | |
| | | | | Gain on Sale — UK Business | | | (15 | ) | | | (0.07 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | Discrete Tax Benefit | | | (13 | ) | | | (0.06 | ) | | | 71 | | | | 0.38 | | | | (30 | ) | | | (0.16 | ) |
| | | | | Impairments on AHFS and Other | | | 8 | | | | 0.04 | | | | 23 | | | | 0.12 | | | | 55 | | | | 0.29 | |
| | | | | Liquidating Europe CTA | | | 3 | | | | 0.01 | | | | – | | | | – | | | | – | | | | – | |
| | | | | China Tax Valuation Allowance | | | 16 | | | | 0.08 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Canadian TRS Termination Charge | | | 146 | | | | 0.72 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Consumer Goodwill Impairment | | | 319 | | | | 1.58 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Commercial Services Goodwill Impairment | | | 28 | | | | 0.14 | | | | – | | | | – | | | | – | | | | – | |
| Continuing Operations | | | | Canadian Tax Assertion Change | | | 54 | | | | 0.27 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Gain on Sale — Canadian Businesses | | | (16 | ) | | | (0.08 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | OneWest Bank Legacy Matters | | | 17 | | | | 0.08 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Gain Related to IndyMac Venture | | | (3 | ) | | | (0.01 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | Partial Tax Valuation Allowance Reversal | | | – | | | | – | | | | (647 | ) | | | (3.47 | ) | | | (375 | ) | | | (1.98 | ) |
| | | | | International Tax Valuation Allowance Reversal | | | – | | | | – | | | | – | | | | – | | | | (44 | ) | | | (0.23 | ) |
| | | | | Currency Translation Adjustments on Portfolio Sales | | | – | | | | – | | | | 74 | | | | 0.40 | | | | – | | | | – | |
| | | | | Transaction Costs | | | – | | | | – | | | | 15 | | | | 0.08 | | | | – | | | | – | |
| | | | | Restructuring | | | 23 | | | | 0.11 | | | | 36 | | | | 0.19 | | | | 31 | | | | 0.17 | |
| | | | | Financial Freedom Interest Curtailment Reserve | | | 179 | | | | 0.89 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Business Air Impairments | | | 18 | | | | 0.09 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Reverse Mortgage Servicing Rights Impairment | | | 12 | | | | 0.06 | | | | – | | | | – | | | | – | | | | – | |
| Discontinued Operations | | | | Commercial Air Tax Provision | | | 847 | | | | 4.20 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Commercial Air Suspended Depreciation | | | (66 | ) | | | (0.33 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | Gain on Student Loan Portfolio Sale | | | – | | | | – | | | | – | | | | – | | | | (53 | ) | | | (0.28 | ) |
Non-GAAP net income, excluding noteworthy items(1) | $ | 710 | | | $ | 3.52 | | | $ | 606 | | | $ | 3.25 | | | $ | 704 | | | $ | 3.72 | |
(Loss) income from continuing operations | $ | (183 | ) | | $ | (0.90 | ) | | $ | 724 | | | $ | 3.89 | | | $ | 676 | | | $ | 3.57 | |
| | | | | Gain on Sale — UK Business | | | (15 | ) | | | (0.07 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | Discrete Tax Benefit | | | (13 | ) | | | (0.06 | ) | | | 71 | | | | 0.38 | | | | (30 | ) | | | (0.16 | ) |
| | | | | Impairments on AHFS and Other | | | 8 | | | | 0.04 | | | | 23 | | | | 0.12 | | | | 55 | | | | 0.29 | |
| | | | | Liquidating Europe CTA | | | 3 | | | | 0.01 | | | | – | | | | – | | | | – | | | | – | |
| | | | | China Tax Valuation Allowance | | | 16 | | | | 0.08 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Canadian TRS Termination Charge | | | 146 | | | | 0.72 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Consumer Goodwill Impairment | | | 319 | | | | 1.58 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Commercial Services Goodwill Impairment | | | 28 | | | | 0.14 | | | | – | | | | – | | | | – | | | | – | |
| Continuing Operations | | | | Canadian Tax Assertion Change | | | 54 | | | | 0.27 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Gain on Sale — Canadian Businesses | | | (16 | ) | | | (0.08 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | OneWest Bank Legacy Matters | | | 17 | | | | 0.08 | | | | – | | | | – | | | | – | | | | – | |
| | | | | Gain Related to IndyMac Venture | | | (3 | ) | | | (0.01 | ) | | | – | | | | – | | | | – | | | | – | |
| | | | | Partial Tax Valuation Allowance Reversal | | | – | | | | – | | | | (647 | ) | | | (3.47 | ) | | | (375 | ) | | | (1.98 | ) |
| | | | | International Tax Valuation Allowance Reversal | | | – | | | | – | | | | – | | | | – | | | | (44 | ) | | | (0.23 | ) |
| | | | | Currency Translation Adjustments on Portfolio Sales | | | – | | | | – | | | | 74 | | | | 0.40 | | | | – | | | | – | |
| | | | | Transaction Costs | | | – | | | | – | | | | 15 | | | | 0.08 | | | | – | | | | – | |
| | | | | Restructuring | | | 23 | | | | 0.11 | | | | 36 | | | | 0.19 | | | | 31 | | | | 0.17 | |
Non-GAAP income from continuing operations, excluding noteworthy items(1) | $ | 385 | | | $ | 1.91 | | | $ | 296 | | | $ | 1.59 | | | $ | 313 | | | $ | 1.65 | |
(1) | | Balances may not sum due to rounding . |
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6. Continuing Operations Total Assets
Continuing operations total assets is a non-GAAP measure due to the exclusion of assets of discontinued operations. Management uses this total for analytical purposes to compare balance sheet assets on an ongoing basis.
Continuing Operations Total Assets(dollars in millions)
| | | | December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Total assets(1) | | | | $ | 64,170.2 | | | $ | 67,391.9 | | | $ | 47,755.5 | |
Assets of discontinued operation(1) | | | | | (13,220.7 | ) | | | (13,059.6 | ) | | | (12,493.7 | ) |
| Continuing operations total assets | | | | $ | 50,949.5 | | | $ | 54,332.3 | | | $ | 35,261.8 | |
(1) | | Balances agree directly to the balance sheet for 2016 and 2015 in Item 8 Financial Statements. |
7. Effective Tax Rate Reconciliation
The provision for income before discrete items and the respective effective tax rate are non-GAAP measures, which management uses for analytical purposes to understand the Company’s underlying tax rate. Discrete items are discussed in the Income Tax section.
Effective Tax Rate Reconciliation(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Provision (benefit) for income taxes | | | | $ | 203.5 | | | | (538.0 | ) | | $ | (432.4 | ) |
| Less: Discrete tax items | | | | | (60.0 | ) | | | 617.5 | | | | 451.9 | |
| Provision for income taxes, before discrete tax items | | | | $ | 143.5 | | | $ | 79.5 | | | $ | 19.5 | |
| Income from continuing operations, before provision for income taxes | | | | $ | 20.9 | | | $ | 186.0 | | | $ | 244.5 | |
| Effective tax rate | | | | | 978.0 | % | | | (289.2 | )% | | | (176.8 | )% |
| Effective tax rate, before discrete items | | | | | 689.4 | % | | | 42.8 | % | | | 8.0 | % |
8. Regulatory
Included within this Form 10-K are risk-weighted assets (RWA), risk-based capital and leverage ratios as calculated under Basel III capital guidelines. For banking industry regulatory reporting purposes, we report our capital in accordance with Transitional Requirements, but also monitor our capital based on a fully phased-in methodology. Such measures are considered key regulatory capital measures used by banking regulators, investors and analysts to assess the CIT (as a BHC) regulatory capital position and to compare that to other financial institutions. For information on our capital ratios and requirements, seeNote 15 — Regulatory Capital inItem 8. Financial Statements, theCapital section inItem 7. Management’s Discussion and Analysis and the Regulatory section inItem 1 Business.
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, as amended. 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:
| - | | 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, to repay secured and unsecured debt, to issue qualifying capital instruments, including Tier 1 qualifying preferred stock, and for a return of capital, |
| - | | our plans to change our funding mix and to access new sources of funding to broaden our use of deposit taking capabilities, |
| - | | our pending or potential acquisition and disposition plans, and the integration and restructuring risks inherent in such acquisitions, including our previous acquisition of OneWest Bank in August 2015, our pending sale of the Commercial Air business, and our proposed sale of our Financial Freedom reverse mortgage business and our Business Air loan portfolio, |
| - | | our credit risk management and credit quality, |
| - | | our asset/liability risk management, |
Item 7: Management’s Discussion and Analysis
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102 CIT ANNUAL REPORT 2016
| - | | our funding, borrowing costs and net finance revenue, |
| - | | our operational risks, including risk of operational errors, failure of operational controls, success of systems enhancements and expansion of risk management and control functions, |
| - | | our mix of portfolio asset classes, including changes resulting from growth initiatives, new business initiatives, new products, acquisitions and divestitures, new business and customer retention, |
| - | | legal risks, including related to the enforceability of our agreements and to changes in laws and regulations, |
| - | | our commitments to extend credit or purchase equipment, and |
| - | | 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:
| - | | capital markets liquidity, |
| - | | risks inherent in a return of capital, including risks related to obtaining regulatory approval, the nature and allocation among different methods of returning capital, and the amount and timing of any capital return, |
| - | | risks of and/or actual economic slowdown, downturn or recession, |
| - | | industry cycles and trends, |
| - | | uncertainties associated with risk management, including credit, prepayment, asset/liability, interest rate and currency risks, |
| - | | adequacy of reserves for credit losses, |
| - | | risks inherent in changes in market interest rates and quality spreads, |
| - | | funding opportunities, deposit taking capabilities and borrowing costs, |
| - | | conditions and/or changes in funding markets and our access to such markets, including the secured and unsecured debt and asset-backed securitization markets, |
| - | | risks of implementing new processes, procedures, and systems, including any new processes, procedures, and systems required to comply with the additional laws and regulations applicable to systematically important financial institutions, |
| - | | risks associated with the value and recoverability of leased equipment and related lease residual values, |
| - | | risks of failing to achieve the projected revenue growth from new business initiatives or the projected expense reductions from efficiency improvements, |
| - | | application of fair value accounting in volatile markets, |
| - | | application of goodwill accounting in a recessionary economy, |
| - | | changes in laws or regulations governing our business and operations, or affecting our assets, including our operating lease equipment, |
| - | | changes in competitive factors, |
| - | | customer retention rates, |
| - | | risks associated with dispositions of businesses or asset portfolios, including how to replace the income associated with such businesses or asset portfolios and the risk of residual liabilities from such businesses or portfolios, |
| - | | risks associated with acquisitions of businesses or asset portfolios and the risks of integrating such acquisitions, including the integration of OneWest Bank, and |
| - | | regulatory changes and/or developments. |
Any or all of our forward-looking statements here or in other publications may turn out to be wrong, and there are no guarantees regarding our performance. We do not assume any obligation to update any forward-looking statement for any reason.
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CIT ANNUAL REPORT 2016 103
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of CIT Group Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of CIT Group Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to the Home Equity Conversion Mortgage (“HECM”) Interest Curtailment Reserve and Information Technology General Controls (“ITGCs”) for information systems that are relevant to the preparation of the Company’s financial statements existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 15, 2017
Item 8: Financial Statements and Supplementary Data
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104 CIT ANNUAL REPORT 2016
CIT GROUP INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(dollars in millions – except share data)
| | | |
December 31,
2016
| |
December 31,
2015
|
|---|
Assets | | | | | | | | | | |
Cash and due from banks, including restricted balances of $176.1 and $150.2
at December 31, 2016 and 2015(1), respectively (see Note 10 for amounts pledged) | | | | $ | 822.1 | | | $ | 1,000.4 | |
Interest bearing deposits, including restricted balances of $102.8 and $182.5
at December 31, 2016 and 2015(1), respectively (see Note 10 for amounts pledged) | | | | | 5,608.5 | | | | 6,652.0 | |
| Investment securities, including $283.5 and $339.7 at December 31, 2016 and December 31, 2015 of securities carried at fair value with changes recorded in net income (see Note 10 for amounts pledged) | | | | | 4,491.1 | | | | 2,953.7 | |
Assets held for sale(1) | | | | | 636.0 | | | | 2,057.7 | |
| Loans (see Note 10 for amounts pledged) | | | | | 29,535.9 | | | | 30,518.7 | |
| Allowance for loan losses | | | | | (432.6 | ) | | | (347.0 | ) |
Total loans, net of allowance for loan losses(1) | | | | | 29,103.3 | | | | 30,171.7 | |
Operating lease equipment, net (see Note 10 for amounts pledged)(1) | | | | | 7,486.1 | | | | 6,851.7 | |
| Indemnification assets | | | | | 341.4 | | | | 409.1 | |
| Unsecured counterparty receivable | | | | | 394.5 | | | | 537.8 | |
| Goodwill | | | | | 685.4 | | | | 1,063.2 | |
| Intangible assets | | | | | 140.7 | | | | 166.1 | |
| Other assets, including $111.6 and $195.9 at December 31, 2016 and 2015, respectively, at fair value | | | | | 1,240.4 | | | | 2,468.9 | |
| Assets of discontinued operations | | | | | 13,220.7 | | | | 13,059.6 | |
Total Assets | | | | $ | 64,170.2 | | | $ | 67,391.9 | |
Liabilities |
| Deposits | | | | $ | 32,304.3 | | | $ | 32,761.4 | |
| Credit balances of factoring clients | | | | | 1,292.0 | | | | 1,344.0 | |
| Other liabilities, including $177.9 and $220.3 at December 31, 2016 and 2015, respectively, at fair value | | | | | 1,897.6 | | | | 1,689.0 | |
Borrowings, including $2,321.7 and $3,091.3 contractually due within twelve months at
December 31, 2016 and December 31, 2015, respectively | | | | | 14,935.5 | | | | 16,350.3 | |
| Liabilities of discontinued operations | | | | | 3,737.7 | | | | 4,302.0 | |
Total Liabilities | | | | | 54,167.1 | | | | 56,446.7 | |
Stockholders’ Equity | | | | | | | | | | |
| Common stock: $0.01 par value, 600,000,000 authorized |
| Issued: 206,182,213 and 204,447,769 at December 31, 2016 and December 31, 2015, respectively | | | | | 2.1 | | | | 2.0 | |
| Outstanding: 202,087,672 and 201,021,508 at December 31, 2016 and December 31, 2015, respectively |
| Paid-in capital | | | | | 8,765.8 | | | | 8,718.1 | |
| Retained earnings | | | | | 1,553.0 | | | | 2,524.0 | |
| Accumulated other comprehensive loss | | | | | (140.1 | ) | | | (142.1 | ) |
Treasury stock: 4,094,541 and 3,426,261 shares at December 31, 2016 and
December 31, 2015 at cost, respectively | | | | | (178.1 | ) | | | (157.3 | ) |
Total Common Stockholders’ Equity | | | | | 10,002.7 | | | | 10,944.7 | |
| Noncontrolling minority interests | | | | | 0.4 | | | | 0.5 | |
Total Equity | | | | | 10,003.1 | | | | 10,945.2 | |
Total Liabilities and Equity | | | | $ | 64,170.2 | | | $ | 67,391.9 | |
(1) | | The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between VIE total assets and total liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT. |
Assets | |
| Cash and interest bearing deposits, restricted | | | | $ | 99.9 | | | $ | 276.9 | |
| Assets held for sale | | | | | – | | | | 279.7 | |
| Total loans, net of allowance for loan losses | | | | | 300.5 | | | | 2,217.5 | |
| Operating lease equipment, net | | | | | 775.8 | | | | 797.2 | |
| Other | | | | | – | | | | 11.2 | |
| Assets of discontinued operations | | | | | 2,321.7 | | | | 3,402.4 | |
Total Assets | | | | $ | 3,497.9 | | | $ | 6,984.9 | |
Liabilities | | | | | | | | | | |
| Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) | | | | $ | 770.0 | | | $ | 1,948.7 | |
| Liabilities of discontinued operations | | | | | 1,204.6 | | | | 2,082.1 | |
Total Liabilities | | | | $ | 1,974.6 | | | $ | 4,030.8 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CIT ANNUAL REPORT 2016 105
CIT GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME (dollars in millions – except per share data)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Interest income |
| Interest and fees on loans | | | | $ | 1,779.6 | | | $ | 1,374.0 | | | $ | 1,120.1 | |
| Other interest and dividends | | | | | 131.9 | | | | 71.2 | | | | 35.5 | |
| Interest income | | | | | 1,911.5 | | | | 1,445.2 | | | | 1,155.6 | |
Interest expense |
| Interest on borrowings | | | | | (358.4 | ) | | | (401.3 | ) | | | (484.1 | ) |
| Interest on deposits | | | | | (394.8 | ) | | | (330.1 | ) | | | (231.0 | ) |
| Interest expense | | | | | (753.2 | ) | | | (731.4 | ) | | | (715.1 | ) |
| Net interest revenue | | | | | 1,158.3 | | | | 713.8 | | | | 440.5 | |
| Provision for credit losses | | | | | (194.7 | ) | | | (158.6 | ) | | | (104.4 | ) |
| Net interest revenue, after credit provision | | | | | 963.6 | | | | 555.2 | | | | 336.1 | |
Non-interest income | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | | 1,031.6 | | | | 1,018.1 | | | | 949.6 | |
| Other income | | | | | 150.6 | | | | 149.6 | | | | 263.9 | |
| Total non-interest income | | | | | 1,182.2 | | | | 1,167.7 | | | | 1,213.5 | |
Total revenue, net of interest expense and credit provision | | | | | 2,145.8 | | | | 1,722.9 | | | | 1,549.6 | |
Non-interest expenses |
| Depreciation on operating lease equipment | | | | | (261.1 | ) | | | (229.2 | ) | | | (229.8 | ) |
| Maintenance and other operating lease expenses | | | | | (213.6 | ) | | | (185.1 | ) | | | (171.7 | ) |
| Operating expenses | | | | | (1,283.5 | ) | | | (1,121.1 | ) | | | (900.1 | ) |
| Goodwill impairment | | | | | (354.2 | ) | | | – | | | | – | |
| Loss on debt extinguishment and deposit redemption | | | | | (12.5 | ) | | | (1.5 | ) | | | (3.5 | ) |
| Total other expenses | | | | | (2,124.9 | ) | | | (1,536.9 | ) | | | (1,305.1 | ) |
Income from continuing operations before (provision) benefit for
income taxes | | | | | 20.9 | | | | 186.0 | | | | 244.5 | |
| (Provision) benefit for income taxes | | | | | (203.5 | ) | | | 538.0 | | | | 432.4 | |
(Loss) income from continuing operations before attribution of
noncontrolling interests | | | | | (182.6 | ) | | | 724.0 | | | | 676.9 | |
| Loss (income) attributable to noncontrolling interests, after tax | | | | | – | | | | 0.1 | | | | (1.2 | ) |
(Loss) income from continuing operations | | | | | (182.6 | ) | | | 724.1 | | | | 675.7 | |
Discontinued operations |
| (Loss) income from discontinued operations, net of taxes | | | | | (665.4 | ) | | | 310.0 | | | | 160.6 | |
| Gain on sale of discontinued operations, net of taxes | | | | | – | | | | – | | | | 282.8 | |
| Total (loss) income from discontinued operations, net of taxes | | | | | (665.4 | ) | | | 310.0 | | | | 443.4 | |
Net (loss) income | | | | $ | (848.0 | ) | | $ | 1,034.1 | | | $ | 1,119.1 | |
Basic income per common share | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | | $ | (0.90 | ) | | $ | 3.90 | | | $ | 3.59 | |
| (Loss) income from discontinued operations, net of taxes | | | | | (3.30 | ) | | | 1.67 | | | | 2.35 | |
Basic (loss) income per common share | | | | $ | (4.20 | ) | | $ | 5.57 | | | $ | 5.94 | |
Diluted income per common share | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | | $ | (0.90 | ) | | $ | 3.89 | | | $ | 3.57 | |
| (Loss) income from discontinued operations, net of taxes | | | | | (3.30 | ) | | | 1.66 | | | | 2.34 | |
Diluted (loss) income per common share | | | | $ | (4.20 | ) | | $ | 5.55 | | | $ | 5.91 | |
Average number of common shares — (thousands) | | | | | | | | | | | | | | |
| Basic | | | | | 201,850 | | | | 185,500 | | | | 188,491 | |
| Diluted | | | | | 201,850 | | | | 186,388 | | | | 189,463 | |
Dividends declared per common share | | | | $ | 0.60 | | | $ | 0.60 | | | $ | 0.50 | |
The accompanying notes are an integral part of these consolidated financial statements.
Item 8: Financial Statements and Supplementary Data
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106 CIT ANNUAL REPORT 2016
CIT GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Net (Loss) income before attribution of noncontrolling interests | | | | $ | (848.0 | ) | | $ | 1,034.0 | | | $ | 1,120.3 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | | | 4.3 | | | | 9.7 | | | | (26.0 | ) |
| Changes in fair values of derivatives qualifying as cash flow hedges | | | | | – | | | | – | | | | 0.2 | |
| Net unrealized gains (losses) on available for sale securities | | | | | (6.3 | ) | | | (7.1 | ) | | | (0.1 | ) |
| Changes in benefit plans net gain (loss) and prior service (cost)/credit | | | | | 4.0 | | | | (10.8 | ) | | | (34.4 | ) |
| Other comprehensive income (loss), net of tax | | | | | 2.0 | | | | (8.2 | ) | | | (60.3 | ) |
Comprehensive (loss) income before noncontrolling interests | | | | | (846.0 | ) | | | 1,025.8 | | | | 1,060.0 | |
| Comprehensive loss (income) attributable to noncontrolling interests | | | | | – | | | | 0.1 | | | | (1.2 | ) |
Comprehensive (loss) income | | | | $ | (846.0 | ) | | $ | 1,025.9 | | | $ | 1,058.8 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CIT ANNUAL REPORT 2016 107
CIT GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(dollars in millions)
| | | | Common
Stock
| | Paid-in
Capital
| | Retained
Earnings
| | Accumulated
Other
Comprehensive
Loss
| | Treasury
Stock
| | Noncontrolling
Minority
Interests
| | Total
Equity
|
|---|
December 31, 2013 | | | | $ | 2.0 | | | $ | 8,555.4 | | | $ | 581.0 | | | $ | (73.6 | ) | | $ | (226.0 | ) | | $ | 11.2 | | | $ | 8,850.0 | |
| Net income | | | | | | | | | | | | | 1,119.1 | | | | | | | | | | | | 1.2 | | | | 1,120.3 | |
| Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | (60.3 | ) | | | | | | | | | | | (60.3 | ) |
| Dividends paid | | | | | | | | | | | | | (95.3 | ) | | | | | | | | | | | | | | | (95.3 | ) |
| Amortization of restricted stock, stock option, and performance share expenses | | | | | | | | | 47.1 | | | | | | | | | | | | (17.0 | ) | | | | | | | 30.1 | |
| Repurchase of common stock | | | | | | | | | | | | | | | | | | | | | (775.5 | ) | | | | | | | (775.5 | ) |
| Employee stock purchase plan | | | | | | | | | 1.1 | | | | | | | | | | | | | | | | | | | | 1.1 | |
| Distribution of earnings and capital | | | | | | | | | | | | | | | | | | | | | | | | | (17.8 | ) | | | (17.8 | ) |
December 31, 2014 | | | | $ | 2.0 | | | $ | 8,603.6 | | | $ | 1,604.8 | | | $ | (133.9 | ) | | $ | (1,018.5 | ) | | $ | (5.4 | ) | | $ | 9,052.6 | |
| Net income | | | | | | | | | | | | | 1,034.1 | | | | | | | | | | | | (0.1 | ) | | | 1,034.0 | |
| Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | (8.2 | ) | | | | | | | | | | | (8.2 | ) |
| Dividends paid | | | | | | | | | | | | | (114.9 | ) | | | | | | | | | | | | | | | (114.9 | ) |
| Amortization of restricted stock, stock option, and performance share expenses | | | | | | | | | 93.4 | | | | | | | | | | | | (23.4 | ) | | | | | | | 70.0 | |
| Repurchase of common stock | | | | | | | | | | | | | | | | | | | | | (531.8 | ) | | | | | | | (531.8 | ) |
| Issuance of common stock — acquisition | | | | | | | | | 45.6 | | | | | | | | | | | | 1,416.4 | | | | | | | | 1,462.0 | |
| Employee stock purchase plan | | | | | | | | | 2.0 | | | | | | | | | | | | | | | | | | | | 2.0 | |
| Distribution of earnings and capital | | | | | | | | | (26.5 | ) | | | | | | | | | | | | | | | 6.0 | | | | (20.5 | ) |
December 31, 2015 | | | | $ | 2.0 | | | $ | 8,718.1 | | | $ | 2,524.0 | | | $ | (142.1 | ) | | $ | (157.3 | ) | | $ | 0.5 | | | $ | 10,945.2 | |
| Net loss | | | | | | | | | | | | | (848.0 | ) | | | | | | | | | | | – | | | | (848.0 | ) |
| Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | 2.0 | | | | | | | | | | | | 2.0 | |
| Dividends paid | | | | | | | | | | | | | (123.0 | ) | | | | | | | | | | | | | | | (123.0 | ) |
| Amortization of restricted stock, stock option, and performance shares and other expenses | | | | | 0.1 | | | | 45.4 | | | | | | | | | | | | (20.8 | ) | | | | | | | 24.7 | �� |
| Employee stock purchase plan | | | | | | | | | 2.3 | | | | | | | | | | | | | | | | – | | | | 2.3 | |
| Other | | | | | | | | | | | | | | | | | | | | | | | | | (0.1 | ) | | | (0.1 | ) |
December 31, 2016 | | | | $ | 2.1 | | | $ | 8,765.8 | | | $ | 1,553.0 | | | $ | (140.1 | ) | | $ | (178.1 | ) | | $ | 0.4 | | | $ | 10,003.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
Item 8: Financial Statements and Supplementary Data
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108 CIT ANNUAL REPORT 2016
CIT GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Cash Flows From Operations |
| Net (loss) income | | | | $ | (848.0 | ) | | $ | 1,034.1 | | | $ | 1,119.1 | |
Adjustments to reconcile net (loss) income to net cash flows from
operations: | | | | | | | | | | | | | | |
| Provision for credit losses | | | | | 210.3 | | | | 160.5 | | | | 100.1 | |
| Net depreciation, amortization and (accretion) | | | | | 700.0 | | | | 783.9 | | | | 973.2 | |
| Net losses (gains) on asset sales and other | | | | | 158.8 | | | | 5.1 | | | | (338.4 | ) |
| Provision (benefit) for deferred income taxes | | | | | 983.5 | | | | (572.9 | ) | | | (433.5 | ) |
| (Increase) decrease in finance receivables held for sale | | | | | 336.7 | | | | (251.3 | ) | | | (161.9 | ) |
| Goodwill impairment | | | | | 358.4 | | | | 15.0 | | | | – | |
| Reimbursement of OREO expenses from FDIC | | | | | 1.8 | | | | 7.2 | | | | – | |
| Decrease (increase) in other assets | | | | | 1,165.1 | | | | 53.3 | | | | (179.2 | ) |
| (Decrease) increase in other liabilities | | | | | (699.7 | ) | | | (67.3 | ) | | | 299.0 | |
| Net cash flows provided by operations | | | | | 2,366.9 | | | | 1,167.6 | | | | 1,378.4 | |
Cash Flows From Investing Activities | | | | | | | | | | | | | | |
| Change in loans, net | | | | | 824.0 | | | | (1,759.2 | ) | | | (1,862.9 | ) |
| Purchases of investment securities | | | | | (4,939.2 | ) | | | (8,316.3 | ) | | | (10,024.3 | ) |
| Proceeds from maturities of investment securities | | | | | 3,585.5 | | | | 9,226.6 | | | | 10,461.2 | |
| Proceeds from sales | | | | | 1,753.9 | | | | 2,252.4 | | | | 3,688.1 | |
| Purchases of assets to be leased and other equipment | | | | | (1,866.8 | ) | | | (3,088.7 | ) | | | (3,058.3 | ) |
| Net (increase) decrease in short-term factoring receivables | | | | | (170.6 | ) | | | 124.7 | | | | (8.0 | ) |
| Purchases of restricted stock | | | | | (1.7 | ) | | | (128.9 | ) | | | (5.9 | ) |
| Proceeds from redemption of restricted stock | | | | | 25.5 | | | | 20.3 | | | | 2.4 | |
| Payments to the FDIC under loss share agreements | | | | | (2.9 | ) | | | (18.1 | ) | | | – | |
Proceeds from FDIC under loss share agreements and participation
agreements | | | | | 147.8 | | | | 33.7 | | | | – | |
| Proceeds from the sale of OREO, net of repurchases | | | | | 129.2 | | | | 60.8 | | | | – | |
| Acquisition, net of cash received | | | | | – | | | | 2,521.2 | | | | (448.6 | ) |
| Net change in restricted cash | | | | | 16.4 | | | | 156.7 | | | | 93.8 | |
| Net cash flows provided by (used in) investing activities | | | | | (498.9 | ) | | | 1,085.2 | | | | (1,162.5 | ) |
Cash Flows From Financing Activities | | | | | | | | | | | | | | |
| Proceeds from the issuance of term debt | | | | | 786.1 | | | | 1,626.9 | | | | 3,875.2 | |
| Repayments of term debt | | | | | (2,620.5 | ) | | | (4,325.3 | ) | | | (5,762.9 | ) |
| Proceeds from FHLB advances | | | | | 1,645.5 | | | | 5,964.1 | | | | 308.6 | |
| Repayments of FHLB debt | | | | | (2,352.3 | ) | | | (6,070.2 | ) | | | (88.6 | ) |
| Net (decrease) increase in deposits | | | | | (448.6 | ) | | | 2,419.2 | | | | 3,310.6 | |
| Collection of security deposits and maintenance funds | | | | | 341.7 | | | | 330.9 | | | | 332.2 | |
| Use of security deposits and maintenance funds | | | | | (149.3 | ) | | | (147.5 | ) | | | (163.0 | ) |
| Repurchase of common stock | | | | | – | | | | (531.8 | ) | | | (775.5 | ) |
| Dividends paid | | | | | (123.0 | ) | | | (114.9 | ) | | | (95.3 | ) |
| Purchase of noncontrolling interest | | | | | – | | | | (20.5 | ) | | | – | |
| Payments on affordable housing investment credits | | | | | (8.4 | ) | | | (4.8 | ) | | | – | |
| Net cash flows (used in) provided by financing activities | | | | | (2,928.8 | ) | | | (873.9 | ) | | | 941.3 | |
| Effect of exchange rate changes on cash and cash equivalents | | | | | (34.6 | ) | | | (63.8 | ) | | | (82.8 | ) |
| Increase (decrease) in unrestricted cash and cash equivalents | | | | | (1,095.4 | ) | | | 1,315.1 | | | | 1,074.4 | |
| Unrestricted cash and cash equivalents, beginning of period | | | | | 7,470.6 | | | | 6,155.5 | | | | 5,081.1 | |
Unrestricted cash and cash equivalents, end of period | | | | $ | 6,375.2 | | | $ | 7,470.6 | | | $ | 6,155.5 | |
Supplementary Cash Flow Disclosure | | | | | | | | | | | | | | |
| Interest paid | | | | $ | (1,149.7 | ) | | $ | (1,112.0 | ) | | $ | (1,075.6 | ) |
| Federal, foreign, state and local income taxes (paid) collected, net | | | | $ | 61.2 | | | $ | (9.5 | ) | | $ | (21.6 | ) |
Supplementary Non Cash Flow Disclosure | | | | | | | | | | | | | | |
| Transfer of assets from held for investment to held for sale | | | | $ | 2,093.6 | | | $ | 3,039.4 | | | $ | 2,671.0 | |
| Transfer of assets from held for sale to held for investment | | | | $ | 124.4 | | | $ | 208.7 | | | $ | 64.9 | |
| Transfers of assets from held for investment to OREO | | | | $ | 90.2 | | | $ | 65.8 | | | $ | – | |
| Deposits on flight equipment purchases applied to acquisition of flight equipment, capitalized interest and buyer furnished equipment | | | | $ | 286.6 | | | $ | 554.2 | | | $ | 589.4 | |
| Issuance of common stock as consideration | | | | $ | – | | | $ | 1,462.0 | | | $ | – | |
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
CIT Group Inc., together with its subsidiaries (collectively “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, including to the transportation industry, and equipment financing and leasing solutions to a wide variety of industries primarily in North America. CIT is a bank holding company (“BHC”) and a financial holding company (“FHC”). CIT also provides a full range of banking and related services to commercial and individual customers through its banking subsidiary, CIT Bank, N.A., which includes 70 branches located in Southern California and its online bank, bankoncit.com. On October 6, 2016 we entered into a definitive agreement to sell our Commercial Air business, except for certain Commercial Air loans and investments in CIT Bank. This business, along with our business air and Financial Freedom businesses, is reported as discontinued operations, with all prior period balances conformed.
Effective as of August 3, 2015, CIT Group Inc. (“CIT”) acquired IMB HoldCo LLC (“IMB”), the parent company of OneWest Bank, National Association, a national bank (“OneWest Bank”). CIT Bank, then a Utah-state chartered bank and a wholly-owned subsidiary of CIT, merged with and into OneWest Bank (the “OneWest Transaction”), with OneWest Bank surviving as a wholly-owned subsidiary of CIT with the name CIT Bank, National Association (“CIT Bank, N.A.” or “CIT Bank”). SeeNote 2 — Acquisition and Discontinued Operations for details.
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, as amended. CIT Bank is regulated by the Office of the Comptroller of the Currency of the U.S. Department of the Treasury (“OCC”).
BASIS OF PRESENTATION
Basis of Financial Information
The accounting and financial reporting policies of CIT Group Inc. conform to generally accepted accounting principles (“GAAP”) in the United States and the preparation of the consolidated financial statements is in conformity with GAAP which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. Some of the more significant estimates include: allowance for loan losses, loan impairment, fair value determination, lease residual values, liabilities for uncertain tax positions, realizability of deferred tax assets, purchase accounting adjustments, indemnification assets, goodwill, intangible assets, and contingent liabilities. Additionally where applicable, the policies conform to accounting and reporting guidelines prescribed by bank regulatory authorities.
Principles of Consolidation
The accompanying consolidated financial statements include financial information related to CIT Group Inc. and its majority-owned subsidiaries and those variable interest entities (“VIEs”) where the Company is the primary beneficiary (“PB”).
In preparing the consolidated financial statements, all significant inter-company accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements.
The results for the year ended December 31, 2015 contain activity of OneWest Bank for approximately five months.
Discontinued Operations
Discontinued Operations as of December 31, 2016 and 2015 included certain assets and liabilities of the commercial air business, the business air business, along with the Financial Freedom business that was acquired as part of the OneWest Transaction. (Loss) income from discontinued operations reflects the activities of the aerospace (commercial air and business air) businesses for the years ended December 31, 2016, 2015, and 2014. (Loss) income from discontinued operations also included the activities of Financial Freedom for the periods since its acquisition date, August 3, 2015, while the year ended December 31, 2014 included activity of the student lending business through its sale date of April 25, 2014. Discontinued Operations are discussed inNote 2 —Acquisition and Discontinued Operations.
Revisions
In preparing its quarterly financial statements for the first three quarters of 2016, the Company discovered and corrected immaterial errors that impacted prior periods. Additional out-of-period errors were identified in the fourth quarter of 2016. These additional out-of-period errors were individually and in the aggregate not material to the fourth quarter results or to the full year 2016 results. In reviewing the impact of these immaterial errors on prior periods, management also concluded that the corrections did not, individually or in the aggregate, result in a material misstatement of the Company’s consolidated financial statements for any prior periods. However, Management has decided to record the errors in the applicable prior periods and revised the previously reported balances in the consolidated financial statements and notes to the consolidated financial statements.
See Note 29 — Selected Quarterly Financial Data and Note 30 — Revision of Previously Reported Annual Financial Statements for more information.
SIGNIFICANT ACCOUNTING POLICIES
Financing and Leasing Assets
CIT extends credit to commercial customers through a variety of financing arrangements including term loans, revolving credit facilities, capital (direct finance) leases and operating leases. CIT also extends credit through consumer loans, including residential mortgages and home equity loans, and has a portfolio of reverse mortgages. The amounts outstanding on term loans, consumer loans, revolving credit facilities and capital leases, along with past due lease payments on operating lease equipment, are referred to as finance receivables. In certain instances, we use the term “Loans” synonymously, as presented on the balance sheet. These finance receivables, when combined withAssets held for sale (“AHFS”) andOperating lease equipment, net are referred to as financing and leasing assets. It is CIT’s expectation that the majority of the loans and leases originated will be held for the foreseeable future or until maturity.
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In certain situations, for example to manage concentrations and/or credit risk or where returns no longer meet specified targets, some or all of certain exposures are sold. Loans for which the Company has the intent and ability to hold for the foreseeable future or until maturity are classified as held for investment (“HFI”). If the Company no longer has the intent or ability to hold loans for the foreseeable future, then the loans are transferred to AHFS. Loans originated with the intent to resell are classified as AHFS.
Loans originated and classified as HFI are recorded at amortized cost. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the contractual lives of the related loans. Unearned income on leases and discounts and premiums on loans purchased are amortized to interest income using the effective interest method. For loans classified as AHFS, the amortization of discounts and premiums on loans purchased and unearned income ceases. Direct financing leases originated and classified as HFI are recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Management performs periodic reviews of estimated residual values, with other than temporary impairment (“OTTI”) recognized in current period earnings.
If it is determined that a loan should be transferred from HFI to AHFS, then the loan is transferred at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as a charge-off when the carrying amount exceeds fair value and the difference relates to credit quality, otherwise the write-down is recorded as a reduction to Other Income, and any allowance for loan loss is reversed. Once classified as AHFS, the amount by which the carrying value exceeds fair value is recorded as a valuation allowance and is reflected as a reduction to Other Income.
If it is determined that a loan should be transferred from AHFS to HFI, the loan is transferred at the lower of cost or fair value on the transfer date, which coincides with the date of change in management’s intent. The difference between the carrying value of the loan and the fair value, if lower, is reflected as a loan discount at the transfer date, which reduces its carrying value. Subsequent to the transfer, the discount is accreted into earnings as an increase to interest income over the life of the loan using the effective interest method.
Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Where management’s intention is to sell the operating lease equipment, these are marked to the lower of cost or fair value and classified as AHFS. Depreciation is no longer recognized and the assets are evaluated for impairment, with any further marks to lower of cost or fair value recorded in Other Income. Equipment held for sale in discontinued operations follows the same treatment, with impairment charges reflected in discontinued operations — other income. Equipment received at the end of the lease is marked to the lower of cost or fair value with the adjustment recorded in Other Income.
In the operating lease portfolio in discontinued operations, maintenance costs incurred that exceed maintenance funds collected for commercial aircraft are expensed if they do not provide a future economic benefit and do not extend the useful life of the aircraft. Such costs may include costs of routine aircraft operation and costs of maintenance and spare parts incurred in connection with re-leasing an aircraft and during the transition between leases. For such maintenance costs that are not capitalized, a charge is recorded in expense at the time the costs are incurred. Income recognition related to maintenance funds collected and not used during the life of the lease is deferred to the extent management estimates costs will be incurred by subsequent lessees performing scheduled maintenance. Upon the disposition of an aircraft, any excess maintenance funds that exist are recognized in discontinued operations — Other Income.
Loans acquired in the OneWest Transaction were initially recorded at their fair value on the acquisition date. For loans that were not considered credit impaired at the date of acquisition and for which cash flows were evaluated based on contractual terms, a premium or discount was recorded, representing the difference between the unpaid principal balance and the fair value. The discount or premium is accreted or amortized to earnings using the effective interest method as a yield adjustment over the remaining contractual terms of the loans and is recorded in Interest Income. If the loan is prepaid, the remaining discount or premium will be recognized in Interest Income. If the loan is sold, the remaining discount will be considered in the resulting gain or loss on sale. If the loan is subsequently classified as non-accrual, or transferred to AHFS, accretion / amortization of the discount (premium) will cease.
For loans that were purchased with evidence of credit quality deterioration since origination, the discount recorded includes accretable and non-accretable components.
For purposes of income recognition, and consistent with valuation models across loan portfolios, the Company has elected to not take a position on the movement of future interest rates in the model. If interest rates rise, the loans will generate higher income. If rates fall, the loans will generate lower income.
Purchased Credit-Impaired Loans
Loans accounted for as purchased credit-impaired loans (“PCI loans”) are accounted for in accordance with ASC 310-30Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). PCI loans were determined as of the date of purchase to have evidence of credit quality deterioration, which make it probable that the Company will be unable to collect all contractually required payments (principal and interest). Evidence of credit quality deterioration as of the purchase date may include past due status, recent borrower credit scores, credit rating (probability of obligor default) and recent loan-to-value ratios.
Commercial PCI loans are accounted for as individual loans. Conversely, consumer PCI loans with similar common risk characteristics are pooled together for accounting purposes (i.e., into one unit of account). Common risk characteristics consist of similar credit risk (e.g., delinquency status, loan-to-value, or credit risk rating) and at least one other predominant risk characteristic (e.g., loan type, collateral type, interest rate index, date of origination or term). For pooled loans, each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows for the pool.
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At acquisition, the PCI loans were initially recorded at estimated fair value, which is determined by discounting each commercial loan’s or consumer pool’s principal and interest cash flows expected to be collected using a discount rate for similar instruments with adjustments that management believes a market participant would consider. The Company estimated the cash flows expected to be collected at acquisition using internal credit risk and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds of the loan.
For both commercial PCI loans (evaluated individually) and consumer PCI loans (evaluated on a pool basis), an accretable yield is measured as the excess of the cash flows expected to be collected, estimated at the acquisition date, over the recorded investment (estimated fair value at acquisition) and is recognized in interest income over the remaining life of the loan, or pool of loans, on an effective yield basis. The difference between the cash flows contractually required to be paid (principal and interest), measured as of the acquisition date, over the cash flows expected to be collected is referred to as the non-accretable difference.
Subsequent to acquisition, the estimates of the cash flows expected to be collected are evaluated on a quarterly basis for both commercial PCI loans (evaluated individually) and consumer PCI loans (evaluated on a pool basis). During each subsequent reporting period, the cash flows expected to be collected shall be reviewed but will be revised only if it is deemed probable that a significant change has occurred. Probable and significant decreases 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 loan losses. Probable and significant increases in cash flows expected to be collected due to improved credit quality result in recovery 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. The accretable yield is affected by revisions to previous expectations that result in an increase in expected cash flows, 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. The Company assumes a flat forward interest curve when analyzing future cash flows for the mortgage loans. Changes in expected cash flows caused by changes in market interest rates are recognized as adjustments to the accretable yield on a prospective basis.
Resolutions of loans may include sales to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Upon resolution, the Company’s policy is to remove an individual consumer PCI loan from the pool at its carrying amount. Any difference between the loans carrying amount and the fair value of the collateral or other assets received does not affect the percentage yield calculation used to recognize accretable yield on the pool. This removal method assumes that the amount received from these resolutions approximates the pool performance expectations of cash flows. The accretable yield percentage is unaffected by the resolution. Modifications or refinancing of loans accounted for within a pool do not result in the removal of those loans from the pool; instead, the revised terms are reflected in the expected cash flows within the pool of loans.
Reverse Mortgages
Reverse mortgage loans are contracts in which a homeowner borrows against the equity in their home and receives cash in one lump sum payment, a line of credit, fixed monthly payments for either a specific term or for as long as the homeowner lives in the home or a combination of these options. Reverse mortgages feature no recourse to the borrower, no required repayment during the borrower’s occupancy of the home (as long as the borrower complies with the terms of the mortgage), and, in the event of foreclosure, a repayment amount that cannot exceed the lesser of either the unpaid principal balance of the loan or the proceeds recovered upon sale of the home. The mortgage balance consists of cash advanced, interest compounded over the life of the loan, capitalized mortgage insurance premiums, and other servicing advances capitalized into the loan.
Revenue Recognition
Interest income on HFI loans is recognized using the effective interest method or on a basis approximating a level rate of return over the life of the asset. Interest income includes components of accretion of the fair value discount on loans and lease receivables recorded in connection with Purchase Accounting Adjustments (“PAA”), which are accreted using the effective interest method as a yield adjustment over the remaining contractual term of the loan and recorded in interest income. If the loan is subsequently classified as AHFS, accretion (amortization) of the discount (premium) will cease. See Purchase Accounting Adjustments inNote 2 —Acquisition and Discontinued Operations.
Uninsured reverse mortgages in continuing operations that were determined to be non-PCI are accounted for in accordance with the instructions provided by the staff of the Securities and Exchange Commission (“SEC”) entitled “Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts.” For these uninsured reverse mortgages, the Company has determined that as a result of the similarities between both the reverse mortgage borrowers’ demographics and the terms of the reverse mortgage loan contracts, these reverse mortgages are accounted for at the pool level. To determine the effective yield of the pool, we project the pool’s cash inflows and outflows including actuarial projections of the life expectancy of the individual contract holder and changes in the collateral value of the residence are projected. At each reporting date, a new economic forecast is made of the cash inflows and outflows for the population of reverse mortgages. Projections of cash flows assume the use of flat forward rate interest curves. The effective yield of the pool is recomputed and income is adjusted to retrospectively reflect the revised rate of return. Because of this accounting, the recorded value of reverse mortgage loans and interest income can result in significant volatility associated with the estimates. As a result, income recognition can vary significantly from period to period. The pool method of accounting results in the establishment of an Actuarial Valuation Allowance (“AVA”) related to the deferral of net gains from loans exiting the pool. The AVA is a component of the net book value of the portfolio and has the ability to absorb potential collectability short-falls.
Insured reverse mortgages included in continuing operations were determined to be PCI, even though these loans are Home Equity Conversion Mortgages (“HECMs”) insured by the Federal Housing Administration, based on management’s consideration of the loan’s
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loan-to-value (“LTV”) and its relationship to the loan’s Maximum Claim Amount. As such, based on the guidance in ASC 310-30, revenue recognition and income measurement for these loans is based on expected rather than contractual cash flows; and, the fair value adjustment on these loans included both accretable and non-accretable components.
Rental revenue on operating leases is recognized on a straight line basis over the lease term and is included in Non-interest Income. Intangible assets were recorded during PAA related to acquisitions completed by the Company and Fresh Start Accounting (“FSA”) adjustments that were applied as of December 31, 2009, (the Convenience Date) to adjust the carrying value of above or below market operating lease contracts to their fair value. The FSA related adjustments (net) are amortized into rental income on a straight line basis over the remaining term of the respective lease.
The recognition of interest income (including accretion) on commercial loans (exclusive of small ticket commercial loans) is suspended and an account is placed on non-accrual status when, in the opinion of management, full collection of all principal and interest due is doubtful. All future interest accruals, as well as amortization of deferred fees, costs, purchase premiums or discounts are suspended. To the extent the estimated cash flows, including fair value of collateral, does not satisfy both the principal and accrued interest outstanding, accrued but uncollected interest at the date an account is placed on non-accrual status is reversed and charged against interest income. Subsequent interest received is applied to the outstanding principal balance until such time as the account is collected, charged-off or returned to accrual status. Loans that are on cash basis non-accrual do not accrue interest income; however, payments designated by the borrower as interest payments may be recorded as interest income. To qualify for this treatment, the remaining recorded investment in the loan must be deemed fully collectable.
The recognition of interest income (including accretion) on consumer mortgages and small ticket commercial loans and lease receivables is suspended and all previously accrued but uncollected revenue is reversed, when payment of principal and/or interest is contractually delinquent for 90 days or more. Accounts, including accounts that have been modified, are returned to accrual status when, in the opinion of management, collection of remaining principal and interest is reasonably assured, and there is a sustained period of repayment performance for a minimum of six months.
The recognition of interest income on reverse mortgages is suspended upon the latter of the foreclosure sale date or date on which marketable title has been acquired (i.e. property becomes OREO).
The Company periodically modifies the terms of finance receivables in response to borrowers’ financial difficulties. These modifications may include interest rate changes, principal forgiveness or payment deferments. Finance receivables that are modified, where a concession has been made to the borrower, are accounted for as Troubled Debt Restructurings (“TDRs”). TDRs are generally placed on non-accrual upon their restructuring and remain on non-accrual until, in the opinion of management, collection of remaining principal and interest is reasonably assured, and upon collection of six consecutive scheduled payments.
PCI loans in pools that the Company may modify as TDRs are not within the scope of the accounting guidance for TDRs.
Allowance for Loan Losses on Finance Receivables
The allowance for loan losses is intended to provide for credit losses inherent in the HFI loan and lease receivables portfolio and is periodically reviewed for adequacy. The allowance for loan losses is determined based on three key components: (1) specific allowances for loans that are impaired, based upon the value of underlying collateral or projected cash flows, or observable market price, (2) non-specific allowances for estimated losses inherent in the portfolio based upon the expected loss over the loss emergence period, and (3) allowances for estimated losses inherent in the portfolio based upon economic risks, industry and geographic concentrations, and other factors. Changes to the Allowance for Loan Losses are recorded in the Provision for Credit Losses.
Determining an appropriate allowance for loan losses requires significant judgment that may change based on management’s ongoing process in analyzing the credit quality of the Company’s HFI loan portfolio.
Finance receivables are divided into the following portfolio segments, which correspond to the Company’s business segments: Commercial Banking, Consumer Banking and Non-Strategic Portfolios (“NSP”). Within each portfolio segment, credit risk is assessed and monitored in the following classes of loans; within Commercial Banking, Commercial Finance, Real Estate Finance, Business Capital, and Rail, are collectively referred to as Commercial Loans. Within Consumer Banking, classes include LCM and Other Consumer Lending, collectively referred to as Consumer Loans. The allowance is estimated based upon the finance receivables in the respective class.
For each portfolio, impairment is generally measured individually for larger non-homogeneous loans (finance receivables of $500 thousand or greater) and collectively for groups of smaller loans with similar characteristics or for designated pools of PCI loans based on decreases in cash flows expected to be collected subsequent to acquisition.
Loans acquired in the OneWest Transaction were initially recorded at estimated fair value at the time of acquisition. Expected credit losses were included in the determination of estimated fair value, no allowance was established on the acquisition date.
Allowance Methodology
Commercial Loans
With respect to commercial portfolios, the Company monitors credit quality indicators, including expected and historical losses and levels of, and trends in, past due loans, non-performing assets and impaired loans, collateral values and economic conditions. Commercial loans are graded according to the Company’s internal rating system with respect to probability of default and loss given default (severity) based on various risk factors. The non-specific allowance is determined based on the estimated probability of default, which reflects the borrower’s financial
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strength, and the severity of loss in the event of default, considering the quality of the underlying collateral. The probability of default and severity are derived through historical observations of default and subsequent losses within each risk grading.
A specific allowance is also established for impaired commercial loans and commercial loans modified in a TDR. Refer to theImpairment of Finance Receivables section of this Note for details.
Consumer Loans
For residential mortgages, the Company develops a loss reserve factor by deriving the projected lifetime losses then adjusting for losses expected to be specifically identified within the loss emergence period. The key drivers of the projected lifetime losses include the type of loan, type of product, delinquency status of the underlying loans, loan-to-value and/or debt-to-income ratios, geographic location of the collateral, and any guarantees.
For uninsured reverse mortgage loans in continuing operations, an allowance is established if the Company is likely to experience losses on the disposition of the property that are not reflected in the recorded investment, including the AVA, as the source of repayment of the loan is tied to the home’s collateral value alone. A reverse mortgage matures when one of the following events occur: 1) the property is sold or transferred, 2) the last remaining borrower dies, 3) the property ceases to be the borrower’s principal residence, 4) the borrower fails to occupy the residence for more than 12 consecutive months or 5) the borrower defaults under the terms of the mortgage or note. A maturity event other than death is also referred to as a mobility event. The level of any required allowance for loan losses on reverse mortgage loans is based on the Company’s estimate of the fair value of the property at the maturity event based on current conditions and trends. The allowance for loan losses assessment on uninsured reverse mortgage loans is performed on a pool basis and is based on the Company’s estimate of the future fair value of the properties at the maturity event based on current conditions and trends.
Other Allowance Factors
If commercial or consumer loan losses are reimbursable by the Federal Deposit Insurance Corporation (“FDIC”) under the loss sharing agreement, the recorded provision is partially offset by any benefit expected to be derived from the related indemnification asset subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. SeeIndemnification Assets later in this section.
With respect to assets transferred from HFI to AHFS, a charge-off is recognized to the extent carrying value exceeds the fair value and the difference relates to credit quality.
An approach similar to the allowance for loan losses is utilized to calculate a reserve for losses related to unfunded loan commitments and deferred purchase commitments. A reserve for unfunded loan commitments is maintained to absorb estimated probable losses related to these facilities. The adequacy of the reserve is determined based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The reserve for unfunded loan commitments and deferred purchase commitments are recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the reserve for unfunded loan commitments and deferred purchase commitments are included in the provision for credit losses.
The allowance policies described above relate to specific and non-specific allowances, and the impaired finance receivables and charge-off policies that follow are applied across the portfolio segments and loan classes therein. Given the nature of the Company’s business, the specific allowance relates to the Commercial Banking segments. The non-specific allowance, which considers the Company’s internal system of probability of default and loss severity ratings for commercial loans, among other factors, is applicable to both commercial and consumer loans. Additionally, divisions in Commercial Banking and Consumer Banking segments also utilize methodologies under ASC 310-30 for PCI loans, as discussed below.
PCI Loans
SeePurchased Credit-Impaired Loans in Financing and Leasing Assets for description of allowance factors.
Past Due and Non-Accrual Loans
A loan is considered past due for financial reporting purposes if default of contractual principal or interest exists for a period of 30 days or more. Past due loans consist of both loans that are still accruing interest as well as loans on non-accrual status.
Loans are placed on non-accrual status when the financial condition of the borrower has deteriorated and payment in full of principal or interest is not expected or the scheduled payment of principal and interest has been delinquent for 90 days or more, unless the loan or finance lease is both well secured and in the process of collection.
PCI loans are written down at acquisition to their fair value using an estimate of cash flows deemed to be probable of collection. Accordingly, such loans are no longer classified as past due or non-accrual even though they may be contractually past due because we expect to fully collect the new carrying values of these loans. Due to the nature of reverse mortgage loans (i.e., these loans do not contain a contractual due date or regularly scheduled payments due from the borrower), they are considered current for purposes of past due reporting and are excluded from reported non-accrual loan balances.
Impairment of Finance Receivables
Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable, with the estimated value determined using fair value of collateral and other cash flows if the finance receivable is collateralized, the present value of expected future cash flows discounted at the contract’s effective interest rate, or observable market prices.
Impaired finance receivables of $500 thousand or greater that are placed on non-accrual status, largely in Commercial Finance, Real
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Estate Finance, and Business Capital, are subject to periodic individual review by the Company’s problem loan management (“PLM”) function. The Company excludes certain loan and lease portfolios from its impaired finance receivables disclosures as charge-offs are typically determined and recorded for such loans beginning at 90-180 days of contractual delinquency. These include small-ticket loan and lease receivables, largely in Business Capital and NSP, and consumer loans, including single family residential mortgages, in Consumer Banking that have not been modified in a TDR, as well as short-term factoring receivables in Business Capital.
Charge-off of Finance Receivables
Charge-offs on loans are recorded after considering such factors as the borrower’s financial condition, the value of underlying collateral and guarantees (including recourse to dealers and manufacturers), and the status of collection activities. Such charge-offs are deducted from the carrying value of the related finance receivables. This policy is largely applicable in the loan classes within Commercial Banking. In general, charge-offs of large ticket commercial loans ($500 thousand or greater) are determined based on the facts and circumstances related to the specific loan and the underlying borrower and the use of judgment by the Company. Charge-offs of small ticket commercial finance receivables are recorded beginning at 90-180 days of contractual delinquency. Charge-offs of Consumer loans are recorded beginning at 120 days of delinquency. The value of the underlying collateral will be considered when determining the charge-off amount if repossession is assured and in process.
Charge-offs on loans originated are reflected in the provision for credit losses. Charge-offs are recognized on consumer loans for which losses are reimbursable under loss sharing agreements with the FDIC, with a provision benefit recorded to the extent applicable via an increase to the related indemnification asset. In the event of a partial charge-off on loans with a PAA, the charge-off is first allocated to the respective loan’s discount. Then, to the extent the charge-off amount exceeds such discount, a provision for credit losses is recorded. Collections on accounts charged off post- acquisition are recorded as recoveries in the provision for credit losses. Collections on accounts that exceed the balance recorded at the date of acquisition are recorded as recoveries in other income. Collections on accounts previously charged off prior to transfer to AHFS are recorded as recoveries in other income.
Impairment of Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease equipment, is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If an asset is impaired, the impairment is the amount by which the carrying amount exceeds the fair value of the asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment and published appraisal data), are considered both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when the projected fair value at the end of the lease term is below the projected book value at the end of the lease term. Assets to be disposed of are included in AHFS in the Consolidated Balance Sheet are reported at the lower of the cost or fair market value less disposal costs (“LOCOM”).
Investments
Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities, investment securities carried at fair value with changes recorded in net income, or as held-to-maturity (“HTM”) securities are classified as available-for-sale (“AFS”) securities. Debt and equity securities classified as AFS are carried at fair value with changes in fair value reported in accumulated other comprehensive income (“AOCI”), a component of stockholders’ equity, net of applicable income taxes. Credit-related declines in fair value that are determined to be OTTI are immediately recorded in earnings. Realized gains and losses on sales are included inother income on a specific identification basis, and interest and dividend income on AFS securities is included in other interest and dividends.
Debt securities classified as HTM represent securities that the Company has both the ability and the intent to hold until maturity, and are carried at amortized cost. Interest on such securities is included inother interest and dividends.
Debt and marketable equity security purchases and sales are recorded as of the trade date.
Mortgage-backed securities are classified as either AFS or securities carried at fair value with changes recorded in net income. Debt securities classified as AFS that had evidence of credit deterioration as of the acquisition date and for which it was probable that the Company would not collect all contractually required principal and interest payments were classified as PCI debt securities. Subsequently, the accretable yield (based on the cash flows expected to be collected in excess of the recorded investment or fair value) is accreted to interest income using an effective interest method pursuant to ASC 310-30 for PCI securities and securities carried at fair value with changes recorded in net income. The Company uses a flat interest rate forward curve for purposes of applying the effective interest method to PCI securities. On a quarterly basis, the cash flows expected to be collected are reviewed and updated. The expected cash flow estimates take into account relevant market and economic data as of the end of the reporting period including, for example, for securities issued in a securitization, underlying loan-level data, and structural features of the securitization, such as subordination, excess spread, overcollateralization or other forms of credit enhancement. OTTI with credit-related losses are recognized as permanent write-downs, while other changes in expected cash flows (e.g., significant increases and contractual interest rate changes) are recognized through a revised accretable yield in subsequent periods. The non-accretable discount is recorded as a reduction to the investments and will be reclassified to
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accretable discount should expected cash flows improve or used to absorb incurred losses as they occur.
Equity securities without readily determinable fair values are generally carried at cost or the equity method of accounting and periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary. Equity method investments are recorded at cost, adjusted to reflect the Company’s portion of income, loss or dividend of the investee. All other non-marketable equity investments are carried at cost and periodically assessed for OTTI.
Evaluating Investments for OTTI
An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities, while such losses related to HTM securities are not recorded, as these investments are carried at their amortized cost. Unrealized losses on securities carried at fair value would be recorded through earnings as part of the total change in fair value.
The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. The Company accounts for investment impairments in accordance with ASC 320-10-35-34,Investments — Debt and Equity Securities: Recognition of an Other-Than-Temporary Impairment. Under the guidance for debt securities, OTTI is recognized in earnings for debt securities that the Company has an intent to sell or that the Company believes it is more-likely-than-not that it will be required to sell prior to the recovery of the amortized cost basis. For debt securities classified as HTM that are considered to have OTTI that the Company does not intend to sell and it is more likely than not that the Company will not be required to sell before recovery, the OTTI is separated into an amount representing the credit loss, which is recognized in other income in the Consolidated Statement of Income, and the amount related to all other factors, which is recognized in OCI. OTTI on debt securities and equity securities classified as AFS and non-marketable equity investments are recognized in other income in the Consolidated Statements of Income in the period determined. Impairment is evaluated and to the extent it is credit related amounts are reclassified out of AOCI to other income. If it is not credit related then, the amounts remain in AOCI.
Amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium. Regardless of the classification of the securities as AFS or HTM, the Company assesses each investment with an unrealized loss for impairment.
Factors considered in determining whether a loss is temporary include:
| - | | the length of time that fair value has been below cost; |
| - | | the severity of the impairment or the extent to which fair value has been below cost; |
| - | | the cause of the impairment and the financial condition and the near-term prospects of the issuer; |
| - | | activity in the market of the issuer that may indicate adverse credit conditions; and |
| - | | the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
The Company’s review for impairment generally includes identification and evaluation of investments that have indications of possible impairment, in addition to:
| - | | analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; |
| - | | discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having OTTI and those that would not support OTTI; and |
| - | | documentation of the results of these analyses, as required under business policies. |
Investments in Restricted Stock
The Company is a member of, and owns capital stock in, the Federal Home Loan Bank (“FHLB”) of San Francisco and the FRB. As a condition of membership, the Company is required to own capital stock in the FHLB based upon outstanding FHLB advances and FRB stock based on a specified ratio relative to the Company’s capital. FHLB and FRB stock may only be sold back to the member institutions at its carrying value and cannot be sold to other parties. For FHLB stock, cash dividends are recorded within other interest and dividends when declared by the FHLB. For FRB stock, the Company is legally entitled (without declaration) to a specified dividend paid semi-annually. Dividends are recorded in other interest and dividends in the Consolidated Statements of Income.
Due to the restricted ownership requirements, the Company accounts for its investments in FHLB and FRB stock as a nonmarketable equity stock accounted for under the cost method. Purchases and redemptions of restricted stock are reflected in the investing section of the statement of cash flows. Impairment reviews of the investment are completed at least annually, or when events or circumstances indicate that their carrying amounts may not be recoverable. The Company’s impairment evaluation considers the long-term nature of the investment, the liquidity position of the member institutions, its recent dividend declarations and the intent and ability to hold this investment for a period of time sufficient to ultimately recover the Company’s recorded investment.
Indemnification Assets
Prior to the OneWest Transaction, OneWest Bank was party to certain shared loss agreements with the FDIC related to its acquisitions of IndyMac Federal Bank, FSB (“IndyMac”), First Federal Bank of California, FSB (“First Federal”) and La Jolla Bank, FSB (“La Jolla”). As part of CITs OneWest Transaction, CIT is now party to these loss sharing agreements with the FDIC. The loss sharing agreements generally require CIT Bank, N.A. to obtain FDIC approval prior to transferring or selling loans and related indemnification assets. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modifications, charge-off of loan balance or liquidation of collateral). Reimbursements approved by the FDIC are usually received within 60 days of submission.
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The IndyMac transaction encompassed multiple loss sharing agreements that provided protection from certain losses related to purchased SFR loans and reverse mortgage proprietary loans. In addition, CIT is party to the FDIC agreement to indemnify OneWest Bank, subject to certain requirements and limitations, for third party claims from the Government Sponsored Enterprises (“GSEs” or “Agencies”) related to IndyMac selling representations and warranties, as well as liabilities arising from the acts or omissions (including, without limitation, breaches of servicer obligations) of IndyMac as servicer.
The loss sharing arrangements related to the First Federal and La Jolla transactions also provide protection from certain losses related to certain purchased assets, specifically the SFR loans.
All of the loss sharing agreements are accounted for as indemnification assets and were initially recognized at estimated fair value as of the acquisition date based on the discounted present value of expected future cash flows under the respective loss sharing agreements pursuant to ASC 805. As of the acquisition date, the First Federal loss share agreement had a zero fair value given the expiration of the commercial loan portion in December 2014 and management’s expectation not to reach the first stated threshold for the SFR mortgage loan portion, which expires in December 2019. As of the acquisition date, the La Jolla loss share agreement had a negligible indemnification asset value. Under the La Jolla loss share agreement, the FDIC indemnifies the eligible credit losses for SFR and commercial loans. Unlike SFR mortgage loan claim submissions, which do not take place until the loss is incurred through the conclusion of the foreclosure process, commercial loan claims are submitted to and paid by the FDIC at the time of charge-off. Similar to the First Federal agreement, the commercial loan portion expired prior to the acquisition date (expired March 2015).
On a subsequent basis, the indemnification asset is measured on the same basis of accounting as the indemnified loans (e.g., as PCI loans under the effective yield method). A yield is determined based on the expected cash flows to be collected from the FDIC over the recorded investment. The expected cash flows on the indemnification asset are reviewed and updated on a quarterly basis.
Changes in expected cash flows caused by changes in market interest rates or by prepayments of principal are recognized as adjustments to the effective yield on a prospective basis in interest income. In some cases, the cash flows expected to be collected from the indemnified loans may improve so that the related indemnification asset is no longer expected to be fully recovered. For PCI loans with an associated indemnification asset, if the increase in expected cash flows is recognized through a higher yield, a lower and potentially negative yield (i.e. due to a decline in expected cash flows in excess of the current carrying value) is applied to the related indemnification asset to mirror an accounting offset for the indemnified loans. Any negative yield is determined based on the remaining term of the indemnification agreement. Both accretion (positive yield) and amortization (negative yield) from the indemnification asset are recognized in interest income on loans over the lesser of the contractual term of the indemnification agreement or the remaining life of the indemnified loans. A decrease in expected cash flows is recorded in the indemnification asset for the portion that previously was expected to be reimbursed from the FDIC resulting in an increase in the Provision for credit losses that was previously recorded in the Allowance for loan losses.
In connection with the IndyMac transaction, the Company has an indemnification receivable for estimated reimbursements due from the FDIC for loss exposure arising from breach in origination and servicing obligations associated with covered reverse mortgage loans prior to March 2009 pursuant to the loss share agreement with the FDIC. The indemnification receivable uses the same assumptions used to measure the indemnified item (contingent liability) subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount.
In connection with the La Jolla transaction, the Company recorded a separate FDIC true-up liability for an estimated payment due to the FDIC at the expiry of the loss share agreement, given the estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses originally estimated by the FDIC at inception of the loss share agreement. There is no FDIC true-up liability recorded in connection with the First Federal transaction based on the projected loss estimates at this time. There is also no FDIC true-up liability recorded in connection with the IndyMac transaction as it was not required. This liability represents contingent consideration to the FDIC and is re-measured at estimated fair value on a quarterly basis, with the changes in fair value recognized in noninterest expense.
For further discussion, seeNote 5 — Indemnification Assets.
Goodwill and Intangible Assets
The Company’s goodwill primarily represented the excess of the purchase prices paid for acquired businesses over the respective fair value of net asset values acquired. The goodwill was assigned to reporting units at the date the goodwill was initially recorded. Once the goodwill was assigned to the reporting unit level, it no longer retained its association with a particular transaction, and all of the activities within the reporting unit, whether acquired or internally generated, are available to support the value of goodwill.
A portion of the Goodwill balance also resulted from the excess of reorganization equity value over the fair value of tangible and identifiable intangible assets, net of liabilities, in connection with the Company’s emergence from bankruptcy in December 2009.
Goodwill is not amortized but it is subject to impairment testing at the reporting unit on an annual basis, or more often if events or circumstances indicate there may be impairment. The Company follows guidance in ASC 350, Intangibles — Goodwill and Other that includes the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step impairment test. Examples of qualitative factors to assess include macroeconomic conditions, industry and market considerations, market changes affecting the Company’s products and services, overall financial performance, and company specific events affecting operations.
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If the Company does not perform the qualitative assessment or upon performing the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, CIT would be required to perform the first step of the two-step goodwill impairment test for that reporting unit. The first step involves comparing the fair value of the reporting unit with its carrying value, including goodwill as measured by allocated equity. If the fair value of the reporting unit exceeds its carrying value, goodwill in that unit is not considered impaired. However, if the carrying value exceeds its fair value, step two must be performed to assess potential impairment. In step two, the implied fair value of the reporting unit’s goodwill (the reporting unit’s fair value less its carrying amount, excluding goodwill) is compared with the carrying amount of the goodwill. An impairment loss would be recorded in the amount that the carrying amount of goodwill exceeds its implied fair value. Reporting unit fair values are primarily estimated using discounted cash flow models. SeeNote 26 — Goodwill and Intangible Assets for further details.
Intangible assets relate to acquisitions and the remaining amount from FSA adjustments. Intangible assets have finite lives and as detailed inNote 26 — Goodwill and Intangible Assets, depending on the component, are amortized on an accelerated or straight line basis over the estimated useful lives. Amortization expense for the intangible assets is recorded in operating expenses.
The Company reviews intangible assets for impairment annually or when events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is recognized by writing down the asset to the extent that the carrying amount exceeds the estimated fair value, with any impairment recorded in operating expense.
Other Assets
Tax Credit Investments
The Company has investments in limited liability entities that were formed to operate qualifying affordable housing projects, and other entities that make equity investments, provide debt financing or support community-based investments in tax-advantaged projects. Certain affordable housing investments qualify for credit under the Community Reinvestment Act (“CRA”), which requires regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, particularly in neighborhoods with low or moderate incomes. These tax credit investments provide tax benefits to investors primarily through the receipt of federal and/or state income tax credits or tax benefits in the form of tax deductible operating losses or expenses.
The Company invests as a limited partner and its ownership amount in each limited liability entity varies. As a limited partner, the Company is not the PB as it does not meet the power criterion, i.e., no power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has no direct ability to unilaterally remove the general partner. Accordingly, the Company is not required to consolidate these entities on its financial statements. For further discussion on VIEs, seeNote 10 — Borrowings.
Tax credit investments that were acquired in the OneWest Bank Transaction, including the commitment to contribute additional capital over the term of the investment, were recorded at fair value at the acquisition date pursuant to ASC 805 — Business Combinations. On a subsequent basis, these investments and new investments are accounted for under the equity method. Under the equity method, the Company’s investments are adjusted for the Company’s share of the investee’s net income or loss for the period. Any dividends or distributions received are recorded as a reduction of the recorded investment. The tax credits generated from investments in affordable housing projects and other tax credit investments are recognized on the consolidated financial statements to the extent they are utilized on the Company’s income tax returns through the tax provision.
Tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or conditions indicate that it is deemed probable that the Company will not recover its investment. Potential indicators of impairment might arise when there is evidence that some or all tax credits previously claimed by the limited liability entities would be recaptured, or that expected remaining credits would no longer be available to the limited liability entities. If an investment is determined to be impaired, it is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent recoveries in value.
These investments are included within other assets and any impairment loss would be recognized in other income.
FDIC Receivable
The Company has a receivable from the FDIC representing a secured interest in certain homebuilder, home construction and lot loans. The secured interest entitles the Company to 40% of the underlying cash flows. The Company elected to measure the FDIC Receivable at estimated fair value under the fair value option. Absent Market data, the fair value is estimated based on cash flows expected to be collected from the Company’s participation interest in the underlying collateral. The modeled underlying cash flows include estimated amounts expected to be collected from repayment of loan principal and interest and net proceeds from property liquidations. These cash flows are offset by amounts paid for servicing expenses, management fees, and liquidation expenses. The Company recognizes interest income on the FDIC receivable on an effective yield basis over the expected remaining life under the accretable yield method pursuant to ASC 310-30. The gains and losses from changes in the estimated fair value of the asset or due to sales of the underlying loans are recorded separately in other income. For further discussion, seeNote 13 — Fair Value.
Other Real Estate Owned
Other real estate owned (“OREO”) represents collateral acquired from the foreclosure of secured loans and is being actively marketed for sale. These assets are initially recorded at the lower of cost or market value less disposition costs. Estimated market value is generally based upon independent appraisals or broker price opinions, which are then modified based on assumptions and expectations that are determined by management. Any write-down as a result of differences between carrying and market value on the date of transfer from loan classification is charged to the allowance for credit losses.
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Subsequently, the assets are recorded at the lower of its carrying value or estimated fair value less disposition costs. If the property or other collateral has lost value subsequent to foreclosure, a valuation allowance (contra asset) is established, and the charge is recorded in other income. OREO values are reviewed on a quarterly basis and subsequent declines in estimated fair value are recognized in earnings in the current period. Holding costs are expensed as incurred and reflected in operating expenses. Upon disposition of the property, any difference between the proceeds received and the carrying value is booked to gain or loss on disposition recorded in other income.
Property and Equipment
Property and equipment are included in other assets and are carried at cost less accumulated depreciation and amortization. Depreciation is expensed using the straight-line method over the estimated service lives of the assets. Estimated service lives generally range from 3 to 7 years for furniture, fixtures and equipment and 20 to 40 years for buildings. Leasehold improvements are amortized over the term of the respective lease or the estimated useful life of the improvement, whichever is shorter.
Servicing Advances
The Company is required to make servicing advances in the normal course of servicing mortgage loans. These advances include customary, reasonable and necessary out-of-pocket costs incurred in the performance of its servicing obligation. They include advances related to mortgage insurance premiums, foreclosure activities, funding of principal and interest with respect to mortgage loans held in connection with a securitized transaction and taxes and other assessments which are or may become a lien upon the mortgage property. Servicing advances are generally reimbursed from cash flows collected from the loans.
As the servicer of securitizations of loans or equipment leases, the Company may be required to make servicing advances on behalf of obligors if the Company determines that any scheduled payment was not received prior to the end of the applicable collection period. Such advances may be limited by the Company based on its assessment of recoverability of such amounts in subsequent collection periods. The reimbursement of servicing advances to the Company is generally prioritized over the distribution of any payments to the investors in the securitizations.
A receivable is recognized for the advances that are expected to be reimbursed, while a loss is recognized in operating expenses for advances that are not expected to be reimbursed. Advances not collected are generally due to payments made in excess of the limits established by the investor or as a result of servicing errors. For loans serviced for others, servicing advances are accrued through liquidation regardless of delinquency status. Any accrued amounts that are deemed uncollectible at liquidation are written off against existing reserves. Any amounts outstanding 180 days post liquidation are written off against established reserves. Due to the Company’s planned exit of third party servicing operations, the servicing advances for third party serviced reverse mortgage loans are designated as Assets of discontinued operations held for sale.
Derivative Financial Instruments
The Company manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. The Company also offers derivative products to its customers in order for them to manage their interest rate and currency risks. The Company does not enter into derivative financial instruments for speculative purposes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, and imposing margin, reporting and registration requirements for certain market participants. Since the Company does not meet the definition of a Swap Dealer or Major Swap Participant under the Dodd-Frank Act, the reporting and clearing obligations apply to a limited number of derivative transactions executed with its lending customers in order to manage their interest rate risk.
Derivatives utilized by the Company may include swaps, forward settlement contracts and options contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time.
The Company documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedges. Upon executing a derivative contract, the Company designates the derivative as either a qualifying hedge or non-qualifying hedge. The designation may change based upon management’s reassessment of circumstances. Upon de-designation or termination of a hedge relationship, changes in fair value of the derivative is reflected in earnings.
The Company utilizes cross-currency swaps and foreign currency forward contracts to hedge net investments in foreign operations. These transactions are classified as foreign currency net investment hedges with resulting gains and losses reflected in AOCI. For hedges of foreign currency net investment positions, the “forward” method is applied whereby effectiveness is assessed and measured based on the amounts and currencies of the individual hedged net investments versus the notional amounts and underlying currencies of the derivative contract. For those hedging relationships where the critical terms of the underlying net investment and the derivative are identical, and the credit-worthiness of the counterparty to the hedging instrument remains sound, there is an expectation of no hedge ineffectiveness so long as those conditions continue to be met.
The Company also enters into foreign currency forward contracts to manage the foreign currency risk associated with its non-U.S. subsidiaries’ funding activities and designates these as foreign currency cash flow hedges for which certain components are reflected in AOCI and others recognized in noninterest income when the underlying transaction impacts earnings.
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The company uses foreign currency forward contracts, interest rate swaps, cross currency interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges.
The Company also provides interest rate derivative contracts to support the business requirements of its customers (“customer-related positions”). The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein the Company acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, the Company enters into similar offsetting positions with broker-dealers.
All derivative instruments are recorded at their respective fair value. Derivative instruments that qualify for hedge accounting are presented in the balance sheet at their fair values in other assets or other liabilities, with changes in fair value (gains and losses) of cash flow hedges deferred in AOCI, a component of equity. For qualifying derivatives with periodic interest settlements, e.g. interest rate swaps, interest income or interest expense is reported as a separate line item in the statement of income. Derivatives that do not qualify for hedge accounting are also presented in the balance sheet in other assets or other liabilities, but with their resulting gains or losses recognized in other income. For non-qualifying derivatives with periodic interest settlements, the Company reports interest income with other changes in fair value in other income.
Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. The fair value of the derivative is reported on a gross-by-counterparty basis. Valuations of derivative assets and liabilities reflect the value of the instrument including the Company’s and counterparty’s credit risk.
CIT is exposed to credit risk to the extent that the counterparty fails to perform under the terms of a derivative. Losses related to credit risk are reflected in other income. The Company manages this credit risk by requiring that all derivative transactions entered into as hedges be conducted with counterparties rated investment grade at the initial transaction by nationally recognized rating agencies, and by setting limits on the exposure with any individual counterparty. In addition, pursuant to the terms of the Credit Support Annexes between the Company and its counterparties, CIT may be required to post collateral or may be entitled to receive collateral in the form of cash or highly liquid securities depending on the valuation of the derivative instruments as measured on a daily basis.
Fair Value
Fair Value Hierarchy
CIT measures the fair value of its financial assets and liabilities in accordance with ASC 820Fair Value Measurements, which defines fair value, establishes a consistent framework for measuring fair value and requires disclosures about fair value measurements. The Company categorizes its financial instruments, based on the significance of inputs to the valuation techniques, according to the following three-tier fair value hierarchy:
| - | | Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain other securities that are highly liquid and are actively traded in over-the-counter markets; |
| - | | Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes derivative contracts and certain loans held-for-sale; |
| - | | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using valuation models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes highly structured or long-term derivative contracts and structured finance securities where independent pricing information cannot be obtained for a significant portion of the underlying assets or liabilities. |
Valuation Process
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company generally determines the estimated fair value of Level 3 assets and liabilities by using internally developed models and, to a lesser extent, prices obtained from third-party pricing services or broker dealers (collectively, third party vendors).
The Company’s internally developed models primarily consist of discounted cash flow techniques, which require the use of relevant observable and unobservable inputs. Unobservable inputs are generally derived from actual historical performance of similar assets or are determined from previous market trades for similar instruments. These unobservable inputs include discount rates, default rates, loss severity and prepayment rates. Internal valuation models are subject to review prescribed by the Company’s model validation policy that governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of significant models by the Company’s model review group, who are independent of the business units and perform model validation. Model validation assesses the adequacy and appropriateness of the model, including reviewing its processing components, logic and output results and supporting model documentation. These procedures are designed to provide reasonable assurance that the model is appropriate for its intended use and performs as expected. Periodic re-assessments of models are performed to ensure that they are continuing to perform as designed. The Company updates model inputs and methodologies periodically as a result of the monitoring procedures in place.
Item 8: Financial Statements and Supplementary Data
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Procedures and controls are in place to ensure new and existing models are subject to periodic validations by the Independent Model Validation Group (“IMV”). Oversight of the IMV is provided by the Model Governance Committee (“MGC”). All internal valuation models are subject to ongoing review by business unit level management. More complex models, such as those involved in the fair value analysis, are subject to additional oversight, at least quarterly, by the Company’s Valuation Reserve Working Group (“VRWG”), which consists of senior management, which reviews the Company’s valuations for complex instruments.
For valuations involving the use of third party vendors for pricing of the Company’s assets and liabilities, or those of potential acquisitions, the Company performs due diligence procedures to ensure information obtained and valuation techniques used are appropriate. The Company monitors and reviews the results (e.g. non-binding broker quotes and prices) from these third party vendors to ensure the estimated fair values are reasonable. Although the inputs used by the third party vendors are generally not available for review, the Company has procedures in place to provide reasonable assurance that the relied upon information is complete and accurate. Such procedures may include, as available and applicable, comparison with other pricing vendors, corroboration of pricing by reference to other independent market data and investigation of prices of individual assets and liabilities.
Fair Value Option
Certain MBS securities are carried at fair value with changes recorded in net income. Unrealized gains and losses are reflected as part of the overall changes in fair value. The Company recognizes interest income on an effective yield basis over the expected remaining life under the accretable yield method pursuant to ASC 310-30. Unrealized and realized gains or losses are reflected in other income. The determination of fair value for these securities is discussed inNote 13 — Fair Value.
The Company acquired a receivable from the FDIC representing a secured interest in certain homebuilder, home construction and lot loans. The secured interest entitles the Company to 40% of the underlying cash flows. The Company elected to measure the FDIC Receivable at estimated fair value under the fair value option. The Company recognizes interest income on the FDIC receivable on an effective yield basis over the expected remaining life under the accretable yield method pursuant to ASC 310-30. The gains and losses from changes in the estimated fair value of the asset is recorded separately in other income. For further discussion regarding the determination of fair value, see Note 13 — Fair Value.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future taxation of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax basis of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the reported amount of any net deferred tax assets of a reporting entity if, based upon the relevant facts and circumstances, it is more likely than not that some or all of the deferred tax assets will not be realized. Additionally, in certain situations, it may be appropriate to write-off the deferred tax asset against the valuation allowance. This reduces the valuation allowance and the amount of the respective gross deferred tax asset that is disclosed. A write-off might be appropriate if there is only a remote likelihood that the reporting entity will ever utilize its respective deferred tax assets, thereby eliminating the need to disclose the gross amounts.
The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a beneficial income tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. An income tax benefit is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the most likely outcome resulting from examination given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome. Liabilities for uncertain income tax positions are included in current taxes payable, which is reflected in accrued liabilities and payables. Accrued interest and penalties for unrecognized tax positions are recorded in income tax expense.
Other Comprehensive Income/Loss
Other Comprehensive Income/Loss includes unrealized gains and losses, unless other than temporarily impaired, on AFS investments, foreign currency translation adjustments for both net investment in foreign operations and related derivatives designated as hedges of such investments, changes in fair values of derivative instruments designated as hedges of future cash flows and certain pension and postretirement benefit obligations, all net of tax.
Foreign Currency Translation
In addition to U.S. operations, the Company has operations in Europe and other jurisdictions. The functional currency for foreign operations is generally the local currency, other than in Commercial Air business. In this business, most of which is reported as discontinued operations, the U.S. dollar is typically the functional currency. The value of assets and liabilities of the foreign operations is translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates during the year. The resulting foreign currency translation gains and losses, as well as offsetting gains and losses on hedges of net investments in foreign operations, are reflected in AOCI. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency are included in Other income.
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Pension and Other Postretirement Benefits
CIT has both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain U.S. and non-U.S. employees, each of which is designed in accordance with the practices and regulations in the related countries.
Recognition of the funded status of a benefit plan, which is measured as the difference between plan assets at fair value and the benefit obligation, is included in the balance sheet. The Company recognizes as a component of Other Comprehensive Income, net of tax, the net actuarial gains or losses and prior service cost or credit that arise during the period but are not recognized as components of net periodic benefit cost in the Statements of Income.
Variable Interest Entities
A VIE is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity’s operations; and/or have equity owners that do not have an obligation to absorb the entity’s losses or the right to receive the entity’s returns.
The Company accounts for its VIEs in accordance with Accounting Standards Update (“ASU”) No. 2009-16,Transfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets and ASU No. 2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities as updated by ASU 2015-02.
ASC 810 requires qualified special purpose entities to be evaluated for consolidation and also changed the approach to determining a VIE’s Primary Beneficiary (“PB”) and required companies to more frequently reassess whether they must consolidate VIEs. The PB is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
ASU 2015-02 amended the current consolidation guidance to change the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE.
CIT adopted ASU 2015-02, effective January 1, 2016, under the modified retrospective approach along with ASU 2016-17 which was adopted retrospectively to all relevant prior periods beginning with the annual period in which the amendments in Update 2015-02 were initially adopted, as required. The adoption of both these ASUs did not have a significant impact on CIT’s financial statements or disclosures.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers, collateral managers, servicers, or owners of call options or liquidation rights over the VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
The Company performs on-going reassessments of: (1) whether any entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s consolidation conclusion regarding the VIE to change.
When in the evaluation of its interest in each VIE it is determined that the Company is considered the PB, the VIE’s assets, liabilities and non-controlling interests are consolidated and included in the Consolidated Financial Statements. SeeNote 10 — Borrowings for further details.
Non-interest Income
Non-interest income is recognized in accordance with relevant authoritative pronouncements and includes rental income on operating leases and other income. Other income includes (1) factoring commissions, (2) gains and losses on sales of leasing equipment, (3) fee revenues, including fees on lines of credit, letters of credit, capital markets related fees, agent and advisory fees, service charges on deposit accounts, and servicing fees on loans CIT services for others, (4) gains and losses on loan and portfolio sales, (5) gains and losses on OREO sales, (6) gains and losses on investments, (7) gains and losses on derivatives and foreign currency exchange, (8) impairment on assets held for sale, and (9) other revenues. Other revenues include items that are more episodic in nature, such as gains on work-out related claims, recoveries on acquired loans or loans charged off prior to transfer to AHFS, proceeds received in excess of carrying value on non-accrual accounts held for sale that were repaid or had another workout resolution, insurance proceeds in excess of carrying value on damaged leased equipment, and also includes income from joint ventures.
Item 8: Financial Statements and Supplementary Data
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Non-interest Expenses
Non-interest expense is recognized in accordance with relevant authoritative pronouncements and includes deprecation on operating lease equipment, maintenance and other operating lease expenses, loss on debt extinguishments and deposit redemptions and operating expenses.
Operating expenses consists of (1) compensation and benefits, (2) technology costs, (3) professional fees, (4) net occupancy expenses, (5) provision for severance and facilities exiting activities, (6) advertising and marketing, (7) intangible assets amortization, and (8) other expenses.
Stock-Based Compensation
Compensation expense associated with equity-based awards is recognized over the vesting period (requisite service period), generally three years, under the “graded vesting” attribution method, whereby each vesting tranche of the award is amortized separately as if each were a separate award. The cost of awards granted to directors in lieu of cash is recognized using the single grant approach with immediate vesting and expense recognition. Expenses related to stock-based compensation are included in operating expenses (compensation and benefits).
Earnings per Share (“EPS”)
Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding increased by the weighted-average potential impact of dilutive securities. The Company’s potential dilutive instruments primarily include restricted unvested stock grants and performance stock grants. The dilutive effect is computed using the treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the EPS computation as the result would have an anti-dilutive effect.
Accounting for Costs Associated with Exit or Disposal Activities
A liability for costs associated with exit or disposal activities, other than in a business combination, is recognized when the liability is incurred. The liability is measured at fair value, with adjustments for changes in estimated cash flows recognized in earnings.
Consolidated Statements of Cash Flows
Unrestricted cash and cash equivalents includes cash and interest-bearing deposits, which are primarily overnight money market investments and short term investments in mutual funds. The Company maintains cash balances principally at financial institutions located in the U.S. The balances are not insured in all cases. Cash and cash equivalents also include amounts at CIT Bank, which are only available for the bank’s funding and investment requirements. Cash inflows and outflows from customer deposits are presented on a net basis. Most factoring receivables are presented on a net basis in the Statements of Cash Flows, as factoring receivables are generally due in less than 90 days.
Cash receipts and cash payments resulting from purchases and sales of loans, securities, and other financing and leasing assets are classified as operating cash flows in accordance with ASC 230-10-45-21 when these assets are originated/acquired and designated specifically for resale.
Activity for loans originated or acquired for investment purposes, including those subsequently transferred to AHFS, is classified in the investing section of the statement of cash flows in accordance with ASC 230-10-45-12 and 230-10-45-13. The vast majority of the Company’s loan originations are for investment purposes. Cash receipts resulting from sales of loans, beneficial interests and other financing and leasing assets that were not specifically originated and/or acquired and designated for resale are classified as investing cash inflows regardless of subsequent classification.
The cash flows related to investment securities and finance receivables (excluding loans held for sale) purchased at a premium or discount are as follows:
| - | | CIT classifies the entire cash flow, including the premium, as investing outflow in the period of acquisition and on a subsequent basis, the premium amortization is classified in investing as a positive adjustment under a constructive receipts model. Under the constructive receipts model, similar to the cumulative earnings approach, CIT compares the cash receipts to the investment from inception to date. The Company first allocates cash receipts to operating activities based on earned interest income, with the remaining allocated to Investing activities when received in cash. |
| - | | CIT classifies the entire cash flow, net of the discount, as investing outflow in the period of acquisition and on a subsequent basis, the discount accretion is classified in investing as a negative adjustment under a constructive receipts model. The Company first allocates cash receipts to operating activities based on earned interest income, with the remaining allocated to Investing activities when received in cash. |
Restricted cash includes cash on deposit with other banks that are legally restricted as to withdrawal and primarily serve as collateral for certain servicer obligations of the Company. Because the restricted cash results from a contractual requirement to invest cash balances as stipulated, CIT’s change in restricted cash balances is classified as cash flows from (used for) investing activities. See New Accounting Pronouncements for future presentation changes for restricted cash.
Activity of discontinued operations is included in various line items of the Statements of Cash Flows and summary items are disclosed inNote 2 —Acquisition and Disposition Activities.
Accounting Pronouncements Adopted
During 2016, the Company adopted the following Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
ASU 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period;
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ASU 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items;
ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting
ASU 2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
Stock Compensation
ASU 2014-12 directs that a performance target that affects vesting and can be achieved after the requisite service period is a performance condition. That is, compensation cost would be recognized over the required service period if it is probable that the performance condition would be achieved. The total amount of compensation cost recognized during and after the requisite service period would reflect the number of awards that are expected to vest and would be adjusted to reflect those awards that ultimately vest. The ASU does not require additional disclosures.
CIT adopted this ASU, effective January 1, 2016, for all awards granted or modified after the effective date. Adoption of this guidance did not impact CIT’s financial statements or disclosures.
Extraordinary and Unusual Items
ASU 2015-01 eliminates the concept of extraordinary items and the need for entities to evaluate whether transactions or events are both unusual in nature and infrequently occurring.
The ASU precludes (1) segregating an extraordinary item from the results of ordinary operations; (2) presenting separately an extraordinary item on the income statement, net of tax, after income from continuing operations; and (3) disclosing income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event or transaction that is unusual in nature or that occurs infrequently. Consequently, although the Company will no longer need to determine whether a transaction or event is both unusual in nature and infrequently occurring, CIT will still need to assess whether items are unusual in nature or infrequent to determine if the additional presentation and disclosure requirements for these items apply.
CIT adopted this ASU effective January 1, 2016. Adoption of this guidance did not have a significant impact on CIT’s financial statements or disclosures.
Consolidation
ASU 2015-02 amended the current consolidation guidance to change the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities.
The Board changed the way the voting rights characteristic in the VIE scope determination is evaluated for corporations, which may significantly impact entities for which decision making rights are conveyed through a contractual arrangement.
Under ASU 2015-02:
More limited partnerships and similar entities will be evaluated for consolidation under the revised consolidation requirements that apply to VIEs.
Fees paid to a decision maker or service provider are less likely to be considered a variable interest in a VIE.
Variable interests in a VIE held by related parties of a reporting enterprise are less likely to require the reporting enterprise to consolidate the VIE.
There is a new approach for determining whether equity at-risk holders of entities that are not similar to limited partnerships have power to direct the entity’s key activities when the entity has an outsourced manager whose fee is a variable interest.
The deferral of consolidation requirements for certain investment companies and similar entities of the VIE in ASU 2009-17 is eliminated.
The impacts of the update include:
A new consolidation analysis is required for VIEs, including many limited partnerships and similar entities that previously were not considered VIEs.
It is less likely that the general partner or managing member of limited partnerships and similar entities will be required to consolidate the entity when the other investors in the entity lack both participating rights and kick-out rights.
Limited partnerships and similar entities that are not VIEs will not be consolidated by the general partner.
It is less likely that decision makers or service providers involved with a VIE will be required to consolidate the VIE.
Entities for which decision making rights are conveyed through a contractual arrangement are less likely to be considered VIEs.
Reporting enterprises with interests in certain investment companies and similar entities that are considered VIEs will no longer evaluate those entities for consolidation based on majority exposure to variability.
CIT adopted ASU 2015-02, effective January 1, 2016, under the modified retrospective approach. Based on CIT’s re-assessment of its VIEs under the amended guidance, the adoption of this ASU did not have a significant impact on CIT’s financial statements or disclosures.
Debt Issuance Costs
ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.
Item 8: Financial Statements and Supplementary Data
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Debt issuance costs are specific incremental costs, other than those paid to the lender, that are directly attributable to issuing a debt instrument (i.e., third party costs). Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset).
ASU 2015-15 clarified ASU 2015-03, which did not address the balance sheet presentation of debt issuance costs that are either (1) incurred before a debt liability is recognized (e.g., before the debt proceeds are received), or (2) associated with revolving debt arrangements. ASU 2015-15 states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line of credit (“LOC”) arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement.
In accordance with the new guidance, CIT reclassified deferred debt costs previously included in other assets to borrowings in the first quarter of 2016 and conformed prior periods. The adoption of this guidance did not have a significant impact on CIT’s financial statements or disclosures.
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
ASU 2014-15 — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, describes how entities should assess their ability to meet their obligations and sets disclosure requirements about how this information should be communicated. The standard will be used along with existing auditing standards, and provides the following key guidance:
| 1. | | Entities must perform a going concern assessment by evaluating their ability to meet their obligations for a look-forward period of one year from the financial statement issuance date (or date the financial statements are available to be issued). |
| 2. | | Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans. |
| 3. | | Pursuant to the ASU, substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the annual or interim financial statements are issued or available to be issued (assessment date). |
The new standard applies to all entities for the first annual period ending after December 15, 2016. Company management is responsible for assessing going concern uncertainties at each annual and interim reporting period thereafter.
CIT has considered relevant events and conditions up to and within one year from the issuance date of the financial statements, to determine if conditions exist, or will exist, that would give rise to “substantial doubt” about the Company’s ability to meet its obligations and ability to continue as a going concern, a summary of our conclusions is outlined inNote 10 — Borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncements have been issued by the FASB but are not yet effective:
| - | | ASU 2014-09, Revenue from Contracts with Customers (Topic 606) |
| - | | ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; |
| - | | ASU 2016-02,Leases (Topic 842); |
| - | | ASU 2016-05,Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships; |
| - | | ASU 2016-06,Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments; |
| - | | ASU 2016-07, Investments —Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting; |
| - | | ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); |
| - | | ASU 2016-09,Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting; |
| - | | ASU 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; |
| - | | ASU 2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC guidance because of ASU 2014-09 and ASU 2014-16 pursuant to staff announcements at the March 3, 2016 EITF meeting; |
| - | | ASU 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; |
| - | | ASU 2016-13,Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; |
| - | | ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. |
| - | | ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory |
| - | | ASU 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) |
| - | | ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers |
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows.
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The core principle of the five-step model is that a company will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In doing so, many companies will have to make more estimates and use more judgment than they do under current GAAP. The five-step analysis of transactions, to determine when and how revenue is recognized, includes:
| 1. | | Identify the contract with the customer. |
| 2. | | Identify the performance obligations in the contract. |
| 3. | | Determine the transaction price. |
| 4. | | Allocate the transaction price to the performance obligations. |
| 5. | | Recognize revenue when or as each performance obligation is satisfied. |
In 2016, the FASB issued several amendments and clarifications to the new revenue standard:
| - | | ASU 2015-14 defers the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP for one year to effective for fiscal years beginning after December 15, 2017. |
| - | | ASU 2016-08 Revenue from Contracts with Customers: Principal versus Agent Considerations, |
| - | | ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, |
| - | | ASC 2016-11, Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606, Revenue from Contracts with Customers, |
| - | | ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients, |
| - | | ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers |
These were primarily as a result of issues raised by stakeholders and deliberations by the transition resource group (TRG). Amendments were made to the guidance related to the principal versus agent assessment, identifying performance obligations, accounting for licenses of intellectual property, and other matters (such as the definition of completed contracts at transition and the addition of new practical expedients).
Companies can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Under the modified approach, financial statements will be prepared for the year of adoption using the new standard, but prior periods will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under today’s revenue guidance.
The effective date and transition of ASU 2014-09, ASU 2016-08, 2016-10, 2016-11 and 2016-12 aligns with adoption date of the Revenue recognition standard, as amended by ASU 2015-14, effective for fiscal years beginning after December 15, 2017.
The review and analysis of CIT’s individual revenue streams is currently underway. “Interest Income” and “Rental Income on Operating Leases”, CIT’s two largest revenue items, are scoped out of the new guidance; as are many other revenues relating to financial assets and liabilities including loans, leases, securities and derivatives. As such, the majority of our revenues will not be impacted; however, certain ancillary revenues and components of “Other income” are being assessed at a contractual level pursuant to the new standard. We expect our accounting policies will not change materially.
CIT plans to adopt the standard in the first quarter of 2018 and expects to use the modified retrospective method (cumulative initial effect recognized at the date of adoption, with additional footnote disclosures). However, we are continuing to evaluate the impact of the standard, and our adoption method is subject to change. CIT does not anticipate a significant impact upon adoption of this standard. Our evaluations are not final and we continue to assess the impact of the Update on our revenue contracts.
Leases (Topic 842)
ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability of accounting for lease transactions, will require all leases to be recognized on the balance sheet as lease assets and lease liabilities.
Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. Lease classifications by lessors are similar; operating, direct financing, or sales-type.
Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit thresholds. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements.
The standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
Although the new guidance does not significantly change lessor accounting, CIT will need to determine impact to both, where it is a lessee and a lessor:
| - | | Lessor accounting: Given limited changes to Lessor accounting, we do not expect material changes to recognition or measurement. Current lease administration and/or reporting systems and processes will need to be evaluated and updated |
Item 8: Financial Statements and Supplementary Data
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| | | as required to ensure appropriate lease-type identification and classification. |
| - | | Lessee accounting: The new standard will result in virtually all leases being reflected on the balance sheet. The impact on lessee accounting also includes identification of any embedded leases included in service contracts that CIT has with vendors. |
CIT is currently evaluating the impact and will adopt the new guidance in the first quarter of 2019.
Financial Instruments
ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main objective is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments to current GAAP are summarized as follows:
| - | | Supersede current guidance to classify equity securities into different categories (i.e. trading or available-for-sale); |
| - | | Require equity investments to be measured at fair value with changes in fair value recognized in net income, rather than other comprehensive income. This excludes those investments accounted for under the equity method, or those that result in consolidation of the investee; |
| - | | Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment (similar to goodwill); |
| - | | Eliminate the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost; |
| - | | Require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; |
| - | | Require an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with fair value option for financial instruments; |
| - | | Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities, or loans and receivables) on the balance sheet or accompanying notes to the financial statements; and |
| - | | Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. |
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. CIT is currently evaluating the impact of adopting this amendment on its financial instruments.
Derivatives and Hedging
In March 2016, the FASB issuedASU 2016-05, Derivative Contract Novations. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in critical term of the hedging relationship. The update is effective for fiscal years and interim periods within those beginning after December 15, 2016. CIT adopted this amendment as of January 1, 2017. This update did not have a significant impact on the Company’s financial statements.
In March 2016, the FASB issuedASU 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. The amendments clarify the steps required to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. CIT adopted this amendment as of January 1, 2017 and did not have a significant impact on the Company’s financial statements.
Equity Method and Joint Ventures
ASU 2016-07, Investments — Equity method and joint ventures (Topic 323), eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.
For available-for-sale securities that become eligible for the equity method of accounting, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for the use of the equity method. CIT has adopted the new standard prospectively for investments that qualify for the equity method of accounting as of January 1, 2017. CIT adopted this amendment as of January 1, 2017 and did not have a significant impact on the Company’s financial statements.
Stock Compensation
In March 2016, the FASB issuedASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Account. The amendments simplify several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and cash flow statements.
CIT adopted the new standard as of January 1, 2017, prospectively under the modified retrospective approach, with a cumulative-effect adjustment made to retained earnings as of the beginning of the fiscal period and did not have a significant impact on the Company’s financial statements.
Credit Losses
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), introduces a forward-looking “expected loss” model, the Current Expected Credit Losses (“CECL”) model, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale (“AFS”) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.
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CECL Model
The CECL model will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. The ASU does not prescribe a specific method to make the estimate so its application will require significant judgment. Generally, the initial estimate of the expected credit losses and subsequent changes in the estimate will be reported in current earnings.
The expected credit losses will be recorded through an allowance for loan and lease losses (ALLL) in the statement of financial position.
AFS Debt Securities
The FASB made targeted improvements to the existing other-than-temporary impairment (“OTTI”) model in ASC 320 for certain AFS debt securities to eliminate the concept of “other-than-temporary” from that model. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset.
The notable changes under the ASU include:
| - | | Use of an ALLL approach (versus permanently writing down the security’s cost basis) for impairment; |
| - | | Limit the ALLL to the amount at which the security’s fair value is less than its amortized cost basis; |
| - | | Removing the consideration for the length of time fair value has been less than amortized cost when assessing credit loss; |
| - | | Removing the consideration for recoveries in fair value after the balance sheet date when assessing whether a credit loss exists. |
Purchased Financial Assets with Credit Deterioration
The purchased financial assets with credit deterioration (“PCD”) model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired (“PCI”) assets in ASC 310-30 under current GAAP. The initial estimate of expected credit losses for a PCD would be recognized through an ALLL with an offset to the cost basis of the related financial asset at acquisition (i.e., increases the cost basis of the asset, the “gross-up” approach with no impact to net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or AFS debt security impairment model with all adjustments of the ALLL recognized through earnings. Beneficial interests classified as held-to-maturity or AFS will need to apply the PCD model if the beneficial interest meets the definition of PCD or if there is a significant difference between contractual and expected cash flows at initial recognition.
This guidance also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ALLL. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e. by vintage year).
Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach). A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. A prospective transition approach should be used for PCD assets where upon adoption; the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses.
The ASU will be effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. CIT is currently reviewing the impact of this guidance.
Statement of Cash Flows
The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The following issues are addressed:
| - | | Issue 1 — Debt prepayment or debt extinguishment costs — Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities. |
| - | | Issue 2 — Settlement of zero-coupon debt instruments — Cash payments for the settlement of zero-coupon debt instruments, including other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal. |
| - | | Issue 3 — Contingent consideration payments made after a business combination — Cash payments made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. |
| - | | Issue 4 — Proceeds from the settlement of insurance claim — Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement). |
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| - | | Issue 5 — Proceeds from the settlement of corporate-owned life insurance (“COLI”) policies, including bank-owned life insurance (“BOLI”) policies — Cash payments received from the settlement of COLI or BOLI policies should be classified as cash inflows from investing activities. Cash payments for premiums on COLI or BOLI policies may be classified as cash outflows for investing, operating, or a combination of investing and operating activities. |
| - | | Issue 6 — Distributions received from equity method investments — The guidance provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a 1) cumulative earnings approach, or 2) nature of distribution (or “look-through”) approach. |
| - | | Issue 7 — Beneficial interests in securitization transactions — A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity. Cash receipts from a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities. |
| - | | Issue 8 — Separately identifiable cash flows and application of the predominance principle — Entities should use reasonable judgment to separate cash flows. In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. |
For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. CIT is currently evaluating the impact of the above eight issues on its statement of cash flows and related disclosures.
Presentation of restricted cash in the Statement of Cash Flows
The FASB issued final guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of period and end-of-period total amounts shown on the statement of cash flows.
The guidance will be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. CIT is currently evaluating the impact of this amendment and plans to adopt this amendment in the first quarter of 2018.
Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB released the guidance ASU 2016-16, Income Taxes (Topic 740), accounting for the income tax effects of intra-entity transfers of assets. Current GAAP requires a company to defer accounting for the income tax implications of an intercompany sale of assets until the assets are sold to a third party or recovered through use. Under the new guidance, the seller’s tax effects and the buyer’s deferred taxes will be immediately recognized upon the sale. This will likely cause an increase in the consolidated entity’s effective tax rate in the year of the transfer.
The new intra-entity guidance is effective for public companies in fiscal years beginning after December 15, 2017. Early adoption is permitted, but only in the first quarter of a fiscal year. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. CIT is currently evaluating the impact and does not intend to early adopt this standard.
NOTE 2 — ACQUISITION AND DISCONTINUED OPERATIONS
ACQUISITIONS
During 2015, the Company completed the following significant business acquisition. There were no significant business acquisitions in 2016.
OneWest Transaction
On August 3, 2015, CIT acquired IMB Holdco LLC, the parent company of OneWest Bank N.A. (the “OneWest Transaction”). CIT Bank, then a Utah-state chartered bank and a wholly owned subsidiary of CIT, merged with and into OneWest Bank, N.A., with OneWest Bank, N.A. surviving as a wholly owned subsidiary of CIT with the name CIT Bank, National Association. CIT paid approximately $3.4 billion as consideration, comprised of approximately $1.9 billion in cash proceeds, approximately 30.9 million shares of CIT Group Inc. common stock (valued at approximately $1.5 billion at the time of closing), and approximately 168,000 restricted stock units of CIT (valued at approximately $8 million at the time of closing). Total consideration also included $116 million of cash retained by CIT as a holdback for certain potential liabilities relating to IMB Holdco LLC and $2 million of cash for expenses of the holders’ representative. The acquisition was accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations.
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Consideration and Net Assets Acquired (dollars in millions)
| | | | Adjusted
Purchase
Price
|
|---|
Purchase price | | | | $ | 3,391.6 | | |
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value | | | | | | | |
| Cash and interest bearing deposits | | | | $ | 4,411.6 | | |
| Investment securities | | | | | 1,297.3 | | |
| Assets held for sale | | | | | 20.4 | | |
| Loans HFI | | | | | 13,571.0 | | |
| Indemnification assets | | | | | 455.4 | | |
| Other assets | | | | | 722.4 | | |
| Assets of discontinued operation | | | | | 524.4 | | |
| Deposits | | | | | (14,533.3 | ) | |
| Borrowings | | | | | (2,970.3 | ) | |
| Other liabilities | | | | | (206.1 | ) | |
| Liabilities of discontinued operation | | | | | (708.4 | ) | |
| Total fair value of identifiable net assets | | | | $ | 2,584.4 | | |
Intangible assets | | | | $ | 164.7 | | |
Goodwill* | | | | $ | 642.5 | | |
* | | See Note 26 — Goodwill and Intangible Assets for discussion on goodwill impairment. |
Unaudited Pro Forma Information
Upon closing the OneWest Transaction and integration of OneWest Bank, effective August 3, 2015, separate records for OneWest Bank as a stand-alone business have not been maintained as the operations have been integrated into CIT. At and after year-end 2015, the Company no longer has the ability to break out the results of the former OneWest entities in a reliable manner. The pro forma information presented below reflects management’s best estimate, based on information available at the reporting date.
The following table presents certain unaudited pro forma information for illustrative purposes only, for the year ended December 31, 2015 and 2014 as if OneWest Bank had been acquired on January 1, 2014. The unaudited estimated pro forma information combines the historical results of OneWest Bank with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition taken place on January 1, 2014.
Further, the unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value by OneWest Bank prior to the acquisition, which in turn did not require an allowance for loan losses. The pro forma financial information does not include the impact of possible business changes or synergies. The preparation of the pro forma financial information includes adjustments to conform accounting policies between OneWest Bank and CIT, specifically related to (1) adjustments to remove the fair value adjustments previously recorded by OneWest Bank on $4.4 billion of loan balances and record income on a level yield basis, reflecting the adoption of ASC 310-20 and ASC 310-30 for loans, depending on whether the loans were determined to be purchased credit impaired; and (2) adjustments to remove the fair value adjustments previously recorded by OneWest Bank on $500 million of borrowings and record interest expense in accordance with ASC 835-30.
The pro forma financial information in the table below reflects the total impact ($1,022 million) of income tax benefits recognized by the Company in 2015 and 2014 ($647 million and $375 million for the year ended December 31, 2014 and 2015, respectively) in the 2014 period, assuming for the purpose of preparing the pro forma information that the OneWest Transaction had occurred on January 1, 2014. These tax benefits, which related to the reduction in the Company’s deferred tax asset valuation allowance, do not have a continuing impact. Similarly, in connection with the OneWest Transaction, CIT incurred acquisition and integration costs recognized by the Company during the year ended December 31, 2015 and 2014 of approximately $55 million and $5 million, respectively. For the purpose of preparing the pro forma information, these acquisition and integration costs have been reflected as if the acquisition had occurred on January 1, 2014. Actual results may differ from the unaudited pro forma information presented and the differences could be material.
Unaudited Pro Forma (dollars in millions)
| | | |
Years Ended December 31,
| |
|---|
| | | | 2015
| | 2014
|
|---|
| Net finance revenue | | | | $ | 3,131.4 | | | $ | 3,247.4 | |
| Net income | | | | | 636.1 | | | | 1,708.2 | |
DISCONTINUED OPERATIONS
Aerospace
Previously, Aerospace had been a division of the Transportation Finance segment, which consisted of Commercial Air and Business Air. The activity of the Commercial Air business that is subject to a definitive sales agreement (discussed below), as well as activity associated with the Business Air business are included in discontinued operations.
Commercial Air
Commercial Air provides aircraft leasing, lending, asset management, and advisory services. The primary clients of the business include global and regional airlines around the world. Offices are located in the U.S., Europe and Asia.
On October 6, 2016, the Company announced that it had agreed to sell Commercial Air to Avolon Holdings Limited (“Avolon”), an international aircraft leasing company and a wholly-owned subsidiary of Bohai Capital Holding Co. Ltd. (“Bohai”), pursuant to a Purchase and Sale Agreement, by and among C.I.T. Leasing Corporation, a wholly-owned subsidiary of the Company (“CIT Leasing”), Park Aerospace Holdings Limited, a wholly-owned subsidiary of Avolon, the Company, Bohai, and Avolon (the “Agreement”). The Agreement provides for the acquisition of all of the capital stock or other equity interests of C2 Aviation Capital, Inc., a Delaware corporation and wholly- owned subsidiary of CIT Leasing (the “Transaction”).
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CIT expects to sell its Commercial Air business (the “Business”) to Avolon, including its operations, forward order aircraft purchase commitments, and certain assets and liabilities.
We continue to target closing at the end of the first quarter of 2017. In March 2017, Bohai has advised us that they received approval of Bohai shareholders to complete the transaction. The key remaining milestone for closing includes receipt of Chinese regulatory approvals. Bohai has advised us that they continue to work toward achieving the milestone by the end of the first quarter.
Avolon deposited $600 million into an escrow account with a U.S. bank, which is payable to CIT at closing as part of the purchase price and in certain circumstances if the transaction is not consummated.
Included as part of the transaction are purchase commitments for commercial aircraft. Commitments to purchase new commercial aircraft are predominantly with Airbus Industries (“Airbus”) and The Boeing Company (“Boeing”). Aerospace equipment purchases were contracted for specific models, using baseline aircraft specifications at fixed prices, which reflect discounts from fair market purchase prices prevailing at the time of commitment. The delivery price of an aircraft may change depending on final specifications. Equipment purchases are recorded at the delivery date. The estimated commitment amount of $8.7 billion at December 31, 2016, was based on contracted purchase prices reduced for pre-delivery payments to date and excludes buyer furnished equipment selected by the lessee. Pursuant to existing contractual commitments, 128 aircraft remain to be purchased from Airbus and Boeing at December 31, 2016. Aircraft deliveries are scheduled periodically through 2020.
Business Air
Business Air offers financing and leasing programs for corporate and private owners of business jets. Serving clients around the world, we provide financing that is tailored to our clients’ unique business requirements. Products include term loans, leases, pre-delivery financing, fractional share financing and vendor / manufacturer financing.
With the Commercial Air separation announced and the sales of various international businesses, Business Air, which included international loans, no longer was considered a strategic business. Business Air loans were classified as held for sale during 2016. Upon classification as AHFS, Business Air did not meet the strategic shift criteria to be classified as discontinued operations, since it was a minor part of the Aerospace division. When the assets of Commercial Air were transferred to AHFS in the fourth quarter of 2016, the total for the division (including Commercial Air and Business Air) met the strategic shift criteria and thus are reported as discontinued operations. The Company expects to dispose of the assets through sales and customer paydowns.
The following condensed financial information reflects the combination of our Commercial Air and Business Air businesses.
Condensed Balance Sheet — Aerospace Discontinued Operations (dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Total cash and deposits, of which $535.5 million and $498.2 million at December 31, 2016 and 2015, respectively, is restricted | | | | $ | 759.0 | | | $ | 649.1 | |
| Net finance receivables | | | | | 1,047.7 | | | | 1,136.6 | |
| Operating lease equipment, net | | | | | 9,677.6 | | | | 9,799.9 | |
| Goodwill | | | | | 126.8 | | | | 135.1 | |
Other assets(1) | | | | | 1,161.5 | | | | 838.4 | |
| Assets of discontinued operations | | | | $ | 12,772.6 | | | $ | 12,559.1 | |
| Secured borrowings | | | | $ | 1,204.6 | | | $ | 2,091.6 | |
Other liabilities(2) | | | | | 1,597.3 | | | | 1,514.2 | |
| Liabilities of discontinued operations | | | | $ | 2,801.9 | | | $ | 3,605.8 | |
(1) | | Amount includes Deposits on commercial aerospace equipment of $1,013.7 million and $696.0 million at December 31, 2016 and December 31, 2015, respectively. |
(2) | | Amount includes commercial aerospace maintenance reserves of $1,084.9 million and security deposits of $167.0 million at December 31, 2016, and commercial aerospace maintenance reserves of $980.1 million and security deposits of $155.1 million at December 31, 2015. |
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Condensed Statement of Income — Aerospace Discontinued Operations (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Interest income | | | | $ | 72.8 | | | $ | 70.2 | | | $ | 75.2 | |
| Interest expense | | | | | (369.3 | ) | | | (366.5 | ) | | | (356.7 | ) |
| (Provision) recovery for credit losses | | | | | (15.6 | ) | | | (1.8 | ) | | | 4.2 | |
| Rental income on operating leases | | | | | 1,236.8 | | | | 1,134.4 | | | | 1,143.3 | |
Other income(1) | | | | | 22.5 | | | | 56.5 | | | | 22.7 | |
Depreciation on operating lease equipment(2) | | | | | (345.6 | ) | | | (411.4 | ) | | | (385.8 | ) |
| Maintenance and other operating lease expenses | | | | | (32.1 | ) | | | (45.8 | ) | | | (25.1 | ) |
Operating expenses(3) | | | | | (101.9 | ) | | | (68.2 | ) | | | (59.3 | ) |
| Loss on debt extinguishment | | | | | (8.3 | ) | | | (1.1 | ) | | | – | |
| Income from discontinued operation before provision for income taxes | | | | | 459.3 | | | | 366.3 | | | | 418.5 | |
Provision for income taxes(4) | | | | | (914.6 | ) | | | (45.9 | ) | | | (27.6 | ) |
| (Loss) income from discontinued operations, net of taxes | | | | $ | (455.3 | ) | | $ | 320.4 | | | $ | 390.9 | |
(1) | | Other income includes impairment charges on assets transferred to AHFS for $32 million, $4 million and $19 million for the years ended December 31, 2016, 2015 and 2014, respectively. |
(2) | | Depreciation on operating lease equipment is suspended when an operating lease asset is placed in Assets Held for Sale. Pre-tax income for 2016 benefited from $106 million of suspended depreciation related to operating lease equipment to be sold to Avolon as described above. |
(3) | | Operating expenses in 2016 include costs related to the commercial air separation initiative of $34 million. Operating expense includes salaries and benefits of $47 million, $49 million and $45 million for the years ended December 31, 2016, 2015 and 2014, respectively. |
(4) | | Provision for income taxes for the year ended December 31, 2016 includes $847 million net tax expense related to the Company’s decision to no longer assert that it would indefinitely reinvest the unremitted earning of Commercial Air. For the years ended December 31, 2016, 2015, and 2014, the Company’s tax rate for discontinued operations was 199%, 12% and 7%, respectively. |
Income from the discontinued operation for the years ended December 31, 2016, 2015 and 2014 was driven primarily by revenues on leased aircraft. The interest expense includes amounts allocated to the businesses and on secured debt included in the condensed balance sheet. Operating expenses included in the discontinued operations consisted of direct expenses of the Commercial Air and Business Air businesses that were separate from ongoing CIT operations.
In connection with the classification of the Aerospace businesses as discontinued operations, certain indirect operating expenses that previously had been allocated to the businesses have instead been re-allocated as part of continuing operations. The total incremental pretax amounts of indirect overhead expenses that were previously allocated to the Aerospace businesses and remain in continuing operations were approximately $19 million, $39 million and $32 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Condensed Statement of Cash Flows — Aerospace Discontinued Operations (dollars in millions)
| | Years Ended December 31,
| |
|---|
| | 2016
| | | 2015
| | | 2014
| |
|---|
| Net cash flows provided by operations | | $ | 35.7 | | | $ | 942.1 | | | $ | 1,009.8 | |
| Net cash flows used in investing activities | | | (655.9 | ) | | | (749.6 | ) | | | (1,812.8 | ) |
Reverse Mortgage Servicing
The Financial Freedom business, a division of CIT Bank (formerly a division of OneWest Bank) that services reverse mortgage loans, was acquired in conjunction with the OneWest Transaction. Pursuant to ASC 205-20, the Financial Freedom business is reflected as discontinued operations effective 2015. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, systems and servicing assets. The assets of discontinued operations primarily include Home Equity Conversion Mortgage (“HECM”) loans and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which relates primarily to loans serviced for third party investors, secured borrowings and contingent liabilities. In addition, continuing operations includes a portfolio of reverse mortgages, which are recorded in the Legacy Consumer Mortgage division of the Consumer Banking segment, and are serviced by Financial Freedom. For the year ended December 31, 2016, based on the Company’s assessment of market and third party data, the Company recorded an impairment charge of $19 million to increase the servicing liability to $29 million as of December 31, 2016, as compared to $10 million at December 31, 2015.
As a mortgage servicer of residential reverse mortgage loans, the Company is exposed to contingent liabilities for breaches of servicer obligations as set forth in industry regulations established by the Department of Housing and Urban Development (“HUD”) and the Federal Housing Administration (“FHA”) and in servicing agreements with the applicable counterparties, such as third party investors. Under these agreements, the servicer may be liable for failure to perform its servicing obligations, which could include fees imposed for failure to comply with foreclosure timeframe requirements established by servicing guides and agreements to which CIT is a party as the servicer of the loans. The Company has established reserves for contingent servicing-related liabilities associated with discontinued operations.
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During the year ended December 31, 2016, as a result of new information and taking into consideration the investigation being conducted by the Office of Inspector General (“OIG”) for the HUD, the Company recorded additional reserves, due to a change in estimate, of approximately $260 million during 2016, which is net of a corresponding increase in the indemnification receivable from the FDIC noted in the paragraph below.
A corresponding indemnification receivable from the FDIC of $108 million and $66 million at December 31, 2016 and December 31, 2015, respectively, was recognized for the loans covered by indemnification agreements with the FDIC reported in continuing operations. The indemnification receivable is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount.
Condensed Balance Sheet — Financial Freedom Discontinued Operation (dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Total cash and deposits, all of which is restricted | | | | $ | 5.8 | | | $ | 1.5 | |
Net Finance Receivables(1) | | | | | 374.0 | | | | 449.5 | |
Other assets(2) | | | | | 68.3 | | | | 49.5 | |
| Assets of discontinued operation | | | | $ | 448.1 | | | $ | 500.5 | |
Secured borrowings(1) | | | | $ | 366.4 | | | $ | 440.6 | |
Other liabilities(3) | | | | | 569.4 | | | | 255.6 | |
| Liabilities of discontinued operation | | | | $ | 935.8 | | | $ | 696.2 | |
(1) | | Net finance receivables include $365.5 million and $440.2 million of securitized balances at December 31, 2016 and December 31, 2015, respectively, and $8.5 million and $9.3 million of additional draws awaiting securitization respectively. Secured borrowings relate to those receivables. |
(2) | | Amount includes servicing advances, servicer receivables and property and equipment, net of accumulated depreciation. |
(3) | | Other liabilities include contingent liabilities, reverse mortgage servicing liabilities and other accrued liabilities. |
The results from discontinued operations for the year ended December 31, 2016 and 2015 are presented below. The year end results for 2016 include full period results while the year end results for 2015 represents a partial period in connection with the OneWest Transaction for Financial Freedom.
Condensed Statements of Operation — Financial Freedom Discontinued Operation (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
|
|---|
Interest income(1) | | | | $ | 11.6 | | | $ | 4.3 | |
Interest expense(1) | | | | | (10.7 | ) | | | (4.4 | ) |
Other income (loss)(2) | | | | | 15.4 | | | | 16.7 | |
Operating expenses(3) | | | | | (330.1 | ) | | | (33.7 | ) |
| Loss from discontinued operation before benefit for income taxes | | | | | (313.8 | ) | | | (17.1 | ) |
Benefit for income taxes(4) | | | | | 103.7 | | | | 6.7 | |
| Loss from discontinued operation, net of taxes | | | | $ | (210.1 | ) | | $ | (10.4 | ) |
(1) | | Includes amortization for the premium associated with the HECM loans and related secured borrowings. |
(2) | | For the year ended December 31, 2016, other income (loss) includes a $19 million impairment charge to the servicing liability related to our reverse mortgage servicing operations. |
(3) | | For the year ended December 31, 2016, operating expense is comprised of approximately $16 million in salaries and benefits, $27 million in professional and legal services, and $22 million for other expenses such as data processing, premises and equipment, and miscellaneous charges. In addition, operating expenses for the year ended December 31, 2016 includes a servicing-related reserve of approximately $260 million, which is net of a corresponding increase in the indemnification receivable from the FDIC. For the year ended December 31, 2015, operating expense is comprised of approximately $11 million in salaries and benefits, $6 million in professional services and $16 million for other expenses such as data processing, premises and equipment, legal settlement, and miscellaneous charges. |
(4) | | For the years ended December 31, 2016 and 2015, the Company’s tax rate for discontinued operations is 33% and 39%, respectively. |
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CIT ANNUAL REPORT 2016 133
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flow — Financial Freedom Discontinued Operation (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
|
|---|
| Net cash flows (used in) provided by operations | | | | $ | (40.0 | ) | | $ | 18.5 | |
| Net cash flows provided by investing activities | | | | | 88.5 | | | | 27.9 | |
Student Lending
On April 25, 2014, the Company completed the sale of its student lending business, along with certain secured debt and servicing rights. The business was in run-off. There were no assets or liabilities related to the student loan business at December 31, 2016 or 2015.
Condensed Statements of Operation — Student Lending Discontinued Operation (dollars in millions)
| | | | Year Ended
December 31, 2014
|
|---|
| Interest income | | | | $ | 27.0 | |
| Interest expense | | | | | (248.2 | ) |
| Other income | | | | | (2.1 | ) |
| Operating expenses | | | | | (3.6 | ) |
| Loss from discontinued operation before provision for income taxes | | | | | (226.9 | ) |
| Provision for income taxes | | | | | (3.4 | ) |
| Loss from discontinued operation, net of taxes | | | | | (230.3 | ) |
| Gain on sale of discontinued operations, net of taxes | | | | | 282.8 | |
| Income from discontinued operation, net of taxes | | | | $ | 52.5 | |
Income from the discontinued operation for the year ended December 31, 2014, reflected the benefit of proceeds received in excess of the net carrying value of assets and liabilities sold. The interest expense primarily reflected the acceleration of FSA accretion on the extinguishment of the debt, while the gain on sale mostly reflects the excess of purchase price over net assets, and amounts received for the sale of servicing rights.
The 2014 interest expense allocated to the discontinued operation corresponded to debt of approximately $3.2 billion, net of $224 million of FSA. The debt included $0.8 billion that was repaid using a portion of the cash proceeds. Operating expenses included in the discontinued operation consisted of direct expenses of the student lending business that were separate from ongoing CIT operations.
In connection with the classification of the student lending business as a discontinued operation, certain indirect operating expenses that previously had been allocated to the business have instead been allocated to Corporate and Other as part of continuing operations and are not included in the summary of discontinued operations presented in the table below. The total incremental pretax amounts of indirect overhead expense that were previously allocated to the student lending business and remain in continuing operations were approximately $2.2 million for the year ended December 31, 2014.
Condensed Statement of Cash Flow — Student Lending Discontinued Operation (dollars in millions)
| | | | Year Ended
December 31, 2014
|
|---|
| Net cash flows used in operations | | | | $ | (1,155.9 | ) | |
| Net cash flows provided by investing activities | | | | | 1,141.4 | | |
Combined Results for Discontinued Operations
The following tables reflect the combined results of the discontinued operations. Details of balances are discussed in the prior tables.
Condensed Combined Balance Sheets of Discontinued Operations (dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Total cash and deposits | | | | $ | 764.8 | | | $ | 650.6 | |
| Net Finance Receivables | | | | | 1,421.7 | | | | 1,586.1 | |
| Operating lease equipment, net | | | | | 9,677.6 | | | | 9,799.9 | |
| Goodwill | | | | | 126.8 | | | | 135.1 | |
| Other assets | | | | | 1,229.8 | | | | 887.9 | |
| Assets of discontinued operations | | | | $ | 13,220.7 | | | $ | 13,059.6 | |
| Secured borrowings | | | | $ | 1,571.0 | | | $ | 2,532.2 | |
| Other liabilities | | | | | 2,166.7 | | | | 1,769.8 | |
| Liabilities of discontinued operations | | | | $ | 3,737.7 | | | $ | 4,302.0 | |
Item 8: Financial Statements and Supplementary Data
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134 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Combined Statements of Operation of Discontinued Operations (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Interest income | | | | $ | 84.4 | | | $ | 74.5 | | | $ | 102.2 | |
| Interest expense | | | | | (380.0 | ) | | | (370.9 | ) | | | (604.9 | ) |
| (Provision) recovery for credit losses | | | | | (15.6 | ) | | | (1.8 | ) | | | 4.2 | |
| Rental income on operating leases | | | | | 1,236.8 | | | | 1,134.4 | | | | 1,143.3 | |
| Other income (loss) | | | | | 37.9 | | | | 73.2 | | | | 20.6 | |
| Depreciation on operating lease equipment | | | | | (345.6 | ) | | | (411.4 | ) | | | (385.8 | ) |
| Maintenance and other operating lease expenses | | | | | (32.1 | ) | | | (45.8 | ) | | | (25.1 | ) |
| Operating expenses | | | | | (432.0 | ) | | | (101.9 | ) | | | (62.9 | ) |
| Loss on debt extinguishment | | | | | (8.3 | ) | | | (1.1 | ) | | | – | |
| Income from discontinued operation before provision for income taxes | | | | | 145.5 | | | | 349.2 | | | | 191.6 | |
| Provision for income taxes | | | | | (810.9 | ) | | | (39.2 | ) | | | (31.0 | ) |
| (Loss) income from discontinued operations, net of taxes | | | | | (665.4 | ) | | | 310.0 | | | | 160.6 | |
| Gain on sale of discontinued operations, net of taxes | | | | | – | | | | – | | | | 282.8 | |
| (Loss) income from discontinued operation, net of taxes | | | | $ | (665.4 | ) | | $ | 310.0 | | | $ | 443.4 | |
Condensed Combined Statement of Cash Flows of Discontinued Operations (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Net cash flows (used in) provided by operations | | | | $ | | (4.3) | | | $ | 960.6 | | | $ | (146.1) |
| Net cash flows used in investing activities | | | | | | (567.4) | | | | (721.7) | | | | (671.4) |
NOTE 3 — LOANS
The following tables and data include the loan balances acquired in the OneWest Transaction, which were recorded at fair value at the time of the acquisition (August 3, 2015). SeeNote 2 —Acquisition and Disposition Activities 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)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Commercial Loans | | | | $ | 20,117.8 | | | $ | 20,739.4 | |
| Direct financing leases and leveraged leases | | | | | 2,852.9 | | | | 2,919.1 | |
Total commercial | | | | | 22,970.7 | | | | 23,658.5 | |
| Consumer Loans | | | | | 6,565.2 | | | | 6,860.2 | |
Total finance receivables | | | | | 29,535.9 | | | | 30,518.7 | |
| Finance receivables held for sale | | | | | 635.8 | | | | 1,985.1 | |
Finance receivables and held for sale receivables(1) | | | | $ | 30,171.7 | | | $ | 32,503.8 | |
(1) | | Assets held for sale on the Balance Sheet as of December 31, 2016 includes finance receivables and operating lease equipment primarily related to portfolios in Commercial Banking and the China portfolio in NSP. December 31, 2015 included finance receivables and operating lease equipment in Canada, China and the U.K. 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)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | Domestic
| | Foreign
| | Total
| | Domestic
| | Foreign
| | Total
|
|---|
| Commercial Banking | | | | $ | 20,440.7 | | | $ | 2,121.6 | | | $ | 22,562.3 | | | $ | 20,999.6 | | | $ | 2,332.8 | | | $ | 23,332.4 | |
| Consumer Banking | | | | | 6,973.6 | | | | – | | | | 6,973.6 | | | | 7,186.3 | | | | – | | | | 7,186.3 | |
| Total | | | | $ | 27,414.3 | | | $ | 2,121.6 | | | $ | 29,535.9 | | | $ | 28,185.9 | | | $ | 2,332.8 | | | $ | 30,518.7 | |
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CIT ANNUAL REPORT 2016 135
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents selected components of the net investment in finance receivables:
Components of Net Investment in Finance Receivables (dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Unearned income | | | | $ | (727.1 | ) | | $ | (711.6 | ) |
| Equipment residual values | | | | | 583.4 | | | | 581.7 | |
| Unamortized premiums / (discounts) | | | | | (31.0 | ) | | | (34.0 | ) |
| Accretable yield on PCI loans | | | | | 1,261.4 | | | | 1,299.1 | |
Net unamortized deferred costs and (fees)(1) | | | | | 55.8 | | | | 42.9 | |
| Leveraged lease third party non-recourse debt payable | | | | | (109.7 | ) | | | (119.2 | ) |
(1) | | Balance relates to the Commercial Banking segment. |
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.
Item 8: Financial Statements and Supplementary Data
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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
|
|---|
December 31, 2016 |
Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Finance | | | | $ | 8,184.7 | | | $ | 677.6 | | | $ | 1,181.7 | | | $ | 188.8 | | | $ | 42.7 | | | $ | 10,275.5 | |
| Real Estate Finance | | | | | 5,191.4 | | | | 168.7 | | | | 115.6 | | | | 20.4 | | | | 70.5 | | | | 5,566.6 | |
| Business Capital | | | | | 6,238.7 | | | | 422.0 | | | | 271.7 | | | | 41.7 | | | | – | | | | 6,974.1 | |
| Rail | | | | | 88.7 | | | | 14.1 | | | | 0.9 | | | | – | | | | – | | | | 103.7 | |
| Total Commercial Banking | | | | | 19,703.5 | | | | 1,282.4 | | | | 1,569.9 | | | | 250.9 | | | | 113.2 | | | | 22,919.9 | |
Consumer Banking | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Consumer Banking | | | | | 374.9 | | | | 8.3 | | | | 22.4 | | | | – | | | | 2.8 | | | | 408.4 | |
| Total Consumer Banking | | | | | 374.9 | | | | 8.3 | | | | 22.4 | | | | – | | | | 2.8 | | | $ | 408.4 | |
Non-Strategic Portfolios | | | | | 143.7 | | | | 36.9 | | | | 19.1 | | | | 10.3 | | | | – | | | | 210.0 | |
Total | | | | | 20,222.1 | | | | 1,327.6 | | | | 1,611.4 | | | | 261.2 | | | | 116.0 | | | | 23,538.3 | |
December 31, 2015 |
Commercial Banking |
| Commercial Finance | | | | $ | 10,138.0 | | | $ | 790.6 | | | $ | 593.5 | | | $ | 131.5 | | | $ | 69.4 | | | $ | 11,723.0 | |
| Real Estate Finance | | | | | 5,154.9 | | | | 97.6 | | | | 18.5 | | | | 3.6 | | | | 93.9 | | | | 5,368.5 | |
| Business Capital | | | | | 5,648.8 | | | | 517.0 | | | | 320.1 | | | | 56.0 | | | | – | | | | 6,541.9 | |
| Rail | | | | | 119.0 | | | | 1.4 | | | | 0.6 | | | | – | | | | – | | | | 121.0 | |
| Total Commercial Banking | | | | | 21,060.7 | | | | 1,406.6 | | | | 932.7 | | | | 191.1 | | | | 163.3 | | | | 23,754.4 | |
Consumer Banking |
| Other Consumer Banking | | | | | 292.2 | | | | 11.5 | | | | 17.2 | | | | – | | | | 5.3 | | | | 326.2 | |
| Total Consumer Banking | | | | | 292.2 | | | | 11.5 | | | | 17.2 | | | | – | | | | 5.3 | | | | 326.2 | |
Non- Strategic Portfolios | | | | | 1,286.6 | | | | 115.4 | | | | 60.0 | | | | 56.0 | | | | – | | | | 1,518.0 | |
Total | | | | $ | 22,639.5 | | | $ | 1,533.5 | | | $ | 1,009.9 | | | $ | 247.1 | | | $ | 168.6 | | | $ | 25,598.6 | |
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. Covered Loans are discussed further inNote 5 — Indemnification Assets.
Included in the consumer loan balances as of December 31, 2016 and December 2015 were loans with terms that permitted negative amortization with an unpaid principal balance of $761 million and $966 million, respectively.
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CIT ANNUAL REPORT 2016 137
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer Loan LTV Distributions (dollars in millions)
| | | | Single Family Residential
| | Reverse Mortgage
| |
|---|
| | | | Covered Loans
| | Non-covered Loans
| |
| |
| | Non-covered loans
| |
|---|
| | | | Non-PCI
| | PCI
| | Non-PCI
| | PCI
| | Total
Single
Family
Residential
| | Covered
Loans
Non-PCI
| | Non-PCI
| | PCI
| | Total
Reverse
Mortgages
| | Total
Consumer
Loans
|
|---|
December 31, 2016 |
Greater than 125% | | | | $ | 2.2 | | | $ | 261.4 | | | $ | 12.3 | | | $ | – | | | $ | 275.9 | | | $ | 0.6 | | | $ | 8.8 | | | $ | 33.8 | | | $ | 43.2 | | | $ | 319.1 | |
101% – 125% | | | | | 4.7 | | | | 443.7 | | | | 13.6 | | | | – | | | | 462.0 | | | | 1.2 | | | | 12.7 | | | | 7.9 | | | | 21.8 | | | | 483.8 | |
80% – 100% | | | | | 226.6 | | | | 588.1 | | | | 40.5 | | | | – | | | | 855.2 | | | | 24.0 | | | | 42.3 | | | | 7.5 | | | | 73.8 | | | | 929.0 | |
Less than 80% | | | | | 1,515.6 | | | | 872.4 | | | | 1,713.1 | | | | 9.2 | | | | 4,110.3 | | | | 405.4 | | | | 304.9 | | | | 9.8 | | | | 720.1 | | | | 4,830.4 | |
Not Applicable(1) | | | | | – | | | | – | | | | 2.9 | | | | – | | | | 2.9 | | | | – | | | | – | | | | – | | | | – | | | | 2.9 | |
Total | | | | $ | 1,749.1 | | | $ | 2,165.6 | | | $ | 1,782.4 | | | $ | 9.2 | | | $ | 5,706.3 | | | $ | 431.2 | | | $ | 368.7 | | | $ | 59.0 | | | $ | 858.9 | | | $ | 6,565.2 | |
December 31, 2015 |
Greater than 125% | | | | $ | 1.1 | | | $ | 394.6 | | | $ | 0.8 | | | $ | 15.7 | | | $ | 412.2 | | | $ | 1.0 | | | $ | 3.9 | | | $ | 39.3 | | | $ | 44.2 | | | $ | 456.4 | |
101% – 125% | | | | | 3.6 | | | | 619.2 | | | | 0.2 | | | | 14.8 | | | | 637.8 | | | | 2.5 | | | | 6.5 | | | | 17.0 | | | | 26.0 | | | | 663.8 | |
80% – 100% | | | | | 449.3 | | | | 551.4 | | | | 14.3 | | | | 11.4 | | | | 1,026.4 | | | | 26.5 | | | | 37.5 | | | | 7.0 | | | | 71.0 | | | | 1,097.4 | |
Less than 80% | | | | | 1,621.0 | | | | 828.6 | | | | 1,416.1 | | | | 12.9 | | | | 3,878.6 | | | | 432.6 | | | | 312.5 | | | | 11.1 | | | | 756.2 | | | | 4,634.8 | |
Not Applicable(1) | | | | | – | | | | – | | | | 7.8 | | | | – | | | | 7.8 | | | | – | | | | – | | | | – | | | | – | | | | 7.8 | |
Total | | | | $ | 2,075.0 | | | $ | 2,393.8 | | | $ | 1,439.2 | | | $ | 54.8 | | | $ | 5,962.8 | | | $ | 462.6 | | | $ | 360.4 | | | $ | 74.4 | | | $ | 897.4 | | | $ | 6,860.2 | |
(1) | | Certain Consumer Loans do not have LTV’s, including the Credit Card portfolio. |
The following table summarizes the covered loans, all of which are in the Consumer Banking segment:
Covered Loans (dollars in millions)
| Balance at December 31, 2016 | | | | PCI
| | Non-PCI
| | Total
|
|---|
Loans HFI | | | | | | | | | | | | | | |
| LCM | | | | $ | 2,165.6 | | | $ | 2,180.3 | | | $ | 4,345.9 | |
| Loans HFI | | | | | 2,165.6 | | | | 2,180.3 | | | | 4,345.9 | |
| Consumer Banking loans HFI at carrying value | | | | $ | 2,165.6 | | | $ | 2,180.3 | | | $ | 4,345.9 | |
| Balance at December 31, 2015 | | | | PCI
| | Non-PCI
| | Total
|
|---|
Loans HFI | | | | | | | | | | | | | | |
| LCM | | | | $ | 2,393.8 | | | $ | 2,537.6 | | | $ | 4,931.4 | |
Loans HFI | | | | | 2,393.8 | | | | 2,537.6 | | | | 4,931.4 | |
| Consumer Banking loans HFI at carrying value | | | | $ | 2,393.8 | | | $ | 2,537.6 | | | $ | 4,931.4 | |
Item 8: Financial Statements and Supplementary Data
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138 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past Due and Non-accrual Loans
The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification:
Finance and Held for Sale Receivables — Delinquency Status (dollars in millions)
| | | | Past Due
| |
|---|
| | | | 30 – 59 Days
Past Due
| | 60 – 89 Days
Past Due
| | 90 Days
or Greater
| | Total
Past Due
| | Current(1)
| | PCI Loans(2)
| | Total
|
|---|
December 31, 2016 |
Commercial Banking |
| Commercial Finance | | | | $ | 21.4 | | | $ | – | | | $ | 17.6 | | | $ | 39.0 | | | $ | 10,193.8 | | | $ | 42.7 | | | $ | 10,275.5 | |
| Real Estate Finance | | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | 5,496.0 | | | | 70.5 | | | | 5,566.6 | |
| Business Capital | | | | | 143.6 | | | | 42.4 | | | | 16.3 | | | | 202.3 | | | | 6,771.8 | | | | – | | | | 6,974.1 | |
| Rail | | | | | 5.9 | | | | 0.6 | | | | 2.3 | | | | 8.8 | | | | 94.9 | | | | – | | | | 103.7 | |
| Total Commercial Banking | | | | | 171.0 | | | | 43.0 | | | | 36.2 | | | | 250.2 | | | | 22,556.5 | | | | 113.2 | | | | 22,919.9 | |
Consumer Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy Consumer Mortgages | | | | | 22.6 | | | | 6.1 | | | | 36.6 | | | | 65.3 | | | | 2,563.6 | | | | 2,233.8 | | | | 4,862.7 | |
| Other Consumer Banking | | | | | 7.4 | | | | 4.9 | | | | 0.6 | | | | 12.9 | | | | 2,163.4 | | | | 2.8 | | | | 2,179.1 | |
| Total Consumer Banking | | | | | 30.0 | | | | 11.0 | | | | 37.2 | | | | 78.2 | | | | 4,727.0 | | | | 2,236.6 | | | | 7,041.8 | |
Non-Strategic Portfolios | | | | | 3.0 | | | | 1.1 | | | | 7.0 | | | | 11.1 | | | | 198.9 | | | | – | | | | 210.0 | |
| Total | | | | $ | 204.0 | | | $ | 55.1 | | | $ | 80.4 | | | $ | 339.5 | | | $ | 27,482.4 | | | $ | 2,349.8 | | | $ | 30,171.7 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Banking |
| Commercial Finance | | | | $ | – | | | $ | – | | | $ | 20.5 | | | $ | 20.5 | | | $ | 11,633.1 | | | $ | 69.4 | | | $ | 11,723.0 | |
| Real Estate Finance | | | | | 1.9 | | | | – | | | | 0.7 | | | | 2.6 | | | | 5,272.0 | | | | 93.9 | | | | 5,368.5 | |
| Business Capital | | | | | 131.0 | | | | 32.7 | | | | 26.8 | | | | 190.5 | | | | 6,351.4 | | | | – | | | | 6,541.9 | |
| Rail | | | | | 8.4 | | | | 2.0 | | | | 2.1 | | | | 12.5 | | | | 108.5 | | | | – | | | | 121.0 | |
| Total Commercial Banking | | | | | 141.3 | | | | 34.7 | | | | 50.1 | | | | 226.1 | | | | 23,365.0 | | | | 163.3 | | | | 23,754.4 | |
Consumer Banking |
| Legacy Consumer Mortgages | | | | | 15.8 | | | | 1.7 | | | | 4.1 | | | | 21.6 | | | | 2,923.7 | | | | 2,523.1 | | | | 5,468.4 | |
| Other Consumer Banking | | | | | 2.7 | | | | 0.3 | | | | 0.4 | | | | 3.4 | | | | 1,754.3 | | | | 5.3 | | | | 1,763.0 | |
| Total Consumer Banking | | | | | 18.5 | | | | 2.0 | | | | 4.5 | | | | 25.0 | | | | 4,678.0 | | | | 2,528.4 | | | | 7,231.4 | |
Non-Strategic Portfolios | | | | | 18.8 | | | | 22.1 | | | | 33.7 | | | | 74.6 | | | | 1,443.4 | | | | – | | | | 1,518.0 | |
Total | | | | $ | 178.6 | | | $ | 58.8 | | | $ | 88.3 | | | $ | 325.7 | | | $ | 29,486.4 | | | $ | 2,691.7 | | | $ | 32,503.8 | |
(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. |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (repossessed assets and OREO) and loans 90 days or more past due and still accruing.
Finance Receivables on Non-Accrual Status(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | Held for
Investment
| | Held for
Sale
| | Total
| | Held for
Investment
| | Held for
Sale
| | Total
|
|---|
Commercial Banking |
| Commercial Finance | | | | $ | 156.7 | | | $ | 32.1 | | | $ | 188.8 | | | $ | 120.5 | | | $ | 11.0 | | | $ | 131.5 | |
| Real Estate Finance | | | | | 20.4 | | | | – | | | | 20.4 | | | | 3.6 | | | | – | | | | 3.6 | |
| Business Capital | | | | | 41.7 | | | | – | | | | 41.7 | | | | 56.0 | | | | – | | | | 56.0 | |
| Total Commercial Banking | | | | | 218.8 | | | | 32.1 | | | | 250.9 | | | | 180.1 | | | | 11.0 | | | | 191.1 | |
Consumer Banking | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy Consumer Mortgages | | | | | 17.3 | | | | – | | | | 17.3 | | | | 4.2 | | | | 0.6 | | | | 4.8 | |
| Other Consumer Banking | | | | | 0.1 | | | | – | | | | 0.1 | | | | – | | | | 0.4 | | | | 0.4 | |
| Total Consumer Banking | | | | | 17.4 | | | | – | | | | 17.4 | | | | 4.2 | | | | 1.0 | | | | 5.2 | |
Non-Strategic Portfolios | | | | | – | | | | 10.3 | | | | 10.3 | | | | – | | | | 56.0 | | | | 56.0 | |
| Total | | | | $ | 236.2 | | | $ | 42.4 | | | $ | 278.6 | | | $ | 184.3 | | | $ | 68.0 | | | $ | 252.3 | |
| Repossessed assets and OREO | | | | | | | | | | | | | 72.7 | | | | | | | | | | | | 123.5 | |
| Total non-performing assets | | | | | | | | | | | | $ | 351.3 | | | | | | | | | | | $ | 375.8 | |
| Commercial loans past due 90 days or more accruing | | | | | | | | | | | | $ | 7.2 | | | | | | | | | | | $ | 15.6 | |
| Consumer loans past due 90 days or more accruing | | | | | | | | | | | | | 24.8 | | | | | | | | | | | | 0.2 | |
| Total Accruing loans past due 90 days or more | | | | | | | | | | | | $ | 32.0 | | | | | | | | | | | $ | 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 due to the nature of the mortgage product.
Loans in Process of Foreclosure
The table below summarizes the residential mortgage loans in the process of foreclosure and OREO:
| (dollars in millions) | | | | December 31, 2016
| | December 31, 2015
|
|---|
| PCI | | | | $ | 201.7 | | | $ | 317.9 | |
| Non-PCI | | | | | 106.3 | | | | 71.0 | |
| Loans in process of foreclosure | | | | $ | 308.0 | | | $ | 388.9 | |
| OREO | | | | $ | 69.9 | | | $ | 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. Small-ticket loan and lease receivables that 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.
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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)
| | | |
Recorded
Investment
| |
Unpaid
Principal
Balance
| |
Related
Allowance
| |
Average
Recorded
Investment(3)
|
|---|
December 31, 2016 |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial Banking |
| Commercial Finance | | | | $ | 54.3 | | | $ | 72.2 | | | $ | – | | | $ | 29.5 | |
| Business Capital | | | | | 0.5 | | | | 1.8 | | | | – | | | | 5.1 | |
| Real Estate Finance | | | | | 0.7 | | | | 0.7 | | | | – | | | | 1.3 | |
With an allowance recorded: |
Commercial Banking | | | | | | | | | | | | | | | | | | |
| Commercial Finance | | | | | 143.0 | | | | 146.2 | | | | 25.5 | | | | 132.1 | |
| Business Capital | | | | | 6.6 | | | | 6.6 | | | | 4.2 | | | | 8.2 | |
| Real Estate Finance | | | | | 16.7 | | | | 16.8 | | | | 4.0 | | | | 5.2 | |
Total Impaired Loans(1) | | | | | 221.8 | | | | 244.3 | | | | 33.7 | | | | 181.4 | |
Total Loans Impaired at Acquisition Date(2) | | | | | 2,349.8 | | | | 3,440.7 | | | | 13.6 | | | | 2,504.4 | |
| Total | | | | $ | 2,571.6 | | | $ | 3,685.0 | | | $ | 47.3 | | | $ | 2,685.8 | |
December 31, 2015 |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial Banking |
| Commercial Finance | | | | $ | 15.4 | | | $ | 22.8 | | | $ | – | | | $ | 6.5 | |
| Business Capital | | | | | 6.4 | | | | 9.7 | | | | – | | | | 5.9 | |
| Real Estate Finance | | | | | 0.2 | | | | 0.8 | | | | – | | | | 0.7 | |
Non-Strategic Portfolios | | | | | – | | | | – | | | | – | | | | 7.3 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial Banking |
| Commercial Finance | | | | | 102.5 | | | | 112.1 | | | | 22.7 | | | | 53.2 | |
| Business Capital | | | | | 9.7 | | | | 11.8 | | | | 4.7 | | | | 5.4 | |
| Non-Strategic Portfolios | | | | | – | | | | – | | | | – | | | | 7.3 | |
Total Impaired Loans(1) | | | | | 134.2 | | | | 157.2 | | | | 27.4 | | | | 86.3 | |
Total Loans Impaired at Acquisition Date(2) | | | | | 2,691.7 | | | | 3,976.7 | | | | 4.9 | | | | 1,107.4 | |
| Total | | | | $ | 2,825.9 | | | $ | 4,133.9 | | | $ | 32.3 | | | $ | 1,193.7 | |
(1) | | Interest income recorded for the years ended December 31, 2016 and December 31, 2015 while the loans were impaired were $1.6 million and $1.5 million, of which $0.6 million and $0.5 million was interest recognized using cash-basis method of accounting for each year, 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, 2016 and 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) and loss given default (LGD) ratings. A PD rating is determined by evaluating borrower credit-worthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. An LGD rating is predicated on transaction structure, collateral valuation and related guarantees or recourse. Further, related considerations in determining probability of collection include the following:
| - | | Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the loan document; |
| - | | Lack of current financial data related to the borrower or guarantor; |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| - | | 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 of OneWest Bank. 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. SeeNote 4 — Allowance for Loan Losses.
Purchased Credit Impaired Loans(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | Unpaid
Principal
Balance
| | Carrying
Value
| | Allowance
for Loan
Losses
|
|---|
Commercial Banking |
| Commercial Finance | | | | $ | 70.0 | | | $ | 42.7 | | | $ | 2.4 | |
| Real Estate Finance | | | | | 108.1 | | | | 70.5 | | | | 4.9 | |
Consumer Banking | | | | | | | | | | | | | | |
| Other Consumer Banking | | | | | 3.7 | | | | 2.8 | | | | – | |
| Legacy Consumer Mortgages | | | | | 3,258.9 | | | | 2,233.8 | | | | 6.3 | |
| | | | | $ | 3,440.7 | | | $ | 2,349.8 | | | $ | 13.6 | |
| | | | 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 | | | | | 160.4 | | | | 93.9 | | | | 0.6 | |
Consumer Banking | | | | | | | | | | | | | | |
| Other Consumer Banking | | | | | 6.8 | | | | 5.3 | | | | – | |
| Legacy Consumer Mortgages | | | | | 3,694.0 | | | | 2,523.1 | | | | 1.8 | |
| | | | | $ | 3,976.7 | | | $ | 2,691.7 | | | $ | 4.9 | |
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An accretable yield is measured as the excess of the cash flows expected to be collected, estimated at the acquisition date, over the recorded investment (estimated fair value at acquisition) and is recognized in interest income over the remaining life of the loan, or pool of loans, on an effective yield basis. The difference between the cash flows contractually required to be paid, measured as of the acquisition date, 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 decreases 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 increases in expected cash flows due to improved credit quality result in reversal 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.
The following table summarizes commercial PCI loans, 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.
| | | | December 31, 2016
| |
|---|
| (dollars in millions) | | | | Non-criticized
| | Criticized
| | Total
|
|---|
| Commercial Finance | | | | $ | 5.4 | | | $ | 37.3 | | | $ | 42.7 | |
| Real Estate Finance | | | | | 35.6 | | | | 34.9 | | | | 70.5 | |
| Total | | | | $ | 41.0 | | | $ | 72.2 | | | $ | 113.2 | |
| | | | December 31, 2015
| |
|---|
| (dollars in millions) | | | | Non-criticized
| | Criticized
| | Total
|
|---|
| Commercial Finance | | | | $ | 5.3 | | | $ | 64.1 | | | $ | 69.4 | |
| Real Estate Finance | | | | | 33.0 | | | | 60.9 | | | | 93.9 | |
| Total | | | | $ | 38.3 | | | $ | 125.0 | | | $ | 163.3 | |
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 recognized 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.
Changes in the accretable yield for PCI loans are summarized below:
| (dollars in millions) | | | | Year ended
December 31,
2015
|
|---|
Balance at August 3, 2015 | | | | $ | 1,254.8 | | |
| Accretion into interest income | | | | | (76.2 | ) | |
| Reclassification from non-accretable difference | | | | | 133.2 | | |
| Disposals and Other | | | | | (12.7 | ) | |
Balance at December 31, 2015 | | | | $ | 1,299.1 | | |
| | | |
Year ended
December 31,
2016
|
|---|
Balance at December 31, 2015 | | | | $ | 1,299.1 | | |
| Accretion into interest income | | | | | (208.3 | ) | |
| Reclassification from non-accretable difference | | | | | 213.7 | | |
| Disposals and Other | | | | | (43.1 | ) | |
Balance at December 31, 2016 | | | | $ | 1,261.4 | | |
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 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 |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| - | | 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. HAMP expired on December 31, 2016, which was the last day to submit an application.
At December 31, 2016, the loans in trial modification period were $36.4 million under HAMP, $0.1 million under 2MP and $3 million under proprietary programs. Trial modifications with a recorded investment of $38.1 million at December 31, 2016 were accruing loans and $1.4 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 December 31, 2016 and December 31, 2015, was $82.3 million and $31.0 million, of which 41% and 84%, respectively, were on non-accrual. Commercial Finance and Consumer banking accounted for 85% and 15%, respectively, of the total TDRs at December 31, 2016. At December 31, 2015, Commercial Banking and Consumer banking receivables accounted for 79% and 6%, respectively and the remainder related to NSP. There were $5.4 million and $1.4 million, as of December 31, 2016 and 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 years ended December 31, 2016 and 2015 were $80.5 million and $22.4 million, respectively. The recorded investment at the time of default of TDRs that experience a payment default (payment default is one missed payment), during the years ended December 31, 2016 and 2015, and for which the payment default occurred within one year of the modification totaled $11.3 million and $4.3 million, respectively. The December 31, 2016 defaults related to Commercial Banking.
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 2016 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 December 31, 2016 was comprised of payment deferrals for 12% and covenant relief and/or other for 88%. For December 31, 2015 TDR recorded investment was comprised of payment deferrals for 74% and covenant relief and/or other for 26%. |
| - | | 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 funding in the market and assessments of the relationship between modified rates and terms and comparable market rates and terms. The weighted average change in interest rates for all TDRs occurring during the quarters ended December 31, 2016 and 2015 was not significant; |
| - | | Debt forgiveness, or the reduction in amount owed by borrower, results in incremental provision for credit losses, in the form of higher charge-offs. While these types of modifications have the greatest individual impact on the allowance, the amounts of principal forgiveness for TDRs occurring during the years ended December 31, 2016 and 2015 was not significant, as debt forgiveness is a relatively small component of the Company’s modification programs; and |
| - | | The other elements of the Company’s modification programs that are not TDRs, do not have a significant impact on financial results given their relative size, or do not have a direct financial impact, as in the case of covenant changes. |
Item 8: Financial Statements and Supplementary Data
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144 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reverse Mortgages
Consumer loans within continuing operations include an outstanding balance of $859.0 million and $897.3 million at December 31, 2016 and December 31, 2015, respectively, related to the reverse mortgage portfolio, of which $769.6 million and $812.6 million at December 31, 2016 and December 31, 2015, respectively, was uninsured. Reverse mortgage loans are contracts in which a homeowner borrows against the equity in their home and receives cash in one lump sum payment, a line of credit or fixed monthly payments for either a specific term or for as long as the homeowner lives in the home, or a combination of these options. Reverse mortgages feature no recourse to the borrower, no required repayment during the borrower’s occupancy of the home (as long as the borrower complies with the terms of the mortgage), and, in the event of foreclosure, a repayment amount cannot exceed the lesser of either the unpaid principal balance of the loan or the proceeds recovered upon sale of the home. The mortgage balance consists of cash advanced, interest compounded over the life of the loan, capitalized mortgage insurance premiums, and other servicing advances capitalized into the loan.
The uninsured reverse mortgage portfolio consists of approximately 1,700 loans with an average borrowers’ age of 83 years old and an unpaid principal balance of $1,027.9 million at December 31, 2016. The uninsured reverse mortgage portfolio consisted of approximately 1,960 loans with an average borrowers’ age of 82 years old and an unpaid principal balance of $1,113.4 million at December 31, 2015. There is currently overcollateralization in the portfolio, as the realizable collateral value (the lower of collectible principal and interest, or estimated value of the home) exceeds the outstanding book balance at December 31, 2016 and 2015.
Reverse mortgage loans were recorded at fair value on the acquisition date. Subsequent to that, we account for uninsured reverse mortgages, which are the vast majority of the total, in accordance with the instructions provided by the staff of the Securities and Exchange Commission (SEC) entitled “Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts.” The remaining amounts are accounted for in accordance with PCI guidance. SeeNote 1 — Business and Summary of Significant Accounting Policies for further details. To determine the carrying value of these reverse mortgages as of December 31, 2016 and December 31, 2015, the Company used a proprietary model which uses actual cash flow information, actuarially determined mortality assumptions, likelihood of prepayments, and estimated future collateral values (determined by applying externally published market index). In addition, drivers of cash flows include:
| - | | Mobility rates — We used the actuarial estimates of contract termination using the Society of Actuaries mortality tables, adjusted for expected prepayments and relocations. |
| - | | Home Price Appreciation — Consistent with other projections from various market sources, we use the Moody’s baseline forecast at a regional level to estimate home price appreciation on a loan-level basis. |
Estimated Future Advances in Reverse Mortgagors (dollars in millions)
As of December 31, 2016, the Company’s estimated future advances to reverse mortgagors are as follows:
| Year Ending: | | | |
|---|
| 2017 | | | | $ | 13.5 | |
| 2018 | | | | | 11.2 | |
| 2019 | | | | | 9.3 | |
| 2020 | | | | | 7.6 | |
| 2021 | | | | | 6.2 | |
| 2022 – 2026 | | | | | 17.0 | |
| 2027 – 2031 | | | | | 5.2 | |
| 2032 – 2036 | | | | | 1.3 | |
| Thereafter | | | | | 0.3 | |
Total(1)(2) | | | | $ | 71.6 | |
(1) | | This table does not take into consideration cash inflows including payments from mortgagors or payoffs based on contractual terms. |
(2) | | This table includes the reverse mortgages supported by the Company as a result of the IndyMac loss-share agreements with the FDIC. As of December 31, 2016, the Company is responsible for funding up to a remaining $54.8 million of the total amount. Refer to the Indemnification Asset footnote for more information on this agreement and the Company’s responsibilities toward this reverse mortgage portfolio. |
From the acquisition date through December 31, 2016, any changes to the portfolio value as a result of re-estimated cash flows due to changes in actuarial assumptions or actual or expected appreciation or depreciation in property values was immaterial to the portfolio as a whole.
Serviced Loans
In conjunction with the OneWest Transaction, the Company services HECM reverse mortgage loans sold to Agencies (Fannie Mae) and securitized in GNMA HMBS pools. HECM loans transferred into the HMBS program have not met all of the requirements for sale accounting and, therefore, the Company has accounted for these transfers as a financing transaction with the loans remaining on the Company’s statement of financial position and the proceeds received are recorded as a secured borrowing. The pledged loans and secured borrowings are reported in Assets of discontinued operations and Liabilities of discontinued operations, respectively.See Note 2 — Acquisition and Disposition Activities.
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CIT ANNUAL REPORT 2016 145
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As servicer of HECM loans, the Company is required to repurchase loans out of the HMBS pool upon completion of foreclosure or once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. These HECM loans are repurchased at a price equal to the unpaid principal balance outstanding on the loan plus accrued interest. The repurchase transaction represents extinguishment of debt. As a result, the HECM loan basis and accounting methodology (retrospective effective interest) would carry forward. However, if the Company classifies these repurchased loans as AHFS, that classification would result in a new accounting methodology. Loans classified as AHFS are carried at LOCOM pending assignment to the Department of Housing and Urban Development (“HUD”). Loans classified as HFI are not assignable to HUD and are subject to periodic impairment assessment. Although permitted under the GNMA HMBS program, the Company does not conduct optional repurchases upon the loan reaching a maturity event (i.e. borrower’s death or the property ceases to be the borrower’s principal residence).
In the year ended December 31, 2016, the Company repurchased $96.1 million (unpaid principal balance) of additional HECM loans, of which $66.1 million were classified as AHFS and the remaining $30.0 million were classified as HFI. As of December 31, 2016, the Company had an outstanding balance of $122.2 million of HECM loans, of which $32.8 million (unpaid principal balance) is classified as AHFS with a remaining purchase discount of $0.1 million and $68.1 million is classified as HFI accounted for as PCI loans with an associated remaining purchase discount of $9.1 million. Serviced loans also include $30.4 million that are classified as HFI, which are accounted for under the effective yield method, with no remaining purchase discount.
As of December 31, 2015, the Company had an outstanding balance of $118.1 million of HECM loans, of which $20.2 million (unpaid principal balance) were classified as AHFS with a remaining purchase discount of $0.1 million, $87.6 million were classified as HFI accounted for as PCI loans with an associated remaining purchase discount of $13.2 million. Serviced loans also included $10.3 million that were classified as HFI, accounted for under the effective yield method and have no remaining purchase discount.
NOTE 4 — ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses for estimated credit losses in its HFI loan portfolio. The allowance is adjusted through a provision for credit losses, which is charged against current period earnings, and reduced by any charge-offs for losses, net of recoveries.
The Company maintains a separate reserve for credit losses on off-balance sheet commitments, which is reported in Other Liabilities. Off-balance sheet credit exposures include items such as unfunded loan commitments, issued standby letters of credit and deferred purchase agreements. The Company’s methodology for assessing the appropriateness of this reserve is similar to the allowance process for outstanding loans.
Item 8: Financial Statements and Supplementary Data
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Allowance for Loan Losses and Recorded Investment in Finance Receivables(dollars in millions)
| | | | Commercial
Banking
| | Consumer Banking
| | Non-Strategic
Portfolios
| | Corporate
and Other
| | Total
|
|---|
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Balance – December 31, 2015 | | | | $ | 336.8 | | | $ | 10.2 | | | $ | – | | | $ | – | | | $ | 347.0 | |
| Provision for credit losses | | | | | 183.1 | | | | 11.7 | | | | (0.1 | ) | | | – | | | | 194.7 | |
Other(1) | | | | | 0.2 | | | | 2.0 | | | | – | | | | – | | | | 2.2 | |
Gross charge-offs(2) | | | | | (133.8 | ) | | | (2.8 | ) | | | – | | | | – | | | | (136.6 | ) |
| Recoveries | | | | | 22.1 | | | | 3.1 | | | | 0.1 | | | | – | | | | 25.3 | |
| Balance – December 31, 2016 | | | | $ | 408.4 | | | $ | 24.2 | | | $ | – | | | $ | – | | | $ | 432.6 | |
Allowance balance at December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | | | $ | 33.7 | | | $ | – | | | $ | – | | | $ | – | | | $ | 33.7 | |
| Loans collectively evaluated for impairment | | | | | 367.4 | | | | 17.9 | | | | – | | | | – | | | | 385.3 | |
Loans acquired with deteriorated credit quality(3) | | | | | 7.3 | | | | 6.3 | | | | – | | | | – | | | | 13.6 | |
| Allowance for loan losses | | | | $ | 408.4 | | | $ | 24.2 | | | $ | – | | | $ | – | | | $ | 432.6 | |
Other reserves(1) | | | | $ | 43.6 | | | $ | 0.1 | | | $ | – | | | $ | – | | | $ | 43.7 | |
Finance receivables at December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | | | $ | 221.8 | | | $ | – | | | $ | – | | | $ | – | | | $ | 221.8 | |
| Loans collectively evaluated for impairment | | | | | 22,227.3 | | | | 4,737.0 | | | | – | | | | – | | | | 26,964.3 | |
Loans acquired with deteriorated credit quality(3) | | | | | 113.2 | | | | 2,236.6 | | | | – | | | | – | | | | 2,349.8 | |
| Ending balance | | | | $ | 22,562.3 | | | $ | 6,973.6 | | | $ | – | | | $ | – | | | $ | 29,535.9 | |
| Percent of loans to total loans | | | | | 76.4 | % | | | 23.6 | % | | | – | | | | – | | | | 100 | % |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Balance – December 31, 2014 | | | | $ | 296.7 | | | $ | – | | | $ | 37.5 | | | $ | – | | | $ | 334.2 | |
| Provision for credit losses | | | | | 143.7 | | | | 8.7 | | | | 6.2 | | | | – | | | | 158.6 | |
Other(1) | | | | | (8.2 | ) | | | 1.7 | | | | (2.7 | ) | | | – | | | | (9.2 | ) |
Gross charge-offs(2) | | | | | (113.0 | ) | | | (1.3 | ) | | | (50.8 | ) | | | – | | | | (165.1 | ) |
| Recoveries | | | | | 17.6 | | | | 1.1 | | | | 9.8 | | | | – | | | | 28.5 | |
| Balance – December 31, 2015 | | | | $ | 336.8 | | | $ | 10.2 | | | $ | – | | | $ | – | | | $ | 347.0 | |
Allowance balance at December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | | | $ | 27.4 | | | $ | – | | | $ | – | | | $ | – | | | $ | 27.4 | |
| Loans collectively evaluated for impairment | | | | | 306.2 | | | | 8.4 | | | | – | | | | – | | | | 314.6 | |
Loans acquired with deteriorated credit quality(3) | | | | | 3.2 | | | | 1.8 | | | | – | | | | – | | | | 5.0 | |
Allowance for loan losses | | | | $ | 336.8 | | | $ | 10.2 | | | $ | – | | | $ | – | | | $ | 347.0 | |
Other reserves(1) | | | | $ | 43.0 | | | $ | 0.1 | | | $ | – | | | $ | – | | | $ | 43.1 | |
| Finance receivables at December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | | | $ | 134.2 | | | $ | – | | | $ | – | | | $ | – | | | $ | 134.2 | |
| Loans collectively evaluated for impairment | | | | | 23,034.9 | | | | 4,657.9 | | | | – | | | | – | | | | 27,692.8 | |
Loans acquired with deteriorated credit quality(3) | | | | | 163.3 | | | | 2,528.4 | | | | – | | | | – | | | | 2,691.7 | |
| Ending balance | | | | $ | 23,332.4 | | | $ | 7,186.3 | | | $ | – | | | $ | – | | | $ | 30,518.7 | |
| Percentage of loans to total loans | | | | | 76.5 | % | | | 23.5 | % | | | – | | | | – | | | | 100 | % |
(1) | | “Other reserves” represents credit loss reserves for unfunded lending commitments, letters of credit and for deferred purchase agreements, all of which is recorded in Other liabilities. “Other” also includes allowance for loan losses associated with loan sales and foreign currency translations. |
(2) | | Gross charge-offs of amounts specifically reserved in prior periods included $35.8 million and $21.3 million charged directly to the Allowance for loan losses for the years ended December 31, 2016 and December 31, 2015, respectively. The current year charge offs related to Commercial Banking for all periods. The prior year charge offs related to Commercial banking and Non-Strategic Portfolio. |
(3) | | Represents loans considered impaired as part of the OneWest transaction and are accounted for under the guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality). |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 —INDEMNIFICATION ASSETS
The Company acquired the indemnifications provided by the FDIC under the loss sharing agreements from previous transactions entered into by OneWest Bank. The loss share agreements with the FDIC relates to the FDIC-assisted transactions of IndyMac in March 2009 (“IndyMac Transaction”), First Federal in December 2009 (“First Federal Transaction”) and La Jolla in February 2010 (“La Jolla Transaction”). Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modification, charge-off of loan balance or liquidation of collateral). Reimbursements approved by the FDIC are received usually within 60 days of submission.
In connection with the lndyMac, First Federal and La Jolla Transactions, the FDIC indemnified the Company against certain future losses for covered loans. For the IndyMac Transaction, First Federal Transaction and La Jolla Transaction, the loss share agreement covering SFR mortgage loans is set to expire March 2019, December 2019 and February 2020, respectively. In addition, in connection with the IndyMac Transaction, the Company recorded an indemnification receivable for estimated reimbursements due from the FDIC for loss exposure arising from breach in origination and servicing obligations associated with covered reverse mortgage loans sold to the Agencies prior to March 2009 pursuant to the loss share agreement with the FDIC.
No indemnification asset was recognized in connection with the First Federal Transaction and an insignificant indemnification asset balance was associated with the La Jolla Transaction. Below provides the carrying value of the recognized indemnification assets and related receivable/payable balance with the FDIC associated with indemnified losses under the IndyMac Transaction.
Indemnification Assets — IndyMac Transaction(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | | 2016
| | 2015
|
Loan indemnification(1) | | | | $ | 223.0 | | | $ | 332.9 | |
| Reverse mortgage indemnification | | | | | 10.4 | | | | 10.3 | |
Agency claims indemnification(2) | | | | | 108.0 | | | | 65.6 | |
| Total | | | | $ | 341.4 | | | $ | 408.8 | |
| Receivable with (Payable to) the FDIC | | | | $ | 12.7 | | | $ | 18.6 | |
(1) | | As of December 31, 2016, the carrying value of the loan indemnification decreased by $115.6 million from December 31, 2015, which comprised of $85.3 million in claim submissions filed with the FDIC during the period and $30.3 million in other (yield and provision for credit losses adjustments). |
(2) | | As of December 31, 2016, the carrying value of the agency claims indemnification increased by $42.4 million, which is primarily attributable to an increase in the amount of servicing-related obligations covered by the loss share agreement related to reverse mortgage loans. |
The amount of net amortization recognized on the indemnification asset from the IndyMac Transaction was $21.9 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively.
The Company separately recognizes a net receivable (recorded in other assets) for the claim submissions filed with the FDIC and a net payable (recorded in other liabilities) for the remittances due to the FDIC for previously submitted claims that were later recovered by investor (e.g., guarantor payments, recoveries).
IndyMac Transaction
There are three components to the Indy Mac indemnification program described below: 1. SFR Mortgages, 2. Reverse Mortgages, and 3. Certain Servicing Obligations.
Single Family Residential (SFR) Mortgage Loan Indemnification Asset
The FDIC indemnifies the Company against certain credit losses on SFR mortgage loans based on specified thresholds. Prior to the OneWest acquisition, the cumulative losses of the SFR portfolio exceeded the First Loss Tranche ($2.551 billion) with the excess losses reimbursed 80% by the FDIC. As of December 31, 2016, the Company projects the cumulative losses will reach the final loss threshold of “meets or exceeds stated threshold” ($3.826 billion) in December 2017 at which time the excess losses will be reimbursed 95% by the FDIC.
Item 8: Financial Statements and Supplementary Data
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148 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the submission of qualifying losses (net of recoveries) for reimbursement from the FDIC since inception of the loss share agreement as of December 31, 2016 and 2015, respectively:
Submission of Qualifying Losses for Reimbursement(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Unpaid principal balance | | | | $ | 3,832.1 | | | $ | 4,372.8 | |
| Cumulative losses incurred | | | | | 3,727.8 | | | | 3,623.4 | |
| Cumulative claims | | | | | 3,722.9 | | | | 3,608.4 | |
| Cumulative reimbursement | | | | | 893.7 | | | | 802.6 | |
Reverse Mortgage Indemnification Asset
The FDIC indemnifies the Company against losses on the first $200.0 million of funds advanced post March 2009, and to fund any advances above $200.0 million.
As of December 31, 2016 and 2015, $145.2 million and $152.4 million, respectively, had been advanced on the reverse mortgage loans post March 2009. Prior to the OneWest Transaction, the cumulative loss submissions and reimbursements totaled $1.8 million from the FDIC. From August 3, 2015 (the date of OneWest Transaction) through December 31, 2016, the Company was reimbursed $1.4 million from the FDIC for the cumulative losses incurred.
Indemnification from Certain Servicing Obligations
Subject to certain requirements and limitations, the FDIC agreed to indemnify the Company, among other things, for third party claims from the Agencies related to the selling representations and warranties of IndyMac as well as liabilities arising from the acts or omissions, including, without limitation, breaches of servicer obligations of IndyMac for SFR mortgage loans and reverse mortgage loans as follows:
SFR mortgage loans sold to the Agencies
The FDIC indemnification for third party claims by the Agencies for servicer obligations expired as of the acquisition date; however, for any claims, issues or matters relating to the servicing obligations that are known or identified as of the end of the expired term, the FDIC indemnification protection continues until resolution of such claims, issues or matters.
The Company had no submitted claims from acquisition date through December 31, 2016. Prior to the OneWest acquisition, the cumulative loss submissions and reimbursements totaled $5.7 million from the FDIC to cover third party claims made by the Agencies for SFR loans. During the fourth quarter of 2016, the Company and the FDIC resolved the selling and servicing-related obligations of IndyMac for SFR mortgage loans with one of the Agencies, Fannie Mae and the Company released the FDIC from its indemnification obligation to CIT with respect to the settled loans.
Reverse mortgage loans sold to the Agencies
The FDIC indemnifies the Company through March 2019 for third party claims made by the Agencies relating to any liabilities or obligations imposed on the seller of HECM loans acquired by the Agencies from IndyMac resulting from servicing errors or servicing obligations prior to March 2009.
The Company had submitted $0.2 million in claims from acquisition date through December 31, 2016. Prior to the OneWest Transaction, the cumulative loss submissions totaled $11.2 million and reimbursements totaled $10.7 million from the FDIC to cover third party claims made by the Agencies for reverse mortgage loans.
First Federal Transaction
The FDIC agreed to indemnify the Company against certain losses on SFR and commercial HFI loans based on established thresholds.
As of December 31, 2016, the loss share agreements covering the SFR mortgage loans remain in effect (expiring in December 2019) while the agreement covering commercial loans expired (in December 2014). However, pursuant to the terms of the shared-loss agreement, the loss recovery provisions for commercial loans extend for three years past the expiration date (December 2017). The loss thresholds apply to the covered loans collectively. Pursuant to the loss share agreement, the first $932 million (First Loss Tranche) of cumulative losses are borne by the Company without reimbursement by the FDIC.
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the submission of qualifying losses for reimbursement from the FDIC since inception of the loss share agreement:
Submission of Qualifying Losses for Reimbursement(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | SFR
| | Commercial(1)
| | Total
|
|---|
| Unpaid principal balance | | | | $ | 1,237.1 | | | $ | – | | | $ | 1,237.1 | |
| Cumulative losses incurred | | | | | 416.6 | | | | 9.0 | | | | 425.6 | |
| Cumulative claims | | | | | 416.4 | | | | 9.0 | | | | 425.4 | |
| Cumulative reimbursement | | | | | – | | | | – | | | | – | |
| | | | December 31, 2015
| |
|---|
| | | | SFR
| | Commercial(1)
| | Total
|
|---|
| Unpaid principal balance | | | | $ | 1,456.8 | | | $ | – | | | $ | 1,456.8 | |
| Cumulative losses incurred | | | | | 408.5 | | | | 9.0 | | | | 417.5 | |
| Cumulative claims | | | | | 407.2 | | | | 9.0 | | | | 416.2 | |
| Cumulative reimbursement | | | | | – | | | | – | | | | – | |
(1) | | Due to the expiration of the loss share agreement covering commercial loans in December 2014, the outstanding unpaid principal balance eligible for reimbursement is zero. As provided by the loss share agreement, the loss recoveries for commercial loans extend for three years from expiration date (December 2017). As such, the cumulative losses incurred, claim submissions and reimbursements for commercial loans are reduced by the reported recoveries. |
As reflected above, the cumulative losses incurred have not reached the specified level ($932 million) for FDIC reimbursement and the Company does not project to reach the specified level of losses. Accordingly, no indemnification asset was recognized in connection with the First Federal Transaction.
Separately, as part of the loss sharing agreement, the Company is required to make a true-up payment to the FDIC in the event that losses do not exceed a specified level by December 2019. As the Company does not project to reach the First Loss Tranche ($932 million) for FDIC reimbursement, the Company does not expect that such true-up payment will be required for the First Federal portfolio.
La Jolla Transaction
The FDIC agreed to indemnify the Company against certain losses on SFR, and commercial loans HFI based on established thresholds.
As of December 31, 2016, the loss share agreement covering the SFR mortgage loans remain in effect (expiring in February 2020) while the agreement covering commercial loans expired (in March 2015). However, pursuant to the terms of the loss share agreement, the loss recovery provisions for commercial loans extend for three years past the expiration date (March 2018). The loss thresholds apply to the covered loans collectively. Pursuant to the loss share agreement, the Company’s cumulative losses since the acquisition date by OneWest Bank are reimbursed by the FDIC at 80% until the stated threshold ($1.007 billion) is met.
The following table summarizes the submission of cumulative qualifying losses for reimbursement from the FDIC since inception of the loss share agreement:
Submission of Qualifying Losses for Reimbursement(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | SFR
| | Commercial(1)
| | Total
|
|---|
| Unpaid principal balance | | | | $ | 68.8 | | | $ | – | | | $ | 68.8 | |
| Cumulative losses incurred | | | | | 56.3 | | | | 351.8 | | | | 408.1 | |
| Cumulative claims | | | | | 56.3 | | | | 351.8 | | | | 408.1 | |
| Cumulative reimbursement | | | | | 45.0 | | | | 281.4 | | | | 326.4 | |
| | | | December 31, 2015
| |
|---|
| | | | SFR
| | Commercial(1)
| | Total
|
|---|
| Unpaid principal balance | | | | $ | 89.3 | | | $ | – | | | $ | 89.3 | |
| Cumulative losses incurred | | | | | 56.2 | | | | 359.5 | | | | 415.7 | |
| Cumulative claims | | | | | 56.2 | | | | 359.5 | | | | 415.7 | |
| Cumulative reimbursement | | | | | 45.0 | | | | 287.6 | | | | 332.6 | |
(1) | | Due to the expiration of the loss share agreement covering commercial loans in March 2015, the outstanding unpaid principal balance eligible for reimbursement is zero. As provided by the loss share agreement, the loss recoveries for commercial loans extend for three years from expiration date (March 2018). As such, the cumulative losses incurred, claim submissions and reimbursements for commercial loans are reduced by the reported recoveries. |
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the loss share agreement with La Jolla, the Company is required to make a true-up payment to the FDIC in the event that losses do not exceed a specified level by the tenth anniversary of the agreement (February 2020). The Company currently expects that such payment will be required based upon its forecasted loss estimates for the La Jolla portfolio as the actual and estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses. As of December 31, 2016 and 2015, an obligation of $61.9 million and $56.9 million, respectively, has been recorded as a FDIC true-up liability for the contingent payment measured at estimated fair value. Refer to Note 13 —Fair Value for further discussion.
NOTE 6 —OPERATING LEASE EQUIPMENT
The following table provides the net book value (net of accumulated depreciation of $0.9 billion at December 31, 2016 and $0.7 billion at December 31, 2015) of operating lease equipment, by equipment type.
Operating Lease Equipment(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| Railcars and locomotives | | | | $ | 7,116.5 | | | $ | 6,591.9 | |
| Other equipment | | | | | 369.6 | | | | 259.8 | |
Total(1) | | | | $ | 7,486.1 | | | $ | 6,851.7 | |
(1) | | Includes equipment off-lease of $823.5 million and $493.2 million at December 31, 2016 and 2015, respectively, primarily consisting of rail assets. |
The following table presents future minimum lease rentals due on non-cancelable operating leases at December 31, 2016. Excluded from this table are variable rentals calculated on asset usage levels, re-leasing rentals, and expected sales proceeds from remarketing equipment at lease expiration, all of which are components of operating lease profitability.
Minimum Lease Rentals Due (dollars in millions)
| Years Ended December 31, | | | | |
|---|
| 2017 | | | | $ | 787.3 | | |
| 2018 | | | | | 595.4 | | |
| 2019 | | | | | 389.0 | | |
| 2020 | | | | | 238.1 | | |
| 2021 | | | | | 129.6 | | |
| Thereafter | | | | | 147.4 | | |
| Total | | | | $ | 2,286.8 | | |
NOTE 7 — INVESTMENT SECURITIES
Investments include debt and equity securities. The Company’s debt securities include residential mortgage-backed securities (“MBS”), U.S. Government Agency securities, U.S. Treasury securities, and supranational and foreign government securities. Equity securities include common stock and warrants, along with restricted stock in the FHLB and FRB.
Investment Securities(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
Available-for-sale securities | | | | | | | | | | |
| Debt securities | | | | $ | 3,674.1 | | | $ | 2,007.8 | |
| Equity securities | | | | | 34.1 | | | | 14.3 | |
Held-to-maturity securities | | | | | | | | | | |
Debt securities(1) | | | | | 243.0 | | | | 300.1 | |
Securities carried at fair value with changes recorded in net income | | | | | | | | | | |
| Debt securities | | | | | 283.5 | | | | 339.7 | |
Non-marketable investments(2) | | | | | 256.4 | | | | 291.8 | |
Total investment securities | | | | $ | 4,491.1 | | | $ | 2,953.7 | |
(1) | | Recorded at amortized cost. |
(2) | | Non-marketable investments include securities of the FRB and FHLB carried at cost of $239.7 million at December 31, 2016 and $263.5 million at December 31, 2015. The remaining non-marketable investments include ownership interests greater than 3% in limited partnership investments that are accounted for under the equity method, other investments carried at cost, which include qualified Community Reinvestment Act (CRA) investments, equity fund holdings and shares issued by customers during loan work out situations or as part of an original loan investment, totaling $16.7 million and $28.3 million at December 31, 2016 and December 31, 2015, respectively. |
Realized investment gains totaled $29.3 million, $8.1 million, and $38.8 million for the years ended 2016, 2015, and 2014, respectively. In addition, the Company maintained $5.6 billion and $6.7 billion of interest bearing deposits at December 31, 2016 and December 31, 2015, respectively, which are cash equivalents and are classified separately on the balance sheet.
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents interest and dividends on interest bearing deposits and investments:
Interest and Dividend Income(dollars in millions)
| | | | Year Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Interest income — investments / reverse repos | | | | $ | 82.1 | | | $ | 43.7 | | | $ | 14.1 | |
| Interest income — interest bearing deposits | | | | | 33.1 | | | | 17.1 | | | | 17.7 | |
| Dividends — investments | | | | | 16.7 | | | | 10.4 | | | | 3.7 | |
| Total interest and dividends | | | | $ | 131.9 | | | $ | 71.2 | | | $ | 35.5 | |
Securities Available-for-Sale
The following table presents amortized cost and fair value of securities AFS.
Debt Securities AFS — Amortized Cost and Fair Value(dollars in millions)
| December 31, 2016 | | | | Amortized
Cost
| | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| |
Fair
Value
|
|---|
| Debt securities AFS | | | | | | | | | | | | | | | | | | |
| Mortgage-backed Securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 2,073.6 | | | $ | 1.6 | | | $ | (32.3 | ) | | $ | 2,042.9 | |
| Non-agency securities | | | | | 471.7 | | | | 15.6 | | | | (1.8 | ) | | | 485.5 | |
| U.S. government agency obligations | | | | | 649.9 | | | | – | | | | (3.9 | ) | | | 646.0 | |
| U.S. Treasury securities | | | | | 299.9 | | | | – | | | | (0.4 | ) | | | 299.5 | |
| Supranational and foreign government securities | | | | | 200.2 | | | | – | | | | – | | | | 200.2 | |
| Total debt securities AFS | | | | | 3,695.3 | | | | 17.2 | | | | (38.4 | ) | | | 3,674.1 | |
| Equity securities AFS | | | | | 35.0 | | | | – | | | | (0.9 | ) | | | 34.1 | |
| Total securities AFS | | | | $ | 3,730.3 | | | $ | 17.2 | | | $ | (39.3 | ) | | $ | 3,708.2 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
| Debt securities AFS | | | | | | | | | | | | | | | | | | |
| Mortgage-backed Securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 148.4 | | | $ | – | | | $ | (0.9 | ) | | $ | 147.5 | |
| Non-agency securities | | | | | 573.9 | | | | 0.4 | | | | (7.2 | ) | | | 567.1 | |
| U.S. government agency obligations | | | | | 996.8 | | | | – | | | | (3.7 | ) | | | 993.1 | |
| U.S. Treasury securities | | | | �� | – | | | | – | | | | – | | | | – | |
| Supranational and foreign government securities | | | | | 300.1 | | | | – | | | | – | | | | 300.1 | |
| Total debt securities AFS | | | | | 2,019.2 | | | | 0.4 | | | | (11.8 | ) | | | 2,007.8 | |
| Equity securities AFS | | | | | 14.4 | | | | 0.1 | | | | (0.2 | ) | | | 14.3 | |
| Total securities AFS | | | | $ | 2,033.6 | | | $ | 0.5 | | | $ | (12.0 | ) | | $ | 2,022.1 | |
Item 8: Financial Statements and Supplementary Data
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152 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the debt securities AFS by contractual maturity dates:
Securities AFS — Maturities(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | |
Amortized
Cost
| |
Fair
Value
| | Weighted
Average
Yields
|
|---|
Mortgage-backed securities — U.S. government agency securities | | | | | | | | | | | | | | |
| After 5 but within 10 years | | | | $ | 55.1 | | | $ | 54.2 | | | | 1.56 | % |
| Due after 10 years | | | | | 2,018.5 | | | | 1,988.7 | | | | 2.45 | % |
Total | | | | | 2,073.6 | | | | 2,042.9 | | | | 2.43 | % |
Mortgage-backed securities — non agency securities | | | | | | | | | | | | | | |
| After 5 but within 10 years | | | | | 22.3 | | | | 21.7 | | | | 4.93 | % |
| Due after 10 years | | | | | 449.4 | | | | 463.8 | | | | 5.88 | % |
Total | | | | | 471.7 | | | | 485.5 | | | | 5.84 | % |
U.S. government agency obligations | | | | | | | | | | | | | | |
| After 1 but within 5 years | | | | | 649.9 | | | | 646.0 | | | | 1.22 | % |
Total | | | | | 649.9 | | | | 646.0 | | | | 1.22 | % |
U.S. Treasury Securities | | | | | | | | | | | | | | |
| Due within 1 year | | | | | 200.1 | | | | 200.1 | | | | 0.36 | % |
| After 1 but within 5 years | | | | | 99.8 | | | | 99.4 | | | | 0.93 | % |
Total | | | | | 299.9 | | | | 299.5 | | | | 0.55 | % |
Supranational and foreign government securities | | | | | | | | | | | | | | |
| Due within 1 year | | | | | 200.2 | | | | 200.2 | | | | 0.36 | % |
Total | | | | | 200.2 | | | | 200.2 | | | | 0.36 | % |
Total debt securities available-for-sale | | | | $ | 3,695.3 | | | $ | 3,674.1 | | | | 2.38 | % |
The following table summarizes the gross unrealized losses and estimated fair value of AFS securities aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position.
Securities AFS — Estimated Unrealized Losses (dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | Less than 12 months
| | 12 months or greater
| |
|---|
| | | |
Fair
Value
| |
Gross
Unrealized
Loss
| |
Fair
Value
| |
Gross
Unrealized
Loss
|
|---|
| Debt securities AFS | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 1,589.6 | | | $ | (31.8 | ) | | $ | 13.8 | | | $ | (0.5 | ) |
| Non-agency securities | | | | | 56.5 | | | | (1.4 | ) | | | 15.8 | | | | (0.4 | ) |
| U.S. government agency obligations | | | | | 546.1 | | | | (3.9 | ) | | | – | | | | – | |
| U.S. Treasury Securities | | | | | 299.5 | | | | (0.4 | ) | | | – | | | | – | |
| Total debt securities AFS | | | | | 2,491.7 | | | | (37.5 | ) | | | 29.6 | | | | (0.9 | ) |
| Equity securities AFS | | | | | 34.1 | | | | (0.9 | ) | | | – | | | | – | |
Total securities available-for-sale | | | | $ | 2,525.8 | | | $ | (38.4 | ) | | $ | 29.6 | | | $ | (0.9 | ) |
| | | | December 31, 2015
| |
|---|
| | | | Less than 12 months
| | 12 months or greater
| |
|---|
| | | |
Fair
Value
| |
Gross
Unrealized
Loss
| |
Fair
Value
| |
Gross
Unrealized
Loss
|
|---|
| Debt securities AFS | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 147.0 | | | $ | (0.9 | ) | | $ | – | | | $ | – | |
| Non-agency securities | | | | | 495.5 | | | | (7.2 | ) | | | – | | | | – | |
| U.S. government agency obligations | | | | | 943.0 | | | | (3.7 | ) | | | – | | | | – | |
| Total debt securities AFS | | | | | 1,585.5 | | | | (11.8 | ) | | | – | | | | – | |
| Equity securities AFS | | | | | 0.2 | | | | (0.2 | ) | | | – | | | | – | |
Total securities available-for-sale | | | | $ | 1,585.7 | | | $ | (12.0 | ) | | $ | – | | | $ | – | |
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CIT ANNUAL REPORT 2016 153
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchased Credit-Impaired AFS Securities
In connection with the OneWest acquisition, the Company classified AFS mortgage-backed securities as PCI due to evidence of credit deterioration since issuance and for which it was probable that the Company will not collect all principal and interest payments contractually required at the time of purchase. Accounting for these PCI securities is discussed in Note 1 —Business and Summary of Significant Accounting Policies.
Changes in the accretable yield for PCI securities are summarized below:
Changes in Accretable Yield (dollars in millions)
| | | |
Year Ended
December 31, 2016
|
|---|
Beginning Balance | | | | $ | 189.0 | | |
| Accretion into interest income | | | | | (29.2 | ) | |
| Reclassifications from non-accretable difference due to increasing cash flows | | | | | 4.7 | | |
| Reclassifications to non-accretable difference due to decreasing cash flows | | | | | 0.5 | | |
Balance at December 31, 2016 | | | | $ | 165.0 | | |
| | | |
Year Ended
December 31, 2015
|
|---|
Beginning Balance | | | | $ | 204.4 | | |
| Accretion into interest income | | | | | (13.5 | ) | |
| Reclassifications to non-accretable difference due to decreasing cash flows | | | | | (1.7 | ) | |
| Disposals and Other | | | | | (0.2 | ) | |
Balance at December 31, 2015 | | | | $ | 189.0 | | |
The estimated fair value of PCI securities was $478.9 million and $559.6 million with a par value of $615.2 million and $717.1 million as of December 31, 2016 and December 31, 2015, respectively.
Securities Carried at Fair Value with Changes Recorded in Net Income
Securities carried at fair value with changes recorded in net income are presented in the following tables.
Securities Carried at Fair Value with changes Recorded in Net Income (dollars in millions)
| | | |
Amortized
Cost
| |
Gross
Unrealized
Gains
| |
Gross
Unrealized
Losses
| |
Fair
Value
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | |
| Mortgage-backed Securities — Non-agency | | | | $ | 277.5 | | | $ | 6.7 | | | $ | (0.7 | ) | | $ | 283.5 | |
| Total Securities Carried at Fair Value with Changes Recorded in Net Income | | | | $ | 277.5 | | | $ | 6.7 | | | $ | (0.7 | ) | | $ | 283.5 | |
| | | |
Amortized
Cost
| |
Gross
Unrealized
Gains
| |
Gross
Unrealized
Losses
| |
Fair
Value
|
|---|
December 31, 2015 | | | | | | | | | | | | | | | | | | |
| Mortgage-backed Securities — Non-agency | | | | $ | 343.8 | | | $ | 0.3 | | | $ | (4.4 | ) | | $ | 339.7 | |
| Total Securities Carried at Fair Value with Changes Recorded in Net Income | | | | $ | 343.8 | | | $ | 0.3 | | | $ | (4.4 | ) | | $ | 339.7 | |
Item 8: Financial Statements and Supplementary Data
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154 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities Carried at Fair Value with changes Recorded in Net Income — Amortized Cost and Fair Value Maturities(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | |
Amortized
Cost
| |
Fair
Value
| | Weighted
Average
Yield
|
|---|
Mortgage-backed securities — Non agency | | | | | | | | | | | | | | |
| After 5 but within 10 years | | | | $ | 0.3 | | | $ | 0.3 | | | | 41.82 | % |
| Due after 10 years | | | | | 277.2 | | | | 283.2 | | | | 4.89 | % |
Total | | | | $ | 277.5 | | | $ | 283.5 | | | | 4.93 | % |
Debt Securities Held-to-Maturity
The carrying value and fair value of securities HTM at December 31, 2016 and December 31, 2015 were as follows:
Debt Securities HTM — Carrying Value and Fair Value (dollars in millions)
| | | |
Carrying
Value
| |
Gross
Unrealized
Gains
| |
Gross
Unrealized
Losses
| |
Fair
Value
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 110.0 | | | $ | 0.7 | | | $ | (3.3 | ) | | $ | 107.4 | |
| State and municipal | | | | | 27.7 | | | | – | | | | (0.5 | ) | | | 27.2 | |
| Foreign government | | | | | 2.4 | | | | – | | | | – | | | | 2.4 | |
| Corporate — foreign | | | | | 102.9 | | | | 6.2 | | | | – | | | | 109.1 | |
| Total debt securities held-to-maturity | | | | $ | 243.0 | | | $ | 6.9 | | | $ | (3.8 | ) | | $ | 246.1 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 147.2 | | | $ | 1.1 | | | $ | (2.6 | ) | | $ | 145.7 | |
| State and municipal | | | | | 37.1 | | | | – | | | | (1.6 | ) | | | 35.5 | |
| Foreign government | | | | | 13.5 | | | | – | | | | – | | | | 13.5 | |
| Corporate — foreign | | | | | 102.3 | | | | 4.5 | | | | – | | | | 106.8 | |
| Total debt securities held-to-maturity | | | | $ | 300.1 | | | $ | 5.6 | | | $ | (4.2 | ) | | $ | 301.5 | |
The following table presents the debt securities HTM by contractual maturity dates:
Debt Securities HTM — Amortized Cost and Fair Value Maturities (dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | |
Amortized
Cost
| |
Fair
Value
| | Weighted
Average
Yield
|
|---|
Mortgage-backed securities — U.S. government agency securities | | | | | | | | | | | | | | |
| Due after 10 years | | | | $ | 110.0 | | | $ | 107.4 | | | | 2.52 | % |
Total | | | | | 110.0 | | | | 107.4 | | | | 2.52 | % |
State and municipal | | | | | | | | | | | | | | |
| Due within 1 year | | | | | 0.5 | | | | 0.5 | | | | 2.09 | % |
| After 1 but within 5 years | | | | | 0.5 | | | | 0.5 | | | | 2.46 | % |
| After 5 but within 10 years | | | | | 0.5 | | | | 0.5 | | | | 2.70 | % |
| Due after 10 years | | | | | 26.2 | | | | 25.7 | | | | 2.30 | % |
Total | | | | | 27.7 | | | | 27.2 | | | | 2.31 | % |
Foreign government | | | | | | | | | | | | | | |
| Due within 1 year | | | | | 2.4 | | | | 2.4 | | | | 2.43 | % |
Total | | | | | 2.4 | | | | 2.4 | | | | 2.43 | % |
Corporate — Foreign securities | | | | | | | | | | | | | | |
| After 1 but within 5 years | | | | | 102.9 | | | | 109.1 | | | | 4.35 | % |
Total | | | | | 102.9 | | | | 109.1 | | | | 4.35 | % |
Total debt securities held-to-maturity | | | | $ | 243.0 | | | $ | 246.1 | | | | 3.27 | % |
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CIT ANNUAL REPORT 2016 155
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities HTM — Estimated Unrealized Losses(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | Less than 12 months
| | 12 months or greater
| |
|---|
| | | |
Fair
Value
| |
Gross
Unrealized
Loss
| |
Fair
Value
| |
Gross
Unrealized
Loss
|
|---|
| Debt securities HTM | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 68.2 | | | $ | (1.7 | ) | | $ | 26.7 | | | $ | (1.6 | ) |
| State and municipal | | | | | 3.8 | | | | (0.1 | ) | | | 22.4 | | | | (0.4 | ) |
Total securities held-to-maturity | | | | $ | 72.0 | | | $ | (1.8 | ) | | $ | 49.1 | | | $ | (2.0 | ) |
| | | | December 31, 2015
| |
|---|
| | | | Less than 12 months
| | 12 months or greater
| |
|---|
| | | |
Fair
Value
| |
Gross
Unrealized
Loss
| |
Fair
Value
| |
Gross
Unrealized
Loss
|
|---|
| Debt securities HTM | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| U.S. government agency securities | | | | $ | 62.2 | | | $ | (0.9 | ) | | $ | 40.7 | | | $ | (1.7 | ) |
| State and municipal | | | | | 3.1 | | | | (0.1 | ) | | | 28.2 | | | | (1.5 | ) |
Total securities held-to-maturity | | | | $ | 65.3 | | | $ | (1.0 | ) | | $ | 68.9 | | | $ | (3.2 | ) |
Other Than Temporary Impairment
As discussed in Note 1 — Business and Summary of Significant Accounting Policies, the Company conducted and documented its periodic review of all securities with unrealized losses, which it performs to evaluate whether the impairment is other than temporary.
For PCI securities, management determined certain PCI securities with unrealized losses were deemed credit-related and recognized OTTI credit-related losses of $3.3 million and $2.8 million as permanent write-downs for the year ended December 31, 2016 and December 31, 2015, respectively. There were no PCI securities in 2014.
The Company reviewed debt securities AFS and HTM with unrealized losses and determined that the unrealized losses were not OTTI. The unrealized losses were not credit-related and the Company does not have an intent to sell and believes it is not more-likely-than-not that the Company will have to sell prior to the recovery of the amortized cost basis.
The Company reviewed equity securities classified as AFS with unrealized losses and determined that the unrealized losses were not OTTI. The unrealized losses were not credit-related.
There were no unrealized losses on non-marketable investments.
Item 8: Financial Statements and Supplementary Data
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156 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 —OTHER ASSETS
The following table presents the components of other assets.
Other Assets(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
Tax credit investments and investments in unconsolidated subsidiaries(1) | | | | $ | 220.2 | | | $ | 174.6 | |
Current and deferred federal and state tax assets(2) | | | | | 201.3 | | | | 1,212.4 | |
| Property, furniture and fixtures | | | | | 191.1 | | | | 196.3 | |
| Fair value of derivative financial instruments | | | | | 111.2 | | | | 140.7 | |
| Other real estate owned and repossessed assets | | | | | 72.7 | | | | 123.5 | |
| Tax receivables, other than income taxes | | | | | 50.7 | | | | 97.2 | |
| Other counterparty receivables | | | | | 42.8 | | | | 59.0 | |
Other(3)(4) | | | | | 350.4 | | | | 465.2 | |
| Total other assets | | | | $ | 1,240.4 | | | $ | 2,468.9 | |
(1) | | Included in this balance are affordable housing investments of $151.3 million and $108.4 million as of December 31, 2016 and December 31, 2015, respectively that provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. As a limited partner, the Company has no significant influence over the operations. In 2016 and 2015, the Company recognized pre-tax losses of $12.1 million and $5.2 million, respectively related to these affordable housing investments. In addition, the Company recognized total tax benefits of $20.6 million and $8.7 million, respectively which included tax credits of $15.9 million and $6.7 million recorded in income taxes. The Company is periodically required to provide additional financial support during the investment period. The Company’s liability for these unfunded commitments was $62.3 million and $15.7 million at December 31, 2016 and December 31, 2015, respectively. See Note 10 — Borrowings. |
(2) | | The decrease is primarily due to the establishment of $847 million deferred tax liabilities related to the change in assertion with respect to indefinite reinvestment of foreign earnings related to the Commercial Air business. See Note 19 — Income Taxes. |
(3) | | Other includes executive retirement plan and deferred compensation, other deferred charges, prepaid expenses, accrued interest and dividends, and other miscellaneous assets. |
(4) | | Other also includes servicing advances. In connection with the OneWest Transaction, the Company acquired the servicing obligations for residential mortgage loans. As of December 31, 2016 and December 31, 2015, the loans serviced for others total $15.6 billion and $17.4 billion for reverse mortgage loans and $55.1 million and $87.4 million for single family mortgage loans, respectively. |
NOTE 9 — DEPOSITS
The following table presents detail on the type, maturities and weighted average interest rates of deposits.
Deposits(dollars in millions)
| | | |
December 31, 2016
| |
December 31, 2015
|
|---|
| Deposits Outstanding | | | | $ | 32,304.3 | | | $ | 32,761.4 | |
| Weighted average contractual interest rate | | | | | 1.19 | % | | | 1.26 | % |
Weighted average remaining number of days to maturity(1) | | | | | 641 | days | | | 864 | days |
(1) | | Excludes deposit balances with no stated maturity. |
| | | | Year Ended
December 31, 2016
| | Year Ended
December 31, 2015
|
|---|
| Daily average deposits | | | | $ | 32,628.4 | | | $ | 23,223.0 | |
| Maximum amount outstanding | | | | | 33,209.9 | | | | 32,868.5 | |
| Weighted average contractual interest rate for the year | | | | | 1.23 | % | | | 1.46 | % |
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CIT ANNUAL REPORT 2016 157
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides further detail of deposits.
Deposits — Rates and Maturities(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | Amount
| | Average Rate
|
|---|
| Deposits – no stated maturity | | | | | | | | | | |
| Non-interest-bearing checking | | | | $ | 1,255.6 | | | | – | |
| Interest-bearing checking | | | | | 3,251.8 | | | | 0.54 | % |
| Money market | | | | | 6,593.3 | | | | 0.85 | % |
| Savings | | | | | 4,303.0 | | | | 0.88 | % |
| Other | | | | | 162.0 | | | | NM | |
| Total checking and savings deposits | | | | | 15,565.7 | | | | | |
| Certificates of deposit, remaining contractual maturity: | | | | | | | | | | |
| Within one year | | | | | 8,659.6 | | | | 1.14 | % |
| One to two years | | | | | 2,673.2 | | | | 1.42 | % |
| Two to three years | | | | | 2,072.3 | | | | 2.27 | % |
| Three to four years | | | | | 1,555.8 | | | | 2.27 | % |
| Four to five years | | | | | 628.2 | | | | 2.41 | % |
| Over five years | | | | | 1,139.9 | | | | 3.27 | % |
| Total certificates of deposit | | | | | 16,729.0 | | | | | |
| Purchase accounting adjustments | | | | | 9.6 | | | | | |
| Total Deposits | | | | $ | 32,304.3 | | | | – | |
NM Not meaningful — includes certain deposits such as escrow accounts, security deposits, and other similar accounts.
The following table presents the maturity profile of other time deposits with a denomination of $100,000 or more.
Certificates of Deposit $100,000 or More(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
|
|---|
| U.S. certificates of deposits: | | | | | | | | | | |
| Three months or less | | | | $ | 1,725.4 | | | $ | 1,476.5 | |
| After three months through six months | | | | | 1,902.6 | | | | 1,462.6 | |
| After six months through twelve months | | | | | 2,907.7 | | | | 2,687.2 | |
| After twelve months | | | | | 7,013.4 | | | | 9,245.8 | |
| Total | | | | $ | 13,549.1 | | | $ | 14,872.1 | |
NOTE 10 — BORROWINGS
The following table presents the carrying value of outstanding borrowings.
Borrowings(1) (dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | CIT Group Inc.
| | Subsidiaries
| | Total
| | Total
|
|---|
| Senior Unsecured | | | | $ | 10,599.0 | | | $ | – | | | $ | 10,599.0 | | | $ | 10,636.3 | |
| Secured borrowings: | | | | | | | | | | | | | | | | | | |
| Structured financings | | | | | – | | | | 1,925.7 | | | | 1,925.7 | | | | 2,596.4 | |
| FHLB advances | | | | | – | | | | 2,410.8 | | | | 2,410.8 | | | | 3,117.6 | |
Total Borrowings | | | | $ | 10,599.0 | | | $ | 4,336.5 | | | $ | 14,935.5 | | | $ | 16,350.3 | |
| (1) | December 31, 2015 balances for Senior Unsecured and Structured Financing were adjusted to include deferred debt issuance costs of $41.4 million and $10.0 million, respectively, compared to balances presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, upon adoption and in accordance with the provision in ASU 2015-03. Previously these amounts were included in other assets. |
Item 8: Financial Statements and Supplementary Data
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158 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes contractual maturities of borrowings outstanding, which excludes PAA discounts, original issue discounts, and FSA discounts.
Contractual Maturities — Borrowings as of December 31, 2016(dollars in millions)
| | | | 2017
| | 2018
| | 2019
| | 2020
| | 2021
| | Thereafter
| | Contractual
Maturities
|
|---|
| Senior unsecured notes | | | | $ | 1,978.6 | | | $ | 3,115.9 | | | $ | 2,750.0 | | | $ | 750.0 | | | $ | – | | | $ | 2,051.4 | | | $ | 10,645.9 | |
| Structured financings | | | | | 328.1 | | | | 281.4 | | | | 787.2 | | | | 68.8 | | | | 61.1 | | | | 411.9 | | | | 1,938.5 | |
| FHLB advances | | | | | 15.0 | | | | 1,150.0 | | | | 1,245.5 | | | | – | | | | – | | | | – | | | | 2,410.5 | |
| | | | | $ | 2,321.7 | | | $ | 4,547.3 | | | $ | 4,782.7 | | | $ | 818.8 | | | $ | 61.1 | | | $ | 2,463.3 | | | $ | 14,994.9 | |
Unsecured Borrowings
Second Amended and Restated Revolving Credit Facility
On February 17, 2016, the Company entered into a Second Amended and Restated Revolving Credit Facility, which amended the Company’s existing revolving credit facility. SeeNote 31 —Subsequent Events. The following information was in effect at December 31, 2016.
There were no outstanding borrowings under the Second Amended and Restated Revolving Credit and Guaranty Agreement (the “Revolving Credit Facility”) at December 31, 2016 and December 31, 2015. The amount available to draw upon at December 31, 2016 was approximately $1.4 billion, with the remaining amount of approximately $0.1 billion being utilized for issuance of letters of credit to customers.
The Revolving Credit Facility has a total commitment amount of $1.5 billion and the maturity date of the commitment is January 26, 2018. 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 to customers. The applicable margin charged under the facility is 2.25% for LIBOR Rate loans and 1.25% for Base Rate loans.
The Revolving Credit Facility may be drawn and prepaid at the option of CIT. The unutilized portion of any commitment under the Revolving Credit Facility may be reduced permanently or terminated by CIT at any time without penalty.
The Revolving Credit Facility is unsecured and is guaranteed by nine of the Company’s domestic operating subsidiaries. The facility was amended in February 2016 to extend the final maturity date of the lenders’ commitments and modify the applicable margin, which depends on the Company’s long-term senior unsecured, non-credit enhanced debt rating used to calculate the interest rate for LIBOR Rate and Base Rate loans. The applicable required minimum guarantor asset coverage ratio ranges from 1.0:1.0 to 1.5: 1.0 and was 1.375: 1.0 at December 31, 2016. The amendment also added Fitch Ratings Ltd. as a provider of the Company’s long-term senior unsecured, non-credit enhanced debt rating.
The Revolving Credit Facility is subject to a $6 billion minimum consolidated net worth covenant of the Company, tested quarterly, and also limits the Company’s ability to create liens, merge or consolidate, sell, transfer, lease or dispose of all or substantially all of its assets, grant a negative pledge or make certain restricted payments during the occurrence and continuance of an event of default.
Senior Unsecured Notes
The following tables present the principal amounts by maturity date.
Senior Unsecured Notes (dollars in millions)
Maturity Date
| | | | Rate (%)
| | Date of Issuance
| | Par Value
|
|---|
| May 2017 | | | | | 5.000 | % | | May 2012 | | $ | 252.8 | |
| August 2017 | | | | | 4.250 | % | | August 2012 | | | 1,725.8 | |
| March 2018 | | | | | 5.250 | % | | March 2012 | | | 1,465.0 | |
| April 2018 | | | | | 6.625 | % | | March 2011 | | | 695.0 | |
May 2018(1) | | | | | 5.000 | % | | December 2016 | | | 955.9 | |
| February 2019 | | | | | 5.500 | % | | February 2012 | | | 1,750.0 | |
| February 2019 | | | | | 3.875 | % | | February 2014 | | | 1,000.0 | |
| May 2020 | | | | | 5.375 | % | | May 2012 | | | 750.0 | |
| August 2022 | | | | | 5.000 | % | | August 2012 | | | 1,250.0 | |
| August 2023 | | | | | 5.000 | % | | August 2013 | | | 750.0 | |
| Weighted average rate and total | | | | | 5.02 | % | | | | $ | 10,594.5 | |
(1) | | Reflects amounts tendered and exchanged to extend maturity of notes originally issued in May 2012 by one year. |
In December 2016, CIT commenced an offer to exchange (the “Exchange Offer”) any and all of its $1.2 billion outstanding 5.00% Senior Unsecured Notes due May 2017 (the “Old Notes”) for its newly issued 5.00% Senior Unsecured Notes due 2018 (the “New Notes”). The New Notes will mature on May 15, 2018, which is one year later than the maturity of the Old Notes. The New Notes will have the same interest rate, ranking and covenants as the Old Notes. Commencing on May 15, 2017, the New
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Notes will be redeemable at the Company’s option at 100.50% of the principal amount of the New Notes. Approximately $956 million of the aggregate principal amount of outstanding Old Notes were validly tendered and exchanged as of December 31, 2016.
The Indentures for the senior unsecured notes limit the Company’s ability to create liens, merge or consolidate, or sell, transfer, lease or dispose of all or substantially all of its assets. Upon a Change of Control Triggering Event as defined in the Indentures for the senior unsecured notes, holders of the senior unsecured notes will have the right to require the Company, as applicable, to repurchase all or a portion of the senior unsecured notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of such repurchase.
In addition to the above table, there is an unsecured note with a 6.0% coupon and a carrying value of $39 million (par value of $51 million) that matures in 2036.
Secured Borrowings
At December 31, 2016 the Company had pledged assets (including collateral for the FRB discount window) of $13.1 billion, which included $11.5 billion of loans (including amounts held for sale), $1.3 billion of operating lease assets, $0.2 billion of cash and $0.1 billion of investment securities.
FHLB Advances
As a member of the FHLB of San Francisco, CIT Bank can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. The interest rates charged by the FHLB for advances typically vary depending upon maturity, the cost of funds of the FHLB, and the collateral provided for the borrowing and the advances are secured by certain Bank assets and bear either a fixed or floating interest rate. The FHLB advances are collateralized by a variety of consumer and commercial loans and leases, including SFR mortgage loans, reverse mortgage loans, multi-family mortgage loans, commercial real estate loans, certain foreclosed properties and certain amounts receivable under a loss sharing agreement with the FDIC, commercial loans, leases and/or equipment.
As of December 31, 2016, the Company had $5.5 billion of financing availability with the FHLB, of which $2.3 billion was unused and available, and $0.8 million was being used for issuance of letters of credit. FHLB Advances as of December 31, 2016, have a weighted average rate of 1.18%. The following table includes the outstanding FHLB Advances, and respective pledged assets.
FHLB Advances with Pledged Assets Summary(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | FHLB
Advances
| | Pledged
Assets
| | FHLB
Advances
| | Pledged
Assets
|
|---|
Total | | | | $ | 2,410.8 | | | $ | 6,389.7 | �� | | $ | 3,117.6 | | | $ | 6,783.1 | |
Structured Financings
Set forth in the following table are amounts primarily related to and owned by consolidated VIEs. Creditors of these VIEs received ownership and/or security interests in the assets. These entities are intended to be bankruptcy remote so that such assets are not available to creditors of CIT or any affiliates of CIT until and unless the related secured borrowings have been fully discharged. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings. Structured financings as of December 31, 2016, had a weighted average rate of 3.39%, which ranged from 0.85% to 5.74%.
Structured Financings and Pledged Assets Summary(1)(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | Secured
Borrowing
| | Pledged
Assets
| | Secured
Borrowing
| | Pledged
Assets
|
|---|
Business Capital(2) | | | | $ | 949.8 | | | $ | 2,608.0 | | | $ | 1,128.6 | | | $ | 2,434.1 | |
Rail(3)(4) | | | | | 860.1 | | | | 1,327.5 | | | | 917.0 | | | | 1,344.4 | |
| Commercial Finance | | | | | – | | | | 0.2 | | | | – | | | | 0.2 | |
| Subtotal — Commercial Banking | | | | | 1,809.9 | | | | 3,935.7 | | | | 2,045.6 | | | | 3,778.7 | |
Non-Strategic Portfolios(3) | | | | | 115.8 | | | | 212.6 | | | | 550.8 | | | | 734.2 | |
Total | | | | $ | 1,925.7 | | | $ | 4,148.3 | | | $ | 2,596.4 | | | $ | 4,512.9 | |
(1) | | As part of our liquidity management strategy, the Company pledges assets to secure financing transactions (which include securitizations), and for other purposes as required or permitted by law while CIT Bank also pledges assets to secure borrowings from the FHLB and access the FRB discount window. |
(2) | | In 2016, the Company established a $1 billion, three-year asset-based lending facility in support of its factoring business in Business Capital. The 2016 secured borrowings and pledged assets include balances under this facility. |
(3) | | Management identified $8 million and $22 million of errors related to Rail and Non-Strategic Portfolios pledged assets, respectively, at December 31, 2015, which were revised. |
(4) | | At December 31, 2016, the TRS Transactions related borrowings and pledged assets, respectively, of $528.7 million and $838.3 million were included in Commercial Banking. The TRS Transactions are described in Note 11 — Derivative Financial Instruments. |
Not included in the above are liabilities of discontinued operations at December 31, 2016, and 2015, of $1,571.0 million and $2,532.2 million of secured borrowings, respectively. SeeNote 2 — Acquisitions and Discontinued Operations. During
Item 8: Financial Statements and Supplementary Data
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February 2017, the Company repaid secured debt related to Commercial Air. SeeNote 31 — Subsequent Events for additional detail.
Going Concern
In accordance with the guidance provided by ASU No. 2014 – 15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which become effective for the Company at year-end 2016, CIT considered relevant events and conditions up to and within one year from the issuance date of the financial statements, to determine if conditions exist, or will exist, that would give rise to “substantial doubt” as defined by the standard, about the Company’s ability to meet its obligations and ability to continue as a going concern.
Given this standard requires a Company to disclose when it would not be able to meet its obligations, absent a management action, within one year from the filing date of these financials, management evaluated the impact of the Commercial Air sale transaction on this disclosure. Specifically, the Commercial Air sale is targeted to close by the end of the first quarter of 2017; therefore, the Company has refrained from taking actions to refinance or extend certain future unsecured debt maturities since, in connection with the sale, the Company has announced plans to return up to $3.3 billion of capital to shareholders and repurchase or redeem approximately $6 billion of unsecured debt. In the event that the Commercial Air transaction does not close in the anticipated timeline, CIT has contingency plans that include drawing on its existing revolving credit facility, issuing additional unsecured debt, entering into exchange offers to extend the maturity of existing debt, and/or taking other actions as needed. The Company believes that these plans are probable and would sufficiently mitigate any adverse conditions.
FRB
The Company has a borrowing facility with the FRB Discount Window that can be used for short-term, typically overnight, borrowings. The borrowing capacity is determined by the FRB based on the collateral pledged.
There were no outstanding borrowings with the FRB Discount Window as of December 31, 2016, or December 31, 2015.
Variable Interest Entities (“VIEs”)
Below describes the results of the Company’s assessment of its variable interests to determine its current status with regards to being the primary beneficiary of a VIE.
Consolidated VIEs
The Company utilizes VIEs in the ordinary course of business to support its own and its customers’ financing needs. Each VIE is a separate legal entity and maintains its own books and records.
The most significant types of VIEs that CIT utilizes are ‘on balance sheet’ secured financings of pools of leases and loans originated by the Company where the Company is the primary beneficiary. The Company originates pools of assets and sells these to special purpose entities, which, in turn, issue debt instruments backed by the asset pools or sells individual interests in the assets to investors. CIT retains the servicing rights and participates in certain cash flows. These VIEs are typically organized as trusts or limited liability companies, and are intended to be bankruptcy remote, from a legal standpoint.
The main risks inherent in structured financings are deterioration in the credit performance of the vehicle’s underlying asset portfolio and risk associated with the servicing of the underlying assets.
Lenders typically have recourse to the assets in the VIEs and may benefit from other credit enhancements, such as: (1) a reserve or cash collateral account that requires the Company to deposit cash in an account, which will first be used to cover any defaulted obligor payments, (2) over-collateralization in the form of excess assets in the VIE, or (3) subordination, whereby the Company retains a subordinate position in the secured borrowing which would absorb losses due to defaulted obligor payments before the senior certificate holders. The VIE may also enter into derivative contracts in order to convert the debt issued by the VIEs to match the underlying assets or to limit or change the risk of the VIE.
With respect to events or circumstances that could expose CIT to a loss, as these are accounted for as on balance sheet, the Company records an allowance for loan losses for the credit risks associated with the underlying leases and loans. The VIE has an obligation to pay the debt in accordance with the terms of the underlying agreements.
Generally, third-party investors in the obligations of the consolidated VIEs have legal recourse only to the assets of the VIEs and do not have recourse to the Company beyond certain specific provisions that are customary for secured financing transactions, such as asset repurchase obligations for breaches of representations and warranties. In addition, the assets are generally restricted to pay only such liabilities.
Unconsolidated VIEs
Unconsolidated VIEs include government sponsored entity (“GSE”) securitization structures, private-label securitizations and limited partnership interests where the Company’s involvement is limited to an investor interest where the Company does not have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and limited partnership interests.
As a result of the OneWest Transaction, the Company has certain contractual obligations related to the HECM loans and the GNMA HMBS securitizations. The Company, as servicer of these HECM loans, is currently obligated to fund future borrower advances, which include fees paid to taxing authorities for borrowers’ unpaid taxes and insurance, mortgage insurance premiums and payments made to borrowers for line of credit draws on HECM loans. In addition, the Company capitalizes the servicing fees and interest income earned and is obligated to fund guarantee fees associated with the GNMA HMBS. The Company periodically pools and securitizes certain of these funded advances through issuance of HMBS to third-party security holders, which did not qualify for sale accounting and rather, are treated as financing transactions. As a financing transaction, the HECM loans and related proceeds from the issuance of the HMBS recognized as secured borrowings remain on the Company’s Consolidated Balance Sheet. Due to the Company’s planned exit of third party servicing, HECM loans of $374.0 million and $449.5 million were included in Assets of discontinued operations and the associated secured borrowing of $366.4 million and $440.6 million (including an unamortized premium balances of $8.1 million and $13.2 million) were included in Liabilities of discontinued operations at December 31, 2016, and 2015, respectively.
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As servicer, the Company is required to repurchase the HECM loans once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount or when the property forecloses to OREO, which reduces the secured borrowing balance. Additionally the Company services $160.2 million and $189.6 million of HMBS outstanding principal balance at December 31, 2016, and 2015, respectively, for transferred loans securitized by IndyMac for which OneWest Bank prior to the acquisition had purchased the mortgage servicing rights (“MSRs”) in connection with the IndyMac Transaction. The carrying value of the MSRs was not significant at December 31, 2016, and 2015. As the HECM loans are federally insured by the FHA and the secured borrowings guaranteed to the investors by GNMA, the Company does not believe maximum loss exposure as a result of its involvement is material or quantifiable.
For Agency and private label securitizations where the Company is not the servicer, the maximum exposure to loss represents the recorded investment based on the Company’s beneficial interests held in the securitized assets. These interests are not expected to absorb losses or receive benefits that are significant to the VIE.
As a limited partner, the nature of the Company’s ownership interest in tax credit equity investments is limited in its ability to direct the activities that drive the economic performance of the entity, as these entities are managed by the general or managing partner. As a result, the Company was not deemed to be the primary beneficiary of these VIEs.
The table below presents potential losses that would be incurred under hypothetical circumstances, such that the value of its interests and any associated collateral declines to zero and at the same time assuming no consideration of recovery or offset from any economic hedges. The Company believes the possibility is remote under this hypothetical scenario; accordingly, this required disclosure is not an indication of expected loss.
Assets and Liabilities in Unconsolidated VIEs(dollars in millions)
| | | |
Unconsolidated VIEs Carrying
Value December 31, 2016
| |
Unconsolidated VIEs Carrying
Value December 31, 2015
| |
|---|
| | | | Securities
| | Partnership
Investment
| | Securities
| |
Partnership
Investment
|
|---|
Agency securities(1) | | | | $ | 2,152.9 | | | $ | – | | | $ | 294.5 | | | $ | – | |
| Non agency securities — Other servicer | | | | | 769.0 | | | | – | | | | 906.8 | | | | – | |
| Tax credit equity investments | | | | | – | | | | 167.7 | | | | – | | | | 125.0 | |
Equity investments(2) | | | | | – | | | | 11.4 | | | | – | | | | 15.4 | |
| Total Assets | | | | $ | 2,921.9 | | | $ | 179.1 | | | $ | 1,201.3 | | | $ | 140.4 | |
| Commitments to tax credit investments | | | | | – | | | | 62.3 | | | | – | | | | 15.7 | |
| Total Liabilities | | | | $ | – | | | $ | 62.3 | | | $ | – | | | $ | 15.7 | |
Maximum loss exposure(3) | | | | $ | 2,921.9 | | | $ | 179.1 | | | $ | 1,201.3 | | | $ | 140.4 | |
(1) | | The Company discovered and corrected an immaterial error impacting the disclosure of agency securities in the amount of $147.0 million as of December 31, 2015. |
(2) | | In preparing the financial statements for the year ended December 31, 2016, the Company discovered and corrected an immaterial omission of disclosure of equity investments as of December 31, 2015. |
(3) | | Maximum loss exposure to the unconsolidated VIEs excludes the liability for representations and warranties, corporate guarantees and also excludes servicing advances. |
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS
As part of managing economic risk and exposure to interest rate and foreign currency risk, the Company primarily enters into derivative transactions in over-the-counter markets with other financial institutions. The Company does not enter into derivative financial instruments for speculative purposes.
The Dodd-Frank Act (the “Act”) includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, and imposing margin, reporting and registration requirements for certain market participants. Since the Company does not meet the definition of a Swap Dealer or Major Swap Participant under the Act, the reporting and clearing obligations apply to a limited number of derivative transactions executed with its lending customers in order to manage their interest rate risk.
SeeNote 1 — Business and Summary of Significant Accounting Policies for further description of the Company’s derivative transaction policies.
Item 8: Financial Statements and Supplementary Data
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The following table presents fair values and notional values of derivative financial instruments:
Fair and Notional Values of Derivative Financial Instruments(1)(dollars in millions)
| | | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | |
Notional
Amount
| |
Asset
Fair Value
| |
Liability
Fair Value
| |
Notional
Amount
| |
Asset
Fair Value
| |
Liability
Fair Value
|
|---|
Qualifying Hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency forward contracts — net
investment hedges | | | | $ | 817.9 | | | $ | 16.9 | | | $ | – | | | $ | 787.6 | | | $ | 45.5 | | | $ | (0.3 | ) |
| Total Qualifying Hedges | | | | | 817.9 | | | | 16.9 | | | | – | | | | 787.6 | | | | 45.5 | | | | (0.3 | ) |
Non-Qualifying Hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps(2) | | | | | 5,309.2 | | | | 63.0 | | | | (50.1 | ) | | | 4,607.6 | | | | 45.1 | | | | (37.9 | ) |
| Written options | | | | | 2,626.5 | | | | 0.1 | | | | (1.0 | ) | | | 3,346.1 | | | | 0.1 | | | | (2.5 | ) |
| Purchased options | | | | | 2,129.6 | | | | 1.0 | | | | (0.1 | ) | | | 2,342.5 | | | | 2.2 | | | | (0.1 | ) |
| Foreign currency forward contracts | | | | | 1,329.8 | | | | 30.2 | | | | (6.0 | ) | | | 1,624.2 | | | | 47.8 | | | | (6.6 | ) |
| Total Return Swap (TRS) | | | | | 587.5 | | | | – | | | | (11.3 | ) | | | 1,152.8 | | | | – | | | | (54.9 | ) |
| Equity Warrants | | | | | 1.0 | | | | 0.2 | | | | – | | | | 1.0 | | | | 0.3 | | | | – | |
| Interest Rate Lock Commitments | | | | | 20.7 | | | | 0.1 | | | | (0.1 | ) | | | 9.9 | | | | 0.1 | | | | – | |
| Forward sale commitments on agency MBS | | | | | 39.0 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | |
| Credit derivatives | | | | | 267.6 | | | | – | | | | (0.2 | ) | | | 37.6 | | | | – | | | | (0.3 | ) |
| Total Non-qualifying Hedges | | | | | 12,310.9 | | | | 94.7 | | | | (68.8 | ) | | | 13,121.7 | | | | 95.6 | | | | (102.3 | ) |
| Total Hedges | | | | $ | 13,128.8 | | | $ | 111.6 | | | $ | (68.8 | ) | | $ | 13,909.3 | | | $ | 141.1 | | | $ | (102.6 | ) |
(1) | | Presented on a gross basis. |
(2) | | Fair value balances include accrued interest. |
TRS Transactions
Two financing facilities between two wholly-owned subsidiaries of CIT, one Canadian (“CFL”) and one Dutch, and Goldman Sachs International (“GSI”), respectively, are structured as total return swaps (“TRS”), under which amounts available for advances (otherwise known as the unused portion) are accounted for as derivatives and recorded at its estimated fair value. The total facility capacity available under the Canadian TRS was $437 million and the Dutch TRS was $625 million at December 31, 2016. The utilized portion reflects the borrowing.
On December 7, 2016, CFL entered into a Fourth Amended and Restated Confirmation (the “Termination Agreement”) with GSI to terminate the Canadian TRS. Under the Termination Agreement, the Canadian TRS terminates on March 31, 2017, or such earlier date designated by CFL upon five business days’ prior notice delivered to GSI on or after January 2, 2017. The Termination Agreement required payment by CFL to GSI on December 7, 2016, of the present value of the remaining facility fee in an amount equal to approximately $280 million.
In order to prepare for the previously announced sale of the Company’s commercial aircraft leasing business to Avolon Holdings Limited, CIT redeemed in December 2016 the commercial aircraft securitization transaction utilized as a reference obligation in the Canadian TRS, causing the Canadian TRS to become fully unutilized. As a result, the Company and its Board of Directors decided to terminate the Canadian TRS in order to further simplify the Company’s business model and reduce earnings volatility resulting from the mark-to-market of the Canadian TRS derivative. On January 9, 2017, CFL provided notice to GSI designating January 17, 2017, as the termination date for the Canadian TRS.
The aggregate “notional amounts” of the TRS Transactions of $587.5 million at December 31, 2016 and $1,152.8 million at December 31, 2015, represent the aggregate unused portions under the Canadian TRS and Dutch TRS, respectively, and constitute derivative financial instruments. These notional amounts are calculated as the maximum aggregate facility commitment amounts, $1,062.3 million at December 31, 2016 and $2,125.0 at December 31, 2015, less the aggregate actual adjusted qualifying borrowing base outstanding of $474.8 million at December 31, 2016 and $972.2 million at December 31, 2015, under the Canadian TRS and Dutch TRS. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying ABS to investors. If CIT funds additional ABS under the Dutch TRS, the aggregate adjusted qualifying borrowing base of the total return swaps will increase and the notional amount of the derivatives will decrease accordingly.
Valuation of the derivatives related to the TRS Transactions is based on several factors using a discounted cash flow (“DCF”) methodology, including:
| - | | Funding costs for similar financings based on current market conditions; |
| - | | Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion; and |
| - | | Specific to the Dutch TRS, forecasted usage of the long-dated facilities through the final maturity date in 2028. |
Based on the Company’s valuation, a liability of $11.3 million and $54.9 million was recorded at December 31, 2016, and December 31, 2015, respectively on the aggregate unused portion. The decrease in the liability of $43.6 million and increase in the liability of $30.4 million for the years ended December 31, 2016, and 2015, respectively, were recognized in Other Income. The termination fee on the financing facility, mentioned above, and the reduction of the liability associated with the TRS Transactions of approximately $37 million, resulted in a net pretax charge for the Company of approximately $245 million in the fourth
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quarter of 2016. As a result of the Termination Agreement, the unsecured counterparty receivable held by GSI under the Canadian TRS was also released.
Interest expense related to the TRS Transactions is affected by the following:
| - | | A fixed facility fee of 2.85% per annum times the maximum facility commitment amount, (the facility fee on the Canadian TRS was reduced to zero effective December 7, 2016) |
| - | | 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 |
| - | | A reduction in interest expense due to the recognition of the payment of any original issue discount from GSI on the various ABS. |
Impact of Collateral and Netting Arrangements on the Total Derivative Portfolio
The following tables present a summary of our derivative portfolio, which includes the gross amounts of recognized financial assets and liabilities; the amounts offset in the consolidated balance sheet; the net amounts presented in the consolidated balance sheet; the amounts subject to an enforceable master netting arrangement or similar agreement that were not included in the offset amount above, and the amount of cash collateral received or pledged. The derivative transactions are entered into under an International Swaps and Derivatives Association (“ISDA”) agreement.
Offsetting of Derivative Assets and Liabilities(dollars in millions)
| | | | | | Gross Amounts not
offset in the
Consolidated Balance Sheet
| |
|---|
| | | | Gross Amount
of Recognized
Assets (Liabilities)
| | Gross Amount
Offset in the
Consolidated
Balance Sheet
| | Net Amount
Presented in the
Consolidated
Balance Sheet
| | Derivative
Financial
Instruments(1)
| | Cash
Collateral
Pledged /
(Received)(1)(2)
| | Net
Amount
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | | | $ | 111.6 | | | $ | – | | | $ | 111.6 | | | $ | (30.9 | ) | | $ | (48.7 | ) | | $ | 32.0 | |
| Derivative liabilities | | | | | (68.8 | ) | | | – | | | | (68.8 | ) | | | 30.9 | | | | 5.0 | | | | (32.9 | ) |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | | | $ | 141.1 | | | $ | – | | | $ | 141.1 | | | $ | (9.7 | ) | | $ | (82.7 | ) | | $ | 48.7 | |
| Derivative liabilities | | | | | (102.6 | ) | | | – | | | | (102.6 | ) | | | 9.7 | | | | 31.8 | | | | (61.1 | ) |
(1) | | The Company’s derivative transactions are governed by ISDA agreements that allow for net settlements of certain payments as well as offsetting of all contracts (“Derivative Financial Instruments”) with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. We believe our ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure. In conjunction with the ISDA agreements, the Company has entered into collateral arrangements with its counterparties which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties. |
(2) | | Collateral pledged or received is included in Other assets or Other liabilities, respectively. |
The following table presents the impact of derivatives on the statements of income.
Derivative Instrument Gains and Losses(dollars in millions)
| | | | | | Years Ended December 31,
| |
|---|
Derivative Instruments
| | | | Gain / (Loss)
Recognized
| | 2016
| | 2015
| | 2014
|
|---|
Non Qualifying Hedges | | | | | | | | | | | | | | | | |
| Cross currency swaps | | | | Other income | | | – | | | | – | | | | 4.1 | |
| Interest rate swaps | | | | Other income | | | 7.9 | | | | 4.6 | | | | (5.2 | ) |
| Interest rate options | | | | Other income | | | 0.6 | | | | 1.6 | | | | (2.4 | ) |
| Foreign currency forward contracts | | | | Other income | | | 26.2 | | | | 116.5 | | | | 118.1 | |
| Equity warrants | | | | Other income | | | (0.2 | ) | | | 0.2 | | | | (0.7 | ) |
| TRS | | | | Other income | | | 43.6 | | | | (30.4 | ) | | | (14.8 | ) |
| Rate Locks | | | | Other income | | | (0.2 | ) | | | – | | | | – | |
| Forward sale commitments on agency MBS | | | | Other income | | | 1.1 | | | | – | | | | – | |
| Risk Participation Agreements | | | | Other income | | | 1.8 | | | | – | | | | – | |
| Total Non-qualifying Hedges | | | | | | | 80.8 | | | | 92.5 | | | | 99.1 | |
Total derivatives-income statement impact | | | | | | $ | 80.8 | | | $ | 92.5 | | | $ | 99.1 | |
Item 8: Financial Statements and Supplementary Data
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The following table presents the changes in AOCI relating to derivatives:
Changes in AOCI Relating to Derivatives(dollars in millions)
Contract Type
| | | | Derivatives —
effective portion
reclassified
from AOCI
to income
| | Hedge
ineffectiveness
recorded
directly in
income
| | Total
income
statement
impact
| | Derivatives —
effective
portion
recorded
in OCI
| | Total change in
OCI for period
|
|---|
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency forward contracts — net investment hedges | | | | $ | 1.8 | | | $ | – | | | $ | 1.8 | | | $ | 2.7 | | | $ | 0.9 | |
Total | | | | $ | 1.8 | | | $ | – | | | $ | 1.8 | | | $ | 2.7 | | | $ | 0.9 | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency forward contracts — cash flow hedges | | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | |
| Foreign currency forward contracts — net investment hedges | | | | | 33.8 | | | | – | | | | 33.8 | | | | 128.4 | | | | 94.6 | |
| Cross currency swaps — net investment hedges | | | | | – | | | | – | | | | – | | | | – | | | | – | |
Total | | | | $ | 33.8 | | | $ | – | | | $ | 33.8 | | | $ | 128.4 | | | $ | 94.6 | |
Year Ended December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency forward contracts — cash flow hedges | | | | $ | – | | | $ | – | | | $ | – | | | $ | 0.2 | | | $ | 0.2 | |
| Foreign currency forward contracts — net investment hedges | | | | | (18.1 | ) | | | – | | | | (18.1 | ) | | | 111.1 | | | | 129.2 | |
| Cross currency swaps — net investment hedges | | | | | – | | | | – | | | | – | | | | 1.1 | | | | 1.1 | |
Total | | | | $ | (18.1 | ) | | $ | – | | | $ | (18.1 | ) | | $ | 112.4 | | | $ | 130.5 | |
NOTE 12 — OTHER LIABILITIES
The following table presents components of other liabilities:
| | | |
December 31, 2016
| |
December 31, 2015
|
|---|
| Accrued expenses and accounts payable | | | | $ | 580.4 | | | $ | 608.9 | |
| Current and deferred taxes payable | | | | | 250.6 | | | | 214.6 | |
| Accrued interest payable | | | | | 181.2 | | | | 201.9 | |
| Fair value of derivative financial instruments | | | | | 69.0 | | | | 102.6 | |
| Security and other deposits | | | | | 59.0 | | | | 107.9 | |
| Equipment maintenance reserves | | | | | 45.9 | | | | 32.3 | |
Other(1) | | | | | 711.5 | | | | 420.8 | |
| Total other liabilities | | | | $ | 1,897.6 | | | $ | 1,689.0 | |
(1) | | Other consists of unsettled investment security purchased of $201.2 million and $0 million as of December 31, 2016 and 2015, respectively, contingent performance liability, and other miscellaneous liabilities. |
NOTE 13 — FAIR VALUE
Fair Value Hierarchy
The Company is required to report fair value measurements for specified classes of assets and liabilities. SeeNote 1 — “Business and Summary of Significant Accounting Policies” for fair value measurement policy.
The Company characterizes inputs in the determination of fair value according to the fair value hierarchy. The fair value of the Company’s assets and liabilities where the measurement objective specifically requires the use of fair value are set forth in the tables below.
Disclosures that follow in this note exclude assets and liabilities classified as discontinued operations.
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Assets and Liabilities Measured at Estimated Fair Value on a Recurring Basis
The following table summarizes the Company’s assets and liabilities measured at estimated fair value on a recurring basis, including those management elected under the fair value option.
Assets and Liabilities Measured at Fair Value on a Recurring Basis(dollars in millions)
| | | | Total
| | Level 1
| | Level 2
| | Level 3
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | |
| Debt Securities AFS | | | | $ | 3,674.1 | | | $ | 200.1 | | | $ | 2,988.5 | | | $ | 485.5 | |
| Securities carried at fair value with changes recorded in net income | | | | | 283.5 | | | | – | | | | – | | | | 283.5 | |
| Equity Securities AFS | | | | | 34.1 | | | | 0.3 | | | | 33.8 | | | | – | |
Derivative assets at fair value — non-qualifying hedges(1) | | | | | 94.7 | | | | – | | | | 94.7 | | | | – | |
| Derivative assets at fair value — qualifying hedges | | | | | 16.9 | | | | – | | | | 16.9 | | | | – | |
| Total | | | | $ | 4,103.3 | | | $ | 200.4 | | | $ | 3,133.9 | | | $ | 769.0 | |
Liabilities | | | | | | | | | | | | | | | | | | |
Derivative liabilities at fair value — non-qualifying hedges(1) | | | | $ | (68.8 | ) | | $ | – | | | $ | (57.3 | ) | | $ | (11.5 | ) |
| Consideration holdback liability | | | | | (47.2 | ) | | | – | | | | – | | | | (47.2 | ) |
| FDIC True-up Liability | | | | | (61.9 | ) | | | – | | | | – | | | | (61.9 | ) |
| Total | | | | $ | (177.9 | ) | | $ | – | | | $ | (57.3 | ) | | $ | (120.6 | ) |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | |
| Debt Securities AFS | | | | $ | 2,007.8 | | | $ | – | | | $ | 1,440.7 | | | $ | 567.1 | |
| Securities carried at fair value with changes recorded in net income | | | | | 339.7 | | | | – | | | | – | | | | 339.7 | |
| Equity Securities AFS | | | | | 14.3 | | | | 0.3 | | | | 14.0 | | | | – | |
| FDIC receivable | | | | | 54.8 | | | | – | | | | – | | | | 54.8 | |
Derivative assets at fair value — non-qualifying hedges(1) | | | | | 95.6 | | | | – | | | | 95.6 | | | | – | |
| Derivative assets at fair value — qualifying hedges | | | | | 45.5 | | | | – | | | | 45.5 | | | | – | |
| Total | | | | $ | 2,557.7 | | | $ | 0.3 | | | $ | 1,595.8 | | | $ | 961.6 | |
Liabilities | | | | | | | | | | | | | | | | | | |
Derivative liabilities at fair value — non-qualifying hedges(1) | | | | $ | (102.3 | ) | | $ | – | | | $ | (46.8 | ) | | $ | (55.5 | ) |
| Derivative liabilities at fair value — qualifying hedges | | | | | (0.3 | ) | | | – | | | | (0.3 | ) | | | – | |
| Consideration holdback liability | | | | | (60.8 | ) | | | – | | | | – | | | | (60.8 | ) |
| FDIC True-up Liability | | | | | (56.9 | ) | | | – | | | | – | | | | (56.9 | ) |
| Total | | | | $ | (220.3 | ) | | $ | – | | | $ | (47.1 | ) | | $ | (173.2 | ) |
(1) | | Derivative fair values include accrued interest. |
Debt and Equity Securities Classified asAFS and Securities carriedat fair valuewith changes recorded in Net Income — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1, Level 2 or Level 3 inputs. Debt securities classified as AFS included investments in U.S. federal government agency, U.S. Treasury, and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Certain equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. For Agency pass-through MBS, which are classified as Level 2, the Company generally determines estimated fair value utilizing prices obtained from independent broker dealers and recent trading activity for similar assets. Debt securities classified as AFS and securities carried at fair value with changes recorded in net income represent non-Agency MBS, the market for such securities is not active and the estimated fair value was determined using a discounted cash flow technique. The significant unobservable assumptions, which are verified to the extent possible using broker dealer quotes, are estimated by type of underlying collateral, including credit loss assumptions, estimated prepayment speeds and appropriate discount rates. Given the lack of observable market data, the estimated fair value of the non-agency MBS is classified as Level 3.
Item 8: Financial Statements and Supplementary Data
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FDIC Receivable — The Company elected to measure its receivable under a participation agreement with the FDIC in connection with the IndyMac Transaction at estimated fair value under the fair value option. The participation agreement provides the Company a secured interest in certain homebuilder, home construction and lot loans, which entitle the Company to a 40% share of the underlying loan cash flows.
Projected future cash flows are estimated by taking the Company’s share (40%) of the future cash flows from the underlying loans and real estate properties that include proceeds and interest offset by servicing expenses and servicing fees. Estimated fair value of the FDIC receivable is based on a discounted cash flow technique using significant unobservable inputs, including prepayment rates, default rates, loss severities and liquidation assumptions.
To determine the estimated fair value, the cash flows are discounted using a market interest rate that represents an overall weighted average discount rate based on the underlying collateral specific discount rates. Due to the reduced liquidity that exists for such loans and lack of observable market data available, this requires the use of significant unobservable inputs; as a result these measurements are classified as Level 3. As of December 31, 2016, substantially all of the underlying loans were sold to a third party.
Derivative Assets and Liabilities — The Company’s financial derivatives include interest rate swaps, floors, caps, forwards and credit derivatives. These derivatives are valued using models that incorporate inputs depending on the type of derivative, such as, interest rate curves, foreign exchange rates and volatility. Readily observable market inputs to models can be validated to external sources, including industry pricing services, or corroborated through recent trades, broker dealer quotes, yield curves, or other market-related data. As such, these derivative instruments are valued using a Level 2 methodology. In addition, these derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk. The fair values of the TRS derivative, written options on certain CIT Bank CDs and credit derivatives were estimated using Level 3 inputs.
FDIC True-up Liability — In connection with the La Jolla Transaction, the Company recognized a FDIC True-up liability due to the FDIC 45 days after the tenth anniversary of the loss sharing agreement (the maturity) because the actual and estimated cumulative losses on the acquired covered PCI loans are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The FDIC True-up liability was recorded at estimated fair value as of the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved. The FDIC True-up liability was valued using the discounted cash flow method based on the terms specified in the loss-sharing agreements with the FDIC, the actual FDIC payments collected and significant unobservable inputs, including a risk-adjusted discount rate (reflecting the Company’s credit risk plus a liquidity premium), prepayment and default rates. Due to the significant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3.
Consideration Holdback Liability — In connection with the OneWest acquisition, the parties negotiated 4 separate holdbacks related to selected trailing risks, totaling $116 million, which reduced the cash consideration paid at closing. Any unapplied Holdback funds at the end of the respective holdback periods, which range from 1 — 5 years, are payable to the former OneWest shareholders. Unused funds for any of the four holdbacks cannot be applied against another holdback amount. The range of potential holdback to be paid is from $0 to $116 million. Based on management’s estimate of the probability of each holdback it was determined that the probable amount of holdback to be paid was originally $62.4 million and currently is $47.2 million. The amount expected to be paid was discounted based on CIT’s cost of funds. This contingent consideration was measured at fair value at the acquisition date and is re-measured at fair value in subsequent accounting periods, with the changes in fair value recorded in the statement of income, until the related contingent issues are resolved. Gross payments, which are determined based on the Company’s probability assessment, are discounted at a rate approximating the Company’s average coupon rate on deposits and borrowings. Due to the significant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3.
The following tables summarize information about significant unobservable inputs related to the Company’s categories of Level 3 financial assets and liabilities measured on a recurring basis as of December 31, 2016 and 2015.
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Quantitative Information about Level 3 Fair Value Measurements — Recurring(dollars in millions)
Financial Instrument
| | | | Estimated
Fair Value
| | Valuation Technique(s)
| | Significant
Unobservable Inputs
| | Range of Inputs
| | Weighted
Average
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | |
| Securities — AFS | | | | $ | 485.5 | | | Discounted cash flow | | Discount Rate | | 0.0% – 96.4% | | 5.5% |
| | | | | | | | | | | Prepayment Rate | | 3.2% – 21.2% | | 8.8% |
| | | | | | | | | | | Default Rate | | 0.0% – 9.0% | | 3.9% |
| | | | | | | | | | | Loss Severity | | 1.0% – 79.8% | | 36.3% |
| Securities carried at fair value with changes recorded in net income | | | | | 283.5 | | | Discounted cash flow | | Discount Rate | | 0.0% – 34.6% | | 5.6% |
| | | | | | | | | | | Prepayment Rate | | 6.1% – 16.2% | | 11.9% |
| | | | | | | | | | | Default Rate | | 1.9% – 8.1% | | 4.6% |
| | | | | | | | | | | Loss Severity | | 22.2% – 44.7% | | 25.8% |
Total Assets | | | | $ | 769.0 | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | |
| FDIC True-up liability | | | | $ | (61.9 | ) | | Discounted cash flow | | Discount Rate | | 3.2% | | 3.2% |
| Consideration holdback liability | | | | | (47.2 | ) | | Discounted cash flow | | Payment Probability | | 0% – 100% | | 40.9% |
| | | | | | | | | | | Discount Rate | | 1.3% – 4.0% | | 2.1% |
| Derivative liabilities — non qualifying | | | | | (11.5 | ) | | Market Comparables(1) | | | | | | | | | | | | |
Total Liabilities | | | | $ | (120.6 | ) | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | |
Assets |
| Securities — AFS | | | | $ | 567.1 | | | Discounted cash flow | | Discount Rate | | 0.0% – 94.5% | | 6.4% |
| | | | | | | | | | | Prepayment Rate | | 2.7% – 20.8% | | 9.2% |
| | | | | | | | | | | Default Rate | | 0.0% – 9.5% | | 4.1% |
| | | | | | | | | | | Loss Severity | | 0.2% – 83.5% | | 36.4% |
| Securities carried at fair value with changes recorded in net income | | | | | 339.7 | | | Discounted cash flow | | Discount Rate | | 0.0% – 19.9% | | 6.3% |
| | | | | | | | | | | Prepayment Rate | | 2.5% – 22.4% | | 11.5% |
| | | | | | | | | | | Default Rate | | 0.0% – 5.9% | | 4.1% |
| | | | | | | | | | | Loss Severity | | 3.8% – 39.0% | | 25.1% |
| FDIC Receivable | | | | | 54.8 | | | Discounted cash flow | | Discount Rate | | 7.8% – 18.4% | | 9.4% |
| | | | | | | | | | | Prepayment Rate | | 2.0% – 14.0% | | 3.6% |
| | | | | | | | | | | Default Rate | | 6.0% – 36.0% | | 10.8% |
| | | | | | | | | | | Loss Severity | | 20.0% – 65.0% | | 31.6% |
Total Assets | | | | $ | 961.6 | | | | | | | | | |
Liabilities |
| FDIC True-up liability | | | | $ | (56.9 | ) | | Discounted cash flow | | Discount Rate | | 4.1% | | 4.1% |
| Consideration holdback liability | | | | | (60.8 | ) | | Discounted cash flow | | Payment Probability | | 0% – 100% | | 53.8% |
| | | | | | | | | | | Discount Rate | | 1.3% – 3.9% | | 3.0% |
| Derivative liabilities — non qualifying | | | | | (55.5 | ) | | Market Comparables(1) | | | | | | |
Total Liabilities | | | | $ | (173.2 | ) | | | | | | | | |
(1) | | The valuation of these derivatives is primarily related to the TRS Transactions, which is based on several factors using a discounted cash flow methodology, including a) funding costs for similar financings based on current market conditions; b) forecasted usage of long-dated facilities through the final maturity date in 2028; and c) forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. |
Item 8: Financial Statements and Supplementary Data
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The level of aggregation and diversity within the products disclosed in the tables results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. For instruments backed by residential real estate, diversity in the portfolio is reflected in a wide range for loss severity due to varying levels of default. The lower end of the range represents high performing loans with a low probability of default while the higher end of the range relates to more distressed loans with a greater risk of default.
The valuation techniques used for the Company’s Level 3 assets and liabilities, as presented in the previous tables, are described as follows:
| - | | Discounted cash flow — Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in the estimated fair value amount. The Company utilizes both the direct and indirect valuation methods. Under the direct method, contractual cash flows are adjusted for expected losses. The adjusted cash flows are discounted at a rate which considers other costs and risks, such as market risk and liquidity. Under the indirect method, contractual cash flows are discounted at a rate which reflects the costs and risks associated with the likelihood of generating the contractual cash flows. |
| - | | Market comparables — Market comparable(s) pricing valuation techniques are used to determine the estimated fair value of certain instruments by incorporating known inputs such as recent transaction prices, pending transactions, or prices of other similar investments which require significant adjustment to reflect differences in instrument characteristics. |
Significant unobservable inputs presented in the previous tables are those the Company considers significant to the estimated fair value of the Level 3 asset or liability. The Company considers unobservable inputs to be significant if, by their exclusion, the estimated fair value of the Level 3 asset or liability would be significantly impacted based on qualitative factors such as nature of the instrument, type of valuation technique used, and the significance of the unobservable inputs on the values relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the tables.
| - | | Default rate — is an estimate of the likelihood of not collecting contractual amounts owed expressed as a constant default rate. |
| - | | Discount rate — is a rate of return used to present value the future expected cash flows to arrive at the estimated fair value of an instrument. The discount rate consists of a benchmark rate component and a risk premium component. The benchmark rate component, for example, LIBOR or U.S. Treasury rates, is generally observable within the market and is necessary to appropriately reflect the time value of money. The risk premium component reflects the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity. |
| - | | Loss severity — is the percentage of contractual cash flows lost in the event of a default. |
| - | | Prepayment rate — is the estimated rate at which forecasted prepayments of principal of the related loan or debt instrument are expected to occur, expressed as a constant prepayment rate (“CPR”). |
| - | | Payment Probability — is an estimate of the likelihood the consideration holdback amount will be required to be paid expressed as a percentage. |
As reflected above, the Company generally uses discounted cash flow techniques to determine the estimated fair value of Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs and assumptions and as a result, changes in these unobservable inputs (in isolation) may have a significant impact to the estimated fair value. Increases in the probability of default and loss severities will result in lower estimated fair values, as these increases reduce expected cash flows. Increases in the discount rate will result in lower estimated fair values, as these increases reduce the present value of the expected cash flows.
Alternatively a change in one unobservable input may result in a change to another unobservable input due to the interrelationship among inputs, which may counteract or magnify the estimated fair value impact from period to period. Generally, the value of the Level 3 assets and liabilities estimated using a discounted cash flow technique would decrease (increase) upon an increase (decrease) in discount rate, default rate, loss severity or weighted average life inputs. Discount rates are influenced by market expectations for the underlying collateral performance, and therefore may directionally move with probability and severity of default; however, discount rates are also impacted by broader market forces, such as competing investment yields, sector liquidity, economic news, and other macroeconomic factors. There is no direct interrelationship between prepayments and discount rate. Prepayment rates generally move in the opposite direction of market interest rates. Increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values.
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities Measured on a Recurring Basis(dollars in millions)
| | | | | Securities-
AFS
| | Securities
carried at
fair value
with changes
recorded in
net income
| | FDIC
Receivable
| | Derivative
liabilities —
non-qualifying(1)
| |
FDIC
True-up
Liability
| | Consideration
holdback
Liability
|
|---|
December 31, 2015 | | | | $ | 567.1 | | | $ | 339.7 | | | $ | 54.8 | | | $ | (55.5 | ) | | $ | (56.9 | ) | | $ | (60.8 | ) |
| Included in earnings | | | | | (5.8 | ) | | | 13.0 | | | | 10.7 | | | | 44.0 | | | | (5.0 | ) | | | (0.7 | ) |
| Included in comprehensive income | | | | | 20.6 | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Impairment | | | | | (3.3 | ) | | | – | | | | – | | | | – | | | | – | | | | – | |
| Paydowns and adjustments | | | | | (93.1 | ) | | | (69.2 | ) | | | (64.9 | ) | | | – | | | | – | | | | 14.3 | |
Balance as of December 31, 2016 | | | | $ | 485.5 | | | $ | 283.5 | | | $ | 0.6 | | | $ | (11.5 | ) | | $ | (61.9 | ) | | $ | (47.2 | ) |
December 31, 2014 | | | | $ | – | | | $ | – | | | $ | – | | | $ | (26.6 | ) | | $ | – | | | $ | – | |
| Included in earnings | | | | | (2.9 | ) | | | (2.5 | ) | | | 3.4 | | | | (28.9 | ) | | | (0.6 | ) | | | – | |
| Included in comprehensive income | | | | | (6.8 | ) | | | – | | | | – | | | | – | | | | – | | | | – | |
| Impairment | | | | | (2.8 | ) | | | – | | | | – | | | | – | | | | – | | | | – | |
| Purchases | | | | | 619.4 | | | | 373.4 | | | | 54.8 | | | | – | | | | (56.3 | ) | | | (60.8 | ) |
| Paydowns | | | | | (39.8 | ) | | | (31.2 | ) | | | (3.4 | ) | | | – | | | | – | | | | – | |
Balance as of December 31, 2015 | | | | $ | 567.1 | | | $ | 339.7 | | | $ | 54.8 | | | $ | (55.5 | ) | | $ | (56.9 | ) | | $ | (60.8 | ) |
(1) | | Valuation of the derivatives related to the TRS Transactions and written options on certain CIT Bank CDs. |
The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in the observability of key inputs to a fair value measurement may result in a transfer of assets or liabilities between Level 1, 2 and 3. The Company’s policy is to recognize transfers in and transfers out as of the end of the reporting period. For the years ended December 31, 2016 and 2015, there were no transfers into or out of Level 1, Level 2 and Level 3.
Financial Assets Measured at Estimated Fair Value on a Non-recurring Basis
Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. This was determined by examining the changes in market factors relative to instrument specific factors.
Assets and liabilities acquired in the OneWest Transaction were recorded at fair value on the acquisition date. See Note 2 — Acquisition and Disposition Activities for balances and assumptions used in the valuations.
The following table presents assets measured at estimated fair value on a non-recurring basis for which a non-recurring change in fair value has been recorded in the current year:
Carrying Value of Assets Measured at Fair Value on a Non-recurring Basis(dollars in millions)
| | | | | | Fair Value Measurements
at Reporting Date Using:
| | | |
|---|
| | | | Total
| | Level 1
| | Level 2
| | Level 3
| | Total
(Losses)
|
|---|
Assets | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | | $ | 51.8 | | | $ | – | | | $ | – | | | $ | 51.8 | | | $ | (354.2 | ) |
| Assets held for sale | | | | | 201.6 | | | | – | | | | – | | | | 201.6 | | | | (14.7 | ) |
| Other real estate owned | | | | | 22.5 | | | | – | | | | – | | | | 22.5 | | | | (3.2 | ) |
| Impaired loans | | | | | 151.9 | | | | – | | | | – | | | | 151.9 | | | | (26.8 | ) |
| Total | | | | $ | 427.8 | | | $ | – | | | $ | – | | | $ | 427.8 | | | $ | (398.9 | ) |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Assets held for sale | | | | $ | 1,648.3 | | | $ | – | | | $ | 31.0 | | | $ | 1,617.3 | | | $ | (32.0 | ) |
Other real estate owned(1) | | | | | 33.6 | | | | – | | | | – | | | | 33.6 | | | | (3.8 | ) |
| Impaired loans | | | | | 112.3 | | | | – | | | | – | | | | 112.3 | | | | (21.6 | ) |
| Total | | | | $ | 1,794.2 | | | $ | – | | | $ | 31.0 | | | $ | 1,763.2 | | | $ | (57.4 | ) |
(1) | | In preparing the year-end financial statements as of December 31, 2016, the Company discovered and corrected an immaterial disclosure error impacting the carrying amount and total losses related to Other real estate owned in the amount of $93.8 million (carrying amount) and $1.9 million (total losses) as of December 31, 2015. |
Item 8: Financial Statements and Supplementary Data
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Assets of continuing operations that are measured at fair value on a non-recurring basis are as follows:
Loans are transferred from held for investment to AHFS at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as a charge-off, if applicable. Once classified as AHFS, the amount by which the carrying value exceeds fair value is recorded as a valuation allowance.
Assets Held for Sale — Assets held for sale are recorded at the lower of cost or fair value on the balance sheet. As there is no liquid secondary market for the other assets held for sale in the Company’s portfolio, the fair value is estimated based on a binding contract, current letter of intent or other third-party valuation, or using internally generated valuations or discounted cash flow technique, all of which are Level 3 inputs. In those instances where a current letter of intent was utilized, the most significant assumption was the discount rate of 13.0%. At December 31, 2016, carrying value of assets held for sale approximates fair value.
Other Real Estate Owned — Other real estate owned represents collateral acquired from the foreclosure of secured real estate loans. Other real estate owned is measured at LOCOM less disposition costs. Estimated fair values of other real estate owned are reviewed on a quarterly basis and any decline in value below cost is recorded as impairment. Estimated fair value is generally based upon broker price opinions or independent appraisals, adjusted for costs to sell. The estimated costs to sell are incremental direct costs to transact a sale, such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The range of inputs in estimating appraised value or the sales price was 5.3% to 29.4% with a weighted average of 6.3%. The significant unobservable input is the appraised value or the sales price and thus is classified as Level 3. As of the reporting date, carrying value of OREO approximates fair value.
Impaired Loans — Impaired finance receivables of $500,000 or greater that are placed on non-accrual status are subject to periodic individual review in conjunction with the Company’s ongoing problem loan management (PLM) function. Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable, with the estimated value determined using fair value of collateral and other cash flows if the finance receivable is collateralized, the present value of expected future cash flows discounted at the contract’s effective interest rate, or observable market prices. The significant unobservable inputs result in the Level 3 classification. As of the reporting date, the carrying value of impaired loans approximates fair value.
Goodwill — In accordance with ASC 350, Intangibles — Goodwill and other, goodwill is assessed for impairment at least annually, or more often if events or circumstances have changed significantly from the annual test date that would indicate a potential reduction in the fair value of the reporting unit below its carrying value. During the fourth quarter of 2016, the Company performed its annual goodwill impairment test. Based on our assessments under both Step 1 and Step 2, the Company recorded an impairment of the Consumer Banking and Commercial Services RUs of $319.4 million and $34.8 million, respectively.See Note 26 — Goodwill and Intangible Assets for further information.
Fair Value Option
FDIC Receivable
The Company has made an irrevocable option to elect fair value for the initial and subsequent measurement of the FDIC receivable acquired by OneWest Bank in the IndyMac Transaction, as it was determined at the time of election that this treatment would allow a better economic offset of the changes in estimated fair values of the loans.
As of December 31, 2016, the FDIC receivable had a negligible balance as substantially all of the underlying loans were sold to a third party. As of December 31, 2015, the following table summarizes the differences between the estimated fair value carrying amount of those assets measured at estimated fair value under the fair value option, and the aggregate unpaid principal amount the Company is contractually entitled to receive or pay respectively:
| | | | December 31, 2015
| |
|---|
| (dollars in millions) | | | | Estimated Fair Value
Carrying Amount
| | Aggregate
Unpaid Principal
| | Difference Between
Estimated Fair Value
and 100% Aggregate
Unpaid Principal Balance
|
|---|
FDIC Receivable | | | | $ | 54.8 | | | $ | 204.5 | | | $ | 149.7 | |
The gains and losses due to changes in the estimated fair value of the FDIC receivable under the fair value option are included in earnings for the period from August 3, 2015 (the date of the OneWest transaction) to December 31, 2016. Amounts recognized in 2016 are negligible and amounts recognized in 2015 are shown in the Financial Assets and Liabilities Measured at Estimated Fair Value on a Recurring Basis section of this Note.
Securities Carried at Fair Value with Changes Recorded in Net Income
As of December 31, 2016, the non-agency MBS securities carried at fair value with changes recorded in net income totaled approximately $284 million.
The acquisition date fair value of the securities was based on market quotes, where available, or on discounted cash flow techniques using assumptions for prepayment rates, market yield requirements and credit losses where market quotes were not available. Future prepayment rates were estimated based on current and expected future interest rate levels, collateral seasoning and market forecasts, as well as relevant characteristics of the collateral underlying the securities, such as loan types, prepayment penalties, interest rates and recent prepayment experience.
Fair Values of Financial Instruments
The carrying values and estimated fair values of financial instruments presented below exclude leases and certain other assets and liabilities, which are not required for disclosure.
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Financial Instruments(dollars in millions)
| | | | | | Estimated Fair Value
| | | |
|---|
| | | |
Carrying
Value
| | Level 1
| | Level 2
| | Level 3
| | Total
|
|---|
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | | | |
| Cash and interest bearing deposits | | | | $ | 6,430.6 | | | $ | 6,430.6 | | | $ | – | | | $ | – | | | $ | 6,430.6 | |
| Derivative assets at fair value — non-qualifying hedges | | | | | 94.7 | | | | – | | | | 94.7 | | | | – | | | | 94.7 | |
| Derivative assets at fair value — qualifying hedges | | | | | 16.9 | | | | – | | | | 16.9 | | | | – | | | | 16.9 | |
| Assets held for sale (excluding leases) | | | | | 428.4 | | | | – | | | | 175.0 | | | | 264.6 | | | | 439.6 | |
| Loans (excluding leases) | | | | | 26,683.0 | | | | – | | | | 390.3 | | | | 26,456.4 | | | | 26,846.7 | |
Investment securities(1) | | | | | 4,491.1 | | | | 200.4 | | | | 3,199.6 | | | | 1,094.2 | | | | 4,494.2 | |
Indemnification assets(2) | | | | | 233.4 | | | | – | | | | – | | | | 201.0 | | | | 201.0 | |
Other assets subject to fair value disclosure and unsecured counterparty receivables(3) | | | | | 712.2 | | | | – | | | | – | | | | 712.2 | | | | 712.2 | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Deposits(4) | | | | | (32,323.2 | ) | | | – | | | | – | | | | (32,490.9 | ) | | | (32,490.9 | ) |
| Derivative liabilities at fair value — non-qualifying hedges | | | | | (68.8 | ) | | | – | | | | (57.3 | ) | | | (11.5 | ) | | | (68.8 | ) |
Borrowings(4) | | | | | (15,097.8 | ) | | | – | | | | (14,457.8 | ) | | | (1,104.9 | ) | | | (15,562.7 | ) |
| Credit balances of factoring clients | | | | | (1,292.0 | ) | | | – | | | | – | | | | (1,292.0 | ) | | | (1,292.0 | ) |
Other liabilities subject to fair value disclosure(5) | | | | | (1,003.6 | ) | | | – | | | | – | | | | (1,003.6 | ) | | | (1,003.6 | ) |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | | | |
| Cash and interest bearing deposits | | | | $ | 7,652.4 | | | $ | 7,652.4 | | | $ | – | | | $ | – | | | $ | 7,652.4 | |
| Derivative assets at fair value — non-qualifying hedges | | | | | 95.6 | | | | – | | | | 95.6 | | | | – | | | | 95.6 | |
| Derivative assets at fair value — qualifying hedges | | | | | 45.5 | | | | – | | | | 45.5 | | | | – | | | | 45.5 | |
Assets held for sale (excluding leases) | | | | | 738.8 | | | | 21.8 | | | | 55.8 | | | | 669.1 | | | | 746.7 | |
Loans (excluding leases) | | | | | 27,599.6 | | | | – | | | | 975.5 | | | | 25,893.2 | | | | 26,868.7 | |
Investment securities(1) | | | | | 2,953.7 | | | | 11.4 | | | | 1,678.7 | | | | 1,265.0 | | | | 2,955.1 | |
Indemnification assets(2) | | | | | 343.2 | | | | – | | | | – | | | | 323.2 | | | | 323.2 | |
Other assets subject to fair value disclosure and unsecured counterparty receivables(3) | | | | | 936.5 | | | | – | | | | – | | | | 936.5 | | | | 936.5 | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Deposits(4) | | | | | (32,793.1 | ) | | | – | | | | – | | | | (32,951.4 | ) | | | (32,951.4 | ) |
| Derivative liabilities at fair value — non-qualifying hedges | | | | | (102.3 | ) | | | – | | | | (46.8 | ) | | | (55.5 | ) | | | (102.3 | ) |
| Derivative liabilities at fair value qualifying hedges | | | | | (0.3 | ) | | | – | | | | (0.3 | ) | | | – | | | | (0.3 | ) |
Borrowings(4) | | | | | (16,520.5 | ) | | | – | | | | (15,792.3 | ) | | | (1,191.6 | ) | | | (16,983.9 | ) |
| Credit balances of factoring clients | | | | | (1,344.0 | ) | | | – | | | | – | | | | (1,344.0 | ) | | | (1,344.0 | ) |
Other liabilities subject to fair value disclosure(5) | | | | | (789.0 | ) | | | – | | | | – | | | | (789.0 | ) | | | (789.0 | ) |
(1) | | Level 3 estimated fair value at December 31, 2016, includes debt securities AFS ($485.5 million), debt securities carried at fair value with changes recorded in net income ($283.5 million), non-marketable investments ($256.4 million), and debt securities HTM ($68.8 million). Level 3 estimated fair value at December 31, 2015, includes debt securities AFS ($567.1 million), debt securities carried at fair value with changes recorded in net income ($339.7 million), non-marketable investments ($291.8 million), and debt securities HTM ($66.3 million). |
(2) | | The indemnification assets included in the above table do not include Agency claims indemnification ($108.0 million and $65.6 million at December 31, 2016 and 2015, respectively), as they are not considered financial instruments. |
(3) | | Other assets subject to fair value disclosure primarily include accrued interest receivable and miscellaneous receivables. These assets have carrying values that approximate fair value generally due to the short-term nature and are classified as Level 3. The unsecured counterparty receivables primarily consist of amounts owed to CIT from GSI for debt discount, return of collateral posted to GSI and settlements resulting from market value changes to asset-backed securities underlying the Dutch TRS. |
(4) | | Deposits and borrowings include accrued interest, which is included in “Other liabilities” in the Balance Sheet. |
(5) | | Other liabilities subject to fair value disclosure include accounts payable, accrued liabilities, customer security and maintenance deposits and miscellaneous liabilities. The fair value of these approximate carrying value and are classified as level 3. |
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The methods and assumptions used to estimate the fair value of each class of financial instruments are explained below:
Cash and interest bearing deposits — The carrying values of cash and interest bearing deposits are at face amount. The impact of the time value of money from the unobservable discount rate for restricted cash is inconsequential as of December 31, 2016 and December 31, 2015. Accordingly cash and cash equivalents and restricted cash approximate estimated fair value and are classified as Level 1.
Derivatives — The estimated fair values of derivatives were calculated using observable market data and represent the gross amount receivable or payable to terminate, taking into account current market rates, which represent Level 2 inputs, except for the TRS derivative, written options on certain CIT Bank CDs and credit derivatives that utilized Level 3 inputs. SeeNote 11 — Derivative Financial Instruments for notional principal amounts and fair values.
Investment Securities — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1, Level 2 or Level 3 inputs. Debt securities classified as AFS included investments in U.S. federal government agency securities, U.S. Treasury and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Debt securities carried at fair value with changes recorded in net income include non-agency MBS where the market for such securities is not active; therefore the estimated fair value was determined using a discounted cash flow technique, which is a Level 3 input. Certain equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. Debt securities classified as HTM include government agency securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. For debt securities HTM where no market rate was available, Level 3 inputs were utilized. Debt securities HTM are securities that the Company has both the ability and the intent to hold until maturity and are carried at amortized cost and periodically assessed for OTTI, with the cost basis reduced when impairment is deemed to be other-than-temporary. Non-marketable equity investments utilize Level 3 inputs to estimate fair value and are generally recorded under the cost or equity method of accounting and are periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary.
Assets held for sale — Assets held for sale are recorded at the lower of cost or fair value on the balance sheet. Of the assets held for sale above $175 million carrying amount at December 31, 2016 was valued using Level 2 inputs. As there is no liquid secondary market for the other assets held for sale in the Company’s portfolio, the fair value is estimated based on a binding contract, current letter of intent or other third-party valuation, or using internally generated valuations or discounted cash flow technique, all of which are Level 3 inputs. Commercial loans are generally valued individually, while small ticket commercial loans are valued on an aggregate portfolio basis.
Loans — Within the Loans category, there are several types of loans as follows:
| - | | Commercial and Consumer Loans — Of the loan balance above, approximately $0.4 billion at December 31, 2016 and $1.0 billion at December 31, 2015, was valued using Level 2 inputs. As there is no liquid secondary market for the other loans in the Company’s portfolio, the fair value is estimated based on discounted cash flow analyses which use Level 3 inputs at both December 31, 2016 and December 31, 2015. In addition to the characteristics of the underlying contracts, key inputs to the analysis include interest rates, prepayment rates, and credit spreads. For the commercial loan portfolio, the market based credit spread inputs are derived from instruments with comparable credit risk characteristics obtained from independent third party vendors. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of the loans. The fair value of loans at December 31, 2016 was $26.8 billion, which was 100.6% of carrying value. The fair value of loans at December 31, 2015 was $26.9 billion, which was 97.4% of carrying value. |
| - | | Impaired Loans — The value of impaired loans is estimated using the fair value of collateral (on an orderly liquidation basis) if the loan is collateralized, the present value of expected cash flows utilizing the current market rate for such loan, or observable market price. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of impaired loans relative to contractual amounts owed (unpaid principal balance or “UPB”) from customers. As of December 31, 2016, the UPB related to impaired loans including loans for which the Company was applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), totaled $244.3 million. Including related allowances, these loans are carried at $188.2 million, or 77.0% of UPB. Of these amounts, $74.7 million and $55.5 million of UPB and carrying value, respectively, relate to loans with no specific allowance. As of December 31, 2015 the UPB related to impaired loans, including loans for which the Company was applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), totaled $157.2 million and including related allowances, these loans were carried at $106.9 million, or 68.0% of UPB. Of these amounts, $33.3 million and $22.0 million of UPB and carrying value relate to loans with no specific allowance. The difference between UPB and carrying value reflects cumulative charge-offs on accounts remaining in process of collection, FSA discounts and allowances. SeeNote 3 — Loans for more information. |
| - | | PCI loans — These loans are valued by grouping the loans into performing and non-performing groups and stratifying the loans based on common risk characteristics such as product type, FICO score and other economic attributes. Due to a lack of observable market data, the estimated fair value of these loan portfolios was based on an internal model using unobservable inputs, including discount rates, prepayment rates, delinquency roll-rates, and loss severities. Due to the |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | significance of the unobservable inputs, these instruments are classified as Level 3. |
| - | | Jumbo Mortgage Loans — The estimated fair value was determined by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, these loans are classified as Level 3. |
Indemnification Assets — The Company’s indemnification assets relating to the SFR loans purchased in the OneWest Bank Transaction are measured on the same basis as the related indemnified item, the underlying SFR and commercial loans. The estimated fair values reflect the present value of expected reimbursements under the indemnification agreements based on the loan performance discounted at an estimated market rate, and classified as Level 3. See “PCI Loans” above for more information.
Deposits — The estimated fair value of deposits with no stated maturity such as: demand deposit accounts (including custodial deposits), money market accounts and savings accounts is the amount payable on demand at the reporting date.
The estimated fair value of time deposits is determined using a discounted cash flow analysis. The discount rate for the time deposit accounts is derived from the rate currently offered on alternate funding sources with similar maturities. Discount rates used in the present value calculation are based on the Company’s average current deposit rates for similar terms, which are Level 3 inputs.
Borrowings
| - | | Unsecured debt — Approximately $10.6 billion par value at December 31, 2016 and $10.7 billion par value at December 31, 2015 were valued using market inputs, which are Level 2 inputs. |
| - | | Secured Borrowings — Approximately $3.3 billion par value at December 31, 2016 and $4.6 billion par value at December 31, 2015 were valued using market inputs, which are Level 2 inputs. Where market estimates were not available for approximately $1.1 billion and $1.2 billion par value at December 31, 2016 and December 31, 2015, respectively, values were estimated using a discounted cash flow analysis with a discount rate approximating current market rates for issuances by CIT of similar debt, which are Level 3 inputs. Included in the above, the estimated fair value of FHLB Advances is based on a discounted cash flow model that utilizes benchmark interest rates and other observable market inputs. The discounted cash flow model uses the contractual advance features to determine the cash flows with a zero spread to the forward FHLB curve, which are discounted using observable benchmark interest rates. As the model inputs can be observed in a liquid market and the model does not require significant judgment, FHLB advances are classified as Level 2. |
Credit balances of factoring clients — The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances (typically 90 days or less) as of December 31, 2016 and December 31, 2015. Accordingly, credit balances of factoring clients approximate estimated fair value and are classified as Level 3.
NOTE 14 — STOCKHOLDERS’ EQUITY
A roll forward of common stock activity is presented in the following table.
| | | | Issued
| | Less
Treasury
| | Outstanding
|
|---|
| Common Stock – December 31, 2015 | | | | | 204,447,769 | | | | (3,426,261 | ) | | | 201,021,508 | |
| Restricted stock issued | | | | | 1,662,119 | | | | – | | | | 1,662,119 | |
| Shares held to cover taxes on vesting restricted shares and other | | | | | – | | | | (668,280 | ) | | | (668,280 | ) |
| Employee stock purchase plan participation | | | | | 72,325 | | | | – | | | | 72,325 | |
| Common Stock – December 31, 2016 | | | | | 206,182,213 | | | | (4,094,541 | ) | | | 202,087,672 | |
We declared and paid dividends totaling $0.60 per common share during 2016 and 2015.
Accumulated Other Comprehensive Income/(Loss)
Total comprehensive loss was $846.0 million for the year ended December 31, 2016, compared to total comprehensive income of $1,025.9 million for the year ended December 31, 2015 and $1,058.8 million for the year ended December 31, 2014, including accumulated other comprehensive loss of $140.1 million and $142.1 million at December 2016 and 2015, respectively.
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table details the components of Accumulated Other Comprehensive Loss, net of tax:
Components of Accumulated Other Comprehensive Income (Loss)(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | |
Gross
Unrealized
| | Income
Taxes
| |
Net
Unrealized
| |
Gross
Unrealized
| | Income
Taxes
| |
Net
Unrealized
|
|---|
| Foreign currency translation adjustments | | | | $ | (28.6 | ) | | $ | (32.8 | ) | | $ | (61.4 | ) | | $ | (29.8 | ) | | $ | (35.9 | ) | | $ | (65.7 | ) |
| Changes in benefit plan net gain (loss) and prior service (cost)/credit | | | | | (70.6 | ) | | | 5.3 | | | | (65.3 | ) | | | (76.3 | ) | | | 7.0 | | | | (69.3 | ) |
| Unrealized net gains (losses) on available for sale securities | | | | | (22.0 | ) | | | 8.6 | | | | (13.4 | ) | | | (11.4 | ) | | | 4.3 | | | | (7.1 | ) |
| Total accumulated other comprehensive loss | | | | $ | (121.2 | ) | | $ | (18.9 | ) | | $ | (140.1 | ) | | $ | (117.5 | ) | | $ | (24.6 | ) | | $ | (142.1 | ) |
The following table details the changes in the components of Accumulated Other Comprehensive Income (Loss), net of income taxes:
Changes in Accumulated Other Comprehensive Loss by Component(dollars in millions)
| | | | Foreign
currency
translation
adjustments
| | Changes in
benefit plan
net gain (loss)
and prior
service (cost)
credit
| | Unrealized net
gains (losses)
on available
for sale
securities
| | Total AOCI
| |
|---|
Balance as of December 31, 2015 | | | | $ | (65.7 | ) | | $ | (69.3 | ) | | $ | (7.1 | ) | | $ | (142.1 | ) | |
| AOCI activity before reclassifications | | | | | (0.4 | ) | | | 2.4 | | | | (6.3 | ) | | | (4.3 | ) | |
| Amounts reclassified from AOCI | | | | | 4.7 | | | | 1.6 | | | | – | | | | 6.3 | | |
| Net current period AOCI | | | | | 4.3 | | | | 4.0 | | | | (6.3 | ) | | | 2.0 | | |
Balance as of December 31, 2016 | | | | $ | (61.4 | ) | | $ | (65.3 | ) | | $ | (13.4 | ) | | $ | (140.1 | ) | |
Balance as of December 31, 2014 | | | | $ | (75.4 | ) | | $ | (58.5 | ) | | $ | – | | | $ | (133.9 | ) | |
| AOCI activity before reclassifications | | | | | (70.8 | ) | | | (12.8 | ) | | | (7.1 | ) | | | (90.7 | ) | |
| Amounts reclassified from AOCI | | | | | 80.5 | | | | 2.0 | | | | – | | | | 82.5 | | |
| Net current period AOCI | | | | | 9.7 | | | | (10.8 | ) | | | (7.1 | ) | | | (8.2 | ) | |
Balance as of December 31, 2015 | | | | $ | (65.7 | ) | | $ | (69.3 | ) | | $ | (7.1 | ) | | $ | (142.1 | ) | |
Other Comprehensive Income/(Loss)
The amounts included in the Statement of Comprehensive Income (Loss) are net of income taxes.
Foreign currency translation reclassification adjustments impacting net income were $4.7 million for 2016, $80.5 million for 2015 and $15.8 million for 2014. The change in income taxes associated with foreign currency translation adjustments was $3.1 million for the year ended December 31, 2016 and $(35.9) million for the year ended December 31, 2015 and there were no taxes associated with foreign currency translation adjustments for 2014.
The changes in benefit plans net gain/(loss) and prior service (cost)/credit reclassification adjustments impacting net income was $1.6 million, $2.0 million and $8.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. The change in income taxes associated with changes in benefit plans net gain/(loss) and prior service (cost)/credit was $(1.7) million and $6.8 million for the years ended December 31, 2016 and 2015, respectively and was not significant for 2014.
There were no reclassification adjustments impacting net income related to unrealized gains (losses) on available for sale securities for the years ended December 31, 2016 and 2015 compared to $0.5 million for 2014. The change in income taxes associated with net unrealized gains on available for sale securities was $4.3 million, $4.3 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has operations primarily in North America. The functional currency for foreign operations is generally the local currency. The value of assets and liabilities of these operations is translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates during the year. The resulting foreign currency translation gains and losses, as well as offsetting gains and losses on hedges of net investments in foreign operations, are reflected in AOCI. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency are recorded in Other Income.
Reclassifications Out of Accumulated Other Comprehensive Income (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| |
|---|
| | | | Gross
Amount
| | Tax
| | Net
Amount
| | Gross
Amount
| | Tax
| | Net
Amount
| | Affected
Income
Statement
line item
|
|---|
| Foreign currency translation adjustments gains (losses) | | | | $ | 3.5 | | | $ | 1.2 | | | $ | 4.7 | | | $ | 73.4 | | | $ | 7.1 | | | $ | 80.5 | | | Other Income |
| Changes in benefit plan net gain/(loss) and prior service (cost)/credit gains (losses) | | | | | 1.8 | | | | (0.2 | ) | | | 1.6 | | | | 2.3 | | | | (0.3 | ) | | | 2.0 | | | Operating
Expenses |
| Total Reclassifications out of AOCI | | | | $ | 5.3 | | | $ | 1.0 | | | $ | 6.3 | | | $ | 75.7 | | | $ | 6.8 | | | $ | 82.5 | | | |
Table of Contents
CIT ANNUAL REPORT 2016 175
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — REGULATORY CAPITAL
The Company and the Bank are each subject to various regulatory capital requirements administered by the FRB and the OCC. Quantitative measures established by regulation to ensure capital adequacy require that the Company and the Bank each maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. We compute capital ratios in accordance with Federal Reserve capital guidelines and OCC capital guidelines for assessing adequacy of capital for the Company and CIT Bank, respectively. At December 31, 2016 and December 31, 2015, the regulatory capital guidelines applicable to the Company and Bank were based on the Basel III Final Rule.
The calculation of the Company’s regulatory capital ratios are subject to review and consultation with the FRB, which may result in refinements to amounts reported at December 31, 2016.
The following table summarizes the actual and effective minimum required capital ratios:
Tier 1 Capital and Total Capital Components(dollars in millions)
| | | | CIT
| | CIT Bank, N.A.
| |
|---|
| Tier 1 Capital | | | |
December 31,
2016
| |
December 31,
2015
| |
December 31,
2016
| |
December 31,
2015
|
|---|
Total common stockholders’ equity(1) | | | | $ | 10,002.7 | | | $ | 10,944.7 | | | $ | 5,187.8 | | | $ | 5,582.2 | |
| Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests | | | | | 79.1 | | | | 76.9 | | | | 13.4 | | | | 7.0 | |
| Adjusted total equity | | | | | 10,081.8 | | | | 11,021.6 | | | | 5,201.2 | | | | 5,589.2 | |
Less: Goodwill(2)(3) | | | | | (733.1 | ) | | | (1,130.8 | ) | | | (490.9 | ) | | | (830.8 | ) |
| Disallowed deferred tax assets | | | | | (213.7 | ) | | | (908.3 | ) | | | – | | | | – | |
Disallowed intangible assets(2)(3) | | | | | (68.3 | ) | | | (53.6 | ) | | | (84.9 | ) | | | (58.4 | ) |
Other Tier 1 components(4)(5) | | | | | (7.8 | ) | | | (0.1 | ) | | | (2.2 | ) | | | – | |
| Common Equity Tier 1 Capital | | | | | 9,058.9 | | | | 8,928.8 | | | | 4,623.2 | | | | 4,700.0 | |
| Tier 1 Capital | | | | | 9,058.9 | | | | 8,928.8 | | | | 4,623.2 | | | | 4,700.0 | |
Tier 2 Capital | | | | | | | | | | | | | | | | | | |
Qualifying allowance for credit losses and other reserves(6) | | | | | 476.3 | | | | 403.3 | | | | 430.2 | | | | 374.7 | |
| Total qualifying capital | | | | $ | 9,535.2 | | | $ | 9,332.1 | | | $ | 5,053.4 | | | $ | 5,074.7 | |
| Risk-weighted assets | | | | $ | 64,586.3 | | | $ | 69,552.3 | | | $ | 34,410.3 | | | $ | 36,807.2 | |
Common Equity Tier 1 Capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
| Actual | | | | | 14.0 | % | | | 12.8 | % | | | 13.4 | % | | | 12.8 | % |
Effective minimum ratios under Basel III
guidelines(7) | | | | | 5.125 | % | | | 4.5 | % | | | 5.125 | % | | | 4.5 | % |
Tier 1 Capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
| Actual | | | | | 14.0 | % | | | 12.8 | % | | | 13.4 | % | | | 12.8 | % |
Effective minimum ratios under Basel III
guidelines(7) | | | | | 6.625 | % | | | 6.0 | % | | | 6.625 | % | | | 6.0 | % |
Total Capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
| Actual | | | | | 14.8 | % | | | 13.4 | % | | | 14.7 | % | | | 13.8 | % |
Effective minimum ratios under Basel III
guidelines(7) | | | | | 8.625 | % | | | 8.0 | % | | | 8.625 | % | | | 8.0 | % |
Tier 1 Leverage Ratio: | | | | | | | | | | | | | | | | | | |
| Actual | | | | | 13.9 | % | | | 13.4 | % | | | 10.9 | % | | | 10.9 | % |
| Required minimum ratio for capital adequacy purposes | | | | | 4.0 | % | | | 4.0 | % | | | 4.0 | % | | | 4.0 | % |
(1) | | See Consolidated Balance Sheets for the components of Total stockholders’ equity. |
(2) | | Goodwill and disallowed intangible assets adjustments also reflect the portion included within assets of discontinued operations. |
(3) | | Goodwill and disallowed intangible assets adjustments include the respective portion of deferred tax liability in accordance with guidelines under Basel III. |
(4) | | The December 31, 2016 amount represents the Volcker Rule requirement of deducting covered funds from equity. This requirement was first implemented in the second quarter of 2016. The December 31, 2015 amount Includes the Tier 1 capital charge for nonfinancial equity instruments under Basel I. |
(5) | | Other Tier 1 components include excess cost over fair market value on available-for-sale equity securities with readily determinable fair values. |
(6) | | “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. |
(7) | | Required ratios under Basel III Final Rule in effect as of the reporting date including the partially phased-in capital conservation buffer. |
The Basel III Final Rule: (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expanded the scope of the deductions from and adjustments to capital as compared to the prior regulations.
Item 8: Financial Statements and Supplementary Data
Table of Contents
176 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Basel III Final Rule also prescribed new approaches for risk weightings. Of these, CIT will calculate risk weightings using the Standardized Approach. This approach expands the risk-weighting categories from the former four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. government and agency securities to as high as 1,250% for such exposures as mortgage backed securities, credit-enhancing interest-only strips or unsettled security/commodity transactions.
The Basel III Final Rule established new minimum capital ratios for CET1, Tier 1 capital, and Total capital of 4.5%, 6.0% and 8.0%, respectively. In addition, the Basel III Final Rule also introduced a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity — repurchases and compensation based on the amount of the shortfall. This buffer was implemented beginning January 1, 2016 at the 0.625% level and increases by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
NOTE 16 — EARNINGS PER SHARE
The following table sets forth the computation of the Basic and Diluted earnings per share:
| | | | Years Ended December 31,
| |
|---|
| (dollars in millions, except per share amounts; shares in thousands) | | | | 2016
| | 2015
| | 2014
|
|---|
Earnings / (Loss) | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | | $ | (182.6 | ) | | $ | 724.1 | | | $ | 675.7 | |
| (Loss) income from discontinued operations | | | | | (665.4 | ) | | | 310.0 | | | | 443.4 | |
| Net (loss) income | | | | $ | (848.0 | ) | | $ | 1,034.1 | | | $ | 1,119.1 | |
Weighted Average Common Shares Outstanding | | | | | | | | | | | | | | |
| Basic shares outstanding | | | | | 201,850 | | | | 185,500 | | | | 188,491 | |
Stock-based awards(1)(2) | | | | | – | | | | 888 | | | | 972 | |
| Diluted shares outstanding | | | | | 201,850 | | | | 186,388 | | | | 189,463 | |
Basic Earnings Per Common Share Data | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | | $ | (0.90 | ) | | $ | 3.90 | | | $ | 3.59 | |
| (Loss) income from discontinued operation | | | | $ | (3.30 | ) | | $ | 1.67 | | | $ | 2.35 | |
| Basic (loss) income per common share | | | | $ | (4.20 | ) | | $ | 5.57 | | | $ | 5.94 | |
Diluted Earnings Per Common Share Data(2) |
| (Loss) income from continuing operations | | | | $ | (0.90 | ) | | $ | 3.89 | | | $ | 3.57 | |
| (Loss) income from discontinued operation | | | | $ | (3.30 | ) | | $ | 1.66 | | | $ | 2.34 | |
| Diluted (loss) income per common share | | | | $ | (4.20 | ) | | $ | 5.55 | | | $ | 5.91 | |
(1) | | Represents the incremental shares from in-the-money non-qualified restricted stock awards, performance shares, and stock options. Weighted average restricted shares, performance shares and options that were either out-of-the money or did not meet performance targets and therefore excluded from diluted earnings per share totaled 2.7 million, 2.0 million, and 1.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. |
(2) | | Due to the net loss for the year ended December 31, 2016, the Diluted Earnings Per Share calculation excluded 0.7 million of weighted average restricted shares, performance shares, and options as they were anti-dilutive. The Basic weighted average shares outstanding and net loss for the year ended December 31, 2016 were utilized for the Diluted Earnings Per Share calculation. |
Table of Contents
CIT ANNUAL REPORT 2016 177
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 — NON-INTEREST INCOME
The following table sets forth the components of non-interest income:
Non-interest Income(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Rental income on operating leases | | | | $ | 1,031.6 | | | $ | 1,018.1 | | | $ | 949.6 | |
| Other Income: | | | | | | | | | | | | | | |
| Fee revenues | | | | | 111.6 | | | | 105.7 | | | | 92.4 | |
| Factoring commissions | | | | | 105.0 | | | | 116.5 | | | | 120.2 | |
| Net gains (losses) on derivatives and foreign currency exchange | | | | | 55.9 | | | | (37.9 | ) | | | (51.8 | ) |
| Gains on sales of leasing equipment | | | | | 51.1 | | | | 57.0 | | | | 59.6 | |
| Gains on investments | | | | | 34.6 | | | | 0.9 | | | | 38.3 | |
| Gains (losses) on loan and portfolio sales | | | | | 34.2 | | | | (47.2 | ) | | | 34.3 | |
| Gains (losses) on OREO sales | | | | | 10.2 | | | | (5.4 | ) | | | – | |
| Impairment on assets held for sale | | | | | (36.6 | ) | | | (55.9 | ) | | | (81.2 | ) |
| Termination fees on Canadian total return swap | | | | | (280.8 | ) | | | – | | | | – | |
| Other revenues | | | | | 65.4 | | | | 15.9 | | | | 52.1 | |
| Total other income | | | | | 150.6 | | | | 149.6 | | | | 263.9 | |
| Total non-interest income | | | | $ | 1,182.2 | | | $ | 1,167.7 | | | $ | 1,213.5 | |
NOTE 18 — NON-INTEREST EXPENSES
The following table sets forth the components of Non-interest expenses:
Non-interest Expense(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Depreciation on operating lease equipment | | | | $ | (261.1 | ) | | $ | (229.2 | ) | | $ | (229.8 | ) |
| Maintenance and other operating lease expenses | | | | | (213.6 | ) | | | (185.1 | ) | | | (171.7 | ) |
| Operating expenses: | | | | | | | | | | | | | | |
| Compensation and benefits | | | | | (585.5 | ) | | | (549.6 | ) | | | (495.1 | ) |
| Professional fees | | | | | (175.8 | ) | | | (135.0 | ) | | | (75.3 | ) |
| Technology | | | | | (133.7 | ) | | | (109.2 | ) | | | (84.5 | ) |
| Insurance | | | | | (96.5 | ) | | | (61.6 | ) | | | (45.3 | ) |
| Net occupancy expense | | | | | (71.9 | ) | | | (49.1 | ) | | | (33.7 | ) |
| Advertising and marketing | | | | | (20.5 | ) | | | (30.4 | ) | | | (33.2 | ) |
| Other | | | | | (137.8 | ) | | | (114.6 | ) | | | (100.2 | ) |
Operating expenses, excluding restructuring costs and
intangible asset amortization | | | | | (1,221.7 | ) | | | (1,049.5 | ) | | | (867.3 | ) |
| Intangible assets amortization | | | | | (25.6 | ) | | | (13.3 | ) | | | (1.4 | ) |
| Provision for severance and facilities exiting activities | | | | | (36.2 | ) | | | (58.3 | ) | | | (31.4 | ) |
| Total operating expenses | | | | | (1,283.5 | ) | | | (1,121.1 | ) | | | (900.1 | ) |
| Goodwill impairment | | | | | (354.2 | ) | | | – | | | | – | |
| Loss on debt extinguishments and deposit redemptions | | | | | (12.5 | ) | | | (1.5 | ) | | | (3.5 | ) |
| Total non-interest expenses | | | | $ | (2,124.9 | ) | | $ | (1,536.9 | ) | | $ | (1,305.1 | ) |
NOTE 19 — INCOME TAXES
The following table presents the U.S. and non-U.S. components of income/ (loss) before (benefit)/ provision for income taxes:
Income (Loss) From Continuing Operations Before Benefit (Provision) for Income Taxes (dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| U.S. operations | | | | $ | 157.5 | | | $ | 227.6 | | | $ | 270.3 | |
| Non-U.S. operations | | | | | (136.6 | ) | | | (41.6 | ) | | | (25.8 | ) |
| Income from continuing operations before benefit / (provision) for income taxes | | | | $ | 20.9 | | | $ | 186.0 | | | $ | 244.5 | |
Item 8: Financial Statements and Supplementary Data
Table of Contents
178 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The (benefit) provision for income taxes is comprised of the following:
(Benefit) Provision for Income Taxes(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
| Current U.S. federal income tax provision | | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.9 | |
| Deferred U.S. federal income tax provision / (benefit) | | | | | 906.9 | | | | (566.3 | ) | | | (412.4 | ) |
| Total federal income tax (benefit) / provision | | | | | 907.2 | | | | (566.0 | ) | | | (411.5 | ) |
| Current state and local income tax provision | | | | | 14.6 | | | | 5.8 | | | | 6.9 | |
| Deferred state and local income tax (benefit) / provision | | | | | 1.8 | | | | (21.0 | ) | | | 2.0 | |
| Total state and local income tax (benefit) / provision | | | | | 16.4 | | | | (15.2 | ) | | | 8.9 | |
| Total non-U.S. income tax provision | | | | | 90.8 | | | | 82.4 | | | | 1.2 | |
| Total (benefit) / provision for income taxes | | | | $ | 1,014.4 | | | $ | (498.8 | ) | | $ | (401.4 | ) |
| Continuing operations | | | | $ | 203.5 | | | $ | (538.0 | ) | | $ | (432.4 | ) |
| Discontinued operations | | | | | 810.9 | | | | 39.2 | | | | 31.0 | |
| Total (benefit) / provision for income taxes | | | | $ | 1,014.4 | | | $ | (498.8 | ) | | $ | (401.4 | ) |
A reconciliation from the U.S. Federal statutory rate to the Company’s actual effective income tax rate is as follows:
Percentage of Pretax Income Years Ended December 31(dollars in millions)
| | | | Effective Tax Rate
| |
|---|
| | | | 2016
| | 2015
| | 2014
| |
|---|
| Continuing Operations | | | | Pretax
Income
| | Income
tax
expense
(benefit)
| | Percent
of pretax
income
| | Pretax
Income
| | Income
tax
expense
(benefit)
| | Percent
of pretax
Income
| | Pretax
Income
| | Income
tax
expense
(benefit)
| | Percent
of pretax
income
|
|---|
| Federal income tax rate | | | | $ | 20.9 | | | $ | 7.3 | | | | 35.0 | % | | $ | 186.0 | | | $ | 65.1 | | | | 35.0 | % | | $ | 244.5 | | | $ | 85.6 | | | | 35.0 | % |
Increase (decrease) due to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local income taxes, net of federal income tax benefit | | | | | – | | | | 21.0 | | | | 101.0 | | | | – | | | | (10.8 | ) | | | (5.9 | ) | | | – | | | | 6.3 | | | | 2.6 | |
| Non-deductible goodwill | | | | | – | | | | 126.2 | | | | 606.6 | | | | – | | | | 8.3 | | | | 4.5 | | | | – | | | | – | | | | – | |
| Domestic tax credits | | | | | – | | | | (18.1 | ) | | | (87.0 | ) | | | – | | | | (7.5 | ) | | | (4.0 | ) | | | – | | | | – | | | | – | |
| Lower tax rates applicable to non-U.S. earnings | | | | | – | | | | (10.3 | ) | | | (49.6 | ) | | | – | | | | 0.6 | | | | 0.3 | | | | – | | | | (15.9 | ) | | | (6.5 | ) |
| International income subject to U.S. tax | | | | | – | | | | 29.2 | | | | 140.3 | | | | – | | | | 42.1 | | | | 22.6 | | | | – | | | | 33.1 | | | | 13.5 | |
| Unrecognized tax expense (benefit) | | | | | – | | | | (14.4 | ) | | | 69.3 | | | | – | | | | 4.5 | | | | 2.4 | | | | – | | | | (269.2 | ) | | | (110.1 | ) |
| Deferred income taxes on international unremitted earnings | | | | | – | | | | 41.8 | | | | 200.7 | | | | – | | | | 30.2 | | | | 16.2 | | | | – | | | | (7.9 | ) | | | (3.2 | ) |
| Valuation allowances | | | | | – | | | | 14.7 | | | | 70.6 | | | | – | | | | (693.8 | ) | | | (373.0 | ) | | | – | | | | (264.8 | ) | | | (108.3 | ) |
| International tax settlements | | | | | – | | | | (0.6 | ) | | | (2.7 | ) | | | – | | | | (3.5 | ) | | | (1.9 | ) | | | – | | | | (1.1 | ) | | | (0.5 | ) |
| Other | | | | | – | | | | 6.7 | | | | 32.4 | | | | – | | | | 26.8 | | | | 14.6 | | | | – | | | | 1.5 | | | | 0.7 | |
| Effective Tax Rate — Continuing operations | | | | | | | | $ | 203.5 | | | | 978.0 | % | | | | | | $ | (538.0 | ) | | | (289.2 | )% | | | | | | $ | (432.4 | ) | | | (176.8 | )% |
Discontinued Operation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal income tax rate | | | | $ | 145.5 | | | $ | 50.9 | | | | 35.0 | % | | $ | 349.2 | | | $ | 122.2 | | | | 35.0 | % | | $ | 474.4 | | | $ | 166.0 | | | | 35.0 | % |
Increase (decrease) due to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| State and local income taxes, net of federal income tax benefit | | | | | – | | | | (9.5 | ) | | | (6.5 | ) | | | – | | | | 0.6 | | | | 0.2 | | | | – | | | | 2.6 | | | | 0.6 | |
| Non-deductible penalties | | | | | – | | | | 16.6 | | | | 11.4 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Lower tax rates applicable to non-U.S. earnings | | | | | – | | | | (110.8 | ) | | | (76.1 | ) | | | – | | | | (89.3 | ) | | | (25.6 | ) | | | – | | | | (82.3 | ) | | | (17.3 | ) |
| International income subject to U.S. tax | | | | | – | | | | 16.7 | | | | 11.5 | | | | – | | | | 8.1 | | | | 2.3 | | | | – | | | | 10.3 | | | | 2.2 | |
| Deferred income taxes on international unremitted earnings | | | | | | | | | 847.3 | | | | 582.1 | | | | | | | | – | | | | – | | | | | | | | – | | | | – | |
| Valuation Allowances | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (64.0 | ) | | | (13.5 | ) |
| Other | | | | | – | | | | (0.3 | ) | | | (0.3 | ) | | | – | | | | (2.4 | ) | | | (0.7 | ) | | | – | | | | (1.6 | ) | | | (0.5 | ) |
| Effective Tax Rate — Discontinued operation | | | | | | | | $ | 810.9 | | | | 557.1 | % | | | | | | $ | 39.2 | | | | 11.2 | % | | | | | | $ | 31.0 | | | | 6.5 | % |
| Total Effective Tax Rate | | | | | | | | $ | 1,014.4 | | | | 609.7 | % | | | | | | $ | (498.8 | ) | | | (93.2 | )% | | | | | | $ | (401.4 | ) | | | (55.8 | )% |
Table of Contents
CIT ANNUAL REPORT 2016 179
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are presented below:
Components of Deferred Income Tax Assets and Liabilities(dollars in millions)
| | | | December 31,
| |
|---|
| | | | 2016
| | 2015
|
|---|
Deferred Tax Assets: | | | | | | | | | | |
| Net operating loss (NOL) carry forwards | | | | $ | 2,528.3 | | | $ | 2,414.8 | |
| Basis difference in loans | | | | | 281.4 | | | | 291.6 | |
| Provision for credit losses | | | | | 185.7 | | | | 164.3 | |
| Accrued liabilities and reserves | | | | | 274.9 | | | | 196.5 | |
| FSA adjustments — aircraft and rail contracts | | | | | 24.2 | | | | 27.1 | |
| Deferred stock-based compensation | | | | | 34.5 | | | | 46.1 | |
| Domestic tax credits | | | | | 40.5 | | | | 14.5 | |
| Other | | | | | 79.1 | | | | 96.0 | |
| Total gross deferred tax assets | | | | | 3,448.6 | | | | 3,250.9 | |
Deferred Tax Liabilities: | | | | | | | | | | |
| Operating leases | | | | | (1,818.5 | ) | | | (1,486.5 | ) |
| Loans and direct financing leases | | | | | (100.3 | ) | | | 13.3 | |
| Basis difference in mortgage backed securities | | | | | (100.0 | ) | | | (145.4 | ) |
| Basis difference in federal home loan bank stock | | | | | (28.1 | ) | | | (33.0 | ) |
| Non-U.S. unremitted earnings | | | | | (1,032.6 | ) | | | (145.9 | ) |
| Unrealized foreign exchange gains | | | | | (27.7 | ) | | | (47.3 | ) |
| Goodwill and intangibles | | | | | (116.7 | ) | | | (123.8 | ) |
| Other | | | | | (21.6 | ) | | | (35.0 | ) |
| Total deferred tax liabilities | | | | | (3,245.5 | ) | | | (2,003.6 | ) |
| Total net deferred tax asset before valuation allowances | | | | | 203.1 | | | | 1,247.3 | |
| Less: Valuation allowances | | | | | (278.4 | ) | | | (340.8 | ) |
| Net deferred tax asset (liability) after valuation allowances | | | | $ | (75.3 | ) | | $ | 906.5 | |
Net Operating Loss Carry-forwards
CIT’s reorganization in 2009 constituted an ownership change under Section 382 of the Internal Revenue Code, which placed an annual dollar limit on the use of the remaining pre-bankruptcy NOLs. In general, the Company’s annual limitation on use of pre-bankruptcy NOLs is approximately $265 million per annum. NOLs arising in post-emergence years are not subject to this limitation absent another ownership change as defined by Section 382. The OneWest Transaction created no further annual dollar limit under Section 382.
As of December 31, 2016, CIT has deferred tax assets (“DTAs”) from continuing operations totaling $2.5 billion on its global NOLs. This includes: (1) a DTA of $2.1 billion relating to its cumulative U.S. federal NOLs of $6.0 billion; (2) DTAs of $0.4 billion relating to cumulative state NOLs of $8.0 billion, including amounts of reporting entities that file in multiple jurisdictions, and (3) DTAs of $58 million relating to cumulative non-U.S. NOLs of $195 million.
Of the $6.0 billion U.S. federal NOLs, approximately $2.8 billion relate to the pre-emergence bankruptcy period and are subject to the Section 382 limitation discussed above, of which approximately $1.5 billion is no longer subject to the limitation. There was an increase in the U.S. federal NOLs from the prior year as a result of a taxable loss for the current year, primarily due to one-time costs associated with the termination of the Canadian TRS along with accelerated tax depreciation on the operating lease portfolios. The U.S. federal NOLs will expire beginning in 2027 through 2036. Approximately $120 million of state NOLs will expire in 2017. While most of the non-U.S. NOLs have no expiration date, a small portion will expire over various periods, including an insignificant amount expiring in 2017.
The determination of whether or not to maintain the valuation allowances on certain reporting entities’ DTAs 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 considered the following potential sources of taxable income in its assessment of a reporting entity’s ability to recognize its net DTA:
| - | | Taxable income in carryback years, |
| - | | Future reversals of existing taxable temporary differences (deferred tax liabilities), |
| - | | Prudent and feasible tax planning strategies, and |
| - | | Future taxable income forecasts. |
Item 8: Financial Statements and Supplementary Data
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Through the second quarter of 2014, the Company generally maintained a full valuation allowance against its net DTAs. During the third quarter of 2014, management concluded that it was 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 U.S. net federal DTAs. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence, which included consideration of:
| - | | The U.S. group transitioned into a 3-year (12 quarter) cumulative normalized income position in the third quarter of 2014, resulting in the Company’s ability to significantly increase the reliance on future taxable income forecasts. |
| - | | Management’s long-term forecast of future U.S. taxable income supporting partial utilization of the U.S. federal NOLs prior to their expiration, and |
| - | | U.S. federal NOLs not expiring 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 DTAs on net operating loss carry-forwards. Accordingly, no discrete adjustment was made to the U.S. State valuation allowance in 2014. The negative evidence supporting this conclusion was as follows:
| - | | Certain separate U.S. state filing entities remaining in a three year cumulative loss, and |
| - | | State NOLs expiration periods varying in time. |
Additionally, during 2014, the Company reduced the U.S. federal and state valuation allowances in the normal course as the Company recognized U.S. taxable income. This taxable income reduced the DTA on NOLs, and, when combined with a concurrent increase in net deferred tax liabilities, which are mainly related to accelerated tax depreciation on the operating lease portfolios, resulted in a reduction in the net DTA and corresponding reduction in the valuation allowance. This net reduction was further offset by favorable IRS audit adjustments and the favorable resolution of an uncertain tax position related to the computation of cancellation of debt income (“CODI”) coming out of the 2009 bankruptcy, which resulted in adjustments to the NOLs. As of December 31, 2014, the Company retained a valuation allowance of $1.0 billion against its U.S. net DTAs, of which approximately $0.7 billion was against its DTA on the U.S. federal NOLs and $0.3 billion was against its DTA on the U.S. state NOLs.
During the third quarter of 2015, Management updated the Company’s long-term forecast of future U.S. federal taxable income to include the anticipated impact of the OneWest Bank acquisition. The updated long-term forecast supports the utilization of all of the U.S. federal DTAs (including those relating to the NOLs prior to their expiration). Accordingly, 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 enable the Company to reverse the remaining $690 million of U.S. federal valuation allowance, $647 million of which was recorded as a discrete item in the third quarter, and the remainder of which was included in determining the annual effective tax rate as normal course in the third and fourth quarters of 2015 as the Company recognized additional U.S. taxable income related to the OneWest Bank acquisition.
The Company also evaluated the impact of the OneWest Bank acquisition on its ability to utilize the NOLs of its state income tax reporting entities and concluded that no additional reduction to the U.S. state valuation allowance was required in 2015. These state income tax reporting entities include both combined unitary state income tax reporting entities and separate state income tax reporting entities in various jurisdictions. The Company analyzed the state net operating loss carry-forwards for each of these reporting entities to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the valuation allowance was still required on U.S. state DTAs on certain net operating loss carry-forwards. The Company retained a valuation allowance of $250 million against the DTA on the U.S. state NOLs at December 31, 2015.
During 2016, Management updated the Company’s long term forecast of future U.S. federal taxable income incorporating recent actions including its decision to sell Commercial Air, which is targeted to close by the end of the first quarter of 2017. The updated forecasts continue to support no valuation allowance on the U.S. federal DTAs on NOLs but valuation allowance of $240 million was retained on U.S. state DTAs on certain NOLs as of December 31, 2016.
The Company maintained a valuation allowance of $39 million against certain non-U.S. reporting entities’ net DTAs at December 30, 2016, down from $91 million at December 31, 2015. In January 2016, the Company sold its U.K. equipment finance business. Thus, there was a reduction of approximately $70 million to the respective U.K. reporting entities’ net DTAs along with their associated valuation allowances. During the third quarter of 2016, the Company established $16 million valuation allowance on the China reporting entities’ net DTAs. In the evaluation process related to the net DTAs of the Company’s other international reporting entities, uncertainties surrounding the future international business operations have made it challenging to reliably project future taxable income. Management will continue to assess the forecast of future taxable income as the business plans for these international reporting entities evolve and evaluate potential tax planning strategies to utilize these net DTAs.
The Company’s ability to recognize DTAs will be evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation allowances may be adjusted accordingly.
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Indefinite Reinvestment Assertion
As of December 31, 2016, the Company decided to no longer assert that it would indefinitely reinvest the unremitted earnings of its Commercial Air business. Up until the fourth quarter of 2016, the Company had been pursuing a possible sale or non-taxable spin-off of this business. However, on October 6, 2016, it entered into a definitive sale agreement with Avolon to sell the business. As a result of this signed agreement, the Company moved its Commercial Air business into discontinued operations, thus triggering a change in the Company’s intent to indefinitely reinvest its unremitted earnings.
Additionally, during the fourth quarter of 2016, Management determined that it could no longer assert its intent to indefinitely reinvest its unremitted earnings in the remaining subsidiaries in Canada. As a result of the sale of the Canadian Equipment Finance and Corporate Finance businesses in 2016, Management reviewed the activities and capital structure of the remaining entities in Canada with the objective of creating and maintaining maximum flexibility. Therefore, the Company can no longer assert the intent to indefinitely reinvestment its unremitted earnings in Canada.
As of December 31, 2016, Management no longer asserts its intent to indefinitely reinvest the unremitted earnings of any of its international subsidiaries and as a result increased the U.S. Federal and State deferred income tax liabilities by $838 million and increased its deferred tax liabilities for international withholding taxes by $49 million. The net change in the U.S. Federal and State deferred income tax liabilities included $847 million of deferred tax liabilities, with the associated income tax expense allocated to discontinued operations, related to the change in assertion with respect to the Commercial Air business, which are expected to reverse at the closing of the Commercial Air sale transaction. The net change in the deferred tax liabilities also included $54 million for the establishment of deferred tax liabilities for withholding and income taxes due to Management’s decision to no longer assert its intent to indefinitely reinvest its unremitted earnings in Canada. As of December 31, 2016, the Company has a deferred tax liability of $1.0 billion for U.S. and non-U.S. taxes associated with the potential future tax on the undistributed earnings of non-U.S. subsidiaries.
Liabilities for Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized Tax Benefits(dollars in millions)
| | | | Liabilities for
Unrecognized
Tax Benefits
| | Interest /
Penalties
| | Grand Total
|
|---|
| Balance at December 31, 2015 | | | | $ | 46.7 | | | $ | 18.0 | | | $ | 64.7 | |
| Additions for tax positions related to current years | | | | | 2.7 | | | | 0.8 | | | | 3.5 | |
| Additions for tax positions related to prior years | | | | | 0.9 | | | | 1.7 | | | | 2.6 | |
| Reductions for tax positions of prior years | | | | | (8.2 | ) | | | (7.6 | ) | | | (15.8 | ) |
| Income Tax Audit Settlements | | | | | (4.0 | ) | | | (0.6 | ) | | | (4.6 | ) |
| Expiration of statutes of limitations | | | | | (2.0 | ) | | | (0.8 | ) | | | (2.8 | ) |
| Foreign currency revaluation | | | | | 0.3 | | | | 0.2 | | | | 0.5 | |
| Balance at December 31, 2016 | | | | $ | 36.4 | | | $ | 11.7 | | | $ | 48.1 | |
During the year ended December 31, 2016, the Company recorded a net $16.6 million reduction on uncertain tax positions, including interest, penalties, and net of a $0.5 million increase attributable to foreign currency revaluation. The majority of the net reduction related to a $7 million decrease resulting from the resolution of certain tax matters by the tax authorities on certain prior year non-U.S. income tax returns.
During the year ended December 31, 2016, the Company recognized $6.3 million net income tax expense relating to interest and penalties on its uncertain tax positions, net of a $0.2 million increase attributable to foreign currency translation. The change in balance is mainly related to the interest and penalties associated with the above mentioned uncertain tax position taken on certain prior-year non-U.S. income tax returns. As of December 31, 2016, the accrued liability for interest and penalties is $11.7 million. The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax expense.
The entire $48.1 million of unrecognized tax benefits including interest and penalties at December 31, 2016 would lower the Company’s effective tax rate, if realized. The Company believes that the total unrecognized tax benefits before interest and penalties may decrease, in the range of $0 to $5 million, from resolution of open tax matters, settlements of audits, and the expiration of various statutes of limitations prior to
December 31, 2017.
Income Tax Audits
On February 13, 2015, the Company and the Internal Revenue Service (IRS) concluded the audit examination of the Company’s U.S. federal income tax returns for the taxable years ended December 31, 2008 through December 31, 2010. The audit settlement resulted in no additional regular or alternative minimum tax liability. The Company has not received notification from the IRS of commencement of a new exam.
On January 27, 2016 and June 13, 2016, the Company and the IRS concluded the audit examination of IMB Holdco LLC, the parent company of OneWest Bank, and its subsidiaries, which was acquired on August 3, 2015 by CIT, for taxable years ended
Item 8: Financial Statements and Supplementary Data
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December 31, 2012 and December 31, 2013, respectively. The audit settlement resulted in no additional regular or alternative minimum tax liability but resulted in a significant cash tax refund, which was reflected in the acquisition date balance sheet.
IMB Holdco LLC and its subsidiaries are also under examination by the California Franchise Tax Board (“FTB”) for tax years 2009 through 2013. The FTB has completed its audit of the 2009 return and has issued a notice of proposed assessment. The Company, working with its outside advisors, is currently in negotiations to agree to a final Closing Agreement that would settle all outstanding issues for 2009 through 2013. The Company expects final resolution and favorable settlement of the issues in 2017. The issues raised by California were anticipated by the Company, and the Company believes it has provided adequate reserves in accordance with ASC 740 for any potential adjustments.
The Company and its subsidiaries are under examination in various states, provinces and countries for years ranging from 2004 through 2015. Management does not anticipate that these examination results will have any material financial impact.
NOTE 20 — RETIREMENT, POSTRETIREMENT AND OTHER BENEFIT PLANS
CIT provides various benefit programs, including defined benefit retirement and postretirement plans, and defined contribution savings incentive plans. A summary of major plans is provided below.
Retirement and Postretirement Benefit Plans
Retirement Benefits
CIT has both funded and unfunded noncontributory defined benefit pension plans covering certain U.S. and non-U.S. employees, each of which is designed in accordance with practices and regulations in the related countries. Retirement benefits under defined benefit pension plans are based on an employee’s age, years of service and qualifying compensation.
The Company’s largest plan is the CIT Group Inc. Retirement Plan (the “Plan”), which accounts for 81% of the Company’s total pension projected benefit obligation at December 31, 2016.
The Company also maintains a U.S. noncontributory supplemental retirement plan, the CIT Group Inc. Supplemental Retirement Plan (the “Supplemental Plan”), for participants whose benefit in the Plan is subject to Internal Revenue Code limitations, and an Executive Retirement Plan, which has been closed to new members since 2006. In aggregate, these two plans account for 18% of the total pension projected benefit obligation at December 31, 2016.
The Company amended the Plan and the Supplemental Plan to freeze benefits earned, and future service cost accruals and credits for services have been discontinued under both plans. However, accumulated balances under the cash balance formula continue to receive periodic interest, subject to certain government limits. The interest credit was 2.61%, 2.55%, and 3.63% for the years ended December 31, 2016, 2015, and 2014, respectively.
As of December 31, 2016, all Plan participants are vested in both plans. Upon termination or retirement, participants under the “cash balance” formula have the option of receiving their benefit in a lump sum, deferring their payment to age 65 or converting their vested benefit to an annuity. Traditional formula participants can only receive an annuity upon a qualifying retirement.
Postretirement Benefits
CIT provides healthcare and life insurance benefits to eligible retired employees. U.S. retiree healthcare and life insurance benefits account for 38% and 58% of the total postretirement benefit obligation, respectively. For most eligible retirees, healthcare is contributory and life insurance is non-contributory. The U.S. retiree healthcare plan pays a stated percentage of most medical expenses, reduced by a deductible and any payments made by the government and other programs. The U.S. retiree healthcare benefit includes a maximum limit on CIT’s share of costs for employees who retired after January 31, 2002. All postretirement benefit plans are funded on a pay-as-you-go basis.
The Company amended CIT’s postretirement benefit plans to discontinue benefits, which reduced future service cost accruals. CIT no longer offers retiree medical, dental and life insurance benefits to those who did not meet the eligibility criteria for these benefits by December 31, 2013. Employees who met the eligibility requirements for retiree health insurance by December 31, 2013 will be offered retiree medical and dental coverage upon retirement. To receive retiree life insurance, employees must have met the eligibility criteria for retiree life insurance by, and must have retired from CIT on or before, December 31, 2013.
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Obligations and Funded Status
The following tables set forth changes in benefit obligation, plan assets, funded status and net periodic benefit cost of the retirement plans and postretirement plans:
Obligations and Funded Status(dollars in millions)
| | | | Retirement Benefits
| | Post-Retirement Benefits
| |
|---|
| | | | 2016
| | 2015
| | 2016
| | 2015
|
|---|
Change in benefit obligation | | | | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | | | $ | 445.5 | | | $ | 463.6 | | | $ | 35.1 | | | $ | 38.6 | |
| Service cost | | | | | 0.1 | | | | 0.2 | | | | – | | | | – | |
| Interest cost | | | | | 17.1 | | | | 16.9 | | | | 1.4 | | | | 1.4 | |
| Plan amendments, curtailments, and settlements | | | | | (1.8 | ) | | | (2.4 | ) | | | – | | | | – | |
| Actuarial (gain) / loss | | | | | 4.7 | | | | (10.9 | ) | | | 0.2 | | | | (1.6 | ) |
| Benefits paid | | | | | (21.8 | ) | | | (21.3 | ) | | | (3.6 | ) | | | (4.9 | ) |
Other(1) | | | | | (0.2 | ) | | | (0.6 | ) | | | 2.1 | | | | 1.6 | |
| Benefit obligation at end of year | | | | | 443.6 | | | | 445.5 | | | | 35.2 | | | | 35.1 | |
Change in plan assets | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of period | | | | | 337.9 | | | | 359.9 | | | | – | | | | – | |
| Actual return on plan assets | | | | | 28.2 | | | | (12.3 | ) | | | – | | | | – | |
| Employer contributions | | | | | 13.2 | | | | 12.8 | | | | 1.5 | | | | 3.3 | |
| Plan settlements | | | | | (1.8 | ) | | | (1.1 | ) | | | – | | | | – | |
| Benefits paid | | | | | (21.8 | ) | | | (21.3 | ) | | | (3.6 | ) | | | (4.9 | ) |
Other(1) | | | | | (0.2 | ) | | | (0.1 | ) | | | 2.1 | | | | 1.6 | |
| Fair value of plan assets at end of period | | | | | 355.5 | | | | 337.9 | | | | – | | | | – | |
Funded status at end of year(2)(3) | | | | $ | (88.1 | ) | | $ | (107.6 | ) | | $ | (35.2 | ) | | $ | (35.1 | ) |
(1) | | Consists of the following: plan participants’ contributions and currency translation adjustments. |
(2) | | These amounts were recognized as liabilities in the Consolidated Balance Sheet at December 31, 2016 and 2015. |
(3) | | Company assets of $86.1 million and $85.9 million as of December 31, 2016 and December 31, 2015, respectively, related to the non-qualified U.S. executive retirement plan obligation are not included in plan assets but related liabilities are in the benefit obligation. |
During 2015, the Company entered into a buy-in/buy-out transaction in Germany with an insurance company that is expected to result in a full buy-out of the related pension plan in 2017. This contract did not meet the settlement requirements in ASC 715,Compensation — Retirement Benefits as of the year ended December 31, 2015 and resulted in a $1.2 million actuarial loss that is included in the net actuarial gain of $10.9 million as of December 31, 2015, as the plan’s pension liabilities were valued at their buy-in value basis. The loss has been recognized in the Statement of Income over the period from which the contract was entered in 2015 and during 2016. The total loss recognized in 2016 and 2015 was $1.3 million and $1.4 million, respectively. The remaining unamortized loss at December 31, 2016 of $0.2 million will be recognized in 2017 when full-settlement is expected to be met.
The accumulated benefit obligation for all defined benefit pension plans was $443.6 million and $445.5 million, at December 31, 2016 and 2015, respectively. Information for those defined benefit plans with an accumulated benefit obligation in excess of plan assets is as follows:
Defined Benefit Plans with an Accumulated Benefit Obligation in Excess of Plan Assets(dollars in millions)
| | | | December 31,
| |
|---|
| | | | 2016
| | 2015
|
|---|
| Projected benefit obligation | | | | $ | 437.4 | | | $ | 439.3 | |
| Accumulated benefit obligation | | | | | 437.4 | | | | 439.3 | |
| Fair value of plan assets | | | | | 349.3 | | | | 331.7 | |
Item 8: Financial Statements and Supplementary Data
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The net periodic benefit cost and other amounts recognized in AOCI consisted of the following:
Net Periodic Benefit Costs and Other Amounts(dollars in millions)
| | | | Retirement Benefits
| | Post-Retirement Benefits
| |
|---|
| | | | 2016
| | 2015
| | 2014
| | 2016
| | 2015
| | 2014
|
|---|
| Service cost | | | | $ | 0.1 | | | $ | 0.2 | | | $ | 0.2 | | | $ | – | | | $ | – | | | $ | – | |
| Interest cost | | | | | 17.1 | | | | 16.9 | | | | 20.2 | | | | 1.4 | | | | 1.4 | | | | 1.6 | |
| Expected return on plan assets | | | | | (18.5 | ) | | | (20.1 | ) | | | (20.8 | ) | | | – | | | | – | | | | – | |
| Amortization of prior service cost | | | | | – | | | | – | | | | – | | | | (0.5 | ) | | | (0.5 | ) | | | (0.5 | ) |
| Amortization of net loss/(gain) | | | | | 2.9 | | | | 2.6 | | | | 7.5 | | | | (0.7 | ) | | | (0.3 | ) | | | (0.7 | ) |
| Settlement and curtailment (gain)/loss | | | | | – | | | | – | | | | 2.9 | | | | – | | | | – | | | | – | |
| Net periodic benefit cost (credit) | | | | | 1.6 | | | | (0.4 | ) | | | 10.0 | | | | 0.2 | | | | 0.6 | | | | 0.4 | |
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss/(gain) | | | | | (5.0 | ) | | | 20.9 | | | | 42.6 | | | | 0.9 | | | | (1.5 | ) | | | 1.0 | |
| Amortization, settlement or curtailment recognition of net (loss)/gain | | | | | (2.9 | ) | | | (2.6 | ) | | | (10.4 | ) | | | 0.7 | | | | 0.3 | | | | 0.7 | |
| Amortization, settlement or curtailment recognition of prior service credit | | | | | – | | | | – | | | | – | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
| Total recognized in OCI | | | | | (7.9 | ) | | | 18.3 | | | | 32.2 | | | | 2.1 | | | | (0.7 | ) | | | 2.2 | |
| Total recognized in net periodic benefit cost and OCI | | | | $ | (6.3 | ) | | $ | 17.9 | | | $ | 42.2 | | | $ | 2.3 | | | $ | (0.1 | ) | | $ | 2.6 | |
The amounts recognized in AOCI during the year ended December 31, 2016 were net gains (before taxes) of $7.9 million for retirement benefits. The net gains (before taxes) included asset gains of $9.5 million, and gains of $5.7 million due to the adoption of the new Society of Actuaries’ improvement scale MP-2016 for the U.S. benefit plans. Additionally, $2.9 million of net loss was amortized from AOCI into net periodic benefit cost during 2016. These gains were partially offset by losses on retirement benefits of $10.2 million. The losses were primarily driven by a 25 basis point decrease in the U.S. benefit plans’ discount rate from 4.00% at December 31, 2015 to 3.75% at December 31, 2016. The estimated net loss for CIT’s retirement benefits that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $1.5 million.
The amounts recognized in AOCI for post-retirement benefits during the year ended December 31, 2016 were net losses (before taxes) of $2.1 million. This amount includes the net impact of assumption changes of $0.9 million, which is primarily driven by a 25 basis point decrease in the U.S. benefit plans’ discount rate from 4.00% at December 31, 2015 to 3.75% at December 31, 2016. Additionally, $1.2 million of net gains and prior service credits were amortized from AOCI into net periodic benefit cost. The estimated prior service credit and net gain for CIT’s post-retirement benefits that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $0.5 million and $0.8 million, respectively.
The amounts recognized in AOCI during the year ended December 31, 2015 were net losses (before taxes) of $18.3 million for retirement benefits. The net losses (before taxes) include losses of $39.5 million, netted by gains of $18.6 million. The losses include asset losses of $32.4 million, demographic experience losses of $3.4 million; losses of $2.5 million due to the US retirement benefit plans’ interest crediting rate’s 25 basis points increase to 2.75% at December 31, 2015, and the actuarial loss related to the German plan buy-in transaction of $1.2 million. The gains were primarily driven by the impacts of the 25 basis point increase in the U.S. benefit plans’ discount rate from 3.75% to 4.00% at December 31, 2015 resulting in a gain of $11.9 million, and the adoption of the new Society of Actuaries’ improvement scale MP-2015 for the U.S. benefit plans resulting in a gain of $6.0 million.
The post retirement AOCI net gains (before taxes) of $0.7 million during the year ended December 31, 2015 include gains of $2.5 million, netted by losses of $0.9 million. The gains were primarily driven by the impacts of the updated healthcare assumptions of $1.1 million and the 25 basis points increase in the post retirement plans’ discount rate from 3.75% to 4.00% at December 31, 2015 resulting in a gain of $1.0 million. The losses were primarily driven by actuarial losses on benefit payments.
The amounts recognized in AOCI during the year ended December 31, 2014 were net losses (before taxes) of $32.2 million for retirement benefits. Changes in assumptions, primarily the discount rate and mortality tables, accounted for $46.8 million of the overall net retirement benefits AOCI losses. The discount rate for the Plan and the Supplemental Plan decreased 100 basis points to 3.75% at December 31, 2014, and the rate for the executive retirement plan decreased 75 basis points to 3.75% at December 31, 2014. This decline in the discount rate accounted for $33.5 million of the net AOCI loss for retirement benefits. Additionally, the adoption of the new Society of Actuaries’ mortality table and improvement scale RP-2014/SP-2014 resulted in an increase in retirement benefit obligations of $10.2 million. Partially offsetting these losses were the settlement of the U.K. pension scheme, which resulted in $8.0 million of loss amortization and settlement charges recorded during 2014, and
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U.S. asset gains of $7.7 million. The postretirement AOCI net losses (before taxes) of $2.2 million during the year ended December 31, 2014 were primarily driven by a 75 basis point decrease in the U.S. postretirement plan discount rate from 4.50% at December 31, 2013 to 3.75% at December 31, 2014.
Assumptions
Discount rate assumptions used for pension and post-retirement benefit plan accounting reflect prevailing rates available on high-quality, fixed-income debt instruments with maturities that match the benefit obligation.
Expected long-term rate of return assumptions on assets are based on projected asset allocation and historical and expected future returns for each asset class. Independent analysis of historical and projected asset returns, inflation, and interest rates are provided by the Company’s investment consultants and actuaries as part of the Company’s assumptions process.
The weighted average assumptions used in the measurement of benefit obligations are as follows:
Weighted Average Assumptions
| | | | Retirement Benefits
| | Post-Retirement Benefits
| |
|---|
| | | | 2016
| | 2015
| | 2016
| | 2015
|
|---|
| Discount rate | | | | | 3.73 | % | | | 3.97 | % | | | 3.75 | % | | | 3.99 | % |
| Rate of compensation increases | | | | | – | | | | – | | | | (1 | ) | | | (1 | ) |
| Health care cost trend rate | | | | | | | | | | | | | | | | | | |
| Pre-65 | | | | | (1 | ) | | | (1 | ) | | | 6.50 | % | | | 6.70 | % |
| Post-65 | | | | | (1 | ) | | | (1 | ) | | | 7.80 | % | | | 8.20 | % |
| Ultimate health care cost trend rate | | | | | (1 | ) | | | (1 | ) | | | 4.50 | % | | | 4.50 | % |
| Year ultimate reached | | | | | (1 | ) | | | (1 | ) | | | 2037 | | | | 2037 | |
The weighted average assumptions used to determine net periodic benefit costs are as follows:
Weighted Average Assumptions
| | | | Retirement Benefits
| | Post-Retirement Benefits
| |
|---|
| | | | 2016
| | 2015
| | 2016
| | 2015
|
|---|
| Discount rate | | | | | 3.97 | % | | | 3.74 | % | | | 3.99 | % | | | 3.74 | % |
| Expected long-term return on plan assets | | | | | 5.68 | % | | | 5.75 | % | | | (1 | ) | | | (1 | ) |
| Rate of compensation increases | | | | | 0.00 | % | | | 0.09 | % | | | (1 | ) | | | (1 | ) |
Healthcare rate trends have a significant effect on healthcare plan costs. The Company uses both external and historical data to determine healthcare rate trends. An increase (decrease) of one-percentage point in assumed healthcare rate trends would increase (decrease) the postretirement benefit obligation by $0.7 million and ($0.7 million), respectively. The service and interest cost are not material.
Plan Assets
CIT maintains a “Statement of Investment Policies and Objectives” which specifies guidelines for the investment, supervision and monitoring of pension assets in order to manage the Company’s objective of ensuring sufficient funds to finance future retirement benefits. The asset allocation policy allows assets to be invested between 15% to 35% in Equities, 35% to 65% in Fixed-Income, 15% to 25% in Global Asset Allocation, and 5% to 10% in Alternative Investments. The asset allocation follows a Liability Driven Investing (“LDI”) strategy. The objective of LDI is to allocate assets in a manner that their movement will more closely track the movement in the benefit liability. The policy provides specific guidance on asset class objectives, fund manager guidelines and identification of prohibited and restricted transactions. It is reviewed periodically by the Company’s Investment Committee and external investment consultants.
The members of the Investment Committee are appointed by the CEO and shall continue until such member’s removal or resignation from the Investment Committee in accordance with the provisions of the charter.
There were no direct investments in equity securities of CIT or its subsidiaries included in pension plan assets in any of the years presented.
Plan investments are stated at fair value. Common stock traded on security exchanges as well as mutual funds, exchange traded funds and short term investment funds are valued at closing market prices. Such investments are considered Level 1 per ASC 820 fair value hierarchy. Investments in Common Collective Trusts and Alternative Investment Funds are carried at fair value based upon reported net asset values (”NAV“). ASU 2015-07 removes the requirements to categorize investments for which fair value is measured using the NAV per share as practical expedient from the fair value hierarchy.
There were no transfers of assets between Levels during 2016 and 2015. The tables below set forth asset fair value measurements.
Item 8: Financial Statements and Supplementary Data
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Fair Value Measurements(dollars in millions)
| December 31, 2016 | | | | Level 1
| | Level 2
| | Level 3
| | Not
Classified1
| | Total
Fair Value
|
|---|
| Cash | | | | $ | 5.8 | | | $ | – | | | $ | – | | | $ | – | | | $ | 5.8 | |
| Mutual Fund | | | | | 69.9 | | | | – | | | | – | | | | – | | | | 69.9 | |
| Exchange Traded Funds | | | | | 26.1 | | | | – | | | | – | | | | – | | | | 26.1 | |
| Common Stock | | | | | 16.0 | | | | – | | | | – | | | | – | | | | 16.0 | |
| Short Term Investment Fund, measured at NAV | | | | | 1.4 | | | | – | | | | – | | | | – | | | | 1.4 | |
| Insurance Contracts, measured at NAV | | | | | – | | | | – | | | | 6.1 | | | | – | | | | 6.1 | |
| Common Collective Trust, measured at NAV | | | | | – | | | | – | | | | – | | | | 195.2 | | | | 195.2 | |
| Partnership, measured at NAV | | | | | – | | | | – | | | | – | | | | 8.6 | | | | 8.6 | |
| Hedge Fund, measured at NAV | | | | | – | | | | – | | | | – | | | | 26.4 | | | | 26.4 | |
| | | | | $ | 119.2 | | | $ | – | | | $ | 6.1 | | | $ | 230.2 | | | $ | 355.5 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Cash | | | | $ | 1.7 | | | $ | – | | | $ | – | | | $ | – | | | $ | 1.7 | |
| Mutual Fund | | | | | 67.9 | | | | – | | | | – | | | | – | | | | 67.9 | |
| Exchange Traded Funds | | | | | 24.6 | | | | – | | | | – | | | | – | | | | 24.6 | |
| Common Stock | | | | | 19.7 | | | | – | | | | – | | | | – | | | | 19.7 | |
| Short Term Investment Fund, measured at NAV | | | | | 1.7 | | | | – | | | | – | | | | – | | | | 1.7 | |
| Insurance Contracts, measured at NAV | | | | | – | | | | – | | | | 6.2 | | | | – | | | | 6.2 | |
| Common Collective Trust, measured at NAV | | | | | – | | | | – | | | | – | | | | 183.1 | | | | 183.1 | |
| Partnership, measured at NAV | | | | | – | | | | – | | | | – | | | | 7.7 | | | | 7.7 | |
| Hedge Fund, measured at NAV | | | | | – | | | | – | | | | – | | | | 25.3 | | | | 25.3 | |
| | | | | $ | 115.6 | | | $ | – | | | $ | 6.2 | | | $ | 216.1 | | | $ | 337.9 | |
(1) | | These investments have been measured using the net asset value per share practical expedient and are not required to be classified in the table above, in accordance with ASU 2015-07. |
The table below sets forth changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 2016:
Fair Value of Level 3 Assets(dollars in millions)
| | | | Insurance
Contracts
|
|---|
December 31, 2015 | | | | $ | 6.2 | |
| Realized and Unrealized losses | | | | | (0.1 | ) |
December 31, 2016 | | | | $ | 6.1 | |
| Change in Unrealized Losses for investments still held at December 31, 2016 | | | | $ | (0.1 | ) |
Contributions
The Company’s policy is to make contributions so that they exceed the minimum required by laws and regulations, are consistent with the Company’s objective of ensuring sufficient funds to finance future retirement benefits and are tax deductible. CIT currently does not expect to have a required minimum contribution to the U.S. Retirement Plan during 2017. For all other plans, CIT currently expects to contribute $8.8 million during 2017.
Estimated Future Benefit Payments
The following table depicts benefits projected to be paid from plan assets or from the Company’s general assets calculated using current actuarial assumptions. Actual benefit payments may differ from projected benefit payments.
Projected Benefits(dollars in millions)
| For the years ended December 31, | | | | Retirement
Benefits
| | Gross
Postretirement
Benefits
| | Medicare
Subsidy
Receipts
|
|---|
| 2017 | | | | $ | 26.2 | | | $ | 3.0 | | | $ | 0.3 | |
| 2018 | | | | | 26.4 | | | | 3.0 | | | | 0.3 | |
| 2019 | | | | | 26.5 | | | | 2.9 | | | | 0.3 | |
| 2020 | | | | | 28.5 | | | | 2.8 | | | | 0.3 | |
| 2021 | | | | | 28.2 | | | | 2.7 | | | | 0.3 | |
| 2022 – 2026 | | | | | 137.4 | | | | 11.9 | | | | 0.8 | |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Savings Incentive Plan
CIT has a number of defined contribution retirement plans covering certain of its U.S. and non-U.S. employees designed in accordance with conditions and practices in the respective countries. The U.S. plan, which qualifies under section 401(k) of the Internal Revenue Code, is the largest and accounts for 94% of the Company’s total defined contribution retirement expense for the year ended December 31, 2016. Generally, employees may contribute a portion of their eligible compensation, as defined, subject to regulatory limits and plan provisions, and the Company matches these contributions up to a threshold. During 2015, the Board of Directors of the Company approved amendments to reduce the Company match on eligible contributions effective January 1, 2016. Participants are also eligible for an additional discretionary company contribution. The cost of these plans totaled $15.8 million, $19.0 million and $21.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Stock-Based Compensation
In February 2016, the Company adopted the CIT Group Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”), which provides for grants of stock-based awards to employees, executive officers and directors, and replaced the Amended and Restated CIT Group Inc. Long-Term Incentive Plan (the “Prior Plan”). The number of shares of common stock that may be issued for all purposes under the 2016 Plan is (1) 5 million shares plus (2) the number of authorized Shares remaining available under the Prior Plan plus (3) the number of Shares relating to awards granted under the Prior Plan that subsequently are forfeited, expire, terminate or otherwise lapse or are settled for cash, in whole or in part, as provided by the 2016 Plan — 6,284,699 at December 31, 2016 (excludes the number of securities to be issued upon exercise of outstanding options and 3,286,786 shares underlying outstanding awards granted to employees and/or directors that are unvested and/or unsettled.) Currently under the 2016 Plan, the issued and unvested awards consist mainly of Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”).
Compensation expense related to equity-based awards are measured and recorded in accordance with ASC 718,Stock Compensation. The fair value of RSUs and PSUs are based on the fair market value of CIT’s common stock on the date of grant. Compensation expense is recognized over the vesting period (requisite service period), which is generally three years for restricted stock/units, under the graded vesting method, whereby each vesting tranche of the award is amortized separately as if each were a separate award. Compensation expenses for PSUs that cliff vest are recognized over the vesting period, which is generally three years, and on a straight-line basis.
Operating expenses includes $36.6 million of compensation expense related to equity-based awards granted to employees or members of the Board of Directors for the year ended December 31, 2016, including $36.4 million related to restricted and retention stock and unit awards and the remaining related to stock purchases. Compensation expense related to equity-based awards included $63.4 million in 2015 and $41.6 million in 2014. Total unrecognized compensation cost related to nonvested awards was $23.7 million at December 31, 2016. That cost is expected to be recognized over a weighted average period of 1.95 years.
Employee Stock Purchase Plan
In December 2010, the Company adopted the CIT Group Inc. 2011 Employee Stock Purchase Plan (the “ESPP”), which was approved by shareholders in May 2011. Eligibility for participation in the ESPP includes employees of CIT and its participating subsidiaries, except that any employees designated as highly compensated are not eligible to participate in the ESPP. The ESPP is available to employees in the United States and to certain international employees. Under the ESPP, CIT is authorized to issue up to 2,000,000 shares of common stock to eligible employees. Eligible employees can choose to have between 1% and 10% of their base salary withheld to purchase shares quarterly, at a purchase price equal to 85% of the fair market value of CIT common stock on the last business day of the quarterly offering period. The amount of common stock that may be purchased by a participant through the ESPP is generally limited to $25,000 per year. A total of 72,325, 46,770, and 31,497 shares were purchased under the plan in 2016, 2015 and 2014, respectively.
Restricted Stock Units and Performance Stock Units
Under the 2016 Plan, RSUs and PSUs are awarded at no cost to the recipient upon grant. RSUs are generally granted annually at the discretion of the Company, but may also be granted during the year to new hires or for retention or other purposes. RSUs granted to employees and members of the Board during 2016 and 2015 generally were scheduled to vest either one third per year for three years or 100% after three years. During 2015, retention RSUs scheduled to vest 100% after nine months were granted to certain key employees in connection with the acquisition of OneWest Bank. Beginning in 2014, RSUs granted to employees were also subject to performance-based vesting based on the Company’s pre-tax income results or beginning in 2016, for certain employees, a minimum Tier 1 Capital ratio. A limited number of vested stock awards are scheduled to remain subject to transfer restrictions through the first anniversary of the grant date for members of the Board who elected to receive stock in lieu of cash compensation for their retainer. Certain RSUs granted to directors, and in limited instances to employees, are designed to settle in cash and are accounted for as “liability” awards as prescribed by ASC 718. The values of these cash-settled RSUs are re-measured at the end of each reporting period until the award is settled.
Certain senior executives receive long-term incentive (LTI) awards, which are generally granted at the discretion of the Company annually in the form of Performance Share Units (PSUs). During 2016, The Company changed the mix of LTI awards to include 50% performance-based RSUs (described above) and 50% PSUs based on after-tax Return on Tangible Common Stockholder’s Equity (ROTCE). During 2015, LTI was awarded by the Company as two forms of PSUs.
The 2016 PSUs, “2016 PSUs- After-Tax ROTCE,” may be earned at the end of a three-year performance period (2016 — 2018) from 0% to 150% of target based on after-tax ROTCE. The first form of 2015 PSUs, “2015 PSUs-Return on Average Earnings Assets (ROA) / Earnings Per Share (EPS),” may also be earned at the end of a three-year performance period (2015 – 2017) from 0% to
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150% of target based on performance against two pre-established performance measures: fully diluted EPS (weighted 75%) and pre-tax ROA (weighted 25%). The second form of 2015 PSUs, “2015 PSUs-PreTax ROTCE,” are earned in each year during a three-year performance period (2015 – 2017) from 0% to a maximum of 150% of target based on pre-tax ROTCE as follows: (1) one-third based on the pre-tax ROTCE for the first year of the performance period; (2) one-third based on the average pre-tax ROTCE for the first two years of the performance period; and (3) one-third based on the three-year average ROTCE during the performance period. Performance measures for all PSU awards have a minimum threshold level of performance that must be achieved to trigger any payout; if the threshold level of performance is not achieved, then no portion of the PSU target will be payable.
The fair value of RSUs and PSUs that vested and settled in stock during 2016, 2015 and 2014 was $52.4 million, $56.2 million and $42.8 million, respectively. The fair value of RSUs that vested and settled in cash during 2016, 2015 and 2014 was $0.2 million, $0.2 million and $0.2 million, respectively.
The following tables summarize restricted stock and RSU activity for 2016 and 2015:
Stock and Cash — Settled Awards Outstanding
| | | | Stock-Settled Awards
| | Cash-Settled Awards
| |
|---|
| December 31, 2016 | | | | Number of
Shares
| | Weighted
Average Grant
Date Value
| | Number of
Shares
| | Weighted
Average Grant
Date Value
|
|---|
| Unvested at beginning of period | | | | | 3,384,297 | | | $ | 45.55 | | | | 9,623 | | | $ | 44.97 | |
| Vested / unsettled awards at beginning of period | | | | | 39,626 | | | | 40.46 | | | | – | | | | – | |
| PSUs — granted to employees | | | | | 284,640 | | | | 32.80 | | | | – | | | | – | |
| PSUs — incremental for performance above 2012-14 targets | | | | | 19,938 | | | | 42.21 | | | | – | | | | – | |
| RSUs — granted to employees | | | | | 1,429,554 | | | | 30.32 | | | | – | | | | – | |
| RSUs — granted to directors | | | | | 38,957 | | | | 33.37 | | | | 7,496 | | | | 33.35 | |
| Forfeited / cancelled | | | | | (276,627 | ) | | | 38.61 | | | | – | | | | – | |
| Vested / settled awards | | | | | (1,633,599 | ) | | | 45.28 | | | | (5,047 | ) | | | 44.83 | |
| Vested / unsettled awards | | | | | (243,335 | ) | | | 46.10 | | | | – | | | | – | |
| Unvested at end of period | | | | | 3,043,451 | | | $ | 37.70 | | | | 12,072 | | | $ | 37.81 | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
| Unvested at beginning of period | | | | | 2,268,484 | | | $ | 44.22 | | | | 6,353 | | | $ | 41.99 | |
| Vested / unsettled Stock Salary at beginning of period | | | | | 25,255 | | | | 40.38 | | | | 1,082 | | | | 39.05 | |
| PSUs — granted to employees | | | | | 445,020 | | | | 45.88 | | | | – | | | | – | |
| PSUs — incremental for performance above 2012-14 targets | | | | | 102,881 | | | | 45.88 | | | | – | | | | – | |
| RSUs — granted to employees | | | | | 2,001,931 | | | | 45.36 | | | | – | | | | – | |
| RSUs — granted to directors | | | | | 28,216 | | | | 46.22 | | | | 6,166 | | | | 46.42 | |
| Forfeited / cancelled | | | | | (173,903 | ) | | | 45.30 | | | | – | | | | – | |
| Vested / settled awards | | | | | (1,273,961 | ) | | | 42.50 | | | | (3,978 | ) | | | 40.85 | |
| Vested / unsettled Stock Salary Awards | | | | | (39,626 | ) | | | 40.46 | | | | – | | | | – | |
| Unvested at end of period | | | | | 3,384,297 | | | $ | 45.55 | | | | 9,623 | | | $ | 44.97 | |
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NOTE 21 — COMMITMENTS
The accompanying table summarizes credit-related commitments, as well as purchase and funding commitments:
Commitments(dollars in millions)
| | | | December 31, 2016
| |
|---|
| | | | Due to Expire
| | | | December 31,
2015
| |
|---|
| | | | Within
One Year
| | After
One Year
| | Total
Outstanding
| | Total
Outstanding
|
|---|
Financing Commitments |
| Financing assets | | | | $ | 1,003.6 | | | $ | 5,004.5 | | | $ | 6,008.1 | | | $ | 7,385.6 | |
Letters of credit |
| Standby letters of credit | | | | | 37.2 | | | | 195.0 | | | | 232.2 | | | | 315.3 | |
| Other letters of credit | | | | | 14.0 | | | | – | | | | 14.0 | | | | 18.3 | |
Guarantees | | | | | | | | | | | | | | | | | | |
| Deferred purchase agreements | | | | | 2,060.5 | | | | – | | | | 2,060.5 | | | | 1,806.5 | |
| Guarantees, acceptances and other recourse obligations | | | | | 1.6 | | | | – | | | | 1.6 | | | | 0.7 | |
Purchase and Funding Commitments |
Aerospace purchase commitments(1) | | | | | 607.9 | | | | 8,075.6 | | | | 8,683.5 | | | | 9,618.1 | |
| Rail and other purchase commitments | | | | | 272.9 | | | | 27.8 | | | | 300.7 | | | | 898.2 | |
(1) | | Aerospace purchase commitments are associated with Aerospace discontinued operations. |
Discontinued operations
The Aerospace purchase commitments in the table above are associated with Aerospace discontinued operations. Financing Commitments include HECM reverse mortgage loan commitments associated with Financial Freedom discontinued operations of $42 million at December 31, 2016 and $50 million at December 31, 2015. Financing Commitments also include commitments associated with the TC-CIT Aviation joint venture in Aerospace discontinued operations of $3 million at December 31, 2016 and $18 million at December 31, 2015.
Financing Commitments
Commercial
Financing commitments, referred to as loan commitments or lines of credit, reflect CIT’s agreements to lend to its customers, subject to the customers’ compliance with contractual obligations. Included in the table above are commitments that have been extended to and accepted by customers, clients or agents, but on which the criteria for funding have not been completed of $572 million at December 31, 2016 and $859 million at December 31, 2015. Financing commitments also include credit line agreements to Business Capital clients that are cancellable by us only after a notice period. The notice period is typically 90 days or less. The amount available under these credit lines, net of the amount of receivables assigned to us, was $335 million at December 31, 2016 and $406 million at December 31, 2015. As financing commitments may not be fully drawn, may expire unused, may be reduced or cancelled at the customer’s request, and may require the customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements.
The table above includes approximately $1.7 billion of undrawn financing commitments at both December 31, 2016 and December 31, 2015 for instances where the customer is not in compliance with contractual obligations or does not have adequate collateral to borrow against the unused facility, and therefore CIT does not have the contractual obligation to lend.
At December 31, 2016, substantially all undrawn financing commitments were senior facilities. Most of the Company’s undrawn and available financing commitments are in the Commercial Banking segment.
The table above excludes uncommitted revolving credit facilities extended by Business Capital to its clients for working capital purposes. In connection with these facilities, Business Capital has the sole discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and whether to honor any specific advance requests made by its clients under these credit facilities.
Consumer
In conjunction with the OneWest Transaction, the Company is committed to fund draws on certain reverse mortgages in conjunction with loss sharing agreements with the FDIC. The FDIC agreed to indemnify the Company for losses on the first $200 million of draws that occur subsequent to the date OneWest Bank originally purchased the applicable loans. In addition, the FDIC agreed to fund any other draws in excess of the $200 million. The Company’s net exposure for loan commitments on the reverse mortgage draws on those purchased loans was $55 million at December 31, 2016 and $48 million at December 31, 2015. SeeNote 5 — Indemnification Assets for further discussion on loss sharing agreements with the FDIC. In addition, as servicer of HECM loans, the Company is required to repurchase the loan out of the GNMA HMBS securitization pools once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount.
Also included was the Company’s commitment to fund draws on certain home equity lines of credit (“HELOCs”). Under the
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HELOC participation and servicing agreement entered into with the FDIC, the FDIC agreed to reimburse the Company for a portion of the draws that the Company made on the purchased HELOCs.
Letters of Credit
In the normal course of meeting the needs of clients, CIT sometimes enters into agreements to provide financing and letters of credit. Standby letters of credit obligate the issuer of the letter of credit to pay the beneficiary if a client on whose behalf the letter of credit was issued does not meet its obligation. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, CIT generally requires collateral and in some cases additional forms of credit support from the client.
Deferred Purchase Agreements
A Deferred Purchase Agreement (“DPA”) is provided in conjunction with factoring, whereby CIT provides a client with credit protection for trade receivables without purchasing the receivables. The trade receivable terms are generally ninety days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, then CIT purchases the receivable from the client. The outstanding amount in the table above is the maximum potential exposure that CIT would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring CIT to purchase all such receivables from the DPA clients.
The table above includes $1,962 million and $1,720 million of DPA credit protection at December 31, 2016 and December 31, 2015, respectively, related to receivables which have been presented to us for credit protection after shipment of goods has occurred and the customer has been invoiced. The table also includes $99 million and $87 million available under DPA credit line agreements, net of the amount of DPA credit protection provided at December 31, 2016 and December 31, 2015, respectively. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period. The notice period is typically 90 days or less.
The methodology used to determine the DPA liability is similar to the methodology used to determine the allowance for loan losses associated with the finance receivables, which reflects embedded losses based on various factors, including expected losses reflecting the Company’s internal customer and facility credit ratings. The liability recorded in Other Liabilities related to the DPAs totaled $6.1 million and $4.4 million at December 31, 2016 and December 31, 2015, respectively.
Purchase and Funding Commitments
CIT’s purchase commitments relate primarily to purchases of commercial aircraft and rail equipment.
Commitments to purchase new commercial aircraft are predominantly with Airbus Industries (“Airbus”) and The Boeing Company (“Boeing”). CIT may also commit to purchase an aircraft directly from an airline. Aerospace equipment purchases are contracted for specific models, using baseline aircraft specifications at fixed prices, which reflect discounts from fair market purchase prices prevailing at the time of commitment. The delivery price of an aircraft may change depending on final specifications. Equipment purchases are recorded at the delivery date. The estimated commitment amounts in the preceding table are based on contracted purchase prices, including estimated contractual cost escalations, reduced for pre-delivery payments to date and exclude buyer furnished equipment selected by the lessee. Prior to obtaining a lease commitment and lessee aircraft specifications, cost escalation is based upon an average delivery date by aircraft type and order, which ranges from 0 to 21 months from estimated future delivery date. When a lessee commitment is obtained, cost escalation is based on the expected delivery date. Pursuant to existing contractual commitments, 128 aircraft remain to be purchased from Airbus and Boeing at December 31, 2016. Aircraft deliveries are scheduled periodically through 2020. Commitments exclude unexercised options to order additional aircraft.
The Company’s rail business entered into commitments to purchase railcars from multiple manufacturers. At December 31, 2016, approximately 2,400 railcars remain to be purchased from manufacturers with deliveries through 2018. Rail equipment purchase commitments are at fixed prices subject to price increases for certain materials.
Other purchase commitments primarily relate to Equipment Finance.
Other Commitments
The Company has commitments to invest in affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments were $62 million at December 31, 2016 and $16 million at December 31, 2015. These commitments are payable on demand and are recorded in Other liabilities.
In addition, as servicer of HECM loans, the Company is required to repurchase loans out of the GNMA HMBS securitization pools once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. Refer toNote 3 — Loans for further detail regarding the purchased HECM loans due to this servicer obligation.
NOTE 22 — CONTINGENCIES
Litigation
CIT is involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory, and arbitration proceedings relating to matters that arise in connection with the conduct of its business (collectively, “Litigation”). In view of the inherent difficulty of predicting the outcome of Litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, CIT cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, CIT
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establishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can be reasonably estimated. Based on currently available information, CIT believes that the results of Litigation that is currently pending, taken together, will not have a material adverse effect on the Company’s financial condition, but may be material to the Company’s operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved.
For certain Litigation matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses in excess of established reserves and insurance. For other matters for which a loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation where losses are reasonably possible, management currently estimates the aggregate range of reasonably possible losses as up to $55 million in excess of established reserves and insurance related to those matters, if any. This estimate represents reasonably possible losses (in excess of established reserves and insurance) over the life of such Litigation, which may span a currently indeterminable number of years, and is based on information currently available as of December 31, 2016. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate.
Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent the Company’s maximum loss exposure.
The foregoing statements about CIT’s Litigation are based on the Company’s judgments, assumptions, and estimates and are necessarily subjective and uncertain. The Company has several hundred threatened and pending judicial, regulatory and arbitration proceedings at various stages. Several of the Company’s significant Litigation matters are described below.
BRAZILIAN TAX MATTER
Banco Commercial Investment Trust do Brasil S.A. (“Banco CIT”), CIT’s Brazilian bank subsidiary, was sold in a stock sale in the fourth quarter of 2015, thereby transferring the legal liabilities of Banco CIT to the buyer. Under the terms of the stock sale, CIT remains liable for indemnification to the buyer for any losses resulting from certain Imposto Sobre Circulaco de Mercadorias e Servicos (“ICMS”) tax appeals relating to disputed local tax assessments on leasing services and importation of equipment (the “ICMS Tax Appeals”).
Notices of infraction were issued to Banco CIT relating to the payment of Imposto sobre Circulaco de Mercadorias e Servicos (“ICMS”) taxes charged by Brazilian states in connection with the importation of equipment. The state of São Paulo claims that Banco CIT should have paid it ICMS taxes for tax years 2006 – 2009 because Banco CIT, the purchaser, was located in São Paulo. Instead, the ICMS taxes were paid to the state of Espirito Santo where the imported equipment arrived. A regulation issued by São Paulo in December 2013 reaffirms a 2009 agreement by São Paulo to conditionally recognize ICMS tax payments made to Espirito Santo. An assessment related to taxes paid to Espirito Santo was upheld in a ruling issued by the administrative court in May 2014. That ruling has been appealed. Another assessment related to taxes paid to Espirito Santo remains pending. Petitions seeking São Paulo’s recognition of the taxes paid to Espirito Santo have been filed in a general amnesty program. In conjunction with the stock sale, the Company posted a letter of credit in the amount of 71 million Reais ($22 million USD) to secure the indemnity obligation for the ICMS Tax Appeals.
HUD OIG INVESTIGATION
In 2009, OneWest Bank acquired the reverse mortgage loan portfolio and related servicing rights of Financial Freedom Senior Funding Corporation, including HECM loans, from the FDIC as Receiver for IndyMac Federal Bank. HECM loans are insured by the FHA, and administered by HUD. Subject to certain requirements, the loans acquired from the FDIC are covered by indemnification agreements. In addition, Financial Freedom is the servicer of HECM loans owned by third party investors. Beginning in the third quarter of 2015, the Office of the Inspector General for HUD (the “HUD OIG”), served a series of subpoenas on the Company regarding HECM loans. The subpoenas request documents and other information related to Financial Freedom’s HECM loan origination and servicing business, including the curtailment of interest payments on HECM insurance claims. The Company continues to cooperate with the investigation and is engaged in discussions with the HUD OIG regarding resolution of the matter. We do not expect the outcome of the investigation to have a material adverse effect on the Company’s financial condition or results of operations in light of existing reserves.
Forward Mortgage Obligations
As owner and servicer of forward residential mortgage loans, the Company is exposed to contingent obligations for breaches of servicer and other contractual obligations as set forth in industry regulations, in servicing agreements and other agreements with the applicable counterparties, such as the FDIC, Fannie Mae and other third party investors.
The Company has established reserves for contingent liabilities associated with continuing forward mortgage operations. While the Company believes that such accrued liabilities are adequate, management currently estimates the aggregate range of reasonably possible losses as up to $5 million in excess of established reserves and insurance, if any, as of December 31, 2016. This estimate is based on information currently available as of December 31, 2016. The obligations underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate.
Indemnification Obligations
In connection with the OneWest acquisition, CIT assumed the obligation to indemnify Ocwen Loan Servicing, LLC (“Ocwen”) against certain claims that may arise from servicing errors which are deemed attributable to the period prior to June 2013, when OneWest sold its servicing business to Ocwen, such as repurchase demands, non-recoverable servicing advances and compensatory fees imposed by the GSEs for servicer delays in completing the foreclosure process within the prescribed
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timeframe established by the servicer guides or agreements, exclusive of losses or repurchase obligations and certain agency fees, and which are limited to an aggregate amount of $150 million and expire three years from closing (February 28, 2017). Ocwen is responsible for liabilities arising from servicer obligations following the service transfer date because substantially all risks and rewards of ownership have been transferred; except for certain Agency fees or loan repurchase amounts. As of December 31, 2016, the cumulative indemnification obligation totaled approximately $56 million, which reduced the Company’s $150 million maximum potential indemnity obligation to Ocwen. Because of the uncertainty in the ultimate resolution and estimated amount of the indemnification obligation, it is reasonably possible that the obligation could exceed the Company’s recorded liability by up to approximately $25 million as of December 31, 2016.
In addition, CIT assumed OneWest Bank’s obligations to indemnify Specialized Loan Servicing, LLC (“SLS”) against certain claims that may arise that are attributable to the period prior to September 2013, the servicing transfer date, when OneWest sold a portion of its servicing business to SLS, such as repurchase demands and non-recoverable servicing advances. SLS is responsible for substantially all liabilities arising from servicer obligations following the service transfer date.
Mortgage Servicing Consent Orders
As a result of CIT Group Inc.’s acquisition of OneWest Bank, CIT (as successor to IMB Holdco LLC) is subject to a Consent Order with the FRB related to residential mortgage servicing operations. The original consent order was entered into with IMB Holdco LLC and the Office of Thrift Supervision in April 2011. Following IMB Holdco’s conversion to a bank holding company the Consent Order was amended in March 2014 to name the FRB as the appropriate regulator to administer the Order. A similar Consent Order had been entered into with the OCC, but in July 2015, immediately prior to completion of CIT’s acquisition of OneWest Bank the OCC terminated its Consent Order. However, the FRB continued its Consent Order in place and oversight was transferred to the Federal Reserve Board New York and CIT succeeded to the Consent Order obligations. The FRB’s Consent Order remains outstanding although improvements required by the Consent Order have been implemented including the completion of an Independent Foreclosure Review in 2014, resulting in approximately $12.7 million of remediation payments being made payable to borrowers.
NOTE 23 — LEASE COMMITMENTS
Lease Commitments
The following table presents future minimum rental payments under non-cancellable long-term lease agreements for premises and equipment at December 31, 2016:
Future Minimum Rentals (dollars in millions)
| Years Ended December 31, |
| 2017 | | | | $ | 49.3 | |
| 2018 | | | | | 46.6 | |
| 2019 | | | | | 44.8 | |
| 2020 | | | | | 38.7 | |
| 2021 | | | | | 27.0 | |
| Thereafter | | | | | 77.4 | |
| Total | | | | $ | 283.8 | |
The future minimum rentals in the table above includes $3.8 million ($1.4 million for 2017) associated with discontinued operations.
In addition to fixed lease rentals, leases generally require payment of maintenance expenses and real estate taxes, both of which are subject to escalation provisions. Minimum payments include $57.7 million ($14.2 million for 2017) which will be recorded against the facility exiting liability when paid and therefore will not be recorded as rental expense in future periods. Minimum payments have not been reduced by minimum sublease rentals of $48.4 million due in the future under non-cancellable subleases which will be recorded against the facility exiting liability when received. SeeNote 27 — “Severance and Facility Exiting Liabilities” for the liability related to closing facilities.
Rental expense for premises and equipment, was as follows. The 2015 balances include five months of activity related to OneWest Bank.
| | | | Years Ended December 31,
| |
|---|
| (dollars in millions) | | | | 2016
| | 2015(1)
| | 2014(1)
|
|---|
| Premises | | | | $ | 42.1 | | | $ | 28.7 | | | $ | 16.9 | |
| Equipment | | | | | 1.7 | | | | 1.8 | | | | 2.3 | |
| Total | | | | $ | 43.8 | | | $ | 30.5 | | | $ | 19.2 | |
(1) | | In preparing the year-end financial statements as of December 31, 2016, the Company discovered and corrected an immaterial error impacting the amount of rental expense disclosed in the table above which resulted in decreases to rental expense of $6 million and $4 million for the years ended December 31, 2015 and December 31, 2014, respectively. |
NOTE 24 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the third quarter of 2015, Strategic Credit Partners Holdings LLC (the “JV”), a joint venture between CIT Group Inc. (“CIT”) and TPG Special Situations Partners (“TSSP”), was formed. The JV extends credit in senior-secured, middle-market corporate term loans, and, in certain circumstances, is a participant to such loans. Participation could be in corporate loans originated by CIT. The JV may acquire other types of loans, such as subordinate corporate loans, second lien loans, revolving loans, asset backed loans and real estate loans. During the year ended December 31, 2016, loans of $122.8 million were sold to the joint venture. CIT also maintains an equity interest of 10% in the JV, and our investment was $5.4 million and $4.6 million at December 31, 2016 and 2015, respectively.
During 2014, the Company formed two joint ventures (collectively “TC-CIT Aviation”) between CIT Aerospace and Century Tokyo Leasing Corporation (“CTL”). CIT records its net investment under the equity method of accounting. Under the terms of the agreements, TC-CIT Aviation will acquire commercial aircraft that will be leased to airlines around the globe. CIT Aerospace is responsible for arranging future aircraft acquisitions, negotiating leases, servicing the portfolio and administering the entities. Initially, CIT Aerospace sold 14 commercial aircraft to TC-CIT Aviation in transactions with an aggregate value of approximately $0.6 billion, including nine aircraft sold in 2014 and five aircraft sold in the first quarter of 2015 (these five aircraft were sold at an aggregate amount of $240 million). In addition to the initial 14 commercial aircraft, CIT sold 5 commercial aircraft with an
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aggregate value of $226 million in the year ended December 31, 2015. There were no aircraft sold to TC-CIT Aviation for the year ended December 31, 2016. In 2016, servicing fees of $9.8 million were billed by CIT to TC-CIT Aviation for the year ended December 31, 2016. CIT also made and maintains a minority equity investment in TC-CIT Aviation in the amount of approximately $81 million and $50 million, which is included in discontinued operations at December 31, 2016 and 2015, respectively. CTL made and maintains a majority equity interest in the joint venture and is a lender to the companies. SeeNote 31 — Subsequent Eventsfor announced sale of the Company’s ownership stake in TC-CIT Aviation.
CIT invests in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects. CIT’s interests in these entities were entered into in the ordinary course of business. Other assets included approximately $220 million and $175 million at December 31, 2016, and 2015, respectively, of investments in non-consolidated entities relating to such transactions that are accounted for under the equity or cost methods.
The combination of investments in and loans to non-consolidated entities represents the Company’s maximum exposure to loss, as the Company does not provide guarantees or other forms of indemnification to non-consolidated entities.
As of December 31, 2016 and 2015, a wholly-owned subsidiary of the Company subserviced loans for a related party with unpaid principal balances of $7.6 million, and $204.5 million, respectively. During 2016, substantially all of the serviced loans were sold to a third party.
NOTE 25 — BUSINESS SEGMENT INFORMATION
Management’s Policy in Identifying Reportable Segments
CIT’s reportable segments are primarily based upon industry categories, geography, target markets and customers served, and, to a lesser extent, the core competencies relating to product origination, distribution methods, operations and servicing and the nature of their regulatory environment. This segment reporting is reflective of the Company’s internal reporting structure and is consistent with the presentation of financial information to the chief operating decision maker.
Summary of Changes to Reportable Segments
Due to changes in our business, our segments have been realigned since our 2015 Annual Report. As of December 31, 2016, CIT manages its business and reports its financial results in three operating segments: Commercial Banking, Consumer Banking, and Non-Strategic Portfolios (“NSP”), and a non-operating segment, Corporate and Other.
The following summarizes changes to our segment reporting from December 31, 2015. All prior period data presented in this Annual Report on Form 10-K were conformed to reflect the following changes
| - | | Commercial Banking (formerly North America Banking or “NAB”) no longer includes the Consumer Banking division or the Canadian Corporate and Equipment Finance business. Commercial Banking is comprised of Commercial Finance, Real Estate Finance, and Business Capital. Business Capital includes the former Equipment Finance and Commercial Services divisions, which had been discrete divisions in the year ago filing. In the fourth quarter of 2016 we further realigned our segments and included Rail as a fourth division. Also part of the fourth quarter realignment, Commercial Finance includes the Maritime Finance portfolio along with the remaining Commercial Air loans not part of discontinued operations. Rail, Maritime Finance and Commercial Air loans not part of discontinued operations were all part of the former Transportation Finance Segment. |
| - | | Transportation Finance (formerly Transportation & International Finance or “TIF”) no longer exists as a separate business segment. In our initial realignment early in 2016, we transferred the international business in China and the U.K. to NSP, such that Transportation Finance was then comprised of three divisions, Aerospace (composed of Commercial Air and Business Air), Rail and Maritime Finance. Based on the definitive sale agreement with respect to Commercial Air that we executed on October 6, 2016, the activity of the Commercial Air business that is subject to the sale agreement, as well as activity associated with the Business Air assets, are reported as discontinued operations. As mentioned above, Rail, Maritime Finance and commercial air loans not part of discontinued operations were transferred to Commercial Banking. |
| - | | Consumer Banking includes Legacy Consumer Mortgages (the former LCM segment) and Other Consumer Banking divisions that were included in the former NAB segment (Retail Banking, Consumer Lending, and SBA Lending). |
| - | | NSP includes businesses that we no longer consider strategic and as of December 31, 2016, essentially all of the remaining portfolio was in China. Historic data also includes businesses and portfolios that have been sold, in countries such as Canada, the U.K., Mexico, and Brazil. |
Types of Products and Services
Commercial Banking consists of four divisions. Through its Commercial Finance, Real Estate Finance, and Business Capital divisions, Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries. Business Capital also provides factoring, receivables management products and secured financing to the retail supply chain. The fourth division, Rail, provides equipment leasing and secured financing to the rail industry. Revenue is generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities, capital markets transactions and banking services, commissions earned on factoring and related activities, and to a lesser extent, interest and dividends on investments. Revenue is also generated from gains on asset sales.
Consumer Banking includes Other Consumer Banking and Legacy Consumer Mortgages.
Other Consumer Banking offers mortgage loans, deposits and private banking services to its consumer customers. The division offers jumbo residential mortgage loans and conforming residential mortgage loans, primarily in Southern California. Mortgage loans are originated directly through leads generated from the
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retail branch network, private bankers, the commercial business units, as well as indirectly through institutional intermediaries. Mortgage lending includes product specialists, internal sales support and origination processing, structuring and closing. Retail banking is the primary deposit gathering business of CIT Bank and operates through 70 retail branches in Southern California and an online direct channel. We offer a broad range of deposit and lending products to meet the needs of our customers, including: checking, savings, certificates of deposit, residential mortgage loans, and fiduciary services. The division also originates qualified Small Business Administration (“SBA”) 504 loans (generally, the financing provides growing small businesses with long-term, fixed-rate financing for major fixed assets, such as land and building) and 7(a) (generally, for purchase/refinance of owner occupied commercial real estate, working capital, acquisition of inventory, machinery, equipment, furniture, and fixtures, the refinance of outstanding debt subject to any program guidelines, and acquisition of businesses, including partnership buyouts).
LCM holds the reverse mortgage and SFR mortgage portfolios acquired in the OneWest Transaction. Certain of these assets and related receivables include loss sharing arrangements with the FDIC, which will continue to reimburse CIT Bank, N.A. for certain losses realized due to foreclosure, short-sale, charge-offs or a restructuring of a single family residential mortgage loan pursuant to an agreed upon loan modification framework.
NSP includes businesses and portfolios that we no longer consider strategic. The China portfolio was predominately the remaining operation at December 31, 2016. Historic data will also include other businesses and portfolios that have been sold, such as Canada, the U.K., Mexico, and Brazil.
On a limited basis, the remaining businesses offer equipment financing, secured lending and leasing and advisory services to small and middle-market businesses and all the portfolios were included in assets held for sale at December 31, 2016.
Corporate and Other
Certain items are not allocated to operating segments and are included in Corporate & Other. Some of the more significant items include interest income on investment securities, a portion of 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 (operating expenses), certain intangible asset amortization expenses (other expenses) and loss on debt extinguishments.
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Segment Profit and Assets
The following table presents segment data. The 2015 include results of OneWest Bank’s operations for approximately five months compared to a full year in 2016.
Segment Pre-tax Income (Loss)(dollars in millions)
| For the year ended December 31, 2016 | | | | Commercial
Banking
| | Consumer
Banking
| | Non-Strategic
Portfolios
| | Corporate &
Other
| | Total CIT
|
|---|
| Interest income | | | | $ | 1,287.9 | | | $ | 420.8 | | | $ | 80.8 | | | $ | 122.0 | | | $ | 1,911.5 | |
| Interest expense | | | | | (519.1 | ) | | | (10.2 | ) | | | (47.2 | ) | | | (176.7 | ) | | | (753.2 | ) |
| Provision for credit losses | | | | | (183.1 | ) | | | (11.7 | ) | | | 0.1 | | | | – | | | | (194.7 | ) |
| Rental income on operating leases | | | | | 1,020.0 | | | | – | | | | 11.6 | | | | – | | | | 1,031.6 | |
| Other income | | | | | 293.8 | | | | 40.0 | | | | 52.1 | | | | (235.3 | ) | | | 150.6 | |
| Depreciation on operating lease equipment | | | | | (261.1 | ) | | | – | | | | – | | | | – | | | | (261.1 | ) |
| Maintenance and other operating lease expenses | | | | | (213.6 | ) | | | – | | | | – | | | | – | | | | (213.6 | ) |
| Goodwill impairment | | | | | (34.8 | ) | | | (319.4 | ) | | | – | | | | – | | | | (354.2 | ) |
| Operating expenses / loss on debt extinguishment | | | | | (761.6 | ) | | | (380.9 | ) | | | (42.2 | ) | | | (111.3 | ) | | | (1,296.0 | ) |
| Income (loss) from continuing operations before (provision) benefit for income taxes | | | | $ | 628.4 | | | $ | (261.4 | ) | | $ | 55.2 | | | $ | (401.3 | ) | | $ | 20.9 | |
Select Period End Balances |
| Loans | | | | $ | 22,562.3 | | | $ | 6,973.6 | | | $ | – | | | $ | – | | | $ | 29,535.9 | |
| Credit balances of factoring clients | | | | | (1,292.0 | ) | | | – | | | | – | | | | – | | | | (1,292.0 | ) |
| Assets held for sale | | | | | 357.7 | | | | 68.2 | | | | 210.1 | | | | – | | | | 636.0 | |
| Operating lease equipment, net | | | | | 7,486.1 | | | | – | | | | – | | | | – | | | | 7,486.1 | |
For the year ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 1,029.1 | | | $ | 176.1 | | | $ | 184.8 | | | $ | 55.2 | | | $ | 1,445.2 | |
| Interest expense | | | | | (481.4 | ) | | | (24.9 | ) | | | (121.4 | ) | | | (103.7 | ) | | | (731.4 | ) |
| Provision for credit losses | | | | | (143.7 | ) | | | (8.7 | ) | | | (6.2 | ) | | | – | | | | (158.6 | ) |
| Rental income on operating leases | | | | | 981.4 | | | | – | | | | 36.7 | | | | – | | | | 1,018.1 | |
| Other income | | | | | 302.6 | | | | 5.4 | | | | (96.8 | ) | | | (61.6 | ) | | | 149.6 | |
| Depreciation on operating lease equipment | | | | | (218.3 | ) | | | – | | | | (10.9 | ) | | | – | | | | (229.2 | ) |
| Maintenance and other operating lease expenses | | | | | (185.1 | ) | | | – | | | | – | | | | – | | | | (185.1 | ) |
| Operating expenses / loss on debt extinguishment | | | | | (727.4 | ) | | | (158.4 | ) | | | (123.9 | ) | | | (112.9 | ) | | | (1,122.6 | ) |
| Income (loss) from continuing operations before (provision) benefit for income taxes | | | | $ | 557.2 | | | $ | (10.5 | ) | | $ | (137.7 | ) | | $ | (223.0 | ) | | $ | 186.0 | |
Select Period End Balances | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | | | $ | 23,332.4 | | | $ | 7,186.3 | | | $ | – | | | $ | – | | | $ | 30,518.7 | |
| Credit balances of factoring clients | | | | | (1,344.0 | ) | | | – | | | | – | | | | – | | | | (1,344.0 | ) |
| Assets held for sale | | | | | 435.1 | | | | 45.1 | | | | 1,577.5 | | | | – | | | | 2,057.7 | |
| Operating lease equipment, net | | | | | 6,851.7 | | | | – | | | | – | | | | – | | | | 6,851.7 | |
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Segment Pre-tax Income (Loss)(dollars in millions) (continued)
| For the year ended December 31, 2014 | | | | Commercial
Banking
| | Consumer
Banking
| | Non-Strategic
Portfolios
| | Corporate &
Other
| | Total CIT
|
|---|
| Interest income | | | | $ | 845.8 | | | $ | – | | | $ | 295.6 | | | $ | 14.2 | | | $ | 1,155.6 | |
| Interest expense | | | | | (441.9 | ) | | | – | | | | (218.4 | ) | | | (54.8 | ) | | | (715.1 | ) |
| Provision for credit losses | | | | | (73.3 | ) | | | – | | | | (30.9 | ) | | | (0.2 | ) | | | (104.4 | ) |
| Rental income on operating leases | | | | | 896.0 | | | | – | | | | 53.6 | | | | – | | | | 949.6 | |
| Other income | | | | | 327.7 | | | | – | | | | (27.5 | ) | | | (36.3 | ) | | | 263.9 | |
| Depreciation on operating lease equipment | | | | | (201.0 | ) | | | – | | | | (28.8 | ) | | | – | | | | (229.8 | ) |
| Maintenance and other operating lease costs | | | | | (171.7 | ) | | | – | | | | – | | | | – | | | | (171.7 | ) |
| Operating expenses / loss on debt extinguishment | | | | | (642.3 | ) | | | – | | | | (180.9 | ) | | | (80.4 | ) | | | (903.6 | ) |
| Income (loss) from continuing operations before (provisions) benefit for income taxes | | | | $ | 539.3 | | | $ | – | | | $ | (137.3 | ) | | $ | (157.5 | ) | | $ | 244.5 | |
Select Period End Balances | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | | | $ | 16,727.8 | | | $ | – | | | $ | 1,532.8 | | | $ | – | | | $ | 18,260.6 | |
| Credit balances of factoring clients | | | | | (1,622.1 | ) | | | – | | | | – | | | | – | | | | (1,622.1 | ) |
| Assets held for sale | | | | | 43.7 | | | | – | | | | 782.8 | | | | – | | | | 826.5 | |
| Operating lease equipment, net | | | | | 5,937.1 | | | | – | | | | 43.8 | | | | – | | | | 5,980.9 | |
Geographic Information
The following table presents information by major geographic region based upon the location of the Company’s legal entities.
Geographic Region (dollars in millions)
| | | | | | Total Assets(1)
| | Total Revenue
from continuing
operations
| | (Loss) income
from continuing
operations before
(provision) benefit
for income taxes
| | (Loss) income
from continuing
operations before
attribution of
noncontrolling
interests
|
|---|
| U.S. | | | | | 2016 | | | $ | 53,252.9 | | | $ | 2,755.6 | | | $ | 157.5 | | | $ | 99.3 | |
| | | | | | 2015 | | | $ | 55,491.1 | | | $ | 2,084.5 | | | $ | 227.6 | | | $ | 876.7 | |
| | | | | | 2014 | | | $ | 34,924.8 | | | $ | 1,713.5 | | | $ | 270.3 | | | $ | 730.9 | |
| Europe | | | | | 2016 | | | $ | 8,575.7 | | | $ | 139.7 | | | $ | (189.2 | ) | | $ | (246.8 | ) |
| | | | | | 2015 | | | $ | 8,351.8 | | | $ | 125.0 | | | $ | (227.6 | ) | | $ | (304.6 | ) |
| | | | | | 2014 | | | $ | 7,898.7 | | | $ | 192.5 | | | $ | (209.2 | ) | | $ | (221.6 | ) |
| Other foreign | | | | | 2016 | | | $ | 2,341.6 | | | $ | 198.4 | | | $ | 52.6 | | | $ | (35.1 | ) |
| | | | | | 2015 | | | $ | 3,549.0 | | | $ | 403.4 | | | $ | 186.0 | | | $ | 151.9 | |
| | | | | | 2014 | | | $ | 4,932.0 | | | $ | 463.1 | | | $ | 183.4 | | | $ | 167.6 | |
| Total consolidated | | | | | 2016 | | | $ | 64,170.2 | | | $ | 3,093.7 | | | $ | 20.9 | | | $ | (182.6 | ) |
| | | | | | 2015 | | | $ | 67,391.9 | | | $ | 2,612.9 | | | $ | 186.0 | | | $ | 724.0 | |
| | | | | | 2014 | | | $ | 47,755.5 | | | $ | 2,369.1 | | | $ | 244.5 | | | $ | 676.9 | |
(1) | | Includes Assets of discontinued operation of $13,220.7 million at December 31, 2016, $13,059.6 million at December 31, 2015 and $12,493.7 million at December 31, 2014. |
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NOTE 26 — GOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill balances by segment. Total goodwill for prior periods has not changed; however, goodwill balances allocated to the segments have been updated from amounts originally reported due to the changes to the segments as described inNote 25 — Business Segment Information.
Goodwill(dollars in millions)
| | | | Commercial
Banking
| | Consumer
Banking
| | Non-Strategic
Portfolios
| | Total
|
|---|
| December 31, 2014 | | | | $ | 403.3 | | | $ | – | | | $ | 29.0 | | | $ | 432.3 | |
| Additions | | | | | 288.8 | | | | 374.2 | | | | – | | | | 663.0 | |
Other activity(1) | | | | | (3.1 | ) | | | – | | | | (29.0 | ) | | | (32.1 | ) |
December 31, 2015(2) | | | | | 689.0 | | | | 374.2 | | | | – | | | | 1,063.2 | |
Impairment(3) | | | | | (34.8 | ) | | | (319.4 | ) | | | – | | | | (354.2 | ) |
Other Activity(4) | | | | | (12.0 | ) | | | (11.6 | ) | | | – | | | | (23.6 | ) |
| December 31, 2016 | | | | $ | 642.2 | | | $ | 43.2 | | | $ | – | | | $ | 685.4 | |
(1) | | Includes adjustments related to transfer to held for sale and foreign exchange translation. |
(2) | | In preparing the interim financial statements for the quarter ended June 30, 2016, the Company discovered and corrected an immaterial error impacting the December 31, 2015 goodwill allocation among Consumer Banking and Commercial Banking in the amount of $23.2 million. The reclassification had no impact on the Company’s Balance Sheet and Statements of Income or Cash Flows for any period. |
(3) | | The impairment charges exclude goodwill impairment recorded upon transfer of assets to held for sale of $4 million and $15 million for the years ended December 31, 2016 and 2015, respectively. |
(4) | | Includes measurement period adjustments related to the OneWest transaction, as described below, and foreign exchange translation. |
The December 31, 2014 goodwill included amounts from CIT’s emergence from bankruptcy in 2009, and its 2014 acquisitions of Capital Direct Group and its subsidiaries (“Direct Capital”), and Nacco, an independent full service railcar lessor. On January 31, 2014, CIT acquired 100% of the outstanding shares of Paris-based Nacco, an independent full service railcar lessor in Europe. The purchase price was approximately $250 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date, resulting in $77 million of goodwill. On August 1, 2014, CIT Bank acquired 100% of Direct Capital, a U.S. based lender providing equipment financing to small and mid-sized businesses operating across a range of industries. The purchase price was approximately $230 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date resulting in approximately $170 million of goodwill. In addition, intangible assets of approximately $12 million were recorded relating mainly to the valuation of existing customer relationships and trade names.
The 2015 addition relates to the OneWest Transaction. On August 3, 2015 CIT acquired 100% of IMB HoldCo LLC, the parent company of OneWest Bank. The purchase price was approximately $3.4 billion and the acquired assets and liabilities were recorded during the third quarter 2015 at their estimated fair value as of the acquisition date resulting in $598 million of goodwill recorded in the third quarter of 2015, which was ultimately adjusted to $642.5 million as a result of measurement period adjustments. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future events that are highly subjective in nature and may require adjustments, which can be updated throughout the year following the acquisition. Subsequent to the acquisition, management continued to review information relating to events or circumstances existing at the acquisition date. This review resulted in adjustments to the acquisition date valuation amounts, which decreased the goodwill balance from $663 million as of December 31, 2015, to $642.5 million as of the end of the measurement period in the third quarter of 2016. Prior to the impairment charge of $319.4 million taken during the fourth quarter of 2016, as discussed below, $362.6 million of the goodwill balance was associated with the Consumer Banking business segment. The remaining goodwill was allocated to the Commercial Finance and Real Estate Finance reporting units in Commercial Banking. Additionally, intangible assets of approximately $165 million were recorded relating mainly to the valuation of core deposit intangibles, trade name and customer relationships, as detailed in the table below.
The table above does not include approximately $136 million of goodwill that was transferred to discontinued operations as a result of the movement of the Commercial Air and Business Air businesses to discontinued operations.
Once goodwill has been assigned, it no longer retains its association with a particular event or acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of goodwill.
In accordance with ASC 350, Intangibles — Goodwill and other, goodwill is assessed for impairment at least annually, or more often if events or circumstances have changed significantly from the annual test date that would indicate a potential reduction in the fair value of the reporting unit below its carrying value. CIT defines its reporting units as Commercial Finance, Real Estate Finance, Equipment Finance, Commercial Services, Rail and Consumer Banking.
The Company performs its annual goodwill impairment test during the fourth quarter of each year or more often if events or circumstances have changed significantly from the annual test date, utilizing data as of September 30 to perform the test.
Item 8: Financial Statements and Supplementary Data
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, during the fourth quarter of 2016, the Company performed its annual goodwill impairment test.
ASC 350 requires a two-step impairment test to be used to identify potential goodwill impairment and to measure the amount of goodwill impairment. Companies can also choose to perform qualitative assessments to conclude on whether it is more likely or not that a company’s carrying amount including goodwill is greater than its fair value, commonly referred to as Step 0, before applying the two-step approach.
For 2016, we performed the first step (“Step 1”) of the analysis for all Reporting Units (RUs), including Commercial Finance, Commercial Services, Equipment Finance, Rail, Real Estate Finance and Consumer Banking.
Fair Value
Determining the value of the RU’s as part of the Step 1 analysis involves significant judgment. For Step 1, the Company used a combination of the Income Approach (i.e. discounted cash flow method) and the Market Approach (i.e. Guideline Public Company (GPC) and, where applicable, Guideline Merged and Acquired Company (GMAC) methods) to determine the fair value.
In the application of the Income Approach, the Company determined the fair value of the RU using a discounted cash flow (DCF) analysis. The DCF model uses earnings projections and respective capitalization assumptions based on three-year financial plans approved by the Board of Directors. Beyond the initial three-year period, the projections converge toward a constant long-term growth rate of up to 3% based on the projected revenues of the RU, as well as expectations for the development of gross domestic product and inflation, which are captured in the terminal value. Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments.
The cash flows determined based on the process described above are discounted to their present value. The discount rate (cost of equity) applied is comprised of a risk-free interest rate, an equity risk premium, a size premium and a factor covering the systematic market risk (RU-specific beta) and, where applicable, accompany specific risk premiums. The values for the factors applied are determined primarily using external sources of information. The RU-specific betas are determined based on a group of peer companies. The discount rates applied to the RU’s ranged from 10% to 12.5%.
In our application of the market approach, for the GPC Method, the Company applied market based multiples derived from the stock prices of companies considered by management to be comparable to each of the RUs, to various financial metrics for each of the Reporting Units, as determined applicable to those reporting units, including tangible book or book value, earnings and projected earnings. In addition, the Company applied a 25% control premium based on our review of transactions observable in the market place that we determined were comparable. The control premium is management’s estimate of how much a market participant would be willing to pay over the market fair value for control of the business.
With respect to the application of the GMAC method, the Company used actual prices paid in merger and acquisition transactions for similar public and private companies in the banking industry. The multiples were then applied to relevant financial metrics of the RUs.
A weighting is ascribed to each of the results of the Income and Market approaches to determine the concluded fair value of each RU. The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology for each specific RU.
Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods.
Carrying Amount
The carrying amount of the RUs is determined using a capital allocation methodology. The allocation uses the Company’s total equity at the date of valuation, which is allocated to each of the Company’s businesses, including the RUs, and to the other areas of the Company not included in the RUs. The allocation is informed by internal analysis and the current target regulatory capital of the Company, to determine the allocated capital.
Step 2
Based on the Step 1 review, as described above, the Company concluded that the carrying amount of the Consumer Banking and Commercial Services RUs exceeded their estimated fair value and thus the Company performed the second step (“Step 2”) to quantify the goodwill impairment, if any, for those two RUs. In this step, the estimated fair value for the RU is allocated to its respective assets and liabilities in order to determine an implied value of goodwill, in a manner similar to the calculations and approach performed in accounting for a business combination. Significant judgment and estimates are involved in the determination of the fair value of the assets (including intangible assets) and liabilities of the RUs, and therefore directly impact the fair value of the implied goodwill determined as part of Step 2.
Based on our assessments under both Step 1 and Step 2, the Company recorded an impairment of the Consumer Banking and Commercial Services RUs of $319.4 million and $34.8 million, respectively.
As described above, Consumer Banking’s goodwill was recorded in August of 2015 as a result of the OneWest Bank acquisition based upon a purchase price that reflected several factors, including the US taxable earnings that were expected to allow CIT to realize the benefit of the NOL prior to expiry. The acquisition resulted in total goodwill of $643 million, of which $363 million was allocated to Consumer Banking. The impairment of approximately $320 million in 2016 was primarily the result of lower forecasted earnings reflecting higher costs, in large part related to being a SIFI bank and higher internally allocated capital.
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill for Commercial Services of approximately $40 million was attributed at the time of emergence from bankruptcy in 2009. Since then, the fundamentals of the factoring business have come under increasing pressure from a challenging retail environment and tighter pricing on factoring commissions. Although we have seen factoring volumes stabilize, we expect commissions to remain under pressure in comparison to their historical levels, and given the impact this has on our forecasted earnings, goodwill was impaired by $34.8 million.
Intangible Assets
The following table presents the gross carrying value and accumulated amortization for intangible assets, excluding fully amortized intangible assets.
Intangible Assets(dollars in millions)
| | | | December 31, 2016
| | December 31, 2015
| |
|---|
| | | | Gross
Carrying
Amount
| | Accumulated
Amortization
| | Net
Carrying
Amount
| | Gross
Carrying
Amount
| | Accumulated
Amortization
| | Net
Carrying
Amount
|
|---|
| Core deposit intangibles | | | | $ | 126.3 | | | $ | (25.4 | ) | | $ | 100.9 | | | $ | 126.3 | | | $ | (7.5 | ) | | $ | 118.8 | |
| Trade names | | | | | 27.4 | | | | (6.1 | ) | | | 21.3 | | | | 27.4 | | | | (3.0 | ) | | | 24.4 | |
| Operating lease rental intangibles | | | | | 7.6 | | | | (6.7 | ) | | | 0.9 | | | | 9.6 | | | | (8.9 | ) | | | 0.7 | |
| Customer relationships | | | | | 23.9 | | | | (7.1 | ) | | | 16.8 | | | | 23.9 | | | | (3.2 | ) | | | 20.7 | |
| Other | | | | | 2.1 | | | | (1.3 | ) | | | 0.8 | | | | 2.1 | | | | (0.6 | ) | | | 1.5 | |
| Total intangible assets | | | | $ | 187.3 | | | $ | (46.6 | ) | | $ | 140.7 | | | $ | 189.3 | | | $ | (23.2 | ) | | $ | 166.1 | |
The following table presents the changes in intangible assets:
Intangible Assets Rollforward (dollars in millions)
| | | | Customer
Relationships
| | Core Deposit
Intangibles
| | Trade Names
| | Operating
Lease Rental
Intangibles
| | Other
| | Total
|
|---|
| December 31, 2014 | | | | $ | 6.8 | | | $ | – | | | $ | 6.9 | | | $ | 2.2 | | | $ | 0.5 | | | $ | 16.4 | |
Additions(1) | | | | | 16.6 | | | | 126.3 | | | | 20.1 | | | | – | | | | 1.7 | | | | 164.7 | |
Amortization(2) | | | | | (2.7 | ) | | | (7.5 | ) | | | (2.4 | ) | | | (1.5 | ) | | | (0.7 | ) | | | (14.8 | ) |
Other(3) | | | | | – | | | | – | | | | (0.2 | ) | | | – | | | | – | | | | (0.2 | ) |
| December 31, 2015 | | | | $ | 20.7 | | | $ | 118.8 | | | $ | 24.4 | | | $ | 0.7 | | | $ | 1.5 | | | $ | 166.1 | |
| Additions | | | | | – | | | | – | | | | – | | | | 1.8 | | | | – | | | | 1.8 | |
Amortization(2) | | | | | (3.9 | ) | | | (17.9 | ) | | | (3.1 | ) | | | (1.6 | ) | | | (0.7 | ) | | | (27.2 | ) |
| December 31, 2016 | | | | $ | 16.8 | | | $ | 100.9 | | | $ | 21.3 | | | $ | 0.9 | | | $ | 0.8 | | | $ | 140.7 | |
(1) | | Includes measurement period adjustments related to the OneWest Transaction. |
(2) | | Includes amortization recorded in operating expenses and operating lease rental income. |
(3) | | Includes foreign exchange translation. |
The addition to intangible assets in 2015 reflects the OneWest Bank Transaction. The largest component related to the valuation of core deposits. Core deposit intangibles (“CDIs”) represent future benefits arising from non-contractual customer relationships (e.g., account relationships with the depositors) acquired from the purchase of demand deposit accounts, including interest and non-interest bearing checking accounts, money market and savings accounts. The Company’s CDI has a finite life and is amortized on a straight line basis over the estimated useful life of seven years. Amortization expense for the intangible assets is primarily recorded in Operating expenses.
Intangible assets prior to the OneWest Transaction included the operating lease rental intangible assets comprised of amounts related to net favorable (above current market rates) operating leases. The net intangible assets have been fully amortized by the end of 2016. The intangible assets also include approximately $7.7 million, net, related to the valuation of existing customer relationships and trade names recorded in conjunction with the acquisition of Direct Capital in 2014.
Accumulated amortization totaled $46.6 million at December 31, 2016. Projected amortization for the years ended December 31, 2017 through December 31, 2021, is approximately $25.5 million, $24.5 million, $23.7 million, $23.1 million, and $22.2 million, respectively.
Item 8: Financial Statements and Supplementary Data
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NOTE 27 — SEVERANCE AND FACILITY EXITING LIABILITIES
The following table summarizes liabilities (pre-tax) related to closing facilities and employee severance:
Severance and Facility Exiting Liabilities(dollars in millions)
| | | | Severance
| | Facilities
| |
|---|
| | | | Number of
Employees
| | Liability
| | Number of
Facilities
| | Liability
| | Total
Liabilities
|
|---|
| December 31, 2014 | | | | | 47 | | | $ | 8.7 | | | | 12 | | | $ | 23.7 | | | $ | 32.4 | |
| Additions and adjustments | | | | | 74 | | | | 38.7 | | | | 2 | | | | 1.6 | | | | 40.3 | |
| Utilization | | | | | (68 | ) | | | (10.5 | ) | | | (6 | ) | | | (6.2 | ) | | | (16.7 | ) |
| December 31, 2015 | | | | | 53 | | | | 36.9 | | | | 8 | | | | 19.1 | | | | 56.0 | |
| Additions and adjustments | | | | | 165 | | | | 28.6 | | | | 5 | | | | (0.6 | ) | | | 28.0 | |
| Utilization | | | | | (183 | ) | | | (62.3 | ) | | | (2 | ) | | | (3.4 | ) | | | (65.7 | ) |
| December 31, 2016 | | | | | 35 | | | $ | 3.2 | | | | 11 | | | $ | 15.1 | | | $ | 18.3 | |
CIT continued to implement various organization efficiency and cost reduction initiatives, such as our international rationalization activities and CIT announced a reorganization of management in the 2015 fourth quarter. The severance additions primarily relate to employee termination benefits incurred in conjunction with these initiatives. The facility additions primarily relate to location closings and consolidations in connection with these initiatives. These additions, along with charges related to accelerated vesting of equity and other benefits, were recorded as part of the $36.2 million and $58.3 million provisions for the years ended December 31, 2016 and 2015, respectively.
NOTE 28 — PARENT COMPANY FINANCIAL STATEMENTS
The following tables present the Parent Company only financial statements:
Condensed Parent Company Only Balance Sheets(dollars in millions)
| | | | December 31,
2016
| | December 31,
2015
|
|---|
Assets: |
| Cash and deposits | | | | $ | 1,172.8 | | | $ | 1,014.5 | |
| Cash held at bank subsidiary | | | | | 15.4 | | | | 15.3 | |
| Investment securities | | | | | 400.3 | | | | 300.1 | |
| Receivables from nonbank subsidiaries | | | | | 9,172.9 | | | | 8,951.4 | |
| Receivables from bank subsidiaries | | | | | 34.7 | | | | 35.6 | |
| Investment in nonbank subsidiaries | | | | | 3,597.4 | | | | 4,989.7 | |
| Investment in bank subsidiaries | | | | | 5,187.9 | | | | 5,582.1 | |
| Goodwill | | | | | 261.4 | | | | 319.6 | |
| Other assets | | | | | 2,217.7 | | | | 2,158.9 | |
Total Assets | | | | $ | 22,060.5 | | | $ | 23,367.2 | |
Liabilities and Equity: |
| Borrowings | | | | $ | 10,599.0 | | | $ | 10,677.7 | |
| Liabilities to nonbank subsidiaries | | | | | 907.9 | | | | 1,029.9 | |
| Liabilities to bank subsidiaries | | | | | 4.6 | | | | 19.8 | |
| Other liabilities | | | | | 546.3 | | | | 695.1 | |
Total Liabilities | | | | $ | 12,057.8 | | | $ | 12,422.5 | |
| Total Stockholders’ Equity | | | | | 10,002.7 | | | | 10,944.7 | |
Total Liabilities and Equity | | | | $ | 22,060.5 | | | $ | 23,367.2 | |
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CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Parent Company Only Statements of Income and Comprehensive Income(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Income |
| Interest income from nonbank subsidiaries | | | | $ | 488.3 | | | $ | 435.1 | | | $ | 560.3 | |
| Interest and dividends on interest bearing deposits and investments | | | | | 2.7 | | | | 3.2 | | | | 1.4 | |
| Dividends from nonbank subsidiaries | | | | | 399.9 | | | | 630.3 | | | | 526.8 | |
| Dividends from bank subsidiaries | | | | | 223.0 | | | | 459.2 | | | | 39.4 | |
| Other income from subsidiaries | | | | | 146.3 | | | | (138.8 | ) | | | (62.4 | ) |
| Other income | | | | | 21.0 | | | | 128.8 | | | | 103.8 | |
| Total income | | | | | 1,281.2 | | | | 1,517.8 | | | | 1,169.3 | |
Expenses |
| Interest expense | | | | | (548.2 | ) | | | (570.7 | ) | | | (649.6 | ) |
| Interest expense on liabilities to subsidiaries | | | | | (51.1 | ) | | | (43.9 | ) | | | (166.4 | ) |
| Other expenses | | | | | (565.0 | ) | | | (267.2 | ) | | | (199.4 | ) |
| Total expenses | | | | | (1,164.3 | ) | | | (881.8 | ) | | | (1,015.4 | ) |
Income before income taxes and equity in undistributed net income of subsidiaries | | | | | 116.9 | | | | 636.0 | | | | 153.9 | |
| Benefit for income taxes | | | | | 308.5 | | | | 827.2 | | | | 769.6 | |
Income before equity in undistributed net income of subsidiaries | | | | | 425.4 | | | | 1,463.2 | | | | 923.5 | |
| Equity in undistributed net income of bank subsidiaries | | | | | (349.8 | ) | | | (265.1 | ) | | | 76.5 | |
| Equity in undistributed net income of nonbank subsidiaries | | | | | (923.6 | ) | | | (164.0 | ) | | | 119.1 | |
Net (loss) income | | | | | (848.0 | ) | | | 1,034.1 | | | | 1,119.1 | |
| Other Comprehensive income (loss) income, net of tax | | | | | 2.0 | | | | (8.2 | ) | | | (60.3 | ) |
Comprehensive (loss) income | | | | $ | (846.0 | ) | | $ | 1,025.9 | | | $ | 1,058.8 | |
Condensed Parent Company Only Statements of Cash Flows(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2016
| | 2015
| | 2014
|
|---|
Cash Flows From Operating Activities: |
| Net (loss) income | | | | $ | (848.0 | ) | | $ | 1,034.1 | | | $ | 1,119.1 | |
| Equity in undistributed earnings of subsidiaries | | | | | 650.4 | | | | 429.1 | | | | (195.6 | ) |
| Other operating activities, net | | | | | 47.1 | | | | (588.6 | ) | | | (735.4 | ) |
| Net cash flows (used in) provided by operations | | | | | (150.5 | ) | | | 874.6 | | | | 188.1 | |
Cash Flows From Investing Activities: | | | | | | | | | | | | | | |
| Decrease (increase) in investments and advances to subsidiaries | | | | | 1,023.1 | | | | 620.1 | | | | (92.6 | ) |
| Acquisitions | | | | | – | | | | (1,559.5 | ) | | | – | |
| Decrease (increase) in Investment securities and securities purchased under agreements to resell | | | | | (100.2 | ) | | | 1,454.1 | | | | 342.3 | |
| Net cash flows provided by investing activities | | | | | 922.9 | | | | 514.7 | | | | 249.7 | |
Cash Flows From Financing Activities: | | | | | | | | | | | | | | |
| Proceeds from the issuance of term debt | | | | | – | | | | – | | | | 991.3 | |
| Repayments of term debt | | | | | (359.5 | ) | | | (1,256.7 | ) | | | (1,603.0 | ) |
| Repurchase of common stock | | | | | – | | | | (531.8 | ) | | | (775.5 | ) |
| Dividends paid | | | | | (123.0 | ) | | | (114.9 | ) | | | (95.3 | ) |
| Net change in advances (to) from subsidiaries | | | | | (131.5 | ) | | | 91.0 | | | | 902.1 | |
| Net cash flows used in financing activities | | | | | (614.0 | ) | | | (1,812.4 | ) | | | (580.4 | ) |
| Net (decrease) increase in unrestricted cash and cash equivalents | | | | | 158.4 | | | | (423.1 | ) | | | (142.6 | ) |
| Unrestricted cash and cash equivalents, beginning of period | | | | | 1,029.8 | | | | 1,452.9 | | | | 1,595.5 | |
| Unrestricted cash and cash equivalents, end of period | | | | $ | 1,188.2 | | | $ | 1,029.8 | | | $ | 1,452.9 | |
Item 8: Financial Statements and Supplementary Data
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202 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 29 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents quarterly data:
Selected Quarterly Financial Data(dollars in millions)
| | | | Unaudited
| |
|---|
| | | | Fourth
Quarter
| | Third
Quarter
| | Second
Quarter
| | First
Quarter
|
|---|
For the year ended December 31, 2016 | | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 474.1 | | | $ | 475.8 | | | $ | 478.7 | | | $ | 482.9 | |
| Interest expense | | | | | (178.3 | ) | | | (188.3 | ) | | | (191.6 | ) | | | (195.0 | ) |
| Provision for credit losses | | | | | (36.7 | ) | | | (45.2 | ) | | | (23.3 | ) | | | (89.5 | ) |
| Rental income on operating leases | | | | | 252.2 | | | | 254.3 | | | | 261.0 | | | | 264.1 | |
| Other income | | | | | (117.6 | ) | | | 83.6 | | | | 99.8 | | | | 84.8 | |
| Depreciation on operating lease equipment | | | | | (69.8 | ) | | | (66.9 | ) | | | (63.1 | ) | | | (61.3 | ) |
| Maintenance and other operating lease expenses | | | | | (57.5 | ) | | | (56.6 | ) | | | (50.6 | ) | | | (48.9 | ) |
| Goodwill impairment | | | | | (354.2 | ) | | | – | | | | – | | | | – | |
| Operating expenses | | | | | (341.3 | ) | | | (302.8 | ) | | | (309.3 | ) | | | (330.1 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (3.3 | ) | | | (5.2 | ) | | | (2.4 | ) | | | (1.6 | ) |
| Benefit (provision) for income taxes | | | | | 6.6 | | | | (54.5 | ) | | | (111.2 | ) | | | (44.4 | ) |
| (Loss) income from discontinued operations, net of taxes | | | | | (716.7 | ) | | | 37.3 | | | | (71.0 | ) | | | 85.0 | |
| Net (loss) income | | | | $ | (1,142.5 | ) | | $ | 131.5 | | | $ | 17.0 | | | $ | 146.0 | |
| Net (loss) income per diluted share | | | | $ | (5.65 | ) | | $ | 0.65 | | | $ | 0.08 | | | $ | 0.72 | |
For the year ended December 31, 2015 | | | | | | | | | | | | | | | | | | |
| Interest income | | | | $ | 492.4 | | | | 418.5 | | | $ | 269.5 | | | $ | 264.8 | |
| Interest expense | | | | | (197.6 | ) | | | (193.3 | ) | | | (168.8 | ) | | | (171.7 | ) |
| Provision for credit losses | | | | | (59.2 | ) | | | (50.3 | ) | | | (18.7 | ) | | | (30.4 | ) |
| Rental income on operating leases | | | | | 255.9 | | | | 259.5 | | | | 255.1 | | | | 247.6 | |
| Other income | | | | | 21.7 | | | | 24.9 | | | | 51.2 | | | | 51.8 | |
| Depreciation on operating lease equipment | | | | | (57.2 | ) | | | (58.8 | ) | | | (57.6 | ) | | | (55.6 | ) |
| Maintenance and other operating lease expenses | | | | | (53.9 | ) | | | (49.0 | ) | | | (42.6 | ) | | | (39.6 | ) |
| Operating expenses | | | | | (351.8 | ) | | | (327.5 | ) | | | (219.2 | ) | | | (222.6 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (1.1 | ) | | | (0.3 | ) | | | (0.1 | ) | | | – | |
| Benefit (provision) for income taxes | | | | | 15.8 | | | | 581.9 | | | | (36.9 | ) | | | (22.8 | ) |
| Income attributable to noncontrolling interest, after tax | | | | | – | | | | – | | | | – | | | | 0.1 | |
| Income from discontinued operation, net of taxes | | | | | 75.0 | | | | 72.0 | | | | 81.9 | | | | 81.1 | |
| Net income | | | | $ | 140.0 | | | $ | 677.6 | | | $ | 113.8 | | | $ | 102.7 | |
| Net income per diluted share | | | | $ | 0.70 | | | $ | 3.53 | | | $ | 0.65 | | | $ | 0.58 | |
Presented below are “As Reported” and “As Revised” quarterly and year to date interim financial statements.
In preparing the financial statements for the quarter and year ended December 31, 2016, management identified errors that were not material to any individual prior period or to the full year Consolidated Statements of Income.
In evaluating the impact of errors within the interim financial statements, management considered the guidance set forth in SEC Staff Accounting Bulletin 99,Materiality (“SAB 99”), SEC Staff Accounting Bulletin 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), and the FASB’s Accounting Standards Codification Topic 250Accounting Changes and Error Corrections.
In assessing these errors, management concluded that the corrections did not, individually or in the aggregate, result in a material misstatement of the Company’s consolidated financial statements for any prior period.
Although the errors were not material individually or in the aggregate to any reporting period, Management has decided to record the errors in the applicable prior periods and revised the previously reported balances in the interim consolidated financial statements.
The Company will revise in subsequent quarterly filings on Form 10-Q its results for the quarters ended September 30, June 30, and March 31, 2016. As detailed in Note 30 — Revisions of Previously Reported Annual Financial Statements, revisions to previously reported Balance Sheet, Statements of Income and Statements of Cash Flows as of and for the years ended December 31, 2015 and 2014 are presented.
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CIT ANNUAL REPORT 2016 203
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the previously reported balances and revised amounts impacting the statements of operations, balance sheets, and statement of cash flows along with descriptions of the more significant corrections.
Balance Sheets
The revisions to the presented interim consolidated balance sheets were not significant in any period.
Consolidated Balance Sheets(dollars in millions) (unaudited)
| | | | March 31, 2016
| | June 30, 2016
| | September 30, 2016
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total cash and deposits | | | | $ | 7,489.4 | | | $ | 7,489.4 | | | $ | 7,435.5 | | | $ | 7,435.5 | | | $ | 6,752.5 | | | $ | 6,752.5 | |
| Investment securities | | | | | 2,896.8 | | | | 2,896.8 | | | | 3,229.1 | | | | 3,229.1 | | | | 3,592.4 | | | | 3,592.4 | |
Assets held for sale(1) | | | | | 1,487.4 | | | | 1,487.4 | | | | 1,639.1 | | | | 1,639.1 | | | | 1,406.7 | | | | 1,406.7 | |
| Loans | | | | | 30,953.5 | | | | 30,948.7 | | | | 30,104.2 | | | | 30,093.8 | | | | 29,906.8 | | | | 29,897.0 | |
| Allowance for loan losses | | | | | (400.8 | ) | | | (400.8 | ) | | | (397.5 | ) | | | (393.1 | ) | | | (421.7 | ) | | | (415.0 | ) |
Total loans, net of allowance for loan losses(1) | | | | | 30,552.7 | | | | 30,547.9 | | | | 29,706.7 | | | | 29,700.7 | | | | 29,485.1 | | | | 29,482.0 | |
Operating lease equipment, net(1) | | | | | 7,071.4 | | | | 7,071.4 | | | | 7,179.1 | | | | 7,179.1 | | | | 7,383.1 | | | | 7,383.1 | |
| Indemnification assets | | | | | 389.4 | | | | 381.4 | | | | 375.5 | | | | 386.0 | | | | 362.2 | | | | 362.4 | |
| Unsecured counterparty receivable | | | | | 556.3 | | | | 556.3 | | | | 570.2 | | | | 570.2 | | | | 560.2 | | | | 560.2 | |
| Goodwill | | | | | 1,060.0 | | | | 1,060.0 | | | | 1,044.1 | | | | 1,044.1 | | | | 1,043.7 | | | | 1,043.7 | |
| Intangible assets | | | | | 160.9 | | | | 160.9 | | | | 154.2 | | | | 154.2 | | | | 147.6 | | | | 147.6 | |
| Other assets | | | | | 2,481.6 | | | | 2,485.4 | | | | 2,406.0 | | | | 2,407.4 | | | | 2,258.6 | | | | 2,277.1 | |
| Assets of discontinued operations | | | | | 12,951.7 | | | | 12,951.7 | | | | 12,960.8 | | | | 12,960.8 | | | | 12,973.4 | | | | 12,973.4 | |
Total Assets | | | | $ | 67,097.6 | | | $ | 67,088.6 | | | $ | 66,700.3 | | | $ | 66,706.2 | | | $ | 65,965.5 | | | $ | 65,981.1 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | $ | 32,877.8 | | | $ | 32,877.8 | | | $ | 32,862.5 | | | $ | 32,862.5 | | | $ | 32,851.7 | | | $ | 32,851.7 | |
| Credit balances of factoring clients | | | | | 1,361.0 | | | | 1,361.0 | | | | 1,215.2 | | | | 1,215.2 | | | | 1,228.9 | | | | 1,228.9 | |
| Other liabilities | | | | | 1,555.8 | | | | 1,581.0 | | | | 1,529.9 | | | | 1,557.6 | | | | 1,598.0 | | | | 1,623.3 | |
| Borrowings | | | | | 15,981.6 | | | | 15,981.6 | | | | 15,583.6 | | | | 15,583.6 | | | | 14,683.9 | | | | 14,684.0 | |
| Liabilities of discontinued operations | | | | | 4,195.1 | | | | 4,195.1 | | | | 4,384.4 | | | | 4,394.0 | | | | 4,365.5 | | | | 4,388.3 | |
Total Liabilities | | | | | 55,971.3 | | | | 55,996.5 | | | | 55,575.6 | | | | 55,612.9 | | | | 54,728.0 | | | | 54,776.2 | |
Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | 2.1 | | | | 2.1 | | | | 2.1 | | | | 2.1 | | | | 2.1 | | | | 2.1 | |
| Paid-in capital | | | | | 8,739.4 | | | | 8,739.4 | | | | 8,749.8 | | | | 8,749.8 | | | | 8,758.2 | | | | 8,758.2 | |
| Retained earnings | | | | | 2,673.7 | | | | 2,639.5 | | | | 2,656.9 | | | | 2,625.5 | | | | 2,758.9 | | | | 2,726.3 | |
| Accumulated other comprehensive loss | | | | | (117.4 | ) | | | (117.4 | ) | | | (107.6 | ) | | | (107.6 | ) | | | (104.2 | ) | | | (104.2 | ) |
| Treasury stock | | | | | (172.0 | ) | | | (172.0 | ) | | | (177.0 | ) | | | (177.0 | ) | | | (178.0 | ) | | | (178.0 | ) |
Total Common Stockholders’ Equity | | | | | 11,125.8 | | | | 11,091.6 | | | | 11,124.2 | | | | 11,092.8 | | | | 11,237.0 | | | | 11,204.4 | |
| Noncontrolling minority interests | | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
Total Equity | | | | | 11,126.3 | | | | 11,092.1 | | | | 11,124.7 | | | | 11,093.3 | | | | 11,237.5 | | | | 11,204.9 | |
Total Liabilities and Equity | | | | $ | 67,097.6 | | | $ | 67,088.6 | | | $ | 66,700.3 | | | $ | 66,706.2 | | | $ | 65,965.5 | | | $ | 65,981.1 | |
(1) | | The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between VIE total assets and total liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT. |
Item 8: Financial Statements and Supplementary Data
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204 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets(dollars in millions) (unaudited) (continued)
Assets |
| Cash and interest bearing deposits, restricted | | | | $ | 242.5 | | | $ | 242.5 | | | $ | 213.8 | | | $ | 213.8 | | | $ | 237.5 | | | $ | 237.5 | |
| Assets held for sale | | | | | 240.5 | | | | 240.5 | | | | 212.5 | | | | 212.5 | | | | – | | | | – | |
| Total loans, net of allowance for loan losses | | | | | 2,283.7 | | | | 2,283.7 | | | | 1,945.2 | | | | 1,945.2 | | | | 2,061.6 | | | | 2,061.6 | |
| Operating lease equipment, net | | | | | 791.8 | | | | 791.8 | | | | 785.3 | | | | 785.3 | | | | 780.6 | | | | 780.6 | |
| Other | | | | | 11.1 | | | | 11.1 | | | | 11.0 | | | | 11.0 | | | | – | | | | – | |
| Assets of discontinued operations | | | | | 3,168.1 | | | | 3,369.1 | | | | 3,069.4 | | | | 3,267.7 | | | | 2,973.7 | | | | 3,223.8 | |
Total Assets | | | | $ | 6,737.7 | | | $ | 6,938.7 | | | $ | 6,237.2 | | | $ | 6,435.5 | | | $ | 6,053.4 | | | $ | 6,303.5 | |
Liabilities |
| Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) | | | | $ | 1,696.8 | | | $ | 1,696.8 | | | $ | 1,487.9 | | | $ | 1,487.9 | | | $ | 1,196.5 | | | $ | 1,196.5 | |
| Liabilities of discontinued operations | | | | | 2,021.5 | | | | 2,021.5 | | | | 1,926.4 | | | | 1,926.4 | | | | 1,864.7 | | | | 1,864.7 | |
Total Liabilities | | | | $ | 3,718.3 | | | $ | 3,718.3 | | | $ | 3,414.3 | | | $ | 3,414.3 | | | $ | 3,061.2 | | | $ | 3,061.2 | |
Assets of the VIEs that are consolidated by the Company were revised primarily to include assets pledged to the underlying secured borrowing facilities that were omitted from this disclosure.
Table of Contents
CIT ANNUAL REPORT 2016 205
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets(dollars in millions) (unaudited) (continued)
| | | | March 31, 2015
| | June 30, 2015
| | September 30, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total cash and deposits | | | | $ | 5,551.6 | | | $ | 5,551.6 | | | $ | 4,767.9 | | | $ | 4,767.9 | | | $ | 7,631.9 | | | $ | 7,631.9 | |
| Securities purchased under agreements to resell | | | | | 450.0 | | | | 450.0 | | | | 750.0 | | | | 750.0 | | | | 100.0 | | | | 100.0 | |
| Investment securities | | | | | 1,347.4 | | | | 1,347.4 | | | | 1,692.9 | | | | 1,692.9 | | | | 3,618.8 | | | | 3,618.8 | |
Assets held for sale(1) | | | | | 817.4 | | | | 817.4 | | | | 843.0 | | | | 843.0 | | | | 2,051.9 | | | | 2,051.9 | |
| Loans | | | | | 18,212.4 | | | | 18,212.4 | | | | 18,439.8 | | | | 18,439.8 | | | | 31,248.1 | | | | 31,248.4 | |
| Allowance for loan losses | | | | | (340.2 | ) | | | (340.2 | ) | | | (334.9 | ) | | | (334.9 | ) | | | (320.9 | ) | | | (320.9 | ) |
Total loans, net of allowance for loan losses(1) | | | | | 17,872.2 | | | | 17,872.2 | | | | 18,104.9 | | | | 18,104.9 | | | | 30,927.2 | | | | 30,927.5 | |
Operating lease equipment,
net(1) | | | | | 6,063.8 | | | | 6,065.1 | | | | 6,292.9 | | | | 6,292.9 | | | | 6,493.0 | | | | 6,493.0 | |
| Indemnification assets | | | | | – | | | | – | | | | – | | | | – | | | | 465.0 | | | | 462.9 | |
| Unsecured counterparty receivable | | | | | 537.1 | | | | 537.1 | | | | 538.2 | | | | 538.2 | | | | 529.5 | | | | 529.5 | |
| Goodwill | | | | | 424.6 | | | | 424.6 | | | | 426.9 | | | | 426.9 | | | | 999.0 | | | | 999.0 | |
| Intangible assets | | | | | 14.8 | | | | 14.8 | | | | 14.1 | | | | 14.1 | | | | 194.8 | | | | 194.8 | |
| Other assets | | | | | 1,218.2 | | | | 1,225.6 | | | | 1,111.9 | | | | 1,120.4 | | | | 2,497.8 | | | | 2,494.4 | |
| Assets of discontinued operations | | | | | 11,997.7 | | | | 11,996.4 | | | | 12,002.4 | | | | 12,002.4 | | | | 12,510.1 | | | �� | 12,510.1 | |
Total Assets | | | | $ | 46,294.8 | | | $ | 46,302.2 | | | $ | 46,545.1 | | | $ | 46,553.6 | | | $ | 68,019.0 | | | $ | 68,013.8 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | $ | 16,739.9 | | | $ | 16,739.9 | | | $ | 17,256.3 | | | $ | 17,256.3 | | | $ | 32,317.0 | | | $ | 32,317.0 | |
| Credit balances of factoring clients | | | | | 1,505.3 | | | | 1,505.3 | | | | 1,373.3 | | | | 1,373.3 | | | | 1,609.3 | | | | 1,609.3 | |
| Other liabilities | | | | | 1,308.4 | | | | 1,327.7 | | | | 1,304.6 | | | | 1,326.4 | | | | 1,968.7 | | | | 1,988.7 | |
| Borrowings | | | | | 14,243.6 | | | | 14,243.6 | | | | 14,098.2 | | | | 14,098.2 | | | | 17,043.8 | | | | 17,043.8 | |
| Liabilities of discontinued operations | | | | | 3,738.5 | | | | 3,738.5 | | | | 3,705.1 | | | | 3,705.1 | | | | 4,281.0 | | | | 4,281.0 | |
Total Liabilities | | | | | 37,535.7 | | | | 37,555.0 | | | | 37,737.5 | | | | 37,759.3 | | | | 57,219.8 | | | | 57,239.8 | |
Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | 2.0 | | | | 2.0 | | | | 2.0 | | | | 2.0 | | | | 2.0 | | | | 2.0 | |
| Paid-in capital | | | | | 8,598.0 | | | | 8,598.0 | | | | 8,615.6 | | | | 8,615.6 | | | | 8,683.5 | | | | 8,683.4 | |
| Retained earnings | | | | | 1,692.3 | | | | 1,680.4 | | | | 1,781.1 | | | | 1,767.7 | | | | 2,443.4 | | | | 2,414.6 | |
| Accumulated other comprehensive loss | | | | | (163.1 | ) | | | (163.1 | ) | | | (158.8 | ) | | | (158.7 | ) | | | (174.3 | ) | | | (170.6 | ) |
| Treasury stock | | | | | (1,370.6 | ) | | | (1,370.6 | ) | | | (1,432.8 | ) | | | (1,432.8 | ) | | | (155.9 | ) | | | (155.9 | ) |
Total Common Stockholders’ Equity | | | | | 8,758.6 | | | | 8,746.7 | | | | 8,807.1 | | | | 8,793.8 | | | | 10,798.7 | | | | 10,773.5 | |
| Noncontrolling minority interests | | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
Total Equity | | | | | 8,759.1 | | | | 8,747.2 | | | | 8,807.6 | | | | 8,794.3 | | | | 10,799.2 | | | | 10,774.0 | |
Total Liabilities and Equity | | | | $ | 46,294.8 | | | $ | 46,302.2 | | | $ | 46,545.1 | | | $ | 46,553.6 | | | $ | 68,019.0 | | | $ | 68,013.8 | |
(1) | | The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between VIE total assets and total liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT. |
Assets |
| Cash and interest bearing deposits, restricted | | | | $ | 340.2 | | | $ | 340.2 | | | $ | 309.2 | | | $ | 309.2 | | | $ | 302.5 | | | $ | 302.5 | |
| Assets held for sale | | | | | 132.5 | | | | 132.5 | | | | 122.5 | | | | 122.5 | | | | 431.5 | | | | 431.5 | |
| Total loans, net of allowance for loan losses | | | | | 3,397.9 | | | | 3,397.9 | | | | 3,048.1 | | | | 3,048.1 | | | | 2,729.0 | | | | 2,729.0 | |
| Operating lease equipment, net | | | | | 945.0 | | | | 945.0 | | | | 938.1 | | | | 938.1 | | | | 929.2 | | | | 929.2 | |
| Other | | | | | 6.5 | | | | 6.5 | | | | 5.9 | | | | 5.9 | | | | 14.0 | | | | 14.0 | |
| Assets of discontinued operations | | | | | 3,361.6 | | | | 3,481.5 | | | | 3,301.1 | | | | 3,515.1 | | | | 3,260.1 | | | | 3,465.6 | |
Total Assets | | | | $ | 8,183.7 | | | $ | 8,303.6 | | | $ | 7,724.9 | | | $ | 7,938.9 | | | $ | 7,666.3 | | | $ | 7,871.8 | |
Liabilities |
| Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) | | | | $ | 2,620.1 | | | $ | 2,620.1 | | | $ | 2,443.1 | | | $ | 2,443.1 | | | $ | 2,425.1 | | | $ | 2,425.1 | |
| Liabilities of discontinued operations | | | | | 2,281.6 | | | | 2,281.6 | | | | 2,220.8 | | | | 2,220.8 | | | | 2,159.4 | | | | 2,159.4 | |
Total Liabilities | | | | $ | 4,901.7 | | | $ | 4,901.7 | | | $ | 4,663.9 | | | $ | 4,663.9 | | | $ | 4,584.5 | | | $ | 4,584.5 | |
Assets of the VIEs that are consolidated by the Company were revised primarily to include assets pledged to the underlying secured borrowing facilities that were omitted from this disclosure.
Item 8: Financial Statements and Supplementary Data
Table of Contents
206 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Income
The following table summarizes the revisions to the statement of income.
The most significant of the revision items related to two operating expense items, $25 million in sales taxes related to our Commercial Banking segment is now recorded in various quarters dating back to 2014, and a write-off of $8 million of servicing advances included in the Consumer Banking segment, mostly related to the third quarter of 2015.
In addition, approximately $3 million for each of the quarters ended March 31 and June 30, 2015, derivative-related expenses were included in interest expense, but are now included in other income.
In discontinued operations, $23 million recorded for curtailment reserves related to the mortgage servicing business was corrected and is now reflected in the third quarter of 2016.
Statement of Income(dollars in millions) (unaudited)
| | | | Quarter Ended
March 31, 2016
| | Quarter Ended
June 30, 2016
| | Quarter Ended
September 30, 2016
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Interest income | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | | | $ | 448.5 | | | $ | 451.9 | | | $ | 448.3 | | | $ | 447.6 | | | $ | 440.6 | | | $ | 443.9 | |
| Other interest and dividends | | | | | 30.9 | | | | 31.0 | | | | 31.2 | | | | 31.1 | | | | 31.9 | | | | 31.9 | |
| Interest income | | | | | 479.4 | | | | 482.9 | | | | 479.5 | | | | 478.7 | | | | 472.5 | | | | 475.8 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on borrowings | | | | | (95.5 | ) | | | (95.5 | ) | | | (92.1 | ) | | | (92.2 | ) | | | (88.8 | ) | | | (88.8 | ) |
| Interest on deposits | | | | | (99.5 | ) | | | (99.5 | ) | | | (99.5 | ) | | | (99.4 | ) | | | (99.4 | ) | | | (99.5 | ) |
| Interest expense | | | | | (195.0 | ) | | | (195.0 | ) | | | (191.6 | ) | | | (191.6 | ) | | | (188.2 | ) | | | (188.3 | ) |
| Net interest revenue | | | | | 284.4 | | | | 287.9 | | | | 287.9 | | | | 287.1 | | | | 284.3 | | | | 287.5 | |
| Provision for credit losses | | | | | (89.5 | ) | | | (89.5 | ) | | | (23.3 | ) | | | (23.3 | ) | | | (45.2 | ) | | | (45.2 | ) |
| Net interest revenue, after credit provision | | | | | 194.9 | | | | 198.4 | | | | 264.6 | | | | 263.8 | | | | 239.1 | | | | 242.3 | |
Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | | 264.0 | | | | 264.1 | | | | 261.1 | | | | 261.0 | | | | 254.3 | | | | 254.3 | |
| Other income | | | | | 85.0 | | | | 84.8 | | | | 99.8 | | | | 99.8 | | | | 77.4 | | | | 83.6 | |
| Total non-interest income | | | | | 349.0 | | | | 348.9 | | | | 360.9 | | | | 360.8 | | | | 331.7 | | | | 337.9 | |
Total revenue, net of interest expense and credit provision | | | | | 543.9 | | | | 547.3 | | | | 625.5 | | | | 624.6 | | | | 570.8 | | | | 580.2 | |
Non-interest expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation on operating lease equipment | | | | | (61.3 | ) | | | (61.3 | ) | | | (63.1 | ) | | | (63.1 | ) | | | (66.9 | ) | | | (66.9 | ) |
| Maintenance and other operating lease expenses | | | | | (49.0 | ) | | | (48.9 | ) | | | (50.6 | ) | | | (50.6 | ) | | | (56.5 | ) | | | (56.6 | ) |
| Operating expenses | | | | | (325.1 | ) | | | (330.1 | ) | | | (313.9 | ) | | | (309.3 | ) | | | (304.3 | ) | | | (302.8 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (1.6 | ) | | | (1.6 | ) | | | (2.4 | ) | | | (2.4 | ) | | | (5.2 | ) | | | (5.2 | ) |
| Total other expenses | | | | | (437.0 | ) | | | (441.9 | ) | | | (430.0 | ) | | | (425.4 | ) | | | (432.9 | ) | | | (431.5 | ) |
| Income from continuing operations before provision for income taxes | | | | | 106.9 | | | | 105.4 | | | | 195.5 | | | | 199.2 | | | | 137.9 | | | | 148.7 | |
| Provision for income taxes | | | | | (45.0 | ) | | | (44.4 | ) | | | (109.8 | ) | | | (111.2 | ) | | | (56.8 | ) | | | (54.5 | ) |
| Income from continuing operations before attribution of noncontrolling interests | | | | | 61.9 | | | | 61.0 | | | | 85.7 | | | | 88.0 | | | | 81.1 | | | | 94.2 | |
Income from continuing operations | | | | | 61.9 | | | | 61.0 | | | | 85.7 | | | | 88.0 | | | | 81.1 | | | | 94.2 | |
Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from discontinued operations, net of taxes | | | | $ | 85.0 | | | $ | 85.0 | | | $ | (71.6 | ) | | $ | (71.0 | ) | | $ | 51.7 | | | $ | 37.3 | |
Net income | | | | $ | 146.9 | | | $ | 146.0 | | | $ | 14.1 | | | $ | 17.0 | | | $ | 132.8 | | | $ | 131.5 | |
Basic income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 0.31 | | | $ | 0.30 | | | $ | 0.42 | | | $ | 0.43 | | | $ | 0.40 | | | $ | 0.47 | |
| Income (loss) from discontinued operations, net of taxes | | | | | 0.42 | | | | 0.42 | | | | (0.35 | ) | | | (0.35 | ) | | | 0.26 | | | | 0.18 | |
Basic income per common share | | | | $ | 0.73 | | | $ | 0.72 | | | $ | 0.07 | | | $ | 0.08 | | | $ | 0.66 | | | $ | 0.65 | |
Diluted income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 0.31 | | | $ | 0.30 | | | $ | 0.42 | | | $ | 0.43 | | | $ | 0.40 | | | $ | 0.47 | |
| Income (loss) from discontinued operations, net of taxes | | | | | 0.42 | | | | 0.42 | | | | (0.35 | ) | | | (0.35 | ) | | | 0.25 | | | | 0.18 | |
Diluted income per common share | | | | $ | 0.73 | | | $ | 0.72 | | | $ | 0.07 | | | $ | 0.08 | | | $ | 0.65 | | | $ | 0.65 | |
Average number of common shares — (thousands) | | | | | | | | | | | | | | | | | | | | �� | | | | | | |
| Basic | | | | | 201,394 | | | | 201,394 | | | | 201,893 | | | | 201,893 | | | | 202,036 | | | | 202,036 | |
| Diluted | | | | | 202,136 | | | | 202,136 | | | | 202,275 | | | | 202,275 | | | | 202,755 | | | | 202,755 | |
Table of Contents
CIT ANNUAL REPORT 2016 207
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income(dollars in millions) (unaudited)
| | | | Quarter Ended
March 31, 2015
| | Quarter Ended
June 30, 2015
| | Quarter Ended
September 30, 2015
| | Quarter Ended
December 31, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | | | $ | 254.8 | | | $ | 256.2 | | | $ | 257.2 | | | $ | 260.6 | | | $ | 395.6 | | | $ | 395.1 | | | $ | 463.7 | | | $ | 462.1 | |
| Other interest and dividends | | | | | 8.6 | | | | 8.6 | | | | 8.9 | | | | 8.9 | | | | 23.4 | | | | 23.4 | | | | 30.3 | | | | 30.3 | |
| Interest income | | | | | 263.4 | | | | 264.8 | | | | 266.1 | | | | 269.5 | | | | 419.0 | | | | 418.5 | | | | 494.0 | | | | 492.4 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on borrowings | | | | | (105.5 | ) | | | (102.7 | ) | | | (99.4 | ) | | | (96.6 | ) | | | (103.6 | ) | | | (103.6 | ) | | | (98.4 | ) | | | (98.4 | ) |
| Interest on deposits | | | | | (69.0 | ) | | | (69.0 | ) | | | (72.2 | ) | | | (72.2 | ) | | | (89.7 | ) | | | (89.7 | ) | | | (99.2 | ) | | | (99.2 | ) |
| Interest expense | | | | | (174.5 | ) | | | (171.7 | ) | | | (171.6 | ) | | | (168.8 | ) | | | (193.3 | ) | | | (193.3 | ) | | | (197.6 | ) | | | (197.6 | ) |
| Net interest revenue | | | | | 88.9 | | | | 93.1 | | | | 94.5 | | | | 100.7 | | | | 225.7 | | | | 225.2 | | | | 296.4 | | | | 294.8 | |
| Provision for credit losses | | | | | (30.4 | ) | | | (30.4 | ) | | | (18.7 | ) | | | (18.7 | ) | | | (51.9 | ) | | | (50.3 | ) | | | (57.6 | ) | | | (59.2 | ) |
| Net interest revenue, after credit provision | | | | | 58.5 | | | | 62.7 | | | | 75.8 | | | | 82.0 | | | | 173.8 | | | | 174.9 | | | | 238.8 | | | | 235.6 | |
Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | | 247.4 | | | | 247.6 | | | | 255.1 | | | | 255.1 | | | | 259.5 | | | | 259.5 | | | | 255.9 | | | | 255.9 | |
| Other income | | | | | 56.1 | | | | 51.8 | | | | 57.4 | | | | 51.2 | | | | 31.4 | | | | 24.9 | | | | 18.1 | | | | 21.7 | |
| Total non-interest income | | | | | 303.5 | | | | 299.4 | | | | 312.5 | | | | 306.3 | | | | 290.9 | | | | 284.4 | | | | 274.0 | | | | 277.6 | |
Total revenue, net of interest expense and credit provision | | | | | 362.0 | | | | 362.1 | | | | 388.3 | | | | 388.3 | | | | 464.7 | | | | 459.3 | | | | 512.8 | | | | 513.2 | |
Non-interest expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation on operating lease equipment | | | | | (55.5 | ) | | | (55.6 | ) | | | (57.6 | ) | | | (57.6 | ) | | | (58.8 | ) | | | (58.8 | ) | | | (57.2 | ) | | | (57.2 | ) |
| Maintenance and other operating lease expenses | | | | | (39.6 | ) | | | (39.6 | ) | | | (42.6 | ) | | | (42.6 | ) | | | (49.0 | ) | | | (49.0 | ) | | | (53.9 | ) | | | (53.9 | ) |
| Operating expenses | | | | | (221.0 | ) | | | (222.6 | ) | | | (216.7 | ) | | | (219.2 | ) | | | (318.3 | ) | | | (327.5 | ) | | | (343.9 | ) | | | (351.8 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | – | | | | – | | | | (0.1 | ) | | | (0.1 | ) | | | (0.3 | ) | | | (0.3 | ) | | | (1.1 | ) | | | (1.1 | ) |
| Total other expenses | | | | | (316.1 | ) | | | (317.8 | ) | | | (317.0 | ) | | | (319.5 | ) | | | (426.4 | ) | | | (435.6 | ) | | | (456.1 | ) | | | (464.0 | ) |
| Income from continuing operations before benefit (provision) for income taxes | | | | | 45.9 | | | | 44.3 | | | | 71.3 | | | | 68.8 | | | | 38.3 | | | | 23.7 | | | | 56.7 | | | | 49.2 | |
| (Provision) benefit for income taxes | | | | | (23.5 | ) | | | (22.8 | ) | | | (37.9 | ) | | | (36.9 | ) | | | 582.8 | | | | 581.9 | | | | 12.9 | | | | 15.8 | |
| Income from continuing operations before attribution of noncontrolling interests | | | | | 22.4 | | | | 21.5 | | | | 33.4 | | | | 31.9 | | | | 621.1 | | | | 605.6 | | | | 69.6 | | | | 65.0 | |
| Loss attributable to noncontrolling interests, after tax | | | | | 0.1 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
Income from continuing operations | | | | | 22.5 | | | | 21.6 | | | | 33.4 | | | | 31.9 | | | | 621.1 | | | | 605.6 | | | | 69.6 | | | | 65.0 | |
Item 8: Financial Statements and Supplementary Data
Table of Contents
208 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income(dollars in millions) (unaudited) (continued)
| | | | Quarter Ended
March 31, 2015
| | Quarter Ended
June 30, 2015
| | Quarter Ended
September 30, 2015
| | Quarter Ended
December 31, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from discontinued operations, net of taxes | | | | $ | 81.2 | | | $ | 81.1 | | | $ | 81.9 | | | $ | 81.9 | | | $ | 72.0 | | | $ | 72.0 | | | $ | 74.9 | | | $ | 75.0 | |
Net income | | | | $ | 103.7 | | | $ | 102.7 | | | $ | 115.3 | | | $ | 113.8 | | | $ | 693.1 | | | $ | 677.6 | | | $ | 144.5 | | | $ | 140.0 | |
Basic income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | | 0.13 | | | $ | 0.12 | | | | 0.19 | | | $ | 0.18 | | | | 3.26 | | | $ | 3.18 | | | $ | 0.35 | | | $ | 0.33 | |
| Income from discontinued operations, net of taxes | | | | | 0.46 | | | | 0.46 | | | | 0.47 | | | | 0.47 | | | | 0.38 | | | | 0.38 | | | | 0.37 | | | | 0.37 | |
Basic income per common share | | | | | 0.59 | | | $ | 0.58 | | | | 0.66 | | | $ | 0.65 | | | | 3.64 | | | $ | 3.56 | | | $ | 0.72 | | | $ | 0.70 | |
Diluted income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | | 0.13 | | | $ | 0.12 | | | | 0.19 | | | $ | 0.18 | | | | 3.24 | | | $ | 3.15 | | | $ | 0.35 | | | $ | 0.33 | |
| Income from discontinued operations, net of taxes | | | | | 0.46 | | | | 0.46 | | | | 0.47 | | | | 0.47 | | | | 0.37 | | | | 0.38 | | | | 0.37 | | | | 0.37 | |
Diluted income per common share | | | | | 0.59 | | | $ | 0.58 | | | | 0.66 | | | $ | 0.65 | | | | 3.61 | | | $ | 3.53 | | | $ | 0.72 | | | $ | 0.70 | |
Average number of common shares — (thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 176,260 | | | | 176,260 | | | | 173,785 | | | | 173,785 | | | | 190,557 | | | | 190,557 | | | | 200,987 | | | | 200,987 | |
| Diluted | | | | | 177,072 | | | | 177,072 | | | | 174,876 | | | | 174,876 | | | | 191,803 | | | | 191,803 | | | | 201,376 | | | | 201,376 | |
Table of Contents
CIT ANNUAL REPORT 2016 209
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income(dollars in millions) (unaudited) (continued)
| | | | Six Months Ended
June 30, 2016
| | Nine Months Ended
September 30, 2016
| | Six Months Ended
June 30, 2015
| | Nine Months Ended
September 30, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | | | $ | 896.8 | | | $ | 899.5 | | | $ | 1,337.4 | | | $ | 1,343.4 | | | $ | 512.0 | | | $ | 516.8 | | | $ | 907.6 | | | $ | 911.9 | |
| Other interest and dividends | | | | | 62.1 | | | | 62.1 | | | | 94.0 | | | | 94.0 | | | | 17.5 | | | | 17.5 | | | | 40.9 | | | | 40.9 | |
| Interest income | | | | | 958.9 | | | | 961.6 | | | | 1,431.4 | | | | 1,437.4 | | | | 529.5 | | | | 534.3 | | | | 948.5 | | | | 952.8 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on borrowings | | | | | (187.6 | ) | | | (187.7 | ) | | | (276.4 | ) | | | (276.5 | ) | | | (204.9 | ) | | | (199.3 | ) | | | (308.5 | ) | | | (302.9 | ) |
| Interest on deposits | | | | | (199.0 | ) | | | (198.9 | ) | | | (298.4 | ) | | | (298.4 | ) | | | (141.2 | ) | | | (141.2 | ) | | | (230.9 | ) | | | (230.9 | ) |
| Interest expense | | | | | (386.6 | ) | | | (386.6 | ) | | | (574.8 | ) | | | (574.9 | ) | | | (346.1 | ) | | | (340.5 | ) | | | (539.4 | ) | | | (533.8 | ) |
| Net interest revenue | | | | | 572.3 | | | | 575.0 | | | | 856.6 | | | | 862.5 | | | | 183.4 | | | | 193.8 | | | | 409.1 | | | | 419.0 | |
| Provision for credit losses | | | | | (112.8 | ) | | | (112.8 | ) | | | (158.0 | ) | | | (158.0 | ) | | | (49.1 | ) | | | (49.1 | ) | | | (101.0 | ) | | | (99.4 | ) |
| Net interest revenue, after credit provision | | | | | 459.5 | | | | 462.2 | | | | 698.6 | | | | 704.5 | | | | 134.3 | | | | 144.7 | | | | 308.1 | | | | 319.6 | |
Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | | 525.1 | | | | 525.1 | | | | 779.4 | | | | 779.4 | | | | 502.5 | | | | 502.7 | | | | 762.0 | | | | 762.2 | |
| Other income | | | | | 184.8 | | | | 184.6 | | | | 262.2 | | | | 268.2 | | | | 113.5 | | | | 103.0 | | | | 144.9 | | | | 127.9 | |
| Total non-interest income | | | | | 709.9 | | | | 709.7 | | | | 1,041.6 | | | | 1,047.6 | | | | 616.0 | | | | 605.7 | | | | 906.9 | | | | 890.1 | |
Total revenue, net of interest expense and credit provision | | | | | 1,169.4 | | | | 1,171.9 | | | | 1,740.2 | | | | 1,752.1 | | | | 750.3 | | | | 750.4 | | | | 1,215.0 | | | | 1,209.7 | |
Non-interest expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation on operating lease equipment | | | | | (124.4 | ) | | | (124.4 | ) | | | (191.3 | ) | | | (191.3 | ) | | | (113.1 | ) | | | (113.2 | ) | | | (171.9 | ) | | | (172.0 | ) |
| Maintenance and other operating lease expenses | | | | | (99.6 | ) | | | (99.5 | ) | | | (156.1 | ) | | | (156.1 | ) | | | (82.2 | ) | | | (82.2 | ) | | | (131.2 | ) | | | (131.2 | ) |
| Operating expenses | | | | | (639.0 | ) | | | (639.4 | ) | | | (943.3 | ) | | | (942.2 | ) | | | (437.7 | ) | | | (441.8 | ) | | | (756.0 | ) | | | (769.3 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (4.0 | ) | | | (4.0 | ) | | | (9.2 | ) | | | (9.2 | ) | | | (0.1 | ) | | | (0.1 | ) | | | (0.4 | ) | | | (0.4 | ) |
| Total other expenses | | | | | (867.0 | ) | | | (867.3 | ) | | | (1,299.9 | ) | | | (1,298.8 | ) | | | (633.1 | ) | | | (637.3 | ) | | | (1,059.5 | ) | | | (1,072.9 | ) |
| Income from continuing operations before benefit (provision) for income taxes | | | | | 302.4 | | | | 304.6 | | | | 440.3 | | | | 453.3 | | | | 117.2 | | | | 113.1 | | | | 155.5 | | | | 136.8 | |
| (Provision) benefit for income taxes | | | | | (154.8 | ) | | | (155.6 | ) | | | (211.6 | ) | | | (210.1 | ) | | | (61.4 | ) | | | (59.7 | ) | | | 521.4 | | | | 522.2 | |
| Income from continuing operations before attribution of noncontrolling interests | | | | | 147.6 | | | | 149.0 | | | | 228.7 | | | | 243.2 | | | | 55.8 | | | | 53.4 | | | | 676.9 | | | | 659.0 | |
| Loss attributable to noncontrolling interests, after tax | | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | |
Income from continuing operations | | | | | 147.6 | | | | 149.0 | | | | 228.7 | | | | 243.2 | | | | 55.9 | | | | 53.5 | | | | 677.0 | | | | 659.1 | |
Item 8: Financial Statements and Supplementary Data
Table of Contents
210 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income(dollars in millions) (unaudited) (continued)
| | | | Six Months Ended
June 30, 2016
| | Nine Months Ended
September 30, 2016
| | Six Months Ended
June 30, 2015
| | Nine Months Ended
September 30, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from discontinued operations, net of taxes | | | | $ | 13.4 | | | $ | 14.0 | | | $ | 65.1 | | | $ | 51.3 | | | $ | 163.1 | | | $ | 163.0 | | | $ | 235.1 | | | $ | 235.0 | |
Net income | | | | $ | 161.0 | | | $ | 163.0 | | | $ | 293.8 | | | $ | 294.5 | | | | 219.0 | | | | 216.5 | | | | 912.1 | | | $ | 894.1 | |
Basic income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 0.73 | | | $ | 0.74 | | | $ | 1.14 | | | $ | 1.21 | | | $ | 0.32 | | | $ | 0.31 | | | $ | 3.76 | | | $ | 3.66 | |
| Income from discontinued operations, net of taxes | | | | | 0.07 | | | | 0.07 | | | | 0.32 | | | | 0.25 | | | | 0.93 | | | | 0.93 | | | | 1.30 | | | | 1.30 | |
Basic income per common share | | | | $ | 0.80 | | | $ | 0.81 | | | $ | 1.46 | | | $ | 1.46 | | | $ | 1.25 | | | $ | 1.24 | | | $ | 5.06 | | | $ | 4.96 | |
Diluted income per common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 0.73 | | | $ | 0.74 | | | $ | 1.13 | | | $ | 1.21 | | | $ | 0.32 | | | $ | 0.30 | | | $ | 3.73 | | | $ | 3.63 | |
| Income from discontinued operations, net of taxes | | | | | 0.07 | | | | 0.07 | | | | 0.32 | | | | 0.25 | | | | 0.92 | | | | 0.93 | | | | 1.30 | | | | 1.30 | |
Diluted income per common share | | | | $ | 0.80 | | | $ | 0.81 | | | $ | 1.45 | | | $ | 1.46 | | | $ | 1.24 | | | $ | 1.23 | | | $ | 5.03 | | | $ | 4.93 | |
Average number of common shares — (thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 201,647 | | | | 201,647 | | | | 201,775 | | | | 201,775 | | | | 175,019 | | | | 175,019 | | | | 180,300 | | | | 180,300 | |
| Diluted | | | | | 202,208 | | | | 202,208 | | | | 202,388 | | | | 202,388 | | | | 175,971 | | | | 175,971 | | | | 181,350 | | | | 181,350 | |
Table of Contents
CIT ANNUAL REPORT 2016 211
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
In evaluating the impact of errors within the statements of cash flows, management has considered the guidance set forth in SEC Staff Accounting Bulletin 99, Materiality (“SAB 99”), SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), and the FASB’s Accounting Standards Codification Topic 250 Accounting Changes and Error Corrections. In assessing the errors, inclusive of revision items not specific to the statement of cash flows, management concluded that the corrections did not, individually or in the aggregate, result in a material misstatement of the Company’s consolidated statements of cash flows for any of the prior periods.
The errors impacted various line items in the statements of cash flows. Specifically, the errors primarily related to the following:
| • | | Presentation of foreign exchange movement in the statement of cash flows. Revisions were made to reclassify the impact of foreign exchange rate movement which had previously been recorded inChange in loans, net within the investing section, to reflect this activity as reconciling from Net income to cash flows from operations, particularly movements relating toIncreases (decreases) in other assets andother liabilities. Corrections were also recorded to reflect foreign exchange movements impactingRepayments of term debt andNet increase in deposits within the financing activities section. In addition, prior periods have been revised to separately disclose theEffect of exchange rate changes on cash and cash equivalents. |
| • | | Inconsistently recording cash flows for lending activities based on original intent in the operations section. Instances were identified, in which activities related to loan syndication and loans designated as held for sale, remained in the investing section. For syndication activity, the original intent is to resell the loan; therefore, that activity should have been recorded in(Increase) decrease in finance receivables held for sale in the operations section, but the activity was recorded withinChange in loans, net andProceeds from asset and receivable sales within the investing section. In addition, when certain portfolios were designated as held for sale, only loan activities subsequent to the held for sale designation date (for example, new loan extensions and collections on the new loans), should have been recorded in(Increase) decrease in finance receivables held for sale in the operations section, however, all activity was recorded in the operations section. Amounts related to balances recorded prior to the designation as held for sale should have been recorded inChange in Loans, net. |
| • | | The remaining errors related to various misclassifications between the changes in other assets or other liabilities line items in the operations section and various investing or financing lines. |
Item 8: Financial Statements and Supplementary Data
Table of Contents
212 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statement Changes(dollars in millions)
| | | | 2016
| |
|---|
| | | | Three Months
Ended March 31
| | Six Months
Ended June 30
| | Nine Months
Ended September 30
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Cash Flows From Operations | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | $ | 146.9 | | | $ | 146.0 | | | $ | 161.0 | | | $ | 163.0 | | | $ | 293.8 | | | $ | 294.5 | |
| Adjustments to reconcile net income to net cash flows from operations: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for credit losses | | | | | 99.3 | | | | 99.3 | | | | 127.4 | | | | 127.4 | | | | 173.6 | | | | 173.6 | |
| Net depreciation, amortization and accretion | | | | | 176.9 | | | | 204.0 | | | | 397.2 | | | | 402.1 | | | | 598.1 | | | | 603.0 | |
| Net gains on equipment, receivable and investment sales | | | | | (8.5 | ) | | | (4.9 | ) | | | (40.6 | ) | | | (43.4 | ) | | | (58.6 | ) | | | (68.8 | ) |
| Provision for deferred income taxes | | | | | 67.3 | | | | 66.7 | | | | 83.1 | | | | 87.9 | | | | 143.1 | | | | 136.4 | |
| (Increase) decrease in finance receivables held for sale | | | | | 347.1 | | | | 233.4 | | | | 244.3 | | | | 244.3 | | | | 168.1 | | | | 168.1 | |
| Goodwill Impairment | | | | | – | | | | – | | | | – | | | | 4.2 | | | | – | | | | 4.2 | |
| Reimbursement of OREO expense from FDIC | | | | | 4.6 | | | | 0.9 | | | | 4.4 | | | | 4.4 | | | | 3.1 | | | | 3.1 | |
| (Increase) decrease in other assets | | | | | (77.2 | ) | | | (44.2 | ) | | | (4.3 | ) | | | 20.8 | | | | 166.0 | | | | 173.1 | |
| (Decrease) increase in accrued liabilities and payables | | | | | (190.4 | ) | | | (301.6 | ) | | | 43.3 | | | | (31.0 | ) | | | (5.8 | ) | | | (68.6 | ) |
Net cash flows provided by operations | | | | | 566.0 | | | | 399.6 | | | | 1,015.8 | | | | 979.7 | | | | 1,481.4 | | | | 1,418.6 | |
Cash Flows From Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in loans, net | | | | | (437.7 | ) | | | (137.7 | ) | | | (47.4 | ) | | | 94.5 | | | | 316.8 | | | | 520.9 | |
| Purchases of investment securities | | | | | (492.5 | ) | | | (494.9 | ) | | | (1,852.8 | ) | | | (1,855.2 | ) | | | (3,344.5 | ) | | | (3,347.3 | ) |
| Proceeds from maturities of investment securities | | | | | 541.5 | | | | 541.5 | | | | 1,624.1 | | | | 1,624.1 | | | | 2,813.3 | | | | 2,835.8 | |
| Proceeds from asset and receivable sales | | | | | 455.9 | | | | 422.1 | | | | 838.5 | | | | 784.4 | | | | 1,182.5 | | | | 1,094.9 | |
| Purchases of assets to be leased and other equipment | | | | | (298.4 | ) | | | (362.0 | ) | | | (899.0 | ) | | | (935.8 | ) | | | (1,382.8 | ) | | | (1,420.2 | ) |
| Net increase in short-term factoring receivables | | | | | (209.9 | ) | | | (209.9 | ) | | | (129.1 | ) | | | (129.1 | ) | | | (288.1 | ) | | | (288.1 | ) |
| Purchases of restricted stock | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Proceeds from redemption of restricted stock | | | | | 2.2 | | | | 2.2 | | | | 2.2 | | | | 2.2 | | | | 32.3 | | | | 9.8 | |
| Payments to the FDIC under loss share agreements | | | | | (3.1 | ) | | | (1.1 | ) | | | (2.1 | ) | | | (2.1 | ) | | | (2.2 | ) | | | (2.2 | ) |
| Proceeds from the FDIC under loss share agreements and participation agreements | | | | | 25.4 | | | | 27.1 | | | | 59.8 | | | | 59.8 | | | | 83.9 | | | | 83.9 | |
| Proceeds from sales of other real estate owned, net of repurchases | | | | | 36.6 | | | | 36.6 | | | | 72.7 | | | | 72.7 | | | | 103.3 | | | | 103.3 | |
| Acquisition, net of cash received | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Change in restricted cash | | | | | 7.6 | | | | 7.6 | | | | 26.7 | | | | 26.7 | | | | (22.4 | ) | | | (22.4 | ) |
Net cash flows used in investing activities | | | | | (372.4 | ) | | | (168.5 | ) | | | (306.4 | ) | | | (257.8 | ) | | | (507.9 | ) | | | (431.6 | ) |
Table of Contents
CIT ANNUAL REPORT 2016 213
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statement Changes(dollars in millions) (continued)
| | | | 2016
| |
|---|
| | | | Three Months
Ended March 31
| | Six Months
Ended June 30
| | Nine Months
Ended September 30
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Cash Flows From Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from the issuance of term debt | | | | $ | 7.2 | | | $ | 4.1 | | | $ | 4.2 | | | $ | 8.5 | | | $ | 2.7 | | | $ | 10.1 | |
| Repayments of term debt | | | | | (470.2 | ) | | | (502.3 | ) | | | (905.2 | ) | | | (915.3 | ) | | | (1,320.0 | ) | | | (1,332.2 | ) |
| Proceeds from the issuance of FHLB Debt | | | | | 551.0 | | | | 551.0 | | | | 1,645.5 | | | | 1,645.5 | | | | 1,645.5 | | | | 1,645.5 | |
| Repayments of FHLB Debt | | | | | (552.3 | ) | | | (552.3 | ) | | | (1,768.0 | ) | | | (1,768.0 | ) | | | (2,324.9 | ) | | | (2,324.9 | ) |
| Net increase in deposits | | | | | 114.2 | | | | 114.2 | | | | 102.6 | | | | 102.6 | | | | 80.9 | | | | 91.5 | |
| Collection of security deposits and maintenance funds | | | | | 70.1 | | | | 70.1 | | | | 168.5 | | | | 168.5 | | | | 270.9 | | | | 260.3 | |
| Use of security deposits and maintenance funds | | | | | (30.8 | ) | | | (30.8 | ) | | | (58.3 | ) | | | (58.3 | ) | | | (118.2 | ) | | | (118.2 | ) |
| Repurchase of common stock | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Dividends paid | | | | | (30.6 | ) | | | (30.6 | ) | | | (61.5 | ) | | | (61.5 | ) | | | (92.3 | ) | | | (92.3 | ) |
| Purchase of non-controlling interest | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Payments on affordable housing investment credits | | | | | (4.3 | ) | | | (4.3 | ) | | | (8.1 | ) | | | (8.1 | ) | | | (8.4 | ) | | | (8.4 | ) |
Net cash flows used in financing activities | | | | | (345.7 | ) | | | (380.9 | ) | | | (880.3 | ) | | | (886.1 | ) | | | (1,863.8 | ) | | | (1,868.6 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | | | – | | | | (2.3 | ) | | | – | | | | (6.7 | ) | | | – | | | | (8.7 | ) |
| Decrease in unrestricted cash and cash equivalents | | | | | (152.1 | ) | | | (152.1 | ) | | | (170.9 | ) | | | (170.9 | ) | | | (890.3 | ) | | | (890.3 | ) |
| Unrestricted cash and cash equivalents, beginning of period | | | | | 7,470.6 | | | | 7,470.6 | | | | 7,470.6 | | | | 7,470.6 | | | | 7,470.6 | | | | 7,470.6 | |
Unrestricted cash and cash equivalents, end of period | | | | $ | 7,318.5 | | | $ | 7,318.5 | | | $ | 7,299.7 | | | $ | 7,299.7 | | | $ | 6,580.3 | | | $ | 6,580.3 | |
Supplementary Cash Flow Disclosure | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest paid | | | | $ | (335.9 | ) | | $ | (338.0 | ) | | $ | (579.9 | ) | | | (581.3 | ) | | $ | (902.9 | ) | | $ | (915.9 | ) |
| Federal, foreign, state and local income taxes (paid) collected, net | | | | | (0.2 | ) | | | (0.2 | ) | | | (6.4 | ) | | | (6.4 | ) | | | 49.9 | | | | 49.9 | |
Supplementary Non Cash Flow Disclosure | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transfer of assets from held for investment to held for sale | | | | | 833.4 | | | | 833.4 | | | | 1,528.3 | | | | 1,528.3 | | | | 2,020.5 | | | | 2,020.5 | |
| Transfer of assets from held for sale to held for investment | | | | | 61.1 | | | | 61.1 | | | | 76.8 | | | | 76.8 | | | | 91.0 | | | | 91.0 | |
| Deposits on flight equipment purchases applied to acquisition of flight equipment, capitalized interest and buyer furnished equipment | | | | | – | | | | 29.4 | | | | 179.9 | | | | 179.9 | | | | 210.4 | | | | 210.4 | |
| Transfers of assets from held for investment to OREO | | | | | 19.9 | | | | 19.9 | | | | 45.3 | | | | 45.3 | | | | 71.6 | | | | 71.6 | |
| Issuance of common stock as consideration | | | | | | | | | | | | | | | | | | | | | | | | | | |
Item 8: Financial Statements and Supplementary Data
Table of Contents
214 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statement Changes(dollars in millions) (continued)
| | | | 2015
| |
|---|
| | | | Three Months
Ended March 31
| | Six Months
Ended June 30
| | Nine Months
Ended September 30
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Cash Flows From Operations | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | $ | 103.7 | | | $ | 102.7 | | | $ | 219.0 | | | $ | 216.5 | | | $ | 912.1 | | | $ | 894.1 | |
| Adjustments to reconcile net income to net cash flows from operations: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for credit losses | | | | | 34.6 | | | | 34.6 | | | | 53.0 | | | | 53.0 | | | | 102.9 | | | | 102.9 | |
| Net depreciation, amortization and accretion | | | | | 165.5 | | | | 196.0 | | | | 388.5 | | | | 388.5 | | | | 582.1 | | | | 582.1 | |
| Net gains on equipment, receivable and investment sales | | | | | (29.2 | ) | | | (25.9 | ) | | | (45.6 | ) | | | (41.4 | ) | | | (63.2 | ) | | | (45.8 | ) |
| Provision for deferred income taxes | | | | | 21.2 | | | | 20.6 | | | | 53.0 | | | | 51.5 | | | | (563.6 | ) | | | (564.4 | ) |
| (Increase) decrease in finance receivables held for sale | | | | | (74.7 | ) | | | (74.7 | ) | | | (148.8 | ) | | | (148.8 | ) | | | (117.1 | ) | | | (119.8 | ) |
| Goodwill Impairment | | | | | – | | | | – | | | | – | | | | – | | | | 29.0 | | | | 15.0 | |
| Reimbursement of OREO expense from FDIC | | | | | – | | | | – | | | | – | | | | – | | | | 2.2 | | | | 2.2 | |
| (Increase) decrease in other assets | | | | | (46.8 | ) | | | (86.6 | ) | | | 54.6 | | | | 9.7 | | | | 9.7 | | | | (95.6 | ) |
| (Decrease) increase in accrued liabilities and payables | | | | | (41.7 | ) | | | 24.7 | | | | (169.4 | ) | | | (49.9 | ) | | | (100.4 | ) | | | 145.4 | |
Net cash flows provided by operations | | | | | 132.6 | | | | 191.4 | | | | 404.3 | | | | 479.1 | | | | 793.7 | | | | 916.1 | |
Cash Flows From Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in loans, net | | | | | (52.3 | ) | | | (188.3 | ) | | | (720.7 | ) | | | (791.3 | ) | | | (1,134.7 | ) | | | (1,305.7 | ) |
| Purchases of investment securities | | | | | (3,094.3 | ) | | | (3,142.7 | ) | | | (5,061.6 | ) | | | (5,217.1 | ) | | | (6,964.8 | ) | | | (6,925.8 | ) |
| Proceeds from maturities of investment securities | | | | | 3,482.3 | | | | 3,535.9 | | | | 4,814.6 | | | | 4,980.2 | | | | 7,139.2 | | | | 7,139.2 | |
| Proceeds from asset and receivable sales | | | | | 544.9 | | | | 537.5 | | | | 781.9 | | | | 760.2 | | | | 1,427.7 | | | | 1,373.9 | |
| Purchases of assets to be leased and other equipment | | | | | (408.2 | ) | | | (445.5 | ) | | | (973.6 | ) | | | (980.9 | ) | | | (1,859.1 | ) | | | (1,862.2 | ) |
| Net increase in short-term factoring receivables | | | | | (112.3 | ) | | | (112.3 | ) | | | 91.7 | | | | 91.7 | | | | (32.3 | ) | | | (32.3 | ) |
| Purchases of restricted stock | | | | | – | | | | – | | | | (2.7 | ) | | | (2.7 | ) | | | (128.9 | ) | | | (128.9 | ) |
| Proceeds from redemption of restricted stock | | | | | 1.7 | | | | 1.7 | | | | – | | | | – | | | | 20.0 | | | | 20.0 | |
| Payments to the FDIC under loss share agreements | | | | | – | | | | – | | | | – | | | | – | | | | (17.4 | ) | | | (17.4 | ) |
| Proceeds from the FDIC under loss share agreements and participation agreements | | | | | – | | | | – | | | | – | | | | – | | | | 11.3 | | | | 11.3 | |
| Proceeds from sales of other real estate owned, net of repurchases | | | | | – | | | | – | | | | – | | | | – | | | | 24.2 | | | | 24.2 | |
| Acquisition, net of cash received | | | | | – | | | | – | | | | – | | | | – | | | | 2,521.2 | | | | 2,521.2 | |
| Change in restricted cash | | | | | 143.8 | | | | 143.8 | | | | 167.4 | | | | 167.4 | | | | 151.1 | | | | 151.1 | |
Net cash flows provided by (used in) investing activities | | | | | 505.6 | | | | 330.1 | | | | (903.0 | ) | | | (992.5 | ) | | | 1,157.5 | | | | 968.6 | |
Table of Contents
CIT ANNUAL REPORT 2016 215
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statement Changes(dollars in millions) (continued)
| | | | 2015
| |
|---|
| | | | Three Months
Ended March 31
| | Six Months
Ended June 30
| | Nine Months
Ended September 30
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Cash Flows From Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from the issuance of term debt | | | | | 519.8 | | | | 519.8 | | | | 956.8 | | | | 956.8 | | | | 1,606.5 | | | | 1,606.5 | |
| Repayments of term debt | | | | | (2,126.9 | ) | | | (2,074.5 | ) | | | (3,020.0 | ) | | | (2,814.8 | ) | | | (3,700.3 | ) | | | (3,634.7 | ) |
| Proceeds from the issuance of FHLB Debt | | | | | – | | | | – | | | | 64.1 | | | | 64.1 | | | | 5,164.1 | | | | 5,164.1 | |
| Repayments of FHLB Debt | | | | | (167.9 | ) | | | (167.9 | ) | | | (3.5 | ) | | | (171.4 | ) | | | (5,168.8 | ) | | | (5,168.8 | ) |
| Net increase in deposits | | | | | 908.4 | | | | 916.8 | | | | 1,412.5 | | | | 1,421.4 | | | | 1,943.1 | | | | 1,960.8 | |
| Collection of security deposits and maintenance funds | | | | | 255.5 | | | | 74.6 | | | | 137.7 | | | | 137.7 | | | | 236.1 | | | | 236.1 | |
| Use of security deposits and maintenance funds | | | | | (316.7 | ) | | | (29.3 | ) | | | (69.0 | ) | | | (69.0 | ) | | | (127.1 | ) | | | (90.5 | ) |
| Repurchase of common stock | | | | | (331.7 | ) | | | (331.7 | ) | | | (392.7 | ) | | | (392.7 | ) | | | (531.8 | ) | | | (531.8 | ) |
| Dividends paid | | | | | (27.1 | ) | | | (27.1 | ) | | | (53.6 | ) | | | (53.6 | ) | | | (84.4 | ) | | | (84.4 | ) |
| Purchase of non-controlling interest | | | | | (20.5 | ) | | | (20.5 | ) | | | (20.5 | ) | | | (20.5 | ) | | | (20.5 | ) | | | (20.5 | ) |
| Payments on affordable housing investment credits | | | | | – | | | | – | | | | – | | | | – | | | | (0.2 | ) | | | (0.2 | ) |
Net cash flows used in financing activities | | | | | (1,307.1 | ) | | | (1,139.8 | ) | | | (988.2 | ) | | | (942.0 | ) | | | (683.3 | ) | | | (563.4 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | | | – | | | | (50.6 | ) | | | – | | | | (31.5 | ) | | | – | | | | (53.4 | ) |
| (Decrease) increase in unrestricted cash and cash equivalents | | | | | (668.9 | ) | | | (668.9 | ) | | | (1,486.9 | ) | | | (1,486.9 | ) | | | 1,267.9 | | | | 1,267.9 | |
| Unrestricted cash and cash equivalents, beginning of period | | | | | 6,155.5 | | | | 6,155.5 | | | | 6,155.5 | | | | 6,155.5 | | | | 6,155.5 | | | | 6,155.5 | |
Unrestricted cash and cash equivalents, end of period | | | | $ | 5,486.6 | | | $ | 5,486.6 | | | $ | 4,668.6 | | | $ | 4,668.6 | | | $ | 7,423.4 | | | $ | 7,423.4 | |
Supplementary Cash Flow Disclosure | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest paid | | | | $ | (324.3 | ) | | $ | (331.2 | ) | | $ | (538.3 | ) | | $ | (539.2 | ) | | $ | (859.3 | ) | | $ | (867.8 | ) |
| Federal, foreign, state and local income taxes (paid) collected, net | | | | | (14.0 | ) | | | (14.0 | ) | | | (17.7) | | | | (17.7 | ) | | | (26.4 | ) | | | (26.4 | ) |
Supplementary Non Cash Flow Disclosure | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transfer of assets from held for investment to held for sale | | | | | 239.4 | | | | 241.7 | | | | 397.7 | | | | 397.7 | | | | 2,049.0 | | | | 2,049.0 | |
| Transfer of assets from held for sale to held for investment | | | | | 0.7 | | | | 0.7 | | | | 43.5 | | | | 43.5 | | | | 93.1 | | | | 93.1 | |
| Deposits on flight equipment purchases applied to acquisition of flight equipment, capitalized interest and buyer furnished equipment | | | | | – | | | | 99.8 | | | | 176.1 | | | | 176.1 | | | | 288.1 | | | | 288.1 | |
| Transfers of assets from held for investment to OREO | | | | | – | | | | – | | | | – | | | | – | | | | 26.4 | | | | 26.4 | |
| Issuance of common stock as consideration | | | | | – | | | | – | | | | – | | | | – | | | | 1,462.0 | | | | 1,462.0 | |
Item 8: Financial Statements and Supplementary Data
Table of Contents
216 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 30 — REVISION OF PREVIOUSLY REPORTED ANNUAL FINANCIAL STATEMENTS
See Note 29 — Select Quarterly Financial Data for further discussion on the assessment of materiality.
The most significant of the items reflected the following:
| - | | $25 million in sales taxes related to our Commercial Banking segment that should have been recorded in 2015 and 2014, and |
| - | | a write-off of $8 million of servicing advances, mostly related to the 2015. |
In addition, interest expense and other income were corrected for the years ended December 31, 2015 and 2014 to reclass certain derivative charges originally recorded as interest expense, and now correctly included in other income.
The following tables reflect the previously reported balances and revised amounts impacting the statements of operations, balance sheets, and statement of cash flows.
Balance Sheets
The revisions to the presented balance sheet was not significant.
The following table summarizes the revisions to the consolidated balance sheet:
Consolidated Balance Sheet(dollars in millions)
| | | | December 31, 2015
| |
|---|
| | | | As
Reported
| | As
Revised
|
|---|
Assets | | | | | | | | | | |
| Total cash and deposits | | | | $ | 7,652.4 | | | $ | 7,652.4 | |
| Investment securities | | | | | 2,953.7 | | | | 2,953.7 | |
Assets held for sale(1) | | | | | 2,057.7 | | | | 2,057.7 | |
| Loans | | | | | 30,521.9 | | | | 30,518.7 | |
| Allowance for loan losses | | | | | (347.0 | ) | | | (347.0 | ) |
Total loans, net of allowance for loan losses(1) | | | | | 30,174.9 | | | | 30,171.7 | |
Operating lease equipment, net(1) | | | | | 6,851.7 | | | | 6,851.7 | |
| Indemnification assets | | | | | 414.8 | | | | 409.1 | |
| Unsecured counterparty receivable | | | | | 537.8 | | | | 537.8 | |
| Goodwill | | | | | 1,063.2 | | | | 1,063.2 | |
| Intangible assets | | | | | 166.1 | | | | 166.1 | |
| Other assets | | | | | 2,469.6 | | | | 2,468.9 | |
| Assets of discontinued operations | | | | | 13,059.6 | | | | 13,059.6 | |
Total Assets | | | | $ | 67,401.5 | | | $ | 67,391.9 | |
Liabilities | | | | | | | | | | |
| Deposits | | | | $ | 32,761.4 | | | $ | 32,761.4 | |
| Credit balances of factoring clients | | | | | 1,344.0 | | | | 1,344.0 | |
| Other liabilities | | | | | 1,665.2 | | | | 1,689.0 | |
| Borrowings | | | | | 16,350.3 | | | | 16,350.3 | |
| Liabilities of discontinued operations | | | | | 4,302.0 | | | | 4,302.0 | |
Total Liabilities | | | | $ | 56,422.9 | | | $ | 56,446.7 | |
Stockholders’ Equity | | | | | | | | | | |
| Common stock | | | | | 2.0 | | | | 2.0 | |
| Paid-in capital | | | | | 8,718.1 | | | | 8,718.1 | |
| Retained earnings | | | | | 2,557.4 | | | | 2,524.0 | |
| Accumulated other comprehensive loss | | | | | (142.1 | ) | | | (142.1 | ) |
| Treasury stock | | | | | (157.3 | ) | | | (157.3 | ) |
Total Common Stockholders’ Equity | | | | | 10,978.1 | | | | 10,944.7 | |
| Noncontrolling minority interests | | | | | 0.5 | | | | 0.5 | |
Total Equity | | | | | 10,978.6 | | | | 10,945.2 | |
Total Liabilities and Equity | | | | $ | 67,401.5 | | | $ | 67,391.9 | |
(1) | | The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between VIE total assets and total liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT. |
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CIT ANNUAL REPORT 2016 217
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet(dollars in millions) (continued)
Assets |
| Cash and interest bearing deposits, restricted | | | | $ | 276.9 | | | $ | 276.9 | |
| Assets held for sale | | | | | 279.7 | | | | 279.7 | |
| Total loans, net of allowance for loan losses | | | | | 2,217.5 | | | | 2,217.5 | |
| Operating lease equipment, net | | | | | 797.2 | | | | 797.2 | |
| Other | | | | | 11.2 | | | | 11.2 | |
| Assets of discontinued operations | | | | | 3,227.2 | | | | 3,402.4 | |
Total Assets | | | | $ | 6,809.7 | | | $ | 6,984.9 | |
Liabilities |
| Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) | | | | $ | 1,948.7 | | | $ | 1,948.7 | |
| Liabilities of discontinued operations | | | | | 2,082.1 | | | | 2,082.1 | |
Total Liabilities | | | | $ | 4,030.8 | | | $ | 4,030.8 | |
Assets of the VIEs that are consolidated by the Company were revised primarily to include assets pledged to the underlying secured borrowing facilities that were omitted from this disclosure.
Statements of Income
The following table summarizes the revisions to the statement of income:
Statement of Income(dollars in millions)
| | | | Years Ended December 31,
| |
|---|
| | | | 2015
| | 2014
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Interest income | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | | | $ | 1,371.3 | | | $ | 1,374.0 | | | $ | 1,115.8 | | | $ | 1,120.1 | |
| Other interest and dividends | | | | | 71.2 | | | | 71.2 | | | | 35.5 | | | | 35.5 | |
| Interest income | | | | | 1,442.5 | | | | 1,445.2 | | | | 1,151.3 | | | | 1,155.6 | |
Interest expense | | | | | | | | | | | | | | | | | | |
| Interest on borrowings | | | | | (406.9 | ) | | | (401.3 | ) | | | (494.5 | ) | | | (484.1 | ) |
| Interest on deposits | | | | | (330.1 | ) | | | (330.1 | ) | | | (231.0 | ) | | | (231.0 | ) |
| Interest expense | | | | | (737.0 | ) | | | (731.4 | ) | | | (725.5 | ) | | | (715.1 | ) |
| Net interest revenue | | | | | 705.5 | | | | 713.8 | | | | 425.8 | | | | 440.5 | |
| Provision for credit losses | | | | | (158.6 | ) | | | (158.6 | ) | | | (104.4 | ) | | | (104.4 | ) |
| Net interest revenue, after credit provision | | | | | 546.9 | | | | 555.2 | | | | 321.4 | | | | 336.1 | |
Non-interest income | | | | | | | | | | | | | | | | | | |
| Rental income on operating leases | | | | | 1,017.9 | | | | 1,018.1 | | | | 948.1 | | | | 949.6 | |
| Other income | | | | | 163.0 | | | | 149.6 | | | | 278.6 | | | | 263.9 | |
| Total non-interest income | | | | | 1,180.9 | | | | 1,167.7 | | | | 1,226.7 | | | | 1,213.5 | |
Total revenue, net of interest expense and credit provision | | | | | 1,727.8 | | | | 1,722.9 | | | | 1,548.1 | | | | 1,549.6 | |
Non-interest expenses | | | | | | | | | | | | | | | | | | |
| Depreciation on operating lease equipment | | | | | (229.1 | ) | | | (229.2 | ) | | | (228.6 | ) | | | (229.8 | ) |
| Maintenance and other operating lease expenses | | | | | (185.1 | ) | | | (185.1 | ) | | | (171.7 | ) | | | (171.7 | ) |
| Operating expenses | | | | | (1,099.9 | ) | | | (1,121.1 | ) | | | (882.4 | ) | | | (900.1 | ) |
| Loss on debt extinguishment and deposit redemption | | | | | (1.5 | ) | | | (1.5 | ) | | | (3.5 | ) | | | (3.5 | ) |
| Total other expenses | | | | | (1,515.6 | ) | | | (1,536.9 | ) | | | (1,286.2 | ) | | | (1,305.1 | ) |
| Income from continuing operations before benefit (provision) for income taxes | | | | | 212.2 | | | | 186.0 | | | | 261.9 | | | | 244.5 | |
| Benefit for income taxes | | | | | 534.3 | | | | 538.0 | | | | 425.6 | | | | 432.4 | |
| Income from continuing operations before attribution of noncontrolling interests | | | | | 746.5 | | | | 724.0 | | | | 687.5 | | | | 676.9 | |
| (Income) loss attributable to noncontrolling interests, after tax | | | | | 0.1 | | | | 0.1 | | | | (1.2 | ) | | | (1.2 | ) |
Income from continuing operations | | | | | 746.6 | | | | 724.1 | | | | 686.3 | | | | 675.7 | |
Discontinued operations | | | | | | | | | | | | | | | | | | |
| Income from discontinued operations, net of taxes | | | | | 310.0 | | | | 310.0 | | | | 443.7 | | | | 443.4 | |
Net (loss) income | | | | $ | 1,056.6 | | | $ | 1,034.1 | | | $ | 1,130.0 | | | $ | 1,119.1 | |
Item 8: Financial Statements and Supplementary Data
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218 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income(dollars in millions) (continued)
| | | | Years Ended December 31,
| |
|---|
| | | | 2015
| | 2014
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Basic income per common share | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 4.03 | | | $ | 3.90 | | | $ | 3.64 | | | $ | 3.59 | |
| Income from discontinued operations, net of taxes | | | | | 1.67 | | | | 1.67 | | | | 2.35 | | | | 2.35 | |
Basic income per common share | | | | $ | 5.70 | | | $ | 5.57 | | | $ | 5.99 | | | $ | 5.94 | |
Diluted income per common share | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | | $ | 4.01 | | | $ | 3.89 | | | $ | 3.63 | | | $ | 3.57 | |
| Income from discontinued operations, net of taxes | | | | | 1.66 | | | | 1.66 | | | | 2.33 | | | | 2.34 | |
Diluted income per common share | | | | $ | 5.67 | | | $ | 5.55 | | | $ | 5.96 | | | $ | 5.91 | |
Average number of common shares — (thousands) | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 185,500 | | | | 185,500 | | | | 188,491 | | | | 188,491 | |
| Diluted | | | | | 186,388 | | | | 186,388 | | | | 189,463 | | | | 189,463 | |
Statements of Cash Flows
In evaluating the impact of errors within the statements of cash flows, management has considered the guidance set forth in SEC Staff Accounting Bulletin 99,Materiality (“SAB 99”), SEC Staff Accounting Bulletin 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), and the FASB’s Accounting Standards Codification Topic 250Accounting Changes and Error Corrections.
In assessing these errors, inclusive of revision items not specific to the statement of cash flows, management concluded that the corrections did not, individually or in the aggregate, result in a material misstatement of the Company’s consolidated statements of cash flows for any of the prior periods.
The errors impacted various line items in the statements of cash flows. Specifically, the errors primarily related to the following:
| - | | Presentation of foreign exchange movement in the statement of cash flows.Revisions were made to reclassify the impact of foreign exchange rate movement which had previously been recorded inChange in loans, net within the investing section, to reflect this activity as reconciling from Net income to cash flows from operations, particularly movements relating toIncreases (decreases) in other assets and other liabilities. Corrections were also recorded to reflect foreign exchange movements impactingRepayments of term debt andNet increase in deposits within the financing activities section. In addition, prior periods have been revised to separately disclose the Effect of exchange rate changes on cash and cash equivalents. |
| - | | Reclassification of cash paid on fixed asset purchases. Cash outflows on certain purchases of long term assets were incorrectly reflected in the operating section withinIncrease (decrease) in other assets, which should have been reflected inPurchases of assets to be leased and other equipment in the investing activities section of the statement of cash flows. |
| - | | Reclassification of accrued rent on operating leases. Changes in accrued rent on operating leases were incorrectly reflected in theChanges in loans, net line item of the investing section. This activity has now been reclassified to theIncrease (decrease) in other assets line item to reflect these changes as reconciling items from Net income to cash flows from operations within the statement of cash flows. |
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CIT ANNUAL REPORT 2016 219
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the revisions to the statements of cash flows:
Cash Flow Statement Changes(dollars in millions)
| | | | Year Ended
December 31, 2015
| | Year Ended
December 31, 2014
| |
|---|
| | | | As
Reported
| | As
Revised
| | As
Reported
| | As
Revised
|
|---|
Cash Flows From Operations | | | | | | | | | | | | | | | | | | |
| Net income | | | | $ | 1,056.6 | | | $ | 1,034.1 | | | $ | 1,130.0 | | | $ | 1,119.1 | |
| Adjustments to reconcile net income to net cash flows from operations: | | | | | | | | | | | | | | | | | | |
| Provision for credit losses | | | | | 160.5 | | | | 160.5 | | | | 100.1 | | | | 100.1 | |
| Net depreciation, amortization and accretion | | | | | 783.9 | | | | 783.9 | | | | 973.2 | | | | 973.2 | |
| Net gains on equipment, receivable and investment sales | | | | | (12.3 | ) | | | 5.1 | | | | (348.4 | ) | | | (338.4 | ) |
| Provision for deferred income taxes | | | | | (569.2 | ) | | | (572.9 | ) | | | (426.7 | ) | | | (433.5 | ) |
| (Increase) decrease in finance receivables held for sale | | | | | (261.5 | ) | | | (251.3 | ) | | | (161.9 | ) | | | (161.9 | ) |
| Goodwill Impairment | | | | | 29.0 | | | | 15.0 | | | | – | | | | – | |
| Reimbursement of OREO expense from FDIC | | | | | 7.2 | | | | 7.2 | | | | – | | | | – | |
| (Increase) decrease in other assets | | | | | 65.9 | | | | 53.3 | | | | (106.5 | ) | | | (179.2 | ) |
| (Decrease) increase in accrued liabilities and payables | | | | | (408.2 | ) | | | (67.3 | ) | | | 32.9 | | | | 299.0 | |
Net cash flows provided by operations | | | | | 851.9 | | | | 1,167.6 | | | | 1,192.7 | | | | 1,378.4 | |
Cash Flows From Investing Activities | | | | | | | | | | | | | | | | | | |
| Changes in loans, net | | | | | (1,475.3 | ) | | | (1,759.2 | ) | | | (1,703.3 | ) | | | (1,862.9 | ) |
| Purchases of investment securities | | | | | (8,051.5 | ) | | | (8,316.3 | ) | | | (10,022.8 | ) | | | (10,024.3 | ) |
| Proceeds from maturities of investment securities | | | | | 8,963.2 | | | | 9,226.6 | | | | 10,461.2 | | | | 10,461.2 | |
| Proceeds from asset and receivable sales | | | | | 2,328.8 | | | | 2,252.4 | | | | 3,692.4 | | | | 3,688.1 | |
| Purchases of assets to be leased and other equipment | | | | | (3,052.5 | ) | | | (3,088.7 | ) | | | (3,028.9 | ) | | | (3,058.3 | ) |
| Net increase in short-term factoring receivables | | | | | 124.7 | | | | 124.7 | | | | (8.0 | ) | | | (8.0 | ) |
| Purchases of restricted stock | | | | | (128.9 | ) | | | (128.9 | ) | | | (5.9 | ) | | | (5.9 | ) |
| Proceeds from redemption of restricted stock | | | | | 20.3 | | | | 20.3 | | | | 2.4 | | | | 2.4 | |
| Payments to the FDIC under loss share agreements | | | | | (18.1 | ) | | | (18.1 | ) | | | – | | | | – | |
| Proceeds from the FDIC under loss share agreements and participation agreements | | | | | 33.7 | | | | 33.7 | | | | – | | | | – | |
| Proceeds from sales of other real estate owned, net of repurchases | | | | | 60.8 | | | | 60.8 | | | | – | | | | – | |
| Acquisition, net of cash received | | | | | 2,521.2 | | | | 2,521.2 | | | | (448.6 | ) | | | (448.6 | ) |
| Change in restricted cash | | | | | 156.7 | | | | 156.7 | | | | 93.8 | | | | 93.8 | |
Net cash flows provided by (used in) investing activities | | | | | 1,483.1 | | | | 1,085.2 | | | | (967.7 | ) | | | (1,162.5 | ) |
Cash Flows From Financing Activities | | | | | | | | | | | | | | | | | | |
| Proceeds from the issuance of term debt | | | | | 1,626.9 | | | | 1,626.9 | | | | 3,871.5 | | | | 3,875.2 | |
| Repayments of term debt | | | | | (4,417.7 | ) | | | (4,325.3 | ) | | | (5,842.3 | ) | | | (5,762.9 | ) |
| Proceeds from the issuance of FHLB Debt | | | | | 5,964.1 | | | | 5,964.1 | | | | 308.6 | | | | 308.6 | |
| Repayments of FHLB Debt | | | | | (6,070.2 | ) | | | (6,070.2 | ) | | | (88.6 | ) | | | (88.6 | ) |
| Net increase in deposits | | | | | 2,402.2 | | | | 2,419.2 | | | | 3,301.8 | | | | 3,310.6 | |
| Collection of security deposits and maintenance funds | | | | | 330.9 | | | | 330.9 | | | | 332.2 | | | | 332.2 | |
| Use of security deposits and maintenance funds | | | | | (184.1 | ) | | | (147.5 | ) | | | (163.0 | ) | | | (163.0 | ) |
| Repurchase of common stock | | | | | (531.8 | ) | | | (531.8 | ) | | | (775.5 | ) | | | (775.5 | ) |
| Dividends paid | | | | | (114.9 | ) | | | (114.9 | ) | | | (95.3 | ) | | | (95.3 | ) |
| Purchase of non-controlling interest | | | | | (20.5 | ) | | | (20.5 | ) | | | – | | | | – | |
| Payments on affordable housing investment credits | | | | | (4.8 | ) | | | (4.8 | ) | | | – | | | | – | |
Net cash flows (used in) provided by financing activities | | | | | (1,019.9 | ) | | | (873.9 | ) | | | 849.4 | | | | 941.3 | |
Item 8: Financial Statements and Supplementary Data
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220 CIT ANNUAL REPORT 2016
CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Statement Changes(dollars in millions) (continued)
| | | | Year Ended
December 31, 2015
| | Year Ended
December 31, 2014
| |
|---|
| | | | As
Reported
| | As
revised
| | As
reported
| | As
revised
|
|---|
| Effect of exchange rate changes on cash and cash equivalents | | | | $ | – | | | $ | (63.8 | ) | | $ | – | | | $ | (82.8 | ) |
| Increase in unrestricted cash and cash equivalents | | | | | 1,315.1 | | | | 1,315.1 | | | | 1,074.4 | | | | 1,074.4 | |
| Unrestricted cash and cash equivalents, beginning of period | | | | | 6,155.5 | | | | 6,155.5 | | | | 5,081.1 | | | | 5,081.1 | |
Unrestricted cash and cash equivalents, end of period | | | | $ | 7,470.6 | | | $ | 7,470.6 | | | $ | 6,155.5 | | | $ | 6,155.5 | |
Supplementary Cash Flow Disclosure | | | | | | | | | | | | | | | | | | |
| Interest paid | | | | $ | (1,110.0 | ) | | $ | (1,112.0 | ) | | $ | (1,049.5 | ) | | $ | (1,075.6 | ) |
| Federal, foreign, state and local income taxes (paid) collected, net | | | | | (9.5 | ) | | | (9.5 | ) | | | (21.6 | ) | | | (21.6 | ) |
Supplementary Non Cash Flow Disclosure | | | | | | | | | | | | | | | | | | |
| Transfer of assets from held for investment to held for sale | | | | | 3,039.4 | | | | 3,039.4 | | | | 2,671.0 | | | | 2,671.0 | |
| Transfer of assets from held for sale to held for investment | | | | | 208.7 | | | | 208.7 | | | | 64.9 | | | | 64.9 | |
| Deposits on flight equipment purchases applied to acquisition of flight equipment, capitalized interest and buyer furnished equipment | | | | | 554.2 | | | | 554.2 | | | | 589.4 | | | | 589.4 | |
| Transfers of assets from held for investment to OREO | | | | | 65.8 | | | | 65.8 | | | | – | | | | – | |
| Issuance of common stock as consideration | | | | | 1,462.0 | | | | 1,462.0 | | | | – | | | | – | |
NOTE 31 — SUBSEQUENT EVENTS
Revolving Credit Facility Amendment
In February 2017, the Revolving Credit Facility was amended to extend the maturity date of the commitment by one year to January 25, 2019. This amendment, among other things, reduces the commitment amount to $1.4 billion. Upon consummation of the sale of our Commercial Air business the total commitments under the facility will be reduced to $750 million, consistent with our expected liquidity position, and the $6 billion minimum consolidated net worth covenant will be replaced with a covenant requiring satisfaction of a minimum Tier 1 capital ratio of nine percent (9%).
The Revolving Credit Agreement is unsecured and is guaranteed by certain of the Company’s domestic operating subsidiaries.
Repayment of Secured Debt
On February 23, 2017 CIT repaid approximately $1.0 billion of secured financings in preparation for the sale of the Commercial Air business. The financings were guaranteed by certain of the European Export Credit Agencies (“ECA”) and were secured by a pool of Airbus aircraft and related operating leases.
Termination of Canadian TRS
On December 7, 2016, CIT Financial Ltd. entered into a Fourth Amended and Restated Confirmation (the “Termination Agreement”) with GSI to terminate the Canadian TRS. Under the Termination Agreement, the Canadian TRS terminates on March 31, 2017, or such earlier date designated by CFL upon five business days’ prior notice delivered to GSI on or after January 2, 2017. On January 9, 2017, CFL provided notice to GSI designating January 17, 2017, as the termination date of the Canadian TRS.
Sale of Joint Ventures
On March 9, 2017, the Company announced that it had reached an agreement to sell its 30 percent ownership stake in the commercial aircraft leasing joint ventures TC-CIT Aviation Ireland and TC-CIT Aviation U.S., Inc. to its joint venture partner Tokyo Century Corporation (TC). The share purchase is expected to close on or prior to March 31, 2017, subject to the satisfaction of customary closing conditions.
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CIT ANNUAL REPORT 2016 221
Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure
None
Item 9A. Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer and principal financial officer, 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 December 31, 2016. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were not effective as a result of the material weaknesses in our internal control over financial reporting described below.
As a result of the material weaknesses, management completed additional substantive procedures prior to filing this Annual Report on Form 10-K for the year ended December 31, 2016 (“Form 10-K”). Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with generally accepted accounting principles. Our principal executive officer and principal financial officer have certified that, based on such officer’s knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. In addition, we are developing and implementing remediation plans for these material weaknesses, which are described below.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of CIT, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control — Integrated Framework” (2013).
Management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2016, based on the criteria established in the “Internal Control — Integrated Framework” (2013), due to the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
| 1. | | Home Equity Conversion Mortgages (HECM) Interest Curtailment Reserve: |
We did not maintain effective controls over the design and operating effectiveness of the estimation process for the HECM Interest Curtailment Reserve. Specifically, we did not adequately design and maintain controls to ensure the following:
| I) | | Key judgments and assumptions developed from loan file reviews or other historical experience are reasonably determined, valid and authorized; |
| II) | | Data used in the estimation process is complete and accurate; and |
| III) | | Assumptions, judgments, and methodology continue to be appropriate. |
As a result of these deficiencies, there were immaterial revisions to the HECM interest curtailment reserve between the second, third and fourth quarters of 2016 included in our consolidated financial statements. These deficiencies could potentially cause material misstatements of the HECM interest curtailment reserve account balances reported in Liabilities of discontinued operations and Loss (income) from discontinued operations, net of taxes, or disclosures, which may not be prevented or detected. Accordingly, management has determined these deficiencies, in the aggregate, constitute a material weakness.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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222 CIT ANNUAL REPORT 2016
| 2. | | Information Technology General Controls (“ITGCs”): |
As of December 31, 2016, we did not maintain effective controls over the design and operating effectiveness of ITGCs for information systems that are relevant to the preparation of our financial statements. Specifically we did not maintain the following:
| I) | | Program change management controls to ensure that information technology program and data changes, or changes to queries and logic used to generate key reports used by management affecting financial Information Technology (“IT”) applications and underlying accounting records are identified, tested, authorized and implemented appropriately; |
| II) | | User access controls to ensure appropriate segregation of duties and access to financial applications and data is adequately restricted to appropriate Company personnel; and |
| III) | | Computer operations controls to ensure that privileges are appropriately granted, and data uploads and transfers are authorized and monitored. |
These deficiencies did not result in a material misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact the effectiveness of IT-dependent controls, such as automated controls, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports. As a result, these deficiencies could potentially cause material misstatements to all financial statement accounts and disclosures, which may not be prevented or detected. Accordingly, management has determined these deficiencies, in the aggregate, constitute a material weakness.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
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 December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
REMEDIATION OF MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
| 1. | | Home Equity Conversion Mortgages (HECM) Interest Curtailment Reserve: |
Management is implementing its remediation plan, with oversight from the Audit Committee and the Board of Directors, to ensure that the control deficiencies contributing to the material weakness are remediated such that these controls are properly designed and will operate effectively. The remediation plan, which management began to implement in the first quarter of 2016, includes the following elements:
| I) | | Implement a data quality control program to ensure the following: |
| | (i) | | Historical data is cleansed and properly reflected in the servicing platform, and |
| | (ii) | | Processes to change data are designed in a manner that ensures accuracy of the data, including, but not limited to, implementation of exception reports and continuous quality control monitoring of data changes; |
| II) | | Enhance controls over documentation of detailed data sources and implement formal change controls governing changes to model logic and data fields used in the reserve estimation process; and |
| III) | | Simplify the reserve estimation process and improve governance, controls and documentation over the reserving process. |
| 2. | | Information Technology General Controls (“ITGCs”): |
Management is developing and implementing a remediation plan, with oversight from the Audit Committee and the Board of Directors to ensure that the control deficiencies contributing to the material weakness are remediated such that these controls are properly designed and operate effectively. The remediation plan, which management has begun to implement, includes the following elements:
| I) | | Change Management — Ensure financially relevant applications and reports used by management are subject to consistent controls for initiation, testing and approval of change activities. Reduce or eliminate access that allows direct changes to data and programs in the company’s production environment. Where such access is required, enhance existing monitoring controls to ensure activity is reviewed and appropriately authorized; |
| II) | | Logical Access — Enhance the quality and timeliness of information sharing between Human Resources (“HR”) and IT to ensure timely and appropriate actions are taken on employee terminations and movements, and update the quality of information available to reviewers and approvers of user access to applications, databases and operating systems supporting the company’s operations and financial reporting; and |
| III) | | Computer Operations — Develop and maintain a comprehensive inventory of all key financial system interfaces and job schedulers used in the Company, and implement the requisite preventive and detective controls for each. |
Management believes that these efforts will remediate the material weaknesses. However, the material weaknesses in our internal control over financial reporting will not be considered remediated until the new processes and internal controls are fully implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plans described above. Management will test and evaluate the implementation of these new processes and internal controls during 2017 to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements.
Management believes that the new or enhanced procedures and controls, when implemented, will remediate the material weaknesses described above. However, the Company cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
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Item 9B. Other InformationOn March 11, 2017, the Board of Directors of CIT approved an amendment to the CIT Employee Severance Plan (the “Plan”) to change the definition of short term incentive awards (“STI”) to exclude from any benefit calculations under the Plan any prior year STI that was previously awarded for any period shorter than a year, with any participant being treated as ineligible for STI for such period. Under the Plan, each of the NEOs, other than Ms. Alemany and Mr. Knittel, who each have individual agreements, is eligible to receive benefits on a qualifying termination, including a cash severance amount equal to 52 weeks of base salary and a severance bonus (prorated based on prior year STI). In the event of a qualifying Change of Control termination, each of the NEOs, including Ms. Alemany and Mr. Knittel, is eligible to receive benefits on a qualifying termination, including a cash severance amount equal to two times the sum of base salary plus STI (using an average of the highest 2 out of the last 3 years, as determined above) and a severance bonus (prorated based on prior year STI). As a result of the amendment to the Plan, STI awarded for a period shorter than a year will be excluded from any calculation under the Plan.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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PART THREE
Item 10. Directors, Executive Officers and Corporate GovernanceThe information called for by Item 10 is incorporated by reference from the information under the captions “Directors”, “Corporate Governance” and “Executive Officers” in our Proxy Statement for our 2017 annual meeting of stockholders.
Item 11. Executive CompensationThe information called for by Item 11 is incorporated by reference from the information under the captions “Director Compensation”, “Executive Compensation”, including “Compensation Discussion and Analysis” and “2016 Compensation Committee Report” in our Proxy Statement for our 2017 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information called for by Item 12 is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for our 2017 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information called for by Item 13 is incorporated by reference from the information under the captions “Corporate Governance-Director Independence” and “Related Person Transactions Policy” in our Proxy Statement for our 2017 annual meeting of stockholders.
Item 14. Principal Accountant Fees and ServicesThe information called for by Item 14 is incorporated by reference from the information under the caption “Proposal 2 — Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement for our 2017 annual meeting of stockholders.
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PART FOUR
Item 15. Exhibits and Financial Statement Schedules| (a) | | The following documents are filed with the Securities and Exchange Commission as part of this report (seeItem 8): |
| 1. | | The following financial statements of CIT and Subsidiaries:
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2016 and December 31, 2015.
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014.
Notes to Consolidated Financial Statements. |
| 2. | | All schedules are omitted because they are not applicable or because the required information appears in the Consolidated Financial Statements or the notes thereto. |
| 2.1 | | | | Agreement and Plan of Merger, by and among CIT Group Inc., IMB HoldCo LLC, Carbon Merger Sub LLC and JCF III HoldCo I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 25, 2014). |
| 2.2 | | | | Amendment No. 1, dated as of July 21, 2015, to the Agreement and Plan of Merger, by and among CIT Group Inc., IMB HoldCo I L.P., Carbon Merger Sub LLC and JCF III HoldCo I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 27, 2015). |
| 3.1 | | | | Fourth Restated Certificate of Incorporation of the Company, as filed with the Office of the Secretary of State of the State of Delaware on May 17, 2016 (incorporated by reference to Exhibit 3.1 to Form 8-K filed May 17, 2016). |
| 3.2 | | | | Amended and Restated By-laws of the Company, as amended through May 15, 2016 (incorporated by reference to Exhibit 3.2 to Form 8-K filed May 17, 2016). |
| 4.1 | | | | Indenture, dated as of January 20, 2006, between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) for the issuance of senior debt securities (incorporated by reference to Exhibit 4.3 to Form S-3 filed January 20, 2006). |
| 4.2 | | | | Framework Agreement, dated July 11, 2008, among ABN AMRO Bank N.V., as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as amended by the Deed of Amendment, dated July 19, 2010, among The Royal Bank of Scotland N.V. (f/k/a ABN AMRO Bank N.V.), as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as supplemented by Letter Agreement No. 1 of 2010, dated July 19, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, as amended and supplemented by the Accession Deed, dated July 21, 2010, among The Royal Bank of Scotland N.V., as arranger, Madeleine Leasing Limited, as original borrower, and Jessica Leasing Limited, as acceding party, as supplemented by Letter Agreement No. 2 of 2010, dated July 29, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets (incorporated by reference to Exhibit 4.11 to Form 10-K filed March 10, 2011). |
| 4.3 | | | | Form of All Parties Agreement among CIT Aerospace International, as head lessee, Madeleine Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.12 to Form 10-K filed March 10, 2011). |
| 4.4 | | | | Form of ECA Loan Agreement among Madeleine Leasing Limited, as borrower, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.13 to Form 10-K filed March 10, 2011). |
Item 15. Exhibits and Financial Statement Schedules
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| 4.5 | | | | Form of Aircraft Head Lease between Madeleine Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.14 to Form 10-K filed March 10, 2011). |
| 4.6 | | | | Form of Proceeds and Intercreditor Deed among Madeleine Leasing Limited, as borrower and lessor, various financial institutions, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.15 to Form 10-K filed March 10, 2011). |
| 4.7 | | | | Form of All Parties Agreement among CIT Aerospace International, as head lessee, Jessica Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, CIT Aerospace International, as servicing agent, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.16 to Form 10-K filed March 10, 2011). |
| 4.8 | | | | Form of ECA Loan Agreement among Jessica Leasing Limited, as borrower, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.17 to Form 10-K filed March 10, 2011). |
| 4.9 | | | | Form of Aircraft Head Lease between Jessica Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.18 to Form 10-K filed March 10, 2011). |
| 4.9 | | | | Form of Aircraft Head Lease between Jessica Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.18 to Form 10-K filed March 10, 2011). |
| 4.10 | | | | Form of Proceeds and Intercreditor Deed among Jessica Leasing Limited, as borrower and lessor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.19 to Form 10-K filed March 10, 2011). |
| 4.11 | | | | Indenture, dated as of March 30, 2011, between CIT Group Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed June 30, 2011). |
| 4.12 | | | | First Supplemental Indenture, dated as of March 30, 2011, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of 5.250% Note due 2014 and the Form of 6.625% Note due 2018) (incorporated by reference to Exhibit 4.2 to Form 8-K filed June 30, 2011). |
| 4.13 | | | | Third Supplemental Indenture, dated as of February 7, 2012, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of Notes) (incorporated by reference to Exhibit 4.4 of Form 8-K dated February 13, 2012). |
| 4.14 | | | | Registration Rights Agreement, dated as of February 7, 2012, among CIT Group Inc., the Guarantors named therein, and JP Morgan Securities LLC, as representative for the initial purchasers named therein (incorporated by reference to Exhibit 10.1 of Form 8-K dated February 13, 2012). |
| 4.15 | | | | Amended and Restated Revolving Credit and Guaranty Agreement, dated as of January 27, 2014 among CIT Group Inc., certain subsidiaries of CIT Group Inc., as Guarantors, the Lenders party thereto from time to time and Bank of America, N.A., as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 28, 2014). |
| 4.16 | | | | Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (incorporated by reference to Exhibit 4.1 of Form 8-K filed March 16, 2012). |
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| 4.17 | | | | First Supplemental Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.25% Senior Unsecured Note due 2018) (incorporated by reference to Exhibit 4.2 of Form 8-K filed March 16, 2012). |
| 4.18 | | | | Second Supplemental Indenture, dated as of May 4, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.000% Senior Unsecured Note due 2017 and the Form of 5.375% Senior Unsecured Note due 2020) (incorporated by reference to Exhibit 4.2 of Form 8-K filed May 4, 2012). |
| 4.19 | | | | Third Supplemental Indenture, dated as of August 3, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 4.25% Senior Unsecured Note due 2017 and the Form of 5.00% Senior Unsecured Note due 2022) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 3, 2012). |
| 4.20 | | | | Fourth Supplemental Indenture, dated as of August 1, 2013, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.00% Senior Unsecured Note due 2023) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 1, 2013). |
| 4.21 | | | | Fifth Supplemental Indenture, dated as of February 19, 2014, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 3.875% Senior Unsecured Note due 2019) (incorporated by reference to Exhibit 4.1 to Form 8-K filed February 19, 2014. |
| 4.22 | | | | Sixth Supplemental Indenture, dated as of December 23, 2016, 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 2018) (incorporated by reference to Exhibit 4.1 to Form 8-K filed December 23, 2016). |
| 4.23 | | | | Second Amended and Restated Revolving Credit and Guaranty Agreement, dated as of February 17, 2016, 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 February 18, 2016). |
| 10.1* | | | | CIT Group Inc. Omnibus Incentive Plan (incorporated by reference to Exhibit 4.1 to Form S-8 filed September 27, 2016). |
| 10.2* | | | | CIT Group Inc. Supplemental Retirement Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.27 to Form 10-Q filed May 12, 2008). |
| 10.3* | | | | CIT Group Inc. Supplemental Savings Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.28 to Form 10-Q filed May 12, 2008). |
| 10.4* | | | | New Executive Retirement Plan of CIT Group Inc. (As Amended and Restated as of January 1, 2008) (incorporated by reference to Exhibit 10.29 to Form 10-Q filed May 12, 2008). |
| 10.5* | | | | Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (One Year Vesting) (incorporated by reference to Exhibit 10.35 to Form 10-Q filed August 9, 2010). |
| 10.6* | | | | Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (Three Year Vesting) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed August 9, 2010). |
| 10.7* | | | | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Initial Grant) (incorporated by reference to Exhibit 10.39 to Form 10-Q filed August 9, 2010). |
| 10.8* | | | | Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Annual Grant) (incorporated by reference to Exhibit 10.40 to Form 10-Q filed August 9, 2010). |
| 10.9* | | | | Amended and Restated Employment Agreement, dated as of May 7, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.35 to Form 10-K filed March 2, 2009). |
| 10.10* | | | | Amendment to Employment Agreement, dated December 22, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 2, 2009). |
| 10.11** | | | | Airbus A320 NEO Family Aircraft Purchase Agreement, dated as of July 28, 2011, between Airbus S.A.S. and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.35 of Form 10-Q/A filed February 1, 2012). |
Item 15. Exhibits and Financial Statement Schedules
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| 10.12** | | | | Amended and Restated Confirmation, dated June 28, 2012, between CIT TRS Funding B.V. and Goldman Sachs International, and Credit Support Annex and ISDA Master Agreement and Schedule, each dated October 26, 2011, between CIT TRS Funding B.V. and Goldman Sachs International, evidencing a $625 billion securities based financing facility (incorporated by reference to Exhibit 10.32 to Form 10-Q filed August 9, 2012). |
| 10.13** | | | | Fourth Amended and Restated Confirmation, dated December 7, 2016, between CIT Financial Ltd. and Goldman Sachs International, and Amended and Restated ISDA Master Agreement Schedule, dated October 26, 2011 between CIT Financial Ltd. and Goldman Sachs International, evidencing a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 9, 2012). |
| 10.14** | | | | ISDA Master Agreement and Credit Support Annex, each dated June 6, 2008, between CIT Financial Ltd. and Goldman Sachs International related to a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 11, 2008). |
| 10.15* | | | | Assignment and Extension of Employment Agreement, dated February 6, 2013, by and among CIT Group Inc., C. Jeffrey Knittel and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.34 to Form 10-Q filed November 6, 2013). |
| 10.16* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.36 to Form 10-K filed March 1, 2013). |
| 10.17* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 1, 2013). |
| 10.18* | | | | CIT Employee Severance Plan (Effective as of November 6, 2013) (incorporated by reference to Exhibit 10.37 in Form 10-Q filed November 6, 2013). |
| 10.19 | | | | Stockholders Agreement, by and among CIT Group Inc. and the parties listed on the signature pages thereto, dated as of July 21, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 25, 2014). |
| 10.20* | | | | Extension to Term of Employment Agreement, dated January 2, 2014, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 6, 2014). |
| 10.21* | | | | Amendment to Employment Agreement, dated January 16, 2015, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.29 to Form 10-K filed February 20, 2015). |
| 10.22* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2013) (incorporated by reference to Exhibit 10.30 to Form 10-K filed February 20, 2015). |
| 10.23* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2013) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.31 to Form 10-K filed February 20, 2015). |
| 10.24* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2014) (incorporated by reference to Exhibit 10.32 to Form 10-K filed February 20, 2015). |
| 10.25* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (Executives with Employment Agreements) (2014) (incorporated by reference to Exhibit 10.33 to Form 10-K filed February 20, 2015). |
| 10.26* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (incorporated by reference to Exhibit 10.30 to Form 10-Q filed August 5, 2015). |
| 10.27* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.31 to Form 10-Q filed August 5, 2015). |
| 10.28* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.32 to Form 10-Q filed August 5, 2015). |
| 10.29* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 5, 2015). |
| 10.30* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 5, 2015). |
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| 10.31* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.35 to Form 10-Q filed August 5, 2015). |
| 10.32* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed August 5, 2015). |
| 10.33* | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.37 to Form 10-Q filed August 5, 2015). |
| 10.34* | | | | Offer Letter, dated October 27, 2015, between CIT Group Inc. and Ellen R. Alemany, including Attached Exhibits. (incorporated by reference to Exhibit 10.39 to Form 10-Q filed November 13, 2015). |
| 10.35 | | | | Nomination and Support Agreement dated February 18, 2016 by and between J.C. Flowers & Co. LLC and CIT Group Inc. (incorporated by reference to Exhibit 99.1 to Form 8-K filed February 22, 2016). |
| 10.36 | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2016) (with ROTCE and Credit Provision Performance Measures) (Executives with Employment Agreements) (filed herein). |
| 10.37 | | | | Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2016) (with ROTCE and Credit Provision Performance Measures) (filed herein). |
| 10.38 | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (2016) (with Performance Based Vesting) (filed herein). |
| 10.39 | | | | Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (2016) (with Performance Based Vesting) (Executives with Employment Agreements) (filed herein). |
| 10.40 | | | | Form of CIT Group Inc. Omnibus Incentive Plan Performance Share Unit Award Agreement (2016) (Executives with Employment Agreements) (with ROTCE and Credit Provision Performance Measures) (filed herein). |
| 10.41 | | | | Form of CIT Group Inc. Omnibus Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2016) (filed herein). |
| 10.42 | | | | CIT Employee Severance Plan (As Amended and Restated Effective January 1, 2017) (incorporated by reference to Exhibit 10.40 to Form 10-Q filed November 9, 2016). |
| 10.43 | | | | Form of CIT Group Inc. Omnibus Incentive Plan Restricted Stock Unit Director Award Agreement (Three Year Vesting) (filed herein). |
| 12.1 | | | | CIT Group Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges. |
| 21.1 | | | | Subsidiaries of CIT Group Inc. |
| 23.1 | | | | Consent of PricewaterhouseCoopers LLP. |
| 24.1 | | | | Powers of Attorney. |
| 31.1 | | | | Certification of Ellen R. Alemany pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | | | Certification of E. Carol Hayles pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1*** | | | | Certification of Ellen R. Alemany pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2*** | | | | Certification of E. Carol Hayles pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Item 15. Exhibits and Financial Statement Schedules
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| 101.INS | | | | XBRL Instance Document (Includes the following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.) |
| 101.SCH | | | | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB | | | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 101.DEF | | | | XBRL Taxonomy Extension Definition Linkbase Document. |
* | | Indicates a management contract or compensatory plan or arrangement. |
** | | Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for granting confidential treatment pursuant to the Securities Exchange Act of 1934, as amended. |
*** | | This information is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not incorporated by reference into any filing under the Securities Act of 1933. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | | | | CIT GROUP INC. |
| March 15, 2017 | | | | By: /s/ Ellen R. Alemany |
| | | | | Ellen R. Alemany |
| | | | | Chairwoman and Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 15, 2017 in the capacities indicated below.
NAME | | | | NAME |
| |
| Ellen R. Alemany | | | | John R. Ryan* |
Ellen R. Alemany
Chairwoman and Chief Executive Officer and Director | | | | John R. Ryan
Director |
| |
| Michael L. Brosnan* | | | | Gerald Rosenfeld* |
Michael L. Brosnan
Director | | | | Gerald Rosenfeld
Director |
| |
| Michael A. Carpenter* | | | | Sheila A. Stamps* |
Michael A. Carpenter
Director | | | | Sheila A. Stamps
Director |
| |
| Dorene C. Dominquez* | | | | Peter J. Tobin* |
Dorene C. Dominquez
Director | | | | Peter J. Tobin
Director
|
| |
| Alan Frank* | | | | Laura S. Unger* |
Alan Frank
Director | | | | Laura S. Unger
Director |
| |
| William M. Freeman* | | | | /s/ E. Carol Hayles |
William M. Freeman
Director | | | | E. Carol Hayles
Executive Vice President and Chief Financial Officer |
| |
| R. Brad Oates* | | | | /s/ Edward K. Sperling |
R. Brad Oates
Director | | | | Edward K. Sperling
Executive Vice President and Controller |
| |
| Marianne Miller Parrs* | | | | /s/ James P. Shanahan |
Marianne Miller Parrs | | | | James P. Shanahan
|
Director | | | | Senior Vice President,
Chief Regulatory Counsel, Attorney-in-fact |
* | | Original powers of attorney authorizing Stuart Alderoty, Eric S. Mandelbaum, and James P. Shanahan and each of them to sign on behalf of the above-mentioned directors are held by the Corporation and available for examination by the Securities and Exchange Commission pursuant to Item 302(b) of Regulation S-T. |
