DISCONTINUED OPERATIONS

Aerospace

The following condensed balance sheet reflects the Business Air business as of December 31, 2017 and a combination of the Commercial Air and Business Air businesses as of December 31, 2016. The condensed statements of income include Commercial Air up to the sale on April 4, 2017, and Business Air for all periods. The Commercial Air sale price was $10.4 billion, and we recorded a pre-tax gain of $146 million ($106 million after tax), which is included in the Condensed Statement of Income below for the year ended December 31, 2017.

Business Air offered financing and leasing programs for corporate and private owners of business jets. Products included term loans, leases, pre-delivery financing, fractional share financing and vendor / manufacturer financing.

Condensed Balance Sheet — Aerospace Discontinued Operations (dollars in millions)



	December 31, 2017		December 31, 2016
Total cash and deposits	$	—	$	759.0
Net Loans	165.8		1,047.7
Operating lease equipment, net	18.4		9,677.6
Goodwill	—		126.8
Other assets⁽¹⁾	—		1,161.5
Assets of discontinued operations	$	184.2	$	12,772.6
Secured borrowings	$	—	$	1,204.6
Other liabilities⁽²⁾	8.8		1,597.3
Liabilities of discontinued operations	$	8.8	$	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.

Condensed Statement of Income — Aerospace Discontinued Operations (dollars in millions)



	Years Ended December 31,
	2017		2016			2015
Interest income	$	29.3	$	72.8		$	70.2
Interest expense	99.6		369.3			366.5
Provision for credit losses	—		15.6			1.8
Rental income on operating leases	312.5		1,236.8			1,134.4
Other non-interest income⁽¹⁾	9.0		22.5			56.5
Depreciation on operating lease equipment⁽²⁾	—		345.6			411.4
Maintenance and other operating lease expenses	4.2		32.1			45.8
Operating expenses⁽³⁾	39.6		101.9			68.2
Loss on debt extinguishment⁽⁴⁾	39.0		8.3			1.1
Income from discontinued operations before provision for income taxes	168.4		459.3			366.3
Provision for income taxes⁽⁵⁾	70.5		914.6			45.9
Gain on sale of discontinued operations, net of taxes	118.6		—			—
Income (loss) from discontinued operations, net of taxes	$	216.5	$	(455.3	)	$	320.4


⁽¹⁾	Other non-interest income includes impairment charges on assets transferred to AHFS of $32 million and $4 million for the years ended 2016 and 2015, respectively.


⁽²⁾	Depreciation on operating lease equipment is suspended when an operating lease asset is placed in Assets Held for Sale. Pre-tax income for 2016 benefited from $106 million of suspended depreciation related to operating lease equipment


⁽³⁾	Operating expenses include salaries and benefits and other operating expenses in prior quarters. Operating expenses included costs related to the commercial air separation initiative for the years ended December 31, 2017 and 2016.


⁽⁴⁾	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.


⁽⁵⁾	Provision for income taxes for the year ended December 31, 2016 includes $847 million net tax expense related to the Company's decision to no longer assert that it would indefinitely reinvest the unremitted earnings of Commercial Air. For the years ended December 31, 2017, 2016 and 2015, the Company's tax rate for discontinued operations was 42%, 199% and 12%, respectively.

Income from the discontinued operations for the years ended December 31, 2017, 2016, and 2015 was driven primarily by revenues on leased aircraft, while 2017 also reflected the gain on sale of Commercial Air. The interest expense included amounts allocated to the businesses and on secured debt included in the Condensed Balance Sheet. Operating expenses included in discontinued operations consisted of direct expenses of the Commercial Air and Business Air businesses that were separate from ongoing CIT operations.

In connection with the classification of the Aerospace businesses as discontinued operations, certain indirect operating expenses that previously had been allocated to the businesses have instead been re-allocated as part of continuing operations. The total incremental pretax amounts of indirect overhead expenses that were previously allocated to the Aerospace businesses and remain in continuing operations were approximately $19 million and $39 million for the years ended December 31, 2016 and 2015, respectively.

Condensed Statement of Cash Flows — Aerospace Discontinued Operations (dollars in millions)



	Years Ended December 31,
	2017		2016			2015
Net cash flows provided by operations	$	32.4	$	35.7		$	942.1
Net cash flows provided by (used in) investing activities	10,812.7		(655.9		)	(749.6		)

Reverse Mortgage Servicing

The Financial Freedom business, a division of CIT Bank that services reverse mortgage loans, was acquired in conjunction with the OneWest Transaction. The Financial Freedom business is reflected as discontinued operations. Assets of discontinued operations primarily include Home Equity Conversion Mortgage ("HECM") loans and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which 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 $861 million and other real estate owned assets of $21 million at December 31, 2017, which are recorded on 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 and OREO serviced by Financial Freedom (the "Financial Freedom Transaction"). The Financial Freedom Transaction is expected to close in the second quarter of 2018 and is subject to customary closing conditions, including the approval of certain government agencies and the consent of private investors related to the reverse mortgage servicing business. The agreement between the Company and the buyer contains representations and warranties, including but not limited to the conduct of the business, the servicing practices, and compliance with the servicing standards set by HUD and the FHA and by private investors, as well as covenants regarding the conduct of business both pre-closing and post-closing. The agreement contains certain indemnifications to allocate risks between the parties, subject to certain caps and limitations, including but not limited to the conduct of the business and compliance with servicing standards pre-closing. CIT also will retain certain pre-closing liabilities, including the cost of legacy and future litigation matters related to pre-closing actions.

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.

During the year ended December 31, 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 asset by $77 million. As of December 31, 2017, the indemnification asset 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"). Refer to Note 5 - Indemnification Assets, for further information.

During the year ended December 31, 2017, Financial Freedom results were 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 connection with the settlement with Fannie Mae. In addition, during the year ended December 31, 2017, the Company entered into a settlement of approximately $89 million with the HUD OIG and Department of Justice to resolve servicing related claims. See Note 22 - Contingencies, for further discussion. Further, the Company recognized an impairment of its mortgage servicing rights liability of approximately $50 million, included in Other liabilities.

Condensed Balance Sheet — Financial Freedom Discontinued Operation (dollars in millions)



	December 31, 2017		December 31, 2016
Total cash and deposits, all of which is restricted	$	7.7	$	5.8
Net Loans⁽¹⁾	272.8		374.0
Other assets⁽²⁾	36.6		68.3
Assets of discontinued operations	$	317.1	$	448.1
Secured borrowings⁽¹⁾	$	268.2	$	366.4
Other liabilities⁽³⁾	232.3		569.4
Liabilities of discontinued operations	$	500.5	$	935.8


⁽¹⁾	Net finance receivables include $267.2 million and $365.5 million of securitized balances at December 31, 2017 and December 31, 2016, respectively, and $5.6 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. The loans serviced for others total $14.1 billion and $15.6 billion for reverse mortgage loans as of December 31, 2017 and 2016.


⁽³⁾	Other liabilities include $137.8 million and $518.2 million of contingent liabilities, $79.5 million and $28.8 million of reverse mortgage servicing liabilities and $15.0 million and $22.3 million of other accrued liabilities at December 31, 2017 and December 31, 2016, respectively.

The results from discontinued operations for the years ended December 31, 2017, 2016 and 2015, which includes approximately five months of activity, are presented below.

Condensed Statements of Income — Financial Freedom Discontinued Operation (dollars in millions)



	Years Ended December 31,
	2017			2016			2015
Interest income⁽¹⁾	$	10.2		$	11.6		$	4.3
Interest expense⁽¹⁾	9.5			10.7			4.4
Other non-interest income (loss)⁽²⁾	(22.9		)	15.4			16.7
Operating expenses (benefit)⁽³⁾	(9.6		)	330.1			33.7
Loss from discontinued operations before benefit for income taxes	(12.6		)	(313.8		)	(17.1		)
(Benefit) for income taxes⁽⁴⁾	(4.9		)	(103.7		)	(6.7		)
Loss from discontinued operations, net of taxes	$	(7.7	)	$	(210.1	)	$	(10.4	)


⁽¹⁾	Includes amortization for the premium associated with the HECM loans and related secured borrowings.


⁽²⁾	For the year ended December 31, 2017 and December 31, 2016, other non-interest income (loss) included an impairment charge of approximately $50 million and $19 million, respectively, on the mortgage servicing liability.

⁽³⁾

For the year ended December 31, 2017, 2016 and 2015, operating expense is comprised of approximately $19 million, $16 million and $11 million in salaries and benefits, $11 million, $27 million and $6 million in professional and legal services, and $17 million, $22 million and $16 million for other expenses such as data processing, premises and equipment, and miscellaneous charges, respectively. In addition, for the year ended December 31, 2017 operating expenses included a net release of the curtailment reserve of $111 million which is net of a corresponding decrease in the indemnification receivable from the FDIC, partially offset by an increase of $40 million in other servicing-related reserve. For the year ended December 31, 2016, operating expenses included an increase in servicing-related reserve of approximately $260 million net of a corresponding increase in the indemnification receivable from the FDIC.


⁽⁴⁾	For the years ended December 31, 2017, 2016 and 2015 the Company's tax rate for discontinued operations is 39%, 33% and 39%, respectively.

Condensed Statements of Cash Flow — Financial Freedom Discontinued Operation (dollars in millions)



	Years Ended December 31,
	2017			2016			2015
Net cash flows (used) in provided by operations	$	(47.0	)	$	(40.0	)	$	18.5
Net cash flows provided by investing activities	112.6			88.5			27.9

Combined Results for Discontinued Operations

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

Condensed Combined Balance Sheets of Discontinued Operations (dollars in millions)



	December 31, 2017		December 31, 2016
Total cash and deposits	$	7.7	$	764.8
Net Loans	438.6		1,421.7
Operating lease equipment, net	18.4		9,677.6
Goodwill	—		126.8
Other assets	36.6		1,229.8
Assets of discontinued operations	$	501.3	$	13,220.7
Secured borrowings	$	268.2	$	1,571.0
Other liabilities	241.1		2,166.7
Liabilities of discontinued operations	$	509.3	$	3,737.7

Condensed Combined Statements of Income of Discontinued Operations (dollars in millions)



	Years Ended December 31,
	2017			2016			2015
Interest income	$	39.5		$	84.4		$	74.5
Interest expense	109.1			380.0			370.9
Provision for credit losses	—			15.6			1.8
Rental income on operating leases	312.5			1,236.8			1,134.4
Other non-interest income (loss)	(13.9		)	37.9			73.2
Depreciation on operating lease equipment	—			345.6			411.4
Maintenance and other operating lease expenses	4.2			32.1			45.8
Operating expenses	30.0			432.0			101.9
Loss on debt extinguishment	39.0			8.3			1.1
Income from discontinued operations before provision for income taxes	155.8			145.5			349.2
Provision for income taxes	65.6			810.9			39.2
Gain on sale of discontinued operations, net of taxes	118.6			—			—
Income (loss) from discontinued operations, net of taxes	$	208.8		$	(665.4	)	$	310.0

Condensed Combined Statement of Cash Flows of Discontinued Operations (dollars in millions)



	Years Ended December 31,
	2017			2016			2015
Net cash flows (used in) provided by operations	$	(14.6	)	$	(4.3	)	$	960.6
Net cash flows provided by (used in) investing activities	10,925.3			(567.4		)	(721.7		)