10-Q 1 e71795_10q.htm QUARTERLY REPORT

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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 September 30, 2016
           
|  | 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. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act. (Check One): 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 October 31, 2016 there were 202,061,727 shares of the registrant’s common stock outstanding.



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CONTENTS

 
 
Item 1.
                     2    
 
                     2    
 
                     3    
 
                     4    
 
                     5    
 
                     6    
 
                     7    
Item 2.
                     70    
 
           
and
              
Item 3.
                      70    
Item 4.
                      131    
 
 
Item 1.
                     133    
Item 1A.
                      133    
Item 2.
                      133    
Item 4.
                      133    
Item 6.
                      134    
            139  
 

Table of Contents   1



Table of Contents

Part One — Financial Information

Item 1. Consolidated Financial Statements

 


CIT GROUP INC. AND SUBSIDIARIES


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

        September 30,
2016
    December 31,
2015
Assets
                                     
Cash and due from banks, including restricted balances of $239.2 and $601.4 at September 30, 2016 and December 31, 2015(1), respectively (see Note 8 for amounts pledged)
              $ 920.5          $ 1,481.2   
Interest bearing deposits, including restricted balances of $614.1 and $229.5 at September 30, 2016 and December 31, 2015(1), respectively (see Note 8 for amounts pledged)
                 6,513.1             6,820.3   
Investment securities, including securities carried at fair value with changes recorded in net income of $301.3 and $339.7 at September 30, 2016 and December 31, 2015, respectively (see Note 8 for amounts pledged)
                 3,592.4             2,953.8   
Assets held for sale(1)
                 2,462.1             2,092.4   
Loans (see Note 8 for amounts pledged)
                 29,918.2             31,671.7   
Allowance for loan losses
                 (421.7 )            (360.2 )  
Total loans, net of allowance for loan losses(1)
                 29,496.5             31,311.5   
Operating lease equipment, net (see Note 8 for amounts pledged)(1)
                 16,954.8             16,617.0   
Indemnification assets
                 362.2             414.8   
Unsecured counterparty receivable
                 560.2             537.8   
Goodwill
                 1,170.5             1,198.3   
Intangible assets
                 161.3             176.3   
Other assets, including $174.3 and $195.9 at September 30, 2016 and December 31, 2015, respectively, at fair value
                 3,319.0             3,297.6   
Assets of discontinued operations
                 452.9             500.5   
Total Assets
              $ 65,965.5          $ 67,401.5   
Liabilities
                                     
Deposits
              $ 32,854.3          $ 32,782.2   
Credit balances of factoring clients
                 1,228.9             1,344.0   
Other liabilities, including $263.7 and $221.3 at September 30, 2016 and December 31, 2015, respectively, at fair value
                 3,168.3             3,158.7   
Borrowings, including $3,977.3 and $3,361.2 contractually due within twelve months at September 30, 2016 and December 31, 2015, respectively
                 16,548.7             18,441.8   
Liabilities of discontinued operations
                 927.8             696.2   
Total Liabilities
                 54,728.0             56,422.9   
Stockholders’ Equity
                                      
Common stock: $0.01 par value, 600,000,000 authorized
                                     
Issued: 206,140,114 and 204,447,769 at September 30, 2016 and December 31, 2015, respectively
                 2.1             2.0   
Outstanding: 202,047,304 and 201,021,508 at September 30, 2016 and December 31, 2015, respectively
                                     
Paid-in capital
                 8,758.2             8,718.1   
Retained earnings
                 2,758.9             2,557.4   
Accumulated other comprehensive loss
                 (104.2 )            (142.1 )  
Treasury stock: 4,092,810 and 3,426,261 shares at September 30, 2016 and December 31, 2015 at cost, respectively
                 (178.0 )            (157.3 )  
Total Common Stockholders’ Equity
                 11,237.0             10,978.1   
Noncontrolling minority interests
                 0.5             0.5   
Total Equity
                 11,237.5             10,978.6   
Total Liabilities and Equity
              $ 65,965.5          $ 67,401.5   
(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
              $ 267.9          $ 314.2   
Assets held for sale
                              279.7   
Total loans, net of allowance for loan losses
                 2,061.9             2,218.6   
Operating lease equipment, net
                 3,723.6             3,985.9   
Other
                              11.2   
Total Assets
              $ 6,053.4          $ 6,809.6   
Liabilities
                                      
Beneficial interests issued by consolidated VIEs (classified as long-term borrowings)
              $ 3,061.2          $ 4,084.8   
Total Liabilities
              $  3,061.2          $  4,084.8   

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

2   CIT GROUP INC



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CIT GROUP INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (dollars in millions — except per share data)

        Quarters Ended September 30,
    Nine Months Ended September 30,
        2016
    2015
    2016
    2015
Interest income
                                                                   
Interest and fees on loans
              $ 457.6          $ 414.2          $ 1,385.7          $ 961.4   
Other interest and dividends
                 32.5             23.5             95.1             41.1   
Interest income
                 490.1             437.7             1,480.8             1,002.5   
Interest expense
                                                                   
Interest on borrowings
                 (180.0 )            (190.6 )            (550.0 )            (585.9 )  
Interest on deposits
                 (99.4 )            (89.7 )            (298.3 )            (230.9 )  
Interest expense
                 (279.4 )            (280.3 )            (848.3 )            (816.8 )  
Net interest revenue
                 210.7             157.4             632.5             185.7   
Provision for credit losses
                 (46.2 )            (49.9 )            (173.6 )            (102.9 )  
Net interest revenue, after credit provision
                 164.5             107.5             458.9             82.8   
Non-interest income
                                                                      
Rental income on operating leases
                 563.6             539.3             1,708.3             1,601.6   
Other income
                 73.9             39.2             279.1             189.1   
Total non-interest income
                 637.5             578.5             1,987.4             1,790.7   
Total revenue, net of interest expense and credit provision
                 802.0             686.0             2,446.3             1,873.5   
Non-interest expenses
                                                                   
Depreciation on operating lease equipment
                 (179.1 )            (159.1 )            (530.8 )            (473.7 )  
Maintenance and other operating lease expenses
                 (60.4 )            (55.9 )            (181.5 )            (151.4 )  
Operating expenses
                 (332.0 )            (333.9 )            (1,018.0 )            (810.5 )  
Loss on debt extinguishment and deposit redemption
                 (5.1 )            (0.3 )            (10.8 )            (0.4 )  
Total non-interest expenses
                 (576.6 )            (549.2 )            (1,741.1 )            (1,436.0 )  
Income from continuing operations before provision for income taxes
                 225.4             136.8             705.2             437.5   
(Provision) benefit for income taxes
                 (77.0 )            560.0             (224.0 )            478.2   
Income from continuing operations, before attribution of noncontrolling interests
                 148.4             696.8             481.2             915.7   
Loss attributable to noncontrolling interests, after tax
                                                        0.1   
Income from continuing operations
                 148.4             696.8             481.2             915.8   
Discontinued Operations
                                                                      
Loss from discontinued operation, net of taxes
                 (15.6 )            (3.7 )            (187.4 )            (3.7 )  
Total loss from discontinued operations, net of tax
                 (15.6 )            (3.7 )            (187.4 )            (3.7 )  
Net Income
              $ 132.8          $ 693.1          $ 293.8          $ 912.1   
Basic income per common share
                                                                      
Income from continuing operations
              $ 0.74          $ 3.66          $ 2.39          $ 5.08   
Loss from discontinued operation
                 (0.08 )            (0.02 )            (0.93 )            (0.02 )  
Basic income per share
              $ 0.66          $ 3.64          $ 1.46          $ 5.06   
Diluted income per common share
                                                                    
Income from continuing operations
              $ 0.73          $ 3.63          $ 2.38          $ 5.05   
Loss from discontinued operation
                 (0.08 )            (0.02 )            (0.93 )            (0.02 )  
Diluted income per share
              $ 0.65          $ 3.61          $ 1.45          $ 5.03   
Average number of common shares (thousands)
                                                                    
Basic
                 202,036             190,557             201,775             180,300   
Diluted
                 202,755             191,803             202,388             181,350   
Dividends declared per common share
              $ 0.15          $ 0.15          $ 0.45          $ 0.45   

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

Item 1.  Consolidated Financial Statements  3



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CIT GROUP INC. AND SUBSIDIARIES


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

        Quarters Ended September 30,
    Nine Months Ended September 30,
        2016
    2015
    2016
    2015
Net Income before attribution of noncontrolling interests
              $ 132.8          $ 693.1          $ 293.8          $ 912.0   
Other comprehensive income (loss), net of tax:
                                                                   
Foreign currency translation adjustments
                 (2.2 )            (8.7 )            16.3             (33.4 )  
Net unrealized gains (losses) on available for sale securities
                 5.6             (6.1 )            20.3             (5.9 )  
Changes in benefit plans net gain (loss) and prior service (cost)/credit
                 0.1             (0.7 )            1.3             (1.1 )  
Other comprehensive income (loss), net of tax
                 3.5             (15.5 )            37.9             (40.4 )  
Comprehensive income before noncontrolling interests
                 136.3             677.6             331.7             871.6   
Comprehensive loss attributable to noncontrolling interests
                                                        0.1   
Comprehensive income
              $ 136.3          $ 677.6          $ 331.7          $ 871.7   

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

4   CIT GROUP INC



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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
Minority
Interests
    Total
Equity
December 31, 2015
              $ 2.0          $ 8,718.1          $ 2,557.4          $ (142.1 )         $ (157.3 )         $ 0.5          $ 10,978.6   
Net income
                                           293.8                                                    293.8   
Other comprehensive income, net of tax
                                                        37.9                                       37.9   
Dividends paid
                                           (92.3 )                                                   (92.3 )  
Amortization of restricted stock, stock option and performance shares expenses
                              38.2                                       (20.7 )                         17.5   
Issuance of common stock
                 0.1                                                                              0.1   
Employee stock purchase plan
                              1.9                                                                 1.9   
September 30, 2016
              $ 2.1          $ 8,758.2          $ 2,758.9          $ (104.2 )         $ (178.0 )         $ 0.5          $ 11,237.5   
December 31, 2014
              $ 2.0          $ 8,603.6          $ 1,615.7          $ (133.9 )         $ (1,018.5 )         $ (5.4 )         $ 9,063.5   
Net income
                                           912.1                                       (0.1 )            912.0   
Other comprehensive loss, net of tax
                                                        (40.4 )                                      (40.4 )  
Dividends paid
                                           (84.4 )                                                   (84.4 )  
Amortization of restricted stock, stock option and performance shares expenses
                              59.8                                       (22.0 )                         37.8   
Issuance of common stock — acquisition
                              45.6                                       1,416.4                          1,462.0   
Repurchase of common stock
                                                                     (531.8 )                         (531.8 )  
Employee stock purchase plan
                              1.0                                                                 1.0   
Purchase of noncontrolling interest and distribution of earnings and capital
                              (26.5 )                                                   6.0             (20.5 )  
September 30, 2015
              $ 2.0          $ 8,683.5          $ 2,443.4          $ (174.3 )         $ (155.9 )         $ 0.5          $ 10,799.2   

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

Item 1.  Consolidated Financial Statements  5



Table of Contents


CIT GROUP INC. AND SUBSIDIARIES


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

        Nine Months Ended September 30,
        2016
    2015
Cash Flows From Operations
                                     
Net income
              $ 293.8          $ 912.1   
Adjustments to reconcile net income to net cash flows from operations:
                                     
Provision for credit losses
                 173.6             102.9   
Net depreciation, amortization and (accretion)
                 598.1             582.1   
Net gains on asset sales and impairments on assets held for sale
                 (58.6 )            (34.2 )  
Provision (benefit) for deferred income taxes
                 143.1             (563.6 )  
(Increase) decrease in finance receivables held for sale
                 168.1             (117.1 )  
Net reimbursement of expense from FDIC
                 3.1             2.2   
Decrease in other assets
                 166.0             9.7   
Decrease in other liabilities
                 (5.8 )            (100.4 )  
Net cash flows provided by operations
                 1,481.4             793.7   
Cash Flows From Investing Activities
                                      
Changes in loans, net
                 316.8             (1,134.7 )  
Purchases of investment securities
                 (3,344.5 )            (6,964.8 )  
Proceeds from maturities of investment securities
                 2,813.3             7,139.2   
Proceeds from asset and receivable sales
                 1,182.5             1,427.7   
Purchases of assets to be leased and other equipment
                 (1,382.8 )            (1,859.1 )  
Net decrease in short-term factoring receivables
                 (288.1 )            (32.3 )  
Purchases of restricted stock
                              (128.9 )  
Proceeds from redemption of restricted stock
                 32.3             20.0   
Payments to the FDIC under loss share agreements
                 (2.2 )            (17.4 )  
Proceeds from the FDIC under loss share agreements and participation agreements
                 83.9             11.3   
Proceeds from sale of OREO, net of repurchases
                 103.3             24.2   
Acquisition, net of cash received
                              2,521.2   
Net change in restricted cash
                 (22.4 )            151.1   
Net cash flows (used in) provided by investing activities
                 (507.9 )            1,157.5   
Cash Flows From Financing Activities
                                     
Proceeds from the issuance of term debt
                 2.7             1,606.5   
Repayments of term debt
                 (1,320.0 )            (3,700.3 )  
Proceeds from FHLB advances
                 1,645.5             5,164.1   
Repayments of FHLB debt
                 (2,324.9 )            (5,168.8 )  
Net increase in deposits
                 80.9             1,943.1   
Collection of security deposits and maintenance funds
                 270.9             236.1   
Use of security deposits and maintenance funds
                 (118.2 )            (127.1 )  
Repurchase of common stock
                              (531.8 )  
Dividends paid
                 (92.3 )            (84.4 )  
Purchase of noncontrolling interest
                              (20.5 )  
Payments on affordable housing investment credits
                 (8.4 )            (0.2 )  
Net cash flows used in financing activities
                 (1,863.8 )            (683.3 )  
(Decrease) Increase in unrestricted cash and cash equivalents
                 (890.3 )            1,267.9   
Unrestricted cash and cash equivalents, beginning of period
                 7,470.6             6,155.5   
Unrestricted cash and cash equivalents, end of period
              $ 6,580.3          $ 7,423.4   
Supplementary Cash Flow Disclosure
                                     
Interest paid
              $ (902.9 )         $ (859.3 )  
Federal, foreign, state and local income taxes refunded (paid), net
              $ 49.9          $ (26.4 )  
Supplementary Non Cash Flow Disclosure
                                      
Transfer of assets from held for investment to held for sale
              $ 2,020.5          $ 2,049.0   
Transfer of assets from held for sale to held for investment
              $ 91.0          $ 93.1   
Deposits on flight equipment purchases applied to acquisition of flight equipment purchases, and origination of finance leases, capitalized interest, and buyer furnished equipment
              $ 210.4          $ 288.1   
Transfers of assets from held for investment to OREO
              $ 71.6          $ 26.4   
Issuance of common stock as consideration
              $           $ 1,462.0   

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

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

NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CIT Group Inc., together with its subsidiaries (collectively “CIT” or, the “Company”), has provided financial solutions to its clients since its formation in 1908. The Company provides financing, leasing and advisory services principally to middle market companies in a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation industry worldwide. CIT is a bank holding company (“BHC”) and a financial holding company (“FHC”). Through its bank subsidiary, CIT Bank, N.A., CIT provides a full range of commercial and consumer banking and related services to customers through 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, N.A. is regulated by the Office of the Comptroller of the Currency, 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, 2015, as updated by the Company’s Current Report filed on Form 8-K filed on September 26, 2016, which are on file with the U.S. Securities and Exchange Commission. Effective March 31, 2016, CIT re-organized its reportable operating segments to Commercial Banking, Transportation Finance, Consumer and Community Banking and Non-Strategic Portfolios. Refer to Note 17 — Business Segment Information for further discussion.

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: 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 Group Inc. 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 inter-company accounts and transactions have been eliminated. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements.

The results for the quarter and nine months ended September 30, 2016 contain activity of OneWest Bank, National Association (“OneWest Bank”), acquired on August 3, 2015. The comparable 2015 periods presented in this Form 10-Q includes activity only from the acquisition date through September 30, 2015. See Note 2 — Acquisition and Disposition Activities for details. 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

The Financial Freedom business, a division of CIT Bank, N.A. (formerly a division of OneWest Bank) that services reverse mortgage loans, was acquired as part of the OneWest Transaction. Pursuant to ASC 205-20, the Financial Freedom business was reflected as discontinued operations as of the August 3, 2015 OneWest Transaction and in the subsequent periods. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, systems and servicing assets. The assets of discontinued operations primarily include Home Equity Conversion Mortgage (“HECM”) loans and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which relates primarily to loans serviced for third party investors, secured borrowings and contingent liabilities. Unrelated to the Financial Freedom business, continuing operations includes a portfolio of reverse mortgages, which is reported in the Consumer and Community Banking segment.

In addition to the mortgage servicing rights, discontinued operations reflect HECM loans, which were pooled and securitized in the form of GNMA HMBS and sold into the secondary market with servicing retained. These HECM loans are insured by the Federal Housing Administration (“FHA”). Based upon the structure of the GNMA HMBS the Company has determined that the HECM loans that were securitized as GNMA HMBS had not met all of the requirements for sale accounting and therefore, has accounted for these transfers as a financing transaction. Under a financing transaction, the transferred loans remain on the Company’s statement of financial position and the proceeds received are recorded as a secured borrowing.

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Discontinued Operations are discussed in Note 2Acquisition and Disposition Activities.

Revisions of Previously Issued Statements of Cash Flows

In preparing the financial statements for the nine months ended September 30, 2016, the Company discovered and corrected immaterial errors impacting the classification of certain balances between line items and categories presented in the Consolidated Statements of Cash Flows. The most significant of these errors related to classification issues between the operating and investing sections. The Company has evaluated the impact of the errors and has concluded that individually and in the aggregate, the errors were not material to any previously issued Statement of Cash Flows. However, the Company has elected to revise the Statements of Cash Flows for the nine months ended September 30, 2015, in this filing, and will revise previously issued balances in the Statements of Cash Flows when they are next filed in the Company’s Form 10-Q for the quarters ended March 31, 2017, and June 30, 2017, and in the Form 10-K for the year ended December 31, 2016.

Quarter ended September 30, 2015

The amounts presented comparatively for the nine months ended September 30, 2015 have been revised for these misclassifications. For the nine months ended September 30, 2015, the misclassifications resulted in an understatement of net cash flows provided by operations of $13 million, an understatement of net cash flows provided by investing activities of $9 million, and an understatement of net cash flows used in financing activities of $22 million.

Quarter ended June 30, 2016

The amounts presented comparatively for the six months ended June 30, 2016 in the Company’s Form 10-Q for the quarter ended June 30, 2017 will be revised for these misclassifications. For the six months ended June 30, 2016, the misclassifications resulted in an understatement of net cash flows provided by operations of $20.4 million, which will result in a revised balance of $1,036.2 million, an understatement of net cash flows used in investing activities of $20.4 million, which will result in a revised balance of $(326.8) million, with no impact on net cash flows used in financing activities.

Quarter ended March 31, 2016

The amounts presented comparatively for the three months ended March 31, 2016 in the Company’s Form 10-Q for the quarter ended March 31, 2017 will be revised for these misclassifications. For the three months ended March 31, 2016, the misclassifications resulted in an overstatement of net cash flows provided by operations of $43.5 million, which will result in a revised balance of $522.5 million, an overstatement of net cash flows used in investing activities of $73.2 million, which will result in a revised balance of $(299.2) million, and an understatement of net cash flows used in financing activities of $29.7 million which will result in a revised balance of $ (375.4) million.

Year ended December 31, 2015

The amounts presented comparatively for the year ended December 31, 2015 in the Company’s Form 10-K for the year ended December 31, 2016 will be revised for these misclassifications. For the year ended December 31, 2015, the misclassifications resulted in an understatement of net cash flows provided by operations of $19.3 million, which will result in a revised balance of $871.2 million, an overstatement of net cash flows provided by investing activities of $19.3 million, which will result in a revised balance of $1,463.8 million, with no impact on net cash flows used in financing activities.

Year ended December 31, 2014

The amounts presented comparatively for the year ended December 31, 2014 in the Company’s Form 10-K for the year ended December 31, 2016 will be revised for these misclassifications. For the year ended December 31, 2014, the misclassifications resulted in an understatement of net cash flows provided by operations of $13.7 million, which will result in a revised balance of $1,206.4 million, an understatement of net cash flows used in investing activities of $13.7 million, which will result in a revised balance of $(981.4) million, with no impact on net cash flows used in financing activities.

These revisions had no impact on the Company’s reported net income, shareholders’ equity, net change in cash, total assets, or total liabilities for any period.

SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are included with the current Form 10-K on file. There were no material changes to these policies during the nine months ended September 30, 2016 except for applicable updates to reflect the change in segment and classes.

Accounting Pronouncements Adopted

During the first quarter of 2016, the Company adopted the following Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):

n
  ASU 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period;
n
  ASU 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items;
n
  ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis;
n
  ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs; and

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n
  ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting.

Stock Compensation

ASU 2014-12 directs that a performance target that affects vesting and can be achieved after the requisite service period is a performance condition. That is, compensation cost would be recognized over the required service period if it is probable that the performance condition would be achieved. The total amount of compensation cost recognized during and after the requisite service period would reflect the number of awards that are expected to vest and would be adjusted to reflect those awards that ultimately vest. The ASU does not require additional disclosures.

CIT adopted this ASU, effective January 1, 2016, for all awards granted or modified after the effective date. Adoption of this guidance did not have a significant impact on CIT’s financial statements or disclosures.

Extraordinary and Unusual Items

ASU 2015-01 eliminates the concept of extraordinary items and the need for entities to evaluate whether transactions or events are both unusual in nature and infrequently occurring.

The ASU precludes (1) segregating an extraordinary item from the results of ordinary operations; (2) presenting separately an extraordinary item on the income statement, net of tax, after income from continuing operations; and (3) disclosing income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event or transaction that is unusual in nature or that occurs infrequently. Consequently, although the Company will no longer need to determine whether a transaction or event is both unusual in nature and infrequently occurring, CIT will still need to assess whether items are unusual in nature or infrequent to determine if the additional presentation and disclosure requirements for these items apply.

CIT adopted this ASU effective January 1, 2016. Adoption of this guidance did not have a significant impact on CIT’s financial statements or disclosures.

Consolidation

ASU 2015-02 amended the current consolidation guidance to change the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities.

The Board changed the way the voting rights characteristic in the VIE scope determination is evaluated for corporations, which may significantly impact entities for which decision making rights are conveyed through a contractual arrangement.

Under ASU 2015-02:

n
  More limited partnerships and similar entities will be evaluated for consolidation under the revised consolidation requirements that apply to VIEs.
n
  Fees paid to a decision maker or service provider are less likely to be considered a variable interest in a VIE.
n
  Variable interests in a VIE held by related parties of a reporting enterprise are less likely to require the reporting enterprise to consolidate the VIE.
n
  There is a new approach for determining whether equity at-risk holders of entities that are not similar to limited partnerships have power to direct the entity’s key activities when the entity has an outsourced manager whose fee is a variable interest.
n
  The deferral of consolidation requirements for certain investment companies and similar entities of the VIE in ASU 2009-17 is eliminated.

The impacts of the update include:

n
  A new consolidation analysis is required for VIEs, including many limited partnerships and similar entities that previously were not considered VIEs.
n
  It is less likely that the general partner or managing member of limited partnerships and similar entities will be required to consolidate the entity when the other investors in the entity lack both participating rights and kick-out rights.
n
  Limited partnerships and similar entities that are not VIEs will not be consolidated by the general partner.
n
  It is less likely that decision makers or service providers involved with a VIE will be required to consolidate the VIE.
n
  Entities for which decision making rights are conveyed through a contractual arrangement are less likely to be considered VIEs.
n
  Reporting enterprises with interests in certain investment companies and similar entities that are considered VIEs will no longer evaluate those entities for consolidation based on majority exposure to variability.

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CIT adopted ASU 2015-02, effective January 1, 2016, under the modified retrospective approach. Based on CIT’s re-assessment of its VIEs under the amended guidance, the adoption of this ASU did not have a significant impact on CIT’s financial statements or disclosures.

Debt Issuance Costs

ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.

Debt issuance costs are specific incremental costs, other than those paid to the lender, that are directly attributable to issuing a debt instrument (i.e., third party costs). Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred charge (i.e., an asset).

ASU 2015-15 clarified ASU 2015-03, which did not address the balance sheet presentation of debt issuance costs that are either (1) incurred before a debt liability is recognized (e.g., before the debt proceeds are received), or (2) associated with revolving debt arrangements. ASU 2015-15 states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the LOC arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement.

In accordance with the new guidance, CIT reclassified deferred debt costs previously included in other assets to borrowings in the first quarter of 2016 and conformed prior periods. The adoption of this guidance did not have a significant impact on CIT’s financial statements or disclosures.

Recent Accounting Pronouncements

The following accounting pronouncements have been issued by the FASB but are not yet effective:

n
  ASU 2014-09, Revenue from contracts with customers (Topic 606)
n
  ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern;
n
  ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date;
n
  ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities;
n
  ASU 2016-02, Leases (Topic 842);
n
  ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships;
n
  ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments;
n
  ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting;
n
  ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
n
  ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting;
n
  ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;
n
  ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC guidance because of ASU 2014-09 and ASU 2014-16 pursuant to staff announcements at the March 3, 2016 EITF meeting;
n
  ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients;
n
  ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and
n
  ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

ASU 2014-15 describes how entities should assess their ability to meet their obligations and sets disclosure requirements about how this information should be communicated. The standard will be used along with existing auditing standards, and provides the following key guidance:

1.  
  Entities must perform a going concern assessment by evaluating their ability to meet their obligations for a look-forward period of one year from the financial statement issuance date (or date the financial statements are available to be issued).
2.  
  Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans.
3.  
  Pursuant to the ASU, substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the annual or interim financial statements are issued or available to be issued (assessment date).

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The new standard applies to all entities for the first annual period ending after December 15, 2016. Company management is responsible for assessing going concern uncertainties at each annual and interim reporting period thereafter. The adoption of this guidance is not expected to have a significant impact on CIT’s financial statements or disclosures.

Financial Instruments

ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main objective is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments to current GAAP are summarized as follows:

n
  Supersede current guidance to classify equity securities into different categories (i.e., trading or available-for-sale);
n
  Require equity investments to be measured at fair value with changes in fair value recognized in net income, rather than other comprehensive income. This excludes those investments accounted for under the equity method, or those that result in consolidation of the investee;
n
  Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment (similar to goodwill);
n
  Eliminate the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost;
n
  Require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
n
  Require an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with fair value option for financial instruments;
n
  Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities, or loans and receivables) on the balance sheet or accompanying notes to the financial statements;
n
  Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. CIT is currently evaluating the impact of adopting this amendment on its financial instruments.

Leases

ASU 2016-02, which is intended to increase transparency and comparability of accounting for lease transactions, will require all leases to be recognized on the balance sheet as lease assets and lease liabilities.

Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. Lease classifications by lessors are similar; operating, direct financing, or sales-type.

Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit thresholds. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements.

The standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. CIT is currently evaluating the effect of this ASU on its financial statements and disclosures.

Derivatives and Hedge Accounting

ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. Therefore, a novation (replacing one counterparty to a derivative instrument with a new counterparty) of a derivative to a counterparty with a sufficiently high credit risk could still result in the dedesignation of the hedging relationship. The new guidance, which may be applied either on a prospective

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basis or a modified retrospective basis, is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. CIT is currently reviewing the impact of adopting this guidance on CIT’s financial statement or disclosures.

ASU 2016-06 clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815, as amended by the ASU. Accordingly, when a call (put) option is contingently exercisable, there is no requirement that an entity must assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The new guidance is effective for public business entities in interim and annual periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim period for which the entity’s financial statements have not been issued but would be retroactively applied to the beginning of the year that includes that interim period. CIT is currently evaluating the effect of this ASU on its financial statements and disclosures.

Equity Method and Joint Ventures

ASU 2016-07 eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.

For available-for-sale securities that become eligible for the equity method of accounting, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for the use of the equity method.

The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. For all entities, public and nonpublic, the new standard is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. CIT is currently evaluating the effect of this ASU on its financial statements and disclosures.

Revenue Recognition

ASU 2014-09 will supersede virtually all of the revenue recognition guidance in GAAP, except as it relates to lease accounting. The core principle of the five-step model is that a company will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In doing so, many companies will have to make more estimates and use more judgment than they do under current GAAP. The five-step analysis of transactions, to determine when and how revenue is recognized, includes:

1.  
  Identify the contract with the customer.
2.  
  Identify the performance obligations in the contract.
3.  
  Determine the transaction price.
4.  
  Allocate the transaction price to the performance obligations.
5.  
  Recognize revenue when or as each performance obligation is satisfied.

Companies can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Under the modified approach, financial statements will be prepared for the year of adoption using the new standard, but prior periods will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under today’s revenue guidance.

ASU 2015-14 deferred the effective date one year for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, which means CIT would apply the standard in their SEC filings for the first quarter of 2018. Public companies that choose full retrospective application will need to apply the standard to amounts they report for 2016 and 2017 on the face of their full year 2018 financial statements.

ASU 2016-08 clarifies that when another party, along with the entity, is involved in providing a good or service to a customer, the entity must determine if the nature of its obligation is to provide a good or service to a customer (that is, to be a principal) or is to arrange for the good or service to be provided to the customer (that is, to act as an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. ASU 2016-08 also amends the principal-versus agent implementation guidance and illustrations in ASU 2014-09.

ASU 2016-10 clarifies identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. For identifying performance obligations, the ASU specifies that an entity is not required to assess whether promised goods or services

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are performance obligations if they are immaterial in the context of the contract. In addition, an entity is permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. The ASU also improves the guidance on assessing whether promises to transfer goods or services are separately identifiable. For licensing implementation, the ASU clarifies the timing of revenue recognition from a license to intellectual property. In addition, a sales-based or usage-based royalty is promised in exchange for a license and, therefore, the royalty’s recognition constraint applies whenever a license is the sole or predominant item to which the royalty relates.

ASU 2016-11 rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the EITF’s March 3, 2016, meetings. Specifically, the ASU supersedes SEC observer comments upon the adoption of ASU 2014-09 on topics related to revenue and expense recognition for freight services in process, and accounting for shipping and handling fees and costs, consideration given by a vendor to a customer, and gas-balancing arrangements.

ASU 2016-12 amends certain aspects of ASU 2014-09, which includes the following:

n
  Collectability — ASU 2016-12 clarifies the objective of the entity’s collectability assessment and contains new guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectability is not probable;
n
  Presentation of sales tax and other similar taxes collected from customers — Entities are permitted to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., to exclude from the transaction price sales taxes that meet certain criteria);
n
  Noncash consideration — An entity’s calculation of the transaction price for contracts containing noncash consideration would include the fair value of the noncash consideration to be received as of the contract inception date. Further, subsequent changes in the fair value of noncash consideration after contract inception would be subject to the variable consideration constraint only if the fair value varies for reasons other than its form;
n
  Contract modifications and completed contracts at transition — The ASU establishes a practical expedient for contract modifications at transition and defines completed contracts as those for which all (or substantially all) revenue was recognized under the applicable revenue guidance before the new revenue standard was initially applied;
n
  Transition technical correction — Entities that elect to use the full retrospective transition method to adopt the new revenue standard would no longer be required to disclose the effect of the change in accounting principle on the period of adoption; however, entities would still be required to disclose the effects on pre-adoption periods that were retrospectively adjusted.

The effective date and transition of ASU 2016-08, 2016-10, 2016-11 and 2016-12 aligns with ASU 2014-09, as amended by ASU 2015-14, effective for fiscal years beginning after December 15, 2017.

CIT is currently reviewing the impact of adoption of these ASUs, the method of adoption and the effect of the standard on its ongoing financial reporting.

Stock Compensation

ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions to employees, including:

n
  Requiring companies to record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement; a Company would account for excess tax benefits and deficiencies as discrete items in the period in which they occur (i.e., they would be excluded from the estimated annual effective tax rate).
n
  Eliminating the requirement that excess tax benefits be realized (i.e., reduce income taxes payable) before being recognized, and to require excess tax benefits to be presented as an operating activity in the statement of cash flows.
n
  Using employee’s shares to satisfy the employers’ statutory income tax withholding obligation. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.
n
  Allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.

For the amendments that change the recognition and measurement of share-based payment awards, the new guidance requires transition under a modified retrospective approach, with a cumulative-effect adjustment made to retained earnings as of the beginning of the fiscal period in which the guidance is adopted. Prospective application is required for the accounting for excess tax benefits and tax deficiencies and for use of the practical expedient for estimating the expected term.

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

An entity should apply the new guidance retrospectively for all periods presented related to the classification of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirements. It can elect to apply the new guidance either prospectively or retrospectively, however, to the presentation of excess tax benefits on the statement of cash flows.

The guidance is effective for public entities for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. CIT is currently evaluating the effect of this ASU on its financial statements and disclosures.

Credit Losses

ASU 2016-13 introduces a forward-looking “expected loss” model (the “Current Expected Credit Losses” (CECL) model) to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.

CECL Model

The CECL model will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. The ASU does not prescribe a specific method to make the estimate so its application will require significant judgment. Generally, the initial estimate of the expected credit losses and subsequent changes in the estimate will be reported in current earnings. The expected credit losses will be recorded through an allowance for loan and lease losses (ALLL) in the statement of financial position.

AFS Debt Securities

The FASB made targeted improvements to the existing other-than-temporary impairment (OTTI) model in ASC 320 for certain AFS debt securities to eliminate the concept of “other-than-temporary” from that model. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The notable changes under the ASU include:

n
  Use of an ALLL approach (versus permanently writing down the security’s cost basis) for impairment;
n
  Limit the ALLL to the amount at which the security’s fair value is less than its amortized cost basis;
n
  Removing the consideration for the length of time fair value has been less than amortized cost when assessing credit loss;
n
  Removing the consideration for recoveries in fair value after the balance sheet date when assessing whether a credit loss exists.

Purchased Financial Assets with Credit Deterioration

The purchased financial assets with credit deterioration (PCD) model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired (PCI) assets in ASC 310-30 under current GAAP. The initial estimate of expected credit losses for a PCD would be recognized through an ALLL with an offset to the cost basis of the related financial asset at acquisition (i.e., increases the cost basis of the asset, the “gross-up” approach with no impact to net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or AFS debt security impairment model with all adjustments of the ALLL recognized through earnings. Beneficial interests classified as held-to-maturity or AFS will need to apply the PCD model if the beneficial interest meets the definition of PCD or if there is a significant difference between contractual and expected cash flows at initial recognition.

This guidance also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ALLL. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year).

Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach). A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. A prospective transition approach should be used for PCD assets where upon adoption; the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses.

The ASU will be effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. CIT is currently evaluating the effect of this ASU on its financial statements and disclosures.

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Statement of Cash Flows

FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The following issues are addressed:

n
  Issue 1 — Debt prepayment or debt extinguishment costs — Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities.
n
  Issue 2 — Settlement of zero-coupon debt instruments — Cash payments for the settlement of zero-coupon debt instruments, including other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal.
n
  Issue 3 — Contingent consideration payments made after a business combination — Cash payments made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities.
n
  Issue 4 — Proceeds from the settlement of insurance claim — Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement).
n
  Issue 5 — Proceeds from the settlement of corporate-owned life insurance (“COLI”) policies, including bank-owned life insurance (“BOLI”) policies — Cash payments received from the settlement of COLI or BOLI policies should be classified as cash inflows from investing activities. Cash payments for premiums on COLI or BOLI policies may be classified as cash outflows for investing, operating, or a combination of investing and operating activities.
n
  Issue 6 — Distributions received from equity method investments — The guidance provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a 1) cumulative earnings approach, or 2) nature of distribution (or “look-through”) approach.

Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities.

Alternatively, an investor can choose to classify the distributions based on the nature of activities of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change in accounting principle on a retrospective basis.

n
  Issue 7 — Beneficial interests in securitization transactions — A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity. Cash receipts from a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities.
n
  Issue 8 — Separately identifiable cash flows and application of the predominance principle — Entities should use reasonable judgment to separate cash flows. In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow.

The ASU will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. CIT is currently evaluating the impact of the above eight issues identified on its cash flow statement and related disclosures.

NOTE 2 — ACQUISITION AND DISPOSITION ACTIVITIES

ACQUISITION

During 2015, the Company completed the following significant business acquisition.

OneWest Transaction

Effective August 3, 2015, CIT acquired IMB HoldCo, LLC (“IMB”), the parent company of OneWest Bank. CIT Bank, a Utah-state chartered bank and a wholly owned subsidiary of CIT, merged with and into OneWest Bank, with OneWest Bank surviving as a wholly owned subsidiary of CIT with the name CIT Bank, National Association. CIT paid approximately $3.4 billion as consideration, comprised of approximately $1.9 billion in cash proceeds, approximately 30.9 million shares of CIT Group Inc. common stock (valued at approximately $1.5 billion at the time of closing), and approximately 168,000 restricted stock units of CIT (valued at approximately $8 million at the time of closing). Total consideration also included $116 million of cash retained by CIT as a holdback for certain potential liabilities relating to IMB and $2 million of cash for expenses of the holders’ representative. The acquisition was accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations.

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The acquisition added approximately $21.8 billion of assets, and $18.4 billion of liabilities to CIT’s Consolidated Balance Sheet and 70 branches in Southern California. Primary reasons for the acquisition included advancing CIT’s bank deposit strategy, expanding the Company’s products and services offered to small and middle market customers, and improving CIT’s competitive position in the financial services industry.

DISCONTINUED OPERATION

Reverse Mortgage Servicing

The Financial Freedom business, a division of CIT Bank (formerly a division of OneWest Bank) that services reverse mortgage loans, was acquired in conjunction with the OneWest Transaction. Pursuant to ASC 205-20, the Financial Freedom business is reflected as discontinued operations. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, systems and servicing assets. The assets of discontinued operations primarily include Home Equity Conversion Mortgage (“HECM”) loans and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which relates primarily to loans serviced for third party investors, secured borrowings and contingent liabilities. In addition, continuing operations includes a portfolio of reverse mortgages, which are recorded in the Legacy Consumer Mortgage division of the Consumer and Community Banking segment, and are serviced by Financial Freedom. Based on the Company’s assessment of market and third party data, the Company recorded an impairment charge of $19 million to increase the servicing liability to $29 million at September 30, 2016, as compared to $10 million at December 31, 2015.

As a mortgage servicer of residential reverse mortgage loans, the Company is exposed to contingent liabilities for breaches of servicer obligations as set forth in industry regulations established by the Department of Housing and Urban Development (“HUD”) and the Federal Housing Administration (“FHA”) and in servicing agreements with the applicable counterparties, such as third party investors. Under these agreements, the servicer may be liable for failure to perform its servicing obligations, which could include fees imposed for failure to comply with foreclosure timeframe requirements established by servicing guides and agreements to which CIT is a party as the servicer of the loans. The Company has established reserves for contingent servicing-related liabilities associated with discontinued operations.

As disclosed in CIT’s Form 10-K for fiscal year 2015, CIT determined that there was a material weakness related to the HECM interest curtailment reserve included in the contingent servicing-related liability associated with this business. During the quarter ended June 30, 2016, as a result of the ongoing review to remediate the material weakness and taking into consideration the investigation being conducted by the Office of Inspector General (“OIG”) for HUD, the Company recorded additional reserves, due to a change in estimate, of approximately $230 million, which is net of a corresponding increase in the indemnification receivable from the FDIC noted in the paragraph below.

No additional net reserves were recorded to the interest curtailment reserve in the third quarter. However, in preparing the interim financial statements for the quarter ended September 30, 2016, the Company discovered and corrected an error, which was determined to be immaterial to the current and prior quarters, resulting in a $10 million pre-tax overstatement of the interest curtailment reserve that should have been recorded in the prior quarter, which was offset by other increases to the reserve resulting from the Company’s quarterly reserving process. While the Company believes that such accrued liabilities are adequate, it is reasonably possible that such liabilities could ultimately exceed the Company’s reserve for probable and reasonably estimable losses by up to $5 million as of September 30, 2016, which decreased by $35 million from December 31, 2015.

A corresponding indemnification receivable from the FDIC of $102 million and $66 million at September 30, 2016 and December 31, 2015, respectively, was recognized for the loans covered by indemnification agreements with the FDIC reported in continuing operations. The indemnification receivable is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount.


Condensed Balance Sheet of Discontinued Operation
(dollars in millions)

        September 30,
2016
    December 31,
2015

Net Finance Receivables(1)
              $ 393.0          $ 449.5   
Other assets(2)
                 59.9             51.0   
Assets of discontinued operations
              $ 452.9          $ 500.5   
Secured borrowings(1)
              $ 386.6          $ 440.6   
Other liabilities(3)
                 541.2             255.6   
Liabilities of discontinued operations
              $ 927.8          $ 696.2   
(1)  
  Net finance receivables include $385.6 million and $440.2 million of securitized balances at September 30, 2016 and December 31, 2015, respectively, and $7.4 million and $9.3 million of additional draws awaiting securitization respectively. Secured borrowings relate to those receivables.
(2)  
  Amount includes servicing advances, servicer receivables and property and equipment, net of accumulated depreciation.
(3)  
  Other liabilities include contingent liabilities, reverse mortgage servicing liabilities and other accrued liabilities.

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The results from discontinued operations for the quarter and nine months ended September 30, 2016 and 2015 are presented below. The three-month and nine-month results for 2016 include full period results while the three-month and nine-month results for 2015 include only the results of discontinued operations for a partial period in the third quarter of 2015 in connection with the OneWest Transaction for Financial Freedom.


Condensed Statements of Operations (dollars in millions)

        Quarters Ended September 30,
    Nine Months Ended September 30,
        2016
    2015
    2016
    2015
Interest income(1)
              $ 2.8          $ 2.2          $ 8.7          $ 2.2   
Interest expense(1)
                 (2.5 )            (2.3 )            (8.1 )            (2.3 )  
Other income (loss)(2)
                 (10.3 )            6.1             7.3             6.1   
Operating expenses(3)
                 (14.9 )            (11.8 )            (276.6 )            (11.8 )  
Loss from discontinued operation before benefit for income taxes
                 (24.9 )            (5.8 )            (268.7 )            (5.8 )  
Benefit for income taxes(4)
                 9.3             2.1             81.3             2.1   
Loss from discontinued operation, net of taxes
              $ (15.6 )         $ (3.7 )         $ (187.4 )         $ (3.7 )  
(1)  
  Includes amortization for the premium associated with the HECM loans and related secured borrowings.
(2)  
  For the quarter ended September 30, 2016, other income (loss) includes a $19 million impairment charge to the servicing liability related to our reverse mortgage servicing operations.
(3)  
  For the quarter and nine months ended September 30, 2016, operating expense is comprised of $5.1 million and $11 million, respectively, in salaries and benefits, $6.6 million and $16.1 million, respectively, in professional and legal services, and $3.2 million and $10.5 million, respectively, for other expenses such as data processing, premises and equipment, and miscellaneous charges. In addition, operating expenses for the nine months ended September 30, 2016 included a one-time increase to the servicing-related reserve of approximately $230 million due to a change in estimate, which is net of a corresponding increase in the indemnification receivable from the FDIC. For the quarter and nine months ended September 30, 2015, operating expense is comprised of $4.4 million in salaries and benefits, $2.8 million in professional services and $4.6 million for other expenses such as data processing, premises and equipment, legal settlement, and miscellaneous charges.
(4)  
  For the quarter and nine months ended September 30, 2016, the Company’s tax rate for discontinued operations is 38% and 30%, respectively. For the quarter and nine months ended September 30, 2015, the Company’s tax rate for discontinued operations is 36.5%.

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


Condensed Statement of Cash Flows (dollars in millions)

        Nine Months Ended
        September 30,
2016

    September 30,
2015

Net cash flows used for operations
              $ (32.0 )         $ (1.4 )  
Net cash flows provided by investing activities
                 69.8             9.8   

NOTE 3 — LOANS

The following tables and data as of September 30, 2016 include the loan balances acquired in the OneWest Transaction, which were recorded at fair value at the time of the acquisition (August 3, 2015). See Note 2 — Acquisition and Disposition Activities in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015 for details of the OneWest Transaction.

Finance receivables, excluding those reflected as discontinued operations, consist of the following:


Finance Receivables by Product (dollars in millions)

        September 30,
2016

    December 31,
2015

Commercial loans
              $ 20,341.8          $ 21,380.9   
Direct financing leases and leveraged leases
                 2,833.7             3,427.5   
Total commercial
                 23,175.5             24,808.4   
Consumer loans
                 6,742.7             6,863.3   
Total finance receivables
                 29,918.2             31,671.7   
Finance receivables held for sale(1)
                 2,361.7             1,985.1   
Finance receivables and held for sale receivables(1)
              $ 32,279.9          $ 33,656.8   
(1)  
  Assets held for sale on the Balance Sheet at September 30, 2016 includes finance receivables and operating lease equipment primarily related to portfolios in Canada, China, Business Air and Commercial Air. As discussed in subsequent tables, since the Company manages the credit risk and collections of finance receivables held for sale consistently with its finance receivables held for investment, the aggregate amount is presented in this table.

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


Finance Receivables (dollars in millions)

        September 30, 2016
    December 31, 2015
 
                 Domestic              Foreign              Total              Domestic              Foreign              Total    
Transportation Finance
              $ 317.3          $ 1,906.9          $ 2,224.2          $ 815.1          $ 2,727.0          $ 3,542.1   
Commercial Banking
                 20,265.6             299.1             20,564.7             20,607.9             321.3             20,929.2   
Consumer and Community Banking(1)
                 7,129.3                          7,129.3             7,200.4                          7,200.4   
Total
              $ 27,712.2          $ 2,206.0          $ 29,918.2          $ 28,623.4          $ 3,048.3          $ 31,671.7   
(1)  
  The Consumer and Community Banking segment includes certain commercial loans, primarily consisting of a portfolio of Small Business Administration (SBA) loans. These loans are excluded from the Consumer loan balance and included in the Commercial loan balances in the tables throughout this note.

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


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

        September 30,
2016

    December 31,
2015

Unearned income
              $ (715.7 )         $ (870.4 )  
Unamortized premiums / (discounts)
                 (39.1 )            (34.0 )  
Accretable yield on Purchased Credit-Impaired (“PCI”) loans
                 1,256.8             1,294.0   
Net unamortized deferred costs and (fees)(1)
                 49.0             42.9   
(1)  
  Balance relates to Commercial Banking and Transportation Finance segments.

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

Credit Quality Information

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

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The definitions of the commercial loan 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 exhibit a well-defined weakness and are inadequately protected by the current sound worth and paying capacity of the borrower, and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected to (2) assets with weaknesses that make collection or liquidation in full unlikely on the basis of current facts, conditions, and values. Assets in this classification can be accruing or on non-accrual depending on the evaluation of these factors.

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


Commercial Finance and Held for Sale Receivables — Risk Rating by Class / Segment (dollars in millions)

Grade:         Pass
    Special
Mention

    Classified-
accruing

    Classified-
non-accrual

    PCI Loans
    Total
September 30, 2016
                                                                                                 
Transportation Finance
                                                                                                      
Aerospace
              $ 1,301.6          $ 231.5          $ 53.0          $ 5.0          $           $ 1,591.1   
Rail
                 103.6             1.4             1.3                                       106.3   
Maritime Finance
                 845.6             170.3             496.1             49.4                          1,561.4   
Total Transportation
                 2,250.8             403.2             550.4             54.4                          3,258.8   
Commercial Banking
                                                                                                 
Commercial Finance
                 7,049.5             751.9             602.4             131.1             45.1             8,580.0   
Real Estate Finance
                 5,060.5             178.0             92.5             6.9             76.0             5,413.9   
Business Capital
                 6,055.2             533.0             272.4             41.9                          6,902.5   
Total Commercial Banking
                 18,165.2             1,462.9             967.3             179.9             121.1             20,896.4   
Consumer & Community Banking
                                                                                                      
Other Consumer Banking(1)
                 348.5             13.5             20.2             0.1             4.3             386.6   
Non- Strategic Portfolios
                 814.4             52.5             46.8             40.0                          953.7   
Total
              $ 21,578.9          $ 1,932.1          $ 1,584.7          $ 274.4          $ 125.4          $ 25,495.5   
December 31, 2015
                                                                                                      
Transportation Finance
                                                                                                 
Aerospace
              $ 1,635.7          $ 65.0          $ 46.2          $ 15.4          $           $ 1,762.3   
Rail
                 118.9             1.4             0.6                                       120.9   
Maritime Finance
                 1,309.0             162.0             207.4                                       1,678.4   
Total Transportation Finance
                 3,063.6             228.4             254.2             15.4                          3,561.6   
Commercial Banking
                                                                                                      
Commercial Finance
                 8,215.0             626.4             389.9             131.5             69.4             9,432.2   
Real Estate Finance
                 5,143.2             97.6             18.6             3.6             94.6             5,357.6   
Business Capital
                 5,649.0             517.0             320.1             56.0                          6,542.1   
Total Commercial Banking
                 19,007.2             1,241.0             728.6             191.1             164.0             21,331.9   
Consumer & Community Banking
                                                                                                 
Other Consumer Banking(1)
                 300.6             12.1             18.3                          5.3             336.3   
Non- Strategic Portfolios
                 1,286.3             115.4             60.1             56.0                          1,517.8   
Total
              $ 23,657.7          $ 1,596.9          $ 1,061.2          $ 262.5          $ 169.3          $ 26,747.6   
(1)  
  The Consumer and Community Banking segment includes certain commercial loans, primarily consisting of a portfolio of Small Business Administration (SBA) loans. These loans are excluded from the Consumer loan balance and included in the Commercial loan balances.

Item 1.  Consolidated Financial Statements  19



Table of Contents


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

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

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

The following table provides a summary of the consumer portfolio credit quality. The amounts represent the carrying value, which differ from unpaid principal balances, and include the premiums or discounts and the accretable yield and non-accretable difference for PCI loans recorded in purchase accounting. Included in the consumer finance receivables are “covered loans” for which the Company can be reimbursed for a substantial portion of future losses under the terms of loss sharing agreements with the FDIC if losses occur within the indemnification period. Covered loans are discussed further in Note 5 — Indemnification Assets.

Included in the consumer loan balances as of September 30, 2016 and December 31, 2015, were loans with terms that permitted negative amortization with an unpaid principal balance of $813 million and $966 million, respectively.


Consumer Loan LTV Distribution (dollars in millions)

      Single Family Residential
  Reverse Mortgage
 
      Covered Loans
  Non-covered Loans
  Total
Single Family
  Covered Loans   Non-covered Loans
  Total Reverse   Total Consumer
LTV Range       Non-PCI
   PCI
   Non-PCI
   PCI
   Residential
   Non-PCI
   Non-PCI
   PCI
   Mortgages
   Loans
September 30, 2016
Greater than 125%
        $ 1.6        $ 296.0        $ 13.7        $       $ 311.3        $ 0.6        $ 7.6        $ 33.0        $ 41.2        $ 352.5   
101% – 125%
         3.2         489.8         14.3                507.3         1.1         11.7         10.2         23.0         530.3   
80% – 100%
         281.7         577.7         34.3                893.7         26.5         40.8         8.2         75.5         969.2   
Less than 80%
         1,559.0         871.2         1,720.0         9.1         4,159.3         415.4         304.2         9.6         729.2         4,888.5   
Not Applicable(1)
                       2.2                  2.2                                     2.2   
Total
        $ 1,845.5        $ 2,234.7        $ 1,784.5        $ 9.1        $ 5,873.8        $ 443.6        $ 364.3        $ 61.0        $ 868.9        $ 6,742.7   
December 31, 2015
                                                                                    
Greater than 125%
        $ 1.1        $ 395.6        $ 0.8        $ 15.7        $ 413.2        $ 1.0        $ 3.9        $ 39.3        $ 44.2        $ 457.4   
101% – 125%
         3.6         619.9         0.2         14.9         638.6         2.5         6.5         17.0         26.0         664.6   
80% – 100%
         449.3         552.1         14.3         11.4         1,027.1         26.5         37.4         7.0         70.9         1,098.0   
Less than 80%
         1,621.0         829.3         1,416.1         12.9         3,879.3         432.6         312.5         11.1         756.2         4,635.5   
Not Applicable(1)
                       7.8                7.8                                     7.8   
Total
        $ 2,075.0        $ 2,396.9        $ 1,439.2        $ 54.9        $ 5,966.0        $ 462.6        $ 360.3        $ 74.4        $ 897.3        $ 6,863.3   
(1)  
  Certain Consumer Loans do not have LTV’s, including the Credit Card portfolio.

Covered loans are limited to the Consumer and Community Banking segment. The following table summarizes the covered loans (single family residential and reverse mortgages) as of September 30, 2016 and December 31, 2015:


Covered Loans (dollars in millions)

        September 30,
2016

    December 31,
2015

Consumer and Community Banking loans HFI at carrying value
                                     
PCI
              $ 2,234.7          $ 2,396.9   
Non-PCI
                 2,289.1             2,537.6   
Total
              $ 4,523.8          $ 4,934.5   
 

20   CIT GROUP INC



Table of Contents


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

Past Due and Non-accrual Loans

The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification:


Past Due Finance and Held for Sale Receivables (dollars in millions)

        Past Due
   
        30–59 Days
Past Due
    60–89 Days
Past Due
    90 Days or
Greater
    Total
Past Due
    Current(1)
    PCI Loans(2)
    Total Finances
Receivables
September 30, 2016
Transportation Finance
Aerospace
              $           $ 0.3          $ 0.2          $ 0.5          $ 1,590.6          $           $ 1,591.1   
Rail
                 1.4             0.7             1.9             4.0             102.3                          106.3   
Maritime Finance
                                                                     1,561.4                          1,561.4   
Total Transportation Finance
                 1.4             1.0             2.1             4.5             3,254.3                          3,258.8   
Commercial Banking
Commercial Finance
                              34.9             32.1             67.0             8,467.9             45.1             8,580.0   
Real Estate Finance
                              0.1                          0.1             5,337.8             76.0             5,413.9   
Business Capital
                 93.5             24.4             13.0             130.9             6,771.6                          6,902.5   
Total Commercial Banking
                 93.5             59.4             45.1             198.0             20,577.3             121.1             20,896.4   
Consumer & Community Banking
                                                                                                                      
Legacy Consumer Mortgages
                 24.4             7.2             33.5             65.1             2,670.9             2,304.8             5,040.8   
Other Consumer Banking
                 6.7                          1.0             7.7             2,118.2             4.3             2,130.2   
Total Consumer & Community Banking
                 31.1             7.2             34.5             72.8             4,789.1             2,309.1             7,171.0   
Non-Strategic Portfolios
                 6.9             3.5             15.0             25.4             928.3                          953.7   
Total
              $ 132.9          $ 71.1          $ 96.7          $ 300.7          $ 29,549.0          $ 2,430.2          $ 32,279.9   
December 31, 2015
                                                                                                                      
Transportation Finance
Aerospace
              $ 1.4          $           $ 15.4          $ 16.8          $ 1,745.5          $           $ 1,762.3   
Rail
                 8.5             2.0             2.1             12.6             108.3                          120.9   
Maritime Finance
                                                                     1,678.4                          1,678.4   
Total Transportation Finance
                 9.9             2.0             17.5             29.4             3,532.2                          3,561.6   
Commercial Banking
                                                                                                                      
Commercial Finance
                                           20.5             20.5             9,342.3             69.4             9,432.2   
Real Estate Finance
                 1.9                          0.7             2.6             5,260.4             94.6             5,357.6   
Business Capital
                 131.1             32.8             26.8             190.7             6,351.4                          6,542.1   
Total Commercial Banking
                 133.0             32.8             48.0             213.8             20,954.1             164.0             21,331.9   
Consumer & Community Banking
Legacy Consumer Mortgages
                 15.8             1.7             4.1             21.6             2,923.8             2,526.2             5,471.6   
Other Consumer Banking
                 2.7             0.3             0.4             3.4             1,765.2             5.3             1,773.9   
Total Consumer & Community Banking
                 18.5             2.0             4.5             25.0             4,689.0             2,531.5             7,245.5   
Non-Strategic Portfolios
                 18.7             22.1             33.7             74.5             1,443.3                          1,517.8   
Total
              $ 180.1          $ 58.9          $ 103.7          $ 342.7          $ 30,618.6          $ 2,695.5          $ 33,656.8   
(1)  
  Due to their nature, reverse mortgage loans are included in Current, as they do not have contractual payments due at a specified time.
(2)  
  PCI loans are written down at acquisition to their fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as past due or non-accrual even though they may be contractually past due as we expect to fully collect the new carrying values of these loans.

Item 1.  Consolidated Financial Statements  21



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

Non-accrual loans include loans that are individually evaluated and determined to be impaired (generally loans with balances greater than $500,000), as well as other, smaller balance loans placed on non-accrual due to delinquency (generally 90 days or more for smaller commercial loans and 120 or more days regarding real estate mortgage loans).

Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due.

The following table sets forth non-accrual loans, assets received in satisfaction of loans (OREO and repossessed assets) and loans 90 days or more past due and still accruing.


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

        September 30, 2016
    December 31, 2015
        Held for
Investment
    Held for
Sale
    Total
    Held for
Investment
    Held for
Sale
    Total
Transportation Finance
Aerospace
              $           $ 5.0          $ 5.0          $ 15.4          $           $ 15.4   
Maritime Finance
                 49.4                          49.4                                          
Total Transportation Finance
                 49.4             5.0             54.4             15.4                          15.4   
Commercial Banking
Commercial Finance
                 117.9             13.2             131.1             120.5             11.0             131.5   
Real Estate Finance
                 6.9                          6.9             3.6                          3.6   
Business Capital
                 41.9                          41.9             56.0                          56.0   
Total Commercial Banking
                 166.7             13.2             179.9             180.1             11.0             191.1   
Consumer & Community Banking
                                                                                                      
Legacy Consumer Mortgages
                 13.9                          13.9             4.2             0.6             4.8   
Other Consumer Banking
                 0.3                          0.3                          0.4             0.4   
Total Consumer & Community Banking
                 14.2                          14.2             4.2             1.0             5.2   
Non-Strategic Portfolios
                              40.0             40.0                          56.0             56.0   
Total
              $ 230.3          $ 58.2          $ 288.5          $ 199.7          $ 68.0          $ 267.7   
OREO and repossessed assets
                                               88.7                                           127.3   
Total non-performing assets
                                            $ 377.2                                        $ 395.0   
Commercial loans past due 90 days or more accruing
                                            $ 5.2                                        $ 15.6   
Consumer loans past due 90 days or more accruing
                                               24.4                                           0.2   
Total Accruing loans past due 90 days or more
                                            $ 29.6                                        $ 15.8   

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

The table below summarizes the residential mortgage loans in the process of foreclosure and OREO:


Loans in Process of Foreclosure (dollars in millions)

        September 30,
2016

    December 31,
2015

PCI
              $ 221.6          $ 320.0   
Non-PCI
                 109.6             71.0   
Loans in process of foreclosure
              $ 331.2          $ 391.0   
OREO
              $ 83.5          $ 118.0   

Impaired Loans

The Company’s policy is to review for impairment finance receivables greater than $500,000 that are on non-accrual status. Consumer and small-ticket loan and lease receivables that have not been modified in a restructuring, as well as short-term factoring receivables, are included (if appropriate) in the reported non-accrual balances above, but are excluded from the impaired finance receivables disclosure below as charge-offs are typically determined and recorded for such loans when they are more than 90 – 150 days past due.

22   CIT GROUP INC



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

The following table contains information about impaired finance receivables and the related allowance for loan losses by class, exclusive of finance receivables that were identified as impaired at the date of the OneWest Transaction (the “Acquisition Date”) for which the Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), which are disclosed further below in this note. Impaired loans exclude PCI loans.


Impaired Loans (dollars in millions)

                    Average Recorded Investment
                    Three Months Ended
September 30,
    Nine Months Ended
September 30,
        Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    2016
    2015
    2016
    2015
September 30, 2016
With no related allowance recorded:
                                                                                                                       
Transportation Finance
Aerospace
              $           $           $           $            $           $ 0.2          $    
Commercial Banking
Commercial Finance
                 17.5             34.0                          13.6             7.7             13.2             4.3   
Business Capital
                 2.0             6.1                          5.5             5.6             6.2             5.8   
Real Estate Finance
                 0.8             0.8                          0.8             1.7             1.5             0.8   
Non-Strategic Portfolios
                                                                     6.1                          9.2   
With an allowance recorded:
                                                                                                                       
Transportation Finance
Aerospace
                                                                     4.7             3.8             2.4   
Maritime Finance
                 49.4             49.4             6.8             24.7                          12.3                
Commercial Banking
                                                                                                                      
Commercial Finance
                 100.4             107.7             23.8             113.6             45.5             117.1             40.8   
Business Capital
                 4.0             4.0             2.8             5.9             8.6             8.6             4.3   
Real Estate Finance
                 3.1             3.1             0.4             3.1                          2.4                
Non-Strategic Portfolios
                                                                     11.1                          9.1   
Total Impaired Loans(1)
                 177.2             205.1             33.8             167.2             91.0             165.3             76.7   
Total Loans Impaired at Acquisition Date and Convenience Date(2)
                 2,430.2             3,556.9             13.8             2,459.3             1,421.6             2,543.8             711.1   
Total
              $ 2,607.4          $ 3,762.0          $ 47.6          $ 2,626.5          $ 1,512.6          $ 2,709.1          $ 787.8   
        Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Average
Recorded
Investment(3)
December 31, 2015
                                                                   
With no related allowance recorded:
                                                                      
Commercial Banking
                                                                   
Commercial Finance
              $ 15.4          $ 22.8          $           $ 6.5   
Business Capital
                 6.3             9.7                          5.9   
Real Estate Finance
                 0.2             0.8                          0.7   
Non-Strategic Portfolios
                                                        7.3   
With an allowance recorded:
                                                                      
Transportation Finance
                                                                   
Aerospace
                 15.4             15.4             0.4             5.0   
Commercial Banking
                                                                   
Commercial Finance
                 102.6             112.1             22.7             53.2   
Business Capital
                 9.7             11.7             4.7             5.4   
Non-Strategic Portfolios
                                                        7.3   
Total Impaired Loans(1)
                 149.6             172.5             27.8             91.3   
Total Loans Impaired at Acquisition Date and Convenience Date(2)
                 2,695.5             3,977.3             4.9             1,108.0   
Total
              $ 2,845.1          $ 4,149.8          $ 32.7          $ 1,199.3   
(1)  
  Interest income recorded for the three and nine months ended September 30, 2016 and the year ended December 31, 2015 while the loans were impaired were $0.5 million, $1.4 million and $1.5 million of which $0.2 million, $0.6 million and $0.5 million was interest recognized using cash-basis method of accounting, respectively. Interest income recorded for the three and nine months ended September 30, 2015 while the loans were impaired were $0.2 million and $0.8 million of which $0.1 million was interest recognized using cash-basis method of accounting.
(2)  
  Details of finance receivables that were identified as impaired at the Acquisition Date are presented under Loans Acquired with Deteriorated Credit Quality.
(3)  
  Average recorded investment for the year ended December 31, 2015.

Item 1.  Consolidated Financial Statements  23



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

Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. For commercial loans, the Company has established review and monitoring procedures designed to identify, as early as possible, customers that are experiencing financial difficulty. Credit risk is captured and analyzed based on the Company’s internal probability of obligor default (PD) and loss given default (LGD) ratings. A PD rating is determined by evaluating borrower credit-worthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. An LGD rating is predicated on transaction structure, collateral valuation and related guarantees or recourse. Further, related considerations in determining probability of collection include the following:

n
  Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the related 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, excessive financial leverage or business interruptions;
n
  Loans secured by collateral that is not readily marketable or that has experienced or is susceptible to deterioration in realizable value; and
n
  Loans to borrowers in industries or countries experiencing severe economic instability.

Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable. A specific allowance or charge-off is recorded for the shortfall. In instances where the estimated value exceeds the recorded investment, no specific allowance is recorded. The estimated value is determined using fair value of collateral and other cash flows if the finance receivable is collateralized, the present value of expected future cash flows discounted at the contract’s effective interest rate, or market price. A shortfall between the estimated value and recorded investment in the finance receivable is reported in the provision for credit losses. In instances when the Company measures impairment based on the present value of expected future cash flows, the change in present value is reported in the provision for credit losses.

The following summarizes key elements of the Company’s policy regarding the determination of collateral fair value in the measurement of impairment:

n
  “Orderly liquidation value” is the basis for collateral valuation;
n
  Appraisals are updated annually or more often as market conditions warrant; and
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 that may become difficult to locate, or collect or may be subject to pilferage in a liquidation.

Loans Acquired with Deteriorated Credit Quality

For purposes of this presentation, the Company is applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) to loans that were identified as impaired as of the Acquisition Date. PCI loans were initially recorded at estimated fair value with no allowance for loan losses carried over, since the initial fair values reflected credit losses expected to be incurred over the remaining lives of the loans. The acquired loans are subject to the Company’s internal credit review. See Note 4 — Allowance for Loan Losses.


Purchased Credit Impaired Loans(1) (dollars in millions)

September 30, 2016         Unpaid
Principal
Balance
    Carrying
Value
    Allowance
for Loan
Losses
Commercial Banking
Commercial Finance
              $ 74.9          $ 45.1          $ 1.8   
Real Estate Finance
                 122.1             76.0             3.8   
Consumer & Community Banking
                                                       
Other Consumer Banking
                 5.6             4.3                
Legacy Consumer Mortgages
                 3,354.3             2,304.8             8.2   
 
              $ 3,556.9          $ 2,430.2          $ 13.8   
(1)  
  PCI loans from prior transactions were not significant and are not included.

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


Purchased Credit Impaired Loans(1) (dollars in millions) (continued)

December 31, 2015         Unpaid
Principal
Balance
    Carrying
Value
    Allowance
for Loan
Losses
Commercial Banking
Commercial Finance
              $ 115.5          $ 69.4          $ 2.5   
Real Estate Finance
                 161.1             94.6             0.6   
Consumer & Community Banking
Other Consumer Banking
                 6.8             5.3                
Legacy Consumer Mortgages
                 3,693.9             2,526.2             1.8   
 
              $ 3,977.3          $ 2,695.5          $ 4.9   
(1)  
  PCI loans from prior transactions were not significant and are not included.

The following table summarizes commercial PCI loans within Commercial Banking, which are monitored for credit quality based on internal risk classifications. See previous table Consumer Loan LTV Distributions for credit quality metrics on consumer PCI loans.

        September 30, 2016
(dollars in millions)         Non-
criticized

    Criticized
    Total
Commercial Finance
              $ 5.2          $ 39.9          $ 45.1   
Real Estate Finance
                 35.9             40.1             76.0   
Total
              $ 41.1          $ 80.0          $ 121.1   
        December 31, 2015
        Non-
criticized

    Criticized
    Total
Commercial Finance
              $ 5.3          $ 64.1          $ 69.4   
Real Estate Finance
                 33.2             61.4             94.6   
Total
              $ 38.5          $ 125.5          $ 164.0   

Non-criticized loans generally include loans that are expected to be repaid in accordance with contractual loan terms. Criticized loans are risk rated as special mention or classified.

Accretable Yield

The excess of cash flows expected to be collected over the recorded investment (estimated fair value at acquisition) of the PCI loans represents the accretable yield and is recognized in interest income on an effective yield basis over the remaining life of the loan, or pools of loans. The accretable yield is adjusted for changes in interest rate indices for variable rate PCI loans, changes in prepayment assumptions and changes in expected principal and interest payments and collateral values. Further, if a loan within a pool of loans is modified, the modified loan remains part of the pool of loans. The difference between the cash flows contractually required to be paid, measured as of the Acquisition Date, over the expected cash flows is referred to as the non-accretable difference.

Subsequent to acquisition, we evaluate our estimates of the cash flows expected to be collected on a quarterly basis. Probable and significant decreases in expected cash flows as a result of further credit deterioration result in a charge to the provision for credit losses and a corresponding increase to the allowance for credit losses. Probable and significant increases in expected cash flows due to improved credit quality result in reversal of any previously recorded allowance for loan losses, to the extent applicable, and an increase in the accretable yield applied prospectively for any remaining increase. Changes in expected cash flows caused by changes in market interest rates or by prepayments are recognized as adjustments to the accretable yield on a prospective basis.

Changes in the accretable yield for PCI loans are summarized below.

(dollars in millions)         September 30, 2016
        Quarter
Ended

    Nine Months
Ended

Beginning Balance
              $ 1,274.8          $ 1,294.0   
Accretion into interest income
                 (48.4 )            (149.3 )  
Reclassification from non-accretable difference
                 35.8             146.2   
Disposals and Other
                 (5.4 )            (34.1 )  
Balance at September 30, 2016
              $ 1,256.8          $ 1,256.8   
        Quarter and Nine
Months Ended
September 30, 2015

Balance at August 3, 2015(1)
              $ 1,254.8   
Accretion into interest income
                 (32.1 )  
Reclassification from non-accretable difference
                 0.1   
Disposals and Other
                 (5.9 )  
Balance at September 30, 2015
              $ 1,216.9   
(1)  
  Balance at August 3, 2015 reflects reclassification of certain PCI loans and measurement period adjustments. Refer to the Company’s December 31, 2015 Form 10-K for further discussion.

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

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 with CIT or other material creditor
n
  Borrower has declared bankruptcy
n
  Growing doubt about the borrower’s ability to continue as a going concern
n
  Borrower has (or is expected to have) insufficient cash flow to service debt
n
  Borrower is de-listing its 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 meet the definition of a TDR are subject to the Company’s standard impaired loan policy, namely that non-accrual loans in excess of $500,000 are individually reviewed for impairment, while non-accrual loans less than $500,000 are considered as part of homogenous pools and are included in the determination of the non-specific allowance.

We may require some consumer borrowers experiencing financial difficulty to make trial payments generally for a period of three to four months, according to the terms of a planned permanent modification, to determine if they can perform according to those terms. These arrangements represent trial modifications, which we classify and account for as TDRs. While loans are in trial payment programs, their original terms are not considered modified and they continue to advance through delinquency status and accrue interest according to their original terms. The planned modifications for these arrangements predominantly involve interest rate reductions or other interest rate concessions; however, the exact concession type and resulting financial effect are usually not finalized and do not take effect until the loan is permanently modified. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasury’s Making Homes Affordable (“MHA”) programs for real estate 1-4 family first lien (i.e., Home Affordable Modification Program — HAMP) and junior lien (i.e., Second Lien Modification Program — 2MP) mortgage loans. HAMP and other MHA programs are set to expire on December 31, 2016 (the last day to submit an application).

At September 30, 2016, the loans in trial modification period were $37.8 million under HAMP, $0.3 million under 2MP and $4.7 million under proprietary programs. Trial modifications with a recorded investment of $41.9 million at September 30, 2016 were accruing loans and $0.9 million were non-accruing loans. At December 31, 2015, the loans in trial modification period were $26.2 million under HAMP, $0.1 million under 2MP and $5.2 million under proprietary programs. Trial modifications with a recorded investment of $31.4 million at December 31, 2015 were accruing loans and $0.1 million were non-accruing loans. Our experience is that substantially all of the mortgages that enter a trial payment period program are successful in completing the program requirements and are then permanently modified at the end of the trial period. Our allowance process considers the impact of those modifications that are probable to occur.

The recorded investment of TDRs, excluding those classified as PCI, at September 30, 2016 and December 31, 2015 was $62.2 million and $40.2 million, of which 87% and 63%, respectively, were on non-accrual. Commercial Banking, NSP and Consumer and Community Banking receivables accounted for 74%, 7% and 18% of the total TDRs, respectively, at September 30, 2016. Commercial Banking and Transportation Finance receivables accounted for 61% and 26% of the total TDRs, respectively at December 31, 2015. There were $4.8 million and $1.4 million as of September 30, 2016 and December 31, 2015, respectively, of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs.

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The recorded investment related to modifications qualifying as TDRs that occurred during the quarters ended September 30, 2016 and 2015 were $39.4 million and $17.3 million, respectively, and $58.1 million and $20.1 million for the nine month periods, respectively. The recorded investment as of September 30, 2016 and 2015 of TDRs that experience a payment default (payment default is one missed payment), during the quarters ended September 30, 2016 and 2015, and for which the payment default occurred within one year of the modification totaled $10.5 million and $0.4 million, respectively, and $12.6 million and $4.5 million for the nine month periods, respectively. The defaults that occurred during the current quarter and year to date related to Commercial Banking, Consumer and Community Banking and Non-Strategic Portfolios and the September 30, 2015 defaults related to Commercial Banking and Non-Strategic Portfolios.

The financial impact of the various modification strategies that the Company employs in response to borrower difficulties is described below. While the discussion focuses on the 2016 amounts, the overall nature and impact of modification programs were comparable in the prior year.

n
  The nature of modifications qualifying as TDR’s based upon recorded investment at September 30, 2016 was comprised of payment deferrals for 14% and covenant relief and/or other for 86%. December 31, 2015 TDR recorded investment was comprised of payment deferrals for 13% and covenant relief and/or other for 87%.
n
  Payment deferrals result in lower net present value of cash flows, if not accompanied by additional interest or fees, and increased provision for credit losses to the extent applicable. The financial impact of these modifications is not significant given the moderate length of deferral periods;
n
  Interest rate reductions result in lower amounts of interest being charged to the customer, but are a relatively small part of the Company’s restructuring programs. Additionally, in some instances, modifications improve the Company’s economic return through increased interest rates and fees, but are reported as TDRs due to assessments regarding the borrowers’ ability to independently obtain similar funding in the market and assessments of the relationship between modified rates and terms and comparable market rates and terms. The weighted average change in interest rates for all TDRs occurring during the quarters ended September 30, 2016 and 2015 was not significant;
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 amounts of principal forgiveness for TDRs occurring during quarters ended September 30, 2016 and 2015 was not significant, as debt forgiveness is a relatively small component of the Company’s modification programs; and
n
  The other elements of the Company’s modification programs that are not TDRs, do not have a significant impact on financial results given their relative size, or do not have a direct financial impact, as in the case of covenant changes.

Reverse Mortgages

Consumer loans within continuing operations include an outstanding balance of $868.9 million and $897.3 million at September 30, 2016 and December 31, 2015, respectively, related to the reverse mortgage portfolio, of which $779.6 million and $812.6 million at September 30, 2016 and December 31, 2015, respectively, was uninsured. Reverse mortgage loans are contracts in which a homeowner borrows against the equity in their home and receives cash in one lump sum payment, a line of credit or fixed monthly payments for either a specific term or for as long as the homeowner lives in the home, or a combination of these options. Reverse mortgages feature no recourse to the borrower, no required repayment during the borrower’s occupancy of the home (as long as the borrower complies with the terms of the mortgage), and, in the event of foreclosure, a repayment amount cannot exceed the lesser of either the unpaid principal balance of the loan or the proceeds recovered upon sale of the home. The mortgage balance consists of cash advanced, interest compounded over the life of the loan, capitalized mortgage insurance premiums, and other servicing advances capitalized into the loan.

The uninsured reverse mortgage portfolio consists of approximately 1,800 loans with an average borrowers’ age of 83 years old and an unpaid principal balance of $1,051.5 million at September 30, 2016. At December 31, 2015, the uninsured reverse mortgage portfolio consisted of approximately 1,960 loans with an average borrowers’ age of 82 years old and an unpaid principal balance of $1,113.4 million. The realizable collateral value (the lower of the collectible principal and interest or the estimated value of the home) exceeds the outstanding book balance at September 30, 2016.

Reverse mortgage loans were recorded at fair value on the Acquisition Date. Subsequent to that, we account for uninsured reverse mortgages, which are the majority of the total, in accordance with the instructions provided by the staff of the Securities and Exchange Commission (SEC) entitled “Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts.” Refer to Note 1 of the Company’s most recently filed Annual Report on Form 10-K for further details. To determine the carrying value of these reverse mortgages as of September 30, 2016 and December 31, 2015, the Company used a proprietary model which uses actual cash flow information, actuarially determined mortality assumptions, likelihood of

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prepayments, and estimated future collateral values (determined by applying externally published market index). In addition, drivers of cash flows include:

1)  
  Mobility rates — We used the actuarial estimates of contract termination using the Society of Actuaries mortality tables, adjusted for expected prepayments and relocations.
2)  
  Home Price Appreciation — Consistent with other projections from various market sources, we use the Moody’s baseline forecast at a regional level to estimate home price appreciation on a loan-level basis.

As of September 30, 2016, the Company’s estimated future advances to reverse mortgagors are as follows:


Future Advances (dollars in millions)

Year Ending:        
2016
              $ 3.7   
2017
                 13.4   
2018
                 11.2   
2019
                 9.3   
2020
                 7.7   
Years 2021 – 2025
                 21.6   
Years 2026 – 2030
                 7.0   
Years 2031 – 2035
                 1.9   
Thereafter
                 0.5   
Total(1),(2)
              $ 76.3   
(1)  
  This table does not take into consideration cash inflows including payments from mortgagors or payoffs based on contractual terms.
(2)  
  This table includes the reverse mortgages supported by the Company as a result of the IndyMac loss-share agreements with the FDIC. As of September 30, 2016, the Company is responsible for funding up to a remaining $54 million of the total amount. Refer to Note 5 —Indemnification Asset for more information on this agreement and the Company’s responsibilities toward this reverse mortgage portfolio.

Serviced Loans

In conjunction with the OneWest Transaction, the Company services HECM reverse mortgage loans sold to Agencies (Fannie Mae) and securitized into GNMA HMBS pools. HECM loans transferred into the HMBS program have not met all the requirements for sale accounting, and therefore, the Company has accounted for these transfers as a financing transaction with the loans remaining on the Company’s statement of financial position and the proceeds received are recorded as a secured borrowing. The pledged loans and secured borrowings are reported in Assets of discontinued operations and Liabilities of discontinued operations, respectively. See Note 2 — Acquisition and Disposition Activities.

As servicer of HECM loans, the Company is required to repurchase loans out of the HMBS pool upon completion of foreclosure or once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. Although permitted under the GNMA HMBS program, the Company does not conduct optional repurchases upon the loan reaching a maturity event (i.e., borrower’s death or the property ceases to be the borrower’s principal residence). These HECM loans are repurchased at a price equal to the unpaid principal balance outstanding on the loan plus accrued interest. The repurchase transaction represents extinguishment of debt. As a result, the HECM loan basis and accounting methodology (retrospective effective interest) would carry forward. However, if the Company classifies these repurchased loans as AHFS, that classification would result in a new accounting methodology. Loans classified as AHFS are carried at LOCOM pending assignment to the Department of Housing and Urban Development (“HUD”). Loans classified as HFI are not assignable to HUD and are subject to periodic impairment assessment.

In the quarter ended September 30, 2016, the Company repurchased $22.5 million (unpaid principal balance) of additional HECM loans, of which $16.0 million were classified as AHFS and the remaining $6.5 million were classified as HFI. As of September 30, 2016, the Company had an outstanding balance of $122.0 million of HECM loans, of which $32.8 million (unpaid principal balance) is classified as AHFS with a remaining purchase discount of $0.1 million and $70.8 million is classified as HFI accounted for as PCI loans with an associated remaining purchase discount of $9.8 million. Serviced loans also include $28.3 million that are classified as HFI, which are accounted for under the effective yield method, with no remaining purchase discount. As of December 31, 2015, the Company had an outstanding balance of $118.1 million of HECM loans, of which $20.2 million (unpaid principal balance) were classified as AHFS with a remaining purchase discount of $0.1 million, $87.6 million were classified as HFI accounted for as PCI loans with an associated remaining purchase discount of $13.2 million. Serviced loans also included $10.3 million that were classified as HFI, accounted for under the effective yield method and have no remaining purchase discount.

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

The Company maintains an allowance for loan losses for estimated credit losses in its HFI loan portfolio. The allowance is adjusted through a provision for credit losses, which is charged against current period earnings, and reduced by any charge-offs for losses, net of recoveries.

The Company maintains a separate reserve for credit losses on off-balance sheet commitments, which is reported in Other Liabilities. Off-balance sheet credit exposures include items such as unfunded loan commitments, issued standby letters of credit and deferred purchase agreements. The Company’s methodology for assessing the appropriateness of this reserve is similar to the allowance process for outstanding loans.

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

        Transportation
Finance
    Commercial
Banking
    Consumer &
Community
Banking
    Non-Strategic
Portfolios
    Corporate
and Other
    Total
Quarter Ended September 30, 2016
Balance — June 30, 2016
              $ 51.3             327.6          $ 20.5          $           $   –           $ 399.4   
Provision for credit losses
                 5.5             39.2             1.6             (0.1 )                         46.2   
Other(1)
                              (2.8 )            2.3                                       (0.5 )  
Gross charge-offs(2)
                 (2.1 )            (27.7 )            (0.7 )                                      (30.5 )  
Recoveries
                              6.2             0.8             0.1                          7.1   
Balance — September 30, 2016
              $ 54.7          $ 342.5          $ 24.5          $           $           $ 421.7   
Nine Months Ended September 30, 2016
                                                                                                      
Balance — December 31, 2015
              $ 39.4          $ 310.5          $ 10.3          $           $           $ 360.2   
Provision for credit losses
                 43.8             124.1             5.8             (0.1 )                         173.6   
Other(1)
                 (0.2 )            (4.1 )            7.9                                         3.6   
Gross charge-offs(2)
                 (28.3 )            (101.5 )            (1.9 )                                      (131.7 )  
Recoveries
                              13.5             2.4             0.1