XNYS:CIT CIT Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:CIT (CIT Group Inc): Fair Value Estimate
Premium
XNYS:CIT (CIT Group Inc): Consider Buying
Premium
XNYS:CIT (CIT Group Inc): Consider Selling
Premium
XNYS:CIT (CIT Group Inc): Fair Value Uncertainty
Premium
XNYS:CIT (CIT Group Inc): Economic Moat
Premium
XNYS:CIT (CIT Group Inc): Stewardship
Premium
 

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

FORM 10-Q

|X|  Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012
           
|  | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 


Commission File Number: 001-31369

CIT GROUP INC.

(Exact name of Registrant as specified in its charter)


 
Delaware
(State or other jurisdiction of incorporation or organization)
           
65-1051192
(IRS Employer Identification Number)
 
                       
11 West 42nd Street New York, New York
(Address of Registrant’s principal executive offices)
           
10036
(Zip Code)
 
                       
(212) 461-5200
(Registrant’s telephone number)
                       
 
                       
 

    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| Smaller reporting company |_|.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No |_|

As of April 30, 2012 there were 200,818,303 shares of the registrant’s common stock outstanding.




CONTENTS

 
Part One—Financial Information:
ITEM 1.
           
Consolidated Financial Statements
         2   
 
           
Consolidated Balance Sheets (Unaudited)
         2    
 
           
Consolidated Statements of Operations (Unaudited)
         3    
 
           
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
         4    
 
           
Consolidated Statements of Stockholders’ Equity (Unaudited)
         5    
 
           
Consolidated Statements of Cash Flows (Unaudited)
         6    
 
           
Notes to Consolidated Financial Statements
         7    
ITEM 2.
           
Management’s Discussion and Analysis of Financial Condition and Results of Operations
         36    
 
           
and
              
ITEM 3.
           
Quantitative and Qualitative Disclosures about Market Risk
         36    
ITEM 4.
           
Controls and Procedures
         84   
 
Part Two—Other Information:
ITEM 1.
           
Legal Proceedings
         85   
ITEM 1A
           
Risk Factors
         85    
ITEM 2.
           
Unregistered Sales of Equity Securities and Use of Proceeds
         85    
ITEM 6.
           
Exhibits
         86    
Signatures
     92    
 

Table of Contents   1



Part One—Financial Information

ITEM 1. Consolidated Financial Statements

 


CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in millions – except share data)

        March 31,
2012
    December 31,
2011
Assets
                                     
Cash and due from banks
              $ 321.3          $ 433.2   
Interest bearing deposits, including restricted balances of $907.7 and $869.9 at March 31, 2012 and December 31, 2011(1)
                 6,014.8             7,002.4   
Investment securities
                 1,334.2             1,250.6   
Trading assets at fair value – derivatives
                 21.0             42.9   
Assets held for sale(1)
                 1,701.9             2,332.3   
Loans (see Note 5 for amounts pledged)
                 20,490.6             19,885.5   
Allowance for loan losses
                 (420.0 )            (407.8 )  
Total loans, net of allowance for loan losses(1)
                 20,070.6             19,477.7   
Operating lease equipment, net (see Note 5 for amounts pledged)(1)
                 11,904.0             11,991.6   
Unsecured counterparty receivable
                 700.1             733.5   
Goodwill
                 330.8             330.8   
Intangible assets, net
                 50.0             63.6   
Other assets
                 1,699.6             1,576.8   
Total Assets
              $ 44,148.3          $ 45,235.4   
Liabilities
                                   
Deposits
              $ 6,814.7          $ 6,193.7   
Trading liabilities at fair value – derivatives
                 92.0             74.9   
Credit balances of factoring clients
                 1,109.8             1,225.5   
Other liabilities
                 2,574.4             2,562.2   
Long-term borrowings, including $3,331.7 and $3,203.8 contractually due within twelve months at
March 31, 2012 and December 31, 2011, respectively
                 25,101.1             26,288.1   
Total Liabilities
                 35,692.0             36,344.4   
Stockholders’ Equity
                                     
Common stock: $0.01 par value, 600,000,000 authorized
                                     
Issued: 201,224,636 and 200,980,752 at March 31, 2012 and December 31, 2011
                 2.0             2.0   
Outstanding: 200,817,310 and 200,660,314 at March 31, 2012 and December 31, 2011
                                     
Paid-in capital
                 8,471.7             8,459.3   
Retained earnings
                 85.6             532.1   
Accumulated other comprehensive loss
                 (89.6 )            (92.1 )  
Treasury stock: 407,326 and 320,438 shares at March 31, 2012 and December 31, 2011 at cost
                 (16.5 )            (12.8 )  
Total Common Stockholders’ Equity
                 8,453.2             8,888.5   
Noncontrolling minority interests
                 3.1             2.5   
Total Equity
                 8,456.3             8,891.0   
Total Liabilities and Equity
              $ 44,148.3          $ 45,235.4   
 
(1)
 
The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between total VIE assets and liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT.

 
Assets
                                     
Interest bearing deposits, restricted
              $ 745.3          $ 753.2   
Assets held for sale
                 36.6             317.2   
Total loans, net of allowance for loan losses
                 8,553.2             8,523.7   
Operating lease equipment, net
                 4,247.4             4,285.4   
Total Assets
              $ 13,582.5          $ 13,879.5   
Liabilities
                                     
Beneficial interests issued by consolidated VIEs (classified as long-term borrowings)
              $ 9,719.5          $ 9,875.5   
Total Liabilities
              $ 9,719.5          $ 9,875.5   
 
                                       
 

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

2   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES


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

        Quarters Ended March 31,
   
        2012
    2011
Interest income
                                     
Interest and fees on loans
              $ 403.8          $ 630.4   
Interest and dividends on investments
                 7.8             8.4   
Interest income
                 411.6             638.8   
Interest expense
                                     
Interest on long-term borrowings
                 (1,043.4 )            (674.2 )  
Interest on deposits
                 (36.3 )            (24.4 )  
Interest expense
                 (1,079.7 )            (698.6 )  
Net interest revenue
                 (668.1 )            (59.8 )  
Provision for credit losses
                 (42.6 )            (122.4 )  
Net interest revenue, after credit provision
                 (710.7 )            (182.2 )  
Other income
                                      
Rental income on operating leases
                 439.3             408.9   
Other
                 249.4             270.4   
Total other income
                 688.7             679.3   
Total revenue, net of interest expense and credit provision
                 (22.0 )            497.1   
Other expenses
                                     
Depreciation on operating lease equipment
                 (137.5 )            (160.2 )  
Operating expenses
                 (223.3 )            (204.9 )  
Loss on debt extinguishments
                 (22.9 )               
Total other expenses
                 (383.7 )            (365.1 )  
Income (loss) before provision for income taxes
                 (405.7 )            132.0   
Provision for income taxes
                 (39.9 )            (62.2 )  
Income (loss) before noncontrolling interests
                 (445.6 )            69.8   
Net (income) loss attributable to noncontrolling interests, after tax
                 (0.9 )            (4.2 )  
Net income (loss)
              $ (446.5 )         $ 65.6   
Basic earnings per common share
              $ (2.22 )         $ 0.33   
Diluted earnings per common share
              $ (2.22 )         $ 0.33   
Average number of common shares – basic (thousands)
                 200,812             200,605   
Average number of common shares – diluted (thousands)
                 200,812             200,933   
 

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

Item 1:  Consolidated Financial Statements  3




CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in millions)

        Quarters Ended March 31,
   
        2012
    2011
Income (loss) before noncontrolling interests
              $ (445.6 )         $ 69.8   
Other comprehensive income (loss), net of tax:
                                       
Foreign currency translation adjustments
                 1.1             6.8   
Changes in fair values of derivatives qualifying as cash flow hedges
                 0.5             0.9   
Net unrealized gains (losses) on available for sale securities
                 0.5             (2.1 )  
Changes in benefit plans net gain/(loss) and prior service (cost)/credit
                 0.4             (0.1 )  
Other comprehensive income, net of tax
                 2.5             5.5   
Comprehensive income (loss) before noncontrolling interests
                 (443.1 )            75.3   
Comprehensive income (loss) attributable to noncontrolling interests
                 (0.9 )            (4.2 )  
Comprehensive income (loss)
              $ (444.0 )         $ 71.1   
 

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

4   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(dollars in millions)

        Common
Stock
    Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income / (Loss)
    Treasury
Stock
    Noncontrolling
Interest in
Subsidiaries
    Total
Stockholders’
Equity
December 31, 2011
              $ 2.0          $ 8,459.3          $ 532.1          $ (92.1 )         $ (12.8 )         $ 2.5          $ 8,891.0   
Net loss
                                               (446.5 )                                          0.9             (445.6 )  
Other comprehensive income, net of tax
                                                              2.5                                           2.5   
Amortization of restricted stock and stock option, and performance shares expense
                                12.1                                           (3.7 )                           8.4   
Employee stock purchase plan
                                0.3                                                                         0.3   
Distribution of earnings and capital
                                                                                            (0.3 )            (0.3 )  
March 31, 2012
              $ 2.0          $ 8,471.7          $ 85.6          $ (89.6 )         $ (16.5 )         $ 3.1          $ 8,456.3   
December 31, 2010
              $ 2.0          $ 8,434.1          $ 505.4          $ (9.6 )         $ (8.8 )         $ (2.3 )         $ 8,920.8   
Net income
                                               65.6                                           4.2             69.8   
Other comprehensive income
                                                              5.5                                           5.5   
Amortization of restricted stock and stock option expenses
                                6.3                                           (1.1 )                           5.2   
Distribution of earnings and capital
                                                                                            (0.2 )            (0.2 )  
March 31, 2011
              $ 2.0          $ 8,440.4          $ 571.0          $ (4.1 )         $ (9.9 )         $ 1.7          $ 9,001.1   
 
 

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

Item 1:  Consolidated Financial Statements  5




CIT GROUP INC. AND SUBSIDIARIES


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

        Quarters Ended March 31,
   
        2012
    2011
Cash Flows From Operations
                                     
Net income (loss)
              $ (446.5 )         $ 65.6   
Adjustments to reconcile net income to net cash flows from operations:
                                     
Provision for credit losses
                 42.6             122.4   
Net depreciation, amortization and (accretion)
                 750.7             121.1   
Net gains on equipment, receivable and investment sales
                 (181.6 )            (135.4 )  
Provision for deferred income taxes
                 13.0             17.9   
Increase in finance receivables held for sale
                 (22.6 )            (1.8 )  
Increase in other assets
                 (127.7 )            (35.9 )  
Increase (decrease) in accrued liabilities and payables
                 (14.6 )            (20.6 )  
Net cash flows provided by operations
                 13.3             133.3   
Cash Flows From Investing Activities
                                     
Loans extended and purchased
                 (5,301.9 )            (4,652.2 )  
Principal collections of loans
                 4,413.3             5,393.5   
Purchases of investment securities
                 (4,310.0 )            (6,125.5 )  
Proceeds from maturities of investment securities
                 4,246.8                
Proceeds from asset and receivable sales
                 1,362.0             860.6   
Purchases of assets to be leased and other equipment
                 (226.0 )            (328.4 )  
Net increase in short-term factoring receivables
                 (78.1 )            (73.3 )  
Change in restricted cash
                 (37.8 )            1,210.1   
Net cash flows used in investing activities
                 68.3             (3,715.2 )  
Cash Flows From Financing Activities
                                     
Proceeds from the issuance of term debt
                 5,132.0             2,354.5   
Repayments of term debt
                 (7,016.8 )            (2,844.4 )  
Net increase (decrease) in deposits
                 625.4             (233.6 )  
Collection of security deposits and maintenance funds
                 128.3             125.8   
Repayment of security deposits and maintenance funds
                 (87.8 )            (95.6 )  
Net cash flows used in financing activities
                 (1,218.9 )            (693.3 )  
Decrease in cash and cash equivalents
                 (1,137.3 )            (4,275.2 )  
Unrestricted cash and cash equivalents, beginning of period
                 6,565.7             8,650.4   
Unrestricted cash and cash equivalents, end of period
              $ 5,428.4          $ 4,375.2   
Supplementary Cash Flow Disclosure
                                     
Interest paid
              $ 395.3          $ 524.2   
Federal, foreign, state and local income taxes (collected), net
              $ (5.9 )         $ 6.7   
Supplementary Non Cash Flow Disclosure
                                      
Transfer of assets from held for investment to held for sale
              $ 171.6          $ 421.6   
Transfer of assets from held for sale to held for investment
              $ 17.1          $ 26.3   
 

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

6   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CIT Group Inc. became a bank holding company (“BHC”) in 2008 and has provided financial solutions to its clients since its formation in 1908. We provide financing and leasing capital principally for small businesses and middle market companies in a wide variety of industries and offer vendor, equipment, commercial and structured financing products, as well as factoring and management advisory services. CIT is the parent of CIT Bank, a state-chartered bank in Utah. We operate primarily in North America, with locations in Europe, South America and Asia.

BASIS OF PRESENTATION

Principles of Consolidation

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

In preparing the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. These consolidated financial statements, which have been prepared in accordance with the instructions to Form 10-Q, do not include all information and note disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The financial statements in this Form 10-Q have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of CIT’s financial position, results of operations and cash flows in accordance with GAAP. These consolidated financial statements should be read in conjunction with our current Form 10-K on file.

The consolidated financial statements include the effects of adopting Fresh Start Accounting (“FSA”) upon emergence from bankruptcy on December 10, 2009, based on a convenience date of December 31, 2009 (the “Convenience Date”), as required by GAAP. Accretion and amortization of certain FSA adjustments are included in the Statements of Operations and Cash Flows. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“Form 10-K”), “Notes 1 — Business and Summary of Significant Accounting Policies” and “Note 26 — Fresh Start Accounting”, for additional FSA and reorganization information.

The accounting and financial reporting policies of CIT Group Inc. conform to GAAP and the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. Some of the more significant estimates include: fresh start accounting fair values; valuation of deferred tax assets; lease residual values and depreciation of operating lease equipment; and allowance for loan losses. Additionally, where applicable, the policies conform to accounting and reporting guidelines prescribed by bank regulatory authorities.

NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurement

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The disclosure requirements also have been enhanced. The most significant change requires entities, for their recurring Level 3 fair value measurements, to disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. The amendment is effective for fiscal years beginning after December 15, 2011, with early adoption prohibited. The adoption of the guidance during the quarter ended March 31, 2012, did not affect the Company’s financial condition and resulted in enhanced fair value measurement disclosures.

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05 to amend the guidance on the presentation of comprehensive income in FASB ASC Topic 220, Comprehensive Income that require companies to present a single statement of comprehensive income or two consecutive statements. The proposed guidance makes the financial statement presentation of other comprehensive income more prominent by eliminating the alternative to present comprehensive income within the statement of equity. The ASU is effective for annual and interim periods beginning after December 15, 2011. The adoption of the guidance during the quarter ended March 31, 2012, did not affect the Company’s financial condition but added the Consolidated Statements of Comprehensive Income (Loss).

On December 23, 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers the requirement to present components of reclassifications

Item 1:  Consolidated Financial Statements  7




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


of other comprehensive income on the face of the income statement, while still requiring companies to adopt the other requirements contained in ASU 2011-05, as noted above.

Balance Sheet Offsetting Disclosure Requirements

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures will enable financial statement users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards (“IFRS”), which are subject to different offsetting models. The disclosures will be limited to financial instruments and derivatives subject to enforceable master netting arrangements or similar agreements and excludes loans unless they are netted in the statement of financial condition. The amendments will affect all entities that have financial instruments and derivatives that are either offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement regardless of whether they are offset in the balance sheet. The ASU will require entities to disclose, separately for financial assets and liabilities, including derivatives, the gross amounts of recognized financial assets and liabilities; the amounts offset under current U.S. GAAP; the net amounts presented in the 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 reconciling amount.

The disclosure requirements are effective for annual and interim reporting periods beginning on or after January 1, 2013, with retrospective application required. The Company is evaluating the impact of this amendment.

NOTE 2 — LOANS

Finance receivables consist of the following:


Finance Receivables by Product
(dollars in millions)

        March 31, 2012
    December 31, 2011
Loans
              $ 15,888.6          $ 15,663.6   
Direct Financing Leases and Leveraged Leases
                 4,602.0             4,221.9   
 
              $ 20,490.6          $ 19,885.5   
 

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


Finance Receivables
(dollars in millions)

        March 31, 2012
    December 31, 2011
   
        Domestic
    Foreign
    Total
    Domestic
    Foreign
    Total
Corporate Finance
              $  6,168.2          $ 1,155.8          $ 7,324.0          $ 5,870.0          $ 992.7          $ 6,862.7   
Transportation Finance
                 1,294.3             409.1             1,703.4             1,063.2             423.8             1,487.0   
Trade Finance
                 2,283.9             104.3             2,388.2             2,299.1             132.3             2,431.4   
Vendor Finance
                 2,332.0             2,154.1             4,486.1             2,365.5             2,056.2             4,421.7   
Consumer
                   4,576.9                 12.0               4,588.9               4,670.9                 11.8               4,682.7   
Total
              $ 16,655.3          $ 3,835.3          $ 20,490.6          $ 16,268.7          $ 3,616.8          $ 19,885.5   
 

The following table presents selected components of the net investment in finance receivables.


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

        March 31,
2012
    December 31,
2011
Unearned income
              $ (1,031.1 )         $ (1,057.5 )  
Unamortized premiums and discounts
                 (53.8 )            (42.3 )  
Net unamortized deferred fees and costs
                 30.8             39.8   
 

Certain of the following tables present credit-related information at the “class” level in accordance with ASC 310-10-50, Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses. A class is generally a disaggregation of a portfolio segment. In determining the classes, CIT considered the finance receivable characteristics and methods it applies in monitoring and assessing credit risk and performance.

Credit Quality Information

The following table summarizes finance receivables by the risk ratings that bank regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. 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.

8   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The definitions of these ratings are as follows:

n
  Pass – finance receivables in this category do not meet the criteria for classification in one of the categories below.

n
  Special mention – a special mention asset exhibits potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects.

n
  Classified – a classified asset ranges from: 1) assets that 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.


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

Grade:
        Corporate
Finance –
Other
    Corporate
Finance –
SBL
    Transportation
Finance
    Trade
Finance
    Vendor
Finance
U.S.
    Vendor
Finance
International
    Commercial
    Consumer
    Totals
March 31, 2012
                                                                                                                                              
Pass
              $ 4,855.2          $ 329.6          $ 1,319.0          $ 1,964.7          $ 2,007.1          $ 2,168.8          $ 12,644.4          $ 5,046.6          $ 17,691.0   
Special mention
                 887.6             247.1             138.8             262.7             137.6             123.1             1,796.9             270.2             2,067.1   
Classified – accruing
                 656.4             83.6             220.3             117.0             130.0             62.7             1,270.0             361.5             1,631.5   
Classified – non accrual
                 216.2             112.7             25.3             43.8             53.6             29.8             481.4             0.5             481.9   
Total
              $ 6,615.4          $ 773.0          $ 1,703.4          $ 2,388.2          $ 2,328.3          $ 2,384.4          $ 16,192.7          $ 5,678.8          $ 21,871.5   
December 31, 2011
                                                                                                                                              
Pass
              $ 4,255.6          $ 279.9          $ 1,089.3          $ 2,019.1          $ 2,017.8          $ 2,058.8          $ 11,720.5          $ 5,580.1          $ 17,300.6   
Special mention
                 930.9             236.9             136.7             263.8             156.1             123.0             1,847.4             367.5             2,214.9   
Classified – accruing
                 735.6             135.0             216.0             73.2             131.9             67.3             1,359.0             397.0             1,756.0   
Classified – non accrual
                 356.4             141.5             45.0             75.3             55.3             27.6             701.1             0.9             702.0   
Total
              $ 6,278.5          $ 793.3          $ 1,487.0          $ 2,431.4          $ 2,361.1          $ 2,276.7          $ 15,628.0          $ 6,345.5          $ 21,973.5   
 
(1)
  Balances include $1,380.9 million and $2,088.0 million of loans in Assets Held for Sale at March 31, 2012 and December 31, 2011, respectively, which are measured at the lower of cost or fair value. ASC 310-10-50 does not require inclusion of these finance receivables in the disclosures above. However, until they are disposed of, the Company manages the credit risk and collections of finance receivables held for sale consistently with its finance receivables held for investment, so that Company data are tracked and used for management purposes on an aggregated basis, as presented above. Other than finance receivables, the total for Assets Held for Sale on the balance sheet also include operating lease equipment held for sale, which are not included in the above table.

Item 1:  Consolidated Financial Statements  9




CIT GROUP INC. 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 Receivables
(1) — Delinquency Status (dollars in millions)

        30–59 Days
Past Due
    60–89 Days
Past Due
    90 Days or
Greater
    Total Past
Due
    Current
    Total Finance
Receivables(1)
March 31, 2012
                                                                                                 
Commercial
                                                                                                       
Corporate Finance – Other
              $ 1.9          $ 10.5          $ 21.8          $ 34.2          $ 6,581.2          $ 6,615.4   
Corporate Finance – SBL
                 31.6             0.9             19.9             52.4             720.6             773.0   
Transportation Finance
                 2.3             2.0             1.1             5.4             1,698.0             1,703.4   
Trade Finance
                 20.6             2.2             0.5             23.3             2,364.9             2,388.2   
Vendor Finance – U.S.
                 41.1             17.3             13.0             71.4             2,256.9             2,328.3   
Vendor Finance – International
                 18.7             4.7             6.1             29.5             2,354.9             2,384.4   
Total Commercial
                 116.2             37.6             62.4             216.2             15,976.5             16,192.7   
Consumer
                 182.5             91.5             364.0             638.0             5,040.8             5,678.8   
Total
              $ 298.7          $ 129.1          $ 426.4          $ 854.2          $ 21,017.3          $ 21,871.5   
December 31, 2011
                                                                                                 
Commercial
                                                                                                 
Corporate Finance – Other
              $ 5.9          $ 2.5          $ 35.6          $ 44.0          $ 6,234.5          $ 6,278.5   
Corporate Finance – SBL
                 7.7             7.2             27.7             42.6             750.7             793.3   
Transportation Finance
                 1.8             3.4             0.7             5.9             1,481.1             1,487.0   
Trade Finance
                 60.8             2.3             1.2             64.3             2,367.1             2,431.4   
Vendor Finance – U.S.
                 47.7             18.9             15.7             82.3             2,278.8             2,361.1   
Vendor Finance – International
                 15.7             6.0             5.6             27.3             2,249.4             2,276.7   
Total Commercial
                 139.6             40.3             86.5             266.4             15,361.6             15,628.0   
Consumer
                 246.0             123.0             395.1             764.1             5,581.4             6,345.5   
Total
              $ 385.6          $ 163.3          $ 481.6          $ 1,030.5          $ 20,943.0          $ 21,973.5   
 
(1)
  Balances include $1,380.9 million and $2,088.0 million of loans in Assets Held for Sale at March 31, 2012 and December 31, 2011, respectively. Other than finance receivables, Assets Held for Sale on the balance sheet also include operating lease equipment held for sale, which are not included in the above table.

10   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


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

        March 31, 2012
    December 31, 2011
   
        Held for
Investment
    Held for
Sale
    Total
    Held for
Investment
    Held for
Sale
    Total
Commercial
                                                                                                 
Corporate Finance – Other
              $ 213.9          $ 2.3          $ 216.2          $ 225.7          $ 130.7          $ 356.4   
Corporate Finance – SBL
                 103.1             9.6             112.7             132.0             9.5             141.5   
Transportation Finance
                 25.3                          25.3             45.0                          45.0   
Trade Finance
                 43.8                          43.8             75.3                          75.3   
Vendor Finance – U.S.
                 53.6                          53.6             55.3                          55.3   
Vendor Finance – International
                 28.3             1.5             29.8             25.6             2.0             27.6   
Consumer
                              0.5             0.5             0.2             0.7             0.9   
Total non-accrual loans
              $ 468.0          $ 13.9          $ 481.9          $ 559.1          $ 142.9          $ 702.0   
Repossessed assets
                                               19.1                                           9.7   
Total non-performing assets
                                            $ 501.0                                        $ 711.7   
Government guaranteed accruing loans past due 90 days or more
                                            $ 365.7                                        $ 390.3   
Other accruing loans past due 90 days or more
                                               2.2                                           2.2   
Total accruing loans past due 90 days or more
                                            $ 367.9                                        $ 392.5   
 

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

Impaired Loans

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

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

    

Item 1:  Consolidated Financial Statements  11




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Impaired Loans
(dollars in millions)

                    Quarters Ended March 31,
   
        March 31, 2012
    2012
    2011
   
        Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Average
Recorded
Investment
    Average
Recorded
Investment
March 31, 2012
                                                                                  
With no related allowance recorded:
                                                                                  
Commercial
                                                                                  
Corporate Finance – Other
              $ 169.2          $ 250.7          $           $ 183.1          $ 237.4   
Corporate Finance – SBL
                 47.7             82.1                          43.0             41.8   
Transportation Finance
                 12.6             17.2                          6.3             9.8   
Trade Finance
                 37.5             42.4                          48.8             107.9   
Vendor Finance – U.S.
                 9.9             20.8                          10.2             21.7   
Vendor Finance – International
                 10.0             22.7                          9.0             16.0   
With an allowance recorded:
                                                                                  
Commercial
                                                                                  
Corporate Finance – Other
                 110.5             123.9             31.4             105.8             132.3   
Corporate Finance – SBL
                 11.6             13.7             4.5             21.8             50.1   
Transportation Finance
                 13.4             27.7             2.9             29.5             54.9   
Trade Finance
                 6.2             8.7             3.6             10.7             23.1   
Total Commercial Impaired Loans(1)
                 428.6             609.9             42.4             468.2             695.0   
Total Loans Impaired at Convenience date(2)
                 174.5             557.9             4.5             180.6             677.3   
Total
              $ 603.1          $ 1,167.8          $ 46.9          $ 648.8          $ 1,372.3   
 

                        Year ended
            December 31, 2011
    December 31, 2011
   
            Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Average
Recorded
Investment
With no related allowance recorded:
                                                                                  
Commercial
                                                                                  
Corporate Finance – Other
                                  $ 197.0          $ 298.7          $           $ 160.6   
Corporate Finance – SBL
                                38.3             70.7                          41.3   
Transportation Finance
                                                                       6.6   
Trade Finance
                                60.1             72.2                          73.7   
Vendor Finance – U.S.
                                10.5             24.6                          16.9   
Vendor Finance – International
                                8.0             20.7                          11.6   
With an allowance recorded:
                                                                                  
Commercial
                                                                                  
Corporate Finance – Other
                                101.0             112.0             31.7             109.5   
Corporate Finance – SBL
                                31.9             34.7             7.4             43.9   
Transportation Finance
                                45.6             58.1             9.0             50.7   
Trade Finance
                                15.1             18.0             5.3             25.9   
Total Commercial Impaired Loans
                                507.5             709.7             53.4             540.7   
Total Loans Impaired at Convenience date(2)
                                186.7             605.4             5.4             418.3   
Total
                             $ 694.2          $ 1,315.1          $ 58.8          $ 959.0   
 
(1)
  Interest income recorded while the loans were impaired was not material for the quarters ended March 31, 2012 and 2011.

(2)
  Details of finance receivables that were identified as impaired at the Convenience date are presented under Loans and Debt Securities Acquired with Deteriorated Credit Quality.

12   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to the contractual terms of the agreement. The Company has established review and monitoring procedures designed to identify, as early as possible, customers that are experiencing financial difficulty. Credit risk is captured and analyzed based on the 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:

n
  Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the loan document;

n
  Lack of current financial data related to the borrower or guarantor;

n
  Delinquency status of the loan;

n
  Borrowers experiencing problems, such as operating losses, marginal working capital, inadequate cash flow or business interruptions;

n
  Loans secured by collateral that is not readily marketable or that is susceptible to deterioration in realizable value; and

n
  Loans to borrowers in industries or countries experiencing 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, or the present value of expected future cash flows discounted at the contract’s effective interest rate. In instances when the Company measures impairment based on the present value of expected future cash flows, the change in present value is reported 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:

n
  “Orderly liquidation value” is the basis for collateral valuation;

n
  Appraisals are updated annually or more often as market conditions warrant; or

n
  Appraisal values are discounted in the determination of impairment if the:

n
  appraisal does not reflect current market conditions; or

n
  collateral consists of inventory, accounts receivable, or other forms of collateral, which may become difficult to locate, collect or subject to pilferage in a liquidation.

Loans and Debt Securities Acquired with Deteriorated Credit Quality

For purposes of this presentation, finance receivables that were identified as impaired at the Convenience Date are presented separately below. The Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) to loans considered impaired under FSA at the time of emergence.

  


Loans Acquired with Deteriorated Credit Quality
(dollars in millions)

        March 31, 2012(2)
    December 31, 2011(2)
   
        Carrying
Amount
    Outstanding
Balance(2)
    Allowance
    Carrying
Amount
    Outstanding
Balance(2)
    Allowance
Commercial
              $ 173.3          $ 553.5          $ 4.5          $ 185.6          $ 599.0          $ 5.4   
Consumer
                 1.2             4.4                          1.1             6.4                
Totals loans
              $ 174.5          $ 557.9          $ 4.5          $ 186.7          $ 605.4          $ 5.4   
 
(1)
  The table excludes amounts in Assets Held for Sale with carrying amounts of $1 million and $117 million at March 31, 2012 and December 31, 2011, and outstanding balances of $25 million and $286 million at March 31, 2012 and December 31, 2011.

(2)
  Represents the sum of contractual principal, interest and fees earned at the reporting date, calculated as pre-FSA net investment plus inception to date charge-offs.

Item 1:  Consolidated Financial Statements  13




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        Quarter Ended March 31, 2012
    Quarter Ended March 31, 2011
   
        Provision for
Credit Losses
    Net Charge-offs
(Recoveries)
    Provision for
Credit Losses
    Net Charge-offs
(Recoveries)
Commercial
              $ (1.4 )         $ (0.5 )         $ 63.1          $ 94.5   
Consumer
                 0.1             0.1             (0.2 )            (0.2 )  
Totals
              $ (1.3 )         $ (0.4 )         $ 62.9          $ 94.3   
 

The following table presents the changes to the accretable discount related to all loans accounted for under ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality).


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

        Quarters Ended March 31,
   
        2012
    2011
Accretable discount, beginning of period
              $ 80.0          $ 207.2   
Accretion
                 (2.8 )            (12.3 )  
Disposals/transfers(1)
                 (49.0 )            (27.4 )  
Accretable discount, end of period
              $ 28.2          $ 167.5   
 
(1)
  Amounts include transfers of non-accretable to accretable discounts, which were not material for the quarters ended March 31, 2012 and 2011.

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:

n
  Borrower is in default

n
  Borrower has declared bankruptcy

n
  Growing doubt about the borrower’s ability to continue as a going concern

n
  Borrower has insufficient cash flow to service debt

n
  Borrower is de-listing securities

n
  Borrower’s inability to obtain funds from other sources

n
  Breach of financial covenants by the borrower

If the borrower is determined to be in financial difficulty, then CIT utilizes the following criteria to determine whether a concession has been granted to the borrower:

n
  Assets used to satisfy debt are less than CIT’s recorded investment in the receivable

n
  Modification of terms – interest rate changed to below market rate

n
  Maturity date extension at an interest rate less than market rate

n
  The borrower does not otherwise have access to funding for debt with similar risk characteristics in the market at the restructured rate and terms

n
  Capitalization of interest

n
  Increase in interest reserves

n
  Conversion of credit to Payment-In-Kind (PIK)

n
  Delaying principal and/or interest for a period of three months or more

n
  Partial forgiveness of the balance

Modified loans that are classified as TDRs are individually evaluated and measured for impairment. 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.

The recorded investment of TDRs at March 31, 2012 and December 31, 2011 was $313.7 million and $445.2 million, of which 57% and 63%, respectively, were on non-accrual. Corporate Finance receivables accounted for 85% and 88% of the total TDRs at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 and December 31, 2011, there were $10.7 million and $27.8 million, respectively, of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs.

14   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables that follow present additional information related to modifications qualifying as TDRs that occurred during the quarters ended March 31, 2012 and 2011.


Recorded investment of TDRs that occurred during the quarters ended March 31, 2012 and 2011
(dollars in millions)

        Quarter Ended
March 31,
2012
    Quarter Ended
March 31,
2011
Commercial
                                     
Corporate Finance
              $           $ 11.7   
Corporate Finance – SBL
                 5.9             6.1   
Trade Finance
                              25.6   
Vendor Finance – U.S.
                 2.7             1.4   
Vendor Finance – International
                 1.4             2.0   
Total
              $ 10.0          $ 46.8   
 


Recorded investment of TDRs that experience a payment default
(1) at the time of default, in the period presented, and for which the payment default occurred within one year of the modification (dollars in millions)

        Quarter Ended
March 31,
2012
    Quarter Ended
March 31,
2011
Commercial
                                     
Corporate Finance – SBL
              $ 3.6          $ 0.6   
Vendor Finance – International
                 0.4                
Total
              $ 4.0          $ 0.6   
 
(1)
  Payment default in the table above is one missed payment.

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 current quarter amounts, the overall nature and impact of modification programs were comparable in the current and prior years.

n
  The nature of modifications qualifying as TDR’s, based upon investment at March 31, 2012, was payment deferral – 91%, covenant relief and/or other – 7%, interest rate reductions and debt forgiveness – 2%;

n
  Debt forgiveness, or the reduction in amount owed by borrower, results in incremental provision for credit losses, in the form of higher charge-offs. While these types of modifications have the greatest individual impact on the allowance, the combined financial impact for the quarter ended March 31, 2012 for TDR’s occurring during the quarter and outstanding as of March 31, 2012 approximated $1.2 million, as debt forgiveness is a relatively small component of the Company’s modification programs;

n
  Payment deferrals, the most common type of the Company’s modification programs, result in lower net present value of cash flows and increased provision for credit losses to the extent applicable. The financial impact of these modifications is not significant given the reduction to recorded investment balances from FSA discount and the moderate length of deferral periods. Interest rate reductions result in incremental reduction in interest revenue charged to the customer, but are a relatively small part of the Company’s restructuring programs. In the 2012 first quarter, there were no interest reductions granted. 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 2012 first quarter was immaterial; and

n
  The other elements of the Company’s modification programs 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 1:  Consolidated Financial Statements  15




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — ALLOWANCE FOR LOAN LOSSES

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


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

        March 31, 2012
   
        Corporate
Finance
    Transportation
Finance
    Trade
Finance
    Vendor
Finance
    Total
Commercial
    Consumer
    Total
Beginning balance
              $ 262.2          $ 29.3          $ 29.0          $ 87.3          $ 407.8          $           $ 407.8   
Provision for credit losses
                 22.7             7.6             3.8             8.2             42.3             0.3             42.6   
Other(1)
                 (7.9 )            0.2             (1.7 )            1.0             (8.4 )                         (8.4 )  
Gross charge-offs(2)
                 (18.0 )            (7.9 )            (1.5 )            (16.2 )            (43.6 )            (0.6 )            (44.2 )  
Recoveries
                 11.3                          0.4             10.2             21.9             0.3             22.2   
Allowance balance – end of period
              $ 270.3          $ 29.2          $ 30.0          $ 90.5          $ 420.0          $           $ 420.0   
Individually evaluated for impairment
              $ 35.9          $ 2.9          $ 3.6          $           $ 42.4          $           $ 42.4   
Collectively evaluated for impairment
                 231.5             26.3             26.4             88.9             373.1                          373.1   
Loans acquired with deteriorated credit quality(3)
                 2.9                                       1.6             4.5                          4.5   
Allowance balance – end of period
              $ 270.3          $ 29.2          $ 30.0          $ 90.5          $ 420.0          $           $ 420.0   
Other reserves(1)
              $ 16.8          $ 1.2          $ 7.7          $           $ 25.7          $           $ 25.7   
Finance receivables:
                                                                                                                      
Individually evaluated for impairment
              $ 339.0          $ 26.0          $ 43.7          $ 19.9          $ 428.6          $           $ 428.6   
Collectively evaluated for impairment
                 6,831.5             1,677.4             2,344.5             4,446.4             15,299.8             4,587.7             19,887.5   
Loans acquired with deteriorated credit quality(3)
                 153.5                                       19.8             173.3             1.2             174.5   
Ending balance
              $ 7,324.0          $ 1,703.4          $ 2,388.2          $ 4,486.1          $ 15,901.7          $ 4,588.9          $ 20,490.6   
Percent of loans to total loans
                 35.7 %            8.3 %            11.7 %            21.9 %            77.6 %            22.4 %            100.0 %  
 
 
           
March 31, 2011
Beginning balance
              $ 304.0          $ 23.7          $ 29.9          $ 58.6          $ 416.2          $           $ 416.2   
Provision for credit losses
                 64.5             1.8             3.3             51.9             121.5             0.9             122.4   
Other(1)
                 2.1             (0.1 )            0.7             0.8             3.5                          3.5   
Gross charge-offs(2)
                 (123.4 )            (0.7 )            (6.2 )            (27.9 )            (158.2 )            (1.2 )            (159.4 )  
Recoveries
                 7.3                          1.9             10.3             19.5             0.3             19.8   
Allowance balance – end of period
              $ 254.5          $ 24.7          $ 29.6          $ 93.7          $ 402.5          $           $ 402.5   
Individually evaluated for impairment
              $ 56.9          $ 11.7          $ 4.8          $           $ 73.4          $           $ 73.4   
Collectively evaluated for impairment
                 176.1             13.0             24.8             91.7             305.6                          305.6   
Loans acquired with deteriorated credit quality(3)
                 21.5                                       2.0             23.5                          23.5   
Allowance balance – end of period
              $ 254.5          $ 24.7          $ 29.6          $ 93.7          $ 402.5          $           $ 402.5   
Other reserves(1)
              $ 8.2          $ 0.9          $ 3.7          $           $ 12.8          $           $ 12.8   
Finance receivables:
                                                                                                                
Individually evaluated for impairment
              $ 436.4          $ 62.0          $ 103.5          $ 33.2          $ 635.1          $           $ 635.1   
Collectively evaluated for impairment
                 6,496.6             1,222.1             2,509.9             4,475.8             14,704.4             7,897.4             22,601.8   
Loans acquired with deteriorated credit quality(3)
                 513.0             0.1                          42.9             556.0             1.5             557.5   
Ending balance
              $ 7,446.0          $ 1,284.2          $ 2,613.4          $ 4,551.9          $ 15,895.5          $ 7,898.9          $ 23,794.4   
Percent of loans to total loans
                 31.3 %            5.4 %            11.0 %            19.1 %            66.8 %            33.2 %            100.0 %  
 
(1)
  “Other reserves” represents additional credit loss reserves for unfunded lending commitments, letters of credit and for deferred purchase agreements, all of which is recorded in Other Liabilities. “Other” also includes changes relating to sales and foreign currency translations,

(2)
  Gross charge-offs included $11.3 million that were charged directly to the Allowance for loan losses for the quarter ended March 31, 2012. Corporate Finance totaled $6.1 million, Transportation Finance $5.0 million and remainder was from Trade Finance. Gross charge-offs included $75 million that were charged directly to the Allowance for loan losses for the quarter ended March 31, 2011. Corporate Finance totaled $70 million, with the remainder related to Trade Finance.

3)
  Represents loans considered impaired in FSA and are accounted for under the guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality).

16   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES

The Company invests primarily in U.S. Treasury securities, U.S. Government Agency securities and Canadian Government securities. These investments typically mature in 91 days or less, and the carrying value approximates fair value.

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


Investment Securities
(dollars in millions)

        March 31,
2012
    December 31,
2011
Debt securities available-for-sale
              $ 1,000.0          $ 937.2   
Equity securities available-for-sale
                 16.9             16.9   
Debt securities held-to-maturity(1)
                 233.0             211.3   
Non-marketable equity securities carried at cost(2)
                 84.3             85.2   
Total investment securities
              $ 1,334.2          $ 1,250.6   
 
(1)
  Recorded at amortized cost less impairment on securities that have credit-related impairment.

(2)
  Non-marketable equity securities are carried at cost less impairment and primarily consist of shares issued by customers during loan work out situations or as part of an original loan investment.

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

The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. Any credit-related impairment on debt securities that the Company does not plan to sell and is not likely to be required to sell is recognized in the Consolidated Statement of Operations, with the non-credit-related impairment recognized in other comprehensive income (“OCI”). For other impaired debt securities, the entire impairment is recognized in the Consolidated Statement of Operations.

The following table presents interest and dividends on investments:


Interest and Dividend Income
(dollars in millions)

        Quarters Ended
March 31,
   
        2012
    2011
Interest
              $ 7.4          $ 8.4   
Dividends
                 0.4                
Total interest and dividends
              $ 7.8          $ 8.4   
 

Gross realized investment gains totaled $19.1 million and $23.0 million for the quarters ended March 31, 2012 and 2011, respectively, and exclude losses from other-than-temporary impairments (“OTTI”). OTTI credit-related impairments on equity securities recognized in earnings were not material for the quarter ended March 31, 2012 and totaled $ 6.1 million for the prior-year quarter. Impairment amounts in accumulated other comprehensive income (“AOCI”) were not material at March 31, 2012 and December 31, 2011.

Securities Available-for-Sale

The following table presents amortized cost and fair value of securities available-for-sale (“AFS”) at March 31, 2012 and December 31, 2011.


Securities Available-for-Sale — Amortized Cost and Fair Value
(dollars in millions)

        Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
March 31, 2012
                                                                   
Debt securities AFS
                                                                   
U.S. Treasuries
              $ 1,000.0          $           $   –           $ 1,000.0   
Total debt securities available for sale
                 1,000.0                                       1,000.0   
Equity securities AFS
                 15.5             1.4                          16.9   
Total securities AFS
              $ 1,015.5          $ 1.4          $           $ 1,016.9   
December 31, 2011
                                                                   
Debt securities AFS
                                                                   
U.S. Treasuries
              $ 166.7          $           $           $ 166.7   
U.S. Government Agency Obligations
                 672.7                                       672.7   
Canadian Government Treasuries
                 97.8                                       97.8   
Total debt securities available for sale
                 937.2                                       937.2   
Equity securities AFS
                 15.5             1.4                          16.9   
Total securities AFS
              $ 952.7          $ 1.4          $           $ 954.1   
 

Item 1:  Consolidated Financial Statements  17




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Securities Held-to-Maturity

The carrying value and fair value of securities held-to-maturity (“HTM”) at March 31, 2012 and December 31, 2011 were as follows:


Securities Held-to-Maturity — Carrying Value and Fair Value
(dollars in millions)

        Carrying
Value
    Gross
Unrecognized
Gains
    Gross
Unrecognized
Losses
    Fair
Value
March 31, 2012
                                                                   
U.S. Treasury and federal agency securities
                                                                      
U.S. Government Agency Obligations
              $ 89.1          $           $ (0.6 )         $ 88.5   
Mortgage-backed securities
                                                                      
U.S. government-sponsored agency guaranteed
                 49.3             3.1                          52.4   
State and municipal
                 0.3                                       0.3   
Foreign government
                 19.4                                       19.4   
Guaranteed Investment Contract(1)
                 24.8                                       24.8   
Corporate – Foreign
                 50.1                                       50.1   
Total debt securities held-to-maturity
              $ 233.0          $ 3.1          $ (0.6 )         $ 235.5   
December 31, 2011
                                                                   
U.S. Treasury and federal agency securities
                                                                      
U.S. Government Agency Obligations
              $ 92.5          $           $ (1.1 )         $ 91.4   
Mortgage-backed securities
                                                                      
U.S. government-sponsored agency guaranteed
                 49.8             3.2                          53.0   
State and municipal
                 0.4                                       0.4   
Foreign government
                 19.6                                       19.6   
Corporate – Foreign
                 49.0                                       49.0   
Total debt securities held-to-maturity
              $ 211.3          $ 3.2          $ (1.1 )         $ 213.4   
 
(1)
  These balances represent amounts held in restricted securitization accounts that are invested by the trustee in highly rated guaranteed investment contracts.

18   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Securities Held-to-Maturity — Carrying Value and Fair Value Maturities
(dollars in millions)

        March 31, 2012
    December 31, 2011
   
        Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
Mortgage-backed securities(1)
                                                                   
After 10 years(2)
              $ 49.3          $ 52.4          $ 49.8          $ 53.0   
Total
                 49.3             52.4             49.8             53.0   
U.S. Treasury and federal agencies
                                                                   
Due within 1 year
                 89.1             88.5             92.5             91.4   
Total
                 89.1             88.5             92.5             91.4   
State and municipal
                                                                   
After 1 but within 5 years
                 0.2             0.2             0.3             0.3   
After 5 but within 10 years
                 0.1             0.1             0.1             0.1   
Total
                 0.3             0.3             0.4             0.4   
Foreign government
                                                                   
Due within 1 year
                 16.5             16.5             16.8             16.8   
After 1 but within 5 years
                 2.9             2.9             2.8             2.8   
Total
                 19.4             19.4             19.6             19.6   
Guaranteed Investment Contracts
                                                                   
After 10 years(2)
                 24.8             24.8                             
Total
                 24.8             24.8                             
Corporate – Foreign
                                                                       
After 5 but within 10 years
                 50.1             50.1             49.0             49.0   
Total
                 50.1             50.1             49.0             49.0   
Total debt securities HTM
              $ 233.0          $ 235.5          $ 211.3          $ 213.4   
 
(1)
  Includes mortgage-backed securities of U.S. federal agencies.

(2)
  Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment rights.

Item 1:  Consolidated Financial Statements  19




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LONG-TERM BORROWINGS

The following table presents outstanding long-term borrowings, net of FSA. The fair value adjustment is amortized as a cost adjustment over the remaining term of the respective debt and is reflected in Interest Expense.


Long-term Borrowings
(dollars in millions)

        March 31, 2012
    December 31, 2011
   
        CIT Group Inc.
    Subsidiaries
    Total
    Total
Unsecured(1)
                                                                   
Revolving credit facility
              $           $           $           $    
Series C Notes – 7% (exchanged)
                 7,994.1                          7,994.1                
Series C Notes (other)
                 5,250.0                          5,250.0                
Senior unsecured
                 1,500.0                          1,500.0                
Other debt
                 84.1             3.2             87.3                
Total Unsecured Debt
                 14,828.2             3.2             14,831.4                
Secured
                                                                   
Secured borrowings
              $           $ 10,269.7          $ 10,269.7          $ 10,408.0   
Revolving credit facility
                                                           
Series A Notes – 7%
                                                        5,834.8   
Series C Notes – 7% (exchanged)
                                                        7,959.2   
Series C Notes (other)
                                                        2,000.0   
Other debt
                                                        86.1   
Total Secured Debt
                              10,269.7             10,269.7             26,288.1   
Total Long-term Borrowings
              $ 14,828.2          $ 10,272.9          $ 25,101.1          $ 26,288.1   
 
(1)
  The previously secured Revolving Credit Facility, Series C Notes and Other Debt became unsecured upon full redemption of Series A Notes on March 9, 2012.

Unsecured

Revolving Credit Facility

On August 25, 2011, CIT and certain of its subsidiaries entered into a Revolving Credit and Guaranty Agreement, 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, collateral agent and letter of credit issuer (the “Revolving Credit Facility”). The total commitment amount under the Revolving Credit Facility is $2 billion consisting of a $1.65 billion revolving loan tranche and a $350 million revolving loan tranche that can also be utilized for issuance of letters of credit. The Revolving Credit Facility matures on August 14, 2015 and will accrue interest at a per annum rate of LIBOR plus a margin of 2.00% to 2.75% (with no floor) or Base Rate plus a margin of 1.00% to 1.75% (with no floor). The applicable margin will be determined by reference to the long-term senior unsecured, non-credit enhanced debt rating of the Company by S&P and Moody’s effective at relevant times during the life of the Revolving Credit Facility. Due to the Company’s credit rating upgrade, the applicable margin for LIBOR loans is now 2.50% and the applicable margin for Base Rate loans is now 1.50% at March 31, 2012.

The Revolving Credit Facility may be prepaid and re-borrowed from time to time at the option of CIT. The amount available to draw upon at March 31, 2012 was approximately $1.9 billion, with the remaining portion reflecting letter of credit usage. Also, the unutilized portion of any commitment under the Revolving Credit Facility may be reduced permanently or terminated by CIT at any time without penalty.

Once the Company extinguished the Series A Second-Priority Secured Notes (“Series A Notes”) during the 2012 first quarter, all the collateral and subsidiary guarantees under the Revolving Credit Facility were released, except for subsidiary guarantees from eight of the Company’s domestic operating subsidiaries (“Continuing Guarantors”). Once the Revolving Credit Facility became unsecured, the collateral coverage covenant was replaced by an asset coverage covenant (based on the book value of eligible assets of the Continuing Guarantors) of 2.0x the committed facility size plus unsubordinated debt of the Continuing Guarantors, tested monthly and upon certain dispositions or encumbrances of eligible assets of the Continuing Guarantors.

The Revolving Credit Facility is also subject to a $6 billion minimum consolidated net worth covenant, tested quarterly, and 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.

20   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Series C Notes

Series C Notes 4.75% & 5.50% – In February 2012, the Company issued $3.25 billion aggregate principal amount of Series C Notes, consisting of $1.5 billion principal amount due 2015 (the “2015 Notes”) and $1.75 billion principal amount due 2019 (the “2019 Notes,” together with the 2015 Notes, the “Notes”). The 2015 Notes priced at par and bear interest at a rate of 4.75% and the 2019 Notes priced at par and bear interest at a rate of 5.50%. The proceeds of the transaction were used, in conjunction with available cash, to redeem the remaining Series A Notes in March 2012.

Series C Notes 5.25% & 6.625% – In March 2011, the Company issued $2 billion of new Series C Notes, consisting of $1.3 billion of three-year 5.25% fixed rate notes and $700 million of seven-year 6.625% fixed rate notes. The proceeds of the transaction were used in May 2011, in conjunction with available cash, to redeem $2.5 billion of 7% Series A Notes.

Series C Notes 7% (Exchanged) – In June 2011, the Company successfully completed an Exchange Offer and Consent Solicitation for outstanding 7% Series A Notes maturing in 2015, 2016 and 2017. At the Offer Expiration, tenders with consents or separate consents were received from holders of approximately $10.9 billion in aggregate principal amount of Series A Notes, made up of $8.76 billion (pre-FSA) of Series A Notes tendered and accepted for exchange, and $2.17 billion of Series A Notes separately consented, including a majority of each maturity of these Series A Notes. As a result, $8.76 billion principal amount of Series C Notes (pre-FSA) with the same interest rate and interest payment dates, but maturing one business day later than the Series A Notes for which they were exchanged, were issued in exchange for the Series A Notes tendered and accepted.

Consents were solicited to replace the covenants and events of default in the 2015 – 2017 Series A Notes Indentures with the same covenants and events of default as those in the Indenture that govern the existing 5.250% Series C Notes due 2014 and 6.625% Series C Notes due 2018. The covenants in the Series C Notes are more consistent with covenants of investment-grade rated bonds. Approximately $27 million of consent fees were paid to Series A Note holders that delivered consents and were capitalized and will be amortized as an adjustment of interest expense over the life of the Series C Notes issued in exchange.

Once the Company’s remaining Series A Notes were redeemed during the 2012 first quarter, all the collateral and subsidiary guarantees under the Series C Notes were released.

The Series C Notes Indentures limit the Company’s ability to create liens, merge or consolidate, or sell, transfer, lease or dispose of all or substantially all of its assets. Upon a Change of Control Triggering Event as defined in the Series C Indentures, holders of the Series C Notes will have the right to require the Company, as applicable, to repurchase all or a portion of the Series C Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of such repurchase.

See Note 15 – Subsequent Events regarding details on 2012 second quarter Series C Notes redemptions.

Senior Unsecured

In March 2012, CIT filed a “shelf” registration statement and issued at par $1.5 billion of senior unsecured notes that mature in 2018 and bear interest at a rate of 5.25%. These rank equal in right of payment with the Series C Notes and the Revolving Credit Facility.

Secured

Series A Notes

On December 10, 2009, pursuant to the Plan of Reorganization the Company issued $21.04 billion principal amount of its 7.0% Series A Second-Priority Secured Notes with maturities each year from 2013 to 2017 (the “Series A Notes”).

During 2012, CIT redeemed the remaining $6.5 billion of Series A Notes, which resulted in the acceleration of $597 million of FSA discount accretion that was recorded as additional interest expense and a loss of $23 million reflecting a portion of the underwriting fees on the issuance of $3.25 billion of Series C Notes in February 2012.

Secured Borrowings

Set forth below are borrowings and pledged assets primarily owned by consolidated variable interest entities. Creditors of these entities received ownership and/or security interests in the assets. These entities are intended to be bankruptcy remote so that such assets are not available to creditors of CIT or any affiliates of CIT. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings. Except as otherwise noted, pledged assets listed in the following table as of December 31, 2011 were not included in the collateral available to lenders under the Revolving Credit Facility or the Series A or C Notes described above. As of March 31, 2012, the Revolving Credit Facility and Series C Notes were unsecured and all the Series A Notes had been paid off in full.

Item 1:  Consolidated Financial Statements  21




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Secured Borrowings and Pledged Assets Summary
(dollars in millions)

        March 31, 2012
    December 31, 2011
   
        Secured
Borrowing
    Assets
Pledged
    Secured
Borrowing
    Assets
Pledged
Education trusts and conduits (student loans)
              $ 3,415.1          $ 3,411.2          $ 3,445.9          $ 3,690.3   
GSI Facilities borrowings(1)
                 1,205.2             1,798.4             1,257.7             2,015.7   
Trade Finance
                 487.7             1,550.8             483.1             1,332.7   
Corporate Finance (SBL)
                 240.5             260.3             250.4             272.3   
Other equipment secured facilities(2)
                 1,895.3             2,225.5             1,821.2             2,137.5   
Subtotal – Loans
                 7,243.8             9,246.2             7,258.3             9,448.5   
Transportation Finance – Aircraft(3)
                 1,690.9             2,039.4             1,728.9             2,057.9   
Transportation Finance – Rail
                 143.5             139.3             144.5             140.1   
GSI Facilities borrowings (Aircraft and Rail)(1)
                 1,118.5             1,954.0             1,151.4             1,968.8   
Other structures
                 73.0             98.1             74.2             98.9   
Subtotal – Equipment under operating leases
                 3,025.9             4,230.8             3,099.0             4,265.7   
FHLB borrowings (Consumer)(4)
                                           50.7             92.5   
Total
              $ 10,269.7          $ 13,477.0          $ 10,408.0          $ 13,806.7   
 
(1)
  At March 31, 2012 GSI Facilities borrowings were secured by $1.17 billion of student loans, $525.3 million of corporate loans, $98.1 million of small business lending loans, of which $9 million were classified as Assets Held for Sale, and $1.08 billion and $869.8 million of aircraft and railcar assets, respectively, on operating leases. The GSI Facilities are described in Note 6 – Derivative Financial Instruments.

(2)
  Includes facilities secured by equipment primarily in Vendor Finance and Corporate Finance and the associated secured debt.

(3)
  Secured financing facilities for the purchase of aircraft.

(4)
  Collateralized with Government Debentures and Certificates of Deposit.

Variable Interest Entities (“VIEs”)

The Company utilizes VIEs in the ordinary course of business to support its own and its customers’ financing needs.

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

The main risks inherent in these secured borrowing structures are deterioration in the credit performance of the vehicle’s underlying asset portfolio and risk associated with the servicing of the underlying assets.

Investors usually have recourse to the assets in the VIEs and typically benefit from other credit enhancements, such as: (1) a reserve or cash collateral account which requires the Company to deposit cash in an account, which will first be used to cover any defaulted obligor payments, (2) over-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 yield or currency of the underlying assets to match the needs of the VIE investors or to limit or change the risk of the VIE.

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

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

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

As part of managing economic risk and exposure to interest rate, foreign currency and, in limited instances, credit risk, CIT enters into derivative transactions in over-the-counter markets with other financial institutions. CIT does not enter into derivative financial instruments for speculative purposes. Derivative instruments transacted are generally collateralized with cash or highly liquid securities such as U.S. treasuries and agencies.

22   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company continuously assesses its hedge requirements and establishes counterparty relationships to facilitate hedging. During 2012 and 2011, the Company’s portfolio was in an asset sensitive position, whereby assets re-price faster than liabilities, and interest margin increases in a rising interest rate environment. The Company’s hedging strategies relate primarily to currency risk management of foreign operations. The Company utilizes cross-currency swaps and foreign currency forward contracts to effectively convert U.S. dollar denominated debt to a foreign currency. These transactions are classified as either foreign currency net investment hedges, or foreign currency cash flow hedges, with resulting gains and losses reflected in AOCI, a separate component of equity. For hedges of foreign currency net investment positions the “forward” method is applied whereby effectiveness is assessed and measured based on the amounts and currencies of the individual hedged net investments versus the notional amounts and underlying currencies of the derivative contract. For those hedging relationships where the critical terms of the entire debt instrument and the derivative are identical and the credit-worthiness of the counterparty to the hedging instrument remains sound, there is an expectation of no hedge ineffectiveness so long as those conditions continue to be met. The net interest differential is recognized on an accrual basis as an adjustment to other income or as interest expense to correspond with the hedged position.

See Note 1 — Business and Summary of Significant Accounting Policies in our December 31, 2011 Form 10-K for further description of the Company’s derivative transaction policies.

The following table presents fair values and notional values of derivative financial instruments:


Fair and Notional Values of Derivative Financial Instruments
(dollars in millions)

        March 31, 2012
    December 31, 2011
   
Qualifying Hedges
        Notional
Amount
    Asset Fair
Value
    Liability
Fair Value
    Notional
Amount
    Asset Fair
Value
    Liability
Fair Value
Cross currency swaps
              $ 416.2          $           $ (12.5 )         $ 406.2          $ 1.0          $ (3.3 )  
Foreign currency forward exchange – cash flow hedges
                 146.2             3.6             (0.9 )            146.7             6.9             (0.2 )  
Foreign currency forward exchange – net investment hedges
                 1,496.2             9.2             (24.4 )            1,387.0             31.0             (11.4 )  
Total Qualifying Hedges
              $ 2,058.6          $ 12.8          $ (37.8 )         $ 1,939.9          $ 38.9          $ (14.9 )  
Non-Qualifying Hedges(1)
                                                                                                 
Cross currency swaps
              $ 603.1          $ 0.7          $ (9.3 )         $ 668.5          $ 6.1          $ (4.5 )  
Interest rate swaps
                 818.9             0.8             (47.9 )            848.4             0.9             (50.7 )  
Written options(2)
                 132.7                          (0.1 )            114.1                          (0.1 )  
Purchased options(2)
                 984.6             0.9                          913.3             1.1                
Foreign currency forward exchange contracts
                 2,062.7             18.3             (34.7 )            2,662.9             34.4             (19.6 )  
TRS(3)
                 153.6                                       70.1                             
Equity Warrants
                 1.0             0.3                          1.0             0.4                
Total Non-qualifying Hedges
              $ 4,756.6          $ 21.0          $ (92.0 )         $ 5,278.3          $ 42.9          $ (74.9 )  
 
(1)
  A $5.3 million credit valuation adjustment relating to non-qualifying interest rate swaps and options is included in Other Assets.

(2)
  Non-qualifying hedges notional amount includes $18.8 million forward starting written option and purchased option, both of which become effective on June 8, 2012.

(3)
  Two financing facilities with Goldman Sachs International (GSI) are structured as total return swaps (TRS), under which amounts available for advances are accounted for as derivatives. Pursuant to applicable accounting guidance, only the unutilized portion of the TRS is accounted for as a derivative and recorded at its estimated fair value.

  On October 26, 2011, CIT Group Inc. (“CIT”) amended its existing $2.125 billion total return swap facility between CIT Financial Ltd. (“CFL”) and Goldman Sachs International (“GSI”) in order to provide greater flexibility for certain assets to be funded under the facility. The size of the existing CFL facility was reduced to $1.5 billion, and the $625 million formerly available under the existing CFL facility was transferred to a new total return swap facility between GSI and CIT TRS Funding B.V. (“BV”), a wholly-owned subsidiary of CIT.

  The aggregate “notional amounts” of the total return swaps of $153.6 million at March 31, 2012 and $70.1 million at December 31, 2011 represent the aggregate unused portions under the CFL and BV facilities and constitute derivative financial instruments. These notional amounts are calculated as the maximum aggregate facility commitment amounts, currently $2,125.0 million, less the aggregate actual adjusted qualifying borrowing base outstanding of $1,971 million at March 31, 2012 and $2,055 million at December 31, 2011 under the CFL and BV Facilities. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying asset-backed securities (ABS) to investors. If CIT funds additional ABS under the CFL or BV Facilities, the aggregate adjusted qualifying borrowing base of the total return swaps will increase and the notional amount of the derivatives will decrease accordingly.

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

n  
  CIT’s funding costs for similar recent financings;

n  
  Forecasted usage of the long-dated CFL and BV facilities through the final maturity date in 2028; and

n  
  Forecasted amortization, including prepayment assumptions, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion.

Item 1:  Consolidated Financial Statements  23




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Derivative Instrument Gains and Losses
(dollars in millions)

            Quarters Ended
March 31,
   
Derivative Instruments
        Gain / (Loss)
Recognized
    2012
    2011
Non Qualifying Hedges
           
 
                             
Cross currency swaps
           
Other income
      $ (11.3 )         $ (41.0 )  
Interest rate swaps
           
Other income
         2.4             5.9   
Foreign currency forward exchange contracts
           
Other income
         (16.0 )            (53.4 )  
Equity warrants
           
Other income
         (0.1 )            1.4   
Total derivatives – income statement impact
           
 
      $ (25.0 )         $ (87.1 )  
 

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
recorded in OCI
    Total change in
OCI for period
Quarter ended March 31, 2012
                                     
Cross currency swaps – net investment hedges
              $ (0.5 )         $ (0.5 )  
FX forward exchange – cash flow hedges
                 0.5             0.5   
FX forward exchange – net investment hedges
                 (4.6 )            (4.6 )  
Total
              $ (4.6 )         $ (4.6 )  
Quarter ended March 31, 2011
                                      
Cross currency swaps – net investment hedges
              $ 1.5          $ 1.5   
FX forward exchange – cash flow hedges
                 1.4             1.4   
FX forward exchange – net investment hedges
                 2.2             2.2   
Total
              $ 5.1          $ 5.1   
 

There was no effective portion of derivatives reclassified from AOCI to income or any hedge ineffectiveness recorded directly in income during the quarters ended March 31, 2012 and 2011.

24   CIT GROUP INC




CIT GROUP INC. AND SUBSIDIARIES – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 — FAIR VALUE

Fair Value Hierarchy

The Company is required to report fair value measurements for specified classes of assets and liabilities. See Note 1 — “Business and Summary of Significant Accounting Policies” 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:

 


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

March 31, 2012
        Total
    Level 1
    Level 2
    Level 3
Assets
                                                                   
Debt Securities available for sale
              $ 1,000.0          $           $ 1,000.0          $    –    
Equity Securities available for sale
                 16.9             14.1             2.8                
Trading assets at fair value – derivatives
                 21.0                          21.0                
Derivative counterparty assets at fair value
                 12.8                          12.8                
Total Assets
              $ 1,050.7          $ 14.1          $ 1,036.6          $    
Liabilities