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Discontinued Operations
 9 Months Ended
Sep. 30, 2017
Discontinued Operations and Disposal Groups [Abstract]  
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS

Aerospace

As discussed in Note 2 — Acquisitions and Discontinued Operations in our Annual Report on Form 10-K for the year ended December 31, 2016, the activity associated with the Commercial Air and Business Air businesses were included in discontinued operations. The Commercial Air business was sold on April 4, 2017.

The following condensed financial information reflects the Business Air business as of September 30, 2017 and a combination of the Commercial Air and Business Air businesses as of December 31, 2016.
Condensed Balance Sheet — Aerospace (dollars in millions)
 
 
September 30, 2017
 
December 31, 2016
Total cash and deposits
$
—

 
$
759.0

Net Loans
198.9

 
1,047.7

Operating lease equipment, net
19.6

 
9,677.6

Goodwill
—

 
126.8

Other assets(1)
(3.2
)
 
1,161.5

Assets of discontinued operations
$
215.3

 
$
12,772.6

Secured borrowings
$
—

 
$
1,204.6

Other liabilities(2)
9.3

 
1,597.3

Liabilities of discontinued operations
$
9.3

 
$
2,801.9

(1) 
Amount includes deposits on commercial aerospace equipment of $1,013.7 million at December 31, 2016.
(2) 
Amount includes commercial aerospace maintenance reserves of $1,084.9 million and security deposits of $167.0 million at December 31, 2016.

Commercial Air was sold on April 4, 2017. The purchase price was $10.4 billion, and we recorded a pre-tax gain of $146 million, which is included in the Condensed Statement of Income below for the nine months ended September 30, 2017.
Condensed Statement of Income — Aerospace (dollars in millions)
 
 
 
 
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income
$
3.0

 
$
17.7

 
$
26.8

 
$
49.5

Interest expense
(1.2
)
 
(91.2
)
 
(98.5
)
 
(273.5
)
Provision for credit losses
—

 
(1.0
)
 
—

 
(15.7
)
Rental income on operating leases
2.0

 
309.3

 
310.7

 
928.8

Other Income
—

 
(3.8
)
 
13.4

 
16.7

Depreciation on operating lease equipment(1)
—

 
(112.3
)
 
—

 
(339.4
)
Maintenance and other operating lease expenses
—

 
(3.8
)
 
(4.2
)
 
(25.4
)
Operating expenses(2)
(1.0
)
 
(27.6
)
 
(39.6
)
 
(74.5
)
Loss on debt extinguishment(3)
—

 
—

 
(39.0
)
 
(1.6
)
Income from discontinued operations before provision for income taxes
2.8

 
87.3

 
169.6

 
264.9

Provision for income taxes
(0.3
)
 
(20.1
)
 
(71.0
)
 
(12.5
)
Gain (loss) on sale of discontinued operations, net of taxes
(1.3
)
 
—

 
118.6

 
—

Income from discontinued operations, net of taxes
$
1.2

 
$
67.2

 
$
217.2

 
$
252.4

(1) 
Depreciation on operating lease equipment is suspended when an operating lease asset is placed in Assets Held for Sale.
(2) 
Operating expenses include salaries and benefits and other operating expenses in the prior quarters. Operating expenses for the nine months ended September 30, 2017, included costs related to the commercial air separation initiative.
(3) 
The Company repaid approximately $1 billion of secured borrowings in the first quarter of 2017 within discontinued operations and recorded a loss of $39 million in relation to the extinguishment of those borrowings.
Condensed Statement of Cash Flows — Aerospace (dollars in millions)
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
Net cash flows provided by operations
$
32.7

 
$
726.9

Net cash flows provided by (used in) investing activities
10,783.2

 
(462.8
)

Reverse Mortgage Servicing

The Financial Freedom business, a division of CIT Bank that services reverse mortgage loans, was acquired in conjunction with the OneWest Transaction. Pursuant to ASC 205-20, the Financial Freedom business is reflected as discontinued operations. Assets include primarily Home Equity Conversion Mortgages (“HECMs”) and servicing advances. The liabilities include reverse mortgage servicing liabilities, which relates primarily to loans serviced for third party investors, secured borrowings and contingent liabilities. Continuing operations includes a separate portfolio of reverse mortgage loans of $862 million and other real estate owned assets of $25 million at September 30, 2017, which are recorded in the Consumer Banking segment (refer to Note 3-Loans) and are serviced by Financial Freedom. On October 6, 2017, CIT entered into a definitive agreement to sell the Financial Freedom business and the reverse mortgage loan portfolio serviced by Financial Freedom. The Financial Freedom Transaction is expected to close in the second quarter of 2018 and is subject to certain regulatory and investor approvals and other customary closing conditions. See Note 17 - Subsequent Events.

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

During the nine months ended September 30, 2017, the Company and the FDIC resolved the selling and servicing-related obligations for certain reverse mortgage loans with Fannie Mae. In connection with the settlement, the Company released the FDIC from its indemnification obligation to CIT with respect to the Fannie Mae serviced loans, which reduced the indemnification receivable by $77 million. As of September 30, 2017, the indemnification receivable from the FDIC was $29 million for covered servicing-related obligations related to reverse mortgage loans pursuant to the loss share agreement between CIT Bank and the FDIC related to the acquisition by OneWest Bank from the FDIC of certain assets of IndyMac Federal Bank FSB ("IndyMac") (the "IndyMac Transaction"). See the Company's Report on Form 10-K for the year ended December 31, 2016, Note 5 - Indemnification Assets, for further information.

During the nine months ended September 30, 2017, income from Financial Freedom was driven by a net release of the curtailment reserve of $111 million, partially offset by an increase of $40 million in other servicing-related reserves. In addition, during the nine months ended September 30, 2017, the Company entered into a settlement of approximately $89 million with the HUD OIG and Department of Justice to resolve servicing related claims, which was within the Company’s existing reserves.  Further, the Company recognized a write-down of its servicing operations of $54 million, of which $50 million related to impairment of its mortgage servicing rights, included in Other liabilities below.
Condensed Balance Sheet — Financial Freedom (dollars in millions)
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Total cash and deposits, all of which is restricted
$
6.5

 
$
5.8

Net Loans(1)
299.2

 
374.0

Other assets(2)
41.0

 
68.3

Assets of discontinued operations
$
346.7

 
$
448.1

Secured borrowings(1)
$
293.6

 
$
366.4

Other liabilities(3)
260.8

 
569.4

Liabilities of discontinued operations
$
554.4

 
$
935.8

(1) 
Net loans include $292.7 million and $365.5 million of securitized balances at September 30, 2017 and December 31, 2016, respectively, and $6.5 million and $8.5 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 $165.2 million and $518.2 million of contingent liabilities, $79.5 million and $28.8 million of reverse mortgage servicing liabilities and $16.1 million and $22.3 million of other accrued liabilities at September 30, 2017 and December 31, 2016, respectively.

The results from discontinued operations for the quarters and nine months ended September 30, 2017 and 2016 are presented below.
Condensed Statement of Income — Financial Freedom (dollars in millions)
 
 
 
 
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income(1)
$
2.5

 
$
2.8

 
$
8.0

 
$
8.8

Interest expense(1)
(2.3
)
 
(2.5
)
 
(7.2
)
 
(8.2
)
Other income (losses)(2)
5.7

 
(10.2
)
 
(29.8
)
 
7.3

Operating expenses(3)
(13.1
)
 
(38.5
)
 
23.8

 
(299.1
)
Loss from discontinued operations before benefit for income taxes
(7.2
)
 
(48.4
)
 
(5.2
)
 
(291.2
)
Benefit for income taxes(4)
2.8

 
18.5

 
2.0

 
90.1

Loss from discontinued operation, net of taxes
$
(4.4
)
 
$
(29.9
)
 
$
(3.2
)
 
$
(201.1
)
(1) 
Includes amortization for the premium associated with the HECM loans and related secured borrowings.
(2) 
For the nine months ended September 30, 2017, other income included an impairment charge of approximately $50 million on the mortgage servicing rights. For the quarter and nine months ended September 30, 2016, other income included an impairment charge of approximately $19 million on the mortgage servicing rights.
(3) 
For the quarter and nine months ended September 30, 2017, operating expense is comprised of approximately $5 million and $14 million in salaries and benefits, $1 million and $9 million in professional and legal services, and $5 million and $9 million for other expenses such as data processing, premises and equipment, and miscellaneous charges. For the nine months ended September 30, 2017, operating expenses included a net release of the curtailment reserve of $111 million, partially offset by an increase of $40 million in other servicing-related reserves. For the quarter and nine months ended September 30, 2016, operating expense is comprised of approximately $5 million and $11 million in salaries and benefits, $7 million and $16 million in professional services and $3 million and $11 million for other expenses such as data processing, premises and equipment, legal settlement, and miscellaneous charges. In addition, in the nine months ended September 30, 2016, operating expenses included a net increase to the servicing-related reserve of approximately $230 million.
(4) 
For the quarter and nine months ended September 30, 2017, the Company's tax rate for discontinued operations was 39% and 38%, respectively. For the quarter and nine months ended September 30, 2016, the Company’s tax rate for discontinued operations was 38% and 31% respectively.

Condensed Statement of Cash Flows — Financial Freedom Discontinued Operations (dollars in millions)
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
Net cash flows used for operations
$
(33.8
)
 
$
(32.0
)
Net cash flows provided by investing activities
84.3

 
69.8


CIT's Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 included $102 million of activity within the decrease in other liabilities related to the Company's net release of servicing-related reserves partially offset by the impairment charge to the servicing liability, and $77 million of activity within the decrease in other assets related to the Company's release of the FDIC from its indemnification obligation to CIT with respect to the Fannie Mae serviced loans. For the nine months ended September 30, 2016, there was $230 million of activity within the increase in other liabilities related to the Company’s net increase in servicing-related reserves.

Combined Results for Discontinued Operations

The following tables reflect the combined results of the discontinued operations. Details of the balances are discussed in prior tables.
Condensed Combined Balance Sheet Discontinued Operations (dollars in millions)
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Total cash and deposits
$
6.5

 
$
764.8

Net Loans
498.1

 
1,421.7

Operating lease equipment, net
19.6

 
9,677.6

Goodwill
—

 
126.8

Other assets
37.8

 
1,229.8

Assets of discontinued operations
$
562.0

 
$
13,220.7

Secured borrowings
$
293.6

 
$
1,571.0

Other liabilities
270.1

 
2,166.7

Liabilities of discontinued operations
$
563.7

 
$
3,737.7

Condensed Combined Statement of Income Discontinued Operations (dollars in millions)
 
 
 
 
 
Quarters Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income
$
5.5

 
$
20.5

 
$
34.8

 
$
58.3

Interest expense
(3.5
)
 
(93.7
)
 
(105.7
)
 
(281.7
)
Provision for credit losses
—

 
(1.0
)
 
—

 
(15.7
)
Rental income on operating leases
2.0

 
309.3

 
310.7

 
928.8

Other income (losses)
5.7

 
(14.0
)
 
(16.4
)
 
24.0

Depreciation on operating lease equipment
—

 
(112.3
)
 
—

 
(339.4
)
Maintenance and other operating lease expenses
—

 
(3.8
)
 
(4.2
)
 
(25.4
)
Operating expenses
(14.1
)
 
(66.1
)
 
(15.8
)
 
(373.6
)
Loss on debt extinguishment
—

 
—

 
(39.0
)
 
(1.6
)
Income (loss) from discontinued operations before benefit (provision) for income taxes
(4.4
)
 
38.9

 
164.4

 
(26.3
)
Benefit (provision) for income taxes
2.5

 
(1.6
)
 
(69.0
)
 
77.6

Gain (loss) on sale of discontinued operations, net of taxes
(1.3
)
 
—

 
118.6

 
—

Income (loss) from discontinued operations, net of taxes
$
(3.2
)
 
$
37.3

 
$
214.0

 
$
51.3


Condensed Combined Statement of Cash Flows Discontinued Operations (dollars in millions)
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
Net cash flows (used for) provided by operations
$
(1.1
)
 
$
694.9

Net cash flows provided by (used in) investing activities
10,867.5

 
(393.0
)