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Section 1: 10-Q (10-Q)

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Table of Contents



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
|  |    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
 

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, a smaller reporting company or an emerging growth company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’, ‘smaller reporting company’ and ‘emerging growth company’ in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| (Do not check if a smaller reporting company) Smaller reporting company |_| Emerging growth company |_|

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  |_|

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 |_| No |_|

As of April 30, 2018, there were 127,065,926 shares of the registrant’s common stock outstanding.




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Table of Contents



CONTENTS

Item 1.
 
 
 
 
 
 
Item 2.
 
and
 
Item 3.
Item 4.

Item 1.

Item 1A.
Item 2.
Item 4.
Item 6.

Table of Contents 1

Table of Contents



Part One — Financial Information
Item 1. Condensed Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in millions — except share data)
 
 
 
 

March 31, 2018
 
December 31, 2017
Assets
 

 
 

Cash and due from banks, including restricted balances of $34.7 and $42.9 at March 31, 2018 and December 31, 2017(1), respectively (see Note 6 for amounts pledged)
$
200.9

 
$
278.6

Interest bearing deposits, including restricted balances of $82.3 and $81.8 at March 31, 2018 and December 31, 2017(1), respectively (see Note 6 for amounts pledged)
3,895.4

 
1,440.1

Securities purchased under agreement to resell
250.0

 
150.0

Investment securities, including securities carried at fair value with changes recorded in net income of $44.1 at March 31, 2018 and $0.4 at December 31, 2017 (see Note 6 for amounts pledged)
5,910.5

 
6,469.9

Assets held for sale(1)
2,298.8

 
2,263.1

Loans (see Note 6 for amounts pledged)
29,453.6

 
29,113.9

Allowance for loan losses
(447.6
)
 
(431.1
)
Total loans, net of allowance for loan losses(1)
29,006.0

 
28,682.8

Operating lease equipment, net (see Note 6 for amounts pledged)(1)
6,774.9

 
6,738.9

Bank-owned life insurance
795.1

 
788.6

Goodwill
369.9

 
369.9

Other assets, including $118.7 and $68.7 at March 31, 2018 and December 31, 2017, respectively, at fair value
1,577.9

 
1,595.5

Assets of discontinued operations(1)
463.1

 
501.3

Total Assets
$
51,542.5

 
$
49,278.7

Liabilities
 

 
 

Deposits
$
30,593.9

 
$
29,569.3

Credit balances of factoring clients
1,549.0

 
1,468.6

Other liabilities, including $215.4 and $198.1 at March 31, 2018 and December 31, 2017, respectively, at fair value
1,338.9

 
1,437.1

Borrowings, including $1,875.0 and $1,626.3 contractually due within twelve months at March 31, 2018 and December 31, 2017, respectively
10,437.3

 
8,974.4

Liabilities of discontinued operations(1)
496.6

 
509.3

Total Liabilities
44,415.7

 
41,958.7

Stockholders’ Equity
 

 
   
 
 
 
 
Preferred Stock: $0.01 par value, 100,000,000 authorized, 325,000 shares issued and outstanding
325.0


325.0

Common Stock: $0.01 par value, 600,000,000 authorized
 
 
 
Issued: 208,830,397 and 207,628,491 at March 31, 2018 and December 31, 2017, respectively
2.1

 
2.1

Outstanding: 128,418,283 and 131,352,924 at March 31, 2018 and December 31, 2017, respectively
 

 
 

Paid-in capital
8,811.8

 
8,798.1

Retained earnings
1,982.7

 
1,906.5

Accumulated other comprehensive loss
(149.9
)
 
(86.5
)
Treasury stock: 80,412,114 and 76,275,567 shares at March 31, 2018 and December 31, 2017 at cost, respectively
(3,844.9
)
 
(3,625.2
)
Total Common Stockholders’ Equity
6,801.8

 
6,995.0

Total Equity
7,126.8

 
7,320.0

Total Liabilities and Equity
$
51,542.5

 
$
49,278.7

(1) 
The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The difference between VIE total assets and total liabilities represents the Company’s interests in those entities, which were eliminated in consolidation. The assets of the consolidated VIEs will be used to settle the liabilities of those entities and, except for the Company’s interest in the VIEs, are not available to the creditors of CIT or any affiliates of CIT.
Assets
 

 
 

Cash and interest bearing deposits, restricted
$
80.5

 
$
80.4

Total loans, net of allowance for loan losses
2.7

 
119.1

Operating lease equipment, net
771.8

 
763.3

Total Assets
$
855.0

 
$
962.8

Liabilities
 

 
 

Beneficial interests issued by consolidated VIEs (classified as long-term borrowings)
$
484.6

 
$
566.6

Total Liabilities
$
484.6

 
$
566.6

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

2 Item 1.  Consolidated Financial Statements

Table of Contents



CIT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)                                                  (dollars in millions — except per share data)
 
 
 
 
 
 

Quarters Ended March 31,
 

2018
 
2017
 
Interest income
 

 
 

 
Interest and fees on loans
$
400.9

 
$
412.1

 
Other interest and dividends
50.3

 
43.6

 
Interest income
451.2

 
455.7

 
Interest expense


 


 
Interest on borrowings
83.4

 
69.1

 
Interest on deposits
97.1

 
94.0

 
Interest expense
180.5

 
163.1

 
Net interest revenue
270.7

 
292.6

 
Provision for credit losses
68.8

 
49.7

 
Net interest revenue, after credit provision
201.9

 
242.9

 
Non-interest income


 


 
Rental income on operating leases
253.6

 
251.3

 
Other non-interest income
104.7

 
79.1

 
Total non-interest income
358.3

 
330.4

 
Total revenue, net of interest expense and credit provision
560.2

 
573.3

 
Non-interest expenses
 

 
 

 
Depreciation on operating lease equipment
76.4

 
73.5

 
Maintenance and other operating lease expenses
57.4

 
53.8

 
Operating expenses
281.3

 
311.6

 
Loss on debt extinguishment and deposit redemption
0.1

 

 
Total non-interest expenses
415.2

 
438.9

 
Income from continuing operations before benefit (provision) for income taxes
145.0

 
134.4

 
Provision for income taxes
41.3

 
56.2

 
Income from continuing operations
103.7

 
78.2

 
Discontinued Operations
 

 
 

 
Income (loss) from discontinued operations, net of taxes
(6.7
)
 
89.0

 
Gain on sale of discontinued operations, net of taxes

 
12.7

 
Total income (loss) from discontinued operations, net of taxes
(6.7
)
 
101.7

 
Net Income
$
97.0

 
$
179.9

 
Basic income per common share

 
 

 
Income from continuing operations
$
0.79

 
$
0.39

 
Income (loss) from discontinued operations
(0.05
)
 
0.50

 
Basic income per share
$
0.74

 
$
0.89

 
Diluted income per common share

 
 

 
Income from continuing operations
$
0.79

 
$
0.38

 
Income (loss) from discontinued operations
(0.05
)
 
0.50

 
Diluted income per share
$
0.74

 
$
0.88

 
Average number of common shares (thousands)

 
 

 
Basic
130,483

 
202,449

 
Diluted
131,588

 
203,348

 
Dividends declared per common share
$
0.16

 
$
0.15

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

CIT GROUP INC. 3

Table of Contents



CIT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)       (dollars in millions)
 
 
 
 
 
 
 
Quarters Ended March 31,
 
 
2018
 
2017
 
Net Income
$
97.0

 
$
179.9

 
Other comprehensive income (loss), net of tax:
   
 
   
 
Foreign currency translation adjustments
(2.4
)
 
12.8

 
Net unrealized gains (losses) on available for sale securities
(63.9
)
 
2.7

 
Changes in benefit plans net gain (loss) and prior service (cost)/credit
3.4

 
0.9

 
Other comprehensive income (loss), net of tax
(62.9
)
 
16.4

 
Comprehensive income
$
34.1

 
$
196.3

 

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

4 Item 1.  Consolidated Financial Statements

Table of Contents



CIT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Noncontrolling
Minority
Interests
 
Total
Equity
December 31, 2017
$
325.0

 
$
2.1

 
$
8,798.1

 
$
1,906.5

 
$
(86.5
)
 
$
(3,625.2
)
 
$

 
$
7,320.0

Adoption of Accounting Standard Updates 2016-01, 2016-16, and 2018-02

 

 

 
0.7

 
(0.5
)
 

 

 
0.2

Net income

 

 

 
97.0

 

 

 

 
97.0

Other comprehensive loss, net of tax

 

 

 

 
(62.9
)
 

 

 
(62.9
)
Dividends paid

 

 

 
(21.5
)
 

 

 

 
(21.5
)
Share repurchases

 

 

 

 

 
(194.9
)
 

 
(194.9
)
Amortization of restricted stock, stock option and performance shares expenses

 

 
13.0

 

 

 
(24.8
)
 

 
(11.8
)
Employee stock purchase plan

 

 
0.7

 

 

 

 

 
0.7

March 31, 2018
$
325.0

 
$
2.1

 
$
8,811.8

 
$
1,982.7

 
$
(149.9
)
 
$
(3,844.9
)
 
$

 
$
7,126.8

December 31, 2016
$

 
$
2.1

 
$
8,765.8

 
$
1,553.0

 
$
(140.1
)
 
$
(178.1
)
 
$
0.4

 
$
10,003.1

Adoption of Accounting Standard Update 2016-09

 

 
1.0

 
(1.0
)
 

 

 

 

Net income

 

 

 
179.9

 

 

 

 
179.9

Other comprehensive income, net of tax

 

 

 

 
16.4

 

 

 
16.4

Dividends paid

 

 

 
(30.8
)
 

 

 

 
(30.8
)
Amortization of restricted stock, stock option and performance shares expenses

 

 
15.0

 

 

 
(18.8
)
 

 
(3.8
)
Employee stock purchase plan

 

 
0.8

 

 

 

 

 
0.8

Other

 

 

 

 

 

 
(0.1
)
 
(0.1
)
March 31, 2017
$

 
$
2.1

 
$
8,782.6

 
$
1,701.1

 
$
(123.7
)
 
$
(196.9
)
 
$
0.3

 
$
10,165.5


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

CIT GROUP INC. 5

Table of Contents



CIT GROUP INC. AND SUBSIDIARIES
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (dollars in millions)




 
Quarters Ended March 31,
 
2018
 
2017
Cash Flows From Operations
 

 
 

Net income
$
97.0

 
$
179.9

Adjustments to reconcile net income to net cash flows from operations:
 
 
 
Provision for credit losses
68.8

 
49.7

Depreciation on operating lease equipment
76.4

 
73.5

Amortization of stock compensation expenses
13.0

 
15.0

Net gain on asset sales and impairments on assets held for sale
(20.9
)
 
(35.0
)
Loss on debt extinguishment and other deposit redemption
0.1

 
39.0

Provision for deferred income taxes
25.4

 
113.5

Decrease in finance receivables held for sale
7.6

 
53.8

(Increase) decrease in other assets
(33.4
)
 
21.2

Decrease in other liabilities
(112.7
)
 
(220.4
)
Other operating activities
5.8

 
15.5

Net cash flows provided by operations
127.1

 
305.7

Cash Flows From Investing Activities
 

 
 

Changes in loans, net
(412.7
)
 
28.0

Purchases of investment securities
(662.4
)
 
(1,806.2
)
Proceeds from sales and maturities of investment securities
1,067.0

 
1,827.9

Proceeds from asset and receivable sales
175.6

 
393.2

Purchases of assets to be leased and other equipment
(148.3
)
 
(399.5
)
Proceeds from sale of OREO, net of repurchases
19.9

 
28.9

Other investing activities
16.1

 
25.2

Net cash flows provided by investing activities
55.2

 
97.5

Cash Flows From Financing Activities
 

 
 

Proceeds from the issuance of term debt and FHLB advances
3,061.6

 
8.5

Repayments of term debt, FHLB advances, and net settlements
(1,636.6
)
 
(1,083.3
)
Net increase in deposits
1,023.3

 
35.0

Repurchase of common stock
(194.9
)
 

Dividends paid
(21.5
)
 
(30.8
)
Other financing activities
(35.0
)
 
6.5

Net cash flows provided by (used in) financing activities
2,196.9

 
(1,064.1
)
Effect of exchange rate changes on cash and cash equivalents
0.5

 
3.8

Increase (decrease) in cash, cash equivalents and restricted cash
2,379.7

 
(657.1
)
Cash, cash equivalents, and restricted cash beginning of period
1,726.4

 
7,195.4

Cash, cash equivalents, and restricted cash end of period
$
4,106.1

 
$
6,538.3

 
 
 
 
Supplementary Cash Flow Disclosures
 

 
 

Interest paid
$
(200.8
)
 
$
(315.3
)
Federal, foreign, state and local income taxes (paid) refunded, net
$
(3.2
)
 
$
0.2

Supplementary Non Cash Flow Disclosure
 
 
 
Transfer of assets from held for investment to held for sale
$
150.2

 
$
227.2

Transfer of assets from held for sale to held for investment
$
20.8

 
$
26.7

Deposits on flight equipment purchases applied to acquisition of flight equipment purchases, and origination of finance leases, capitalized interest, and buyer furnished equipment
$

 
$
91.2

Transfers of assets to OREO
$
9.6

 
$
38.9

Capital lease unexercised bargain purchase options
$

 
$
17.5

Commitments extended during the period on affordable housing investment credits
$
15.0

 
$



The following tables shows a reconciliation of cash, cash equivalents and restricted cash on the Balance Sheet to that presented in the above Statements of Cash Flow.
 
Quarters Ended March 31,
 
2018
 
2017
Cash and due from banks, including restricted balances of $34.7 and $126.8 at March 31, 2018 and March 31, 2017, respectively
$
200.9

 
$
741.7

Interest bearing deposits, including restricted balances of $82.3 and $102.8 at March 31, 2018 and March 31, 2017, respectively
3,895.4

 
5,415.2

Cash included in assets of discontinued operations
9.8

 
381.4

Total cash, cash equivalents, and restricted cash shown in the Statements of Cash Flows
$
4,106.1

 
$
6,538.3

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

6 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)


NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CIT Group Inc., together with its subsidiaries (collectively "we", "our", "CIT" or the "Company"), is a bank holding company ("BHC") and a financial holding company ("FHC"). CIT was formed in 1908 and provides financing, leasing and advisory services principally to middle-market companies in a wide variety of industries, primarily in North America. CIT also provides banking and related services to commercial and individual customers through its banking subsidiary, CIT Bank, N.A. ("CIT Bank" or the "Bank"), which includes 70 branches located in Southern California and its online bank, bankoncit.com.

CIT is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Federal Reserve Bank of New York ("FRBNY") under the U.S. Bank Holding Company Act of 1956, as amended. CIT Bank is regulated by the Office of the Comptroller of the Currency of the U.S. Department of the Treasury ("OCC").


BASIS OF PRESENTATION

Basis of Financial Information

These consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial information and accordingly do not include all information and note disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. The financial statements in this Form 10-Q, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement 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 Form 10-K for the year ended December 31, 2017.
The accounting and financial reporting policies of CIT conform to GAAP and the preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. Some of the more significant estimates include: allowance for loan losses, loan impairment, fair value determination, lease residual values, liabilities for uncertain tax positions, realizability of deferred tax assets, purchase accounting adjustments, indemnification assets, goodwill, intangible assets, and contingent liabilities, including amounts associated with the discontinued operation. Additionally where applicable, the policies conform to accounting and reporting guidelines prescribed by bank regulatory authorities.

Principles of Consolidation
The accompanying consolidated financial statements include financial information related to CIT and its majority-owned subsidiaries and those variable interest entities (“VIEs”) where the Company is the primary beneficiary.
In preparing the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements.
The current period’s results of operations do not necessarily indicate the results that may be expected for any other interim period or for the full year as a whole.

Discontinued Operations

Discontinued Operations as of March 31, 2018 and December 31, 2017 included certain assets and liabilities of (i) the Financial Freedom business that was acquired as part of the OneWest Transaction and (ii) the Business Air business. Income from discontinued operations reflects the activities of the Financial Freedom and Business Air businesses for the quarter ended March 31, 2018 and the Financial Freedom and the Aerospace (Commercial Air and Business Air) businesses for the quarter ended March 31, 2017. We completed the sale of our Commercial Air business in April 2017.
On October 6, 2017, CIT announced that CIT Bank, N.A. has agreed to sell Financial Freedom, its reverse mortgage servicing business and the reverse mortgage portfolio serviced by Financial Freedom (the “Financial Freedom Transaction”). The Financial Freedom Transaction is targeted to close in the second quarter of 2018 and is subject to certain regulatory and investor approvals and other customary closing conditions. See further discussions in Note 2 — Discontinued Operations.

SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 Form 10-K"). Effective January 1, 2018, CIT changed its accounting policy for revenue recognition resulting from the adoption of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers and subsequent related Accounting Standards Updates ("ASUs"). There were no other material changes to policies during the quarter ended March 31, 2018. Refer to Newly Adopted Accounting Standards for other ASUs adopted in Q1 2018.

Revenue Recognition

On January 1, 2018, CIT adopted ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (ASC 606) and subsequent related ASUs. ASU 2014-09 establishes the principles to apply in determining the amount and timing of revenue recognition. The core principle is that a company will recognize revenue when it transfers control of goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The guidance introduces a five step, principle-based model, requiring more judgment than under previous GAAP to determine when and how revenue is recognized. The standard defers to existing guidance where revenue recognition models are already in place.


CIT GROUP INC. 7

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

"Interest Income" and "Rental Income on Operating Leases", CIT's two largest revenue items, are out of scope of the new guidance, as are many other revenues relating to other financial assets and liabilities, including loans, leases, securities, and derivatives. As a result, the implementation of the new guidance was limited to certain revenue streams within Non-Interest Income, including some immaterial bank related fees and gains or losses related to the sale and disposition of leased equipment and Other Real Estate Owned ("OREO"), which is accounted for under ASC 610-20, Gains and Losses From the Derecognition of Nonfinancial Assets and requires the Company to apply certain recognition and measurement principles of ASC 606.
CIT evaluated its in-scope revenue streams under the five step model and concluded that ASU 2014-09 did not materially impact the current practice of revenue recognition as ASC 606 is consistent with the current accounting policy being applied by the Company for these revenues. Therefore, no change in the timing or amount of income recognized was identified. CIT also determined that costs incurred to obtain or fulfill contracts and financing components relating to in-scope revenue streams were immaterial to the Company.
Non-interest revenue, including amounts related to the sale and disposition of leased equipment and OREO, is recognized at an amount reflecting the consideration received, or expected to be received, when control of goods or services is transferred, which generally occurs when services are provided or control of leased equipment or OREO is liquidated.
ASU 2014-09 was adopted using the modified retrospective transition method. CIT elected to apply this guidance only to contracts that were not completed at the date of the initial application. The adoption did not have a significant impact on CIT’s financial statements or disclosures. No adjustment to the opening balance of retained earnings was necessary.
Interest income on held for investment ("HFI") loans is recognized using the effective interest method or on a basis approximating a level rate of return over the life of the asset. Interest income includes components of accretion of the fair value discount on loans and lease receivables recorded in connection with Purchase Accounting Adjustments (“PAA”), which are accreted using the effective interest method as a yield adjustment over the remaining contractual term of the loan and recorded in interest income. If the loan is subsequently classified as assets held for sale ("AHFS"), accretion (amortization) of the discount (premium) will cease.

Rental revenue on operating leases is recognized on a straight line basis over the lease term and is included in Non-interest Income. Intangible assets related to acquisitions completed by the Company and Fresh Start Accounting (“FSA”) adjustments that were applied as of December 31, 2009 (the Convenience Date), were recorded to adjust the carrying value of above or below market operating lease contracts to their fair value. The FSA related adjustments (net) are amortized into rental income on a straight line basis over the remaining term of the respective lease.

The recognition of interest income (including accretion) on commercial loans (exclusive of small ticket commercial loans) is suspended and an account is placed on non-accrual status when, in the opinion of management, full collection of all principal and interest due is doubtful. All future interest accruals, as well as amortization of deferred fees, costs, purchase premiums or discounts are suspended. To the extent the estimated cash flows, including fair value of collateral, does not satisfy both the principal and accrued interest outstanding, accrued but uncollected interest at the date an account is placed on non-accrual status is reversed and charged against interest income. Subsequent interest received is applied to the outstanding principal balance until such time as the account is collected, charged-off or returned to accrual status. Loans that are on cash basis nonaccrual do not accrue interest income; however, payments designated by the borrower as interest payments may be recorded as interest income. To qualify for this treatment, the remaining recorded investment in the loan must be deemed fully collectable.

The recognition of interest income (including accretion) on consumer mortgages and small ticket commercial loans and lease receivables is suspended and all previously accrued but uncollected revenue is reversed, when payment of principal and/or interest is contractually delinquent for 90 days or more. Accounts, including accounts that have been modified, are returned to accrual status when, in the opinion of management, collection of remaining principal and interest is reasonably assured, and there is a sustained period of repayment performance for a minimum of six months.

The recognition of interest income on reverse mortgages is suspended upon the latter of the foreclosure sale date or date on which marketable title has been acquired (i.e. property becomes OREO).

The Company periodically modifies the terms of a loan in response to borrowers’ financial difficulties. These modifications may include interest rate changes, principal forgiveness or payment deferments. Loans that are modified, where a concession has been made to the borrower, are accounted for as Troubled Debt Restructurings (“TDRs”). TDRs are generally placed on nonaccrual upon their restructuring and remain on non-accrual until, in the opinion of management, collection of remaining principal and interest is reasonably assured, and upon collection of six consecutive scheduled payments.

Purchased credit impaired ("PCI") loans in pools that the Company may modify as TDRs are not within the scope of the accounting guidance for TDRs.

Fair Value Hedging
As noted in the Company's 2017 Form 10-K, CIT early adopted ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities in fourth quarter of 2017. In accordance with this new guidance, the Company presents the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness in the same income statement line as the earnings effect of the hedged item. See Note 7 — Derivative Financial Instruments for further details.
 
Other Newly Adopted Accounting Standards
The following pronouncements were issued by the Financial Accounting Standards Board (“FASB”) and adopted by CIT as of January 1, 2018:


8 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and Technical Corrections and Improvements to Financial Instruments - Overall
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities includes amendments on recognition, measurement, presentation and disclosure of financial instruments. In addition, this guidance adds a new Topic (ASC 321, Investments - Equity Securities) to the FASB Accounting Standards Codification, which provides guidance on accounting for equity investments. ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) clarifies certain aspects of ASU 2016-01.
CIT adopted these standards as of January 1, 2018 with a cumulative-effect adjustment to the balance sheet as of the adoption date. The cumulative-effect adjustment resulted in a decrease in retained earnings due to the reclassification of $1.1 million of unrealized losses from accumulated other comprehensive loss to opening retained earnings. The adoption of these standards did not have a material impact on CIT’s consolidated financial statements and disclosures.
Income Taxes (Topic 740): Intra - Entity Transfers of Assets Other Than Inventory
ASU 2016-16, Income Taxes (Topic 740): Intra - Entity Transfers of Assets Other Than Inventory requires that a Company recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, and any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer even though the pre-tax effects of the transaction are eliminated in consolidation.
CIT adopted this guidance as of January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on CIT's consolidated financial statements and disclosures. The balance sheet impact was an approximately $0.2 million increase to the opening retained earnings due to the adjustment recorded.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments and Restricted Cash
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments clarifies how entities should classify certain cash receipts and cash payments within the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows.
CIT retrospectively adopted this guidance as of January 1, 2018, to each period presented. The adoption did not have a material impact on CIT’s consolidated financial statements and disclosures.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires that the Statement of Cash Flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
CIT retrospectively adopted this guidance as of January 1, 2018, to each period presented. The adoption did not have a material impact on CIT’s consolidated financial statements and disclosures.
Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business narrows the definition of a business and provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business.
CIT adopted this guidance effective January 1, 2018. The adoption did not have a material impact on CIT’s consolidated financial statements and disclosures.
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost requires employers that present a measure of operating income in their Statement of Income to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses in a separate line item(s). This standard also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The amendments related to presentation of service cost and other components in the Income Statements must be applied retrospectively to all periods presented. The amendments related to the capitalization of the service cost component should be applied prospectively, on and after the date of adoption.
CIT adopted this guidance as of January 1, 2018. The adoption was determined not to be material to the financial statements and disclosures.
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
CIT prospectively adopted this guidance as of January 1, 2018. The adoption did not have a material impact on CIT’s consolidated financial statements and disclosures.
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
ASU 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.


CIT GROUP INC. 9

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

CIT early adopted this guidance as of January 1, 2018 by applying the aggregate portfolio approach. Adjustment to opening retained earnings due to the reclassification of certain tax effects stranded in accumulated other comprehensive income was a $1.6 million increase. The adoption did not have a material impact on CIT’s consolidated financial statements and disclosures.

Recent Accounting Pronouncements
The following accounting pronouncements were issued by the FASB but are not yet effective for CIT.
Standard
Summary of Guidance
Effect on CIT's Financial Statements
ASU 2017-08, Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
Issued March 2017

ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.
The new guidance applies to all entities that hold investments in callable debt securities for which the amortized cost basis exceeds the amount repayable by the issuer at the earliest call date (i.e., at a premium).
This guidance must be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings.

Effective for CIT as of January 1, 2019.
CIT is currently evaluating the impact of this standard on its consolidated financial statements and disclosures and does not intend to early adopt this standard.

ASU 2016-02, Leases (Topic 842)
Issued February 2016
Lessees will need to recognize all leases longer than twelve months on the consolidated balance sheets as lease liabilities with corresponding right-of-use assets. For Income Statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit thresholds.
Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. Lease classifications by lessors are similar, operating, direct financing, or sales-type.
The ASU requires both quantitative and qualitative disclosures regarding key information about leasing arrangements. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. Early adoption is permitted.

Effective for CIT as of January 1, 2019.
CIT will need to determine the impact where it is both a lessee and a lessor:

Lessor accounting: CIT is analyzing the impact of changes to the definition of ‘initial direct costs’ under the new guidance. The new standard has a narrower definition of initial direct costs, which will result in CIT recognizing increased upfront expenses offset by higher yield over the lease term. CIT is currently evaluating the bifurcation of certain non-lease components from lease revenue streams. If goods or services are determined to be a non-lease component and accounted for under ASC 606 or other applicable GAAP guidance, the income recognition may differ from current accounting.

Lessee accounting: CIT is continuing to evaluate the impact of the amended guidance on its Condensed consolidated financial statements. CIT expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.

CIT management has assembled a project committee to assess the impact of this guidance. Initial scoping and assessment is complete and CIT is continuing to evaluate the impact on its consolidated financial statements and disclosures.


10 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Issued June 2016

Introduces a forward-looking “expected loss” model (the “Current Expected Credit Losses” (“CECL”) model) to estimate credit losses to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP, on certain types of financial instruments.
It eliminates existing guidance for PCI loans, and requires recognition of an allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination.
It amends existing impairment guidance for AFS securities to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves.
In addition, it expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ALLL.
Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach).

Effective for CIT as of January 1, 2020.
CIT management has established a project team and an oversight committee to assess the impact of this guidance and implement this standard. Initial gap assessment is complete and CIT is continuing to evaluate the impact on its consolidated financial statements and disclosures.
While CIT is currently in the process of evaluating the impact of the amended guidance on its Condensed consolidated financial statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of CIT’s loan and lease portfolios at adoption date.


NOTE 2 — DISCONTINUED OPERATIONS

Aerospace

As discussed in Note 2 — Discontinued Operations in our Annual Report on Form 10-K for the year ended December 31, 2017, the activity for 2017 in the following tables included Commercial Air, which was sold on April 4, 2017. The following condensed financial information reflects the Business Air business for the quarter ended March 31, 2018 and as of December 31, 2017.

Condensed Balance Sheet — Aerospace (dollars in millions)
 
March 31, 2018
 
December 31, 2017
Net Loans
$
153.0

 
$
165.8

Operating lease equipment, net
11.4

 
18.4

Other assets
0.1

 

Assets of discontinued operations
$
164.5

 
$
184.2

Other liabilities
$
20.1

 
$
8.8

Liabilities of discontinued operations
$
20.1

 
$
8.8


Condensed Statement of Income — Aerospace (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Interest income
$
2.1

 
$
20.2

Interest expense
1.0

 
95.9

Rental income on operating leases
0.5

 
306.7

Other income (losses)
(1.0
)
 
13.4

Maintenance and other operating lease expenses

 
4.2

Operating expenses
0.3

 
24.9

Loss on debt extinguishment(1)

 
39.0

Income from discontinued operations before provision for income taxes
0.3

 
176.3

Provision for income taxes
0.1

 
78.1

Gain on sale of discontinued operations, net of taxes

 
12.7

Income from discontinued operations, net of taxes
$
0.2

 
$
110.9

(1) 
The Company repaid approximately $1 billion of secured borrowings in the first quarter of 2017 within discontinued operations and recorded a loss of $39 million in relation to the extinguishment of those borrowings.


CIT GROUP INC. 11

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CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

Condensed Statement of Cash Flows — Aerospace (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Net cash flows provided by operations
$
13.6

 
$
128.1

Net cash flows provided by investing activities
20.1

 
98.7


Reverse Mortgage Servicing

The Financial Freedom business, a division of CIT Bank that services reverse mortgage loans, was acquired in conjunction with the OneWest Transaction. The Financial Freedom business is reflected in discontinued operations. Assets of discontinued operations primarily include Home Equity Conversion Mortgage ("HECM") loans and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which related primarily to loans serviced for third party investors, secured borrowings and contingent liabilities. Continuing operations includes a separate portfolio of reverse mortgage loans of $861 million and other real estate owned assets of $17 million at March 31, 2018, which are recorded in the Consumer Banking segment (refer to Note 3 - Loans) and are serviced by Financial Freedom. On October 6, 2017, CIT entered into a definitive agreement to sell the Financial Freedom business and the reverse mortgage loan portfolio serviced by Financial Freedom (the "Financial Freedom Transaction"). The Financial Freedom Transaction is targeted to close in the second quarter of 2018 and is subject to certain regulatory and investor approvals and other customary closing conditions

As a mortgage servicer of residential reverse mortgage loans, the Company is exposed to contingent liabilities for breaches of servicer obligations as set forth in industry regulations established by the Department of Housing and Urban Development (“HUD”) and the Federal Housing Administration (“FHA”) and in servicing agreements with the applicable counterparties, such as third party investors. Under these agreements, the servicer may be liable for failure to perform its servicing obligations, which could include fees imposed for failure to comply with foreclosure timeframe requirements established by servicing guides and agreements to which CIT is a party as the servicer of the loans. The Company had established reserves for contingent servicing-related liabilities associated with discontinued operations. Separately, the Company recognized an indemnification receivable from the FDIC of $29 million as of March 31, 2018, and December 31, 2017 for covered servicing-related obligations related to reverse mortgage loans pursuant to the loss share agreement between CIT Bank and the FDIC related to the acquisition by OneWest Bank from the FDIC of certain assets of IndyMac Federal Bank FSB ("IndyMac") (the "IndyMac Transaction"). See the Company's Report on Form 10-K for the year ended December 31, 2017, Note 5 - Indemnification Assets, for further information.

Condensed Balance Sheet — Financial Freedom (dollars in millions)
 
March 31, 2018
 
December 31, 2017
Total cash and deposits, all of which is restricted
$
9.8

 
$
7.7

Net Loans(1)
253.7

 
272.8

Other assets(2)
35.1

 
36.6

Assets of discontinued operation
$
298.6

 
$
317.1

Secured borrowings(1)
$
247.8

 
$
268.2

Other liabilities(3)
228.7

 
232.3

Liabilities of discontinued operation
$
476.5

 
$
500.5

(1) 
Net loans include $246.8 million and $267.2 million of securitized balances at March 31, 2018 and December 31, 2017, respectively, and $6.9 million and $5.6 million of additional draws awaiting securitization respectively. Secured borrowings relate to those receivables.
(2) 
Amount includes servicing advances, servicer receivables and property and equipment, net of accumulated depreciation. The loans serviced for others total $13.8 billion and $14.1 billion for reverse mortgage loans as of March 31, 2018 and December 31, 2017, respectively.
(3) 
Other liabilities include $135.3 million and $137.8 million of contingent liabilities, $79.5 million of reverse mortgage servicing liabilities and $13.9 million and $15.0 million of other accrued liabilities at March 31, 2018 and December 31, 2017, respectively.

12 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

The results from discontinued operations for the quarters ended March 31, 2018 and 2017 are presented below.

Condensed Statement of Income — Financial Freedom (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Interest income(1)
$
2.1

 
$
2.8

Interest expense(1)
2.1

 
2.5

Other income
6.7

 
7.3

Operating expenses(2)
16.1

 
22.7

Loss from discontinued operations before benefit for income taxes
(9.4
)
 
(15.1
)
Benefit for income taxes(3)
(2.5
)
 
(5.9
)
Loss from discontinued operation, net of taxes
$
(6.9
)
 
$
(9.2
)
(1) 
Includes amortization for the premium associated with the HECM loans and related secured borrowings.
(2) 
For the quarter ended March 31, 2018 and March 31, 2017, operating expense is comprised of approximately $4 million and $5 million in salaries and benefits, $1 million and $6 million in professional and legal services, and $11 million and $13 million for other expenses such as data processing, premises and equipment, and miscellaneous charges, respectively.
(3) 
For the quarters ended March 31, 2018 and 2017, the Company's tax rate for discontinued operation was 27% and 39%, respectively.

Condensed Statement of Cash Flows — Financial Freedom (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Net cash flows used for operation
$
(3.3
)
 
$
(8.4
)
Net cash flows provided by investing activities
22.1

 
25.0


Combined Results for Discontinued Operations

The following tables reflect the combined results of the discontinued operations. Details of the balances are discussed in prior tables.

Condensed Combined Balance Sheet (dollars in millions)
 
March 31, 2018
 
December 31, 2017
Total cash and deposits
$
9.8

 
$
7.7

Net Loans
406.7

 
438.6

Operating lease equipment, net
11.4

 
18.4

Other assets
35.2

 
36.6

Assets of discontinued operations
$
463.1

 
$
501.3

Secured borrowings
$
247.8

 
$
268.2

Other liabilities
248.8

 
241.1

Liabilities of discontinued operations
$
496.6

 
$
509.3


Condensed Combined Statement of Income (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Interest income
$
4.2

 
$
22.9

Interest expense
3.1

 
98.4

Rental income on operating leases
0.5

 
306.7

Other income (losses)
5.7

 
20.7

Maintenance and other operating lease expenses

 
4.2

Operating expenses
16.4

 
47.6

Loss on debt extinguishment

 
39.0

Income (loss) from discontinued operations before benefit (provision) for income taxes
(9.1
)
 
161.1

(Benefit) provision for income taxes
(2.4
)
 
72.1

Gain on sale of discontinued operations, net of taxes

 
12.7

Income (loss) from discontinued operations, net of taxes
$
(6.7
)
 
$
101.7



CIT GROUP INC. 13

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CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

Condensed Combined Statement of Cash Flows (dollars in millions)
 
Quarters Ended March 31,
 
2018
 
2017
Net cash flows provided by operations
$
10.3

 
$
119.7

Net cash flows provided by investing activities
42.2

 
123.7



NOTE 3 — LOANS

Loans, excluding those reflected as discontinued operations, consist of the following:
Loans by Product (dollars in millions)
 
 
 
 
 
March 31,
2018
 
December 31,
2017
Commercial loans
$
21,163.9

 
$
20,892.1

Direct financing leases and leveraged leases
2,625.2

 
2,685.8

Total commercial
23,789.1

 
23,577.9

Consumer loans
5,664.5

 
5,536.0

Total loans
29,453.6

 
29,113.9

Loans held for sale(1)
1,085.9

 
1,095.7

Loans and held for sale loans(1)
$
30,539.5

 
$
30,209.6

(1) 
Loans held for sale includes loans primarily related to portfolios in Commercial Banking, Consumer Banking and the China portfolio in Non-Strategic Portfolios ("NSP"). As discussed in subsequent tables, since the Company manages the credit risk and collections of loans held for sale consistently with its loans held for investment, the aggregate amount is presented in this table.

The following table presents loans, excluding loans held for sale, by segment, based on obligor location:
Loans (dollars in millions)
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
Domestic
 
Foreign
 
Total
 
Domestic
 
Foreign
 
Total
Commercial Banking
$
21,693.8

 
$
1,652.1

 
$
23,345.9

 
$
21,368.7

 
$
1,790.6

 
$
23,159.3

Consumer Banking(1)
6,107.7

 

 
6,107.7

 
5,954.6

 

 
5,954.6

Total
$
27,801.5

 
$
1,652.1

 
$
29,453.6

 
$
27,323.3

 
$
1,790.6

 
$
29,113.9

(1) 
The Consumer Banking segment includes certain commercial loans, primarily consisting of a portfolio of Small Business Administration ("SBA") loans. These loans are excluded from the Consumer loan balance and included in the Commercial loan balances in the tables throughout this note.

The following table presents selected components of the net investment in loans:
Components of Net Investment in Loans (dollars in millions)
 
 
 
 
 
March 31,
2018
 
December 31,
2017
Unearned income
$
(726.8
)
 
$
(727.8
)
Unamortized premiums / (discounts)
9.4

 
3.7

Accretable yield on Purchased Credit-Impaired (“PCI”) loans
(1,016.3
)
 
(1,063.7
)
Net unamortized deferred costs and (fees)(1)
69.6

 
68.7

(1) 
Balance relates to the Commercial Banking segment.

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

Credit Quality Information

Commercial obligor risk ratings are reviewed on a regular basis by Credit Risk Management and are adjusted as necessary for updated information affecting the borrowers’ ability to fulfill their obligations.

The following table summarizes commercial loans by the risk ratings that bank regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. The consumer loan risk profiles are different from commercial loans, and use loan-to-value (“LTV”) ratios in rating the credit quality, and therefore are presented separately below.


14 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

Commercial Loans and Held for Sale Loans — Risk Rating by Class / Segment (dollars in millions)
Grade:
Pass
 
Special
Mention
 
Classified-
accruing
 
Classified-
non-accrual
 
PCI Loans
 
Total
March 31, 2018
 

 
 

 
 

 
 

 
 

 
 

Commercial Banking
 

 
   
 
   
 
   
 
   
 
   
Commercial Finance
$
8,020.5

 
$
641.1

 
$
1,189.0

 
$
153.2

 
$
10.4

 
$
10,014.2

Real Estate Finance
5,158.3

 
241.2

 
183.8

 

 
39.2

 
5,622.5

Business Capital
7,192.3

 
246.1

 
263.5

 
45.6

 

 
7,747.5

Rail
120.8

 
2.5

 
1.8

 

 

 
125.1

Total Commercial Banking
20,491.9

 
1,130.9

 
1,638.1

 
198.8

 
49.6

 
23,509.3

Consumer Banking
 

 
   
 
   
 
   
 
   
 
   
Other Consumer Banking(1)
398.9

 
4.2

 
37.9

 

 
2.2

 
443.2

Total Consumer Banking
398.9

 
4.2

 
37.9

 

 
2.2

 
443.2

Non- Strategic Portfolios
31.5

 
9.6

 
5.2

 
12.2

 

 
58.5

Total
$
20,922.3

 
$
1,144.7

 
$
1,681.2

 
$
211.0

 
$
51.8

 
$
24,011.0

December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Commercial Banking
 

 
   
 
   
 
   
 
   
 
   
Commercial Finance
$
8,284.1

 
$
640.9

 
$
981.9

 
$
134.8

 
$
10.6

 
$
10,052.3

Real Estate Finance
5,228.1

 
139.9

 
174.3

 
2.8

 
45.1

 
5,590.2

Business Capital
7,028.6

 
269.2

 
228.8

 
53.2

 

 
7,579.8

Rail
100.6

 
2.0

 
1.2

 

 

 
103.8

Total Commercial Banking
20,641.4

 
1,052.0

 
1,386.2

 
190.8

 
55.7

 
23,326.1

Consumer Banking
 

 
   
 
   
 
   
 
   
 
   
Other Consumer Banking(1)
378.5

 
5.9

 
31.9

 

 
2.2

 
418.5

Total Consumer Banking
378.5

 
5.9

 
31.9

 

 
2.2

 
418.5

Non- Strategic Portfolios
35.7

 
7.6

 
10.2

 
9.8

 

 
63.3

Total
$
21,055.6

 
$
1,065.5

 
$
1,428.3

 
$
200.6

 
$
57.9

 
$
23,807.9

(1) Other Consumer Banking loans consisted of SBA loans.

For consumer loans, the Company monitors credit risk based on indicators such as delinquencies and LTV, which the Company believes are relevant credit quality indicators.

LTV refers to the ratio comparing the loan’s unpaid principal balance to the property’s collateral value. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes.

The following table provides a summary of the consumer portfolio credit quality. The amounts represent the carrying value, which differ from unpaid principal balances, and include the premiums or discounts and the accretable yield and non-accretable difference for PCI loans recorded in purchase accounting. Included in the consumer loans are “covered loans” for which the Company can be reimbursed for a substantial portion of future losses under the terms of loss sharing agreements with the FDIC. Covered loans are limited to the Legacy Consumer Mortgage ("LCM") division. Covered loans are further discussed in our Form 10-K for the year ended December 31, 2017, Note 5 — Indemnification Assets.

Included in the consumer loan balances as of March 31, 2018 and December 31, 2017, were loans with terms that permitted negative amortization with an unpaid principal balance of $452 million and $484 million, respectively.


CIT GROUP INC. 15

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CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

The table below summarizes the consumer loan LTV distribution and the covered loan held for investment balances as of March 31, 2018 and December 31, 2017 for single family residential mortgage loans.
Consumer Loan LTV Distribution (dollars in millions)
 
Single Family Residential
 
 
 
 
Covered Loans
 
Non-covered Loans
 
Total
Consumer
Loans
 
LTV Range
Non-PCI
 
PCI
 
Non-PCI
 
PCI
 
 
March 31, 2018
 

 
 

 
 

 
 

 
 

 
Greater than 125%
$
3.5

 
$
145.7

 
$
5.8

 
$

 
$
155.0

 
101% – 125%
6.0

 
260.4

 
4.8

 

 
271.2

 
80% – 100%
58.1

 
538.3

 
178.9

 

 
775.3

 
Less than 80%
1,254.5

 
895.0

 
2,304.9

 
7.8

 
4,462.2

 
Not Applicable(1)

 

 
0.8

 

 
0.8

 
Total
$
1,322.1

 
$
1,839.4

 
$
2,495.2

 
$
7.8

 
$
5,664.5

 
December 31, 2017
 

 
   
 
   
 
   
 
   
 
Greater than 125%
$
2.7

 
$
160.0

 
$
7.7

 
$

 
$
170.4

 
101% – 125%
6.4

 
291.5

 
4.4

 

 
302.3

 
80% – 100%
77.4

 
566.2

 
137.3

 

 
780.9

 
Less than 80%
1,306.1

 
878.1

 
2,089.7

 
7.7

 
4,281.6

 
Not Applicable(1)

 

 
0.8

 

 
0.8

 
Total
$
1,392.6

 
$
1,895.8

 
$
2,239.9

 
$
7.7

 
$
5,536.0

 
(1) Certain Consumer Loans do not have LTV's.
 
 
 
 
 
 
 
 
 
 
Past Due and Non-accrual Loans

The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification:
Loans and Held for Sale Loans - Delinquency Status (dollars in millions)
 
Past Due
 
 
 
 
 
 
 
 
 
30–59 Days
Past Due
 
60–89 Days
Past Due
 
90 Days or
Greater
 
Total
Past Due
 
Current(1)
 
PCI Loans(2)
 
Total
March 31, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial Banking
   
 
   
 
   
 
   
 
   
 
   
 
   
Commercial Finance
$
17.5

 
$

 
$
43.8

 
$
61.3

 
$
9,942.5

 
$
10.4

 
$
10,014.2

Real Estate Finance
10.4

 
2.9

 
4.1

 
17.4

 
5,565.9

 
39.2

 
5,622.5

Business Capital
135.8

 
24.3

 
18.0

 
178.1

 
7,569.4

 

 
7,747.5

Rail
6.5

 
0.9

 
0.8

 
8.2

 
116.9

 

 
125.1

Total Commercial Banking
170.2

 
28.1

 
66.7

 
265.0

 
23,194.7

 
49.6

 
23,509.3

Consumer Banking
 

 
   
 
   
 
   
 
   
 
   
 
   
Legacy Consumer Mortgages
79.5

 
7.3

 
38.2

 
125.0

 
2,091.3

 
1,847.2

 
4,063.5

Other Consumer Banking
137.5

 
4.4

 
0.3

 
142.2

 
2,763.8

 
2.2

 
2,908.2

Total Consumer Banking
217.0

 
11.7

 
38.5

 
267.2

 
4,855.1

 
1,849.4

 
6,971.7

Non-Strategic Portfolios
0.7

 

 
12.2

 
12.9

 
45.6

 

 
58.5

Total
$
387.9

 
$
39.8

 
$
117.4

 
$
545.1

 
$
28,095.4

 
$
1,899.0

 
$
30,539.5

December 31, 2017
 

 
   
 
   
 
   
 
   
 
   
 
   
Commercial Banking
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial Finance
$
4.5

 
$

 
$
49.3

 
$
53.8

 
$
9,987.9

 
$
10.6

 
$
10,052.3

Real Estate Finance
8.7

 

 
4.1

 
12.8

 
5,532.3

 
45.1

 
5,590.2

Business Capital
172.2

 
33.4

 
19.1

 
224.7

 
7,355.1

 

 
7,579.8

Rail
3.9

 
1.4

 
0.8

 
6.1

 
97.7

 

 
103.8

Total Commercial Banking
189.3

 
34.8

 
73.3

 
297.4

 
22,973.0

 
55.7

 
23,326.1

Consumer Banking
Legacy Consumer Mortgages
26.7

 
7.6

 
34.8

 
69.1

 
2,219.5

 
1,903.5

 
4,192.1

Other Consumer Banking
9.6

 
0.5

 
0.4

 
10.5

 
2,615.4

 
2.2

 
2,628.1

Total Consumer Banking
36.3

 
8.1

 
35.2

 
79.6

 
4,834.9

 
1,905.7

 
6,820.2

Non-Strategic Portfolios
1.8

 
7.7

 
9.4

 
18.9

 
44.4

 

 
63.3

Total
$
227.4

 
$
50.6

 
$
117.9

 
$
395.9

 
$
27,852.3

 
$
1,961.4

 
$
30,209.6

(1) 
Due to their nature, reverse mortgage loans are included in Current, as they do not have contractual payments due at a specified time. During the current quarter, an immaterial error was discovered and corrected relating to the December 31, 2017 Current balance for Legacy Consumer Mortgage; which was understated by $861 million, and the Current balance for Other Consumer Banking, which was overstated by $861 million. The current presentation reflects the revised Current balances at December 31, 2017.
(2) 
PCI loans are written down at acquisition to their fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as past due or non-accrual even though they may be contractually past due as we expect to fully collect the new carrying values.

16 Item 1.  Consolidated Financial Statements

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table sets forth non-accrual loans, assets received in satisfaction of loans (OREO and repossessed assets) and loans 90 days or more past due and still accruing.
Loans on Non-Accrual Status (dollars in millions)(1)
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
Held for
Investment
 
Held for
Sale
 
Total
 
Held for
Investment
 
Held for
Sale
 
Total
Commercial Banking
 

 
 

 
 

 
 

 
 

 
 

Commercial Finance
$
153.2

 
$

 
$
153.2

 
$
134.8

 
$

 
$
134.8

Real Estate Finance

 

 

 
2.8

 

 
2.8

Business Capital
45.6

 

 
45.6

 
53.2

 

 
53.2

Total Commercial Banking
198.8

 

 
198.8

 
190.8

 

 
190.8

Consumer Banking
 

 
   
 
   
 
   
 
   
 
   
Legacy Consumer Mortgages
25.2

 

 
25.2

 
19.9

 

 
19.9

Other Consumer Banking
0.3

 

 
0.3

 
0.4

 

 
0.4

Total Consumer Banking
25.5

 

 
25.5

 
20.3

 

 
20.3

Non-Strategic Portfolios

 
12.2

 
12.2

 

 
9.8

 
9.8

Total
$
224.3

 
$
12.2

 
$
236.5

 
$
211.1

 
$
9.8

 
$
220.9

Repossessed assets and OREO
 

 
 

 
45.6

 
 

 
 

 
54.6

Total non-performing assets
 

 
 

 
$
282.1

 
 

 
 

 
$
275.5

Commercial loans past due 90 days or more accruing
 
 

 
$
9.9

 
 

 
 

 
$
11.7

Consumer loans past due 90 days or more accruing
 
 

 
17.1

 
 

 
 

 
20.2

Total Accruing loans past due 90 days or more
 
 

 
$
27.0

 
 

 
 

 
$
31.9

(1) 
Factored receivables within our Business Capital division do not accrue interest and therefore are not considered within non-accrual loan balances; however factored receivables are considered for credit provisioning purposes.

Payments received on non-accrual financing receivables are generally applied first against outstanding principal, though in certain instances where the remaining recorded investment is deemed fully collectible, interest income is recognized on a cash basis. Reverse mortgages are not included in the non-accrual balances.

The table below summarizes the residential mortgage loans in the process of foreclosure and OREO:
Loans in Process of Foreclosure and OREO (dollars in millions)(1)
 
 
 
 
 
March 31,
2018
 
December 31,
2017
PCI
$
134.5

 
$
133.7

Non-PCI
138.2

 
140.9

Loans in process of foreclosure
$
272.7

 
$
274.6

OREO
$
43.1

 
$
52.1

(1) 
As of March 31, 2018 and December 31, 2017, the table included $120.4 million and $122.5 million of reverse mortgage loans in the process of foreclosure and $17.2 million and $21.0 million of reverse mortgage OREO, respectively.

Impaired Loans

The Company’s policy is to review for impairment loans greater than $500,000 that are on non-accrual status, as well as short-term factoring receivables greater than $500,000 when events or circumstances indicate that it is probable that CIT will be unable to collect all amounts due according to the contractual terms of the factoring agreement. Small-ticket loan and lease receivables that have not been modified in a restructuring are included (if appropriate) in the reported non-accrual balances above, but are excluded from the impaired loans disclosure below as charge-offs are typically determined and recorded for such loans when they are more than 90150 days past due.

The following table contains information about impaired loans and the related allowance for loan losses by class. Impaired loans exclude PCI loans. Loans that were identified as impaired at the date of the OneWest Transaction (the “Acquisition Date”) for which the Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), are not included in the following table but are disclosed further below in Loans Acquired with Deteriorated Credit Quality.



CIT GROUP INC. 17

Table of Contents
 
CIT Group Inc. and Subsidiaries – Notes to Condensed Consolidated Financial Statements (Unaudited)

Impaired Loans (dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Recorded Investment(3)
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Quarter Ended March 31, 2018
 
Quarter Ended March 31, 2017
March 31, 2018
 

 
 

 
 

 
 

 
 

With no related allowance recorded:
 

 
   
 
   
 
   
 
   
Commercial Banking