UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual Report Pursuant to Section 13 or 15(d) or | | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2007
Commission File Number: 001-31369
CIT GROUP INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
505 Fifth Avenue, New York, New York 10017
(Address of Registrant’s principal executive offices) (Zip Code)
Registrant’s telephone number including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Preferred Stock, Series A par value $0.01 per share New York Stock Exchange
Common Stock, par value $0.01 per share New York Stock Exchange
Equity Units, stated amount $25.00 per unit New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known common stock outstanding), which occurred on June 29,
seasoned issuer, as defined in Rule 405 of the Securities 2007, was $10,419,981,092. For purposes of this computa-
Act. Yes |X| No | |. tion, all officers and directors of the registrant are deemed
to be affiliates. Such determination shall not be deemed an
Indicate by check mark if the registrant is not required to
admission that such officers and directors are, in fact, affil-
file reports pursuant to Section 13 or Section 15(d) of the
iates of the registrant. At February 15, 2008, 191,231,307
Act. Yes | | No |X|.
shares of CIT’s common stock, par value $0.01 per share,
Indicate by check mark whether the registrant (1) has filed were outstanding.
all reports required to be filed by Section 13 or 15(d) of the
Indicate by check mark whether the registrant is a shell
Securities Exchange Act of 1934 during the preceding 12
company (as defined in Rule 12b-2 of the Act). Yes | | No |X|.
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
DOCUMENTS INCORPORATED BY REFERENCE
such filing requirements for the past 90 days. Yes |X| No | |.
List here under the following documents if incorporated by
Indicate by check mark whether the registrant is a large reference and the Part of the Form 10-K (e.g., Part I, Part II,
accelerated filer, an accelerated filer, or a non-accelerated etc.) into which the document is incorporated: (1) Any
filer. Large accelerated filer |X| Accelerated filer | | Non- annual report to security holders; (2) Any proxy or informa-
accelerated filer | | Smaller reporting company | | tion statement; and (3) Any prospectus filed pursuant to
Rule 424 (b) or (c) under the Securities Act of 1933. The
Indicate by check mark if disclosure of delinquent filers
listed documents should be clearly described for identifi-
pursuant to Item 405 of Regulation S-K (229.405 of this
cation purposes (e.g., annual report to security holders for
Chapter) is not contained herein, and will not be contained,
fiscal year ended December 24, 1980).
to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III Portions of the registrant’s definitive proxy statement relat-
of this Form 10-K or any amendment to this Form 10-K. | | ing to the 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof to the extent
The aggregate market value of voting common stock held
by non-affiliates of the registrant, based on the New York
Stock Exchange Composite Transaction closing price of See pages 120 to 122 for the exhibit index.
Common Stock ($54.83 per share, 190,041,603 shares of
ITEM 1. Business
BUSINESS DESCRIPTION We previously offered mortgage loans to consumers.
However, we closed the home lending origination platform
Founded a hundred years ago on February 11, 1908, CIT
in August 2007 due to the disruptions in that market. See
Group Inc., a Delaware corporation (“we,” “CIT” or the
“Home Lending” segment in this section and “Profitability
“Company”), is a leading commercial finance company pro-
and Key Business Trends” section of Item 7. Management’s
viding financing and leasing products and services to clients
Discussion and Analysis of Financial Condition and Results of
in a wide variety of industries around the globe.
Operations for further discussion on home lending.
Diversification is a hallmark of CIT, with a broad range of
Asset generation is a core strength of CIT. We source transac-
financial services businesses serving customers in over 30
tions through direct marketing efforts to borrowers, lessees,
industries and 50 countries. The majority of our business
manufacturers, vendors, distributors and to end-users
focuses on commercial clients with a particular focus on mid-
through referral sources and other intermediaries. In addition,
dle-market companies. We serve a wide variety of industries.
our business units work together both in referring transac-
Our largest industries include transportation, particularly
tions between units (i.e. cross-selling) and by combining
aerospace and rail, and a broad range of manufacturing and
various products and services to meet our customers’ overall
retailing. We also serve the wholesaling, healthcare, commu-
financing needs. We also buy and sell participations in syndi-
nications, media and entertainment and various
cations of finance receivables and lines of credit and
service-related industries. Our SBA preferred lender opera-
periodically purchase and sell finance receivables on a whole-
tions has been recognized as the nation’s #1 SBA Lender
(based on 7(a) program volume) in each of the last eight
years. We also provide financing to the student loan market. Credit adjudication and servicing are also core strengths.
We maintain disciplined underwriting standards and
Each business has industry alignment and focuses on specific
employ sophisticated portfolio risk management models to
sectors, products and markets, with portfolios diversified by
achieve desired portfolio demographics. Our collection and
client and geography. Our principal product and service offer-
servicing operations are centralized across businesses and
geographies providing efficient client interfaces and uni-
Products form customer experiences.
We generate revenue by earning interest income on the loans
Secured lines of credit
we hold on our balance sheet, collecting rentals on the equip-
Leases – operating, capital and leveraged
ment we lease, and earning fee and other income for the
Vendor finance programs
financial services we provide. In addition, we syndicate and
Import and export financing
CIT – ANNUAL REPORT 2007
sell certain finance receivables and equipment to leverage
Debtor-in-possession / turnaround financing
our origination capabilities, reduce concentrations, manage
Acquisition and expansion financing
our balance sheet and improve profitability.
Small business loans
_ We fund our business in the global capital markets, principally
_ through asset-backed and other secured financing arrange-
Letters of credit / trade acceptances
_ ments, commercial paper, unsecured term debt, and
broker-originated deposits. We rely on these diverse funding
sources to maintain liquidity and strive to mitigate interest rate,
Financial risk management
foreign currency, and other market risks through disciplined
Asset management and servicing
matched-funding strategies. Our debt ratings are summarized
Merger and acquisition advisory services
on page 46 in the “Risk Management” section of Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Accounts receivable collection
At December 31, 2007, we had managed assets of $83.2 billion
Commercial real estate advisory services
comprised of an owned loan and lease portfolio of $76.9 billion
Debt underwriting and syndication
and a securitized portfolio of $6.3 billion. We also serviced third
party assets under fee-based contracts at year-end. Common
Capital markets structuring
stockholders’ equity at December 31, 2007 was $6.5 billion.
CIT meets customers’ financing needs through six business segments.
SEGMENT MARKET AND SERVICES
Lending, leasing and other financial services to middle-market companies,
Corporate Finance Group
through industry focused sales teams, including Healthcare, Communications,
Media and Entertainment, and Energy, as well as to small businesses, through
broker and intermediary relationships.
Large ticket equipment leases and other secured financing to companies in
aerospace, rail and defense industries.
Factoring, lending, credit protection, receivables management and other trade
products to retail supply chain companies.
Innovative financing and leasing solutions to manufacturers, distributors and
customer end-users around the globe.
Student loans through Student Loan Xpress; other consumer loans through CIT
Servicing and collecting our liquidating home lending assets. We ceased origi-
nating new loans in the second half of 2007.
Our managed assets are presented in the following graphs.
Managed Assets by Segment Managed Assets by Country
At December 31, 2007 (dollars in billions) At December 31, 2007 (dollars in billions)
Australia 1% Canada 7%
Corporate Finance $24.1
Vendor Finance $16.1
Consumer $12.3 U.S. 75%
Home Lending $9.8 Trade Finance $7.3
Item 1: Business
CORPORATE FINANCE and leaseback arrangements, as well as loans secured by
equipment. Our equipment financing clients represent major
Our Corporate Finance segment provides a full spectrum of
and regional airlines worldwide, North American railroad
financing alternatives to borrowers ranging from small compa-
companies, and middle-market to larger-sized aerospace and
nies to large multinationals with emphasis on middle market
companies. We service clients in a broad array of industries
with specialized groups serving commercial and industrial; This segment has been servicing the aerospace and rail
capital markets; communications, media and entertainment; industries for many years and has built a global presence with
energy; and healthcare sectors in the U.S. and abroad. We also operations in the United States, Canada, Europe and Asia. We
provide collateralized and government-secured loans to small have extensive experience in managing equipment over its full
businesses (such as SBA loans), leveraging broker and inter- life cycle, including purchasing new equipment, equipment
mediary relationships. maintenance, estimating residual values and re-marketing by
re-leasing or selling equipment.
We offer loan structures ranging from working capital loans
secured by accounts receivable and inventories, term loans The aerospace group offers commercial aircraft financing,
secured by fixed assets to leveraged loans based on operating business aircraft and aerospace and defense financing. It
cash flow and enterprise valuation. Loans may be fixed or provides aircraft leasing and sales, asset management,
variable rate, senior or subordinated, and revolving or term. finance, banking, technical and engineering, aircraft valuation
Our clients typically use the proceeds for working capital, and advisory services. The team has built strong relationships
asset growth, acquisitions, debtor-in-possession financing, across the entire aerospace industry, including the major
and debt restructurings. Additionally, we provide equipment manufacturers, parts suppliers and carriers. These relation-
lending and leasing products, including loans, leases, whole- ships provide us with access to technical information, which
sale and retail financing packages, operating leases, and enhances our customer service and provides opportunities to
sale-leaseback arrangements to meet our customer’s needs. finance new business. Our clients include major and regional
airlines around the world.
We also offer clients an array of financial and advisory services.
The unit offers capital markets structuring and syndication Our commercial aerospace business has offices in North
capabilities, as well as advisory services, a capability that we America, Europe and Asia and a global reach of customers in
enhanced in 2007 with a strategic acquisition. We also offer 45 countries. Our international aerospace servicing center in
financial risk management services to selected customers, Dublin, Ireland, puts us closer to our growing international
whereby we will enter into offsetting derivative transactions client base and provides us with favorable tax treatment for
with a customer and a third party financial institution. As the certain aircraft leasing operations. Our commercial fleet
offsetting derivatives have like notional amounts and terms, we consists of 287 aircraft with a weighted average age of
retain only the counter–party risk. approximately 5 years placed with 105 clients around the
world. As of December 31, 2007, our commercial aerospace
CIT – ANNUAL REPORT 2007
Industry focused teams originate business through various
financing and leasing portfolio was $8.2 billion.
intermediaries, referral sources, strategic partnerships and
direct calling. We maintain relationships with selected banks, The business aircraft team offers financing and leasing pro-
finance companies, hedge funds and other lenders both to grams for owners of business jet aircraft and turbine
obtain business leads and distribute our products. We also helicopters primarily in the United States. The aerospace and
purchase and sell participation interests in syndicated loans defense business provides comprehensive financing solutions
from and to other financial institutions. to the aerospace and defense corporate finance market, as
well as the aerospace financial intermediary market.
Our small business lending unit originates and services Small
Business Administration and conventional loans for commercial Our dedicated rail equipment group maintains relationships with
real estate financing, construction, business acquisition and numerous leading railcar manufacturers and calls directly on
business succession financing. We are a SBA preferred lender railroads and rail shippers throughout North America. Our rail
and have been recognized as the nation’s #1 SBA Lender (based portfolio, which totaled $4.4 billion at December 31, 2007,
on 7(a) program volume) in each of the last eight years. includes leases to all of the U.S. and Canadian Class I railroads
(railroads with annual revenues of at least $250 million) and
We earn interest revenue on receivables we keep on-balance
other non-rail companies, such as shippers and power and
sheet and recognize gains on receivables sold. We also earn
energy companies. The operating lease fleet primarily includes:
fees for servicing third party assets, which approximated
covered hopper cars used to ship grain and agricultural prod-
$2.1 billion at year end. Small business lending activities are
ucts, plastic pellets and cement; gondola cars for coal, steel coil
principally focused on the U.S. market.
and mill service; open hopper cars for coal and aggregates; cen-
ter beam flat cars for lumber; boxcars for paper and auto parts;
and tank cars. Our railcar operating lease fleet has an average
Our Transportation Finance segment specializes in providing
age of approximately 6 years and approximately 86% (based on
customized leasing and secured financing primarily to end-
net investment) were manufactured in 1998 or later. Our total rail
users of aircraft, locomotives and railcars. Our transportation
fleet includes approximately 114,000 railcars and over 500 loco-
equipment financing products include operating leases, single
motives that we own, lease or service.
investor leases, equity portions of leveraged leases and sale
See “Concentrations” section of Item 7. Management’s Our vendor alliances feature traditional vendor finance pro-
Discussion and Analysis of Financial Condition and Results of grams, joint ventures, profit sharing and other transaction
Operations and Note 17 – Commitments and Contingencies of structures with large, sales-oriented partners. In the case of
Item 8. Financial Statements and Supplementary Data for fur- joint ventures, we engage in financing activities jointly with the
ther discussion of our aerospace portfolio. vendor through a distinct legal entity that is jointly owned. We
also use “virtual joint ventures,” by which we originate the
TRADE FINANCE assets on our balance sheet and share with the vendor the
economic outcomes from the customer financing activity. A
Our Trade Finance segment provides factoring, receivable
key part of these partnership programs is coordinating with
and collection management products, and secured financing
the vendor’s product offering systems to improve execution
to businesses that operate in several industries including
and reduce cycle times.
apparel, textile, furniture, home furnishings and electronics.
Although primarily U.S.-based, we have increased our inter- These alliances allow our vendor partners to focus on their
national business in Asia and Europe. CIT has many core competencies, reduce capital needs and drive incre-
relationships with factors located throughout Asia, and from mental sales volume. As a part of these programs, we offer
our full-service factoring company based in Frankfurt, our partners (1) financing to commercial and consumer end
Germany, we provide factoring and financing services to users for the purchase or lease of products, (2) enhanced
companies in Europe. sales tools such as asset management services, efficient
loan processing and real-time credit adjudication, and (3) a
We offer a full range of domestic and international customized
single point of contact in our regional servicing hubs to
credit protection, lending and outsourcing services that include
facilitate global sales. In turn, these alliances provide us
working capital and term loans, factoring, receivable manage-
with a highly efficient origination platform as we leverage
ment outsourcing, bulk purchases of accounts receivable,
our partners’ sales forces.
import and export financing and letter of credit programs.
Vendor Finance includes a small and mid-ticket commercial
We provide financing to our clients, primarily manufacturing,
business, which focuses on leasing office equipment, comput-
through the purchase of accounts receivable owed to our
ers and other technology products primarily in the United
clients by their customers, typically retailers. We also guar-
States and Canada. We originate products through relation-
antee amounts due to our client’s suppliers under letters of
ships with manufacturers, dealers, distributors and other
credit collateralized by accounts receivable and other assets.
intermediaries as well as through direct calling.
The purchase of accounts receivable is traditionally known as
“factoring” and results in the payment by the client of a fac- Vendor Finance also houses CIT Insurance Services, through
toring fee that is commensurate with the underlying degree which we offer insurance and financial protection products in
of credit risk and recourse, and which is generally a percent- key markets around the world. We leverage our existing dis-
age of the factored receivables or sales volume. We also may tribution capabilities and alliances with insurance and
advance funds to our clients, typically in an amount up to financial services providers, enabling us to offer protection
80% of eligible accounts receivable, charging interest on the products for small business and middle market clients and
advance (in addition to any factoring fees), and satisfying the consumers. Our offerings to middle market and small busi-
advance by the collection of the factored accounts receivable. ness customers range from commercial property & casualty
We integrate our clients’ operating systems with ours to insurance, employee benefits, key person life insurance, and
facilitate the factoring relationship. high net worth personal line coverage. For our consumer
clients, we offer property coverage, debt protection, credit
Clients use our products and services for various purposes,
insurance, as well as supplemental insurance programs.
including improving cash flow, mitigating or reducing credit
risk, increasing sales, and improving management informa-
tion. Further, with our TotalSourceSM product, our clients can
out-source their bookkeeping, collection, and other receiv- Our Consumer segment includes student lending and CIT
able processing to us. These services are attractive to Bank, a Utah-based industrial bank with deposit-taking
industries outside the traditional factoring markets. capabilities. Our consumer activities are principally focused
on the U.S. market.
Our student lending unit, which markets under the name
We are a leading global vendor finance company with numer- Student Loan Xpress, offers student loan products, services,
ous vendor relationships and operations serving customers in and solutions to students, parents, schools, and alumni
over 30 countries. We have significant vendor programs in associations. We offer government-guaranteed student
information technology, telecommunications equipment, loans made under the Federal Family Education Loan
healthcare and other diversified asset types across multiple Program (FFELP), including consolidation loans, Stafford
industries. Through our global relationships with industry- loans, Parent Loans for Undergraduate Students (PLUS) and
leading equipment vendors, including manufacturers, dealers, Grad PLUS. We discontinued offering private loans during
and distributors, we deliver customized financing solutions to 2007. We originate and acquire loans through direct con-
both commercial and consumer customers of our vendor sumer marketing, school channel referrals and periodically
partners in a wide array of programs. purchase portfolios of loans. The majority of our student
Item 1: Business
loan portfolio is consolidation loans, but our portfolio of and have commenced originating corporate loans. The Bank is
Stafford and PLUS loans has continued to grow. Most of our chartered by the state of Utah as an industrial bank and is sub-
student loan portfolio is serviced in-house from our ject to regulation and examination by the Federal Deposit
Cleveland facility. Insurance Corporation and the Utah Department of Financial
During 2007, the federal government passed legislation with
respect to the student lending business. Among other See “Concentrations” section of Item 7. Management’s
things, the legislation reduces special allowance payments Discussion and Analysis of Financial Condition and Results of
paid to lenders by the federal government, increases loan Operations and “Note 23 – Goodwill and Intangible Assets” of
origination fees paid to the government by lenders, and Item 8. Financial Statements and Supplementary Data for fur-
reduces the lender guarantee percentage. The legislation ther discussion of our student lending portfolios.
went into effect for all new FFELP student loans with first
disbursements on or after October 1, 2007. The guarantee HOME LENDING
percentage, reduced from 97% to 95%, is in effect for loans The Home Lending segment consists primarily of a liquidating
originated after October 1, 2012. While the demographics of portfolio of home mortgage receivables and manufactured
this market remain strong, the returns related to future housing receivables. In July of 2007, we announced our intent
originations will be impacted by the recent legislation. to exit this business and closed the home lending origination
platform in August 2007.
As a result of decreased market valuations for student lending
businesses and lower profit expectations resulting from The remaining portfolio is serviced out of our centralized
higher funding costs, we recorded goodwill and intangible servicing center in Oklahoma City, Oklahoma.
asset impairment charges during the last quarter of 2007.
See “Profitability and Key Business Trends” section of Item 7.
CIT Bank, with assets of $3.3 billion and deposits of $2.7 billion, Management’s Discussion and Analysis of Financial Condition
is located in Salt Lake City, Utah. Since its inception, the bank and Results of Operations for further discussion of our home
had been primarily funding consumer type loans. During late lending portfolios.
2007, we refined the Bank’s focus to fund commercial assets
2007 SEGMENT PERFORMANCE
Earnings and Return Summary (dollars in millions)
Net Return on
CIT – ANNUAL REPORT 2007
Corporate Finance $ 453.0 18.3%
Transportation Finance 271.1 16.3%
Trade Finance 164.0 17.8%
Vendor Finance 410.1 23.6%
Commercial Segments 1,298.2 19.1%
Consumer (274.9) (52.3%)
Home Lending (989.2) (171.8%)
Corporate and Other (145.1) (2.1%)
Total $(111.0) (1.6%)
See the “Results by Business Segments” and Item 7A. Quantitative and Qualitative Disclosures about Market
“Concentrations” sections of Item 7. Management’s Discussion Risk, and Notes 5 and 21 of Item 8. Financial Statements and
and Analysis of Financial Condition and Results of Operations and Supplementary Data, for additional information.
CIT employed approximately 6,700 people at December 31, United States and approximately 1,845 were outside the
2007, of which approximately 4,855 were employed in the United States.
Our markets are highly competitive, based on factors that vary We compete primarily on the basis of financing terms,
depending upon product, customer, and geographic region. structure, client service, and price. From time to time, our
Our competitors include captive and independent finance competitors seek to compete aggressively on the basis of
companies, commercial banks and thrift institutions, indus- these factors and we may lose market share to the extent
trial banks, leasing companies, insurance companies, hedge we are unwilling to match competitor product structure,
funds, manufacturers, and vendors. Many bank holding, leas- pricing or terms that do not meet our credit standards or
ing, finance, and insurance companies that compete with us return requirements.
have formed substantial financial services operations with
Other primary competitive factors include industry experience,
global reach. On a local level, community banks and smaller
equipment knowledge, and relationships. In addition, demand
independent finance and mortgage companies are competitive
for an industry’s services and products and industry regula-
with substantial local market positions. Many of our competi-
tions will affect demand for our products in some industries.
tors are large companies that have substantial capital,
technological, and marketing resources. Some of these com-
petitors are larger than we are and may have access to capital
at a lower cost than we do. The markets for most of our prod-
ucts have a large number of competitors.
In some instances, our operations are subject to supervision Department of Education, including Fifth Third Bank, CIT Bank
and regulation by federal, state, and various foreign govern- and Liberty Bank, as eligible lender trustees. CIT Small
mental authorities. Additionally, our operations may be Business Lending Corporation, a Delaware corporation, is
subject to various laws and judicial and administrative deci- licensed by and subject to regulation and examination by the
sions imposing various requirements and restrictions. This U.S. Small Business Administration. CIT Capital Securities
oversight may serve to: L.L.C., a Delaware limited liability company, is a broker-dealer
licensed by the National Association of Securities Dealers, and is
regulate credit granting activities, including establishing
subject to regulation by the Financial Industry Regulatory
licensing requirements, if any, in various jurisdictions,
Authority and the Securities and Exchange Commission. CIT
establish maximum interest rates, finance charges and
Bank Limited, an English corporation, is licensed as a bank and
broker-dealer and is subject to regulation and examination by
regulate customers’ insurance coverages,
the Financial Service Authority of the United Kingdom.
require disclosures to customers,
govern secured transactions, Our insurance operations are conducted through The
set collection, foreclosure, repossession and claims han- Equipment Insurance Company, a Vermont corporation,
dling procedures and other trade practices, Highlands Insurance Company Limited, a Barbados company,
prohibit discrimination in the extension of credit and and Equipment Protection Services (Europe) Limited, an Irish
administration of loans, and Company. Each company is licensed to enter into insurance
regulate the use and reporting of information related to a contracts. The local regulators in Vermont, Barbados, and
borrower’s credit experience and other data collection. Ireland regulate them. In addition, we have various banking
corporations in Brazil, France, Germany, Italy, Belgium,
Certain of our subsidiaries are subject to regulation from various
Sweden, and the Netherlands and a broker-dealer entity in
agencies. CIT Bank, a Utah industrial bank wholly owned by CIT,
Canada, each of which is subject to regulation and examina-
is subject to regulation and examination by the Federal Deposit
tion by banking regulators and securities regulators in their
Insurance Corporation and the Utah Department of Financial
Institutions. Student Loan Xpress, Inc., a Delaware corporation,
conducts its business through various banks authorized by the
Item 1: Business
GLOSSARY OF TERMS
Average Earning Assets (AEA) is the average of finance receiv- Lower of Cost or Market (LOCOM) relates to the carrying value
ables, operating lease equipment, financing and leasing of an asset. The cost refers to the current book balance, and
assets held for sale, and some investments, less the credit if that balance is higher than the market value, then an
balances of factoring clients. We use this average for certain impairment charge is reflected in the current period state-
key profitability ratios, including return on AEA and net finance ment of income.
revenue as a percentage of AEA.
Managed Assets are comprised of finance receivables, operating
Average Finance Receivables (AFR) is the average of finance lease equipment, financing and leasing assets held for sale,
receivables and includes loans and finance leases. It excludes some investments, and receivables securitized and still man-
operating lease equipment. We use this average to measure aged by us. The change in managed assets during a reporting
the rate of net charge-offs on an owned basis for the period. period is one of our measurements of asset growth.
Capital is the sum of common equity, preferred stock, junior Net Finance Revenue reflects finance revenue after interest
subordinated notes, convertible debt (equity units) and pre- expense and depreciation on operating lease equipment,
ferred capital securities. which is a direct cost of equipment ownership. This subtotal is
a key measure in the evaluation of our business.
Derivative Contract is a contract whose value is derived from a
specified asset or an index, such as interest rates or foreign Net Finance Revenue after Credit Provision reflects net finance
currency exchange rates. As the value of that asset or index revenue after credit costs. This subtotal is also called “risk
changes, so does the value of the derivative contract. We use adjusted revenue” by management as it reflects the periodic
derivatives to reduce interest rate, foreign currency or credit cost of credit risk.
risks. We also offer derivatives to our own customers to
Net (loss) income (attributable) available to Common
enable those customers to reduce their own interest rate, for-
Shareholders (“net (loss) income”) reflects net (loss) income
eign currency or credit risks. The derivative contracts we use
after preferred dividends and is utilized to calculate return on
include interest-rate swaps, cross-currency swaps, foreign
common equity and other performance measurements.
exchange forward contracts, and credit default swaps.
Non-GAAP Financial Measures are balances, amounts or
Efficiency Ratio is the percentage of salaries and general oper-
ratios that do not readily agree to balances disclosed in finan-
ating expenses to Total Net Revenue. We use the efficiency
cial statements presented in accordance with accounting
ratio to measure the level of expenses in relation to revenue
principles generally accepted in the U.S. We use non-GAAP
measures to provide additional information and insight into
Finance Revenue includes interest income on finance receiv-
how current operating results and financial position of the
ables and rental income on operating leases.
CIT – ANNUAL REPORT 2007
business compare to historical operating results and finan-
Financing and Leasing Assets include loans, capital and finance cial position of the business and trends, as well as adjusting
leases, leveraged leases, operating leases, assets held for for certain nonrecurring or unusual transactions.
sale, and other investments.
Non-performing Assets include loans placed on non-accrual
Held for Investment describes loans that CIT has the ability status, typically after becoming 90 days delinquent or prior
and intent to hold in portfolio for the foreseeable future or to that time due to doubt of collectibility of principal and
until maturity. These are carried at amortized cost, unless it interest, and repossessed assets.
is determined that other than temporary impairment has
Other Income includes syndication fees, gains from dispositions
occurred, then a charge is recorded in the current period
of receivables and equipment, factoring commissions, loan
statement of income.
servicing and other fees.
Held for Sale describes loans that we intend to sell in the near-
Retained Interest is the portion of the interest in assets we
term. These are carried at the lower of cost or market, with a
retain when we sell assets in a securitization transaction.
charge reflected in the current period statement of income if
the cost (or current book value) exceeds the market value. Residual Values represent the estimated value of equipment at
the end of the lease term. For operating leases, it is the value
Lease – capital and finance is an agreement in which the party
to which the asset is depreciated at the end of its useful eco-
who owns the property (lessor) permits another party (lessee)
nomic life (i.e., “salvage” or “scrap value”).
to use the property with substantially all of the economic ben-
efits and risks of ownership passed to the lessee. Return on Common Equity (ROE) is net income available to
common stockholders, expressed as a percentage of average
Lease – leveraged is a lease in which a third party, a long-term
common equity, and is a key measurement of profitability.
creditor, provides non-recourse debt financing. We are party
to these lease types either as a creditor or as the lessor.
Special Purpose Entity (SPE) is a distinct legal entity created for
Lease – operating is a lease in which we retain beneficial a specific purpose in order to isolate the risks and rewards of
ownership of the asset, collect rental payments, recognize owning its assets and incurring its liabilities. We typically use
depreciation on the asset, and retain the risks of ownership, SPEs in securitization transactions, joint venture relation-
including obsolescence. ships, and certain structured leasing transactions.
Syndication and Sale of Receivables result from originating valuation allowances from total net revenue and other income
leases and receivables with the intent to sell a portion, or the and is a measurement of our revenue growth.
entire balance, of these assets to other financial institutions.
Unpaid Principal Balance (UPB) refers to the remaining unpaid
We earn and recognize fees and/or gains on sales, which are
principal balance of a loan and is used in the discussion sur-
reflected in other income, for acting as arranger or agent in
rounding home lending assets and reflects the carrying value,
before applying the recorded discount or valuation allowance.
Tangible Capital and Metrics exclude goodwill, other intangible
Yield-related Fees are collected in connection with our
assets and some comprehensive income items. We use tangi-
assumption of underwriting risk in certain transactions in
ble metrics in measuring capitalization.
addition to interest income. We recognize yield-related fees,
Total Net Revenue is the total of net finance revenue plus other which include prepayment fees and certain origination fees, in
income. This amount excludes provision for credit losses and Finance Revenue over the life of the lending transaction.
ITEM 1A. Risk Factors
You should carefully consider the following discussion of risks, terms of any such equity transactions may subject existing
and the other information provided in this Annual Report on security holders to potential subordination or dilution and may
Form 10-K. Our business activities involve various elements of involve change in governance.
risk. The risks described below are not the only ones facing
WE MAY BE ADVERSELY AFFECTED BY DETERIORATION IN
us. Additional risks that are presently unknown to us or that
ECONOMIC CONDITIONS THAT IS GENERAL OR SPECIFIC
we currently deem immaterial may also impact our business.
TO INDUSTRIES, PRODUCTS OR GEOGRAPHIES.
We consider the following issues to be the most critical risks
A recession or downturn in the U.S. or global economies or
to the success of our business:
affecting specific industries, geographic locations and/or
OUR LIQUIDITY OR ABILITY TO RAISE DEBT OR EQUITY products could make it difficult for us to originate new busi-
CAPITAL MAY BE LIMITED. ness, given the resultant reduced demand for consumer or
commercial credit. In addition, a downturn in certain indus-
We rely upon access to the capital markets to provide sources of
tries may result in a reduced demand for the products that we
liquidity and to fund asset growth. These markets have exhib-
finance in that industry or negatively impact collection and
ited heightened volatility and reduced liquidity. Recently, liquidity
asset recovery efforts.
in the capital markets has been more constrained and interest
rates available to us have increased significantly relative to Credit quality also may be impacted during an economic slow-
benchmark rates, such as U.S. treasury securities and LIBOR. down or recession as borrowers may fail to meet their debt
As a result, our cost of funds has increased and we have shifted payment obligations. Adverse economic conditions may also
our funding sources primarily to asset-backed securities and result in declines in collateral values. Accordingly, higher
other secured credit facilities, including both on-balance sheet credit and collateral related losses could impact our financial
and off-balance sheet securitizations, rather than unsecured position or operating results.
debt securities. Adverse changes in the economy, long-term
For example, decreased demand for the products of various
disruption in the capital markets, deterioration in our business
manufacturing customers due to a general economic slow-
performance or downgrades in our credit ratings could limit our
down may adversely affect their ability to repay their loans and
access to these markets or increase our cost of capital. Any one
leases with us. Similarly, a decrease in the level of airline pas-
of these developments would adversely affect our business
senger traffic due to general economic slowdown or a decline
operating results and financial condition. A downgrade in our
in shipping volumes due to a slowdown in particular industries
short-term credit ratings could result in our having to issue
may adversely affect our aerospace or rail businesses.
commercial paper to a different group of investors, as a portion,
or potentially all, of our current investor base could require WE MAY BE ADVERSELY AFFECTED BY CONTINUED
maintenance of our short-term credit ratings. DETERIORATION IN MARKET CONDITIONS AND CREDIT
QUALITY IN THE HOME LENDING AND RELATED
We may also raise additional equity capital through the sale of
common stock, preferred stock, or securities that are convert-
ible into common stock. There are no restrictions on entering The U.S. residential market and home lending industry began
into the sale of any such equity securities in either public or showing signs of stress in early 2007, with credit conditions
private transactions, except that any private transaction deteriorating rapidly in the second quarter of 2007 and contin-
involving more than 20% of the shares outstanding will require uing into the third and fourth quarters of 2007, including
shareholder approval. Under current market conditions, the
Item 1A: Risk Factors
increased rates of defaults and foreclosures, stagnating or derivative counterparties, customers, manufacturers, or
declining home prices, and declining sales in both the new other parties with which we conduct business materially
construction and the resale markets. deteriorates, we may be exposed to credit risk related losses
that may negatively impact our financial condition, results of
These market conditions were reflected in the deterioration of
operations or cash flows.
credit metrics of our home lending portfolio and the
decreased market liquidity for such portfolios and resulted in
WE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT
higher charge-offs and significant valuation allowances
CHANGES IN INTEREST RATES.
through year end 2007. These changes in the home lending
Although we generally employ a matched funding approach to
and home construction industries have also resulted in
managing our interest rate risk, including matching the
reduced demand for certain types of railcars that are used to
repricing characteristics of our assets with our liabilities, sig-
transport building materials, produced higher volatility and
nificant increases in market interest rates or widening of our
reduced demand from investors in the high yield loan markets,
generated concerns about credit quality in general, and ham- credit spreads, or the perception that an increase may occur,
pered activity in the syndication market, among other effects. could adversely affect both our ability to originate new finance
receivables and our profitability. Conversely, a decrease in
We will continue to be adversely affected by conditions in the
interest rates could result in accelerated prepayments of
U.S. residential home lending industry if they continue to dete-
owned and managed finance receivables.
riorate further. It is also likely that we will be adversely affected
if the conditions in the home lending industry negatively impact
WE MAY BE REQUIRED TO TAKE AN IMPAIRMENT
our other consumer businesses or other parts of our credit
CHARGE FOR GOODWILL OR INTANGIBLE ASSETS
portfolio or the U.S. or world economies. Finally, we may be
RELATED TO ACQUISITIONS.
adversely affected if the conditions in the home lending indus-
We have acquired certain portions of our business and certain
try result in new or increased regulation of financing and
portfolios through acquisitions and bulk purchases. Further,
leasing companies in general or with respect to specific prod-
as part of our long-term business strategy, we may continue to
ucts or markets.
pursue acquisitions of other companies or asset portfolios. In
connection with prior acquisitions and portfolio purchases, we
OUR RESERVES FOR CREDIT LOSSES MAY PROVE
have accounted for the portion of the purchase price paid in
INADEQUATE OR WE MAY BE NEGATIVELY AFFECTED BY
excess of the book value of the assets acquired as goodwill or
CREDIT RISK EXPOSURES.
intangible assets, and we may be required to account for simi-
Our business depends on the creditworthiness of our cus-
lar premiums paid on future acquisitions in the same manner.
tomers. We maintain a consolidated reserve for credit losses
on finance receivables that reflects management’s judgment Under the applicable accounting rules, goodwill is not amor-
of losses inherent in the portfolio. We periodically review our tized and is carried on our books at its original value, subject
CIT – ANNUAL REPORT 2007
consolidated reserve for adequacy considering economic to periodic review and evaluation for impairment, while intan-
conditions and trends, collateral values and credit quality gible assets are amortized over the life of the asset. If, as a
indicators, including past charge-off experience and levels of result of our periodic review and evaluation of our goodwill
past due loans and non-performing assets. We cannot be and intangible assets for potential impairment, we determine
certain that our consolidated reserve for credit losses will be that changes in the business itself, the economic environ-
adequate over time to cover credit losses in our portfolio ment including business valuation levels and trends, or the
because of adverse changes in the economy or events legislative or regulatory environment have adversely affected
adversely affecting specific customers, industries or mar- the fair value of the business, we may be required to take an
kets. If the credit quality of our customer base materially impairment charge to the extent that the carrying values of
decreases, if the risk of a market, industry, or group of cus- our goodwill or intangible assets exceeds the fair value of the
tomers changes significantly, or if our reserves for credit business. As a result of our 2007 fourth quarter analysis of
losses are not adequate, our business, financial condition goodwill and intangible assets associated with our student
and results of operations could suffer. For example, credit lending business, we recorded impairment charges. Also, if
performance in the home lending industry, and particularly in we sell a business for less than the book value of the assets
the sub-prime market, has been declining over the past year. sold, plus any goodwill or intangible assets attributable to
This decline in the home lending industry has been reflected that business, we may be required to take an impairment
in our home lending portfolio during 2007, resulting in charge on all or part of the goodwill and intangible assets
increased charge-offs and significant valuation allowances. attributable to that business.
In addition to customer credit risk associated with loans and
BUSINESSES OR ASSET PORTFOLIOS ACQUIRED MAY
leases, we are also exposed to other forms of credit risk,
NOT PERFORM AS EXPECTED AND WE MAY NOT BE ABLE
including counterparties to our derivative transactions, loan
TO ACHIEVE ADEQUATE CONSIDERATION FOR PLANNED
sales, syndications and equipment purchases. These coun-
terparties include other financial institutions, manufacturers
As part of our long-term business strategy, we may pursue
and our customers. To the extent that our credit underwrit-
acquisitions of other companies or asset portfolios as well as
ing processes or credit risk judgments fail to adequately
dispose of non-strategic businesses or portfolios. Future
identify or assess such risks, or if the credit quality of our
acquisitions may result in potentially dilutive issuances of factors as the board of directors may consider to be relevant. If
equity securities and the incurrence of additional debt, which any of these factors are adversely affected it may impact our
could have a material adverse effect on our business, financial ability to pay dividends on our common stock.
condition and results of operations. Such acquisitions may
In addition, the terms of our outstanding preferred stock and
involve numerous other risks, including difficulties in integrat-
junior subordinated notes restrict our ability to pay dividends
ing the operations, services, products and personnel of the
on our common stock if we do not make distributions on our
acquired company; the diversion of management’s attention
preferred stock and subordinated notes. Further, we are pro-
from other business concerns; entering markets in which we
hibited from declaring dividends on our preferred stock and
have little or no direct prior experience; and the potential loss
from paying interest on our junior subordinated notes if we do
of key employees of the acquired company. In addition,
not meet certain financial tests, provided that the limitation
acquired businesses and asset portfolios may have credit-
does not apply if we pay such dividends and interest out of net
related risks arising from substantially different underwriting
proceeds that we have received from the sale of common
standards associated with those businesses or assets.
stock. We sold common stock to cover such dividend and
With respect to our planned disposition of certain home lend- interest payments during the third and fourth quarters of 2007
ing assets held for sale, or any future dispositions of our and the first quarter of 2008, and we obtained a forward com-
businesses or asset portfolios, there can be no assurance that mitment from two investment banks to purchase additional
we will receive adequate consideration for those businesses or shares, at our option, in the second and third quarters of 2008.
assets at the time of their disposition or that we will be able to If we are unable to sell our common stock in the future, and
adequately replace the volume associated with the businesses we fail to meet the requisite financial tests, then we will be
or asset portfolios that we dispose of with higher-yielding prohibited from declaring dividends on our preferred stock,
businesses or asset portfolios having acceptable risk charac- paying interest on our junior subordinated notes, or declaring
teristics. As a result, our future disposition of businesses or dividends on our common stock.
asset portfolios could have a material adverse effect on our
business, financial condition and results of operations. COMPETITION FROM BOTH TRADITIONAL COMPETITORS
AND NEW MARKET ENTRANTS MAY ADVERSELY AFFECT
ADVERSE OR VOLATILE MARKET CONDITIONS MAY OUR RETURNS, VOLUME AND CREDIT QUALITY.
REDUCE FEES AND OTHER INCOME.
Our markets are highly competitive and are characterized by
In 2005, we began pursuing strategies to leverage our competitive factors that vary based upon product and geo-
expanded asset generation capability and diversify our rev- graphic region. We have a wide variety of competitors that
enue base to increase other income as a percentage of total include captive and independent finance companies, commer-
revenue. We invested in infrastructure and personnel focused cial banks and thrift institutions, industrial banks, community
on increasing other income in order to generate higher levels banks, leasing companies, hedge funds, insurance companies,
of syndication and participation income, advisory fees, servic- mortgage companies, manufacturers and vendors.
ing fees and other types of fee income. These revenue
Competition from both traditional competitors and new market
streams are dependent on market conditions and, therefore,
entrants has intensified due to increasing recognition of the
can be more volatile than interest on loans and rentals on
attractiveness of the commercial finance markets. We compete
leased equipment. Current market conditions, including
primarily on the basis of pricing, terms and structure. To the
lower liquidity levels, have had a direct impact on syndication
extent that our competitors compete aggressively on any com-
activity, and have resulted in lower fee generation. If we are
bination of those factors, we could lose market share. Should
unable to sell or syndicate a transaction after it is originated,
we match competitors’ terms, it is possible that we could expe-
this activity will involve the assumption of greater underwrit-
rience margin compression and/or increased losses.
ing risk than we originally intended and could increase our
capital requirements to support our business.
WE MAY NOT BE ABLE TO REALIZE OUR ENTIRE
Continued disruption to the capital markets, our failure to INVESTMENT IN THE EQUIPMENT WE LEASE.
implement these initiatives successfully, or the failure of
The realization of equipment values (residual values) at the end
such initiatives to result in increased asset and revenue
of the term of a lease is an important element in the leasing
levels could adversely affect our financial position and
business. At the inception of each lease, we record a residual
results of operations.
value for the leased equipment based on our estimate of the
future value of the equipment at the expected disposition date.
ADVERSE FINANCIAL RESULTS OR OTHER FACTORS MAY
Internal equipment management specialists, as well as exter-
LIMIT OUR ABILITY TO PAY DIVIDENDS
nal consultants, determine residual values.
Our board of directors decides whether we will pay dividends
A decrease in the market value of leased equipment at a rate
on our common stock. That decision depends upon, among
greater than the rate we projected, whether due to rapid
other things, general economic and business conditions, our
technological or economic obsolescence, unusual wear and
strategic and operational plans, our financial results and con-
tear on the equipment, excessive use of the equipment, or
dition, contractual, legal and regulatory restrictions on the
other factors, would adversely affect the residual values of
payment of dividends by us, our credit ratings, and such other
Item 1A: Risk Factors