C I T A N N U A L R E P O R T 2 0 1 5 CIT Annual Report 2015 Building Long-Term Value cit.com 35116_CIT_cvr.pdf pg 1 April 7, 2016 16:10:32 CIT Group Inc. Founded in 1908, CIT (NYSE: CIT) is a financial holding company with more than $65 billion in assets. Its principal bank subsidiary, CIT Bank, N.A., (Member FDIC, Equal Housing Lender) has more than $30 billion of deposits and more than $40 billion of assets. It provides financing, leasing and advisory services principally to middle-market companies across a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation sector. It also offers products and services to consumers through its Internet bank franchise and a network of retail branches in Southern California, operating as OneWest Bank, a division of CIT Bank, N.A. cit.com CIT Bank Founded in 2000, CIT Bank (Member FDIC, Equal Housing Lender) is the U.S. commercial bank subsidiary of CIT Group Inc. (NYSE: CIT). It provides lending and leasing to the small business, middle-market and transportation sectors. CIT Bank (BankOnCIT.com) offers a variety of savings options designed to help customers achieve their financial goals. As of December 31, 2015, it had approximately $43 billion of deposits and more than $33 billion of assets. TRANSPORTATION AND INTERNATIONAL FINANCE Business Aircraft Finance CIT Business Aircraft Finance provides financing solutions to business jet operators. Serving clients around the globe, we provide financing that is tailored to our clients’ unique business requirements. Products include term loans, leases, Entertainment & Media, Energy and Healthcare. The division also originates qualified SBA 504 loans (generally for buying a building, ground-up construction, building renovation or the purchase of heavy machinery and equipment) and 7(a) loans (generally for working capital or financing leasehold improvements). Additionally, the division offers a full suite of deposit and payment solutions to small- and medium-size pre-delivery financing, fractional share financing and vendor/ businesses. manufacturer financing. Commercial Air CIT Commercial Air is one of the world’s leading aircraft leasing organizations and provides leasing and financing solutions—including operating leases, capital leases, loans and structuring, and advisory services—for commercial airlines worldwide. We own and finance a fleet of more approximately 50 countries. International Finance CIT International Finance offers equipment financing and leasing to small- and middle-market businesses in China. Maritime Finance Commercial Real Estate CIT Real Estate Finance provides senior secured commercial real estate loans to developers and other commercial real estate professionals. We focus on properties with a stable cash flow and originate construction loans to highly experienced and well-capitalized developers. CIT Commercial Services is a leading provider of factoring services in the United States. We provide credit protection, accounts receivable management services and asset-based lending to manufacturers and importers that sell into retail channels of distribution, including apparel, textile, furniture, home furnishings and consumer electronics. than 300 commercial aircraft with about 100 customers in Commercial Services CIT Maritime Finance offers senior secured loans, sale- Consumer Banking leasebacks and bareboat charters to owners and operators of oceangoing cargo vessels, including tankers, bulkers, container ships, car carriers, and offshore vessels and drilling Consumer Banking offers mortgage loans, deposits and private banking services to its consumer customers. The division offers jumbo residential mortgage loans and CIT Rail is an industry leader in offering customized leasing and financing solutions and a highly efficient, diversified fleet of railcar assets to freight shippers and carriers throughout rigs. Rail North America and Europe. NORTH AMERICA BANKING Commercial Banking Commercial Banking (previously known as Corporate Finance) provides a range of lending and deposit products, as well as ancillary services, including cash management and advisory services, to small- and medium-size businesses. conforming residential mortgage loans, primarily in Southern California. Mortgage loans are primarily originated through leads generated from the retail branch network, private bankers and the commercial business units. Mortgage lending includes product specialists, internal sales support and origination processing, structuring and closing. Retail banking is the primary deposit-gathering business of CIT Bank and operates through 70 retail branches in Southern California and an online direct channel. We offer a broad range of deposit and lending products to meet the needs of our clients (both individuals and small businesses), including checking, savings, certificates of deposit, residential mortgage loans and investment advisory services. We also offer banking services to high net worth individuals. Loans offered are primarily senior secured loans collateralized Equipment Finance by accounts receivable, inventory, machinery & equipment and/or intangibles that are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature and quality of the collateral, may be asset-based loans or cash flow loans. Loans are originated through direct relationships, led by individuals with significant experience in their respective industries, or through relationships with private equity sponsors. We provide CIT Equipment Finance provides leasing and equipment financing solutions to small businesses and middle-market companies in a wide range of industries including Technology, Office Imaging, Healthcare, Industrial and Franchise. We assist manufacturers and distributors in growing sales, profitability and customer loyalty by providing customized, value-added finance solutions to their commercial customers. The LendEdge platform, in our Direct Capital business, allows small businesses to access financing through a highly financing to customers in a wide range of industries, including automated credit approval, documentation and funding Commercial & Industrial, Communications & Technology, process. We offer loans and both capital and operating leases. Corporate Information GLOBAL HEADQUARTERS BOARD OF DIRECTORS INVESTOR INFORMATION 11 West 42nd Street New York, NY 10036 Telephone: (212) 461-5200 CORPORATE HEADQUARTERS One CIT Drive Livingston, NJ 07039 Telephone: (973) 740-5000 Number of employees: 4,934 as of December 31, 2015 Number of beneficial shareholders: 48,184 as of February 6, 2016 EXECUTIVE MANAGEMENT COMMITTEE Ellen R. Alemany Chief Executive Officer and Chairwoman-Elect Bryan D. Allen Executive Vice President, Chief Human Resources Officer Matthew Galligan President, CIT Real Estate Finance Stacey Goodman Executive Vice President, Chief Information Officer and Operations Officer E. Carol Hayles Executive Vice President, Chief Financial Officer James L. Hudak President, CIT Commercial Finance Robert J. Ingato Executive Vice President, General Counsel and Secretary C. Jeffrey Knittel President, Transportation & International Finance Raymond D. Matsumoto Executive Vice President, Chief Administrative Officer Kelley Morrell Executive Vice President, Chief Strategy Officer Robert C. Rowe Executive Vice President, Chief Risk Officer Steven Solk President, CIT Business Capital John A. Thain Chairman of the Board Ellen R. Alemany 5M Chief Executive Officer and Chairwoman-Elect of CIT Group Inc. Michael J. Embler 1M, 3M Former Chief Investment Officer of Franklin Mutual Advisors LLC Alan Frank Retired Partner of Deloitte & Touche LLP William M. Freeman 2M, 3M Executive Chairman of General Waters Inc. Steven T. Mnuchin Chairman and Chief Executive Officer of Dune Capital Management LP David M. Moffett 2M Former Chief Executive Officer of the Federal Home Loan Mortgage Corporation R. Brad Oates 4M Chairman and Managing Partner of Stone Advisors LP Marianne Miller Parrs 1C, 5M Retired Executive Vice President and Chief Financial Officer of International Paper Company Gerald Rosenfeld 4C Vice Chairman of Lazard Ltd. Stock Exchange Information In the United States, CIT common stock is listed on the New York Stock Exchange under the ticker symbol “CIT.” Shareowner Services For shareowner services, including address changes, security transfers and general shareowner inquiries, please contact Computershare. By writing: Computershare Shareowner Services LLC P.O. Box 43006 Providence, RI 02940-3006 By visiting: https://www-us.computershare.com/investor/ Contact By calling: (800) 851-9677 U.S. & Canada (201) 680-6578 Other countries (800) 231-5469 Telecommunication device for the hearing impaired For general shareowner information and online access to your shareowner account, visit Computershare’s website: computershare. com Form 10-K and Other Reports A copy of Form 10-K and all quarterly filings on Form 10-Q, Board Committee Charters, Corporate Governance Guidelines and the Code of Business Conduct are available without charge at cit.com, or upon written request to: Vice Admiral John R. Ryan, USN (Ret.) 2M, 3M, 6 President and Chief Executive Officer of the Center for Creative Leadership CIT Investor Relations One CIT Drive Livingston, NJ 07039 Sheila A. Stamps 4M, 5M Retired Executive Vice President of Corporate Strategy and Investor Relations at Dreambuilder Investments LLC For additional information, please call (866) 54CITIR or email investor.relations@cit.com. INVESTOR INQUIRIES Barbara Callahan Senior Vice President (973) 740-5058 barbara.callahan@cit.com cit.com/investor MEDIA INQUIRIES Matt Klein Vice President (973) 597-2020 matt.klein@cit.com cit.com/media Seymour Sternberg 2C Retired Chairman of the Board and Chief Executive Officer of New York Life Insurance Company Peter J. Tobin 4M, 5C Retired Special Assistant to the President of St. John’s University and Retired Chief Financial Officer of The Chase Manhattan Corporation Laura S. Unger 1M, 3C Independent Consultant, Former Commissioner of the U.S. Securities and Exchange Commission 1 Audit Committee 2 Compensation Committee 3 Nominating and Governance Committee 4 Risk Management Committee 5 Regulatory Compliance Committee 6 Lead Director C Committee Chairperson M Committee Member The NYSE requires that the Chief Executive Officer of a listed company certify annually that he or she was not aware of any violation by the company of the NYSE’s corporate governance listing standards. Such certification was made by John A. Thain on June 10, 2015. Certifications by the Chief Executive Officer and the Chief Financial Officer of CIT pursuant to section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to CIT’s Annual Report on Form 10-K. Printed on recycled paper CIT ANNUAL REPORT 2015 April 11, 2016 JOHN A. THAIN CHAIRMAN OF THE BOARD DEAR FELLOW SHAREHOLDERS, The past year has been one of tremendous change for CIT. We completed the acquisi- tion of OneWest Bank, announced the decision to separate our commercial air business, received an investment-grade rating for CIT Bank, and appointed Ellen Alemany as our new Chief Executive Officer. All of these efforts further our goal for CIT to be a leading national middle-market bank. With the completion of the OneWest transaction, 64 percent of CIT’s assets are funded in CIT Bank. The transaction adds core retail deposits to CIT’s funding mix, lowers CIT’s overall cost of funds, provides commercial deposit and treasury services capabilities, and adds 70 retail branches in the Greater Los Angeles metropolitan area. Following the completion of the transaction, CIT Bank was upgraded to an investment-grade credit rat- ing by Standard & Poor’s. The separation of Commercial Air from CIT will free up significant regulatory capital, al- low for greater growth of the commercial air business, and realize value for shareholders. After the separation of the commercial air business, approximately 75 percent of CIT’s assets will be funded with deposits. Upon my decision to retire, the Board of Directors of CIT appointed Ellen Alemany to become the next CEO of CIT on April 1, 2016. Ellen has 38 years of commercial banking experience including previous roles as Chief Executive Officer of RBS Citizens Financial Group and as Chief Executive Officer for Global Transaction Services, Commercial Bank- ing, and CitiCapital of Citigroup. Ellen joined CIT’s Board of Directors in January 2014, and in addition to CEO, will become Chairwoman of the Board at our May Annual Meeting. Throughout the year, as we provided lending and leasing solutions for our middle-market commercial customers, we maintained our strong credit discipline and culture of compli- ance. CIT continues to have robust levels of capital and liquidity. I want to thank all of our employees for their dedication and support to our customers, our shareholders, and to the communities in which we live and work. John A. Thain Chairman of the Board UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the or | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2015 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 No.) 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 including area code: Title of each class Common Stock, par value $0.01 per share Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None | | No |X| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |X| No | Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes | 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | 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 | | Smaller reporting company | filer | At February 15, 2016, there were 201,538,384 shares of CIT’s common stock, par value $0.01 per share, outstanding. | Non-accelerated | | No |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | 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 Common Stock ($46.49 per share, 172,107,511 shares of common stock outstanding), which occurred on June 30, 2015, was $8,001,278,186. For purposes of this computation, all officers and directors of the registrant are deemed to be affiliates. Such determination shall not be deemed an admission that such officers and directors are, in fact, affiliates of the registrant. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 | DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement relating to the 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereof to the extent described herein. | CIT ANNUAL REPORT 2015 1 CONTENTS Part One Item 1. Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Where You Can Find More Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part Two Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 18 22 32 32 32 32 33 35 38 38 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Part Three Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . 205 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Part Four Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Table of Contents 2 CIT ANNUAL REPORT 2015 PART ONE Item 1: Business Overview BUSINESS DESCRIPTION CIT Group Inc., together with its subsidiaries (collectively “we”, “our”, “CIT” or the “Company”), has provided financial solutions to its clients since its formation in 1908. We provide financing, leasing and advisory services principally to middle market compa- nies in a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation industry worldwide. We had nearly $60 billion of earning assets at December 31, 2015. CIT became a bank holding company (“BHC”) in December 2008 and a financial holding company (“FHC”) in July 2013. CIT provides a full range of banking and related services to commercial and individual customers through its bank subsidiary, CIT Bank, N.A., which includes 70 branches located in southern California, and its online bank, bankoncit.com, and through other offices in the U.S. and internationally. Effective as of August 3, 2015, CIT acquired IMB HoldCo LLC (“IMB”), the parent company of OneWest Bank, National Associa- tion, a national bank (“OneWest Bank”) (the “OneWest Transaction”). CIT Bank, a Utah-state chartered bank and a wholly owned subsidiary of CIT, merged with and into OneWest Bank, Products and Services • Account receivables collection • Acquisition and expansion financing • Advisory services — investment and trust • Asset management and servicing • Asset-based loans • Credit protection • Cash management and payment services • Debt restructuring • Debt underwriting and syndication • Deposits • Enterprise value and cash flow loans with OneWest Bank surviving as a wholly owned subsidiary of CIT with the name CIT Bank, National Association (“CIT Bank, N.A.” or “CIT Bank”). The acquisition improves CIT’s competitive posi- tion in the financial services industry while advancing our commercial banking model. See Note 2 — Acquisition and Dis- position Activities in Item 8. Financial Statements and Supplementary Data for additional information and OneWest Transaction for information on certain acquired assets and liabilities. 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. CIT Bank, N.A. is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury (“OCC”). Prior to the OneWest Transaction, CIT Bank was regulated by the Fed- eral Deposit Insurance Corporation (“FDIC”) and the Utah Department of Financial Institutions (“UDFI”). Each business has industry alignment and focuses on specific sec- tors, products and markets. Our principal product and service offerings include: • Equipment leases • Factoring services • Financial risk management • Import and export financing • Insurance services • Letters of credit / trade acceptances • Merger and acquisition advisory services (“M&A”) • Private banking • Residential mortgage loans • Secured lines of credit • Small Business Administration (“SBA”) loans We source our commercial lending business through direct mar- keting to borrowers, lessees, manufacturers, vendors and distributors, and through referral sources and other intermediar- ies. As a result of the OneWest Bank acquisition, we are now able to source our commercial and consumer lending business through our branch network. Periodically we buy participations in syndications of loans and lines of credit and purchase finance receivables on a whole-loan basis. We generate revenue by earning interest on loans and invest- ments, collecting rentals on equipment we lease, and earning commissions, fees and other income for services we provide. We syndicate and sell certain finance receivables and equipment to leverage our origination capabilities, reduce concentrations and manage our balance sheet. We set underwriting standards for each division and employ port- folio risk management models to achieve desired portfolio demographics. Our collection and servicing operations are orga- nized by business and geography in order to provide efficient client interfaces and uniform customer experiences. Funding sources include deposits and borrowings. As a result of the OneWest Transaction and our continued funding and liability management initiatives, our funding mix has continued to migrate towards a higher proportion of deposits. CIT ANNUAL REPORT 2015 3 BUSINESS SEGMENTS Certain changes to our segments occurred during 2015 to reflect the inclusion of OneWest Bank operations. North American Commercial Finance (“NACF”) was renamed North America Banking (“NAB”) and includes the Commer- cial Real Estate, Commercial Banking and Consumer Banking divisions. We created a new segment, Legacy Consumer Mortgages (“LCM”), which includes single-family residential mortgage (“SFR”) loans and reverse mort- gage loans that were acquired as part of the OneWest Bank acquisition. Certain of the LCM loans are subject to loss sharing agreements with the FDIC, under which CIT may be reimbursed for a portion of future losses. SEGMENT NAME DIVISIONS MARKETS AND SERVICES North America Banking Transportation & International Finance Legacy Consumer Mortgages Non-Strategic Portfolios Corporate and Other Commercial Banking Commercial Real Estate Commercial Services Equipment Finance Consumer Banking Aerospace Rail Maritime Finance International Finance Single Family Residential Mortgages Reverse Mortgages • The commercial divisions provide lending, leasing and other financial and advisory services, including Small Business Administration (“SBA”) loans, to small and middle-market companies across select industries. • Factoring, receivables management products and secured financing to retail supply chain. • Consumer Banking includes a full suite of deposit products, and SFR loans offered through retail branches, private bankers, and an online direct channel. • Large ticket equipment leasing and secured financing to select transportation industries. • Equipment finance and secured lending in select international geographies. • Consists of SFR loans and reverse mortgage loans, certain of which are covered by loss sharing agreements with the FDIC. • Consists of portfolios that we do not consider strategic. • Includes investments and other unallocated items, such as certain amortization of intangible assets. Financial information about our segments and geographic areas of operation are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data (Note 25 — Business Segment Information). With the announced changes to CIT management, along with the Company’s exploration of alternatives for the commercial aerospace business, we will further refine our segment reporting effective January 1, 2016. Item 1: Business Overview 4 CIT ANNUAL REPORT 2015 NORTH AMERICA BANKING The NAB segment (the legacy CIT components of which were previously known as North American Commercial Finance) con- sists of five divisions: Commercial Banking, Commercial Real Estate, Commercial Services, Equipment Finance, and Consumer Banking. Revenue is generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities, capital markets transactions and banking services, commissions earned on factoring and related activities, and to a lesser extent, interest and dividends on investments. Revenue is also generated from gains on asset sales. In the fourth quarter of 2015, we announced that we intend to sell our Canada portfolio. Description of Divisions Commercial Banking (previously known as Corporate Finance) provides a range of lending and deposit products, as well as ancillary services, including cash management and advisory ser- vices, to small and medium size businesses. Loans offered are primarily senior secured loans collateralized by accounts receiv- able, inventory, machinery & equipment and/or intangibles that are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature and quality of the collateral, may be asset-based loans or cash flow loans. Loans are originated through direct relationships, led by individuals with significant experience in their respective industries, or through relationships with private equity sponsors. We provide financing to customers in a wide range of industries, including Commercial & Industrial, Communications & Technology, Entertainment & Media, Energy, and Healthcare. The division also originates qualified SBA 504 loans (generally for buying a building, ground-up construction, building renovation, or the purchase of heavy machinery and equipment) and 7(a) loans (generally for working capital or financing leasehold improvements). Addition- ally, the division offers a full suite of deposit and payment solutions to small and medium size businesses. Commercial Real Estate provides senior secured commercial real estate loans to developers and other commercial real estate pro- fessionals. We focus on properties with a stable cash flow and originate construction loans to highly experienced and well capi- talized developers. In addition, the OneWest Bank portfolio included multi-family mortgage loans that are being run off. Commercial Services provides factoring, receivable management products, and secured financing to businesses (our clients, gener- ally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e. sold or assigned to the fac- tor). Although primarily U.S.-based, Commercial Services also conducts business with clients and their customers internationally. Equipment Finance provides leasing and equipment financing solutions to small businesses and middle market companies in a wide range of industries on both a private label and direct basis. We provide financing solutions for our borrowers and lessees, and assist manufacturers and distributors in growing sales, profit- ability and customer loyalty by providing customized, value- added finance solutions to their commercial clients. Our LendEdge platform allows small businesses to access financing through a highly automated credit approval, documentation and funding process. We offer loans and leases, both capital and operating leases. Consumer Banking offers mortgage loans, deposits and private banking services to its consumer customers. The division offers jumbo residential mortgage loans and conforming residential mortgage loans, primarily in Southern California. Mortgage loans are primarily originated through leads generated from the retail branch network, private bankers, and the commercial business units. Mortgage lending includes product specialists, internal sales support and origination processing, structuring and closing. Retail banking is the primary deposit gathering business of CIT Bank and operates through 70 retail branches in Southern Califor- nia and an online direct channel. We offer a broad range of deposit and lending products to meet the needs of our clients (both individuals and small businesses), including: checking, sav- ings, certificates of deposit, residential mortgage loans, and investment advisory services. We also offer banking services to high net worth individuals. Key Risks Key risks faced by NAB’s Commercial Banking, Commercial Real Estate and Equipment Finance divisions are credit risk, business risk and asset risk. Credit risks associated with secured financings relate to the ability of the borrower to repay the loan and the value of the collateral underlying the loan should the borrower default on its obligations. Business risks relate to the demand for NAB’s services that is broadly affected by the level of economic growth and is more specifically affected by the level of economic activity in CIT’s tar- get industries. If demand for CIT’s products and services declines, then new business volume originated by NAB will decline. Like- wise, changes in supply and demand of CIT’s products and services also affect the pricing CIT can command from the mar- ket. Additionally, new business volume in Equipment Finance is influenced by CIT’s ability to maintain and develop relationships with its vendor partners. With regard to pricing, NAB is subject to potential threats from competitor activity or disintermediation by vendor partners and other referral sources, which could nega- tively affect CIT’s margins. NAB is also exposed to business risk related to its syndication activity. Under adverse market circum- stances, CIT would be exposed to risk arising from the inability to sell loans to other lenders, resulting in lower fee income and higher than expected credit exposure to certain borrowers. In Equipment Finance, NAB also is exposed to asset risk, namely that at the end of the lease term, the value of the asset will be lower than expected, resulting in reduced future lease income over the remaining life of the asset or a lower sale value. The products and services provided by Commercial Services involve two types of credit risk: customer and client. A client (typi- cally a manufacturer or importer of goods) is the counterparty to any factoring agreement, financing agreement, or receivables purchasing agreement that has been entered into with Commer- cial Services. A customer (typically a wholesaler or retailer) is the account debtor and obligor on trade accounts receivable that have been factored with and assigned to the factor. The largest risk for Commercial Services is customer credit risk in factoring transactions. Customer credit risk relates to the financial inability of a customer to pay on undisputed trade accounts receivable due from such customer to the factor. While less sig- nificant than customer credit exposure, there is also client credit risk in providing cash advances to factoring clients. Client credit risk relates to a decline in the creditworthiness of a borrowing client, their consequent inability to repay their loan and the pos- sible insufficiency of the underlying collateral (including the aforementioned customer accounts receivable) to cover any loan repayment shortfall. At December 31, 2015, client credit risk accounted for less than 10% of total Commercial Services credit exposure while customer credit risk accounted for the remainder. Commercial Services is also subject to a variety of business risks including operational, due to the high volume of transactions, as well as business risks related to competitive pressures from other banks, boutique factors, and credit insurers. These pressures cre- ate risk of reduced pricing and factoring volume for CIT. In addition, client de-factoring can occur if retail credit conditions are benign for a long period and clients no longer demand fac- toring services for credit protection. Key risks faced by NAB’s Consumer Banking division are credit risk, collateral risk and geographic concentration risk. Similar to our commercial business, credit risks associated with secured consumer financings relate to the ability of the borrower to repay its loan and the value of the collateral underlying the loan should the borrower default on its obligations. Our consumer mortgage loans are typically collateralized by the underlying property, pri- marily single family homes. Therefore, collateral risk relates to the potential decline in value of the property securing the loan. Most of the loans are concentrated in California; therefore, the geo- graphic concentration risk relates to a potential downturn in the economic conditions in that state. TRANSPORTATION & INTERNATIONAL FINANCE TIF is a leading provider of leasing and financing solutions to operators and suppliers in the global aviation and railcar indus- tries, and has a growing maritime business. TIF consists of four divisions: Aerospace (Commercial Air and Business Air), Rail, Maritime Finance, and International Finance, the latter of which includes equipment financing, secured lending and leasing in China and the U.K. The financing and leasing assets of the Inter- national Division are included in assets held for sale at December 31, 2015. Also, the Company announced during the fourth quarter it is reviewing all of the options available to enhance value through separating or selling our Commercial Air business. Revenues generated by TIF primarily include rents collected on leased assets, interest on loans, fees, and gains from assets sold. Aerospace and Rail account for the majority of the segment’s assets, revenues and earnings. CIT ANNUAL REPORT 2015 5 leasing, remarketing and selling new and used equipment. TIF is a global business, with aircraft leased or financed around the world, railcar leasing operations throughout North America and Europe and a growing loan portfolio. Description of Businesses Aerospace Commercial Air provides aircraft leasing, lending, asset manage- ment, and advisory services. The division’s primary clients include global and regional airlines around the world. Offices are located in the U.S., Europe and Asia. As of December 31, 2015, our com- mercial aerospace financed, leased and managed portfolio consists of 386 owned, financed and managed aircraft, which are placed with about 100 clients in approximately 50 countries. Business Air offers financing and leasing programs for corporate and private owners of business jets. Serving clients around the world, we provide financing that is tailored to our clients’ unique business requirements. Products include term loans, leases, pre- delivery financing, fractional share financing and vendor / manufacturer financing. Rail offers customized leasing and financing solutions and a highly efficient fleet of railcars and locomotives to railroads and shippers throughout North America and Europe. We expanded our operations to Europe during 2014 through an acquisition. We serve over 650 customers, including all of the U.S. and Canadian Class I railroads (railroads with annual revenues of at least $250 million), other railroads and non-rail companies, such as shippers and power and energy companies. Our operating lease fleet con- sists of over 128,000 railcars and 390 locomotives. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement, tank cars for energy products and chemicals, gondolas for coal, steel coil and mill ser- vice products, open hopper cars for coal and aggregates, boxcars for paper and auto parts and centerbeams and flat cars for lumber. Maritime Finance offers senior secured loans, sale-leasebacks and bareboat charters to owners and operators of oceangoing cargo vessels, including tankers, bulkers, container ships, car car- riers and offshore vessels and drilling rigs. International Finance offers equipment financing, secured lend- ing and leasing to small and middle-market businesses in China and the U.K., all of which was included in assets held for sale at December 31, 2015. The U.K. portfolio was sold January 1, 2016. The primary asset type held by TIF is equipment (predominantly commercial aircraft and railcars) purchased and leased to com- mercial end-users. The typical structure for leasing of large ticket transportation assets is an operating lease, whereby CIT retains the majority of the asset risk by virtue of the relatively short lease term in comparison to the useful life of the asset. TIF also has a loan portfolio consisting primarily of senior, secured loans. Key Risks We achieved leadership positions in transportation finance by leveraging our deep industry experience and core strengths in technical asset management, customer relationship manage- ment, and credit analysis. We have extensive experience managing equipment over its full life cycle, including purchasing, The primary risks for TIF are asset risk (resulting from ownership of the equipment on operating lease), credit risk and utilization risk. Asset risk arises from fluctuations in supply and demand for the underlying equipment that is leased. TIF invests in long-lived equipment; commercial aircraft have economic useful lives of Item 1: Business Overview 6 CIT ANNUAL REPORT 2015 approximately 20-25 years and railcars/locomotives have eco- nomic useful lives of approximately 35-50 years. This equipment is then leased to commercial end-users with lease terms of approximately 3-12 years. CIT is exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk is generally recognized through changes to lease income streams from fluctuations in lease rates and/or utilization. Changes to lease income occur when the existing lease contract expires, the asset comes off lease, and the business seeks to enter a new lease agreement. Asset risk may also change depre- ciation, resulting from changes in the residual value of the operating lease asset or through impairment of the asset carrying value, which can occur at any time during the life of the asset. Credit risk in the leased equipment portfolio results from the potential default of lessees, possibly driven by obligor specific or industry-wide conditions, and is economically less significant than asset risk for TIF, because in the operating lease business, there is no extension of credit to the obligor. Instead, the lessor deploys a portion of the useful life of the asset. Credit losses manifest through multiple parts of the income statement including loss of lease/rental income due to missed payments, time off lease, or lower rental payments than the existing contract due to either a restructuring with the existing obligor or re-leasing of the asset to another obligor as well as higher expenses due to, for example, repossession costs to recover, refurbish, and re-lease assets. Credit risk associated with loans relates to the ability of the bor- rower to repay its loan and the Company’s ability to realize the value of the collateral underlying the loan should the borrower default on its obligations. Exposure to certain industries could result in lower utilization of our equipment. A decrease in the level of airline passenger traffic or a decline in railroad shipping volumes or demand for specific railcars due to reduced demand for certain raw materials or bulk products, such as oil, coal, or steel, may adversely affect our aero- space or rail businesses, the value of our aircraft and rail assets, and the ability of our lessees to make lease payments. See “Concentrations” section of Item 7. Management’s Discus- sion and Analysis of Financial Condition and Results of Operations and Note 21 — Commitments of Item 8. Financial Statements and Supplementary Data for further discussion of our aerospace and rail portfolios. LEGACY CONSUMER MORTGAGES LCM was created in connection with the OneWest Transaction and includes portfolios of SFR mortgage loans and reverse mort- gage loans. Revenue generated is primarily interest on loans. LCM does not extend new originations for these products, but does fund pre-existing commitments and performs loan modifica- tions. These loans were previously acquired by OneWest Bank in connection with the lndyMac, First Federal and La Jolla transac- tions described in Note 5 — Indemnification Assets of Item 8 Financial Statements and Supplementary Data. Certain of the loans are covered by loss sharing agreements with the FDIC, which are scheduled to expire in 2019 and 2020. The FDIC indem- nified OneWest Bank against certain future losses sustained on these loans. In conjunction with the OneWest Transaction, CIT Bank may now be reimbursed for losses under the terms of the loss sharing agreements with the FDIC. Eligible losses are sub- mitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., liquidation of collateral). Reimbursements approved by the FDIC are usually received within 60 days of submission. Key Risks Key risks are credit risk, collateral risk and geographic concentra- tion risk. Credit risks associated with secured consumer financings relate to the ability of the borrower to repay the loan and the value of the collateral underlying the loan should the bor- rower default on its obligations. As discussed in Note 5 — Indemnification Assets of Item 8. Financial Statements and Supplementary Data, certain indemnifications from the FDIC begin to expire in 2019. LCM consumer loans are typically collat- eralized by the underlying property, primarily single family homes. Therefore, collateral risk relates to the potential decline in value of the property securing the loan. Most of the LCM loans are concentrated in California, therefore the geographic concen- tration risk relates to a potential downturn in the economic conditions in that state. NON-STRATEGIC PORTFOLIOS NSP had consisted of portfolios that we no longer considered strategic. During 2015 the remaining portfolios, which consisted primarily of equipment financing portfolios in Mexico and Brazil, were sold. CORPORATE AND OTHER Certain items are not allocated to operating segments and are included in Corporate & Other. Some of the more significant items include interest income on investment securities, a portion of interest expense primarily related to corporate liquidity costs (Interest Expense), mark-to-market adjustments on non-qualifying derivatives (Other Income), restructuring charges for severance and facilities exit activities as well as certain unallocated costs (Operating Expenses), certain intangible assets amortization expenses (Other Expenses) and loss on debt extinguishments. CIT ANNUAL REPORT 2015 7 CIT BANK, N.A. Prior to August 3, 2015, CIT Bank was a Utah-state chartered bank and a wholly owned subsidiary of CIT. On that date, CIT Bank merged with and into OneWest Bank, with OneWest Bank surviv- ing as a wholly owned subsidiary of CIT with the name CIT Bank, National Association (the “Bank”, “CIT Bank” or “CIT Bank, N.A.”). CIT Bank, N.A. is regulated by the OCC. CIT Bank, N.A. raises deposits through its 70 branch network and from retail and institutional customers through commercial chan- nels, as well as its online bank (www.BankOnCIT.com) and, to a lessening extent, through broker channels. Its existing suite of deposit products includes checking and savings accounts, Indi- vidual Retirement Accounts and Certificates of Deposit. CIT Bank’s commercial banking division provides a range of lend- ing and deposit products, as well as ancillary services, including cash management and advisory services, to small and medium size companies. The Bank’s consumer banking division offers mortgage lending, deposits and private banking services to its customers. The Bank’s financing and leasing assets are primarily commercial loans, consumer loans and operating lease equipment. Its com- mercial loans and operating lease equipment are reported in NAB and TIF, and consumer loans are in LCM and NAB. Con- sumer loans consist of jumbo residential mortgage loans and conforming residential mortgage loans, which are included in NAB, and SFR and reverse mortgage loans, which are within LCM. The Bank’s growing operating lease portfolio primarily con- sists of railcars, with some aircraft. The commercial aerospace business is conducted largely outside the bank. At year-end, CIT Bank remained well capitalized, maintaining capital ratios well above required levels. DISCONTINUED OPERATIONS Discontinued operations are discussed, along with balance sheet and income statement items, in Note 2 — Acquisition and Dispo- sition Activities in Item 8. Financial Statements and Supplementary Data. See also Note 22 — Contingencies for dis- cussion related to the servicing business. EMPLOYEES CIT employed approximately 4,900 people at December 31, 2015, up from approximately 3,360 at December 31, 2014, mostly reflecting the OneWest Bank acquisition. Based upon the loca- tion of the Company’s legal entities, approximately 4,415 were employed in the U.S. entities and 485 in non-U.S. entities. COMPETITION We operate in competitive markets, based on factors that vary by product, customer, and geographic region. Our competitors include global and domestic commercial banks, regional and community banks, captive finance companies, and leasing com- panies. In most of our business segments, we have a few large competitors that have significant market share and many smaller niche competitors. Many of our competitors are large companies with substantial financial, technological, and marketing resources. Our customer value proposition is primarily based on financing terms, structure, and client service. From time to time, due to highly competitive markets, we may (i) lose market share if we are unwilling to match product structure, pricing, or terms of our competitors that do not meet our credit standards or return requirements or (ii) receive lower returns or incur higher credit losses if we match our competitors’ product structure, pricing, or terms. While our funding structure puts us at a competitive disadvantage to other banks due to our proportion of higher cost debt, the OneWest Bank acquisition has reduced that disadvantage by increasing lower-cost funding sources, such as deposits. To take advantage of opportunities, we must continue to com- pete successfully with banks and financial institutions that are larger and have better access to low cost funding. As a result, we tend not to compete on price, but rather on industry experience, asset and equipment knowledge, and customer service. The regulatory environment in which we and/or our customers oper- ate also affects our competitive position. Item 1: Business Overview 8 CIT ANNUAL REPORT 2015 REGULATION We are regulated by federal banking laws, regulations and poli- cies. Such laws and regulations are intended primarily for the protection of depositors, customers and the federal deposit insurance fund (“DIF”), as well as to minimize risk to the banking system as a whole, and not for the protection of our shareholders or non-depository creditors. Bank regulatory agencies have broad examination and enforcement power over bank holding compa- nies (“BHCs”) and their subsidiaries, including the power to impose substantial fines, limit dividends, and other capital distri- butions, restrict operations and acquisitions, and require divestitures. BHCs and banks, as well as subsidiaries of both, are prohibited by law from engaging in practices that the relevant regulatory authority deems unsafe or unsound. CIT is a BHC, and elected to become a FHC, subject to regulation and examination by the FRB and the FRBNY. As an FHC, CIT is subject to certain limitations on our activities, transactions with affiliates, and pay- ment of dividends, and certain standards for capital and liquidity, safety and soundness, and incentive compensation, among other matters. Under the system of “functional regulation” established under the BHC Act, the FRB supervises CIT, including all of its non-bank subsidiaries, as an “umbrella regulator” of the consoli- dated organization. CIT Bank is chartered as a national bank by the OCC and is a member bank of the Federal Reserve System. CIT’s principal regulator is the FRB and CIT Bank’s principal regu- lator is the OCC. Both CIT and CIT Bank are regulated by the Consumer Financial Protection Bureau (“CFPB”), which regulates consumer financial products. Prior to the OneWest Transaction, CIT Bank was regulated by the FDIC and the UDFI. Certain of our subsidiaries are subject to regulation by other domestic and foreign governmental agencies. In connection with the restructuring of our international platforms, we have surren- dered all of our banking licenses outside of the United States. CIT Capital Securities L.L.C., a Delaware limited liability company, is a broker-dealer licensed by the Financial Industry Regulatory Authority (“FINRA”), and is subject to regulation by FINRA and the Securities and Exchange Commission (“SEC”). CIT also holds a 16% interest in CIT Group Securities (Canada) Inc., a Canadian broker dealer, which is licensed and regulated by the Ontario Securities Commission. Our insurance operations are primarily conducted through The Equipment Insurance Company, a Vermont corporation, and CIT Insurance Agency, Inc., a Delaware corporation. Each company is licensed to enter into insurance contracts and is subject to regu- lation and examination by insurance regulators. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, made extensive changes to the regulatory structure and environ- ment affecting banks, BHCs, non-bank financial companies, broker-dealers, and investment advisory and management firms. Although the Dodd-Frank Act has not significantly limited CIT from conducting the activities in which we were previously engaged, a number of regulations have affected and will con- tinue to affect the conduct of a number of our business activities, either directly through regulation of specific activities or indirectly through regulation of concentration risks, capital, or liquidity or through the imposition of additional compliance requirements. As of September 30, 2015, as a result of the OneWest Transac- tion, we exceeded the $50 billion threshold that subjects BHCs to enhanced prudential supervision requirements under Sections 165 and 166 of the Dodd-Frank Act and regulations issued by the FRB thereunder. These additional requirements will be phased in over time, through March 2017. We expect to continue devoting significant additional resources in terms of both increased expen- ditures and management time in 2016 to implement each of these requirements and ongoing costs thereafter to continue to comply with these enhanced prudential supervision require- ments. See “Enhanced Prudential Standards for Large Bank Holding Companies” below. The OCC approval of the OneWest Transaction was subject to two con- ditions. First, the OCC required CIT Bank to submit a comprehensive business plan covering a period of at least three years, including a financial forecast, a capital plan that provides for maintenance of CIT Bank’s capital, a funding plan and contingency funding plan, the intended types and volumes of lending activities, and an action plan to accomplish identified strategic goals and objectives. After each calen- dar quarter, the Bank must report and explain to the OCC any material variances. The Board must review the performance of CIT Bank under the business plan at least annually and CIT Bank must update the busi- ness plan annually. Second, the OCC required CIT Bank to submit a revised Community Reinvestment Act of 1977 (“CRA”) Plan after the merger. The revised CRA Plan must describe the actions it intends to take to help meet the credit needs in low and moderate income (“LMI”) areas within its assessment areas, including annual goals for helping to meet the credit needs of LMI individuals and geographies within the assessment areas, the management structure responsible for implementing the CRA Plan, and the Board committee responsible for overseeing the Bank’s perfor- mance under the CRA Plan. CIT Bank must informally seek input on its CRA Plan from members of the public in its assessment areas. In addi- tion, CIT Bank must publish on its public website (i) a copy of its revised CRA Plan after it receives a written determination of non-objection from the OCC and (ii) a CRA Plan summary report that demonstrates the measurable results of the revised CRA Plan a month prior to the commencement of CIT Bank’s performance evaluation. The FRB Order approved the OneWest Transaction conditioned on CIT meeting certain conditions and on commitments made in connection with CIT’s application. CIT committed to meeting cer- tain levels of CRA-reportable lending and CRA Qualified Investments in its assessment areas over 4 years, making annual donations to qualified non-profit organizations that provide ser- vices in its assessment areas, locating 15% of its branches and ATMs in LMI census tracts, and providing 2,100 hours of CRA vol- unteer service. CIT Bank filed its CRA Plan with the OCC in December 2015 and its comprehensive business plan in January 2016. The CRA Plan and the comprehensive business plan each are subject to review and non-objection by the OCC. Banking Supervision and Regulation Permissible Activities The BHC Act limits the business of BHCs that are not financial holding companies to banking, managing or controlling banks, performing servicing activities for subsidiaries, and engaging in activities that the FRB has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto. An FHC, however, may engage in other activities, or acquire and retain the shares of a company engaged in activities that are financial in nature or incidental or complementary to activities that are financial in nature as long as the FHC continues to meet the eligibility requirements for FHCs. These requirements include that the FHC and each of its U.S. depository institution subsidiar- ies maintain their status as “well-capitalized” and “well- managed.” A depository institution subsidiary is considered to be “well- capitalized” if it satisfies the requirements for this status discussed below under “Prompt Corrective Action.” A depository institution subsidiary is considered “well-managed” if it received a composite rating and management rating of at least “satisfac- tory” in its most recent examination. An FHC’s status will also depend upon its maintaining its status as “well-capitalized” and “well-managed” under applicable FRB regulations. If an FHC ceases to meet these capital and management requirements, the FRB’s regulations provide that the FHC must enter into an agree- ment with the FRB to comply with all applicable capital and management requirements. Until the FHC returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any non- banking financial activities permissible for FHCs or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compli- ance within 180 days, the FRB may require divestiture of the FHC’s depository institutions. BHCs and banks must also be well- capitalized and well-managed in order to acquire banks located outside their home state. An FHC will also be limited in its ability to commence non-banking financial activities or acquire a com- pany engaged in such financial activities if any of its insured depository institution subsidiaries fails to maintain a “satisfac- tory” rating under the CRA, as described below under “Community Reinvestment Act.” Activities that are “financial in nature” include securities under- writing, dealing and market making, advising mutual funds and investment companies, insurance underwriting and agency, mer- chant banking, and activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature or incidental to such financial activity. “Complementary activities” are activities that the FRB determines upon application to be complementary to a financial activity and that do not pose a safety and soundness issue. CIT is primarily engaged in activities that are permissible for a BHC, rather than the expanded activi- ties available to an FHC. Volcker Rule The Dodd-Frank Act limits banks and their affiliates from engag- ing in proprietary trading and investing in and sponsoring certain unregistered investment companies (e.g., hedge funds and pri- vate equity funds). This statutory provision is commonly called CIT ANNUAL REPORT 2015 9 the “Volcker Rule”. The statutory provision became effective in July 2012 and required banking entities subject to the Volcker Rule to bring their activities and investments into compliance with applicable requirements by July 2014. In December 2013, the federal banking agencies, the SEC, and the Commodity Futures Trading Commission (“CFTC”) adopted final rules to implement the Volcker Rule, and the FRB, by order, extended the compliance period to July 2015. In December 2014, the FRB, by order, extended the conformance period to July 2016 for invest- ments in and relationships with so-called legacy covered funds and stated its intention to grant an additional extension through July 2017. The final rules are highly complex and require an extensive compliance program, including an enhanced compli- ance program applicable to banking entities with more than $50 billion in consolidated assets. CIT does not currently antici- pate that the Volcker Rule will have a material effect on its business and activities, as we have a limited amount of trading activities and fund investments. CIT has sold most of its private equity fund investments, and may incur additional costs to dis- pose of its remaining fund investments, which have a remaining book value of less than $20 million. In addition, CIT will incur additional costs to revise its policies and procedures and review its operating and monitoring systems to ensure compliance with the Volcker Rule. We cannot yet determine the precise financial impact of the rule on CIT. Capital Requirements As a BHC, CIT is subject to consolidated regulatory capital requirements administered by the FRB. Upon completion of the merger with OneWest Bank on August 3, 2015, CIT Bank became subject to similar capital requirements administered by the OCC. In July 2013, the FRB, OCC, and FDIC issued a final rule (the “Basel III Final Rule”) establishing risk-based capital guidelines that are based upon the final framework for strengthening capital and liquidity regulation of the Basel Committee on Banking Supervision (the “Basel Committee”), which was released in December 2010 and revised in June 2011 (“Basel III”). The Com- pany, as well as the Bank, became subject to the Basel III Final Rule, applying the Standardized Approach, effective January 1, 2015. Prior to January 1, 2015, the risk-based capital guidelines applicable to CIT were based upon the 1988 Capital Accord (“Basel I”) of the Basel Committee. Although the Basel III Final Rule retained the capital components of Tier 1 capital, Tier 2 capital, and Total capital (the sum of Tier 1 and Tier 2 capital) and their related regulatory capital ratios, it implemented numerous changes in the composition of Tier 1 and Tier 2 capital and the related capital adequacy guidelines. Among other matters, the Basel III Final Rule: (i) introduces a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandates that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other compo- nents of capital; and (iv) expands the scope of the deductions from and adjustments to capital as compared to previous regula- tions. For most banking organizations, the most common form of Additional Tier 1 capital instruments is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital instruments is subordinated notes, which are subject to the Basel Item 1: Business Overview 10 CIT ANNUAL REPORT 2015 III Final Rule specific requirements. The Company does not cur- rently have either of these forms of capital outstanding. panies’ Tier 1 capital. The Company did not have any hybrid securities outstanding at December 31, 2015. The Basel III Final Rule provides for a number of deductions from and adjustments to CET1. These include, for example, goodwill, other intangible assets, and deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carry-forwards net of any related valuation allowance. Also, mortgage servicing rights, DTAs arising from temporary differences that could not be real- ized through net operating loss carrybacks and significant investments in non-consolidated financial institutions must be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. The non-DTA related deductions (goodwill, intan- gibles, etc.) may be reduced by netting with any associated deferred tax liabilities (“DTLs”). As for the DTA deductions, the netting of any remaining DTL must be allocated in proportion to the DTAs arising from net operating losses and tax credit carry- forward and those arising from temporary differences. Implementation of some of these deductions to CET1 began on January 1, 2015, and will be phased-in over a 4-year period (40% effective January 1, 2015 and adding 20% per year thereafter until January 1, 2018). In addition, under the Basel I general risk-based capital rules, the effects of certain components of accumulated other comprehen- sive income (“AOCI”) included in shareholders’ equity (for example, mark-to-market of securities held in the available-for- sale (“AFS”) portfolio) under U.S. GAAP are reversed for the purpose of determining regulatory capital ratios. Pursuant to the Basel III Final Rule, the effects of these AOCI items are not excluded; however, non-advanced approaches banking organiza- tions, including the Company and CIT Bank, may make a one- time permanent election to continue to exclude the AOCI items excluded under Basel I. Both the Company and CIT Bank have elected to exclude AOCI items from regulatory capital ratios. The Basel III Final Rule also precludes certain hybrid securities, such as trust preferred securities, from inclusion in bank holding com- Stated minimum ratios Capital conservation buffer (fully phased-in) Effective minimum ratios (fully phased-in) With respect to CIT Bank, the Basel III Final Rule revises the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the previous 6%); and (iii) eliminating the prior provision that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and requiring a minimum Tier 1 leverage ratio of 5.0%. The Basel III Final Rule does not change the total risk-based capital requirement for any PCA category. See “Prompt Corrective Action” below. Under the Basel III Final Rule, and previously under Basel I capital guidelines, assets and certain off-balance sheet commitments and obligations are converted into risk-weighted assets against which regulatory capital is measured. The Basel III Final Rule pre- scribed a new approach for risk weightings for BHCs and banks that follow the Standardized approach, which applies to CIT. This approach expands the risk-weighting categories from the previ- ous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. govern- ment, to as high as 1,250% for such exposures as credit- enhancing interest-only strips or unsettled security/commodity transactions. Per the Basel III Final Rule, the minimum capital ratios for CET1, Tier 1 capital, and Total capital are 4.5%, 6.0% and 8.0%, respec- tively. In addition, the Basel III Final Rule introduces a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conser- vation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk- weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. This buffer will be implemented beginning January 1, 2016 at the 0.625% level and increase by 0.625% on each subse- quent January 1, until it reaches 2.5% on January 1, 2019. Under the previous Basel I capital guidelines, the Company and CIT Bank were required to maintain Tier 1 and Total capital equal to at least 4.0% and 8.0%, respectively, of total risk-weighted assets to be considered “adequately capitalized”, or 6.0% and 10.0%, respectively, to be considered “well capitalized.” CIT will be required to maintain risk-based capital ratios at January 1, 2019 as follows: Minimum Capital Requirements — January 1, 2019 CET 1 4.5% 2.5% 7.0% Tier 1 Capital 6.0% 2.5% 8.5% Total Capital 8.0% 2.5% 10.5% As non-advanced approaches banking organizations, the Com- pany and CIT Bank will not be subject to the Basel III Final Rule’s countercyclical buffer or the supplementary leverage ratio. The Company and CIT Bank have met all capital requirements under the Basel III Final Rule, including the capital conservation buffer, on a fully phased in basis as if such requirements were cur- rently effective. The following table presents CIT’s and CIT Bank’s estimated capital ratios as of December 31, 2015 calculated under the fully phased-in Basel III Final Rule — Standardized approach. Preliminary Basel III Capital Ratios — Fully Phased-in Standardized Approach(1) (dollars in millions) CIT ANNUAL REPORT 2015 11 Capital CET1 Tier 1 Total Risk-weighted assets Adjusted quarterly average assets Capital ratios CET1 Tier 1 Total Leverage As of December 31, 2015 CIT CIT Bank Actuals Requirement Actuals Requirement $ 8,885.6 8,885.6 9,288.9 70,239.3 66,418.9 $ 4,636.7 4,636.7 5,011.4 36,756.3 43,205.1 12.7% 12.7% 13.2% 13.4% 7.0%(2) 8.5%(2) 10.5%(2) 4.0% 12.6% 12.6% 13.6% 10.7% 7.0%(2) 8.5%(2) 10.5%(2) 4.0% (1) Basel III Final Rule calculated under the Standardized Approach on a fully phased-in basis that will be required effective January 1, 2019. (2) Required ratios under the Basel III Final Rule include the post-transition minimum capital conservation buffer effective January 1, 2019. Enhanced Prudential Standards for Large Bank Holding Companies Under Sections 165 and 166 of the Dodd-Frank Act, the FRB has promulgated regulations imposing enhanced prudential supervi- sion requirements on BHCs with total consolidated assets of $50 billion or more. As a result of the OneWest Transaction, CIT exceeded the $50 billion threshold as of September 30, 2015 and therefore will be subject to certain of these requirements, includ- ing (i) capital planning and company-run and supervisory stress testing requirements, under the FRB’s CCAR process, (ii) enhanced risk management and risk committee requirements, (iii) company-run liquidity stress testing and the requirement to hold a buffer of highly liquid assets based on projected funding needs for various time horizons, including 30, 60, and 90 days, (iv) the modified liquidity coverage ratio, which requires that we hold a sufficient level of high quality liquid assets to meet our projected net cash outflows over a 30 day stress horizon, (v) recovery and resolution planning (also referred to as the “Living Will”), and (vi) enhanced reporting requirements. These additional requirements will be phased in over time, through March 2017. We expect to incur additional costs in 2016 to implement these requirements and ongoing costs thereafter to continue to comply with these enhanced prudential supervision requirements. We expect that upon full implementation of the CCAR process in 2017, CIT may pay dividends and repurchase stock only in accor- dance with an approved capital plan to which the FRB has not objected. Prior to implementation of the CCAR process, CIT continues to consult with the FRB regarding dividends and repur- chasing stock. Annual capital plans and company-run stress tests must be submitted by April 5, with publication of results by both the FRB and CIT by June 30, although we anticipate that results will not be required to be published until the 2017 CCAR process. Furthermore, CIT and CIT Bank are required to conduct Company-run stress tests, pursuant to the enhanced prudential standards relating to Dodd-Frank Act Stress Tests (“DFAST”) to assess the impact of stress scenarios (including supervisor- provided baseline, adverse, and severely adverse scenarios and, for CIT, one Company-defined baseline scenario and at least one Company-defined stress scenario) on their consolidated earnings, losses, and capital over a nine-quarter planning horizon, taking into account their current condition, risks, exposures, strategies, and activities. While CIT Bank is only required to conduct an annual stress test, CIT must conduct both an annual and a mid- cycle stress test. Both CIT and CIT Bank must submit their annual DFAST results to their respective regulators by July 31, with pub- lic disclosure of summary stress test results between October 15 and October 31. Stress Test and Capital Plan Requirements Liquidity Requirements Under the enhanced prudential supervision requirements of the Dodd-Frank Act, CIT will be subject to capital planning and company-run and supervisory stress testing requirements under the FRB’s CCAR process, which will require CIT to submit an annual capital plan, along with a Company-run stress test, and demonstrate that it can meet required regulatory capital mini- mums over a nine-quarter planning horizon. The FRB will conduct a separate supervisory stress test using data submitted by CIT in a format specified by the FRB. We will participate in the CCAR process in 2016, but we don’t expect to be part of the same pro- cess as established CCAR banks until 2017. CIT will need to collect and report certain related data on a quarterly basis, which the FRB would use to track our progress against the capital plan. Historically, regulation and monitoring of bank and BHC liquidity has been addressed as a supervisory matter, without required for- mulaic measures. The Basel III final framework requires banks and BHCs to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash out- flow for a 30-day time horizon under an acute liquidity stress scenario, with a phased implementation process starting January 1, 2015 and complete implementation by January 1, 2019. The other, referred to as the net stable funding ratio (“NSFR”), is designed to Item 1: Business Overview 12 CIT ANNUAL REPORT 2015 promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. The NSFR, which is subject to an observation period through mid-2016 and to any revisions resulting from the analyses conducted and data col- lected during the observation period, is expected to be implemented as a minimum standard by January 1, 2018. On September 3, 2014, the banking regulators adopted a joint final rule implementing the LCR for certain U.S. banking institu- tions. The rule applies a comprehensive version of the LCR to large and internationally active U.S. banking organizations, which include banks with total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposure of $10 billion or more, or any depository institution with total con- solidated assets of $10 billion or more that is a consolidated subsidiary of either of the foregoing. These institutions will be required to hold minimum amounts of high-quality, liquid assets, such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash. Each institution would be required to hold high quality, liquid assets in an amount equal to or greater than its projected net cash out- flows minus its projected cash inflows capped at 75% of projected cash outflows for a 30-day stress period. The firms must calculate their LCR each business day. The final rule applies a modified version of the LCR requirements to bank holding companies with total consolidated assets of greater than $50 billion but less than $250 billion. The modified version of the LCR requirement only requires the LCR calculation to be performed on the last business day of each month and sets the denominator (that is, the calculation of net cash outflows) for the modified version at 70% of the denominator as calculated under the most comprehensive version of the rule applicable to larger institutions. Under the FRB final rule, a BHC with between $50 billion and $250 billion in total consolidated assets must comply with the first phase of the minimum LCR requirement at the later of January 1, 2016 or the first quarter after the quarter in which it exceeds $50 billion in total consolidated assets, with the LCR requirement going into full effect on January 1, 2017. The U.S. bank regulatory agencies have not issued final rules implementing the NSFR test called for by the Basel III final frame- work. The Basel Committee released its final standards on the NSFR on October 31, 2014. Resolution Planning As required by the Dodd-Frank Act, the FRB and FDIC have jointly issued a final rule that requires certain organizations, including BHCs with consolidated assets of $50 billion or more, to report periodically to regulators a resolution plan for their rapid and orderly resolution in the event of material financial distress or failure. Such a resolution plan must, among other things, ensure that its depository institution subsidiaries are adequately pro- tected from risks arising from its other subsidiaries. The final rule sets specific standards for the resolution plans, including requir- ing a detailed resolution strategy, a description of the range of specific actions the company proposes to take in resolution, and an analysis of the company’s organizational structure, material entities, interconnections and interdependencies, and manage- ment information systems, among other elements. Orderly Liquidation Authority The Dodd-Frank Act created the Orderly Liquidation Authority (“OLA”), a resolution regime for systemically important non-bank financial companies, including BHCs and their non-bank affiliates, under which the FDIC may be appointed receiver to liquidate such a company upon a determination by the Secretary of the U.S. Department of the Treasury (Treasury), after consultation with the President, with support by a supermajority recommendation from the FRB and, depending on the type of entity, the approval of the director of the Federal Insurance Office, a supermajority vote of the SEC, or a supermajority vote of the FDIC, that the company is in danger of default, that such default presents a sys- temic risk to U.S. financial stability, and that the company should be subject to the OLA process. This resolution authority is similar to the FDIC resolution model for depository institutions, with cer- tain modifications to reflect differences between depository institutions and non-bank financial companies and to reduce dis- parities between the treatment of creditors’ claims under the U.S. Bankruptcy Code and in an orderly liquidation authority proceed- ing compared to those that would exist under the resolution model for insured depository institutions. An Orderly Liquidation Fund will fund OLA liquidation proceed- ings through borrowings from the Treasury and risk-based assessments made, first, on entities that received more in the resolution than they would have received in liquidation to the extent of such excess, and second, if necessary, on BHCs with total consolidated assets of $50 billion or more, any non-bank financial company supervised by the FRB, and certain other finan- cial companies with total consolidated assets of $50 billion or more. If an orderly liquidation is triggered, CIT could face assess- ments for the Orderly Liquidation Fund. We do not yet have an indication of the level of such assessments. Furthermore, were CIT to become subject to the OLA, the regime may also require changes to CIT’s structure, organization and funding pursuant to the guidelines described above. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, establishes five capital cat- egories for FDIC-insured banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The following table sets forth the required capital ratios to be deemed “well capitalized” or “adequately capitalized” under regulations in effect at December 31, 2015. Prompt Corrective Action Ratios — December 31, 2015 Well Capitalized(1) 6.5% 8.0% 10.0% 5.0% Adequately Capitalized 4.5% 6.0% 8.0% 4.0% CET 1 Tier 1 Capital Total Capital Tier 1 Leverage(2) (1) A “well capitalized” institution also must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. (2) As a standardized approach banking organization, CIT Bank is not sub- ject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018. CIT Bank’s capital ratios were all in excess of minimum guidelines for well capitalized at December 31, 2015. Neither CIT nor CIT Bank is subject to any order or written agreement regarding any capital requirements. FDICIA requires the applicable federal regulatory authorities to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum requirements. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions as the capital category of an institution declines. Undercapitalized, significantly undercapitalized and critically undercapitalized depository insti- tutions are required to submit a capital restoration plan to their primary federal regulator. Although prompt corrective action regulations apply only to depository institutions and not to BHCs, the holding company must guarantee any such capital restoration plan in certain circumstances. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapital- ized” or the amount needed to comply. The parent holding company might also be liable for civil money damages for failure to fulfill that guarantee. In the event of the bankruptcy of the par- ent holding company, such guarantee would take priority over the parent’s general unsecured creditors. Regulators take into consideration both risk-based capital ratios and other factors that can affect a bank’s financial condition, including (a) concentrations of credit risk, (b) interest rate risk, and (c) risks from non-traditional activities, along with an institu- tion’s ability to manage those risks, when determining capital adequacy. This evaluation is made during the institution’s safety and soundness examination. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examina- tion rating with respect to certain matters. Acquisitions Federal and state laws impose notice and approval requirements for mergers and acquisitions involving depository institutions or BHCs. The BHC Act requires the prior approval of the FRB for (1) the acquisition by a BHC of direct or indirect ownership or control of more than 5% of any class of voting shares of a bank, savings association, or BHC, (2) the acquisition of all or substan- tially all of the assets of any bank or savings association by any subsidiary of a BHC other than a bank, or (3) the merger or con- solidation of any BHC with another BHC. Prior regulatory approval is also generally required for mergers, acquisitions and consolidations involving other insured depository institutions. In reviewing acquisition and merger applications, the bank regula- tory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues, including the capital position of the combined organiza- tion, convenience and needs factors, including the applicant’s record under the CRA, the effectiveness of the subject organiza- tions in combating money laundering activities, and the transaction’s effect on the stability of the U.S. banking or financial system. In addition, an FHC must obtain prior approval of the FRB before acquiring certain non-bank financial companies with assets exceeding $10 billion. CIT ANNUAL REPORT 2015 13 Dividends CIT Group Inc. is a legal entity separate and distinct from CIT Bank and CIT’s other subsidiaries. CIT provides a significant amount of funding to its subsidiaries, which is generally recorded as intercompany loans or equity investments. Most of CIT’s cash inflow is comprised of interest on intercompany loans to its sub- sidiaries and dividends from its subsidiaries. The ability of CIT to pay dividends on common stock may be affected by, among other things, various capital requirements, particularly the capital and non-capital standards established for depository institutions under FDICIA, which may limit the ability of CIT Bank to pay dividends to CIT. The right of CIT, its stock- holders, and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to prior claims of creditors of CIT Bank and CIT’s other subsidiaries. OCC regulations impose limitations on the payment of dividends by CIT Bank. These regulations limit dividends if the total amount of all dividends (common and preferred) declared in any current year, including the proposed dividend, exceeds the total net income for the current year to date plus any retained net income for the prior two years, less the sum of any transfers required by the OCC and any transfers required to fund the retirement of any preferred stock. If the dividend in either of the prior two years exceeded that year’s net income, the excess shall not reduce the net income for the three year period described above, provided the amount of excess dividends for either of the prior two years can be offset by retained net income in the current year minus three years or the current year minus four years. It is the policy of the FRB that a BHC generally pay dividends on common stock out of net income available to common sharehold- ers over the past year, only if the prospective rate of earnings retention appears consistent with capital needs, asset quality, and overall financial condition, and only if the BHC is not in danger of failing to meet its minimum regulatory capital adequacy ratios. In the current financial and economic environment, the FRB indi- cated that BHCs should not maintain high dividend pay-out ratios unless both asset quality and capital are very strong. A BHC should not maintain a dividend level that places undue pressure on the capital of bank subsidiaries, or that may undermine the BHC’s ability to serve as a source of strength to its subsidiary bank. We anticipate that our capital ratios reflected in the stress test calculations required of us and the capital plan that we prepare as described under “Stress Test and Capital Requirements”, above, will be an important factor considered by the FRB in evaluating whether our proposed return of capital may be an unsafe or unsound practice. Since our total consolidated assets exceeded an average of $50 billion for the prior four consecutive quarters due to the OneWest Transaction, we will likely also be limited to paying dividends and repurchasing stock only in accor- dance with our annual capital plan submitted to the FRB under the capital plan rule. Source of Strength Doctrine and Support for Subsidiary Banks FRB policy and federal statute require BHCs such as CIT to serve as a source of strength and to commit capital and other financial resources to subsidiary banks. This support may be required at times when CIT may not be able to provide such support without Item 1: Business Overview 14 CIT ANNUAL REPORT 2015 adversely affecting its ability to meet other obligations. If CIT is unable to provide such support, the FRB could instead require the divestiture of CIT Bank and impose operating restrictions pending the divestiture. Any capital loans by a BHC to any of its subsidiary banks are subordinate in right of payment to deposi- tors and to certain other indebtedness of the subsidiary bank. If a BHC commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the FRB’s invoking its source of strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority pay- ment in respect of that commitment. Enforcement Powers of Federal Banking Agencies The FRB and other U.S. banking agencies have broad enforce- ment powers with respect to an insured depository institution and its holding company, including the power to (i) impose cease and desist orders, substantial fines and other civil penalties, (ii) terminate deposit insurance, and (iii) appoint a conservator or receiver. Failure to comply with applicable laws or regulations could subject CIT or CIT Bank, as well as their officers and direc- tors, to administrative sanctions and potentially substantial civil and criminal penalties. FDIC Deposit Insurance Deposits of CIT Bank are insured by the FDIC Deposit Insurance Fund (“DIF”) up to $250,000 for each depositor . The DIF is funded by fees assessed on insured depository institutions, including CIT Bank, N.A. For larger institutions such as CIT Bank, the FDIC uses a two scorecard system, one scorecard for most large institutions that had more than $10 billion in assets as of December 31, 2006 (unless the institution subsequently reported assets of less than $10 billion for four consecutive quarters) or had more than $10 billion in total assets for at least four consecutive quarters since December 31, 2006 and another scorecard for (i) “highly complex” institutions that have had over $50 billion in assets for at least four consecutive quarters and are directly or indirectly controlled by a U.S. parent with over $500 billion in assets for four consecutive quarters and (ii) certain processing banks and trust companies with total fiduciary assets of $500 billion or more for at least four consecutive quarters. Each scorecard has a perfor- mance score and a loss-severity score that is combined to produce a total score, which is translated into an initial assess- ment rate. In calculating these scores, the FDIC utilizes a bank’s capital level and CAMELS ratings (a composite regulatory rating based on Capital adequacy, Asset quality, Management, Earn- ings, Liquidity, and Sensitivity to market risk) and certain financial measures designed to assess an institution’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to make discretionary adjustments to the total score, up or down, by a maximum of 15 basis points, based upon signifi- cant risk factors that are not adequately captured in the scorecard. The total score translates to an initial base assessment rate on a non-linear, sharply increasing scale. For large institu- tions, the initial base assessment rate ranges from 5 to 35 basis points on an annualized basis. After the effect of potential base rate adjustments described below (but not including the deposi- tory institution debt adjustment), the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution’s initial base assess- ment rate include (i) potential decrease of up to 5 basis points for certain long-term unsecured debt (unsecured debt adjustment) and, (ii) except for well capitalized institutions with a CAMELS rat- ing of 1 or 2, a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits (bro- kered deposit adjustment). As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Also, an institution must pay an additional premium (the depository institution debt adjustment) equal to 50 basis points on every dollar above 3% of an institution’s Tier 1 capital of long-term, unsecured debt held that was issued by another insured depository institution (exclud- ing debt guaranteed under the Temporary Liquidity Guarantee Program). For the year ended December 31, 2015, CIT Bank’s FDIC deposit insurance assessment, including FICO assessments, totaled $45 million. Under the Federal Deposit Insurance Act (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Transactions with Affiliates Transactions between CIT Bank and its subsidiaries, and CIT and its other subsidiaries and affiliates, are regulated pursuant to Sections 23A and 23B of the Federal Reserve Act. These regulations limit the types and amounts of transactions (including loans due and credit extensions from CIT Bank or its subsidiaries to CIT and its other sub- sidiaries and affiliates) as well as restrict certain other transactions (such as the purchase of existing loans or other assets by CIT Bank or its subsidiaries from CIT and its other subsidiaries and affiliates) that may otherwise take place and generally require those transactions to be on an arms-length basis and, in the case of extensions of credit, be secured by specified amounts and types of collateral. These regu- lations generally do not apply to transactions between CIT Bank and its subsidiaries. During 2015, CIT Bank purchased $115.8 million of loans from affiliates and received capital infusions from CIT of $88.7 million comprised of loans, certain real property and software, and ven- dor upgrades used by CIT Bank in the conduct of its business, and CIT Bank and CIT agreed to terminate a Put Agreement pur- suant to which CIT Bank could require CIT to repurchase certain loans. CIT Bank maintains sufficient collateral in the form of cash deposits and pledged loans to cover any extensions of credit to its affiliates. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization and changes the procedure for seeking exemptions from these restrictions. For example, the Dodd-Frank Act expanded the definition of a “covered transaction” to include derivatives transactions and securities lending transactions with a non-bank affiliate under which a bank (or its subsidiary) has credit exposure (with the term “credit exposure” pending final defini- tion by the FRB under its existing rulemaking authority). Collateral requirements will apply to such transactions as well as to certain repurchase and reverse repurchase agreements. Safety and Soundness Standards FDICIA requires the federal bank regulatory agencies to pre- scribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation, compensa- tion, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guide- lines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compen- sation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to iden- tify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or dispropor- tionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compli- ance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “Prompt Corrective Action” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil monetary penalties. Insolvency of an Insured Depository Institution If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power: - - - to transfer any of the depository institution’s assets and liabili- ties to a new obligor without the approval of the depository institution’s creditors; to enforce the terms of the depository institution’s contracts pursuant to their terms; or to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffir- mance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. In addition, under federal law, the claims of holders of deposit liabilities, including the claims of the FDIC as the guarantor of insured depositors, and certain claims for administrative expenses against an insured depository institution would be afforded priority over other general unsecured claims against such an institution, including claims of debt holders of the institu- tion, in the liquidation or other resolution of such an institution by any receiver. As a result, whether or not the FDIC ever seeks to repudiate any debt obligations of CIT Bank, the debt holders CIT ANNUAL REPORT 2015 15 would be treated differently from, and could receive, if anything, substantially less than CIT Bank’s depositors. Consumer Protection Regulation Retail banking activities are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by national banks are subject to federal laws concerning interest rates. Loan operations are also subject to numerous laws applicable to credit transactions, such as: - - - - - - - - the federal Truth-In-Lending Act and Regulation Z issued by the CFPB, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act and Regulation C issued by the CFPB, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act and Regulation B issued by the CFPB, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act and Regulation V issued by the CFPB, governing the use and provision of information to con- sumer reporting agencies; the Fair Debt Collections Practices Act, governing the manner in which consumer debts may be collected by debt collectors; the Servicemembers Civil Relief Act, applying to all debts incurred prior to commencement of active military service (including credit card and other open-end debt) and limiting the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that is related to the obligation or liability, as well as affording other protections, including with respect to foreclosures; and the guidance of the various federal agencies charged with the responsibility of implementing such laws; and the Real Estate Settlement Procedures Act and Regulation X issued by the CFPB, requiring disclosures regarding the nature and costs of the real estate settlement process and governing transfers of servicing, escrow accounts, force-placed insurance, and general servicing policies. Deposit operations also are subject to consumer protection laws and regulation, such as: 1. the Truth in Savings Act and Regulation DD issued by the CFPB, which require disclosure of deposit terms to consumers; 2. Regulation CC issued by the FRB, which relates to the avail- ability of deposit funds to consumers; 3. the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative sub- poenas of financial records; and 4. the Electronic Funds Transfer Act and Regulation E issued by the CFPB, which governs electronic deposits to and withdraw- als from deposit accounts and customer’ rights and liabilities arising from the use of automated teller machines and other electronic banking services, including remittance transfers. CIT and CIT Bank are also subject to certain other non- preempted state laws and regulations designed to protect Item 1: Business Overview 16 CIT ANNUAL REPORT 2015 consumers. Additionally, CIT Bank is subject to a variety of regu- latory and contractual obligations imposed by credit owners, insurers and guarantors of the mortgages we originate and ser- vice. This includes, but is not limited to, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Finance Agency (“FHFA”), and the Federal Housing Administration (“FHA”). We are also subject to the requirements of the Home Affordable Modification Program (“HAMP”), Home Affordable Refinance Program (“HARP”) and other government programs in which we participate. Consumer Financial Protection Bureau Supervision (“CFPB”) The CFPB is authorized to interpret and administer, and to issue orders or guidelines pursuant to, any federal consumer financial laws, as well as to directly examine and enforce compliance with those laws by depository institutions with assets of $10 billion or more, such as CIT Bank. The CFPB regulates and examines CIT, CIT Bank, and other subsidiaries with respect to matters that relate to these laws and consumer financial services and prod- ucts. The CFPB undertook numerous rule-making and other initiatives in 2015, and is expected to continue to do so in 2016. The CFPB’s rulemaking, examination and enforcement authority has and will continue to significantly affect financial institutions involved in the provision of consumer financial products and ser- vices, including CIT, CIT Bank and CIT’s other subsidiaries. These regulatory activities may limit the types of financial services and products CIT may offer, which in turn may reduce CIT’s revenues. As a result of various requirements of the Dodd-Frank Act, CFPB has adopted a number of significant rules that implement amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rules require banks to, among other things: (a) develop and implement procedures to ensure compliance with a new “ability to repay” requirement and identify whether a loan meets a new definition for a “qualified mortgage”; (b) implement new or revised disclosures, policies and procedures for servicing mort- gages including, but not limited to, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence; and (c) comply with additional rules and restrictions regarding mortgage loan originator compensation and the qualification and registration or licensing of loan originators. The CFPB and other federal agencies have also jointly finalized rules imposing credit risk retention requirements on lenders origi- nating certain mortgage loans, which require sponsors of a securitization to retain at least 5 percent of the credit risk of assets collateralizing asset-backed securities. Residential mortgage-backed securities qualifying as “qualified residential mortgages” will be exempt from the risk retention requirements. The final rule maintains revisions to the proposed rules that cover degrees of flexibility for meeting risk retention requirements and the relationship between “qualified mortgages” and “qualified residential mortgages.” These rules and any other new regulatory requirements promulgated by the CFPB could require changes to the Company’s mortgage origination and servicing businesses, result in increased compliance costs and affect the streams of revenue of such businesses. Over the last few years, the reverse mortgage business has been subject to substantial amendments to federal laws, regulations and administrative guidance. The U.S. Department of Housing and Urban Development (“HUD”), through the FHA, amended or clarified both origination and servicing requirements related to Home Equity Conversion Mortgages (“HECMs”) through a series of issuances during 2015 and 2014. These program changes related to advertising, restrictions on loan provisions, limitations on payment methods, new underwriting requirements, revised principal limits, revised financial assessment and property charge requirements, and the treatment of non-borrowing spouses. Community Reinvestment Act The CRA requires depository institutions like CIT Bank to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice by, among other things, provid- ing credit to low-and moderate-income individuals and communities. The CRA does not establish specific lending requirements or programs for depository institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular com- munity, consistent with the CRA. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings, which are made available to the public. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regula- tors take into account CRA ratings when considering approval of applications to acquire, merge, or consolidate with another bank- ing institution or its holding company, to establish a new branch office that will accept deposits or to relocate an office, and such record may be the basis for denying the application. Prior to the OneWest Bank acquisition, both CIT Bank and OneWest Bank received a rating of “Satisfactory” on its most recent CRA exami- nation by the FDIC and OCC, respectively. Incentive Compensation The Dodd-Frank Act requires the federal bank regulatory agen- cies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as CIT and CIT Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requir- ing enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regu- lations in April 2011, but these regulations have not yet been finalized. If the regulations are adopted in the form initially pro- posed, they will impose limitations on the manner in which CIT may structure compensation for its executives. In June 2010, the federal banking agencies issued comprehensive final guidance intended to ensure that the incentive compensa- tion policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an orga- nization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive com- pensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effec- tively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective over- sight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act discussed above. Anti-Money Laundering (“AML”) and Economic Sanctions In the U.S., the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions, including banks, to detect and deter money launder- ing and terrorist financing, including requirements to implement AML programs, verify the identity of customers that maintain accounts, file currency transaction reports, and monitor and report suspicious activity to appropriate law enforcement or regu- latory authorities. Anti-money laundering laws outside the U.S. contain similar requirements to implement AML programs. The Company has implemented policies, procedures, and internal controls that are designed to comply with all applicable AML laws and regulations. The Company has also implemented policies, procedures, and internal controls that are designed to comply with the regulations and economic sanctions programs adminis- tered by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), which administers and enforces economic and trade sanctions against targeted foreign countries and regimes, terror- ists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy, or economy of the U.S., as well as sanctions based on United Nations and other international mandates. Anti-corruption The Company is subject to the Foreign Corrupt Practices Act (“FCPA”), which prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. The Company is also subject to applicable anti-corruption laws in the jurisdictions in which it operates, such as the U.K. Bribery Act, which generally prohib- its commercial bribery, the receipt of a bribe, and the failure to prevent bribery by an associated person, in addition to prohibiting improper payments to foreign government officials. The Company has imple- mented policies, procedures, and internal controls that are designed to comply with such laws, rules, and regulations. Privacy Provisions and Customer and Client Information Certain aspects of the Company’s business are subject to legal requirements concerning the use and protection of customer information, including those adopted pursuant to Gramm-Leach- Biley Act (“GLBA”) and the Fair and Accurate Credit Transactions Act of 2003 in the U.S., the E.U. Data Protection Directive, and various laws in Asia and Latin America. Federal banking regula- tors, as required under the GLBA, have adopted rules limiting the ability of banks and other financial institutions to disclose non- public information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of CIT ANNUAL REPORT 2015 17 certain personal information to nonaffiliated third parties. The privacy provisions of the GLBA affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. Federal financial regulators have issued regulations under the Fair and Accurate Credit Trans- actions Act that have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new cus- tomers, before information can be shared among different affiliated companies for the purpose of cross-selling products and services between those affiliated companies. In many foreign jurisdictions, the Company is also restricted from sharing cus- tomer or client information with third party non-affiliates. Other Regulations In addition to U.S. banking regulation, our operations are subject to supervision and regulation by other federal, state, and various foreign governmental authorities. Additionally, our operations may be subject to various laws and judicial and administrative decisions. This oversight may serve to: - regulate credit granting activities, including establishing licens- ing requirements, if any, in various jurisdictions; - establish maximum interest rates, finance charges and other charges; regulate customers’ insurance coverages; require disclosures to customers; - - - govern secured transactions; - set collection, foreclosure, repossession and claims handling procedures and other trade practices; - prohibit discrimination in the extension of credit and adminis- - tration of loans; and regulate the use and reporting of information related to a bor- rower’s credit experience and other data collection. Our Aerospace, Rail, Maritime, and other equipment financing operations are subject to various laws, rules, and regulations administered by authorities in jurisdictions where we do business. In the U.S., our equipment leasing operations, including for air- craft, railcars, ships, and other equipment, are subject to rules and regulations relating to safety, operations, maintenance, and mechanical standards promulgated by various federal and state agencies and industry organizations, including the U.S. Depart- ment of Transportation, the Federal Aviation Administration, the Federal Railroad Administration, the Association of American Railroads, the Maritime Administration, the U.S. Coast Guard, and the U.S. Environmental Protection Agency. In addition, state agencies regulate some aspects of rail and maritime operations with respect to health and safety matters not otherwise pre- empted by federal law. Each of CIT’s insurance subsidiaries is licensed and regulated in the states in which it conducts insurance business. The extent of such regulation varies, but most jurisdictions have laws and regu- lations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authori- ties broad administrative powers with respect to, among other things: licensing companies and agents to transact business; establish statutory capital and reserve requirements and the sol- vency standards that must be met and maintained; regulating certain premium rates; reviewing and approving policy forms; regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, Item 1: Business Overview 18 CIT ANNUAL REPORT 2015 distribution arrangements and payment of inducements; approv- ing changes in control of insurance companies; restricting the payment of dividends and other transactions between affiliates; and regulating the types, amounts and valuation of investments. Each insurance subsidiary is required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which it does business, and its operations and accounts are subject to periodic examination by such authorities. WHERE YOU CAN FIND MORE INFORMATION A copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as our Proxy Statement, may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested parties can electronically access the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as our Proxy Statement. The Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as well as our Proxy Statement, are available free of GLOSSARY OF TERMS Accretable Yield reflects the excess of cash flows expected to be col- lected (estimated fair value at acquisition date) over the recorded investment of purchase credit impaired (“PCI”) loans and investments (defined below) and is recognized in interest income using an effective yield method over the expected remaining life. The accretable yield is affected by changes in interest rate indices for variable rate PCI loans, changes in prepayment assumptions and changes in expected princi- pal and interest payments and collateral values. Available-for-sale (“AFS”) is a classification that pertains to debt and equity securities. We classify these securities as AFS when they are not considered trading securities, securities carried at fair value, or held-to-maturity securities. Loans and operating lease equipment that we classify in assets held for sale (“AHFS”) generally pertain to assets we no longer have the intent or ability to hold until maturity. Average Earning Assets (“AEA”) is computed using month end balances and is the average of earning assets (defined below). We use this average for certain key profitability ratios, including return on AEA, Net Finance Revenue as a percentage of AEA and operating expenses as a percentage of AEA. Average Finance Receivables (“AFR”) is computed using month end balances and is the average of finance receivables (defined below), which does not include amounts held for sale. We use this average to measure the rate of net charge-offs for the period. Changes to laws of states and countries in which we do business could affect the operating environment in substantial and unpre- dictable ways. We cannot accurately predict whether such changes will occur or, if they occur, the ultimate effect they would have upon our financial condition or results of operations. charge on the Company’s Internet site at http://www.cit.com as soon as reasonably practicable after such material is electroni- cally filed or furnished with the SEC. Copies of our Corporate Governance Guidelines, the Charters of the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Regulatory Compliance Committee, and the Risk Management Committee, and our Code of Business Conduct are available, free of charge, on our internet site at www.cit.com/investor, and printed copies are available by contacting Investor Relations, 1 CIT Drive, Livingston, NJ 07039 or by telephone at (973) 740-5000. Information contained on our website or that can be accessed through our website is not incor- porated by reference into this Form 10-K, unless we have specifically incorporated it by reference. Average Operating Leases (“AOL”) is computed using month end balances and is the average of operating lease equipment, which does not include amounts held for sale. We use this aver- age to measure the rate of return on our operating lease portfolio for the period. Covered Loans are loans that CIT may be reimbursed for a por- tion of future losses under the terms of loss sharing agreements (defined below) with the FDIC. See Indemnification Assets. Delinquent loan categorization occurs when payment is not received when contractually due. Delinquent loan trends are used as a gauge of potential portfolio degradation or improvement. Derivative Contract is a contract whose value is derived from a specified asset or an index, such as an interest rate or a foreign currency exchange rate. As the value of that asset or index changes, so does the value of the derivative contract. We use derivatives to manage interest rate, foreign currency or credit risks. The derivative contracts we use may include interest-rate swaps, interest rate caps, cross-currency swaps, foreign exchange forward contracts, and credit default swaps. Earning Assets is the sum of finance receivables (defined below), operating lease equipment, financing and leasing assets held for sale, interest-bearing cash, securities purchased under agree- ments to resell and investments less the credit balances of factoring clients. Economic Value of Equity (“EVE”) measures the net economic value of equity by assessing the market value of assets, liabilities and derivatives. FICO Score is a credit bureau-based industry standard score developed by the Fair Isaac Corporation (currently named FICO) that predicts the likelihood of borrower default. We use FICO scores in underwriting and assessing risk in our consumer lending portfolio. Finance Receivables include loans, capital lease receivables and factoring receivables held for investment, and does not include amounts contained within AHFS. In certain instances, we use the term “Loans” synonymously, as presented on the balance sheet. Financing and Leasing Assets (“FLA”) include finance receivables, operating lease equipment, and AHFS. Gross Yield is calculated as finance revenue divided by AEA. Indemnification Assets relate to asset purchases completed by OneWest Bank, in which the FDIC indemnified OneWest Bank prior to its acquisition by CIT against certain future losses in accordance with the Loss Sharing Agreements, as defined below. The indemnification assets were acquired by CIT in connection with the OneWest Transaction. Interest income includes interest earned on finance receivables, cash balances, debt investments and dividends on investments. Lease — capital is an agreement in which the party who owns the property (lessor), which is CIT as part of our finance business, per- mits another party (lessee), which is our customer, to use the property with substantially all of the economic benefits and risks of asset ownership passed to the lessee. Lease — operating is a lease in which CIT retains ownership of the asset (operating lease equipment), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence. Loan-to-Value Ratio (“LTV”) is a calculation of a loan’s collateral coverage that is used in underwriting and assessing risk in our lending portfolio. LTV is the result of the total loan obligations secured by collateral divided by the fair value of the collateral. Loss Sharing Agreements are agreements in which the FDIC indemnified OneWest Bank against certain future losses. See Indemnification Assets defined above. The loss sharing agree- ments generally require CIT to obtain FDIC approval prior to transferring or selling loans and related indemnification assets. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., charge-off of loan bal- ance or liquidation of collateral). Reimbursements approved by the FDIC usually are received within 60 days of submission. Receivables related to these indemnification assets are referred to as Covered Loans. Lower of Cost or Fair Value relates to the carrying value of an asset. The cost refers to the current book balance of certain assets, such as held for sale assets, and if that balance is higher than the fair value, an impairment charge is reflected in the cur- rent period statement of income. Measurement Period is the period of time that an acquirer has to adjust provisional amounts assigned to acquired assets or liabili- ties. The measurement period provides the acquirer with a CIT ANNUAL REPORT 2015 19 reasonable time to obtain the information necessary to identify and measure various items in a business combination. Net Efficiency Ratio is a non-GAAP measure that measures the level of operating expenses to our revenue generation. It is calcu- lated by dividing operating expenses, excluding intangible assets amortization, goodwill impairment, and restructuring charges, by Total Net Revenue. This calculation may not be similar to other financial institutions’ ratio due to the inclusion of operating lease revenue and associated expenses, and the exclusion of the noted items. Net Finance Revenue (“NFR”) is a non-GAAP measurement defined as Net Interest Revenue (defined below) plus rental income on operating lease equipment less depreciation and maintenance and other operating lease expenses. When divided by AEA, the product is defined as Net Finance Margin (“NFM”). These are key measures used by management in the evaluation of the financial performance of our business. While other financial institutions may use net interest margin (“NIM”), defined as inter- est income less interest expense, we discuss NFR, which includes net operating lease revenue (operating lease rental revenue, less depreciation expense and maintenance and other operating lease expenses), due to the significant revenue impact of operat- ing lease equipment and the fact that a portion of interest expense reflects the funding of operating lease equipment. Net Interest Income Sensitivity (“NII Sensitivity”) measures the impact of hypothetical changes in interest rates on NFR. Net Interest Revenue reflects interest and fees on finance receiv- ables and interest/dividends on investments less interest expense on deposits and borrowings. Net Operating Loss Carryforward / Carryback (“NOL”) is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. For example, a U.S. Federal NOL can first be carried-back and applied against taxable income recorded in the two preceding years with any remaining amount being carried-forward for the next twenty years to offset future taxable income. The rules pertaining to the number of years allowed for the carryback or carryforward of an NOL varies by jurisdiction. New business volume represents the initial cash outlay related to new loan or lease equipment transactions entered into during the period. The amount includes CIT’s portion of a syndicated trans- action, whether it acts as the agent or a participant, and in certain instances, it includes asset purchases from third parties. Non-accrual Assets include finance receivables greater than $500,000 that are individually evaluated and determined to be impaired, as well as finance receivables less than $500,000 that are delinquent (generally for 90 days or more), unless it is both well secured and in the process of collection. Non-accrual assets also include finance receivables with revenue recognition on a cash basis because of deterioration in the financial position of the borrower. Non-performing Assets include non-accrual assets (described above) combined with OREO and repossessed assets. Other Income includes (1) factoring commissions, (2) gains and losses on sales of leasing equipment (3) fee revenues, including fees on lines of credit, letters of credit, capital market related Item 1: Business Overview 20 CIT ANNUAL REPORT 2015 fees, agent and advisory fees and servicing fees (4) gains and losses on loan and portfolio sales, (5) gains and losses on invest- ments, (6) gains and losses on sales of other real estate owned, (7) gains and losses on derivatives and foreign currency exchange, (8) impairment on assets held for sale, and (9) other revenues. Service charges (fee income) on deposit accounts pri- marily represent monthly fees based on minimum balances or transaction-based fees. Loan servicing revenue includes fees col- lected for the servicing of loans not owned by the Company. Other income combined with rental income on operating leases is defined as Non-interest income. Non-interest income is recog- nized in accordance with relevant authoritative pronouncements. Other Real Estate Owned (“OREO”) is a term applied to real estate property owned by a financial institution. OREO are con- sidered non-performing assets. Purchase Accounting Adjustments (“PAA”) reflect accretable and non-accretable components of the fair value adjustments to acquired assets and liabilities assumed in a business combina- tion. Accretable adjustments reflect the accretion or amortization of the discounts and premiums and flow through the related line items on the income statement (interest income, interest expense, non-interest income and other expenses) over the weighted average life of the assets or liabilities. The accretable adjustments are recognized using an applicable methodology, such as the effective interest method, and the retrospective method specific to reverse mortgages. These primarily relate to interest adjustments on loans and leases, as well as deposits and borrowings. The PAA for the intangible assets is amortized over the respective life of the underlying intangible asset and recorded in Operating expenses. Non-accretable adjustments, for instance credit related write-downs on loans, become adjust- ments to the basis of the asset and flow back through the statement of income only upon the occurrence of certain events, such as, but not limited to repayment or sale. Purchase Credit Impaired (“PCI”) Loans and PCI Investments are loans and investments that at the time of an acquisition are con- sidered impaired under ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality). These are deter- mined to be impaired as there was evidence of credit deterioration since origination of the loan and investment and for which it was probable that all contractually due amounts (princi- pal and interest) would not be collected. Regulatory Credit Classifications used by CIT are as follows: - Pass — These assets do not meet the criteria for classification in one of the other categories; - Special Mention — These assets exhibit potential weaknesses that deserve management’s close attention and if left uncor- rected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects; - Substandard — These assets 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; - Doubtful — These assets have weaknesses that make collection or liquidation in full unlikely on the basis of current facts, condi- tions, and values and - Loss — These assets are considered uncollectible and of little or no value and are generally charged off. Classified assets are rated as substandard, doubtful and loss and range from: (1) assets that exhibit a well-defined weakness and are inadequately protected by the current sound worth and pay- ing 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, condi- tions, and values. Assets in this classification can be accruing or on non-accrual depending on the evaluation of these factors. Classified loans plus special mention loans are considered criticized loans. Residual Values represent the estimated value of equipment at the end of the lease term. For operating leases, it is the value to which the asset is depreciated at the end of its estimated useful life. Risk Weighted Assets (“RWA”) is the denominator to which Total Capital and Tier 1 Capital is compared to derive the respective risk based regulatory ratios. RWA is comprised of both on-balance sheet assets and certain off-balance sheet items (for example loan commitments, purchase commitments or derivative contracts), all of which are adjusted by certain risk-weightings as defined by the regulators, which are based upon, among other things, the relative credit risk of the counterparty. Syndication and Sale of Receivables result from originating finance receivables with the intent to sell a portion, or the entire balance, of these assets to other institutions. We earn and recog- nize fees and/or gains on sales, which are reflected in other income, for acting as arranger or agent in these transactions. Tangible Book Value (“TBV”) excludes goodwill and intangible assets from total stockholders’ equity. We use TBV in measuring tangible book value per share. Common Tier 1 Capital, Tier 1 Capital and Total Capital are regu- latory capital as defined in the capital adequacy guidelines issued by the Federal Reserve. Common Tier 1 Capital is total stockholders’ equity reduced by goodwill and intangible assets and adjusted by elements of other comprehensive income and other items. Tier 1 Capital is Common Tier 1 Capital plus other additional Tier 1 Capital instruments included, among other things, non-cumulative preferred stock. Total Capital consists of Common Tier 1, additional Tier 1 and, among other things, man- datory convertible debt, limited amounts of subordinated debt, other qualifying term debt, and allowance for loan losses up to 1.25% of risk weighted assets. Total Net Revenue is a non-GAAP measurement and is the com- bination of NFR and other income. Total Return Swap (“TRS”) is a swap where one party agrees to pay the other the “total return” of a defined underlying asset (e.g., a loan), usually in return for receiving a stream of LIBOR- based cash flows. The total returns of the asset, including interest and any default shortfall, are passed through to the counterparty. The counterparty is therefore assuming the risks and rewards of the underlying asset. Troubled Debt Restructuring (“TDR”) occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower’s financial difficulties that it would not otherwise consider. CIT ANNUAL REPORT 2015 21 Variable Interest Entity (“VIE”) is a corporation, partnership, lim- ited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activi- ties without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the enti- ty’s operations; and/or have equity owners that do not have an obligation to absorb the entity’s losses or the right to receive the entity’s returns. Yield-related Fees are collected in connection with our assump- tion of underwriting risk in certain transactions in addition to interest income. We recognize yield-related fees, which include prepayment fees and certain origination fees, in interest income over the life of the lending transaction. Acronyms The following is a list of acronyms we use throughout this document: Acronym AFS Definition Available for Sale Acronym HELOC Definition Home Equity Lines of Credit AHFS ALLL ALM AOCI ARM ASC ASU AVA BHC CCAR CDI CET 1 CRA CTA DCF DPA DTAs DTLs ECAP EMC ERM EVE FDIC FHA FHC FHLB FLA FNMA FRB FRBNY FSA FV GAAP GSEs HECM Assets Held for Sale Allowance for Loan and Lease Losses Asset and Liability Management Accumulated Other Comprehensive Income Adjustable Rate Mortgage Accounting Standards Codification Accounting Standards Update Actuarial Valuation Allowance Bank Holding Company Comprehensive Capital Analysis and Review Core Deposit Intangibles Common Equity Tier 1 Community Reinvestment Act Currency Translation Adjustment Discounted Cash Flows Deferred Purchase Agreement Deferred Tax Assets Deferred Tax Liabilities Enterprise Stress Testing and Economic Capital Executive Management Committee Enterprise Risk Management Economic Value of Equity Federal Deposit Insurance Corporation Federal Housing Administration Financial Holding Company Federal Home Loan Bank Financing and Leasing Assets Federal National Mortgage Association Board of Governors of the Federal Reserve System Federal Reserve Bank of New York Fresh Start Accounting Fair Value Accounting Principles Generally Accepted in the U.S. Government-Sponsored Enterprises Home Equity Conversion Mortgage HFI HTM HUD LCM LCR LGD Held for Investment Held to Maturity U.S. Department of Housing and Urban Development Legacy Consumer Mortgages Liquidity Coverage Ratio Loss Given Default LIHTC LOCOM Low Income Housing Tax Credit Lower of the Cost or Market Value LTV MBS MSR NFR Loan-to-Value Mortgage-Backed Securities Mortgage Servicing Rights Net Finance Revenue NII Sensitivity Net Interest Income Sensitivity NIM NOLs OCC OCI OREO OTTI PAA PB PCI PD ROA ROTCE SBA SEC SFR SOP TBV TCE TDR TRS UPB VIE Net Interest Margin Net Operating Loss Carry-Forwards Office of the Comptroller of the Currency Other Comprehensive Income Other Real Estate Owned Other than Temporary Impairment Purchase Accounting Adjustments Primary Beneficiary Purchased Credit-Impaired Loans/Securities Probability of Obligor Default Return on Average Earning Assets Return on Tangible Common Stockholders’ Equity Small Business Administration Securities and Exchange Commission Single Family Residential Statement of Position Tangible Book Value Tangible Common Stockholders’ Equity Troubled Debt Restructuring Total Return Swaps Unpaid Principal Balance Variable Interest Entity Item 1: Business Overview 22 CIT ANNUAL REPORT 2015 Item 1A. Risk Factors The operation of our business, and the economic and regulatory climate in the U.S. and other regions of the world involve various elements of risk and uncertainty. You should carefully consider the risks and uncertainties described below before making a decision whether to invest in the Company. This is a discussion of the risks that we believe are material to our business and does not include all risks, material or immaterial, that may possibly affect our business. Any of the following risks, and additional risks that are presently unknown to us or that we currently deem imma- terial, could have a material adverse effect on our business, financial condition, and results of operations. Strategic Risks If the assumptions and analyses underlying our strategy and business plan, including with respect to market conditions, capi- tal and liquidity, business strategy, and operations are incorrect, we may be unsuccessful in executing our strategy and business plan. A number of strategic issues affect our business, including how we allocate our capital and liquidity, our business strategy, our funding models, and the quality and efficiency of operations. We developed our strategy and business plan based upon certain assumptions, analyses, and financial forecasts, including with respect to our capital levels, funding model, credit ratings, rev- enue growth, earnings, interest margins, expense levels, cash flow, credit losses, liquidity and financing sources, lines of busi- ness and geographic scope, acquisitions and divestitures, equipment residual values, capital expenditures, retention of key employees, and the overall strength and stability of general eco- nomic conditions. Financial forecasts are inherently subject to many uncertainties and are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. Accord- ingly, our actual financial condition and results of operations may differ materially from what we have forecast. If we are unable to implement our strategic initiatives effectively, we may need to refine, supplement, or modify our business plan and strategy in significant ways. If we are unable to fully implement our business plan and strategy, it may have a material adverse effect on our business, results of operations and financial condition. We may not be able to achieve the expected benefits from acquiring a business or assets or from disposing of a business or assets, which may have an adverse effect on our business or results of operations. As part of our strategy and business plan, we may consider engaging in business or asset acquisitions or sales to manage our business, the products and services we offer, and our asset levels, credit exposures, or liquidity position. There are a number of risks inherent in acquisition and sale transactions, including the risk that we fail to identify or acquire key businesses or assets, that we fail to complete a pending transaction, that we fail to sell a busi- ness or assets that are considered non-strategic or high risk, that we overpay for an acquisition or receive inadequate consider- ation for a disposition, or that we fail to properly integrate an acquired company or to realize the anticipated benefits from the transaction. We acquired IMB HoldCo LLC and its subsidiary, OneWest Bank, N.A., in 2015 and two businesses, Nacco and Direct Capital, in 2014. We sold our equipment financing portfo- lio in the U.K. in January 2016; equipment financing portfolios in Mexico and Brazil in 2015; and our student lending portfolio, small business lending portfolio, and various financing portfolios in Europe, Asia, and Latin America in 2014. We are currently look- ing at strategic alternatives for our Commercial Aerospace business, which may be structured as a spin-off or sale, and we have transferred our financings in Canada and China into assets held for sale. In engaging in business acquisitions, CIT may decide to pay a premium over book and market values to complete the transac- tion, which may result in some dilution of our tangible book value and net income per common share. If CIT uses substantial cash or other liquid assets or incurs substantial debt to acquire a busi- ness or assets, we could become more susceptible to economic downturns and competitive pressures. CIT used a combination of cash ($1.9 billion) and common stock (30.9 million shares valued at $1.5 billion) to complete the OneWest Transaction. Integrating the operations of an acquired entity can be difficult. Prior to com- pleting the OneWest Transaction, CIT and OneWest Bank had different policies, procedures, and processes, including account- ing, credit and other risk and reporting policies, and utilized different systems, which are requiring significant time, cost, and effort to integrate. As a result, CIT may not be able to fully achieve its strategic objectives and planned operating efficien- cies in an acquisition. CIT may also be exposed to other risks inherent in an acquisition, including the risk of unknown or con- tingent liabilities, changes in our credit, liquidity, interest rate or other risk profiles, potential asset quality issues, potential disrup- tion of our existing business and diversion of management’s time and attention, possible loss of key employees or customers of the acquired business, and the risk that certain items were not accounted for properly by the seller in accordance with financial accounting and reporting standards. If we fail to realize the expected revenue increases, cost savings, increases in geo- graphic or product scope, and/or other projected benefits from an acquisition, or if we are unable to adequately integrate the acquired business, or experience unexpected costs, changes in our risk profile, or disruption to our business, it could have a material adverse effect on our business, financial condition, and results of operations. CIT must generally receive regulatory approval before it can acquire a bank or BHC or for any acquisition in which the assets acquired exceeds $10 billion. We cannot be certain when or if, or on what terms and conditions, any required regulatory approval may be granted. We may be required to sell assets or business units as a condition to receiving regulatory approval. If CIT fails to close a pending transaction for any reason, including failure to obtain either regulatory approvals or shareholder approval, CIT may be exposed to potential disruption of our business, diversion of management’s time and attention, risk from a failure to diver- sify our business and products, and increased expenses without a commensurate increase in revenues. As a result of economic cycles and other factors, the value of cer- tain asset classes may fluctuate and decline below their historic cost. If CIT is holding such businesses or asset classes, we may not recover our carrying value if we sell such businesses or assets or we may end up with a higher risk exposure to specific custom- ers, industries, asset classes, or geographic regions than we have targeted. In addition, potential purchasers may be unwilling to pay an amount equal to the face value of a loan or lease if the purchaser is concerned about the quality of our credit underwrit- ing. Potential purchasers may also be unwilling to pay adequate consideration for a business or assets depending on the nature of any financial, legal, or tax structures of the business, the regula- tory or geographic exposure of the business, the projected growth rate of the business, or the size or nature of its outstand- ing commitments. These transactions, if completed, may reduce the size of our business and we may not be able to replace the lending and leasing activity associated with these businesses. As a result, future disposition of assets could have a material adverse effect on our business, financial condition and results of operations. We may incur losses on loans, securities and other acquired assets of OneWest Bank that are materially greater than reflected in our fair value adjustments. We accounted for the OneWest Transaction under the purchase method of accounting, recording the acquired assets and liabili- ties of OneWest Bank at fair value. All PCI loans acquired in the OneWest Transaction were recorded at fair value based on the present value of their expected cash flows. We estimated cash flows using internal credit, interest rate and prepayment risk models using assumptions about matters that are inherently uncertain. We may not realize the estimated cash flows or fair value of these loans. In addition, although the difference between the pre-acquisition carrying value of the credit-impaired loans and their expected cash flows — the “non-accretable differ- ence” — is available to absorb future charge-offs, we may be required to increase our allowance for credit losses and related provision expense because of subsequent additional deteriora- tion in these loans. Competition from both traditional competitors and new market entrants may adversely affect our market share, profitability, and returns. Our markets are highly competitive and are characterized by competitive factors that vary based upon product and geo- graphic region. We have a wide variety of competitors that include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, community banks, leasing companies, hedge funds, insurance companies, mortgage companies, manufacturers and vendors. We compete on the basis of pricing (including the interest rates charged on loans or paid on deposits and the pricing for equip- ment leases), product terms and structure, the range of products and services offered, and the quality of customer service (includ- ing convenience and responsiveness to customer needs and concerns). The ability to access and use technology in the deliv- ery of products and services to our customers is an increasingly important competitive factor in the financial services industry, and it is a critically important component to customer satisfaction. If we are unable to address the competitive pressures that we face, we could lose market share. On the other hand, if we meet those competitive pressures, it is possible that we could incur sig- CIT ANNUAL REPORT 2015 23 nificant additional expense, experience lower returns due to compressed net finance revenue, and/or incur increased losses due to less rigorous risk standards. Capital and Liquidity Risks If we fail to maintain sufficient capital or adequate liquidity to meet regulatory capital guidelines, there could be a material adverse effect on our business, results of operations, and finan- cial condition. New and evolving capital and liquidity standards will have a sig- nificant effect on banks and BHCs. The Basel III Final Rule issued by the federal banking agencies requires BHCs and insured depository institutions to maintain more and higher quality capi- tal than in the past. In addition, the federal banking agencies created a standardized minimum liquidity requirement for large and internationally active banking organizations, referred to as the “liquidity coverage ratio”, or “LCR”. The U.S. bank regulatory agencies are also expected to issue a rule implementing the net stable funding ratio, or “NSFR”, called for by the Basel III Final Framework. If we incur future losses that reduce our capital levels or affect our liquidity, we may fail to maintain our regulatory capi- tal or our liquidity above regulatory minimums and at economically satisfactory levels. The new capital standards could require CIT to maintain more and higher quality capital than pre- viously expected and could limit our business activities (including lending) and our ability to expand organically or through acquisi- tions, to diversify our capital structure, or to pay dividends or otherwise return capital to shareholders. The new liquidity stan- dards could also require CIT to hold higher levels of short-term investments, thereby reducing our ability to invest in longer-term or less liquid assets. If we fail to maintain the appropriate capital levels or adequate liquidity, we could become subject to a variety of formal or informal enforcement actions, which may include restrictions on our business activities, including limiting lending and leasing activities, limiting the expansion of our business, either organically or through acquisitions, requiring the raising of additional capital, which may be dilutive to shareholders, or requiring prior regulatory approval before taking certain actions, such as payment of dividends or otherwise returning capital to shareholders. If we are unable to meet any of these capital or liquidity standards, it may have a material adverse effect on our business, results of operations and financial condition. If we fail to maintain adequate liquidity or to generate sufficient cash flow to satisfy our obligations as they come due, whether due to a downgrade in our credit ratings or for any other rea- sons, it could materially adversely affect our future business operations. CIT’s liquidity is essential for the operation of our business. Our liquidity, and our ability to issue debt in the capital markets or fund our activities through bank deposits, could be affected by a number of factors, including market conditions, our capital struc- ture and capital levels, our credit ratings, and the performance of our business. An adverse change in any of those factors, and par- ticularly a downgrade in our credit ratings, could negatively affect CIT’s liquidity and competitive position, increase our funding costs, or limit our access to the capital markets or deposit mar- kets. Further, an adverse change in the performance of our business could have a negative impact on our operating cash flow. CIT’s credit ratings are subject to ongoing review by the Item 1A. Risk Factors 24 CIT ANNUAL REPORT 2015 rating agencies, which consider a number of factors, including CIT’s own financial strength, performance, prospects, and opera- tions, as well as factors not within our control, including conditions affecting the financial services industry generally. There can be no assurance that we will maintain or increase our current ratings, which currently are not investment grade at the holding company level. If we experience a substantial, unex- pected, or prolonged change in the level or cost of liquidity, or fail to generate sufficient cash flow to satisfy our obligations, it could materially adversely affect our business, financial condition, or results of operations. Our business may be adversely affected if we fail to successfully expand our sources of deposits at CIT Bank. CIT Bank currently has a branch network with 70 branches, which offer a variety of deposit products. However, CIT also must rely on its online bank, brokered deposits, and certain deposit sweep accounts to raise additional deposits. Our ability to raise deposits and offer competitive interest rates on deposits is dependent on CIT Bank’s capital levels. Federal banking law generally prohibits a bank from accepting, renewing or rolling over brokered depos- its, unless the bank is well-capitalized or it is adequately capitalized and obtains a waiver from the FDIC. There are also restrictions on interest rates that may be paid by banks that are less than well capitalized, under which such a bank generally may not pay an interest rate on any deposit of more than 75 basis points over the national rate published by the FDIC, unless the FDIC determines that the bank is operating in a high-rate area. Continued expansion of CIT Bank’s retail online banking platform to diversify the types of deposits that it accepts may require sig- nificant time, effort, and expense to implement. We are likely to face significant competition for deposits from larger BHCs who are similarly seeking larger and more stable pools of funding. If CIT Bank fails to expand and diversify its deposit-taking capabil- ity, it could have an adverse effect on our business, results of operations, and financial condition. We may be restricted from paying dividends or repurchasing our common stock. CIT is a legal entity separate and distinct from its subsidiaries, including CIT Bank, and relies on dividends from its subsidiaries for a significant portion of its cash flow. Federal banking laws and regulations limit the amount of dividends that CIT Bank can pay. BHCs with assets in excess of $50 billion must develop and sub- mit to the FRB for review an annual capital plan detailing their plans for the payment of dividends on their common or preferred stock or the repurchase of common stock. If our capital plan were not approved or if we do not satisfy applicable capital require- ments, our ability to undertake capital actions may be restricted. We cannot determine whether the FRBNY will object to future capital returns. Regulatory and Legal Risks We could be adversely affected by the additional enhanced pru- dential supervision requirements applicable to large banking organizations due to the acquisition of IMB Holdco LLC and OneWest Bank. When we acquired IMB Holdco LLC and its subsidiary, OneWest Bank we exceeded the $50 billion threshold and became subject to the FRB’s enhanced prudential standards applicable to BHC’s with an average of $50 billion or more of assets for the prior four quarters. There are a number of regulations that are now appli- cable to us that are not applicable to smaller banking organizations, including but not limited to enhanced rules on capital plans and stress testing, enhanced governance standards, liquidity stress testing and enhanced reporting requirements, and a requirement to develop a resolution plan. Each of these rules will require CIT to dedicate significant time, effort, and expense to comply with the enhanced standards and requirements. If we fail to develop at a reasonable cost the systems and processes necessary to comply with the enhanced standards and require- ments imposed by these rules, it could have a material adverse effect on our business, financial condition, or results of operations. Our business is subject to significant government regulation and supervision and we could be adversely affected by banking or other regulations, including new regulations or changes in existing regulations or the application thereof. The financial services industry, in general, is heavily regulated. We are subject to the comprehensive, consolidated supervision of the FRB, including risk-based and leverage capital require- ments and information reporting requirements. In addition, CIT Bank is subject to supervision by the OCC, including risk-based capital requirements and information reporting requirements. This regulatory oversight is established to protect depositors, federal deposit insurance funds and the banking system as a whole, and is not intended to protect debt and equity security holders. If we fail to satisfy regulatory requirements applicable to bank holding companies that have elected to be treated as finan- cial holding companies, our financial condition and results of operations could be adversely affected, and we may be restricted in our ability to undertake certain capital actions (such as declar- ing dividends or repurchasing outstanding shares) or engage in certain activities or acquisitions. In addition, our banking regula- tors have significant discretion in the examination and enforcement of applicable banking statutes and regulations, and may restrict our ability to engage in certain activities or acquisi- tions, or may require us to maintain more capital. Proposals for legislation to further regulate, restrict, and tax cer- tain financial services activities are continually being introduced in the United States Congress and in state legislatures. The Dodd-Frank Act, which was adopted in 2010, constitutes the most wide-ranging overhaul of financial services regulation in decades, including provisions affecting, among other things, (i) corporate governance and executive compensation of companies whose securities are registered with the SEC, (ii) FDIC insurance assess- ments based on asset levels rather than deposits, (iii) minimum capital levels for BHCs, (iv) derivatives activities, proprietary trad- ing, and private investment funds offered by financial institutions, and (v) the regulation of large financial institutions. In addition, the Dodd-Frank Act established additional regulatory bodies, including the FSOC, which is charged with identifying systemic risks, promoting stronger financial regulation, and identifying those non-bank companies that are “systemically important”, and the CFPB, which has broad authority to establish a federal regula- tory framework for consumer financial protection. The agencies regulating the financial services industry periodically adopt changes to their regulations and are still finalizing regulations to implement various provisions of the Dodd-Frank Act. In recent years, regulators have increased significantly the level and scope of their supervision and regulation of the financial services indus- try. We are unable to predict the form or nature of any future changes to statutes or regulation, including the interpretation or implementation thereof. Such increased supervision and regula- tion could significantly affect our ability to conduct certain of our businesses in a cost-effective manner, restrict the type of activi- ties in which we are permitted to engage, or subject us to stricter and more conservative capital, leverage, liquidity, and risk man- agement standards. Any such action could have a substantial impact on us, significantly increase our costs, limit our growth opportunities, affect our strategies and business operations and increase our capital requirements, and could have an adverse effect on our business, financial condition and results of operations. Our Aerospace, Rail, Maritime, and other equipment financing operations are subject to various laws, rules, and regulations administered by authorities in jurisdictions where we do business. In the U.S., our equipment leasing operations, including for air- craft, railcars, ships, and other equipment, are subject to rules and regulations relating to safety, operations, maintenance, and mechanical standards promulgated by various federal and state agencies and industry organizations, including the U.S. Depart- ment of Transportation, the Federal Aviation Administration, the Federal Railroad Administration, the Association of American Railroads, the Maritime Administration, the U.S. Coast Guard, and the U.S. Environmental Protection Agency. In 2015, the U.S. Pipeline and Hazardous Materials Safety Administration (“PHMSA”) and Transport Canada (“TC”) each released final rules establishing enhanced design and performance criteria for tank cars loaded with a flammable liquid and requiring retrofitting of existing tank cars to meet the enhanced standards within a speci- fied time frame. In addition, the U.S. Congress enacted the Fixing America’s Surface Transportation Act (“FAST Act”), which, among other things, expanded the scope of tank cars classified as carry- ing flammable liquids, added additional design and performance criteria for tank cars in flammable service, and required additional studies of certain criteria established by PHMSA and TC. In addi- tion, state agencies regulate some aspects of rail and maritime operations with respect to health and safety matters not other- wise preempted by federal law. Our business operations and our equipment leasing portfolios may be adversely impacted by rules and regulations promulgated by governmental and industry agencies, which could require substantial modification, mainte- nance, or refurbishment of our aircraft, railcars, ships, or other equipment, or potentially make such equipment inoperable or obsolete. Violations of these rules and regulations can result in substantial fines and penalties, including potential limitations on operations or forfeitures of assets. We are currently involved in a number of legal proceedings, and may from time to time be involved in government investigations and inquiries, related to the conduct of our business, the results of which could have a material adverse effect on our business, financial condition, or results of operation. We are currently involved in a number of legal proceedings, and may from time to time be involved in government investigations and inquiries, relating to matters that arise in connection with the conduct of our business (collectively, “Litigation”). We are also at risk when we have agreed to indemnify others for losses related CIT ANNUAL REPORT 2015 25 to Litigation they face, such as in connection with the sale of a business or assets by us. It is inherently difficult to predict the outcome of Litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages. We cannot state with certainty what the eventual out- come of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. The actual results of resolving Litigation matters may be sub- stantially higher than the amounts reserved, or judgments may be rendered, or fines or penalties assessed in matters for which we have no reserves. Adverse judgments, fines or penalties in one or more Litigation matters could have a material adverse effect on our business, financial condition, or results of operations. We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we have business operations. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, administrative rulings or court decisions could increase our provision for income taxes and reduce our net income. It is difficult to predict whether changes to the U.S. tax laws and regulations will occur within the next few years. Governments’ need for additional revenue makes it likely that there will be con- tinued proposals to change tax rules in ways that could increase our effective tax rate. In addition, such changes could include a widening of the corporate tax base by including earnings from international operations. Such changes to the tax laws could have a material impact on our income tax expense and deferred tax balances. Conversely, should the tax laws be amended to reduce our effec- tive tax rate, the value of our remaining deferred tax asset would decline resulting in a charge to our net income during the period in which the amendment is enacted. In addition, the value assigned to our deferred tax assets is dependent upon our ability to generate future taxable income. If we are not able to do so at the rates currently projected, we may need to increase our valua- tion allowance for deferred tax assets with a corresponding charge recorded to net income. These changes could affect our regulatory capital ratios as calcu- lated in accordance with the Basel III Final Rule. The exact impact is dependent upon the effects an amendment has on our net deferred tax assets arising from net operating loss and tax credit carry-forwards, versus our net deferred tax assets related to tem- porary timing differences, as the former is a deduction from capital (the numerator to the ratios), while the latter is included in risk-weighted assets (the denominator). See “Regulation — Bank- ing Supervision and Regulation — Capital Requirements” section of Item 1. Business Overview for further discussion regarding the impact of deferred tax assets on regulatory capital. Item 1A. Risk Factors 26 CIT ANNUAL REPORT 2015 Our investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results. We invest in certain tax-advantaged projects promoting afford- able housing, community development and renewable energy resources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authori- ties based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of our control, including changes in the applicable tax code and the ability of the projects to be completed. If we are unable to realize these tax credits and other tax benefits, it may have a material adverse effect on our financial results. We previously originated and securitized and currently service reverse mortgages, which subjects us to additional risks and could have a material adverse effect on our business, liquidity, financial condition, and results of operations. We previously originated and securitized and currently service reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. A reverse mortgage is a loan available to seniors aged 62 or older that allows homeown- ers to borrow money against the value of their home. We depend on our ability to securitize reverse mortgages, subsequent draws, mortgage insurance premiums and servicing fees, and would be adversely affected if our ability to access the securitization market were to be limited. Defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to meet maintenance obligations, such as payment of taxes or home insurance premi- ums, or fail to meet requirements to occupy the premises. An increase in foreclosure rates may increase our cost of servicing. We may become subject to negative publicity if defaults on reverse mortgages lead to foreclosures or evictions of senior homeowners. As a reverse mortgage servicer, we are responsible for funding any payments due to borrowers in a timely manner, remitting to credit owners interest accrued, paying for interest shortfalls, and funding advances such as taxes and home insurance premiums. During any period in which a borrower is not making required real estate tax and property insurance premium payments, we may be required under servicing agreements to advance our own funds to pay property taxes, insurance premiums, legal expenses and other protective advances. We also may be required to advance funds to maintain, repair and market real estate properties. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, if a mortgage loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or liquidation occurs. A delay in collecting advances may adversely affect our liquidity, and a failure to be reimbursed for advances could adversely affect our business, financial condition or results of operations. Advances are typically recovered upon weekly or monthly reimbursement or from securitization in the market. We could receive requests for advances in excess of amounts we are able to fund, which could materially and adversely affect our liquidity. All of the above factors could have a material adverse effect on our business, liquidity, financial condition and results of operations. Material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs operated by the FHA, HUD or the government-sponsored enterprises, or a loss of our approved status under such programs, could adversely affect our reverse mortgage division. The mortgage industry, including both forward mortgages and reverse mortgages, is largely dependent upon the FHA, HUD and government-sponsored enterprises, like the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). There can be no guarantee that any or all of these entities will continue to partici- pate in the mortgage industry, including forward mortgages and reverse mortgages, or that they will not make material changes to the laws, regulations, rules or practices applicable to the mort- gage industry. For example, the FHA has issued regulations since January 1, 2013 governing its reverse mortgage program that impact initial mortgage insurance premiums and principal limit factors, impose restrictions on the amount of funds that senior borrowers may draw down at closing and during the first 12 months after closing, and will require a financial assessment for all borrowers to ensure that they have the capacity and willing- ness to meet their financial obligations and the terms of the reverse mortgage. In addition, the changes require borrowers to set aside a portion of the loan proceeds they receive at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and homeowners insurance based on the results of the financial assessment. Similarly, the CFPB has issued new rules for mortgage origination and mortgage servic- ing. Both the origination and servicing rules create new private rights of action for consumers against lenders and servicers in the event of certain violations. Additionally, two GSEs (Fannie Mae and Freddie Mac) are cur- rently in conservatorship, with their primary regulator acting as a conservator. We cannot predict when or if the conservatorships will end or whether, as a result of legislative or regulatory action, there will be any associated changes to the structure of these GSEs or the housing finance industry more generally, including, but not limited to, changes to the structure of these GSEs or the housing finance industry more generally, including, but not lim- ited to, changes to the relationship among these GSEs, the government and the private markets. The effects of any such reform on our business and financial results are uncertain. Any material changes to the laws, regulations, rules or practices applicable to our residential mortgage business could have a material adverse effect on our overall business and our financial position, results of operations and cash flows. If we are determined to be liable with respect to interest curtail- ment obligations or “compensatory fees” on both forward mortgages and reverse mortgages arising out of servicing errors, and we are required to record incremental charges for such amounts, there may be an adverse impact on our results of operations or financial condition. We have originated and securitized, as well as acquired through multiple portfolio purchases, both forward mortgages and reverse mortgages for which we have retained the servicing rights. Certain of these mortgage loans are insured and guaran- teed by the FHA, which is administered by HUD. FHA regulations provide that servicers must meet a series of event-specific time- frames during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any pro- cessing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mort- gage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed or for making the credit owner whole for any interest curtailed by HUD due to not meeting the required event-specific timeframes. The penalty HUD applies for failure to meet the foreclosure timeline is curtail- ment of interest from the date of failure (e.g. the date to take the first legal action in the foreclosure process is missed) to the claims settlement date, which might be months or years after the missed deadline. As a servicer of forward residential mortgage loans and reverse mortgage loans owned by the GSEs, the servicing guides provide that servicers may become liable for so-called “compensatory fees” for certain delays in completing the foreclosure process with respect to defaulted loans. The compensatory fee formula represents the pass-through interest rate multiplied by the unpaid principal balance multiplied by the number of days of pur- ported servicer delay (i.e. beyond the allowable time frame established by the GSEs) which might be months or years depending on the state and jurisdiction. If we are required to record incremental charges for interest curtailment obligations or for compensatory fees, there may be a material adverse effect on our results of operations or financial condition. Credit and Market Risks We could be adversely affected by the actions and commercial soundness of other financial institutions. CIT’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty, or other relation- ships. CIT has exposure to many different industries and counterparties, and it routinely executes transactions with coun- terparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, pri- vate equity funds, and hedge funds, and other institutional clients. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry gen- erally, could affect market liquidity and could lead to losses or defaults by us or by other institutions. Many of these transactions could expose CIT to credit risk in the event of default by its coun- terparty or client. In addition, CIT’s credit risk may be impacted if the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial CIT ANNUAL REPORT 2015 27 instrument exposure due to CIT. There is no assurance that any such losses would not adversely affect, possibly materially, CIT. Our Commercial Aerospace business is concentrated by indus- try and our retail banking business is concentrated geographically, and any downturn in the aerospace industry or in the geographic area of our retail banking business may have a material adverse effect on our business. Most of our business is diversified by customer, industry, and geography. However, although our Commercial Aerospace busi- ness is diversified by customer and geography, it is concentrated in one industry and represents over 20% of our financing and leasing assets. If there is a significant downturn in commercial air travel, it could have a material adverse effect on our business and results of operations. Our retail banking business is primarily concentrated within our retail branch network, which is located in Southern California. Although our other businesses are national in scope, these other businesses also have a presence within the Southern California geographic market. Adverse conditions in the Southern California geographic market, such as inflation, unemployment, recession, natural disasters, or other factors beyond our control, could impact the ability of borrowers in Southern California to repay their loans, decrease the value of the collateral securing loans in Southern California, or affect the ability of our customers in Southern California to continue conducting business with us, any of which could have a material adverse effect on our business and results of operations. Our allowance for loan losses may prove inadequate. The quality of our financing and leasing assets depends on the creditworthiness of our customers and their ability to fulfill their obligations to us. We maintain a consolidated allowance for loan losses on our financing and leasing assets to provide for loan defaults and non-performance. The amount of our allowance reflects management’s judgment of losses inherent in the portfo- lio. However, the economic environment is dynamic, and our portfolio credit quality could decline in the future. Our allowance for loan losses may not keep pace with changes in the credit-worthiness of our customers or in collateral values. If the credit quality of our customer base declines, if the risk profile of a market, industry, or group of customers changes significantly, if we are unable to collect the full amount on accounts receivable taken as collateral, or if the value of equipment, real estate, or other collateral deteriorates significantly, our allowance for loan losses may prove inadequate, which could have a material adverse effect on our business, results of opera- tions, and financial condition. In addition to customer credit risk associated with loans and leases, we are exposed to other forms of credit risk, including counterparties to our derivative transactions, loan sales, syndications and equipment pur- chases. These counterparties include other financial institutions, manufacturers, and our customers. If our credit underwriting processes or credit risk judgments fail to adequately identify or assess such risks, or if the credit quality of our derivative counterparties, customers, manufacturers, or other parties with which we conduct business materi- ally deteriorates, we may be exposed to credit risk related losses that may negatively impact our financial condition, results of operations or cash flows. Item 1A. Risk Factors 28 CIT ANNUAL REPORT 2015 We may not be able to realize our entire investment in the equipment we lease to our customers. Our financing and leasing assets include a significant portion of leased equipment, including but not limited to aircraft, railcars and locomotives, technology and office equipment, and medical equipment. The realization of equipment values (residual values) during the life and at the end of the term of a lease is an impor- tant element in the profitability of our leasing business. At the inception of each lease, we record a residual value for the leased equipment based on our estimate of the future value of the equipment at the end of the lease term or end of the equip- ment’s estimated useful life. If the market value of leased equipment decreases at a rate greater than we projected, whether due to rapid technological or economic obsolescence, unusual wear and tear on the equip- ment, excessive use of the equipment, recession or other adverse economic conditions, including a significant decrease in the ship- ment of oil, coal, or other commodities or goods due to changing market conditions, or other factors, it could adversely affect the current values or the residual values of such equipment. Further, certain equipment residual values, including commercial aerospace residuals, are dependent on the manufacturers’ or vendors’ warranties, reputation, and other factors, including mar- ket liquidity. Residual values for certain equipment, including aerospace, rail, and medical equipment, may also be affected by changes in laws or regulations that mandate design changes or additional safety features. For example, new regulations issued by the PHMSA in the U.S. and TC in Canada in 2015, and supple- mented by the FAST Act in the U.S., will require us to retrofit a significant portion of our tank cars over the next several years in order to continue leasing those tank cars for the transport of crude oil. In addition, we may not realize the full market value of equipment if we are required to sell it to meet liquidity needs or for other reasons outside of the ordinary course of business. Con- sequently, there can be no assurance that we will realize our estimated residual values for equipment. The degree of residual realization risk varies by transaction type. Capital leases bear the least risk because contractual payments usually cover approximately 90% of the equipment’s cost at the inception of the lease. Operating leases have a higher degree of risk because a smaller percentage of the equipment’s value is covered by contractual cash flows over the term of the lease. A significant portion of our leasing portfolios are comprised of operating leases, which increase our residual realization risk. Investment in and revenues from our foreign operations are subject to various risks and requirements associated with trans- acting business in foreign countries. An economic recession or downturn, increased competition, or business disruption associated with the political or regulatory environments in the international markets in which we operate could adversely affect us. In addition, our foreign operations generally conduct business in foreign currencies, which subject us to foreign currency exchange rate fluctuations. These exposures, if not effectively hedged could have a material adverse effect on our investment in interna- tional operations and the level of international revenues that we generate from international financing and leasing transactions. Reported results from our operations in foreign countries may fluctuate from period to period due to exchange rate movements in relation to the U.S. dollar, particularly exchange rate move- ments in the Canadian dollar, which is our largest non-U.S. exposure. Foreign countries have various compliance requirements for financial statement audits and tax filings, which are required in order to obtain and maintain licenses to transact business and may be different in some respects from GAAP in the U.S. or the tax laws and regulations of the U.S. If we are unable to properly complete and file our statutory audit reports or tax filings, regula- tors or tax authorities in the applicable jurisdiction may restrict our ability to do business. Furthermore, our international operations could expose us to trade and economic sanctions or other restrictions imposed by the United States or other governments or organizations. The U.S. Department of Justice (“DOJ”) and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of trade sanction laws, the Foreign Corrupt Practices Act (“FCPA”) and other federal statutes. Under trade sanction laws, the government may seek to impose modifications to busi- ness practices, including cessation of business activities with sanctioned parties or in sanctioned countries, and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. If any of the risks described above materialize, it could adversely impact our operating results and financial condition. These laws also prohibit improper payments or offers of pay- ments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with government entities and have con- tracts in countries known to experience corruption. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or associates that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. Our employees, consultants, sales agents, or associates may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition. We may be adversely affected by significant changes in interest rates. We rely on borrowed money from deposits, secured debt, and unsecured debt to fund our business. We derive the bulk of our income from net finance revenue, which is the difference between interest and rental income on our financing and leasing assets and interest expense on deposits and other borrowings, depreciation on our operating lease equipment and maintenance and other operating lease expenses. Prevailing economic condi- tions, the trade, fiscal, and monetary policies of the federal government and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which in turn significantly affects our net finance revenue. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal government and corporate securities and other investment vehicles, which, because of the absence of federal insurance premiums and reserve require- ments, generally pay higher rates of return than financial institutions. Although interest rates are currently lower than usual, any signifi- cant decrease in market interest rates may result in a change in net interest margin and net finance revenue. A substantial portion of our loans and other financing products, as well as our deposits and other borrowings, bear interest at floating interest rates. If interest rates increase, monthly interest obligations owed by our customers to us will also increase, as will our own interest expense. Demand for our loans or other financing products may decrease as interest rates rise or if interest rates are expected to rise in the future. In addition, if prevailing interest rates increase, some of our customers may not be able to make the increased interest payments or refinance their balloon and bullet payment transactions, resulting in payment defaults and loan impairments. Conversely, if interest rates remain low, our interest expense may decrease, but our customers may refinance the loans they have with us at lower interest rates, or with others, leading to lower revenues. As interest rates rise and fall over time, any significant change in market rates may result in a decrease in net finance revenue, particularly if the interest rates we pay on our deposits and other borrowings and the interest rates we charge our cus- tomers do not change in unison, which may have a material adverse effect on our business, operating results, and financial condition. Changes in interest rates can reduce the value of our mortgage servicing rights and mortgages held for sale, and can make our mortgage banking revenue volatile from quarter to quarter, which can reduce our earnings. We have a portfolio of mortgage servicing rights (“MSRs”), which is the right to service a mortgage loan — collect principal, inter- est and escrow amounts — for a fee, which we retained after selling or securitizing mortgage loans that we originated or pur- chased. We initially carry our MSRs at fair value, measured by the present value of the estimated future net servicing income, which includes assumptions about the likelihood of prepayment by bor- rowers. Changes in interest rates can affect the prepayment assumptions and thus fair value. As interest rates fall, borrowers are usually more likely to prepay their mortgages by refinancing at a lower rate. As the likelihood of prepayment increases, the fair value of MSRs can decrease. Each quarter we evaluate the fair value of our MSRs, and decreases in fair value below amortized cost will reduce earnings in the period in which the decrease occurs. Even if interest rates fall or remain low, mortgage origina- tions may also fall or increase only modestly due to economic conditions or a weak or deteriorating housing market, which may not be enough to offset the decrease in the MSRs’ value caused by lower rates. We may be adversely affected by deterioration in economic conditions that is general in scope or affects specific industries, products or geographic areas. Given the high percentage of our financing and leasing assets represented directly or indirectly by loans and leases, and the importance of lending and leasing to our overall business, weak economic conditions are likely to have a negative impact on our business and results of operations. Prolonged economic weak- CIT ANNUAL REPORT 2015 29 ness or other adverse economic or financial developments in the U.S. or global economies in general, or affecting specific indus- tries, geographic locations and/or products, would likely adversely impact credit quality as borrowers may fail to meet their debt payment obligations, particularly customers with highly leveraged loans. Adverse economic conditions have in the past and could in the future result in declines in collateral values, which also decreases our ability to fund against collateral. This would result in higher levels of nonperforming loans, net charge- offs, provision for credit losses, and valuation adjustments on loans held for sale. The value to us of other assets such as invest- ment securities, most of which are debt securities or other financial instruments supported by loans, similarly would be negatively impacted by widespread decreases in credit quality resulting from a weakening of the economy. Accordingly, higher credit and collateral related losses and decreases in the value of financial instruments could impact our financial position or oper- ating results. Aside from a general economic downturn, a downturn in certain industries may result in reduced demand for products that we finance in that industry or negatively impact collection and asset recovery efforts. Decreased demand for the products of various manufacturing customers due to recession may adversely affect their ability to repay their loans and leases with us. Similarly, a decrease in the level of airline passenger traffic or a decline in railroad shipping volumes may adversely affect our aerospace and rail businesses, the value of our aircraft and rail assets, and the ability of our lessees to make lease payments. Further, a decrease in prices or reduced demand for certain raw materials or bulk products, such as oil, coal, or steel, may result in a signifi- cant decrease in gross revenues and profits of our borrowers and lessees or a decrease in demand for certain types of equipment for the production, processing and transport of such raw materials or bulk products, including certain specialized railcars, which may adversely affect the ability of our customers to make payments on their loans and leases and the value of our rail assets and other leased equipment. We are also affected by the economic and other policies adopted by various governmental authorities in the U.S. and other jurisdic- tions in reaction to economic conditions. Changes in monetary policies of the FRB and non-U.S. central banking authorities directly impact our cost of funds for lending, capital raising, and investment activities, and may impact the value of financial instru- ments we hold. In addition, such changes may affect the credit quality of our customers. Changes in domestic and international monetary policies are beyond our control and difficult to predict. Operational Risks Revenue growth from new business initiatives and expense reductions from efficiency improvements may not be achieved. As part of its ongoing business, CIT from time to time enters into new business initiatives. In addition, CIT from time to time has targeted certain expense reductions in its business. The new business initiatives may not be successful in increasing revenue, whether due to significant levels of competition, lack of demand for services, lack of name recognition or a record of prior perfor- mance, or otherwise, or may require higher expenditures than anticipated to generate new business volume. The expense initia- tives may not reduce expenses as much as anticipated, whether Item 1A. Risk Factors 30 CIT ANNUAL REPORT 2015 due to delays in implementation, higher than expected or unan- ticipated costs of implementation, increased costs for new regulatory obligations, or for other reasons. If CIT is unable to achieve the anticipated revenue growth from its new business ini- tiatives or the projected expense reductions from efficiency improvements, its results of operations and profitability may be adversely affected. If we fail to maintain adequate internal control over financial reporting, it could result in a material misstatement of the Com- pany’s annual or interim financial statements. Management of CIT is responsible for establishing and maintain- ing adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. If we identify material weak- nesses or other deficiencies in our internal controls, or if material weaknesses or other deficiencies exist that we fail to identify, our risk will be increased that a material misstatement to our annual or interim financial statements will not be prevented or detected on a timely basis. Any such potential material misstatement, if not prevented or detected, could require us to restate previously released financial statements and could otherwise have a material adverse effect on our business, results of operations, and finan- cial condition. Changes in accounting standards or interpretations could mate- rially impact our reported earnings and financial condition. The Financial Accounting Standards Board, the SEC and other regulatory agencies periodically change the financial accounting and reporting standards that govern the preparation of CIT’s con- solidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroac- tively, potentially resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. If the models that we use in our business are poorly designed, our business or results of operations may be adversely affected. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating regulatory capital levels, as well as to estimate the value of finan- cial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, infor- mation we provide to the public or to our regulators based on poorly designed or implemented models could be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our sharehold- ers, could be affected adversely if their perception is that the quality of the models used to generate the relevant information is insufficient. It could adversely affect our business if we fail to retain and/or attract skilled employees. Our business and results of operations will depend in part upon our ability to retain and attract highly skilled and qualified execu- tive officers and management, financial, compliance, technical, marketing, sales, and support employees. Competition for quali- fied executive officers and employees can be challenging, and CIT cannot ensure success in attracting or retaining such individu- als. This competition can lead to increased expenses in many areas. If we fail to attract and retain qualified executive officers and employees, it could materially adversely affect our ability to compete and it could have a material adverse effect on our ability to successfully operate our business or to meet our operations, risk management, compliance, regulatory, funding and financial reporting requirements. We and our subsidiaries are party to various financing arrange- ments, commercial contracts and other arrangements that under certain circumstances give, or in some cases may give, the counterparty the ability to exercise rights and remedies under such arrangements which, if exercised, may have material adverse consequences. We and our subsidiaries are party to various financing arrange- ments, commercial contracts and other arrangements, such as securitization transactions, derivatives transactions, funding facili- ties, and agreements to purchase or sell loans, leases or other assets, that give, or in some cases may give, the counterparty the ability to exercise rights and remedies upon the occurrence of certain events. Such events may include a material adverse effect or material adverse change (or similar event), a breach of repre- sentations or warranties, a failure to disclose material information, a breach of covenants, certain insolvency events, a default under certain specified other obligations, or a failure to comply with certain financial covenants. The counterparty could have the ability, depending on the arrangement, to, among other things, require early repayment of amounts owed by us or our subsidiaries and in some cases payment of penalty amounts, or require the repurchase of assets previously sold to the counter- party. Additionally, a default under financing arrangements or derivatives transactions that exceed a certain size threshold in the aggregate may also cause a cross-default under instruments gov- erning our other financing arrangements or derivatives transactions. If the ability of any counterparty to exercise such rights and remedies is triggered and we are unsuccessful in avoiding or minimizing the adverse consequences discussed above, such consequences could have a material adverse effect on our business, results of operations, and financial condition. We may be exposed to risk of environmental liability or claims for negligence, property damage, or personal injury when we take title to properties or lease certain equipment. In the course of our business, we may foreclose on and take title to real estate that contains or was used in the manufacture or processing of hazardous materials, or that is subject to other haz- ardous risks. In addition, we may lease equipment to our customers that is used to mine, develop, process, or transport hazardous materials. As a result, we could be subject to environ- mental liabilities or claims for negligence, property damage, or personal injury with respect to these properties or equipment. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, accidents or other hazardous risks, or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site or equipment involved in a hazardous incident, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination, property damage, personal injury or other hazardous risks emanating from the property or related to the equipment. If we become subject to significant environmental liabilities or claims for negligence, property damage, or personal injury, our financial condition and results of operations could be adversely affected. We rely on our systems, employees, and certain third party ven- dors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, systems malfunctions, disasters, or terrorist activities, could materially adversely affect our operations. We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and record- keeping errors, and computer or telecommunications systems malfunctions. Our businesses depend on our ability to process a large number of increasingly complex transactions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. We are similarly dependent on our employ- ees. We could be materially adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems. Third par- ties with which we do business, including vendors that provide internet access, portfolio servicing, deposit products, or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns, failures, or capacity constraints of their own systems or employ- ees. Any of these occurrences could diminish our ability to operate one or more of our businesses, or cause financial loss, potential liability to clients, inability to secure insurance, reputa- tional damage, or regulatory intervention, which could have a material adverse effect on our business. We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our con- trol, which may include, for example, electrical or telecommunications outages, natural or man-made disasters, such as fires, earthquakes, hurricanes, floods, or tornados, dis- ease pandemics, or events arising from local or regional politics, including terrorist acts or international hostilities. Such disrup- tions may give rise to losses in service to clients and loss or liability to us. In addition, there is the risk that our controls and procedures as well as business continuity and data security sys- tems prove to be inadequate. The computer systems and network systems we and others use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of third-party hard- ware, software, and service providers. In addition, our computer systems and network infrastructure present security risks, and could be susceptible to hacking, computer viruses, or identity CIT ANNUAL REPORT 2015 31 theft. Any such failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance. The adverse impact of disasters, terrorist activities, or interna- tional hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emer- gency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over. We continually encounter technological change, and if we are unable to implement new or upgraded technology when required, it may have a material adverse effect on our business. The financial services industry is continually undergoing rapid technological change with frequent introduction of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our continued success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that satisfy customer demands and create efficiencies in our operations. If we are unable to effectively implement new technology-driven products and services that allow us to remain competitive or be successful in marketing these products and ser- vices to our customers, it may have a material adverse effect on our business. We could be adversely affected by information security breaches or cyber security attacks. Information security risks for large financial institutions such as CIT have generally increased in recent years, in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transac- tions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. Our operations rely on the secure process- ing, transmission and storage of confidential information in our computer systems and networks. Our businesses rely on our digi- tal technologies, computer and email systems, software, and networks to conduct their operations. Our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of CIT’s or our customers’ confidential, proprietary and other information, including personally identifiable informa- tion of our customers and employees, or otherwise disrupt CIT’s or its customers’ or other third parties’ business operations. In recent years, there have been several well-publicized attacks on retailers and financial services companies in which the perpe- trators gained unauthorized access to confidential information and customer data, often through the introduction of computer viruses or malware, cyber attacks, phishing, or other means. There have also been a series of apparently related denial of ser- vice attacks on large financial services companies. In a denial of service attack, hackers flood commercial websites with extraordi- narily high volumes of traffic, with the goal of disrupting the ability of commercial enterprises to process transactions and pos- sibly making their websites unavailable to customers for Item 1A. Risk Factors 32 CIT ANNUAL REPORT 2015 extended periods of time. We recently experienced denial of ser- vice attacks that targeted a third party service provider that provides software and customer services with respect to our online deposit taking activities, which resulted in temporary dis- ruptions in customers’ ability to perform online banking transactions, although no customer data was lost or compro- mised. Even if not directed at CIT specifically, attacks on other entities with whom we do business or on whom we otherwise rely or attacks on financial or other institutions important to the over- all functioning of the financial system could adversely affect, directly or indirectly, aspects of our business. Since January 1, 2013, we have not experienced any material information security breaches involving either proprietary or cus- tomer information. However, if we experience cyber attacks or other information security breaches in the future, either the Com- pany or its customers may suffer material losses. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the prominent size and scale of CIT and its role in the financial ser- vices industry, our plans to continue to implement our online banking channel strategies and develop additional remote con- nectivity solutions to serve our customers when and how they want to be served, our expanded geographic footprint and inter- national presence, the outsourcing of some of our business operations, and the continued uncertain global economic envi- ronment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or interven- tion, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition. Item 1B. Unresolved Staff Comments There are no unresolved SEC staff comments. Item 2. Properties CIT primarily operates in North America, with additional locations in Europe, and Asia. CIT occupies approximately 2.2 million square feet of space, which includes office space and branch network, the majority of which is leased. Item 3. Legal Proceedings CIT is currently involved, and from time to time in the future may be involved, in a number of judicial, regulatory, and arbitration proceedings relating to matters that arise in connection with the conduct of its business (collectively, “Litigation”), certain of which Litigation matters are described in Note 22 — Contingencies of Item 8. Financial Statements and Supplementary Data. In view of the inherent difficulty of predicting the outcome of Litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, CIT cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter may be, if any. In accordance with applicable accounting guidance, CIT establishes reserves for Liti- gation when those matters present loss contingencies as to which Item 4. Mine Safety Disclosures Not applicable. it is both probable that a loss will occur and the amount of such loss can be reasonably estimated. Based on currently available information, CIT believes that the results of Litigation that is cur- rently pending, taken together, will not have a material adverse effect on the Company’s financial condition, but may be material to the Company’s operating results or cash flows for any particu- lar period, depending in part on its operating results for that period. The actual results of resolving such matters may be sub- stantially higher than the amounts reserved. For more information about pending legal proceedings, includ- ing an estimate of certain reasonably possible losses in excess of reserved amounts, see Note 22 — Contingencies of Item 8. Financial Statements and Supplementary Data. PART TWO Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information — CIT’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “CIT.” The following tables set forth the high and low reported closing prices for CIT’s common stock. CIT ANNUAL REPORT 2015 33 Common Stock First Quarter Second Quarter Third Quarter Fourth Quarter 2015 2014 High $47.83 $48.07 $48.51 $46.14 Low $43.74 $44.62 $39.61 $39.70 High $52.15 $49.89 $49.73 $49.45 Low $45.46 $41.52 $43.50 $44.15 Holders of Common Stock — As of February 16, 2016, there were 48,184 beneficial holders of common stock. Dividends — We declared the following dividends in 2015 and 2014: Declaration Date January April July October Per Share Dividend 2014 2015 $0.10 $0.15 $0.10 $0.15 $0.15 $0.15 $0.15 $0.15 On January 20, 2016, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on February 26, 2016 to shareholders of record on February 12, 2016. Shareholder Return — The following graph shows the annual cumulative total shareholder return for common stock during the period from December 31, 2010 to December 31, 2015. The chart also shows the cumulative returns of the S&P 500 Index and S&P Banks Index for the same period. The comparison assumes $100 was invested on December 31, 2010. Each of the indices shown assumes that all dividends paid were reinvested. CIT STOCK PERFORMANCE DATA $200 $150 $100 $50 $0 $180.66 $175.12 $164.15 $86.50 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 CIT S&P 500 S&P Banks $100.00 $100.00 $100.00 S&P Financials $100.00 $ 74.03 $102.11 $ 89.28 $ 82.94 $ 82.04 $118.43 $110.76 $106.78 $110.90 $156.77 $150.33 $144.78 $102.84 $178.21 $173.64 $166.75 $ 86.50 $180.66 $175.12 $164.15 Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 34 CIT ANNUAL REPORT 2015 Securities Authorized for Issuance Under Equity Compensation Plans — Our equity compensation plans in effect following the Effective Date were approved by the Bankruptcy Court and do not require shareholder approval. Equity awards associated with these plans are presented in the following table. Number of Securities to be Issued Upon Exercise of Outstanding Options Weighted-Average Exercise Price of Outstanding Options Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Equity compensation plan approved by the Court 59,095 $31.23 2,781,161* * Excludes the number of securities to be issued upon exercise of outstanding options and 3,423,923 shares underlying outstanding awards granted to employees and/or directors that are unvested and/or unsettled. During 2015, we had no equity compensation plans that were not approved by the Court or by shareholders. For further informa- tion on our equity compensation plans, including the weighted average exercise price, see Item 8. Financial Statements and Supplementary Data, Note 20 — Retirement, Postretirement and Other Benefit Plans. Issuer Purchases of Equity Securities — In April 2015, the Board authorized a $200 million share repurchase program. In January and April 2014, the Board of Directors approved the repurchase of up to $307 million and $300 million, respectively, of common stock through December 31, 2014. On July 22, 2014, the Board of Directors approved an additional repurchase of up to $500 million of common stock through June 30, 2015. All of these approved purchases were completed. Management determined the timing and amount of shares repurchased under the share repurchase authorizations based on market conditions and other consider- ations. The repurchases were effected via open market purchases and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The repur- chased common stock is held as treasury shares and may be used for the issuance of shares under CIT’s employee stock plans. The following table provides information related to purchases by the Company of its common shares: First Quarter Purchases Second Quarter Purchases Third Quarter Purchases Fourth Quarter Purchases October 1–31, 2015 November 1–30, 2015 December 1–31, 2015 Total Number of Shares Purchased Average Price Paid per Share $45.43 $45.87 $46.28 $ $ $ $ – – – – – – – – Total Number of Shares Purchased as Part of the Publicly Announced Program 7,298,793 1,329,152 3,003,893 – – – – Total Dollar Amount Purchased Under the Program Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (dollars in millions) (dollars in millions) $331.6 $ 61.0 $139.0 $ $ $ $ – – – – Year to date December 31, 2015 11,631,838 $531.6 $ – Unregistered Sales of Equity Securities — There were no sales of common stock during 2013 and 2014. During the 2015 third quar- ter, the Company issued 30.9 million shares of unregistered common stock held in treasury, mostly repurchased through share buyback plans, as a component of the purchase price paid for the acquisition of OneWest Bank. In addition, there were issuances of common stock under equity compensation plans and an employee stock purchase plan, both of which are subject to regis- tration statements. CIT ANNUAL REPORT 2015 35 Item 6. Selected Financial Data The following table sets forth selected consolidated financial information regarding our results of operations, balance sheets and certain ratios. Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Item 8. Financial Statements and Supplementary Data. The data presented below is explained further in, and should be read in conjunction with, Item 7. Management’s Discussion and Select Data (dollars in millions) Select Statement of Income Data Net interest revenue Provision for credit losses Total non-interest income Total non-interest expenses Income (loss) from continuing operations Net income (loss) Per Common Share Data Diluted income (loss) per common share - continuing operations Diluted income (loss) per common share Book value per common share Tangible book value per common share Dividends declared per common share Dividend payout ratio Performance Ratios Pre-tax return from continuing operations on average common stockholders’ equity Return on average common stockholders’ equity Net finance revenue as a percentage of average earning assets Return from continuing operations on average earnings assets Return on average continuing operations total assets Balance Sheet Data Loans including receivables pledged Allowance for loan losses Operating lease equipment, net Goodwill Total cash and deposits Investment securities Assets of discontinued operation Total assets Deposits Borrowings Liabilities of discontinued operation Total common stockholders’ equity Credit Quality Non-accrual loans as a percentage of finance receivables Net charge-offs as a percentage of average finance receivables Allowance for loan losses as a percentage of finance receivables Financial Ratios Common Equity Tier 1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio Total ending equity to total ending assets N/A — Not applicable under Basel I guidelines. At or for the Years Ended December 31, 2015 2014 2013 2012 2011 $ $ $ $ $ $ 409.4 (160.5) 2,372.0 (2,042.4) 1,067.0 1,056.6 5.72 5.67 54.61 47.77 0.60 10.6% 6.0% 10.9% 3.47% 1.19% 1.93% $ $ $ $ $ $ 140.3 (100.1) 2,398.4 (1,757.8) 1,077.5 1,130.0 5.69 5.96 50.13 46.83 0.50 $ $ $ $ $ $ 194.3 (64.9) 2,278.7 (1,673.9) 644.4 675.7 3.19 3.35 44.78 42.98 0.10 8.4% 3.0% $ (1,271.7) (51.4) 2,515.5 (1,607.8) (535.8) (592.3) $ $ $ $ $ (2.67) (2.95) 41.49 39.61 – – 7.7% 12.8% 3.49% 1.67% 2.37% 8.5% 7.8% 3.69% 1.95% 1.56% (4.9)% (7.0)% (0.07)% (1.17)% (1.38)% $ $ $ $ $ $ (532.3) (269.7) 2,739.8 (1,691.9) 83.9 14.8 0.42 0.07 44.27 42.23 – – 2.7% 0.2% 1.58% 0.70% 0.21% $31,671.7 (360.2) 16,617.0 1,198.3 8,301.5 2,953.8 500.5 67,498.8 32,782.2 18,539.1 696.2 10,978.1 $19,495.0 (346.4) 14,930.4 571.3 7,119.7 1,550.3 – 47,880.0 15,849.8 18,455.8 – 9,068.9 $18,629.2 (356.1) 13,035.4 334.6 6,044.7 2,630.7 3,821.4 47,139.0 12,526.5 18,484.5 3,277.6 8,838.8 $17,153.1 (379.3) 12,411.7 345.9 6,709.6 1,065.5 4,202.6 44,012.0 9,684.5 18,330.9 3,648.8 8,334.8 $15,225.8 (407.8) 12,006.4 345.9 7,327.1 1,257.8 7,021.8 45,263.4 6,193.7 21,743.9 4,595.4 8,883.6 0.85% 0.55% 1.14% 12.7% 12.7% 13.2% 16.3% 0.82% 0.52% 1.78% N/A 14.5% 15.2% 18.9% 1.29% 0.44% 1.91% N/A 16.7% 17.4% 18.8% 1.92% 0.46% 2.21% N/A 16.2% 17.0% 18.9% 4.61% 1.70% 2.68% N/A 18.8% 19.7% 19.6% Item 6: Selected Financial Data 36 CIT ANNUAL REPORT 2015 Average Balances(1) and Associated Income for the year ended: (dollars in millions) Interest bearing deposits Securities purchased under agreements to resell Investment securities Loans (including held for sale)(2)(3) U.S.(2) Non-U.S. Total loans(2) Total interest earning assets / interest income(2)(3) Operating lease equipment, net (including held for sale)(4) U.S.(4) Non-U.S.(4) Total operating lease equipment, net(4) Indemnification assets Total earning assets(2) Non interest earning assets Cash due from banks Allowance for loan losses All other non-interest earning assets Assets of discontinued operation Total Average Assets Average Liabilities Borrowings Deposits Borrowings(5) Total interest-bearing liabilities Non-interest bearing deposits Credit balances of factoring clients Other non-interest bearing liabilities Liabilities of discontinued operation Noncontrolling interests Stockholders’ equity Total Average Liabilities and Stockholders’ Equity Net revenue spread Impact of non-interest bearing sources Net revenue/yield on earning assets(2) December 31, 2015 Revenue / Expense 17.2 $ Average Balance $ 5,841.3 Average Rate (%) Average Balance 0.29% $ 5,343.0 December 31, 2014 Revenue / Expense 17.7 $ Average Rate (%) Average Balance 0.33% $ 5,531.6 December 31, 2013 Revenue / Expense 16.6 $ Average Rate (%) 0.30% 411.5 2,239.2 2.3 51.9 0.56% 2.32% 242.3 1,667.8 1.3 16.5 24,000.4 2,016.2 26,016.6 1,256.7 185.3 1,442.0 5.58% 16,759.1 9.19% 3,269.0 5.88% 20,028.1 905.1 285.9 1,191.0 0.54% 0.99% 5.88% 8.75% 6.38% – 1,886.0 – 12.3 14,618.0 4,123.6 18,741.6 855.3 371.0 1,226.3 – 0.65% 6.40% 9.00% 7.01% 34,508.6 1,513.4 4.58% 27,281.2 1,226.5 4.73% 26,159.2 1,255.2 5.04% 8,082.3 7,432.3 692.4 588.6 8.57% 7.92% 7,755.0 7,022.3 689.6 590.9 15,514.6 189.5 50,212.7 1,281.0 (0.5) $2,793.9 8.26% 14,777.3 (0.26)% – 5.73% 42,058.5 1,280.5 – $2,507.0 8.89% 8.41% 8.67% – 6.16% 6,559.0 6,197.1 613.1 580.6 12,756.1 – 38,915.3 1,193.7 – $2,448.9 9.35% 9.37% 9.36% – 6.50% 1,365.1 (347.6) 4,105.7 212.0 $55,547.9 $22,891.4 17,863.0 40,754.4 390.1 1,492.4 2,971.9 279.1 (0.9) 9,660.9 $55,547.9 945.0 (349.6) 2,720.5 1,167.2 $46,541.6 522.1 (367.8) 2,215.3 4,016.3 $45,301.2 $ 330.1 773.4 1,103.5 $ 231.0 855.2 1,086.2 1.44% $13,955.8 4.33% 18,582.0 2.71% 32,537.8 – 1,368.5 2,791.7 997.2 7.0 8,839.4 1.66% $11,212.1 18,044.5 4.60% 29,256.6 3.34% – 1,258.6 2,638.2 3,474.2 9.2 8,664.4 $ 179.8 881.1 1,060.9 1.60% 4.88% 3.63% $46,541.6 $45,301.2 3.02% 0.45% 2.82% 0.67% 2.87% 0.82% $1,690.4 3.47% $1,420.8 3.49% $1,388.0 3.69% (1) The average balances presented are derived based on month end balances during the year. Tax exempt income was not significant in any of the years pre- sented. Average rates are impacted by PAA and FSA accretion and amortization. (2) The rate presented is calculated net of average credit balances for factoring clients. (3) Non-accrual loans and related income are included in the respective categories. (4) Operating lease rental income is a significant source of revenue; therefore, we have presented the rental revenues net of depreciation and net of Mainte- nance and other operating lease expenses. (5) Interest and average rates include FSA accretion, including amounts accelerated due to redemptions or extinguishments, and accelerated original issue dis- count on debt extinguishment related to the GSI facility. CIT ANNUAL REPORT 2015 37 The table below disaggregates CIT’s year-over-year changes (2015 versus 2014 and 2014 versus 2013) in net interest revenue and operating lease margins as presented in the preceding tables between volume (level of lending or borrowing) and rate (rates charged customers or incurred on borrowings). See “Net Finance Revenue” section for further discussion. Changes in Net Finance Revenue (dollars in millions) Interest Income Loans (including held for sale and net of credit balances of factoring clients) Interest bearing deposits Securities purchased under agreements to resell Investments Interest income Operating lease equipment, net (including held for sale)(1) Indemnification assets Interest Expense Interest on deposits Borrowings Interest expense Net finance revenue Loans U.S. and Non U.S. (including held for sale and net of credit balances of factoring clients): U.S. Non-U.S. 2015 Compared to 2014 2014 Compared to 2013 Increase (decrease) due to change in: Increase (decrease) due to change in: Volume Rate Net Volume Rate Net $ 374.2 1.6 $(123.2) (2.1) $ 251.0 (0.5) $ 82.5 (0.6) $(117.8) 1.7 $(35.3) 1.1 0.9 5.7 382.4 63.9 (0.5) 148.3 (33.1) 115.2 $ 330.6 0.1 29.7 (95.5) (63.4) – (49.2) (48.7) (97.9) $ (61.0) 1.0 35.4 286.9 0.5 (0.5) 99.1 (81.8) 17.3 $ 269.6 1.3 (1.4) 81.8 189.2 – 43.9 26.2 70.1 $200.9 – 5.6 (110.5) (102.4) – 7.3 (52.1) (44.8) $(168.1) 1.3 4.2 (28.7) 86.8 – 51.2 (25.9) 25.3 $ 32.8 $ 418.5 (109.6) $ (66.9) 9.0 $ 351.6 (100.6) $130.0 (76.9) $ (80.2) (8.2) $ 49.8 (85.1) (1) Operating lease rental income is a significant source of revenue; therefore, we have presented the net revenues. Item 6: Selected Financial Data 38 CIT ANNUAL REPORT 2015 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk BACKGROUND CIT Group Inc., together with its subsidiaries (collectively “we”, “our”, “CIT” or the “Company”), has provided financial solutions to its clients since its formation in 1908. We provide financing, leasing and advisory services principally to middle market compa- nies in a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation industry worldwide. We had nearly $60 billion of earning assets at December 31, 2015. CIT became a bank holding company (“BHC”) in December 2008 and a financial holding company (“FHC”) in July 2013. Through its bank subsidiary, CIT Bank, N.A., CIT provides a full range of banking and related services to com- mercial and individual customers through 70 branches located in southern California, through its online banking, and through other offices in the U.S. and internationally. Effective as of August 3, 2015, CIT Group Inc. (“CIT”) acquired IMB HoldCo LLC (“IMB”), the parent company of OneWest Bank, National Association, a national bank (“OneWest Bank”). Upon acquisition, CIT Bank, a Utah-state chartered bank and a wholly owned subsidiary of CIT, merged with and into OneWest Bank (the “OneWest Transaction”), with OneWest Bank surviving as a wholly owned subsidiary of CIT with the name CIT Bank, National Association (“CIT Bank, N.A.”). The acquisition improves CIT’s competitive position in the financial services industry while advancing our commercial banking model. CIT paid approximately $3.4 billion as consideration for the OneWest Transaction (which includes agreed-upon adjustments for transaction expenses incurred by OneWest Bank prior to clos- ing and retention awards made to OneWest Bank employees), 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 consider- ation 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. See Note 2 — Acquisition and Disposition Activities in Item 8. Finan- cial Statements and Supplementary Data for additional information and OneWest Transaction following this section for information on certain acquired assets and liabilities. 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. CIT Bank, N.A. is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury (“OCC”). Prior to the OneWest Transaction, CIT Bank was regulated by the Fed- eral Deposit Insurance Corporation (“FDIC”) and the Utah Department of Financial Institutions (“UDFI”). The consolidated financial statements include the effects of Pur- chase Accounting Adjustments (“PAA”) upon completion of the OneWest Transaction, as required by U.S. GAAP. As such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. No allowance for loan losses was carried over nor created at acquisi- tion. Consideration paid in excess of the net fair values of the acquired assets, intangible assets and assumed liabilities was recorded as Goodwill. Accretion and amortization of certain PAA are included in the consolidated Statements of Income, primarily impacting Net Finance Revenue (Interest income and interest expense) and Non-interest expenses. The purchase accounting accretion and amortization on loans, borrowings and deposits is recorded in interest income and interest expense over the weighted-average life of the financial instruments using the effec- tive yield method. Accretion for purchased credit impaired (“PCI”) loans includes cash recoveries received in excess of the recorded investment. Intangible assets related to the OneWest Transaction were recorded related to the valuation of core depos- its, customer relationships, trade names and other intangible assets. Intangible assets have finite lives, and as detailed in Note 2 — Acquisition and Disposition Activities and Note 26 — Goodwill and Intangible Assets in Item 8. Financial Statements and Supplementary Data, are amortized on an accelerated or straight-line basis, as appropriate, over the estimated useful lives and recorded in Non-interest expense. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” contain financial terms that are relevant to our busi- ness and a Glossary of key terms has been updated and is included later in this document. Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of opera- tions of the Company. See “Non-GAAP Financial Measurements” for a reconciliation of these financial measures to comparable financial mea- sures based on U.S. GAAP. 2015 ACCOMPLISHMENTS AND FINANCIAL OVERVIEW SUMMARY OF 2015 ACCOMPLISHMENTS During 2015, we were focused on continuing to create long term value for shareholders. Specific business objectives established for 2015 and accomplishments included: 1. Expand Our Commercial Banking Franchise — We are integrat- ing our existing banking operations with those of OneWest Bank, and will grow the combined operations. - The OneWest Bank acquisition added 70 retail branches in Southern California and over $20 billion of assets and $14 billion of deposits. - OneWest Bank enhanced our products and service offerings by adding consumer banking, private banking, and corporate cash management, and additional deposit products and capabilities. - CIT Bank, N.A. funded most of our U.S. lending and leasing volume. CIT ANNUAL REPORT 2015 39 2. Maintain Strong Risk Management Practices — We will con- - We completed purchasing shares under the most recent tinue to maintain credit discipline focused on appropriate risk- adjusted returns through the business cycle and continue enhancements in select areas to ensure SIFI Readiness. repurchase program. We repurchased 11.6 million of our shares at an average price of $45.70 for an aggregate purchase price of $532 million during 2015. - The allowance for loan losses was $360 million (1.14% of - We declared and paid $115 million of dividends during 2015. finance receivables, 1.35% excluding loans subject to loss sharing agreements with the FDIC) at December 31, 2015, compared to $346 million (1.78%) at December 31, 2014. The decline in the percentage of allowance to finance receivables reflects the OneWest Bank acquisition, which added $13.6 billion of loans at fair value with no related allowance at the time of acquisition. See further discussion in Credit Metrics. - We maintained stable liquidity, with cash, investments, and the unused portion of the revolving credit facility representing 16% of assets. - Our capital ratios remained strong, with our Common Equity Tier 1 (“CET 1”) Ratio at 12.7%, which exceeds the minimum requirement under the fully phased-in Basel III requirements. - We integrated the OneWest Bank risk management teams, policies and procedures, and platforms, and continue strengthening the combined organizations ability to meet the enhanced prudential standards applicable to SIFIs. 3. Grow Business Franchises — We will concentrate our growth on building franchises that meet or exceed our risk adjusted return hurdles and improve profitability by exiting non-strategic portfolios, including financing portfolios in Canada and China. - Financing and leasing assets increased significantly, reflecting the acquisition of OneWest Bank. Absent the acquisition, FLA grew reflecting continued expansion of both our transportation assets in TIF and loans in NAB. - We made good progress exiting, our remaining non-strategic businesses; we sold the Mexico and Brazil businesses in 2015, we transferred our China and Canada businesses to AHFS and sold the U.K. portfolio on January 1, 2016. 4. Realize embedded value — We will focus on enhancing our economic returns by: - Utilizing our U.S. net operating loss carry-forward (“NOLs”), thereby reducing the net deferred tax asset and increasing regulatory capital. While the NOL usage was small during the year, the OneWest Bank acquisition is expected to accelerate the NOL utilization, which led to the reversal of a $647 million valuation allowance against our deferred tax asset in the third quarter. - Combined cash and investment portfolio is positioned to benefit from increased interest rates. - Additional actions to optimize the Bank Holding Company include: transferring additional U.S.-based business platforms into the bank, improving the efficiency of our secured debt facilities, generating incremental cash at the BHC to pay down high cost debt and/or return capital to shareholders and optimizing existing portfolios, including exploring strategic alternatives for the Commercial Aerospace business and sales of the businesses in Canada and China. - Regulatory capital ratios remain well above required levels on a fully phased-in Basel III basis. SUMMARY OF 2015 FINANCIAL RESULTS As discussed below, our 2015 results reflected increased business activity, which was driven by the inclusion of five months of One- West Bank activity. The expected benefits from the acquisition, which include lower funding costs, and the reversal of the valua- tion allowance on the U.S. federal tax asset were offset by headwinds we faced, which took the form of margin pressure, lower other income, higher credit costs and increased operating expenses. The low interest rate environment continued to pres- sure yields on new business. Although we successfully completed the sales of the remaining financing and leasing assets in the NSP segment, other income was down, primarily driven by currency translation losses recognized on the sale of businesses. Credit costs increased, reflecting the higher reserves required for certain industry exposures, along with higher provisioning resulting from purchase accounting. Operating expenses were high, as they included transaction costs for the OneWest Bank acquisition, along with costs for integration such as systems and the restruc- turing of management. As a result, net income was down from 2014. We also announced certain strategic initiatives that impacted 2015 results, such as our intention to sell our financing portfolios in Canada and China, and the exploration of strategic alternatives for our commercial aerospace business. Net income for 2015 totaled $1,057 million, $5.67 per diluted share, compared to $1,130 million, $5.96 per diluted share for 2014 and $676 million, $3.35 per diluted share for 2013. Income from continuing operations (after taxes) for 2015 totaled $1,067 million, $5.72 per diluted share, compared to $1,078 million, $5.69 per diluted share for 2014 and $644 million, $3.19 per diluted share for 2013. Income from continuing operations for 2015 included five months of results from OneWest Bank and a $647 million, $3.47 per diluted share, discrete income tax item resulting from the reversal of the valuation allowance on the U.S. federal deferred tax asset. Net income for 2014 included $419 million, $2.21 per diluted share, of income tax benefits associated with partial reversals of valuation allowances on certain domestic and international deferred tax assets. Income from continuing operations, before provision for income taxes totaled $579 million for 2015, down from $681 million for 2014 and $734 million for 2013. Pre-tax income for 2015 reflected yield compression in certain sectors, higher credit costs, and higher operating expenses, which more than offset the incremen- tal contribution from a higher level of earning assets, driven by the OneWest Bank acquisition. Net finance revenue(1) (“NFR”) was $1.7 billion in 2015, up from $1.4 billion in 2014 and $1.4 billion in 2013, on higher average earning assets (“AEA”).(1) Growth in AEA and lower funding costs increased 5. Return Excess Capital — We plan to prudently return capital to our shareholders through share repurchases and dividends, while maintaining strong capital ratios. (1) Net finance revenue and average earning assets are non-GAAP mea- sures; see “Non-GAAP Financial Measurements” for a reconciliation of non-GAAP to GAAP financial information. Item 7: Management’s Discussion and Analysis 40 CIT ANNUAL REPORT 2015 NFR in 2015, 2014 and 2013. AEA was $48.7 billion in 2015, up from $40.7 billion in 2014 and from $37.6 billion in 2013. The acquisition of OneWest Bank resulted in higher revenues from the additional earning assets and lower funding costs, as OneWest Bank’s funding consisted mostly of deposits, which have a lower interest rate. Compared to the prior year, the slight increase in net operating lease revenue reflected revenue growth on higher assets, which was essentially offset by lower equipment utilization, higher depreciation and higher maintenance costs. Provision for credit losses for 2015 was $161 million, up from $100 million last year and $65 million in 2013. The provision for credit losses reflected the reserve build on loan growth and an increase in the reserve resulting from the recognition of purchase accounting accretion on non-PCI loans. In addition, the provision was elevated due to increases in reserves related to the energy sector and, to a lesser extent, the maritime portfolios, as well as from the establishment of reserves on certain acquired non-credit impaired loans in the initial period post acquisition. Credit metrics reflect the impact of the acquired portfolios, which, due to purchase accounting, did not have non-accrual loans or an Allowance for Loan Losses at the time of acquisition. Net charge-offs were $138 million (0.55%) in 2015 and included $73 million related to receivables transferred to assets held for sale. Excluding assets moved to held for sale, net charge-offs were $65 million, compared to $56 million in 2014 and $42 million in 2013. Recoveries of $28 mil- lion were unchanged from 2014 and down from $58 million in 2013. Non-accrual loans rose to $268 million (0.85% of finance receivables) at December 31, 2015 from $161 million (0.82%) a year ago and $241 million (1.29%) at December 31, 2013, driven mostly by an increase in the NAB energy portfolio. Other income of $220 million decreased from $305 million in 2014 and $381 million in 2013, reflecting losses on portfolios sold, driven primarily by the realization of currency translation adjustment losses ($70 million) on the sales of the Brazil and Mexico businesses. Operating expenses were $1,168 million, up from $942 million in 2014 and $970 million in 2013. In addition to higher costs associ- ated with five months of activity from the OneWest Bank acquisition, the acquisition also resulted in higher professional fees and other integration related costs, increased other expenses, including higher FDIC insurance costs, and higher occupancy costs. Excluding restructuring costs and intangible asset amortization, operating expenses(2) were $1,097 million, $909 million and $933 million for 2015, 2014 and 2013, respec- tively. Restructuring costs mostly reflected streamlining of the Bank and Bank Holding Company senior management structure, while expenses associated with the amortization of intangibles were mainly the result of the OneWest Bank acquisition. 2013 expenses included a $50 million tax agreement settlement charge. Headcount at December 31, 2015, 2014 and 2013 was approximately 4,900, 3,360, and 3,240, respectively, with the cur- rent year increase reflecting the headcount associated with the OneWest Bank acquisition. Provision for income taxes was a benefit of $488 million, primarily reflecting a $647 million reversal of the valuation allowance on the U.S. federal deferred tax asset. The effective tax rate excluding dis- crete items was 23%. Net cash taxes paid were $10 million, compared to $22 million in 2014 and $68 million in 2013. The 2014 provision for income taxes was a benefit of $398 million, mostly reflecting $375 million relating to a partial reversal of the U.S. Federal deferred tax asset valuation allowance. The provision for income taxes was $84 million for 2013, as described in “Income Taxes” section. Total assets of continuing operations(3) at December 31, 2015 were $67.0 billion, up from $47.9 billion at December 31, 2014, and $43.3 billion at December 31, 2013, primarily reflecting the addition of assets acquired in the OneWest Transaction. - Financing and leasing assets (“FLA”), which includes loans, operating lease equipment and assets held for sale (“AHFS”), increased to $50.4 billion, up from $35.6 billion at December 31, 2014 and $32.7 billion at December 31, 2013. In addition to FLA from the OneWest Bank acquisition of $13.6 billion, FLAs were up reflecting growth in both transportation assets and NAB. - Cash (cash and due from banks and interest bearing deposits) totaled $8.3 billion, compared to $7.1 billion at December 31, 2014 and $6.0 billion at December 31, 2013, reflecting $4.4 billion of cash acquired in the OneWest Transaction, partially offset by the payment of $1.9 billion as consideration for the OneWest Transaction. - Investment securities and securities purchased under resale agreements totaled $3.0 billion at December 31, 2015 compared to $2.2 billion at December 31, 2014, and $2.6 billion at December 31, 2013, reflecting $1.3 billion of investment securities, primarily comprised of MBS, acquired in the OneWest Transaction. - Goodwill and Intangible assets increased due to the addition of $663 million and $165 million, respectively, related to the OneWest Bank acquisition. - Other assets of $3.4 billion were up due primarily to the acquisition of OneWest Bank ($722 million of other assets acquired) and the reversal of the U.S. Federal deferred tax asset valuation allowance ($647 million). The components are included in Note 8 — Other Assets in Item 8. Financial Statements and Supplementary Data. Deposits increased to $32.8 billion at December 31, 2015 from $15.8 billion at December 31, 2014 and $12.5 billion at December 31, 2013, reflecting $14.5 billion acquired in the One- West Transaction and continued solid growth of online banking. The proportion of funding by deposits has increased significantly with the OneWest Bank acquisition. Borrowings were $18.5 billion at December 31, 2015, essentially unchanged from December 31, 2014 and 2013, reflecting the addition of $3.0 billion of FHLB advances in the OneWest Bank acquisition, offset by repayments and maturities. Stockholders’ Equity increased to $11.0 billion at December 31, 2015 from $9.1 billion at December 31, 2014 and $8.9 billion at December 31, 2013, reflecting net income, along with the issuance of 30.9 million common shares (valued at $1.5 billion) related to the acqui- sition that had previously been held in treasury. (2) Operating expenses excluding restructuring costs and intangible asset amortization is a non-GAAP measure; see “Non-GAAP Financial Mea- surements” for a reconciliation of non-GAAP to GAAP financial information. (3) Total assets from continuing operations is a non-GAAP measure. See “Non-GAAP Measurements” for reconciliation of non-GAAP financial information. Capital ratios remain well above required levels. The acquisition of OneWest Bank increased equity, primarily due to the issuance of $1.5 billion in common shares and the reversal of the valuation allowance on our Federal deferred tax asset. Tangible common equity reflects the increase in equity net of the increase in goodwill and intangibles result- ing from the acquisition. Regulatory capital increased in 2015. While the reversal of the deferred tax asset valuation allowance benefited stock- holders’ equity, it had minimal impact on regulatory capital as the majority of the deferred tax asset balance was disallowed for regulatory capital purposes. As a result, capital ratios declined modestly, as the benefit from the increase in regulatory capital was more than offset by the increase in the risk-weighted assets acquired. CIT ANNUAL REPORT 2015 41 2016 PRIORITIES In continuing our transition to a national middle-market bank, our 2016 priorities include: 1. Determine and execute on Strategic Alternatives for our Com- mercial Air business — Maximize value for shareholders by executing on strategic alternatives for the Commercial Air business. 2. Improve Return on Tangible Common Equity — Complete the sales of our China and Canada businesses. Complete the stra- tegic review of our businesses with the objective of improving returns to drive value for stakeholders, the details of which we expect to communicate by the end of the first quarter. 3. Maintain strong risk management practices — We will con- tinue to maintain strong risk management practices to ensure appropriate risk adjusted returns through the business cycle for both our lending and operating lease businesses. PERFORMANCE MEASUREMENTS The following chart reflects key performance indicators evaluated by management and used throughout this management discussion and analysis: KEY PERFORMANCE METRICS MEASUREMENTS Asset Generation — to originate new business and grow earning assets. - New business volumes; and - Earning asset balances. Revenue Generation — lend money at rates in excess of borrowing costs and consistent with risk profile of obligor, earn rentals on the equipment we lease commensurate with the risk, and generate other revenue streams. - Net finance revenue and other income; - Net finance margin and Operating lease revenue as a percentage of average operating lease equipment; and - Asset yields and funding costs. Credit Risk Management — accurately evaluate credit worthiness of customers, maintain high-quality assets and balance income potential with loss expectations. - Net charge-offs, amounts and as a percentage of AFR; - Non-accrual loans, balances and as a percentage of loans; - Classified assets and delinquencies balances; and - Loan loss reserve, balance and as a percentage of loans. Equipment and Residual Risk Management — appropriately evaluate collateral risk in leasing transactions and remarket or sell equipment at lease termination. - Equipment utilization; - Market value of equipment relative to book value; and - Gains and losses on equipment sales. Expense Management — maintain efficient operating platforms and related infrastructure. - SG&A expenses and trends; - SG&A expenses as a percentage of AEA; and - Net efficiency ratio. Profitability — generate income and appropriate returns to shareholders. - Net income per common share (EPS); - Net income and pre-tax income, each as a percentage of average earning assets (ROA); and - Pre-tax income as a percentage of average tangible common stockholders’ equity (ROTCE). Capital Management — maintain a strong capital position, while deploying excess capital. - Common equity tier 1, Tier 1 and Total capital ratios; and - Tier 1 capital as a percentage of adjusted average assets; Liquidity Management — maintain access to ample funding at competitive rates to meet obligations as they come due. (“Tier 1 Leverage Ratio”). - Levels of high quality liquid assets and as a % of total assets; - Committed and available funding facilities; - Debt maturity profile and ratings; - Funding mix; and - Deposit generation. Manage Market Risk — measure and manage risk to income statement and economic value of enterprise due to movements in interest and foreign currency exchange rates. - Net Interest Income Sensitivity; and - Economic Value of Equity (EVE). Item 7: Management’s Discussion and Analysis 42 CIT ANNUAL REPORT 2015 ONEWEST TRANSACTION The following discussion summarizes certain assets and liabilities acquired in the OneWest Transaction. In accordance with pur- chase accounting, all assets acquired and liabilities assumed were recorded at their fair value. The excess of the purchase price over the fair value of the net assets acquired was recorded as good- will. Certain purchase accounting adjustments are accreted or amortized into income and expenses. No allowance for loan losses was carried over and no allowance was created at acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future events that are highly subjective in nature and may require adjustments, which can be updated throughout the year following the acquisition (the “Measurement Period”). Subsequent to the acquisition, management continued to review information relating to Consideration and Net Assets Acquired (dollars in millions) events or circumstances existing at the acquisition date. This review resulted in adjustments to the acquisition date valuation amounts, which increased the goodwill balance as previously reported in the Company’s February 2, 2016 earnings release. Subsequent to issuing its earnings release, the Company made additional adjustments that increased the goodwill balance further to $663 million, including an increase in goodwill of $13 million, an increase in other assets of $8 million, and a decrease in intangible assets of $21 million as of December 31, 2015. The additional adjustments had no impact on the Statement of Income. See Note 2 — Acquisition and Disposition Activities in Item 8. Financial Statements and Supplementary Data for assumptions used to value assets and liabilities. Purchase Price Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value Cash and interest bearing deposits Investment securities Assets held for sale Loans HFI Indemnification assets Other assets Assets of discontinued operations Deposits Borrowings Other liabilities Liabilities of discontinued operations Total fair value of identifiable net assets Intangible assets Goodwill Loans The acquired commercial loans included commercial real estate loans secured by multi-family properties, both owner-occupied and non-owner occupied commercial real estate, and commercial and industrial loans. Commercial loans were principally to middle market businesses and included equipment loans, working capi- tal lines of credit, asset-backed loans, acquisition finance credit facilities, and small business administration product offerings, mostly 504 loans. The commercial loans are included in divisions within the NAB segment, including Commercial Banking and Commercial Real Estate. OneWest Bank had both originated and purchased consumer loans. The acquired consumer loan portfolio that was originated Original Purchase Price $ 3,391.6 Measurement Period Adjustments – $ $ 4,411.6 $ 1,297.3 20.4 13,598.3 480.7 676.6 524.4 (14,533.3) (2,970.3) (221.1) (676.9) $ 2,607.7 $ $ 185.9 598.0 $ $ $ – – – (32.7) (25.3) 45.7 – – – – (31.5) (43.8) (21.2) 65.0 Adjusted Purchase Price $ 3,391.6 $ 4,411.6 1,297.3 20.4 13,565.6 455.4 722.3 524.4 (14,533.3) (2,970.3) (221.1) (708.4) $ 2,563.9 $ $ 164.7 663.0 by OneWest Bank was comprised mainly of jumbo residential mortgage loans and conforming residential mortgage loans. These loans had terms ranging from 10 to 30 years, were either fixed or adjustable interest rates, and were mostly to customers in California. In addition, these mortgage loans are primarily closed-end first lien loans for the purchase or re-finance of owner occupied properties, and are included in the Consumer Banking division of the NAB segment. The consumer loans that were pre- viously purchased by OneWest Bank from the FDIC, most of which the FDIC has provided indemnification against certain losses, are referred to as Covered Loans (see Indemnification Assets below), are maintained in the LCM segment and consist of SFR loans and reverse mortgage loans. CIT ANNUAL REPORT 2015 43 The following table reflects the carrying values and UPB of financing and leasing assets acquired at the acquisition date, August 3, 2015: Financing and Leasing Assets Balances at Acquisition Date (dollars in millions) Original Purchase Price Carrying Value (CV) Unpaid Principal Balance (UPB) CV as a % of UPB Measurement Period Adjustments Adjusted Purchase Price CV CV UPB CV as a % of UPB North America Banking Segment Total Loans Assets held for sale Financing and leasing assets Commercial Banking Loans Assets held for sale Financing and leasing assets Commercial Real Estate $ 7,871.3 $ 8,324.5 94.6% $ (17.0) $ 7,854.3 $ 8,324.5 6.3 7,877.6 6.3 8,330.8 100.0% 94.6% – 6.3 6.3 (17.0) 7,860.6 8,330.8 $ 3,377.0 $ 3,610.1 93.5% $ (12.9) $ 3,364.1 $ 3,610.1 0.5 3,377.5 0.5 3,610.6 100.0% 93.5% – 0.5 0.5 (12.9) 3,364.6 3,610.6 Loans $ 3,130.3 $ 3,350.2 Financing and leasing assets 3,130.3 3,350.2 $ 1,364.0 $ 1,364.2 5.8 1,369.8 5.8 1,370.0 $ $ 93.4% 93.4% 100.0% 100.0% 100.0% – – $ 3,130.3 $ 3,350.2 3,130.3 3,350.2 (4.1) $ 1,359.9 $ 1,364.2 – 5.8 5.8 (4.1) 1,365.7 1,370.0 Consumer Banking Loans Assets held for sale Financing and leasing assets Legacy Consumer Mortgages(1) Segment Total Loans Assets held for sale Financing and leasing assets Single Family Residential Mortgages Loans Financing and leasing assets Reverse Mortgages(2) Loans Assets held for sale Financing and leasing assets $ 5,727.0 $ 7,426.0 77.1% $ (15.7) $ 5,711.3 $ 7,426.0 14.1 5,741.1 14.1 7,440.1 100.0% 77.2% – 14.1 14.1 (15.7) 5,725.4 7,440.1 $ 4,834.3 $ 6,199.7 4,834.3 6,199.7 78.0% 78.0% $ (15.7) $ 4,818.6 $ 6,199.7 (15.7) 4,818.6 6,199.7 Total $13,618.7 $15,770.9 $ (32.7) $13,586.0 $15,770.9 $ 892.7 $ 1,226.3 72.8% $ 14.1 906.8 14.1 100.0% 1,240.4 73.1% 86.4% – – – $ 892.7 $ 1,226.3 14.1 906.8 14.1 1,240.4 (1) Includes $5.1 billion of covered loans. (2) Includes Jumbo reverse mortgages, as well as approximately $82 million of HECM reverse mortgages. Covered Loans of approximately $5.1 billion are loans that were acquired by OneWest Bank from the FDIC for which CIT may be reimbursed for a portion of future losses under the terms of loss sharing agreements with the FDIC. Our exposure to losses related to Covered Loans is mitigated by the Loss Sharing Agree- ments and by the fact that those loans were recorded at fair value at acquisition. The Consumer Covered Loans are included in the LCM segment. Non-Covered Loans of approximately $8.5 billion included loans that were either acquired or originated by OneWest Bank and were not subject to a loss sharing agreement. Both the Covered Loans and Non-Covered Loans have been accounted for either as purchased credit impaired (“PCI”) loans or Non-PCI loans. Loans acquired as part of the OneWest Transaction were recorded at fair value. No separate allowance was carried over or created at acquisition. Fair values were determined by discount- ing both principal and interest cash flows expected to be collected using a market discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. Cash flows expected to be collected as of the acquisition date were estimated using internal models and third party data that incorporate manage- Item 7: Management’s Discussion and Analysis 94.4% 100.0% 94.4% 93.2% 100.0% 93.2% 93.4% 93.4% 99.7% 100.0% 99.7% 76.9% 100.0% 77.0% 77.7% 77.7% 72.8% 100.0% 73.1% 86.1% 44 CIT ANNUAL REPORT 2015 ment’s best estimate of key assumptions, such as default rates, loss severity, prepayment speeds, and timing of disposition upon default. Loans with evidence of credit quality deterioration since origination and for which it was probable at purchase that CIT would be unable to collect all contractually required payments (principal and interest) were considered PCI. As a result of the purchase accounting adjustments for the acquired loan balances, CIT recorded a discount to UPB of approximately $2,200.5 million (“Total UPB Discount”). This dis- count is comprised of two components as follows: 1) the “Incremental Yield Discount”, which are amounts expected to result in $1,261.4 million of additional yield income above the contractual coupon, and 2) the “Principal Loss Discount”, which are amounts relating to the unpaid principal balance at acquisi- tion of $939.1 million which will be utilized to offset the loss of principal on PCI loans. As of December 31, 2015, the remaining Incremental Yield Dis- count and Principal Loss Discount were approximately $1,260.1 million and $757.5 million, respectively. The Incremental Yield Discount will primarily be reflected, along with the underlying contractual yield, in interest income, and will cause the Total UPB Discount to decline as it accretes into income. In addition, the Total UPB Discount will also decline as a result of asset sales, transfers to held for sale, and loans charged off. The accretion of these discounts resulted in additional recorded interest income on loans. See Net Finance Revenue section for the accretion of these discounts for the year ended December 31, 2015. As of the acquisition date, loans were classified as PCI or non-PCI with corresponding fair values as follows: OneWest Bank Purchased Loan Portfolio at Acquisition Date (dollars in millions) Original Purchase Price Commercial Banking Commercial Real Estate Consumer Banking Single Family Residential Mortgages Reverse Mortgages Total Measurement Period Adjustments Commercial Banking Consumer Banking Single Family Residential Mortgages Total Adjusted Purchase Price Commercial Banking Commercial Real Estate Consumer Banking Single Family Residential Mortgages Reverse Mortgages Total PCI Loans Non-PCI Loans Fair Value $ 101.3 112.0 – 2,626.2 77.8 Unpaid Principal Balance $ 149.2 191.5 – 3,830.0 92.6 Fair Value $ 3,275.7 3,018.3 1,364.0 2,208.1 814.9 Unpaid Principal Balance $ 3,460.9 3,158.7 1,364.2 2,369.7 1,133.7 Total Fair Value $ 3,377.0 3,130.3 1,364.0 4,834.3 892.7 Total Unpaid Principal Balance $ 3,610.1 3,350.2 1,364.2 6,199.7 1,226.3 $2,917.3 $4,263.3 $10,681.0 $11,487.2 $13,598.3 $15,750.5 $ (15.3) $ (15.0) $ – (15.7) – – 2.4 (4.1) − – – $ 15.0 $ (12.9) $ (31.0) $ 15.0 $ (1.7) $ 15.0 $ (4.1) (15.7) (32.7) $ $ – – – – $ 86.0 $ 134.2 $ 3,278.1 $ 3,475.9 $ 3,364.1 $ 3,610.1 112.0 – 2,610.5 77.8 191.5 – 3,830.0 92.6 3,018.3 1,359.9 2,208.1 814.9 3,158.7 1,364.2 2,369.7 1,133.7 3,130.3 1,359.9 4,818.6 892.7 3,350.2 1,364.2 6,199.7 1,226.3 $2,886.3 $4,248.3 $10,679.3 $11,502.2 $13,565.6 $15,750.5 The difference between the acquisition date fair value and the unpaid principal balance for non-PCI loans represents the fair value adjustment for a loan and includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest and fees on loans over the loan’s remaining life. The acquired loans are discussed in detail elsewhere in this fil- ing. See Note 1 — Business and Summary of Significant Accounting Policies, Note 2 — Acquisition and Disposition Activities, Note 3 — Loans and Note 13 — Fair Value in Item 8. Financial Statements and Supplementary Data. CIT ANNUAL REPORT 2015 45 Indemnification Assets Intangible Assets Indemnification assets totaled $455 million as of the acquisition date, including the effects of the measurement period adjust- ments. As part of the OneWest Transaction, CIT is party to the loss sharing agreements with the FDIC related to OneWest Bank’s previous acquisitions of IndyMac Federal Bank, FSB, First Federal Bank of California, FSB and La Jolla Bank, FSB. The loss sharing agreements generally require CIT Bank, N.A. to obtain FDIC approval prior to transferring or selling loans and related indem- nification assets. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., charge- off of loan balance or liquidation of collateral). The acquired indemnification assets are discussed in detail else- where in this filing. See Note 1 — Business and Summary of Significant Accounting Policies, Note 2 — Acquisition and Dispo- sition Activities and Note 5 — Indemnification Assets in Item 8. Financial Statements and Supplementary Data. Investment Securities In connection with the OneWest acquisition, the Company acquired securities, mostly comprised of mortgage-backed secu- rities (“MBS”) valued at approximately $1.3 billion as of the acquisition date. Approximately $1.0 billion of the MBS securities were classified as PCI as of the acquisition date due to evidence of credit deterioration since issuance and for which it was prob- able that the Company would not collect all principal and interest payments that were contractually required at the time of pur- chase. These securities were initially classified as available-for- sale upon acquisition; however, upon further review following the filing of the Company’s September 30, 2015 Form 10-Q, manage- ment determined that $373.4 million of these securities should have been classified as securities carried at fair value with changes recorded in net income as of the acquisition date, and in the fourth quarter of 2015 management corrected this immaterial error impacting classification of investment securities. The acquired investments are discussed in detail elsewhere in this filing. See Note 1 — Business and Summary of Significant Accounting Policies and Note 7 — Investment Securities in Item 8. Financial Statements and Supplementary Data. Cash Cash acquired in the OneWest Transaction totaled $4,411.6 million as of the acquisition date. Goodwill The amount of goodwill recorded, $663.0 million, represents the excess of the purchase price over the estimated fair value of the net assets acquired by CIT, including the affects of the measure- ment period adjustments. The goodwill was assigned to the NAB and LCM segments. As the LCM segment is currently running off, we expect that the goodwill balance will become impaired and that we will begin writing off the goodwill as the cash flows gen- erated by the segment decreases. The acquired goodwill is discussed in detail elsewhere in this filing. See Note 26 — Good- will and Intangible Assets in Item 8. Financial Statements and Supplementary Data for further detail. We recorded intangible assets of $164.7 million, including the effects of the measurement period adjustments, related mainly to the valua- tion of core deposits, customer relationships and trade names recorded in conjunction with the acquisition, which will be amortized on a straight line basis, except for trade names, which are amortized on an accelerated basis, over the respective life of the underlying intangible asset of up to 10 years. The acquired intangible assets are discussed in detail elsewhere in this filing. See Note 26 — Goodwill and Intangible Assets in Item 8. Financial Statements and Supple- mentary Data. Also see Non-Interest Expenses section. Other Assets Other assets acquired in the OneWest Transaction consisted of the following as of the acquisition date, including the effects of the measurement period adjustments: Acquired Other Assets (dollars in millions) Federal and state tax assets Investment tax credits Other real estate owned Property, furniture and fixtures FDIC receivable Other Total other assets August 3, 2015 $170.7 134.5 132.4 61.4 54.8 168.5 $722.3 The acquired other assets are discussed in detail elsewhere in this filing. See Note 1 — Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supple- mentary Data. Deposits Deposits acquired in the OneWest Transaction consisted of the following as of the acquisition date: Acquired Deposits at August 3, 2015 (dollars in millions) Noninterest-bearing checking Interest-bearing checking Money market accounts Savings Other Total checking and savings deposits Certificates of deposit Total deposits Balance 898.7 $ 3,131.8 3,523.1 698.7 75.3 8,327.6 6,205.7 $14,533.3 Rate N/A 0.51% 0.61% 0.48% N/A 0.49% 0.96% 0.69% The premium on deposits totaled $29.0 million at the acquisition date. Borrowings Outstanding borrowings of $2,970.3 million were acquired in the OneWest Transaction as of the acquisition date, primarily consist- ing of FHLB advances. Management expects continued use of FHLB advances as a source of short and long-term funding. The premium on borrowings totaled $6.8 million at the acquisition date. Item 7: Management’s Discussion and Analysis 46 CIT ANNUAL REPORT 2015 SEGMENT UPDATES In conjunction with the OneWest Bank acquisition, we updated our segments as previously reported in our Report on Form 10-Q for the quarter ended September 30, 2015. Operations of the acquired OneWest Bank are included with the activities within the North America Banking (“NAB”) segment (previously North American Commercial Finance) and in a new segment, Legacy Consumer Mortgages (“LCM”). The activities of OneWest Bank are included in the Commercial Real Estate, Commercial Banking and Consumer Banking divisions of NAB. We also created a new segment, LCM, which includes single- family residential mortgage (“SFR”) loans and reverse mortgage loans that were acquired from OneWest Bank. Certain of the LCM loans are subject to loss sharing agreements with the FDIC, under which CIT may be reimbursed for a portion of future losses. Segment Name Divisions Changes Due to OneWest Transaction Transportation & International Finance Aerospace, Rail, Maritime Finance and International Finance No change due to the acquisition North America Banking Former name — North American Commercial Finance Commercial Services No change due to the acquisition Commercial Banking New name, includes the former Corporate Finance and the commercial lending functions of OneWest Bank. The division also originates qualified Small Business Administration (“SBA”) loans. Commercial Real Estate Former name — Real Estate Finance and includes commercial real estate assets and operations from the acquisition, and a run-off portfolio of multi- family mortgage loans. Consumer Banking New division includes a full suite of consumer deposit products and SFR loans offered through retail branches, private bankers, and an online direct channel. Equipment Finance No change due to the acquisition Legacy Consumer Mortgages Single Family Residential Mortgages, Reverse Mortgages New segment contains SFR loans and reverse mortgage loans, most of which are covered by loss sharing agreements with the FDIC. Non-Strategic Portfolios No change due to the acquisition Corporate and Other Includes investments and other unallocated items, such as certain amortization of intangible assets. With the announced changes to CIT management, along with the Company’s exploration of alternatives for the commercial aero- space business, we will further refine our segment reporting effective January 1, 2016. See Note 25 — Business Segment Information in Item 8. Financial Statements and Supplementary Data for additional information relating to the 2015 reorganization. DISCONTINUED OPERATIONS 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, as amended by ASU 2014-08, the Finan- cial Freedom business is reflected as discontinued operations as of the August 3, 2015 acquisition date and as of December 31, 2015. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, sys- tems and servicing assets. The assets of discontinued operations primarily include Home Equity Conversion Mortgage (“HECM”) loans of approximately $450 million at December 31, 2015, and servicing advances. The liabilities of discontinued operations include reverse mortgage servicing liabilities, which relates pri- marily to loans serviced for Fannie Mae, secured borrowings and CIT ANNUAL REPORT 2015 47 Further details of the discontinued businesses, along with con- densed balance sheet and income statement items are included in Note 2 — Acquisition and Disposition Activities in Item 8. Financial Statements and Supplementary Data. See also Note 22 — Contingencies for discussion related to the servicing business. Unless specifically noted, the discussions and data presented throughout the following sections reflect CIT balances on a con- tinuing operations basis. contingent liabilities. In addition, continuing operations includes a portfolio of reverse mortgages of $917 million at December 31, 2015, which are in the LCM segment and are serviced by Financial Freedom. Student Lending On April 25, 2014, the Company completed the sale of the stu- dent lending business, along with certain secured debt and servicing rights. As a result, the student lending business is reported as a discontinued operation for the year ended December 31, 2014. NET FINANCE REVENUE The following tables present management’s view of consolidated NFR. As discussed below, NFR was impacted by the inclusion of OneW- est Bank activity for five months during 2015. Net Finance Revenue(1) (dollars in millions) Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue Average Earning Assets(2) (“AEA”) Net finance margin Years Ended December 31, 2015 2014 2013 $ 1,512.9 $ 1,226.5 $ 1,255.2 2,152.5 3,665.4 (1,103.5) (640.5) (231.0) $ 1,690.4 $48,720.3 2,093.0 3,319.5 (1,086.2) (615.7) (196.8) $ 1,420.8 $40,692.6 1,897.4 3,152.6 (1,060.9) (540.6) (163.1) $ 1,388.0 $37,636.0 3.47% 3.49% 3.69% (1) NFR and AEA are non-GAAP measures; see “Non-GAAP Financial Measurements” sections for a reconciliation of non-GAAP to GAAP financial information. (2) As noted below, AEA components have changed in the current year. All prior periods have been conformed to the current presentation. AEA balances in this table include credit balances of factoring clients, and therefore are less than balances in a similar table in ’Select Data’. NFR and NFM are key metrics used by management to measure the profitability of our earning assets. NFR includes interest and yield-related fee income on our loans and capital leases, rental income on our operating lease equipment, and interest and divi- dend income on cash and investments, less funding costs and depreciation, maintenance and other operating lease expenses from our operating lease equipment. Since our asset composition includes a high level of operating lease equipment (31% of AEA for the year ended December 31, 2015), NFM is a more appropri- ate metric for CIT than net interest margin (“NIM”) (a common metric used by other BHCs), as NIM does not fully reflect the earnings of our portfolio because it includes the impact of debt costs on all our assets but excludes the net revenue (rental income less depreciation, maintenance and other operating lease expenses) from operating leases. In conjunction with the OneWest Transaction, we changed our approach of measuring our margin to include other revenue gen- erating assets in AEA, such as interest-earning cash deposits, investments, and the newly acquired indemnification assets. These additional balances have grown in significance, or are new due to the acquisition, and are now included in our determina- tion of AEA. Prior period balances and percentages have been updated to conform to the current period presentation. See the Glossary at the end of Item 1. Business Overview in this document. Item 7: Management’s Discussion and Analysis 48 CIT ANNUAL REPORT 2015 The following table includes average balances from revenue generating assets along with the respective revenues and average balances of deposits and borrowings with the respective interest expenses. Annual Average Balances(1) and Associated Income (dollars in millions) Interest bearing deposits Securities purchased under agreements to resell Investment securities Loans (including held for sale and credit balances of factoring clients)(2)(3) Operating lease equipment, net (including held for sale)(4) Indemnification assets Average earning assets(2) Deposits Borrowings(5) Total interest-bearing liabilities December 31, 2015 Revenue / Expense 17.2 $ Average Balance $ 5,841.3 Average Rate (%) Average Balance 0.29% $ 5,343.0 December 31, 2014 Revenue / Expense 17.7 $ Average Rate (%) Average Balance 0.33% $ 5,531.6 December 31, 2013 Revenue / Expense 16.6 $ Average Rate (%) 0.30% 411.5 2,239.2 2.3 51.9 0.56% 2.32% 242.3 1,667.8 1.3 16.5 0.54% 0.99% – 1,886.0 – 12.3 – 0.65% 24,524.2 1,442.0 5.88% 18,659.6 1,191.0 6.38% 17,483.0 1,226.3 7.01% 15,514.6 189.5 $48,720.3 $22,891.4 17,863.0 $40,754.4 1,281.0 (0.5) $2,793.9 $ 330.1 773.4 1,103.5 8.26% 14,777.3 (0.26)% – 5.73% $40,690.0 1.44% $13,955.8 4.33% 18,582.0 2.71% $32,537.8 1,280.5 – $2,507.0 $ 231.0 855.2 1,086.2 8.67% – 12,756.1 – 6.16% $37,656.7 1.66% $11,212.1 4.60% 18,044.5 3.34% $29,256.6 1,193.7 – $2,448.9 $ 179.8 881.1 1,060.9 $1,388.0 9.36% – 6.50% 1.60% 4.88% 3.63% 3.69% NFR and NFM $1,690.4 3.47% $1,420.8 3.49% Interest bearing deposits Securities purchased under agreements to resell Investments Loans (including held for sale and net of credit balances of factoring clients)(2)(3) Operating lease equipment, net (including held for sale)(4) Indemnification assets Total earning assets Deposits Borrowings(5) Total interest-bearing liabilities 2015 Over 2014 Comparison 2014 Over 2013 Comparison Increase (decrease) due to change in: Increase (decrease) due to change in: Volume 1.6 $ 0.9 5.7 $ Rate (2.1) 0.1 29.7 Net $ (0.5) 1.0 35.4 Volume $ (0.6) 1.3 (1.4) $ Rate 1.7 – 5.6 Net $ 1.1 1.3 4.2 374.2 (123.2) 251.0 82.5 (117.8) (35.3) 63.9 (0.5) $445.8 $148.3 (33.1) $115.2 (63.4) – $(158.9) $ (49.2) (48.7) $ (97.9) 0.5 (0.5) $286.9 $ 99.1 (81.8) $ 17.3 189.2 – $271.0 $ 43.9 26.2 $ 70.1 (102.4) – $(212.9) $ 7.3 (52.1) $ (44.8) 86.8 – $ 58.1 $ 51.2 (25.9) $ 25.3 (1) Average rates are impacted by PAA and FSA accretion and amortization. (2) The balance and rate presented is calculated net of average credit balances for factoring clients. (3) Non-accrual loans and related income are included in the respective categories. (4) Operating lease rental income is a significant source of revenue; therefore, we have presented the rental revenues net of depreciation and net of mainte- nance and other operating lease expenses. (5) Interest and average rates include FSA accretion, including amounts accelerated due to redemptions or extinguishments, and accelerated original issue dis- count on debt extinguishment related to the GSI facility. Average earning assets increased 20% from 2014, principally from the OneWest Bank acquisition. The acquired earning assets totaled approximately $19 billion on August 3, 2015, the acquisi- tion date. Absent the acquisition, average earning assets declined reflecting asset sales and portfolio collections. Rev- enues generated by the acquired assets for the five months that they were owned, and accretion of $116 million resulting from the fair value discount on earning assets recorded for purchase accounting, along with new business volume, resulted in higher finance revenues that were up 10% from 2014. Overall, the yield on AEA of 5.73% was down from 2014, driven by the continued low rate environment and an increased mix of low yielding cash and securities stemming from the OneWest Bank acquisition. Although interest on loans was up as a result of the acquisition, yield compression in certain loan classes continued, as well as lower interest recoveries and lower prepayments. Portfolio yields by division are included in a forthcoming table in this section. We continued to grow our operating lease portfolio, which primarily consists of transportation related assets, aircraft and railcars, resulting in the higher average balance. Operating lease rev- enues and yields are discussed later in this section. Revenues generated on our cash deposits and investments are indicative of the existing low rate environment and were not significant in any of the periods. Revenues on cash deposits and investments have CIT ANNUAL REPORT 2015 49 grown as the investments from the OneWest Bank acquisition, mostly MBSs, carry a higher rate of return than the previously owned investment portfolio and include a purchase accounting adjustment that accretes into income, thus increasing the yield. The increase in average interest bearing liabilities reflects the $14.5 billion of deposits acquired, along with growth both pre- and post-acquisition, and $3 billion of acquired borrowings, essentially all FHLB advances. While interest expense was up modestly in amount, the overall rate as a % of AEA was down from 2014 and 2013, reflecting lower rates in nearly all deposit and borrowing categories and a higher mix of low cost deposits. Interest expense for 2015 was reduced by $12 million, reflecting the accretion of purchase accounting adjustments on borrowings and deposits. Interest expense on deposits was up in 2015, driven by the higher balances and partially offset by a net benefit from purchase accounting accretion. The decline in rate was the result of the lower cost deposits from OneWest Bank. Interest expense on borrowings is a function of the products and was mostly impacted by the OneWest Bank acquisition, which increased FHLB advances. FHLB advances had lower rates than our average borrowings in the year-ago quarter and prior quarter, thus reduc- ing the average rate. The composition of our funding was significantly impacted by the OneWest Bank acquisition. At December 31, 2015, 2014 and 2013 our funding mix was as follows: Funding Mix Deposits December 31, 2015 64% December 31, 2014 46% December 31, 2013 40% Unsecured Secured Borrowings: Structured financings FHLB Advances 21% 35% 41% 9% 6% 18% 1% 18% 1% These proportions will fluctuate in the future depending upon our funding activities. The following table details further the rates of interest bearing liabilities. Deposits and Borrowings (dollars in millions) Deposits CDs Interest-bearing checking Savings Money markets Total deposits* Borrowings Unsecured notes Secured borrowings FHLB advances Total borrowings Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 Average Balance Interest Expense Rate % Average Balance Interest Expense Rate % Average Balance Interest Expense Rate % $13,799.9 $ 253.2 1.83% $ 8,672.1 $ 180.4 2.08% $ 7,149.7 $ 139.1 1.95% 1,308.3 4,301.6 3,352.9 6.8 42.1 28.8 22,762.7 330.9 10,904.0 5,584.4 1,374.6 17,863.0 561.3 206.4 5.7 773.4 0.52% 0.98% 0.86% 1.45% 5.15% 3.70% 0.41% 4.33% – 3,361.7 1,857.2 – 32.1 18.8 13,891.0 231.3 12,432.0 5,999.1 151.0 18,582.1 639.3 215.2 0.6 855.1 – 0.95% 1.01% 1.67% 5.14% 3.59% 0.40% 4.60% – 2,515.9 1,514.9 – 23.3 17.7 11,180.5 180.1 11,982.9 6,027.2 34.3 18,044.4 637.4 243.4 0.2 881.0 – 0.93% 1.17% 1.61% 5.32% 4.04% 0.58% 4.88% 3.63% Total interest-bearing liabilities $40,625.7 $1,104.3 2.72% $32,473.1 $1,086.4 3.35% $29,224.9 $1,061.1 * Excludes certain deposits such as escrow accounts, security deposits, and other similar accounts, therefore totals may differ from other average balances included in this document. Deposits and borrowings are also discussed in Funding and Liquidity. See Select Financial Data (Average Balances) section for more information on borrowing rates. Item 7: Management’s Discussion and Analysis 50 CIT ANNUAL REPORT 2015 The following table depicts selected earning asset yields and margin related data for our segments, plus select divisions within the segments. Select Segment and Division Margin Metrics (dollars in millions) North America Banking AEA Gross yield NFM AEA Commercial Banking Commercial Real Estate Equipment Finance Commercial Services Consumer Banking Gross yield Commercial Banking Commercial Real Estate Equipment Finance Commercial Services Consumer Banking Transportation & International Finance AEA Gross yield NFM AEA Aerospace Rail Maritime Finance International Finance Gross yield Aerospace Rail Maritime Finance International Finance Legacy Consumer Mortgages AEA Gross yield NFM AEA SFR mortgage loans Reverse mortgage loans Gross yield SFR mortgage loans Reverse mortgage loans Non-Strategic Portfolios AEA Gross yield NFM Years Ended December 31, 2015 2014 2013 $18,794.7 15,074.1 13,605.4 5.86% 3.91% 6.17% 3.73% 6.85% 4.21% $ 8,537.5 $ 7,285.0 $ 6,993.5 3,213.6 5,590.7 888.9 564.0 4.76% 4.83% 8.53% 4.80% 3.63% 1,687.6 5,086.3 1,015.2 – 5.20% 4.15% 8.48% 4.94% – 1,119.0 4,389.7 1,103.2 – 5.56% 4.19% 10.06% 4.98% – $20,321.6 $19,330.7 $16,359.7 11.35% 4.29% 11.64% 4.57% 11.84% 4.62% $11,631.8 $11,301.8 $ 9,985.1 6,245.5 1,323.1 1,121.2 10.68% 14.34% 5.10% 9.04% $ 2,483.5 6.16% 4.74% $ 2,101.1 382.4 5.70% 8.68% 5,651.6 670.0 1,707.3 11.11% 14.57% 5.18% 7.95% $ $ – – – – – – – 4,414.0 300.1 1,660.5 11.42% 14.42% 7.83% 8.31% $ $ – – – – – – – $ 358.8 $ 1,192.2 $ 2,101.0 14.25% 6.08% 10.59% 2.49% 12.76% 5.03% CIT ANNUAL REPORT 2015 51 In 2015 gross yields (interest income plus rental income on oper- ating leases as a % of AEA) on NAB’s commercial assets declined from the year-ago reflecting competitive pressures in certain industries, while NFM was up, benefiting from purchase account- ing accretion and lower funding costs. Gross yields in Aerospace decreased from 2014 due to lower lease rates on re-leased assets, while gross yields in Rail were down, reflecting reduced utilization in energy-related railcars and portfolio growth (with new originations at lower yields than the existing portfolio). TIF International Finance margins vary between periods due to stra- tegic asset sales. LCM was acquired in 2015 as part of the OneWest Transaction. Gross yields in the SFR portfolio will gener- ally be lower than those of the reverse mortgages. NSP contains run-off portfolios, and as a result, gross yields varied due to asset sales and lower balances. The yields in certain divisions of NAB and LCM for 2015 also reflect the net accretion of purchase accounting discounts as fol- lows: NAB divisions Commercial Banking $35 million and Commercial Real Estate $29 million, and LCM $52 million. The following table sets forth the details on net operating lease revenues. Net Operating Lease Revenue as a % of Average Operating Leases (dollars in millions) Rental income on operating leases $ 2,152.5 14.08% $ 2,093.0 14.41% $ 1,897.4 15.22% Depreciation on operating lease equipment Maintenance and other operating lease expenses Net operating lease revenue and % Average Operating Lease Equipment (“AOL”) (640.5) (231.0) (4.19)% (1.51)% (615.7) (196.8) (4.24)% (1.35)% (540.6) (163.1) $ 1,281.0 $15,294.1 8.38% $ 1,280.5 8.82% $ 1,193.7 $14,524.4 $12,463.8 (4.33)% (1.31)% 9.58% Years Ended December 31, 2015 2014 2013 Net operating lease revenue was primarily generated from the commercial air and rail portfolios. Net operating lease revenue was essentially unchanged compared to the year-ago, as the ben- efit from growth in the portfolio was offset by lower rates, lower utilization and higher maintenance and other operating lease expenses. Utilization was mixed compared to year end 2014; air utilization increased as all equipment was leased or under a commitment at year-end while rail utilization declined from 99% to 96%, reflect- ing pressures in demand for cars that transport crude, coal and steel, a trend that is expected to continue. All of the 15 aircraft scheduled for delivery in 2016 and approximately 55% of the total railcar order-book have lease commitments. Depreciation on operating lease equipment mostly reflects trans- portation equipment balances and includes amounts related to impairments on equipment in the portfolio. Depreciation expense, while up in amount due to growth in the portfolio, was down slightly as a percentage of AOL from 2014. Once a long- lived asset is classified as assets held for sale, depreciation expense is no longer recognized, and the asset is evaluated for impairment with any such charge recorded in other income. (See “Non-interest Income — Impairment on assets held for sale” for discussion on impairment charges). Consequently, net operating lease revenue includes rental income on operating lease equip- ment classified as assets held for sale, but there is no related depreciation expense. The amount of suspended depreciation on operating lease equipment in assets held for sale totaled $26 million for 2015, $24 million for 2013 and $73 million for 2013. Operating lease equipment in assets held for sale totaled $93 million at December 31, 2015, $440 million at December 31, 2014 and $205 million at December 31, 2013. Maintenance and other operating lease expenses primarily relate to the rail portfolio and to a lesser extent aircraft re-leasing. Maintenance and other operating lease expenses was up reflect- ing elevated transition costs on several aircraft, increased maintenance, freight and storage costs in rail and growth in the portfolios. The factors noted above affecting rental income, depreciation, and maintenance and other operating lease expenses drove the net operating lease revenue as a percent of AOL. Upon emergence from bankruptcy in 2009, CIT applied Fresh Start Accounting (“FSA”) in accordance with GAAP. The most sig- nificant remaining discount at December 31, 2015, related to operating lease equipment ($1.3 billion related to rail operating lease equipment and $0.6 billion to aircraft operating lease equipment). The discount on the operating lease equipment was, in effect, an impairment of the operating lease equipment upon emergence from bankruptcy, as the assets were recorded at their fair value, which was less than their carrying value. The recording of the FSA adjustment reduced the asset balances subject to depreciation and thus decreases depreciation expense over the remaining useful life of the operating lease equipment or until it is sold. See “Expenses — Depreciation on operating lease equipment” and “Concentrations — Operating Leases” for additional information. Item 7: Management’s Discussion and Analysis 52 CIT ANNUAL REPORT 2015 CREDIT METRICS Non-accrual loans were $268 million (0.85% of finance receiv- ables), up from $161 million (0.82%) at December 31, 2014 and $241 million (1.29%) at December 31, 2013. Non-accrual loans rose in 2015 due mainly to an increase in the energy portfolio, partially offset by a reduction from the sales of portfolios. If oil prices remain at current levels, the energy portfolio could see additional downward credit migration. Our exposure to the energy industry is discussed in the Concentrations section. The change in the percentage reflects the impact of the acquired OneWest Bank assets, discussed below. Non-accruals are dis- cussed further in this section. Loans acquired in the OneWest Transaction were recorded at estimated fair value at the time of acquisition. Credit losses were included in the determination of estimated fair value and were effectively recorded as purchase accounting discounts on loans as part of the fair value of the finance receivables. For PCI loans, a portion of the discount attributable to embedded credit losses of both principal, which we refer to as “principal loss discount,” and future interest was recorded as a non-accretable discount and is utilized as such losses occur. Any incremental deterioration on these loans results in incremental provisions or charge-offs. Improvements, or an increase in forecasted cash flows in excess of the non-accretable discount, reduces any allowance on the loan established after the acquisition date. Once such allowance (if any) has been reduced, the non-accretable discount is reclassi- fied to accretable discount and is recorded as finance income over the remaining life of the account. PCI loans are not included in non-accrual loans or in past-due loans. For non-PCI loans, an allowance for loan losses is established to the extent our estimate of inherent loss exceeds the remaining purchase accounting discount. The provision for credit losses reflects loss adjustments related to loans recorded at amortized cost, off-balance sheet commit- ments, and indemnification agreements. In conjunction with the OneWest Transaction, the provision for credit losses also includes the impact of the mirror accounting principal related to the indemnification agreements. The amount was not significant since the acquisition date, and is included in ‘Other’ in the table below. The provision for credit losses was $161 million for the cur- rent year, up from $100 million in 2014 and $65 million in 2013. The provision for credit losses reflected the reserve build on loan growth and an increase in the reserve resulting from the recogni- tion of purchase accounting accretion on loans. The purchase accounting accretion, in effect, increases the carrying value of the non-PCI loan, thus requiring a higher reserve. In addition, the provision was elevated due to increases in reserves related to the energy sector, and to a lesser extent the maritime portfolios, and from the establishment of reserves on certain acquired non-credit impaired loans in the initial period post acquisition. Net charge-offs were $138 million (0.55% as a percentage of aver- age finance receivables) in 2015, up from $99 million (0.52%) in 2014 and $81 million (0.44%) in 2013. Net charge-offs include $73 million in 2015, $43 million in 2014, and $39 million in 2013 related to the transfer of receivables to assets held for sale. Absent AHFS transfer related charge-offs, net charge-offs were 0.25%, 0.29% and 0.23% for the years ended December 31, 2015, 2014 and 2013, respectively. Recoveries of $28 million were flat with 2014 and down from $58 million in 2013. The following table presents detail on our allowance for loan losses, including charge-offs and recoveries and provides summarized com- ponents of the provision and allowance: Allowance for Loan Losses and Provision for Credit Losses (dollars in millions) CIT ANNUAL REPORT 2015 53 Allowance – beginning of period Provision for credit losses(1) Other(1) Net additions Gross charge-offs(2) Recoveries Net Charge-offs Allowance – end of period Provision for credit losses Specific reserves on impaired loans Non-specific reserves Net charge-offs Total Allowance for loan losses Specific reserves on impaired loans Non-specific reserves Total Ratio Years ended December 31, 2015 $ 346.4 160.5 (9.1) 151.4 (166.0) 28.4 (137.6) 2014 $ 356.1 100.1 (10.7) 89.4 (127.5) 28.4 (99.1) 2013 $ 379.3 64.9 (7.4) 57.5 (138.6) 57.9 (80.7) 2012 $ 407.8 51.4 (5.8) 45.6 (141.7) 67.6 (74.1) 2011 $ 416.2 269.7 (12.9) 256.8 (368.8) 103.6 (265.2) $ 360.2 $ 346.4 $ 356.1 $ 379.3 $ 407.8 $ 15.4 7.5 137.6 $ 160.5 $ 27.8 332.4 $ 360.2 $ (18.0) $ (14.8) $ (9.4) $ (66.7) 19.0 99.1 (1.0) 80.7 (13.3) 74.1 $ 100.1 $ 64.9 $ 51.4 $ 12.4 334.0 $ 346.4 $ 30.4 325.7 $ 356.1 $ 45.2 334.1 $ 379.3 71.2 265.2 $ 269.7 $ 54.6 353.2 $ 407.8 Allowance for loan losses as a percentage of total loans Allowance for loan losses as a percent of finance receivable/Commercial Allowance for loan losses plus principal loss discount as a percent of finance receivables (before the principal loss discount)/Commercial Allowance for loan losses plus principal loss discount as a percent of finance receivables (before the principal loss discount)/Consumer 1.14% 1.78% 1.91% 2.21% 2.68% 1.42% 1.78% 1.91% 2.21% 2.68% 1.80% 1.78% 1.91% 2.21% 2.68% 8.89% – – – – (1) The provision for credit losses includes amounts related to reserves on unfunded loan commitments, unused letters of credit, and for deferred purchase agreements, all of which are reflected in other liabilities. The items included in other liabilities totaled $43 million, $35 million, $28 million, $23 million and $22 million at December 31, 2015, 2014, 2013, 2012 and 2011, respectively. In addition, for the year ended December 31, 2015, the provision also includes the impact of the mirror accounting principal related to the indemnification agreements. Other includes amounts in the provision for credit losses that do not relate to the allowance for loan losses, and include the previously mentioned items. (2) Gross charge-offs included $73 million, $43 million, and $39 million of charge-offs related to the transfer of receivables to assets held for sale for the years ended December 31, 2015, 2014 and 2013, respectively. Prior year amounts were not significant. The allowance for loan losses (“ALLL”) was $360 million (1.14% of finance receivables, 1.35% excluding loans subject to loss sharing agreements with the FDIC) at December 31, 2015. The increase in the allowance from the prior year reflects the reserve build on new loans and on certain acquired non-credit impaired loans. lower oil and natural gas prices on the energy related sectors of Rail are reflected in lower utilization rates and lease rates for tank cars, sand cars and coal cars, not in non-accrual loans, provision for credit losses, or net charge-offs, since it is primarily an operat- ing lease portfolio, not a loan portfolio. In addition, we continuously update the allowance as we monitor credit quality within industry sectors. For instance, the pressures during the year in oil related sectors of energy industries caused increases in specific allowances on certain loans and, along with exposures to certain maritime sectors, also an increase to the non-specific allowance due to lower credit quality. The impact of Our exposure to oil and gas extraction services approximated $1.0 billion at December 31, 2015, or approximately 3% and 4% of total loans and commercial loans, respectively. Approximately 50% of the portfolio is related to exploration and production activities, with the majority of the portfolio secured by traditional reserve-based lending assets, working capital assets and long- Item 7: Management’s Discussion and Analysis 54 CIT ANNUAL REPORT 2015 lived fixed assets. Reserve strengthening in this portfolio contributed to both the increase in provision from prior years and the increase in ALLL to loans in the Commercial portfolio. Includ- ing both reserves and marks from the acquisition accounting on the OWB portfolio, the loss coverage approximated 10% at December 31, 2015. If oil prices remain at current levels, we could see additional downward credit migration. The decline in the percentage of allowance to finance receivables reflects the OneWest Bank acquisition, which added $13.6 billion of loans at fair value with no related allowance at the time of acquisition. Including the impact of the principal loss discount on credit impaired loans, which is essentially a reserve for credit losses on the discounted loans, the commercial loan allowance to finance receivables was 1.80%. The consumer loans ratio includ- ing the principal loss discount on credit impaired loans was 8.89% at December 31, 2015, as most of the consumer loans purchased were credit impaired and are partially covered by loss share agreements with the FDIC. In the previous table, we included new allowance metrics to assist in detailing the impact of the acquired portfolio on our ALLL cov- erage ratio given the impact of adding the OneWest Bank portfolio at fair value and the addition of consumer loans. Due to the OneWest Bank acquisition, we updated our reserving policies to accommodate the additional asset classes. See Note 1 — Business and Summary of Significant Accounting Poli- cies for discussion on policies relating to the allowance for loan losses and Note 4 — Allowance for Loan Losses for additional segment related data in Item 8 Financial Statements and Supple- mentary Data and Critical Accounting Estimates for further analysis of the allowance for credit losses. Segment Finance Receivables and Allowance for Loan Losses (dollars in millions) Finance Receivables Allowance for Loan Losses Net Carrying Value December 31, 2015 North America Banking Transportation & International Finance Legacy Consumer Mortgages Total December 31, 2014 North America Banking Transportation & International Finance Non-Strategic Portfolio Total December 31, 2013 North America Banking Transportation & International Finance Non-Strategic Portfolio Total December 31, 2012 North America Banking Transportation & International Finance Non-Strategic Portfolio Total December 31, 2011 North America Banking Transportation & International Finance Non-Strategic Portfolio Total $22,701.1 3,542.1 5,428.5 $31,671.7 $15,936.0 3,558.9 0.1 $19,495.0 $14,693.1 3,494.4 441.7 $18,629.2 $13,084.4 2,556.5 1,512.2 $17,153.1 $11,894.7 1,848.1 1,483.0 $15,225.8 $(314.2) $22,386.9 (39.4) (6.6) 3,502.7 5,421.9 $(360.2) $31,311.5 $(299.6) (46.8) – $15,636.4 3,512.1 0.1 $(346.4) $19,148.6 $(303.8) $14,389.3 (46.7) (5.6) 3,447.7 436.1 $(356.1) $18,273.1 $(293.7) $12,790.7 (44.3) (41.3) 2,512.2 1,470.9 $(379.3) $16,773.8 $(309.8) $11,584.9 (36.3) (61.7) 1,811.8 1,421.3 $(407.8) $14,818.0 The following table presents charge-offs, by class. See Results by Business Segment for additional information. Charge-offs as a Percentage of Average Finance Receivables (dollars in millions) 2015 2014 2013 2012 2011 CIT ANNUAL REPORT 2015 55 Gross Charge-offs Aerospace Maritime International Finance Transportation & International Finance(1) Commercial Banking Equipment Finance Commercial Real Estate Commercial Services North America Banking(2) Legacy Consumer Mortgages Non-Strategic Portfolio(3) Total Recoveries Aerospace International Finance Transportation & International Finance(1) Commercial Banking Equipment Finance Commercial Real Estate Commercial Services North America Banking(2) Legacy Consumer Mortgages Non-Strategic Portfolio(3) Total Net Charge-offs Aerospace Maritime International Finance Transportation & International Finance(1) Commercial Banking Equipment Finance Commercial Real Estate Commercial Services North America Banking(2) Legacy Consumer Mortgages Non-Strategic Portfolio(3) Total 0.06% $ 0.7 0.05% $ – – – – – – $ 0.9 0.08% $ 1.1 0.13% – – – – 44.1 3.34% 26.0 1.76% 14.8 1.50% 16.9 2.48% $ 1.0 0.7 33.6 35.3 62.8 60.5 – 6.2 129.5 1.2 – 0.05% 8.10% 0.98% 0.77% 1.31% – 0.26% 0.68% 0.05% – 44.8 29.7 35.8 – 9.7 75.2 – 7.5 1.25% 0.42% 0.84% – 0.41% 0.49% – 26.0 21.9 32.0 – 4.4 58.3 – 0.84% 0.33% 0.82% – 0.19% 0.42% – 15.7 37.8 52.5 – 8.6 0.71% 18.0 0.61% 147.9 1.44% 125.8 – 0.36% 6.7 21.1 98.9 0.80% 301.5 – – – 4.91% 54.3 4.82% 27.1 1.81% 49.3 $166.0 0.67% $127.5 0.67% $138.6 0.76% $141.7 0.88% $368.8 $ 0.2 8.3 8.5 3.7 13.8 – 1.5 19.0 0.9 – 0.01% $ 2.00% 0.23% 0.05% 0.30% – 0.06% 0.10% 0.04% – 0.2 6.9 7.1 0.5 16.4 – 2.1 19.0 – 2.3 0.02% $ 0.53% 0.19% 0.01% 0.38% – 0.09% 0.13% – 1.44% 1.1 8.0 9.1 8.0 24.0 – 7.8 39.8 – 9.0 0.09% $ 0.54% 0.29% 0.12% 0.61% – 0.33% 0.29% – – 8.7 8.7 8.3 30.3 – 7.8 46.4 – – $ 0.88% 0.39% 0.13% 0.83% – 0.33% 0.38% – 0.1 5.8 5.9 22.4 42.9 4.0 10.9 80.2 – 0.81% 12.5 0.83% 17.5 $ 28.4 0.12% $ 28.4 0.15% $ 57.9 0.32% $ 67.6 0.42% $103.6 $ 0.8 0.7 25.3 26.8 59.1 46.7 – 4.7 110.5 0.3 – 0.05% 6.10% 0.75% 0.72% 1.01% – 0.20% 0.58% 0.01% – 0.05% $ 0.5 0.03% $ (1.1) -0.09% $ 0.9 0.08% $ 1.0 0.12% – – – – 37.2 2.81% 18.0 1.22% – – – 0.62% 11.1 1.63% – 6.1 7.0 29.5 22.2 – 0.8 1.06% 0.41% 0.46% – 0.32% 0.36% – 37.7 29.2 19.4 – 7.6 56.2 – 5.2 16.9 13.9 8.0 – 0.55% 0.21% 0.21% – (3.4) (0.14)% 0.32% 12.1 0.48% 125.5 0.61% – 0.03% 82.9 2.7 10.2 18.5 0.13% 52.5 0.42% 221.3 – – – – – 3.47% 45.3 4.01% 14.6 0.98% 31.8 1.06% 2.58% 3.03% 35.14% 0.85% 2.44% – 3.23% 2.36% 0.01% 0.85% 0.35% 0.39% 1.03% 20.89% 0.44% 0.65% – 1.15% 0.66% 0.71% 2.19% 2.00% 14.25% 0.41% 1.79% – 2.08% 1.70% $137.6 0.55% $ 99.1 0.52% $ 80.7 0.44% $ 74.1 0.46% $265.2 (1) TIF charge-offs for 2015, 2014 and 2013 included approximately $27 million, $18 million and $2 million, respectively, related to the transfer of receivables to assets held for sale. (2) NAB charge-offs for 2015, 2014 and 2013 included approximately $46 million, $18 million and $5 million, respectively, related to the transfer of receivables to assets held for sale. (3) NSP charge-offs for 2015, 2014 and 2013 included approximately $0, $7 million and $32 million, respectively, related to the transfer of receivables to assets held for sale. Item 7: Management’s Discussion and Analysis 56 CIT ANNUAL REPORT 2015 Net charge-offs had trended lower through 2012. Then in con- junction with strategic initiatives, transfers of portfolios to assets held for sale increased the balances beginning in 2013. This trend continued into 2015, with significant charge-offs recorded on the transfers to AHFS of the Canada (NAB) and China (TIF) portfolios, along with certain asset sales in NAB. Excluding assets trans- ferred to held for sale, net charge-offs were $65 million, up from $56 million and $42 million for 2014 and 2013, respectively, reflecting an increase in the energy portfolio in NAB. Recoveries remained relatively low in 2015. Charge-offs associ- ated with AHFS do not generate future recoveries as the loans are generally sold before recoveries can be realized and any gains on sales are reported in other income. The tables below present information on non-accruing loans, which includes loans related to assets held for sale for each period, and when added to OREO and other repossessed assets, sums to non-performing assets. PCI loans are excluded from these tables as they are written down at acquisition to their fair value using an estimate of cashflows 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 because we expect to fully collect the new carrying values of these loans. Non-accrual and Accruing Past Due Loans at December 31 (dollars in millions) Non-accrual loans U.S. Foreign Non-accrual loans Troubled Debt Restructurings U.S. Foreign Restructured loans Accruing loans past due 90 days or more Accruing loans past due 90 days or more 2015 2014 2013 2012 2011 $185.3 82.4 $267.7 $ 25.2 15.0 $ 40.2 $ 71.9 88.6 $160.5 $176.3 64.4 $240.7 $ 13.8 $218.0 3.4 2.9 $ 17.2 $220.9 $273.1 57.0 $330.1 $263.2 25.9 $289.1 $623.6 77.8 $701.4 $427.5 17.7 $445.2 $ 15.8 $ 10.3 $ 9.9 $ 3.4 $ 2.2 Segment Non-accrual Loans as a Percentage of Finance Receivables at December 31 (dollars in millions) Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Consumer Banking North America Banking Aerospace International Finance Transportation & International Finance Legacy Consumer Mortgages Non-Strategic Portfolio Total 2015 2014 2013 $131.5 65.4 3.6 – 0.4 200.9 15.4 46.6 62.0 4.8 – $267.7 1.39% 1.49% 0.07% – 0.03% 0.88% 0.87% NM 1.75% 0.09% − 0.85% $ 30.9 70.0 – – – 100.9 0.1 37.1 37.2 – 22.4 $160.5 0.45% 1.48% – – – 0.63% 0.01% 5.93% 1.05% – NM 0.82% $ 83.8 59.4 – 4.2 – 147.4 14.3 21.0 35.3 – 58.0 $240.7 1.23% 1.47% – 0.19% – 1.00% 0.86% 1.21% 1.01% – 13.14% 1.29% NM — not meaningful; Non-accrual loans include loans held for sale. The December 31, 2014 Non-Strategic Portfolios and the December 31, 2015 Interna- tional Finance amounts reflected non-accrual loans held for sale; since portfolio loans were insignificant, no % is displayed. Non-accrual loans rose in 2015, with energy related accounts driv- ing the increase in Commercial Banking, partially offset by a reduction from the sales of international platforms, including Mexico and Brazil. Real estate owned as a result of foreclosures of secured mortgage loans was $122 million at December 31, 2015, recorded in the LCM segment acquired with the OneWest Bank transaction. Non-accrual loans remained at low levels dur- ing 2014. The improvements in 2014 reflect the relatively low levels of new non-accruals, the resolution of a small number of larger accounts in Commercial Banking and the sale of the Small Business Lending unit in NSP. The entire NSP portfolio at Decem- ber 2014 was classified as held for sale making the percentage of finance receivables not meaningful while the 2013 NSP non- accruals included $40 million related to accounts in held for sale resulting in an increase of non-accruals as a percentage of finance receivables. Approximately 61% of our non-accrual accounts were paying cur- rently compared to 54% at December 31, 2014. Our impaired loan carrying value (including PAA discount, specific reserves and charge-offs) to estimated outstanding unpaid principal balances CIT ANNUAL REPORT 2015 57 approximated 87%, compared to 68% at December 31, 2014. For this purpose, impaired loans are comprised principally of non- accrual loans over $500,000 and TDRs. Total delinquency (30 days or more) was 1.1% of finance receiv- ables at December 31, 2015, compared to 1.7% at December 31, 2014 due primarily to the increase in finance receivables due to the OneWest acquisition. Foregone Interest on Non-accrual Loans and Troubled Debt Restructurings (dollars in millions) Years Ended December 31 2015 2014 2013 U.S. Foreign Total U.S. Foreign Total U.S. Foreign Total Interest revenue that would have been earned at original terms Less: Interest recorded Foregone interest revenue $23.7 (5.9) $17.8 $ 9.8 $33.5 $22.8 $12.4 $ 35.2 $ 52.9 $12.4 $ 65.3 (3.2) (9.1) (6.7) (4.2) (10.9) (18.4) (4.2) (22.6) $ 6.6 $24.4 $16.1 $ 8.2 $ 24.3 $ 34.5 $ 8.2 $ 42.7 The Company periodically modifies the terms of loans/finance receivables in response to borrowers’ difficulties. Modifications that include a financial concession to the borrower, which other- wise would not have been considered, are accounted for as troubled debt restructurings (“TDRs”). For those accounts that were modified but were not considered to be TDRs, it was determined that no concessions had been granted by CIT to the borrower. Borrower compliance with the modified terms is the primary measurement that we use to determine the success of these programs. The tables that follow reflect loan carrying values of accounts that have been modified, excluding PCI loans. Troubled Debt Restructurings and Modifications at December 31 (dollars in millions) Troubled Debt Restructurings Deferral of principal and/or interest Covenant relief and other Total TDRs Percent non accrual Modifications(1) Extended maturity Covenant relief Interest rate increase Other Total Modifications Percent non-accrual 2015 2014 2013 % Compliant % Compliant % Compliant $ 5.4 34.8 $ 40.2 63% $ 0.2 23.1 9.3 218.4 $251.0 16% 99% 88% 90% 100% 83% 100% 100% 98% $ 6.0 11.2 $ 17.2 75% $ 0.1 70.9 25.1 58.3 $154.4 10% 96% 83% 88% 100% 100% 100% 100% 100% $194.6 26.3 $220.9 33% $ 14.9 50.6 21.8 62.6 $149.9 23% 99% 74% 96% 37% 100% 100% 87% 89% (1) Table depicts the predominant element of each modification, which may contain several of the characteristics listed. The increase in modifications reflects the addition of a few larger accounts. Purchased Credit-Impaired Loans PCI loan portfolios 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. PCI loans, TDRs and other credit quality information is included in Note 3 — Loans in Item 8. Financial Statements and Supple- mentary Data. See also Note 1 — Business and Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data. Item 7: Management’s Discussion and Analysis 58 CIT ANNUAL REPORT 2015 NON-INTEREST INCOME As presented in the following table, Non-interest Income includes Rental Income on Operating Leases and Other Income. Other income was impacted by the inclusion of OneWest Bank activity for five months during 2015. The following discussion is on a consolidated basis; Non-interest income is also discussed in each of the individual segments in Results By Business Segment. Non-interest Income (dollars in millions) Rental income on operating leases Other Income: Factoring commissions Fee revenues Gains on sales of leasing equipment Gain on investments Loss on OREO sales Net (losses) gains on derivatives and foreign currency exchange (Loss) gains on loan and portfolio sales Impairment on assets held for sale Other revenues Total other income Total non-interest income Non-interest Income includes Rental Income on Operating Leases and Other Income. Rental income on operating leases from equipment we lease is generated largely in the TIF segment and recognized principally on a straight line basis over the lease term. Rental income is dis- cussed in “Net Finance Revenues” and “Results by Business Segment”. See also Note 6 — Operating Lease Equipment in Item 8 Financial Statements and Supplementary Data for addi- tional information on operating leases. Other income declined in 2015 and 2014 reflecting the following: Factoring commissions declined slightly, reflecting the change in the underlying portfolio mix and a decline in factoring volume. Factoring volume was $25.8 billion in 2015, a decrease from $26.7 billion in 2014 and comparable to $25.7 billion for 2013. Fee revenues include fees on lines of credit and letters of credit, capital markets-related fees, agent and advisory fees, and servic- ing fees for the assets that we sell, but for which we retain servicing. As a result of the acquisition, banking fee products expanded and included items such as cash management fees and account fees but had little impact in the year. Fee revenues are mainly driven by our NAB segment. Gains on sales of leasing equipment resulted from the sale of approximately $1.2 billion of leasing equipment in each of 2015, 2014 and 2013. Gains as a percentage of equipment sold in 2015 approximated the prior year and decreased from the 2013 per- centage and will vary based on the type and age of equipment sold. Equipment sales for 2015 included $0.9 billion in TIF assets, and $0.3 billion in NAB assets. Equipment sales for 2014 included $0.8 billion in TIF and over $0.3 billion in NAB. Equipment sales for 2013 included $0.9 billion in TIF assets and $0.3 billion in NAB Years Ended December 31, 2015 $2,152.5 2014 $2,093.0 2013 $1,897.4 116.5 108.6 101.1 0.9 (5.4) (32.9) (47.3) (59.6) 37.6 219.5 120.2 93.1 98.4 39.0 – (37.8) 34.3 (100.7) 58.9 305.4 122.3 101.5 130.5 8.2 – 1.0 48.8 (124.0) 93.0 381.3 $2,372.0 $2,398.4 $2,278.7 assets. TIF sold approximately $450 million and $330 million of aircraft to TC-CIT Aviation, a joint venture with Century Tokyo Leasing, in 2015 and 2014, respectively. Gains on investments primarily reflected sales of equity invest- ments that were received as part of a lending transaction or, in some cases, a workout situation. The gains were mostly in NAB. Loss on OREO sales reflects adjustments to the carrying value of Other Real Estate Owned (OREO) assets. OREO properties were acquired in the OneWest Transaction and pertain to foreclosures in the mortgage portfolios. (Losses) gains on derivatives and foreign currency exchange includes transactional foreign currency movements that resulted in losses of $112 million in 2015 driven by the strengthening of the U.S. currency against the Canadian dollar, Euro and U.K. Pound Sterling, losses of $133 million in 2014, and losses of $14 million in 2013. The impact of these transactional foreign currency movements was offset by gains of $121 million in 2015, $124 mil- lion in 2014 and $20 million in 2013 on derivatives that economically hedge foreign currency movements and other exposures. Valuation of the derivatives within the GSI facility resulted in losses of $30 million in 2015, $15 million for 2014, and $4 million for 2013. The increases primarily reflected the higher unused por- tion of the facility. In addition, there were losses of $12 million, $14 million and $1 million in 2015, 2014 and 2013, respectively, on the realization of cumulative translation adjustment (“CTA”) amounts from AOCI due to translational adjustments related to liquidating entities. As of December 31, 2015, there was approximately $10 million of CTA losses included in accumulated other comprehensive loss in CIT ANNUAL REPORT 2015 59 the Consolidated Balance Sheet related to the U.K., which was sold in January 2016. In conjunction with the closing of the trans- actions, certain CTAs will be recognized as a reduction to income, with the pre-tax amount charged to other income and the tax effect in the provision for income taxes. The CTA amounts will fluctuate until the transactions are completed. For additional information on the impact of derivatives on the income state- ment, refer to Note 11 — Derivative Financial Instruments in Item 8 Financial Statements and Supplementary Data. (Losses) gains on loan and portfolio sales in 2015 were signifi- cantly impacted by $69 million of losses in NSP, primarily due to the realization of CTA losses of approximately $70 million related to the sales of the Mexico and Brazil businesses, partially offset by gains on sales volume of $0.8 billion in NAB, and a small amount in TIF. The prior year sales volume totaled $1.4 billion, which included $0.5 billion in each of TIF and NAB and over $0.4 billion in NSP. TIF activity in 2014 was primarily due to the sale of the U.K. corporate lending portfolio (gain of $11 million) and 2014 NSP sales were primarily due to the SBL sale (gains on which were minimal). The 2013 sales volume totaled $0.9 billion, which included $0.6 billion in NSP, and over $0.1 billion in both NAB and TIF. Over 80% of 2013 gains related to NSP and included gains from the sale of the Dell Europe portfolio. Impairment on assets held for sale in 2015 were driven by charges on the Mexico and Brazil portfolios held for sale in NSP, the trans- fer of the Canada portfolio to AHFS and an impairment of associated goodwill in NAB, and international portfolios in TIF. Impairment charges in 2014 included $70 million for NSP identi- fied as subscale platforms and $31 million from TIF. In 2014 TIF charges include over $19 million related to commercial aircraft operating lease equipment held for sale and the remainder related to the transfer of the U.K. portfolio to AHFS. The 2013 amount included $105 million of charges related to NSP and $19 million for TIF operating lease equipment (mostly aerospace related). NSP activity included $59 million of charges related to the Dell Europe portfolio operating lease equipment and the remaining 2013 NSP impairment related mostly to the interna- tional platform rationalization. Impairment charges are also recorded on operating lease equipment in AHFS. When an oper- ating lease asset is classified as held for sale, depreciation expense is suspended and the asset is evaluated for impairment with any such charge recorded in other income. (See Other Expenses for related discussion on depreciation on operating lease equipment.) Other revenues included items that are more episodic in nature, such as gains on work-out related claims, proceeds received in excess of carrying value on non-accrual accounts held for sale, which were repaid or had another workout resolution, insurance proceeds in excess of carrying value on damaged leased equip- ment, and income from joint ventures. The 2013 amount included gains on workout related claims of $19 million in NAB and $13 million in TIF. Other revenue also includes certain recoveries not part of the provision for credit losses, which totaled $17 million in 2015, $20 million in 2014 and $22 million in 2013. The prior year balances also include accretion of a counterparty receivable of $11 million in 2014 and $9 million in 2013. Item 7: Management’s Discussion and Analysis 60 CIT ANNUAL REPORT 2015 EXPENSES As discussed below, certain operating expenses were impacted by the inclusion of OneWest Bank activity for five months during 2015. Non-Interest Expense (dollars in millions) Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses: Compensation and benefits Professional fees Technology Net occupancy expense Advertising and marketing Other Operating expenses, excluding restructuring costs and intangible asset amortization Provision for severance and facilities exiting activities Intangible assets amortization Total operating expenses Loss on debt extinguishments Total non-interest expenses Headcount Years Ended December 31, 2014 $ 615.7 196.8 2013 $ 540.6 163.1 533.8 80.6 85.2 35.0 33.7 140.7 909.0 31.4 1.4 941.8 3.5 535.4 69.1 83.3 35.3 25.2 185.0 933.3 36.9 – 970.2 – $1,757.8 3,360 $1,673.9 3,240 2015 $ 640.5 231.0 594.0 141.0 109.8 50.7 31.3 170.0 1,096.8 58.2 13.3 1,168.3 2.6 $2,042.4 4,900 Operating expenses excluding restructuring costs and intangible asset amortization as a % of AEA(1) Net efficiency ratio(2) 52.7% (1) Operating expenses excluding restructuring costs and intangible asset amortization as a % of AEA is a non-GAAP measure; see “Non-GAAP Financial Mea- 57.4% 2.48% 2.25% 2.23% 52.7% surements” for a reconciliation of non-GAAP to GAAP financial information. (2) Net efficiency ratio is a non-GAAP measurement used by management to measure operating expenses (before restructuring costs and intangible amortiza- tion) to the level of total net revenues. See “Non-GAAP Financial Measurements” for a reconciliation of non-GAAP to GAAP financial information. Depreciation on operating lease equipment is recognized on owned equipment over the lease term or estimated useful life of the asset. Depreciation expense is primarily driven by the TIF operating lease equipment portfolio, which includes long-lived assets such as aircraft and railcars. To a lesser extent, depreciation expense includes amounts on smaller ticket equipment, such as office equipment. Impairments recorded on equipment held in portfolio are reported as depreciation expense. AHFS also impacts the balance, as depreciation expense is suspended on operating lease equipment once it is transferred to AHFS. The trend of increasing depreciation expense reflects the grow- ing portfolio of operating lease equipment. Depreciation expense is discussed further in “Net Finance Revenues,” as it is a component of our asset margin. See “Non-interest Income” for impairment charges on operating lease equipment classified as held for sale. Maintenance and other operating lease expenses primarily relate to equipment ownership and leasing costs in TIF. The majority of the maintenance expenses are related to the railcar fleet, while the majority of operating lease expenses are related to aircraft. CIT Rail provides railcars primarily pursuant to full-service lease contracts under which CIT Rail as lessor is responsible for railcar maintenance and repair. Maintenance expenses on railcars increased in 2015 on the growing portfolio with increased costs associated with end of lease railcar returns and increased Rail- road Interchange repair expenses. Under our aircraft leases, the lessee is generally responsible for normal maintenance and repairs, airframe and engine overhauls, compliance with airworthiness directives, and compliance with return conditions of aircraft on lease. As a result, aircraft operat- ing lease expenses primarily relate to transition costs incurred in connection with re-leasing an aircraft. In Aerospace, during the 2015 fourth quarter a few aircraft were returned that required higher transition costs to be incurred to re-lease aircraft. The increase in maintenance and other operating lease expenses in 2014 from 2013 reflected the growing rail portfolio. Operating expenses increased in 2015, mostly reflecting the acquisition of OneWest Bank and the associated five months of expenses. In addition, 2015 included elevated transaction costs to close the acquisition (included primarily in professional fees) and an increase in FDIC insurance costs resulting from the acqui- sition, partially offset by savings from the completion of the Mexico business sale in 2015. We anticipate certain expenses, such as compensation and benefits, will increase in 2016 as this will include an entire year of OneWest Bank employees, as com- pared to five months in the current year. Operating expenses decreased in 2014 from 2013, due to the 2013 Tyco International Ltd. (“Tyco”) tax agreement settlement charge of $50 million, dis- cussed below in Other expenses. Absent that charge, operating expenses increased by 2%, which included integration costs and additional employee costs related to the Direct Capital and Nacco acquisitions. Operating expenses reflect the following changes: (1) Compensation and benefits increased in 2015, reflecting the impact of the net increase of 1,540 employees, primarily asso- ciated with the OneWest Bank acquisition. Operating expenses had decreased in 2014 as progress on various expense initiatives was partly offset by increased costs related to the acquisitions. Headcount was up in 2015 as noted above, while also up at December 31, 2014, driven by the Direct Capital and Nacco acquisitions. See Note 20 — Retire- ment, Postretirement and Other Benefit Plans in Item 8. Financial Statements and Supplementary Data. (2) Professional fees include legal and other professional fees, such as tax, audit, and consulting services. The 2015 and 2014 increases resulted from acquisitions, including $24 million in transaction costs in the 2015 third quarter related to the One- West Transaction, additional other integration related costs, and exits of our non-strategic portfolios. (3) Technology costs increased in 2015, primarily reflecting amounts incurred to integrate OneWest Bank. (4) Net Occupancy expenses were up in 2015 reflecting the added costs associated with OneWest Bank, which included 70 branch locations. (5) Advertising and marketing expenses include costs associated with raising deposits. Bank advertising and marketing costs INCOME TAXES Income Tax Data (dollars in millions) Provision for income taxes, before discrete items Discrete items Provision for income taxes Effective tax rate CIT ANNUAL REPORT 2015 61 have increased in conjunction with the growth of CIT Bank. Advertising and marketing costs in the Bank totaled $22 mil- lion in 2015, $25 million in 2014, and $15 million in 2013. (6) Provision for severance and facilities exiting activities reflects costs associated with various organization efficiency initia- tives. Restructuring costs in 2015 mostly relate to severance related to streamlining the senior management structure, mainly the result of the OneWest Bank acquisition. The 2014 charges were primarily severance costs related to the termina- tion of approximately 150 employees. The facility exiting activities were minor in comparison. See Note 27 — Sever- ance and Facility Exiting Liabilities for additional information in Item 8. Financial Statements and Supplementary Data. (7) Amortization of intangible assets increased, primarily reflect- ing five months of amortization of the intangible assets recorded in the OneWest Bank acquisition. See Note 26 — Goodwill and Intangible Assets in Item 8. Financial State- ments and Supplementary Data, which displays the intangible assets by type and segment, and describes the accounting methodologies. (8) Other expenses include items such as travel and entertain- ment, insurance, FDIC costs, office equipment and supplies costs and taxes other than income taxes. Other expenses increased in 2015 primarily due to five months of OneWest Bank activity and declined in 2014 primarily due to the 2013 $50 million expense for the Tyco tax agreement settlement. In 2014, other expenses also include increased Bank deposit insurance costs. Loss on debt extinguishments for 2014 primarily related to early extinguishments of unsecured debt maturing in February 2015. Years Ended December 31, 2015 $ 135.8 (624.2) $(488.4) 2014 $ 47.4 (445.3) $(397.9) 2013 $54.4 29.5 $83.9 (84.5)% (58.4)% 11.4% The Company’s 2015 income tax benefit from continuing opera- tions is $488.4 million. This compares to an income tax benefit of $397.9 million in 2014 and an income tax provision of $83.9 mil- lion in 2013. The income tax provision before impact of discrete items was higher this year, as compared to the prior years, pri- marily the consequence of the partial release of the domestic valuation allowance on the net deferred tax assets (“DTA”) in 2014 resulting in the recognition in 2015 of deferred federal and state income tax expense on domestic earnings. The current year tax provision reflected federal and state income taxes in the U.S. as well as taxes on earnings of certain international operations. Included in the discrete tax benefit of $624.2 million for the cur- rent year is: - $647 million tax benefit corresponding to a reduction to the U.S. federal DTA valuation allowance after considering the impact on earnings of the OneWest acquisition to support the Company’s ability to utilize the U.S. federal net operating losses, - $29 million tax expense including interest and penalties related to an uncertain tax position taken on certain prior year interna- tional tax returns, Item 7: Management’s Discussion and Analysis 62 CIT ANNUAL REPORT 2015 - $28 million tax expense related to establishment of domestic and international deferred tax liabilities due to Management’s decision to no longer assert its intent to indefinitely reinvest its unremitted earnings in China, - $18 million tax benefit including interest and penalties related to changes in uncertain tax positions from resolution of open tax matters and closure of statutes, and - $9 million tax benefit corresponding to a reduction of certain tax reserves upon the receipt of a favorable tax ruling on an uncertain tax position taken on prior years’ tax returns. The 2014 income tax provision of $47.4 million, excluding discrete items, reflected income tax expense on the earnings of certain international operations and state income tax expense in the U.S. Included in the prior year net discrete tax benefits of $445.3 million was a $375 million tax benefit relating to the reduc- tion to the U.S. net federal DTA valuation allowance, a $44 million reduction to the valuation allowances on certain international net DTAs and approximately a $30 million tax benefit related to an adjustment to the U.S. federal and state valuation allowances due to the acquisition of Direct Capital, offset partially by other mis- cellaneous net tax expense items. The 2013 income tax provision of $83.9 million reflected income tax expense on the earnings of certain international operations and state income tax expense in the U.S. Included in the 2013 tax provision was approximately $30 million of net discrete tax expense that primarily related to the establishment of valuation allowances against certain international net DTAs due to certain international platform rationalizations, and deferred tax expense due to the sale of a leverage lease. The discrete tax expense items were partially offset by incremental tax benefits associated with favorable settlements of prior year international tax audits. The change in the effective tax rate each period is impacted by a number of factors, including the relative mix of domestic and international earnings, adjustments to the valuation allowances, and discrete items. The actual year-end 2015 effective tax rate may vary from near term future periods due to the changes in these factors. The determination of whether or not to maintain the valuation allowances on certain reporting entities’ DTAs requires significant judgment and an analysis of all positive and negative evidence to determine whether it is more likely than not that these future benefits will be realized. ASC 740-10-30-18 states that “future realization of the tax benefit of an existing deductible temporary difference or NOL carry-forward ultimately depends on the exis- tence of sufficient taxable income within the carryback and carry- forward periods available under the tax law.” As such, the Company considered the following potential sources of taxable income in its assessment of a reporting entity’s ability to recog- nize its net DTA: - Taxable income in carryback years, - Future reversals of existing taxable temporary differences (deferred tax liabilities), - Prudent and feasible tax planning strategies, and - Future taxable income forecasts. Through the second quarter of 2014, the Company generally maintained a full valuation allowance against its net DTAs. During the third quarter of 2014, management concluded that it was more likely than not that the Company will generate sufficient future taxable income within the appli- cable carry-forward periods to realize $375 million of its U.S. net federal DTAs. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evi- dence, which included consideration of: - The U.S. group transitioned into a 3-year (12 quarter) cumula- tive normalized income position in the third quarter of 2014, resulting in the Company’s ability to significantly increase the reliance on future taxable income forecasts. - Management’s long-term forecast of future U.S. taxable income supporting partial utilization of the U.S. federal NOLs prior to their expiration, and - U.S. federal NOLs not expiring until 2027 through 2033. The forecast of future taxable income for the Company reflects a long-term view of growth and returns that management believes is more likely than not of being realized. For the U.S. state valuation allowance, the Company analyzed the state net operating loss carry-forwards for each reporting entity to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the existing valuation allow- ance was still required on the U.S. state DTAs on net operating loss carry-forwards. Accordingly, no discrete adjustment was made to the U.S. State valuation allowance in 2014. The negative evidence sup- porting this conclusion was as follows: - Certain separate U.S. state filing entities remaining in a three year cumulative loss, and - State NOLs expiration periods varying in time. Additionally, during 2014, the Company reduced the U.S. federal and state valuation allowances in the normal course as the Com- pany recognized U.S. taxable income. This taxable income reduced the DTA on NOLs, and, when combined with a concur- rent increase in net deferred tax liabilities, which are mainly related to accelerated tax depreciation on the operating lease portfolios, resulted in a reduction in the net DTA and correspond- ing reduction in the valuation allowance. This net reduction was further offset by favorable IRS audit adjustments and the favor- able resolution of an uncertain tax position related to the computation of cancellation of debt income “CODI” coming out of the 2009 bankruptcy, which resulted in adjustments to the NOLs. As of December 31, 2014, the Company retained a valua- tion allowance of $1.0 billion against its U.S. net DTAs, of which approximately $0.7 billion was against its DTA on the U.S. federal NOLs and $0.3 billion was against its DTA on the U.S. state NOLs. The ability to recognize the remaining valuation allowances against the DTAs on the U.S. federal and state NOLs, and capital loss carry-forwards was evaluated on a quarterly basis to deter- mine if there were any significant events that affected our ability to utilize these DTAs. If events were identified that affected our ability to utilize our DTAs, the analysis was updated to determine if any adjustments to the valuation allowances were required. Such events included acquisitions that support the Company’s long-term business strategies while also enabling it to accelerate the utilization of its net operating losses, as evidenced by the acquisition of Direct Capital Corporation in 2014 and the acquisi- tion of OneWest Bank in 2015. During the third quarter of 2015, Management updated the Com- pany’s long-term forecast of future U.S. federal taxable income to include the anticipated impact of the OneWest Bank acquisition. The updated long-term forecast supports the utilization of all of the U.S. federal DTAs (including those relating to the NOLs prior to their expiration). Accordingly, Management concluded that it is more likely than not that the Company will generate sufficient future taxable income within the applicable carry-forward periods to enable the Company to reverse the remaining $690 million of U.S. federal valuation allowance, $647 million of which was recorded as a discrete item in the third quarter, and the remain- der of which was included in determining the annual effective tax rate as normal course in the third and fourth quarters of 2015 as the Company recognized additional U.S. taxable income related to the OneWest Bank acquisition. The Company also evaluated the impact of the OneWest Bank acquisition on its ability to utilize the NOLs of its state income tax reporting entities and concluded that no additional reduction to the U.S. state valuation allowance was required in 2015. These state income tax reporting entities include both combined uni- tary state income tax reporting entities and separate state income tax reporting entities in various jurisdictions. The Com- pany analyzed the state net operating loss carry-forwards for each of these reporting entities to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the valuation allowance was still required on U.S. state DTAs on certain net operating loss carry-forwards. The Company retained a valuation allowance of $250 million against the DTA on the U.S. state NOLs at December 31, 2015. The Company maintained a valuation allowance of $91 million against certain non-U.S. reporting entities’ net DTAs at December 31, 2015. The reduction from the prior year balance of $141 million was primarily attributable to the sale of various inter- national entities resulting in the transfer of their respective DTAs CIT ANNUAL REPORT 2015 63 and associated valuation allowances, and the write-off of approxi- mately $28 million of DTAs for certain reporting entities due to the remote likelihood that they will ever utilize their respective DTAs. In January 2016, the Company sold its UK equipment leas- ing business. Thus, in the first quarter of 2016, there will be a reduction of approximately $70 million to the respective UK reporting entities’ net DTAs along with their associated valuation allowances. In the evaluation process related to the net DTAs of the Company’s other international reporting entities, uncertain- ties surrounding the future international business operations have made it challenging to reliably project future taxable income. Management will continue to assess the forecast of future taxable income as the business plans for these international reporting entities evolve and evaluate potential tax planning strategies to utilize these net DTAs. Post-2015, the Company’s ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation allowances may be adjusted accordingly. Management expects the 2016 global effective tax rate to be in the range of 30-35%. However, there will be a minimal impact on cash taxes paid until the related NOL carry-forward is fully uti- lized. In addition, while GAAP equity increased as a result of the recognition of net DTAs corresponding to the release of the aforementioned valuation allowances, there was minimal benefit on regulatory capital. See Note 19 — Income Taxes in Item 8. Financial Statements and Supplementary Data for detailed discussion on the Company’s domestic and foreign reporting entities’ net DTAs, inclusive of the DTAs related to the net operating losses (“NOLs”) in these entities and their respective valuation allowance analysis. Item 7: Management’s Discussion and Analysis 64 CIT ANNUAL REPORT 2015 RESULTS BY BUSINESS SEGMENT SEGMENT REPORTING UPDATES Operations of the acquired OneWest Bank are included with the activities within the NAB segment (previously North American Commercial Finance or “NACF”) and in a new segment, LCM. See Background for detailed summary of segment changes and Note 2 — Acquisition and Disposition Activities and Note 25 — Business Segment Information in Item 8. Financial Statements and Supplementary Data. In conjunction with the OneWest Transaction, we changed our definition of AEA to include other revenue generating assets, such as interest-earning cash deposits, investments, and the newly acquired indemnification assets. These additional balances have grown in significance or are new due to the acquisition, and are now included in our determination of AEA, which impacts any metrics that include AEA in their calculation, such as net finance margin. Prior period balances and percentages have been updated to conform to the current period presentation. With the announced changes to CIT management, along with the Company’s exploration of alternatives for the commercial aero- space business, we will further refine our segment reporting effective January 1, 2016. Note 25 — Business Segment Information in Item 8. Financial Statements and Supplementary Data contains additional informa- tion relating to segment reporting. North America Banking (NAB) The NAB segment (the legacy CIT components of which were previously known as NACF, consists of five divisions: Commercial Banking, Commercial Real Estate, Commercial Services, Equip- ment Finance, and Consumer Banking. Revenue is generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities, capital markets transactions and banking services, and commissions earned on factoring and related activities. Commercial Banking (previously known as Corporate Finance) provides a range of lending and deposit products, as well as ancillary services, including cash management and advisory ser- vices, to small and medium size companies. Loans offered are primarily senior secured loans collateralized by accounts receiv- able, inventory, machinery & equipment and/or intangibles that are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature and quality of the collateral, may be referred to as asset-based loans or cash flow loans. Loans are originated through direct relationships, led by individuals with significant experience in their respective indus- tries, or through relationships with private equity sponsors. We provide financing to customers in a wide range of industries, including Commercial & Industrial, Communications & Technol- ogy Finance, Entertainment & Media, Energy, and Healthcare. The division also originates qualified Small Business Administra- tion (“SBA”) 504 loans (generally, for buying a building, ground-up construction, building renovation, or the purchase of heavy machinery and equipment) and 7(a) loans (generally, for working capital or financing leasehold improvements). Addition- ally, the division offers a full suite of deposit and payment solutions to middle market companies and small businesses. Commercial Real Estate provides senior secured commercial real estate loans to developers and other commercial real estate pro- fessionals. We focus on stable, cash flowing properties and originate construction loans to highly experienced and well capi- talized developers. In addition, the OneWest Bank portfolio included multi-family mortgage loans that are being runoff. Commercial Services provides factoring, receivable management products, and secured financing to businesses (our clients, gener- ally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e. sold or assigned to the fac- tor). Although primarily U.S.-based, Commercial Services also conducts business with clients and their customers internationally. Equipment Finance provides leasing and equipment financing solutions to small businesses and middle market companies in a wide range of industries on both a private label and direct basis. We provide financing solutions for our borrowers and lessees, and assist manufacturers and distributors in growing sales, profit- ability and customer loyalty by providing customized, value- added finance solutions to their commercial clients. Our LendEdge platform allows small businesses to access financing through a highly automated credit approval, documentation and funding process. We offer both capital and operating leases. Consumer Banking offers mortgage lending, deposits and private banking services to its customers. The division offers jumbo resi- dential mortgage loans and conforming residential mortgage loans, primarily in Southern California. Mortgage loans are pri- marily originated through leads generated from the retail branch network, private bankers, and the commercial business units. Mortgage Lending includes product specialists, internal sales support and origination processing, structuring and closing. Retail banking is the primary deposit gathering business of the Bank and operates through retail branches and an online direct channel. We offer a broad range of deposit and lending products to meet the needs of our clients (both individuals and small busi- nesses), including checking, savings, certificates of deposit, residential mortgage loans, and investment advisory services. We operate a network of 70 retail branches in Southern California. We also offer banking services to high net worth individuals. NAB – Financial Data and Metrics (dollars in millions) Earnings Summary Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Net finance revenue (NFR) Provision for credit losses Other income Operating expenses CIT ANNUAL REPORT 2015 65 Years Ended December 31, 2015 2014 2013 $ 987.8 $ 832.4 $ 828.6 113.3 1,101.1 (284.9) (82.1) 734.1 (135.2) 267.9 (660.7) 97.4 929.8 (285.4) (81.7) 562.7 (62.0) 318.0 (499.7) 104.0 932.6 (284.3) (75.1) 573.2 (35.5) 306.5 (479.5) Income before provision for income taxes $ 206.1 $ 319.0 $ 364.7 Select Average Balances Average finance receivables (AFR) Average earning assets (AEA)(1) Statistical Data Net finance margin—NFR as a % of AEA Pretax return on AEA New business volume Factoring volume $18,974.1 18,794.7 $15,397.7 15,074.1 $14,040.4 13,605.4 3.91% 1.10% 3.73% 2.12% 4.21% 2.68% $ 7,523.2 $25,839.4 $ 6,201.6 $26,702.5 $ 6,244.9 $25,712.2 (1) AEA is lower than AFR as it is reduced by the average credit balances for factoring clients. As discussed below, 2015 operating results reflected a challeng- ing lending environment and the impact of low interest rates. Business activity increased due to the acquisition of OneWest Bank in the third quarter. The 2015 results include five months of revenues and expenses associated with OneWest Bank, and the average balances include the acquired assets, which were not in the prior period activity and balances. Pre-tax income declined from both 2014 and 2013, as higher credit costs associated with the new business volume and higher reserves related to the energy portfolio, along with lower interest recoveries, offset the benefits of higher earning assets. Trends are further discussed below. Financing and leasing assets totaled $24.1 billion at December 31, 2015, up from $16.2 billion and $15.0 billion at December 31, 2014 and 2013, respectively, due primarily to the acquisition of OneWest Bank, which added approximately $8 billion of loans to NAB as of the acquisition date. Financing and leasing assets at December 31, 2015, totaled $10.0 billion in Commercial Banking, $5.2 billion in Equipment Finance, $5.4 billion in Commercial Real Estate, $2.1 billion in Commercial Services, and $1.4 billion in Consumer Banking. Included in the financing and leasing assets at December 31, 2015 were $1.2 billion that were held for sale, most of which related to the Canada portfolio. New business volume was up from 2014 and 2013, reflecting increases in Equipment Finance and Commercial Real Estate. New business volume was down slightly in 2014 as the decline in Commercial Banking offset the benefit from the acquisition of Direct Capital and the increase in commercial real estate. Factor- ing volume was down from 2014, reflective of mix and market conditions. The vast majority of the U.S. funded loan and lease volume in each of the periods presented was originated in the Bank. At December 31, 2015, 88% of this segment’s financing and leasing assets were in the Bank, which was up from last year, reflecting the acquired assets from OneWest Bank in the Commercial Bank- ing, Commercial Real Estate and Consumer Banking divisions. New business yields on our commercial lending assets were down from the prior year, reflecting competitive pricing pressures. Also, yields on consumer loans, which were acquired during the year, are lower than commercial yields. Highlights included: - NFR increased from 2014 and 2013, as benefits from higher average earning assets and purchase accounting accretion of $72 million, related to the OneWest Bank acquisition, was par- tially offset by lower portfolio yields and a lower level of loan prepayments and interest recoveries. In 2015, asset levels con- tinued to grow, especially driven by the third quarter acquisition. Loan prepayment activity slowed in 2015, and interest recoveries were below 2014. NFM was up from 2014, benefiting from the purchase accounting accretion. - Gross yields were down from 2014 and 2013, mainly reflecting the impact of the acquired assets due to portfolio mix, along with continued pressures on yields, because new business yields were generally below maturing contracts. Gross yields did show some stabilization during the sequential quarters dur- ing 2015 in certain sectors, and also benefited from purchase Item 7: Management’s Discussion and Analysis 66 CIT ANNUAL REPORT 2015 accounting accretion. See Select Segment and Division Margin Metrics table in Net Finance Revenue section. - Other income was down from 2014 and 2013, reflecting the following: - Factoring commissions of $117 million were down slightly from both prior years reflecting lower factoring volume and modest pressure on factoring commission rates due to changes in the portfolio mix and competition. - Gains on asset sales (including receivables, equipment and investments) totaled $51 million in 2015, down from $89 million in 2014, and up from $47 million in 2013. Financing and Leasing assets sold totaled $1.1 billion in 2015, compared to $803 million in 2014 and $439 million in 2013. Gains will vary based on the type of assets sold. Over half of the volume sold occurred in the 2015 final quarter as we rebalanced assets post the OneWest Bank acquisition. - Fee revenue is mainly driven by fees on lines of credit and letters of credit, capital markets-related fees, agent and advisory fees, and servicing fees for the assets we sell but retain servicing. As a result of the acquisition, banking related fees expanded and includes items such as cash management fees and account fees. As a result, fee revenue was $94 million in 2015, up from $81 million in 2014 and $82 million in 2013. Impairments on assets held for sale during 2015 totaled $21 million, primarily from transferring the Canada operations into assets held for sale, compared to $0.1 million in 2014 and none in 2013. - - Non-accrual loans increased to $201 million (0.88% of finance receivables), from $101 million (0.63%) at December 31, 2014 and $147 million (1.00%) at December 31, 2013. The percent did not increase in proportion to the increase in amount due to the additional assets acquired. Non-accruals on consumer accounts were less than $1 million. Non-accruals as a percent of commercial receivables was 0.95% at December 31, 2015. The $135 million provision for credit losses was up from 2014 and 2013, and reflect additional new business volume, reserve build on acquired receivables and higher reserves related to the energy portfolio. Net charge-offs were $111 million (0.58% of average finance receivables) for 2015, compared to $56 million (0.36%) in 2014 and $19 million (0.13%) in 2013. Net charge-offs include $46 million from assets transferred to held for sale in the current year, compared to $18 million in 2014 and $5 million in 2013. The increase reflects transfers to AHFS and sales in the fourth quarter related to portfolio rebalancing and transfer of the Canada portfolio to AHFS in the third quarter. - The increases in operating expenses from 2014 and 2013 are primarily due to the inclusion of costs related to the acquired activities of OneWest Bank. Transportation & International Finance (TIF) TIF includes four divisions: aerospace (commercial air and busi- ness air), rail, maritime finance, and international finance. Revenues generated by TIF include rents collected on leased assets, interest on loans, fees, and gains from assets sold. Aerospace — Commercial Air provides aircraft leasing, lending, asset management, and advisory services for commercial and regional airlines around the world. We own, finance and manage a fleet of approximately 386 aircraft and have about 100 clients in approximately 50 countries. During 2015, management announced it was exploring strategic alternatives for the Commercial Aerospace business, which may be structured as a spinoff or sale. Aerospace — Business Air offers financing and leasing programs for corporate and private owners of business jets. Rail leases railcars and locomotives to railroads and shippers throughout North America and Europe. Our operating lease fleet consists of over 128,000 railcars and 390 locomotives and we serve over 650 customers. Maritime Finance offers secured loans to owners and operators of oceangoing and inland cargo vessels, as well as offshore vessels and drilling rigs. International Finance offers equipment financing, secured lend- ing and leasing to small and middle-market businesses in China and the U.K., both of which were in assets held-for-sale at December 31, 2015. The U.K. portfolio was sold in January 2016. Transportation & International Finance – Financial Data and Metrics (dollars in millions) Earnings Summary Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue (NFR) Provision for credit losses Other income Operating expenses/loss on debt extinguishments Income before provision for income taxes Select Average Balances Average finance receivables (AFR) Average operating leases (AOL) Average earning assets (AEA) Statistical Data CIT ANNUAL REPORT 2015 67 Years Ended December 31, 2015 2014 2013 $ 285.4 $ 289.4 $ 254.9 2,021.7 2,307.1 (645.6) (558.4) (231.0) 872.1 (20.3) 97.1 (293.8) 1,959.9 2,249.3 (650.4) (519.6) (196.8) 882.5 (38.3) 69.9 (301.9) 1,682.4 1,937.3 (585.5) (433.3) (163.0) 755.5 (18.7) 82.2 (255.3) $ 655.1 $ 612.2 $ 563.7 $ 3,591.3 15,027.8 20,321.6 $ 3,571.2 14,255.7 19,330.7 $ 3,078.9 12,195.8 16,359.7 Net finance margin — NFR as a % of AEA 4.29% 4.57% 4.62% Net operating lease revenue — rental income, net of depreciation and maintenance and other operating lease expenses Operating lease margin as a % of AOL Pretax return on AEA New business volume $ 1,232.3 $ 1,243.5 $ 1,086.1 8.20% 3.22% 8.72% 3.17% 8.91% 3.45% $ 4,282.9 $ 5,015.0 $ 3,578.0 Results for 2015 reflect asset growth in our transportation divi- sions, higher costs associated with the air and rail operating lease portfolios, higher other income, continued low credit costs and mixed utilization rates of our aircraft and railcars. Results are dis- cussed further below. We grew financing and leasing assets during 2015, further expanding our aircraft and railcar fleets, and continued building our maritime finance portfolio. Financing and leasing assets grew to $20.8 billion at December 31, 2015, up from $19.0 billion at December 31, 2014 and $16.4 billion at December 31, 2013, as discussed in the following paragraphs. Aerospace financing and leasing assets grew to $11.6 billion from $11.1 billion at December 31, 2014 and $9.7 billion at December 31, 2013. Our owned operating lease commercial port- folio included 284 aircraft, up slightly from December 31, 2014 and 2013, as the purchase of 28 aircraft in 2015, which included 18 order book deliveries, were offset by sales of 23 aircraft, including 10 aircraft sold to TC-CIT Aviation, our joint venture. At December 31, 2015, we manage 24 aircraft for the joint venture. At December 31, 2015, we had 139 aircraft on order from manu- facturers, with deliveries scheduled through 2020. See Note 21 — Commitments in Item 8. Financial Statements and Supplementary Data and Concentrations for further aircraft manufacturer com- mitment data. Rail financing and leasing assets grew to $6.7 billion from $5.8 billion at December 31, 2014 and $4.6 billion at December 31, 2013. We expanded our owned operating lease portfolio by approximately 8,000 railcars during 2015 to over 128,000 at December 31, 2015, reflecting scheduled deliveries from our order book and a portfolio acquisition of approximately 900 rail- cars in the U.K. in the 2015 first quarter. Our owned portfolio approximated 120,000 and 106,000 railcars at December 31, 2014 and 2013, respectively. The 2014 growth in assets and railcars included the impact of the Nacco acquisition, an independent full service railcar lessor in Europe. The purchase included approxi- mately $650 million of assets (operating lease equipment), comprised of more than 9,500 railcars. Absent acquisitions, rail assets are primarily originated through purchase commitments with manufacturers and are also supplemented by spot pur- chases. At December 31, 2015, we had approximately 6,800 railcars on order from manufacturers, with deliveries scheduled through 2018. See Note 21 — Commitments in Item 8. Financial Statements and Supplementary Data and Concentrations for fur- ther railcar manufacturer commitment data. Maritime Finance financing and leasing assets totaled $1.7 bil- lion, up from $1.0 billion at December 31, 2014 and $0.4 billion at December 31, 2013; Item 7: Management’s Discussion and Analysis 68 CIT ANNUAL REPORT 2015 International Finance financing and leasing assets decreased to $0.8 billion, from $1.0 billion at December 31, 2014 and $1.7 billion at December 31, 2013. The 2015 decrease reflects portfolio paydowns while the 2014 decline primarily reflected the sale of the U.K. corporate lending portfolio. All international finance and leasing assets were held for sale at December 31, 2015 and included approximately $0.4 billion related to a U.K. portfolio of equipment finance assets, which were sold in January 2016. The balance consists of our China portfolio. Highlights included: - NFR was down slightly from 2014, as asset growth and lower funding costs were offset by yield compression and higher operating lease equipment expenses. Portfolio growth and lower funding costs in 2014 contributed to the higher NFR over 2013. See Select Segment and Division Margin Metrics table in Net Finance Revenue section. - Gross yields (interest income plus rental income on operating leases as a % of AEA) decreased from 2014 and 2013, reflecting lower rental rates on certain aircraft and lower utilization in rail. See Select Segment and Division Margin Metrics table in Net Finance Revenue section. - Net operating lease revenue, which is a component of NFR, decreased slightly from 2014, as increased rental income from growth in Aerospace and Rail divisions was offset by higher depreciation and maintenance and operating lease expenses. Maintenance and other operating lease expenses primarily relate to the rail portfolio and to a lesser extent aircraft re-leasing. Maintenance and other operating lease expenses was up reflecting elevated transition costs on several aircraft, increased maintenance, freight and storage costs in rail, and growth in the portfolios. Net operating lease revenue also reflects trends in equipment utilization with aircraft utilization improving in the second half of 2015 and railcar utilization declining, a trend that is expected to continue into 2016 due to weakness in demand for certain energy related car types. The decline in the operating lease margin (as a percentage of aver- age operating lease equipment) reflects these trends. Net operating lease revenue increased in 2014 compared to 2013, driven by growth, while operating lease margin declined due to pressure on renewal rates on certain aircraft. - Equipment utilization for commercial aerospace has been con- sistently strong over the 3-year period, and at December 31, 2015, all aircraft were on lease or under a commitment. Rail uti- lization rates strengthened during 2013 through 2014, before beginning to decline in 2015, reflecting pressures mostly from energy related industries. Rail utilization declined from 99% at December 31, 2014 to 96% at December 31, 2015 and further decline is expected. - 2015 new business volume included $2.7 billion of operating lease equipment, including the delivery of 23 aircraft and approximately 9,250 railcars, and $1.6 billion of finance receiv- ables. The 2015 volume was supplemented by a U.K. rail portfolio purchase, which added approximately 900 railcars and approximately $85 million of assets. New business volume for 2014 primarily included the delivery of 37 aircraft and approxi- mately 6,000 railcars, with the vast majority of the rail operating lease volume originated by the Bank, and $2.2 billion of finance receivables. New business volume for 2013 primarily reflected the delivery of 24 aircraft and approximately 5,400 railcars. We have 15 new aircraft deliveries scheduled for 2016, all of which have lease commitments with customers. Approximately 55% of the total railcar order-book have lease commitments. - Other income primarily reflected the following: - Gains on asset sales totaled $75 million in 2015 on $980 million of asset sales, $78 million on $1.3 billion of equipment and receivable sales, and $82 million of gains on $978 million of asset sales in 2013. Gains in 2015 and 2014 include $12 million and $30 million, respectively, on the sale of aircraft to the TC-CIT Aviation joint ventures. Impairment charges on AHFS totaled $16 million and $31 million in 2015 and 2014, respectively, and predominantly related to international portfolios and commercial aircraft, compared to $19 million in 2013, mostly related to commercial aircraft. - - Other income also includes a small amount of fees and other revenue derived from loan commitments, joint ventures and other business activities, as well as periodic items such as a benefit from the termination of a defaulted contract recognized in the prior quarter. Other income included a $13 million benefit related to a work-out related claim in 2013. - Non-accrual loans were $62 million (1.75% of finance receivables) at December 31, 2015, compared to $37 million (1.05%) at December 31, 2014 and $35 million (1.01%) at December 31, 2013 and largely consists of assets in the international portfolio. The provision for credit losses decreased as the elimination of reserves on international assets transferred to AHFS offset reserve build in Maritime. Net charge-offs were $27 million (0.75% of average finance receivables) in 2015, down from $38 million (1.06%) and up from $17 million (0.55%) in 2014 and 2013, respectively. Essentially all of the charge-offs for 2015, 2014 and 2013 were concentrated in the International portfolio. TIF charge-offs in 2015 and 2014 included approximately $27 million and $18 million related to the transfer of receivables to assets held for sale (amounts for 2013 were not significant). - -Operating expenses were down slightly from 2014, and improved as percentages of AEA and total net revenue. Operating expenses increased from 2013, reflecting investments in new initiatives and growth in existing businesses, including the Nacco rail acquisition in 2014. Legacy Consumer Mortgages LCM resulted from the OneWest Transaction; therefore, there are no prior period comparisons. As discussed below, our 2015 oper- ating results reflect five months of revenues and expenses associated with the OneWest Transaction. The Consumer Cov- ered Loans in this segment were previously acquired by OneWest Bank in connection with the lndyMac, First Federal and La Jolla transactions described in the OneWest Transaction Indemnifica- tion Assets section. The FDIC indemnified OneWest Bank against certain future losses sustained on these loans. In conjunction with the OneWest Transaction, CIT may now be reimbursed for losses under the terms of the loss sharing agreements with the FDIC. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., liquidation of collat- eral). Reimbursements approved by the FDIC are usually received within 60 days of submission. See Note 1 — Business and Summary of Significant Accounting Policies and Note 5 — Indemnification Assets in Item 8. Financial Statements and Supplementary Data for accounting and detailed discussions. The following table presents the financial data and metrics since the acquisition on August 3, 2015. Legacy Consumer Mortgages – Financial Data and Metrics (dollars in millions) Earnings Summary Interest income Interest expense Net finance revenue (NFR) Provision for credit losses Other income Operating expenses Year Ended December 31, 2015 $ 152.9 (35.1) 117.8 (5.0) 0.4 (42.9) Income before provision for income taxes $ 70.3 Select Average Balances Average finance receivables (AFR) Average earning assets (AEA) Statistical Data Net finance margin — NFR as a % of AEA Pre-tax return on AEA $2,308.9 2,483.5 4.74% 2.83% CIT ANNUAL REPORT 2015 69 LCM includes the single family residential mortgage loans and reverse mortgage loans acquired in the OneWest Bank acquisi- tion. Pretax results reflect activity since the acquisition date, August 3, 2015. Revenue is primarily generated from interest on loans and includes $52 million of PAA accretion. Gross yield for the portfo- lio was 6.16% for the period of ownership. Other income included pre-acquisition recoveries and fee revenue, partially offset by $5 million of losses on OREO sales. Financing and leasing assets totaled $5.7 billion at the acquisition date, and declined slightly to $5.5 billion at December 31, 2015. LCM includes SFR mortgage loans, totaling $4.6 billion at December 31, 2015, and reverse mortgage loans totaling $0.9 billion. Approximately $5 billion of the LCM receivables are covered by loss share arrangements with the FDIC, resulting in an indemnification asset of approximately $415 million at December 31, 2015, of which approximately $65 million resided with Corporate and Other. The portfolio will continue to run-off, and as a result, at some point, we expect goodwill impairment charges will need to be recorded. Non-accrual loans totaled $5 million and related to SFR loans and there were less than $1 million in net charge-offs. The loans were recorded at fair value upon acquisition, with no associated allow- ance for loan loss. The provision reflected changes in portfolio quality, along with extensions of credit for existing customers since the acquisition. Non-Strategic Portfolios (NSP) NSP consists of portfolios that we no longer consider strategic, all of which were sold as of December 31, 2015. Non-Strategic Portfolios – Financial Data and Metrics (dollars in millions) Earnings Summary Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue (NFR) Provision for credit losses Other income Operating expenses Years Ended December 31, 2015 $ 33.6 $ 17.5 51.1 (29.3) – – 21.8 – (89.4) (33.4) 2014 90.5 35.7 126.2 (82.1) (14.4) – 29.7 0.4 (57.6) (74.6) Loss before provision for income taxes $(101.0) $ (102.1) 2013 $ 157.2 111.0 268.2 (130.2) (32.2) (0.1) 105.7 (10.8) (14.6) (143.1) $ (62.8) $1,128.6 2,101.0 Select Average Balances Average finance receivables (AFR) Average earning assets (AEA) Statistical Data Net finance margin — NFR as a % of AEA New business volume $ – 358.8 $ 151.2 1,192.2 6.08% $ 83.3 2.49% 5.03% $ 216.5 $ 713.0 Item 7: Management’s Discussion and Analysis 70 CIT ANNUAL REPORT 2015 Pre-tax losses in 2015 were driven by currency translation adjustment losses resulting from the sales of the Brazil and Mexico operations and associated portfolios. Pretax losses in 2014 reflected lower asset levels from reduced business activ- ity and lower other income, while 2013 pre-tax results were also impacted by accelerated debt FSA and OID accretion of $5 million, reflecting debt prepayment activities. Financing and leasing assets were reduced to zero during 2015, due to the closing of the Mexico and Brazil sales. Financing and leasing assets were $380 million at December 31, 2014 and $1.3 billion at December 31, 2013. The 2014 year decline reflected the exit from all the sub-scale countries in Asia and Europe, and several in Latin America, as well as our SBL portfolio. During 2013, we completed the sale of the Dell Europe portfolio, approximately $470 million of financing and leasing assets, as well as certain other foreign portfolios. Highlights included: - Net finance revenue (“NFR”) was down, driven by lower earn- ing assets. There was minimal net FSA accretion in 2015 and 2014, while NFR included total net FSA accretion costs of $20 million in 2013. - Other income declined from the prior years, reflecting: - Losses of $65 million (of which $70 million related to CTA losses) on $266 million of receivable and equipment sales, reflecting sales of the Mexico and Brazil portfolios in 2015. A gain of $1 million on $483 million of receivable and equipment sales in 2014, which included approximately $340 million of assets related to the SBL portfolio. Gains totaled $57 million on $656 million of receivable and Corporate and Other — Financial Data (dollars in millions) Earnings Summary Interest income Interest expense Net finance revenue (NFR) Provision for credit losses Other income Operating expenses Loss on debt extinguishments Loss before provision for income taxes - equipment sales in 2013, which included approximately $470 million of assets related to the Dell Europe portfolio sale. Impairment charges recorded on international equipment finance portfolios and operating lease equipment held for sale. Total impairment charges were $23 million for 2015, compared to $70 million and $105 million for 2014 and 2013, respectively. See “Non-interest Income” and “Expenses” for discussions on impairment charges and suspended depreciation on operating lease equipment held for sale. - The remaining balance mostly includes fee revenue, recoveries of loans charged off pre-emergence and loans charged off prior to transfer to held for sale and other revenues. Fee revenue in 2014 and 2013 included servicing fees related to the small business lending portfolio, which totaled $5 million and $11 million, respectively. - Operating expenses were down, primarily reflecting lower cost due to sales. Corporate and Other Certain items are not allocated to operating segments and are included in Corporate & Other. Some of the more significant items include interest income on investment securities, a portion of interest expense primarily related to corporate liquidity costs (interest expense), mark-to-market adjustments on non-qualifying derivatives (other income), restructuring charges for severance and facilities exit activities as well as certain unallocated costs (operating expenses), certain intangible assets amortization expenses (other expenses) and loss on debt extinguishments. Years Ended December 31, 2015 2014 2013 $ 53.2 (108.6) (55.4) – (56.5) (138.6) (1.5) $ 14.2 $ 14.5 (68.3) (54.1) (0.2) (24.9) (65.6) (3.5) (60.9) (46.4) 0.1 7.2 (92.3) – $(252.0) $(148.3) $(131.4) - - Interest income consists of interest and dividend income, pri- marily from investment securities and deposits held at other depository institutions. The 2015 increase reflects additional income from the OneWest Bank acquisition and the investment portfolio now includes a MBS portfolio. Interest expense is allocated to the segments. Interest expense held in Corporate represents amounts in excess of these alloca- tions and amounts related to excess liquidity. - Other income primarily reflects gains and (losses) on deriva- tives, including the GSI facilities and foreign currency exchange. The GSI derivative had a negative mark-to-market of $30 million in 2015, $15 million in 2014 and $4 million in 2013. 2015 also included $9 million related to a write-off of other receivables in connection with the favorable resolution of an uncertain tax position. - Operating expenses reflects salary and general and administra- tive expenses in excess of amounts allocated to the business segments and litigation-related costs, including $50 million in 2013 related to the Tyco tax agreement settlement. Operating expense were elevated in 2015 reflecting closing costs and restructuring charges related to the OneWest Bank acquisition. Operating expenses also included $58 million, $31 million and $37 million related to provision for severance and facilities exit- ing activities during 2015, 2014 and 2013, respectively. CIT ANNUAL REPORT 2015 71 FINANCING AND LEASING ASSETS The following table presents our financing and leasing assets by segment. Financing and Leasing Asset Composition (dollars in millions) December 31, 2015 2014 2013 $ Change 2015 vs 2014 $ Change 2014 vs 2013 North America Banking Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Commercial Banking Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Equipment Finance Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Commercial Real Estate Loans Assets held for sale Financing and leasing assets Commercial Services Loans and factoring receivables Consumer Banking Loans Assets held for sale Financing and leasing assets Transportation & International Finance Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Aerospace Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Rail Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Maritime Finance Loans Assets held for sale Financing and leasing assets International Finance Loans Operating lease equipment, net Assets held for sale Financing and leasing assets $22,701.1 259.0 1,162.2 24,122.3 $15,936.0 265.2 22.8 16,224.0 $14,693.1 240.5 38.2 14,971.8 9,443.4 – 538.8 9,982.2 4,377.5 259.0 562.5 5,199.0 5,305.6 57.0 5,362.6 6,889.9 – 22.8 6,912.7 4,717.3 265.2 – 4,982.5 1,768.6 – 1,768.6 6,831.8 6.2 38.2 6,876.2 4,044.1 234.3 – 4,278.4 1,554.8 – 1,554.8 $6,765.1 (6.2) 1,139.4 7,898.3 2,553.5 – 516.0 3,069.5 (339.8) (6.2) 562.5 216.5 3,537.0 57.0 3,594.0 2,132.5 2,560.2 2,262.4 (427.7) 1,442.1 3.9 1,446.0 3,542.1 16,358.0 889.0 20,789.1 1,762.3 9,765.2 34.7 11,562.2 120.9 6,592.8 0.7 6,714.4 1,658.9 19.5 1,678.4 – – 834.1 834.1 – – – 3,558.9 14,665.2 815.2 19,039.3 1,796.5 8,949.5 391.6 11,137.6 130.0 5,715.2 1.2 5,846.4 1,006.7 19.7 1,026.4 625.7 0.5 402.7 1,028.9 – – – 3,494.4 12,778.5 158.5 16,431.4 1,247.7 8,267.9 148.8 9,664.4 107.2 4,503.9 3.3 4,614.4 412.6 – 412.6 1,726.9 6.7 6.4 1,740.0 1,442.1 3.9 1,446.0 (16.8) 1,692.8 73.8 1,749.8 (34.2) 815.7 (356.9) 424.6 (9.1) 877.6 (0.5) 868.0 652.2 (0.2) 652.0 (625.7) (0.5) 431.4 (194.8) $ 1,242.9 24.7 (15.4) 1,252.2 58.1 (6.2) (15.4) 36.5 673.2 30.9 – 704.1 213.8 – 213.8 297.8 – – – 64.5 1,886.7 656.7 2,607.9 548.8 681.6 242.8 1,473.2 22.8 1,211.3 (2.1) 1,232.0 594.1 19.7 613.8 (1,101.2) (6.2) 396.3 (711.1) Item 7: Management’s Discussion and Analysis 72 CIT ANNUAL REPORT 2015 Financing and Leasing Asset Composition (dollars in millions) (continued) Legacy Consumer Mortgages Loans Assets held for sale Financing and leasing assets Single Family Mortgages Loans Assets held for sale Financing and leasing assets Reverse Mortgages Loans Assets held for sale Financing and leasing assets Non-Strategic Portfolios Loans Operating lease equipment, net Assets held for sale Financing and leasing assets Total financing and leasing assets December 31, 2015 2014 2013 $ Change 2015 vs 2014 $ Change 2014 vs 2013 5,428.5 41.2 5,469.7 4,531.2 21.1 4,552.3 897.3 20.1 917.4 – – – – – – – – – – – – – – – – – – – – – – $50,381.1 0.1 – 380.1 380.2 $35,643.5 441.7 16.4 806.7 1,264.8 $32,668.0 5,428.5 41.2 5,469.7 4,531.2 21.1 4,552.3 897.3 20.1 917.4 (0.1) – (380.1) (380.2) $14,737.6 – – – – – – – – – (441.6) (16.4) (426.6) (884.6) $2,975.5 Financing and leasing assets grew significantly in 2015, reflecting the OneWest Transaction, which included $13.6 billion of loans at the acquisition date and the following: TIF growth in 2015 included each of the transportation divisions, as we increased our commercial aircraft and rail portfolios, and grew our maritime finance business. Growth was partially offset by lower financing and leasing assets in International Finance, as those portfolios have been deemphasized and were included in AHFS. Growth in TIF during 2014 was driven by the transportation divisions, reflecting solid new business volume, and was supple- mented by the acquisition of Nacco that added approximately $650 million of operating lease equipment. Assets held for sale at December 31, 2015 largely consists of the U.K. equipment finance portfolio, which was sold on January 1, 2016, and the China loan portfolio. NAB grew significantly, reflecting the OneWest Bank acquisition. Portfolios were added to Commercial Banking and Commercial Real Estate, while a new Consumer Banking division was added and includes mortgage loan products. Absent the acquisition, new business originations was offset by sales of select assets, mostly in the final quarter of 2015 as we rebalanced our portfolio, portfolio collections and prepayments, and lower factoring receivables in Commercial Services. Growth in NAB in 2014 was led by Equipment Finance, which included the acquisition of Direct Capital that increased loans by approximately $540 million at the time of acquisition in the third quarter. Commercial Ser- vices and Real Estate Finance grew in 2014. Assets held for sale primarily reflect the Canada portfolio. LCM is a new segment that includes consumer covered loans comprised of SFRs and reverse mortgages that were acquired in the OneWest Bank acquisition. The balance is down slightly from the acquisition date as this segment is running off. The decline in NSP primarily reflected the sales of the Mexico business in the third quarter and the Brazil business in the fourth quarter. The 2014 decline in NSP primarily reflected sales, which included the remaining SBL portfolio. Financing and leasing asset trends are also discussed in the respective segment descriptions in “Results by Business Segment”. The following table reflects the contractual maturities of our finance receivables, which excludes certain items such as purchase account- ing adjustments discounts. Contractual Maturities of Loans at December 31, 2015 (dollars in millions) CIT ANNUAL REPORT 2015 73 Fixed-rate 1 year or less Year 2 Year 3 Year 4 Year 5 2-5 years After 5 years Total fixed-rate Adjustable-rate 1 year or less Year 2 Year 3 Year 4 Year 5 2-5 years After 5 years Total adjustable-rate Total Commercial Consumer U.S. Foreign U.S. Foreign Total $ 3,401.8 $ 130.7 $ 73.2 $ 0.1 $ 3,605.8 1,207.2 869.6 469.4 331.2 2,877.4 364.1 6,643.3 3,181.6 2,632.8 2,899.5 2,516.2 1,723.6 9,772.1 2,577.8 15,531.5 $22,174.8 38.8 32.8 92.4 24.9 188.9 188.9 508.5 350.4 398.2 391.1 533.0 395.1 1,717.4 435.9 2,503.7 53.9 55.8 56.5 58.4 224.6 2,559.4 2,857.2 94.6 85.2 113.4 117.8 121.3 437.7 5,093.7 5,626.0 $3,012.2 $8,483.2 0.1 0.2 0.2 0.2 0.7 2.2 3.0 0.1 0.1 0.1 0.2 0.2 0.6 11.8 12.5 $15.5 1,300.0 958.4 618.5 414.7 3,291.6 3,114.6 10,012.0 3,626.7 3,116.3 3,404.1 3,167.2 2,240.2 11,927.8 8,119.2 23,673.7 $33,685.7 Item 7: Management’s Discussion and Analysis 74 CIT ANNUAL REPORT 2015 The following table presents the changes to our financing and leasing assets: Financing and Leasing Assets Rollforward (dollars in millions) Transportation & International Finance North America Banking Legacy Consumer Mortgages Balance at December 31, 2012 New business volume Portfolio / business purchases Loan and portfolio sales Equipment sales Depreciation Gross charge-offs Collections and other Balance at December 31, 2013 New business volume Portfolio / business purchases Loan and portfolio sales Equipment sales Depreciation Gross charge-offs Collections and other Balance at December 31, 2014 New business volume Portfolio / business purchases Loan and portfolio sales Equipment sales Depreciation Gross charge-offs Collections and other $14,908.1 $13,277.4 $ 3,578.0 6,244.9 154.3 (103.2) (874.8) (433.3) (26.0) 720.4 (129.4) (309.5) (75.1) (58.3) (771.7) (4,698.6) 16,431.4 14,971.8 5,015.0 6,201.6 649.2 (474.1) (780.5) (519.6) (44.8) 536.6 (460.6) (342.1) (81.7) (75.2) (1,237.3) (4,526.4) 19,039.3 16,224.0 4,282.9 94.8 (85.3) (894.5) (558.4) (35.3) 7,523.2 7,860.7 (791.2) (263.7) (82.1) (129.5) (1,054.4) (6,219.1) Non-Strategic Portfolios Total $2,024.1 $30,209.6 713.0 10,535.9 – (621.0) (34.8) (32.2) (54.3) 874.7 (853.6) (1,219.1) (540.6) (138.6) (730.0) (6,200.3) 1,264.8 32,668.0 216.5 11,433.1 – 1,185.8 (454.2) (1,388.9) (28.3) (14.4) (7.5) (1,150.9) (615.7) (127.5) (596.7) (6,360.4) 380.2 35,643.5 83.3 11,889.4 – – – – – – – – – – – – – – – – – – 5,725.3 – 13,680.8 – – – (1.2) (254.4) (260.2) (1,136.7) (5.4) (1,163.6) – – (640.5) (166.0) (197.9) (7,725.8) Balance at December 31, 2015 $20,789.1 $24,122.3 $5,469.7 $ – $50,381.1 As discussed in the OneWest Transaction section, financing and leasing assets acquired in the OneWest Transaction are reflected in NAB ($7.9 billion) and LCM ($5.7 billion) as of the acquisition date. New business volume in 2015 decreased in TIF from the year-ago, mostly driven by fewer scheduled aircraft deliveries. Increase in NAB new business volumes were driven by Equipment Finance (which included a full year of Direct Capital) and Commercial Real Estate, mainly due to the OneWest Bank acquisition. New busi- ness volume in 2014 increased 9% from 2013, reflecting solid demand for TIF and NAB products and services. TIF 2014 new business volume primarily reflects scheduled aircraft and railcar deliveries, and increased maritime finance lending. NAB main- tained its strong performance from 2013. New business volume was down slightly in NAB, as the decline in Commercial Banking activity, mostly in the commercial and industrial industries, offset the increase in Equipment Finance, which included solid activity from Direct Capital. NSP was down each year as these interna- tional platforms were being sold. Portfolio/business purchases in 2015 included the OneWest Bank acquisition in NAB and Rail portfolios purchased by Nacco. 2014 activity included Nacco in TIF and Direct Capital in NAB during 2014 and a commercial loan portfolio in NAB and a portfolio in TIF during 2013. Loan and portfolio sales in 2015 primarily were in NAB including approximately $0.6 billion in the fourth quarter as we rebalanced assets post the OneWest Bank acquisition. NSP sales reflect the sale of the Mexico and Brazil businesses. Loan and portfolio sales in TIF during 2014 reflect international portfolios, while NAB had various loan sales throughout the year and NSP sales primarily consisted of the small business loan portfolio, along with some international portfolios. NSP 2013 activity reflected sales of cer- tain international platforms and approximately $470 million of Dell Europe receivables. Equipment sales in TIF consisted of aerospace and rail assets in conjunction with its portfolio management activities. The bal- ances in 2015 and 2014 also reflect aircraft sales to the TC-CIT Aviation joint venture. NAB sales reflect assets within Equipment Finance and Commercial Banking, while NSP sales included oper- ating lease equipment in the various international platforms sold over the years, and 2013 included the sale of Dell Europe assets. Portfolio activities are discussed in the respective segment descriptions in “Results by Business Segment”. CIT ANNUAL REPORT 2015 75 CONCENTRATIONS Geographic Concentrations The following table represents CIT’s combined commercial and consumer financing and leasing assets by obligor geography: Total Financing and Leasing Assets by Obligor – Geographic Region (dollars in millions) West Northeast Southwest Southeast Midwest Total U.S. Asia / Pacific Europe Canada Latin America All other countries Total Ten Largest Accounts Our ten largest financing and leasing asset accounts, the vast majority of which are lessors of air and rail assets, in the aggre- gate represented 8.1% of our total financing and leasing assets at December 31, 2015 (the largest account was less than 2.0%). COMMERCIAL CONCENTRATIONS Geographic Concentrations December 31, 2015 December 31, 2014 December 31, 2013 $12,208.3 9,383.2 4,785.5 4,672.3 4,446.3 35,495.6 5,312.0 3,283.3 2,612.6 1,508.3 2,169.3 $50,381.1 24.2% 18.6% 9.5% 9.3% 8.8% 70.4% 10.6% 6.5% 5.2% 3.0% 4.3% 100.0% $ 3,183.1 6,552.0 3,852.8 3,732.9 3,821.6 21,142.4 5,290.9 3,296.4 2,520.6 1,651.7 1,741.5 $35,643.5 8.9% 18.4% 10.8% 10.5% 10.7% 59.3% 14.8% 9.3% 7.1% 4.6% 4.9% 100.0% $ 3,238.6 5,933.1 3,606.9 2,690.2 3,762.5 19,231.3 4,237.4 3,692.4 2,287.0 1,743.1 1,476.8 $32,668.0 9.9% 18.2% 11.1% 8.2% 11.5% 58.9% 13.0% 11.3% 7.0% 5.3% 4.5% 100.0% While the top exposure balance may not have changed signifi- cantly, the decline in proportion reflects the additional financing and leasing assets from the OneWest Transaction. The ten largest financing and leasing asset accounts were 11.1% at December 31, 2014 and 9.8% at December 31, 2013. The following table represents the commercial financing and leasing assets by obligor geography: Commercial Financing and Leasing Assets by Obligor – Geographic Region (dollars in millions) Northeast West Southwest Midwest Southeast Total U.S. Asia / Pacific Europe Canada Latin America All other countries Total December 31, 2015 December 31, 2014 December 31, 2013 $ 8,169.4 7,456.1 4,669.1 4,193.5 4,117.4 28,605.5 5,311.2 3,278.5 2,604.3 1,507.9 2,167.1 $43,474.5 18.8% 17.1% 10.7% 9.7% 9.5% 65.8% 12.2% 7.5% 6.0% 3.5% 5.0% 100.0% $ 6,552.0 3,183.1 3,852.8 3,821.6 3,732.9 21,142.4 5,290.9 3,296.4 2,520.6 1,651.7 1,741.5 $35,643.5 18.4% 8.9% 10.8% 10.7% 10.5% 59.3% 14.8% 9.3% 7.1% 4.6% 4.9% 100.0% $ 5,933.1 3,238.6 3,606.9 3,762.5 2,690.2 19,231.3 4,237.4 3,692.4 2,287.0 1,743.1 1,476.8 $32,668.0 18.2% 9.9% 11.1% 11.5% 8.2% 58.9% 13.0% 11.3% 7.0% 5.3% 4.5% 100.0% Item 7: Management’s Discussion and Analysis 76 CIT ANNUAL REPORT 2015 The following table summarizes both state concentrations greater than 5.0% and international country concentrations in excess of 1.0% of our financing and leasing assets: Commercial Financing and Leasing Assets by Obligor – State and Country (dollars in millions) State California Texas New York All other states Total U.S. Country Canada China U.K. Marshall Islands Australia Mexico Spain Philippines All other countries Total International December 31, 2015 December 31, 2014 December 31, 2013 $ 5,311.1 3,989.9 2,870.7 16,433.8 $28,605.5 $ 2,604.3 982.6 949.8 882.0 842.9 676.0 560.1 485.7 6,885.6 $14,869.0 12.2% 9.2% 6.6% 37.8% 65.8% 6.0% 2.3% 2.2% 2.0% 1.9% 1.6% 1.3% 1.1% 15.8% 34.2% $ 1,488.0 3,261.4 2,492.3 13,900.7 $21,142.4 $ 2,520.6 1,043.7 855.3 682.2 1,029.1 670.7 339.4 511.3 6,848.8 $14,501.1 4.2% 9.1% 7.0% 39.0% 59.3% 7.1% 2.9% 2.4% 1.9% 2.9% 1.9% 1.0% 1.4% 19.2% 40.7% $ 1,609.6 3,022.4 2,323.3 12,276.0 $19,231.3 $ 2,287.0 969.1 1,166.5 269.2 974.4 819.9 450.7 255.9 6,244.0 $13,436.7 4.9% 9.3% 7.1% 37.6% 58.9% 7.0% 2.9% 3.6% 0.8% 3.0% 2.5% 1.4% 0.8% 19.1% 41.1% Cross-Border Transactions Cross-border transactions reflect monetary claims on borrowers domiciled in foreign countries and primarily include cash depos- ited with foreign banks and receivables from residents of a Cross-border Outstandings as of December 31 (dollars in millions) foreign country, reduced by amounts funded in the same currency and recorded in the same jurisdiction. The following table includes all countries that we have cross-border claims of 0.75% or greater of total consolidated assets at December 31, 2015: 2015 2014 2013 Banks(**) Government Other Net Local Country Claims Total Exposure Exposure as a Percentage of Total Assets Total Exposure Exposure as a Percentage of Total Assets Total Exposure Exposure as a Percentage of Total Assets $ 9.0 453.0 − − − − − $ − $122.0 $839.0 $970.0 1.44% $1,397.0 2.92% $1,784.0 − − − − − − 68.0 812.0 104.0 − − − 383.0 − 574.0 − − − 904.0 812.0 678.0 (*) (*) (*) 1.34% 1.20% 1.00% − − − 1,129.0 687.0 853.0 426.0 (*) − 2.36% 1.43% 1.78% 0.89% − − 1,317.0 − 881.0 586.0 442.0 406.0 3.78% 2.79% − 1.87% 1.24% 0.94% 0.86% Country Canada United Kingdom Marshall Islands China France Germany Mexico (*) Cross-border outstandings were less than 0.75% of total consolidated assets (**) Claims from Bank counterparts include claims outstanding from derivative products. CIT ANNUAL REPORT 2015 77 Industry Concentrations The following table represents financing and leasing assets by industry of obligor: Commercial Financing and Leasing Assets by Obligor – Industry (dollars in millions) Commercial airlines (including regional airlines)(1) Manufacturing(2) Real Estate Transportation(3) Service industries Retail(4) Wholesale Energy and utilities Oil and gas extraction / services Healthcare Finance and insurance Other (no industry greater than 2%) Total December 31, 2015 December 31, 2014 December 31, 2013 $10,728.3 4,951.3 4,895.4 4,586.5 3,441.2 2,513.4 2,310.5 2,091.5 1,871.0 1,223.4 1,128.2 3,733.8 $43,474.5 24.7% 11.4% 11.3% 10.5% 7.9% 5.8% 5.3% 4.8% 4.3% 2.8% 2.6% 8.6% 100.0% $10,313.7 4,702.6 1,590.5 3,361.7 2,553.6 3,187.8 1,710.3 1,513.2 1,483.4 1,159.7 782.9 3,284.1 $35,643.5 28.9% 13.2% 4.5% 9.5% 7.2% 8.9% 4.8% 4.2% 4.2% 3.3% 2.2% 9.1% 100.0% $ 8,972.4 4,311.9 1,351.4 2,515.9 3,123.4 3,063.1 1,394.1 1,384.6 1,157.1 1,393.1 787.0 3,214.0 $32,668.0 27.5% 13.2% 4.1% 7.7% 9.6% 9.4% 4.3% 4.2% 3.5% 4.3% 2.4% 9.8% 100.0% (1) Includes the Commercial Aerospace Portfolio and additional financing and leasing assets that are not commercial aircraft. (2) At December 31, 2015, manufacturers of chemicals, including pharmaceuticals (2.6%), petroleum and coal, including refining (1.7%) and food (1.1%). (3) At December 31, 2015, includes maritime (4.2%), rail (4.0%) and trucking and shipping (1.2%). (4) At December 31, 2015 includes retailers of apparel (1.3%) and general merchandise (1.6%). Energy As part of the OneWest Bank acquisition, CIT’s direct lending to oil and gas extraction and services increased to approximately $1 billion and now comprise about 3% of total loans. In addition, we have approximately $2.3 billion of railcars leased directly to railroads and other diversified shippers in support of the trans- portation and production of crude oil. We discuss our loan portfolio exposure to certain energy sectors in Credit Metrics and our rail operating lease portfolio below. Operating Lease Equipment — Rail As detailed in the following table, at December 31, 2015, TIF had over 128,000 railcars and 390 locomotives on operating lease. The weighted average remaining lease term on the operating lease fleet is approximately 3 years, with approximately 24,500 leases on rail assets scheduled to expire in 2016. We also have commitments to purchase railcars, as disclosed in Item 8. Finan- cial Statements and Supplementary Data, Note 21 — Commitments. Railcar Type Covered Hoppers Tank Cars Mill/Coil Gondolas Coal Boxcars Flatcars Locomotives Other Total Owned Fleet 47,198 Purchase Orders 3,933 34,764 14,488 12,333 8,553 5,375 392 5,642 128,745 2,507 − − 400 − − 2 6,842 TIF’s global Rail business has a fleet of approximately 129,000 railcars and locomotives, including approximately 35,000 tank cars. The North American fleet has approximately 23,000 tank cars used in the transport of crude oil, ethanol and other flam- mable liquids (collectively, “Flammable Liquids”). Of the 23,000 tank cars, approximately 15,000 tank cars are leased directly to railroads and other diversified shippers for the transportation of crude by rail. The North America fleet also contains approxi- mately 10,000 sand cars (covered hoppers) leased to customers to support crude oil and natural gas production. On May 1, 2015, the U.S. Pipeline and Hazardous Materials Safety Administration (“PHMSA”) and Transport Canada (“TC”) each released their final rules (the “Final Rules”), which were generally aligned in recognition that many railcars are used in both coun- tries. The Final U.S. Rules applied to all High Hazard Flammable Trains (“HHFT”), which is defined as trains with a continuous block of 20 or more tank cars loaded with a flammable liquid or 35 or more tank cars loaded with a flammable liquid dispersed through a train. The Final U.S. Rules (i) established enhanced DOT Specification 117 design and performance criteria appli- cable to tank cars constructed after October 1, 2015 for use in an HHFT and (ii) required retrofitting existing tank cars in accor- dance with DOT-prescribed retrofit design or performance standard for use in a HHFT. The retrofit timeline was based on two risk factors, the packing group of the flammable liquid and the differing types of DOT-111 and CPC-1232 tank cars. The Final U.S. Rules also established new braking standards, requiring HHFTs to have in place a functioning two-way end-of-train device or a distributive power braking system. In addition, the Final U.S. Rules established speed restrictions for HHFTs, established stan- dards for rail routing analysis, required improved information sharing with state and local officials, and required more accurate classification of unrefined petroleum-based products, including developing and carrying out sampling and testing programs. On December 4, 2015, President Obama signed into law the Fix- ing America’s Surface Transportation Act (“FAST Act”), which, among other things, modified certain aspects of the Final U.S. Rules for transportation of flammable liquids. The FAST Act Item 7: Management’s Discussion and Analysis 78 CIT ANNUAL REPORT 2015 requires certain new tank cars to be equipped with “thermal blankets”, mandates all legacy DOT-111 tank cars in flammable liquids service, not only those used in an HHFT, to be upgraded to the new retrofit standard, and sets minimum requirements for the protection of certain valves. Further, it requires reporting on the industry-wide progress and capacity to modify DOT-111 tank cars. Finally, the FAST Act requires an independent evaluation to investigate braking technology requirements for the movement of trains carrying certain hazardous materials, and it requires the Secretary of Transportation to determine whether electronically- controlled pneumatic (“ECP”) braking system requirements, as imposed by the Final U.S. Rules, are justified The FAST Act pro- vides clarity on retrofit requirements but will not have a material impact on our original plans to retrofit our fleet. As noted above, CIT has approximately 23,000 tank cars in its North American fleet used in the transport of Flammable Liquids, of which less than half were manufactured prior to the adoption of the CPC-1232 standard. Based on our analysis of the Final U.S. Rules, as modified by the FAST Act, less than 1,000 cars in our current tank car fleet require retrofitting by March 2018. Approxi- Aircraft Type Airbus A310/319/320/321 Airbus A330 Airbus A350 Boeing 737 Boeing 757 Boeing 767 Boeing 787 Embraer 145 Embraer 175 Embraer 190/195 Other Total mately 75% of the cars in our flammable tank car fleet have a deadline of 2023 or later for modification, although we may decide to retrofit them sooner. Current tank cars on order are being configured to meet the Final U.S. Rules, as modified by the Fast Act, except for the installation of ECP braking systems. CIT is currently evaluating how the Final U.S. Rules, as modified by the Fast Act will impact its business and customers. We continue to believe that we will retrofit most, if not all of our impacted cars, depending on future industry and market conditions, and we will amortize the cost over the remaining asset life of the cars. Operating Lease Equipment — Aerospace As detailed in the following table, at December 31, 2015, TIF had 284 commercial aircraft on operating lease. The weighted aver- age remaining lease term on the commercial air operating lease fleet is approximately 5 years, with approximately 30 aircraft leases scheduled to expire in 2016. We also have commitments to purchase aircraft, as disclosed in Item 8. Financial Statements and Supplementary Data, Note 21 — Commitments. Owned Fleet 119 Order Book 56 40 2 84 8 5 4 1 4 16 1 284 15 12 40 − − 16 − − − − 139 Commercial Aerospace The following tables present detail on our commercial and regional aerospace portfolio (“Commercial Aerospace”). The net investment in regional aerospace financing and leasing assets was $43 million, $47 million and $52 million at December 31, 2015, 2014 and 2013, respectively, and was substantially com- prised of loans and capital leases. Commercial Aerospace Portfolio (dollars in millions) CIT ANNUAL REPORT 2015 79 The information presented below by region, manufacturer, and body type, is based on our operating lease aircraft portfolio, which comprises 91% of our total commercial aerospace portfolio and substantially all of our owned fleet of leased aircraft at December 31, 2015. By Product: Operating lease(1) Loan Capital lease Total December 31, 2015 December 31, 2014 December 31, 2013 Net Investment Number Net Investment Number Net Investment Number $ 9,772.2 664.5 320.4 $10,757.1 284 57 21 362 $ 9,309.3 635.0 335.6 $10,279.9 279 50 21 350 $8,379.3 505.3 31.7 $8,916.3 270 39 8 317 Commercial Aerospace Operating Lease Portfolio (dollars in millions) (1) December 31, 2015 December 31, 2014 December 31, 2013 Net Investment Number Net Investment Number Net Investment Number By Region: Asia / Pacific Europe U.S. and Canada Latin America Africa / Middle East Total By Manufacturer: Airbus Boeing Embraer Other Total By Body Type (2) Narrow body Intermediate Regional and other Total Number of customers Weighted average age of fleet (years) $3,704.2 2,195.4 2,091.0 1,152.6 629.0 $9,772.2 $6,232.3 2,929.6 552.7 57.6 $9,772.2 $6,211.4 3,502.2 58.6 $9,772.2 $3,505.9 2,239.4 1,802.6 994.9 766.5 $9,309.3 $5,985.5 2,711.6 547.2 65.0 $9,309.3 $6,287.8 2,955.3 66.2 $9,309.3 88 80 65 38 13 284 161 101 21 1 284 230 52 2 284 95 5 $3,065.1 2,408.8 1,276.5 940.3 688.6 $8,379.3 $5,899.1 2,038.7 441.5 − $8,379.3 $6,080.6 2,297.3 1.4 $8,379.3 84 86 57 37 15 279 160 98 20 1 279 230 47 2 279 98 5 81 91 43 38 17 270 167 87 16 − 270 230 39 1 270 98 5 (1) Includes operating lease equipment held for sale. (2) Narrow body are single aisle design and consist primarily of Boeing 737 and 757 series, Airbus A320 series, and Embraer E170 and E190 aircraft. Intermedi- ate body are smaller twin aisle design and consist primarily of Boeing 767 series and Airbus A330 series aircraft. Regional and Other includes aircraft and related equipment, such as engines. Our top five commercial aerospace outstanding exposures totaled $2,745.4 million at December 31, 2015. The largest indi- vidual outstanding exposure totaled $907.6 million at December 31, 2015, which was to a U.S. carrier. See Note 21 — Commitments in Item 8. Financial Statements and Supplementary Data for additional information regarding commitments to pur- chase additional aircraft. Item 7: Management’s Discussion and Analysis 80 CIT ANNUAL REPORT 2015 CONSUMER CONCENTRATIONS The following table presents our total outstanding consumer financing and leasing assets, including PCI loans as of December 31, 2015. All of the consumer loans were acquired in the OneWest Transaction; thus, there were no balances as of December 31, 2014. The consumer PCI loans are included in the total outstanding and displayed separately, net of purchase accounting adjustments. PCI loans are discussed in more detail in Note 3 — Loans in Item 8. Financial Statements and Supplementary Data. Consumer Financing and Leasing Assets at December 31, 2015 (dollars in millions) Single family residential Reverse mortgage Home Equity Lines of Credit Other consumer Total loans Net Investment $5,655.7 917.4 325.7 7.8 $6,906.6 % of Total 81.9% 13.3% 4.7% 0.1% 100.0% For consumer and residential loans, the Company monitors credit risk based on indicators such as delinquencies and LTV. We moni- tor trending of delinquency/delinquency rates as well as non- performing trends for home equity loans and residential real estate loans. LTV refers to the ratio comparing the loan’s unpaid principal bal- ance to the property’s collateral value. We update the property values of real estate collateral if events require current informa- tion and calculate current LTV ratios. We examine LTV migration and stratify LTV into categories to monitor the risk in the loan classes. See Note 3 — Loans in Item 8. Financial Statements and Supple- mentary Data for information on LTV ratios. Loan concentrations may exist when borrowers could be simi- larly impacted by economic or other conditions. The following table summarizes the carrying value of consumer financing and leasing assets, with concentrations in the top five states based upon property address by geographical regions as of December 31, 2015: Consumer Financing and Leasing Assets Geographic Concentra- tions at December 31, 2015 (dollars in millions) California New York Florida New Jersey Maryland Other States and Territories(1) Net Investment $4,234.6 560.5 306.7 177.8 154.4 1,472.6 $6,906.6 % of Total 61.3% 8.1% 4.5% 2.6% 2.2% 21.3% 100.0% (1) No state or territories have total carrying value in excess of 2%. RISK MANAGEMENT CIT is subject to a variety of risks that may arise through the Company’s business activities, including the following principal forms of risk: - Strategic risk is the risk of the impact on earnings or capital arising from adverse strategic business decisions, improper implementation of strategic decisions, or lack of responsive- ness to changes in the industry, including changes in the financial services industry as well as fundamental changes in the businesses in which our customers and our firm engages. - Credit risk is the risk of loss (including the incurrence of addi- tional expenses) when a borrower does not meet its financial obligations to the Company. Credit risk may arise from lending, leasing, and/or counterparty activities. - Asset risk is the equipment valuation and residual risk of lease equipment owned by the Company that arises from fluctuations in the supply and demand for the underlying leased equip- ment. The Company is exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, resulting in either reduced future lease income over the remaining life of the asset or a lower sale value. - Market risk includes interest rate and foreign currency risk. Interest rate risk is the risk that fluctuations in interest rates will have an impact on the Company’s net finance revenue and on the market value of the Company’s assets, liabilities and deriva- tives. Foreign exchange risk is the risk that fluctuations in exchange rates between currencies can have an economic impact on the Company’s non-dollar denominated assets and liabilities. - Liquidity risk is the risk that the Company has an inability to maintain adequate cash resources and funding capacity to meet its obligations, including under stress scenarios. - Capital risk is the risk that the Company does not have adequate capital to cover its risks and to support its growth and strategic objectives. - Operational risk is the risk of financial loss, damage to the Company’s reputation, or other adverse impacts resulting from inadequate or failed internal processes and systems, people or external events. - Information Technology Risk is the risk of financial loss, damage to the Company’s reputation or other adverse impacts resulting from unauthorized (malicious or accidental) disclosure, modifi- cation, or destruction of information, including cyber-crime, unintentional errors and omissions, IT disruptions due to natu- ral or man-made disasters, or failure to exercise due care and diligence in the implementation and operation of an IT system. - Legal and Regulatory Risk is the risk that the Company is not in compliance with applicable laws and regulations, which may result in fines, regulatory criticism or business restrictions, or damage to the Company’s reputation. - Reputational Risk is the potential that negative publicity, whether true or not, will cause a decline in the value of the Company due to changes in the customer base, costly litiga- tion, or other revenue reductions. CIT ANNUAL REPORT 2015 81 GOVERNANCE AND SUPERVISION CIT’s Risk Management Group (“RMG”) has established a Risk Governance Framework that is designed to promote appropriate risk identification, measurement, monitoring, management and control. The Risk Governance Framework is focused on: - - - the major risks inherent to CIT’s business activities, as defined above; the Enterprise Risk Framework, which includes the policies, pro- cedures, practices and resources used to manage and assess these risks, and the decision-making governance structure that supports it; the Risk Appetite and Risk Tolerance Framework, which defines the level and type of risk CIT is willing to assume in its expo- sures and business activities, given its business objectives, and sets limits, credit authorities, target performance metrics, underwriting standards and risk acceptance criteria used to define and guide the decision-making processes; and - management information systems, including data, models, ana- lytics and risk reporting, to enable adequate identification, monitoring and reporting of risks for proactive management. The Risk Management Committee (“RMC”) of the Board oversees the risk management functions that address the major risks inher- ent in CIT’s business activities and the control processes with respect to such risks. The Chief Risk Officer (“CRO”) supervises CIT’s risk management functions through the RMG, chairs the Enterprise Risk Committee (“ERC”), and reports regularly to the RMC of the Board on the status of CIT’s risk management pro- gram. The ERC provides a forum for structured, cross-functional review, assessment and management of CIT’s enterprise-wide risks. Within the RMG, officers with reporting lines to the CRO supervise and manage groups and departments with specific risk management responsibilities. The Credit Risk Management group manages and approves all credit risk throughout CIT. This group is led by the Chief Credit Officer (“CCO”), and includes the heads of credit for each busi- ness, the head of Problem Loan Management, and Credit Administration. The CCO chairs several key governance commit- tees, including the Corporate Credit Committee (“CCC”). The Enterprise Risk Management (“ERM”) group is responsible for oversight of asset risk, market risk, liquidity risk, capital risk, operational risk, model development, analytics, risk data and reporting. The Chief Model Risk Officer reports directly to the CRO, and is responsible for model governance, validation and monitoring. The Chief Information Security Officer reports to the CRO and is responsible for IT Risk, Business Continuity Planning and Disaster Recovery. The Risk Framework, Risk Policy & Governance are also managed through the CRO. Credit Review is an independent oversight function that is responsible for performing internal credit-related reviews for the organization as well as the ongoing monitoring, testing, and measurement of credit quality and credit process risk in Item 7: Management’s Discussion and Analysis 82 CIT ANNUAL REPORT 2015 enterprise-wide lending and leasing activities. Credit Review reports to the RMC of the Board and administratively to the CRO. The Compliance function reports to the Audit Committee of the Board and administratively to the CRO. Regulatory Relations reports to the Chief Compliance Officer. The Audit Committee and the Regulatory Compliance Committee of the Board oversee financial, legal, compliance, regulatory and audit risk management practices. STRATEGIC RISK Strategic risk management starts with analyzing the short and medium term business and strategic plans established by the Company. This includes the evaluation of the industry, opportuni- ties and risks, market factors and the competitive environment, as well as internal constraints, such as CIT’s risk appetite and control environment. The business plan and strategic plan are linked to the Risk Appetite and Risk Tolerance Frameworks, including the limit structure. RMG is responsible for the New Product and Stra- tegic Initiative process. This process is intended to enable new activities that are consistent with CIT’s expertise and risk appe- tite, and ensure that appropriate due diligence is completed on new opportunities before approval and implementation. Changes in the business environment and in the industry are evaluated periodically through scenario development and analytics, and discussed with the business leaders, CEO and RMC. Strategic risk management includes the effective implementation of new products and strategic initiatives. The New Product and Strategic Initiative process requires tracking and review of all approved new initiatives. In the case of acquisitions, such as Direct Capital and OneWest Bank, integration planning and man- agement covers the implementation process across affected businesses and functions. As a result of the OneWest Transaction, CIT became a SIFI. SIFI planning and implementation is a cross functional effort, led by RMG and coordinated with the integra- tion planning processes. Oversight of strategic risk management is provided by the RMC, the ERC and the Risk Control Committee, a sub-committee of the ERC. CREDIT RISK Lending and Leasing Risk The extension of credit through our lending and leasing activities is core to our businesses. As such, CIT’s credit risk management process is centralized in the RMG, reporting into the CRO through the CCO. This group establishes the Company’s under- writing standards, approves extensions of credit, and is responsible for portfolio management, including credit grading and problem loan management. RMG reviews and monitors credit exposures with the goal of identifying, as early as possible, customers that are experiencing declining creditworthiness or financial difficulty. The CCO evaluates reserves through our ALLL process for performing loans and non-accrual loans, as well as establishing nonspecific reserves to cover losses inherent in the portfolio. CIT’s portfolio is managed by setting limits and target performance metrics, and monitoring risk concentrations by bor- rower, industry, geography and equipment type. We set or modify Risk Acceptance Criteria (underwriting standards) as conditions warrant, based on borrower risk, collateral, industry risk, portfolio size and concentrations, credit concentrations and risk of sub- stantial credit loss. We evaluate our collateral and test for asset impairment based upon collateral value and projected cash flows and relevant market data with any impairment in value charged to earnings. Using our underwriting policies, procedures and practices, com- bined with credit judgment and quantitative tools, we evaluate financing and leasing assets for credit and collateral risk during the credit decision-making process and after the advancement of funds. We set forth our underwriting parameters based on: (1) Target Market Definitions, which delineate risk by market, industry, geography and product, (2) Risk Acceptance Criteria, which detail acceptable structures, credit profiles and risk- adjusted returns, and (3) through our corporate credit policies. We capture and analyze credit risk based on the probability of obligor default (“PD”) and loss given default (“LGD”). PD is determined by evaluating borrower creditworthiness, including analyzing credit history, financial condition, cash flow adequacy, financial performance and management quality. LGD ratings, which estimate loss if an account goes into default, are predi- cated on transaction structure, collateral valuation and related guarantees (including recourse to manufacturers, dealers or gov- ernments). We execute derivative transactions with our customers in order to help them mitigate their interest rate and currency risks. We typi- cally enter into offsetting derivative transactions with third parties in order to neutralize CIT’s interest rate and currency exposure to these customer related derivative transactions. The counterparty credit exposure related to these transactions is monitored and evaluated as part of our credit risk management process. Commercial Lending and Leasing. Commercial credit manage- ment begins with the initial evaluation of credit risk and underlying collateral at the time of origination and continues over the life of the finance receivable or operating lease, including normal collection, recovery of past due balances and liquidating underlying collateral. Credit personnel review potential borrowers’ financial condition, results of operations, management, industry, business model, customer base, operations, collateral and other data, such as third party credit reports and appraisals, to evaluate the potential customer’s borrowing and repayment ability. Transactions are graded by PD and LGD ratings, as described above. Credit facili- ties are subject to our overall credit approval process and underwriting guidelines and are issued commensurate with the credit evaluation performed on each prospective borrower, as well as portfolio concentrations. Credit personnel continue to review the PD and LGD ratings periodically. Decisions on contin- ued creditworthiness or impairment of borrowers are determined through these periodic reviews. Small-Ticket Lending and Leasing. For small-ticket lending and leasing transactions, largely in Equipment Finance, we employ automated credit scoring models for origination (scorecards) and re-grading (auto re-grade algorithms). These are supplemented by business rules and expert judgment. The models evaluate, among other things, financial performance metrics, length of time in business, industry category and geography, and are used to assess a potential borrower’s credit standing and repayment ability, including the value of collateral. We utilize external credit bureau scoring, when available, and behavioral models, as well as judgment in the credit adjudication, evaluation and collection processes. We evaluate the small-ticket leasing portfolio using delinquency vintage curves and other tools to analyze trends and credit per- formance by transaction type, including analysis of specific credit characteristics and selected subsets of the portfolios. Adjust- ments to credit scorecards, auto re-grading algorithms, business rules and lending programs are made periodically based on these evaluations. Individual underwriters are assigned credit authority based upon experience, performance and understand- ing of underwriting policies of small-ticket leasing operations. A credit approval hierarchy is enforced to ensure that an under- writer with the appropriate level of authority reviews applications. Consumer Lending. Consumer lending begins with an evaluation of a consumer’s credit profile against published standards. Loans could be originated HFI or HFS. A loan that is originated as HFS must meet both the credit criteria of the Bank and the investor. At this time, agency eligible loans are originated for sale (Fannie Mae and Freddie Mac) as well as a limited number of Federal Housing Administration (“FHA”) loans. Jumbo loans are consid- ered a HFI product. All loan requests are reviewed by underwriters. Credit decisions are made after reviewing qualita- tive factors and considering the transaction from a judgmental perspective. Single family residential (1-4) mortgage loans are originated through retail originations and closed loan purchases. Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Concentration limits are established by the Board and credit standards follow industry standard documentation requirements. Performance is largely based on an acceptable pay history along with a quarterly assessment, which incorporates an assessment using current market conditions. Non-traditional loans are also monitored by way of a quarterly review of the borrower’s refreshed credit score. When warranted an additional review of the underlying collateral may be conducted. Counterparty Risk We enter into interest rate and currency swaps and foreign exchange forward contracts as part of our overall risk manage- ment practices. We establish limits and evaluate and manage the counterparty risk associated with these derivative instruments through our RMG. The primary risk of derivative instruments is counterparty credit exposure, which is defined as the ability of a counterparty to per- form financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counter- party credit approvals, pre-established exposure limits and monitoring procedures. The CCC, in conjunction with ERM, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements entered into for our own risk management purposes are generally entered into with major financial institutions rated investment grade by nationally recog- nized rating agencies. We also monitor and manage counterparty credit risk, for example, through the use of exposure limits, related to our cash CIT ANNUAL REPORT 2015 83 and investment portfolio, including securities purchased under agreements to resell. ASSET RISK Asset risk in our leasing business is evaluated and managed in the business units and overseen by RMG. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and prod- uct, are reviewed as part of our quarterly financial and asset quality review. Reviews for impairment are performed at least annually. The RMG teams review the air and rail markets, monitor traffic flows, measure supply and demand trends, and evaluate the impact of new technology or regulatory requirements on supply and demand for different types of equipment. Commercial air is more global, while the rail market is regional, mainly North America and Europe. Demand for both passenger and freight equipment is correlated with GDP growth trends for the markets the equipment serves as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in travel and trade flows due to specific events (e.g., natural disasters, conflicts, political upheaval, disease, and terrorism) represent risks to the earnings that can be realized by these businesses. CIT seeks to mitigate these risks by maintaining relatively young fleets of assets with wide operator bases, which can facilitate attractive lease and utilization rates. MARKET RISK CIT is exposed to interest rate and currency risk as a result of its business activities. CIT does not pro-actively assume these risks as a way to make a return, as it does with credit and asset risk. RMG measures, monitors and sets limits on these exposures, by analyzing the impact of potential interest rate and foreign exchange rate changes on financial performance. We consider factors such as customer prepayment trends, maturity, and repric- ing characteristics of assets and liabilities. Our asset-liability management system provides analytical capabilities to assess and measure the effects of various market rate scenarios upon the Company’s financial performance. Interest Rate Risk Interest rate risk arises from lending, leasing, investments, deposit taking and funding, as assets and liabilities reprice at dif- ferent times and by different amounts as interest rates change. We evaluate and monitor interest rate risk primarily through two metrics. - Net Interest Income Sensitivity (“NII Sensitivity”), which mea- sures the net impact of hypothetical changes in interest rates on net finance revenue over a 12 month period; and - Economic Value of Equity (“EVE”), which measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and derivatives. Interest rate risk and sensitivity is influenced primarily by the composition of the balance sheet, driven by the type of products offered (fixed/floating rate loans and deposits), investments, funding and hedging activities. Our assets are primarily Item 7: Management’s Discussion and Analysis 84 CIT ANNUAL REPORT 2015 comprised of commercial loans, consumer loans, operating lease equipment, cash and investments. Our leasing products are level/ fixed payment transactions, whereas the interest rate on the majority of our commercial loan portfolio is based on a floating rate index such as short-term Libor or Prime. Our consumer loan portfolio is based on both floating rate and level/fixed payment transactions. Our debt securities within the investment portfolio, securities purchased under agreements to resell and interest bearing deposits (cash) have generally short durations and reprice frequently. We use a variety of funding sources, including CDs, money market, savings and checking accounts, and secured and unsecured debt. With respect to liabilities, CDs and unse- cured debt are fixed rate, secured debt is a mix of fixed and floating rate, and the rates on savings accounts vary based on the market environment and competition. The composition of our assets and liabilities generally results in a net asset-sensitive posi- tion at the shorter end of the yield curve, mostly related to moves in LIBOR, whereby our assets will reprice faster than our liabilities. Deposits continued to grow as a percent of total funding. CIT Bank, N.A. sources deposits primarily through a retail branch net- work in Southern California, direct-to-consumer (via the internet) and brokered channels. The Bank also offers a full range of com- mercial products. At December 31, 2015, the Bank had over $32 billion in deposits. Certificates of deposits represented approxi- Change to NII Sensitivity and EVE mately $18.2 billion, 56% of the total, most of which were sourced through direct channels. The deposit rates we offer can be influ- enced by market conditions and competitive factors. Changes in interest rates can affect our pricing and potentially impact our ability to gather and retain deposits. Rates offered by competi- tors also can influence our rates and our ability to attract and hold deposits. In a rising rate environment, the Bank may need to increase rates to renew maturing deposits and attract new depos- its. Rates on our savings account deposits may fluctuate due to pricing competition and may also move with short-term interest rates. In general, retail deposits represent a low-cost source of funds and are less sensitive to interest rate changes than many non-deposit funding sources up to ten years. We regularly stress test the effect of deposit rate changes on our margins and seek to achieve optimal alignment between assets and liabilities from an interest rate risk management perspective. The table below summarizes the results of simulation modeling produced by our asset/liability management system. The results reflect the percentage change in the EVE and NII Sensitivity over the next twelve months assuming an immediate 100 basis point parallel increase or decrease in interest rates from the market- based forward curve. NII sensitivity is based on a static balance sheet projection. NII Sensitivity EVE December 31, 2015 December 31, 2014 December 31, 2013 +100 bps 3.5% 0.5% –100 bps (2.1)% (0.5)% +100 bps 6.4% 1.9% –100 bps (0.8)% (1.6)% +100 bps 6.1% 1.8% –100 bps (0.9)% (2.0)% The EVE and NII sensitivity declined from the previous years due to several factors, including the incorporation of the former OneWest Bank assets and liabilities into the measurement assess- ment, the reduction in CIT’s cash balances relative to the overall balance sheet and a refinement of the calculation. As of December 31, 2015, we ran a range of scenarios, including a 200 bps parallel increase scenario, which resulted in an NII Sensitivity of 6.7% and an EVE of 1.0%, while a 200bps decline scenario was not run as the current low rate environment makes the scenario less relevant. Regarding the negative scenarios, we have an assumed rate floor. As detailed in the above table, NII sensitivity is positive with respect to an increase in interest rates. This is primarily driven by our floating rate loan portfolio (including approximately $9.7 billion that are subject to floors), which reprice frequently, and cash and investment securities. On a net basis, we generally have more floating/repricing assets than liabilities in the near term. As a result, our current portfolio is more sensitive to moves in short-term interest rates in the near term. Therefore, our NFR may increase if short-term interest rates rise, or decrease if short- term interest rates decline. Market implied forward rates over the subsequent future twelve months are used to determine a base interest rate scenario for the net interest income projection for the base case. This base projection is compared with those calcu- lated under varying interest rate scenarios such as a 100 basis point parallel rate shift to arrive at NII Sensitivity. EVE complements net interest income simulation and sensitivity analysis as it estimates risk exposures beyond a twelve month horizon. EVE modeling measures the extent to which the economic value of assets, liabilities and off-balance sheet instru- ments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to different rate shocks, measuring the net value of assets, liabilities and off- balance sheet instruments, and comparing those amounts with the EVE sensitivity base case calculated using a market-based forward interest rate curve. The duration of our liabilities is greater than that of our assets, because we have more fixed rate liabilities than assets in the longer term, causing EVE to increase under increasing rates and decrease under decreasing rates. The methodology with which the operating lease assets are assessed in the results table above reflects the existing contractual rental cash flows and the expected residual value at the end of the existing contract term. The simulation modeling for both NII Sensitivity and EVE assumes we take no action in response to the changes in interest rates, while NII Sensitivity generally assumes cashflow from portfolio run-off is reinvested in similar products. A wide variety of potential interest rate scenarios are simulated within our asset/liability management system. All interest sensi- tive assets and liabilities are evaluated using discounted cash flow analysis. Rates are shocked up and down via a set of sce- narios that include both parallel and non-parallel interest rate movements. Scenarios are also run to capture our sensitivity to changes in the shape of the yield curve. Furthermore, we evalu- ate the sensitivity of these results to a number of key assumptions, such as credit quality, spreads, and prepayments. Various holding periods of the operating lease assets are also considered. These range from the current existing lease term to longer terms which assume lease renewals consistent with man- agement’s expected holding period of a particular asset. NII Sensitivity and EVE limits have been set and are monitored for certain of the key scenarios. We manage the exposure to changes in NII Sensitivity and EVE in accordance with our risk appetite and within Board approved limits. We use results of our various interest rate risk analyses to formu- late asset and liability management (“ALM”) strategies, in coordination with the Asset Liability Committee, in order to achieve the desired risk profile, while managing our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage our interest rate risk position through certain pricing strategies for loans and deposits, our investment strategy, issuing term debt with floating or fixed interest rates, and using deriva- tives such as interest rate swaps, which modify the interest rate characteristics of certain assets or liabilities. These measurements provide an estimate of our interest rate sen- sitivity; however, they do not account for potential changes in credit quality, size, and prepayment characteristics of our balance sheet. They also do not account for other business developments that could affect net income, or for management actions that could affect net income or that could be taken to change our risk profile. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations does not rep- resent our current view of the expected range of future interest rate movements. Foreign Currency Risk We seek to hedge transactional exposure of our non-dollar denominated activities, which are comprised of foreign currency loans and leases to foreign entities, through local currency bor- rowings. To the extent such borrowings were unavailable, we have utilized derivative instruments (foreign currency exchange forward contracts and cross currency swaps) to hedge our non- dollar denominated activities. Additionally, we have utilized derivative instruments to hedge the translation exposure of our net investments in foreign operations. Currently, our non-dollar denominated loans and leases are largely funded with U.S. dollar denominated debt and equity which, if unhedged, would cause foreign currency transactional and translational exposures. For the most part, we hedge these exposures through derivative instruments. RMG sets limits and monitors usage to ensure that currency positions are appropri- ately hedged, as unhedged exposures may cause changes in earnings or the equity account. LIQUIDITY RISK Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash resources and funding capacity to meet our obligations. Our overall liquid- ity management strategy is intended to ensure ample liquidity to meet expected and contingent funding needs under both nor- mal and stress environments. Consistent with this strategy, we maintain large pools of cash and highly liquid investments. Addi- tional sources of liquidity include the Amended and Restated Revolving Credit and Guaranty Agreement (the “Revolving Credit CIT ANNUAL REPORT 2015 85 Facility”), other committed financing facilities and cash collections generated by portfolio assets originated in the normal course of business. We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity condi- tions and trends. The primary tool is a cash forecast designed to identify material movements in cash flows. Stress scenarios are applied to measure the resiliency of the liquidity position and to identify stress points requiring remedial action. Also included among our liquidity measurement tools is an early warning sys- tem (summarized on an Early Warning Indicator Report) that monitors key macro-environmental and company specific metrics that serve as early warning signals of potential impending liquid- ity stress events. Event triggers are categorized by severity into a three-level stress monitoring system: Moderately Enhanced Cri- sis, Heightened Crisis, and Maximum Crisis. Assessments outside defined thresholds trigger contingency funding actions, which are detailed in the Company’s Contingency Funding Plan (“CFP”). Integral to our liquidity management practices is our CFP, which outlines actions and protocols under liquidity stress conditions, whether they are idiosyncratic or systemic in nature and defines the thresholds that trigger contingency funding actions. The objective of the CFP is to ensure an adequately sustained level of liquidity under certain stress conditions. CAPITAL RISK Capital risk is the risk that the Company does not have adequate capital to cover its risks and to support its growth and strategic objectives. CIT establishes internal capital risk limits and warning thresholds, using both Economic and Risk-Based Capital calcula- tions, as well as Dodd-Frank Act Stress Testing (“DFAST”), to evaluate the Firm’s capital adequacy for multiple types of risk in both normal and stressed environments. Economic capital includes credit risk, asset risk, market risk, operational risk and model risk. DFAST is a forward-looking methodology that looks at FRB adverse and severely adverse scenarios as well as inter- nally generated scenarios. The capital risk framework requires contingency plans for stress results that would breach the estab- lished capital thresholds. OPERATIONAL RISK Operational risk is the risk of financial loss or other adverse impacts resulting from inadequate or failed internal processes and systems, people or external events. Operational Risk may result from fraud by employees or persons outside the Company, transaction processing errors, employment practices and work- place safety issues, unintentional or negligent failure to meet professional obligations to clients, business interruption due to system failures, or other external events. Operational risk is managed within individual business units. The head of each business and functional area is responsible for maintaining an effective system of internal controls to mitigate operational risks. The business segment Chief Operating Officers designate Operational Risk Managers responsible for implemen- tation of the Operational Risk framework programs. The Enterprise Operational Risk function provides oversight in man- aging operational risk, designs and supports the enterprise-wide Operational Risk framework programs, and promotes awareness Item 7: Management’s Discussion and Analysis 86 CIT ANNUAL REPORT 2015 by providing training to employees and Operational Risk Managers within business units and functional areas. Additionally, Enterprise Operational Risk maintains the Loss Data Collection and Risk Assessment programs. Oversight of the operational risk management function is provided by the RMG, the RMC, the ERC and the Risk Control Committee, a sub-committee of the ERC. INFORMATION TECHNOLOGY RISK Information Technology risks are risks around information secu- rity, cyber-security, and business disruption from systems implementation or downtime, that could adversely impact the organization’s business or business processes, including loss or legal liability due to unauthorized (malicious or accidental) disclo- sure, modification, or destruction of information, unintentional errors and omissions, IT disruptions due to natural or man-made disasters, or failure to exercise due care and diligence in the implementation and operation of an IT system. The Information Risk function provides oversight of the Informa- tion Security and Business Continuity Management (“BCM”) programs. Information Security provides oversight and guidance across the organization intended to preserve and protect the confidentiality, integrity, and availability of CIT information and information systems. BCM provides oversight and guidance of global business continuity and disaster recovery procedures through planning and implementation of proactive, preventive, and corrective actions intended to enable continuous business operations in the event of a disaster, including technology recov- ery. Information Risk is also responsible for crisis management and incident response and performs ongoing IT risk assessments of applications, infrastructure systems and third party vendors, as well as information security and BCM training and awareness for employees, contingent workers and consultants. Oversight of the Information Risk function is provided by the RMG, the RMC, the ERC and the Risk Control Committee, a sub- committee of the ERC. LEGAL and REGULATORY RISK CIT is subject to a number of laws, regulations, regulatory stan- dards, and guidance, both in the U.S. and in other countries in which it does business, some of which are applicable primarily to financial services and others of which are generally applicable to all businesses. Any failure to comply with applicable laws, regula- tions, standards, and guidance in the conduct of our business, including but not limited to funding our business, originating new business, purchasing and selling assets, and servicing our portfo- lios or the portfolios of third parties may result in governmental investigations and inquiries, legal proceedings, including both private and governmental plaintiffs, significant monetary dam- ages, fines, or penalties, restrictions on the way in which we conduct our business, or reputational harm. To reduce these risks, the Company consults regularly with legal counsel, both internal and external, on significant legal and regulatory issues and has established a compliance function to facilitate maintaining com- pliance with applicable laws and regulations. Corporate Compliance is an independent function responsible for maintaining an enterprise-wide compliance risk management program commensurate with the size, scope and complexity of our businesses, operations, and the countries in which we oper- ate. The Compliance function (1) oversees programs and processes to evaluate and monitor compliance with laws and regulations pertaining to our business, (2) tests the adequacy of the compliance control environment in each business, and (3) monitors and promotes compliance with the Company’s ethi- cal standards as set forth in our Code of Business Conduct and compliance policies. Corporate Compliance, led by the Chief Ethics and Compliance Officer, is responsible for setting the over- all global compliance framework and standards, using a risk based approach to identify and manage key compliance obliga- tions and risks. The head of each business and staff function is responsible for ensuring compliance within their respective areas of authority. Corporate Compliance, through the Chief Ethics and Compliance Officer, reports administratively to the CRO and to the Chairperson of the Audit Committee of the Board of Directors. The global compliance risk management program includes train- ing (in collaboration with a centralized Learning and Development team within Human Resources), testing, monitor- ing, risk assessment, and other disciplines necessary to effectively manage compliance and regulatory risks. The Company consults with subject matter experts in the areas of privacy, sanctions, anti- money laundering, anti-corruption compliance and other areas. Corporate Compliance has implemented comprehensive compli- ance policies and procedures and employs Business Unit Compliance Officers and Regional Compliance Officers who work with each business to advise business staff and leadership in the prudent conduct of business within a regulated environment and within the requirements of law, rule, regulation and the control environment we maintain to reduce the risk of violations or other adverse outcomes. They advise business leadership and staff with respect to the implementation of procedures to operationalize compliance policies and other requirements. Oversight of legal and regulatory risk is provided by the Audit and Regulatory Compliance Committees of the Board of Directors, the ERC and the Risk Control Committee, a sub-committee of the ERC. REPUTATIONAL RISK Reputational risk is the potential that negative publicity, whether true or not, will cause a decline in the value of the Company due to changes in the customer base, costly litigation, or other rev- enue reductions. Protecting CIT, its shareholders, employees and brand against reputational risk is of paramount importance to the Company. To address this priority, CIT has established corporate governance standards relating to its Code of Business Conduct and ethics. The Chief Compliance Officer’s responsibilities also include the role of Chief Ethics Officer. In this combined role, his responsibilities also extend to encompass compliance not only with laws and regulations, but also with CIT’s values and its Code of Business Conduct. The Company has adopted, and the Board of Directors has approved, a Code of Business Conduct applicable to all direc- tors, officers and employees, which details acceptable behaviors in conducting the Company’s business and acting on the Compa- ny’s behalf. The Code of Business Conduct covers conflicts of interest, corporate opportunities, confidentiality, fair dealing (with respect to customers, suppliers, competitors and employees), CIT ANNUAL REPORT 2015 87 protection and proper use of Company assets, compliance with laws, and encourages reporting of unethical or illegal behavior, including through a Company hotline. Annually, each employee is trained on the Code of Business Conduct’s requirements, and provides an attestation as to their understanding of the require- ments and their responsibility to comply. CIT’s Executive Management Committee (“EMC”) has estab- lished, and approved, the charter of a Global Ethics Committee. The Ethics Committee is chaired by CIT’s General Counsel and Corporate Secretary. Its members include the Chief Ethics and Compliance Officer, Chief Auditor, Head of Human Resources and the Head of Communications, Marketing & Government Relations. The Committee is charged with (a) oversight of the Code of Business Conduct and Company Values, (b) seeing that CIT’s ethical standards are communicated, upheld and enforced in a consistent manner, and (c) periodic reporting to the EMC and Audit Committee of the Board of Directors of employee miscon- duct and related disciplinary action. Oversight of reputational risk management is provided by the Audit Committee of the Board of Directors, the RMC, the ERC, Compliance Committee and the Risk Control Committee, a sub- committee of the ERC. In addition, CIT’s IAS monitors and tests the overall effectiveness of internal control and operational sys- tems on an ongoing basis and reports results to senior management and to the Audit Committee of the Board. FUNDING AND LIQUIDITY CIT actively manages and monitors its funding and liquidity sources against relevant limits and targets. These sources satisfy funding and other operating obligations, while also providing protection against unforeseen stress events like unanticipated funding obligations, such as customer line draws, or disruptions to capital markets or other funding sources. Primary liquidity sources include cash, investment securities and credit facilities as discussed below. Investment Securities Investment Securities (dollars in millions) Available-for-sale securities Debt securities Equity securities Held-to-maturity securities Debt securities Investment securities carried at fair value with changes recorded in net income Debt securities Non-marketable equity investments and other Total investment securities The increase in investment securities in 2015 primarily reflects $1.3 billion of investments acquired in the OneWest Bank acquisi- tion, mostly MBS securities. In addition, the acquisition also drove the increase in the non-marketable equity investments, which represents the additional investment in FHLB and FRB securities. As part of our business strategy to improve returns, we plan to use cash and proceeds from maturing securities to increase our investments in higher-yielding securities in 2016. See Note 1 — Business and Summary of Significant Accounting Poli- cies in Item 8. Financial Statements and Supplementary Data for policies covering classification and reviewing for OTTI. Cash - Cash totaled $8.3 billion at December 31, 2015, compared to $7.1 billion and $6.7 billion at December 31, 2014 and 2013, respectively. The increase was primarily due to $4.4 billion acquired in the OneWest Transaction, partially offset by cash of $1.9 billion used to pay for the acquisition. Cash at December 31, 2015 consisted of $1.1 billion related to the bank holding company and $6.0 billion at CIT Bank, N.A. (excluding $0.1 billion of restricted cash), with the remainder comprised of cash at operating subsidiaries and other restricted balances of approximately $1.2 billion. December 31, 2015 December 31, 2014 December 31, 2013 $2,007.8 14.3 $1,116.5 14.0 $1,487.8 13.7 300.1 352.3 1,042.3 339.7 291.9 $2,953.8 − 67.5 − 86.9 $1,550.3 $2,630.7 Interest and dividend income (a component of NFR), totaled $71 million, $36 million and $29 million for the years ended December 31, 2015, 2014 and 2013, respectively, with the current year reflecting the acquired mortgage-backed security portfolio from OneWest Bank. We also recognized net gains in other income of $1 million, $39 million and $8 million for the years ended December 31, 2015, 2014 and 2013, respectively. The rev- enue streams are discussed in Net Finance Revenue and Non- interest Income. Item 7: Management’s Discussion and Analysis 88 CIT ANNUAL REPORT 2015 Credit Facilities - A multi-year committed revolving credit facility that has a total commitment of $1.5 billion, of which $1.4 billion was unused at December 31, 2015; and - Committed securitization facilities and secured bank lines totaled $4.1 billion, of which $2.3 billion was unused at December 31, 2015, provided that eligible assets are available that can be funded through these facilities. Securities Purchased Under Resale Agreements - Although at December 31, 2015 we did not invest in securities purchased under agreements to resell (“reverse repurchase agreements”), there were $650 million of investments at December 31, 2014, and we had invested in these securities periodically during 2015. These agreements were mostly short- term securities, and were secured by the underlying collateral, which was maintained at a third-party custodian. Interest earned on these securities is included in “Other interest and dividends” in the statement of income. Asset liquidity is further enhanced by our ability to sell or syndi- cate portfolio assets in secondary markets, which also enables us to manage credit exposure, and to pledge assets to access secured borrowing facilities through the FHLB and FRB. Funding Sources Funding sources include deposits and borrowings. As a result of the OneWest Transaction and our continued funding and liability management initiatives, our funding mix has continued to change to a higher mix of deposits. The following table reflects our funding mix: Funding Mix Deposits Unsecured Secured Borrowings: Structured financings FHLB Advances The higher proportion of deposits and FHLB advances is reflec- tive of the OneWest Transaction. The percentage of funding for each period excludes the debt related to discontinued operations. Deposits The following table details our ending deposit balances by type: Deposits at December 31 (dollars in millions) December 31, 2015 64% December 31, 2014 46% December 31, 2013 40% 21% 9% 6% 35% 18% 1% 41% 18% 1% The following sections on deposits and borrowings provide fur- ther detail on the acquired amounts and the effect on existing balances. Checking and Savings: Non-interest bearing checking Interest bearing checking Money market Savings Certificates of Deposits Other Total 2015 Total Percent of Total 2014 Total Percent of Total 2013 Total Percent of Total $ 866.2 3,123.7 5,560.5 4,840.5 18,201.9 189.4 2.6% 9.5% 17.0% 14.8% 55.5% 0.6% $ − − 1,873.8 3,941.6 9,942.2 92.2 − − 11.8% 24.9% 62.7% 0.6% $ − − 1,857.8 2,710.8 7,859.5 98.4 − − 14.8% 21.6% 62.8% 0.8% $32,782.2 100.0% $15,849.8 100.0% $12,526.5 100.0% During 2015, deposit growth was solid, and included the addition of $14.5 billion related to the OneWest Transaction. The acquisi- tion broadened our product offerings and customer base. CIT Bank, N.A. offers a full suite of deposit offerings to its customers, and with the acquisition, now has a branch network of 70 branches in Southern California to serve its customers. Deposit growth is a key area of focus for CIT as it offers lower funding costs compared to other sources. The weighted average coupon rate of total deposits was 1.26% at December 31, 2015, down from 1.69% at December 31, 2014 and 1.65% at December 31, 2013, as the rates on the acquired deposits were lower than existing deposits due to the mix of deposits acquired. At December 31, 2015, our CDs had a weighted average remaining life of approximately 2.4 years. See Net Finance Revenue section for further discussion on average balances and rates. CIT ANNUAL REPORT 2015 89 Borrowings Senior Unsecured Borrowings Borrowings consist of senior unsecured notes and secured bor- rowings (structured financings and FHLB advances), all of which totaled $18.5 billion at December 31, 2015, essentially unchanged from December 31, 2014 and 2013. The borrowings from the OneWest Transaction, which was mostly in the form of FHLB advances ($3.0 billion), was offset by the maturity of $1.2 billion and repurchase of $55 million of unsecured notes during 2015 and net repayments of structured financings. The weighted aver- age coupon rate of borrowings at December 31, 2015 was 3.91%, down from 4.32% and 4.47% at December 31, 2014 and 2013, respectively, reflecting the acquired FHLB advances, which have lower rates. In conjunction with pursuing strategic alternatives for our Commercial Air business, we are evaluating both a spin-off to shareholders as a separate public entity and sale alternatives. It is very likely that any alter- native will result in restructuring some of our funding facilities, including our secured and unsecured debt, as well as the TRS, which could result in significant debt-related costs. Unsecured Revolving Credit Facility The following information was in effect prior to the 2016 Revolv- ing Credit facility amendment. See Note 30 — Subsequent Events in Item 8. Financial Statements and Supplementary Data for changes to this facility. There were no borrowings outstanding under the Revolving Credit Facility at December 31, 2015. The amount available to draw upon was approximately $1.4 billion at December 31, 2015, with the remaining amount of approximately $0.1 billion utilized for issuance of letters of credit. The Revolving Credit Facility has a $1.5 billion total commitment amount that matures on January 27, 2017. The total commitment amount consists of a $1.15 billion revolving loan tranche and a $350 million revolving loan tranche that can also be utilized for issuance of letters of credit. The applicable margin charged under the facility is based on our debt ratings. Currently, the applicable margin is 2.50% for LIBOR-based loans and 1.50% for Base Rate loans. Improvement in CIT’s long-term senior unse- cured debt ratings to Ba2 by Moody’s would result in a reduction in the applicable margin to 2.25% for LIBOR-based loans and to 1.25% for Base Rate loans. A downgrade in CIT’s long-term senior unsecured debt ratings to B+ by S&P would result in an increase in the applicable margin to 2.75% for LIBOR-based loans and to 1.75% for Base Rate loans. In the event of a one notch down- grade by only one of the agencies, no change to the margin charged under the facility would occur. The Revolving Credit Facility is unsecured and is guaranteed by eight of the Company’s domestic operating subsidiaries. The facility contains a covenant requiring a minimum guarantor asset coverage ratio and the criteria for calculating the ratio. The cov- enant requires a minimum guarantor asset coverage ratio ranging from 1.0:1.0 to 1.75:1.0 depending on the Company’s long-term senior unsecured debt rating. The current requirement is 1.5:1.0. As of December 31, 2015, the last reported asset cover- age ratio was 2.33x. See Note 10 — Borrowings in Item 8. Financial Statements and Supplementary Data for further detail. At December 31, 2015, unsecured borrowings outstanding totaled $10.7 billion, compared to $11.9 billion and $12.5 billion at December 31, 2014 and 2013, respectively. The weighted aver- age coupon rate of unsecured borrowings at December 31, 2015 was 5.03%, up slightly from 5.00% at December 31, 2014 and down from 5.11% at December 31, 2013.The decline in the 2015 outstanding balance and slight increase in rate reflect the repayment of $1.2 billion of maturing 4.75% notes in the first quarter and modest debt repurchases in the third and fourth quarters of 2015. As detailed in “Contractual Commitments and Payments” below, there are no scheduled maturities in 2016, and $5.1 billion of scheduled maturities in 2017 through April 2018. See Note 10 — Borrowings in Item 8. Financial Statements and Supplementary Data for further detail. Secured Secured Borrowings As part of our liquidity management strategy, we may pledge assets to secure financing transactions (which include securitiza- tions), to secure borrowings from the FHLB or for other purposes as required or permitted by law. Our secured financing transac- tions do not meet accounting requirements for sale treatment and are recorded as secured borrowings, with the assets remain- ing on-balance sheet pursuant to GAAP. The debt associated with these transactions is collateralized by receivables, leases and/or equipment. Certain related cash balances are restricted. FHLB Advances FHLB advances have become a larger source of funding as a result of the OneWest Transaction. CIT Bank, N.A. is a member of the FHLB of San Francisco and may borrow under a line of credit that is secured by collateral pledged to the FHLB San Francisco. The Bank makes decisions regarding utilization of advances based upon a number of factors including liquidity needs, capital constraints, cost of funds and alternative sources of funding. CIT Bank, N.A. had $3.1 billion outstanding under the line and $6.8 billion of assets were pledged as collateral at December 31, 2015. Prior to the OneWest Transaction, at December 31, 2014, CIT Bank was a member of the FHLB of Seattle (before its merger into FHLB Des Moines on June 1, 2015) and had $125 million out- standing under a line of credit and $168 million of commercial real estate assets were pledged as collateral. Also at December 31, 2014 and 2013, a subsidiary of CIT Bank was a member of FHLB Des Moines and had $130 million and $35 million of advances outstanding and $142 million and $46 million of collateral pledged, respectively. FHLB Advances and pledged assets are also discussed in Note 10 — Borrowings in Item 8. Financial Statements and Supplementary Data. Structured Financings Structured Financings totaled approximately $4.7 billion at December 31, 2015, compared to $6.3 billion and $5.7 billion at December 31, 2014 and 2013, respectively. The decrease in secured borrowings during 2015 reflects repayments, while the increase during 2014 reflects debt acquired with the Nacco and Direct Capital acquisi- Item 7: Management’s Discussion and Analysis 90 CIT ANNUAL REPORT 2015 tions, partially offset by net repayments. The weighted average coupon rate of structured financings at December 31, 2015 was 3.40%, up from 3.19% and 3.14% at December 31, 2014 and 2013, respectively. The increase in the weighted average rate in 2015 mostly reflects the repay- ments on lower coupon financings. CIT Bank, N.A. structured financings totaled $0.8 billion, $1.6 billion and $0.8 billion at December 31, 2015, 2014 and 2013, respectively, which were secured by $1.1 billion, $2.1 billion and $1.0 billion of pledged assets at December 31, 2015, 2014 and 2013, respectively. Non-bank structured financings were $3.9 billion, $4.7 billion and $5.1 billion at December 31, 2015, 2014 and 2013, respectively, and were secured by assets of $7.2 billion, $8.2 billion and $8.6 billion, at December 31, 2015, 2014 and 2013, respectively. See Note 10 — Borrowings in Item 8. Financial Statements and Supplementary Data for a table displaying our consolidated secured financings and pledged assets. FRB The Company has a borrowing facility with the FRB Discount Win- dow that can be used for short-term, typically overnight, borrowings. The borrowing capacity is determined by the FRB based on the collateral pledged. There were no outstanding borrowings with the FRB Discount Window as of December 31, 2015 or December 31, 2014. See Note 10 — Borrowings in Item 8. Financial Statements and Supplementary Data for total balances pledged, including amounts to the FRB. GSI Facilities Two financing facilities between two wholly-owned subsidiaries of CIT and Goldman Sachs International (“GSI”) are structured as total return swaps (“TRS”), under which amounts available for advances are accounted for as derivatives. Pursuant to applicable accounting guidance, only the unutilized portion of the TRS is accounted for as a derivative and recorded at its estimated fair value. The size of the CIT Financial Ltd. (“CFL”) facility is $1.5 billion and the CIT TRS Funding B.V. (“BV”) facility is $625 million. At December 31, 2015, a total of $1,760 million of pledged assets, and secured debt totaling $1,149 million issued to inves- tors, was outstanding under the GSI Facilities. About half of the pledged assets and debt outstanding under the GSI Facilities related to commercial aerospace assets, a business that manage- ment is pursuing strategic alternatives for. After adjustment to the amount of actual qualifying borrowing base under the terms of the GSI Facilities, this secured debt provided for usage of $972 million of the maximum notional amount of the GSI Facilities. The remaining $1,153 million of the maximum notional amount represents the unused portion of the GSI Facilities and constitutes the notional amount of derivative financial instru- ments. An unsecured counterparty receivable of $537.8 million is owed to CIT from GSI for debt discount, return of collateral posted to GSI and settlements resulting from market value changes to the asset-backed securities underlying the structures at December 31, 2015. The GSI Facilities were structured as a TRS to satisfy the specific requirements set by GSI to obtain its funding commitment. Under the terms of the GSI Facilities, CIT raises cash from the issuance of ABS to investors designated by GSI under the total return swap, equivalent to the face amount of the ABS less an adjust- ment for any OID which equals the market price of the ABS. CIT is also required to deposit a portion of the face amount of the ABS with GSI as additional collateral prior to funding ABS through the GSI Facilities. Amounts deposited with GSI can increase or decrease over time depending on the market value of the ABS and / or changes in the ratings of the ABS. CIT and GSI engage in periodic settle- ments based on the timing and amount of coupon, principal and any other payments actually made by CIT on the ABS. Pursuant to the terms of the TRS, GSI is obligated to return those same amounts to CIT plus a proportionate amount of the initial deposit. Simultaneously, CIT is obligated to pay GSI (1) principal in an amount equal to the contractual market price times the amount of principal reduction on the ABS and (2) interest equal to LIBOR times the adjusted qualifying borrowing base of the ABS. On a quarterly basis, CIT pays the fixed facility fee of 2.85% per annum times the maximum facility commitment amount. Valuation of the derivatives related to the GSI Facilities is based on several factors using a discounted cash flow (DCF) methodol- ogy, including: - Funding costs for similar financings based on the current mar- ket environment; - Forecasted usage of the long-dated GSI Facilities through the final maturity date in 2028; and - Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. Based on the Company’s valuation, we recorded a liability of $55 million, $25 million and $10 million at December 31, 2015, 2014 and 2013, respectively. During 2015, 2014 and 2013, we rec- ognized $30 million, $15 million and $4 million, respectively, as a reduction to other income associated with the change in liability. Interest expense related to the GSI Facilities is affected by the following: - A fixed facility fee of 2.85% per annum times the maximum facility commitment amount, - A variable amount based on one-month or three-month U.S.D. LIBOR times the “utilized amount” (effectively the “adjusted qualifying borrowing base”) of the total return swap, and - A reduction in interest expense due to the recognition of the payment of any OID from GSI on the various asset-backed securities. See Note 11 — Derivative Financial Instruments in Item 8. Finan- cial Statements and Supplementary Data for further information. Debt Ratings Debt ratings can influence the cost and availability of short-and long-term funding, the terms and conditions on which such fund- ing may be available, the collateral requirements, if any, for borrowings and certain derivative instruments, the acceptability of our letters of credit, and the number of investors and counter- parties willing to lend to the Company. A decrease, or potential decrease, in credit ratings could impact access to the capital mar- kets and/or increase the cost of debt, and thereby adversely affect the Company’s liquidity and financial condition. CIT ANNUAL REPORT 2015 91 CIT and CIT Bank debt ratings at December 31, 2015, as rated by Standard & Poor’s Ratings Services (“S&P”), Fitch Ratings, Inc. (“Fitch”), Moody’s Investors Service (“Moody’s”) and Dominion Debt Ratings as of December 31, 2015 Bond Rating Service (“DBRS”) are presented in the following table. CIT Group Inc. Issuer / Counterparty Credit Rating Revolving Credit Facility Rating Series C Notes / Senior Unsecured Debt Rating Outlook CIT Bank, N.A. Deposit Rating (LT/ST) Long-term Senior Unsecured Debt Rating NR — Not Rated In January 2016, S&P assigned a long-term issuer credit rating of BBB- to CIT Bank, N.A. Changes to debt ratings of CIT Group Inc. during 2015 included: - - - In December, S&P raised its long-term issuer credit rating to BB+ with a stable outlook and raised our senior unsecured rat- ing to BB+. In October, Moody’s changed its outlook to positive from stable and DBRS upgraded our Issuer and Unsecured Debt rat- ings to BB (high) with a Stable outlook. In March, Moody’s affirmed CIT Group’s Ba3 corporate family rating but downgraded the senior unsecured rating from Ba3 to B1 with a stable ratings outlook. Concurrently, Moody’s transi- tioned its ratings analysis of CIT Group to Moody’s bank methodology from Moody’s finance company rating methodol- ogy. Because Moody’s does not assign corporate family ratings under the bank rating framework, CIT’s Ba3 corporate family rating was withdrawn. Rating agencies indicate that they base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current operating, legislative and regulatory Contractual Payments and Commitments Payments for the Years Ended December 31(1) (dollars in millions) S&P Fitch Moody’s DBRS BB+ BB+ BB+ BB+ BB+ BB+ NR B1 B1 Stable Stable Positive BB (High) BBB (Low) BB (High) Stable NR BBB-/F3 BBB- BB+ NR NR BB (High)/R-4 BB (High) environment, including implied government support. In addition, rating agencies themselves have been subject to scrutiny arising from the financial crisis and could make or be required to make substantial changes to their ratings policies and practices, par- ticularly in response to legislative and regulatory changes, including as a result of provisions in the Dodd-Frank Act. Poten- tial changes in rating methodology as well as in the legislative and regulatory environment and the timing of those changes could impact our ratings, which as noted above could impact our liquidity and financial condition. A debt rating is not a recommendation to buy, sell or hold securi- ties, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evalu- ated independently of any other rating. Tax Implications of Cash in Foreign Subsidiaries Cash held by foreign subsidiaries totaled $1.0 billion, including cash available to the BHC and restricted cash, at December 31, 2015, compared to $1.8 billion at each of December 31, 2014 and 2013. Other than in a limited number of jurisdictions, Management does not intend to indefinitely reinvest foreign earnings. Structured financings(2) FHLB advances Senior unsecured Total Long-term borrowings Deposits Credit balances of factoring clients Lease rental expense Total contractual payments Total 2016 2017 2018 2019 2020+ $ 4,736.0 $ 1,412.7 $ 810.2 $ 655.6 $ 355.8 $1,501.7 3,113.5 10,695.9 18,545.4 32,762.4 1,948.5 − 3,361.2 22,289.6 1,344.0 305.2 1,344.0 56.6 15.0 2,944.5 3,769.7 3,277.5 − 47.0 1,150.0 2,200.0 4,005.6 1,401.5 − 44.7 − 2,750.0 3,105.8 2,039.1 − 41.7 − 2,801.4 4,303.1 3,754.7 − 115.2 $52,957.0 $27,051.4 $7,094.2 $5,451.8 $5,186.6 $8,173.0 (1) Projected payments of debt interest expense and obligations relating to postretirement programs are excluded. (2) Includes non-recourse secured borrowings, which are generally repaid in conjunction with the pledged receivable maturities. Item 7: Management’s Discussion and Analysis 92 CIT ANNUAL REPORT 2015 Commitment Expiration by Years Ended December 31 (dollars in millions) Financing commitments Aerospace purchase commitments(1) Rail and other purchase commitments Letters of credit Deferred purchase agreements Guarantees, acceptances and other recourse obligations Liabilities for unrecognized tax obligations(2) Total 2016 2017 2018 2019 2020+ $ 7,385.6 $1,646.3 $1,023.0 $1,389.9 $1,514.1 $1,812.3 9,618.1 898.2 333.6 448.7 747.1 56.5 1,806.5 1,806.5 0.7 46.7 0.7 10.0 712.8 126.5 57.3 − − 36.7 2,188.1 3,441.6 2,826.9 24.6 88.9 − − − − 100.0 − − − − 30.9 − − − Total contractual commitments $20,089.4 $4,715.8 $1,956.3 $3,691.5 $5,055.7 $4,670.1 (1) Aerospace commitments are net of amounts on deposit with manufacturers. (2) The balance cannot be estimated past 2017; therefore the remaining balance is reflected in 2017. Financing commitments increased from $4.7 billion at December 31, 2014 to $7.4 billion at December 31, 2015, primar- ily reflecting acquired commitments from OneWest Bank. Financing commitments include commitments that have been extended to and accepted by customers or agents, but on which the criteria for funding have not been completed of $859 million at December 31, 2015. Also included are Commercial Services credit line agreements, with an amount available of $406 million, net of the amount of receivables assigned to us. These are can- cellable by CIT only after a notice period. At December 31, 2015, substantially all our undrawn financing commitments were senior facilities, with approximately 80% secured by equipment or other assets and the remainder com- prised of cash flow or enterprise value facilities. Most of our undrawn and available financing commitments are in the Com- mercial Banking division of NAB. The top ten undrawn commitments totaled $555 million at December 31, 2015. The table above includes approximately $1.7 billion of undrawn financing commitments at December 31, 2015 that were not in compliance with contractual obligations, and therefore CIT does not have the contractual obligation to lend. See Note 21 — Commitments in Item 8. Financial Statements and Supplementary Data for further detail. CAPITAL Capital Management Regulatory Reporting Impact of Exceeding $50 Billion of Assets CIT manages its capital position to ensure that it is sufficient to: (i) support the risks of its businesses, (ii) maintain a “well-capitalized” status under regulatory requirements, and (iii) provide flexibility to take advantage of future investment opportunities. Capital in excess of these requirements is available to distribute to shareholders, subject to a “non-objection” of our capital plan from the FRB. CIT uses a complement of capital metrics and related thresholds to measure capital adequacy and takes into account the existing regulatory capital framework. CIT further evaluates capital adequacy through the enterprise stress testing and economic capital (“ECAP”) approaches, which constitute our internal capital adequacy assessment process (“ICAAP”). Beginning January 1, 2015, CIT reports regulatory capital ratios in accordance with the Basel III Final Rule and determines risk weighted assets under the Standardized Approach. CIT’s capital management is discussed further in the “Regulation” section of Item 1. Business Overview with respect to regulatory matters, including “Capital Requirements” and “Stress Test and Capital Plan Requirements.” As of September 30, 2015, as a result of the OneWest Transaction, we exceeded the $50 billion threshold that subjects BHCs to enhanced prudential regulation under the Dodd-Frank Act. Among other requirements, CIT will be subject to capital planning and company-run and supervisory stress testing require- ments, under the FRB’s Comprehensive Capital Analysis and Review (“CCAR”) process, which will require CIT to submit an annual capital plan and demonstrate that it can meet required regulatory capital minimums over a nine quarter planning hori- zon, but we don’t expect to be part of the same process in 2016 as established CCAR banks. CIT will need to collect and report certain related data on a quarterly basis, which the FRB will use to track our progress against the capital plan. We expect that upon full implementation of the CCAR process in 2017, CIT may pay dividends and repurchase stock only in accordance with an approved capital plan to which the FRB has not objected. Fur- thermore, CIT is required to conduct annual and midcycle Company-run stress tests with company-developed economic scenarios for submission to the FRB, and publically disclose the test details. The Basel III final framework requires banks and BHCs to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon under an acute liquidity stress scenario, with a phased implementation process starting January 1, 2015 and complete implementation by January 1, 2019. The final rule applies a modified version of the LCR require- ments to bank holding companies with total consolidated assets of greater than $50 billion but less than $250 billion. The modi- fied version of the LCR requirement only requires the LCR calculation to be performed on the last business day of each month and sets the denominator (that is, the calculation of net cash outflows) for the modified version at 70% of the denomina- tor as calculated under the most comprehensive version of the rule applicable to larger institutions. Under the FRB final rule, a BHC with between $50 billion and $250 billion in total consoli- dated assets must comply with the first phase of the minimum LCR requirement at the later of January 1, 2016 or the first quar- ter after the quarter in which it exceeds the $50 Billion SIFI Threshold with the LCR requirement going into full-effect on January 1, 2017. Capital Issuance In connection with the OneWest Transaction, CIT paid approxi- mately $3.4 billion as consideration, which included 30.9 million shares of CIT Group Inc. common stock that was valued at approximately $1.5 billion at the time of closing. Pursuant to a Stockholders Agreement between CIT and certain of the former interest-holders in IMB and OneWest Bank (the “Holders”), who collectively owned over 90% of the common interests in IMB, the Holders agreed (i) not to form a “group” with other Holders with respect to any voting securities of CIT or otherwise act with other Holders to seek to control or influence CIT’s board or the management or policies, (ii) not to transfer any shares of CIT Common Stock received in the OneWest Transac- tion for 90 days following the closing of the transaction, subject to certain exceptions, (iii) not to transfer more than half of each Holder’s shares of CIT Common Stock received in the OneWest Transaction for 180 days following the closing of the transaction, subject to certain exceptions, and (iv) not to transfer any shares of CIT Common Stock received in the transaction to a person or group who, to the knowledge of such Holder, would beneficially own 5% or more of the outstanding CIT Common Stock following such transfer, subject to certain exceptions. The restrictions on each Holder remain in effect until such Holder owns 20% or less CIT ANNUAL REPORT 2015 93 of the shares of CIT Common Stock received by such Holder in the OneWest Transaction. CIT also granted the Holders one collec- tive demand registration right and piggy-back registration rights. Return of Capital Capital returned during the year ended December 31, 2015 totaled $647 million, including repurchases of approximately $532 million of our common stock and $115 million in dividends. During 2015, we repurchased 11.6 million of our shares at an aver- age price of $45.70 for an aggregate purchase price of $532 million, which completed the existing $200 million share repurchase program authorized by the Board in April 2015, along with the remaining amount of the 2014 Board authorized pur- chases of approximately $1.1 billion of the Company’s common shares. Our 2015 common stock dividends were as follows: 2015 Dividends Declaration Date Payment Date January April July October February 28, 2015 May 29, 2015 August 28, 2015 November 30, 2015 Per Share Dividend $0.15 $0.15 $0.15 $0.15 Capital Composition and Ratios The Company is subject to various regulatory capital require- ments. We compute capital ratios in accordance with Federal Reserve capital guidelines for assessing adequacy of capital. In July 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the “Regulatory Capital Rules”). While the Regulatory Capital Rules became effective January 1, 2014, the mandatory compli- ance date for CIT as a “standardized approach” banking organization began on January 1, 2015, subject to transitional provisions extending to January 1, 2019. At December 31, 2015, the regulatory capital guidelines appli- cable to the Company were based on the Basel III Final Rule. The ratios presented in the following table for December 31, 2015 were calculated under the current rules. At December 31, 2014 and 2013, the regulatory capital guidelines that were applicable to the Company were based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I). The ratios were not significantly impacted by the change from Basel I to Basel III. Item 7: Management’s Discussion and Analysis 94 CIT ANNUAL REPORT 2015 Tier 1 Capital and Total Capital Components(1) at December 31, (dollars in millions) Tier 1 Capital Total stockholders’ equity Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests Adjusted total equity Less: Goodwill(2) Disallowed deferred tax assets Disallowed intangible assets(2) Investment in certain subsidiaries Other Tier 1 components(3) CET 1 Capital Tier 1 Capital Tier 2 Capital Qualifying reserve for credit losses and other reserves(4) Less: Investment in certain subsidiaries Other Tier 2 components Total qualifying capital Risk-weighted assets BHC Ratios CET 1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio Tier 1 Leverage Ratio CIT Bank Ratios CET 1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio Tier 1 Leverage Ratio Transition Basis 2015 $10,978.1 76.9 11,055.0 (1,130.8) (904.5) (53.6) NA (0.1) 8,966.0 8,966.0 Fully Phased-in Basis 2015 $10,978.1 76.9 11,055.0 (1,130.8) (904.5) (134.0) NA (0.1) 8,885.6 8,885.6 2014 $ 9,068.9 2013 $ 8,838.8 53.0 9,121.9 (571.3) (416.8) (25.7) (36.7) (4.1) 8,067.3 8,067.3 24.2 8,863.0 (338.3) (26.6) (20.3) (32.3) (6.0) 8,439.5 8,439.5 403.3 NA − $ 9,369.3 403.3 NA − $ 9,288.9 381.8 (36.7) − $ 8,412.4 383.9 (32.3) 0.1 $ 8,791.2 $69,563.6 $70,239.3 $55,480.9 $50,571.2 12.9% 12.9% 13.5% 13.5% 12.8% 12.8% 13.8% 10.9% 12.7% 12.7% 13.2% 13.4% 12.6% 12.6% 13.6% 10.7% NA 14.5% 15.2% 17.4% NA 13.0% 14.2% 12.2% NA 16.7% 17.4% 18.1% NA 16.8% 18.1% 16.9% (1) The December 31, 2015 presentations reflect the risk-based capital guidelines under Basel III, which became effective on January 1, 2015, on a transition basis, and under the fully phased-in basis. The December 31, 2014 and 2013 presentations reflect the risk-based capital guidelines under then effective Basel I. (2) Goodwill and disallowed intangible assets adjustments include the respective portion of deferred tax liability in accordance with guidelines under Basel III. (3) Includes the Tier 1 capital charge for nonfinancial equity investments under Basel I. (4) “Other reserves” represents additional credit loss reserves for unfunded lending commitments, letters of credit, and deferred purchase agreements, all of which are recorded in Other Liabilities. NA – Balance is not applicable under the respective guidelines. During 2015, our capital was impacted by the acquisition of One- West Bank and the reversal of our Federal deferred tax asset valuation allowance. The acquisition increased equity, primarily reflected by the issuance of common shares out of treasury. CET 1 and Tier 1 Capital increased by approximately $900 million, while Total Capital increased slightly higher, both net of an increase in goodwill, intangible assets and disallowed deferred tax deductions of $1.1 billion. While the deferred tax asset valua- tion allowance reversal benefited stockholders’ equity, it had minimal impact on regulatory capital ratios as the majority of the deferred tax asset balance was disallowed for regulatory capital purposes. As a result, CET 1 and Tier 1 Capital declined by approximately 160 basis points while Total Capital declined by approximately 170 basis points, as the net increase in capital was more than offset by the increase in the risk-weighing of the acquired exposures. The Leverage ratio declined, impacted by the acquisition. The full impact is not reflected in this ratio, as the adjusted annual aver- age assets only includes five months of the acquired assets. Our CET 1 and Total Capital ratios at December 31, 2015 are calculated under the Basel III Final Rule. The December 31, 2014 and 2013 Tier 1 and Total Capital ratios are reported under the previously effective Basel I capital rules. The impact of the change in Regulatory Capital Rules at January 1, 2015 was minimal. Risk-Weighted Assets (dollars in millions) Balance sheet assets Risk weighting adjustments to balance sheet assets Off balance sheet items Risk-weighted assets CIT ANNUAL REPORT 2015 95 The reconciliation of balance sheet assets to risk-weighted assets is presented below: December 31, 2015 2014 2013 $ 67,498.8 $47,880.0 $ 47,139.0 (13,825.4) 15,890.2 (8,647.8) 16,248.7 (10,328.1) 13,760.3 $ 69,563.6 $55,480.9 $ 50,571.2 The increased balances were primarily the result of acquiring OneWest Bank. The risk weighting adjustments at December 31, 2015 reflect Basel III guidelines, whereas the December 31, 2014 and 2013 risk weighting adjustments followed Basel I guidelines. The Basel III Final Rule prescribed new approaches for risk weightings. Of these, CIT will calculate risk weightings using the Standardized Approach. This approach expands the risk- weighting categories from the former four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk- sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. government and agency secu- rities to as high as 1,250% for such exposures as MBS. Included in the acquisition were significant investments in MBSs, approxi- mately $907 million, which were calculated at a risk-weighting of $2.3 billion (or over 200%) as of December 31, 2015. The 2015 off balance sheet items primarily reflect commitments to purchase aircraft and railcars ($9.5 billion related to aircraft and $0.8 billion related to railcars), unused lines of credit ($3.3 billion credit equivalent, largely related to the Commercial Banking division), and deferred purchase agreements ($1.8 billion related to the Commercial Services division). The change in the 2014 balance sheet assets from 2013 reflect additions from DCC and Nacco acquisitions, along with new business volume, mostly offset by the sale of the student loan portfolio, European assets, and SBL. Risk weighting adjustments declined primarily due to the sale of the student loan assets as the U.S. government guar- anteed portion was risk-weighted at 0%. The increase from 2013 is primarily due to higher aerospace purchase commitments. See Note 21 — Commitments in Item 8. Financial Statements and Supplementary Data for further detail on commitments. Tangible Book Value and Tangible Book Value per Share(1) Tangible book value represents common equity less goodwill and other intangible assets. A reconciliation of CIT’s total common stockholders’ equity to tangible book value, a non-GAAP mea- sure, follows: Tangible Book Value and per Share Amounts (dollars in millions, except per share amounts) Total common stockholders’ equity Less: Goodwill Intangible assets Tangible book value Book value per share Tangible book value per share 2015 $10,978.1 (1,198.3) (176.3) $ 9,603.5 $ $ 54.61 47.77 December 31, 2014 $9,068.9 (571.3) (25.7) $8,471.9 $ 50.13 $ 46.83 2013 $8,838.8 (334.6) (20.3) $8,483.9 $ 44.78 $ 42.98 (1) Tangible book value and tangible book value per share are non-GAAP measures. Book value and Tangible book value (“TBV) per share increased from December 31, 2014 reflecting the net income recorded dur- ing 2015 and the issuance of approximately 30.9 million shares ($1.5 billion) related to the OneWest Transaction payment, offset by the impact of additional goodwill and intangible assets recorded related to the OneWest Transaction. Book value per share grew during 2015 as the increase in equity, impacted mostly from the issuance of common shares out of trea- sury for the acquisition and earnings, including the reversal of the federal valuation allowance, outpaced the impact of higher shares outstanding. Tangible book value per share increased modestly from December 31, 2014, as the equity increase was partially offset by the goodwill and intangible assets recorded related to the acquisition, and higher outstanding shares. Book value was up in 2014 compared to 2013, as the 2014 earn- ings exceeded the impact of share repurchases, the value of which reduced book value while held in treasury. Tangible book value (”TBV“) was down slightly and reflected the reduction for the goodwill recorded with the Direct Capital and Nacco acquisi- tions. Book value per share increased reflecting the decline in outstanding shares and higher common equity. TBV per share increased, as the decline in outstanding shares offset the slight decrease in TBV. Item 7: Management’s Discussion and Analysis 96 CIT ANNUAL REPORT 2015 CIT BANK CIT Bank, N.A., a wholly-owned subsidiary, is regulated by the Office of the Comptroller of the Currency, U.S. Department of the Treasury (”OCC“). See Background for discussion of the Bank’s change to a national bank from a state-chartered bank in connec- tion with the OneWest Transaction. The Bank’s financial statements were significantly impacted by the OneWest Transaction, as discussed in the OneWest Transaction section, and includes five month’s activity on a com- bined basis. The following condensed balance sheet and condensed statement of income, as of and for the year ended December 31, 2015, reflect push down accounting, whereby the purchase accounting adjustments related to the OneWest Trans- action are reflected in CIT Bank, N.A. balances and results. The balances at December 31, 2015 reflects at the time of acquisition, cash of $4.4 billion, investment securities of $1.3 billion, loans of $13.6 billion ($6.5 billion of commercial loans and $7.1 billion of consumer loans), and indemnification assets of $0.5 billion related to loss sharing agreements with the FDIC on certain loans acquired. The acquisition also included deposits of $14.5 billion and FHLB advances of $3.0 billion. The transaction resulted in goodwill of $663 million and intangible assets of $165 million. See OneWest Transaction section for further details on assets and liabilities acquired. Asset growth during 2015 and 2014 reflected the acquisitions of OneWest Bank and Direct Capital, respectively, along with higher commercial lending and leasing volumes. The Bank originates and funds lending and leasing activity in the U.S. Commercial loans were up from December 31, 2014, which in addition to the OneWest Transaction, reflected lending and leasing volume, while deposits grew in support of the increased business and investment activities. Funded volumes represented nearly all of the new U.S. volumes for NAB and TIF. Total cash and investment securities, including non-earning cash, were $8.5 billion at December 31, 2015, and comprised of $6.1 billion of cash and $2.4 billion of debt and equity securities. Additions to investment securities in 2015 consisted primarily of $1.0 billion of U.S. Government Agency notes and $1.3 billion of debt securities acquired through the OneWest Bank acquisition. The portfolio of operating lease equipment, which totaled $2.8 billion, was comprised primarily of railcars and some aircraft. Goodwill and intangibles increased during 2015, reflecting the above noted amounts associated with the OneWest bank acquisi- tion, and 2014, reflecting $168 million of goodwill and $12 million of intangible assets from the Direct Capital acquisition. Other assets were up in 2015 due to the acquisition ($722 million as of the acquisition date). A list of other assets acquired is pre- sented in the OneWest Transaction section. CIT Bank deposits were $32.9 billion at December 31, 2015, up significantly from December 31, 2014 and 2013, reflecting depos- its acquired that support the asset growth and other debt reduction. The weighted average interest rate was 1.26%, com- pared to 1.63% at December 31, 2014, reflecting the change in mix attributed to the deposits acquired from OneWest Bank, which include lower yielding deposits such as non-interest bear- ing checking accounts and lower interest savings accounts. FHLB advances have become a significant source of funding as a result of the OneWest Bank acquisition. CIT Bank, N.A. is a mem- ber of the FHLB of San Francisco and may borrow under a line of credit that is secured by collateral pledged to the FHLB San Francisco. Borrowings increased in 2015 reflecting debt related to both short- and long-term FHLB borrowings and secured borrowing transactions from the OneWest acquisition. The Bank’s capital and leverage ratios are included in the tables that follow and remained well above required levels. Beginning January 1, 2015, CIT reports regulatory capital ratios in accor- dance with the Basel III Final Rule and determines risk weighted assets under the Standardized Approach. The following presents condensed financial information for CIT Bank, N.A. Condensed Balance Sheets (dollars in millions) ASSETS: Cash and deposits with banks Investment securities Assets held for sale Commercial loans Consumer loans Allowance for loan losses Operating lease equipment, net Indemnification Assets Goodwill Intangible assets Other assets Assets of discontinued operations Total Assets LIABILITIES AND EQUITY: Deposits FHLB advances Borrowings Other liabilities Liabilities of discontinued operations Total Liabilities Total Equity Total Liabilities and Equity Capital Ratios* Common Equity Tier 1 Capital Tier 1 Capital Ratio Total Capital Ratio Tier 1 Leverage ratio CIT ANNUAL REPORT 2015 97 At December 31, 2015 2014 2013 $ 6,073.5 2,313.9 444.2 22,479.2 6,870.6 (337.5) 2,777.8 414.8 830.8 163.2 1,307.7 500.5 $43,838.7 $32,864.2 3,117.6 802.1 752.2 696.2 38,232.3 5,606.4 $43,838.7 2015 12.6% 12.6% 13.6% 10.7% $ 3,684.9 285.2 22.8 14,982.8 – (269.5) 2,026.3 – 167.8 12.1 203.6 – $21,116.0 $15,877.9 254.7 1,910.9 356.1 – 18,399.6 2,716.4 $21,116.0 At December 31, 2014 NA 13.0% 14.2% 12.2% $ 2,528.6 234.6 104.5 12,032.6 – (212.9) 1,248.9 – – – 195.0 – $16,131.3 $12,496.2 34.6 820.0 183.9 – 13,534.7 2,596.6 $16,131.3 2013 NA 16.8% 18.1% 16.9% NA – Not applicable under Basel I guidelines. * The capital ratios presented above for December 31, 2015 are reflective of the fully-phased in BASEL III approach. Item 7: Management’s Discussion and Analysis 98 CIT ANNUAL REPORT 2015 Financing and Leasing Assets by Segment (dollars in millions) North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Consumer Banking Transportation & International Finance Aerospace Rail Maritime Legacy Consumer Mortgages Single Family Residential Mortgages Reverse Mortgages Non-Strategic Portfolios Total The Bank’s results in the current year include five months of OneWest activity. The Bank’s results benefited from growth in AEA due primarily to the OneWest Transaction. The provision for credit losses for 2015 and 2014 reflects higher reserve build, including higher non- specific reserves, primarily due to asset growth through the OneWest and Direct Capital acquisitions in 2015 and 2014, respectively. The provision in the current year was elevated due to increases in reserves related to the Energy and to a lesser extent, the Maritime portfolios, and from the establishment of reserves on certain acquired non-credit impaired loans in the Condensed Statements of Income (dollars in millions) Interest income Interest expense Net interest revenue Provision for credit losses Net interest revenue, after credit provision Rental income on operating leases Other income Total net revenue, net of interest expense and credit provision Operating expenses Depreciation on operating lease equipment Maintenance and other operating lease expenses Income before provision for income taxes Provision for income taxes Net Income from continuing operations Loss on discontinued operations Net income New business volume – funded 2015 $21,206.6 9,706.0 4,648.6 5,362.6 43.4 1,446.0 $ 5,895.5 2,007.8 2,209.7 1,678.0 $ 5,469.7 4,552.3 917.4 – $ 32,571.8 At December 31, 2014 $12,518.8 6,553.4 4,143.9 1,766.5 55.0 – $ 4,513.1 1,935.8 1,570.6 1,006.7 – – – – $ 17,031.9 $ 2013 $10,701.1 6,039.3 3,057.9 1,554.8 49.1 – $ 2,606.8 1,044.3 1,152.1 410.4 – – – 78.1 $ 13,386.0 $ initial period post acquisition. The Bank’s 2013 provision for credit losses reflected portfolio growth. For 2015, 2014 and 2013, net charge-offs as a percentage of average finance receivables were 0.42%, 0.31% and 0.15%, respectively. Operating expenses increased from prior years, reflecting the continued growth of both assets and deposits in the Bank, and the addition of 2,610 employees in the current year associated with the OneWest acquisition. As a % of AEA, operating expenses were 2.31% in 2015, up from 2.20% in 2014 and 2.10% in 2013. Years Ended December 31, 2015 $1,214.6 (354.4) 860.2 (155.0) 705.2 299.5 113.0 1,117.7 (685.3) (123.3) (8.1) 301.0 (92.2) $ 208.8 (10.4) $ 198.4 $9,016.0 2014 $ 712.1 (245.1) 467.0 (99.1) 367.9 227.2 114.2 709.3 (404.1) (92.3) (8.2) 204.7 (81.6) $ 123.1 – $ 123.1 $7,845.7 2013 $ 550.5 (172.1) 378.4 (93.1) 285.3 110.2 123.7 519.2 (294.0) (44.4) (2.9) 177.9 (69.4) $ 108.5 – $ 108.5 $7,148.2 Net Finance Revenue (dollars in millions) Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue Average Earning Assets (”AEA“)* As a % of AEA: Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue CIT ANNUAL REPORT 2015 99 Years Ended December 31, 2015 $ 1,214.6 299.5 1,514.1 (354.4) (123.3) (8.1) $ 1,028.3 $29,627.9 4.10% 1.01% 5.11% (1.20)% (0.42)% (0.03)% 3.46% 2014 712.1 227.2 939.3 (245.1) (92.3) (8.2) 593.7 $ $ 2013 550.5 110.2 660.7 (172.1) (44.4) (2.9) 441.3 $ $ $18,383.1 $14,033.4 3.87% 1.24% 5.11% (1.33)% (0.50)% (0.04)% 3.24% 3.92% 0.79% 4.71% (1.23)% (0.32)% (0.02)% 3.14% * In 2015 CIT re-defined the components of assets used in calibrating AEA. Prior year amounts have been changed to conform with this new definition. NFR and NFM are key metrics used by management to measure the profitability of our lending and leasing assets. NFR includes interest and fee income on our loans and capital leases, interest and dividend income on cash and investments, rental revenue from our leased equipment, depreciation and maintenance and other operating lease expenses, as well as funding costs. Since our asset composition includes a significant amount of operating lease equipment (8% of AEA for the year ended December 31, 2015), NFM is a more appropriate metric for the Bank than net interest margin (”NIM“) (a common metric used by other banks), as NIM does not fully reflect the earnings of our portfolio because it includes the impact of debt costs on all our assets but excludes the net revenue (rental income less depreciation and maintenance and other operating lease expenses) from operating leases. CRITICAL ACCOUNTING ESTIMATES NFR increased from 2013 through 2015, reflecting the growth in financing and leasing assets and the benefit of reduced costs of funds. Also, during 2015 and 2014, the Bank grew its operating lease portfolio by adding railcars and some aircraft, which con- tributed $168 million and $127 million to NFR in 2015 and 2014, respectively. The Bank’s effective tax rate decreased to 31% in 2015, from 40% in 2014, due primarily to the release of FIN 48 reserves and to tax credits acquired in the acquisition of OneWest Bank, which also contributed to a slight decrease in state tax rates due to updated apportionment data. The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, reported amounts of income and expense and the disclosure of contingent assets and liabilities. The following estimates, which are based on relevant information available at the end of each period, include inherent risks and uncertainties related to judg- ments and assumptions made. We consider the estimates to be critical in applying our accounting policies, due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact on the financial statements. Management believes that the judgments and estimates utilized in the following critical accounting estimates are reasonable. We do not believe that different assumptions are more likely than those utilized, although actual events may differ from such assumptions. Consequently, our estimates could prove inaccu- rate, and we may be exposed to charges to earnings that could be material. Allowance for Loan Losses — The allowance for loan losses is reviewed for adequacy based on portfolio collateral values and credit quality indicators, including charge-off experience, levels of past due loans and non-performing assets, and evaluation of portfolio diversification and concentration, as well as economic conditions to determine the need for a qualitative adjustment. We review finance receivables periodically to determine the probability of loss, and record charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third party credit enhancements such as guarantees and recourse to Item 7: Management’s Discussion and Analysis 100 CIT ANNUAL REPORT 2015 manufacturers. This information is reviewed on a quarterly basis with senior management, including the Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, Chief Financial Officer and Controller, among others, as well as the Audit and Risk Manage- ment Committees, in order to set the reserve for credit losses. As of December 31, 2015, the allowance was comprised of non- specific reserves of $327 million, specific reserves of $28 million and reserves related to PCI loans of $5 million. The allowance is sensitive to the risk ratings assigned to loans and leases in our portfolio. Assuming a one level PD downgrade across the 14 grade internal scale for all non-impaired loans and leases, the allowance would have increased by $246 million to $606 million at December 31, 2015. Assuming a one level LGD downgrade across the 11 grade internal scale for all non-impaired loans and leases, the allowance would have increased by $124 million to $484 million at December 31, 2015. As a percentage of finance receivables, the allowance would be 1.91% under the hypotheti- cal PD stress scenario and 1.53% under the hypothetical LGD stress scenario, compared to the reported 1.14%. These sensitivity analyses do not represent management’s expec- tations of the deterioration in risk ratings, or the increases in allowance and loss rates, but are provided as hypothetical sce- narios to assess the sensitivity of the allowance for loan losses to changes in key inputs. We believe the risk ratings utilized in the allowance calculations are appropriate and that the probability of the sensitivity scenarios above occurring within a short period of time is remote. The process of determining the level of the allow- ance for loan losses requires a high degree of judgment. Others given the same information could reach different reasonable conclusions. See Note 1 — Business and Summary of Significant Accounting Policies for discussion on policies relating to the allowance for loan losses, and Note 4 — Allowance for Loan Losses for seg- ment related data in Item 8. Financial Statements and Supplementary Data and Credit Metrics for further information on the allowance for credit losses. Loan Impairment — Loan impairment is measured based upon the difference between the recorded investment in each loan and either the present value of the expected future cash flows dis- counted at each loan’s effective interest rate (the loan’s contractual interest rate adjusted for any deferred fees / costs or discount / premium at the date of origination/acquisition) or if a loan is collateral dependent, the collateral’s fair value. When fore- closure or impairment is determined to be probable, the measurement will be based on the fair value of the collateral less costs to sell. The determination of impairment involves manage- ment’s judgment and the use of market and third party estimates regarding collateral values. Valuations of impaired loans and cor- responding impairment affect the level of the reserve for credit losses. See Note 1 — Business and Summary of Significant Accounting Policies for discussion on policies relating to the allowance for loan losses, and Note 3 — Loans for further discus- sion in Item 8. Financial Statements and Supplementary Data. Lease Residual Values — Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to esti- mated residual value using the straight-line method over the lease term or estimated useful life of the asset. Direct financing leases are recorded at the aggregated future minimum lease payments plus estimated residual values less unearned finance income. We generally bear greater residual risk in operating lease transactions (versus finance lease transactions) as the duration of an operating lease is shorter relative to the equipment useful life than a finance lease. Management performs periodic reviews of residual values, with other than temporary impairment recognized in the current period as an increase to depreciation expense for operating lease residual impair- ment, or as an adjustment to yield for value adjustments on finance leases. Data regarding current equipment values, including appraisals, and historical residual realization experience are among the factors considered in evaluating estimated residual values. As of December 31, 2015, our direct financing lease residual balance was $0.7 billion and our total operating lease equipment balance totaled $16.6 billion. Indemnification Assets and related contingent obligations — As part of the OneWest Transaction, CIT is party to loss share agree- ments with the FDIC, which provide for the indemnification of certain losses within the terms of these agreements. These loss share agreements are related to OneWest Bank’s previous acqui- sitions of IndyMac, First Federal and La Jolla. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modification, charge-off of loan balance or liquidation of collateral). The loss share agreements cover SFR loans acquired from IndyMac, First Federal, and La Jolla. In addi- tion, the IndyMac loss share agreement covers reverse mortgage loans. These agreements are accounted for as indemnification assets which were recognized as of the acquisition date at their assessed fair value of $455.4 million, including the affects of the measurement period adjustments. The First Federal and La Jolla loss share agreements also include certain true-up provisions for amounts due to the FDIC if actual and estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses originally estimated at the time of OneWest Bank’s acquisition of the covered loans. Upon acquisi- tion, CIT established a separate liability for these amounts due to the FDIC associated with the LJB loss share agreement at the assessed fair value of $56 million. As a mortgage servicer of residential reverse mortgage loans, the Company is exposed to contingent obligations for breaches of servicer obligations as set forth in industry regulations estab- lished by HUD and FHA and in servicing agreements with the applicable counterparties, such as Fannie Mae and other inves- tors. 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 recorded a liability for contingent servicing-related liabilities in discontinued operations of $191 million as of the acquisition date. As of December 31, 2015, this liability was $231 million, which included a measurement period adjustment of $32 million, with an increase to goodwill from the OneWest Transaction. While the Company believes that such accrued liabilities are adequate, it is reasonably possible that such losses could ulti- mately exceed the Company’s liability for probable and reasonably estimable losses by up to $40 million as of December 31, 2015 associated with discontinued operations. Separately, a corresponding indemnification receivable from the FDIC of $66 million was recognized for the loans covered by indemnification agreements with the FDIC reported in continuing operations as of December 31, 2015. The indemnification receiv- able is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to manage- ment’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. See Note 1 Business and Summary of Significant Accounting Poli- cies, Note 2 Acquisition and Disposition Activities and Note 5 Indemnification Assets for more information. Fair Value Determination — At December 31, 2015, only selected assets (certain debt and equity securities, trading derivatives and derivative counterparty assets, and select FDIC receivable acquired in the OneWest Transaction) and liabilities (trading derivatives and derivative counterparty liabilities) were measured at fair value. The fair value of assets related to net employee pro- jected benefit obligations was determined largely via a level 2 methodology. Liabilities for Uncertain Tax Positions — The Company has open tax years in the U.S., Canada, and other international jurisdictions that are currently under examination, or may be subject to exami- nation in the future, by the applicable taxing authorities. We evaluate the adequacy of our income tax reserves in accordance with accounting standards on uncertain tax positions, taking into account open tax return positions, tax assessments received, and tax law changes. The process of evaluating liabilities and tax reserves involves the use of estimates and a high degree of man- agement judgment. The final determination of tax audits could affect our tax reserves. Realizability of Deferred Tax Assets — The recognition of certain net deferred tax assets of the Company’s reporting entities is dependent upon, but not limited to, the future profitability of the reporting entity, when the underlying temporary differences will reverse, and tax planning strategies. Further, Management’s judg- ment regarding the use of estimates and projections is required in assessing our ability to realize the deferred tax assets relating to net operating loss carry forwards (”NOLs“) as most of these assets are subject to limited carry-forward periods some of which began to expire in 2016. In addition, the domestic NOLs are sub- ject to annual use limitations under the Internal Revenue Code and certain state laws. Management utilizes historical and pro- jected data in evaluating positive and negative evidence regarding recognition of deferred tax assets. See Note 1 — Business and Summary of Significant Accounting Policies and Note 19 — Income Taxes in Item 8 Financial Statements and Supplementary Data for additional information regarding income taxes. Goodwill — The consolidated goodwill balance totaled $1,198.3 million at December 31, 2015, or approximately 1.8% of total assets. CIT acquired OneWest Bank on August 3, 2015, which resulted in the recording of $663 million of goodwill during 2015, including the affects of the measurement period adjustments. Initially, $598 million was recorded in the third quarter of 2015 upon the acquisition of OneWest Bank. A measurement period adjustment, which increased goodwill by $65 million, was recorded during the fourth quarter of 2015. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future events that are highly subjective in nature and may require CIT ANNUAL REPORT 2015 101 adjustments, which can be updated throughout the year following the acquisition. Subsequent to the acquisition, man- agement continued to review information relating to events or circumstances existing at the acquisition date. This review resulted in adjustments to the acquisition date valuation amounts, which increased the goodwill balance to $663 million. During 2014, CIT acquired Paris-based Nacco, and Direct Capital, resulting in the addition of $77 million and approximately $170 million of goodwill, respectively. The remaining amount of good- will represented the excess reorganization value over the fair value of tangible and identified intangible assets, net of liabili- ties, recorded in conjunction with FSA in 2009, and was allocated to TIF (Transportation Finance reporting unit) and NAB (Equip- ment Finance and Commercial Services reporting units) and NSP, the remaining amount of which was sold during 2015. Though the goodwill balance is not significant compared to total assets, management believes the judgmental nature in determin- ing the values of the reporting units when measuring for potential impairment is significant enough to warrant additional discussion. CIT tested for impairment as of September 30, 2015, at which time CIT’s share price was $40.03 and tangible book value (”TBV“) per share was $47.09. This is as compared to December 31, 2009, CIT’s emergence date, when the Company was valued at a discount of 30% to TBV per share of $39.06. At September 30, 2015, CIT’s share price was trading at 45% above the December 31, 2009 share price of $27.61, while the TBV per share of $47.09 was approximately 21% higher than the TBV at December 31, 2009. In accordance with ASC 350, Intangibles — Goodwill and other, goodwill is assessed for impairment at least annually, or more fre- quently if events occur that would indicate a potential reduction in the fair value of the reporting unit below its carrying value. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. The ASC requires a two-step impairment test to be used to identify potential goodwill impairment and to measure the amount of goodwill impairment. Companies can also choose to perform qualitative assessments to conclude on whether it is more likely or not that a company’s carrying amount including goodwill is greater than its fair value, commonly referred to as Step 0, before applying the two-step approach. For 2015, we performed the Step 1 analysis utilizing estimated fair value based on peer price to earnings (”PE“) and TBV mul- tiples for the Transportation Finance, Commercial Services and Equipment Finance goodwill assessments. The Company per- formed the analysis using both a current PE and forward PE method. The current PE method was based on annualized income after taxes and actual peers’ multiples as of September 30, 2015. The forward PE method was based on forecasted income after taxes and forward peers’ multiples as of September 30, 2015. The TBV method is based on the reporting unit’s estimated equity carrying amount and peer ratios using TBV as of September 30, 2015. For all analyses, CIT estimates each report- ing unit’s equity carrying amounts by applying the Company’s economic capital ratios to the unit’s risk weighted assets. In addition, the Company applied a 34.4% control premium. The control premium is management’s estimate of how much a mar- ket participant would be willing to pay over the market fair value for control of the business. Management concluded, based on Item 7: Management’s Discussion and Analysis 102 CIT ANNUAL REPORT 2015 performing the Step 1 analysis, that the fair values of the reporting units exceed their respective carrying values, including goodwill. With respect to the goodwill recognized during 2015 as a result of the OneWest Bank acquisition, the Company first assessed qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its car- rying amount before performing the two-step impairment test as required in ASC 350, Intangibles — Goodwill and Other. Examples of qualitative factors to assess include macroeconomic conditions, industry and market considerations, market changes affecting the Company’s products and services, overall financial performance, and company specific events affecting operations. In such an assessment performed for the year ended INTERNAL CONTROLS WORKING GROUP December 31, 2015, the Company concluded that it is not more likely than not that the fair value of the Commercial Banking, Commercial Real Estate, Consumer Banking and LCM reporting units are less than their carrying amounts, including goodwill. Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods. See Note 26 — Goodwill and Intangible Assets in Item 8 Financial Statements and Supplementary Data for more detailed information. The Internal Controls Working Group (”ICWG“), which reports to the Disclosure Committee, is responsible for monitoring and improving internal controls over external financial reporting. The ICWG is chaired by the Controller and is comprised of executives in Finance, Risk, Operations, Human Resources, Information Tech- nology and Internal Audit. See Item 9A. Controls and Procedures for more information. NON-GAAP FINANCIAL MEASUREMENTS The SEC adopted regulations that apply to any public disclosure or release of material information that includes a non-GAAP financial measure. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk contain certain non-GAAP financial measures. Due to the nature of our financing and leasing assets, which include a higher pro- portion of operating lease equipment than most BHCs, certain financial measures commonly used by other BHCs are not as meaningful for our Company. We intend our non-GAAP financial measures to provide additional information and insight regarding operating results and financial position of the business and in cer- tain cases to provide financial information that is presented to rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from or inconsistent with non-GAAP finan- cial measures used by other companies. See footnotes below the tables for additional explanation of non-GAAP measurements. Total Net Revenue(1) and Net Operating Lease Revenue(2) (dollars in millions) Total Net Revenue Interest income Rental income on operating leases Finance revenue Interest expense Depreciation on operating lease equipment Maintenance and other operating lease expenses Net finance revenue Other income Total net revenue NFR as a % of AEA Net Operating Lease Revenue Rental income on operating leases Depreciation on operating lease equipment Maintenance and other operating lease expenses Net operating lease revenue Years Ended December 31, 2015 2014 2013 $ 1,512.9 2,152.5 3,665.4 (1,103.5) (640.5) (231.0) 1,690.4 219.5 $ 1,909.9 $ 1,226.5 2,093.0 3,319.5 (1,086.2) (615.7) (196.8) 1,420.8 305.4 $ 1,726.2 $ 1,255.2 1,897.4 3,152.6 (1,060.9) (540.6) (163.1) 1,388.0 381.3 $ 1,769.3 3.47% 3.49% 3.69% $ 2,152.5 (640.5) (231.0) $ 1,281.0 $ 2,093.0 (615.7) (196.8) $ 1,280.5 $ 1,897.4 (540.6) (163.1) $ 1,193.7 CIT ANNUAL REPORT 2015 103 Operating Expenses Excluding Certain Costs(3) (dollars in millions) Operating expenses Provision for severance and facilities exiting activities Intangible asset amortization Operating expenses excluding restructuring costs and intangible asset amortization Years Ended December 31, 2015 $(1,168.3) 58.2 13.3 $(1,096.8) 2014 $ (941.8) 31.4 1.4 $ (909.0) 2013 $ (970.2) 36.9 – $ (933.3) Operating expenses excluding restructuring costs as a % of AEA Operating expenses exclusive of restructuring costs and intangible amortization(3) Total Net Revenue Net Efficiency Ratio(4) (2.40)% (2.25)% (2.31)% (2.23)% (2.58)% (2.48)% $ 1,909.9 $1,726.2 $1,769.3 57.4% 52.7% 52.7% Earning Assets(5) (dollars in millions) Loans Operating lease equipment, net Interest bearing cash Investment securities Assets held for sale Indemnification assets Securities purchased under agreements to resell Credit balances of factoring clients Total earning assets Average Earning Assets (for the respective years) Tangible Book Value(6) (dollars in millions) Total common stockholders’ equity Less: Goodwill Intangible assets Tangible book value Continuing Operations Total Assets(7) (dollars in millions) Total assets Assets of discontinued operation Continuing operations total assets Years Ended December 31, 2015 $31,671.7 16,617.0 6,820.3 2,953.8 2,092.4 414.8 – (1,344.0) $59,226.0 $48,720.3 2014 $19,495.0 14,930.4 6,241.2 1,550.3 1,218.1 – 650.0 (1,622.1) $42,462.9 $40,692.6 2015 $10,978.1 (1,198.3) (176.3) $ 9,603.5 December 31, 2014 $9,068.9 (571.3) (25.7) $8,471.9 2013 $18,629.2 13,035.4 – 2,630.7 1,003.4 – – (1,336.1) $33,962.6 $37,636.0 2013 $8,838.8 (334.6) (20.3) $8,483.9 2015 $67,498.8 (500.5) $66,998.3 December 31, 2014 $47,880.0 – $47,880.0 2013 $47,139.0 (3,821.4) $43,317.6 (1) Total net revenues is a non-GAAP measure that represents the combination of net finance revenue and other income and is an aggregation of all sources of revenue for the Company. Total net revenues is used by management to monitor business performance. Given our asset composition includes a high level of operating lease equipment, NFM is a more appropriate metric than net interest margin (”NIM“) (a common metric used by other bank holding companies), as NIM does not fully reflect the earnings of our portfolio because it includes the impact of debt costs of all our assets but excludes the net revenue (rental revenue less depreciation and maintenance and other operating lease expenses) from operating leases. (2) Net operating lease revenue is a non-GAAP measure that represents the combination of rental income on operating leases less depreciation on operat- ing lease equipment and maintenance and other operating lease expenses. Net operating lease revenues is used by management to monitor portfolio performance. (3) Operating expenses excluding restructuring costs and intangible asset amortization is a non-GAAP measure used by management to compare period over period expenses. (4) Net efficiency ratio is a non-GAAP measurement used by management to measure operating expenses (before restructuring costs and intangible amortiza- tion) to total net revenues. (5) Earning assets is a non-GAAP measure and are utilized in certain revenue and earnings ratios. Earning assets are net of credit balances of factoring clients. This net amount represents the amounts we fund. (6) Tangible book value is a non-GAAP measure, which represents an adjusted common shareholders’ equity balance that has been reduced by goodwill and intangible assets. Tangible book value is used to compute a per common share amount, which is used to evaluate our use of equity. (7) Continuing operations total assets is a non-GAAP measure, which management uses for analytical purposes to compare balance sheet assets on a consis- tent basis. Item 7: Management’s Discussion and Analysis 104 CIT ANNUAL REPORT 2015 FORWARD-LOOKING STATEMENTS Certain statements contained in this document are ”forward- looking statements“ within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature are forward-looking and the words ”anticipate,“ ”believe,“ ”could,“ ”expect,“ ”estimate,“ ”forecast,“ ”intend,“ ”plan,“ ”potential,“ ”project,“ ”target“ and similar expressions are generally intended to identify forward-looking statements. Any forward-looking state- ments contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commis- sion or in communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to known and unknown risks, uncertainties and contin- gencies. Forward-looking statements are included, for example, in the discussions about: - our liquidity risk and capital management, including our capital plan, leverage, capital ratios, and credit ratings, our liquidity plan, and our plans and the potential transactions designed to enhance our liquidity and capital, and for a return of capital, - our plans to change our funding mix and to access new sources of funding to broaden our use of deposit taking capabilities, - our pending or potential acquisition plans, and the integration risks inherent in such acquisitions, including our recently com- pleted acquisition of OneWest Bank, - our credit risk management and credit quality, - our asset/liability risk management, - our funding, borrowing costs and net finance revenue, - our operational risks, including success of systems enhancements and expansion of risk management and control functions, - our mix of portfolio asset classes, including changes resulting from growth initiatives, new business initiatives, new products, acquisitions and divestitures, new business and customer retention, - Our interactions with our principal regulators, - legal risks, including related to the enforceability of our agreements and to changes in laws and regulations, - our growth rates, - our commitments to extend credit or purchase equipment, and - how we may be affected by legal proceedings. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors, in addition to those disclosed in ”Risk Factors“, that could cause such differences include, but are not limited to: - capital markets liquidity, - - risks of and/or actual economic slowdown, downturn or recession, industry cycles and trends, - uncertainties associated with risk management, including credit, prepayment, asset/liability, interest rate and currency risks, - adequacy of reserves for credit losses, - - risks inherent in changes in market interest rates and quality spreads, funding opportunities, deposit taking capabilities and borrowing costs, - conditions and/or changes in funding markets and our access to such markets, including secured and unsecured term debt and the asset-backed securitization markets, - - - risks of implementing new processes, procedures, and systems, including any new processes, procedures, and systems required to comply with the additional laws and regulations applicable to systemically important financial institutions, risks associated with the value and recoverability of leased equipment and lease residual values, risks of failing to achieve the projected revenue growth from new business initiatives or the projected expense reductions from efficiency improvements, - application of fair value accounting in volatile markets, - application of goodwill accounting in a recessionary economy, - changes in laws or regulations governing our business and operations, or affecting our assets, including our operating lease equipment, - our dependence on U.S. government-sponsored entities (e.g. Fannie Mae) and agencies and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various GSE, agency, and other capital requirements applicable to our business and our ability to remain qualified as a GSE approved seller, servicer or component servicer, including the ability to continue to comply with the GSE’s respective residential loan and selling and servicing guides, - uncertainties relating to the status and future role of GSEs, and the effects of any changes to the origination and/or servicing requirements of the GSEs or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs or various regulatory authorities, CIT ANNUAL REPORT 2015 105 - risks associated with the origination, securitization and servicing of reverse mortgages, including changes to reverse mortgage programs operated by FHA, HUD or GSE’s, our ability to accurately estimate interest curtailment liabilities, continued demand for reverse mortgages, our ability to fund reverse mortgage repurchase obligations, our ability to fund principal additions on our reverse mortgage loans, and our ability to securitize our reverse mortgage loans and tails, - changes in competitive factors, - demographic trends, - customer retention rates, - - risks associated with dispositions of businesses or asset portfolios, including how to replace the income associated with such businesses or portfolios and the risk of residual liabilities from such businesses or portfolios, risks associated with acquisitions of businesses or asset portfolios and the risks of integrating such acquisitions, including the acquisition of OneWest Bank, and - changes and/or developments in the regulatory environment. Any or all of our forward-looking statements here or in other publications may turn out to be wrong, and there are no guarantees regarding our performance. We do not assume any obligation to update any forward-looking statement for any reason. Item 7: Management’s Discussion and Analysis 106 CIT ANNUAL REPORT 2015 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehen- sive income (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of CIT Group Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effec- tive internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsi- bility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant esti- mates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over finan- cial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and oper- ating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabil- ity of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposi- tions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendi- tures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the finan- cial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projec- tions of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Management’s Report on Internal Control over Financial Reporting, management has excluded IMB HoldCo LLC from its assessment of internal control over financial reporting as of December 31, 2015 because it was acquired by the Company in a purchase business combination during 2015. We have also excluded IMB HoldCo LLC from our audit of internal control over financial reporting. IMB HoldCo LLC is a wholly-owned subsidiary that represented approximately 33% and 10% of the Company’s total consolidated assets and total consolidated revenue, respec- tively, as of and for the year ended December 31, 2015. /s/ PricewaterhouseCoopers LLP New York, New York March 4, 2016 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in millions – except share data) Assets Cash and due from banks, including restricted balances of $601.4 and $374.0 at December 31, 2015 and 2014(1), respectively (see Note 10 for amounts pledged) Interest bearing deposits, including restricted balances of $229.5 and $590.2 at December 31, 2015 and 2014(1), respectively (see Note 10 for amounts pledged) Securities purchased under agreements to resell Investment securities, including $339.7 at December 31, 2015 of securities carried at fair value with changes recorded in net income (see Note 10 for amounts pledged) Assets held for sale(1) Loans (see Note 10 for amounts pledged) Allowance for loan losses Total loans, net of allowance for loan losses(1) Operating lease equipment, net (see Note 10 for amounts pledged)(1) Indemnification assets Unsecured counterparty receivable Goodwill Intangible assets Other assets, including $195.9 and $168.4 at December 31, 2015 and 2014, respectively, at fair value Assets of discontinued operations Total Assets Liabilities Deposits Credit balances of factoring clients Other liabilities, including $221.3 and $62.8 at December 31, 2015 and 2014, respectively, at fair value Borrowings, including $3,361.2 and $3,053.3 contractually due within twelve months at December 31, 2015 and December 31, 2014, respectively Liabilities of discontinued operations Total Liabilities Stockholders’ Equity Common stock: $0.01 par value, 600,000,000 authorized CIT ANNUAL REPORT 2015 107 December 31, 2015 December 31, 2014 $ 1,481.2 $ 878.5 6,820.3 – 2,953.8 2,092.4 31,671.7 (360.2) 31,311.5 16,617.0 414.8 537.8 1,198.3 176.3 3,394.9 500.5 $67,498.8 $32,782.2 1,344.0 3,158.7 18,539.1 696.2 56,520.2 6,241.2 650.0 1,550.3 1,218.1 19,495.0 (346.4) 19,148.6 14,930.4 – 559.2 571.3 25.7 2,106.7 – $47,880.0 $15,849.8 1,622.1 2,888.8 18,455.8 – 38,816.5 Issued: 204,447,769 and 203,127,291 at December 31, 2015 and December 31, 2014, respectively Outstanding: 201,021,508 and 180,920,575 at December 31, 2015 and December 31, 2014, respectively Paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock: 3,426,261 and 22,206,716 shares at December 31, 2015 and December 31, 2014 at cost, respectively Total Common Stockholders’ Equity Noncontrolling minority interests Total Equity Total Liabilities and Equity 2.0 2.0 8,718.1 2,557.4 (142.1) (157.3) 10,978.1 0.5 10,978.6 $67,498.8 8,603.6 1,615.7 (133.9) (1,018.5) 9,068.9 (5.4) 9,063.5 $47,880.0 (1) The following table presents information on assets and liabilities related to Variable Interest Entities (VIEs) that are consolidated by the Company. The differ- ence 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 Assets held for sale Total loans, net of allowance for loan losses Operating lease equipment, net Other Total Assets Liabilities Beneficial interests issued by consolidated VIEs (classified as long-term borrowings) Total Liabilities The accompanying notes are an integral part of these consolidated financial statements. $ 314.2 279.7 2,218.6 3,985.9 11.2 $6,809.6 $4,084.8 $4,084.8 $ 537.3 – 3,619.2 4,219.7 10.0 $8,386.2 $5,331.5 $5,331.5 Item 8: Financial Statements and Supplementary Data 108 CIT ANNUAL REPORT 2015 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in millions – except per share data) Interest income Interest and fees on loans Other interest and dividends Interest income Interest expense Interest on borrowings Interest on deposits Interest expense Net interest revenue Provision for credit losses Net interest revenue, after credit provision Non-interest income Rental income on operating leases Other income Total non-interest income Total revenue, net of interest expense and credit provision Non-interest expenses Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses Loss on debt extinguishment Total other expenses Income from continuing operations before benefit (provision) for income taxes Benefit (provision) for income taxes Income from continuing operations before attribution of noncontrolling interests Net loss (income) attributable to noncontrolling interests, after tax Income from continuing operations Discontinued operations (Loss) income from discontinued operations, net of taxes Gain on sale of discontinued operations, net of taxes Total (loss) income from discontinued operations, net of taxes Net income Basic income per common share Income from continuing operations (Loss) income from discontinued operations, net of taxes Basic income per common share Diluted income per common share Income from continuing operations (Loss) income from discontinued operations, net of taxes Diluted income per common share Average number of common shares – (thousands) Basic Diluted Dividends declared per common share Years Ended December 31, 2015 2014 2013 $ 1,441.5 71.4 1,512.9 $ 1,191.0 35.5 1,226.5 $ 1,226.3 28.9 1,255.2 (773.4) (330.1) (1,103.5) 409.4 (160.5) 248.9 2,152.5 219.5 2,372.0 2,620.9 (640.5) (231.0) (1,168.3) (2.6) (2,042.4) 578.5 488.4 1,066.9 0.1 1,067.0 (10.4) – (10.4) $ 1,056.6 $ $ $ $ 5.75 (0.05) 5.70 5.72 (0.05) 5.67 185,500 186,388 0.60 $ (855.2) (231.0) (1,086.2) 140.3 (100.1) 40.2 2,093.0 305.4 2,398.4 2,438.6 (615.7) (196.8) (941.8) (3.5) (1,757.8) 680.8 397.9 1,078.7 (1.2) 1,077.5 (230.3) 282.8 52.5 $ 1,130.0 $ $ $ $ 5.71 0.28 5.99 5.69 0.27 5.96 188,491 189,463 0.50 $ (881.1) (179.8) (1,060.9) 194.3 (64.9) 129.4 1,897.4 381.3 2,278.7 2,408.1 (540.6) (163.1) (970.2) – (1,673.9) 734.2 (83.9) 650.3 (5.9) 644.4 31.3 – 31.3 675.7 3.21 0.16 3.37 3.19 0.16 3.35 $ $ $ $ $ 200,503 201,695 0.10 $ The accompanying notes are an integral part of these consolidated financial statements. CIT ANNUAL REPORT 2015 109 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in millions) Income from continuing operations, before attribution of noncontrolling interests Other comprehensive income (loss), net of tax: Foreign currency translation adjustments Changes in fair values of derivatives qualifying as cash flow hedges Net unrealized losses on available for sale securities Changes in benefit plans net gain (loss) and prior service (cost)/credit Other comprehensive income (loss), net of tax Comprehensive income before noncontrolling interests and discontinued operation Comprehensive loss (income) attributable to noncontrolling interests Loss (income) from discontinued operation, net of taxes Comprehensive income Years Ended December 31, 2015 2014 $1,066.9 $1,078.7 9.7 – (7.1) (10.8) (8.2) 1,058.7 0.1 (10.4) $1,048.4 (26.0) 0.2 (0.1) (34.4) (60.3) 1,018.4 (1.2) 52.5 $1,069.7 2013 $650.3 (12.8) (0.1) (2.0) 19.0 4.1 654.4 (5.9) 31.3 $679.8 The accompanying notes are an integral part of these consolidated financial statements. Item 8: Financial Statements and Supplementary Data 110 CIT ANNUAL REPORT 2015 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (dollars in millions) December 31, 2012 Net income Other comprehensive income, net of tax Dividends paid Amortization of restricted stock, stock option, and performance share expenses Repurchase of common stock Employee stock purchase plan Distribution of earnings and capital December 31, 2013 Net income Other comprehensive income, net of tax Dividends paid Amortization of restricted stock, stock option, and performance share expenses Repurchase of common stock Employee stock purchase plan Distribution of earnings and capital December 31, 2014 Net income Other comprehensive income, net of tax Dividends paid Amortization of restricted stock, stock option, and performance share expenses Repurchase of common stock Issuance of common stock – acquisition Employee stock purchase plan Purchase of noncontrolling interest and distribution of earnings and capital December 31, 2015 Common Stock Paid-in Capital $2.0 $8,501.8 52.5 1.1 $2.0 $8,555.4 47.1 1.1 $2.0 $8,603.6 93.4 45.6 2.0 (26.5) Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Noncontrolling Minority Interests Total Equity $ (74.6) 675.7 (20.1) $ 581.0 1,130.0 (95.3) $1,615.7 1,056.6 (114.9) $ (77.7) $ (16.7) $ 4.7 $ 8,339.5 5.9 681.6 4.1 (15.9) (193.4) 4.1 (20.1) 36.6 (193.4) 1.1 0.6 0.6 $ (73.6) $ (226.0) $ 11.2 $ 8,850.0 1.2 1,131.2 (60.3) (17.0) (775.5) (60.3) (95.3) 30.1 (775.5) 1.1 $(133.9) $(1,018.5) $ (5.4) $ 9,063.5 (17.8) (17.8) (0.1) 1,056.5 (8.2) (23.4) (531.8) 1,416.4 (8.2) (114.9) 70.0 (531.8) 1,462.0 2.0 6.0 (20.5) $2.0 $8,718.1 $2,557.4 $(142.1) $ (157.3) $ 0.5 $10,978.6 The accompanying notes are an integral part of these consolidated financial statements. CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) Cash Flows From Operations Net income Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses Net depreciation, amortization and (accretion) Net gains on asset sales (Benefit) provision for deferred income taxes (Increase) decrease in finance receivables held for sale Goodwill and intangible assets – impairments and amortization Reimbursement of OREO expenses from FDIC Increase (decrease) in other assets Increase (decrease) in other liabilities Net cash flows provided by operations Cash Flows From Investing Activities Loans originated and purchased Principal collections of loans Purchases of investment securities Proceeds from maturities of investment securities Proceeds from asset and receivable sales Purchases of assets to be leased and other equipment Net (increase) decrease in short-term factoring receivables Purchases of restricted stock Proceeds from redemption of restricted stock Payments to the FDIC under loss share agreements Proceeds from FDIC under loss share agreements and participation agreements Proceeds from the sale of OREO, net of repurchases Acquisition, net of cash received Net change in restricted cash Net cash flows provided by (used in) investing activities Cash Flows From Financing Activities Proceeds from the issuance of term debt Repayments of term debt Proceeds from FHLB advances Repayments of FHLB debt Net increase in deposits Collection of security deposits and maintenance funds Use of security deposits and maintenance funds Repurchase of common stock Dividends paid Purchase of noncontrolling interest Payments on affordable housing investment credits Net cash flows (used in) provided by financing activities Increase (decrease) in unrestricted cash and cash equivalents Unrestricted cash and cash equivalents, beginning of period Unrestricted cash and cash equivalents, end of period Supplementary Cash Flow Disclosure Interest paid Federal, foreign, state and local income taxes (paid) collected, net Supplementary Non Cash Flow Disclosure Transfer of assets from held for investment to held for sale Transfer of assets from held for sale to held for investment Transfers of assets from held for investment to OREO Issuance of common stock as consideration CIT ANNUAL REPORT 2015 111 Years Ended December 31, 2015 2014 2013 $ 1,056.6 $ 1,130.0 $ 675.7 160.5 653.7 (11.7) (569.2) (99.3) 29.0 7.2 195.3 (264.8) 1,157.3 (15,101.7) 13,237.2 (8,054.2) 8,964.9 2,353.8 (3,016.3) 124.7 (126.2) 18.6 (18.1) 33.7 60.8 2,521.2 156.7 1,155.1 1,691.0 (4,571.8) 5,900.0 (5,898.8) 2,408.3 330.1 (184.1) (531.8) (114.9) (20.5) (4.8) (997.3) 1,315.1 6,155.5 $ 7,470.6 $ (1,110.0) (9.5) $ $ 2,955.3 208.7 $ $ 65.8 $ 1,462.0 100.1 882.0 (348.6) (426.7) (165.1) – – (34.9) 33.5 1,170.3 (15,534.3) 13,681.8 (9,824.4) 10,297.8 3,817.2 (3,101.1) (8.0) – – – – – (448.6) 93.8 (1,025.8) 4,180.1 (5,874.7) – – 3,323.9 334.4 (163.0) (775.5) (95.3) – – 929.9 1,074.4 5,081.1 $ 6,155.5 $ (1,049.5) (21.6) $ $ 2,551.3 64.9 $ – $ – $ 64.9 705.5 (187.2) 59.1 404.8 – – (251.1) (151.3) 1,320.4 (18,243.1) 15,310.4 (16,538.8) 15,084.5 1,875.4 (2,071.8) 105.2 – – – – – – 127.0 (4,351.2) 2,107.6 (2,445.8) – – 2,846.1 309.0 (127.7) (193.4) (20.1) – – 2,475.7 (555.1) 5,636.2 $ 5,081.1 $ $ (997.8) (68.0) $ 5,141.9 18.0 $ – $ – $ The accompanying notes are an integral part of these consolidated financial statements. Item 8: Financial Statements and Supplementary Data 112 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 compa- nies in a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation industry worldwide. CIT became a bank holding company (“BHC”) in December 2008 and a financial holding company (“FHC”) in July 2013. 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. Effective as of August 3, 2015, CIT Group Inc. (“CIT”) acquired IMB HoldCo LLC (“IMB”), the parent company of OneWest Bank, National Association, a national bank (“OneWest Bank”). CIT Bank, a Utah-state chartered bank and a wholly owned subsidiary of CIT, merged with and into OneWest Bank (the “OneWest Transaction”), with OneWest Bank surviving as a wholly owned subsidiary of CIT with the name CIT Bank, National Association (“CIT Bank, N.A.” or “CIT Bank”). See Note 2 — Acquisitions and Disposition Activities for details. 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. CIT Bank, N.A. is regulated by the Office of the Comp- troller of the Currency, U.S. Department of the Treasury (“OCC”). Prior to the OneWest Transaction, CIT Bank was regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Utah Department of Financial Institutions (“UDFI”). BASIS OF PRESENTATION Basis of Financial Information The accounting and financial reporting policies of CIT Group Inc. conform to generally accepted accounting principles (“GAAP”) in the United States and the preparation of the consolidated finan- cial statements is in conformity with GAAP which 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 signifi- cant estimates include: allowance for loan losses, loan impairment, fair value determination, lease residual values, liabili- ties for uncertain tax positions, realizability of deferred tax assets, purchase accounting adjustments, indemnification assets, good- will, intangible assets, and contingent liabilities. Additionally where applicable, the policies conform to accounting and report- ing 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 (“PB”). 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 year ended December 31, 2015 contain activity of OneWest Bank for approximately five months, therefore they are not necessarily indicative of the results expected for a full year. Discontinued Operations 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, as amended by ASU 2014-08, the Finan- cial Freedom business is reflected as discontinued operations as of the August 3, 2015 acquisition date and as of December 31, 2015. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, sys- tems 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 Fannie Mae, secured bor- rowings and contingent liabilities. Unrelated to the Financial Freedom business, continuing operations includes a portfolio of reverse mortgages, which is maintained in the Legacy Consumer Mortgage segment. In addition to the 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 securitization program, the Company has determined that the HECM loans transferred into the program 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 Com- pany’s statement of financial position and the proceeds received are recorded as a secured borrowing. On April 25, 2014, the Company completed the sale of the stu- dent lending business, along with certain secured debt and servicing rights. As a result, the student lending business is reported as a discontinued operation for the year ended December 31, 2014. Discontinued Operations are discussed in Note 2 — Acquisition and Disposition Activities. SIGNIFICANT ACCOUNTING POLICIES Financing and Leasing Assets CIT extends credit to commercial customers through a variety of financing arrangements including term loans, revolving credit facilities, capital (direct finance) leases and operating leases. With the addition of OneWest Bank, CIT now also extends credit through consumer loans, including residential mortgages and home equity loans, and has a portfolio of reverse mortgages. The amounts outstanding on term loans, consumer loans, revolving credit facilities and capital leases are referred to as finance receivables. In certain instances, we use the term “Loans” syn- onymously, as presented on the balance sheet. These finance receivables, when combined with Assets held for sale (“AHFS”) and Operating lease equipment, net are referred to as financing and leasing assets. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 113 It is CIT’s expectation that the majority of the loans and leases originated will be held for the foreseeable future or until maturity. In certain situations, for example to manage concentrations and/or credit risk or where returns no longer meet specified tar- gets, some or all of certain exposures are sold. Loans for which the Company has the intent and ability to hold for the foresee- able future or until maturity are classified as held for investment (“HFI”). If the Company no longer has the intent or ability to hold loans for the foreseeable future, then the loans are transferred to AHFS. Loans originated with the intent to resell are classified as AHFS. Loans originated and classified as HFI are recorded at amortized cost. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the contractual lives of the related loans. Unearned income on leases and discounts and premiums on loans purchased are amortized to interest income using the effective interest method. For loans classified as AHFS, the amortization of discounts and premiums on loans purchased and unearned income ceases. Direct financing leases originated and classified as HFI are recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Manage- ment performs periodic reviews of estimated residual values, with other than temporary impairment (“OTTI”) recognized in current period earnings. If it is determined that a loan should be transferred from HFI to AHFS, then the loan is transferred at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as a charge-off when the carrying amount exceeds fair value and the difference relates to credit quality, otherwise the write-down is recorded as a reduction to Other Income, and any allowance for loan loss is reversed. Once classified as AHFS, the amount by which the carrying value exceeds fair value is recorded as a valua- tion allowance and is reflected as a reduction to Other Income. If it is determined that a loan should be transferred from AHFS to HFI, the loan is transferred at the lower of cost or fair value on the transfer date, which coincides with the date of change in management’s intent. The difference between the carrying value of the loan and the fair value, if lower, is reflected as a loan dis- count at the transfer date, which reduces its carrying value. Subsequent to the transfer, the discount is accreted into earnings as an increase to interest income over the life of the loan using the effective interest method. Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Where manage- ment’s intention is to sell the equipment received at the end of a lease, these are marked to the lower of cost or fair value and clas- sified as AHFS. Depreciation is stopped on these assets and any further marks to lower of cost or fair value are recorded in Other Income. Equipment received at the end of the lease is marked to the lower of cost or fair value with the adjustment recorded in Other Income. In the operating lease portfolio, maintenance costs incurred that exceed maintenance funds collected for commercial aircraft are expensed if they do not provide a future economic benefit and do not extend the useful life of the aircraft. Such costs may include costs of routine aircraft operation and costs of mainte- nance and spare parts incurred in connection with re-leasing an aircraft and during the transition between leases. For such main- tenance costs that are not capitalized, a charge is recorded in expense at the time the costs are incurred. Income recognition related to maintenance funds collected and not used during the life of the lease is deferred to the extent management estimates costs will be incurred by subsequent lessees performing sched- uled maintenance. Upon the disposition of an aircraft, any excess maintenance funds that exist are recognized in Other Income. Loans acquired in the OneWest Transaction were initially recorded at their fair value on the acquisition date. For loans that were not considered credit impaired at the date of acquisition and for which cash flows were evaluated based on contractual terms, a premium or discount was recorded, representing the dif- ference between the unpaid principal balance and the fair value. The discount or premium is accreted or amortized to earnings using the effective interest method as a yield adjustment over the remaining contractual terms of the loans and is recorded in Inter- est Income. If the loan is prepaid, the remaining discount or premium will be recognized in Interest Income. If the loan is sold, the remaining discount will be considered in the resulting gain or loss on sale. If the loan is subsequently classified as non-accrual, or transferred to AHFS, accretion / amortization of the discount (premium) will cease. For loans that were purchased with evidence of credit quality deterioration since origination, the discount recorded includes accretable and non-accretable components. For purposes of income recognition, and consistent with valua- tion models across loan portfolios, the Company has elected to not take a position on the movement of future interest rates in the model. If interest rates rise, the loans will generate higher income. If rates fall, the loans will generate lower income. Purchased Credit-Impaired Loans Loans accounted for as purchased credit-impaired loans (“PCI loans”) are accounted for in accordance with ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). PCI loans were determined as of the date of purchase to have evidence of credit quality deterioration, which make it probable that the Company will be unable to collect all contractually required payments (principal and interest). Evi- dence of credit quality deterioration as of the purchase date may include past due status, recent borrower credit scores, credit rating (probability of obligor default) and recent loan-to-value ratios. Commercial PCI loans are accounted for as individual loans. Conversely, consumer PCI loans with similar common risk characteristics are pooled together for accounting purposes (i.e., into one unit of account). Common risk characteristics con- sist of similar credit risk (e.g., delinquency status, loan-to-value, or credit risk rating) and at least one other predominant risk char- acteristic (e.g., loan type, collateral type, interest rate index, date of origination or term). For pooled loans, each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows for the pool. Item 8: Financial Statements and Supplementary Data 114 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At acquisition, the PCI loans were initially recorded at estimated fair value, which is determined by discounting each commercial loan’s or consumer pool’s principal and interest cash flows expected to be collected using a discount rate for similar instru- ments with adjustments that management believes a market participant would consider. The Company estimated the cash flows expected to be collected at acquisition using internal credit risk and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds of the loan. For both commercial PCI loans (evaluated individually) and con- sumer PCI loans (evaluated on a pool basis), an accretable yield is measured as the excess of the cash flows expected to be col- lected, estimated at the acquisition date, over the recorded investment (estimated fair value at acquisition) and is recognized in interest income over the remaining life of the loan, or pool of loans, on an effective yield basis. The difference between the cash flows contractually required to be paid (principal and inter- est), measured as of the acquisition date, over the cash flows expected to be collected is referred to as the non-accretable difference. Subsequent to acquisition, the estimates of the cash flows expected to be collected are evaluated on a quarterly basis for both commercial PCI loans (evaluated individually) and consumer PCI loans (evaluated on a pool basis). During each subsequent reporting period, the cash flows expected to be collected shall be reviewed but will be revised only if it is deemed probable that a significant change has occurred. 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 loan losses. Probable and significant increases in cash flows expected to be collected due to improved credit quality result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and an increase in the accretable yield applied pro- spectively for any remaining increase. The accretable yield is affected by revisions to previous expectations that result in an increase in expected cash flows, 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. The Company assumes a flat forward interest curve when analyzing future cash flows for the mortgage loans. Changes in expected cash flows caused by changes in market interest rates are recognized as adjustments to the accretable yield on a prospective basis. Resolutions of loans may include sales to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Upon resolution, the Company’s policy is to remove an individual consumer PCI loan from the pool at its carrying amount. Any difference between the loans carrying amount and the fair value of the collateral or other assets received does not affect the percentage yield calculation used to recognize accre- table yield on the pool. This removal method assumes that the amount received from these resolutions approximates the pool performance expectations of cash flows. The accretable yield percentage is unaffected by the resolution. Modifications or refinancing of loans accounted for within a pool do not result in the removal of those loans from the pool; instead, the revised terms are reflected in the expected cash flows within the pool of loans. Reverse Mortgages Reverse mortgage loans, which were recorded at fair value on the acquisition date, 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, 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 bor- rower’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 that 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, capital- ized mortgage insurance premiums, and other servicing advances capitalized into the loan. Revenue Recognition Interest income on HFI loans is recognized using the effective interest method or on a basis approximating a level rate of return over the life of the asset. Interest income includes components of accretion of the fair value discount on loans and lease receivables recorded in connection with Purchase Accounting Adjustments (“PAA”) and to a lesser extent Fresh Start Accounting (“FSA”) adjustments that were applied as of December 31, 2009, (the Convenience Date), all of which are accreted using the effective interest method as a yield adjustment over the remaining con- tractual term of the loan and recorded in interest income. If the loan is subsequently classified as AHFS, accretion (amortization) of the discount (premium) will cease. See Purchase Accounting Adjustments in Note 2 — Acquisition and Disposition Activities further in this section. Uninsured reverse mortgages in continuing operations that were determined to be non-PCI are accounted for 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.” For these uninsured reverse mortgages, the Company has determined that as a result of the similarities between both the reverse mortgage borrowers’ demographics and the terms of the reverse mortgage loan contracts, these reverse mortgages are accounted for at the pool level. To determine the effective yield of the pool, we proj- ect the pool’s cash inflows and outflows including actuarial projections of the life expectancy of the individual contract holder and changes in the collateral value of the residence are projected. At each reporting date, a new economic forecast is made of the cash inflows and outflows for the population of reverse mortgages. Projections of cash flows assume the use of flat forward rate interest curves. The effective yield of the pool is recomputed and income is adjusted to retrospectively reflect the revised rate of return. Because of this accounting, the recorded value of reverse mortgage loans and interest income can result in significant volatility associated with the estimates. As a result, income recognition can vary significantly from period to period. The pool method of accounting results in the establishment of an Actuarial Valuation Allowance (“AVA”) related to the deferral of CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS net gains from loans exiting the pool. The AVA is a component of the net book value of the portfolio and has the ability to absorb potential collectability short-falls. ing and remain on non-accrual until, in the opinion of management, collection of remaining principal and interest is reasonably assured, and upon collection of six consecutive scheduled payments. CIT ANNUAL REPORT 2015 115 Insured reverse mortgages included in continuing operations were determined to be PCI, even though these loans are HECMs insured by the Federal Housing Administration, based on man- agement’s consideration of the loan’s loan-to-value (“LTV”) and its relationship to the loan’s Maximum Claim Amount. As such, based on the guidance in ASC 310-30, revenue recognition and income measurement for these loans is based on expected rather than contractual cash flows; and, the fair value adjustment on these loans included both accretable and non-accretable components. Rental revenue on operating leases is recognized on a straight line basis over the lease term and is included in Non-interest Income. Intangible assets were recorded during PAA related to acquisitions completed by the Company and FSA to adjust the carrying value of above or below market operating lease con- tracts to their fair value. The FSA related adjustments (net) are amortized into rental income on a straight line basis over the remaining term of the respective lease. The recognition of interest income (including accretion) on Loans is suspended and an account is placed on non-accrual status when, in the opinion of management, full collection of all princi- pal and interest due is doubtful. To the extent the estimated cash flows, including fair value of collateral, does not satisfy both the principal and accrued interest outstanding, accrued but uncol- lected interest at the date an account is placed on non-accrual status is reversed and charged against interest income. Subse- quent interest received is applied to the outstanding principal balance until such time as the account is collected, charged-off or returned to accrual status. Loans that are on cash basis non- accrual do not accrue interest income; however, payments designated by the borrower as interest payments may be recorded as interest income. To qualify for this treatment, the remaining recorded investment in the loan must be deemed fully collectable. The recognition of interest income (including accretion) on con- sumer mortgages and small ticket commercial loans and lease receivables is suspended and all previously accrued but uncol- lected revenue is reversed, when payment of principal and/or interest is contractually delinquent for 90 days or more. Accounts, including accounts that have been modified, are returned to accrual status when, in the opinion of management, collection of remaining principal and interest is reasonably assured, and there is a sustained period of repayment performance for a minimum of six months. Due to the nature of reverse mortgages, these loans do not contain a contractual due date or regularly scheduled payments, and therefore are not included in delinquency and non-accrual reporting. The rec- ognition of interest income on reverse mortgages is suspended upon the latter of the foreclosure sale date or date on which marketable title has been acquired (i.e. property becomes OREO). The Company periodically modifies the terms of finance receiv- ables in response to borrowers’ financial difficulties. These modifications may include interest rate changes, principal for- giveness or payment deferments. Finance receivables that are modified, where a concession has been made to the borrower, are accounted for as Troubled Debt Restructurings (“TDRs”). TDRs are generally placed on non-accrual upon their restructur- PCI loans in pools that the Company may modify as TDRs are not within the scope of the accounting guidance for TDRs. Allowance for Loan Losses on Finance Receivables The allowance for loan losses is intended to provide for credit losses inherent in the HFI loan and lease receivables portfolio and is peri- odically reviewed for adequacy. The allowance for loan losses is determined based on three key components: (1) specific allowances for loans that are impaired, based upon the value of underlying col- lateral or projected cash flows, or observable market price, (2) non- specific allowances for estimated losses inherent in the portfolio based upon the expected loss over the loss emergence period, and (3) allowances for estimated losses inherent in the portfolio based upon economic risks, industry and geographic concentrations, and other factors. Changes to the Allowance for Loan Losses are recorded in the Provision for Credit Losses. Determining an appropriate allowance for loan losses requires significant judgment that may change based on management’s ongoing process in analyzing the credit quality of the Company’s HFI loan portfolio. Finance receivables are divided into the following portfolio seg- ments, which correspond to the Company’s business segments: Transportation & International Finance (“TIF”), North America Banking (“NAB”); formerly known as North American Commercial Finance, Legacy Consumer Mortgages (“LCM”) and Non-Strategic Portfolios (“NSP”). Within each portfolio segment, credit risk is assessed and monitored in the following classes of loans; within TIF, Aerospace, Rail, Maritime Finance and Interna- tional Finance, within NAB, Commercial Banking, Equipment Finance, Commercial Real Estate, and Commercial Services, (col- lectively referred to as Commercial Loans); and within LCM, the Single Family Residential (“SFR”) Mortgages and Reverse Mort- gages and in NAB, Consumer Banking, (collectively referred to as Consumer Loans). The allowance is estimated based upon the finance receivables in the respective class. For each portfolio, impairment is generally measured individually for larger non-homogeneous loans (finance receivables of $500 thousand or greater) and collectively for groups of smaller loans with similar characteristics or for designated pools of PCI loans based on decreases in cash flows expected to be collected subsequent to acquisition. Loans acquired in the OneWest Transaction were initially recorded at esti- mated fair value at the time of acquisition. Expected credit losses were included in the determination of estimated fair value, no allowance was established on the acquisition date. Allowance Methodology Commercial Loans With respect to commercial portfolios, the Company monitors credit quality indicators, including expected and historical losses and levels of, and trends in, past due loans, non-performing assets and impaired loans, collateral values and economic condi- tions. Commercial loans are graded according to the Company’s internal rating system with respect to probability of default and Item 8: Financial Statements and Supplementary Data 116 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS loss given default (severity) based on various risk factors. The non-specific allowance is determined based on the estimated probability of default, which reflects the borrower’s financial strength, and the severity of loss in the event of default, consider- ing the quality of the underlying collateral. The probability of default and severity are derived through historical observations of default and subsequent losses within each risk grading. A specific allowance is also established for impaired commer- cial loans and commercial loans modified in a TDR. Refer to the Impairment of Finance Receivables section of this Note for details. Consumer Loans For residential mortgages, the Company develops a loss reserve factor by deriving the projected lifetime losses then adjusting for losses expected to be specifically identified within the loss emer- gence period. The key drivers of the projected lifetime losses include the type of loan, type of product, delinquency status of the underlying loans, loan-to-value and/or debt-to-income ratios, geographic location of the collateral, and any guarantees. For uninsured reverse mortgage loans in continuing operations, an allowance is established if the Company is likely to experience losses on the disposition of the property that are not reflected in the recorded investment, including the AVA, as the source of repayment of the loan is tied to the home’s collateral value alone. A reverse mortgage matures when one of the following events occur: 1) the property is sold or transferred, 2) the last remaining borrower dies, 3) the property ceases to be the borrower’s princi- pal residence, 4) the borrower fails to occupy the residence for more than 12 consecutive months or 5) the borrower defaults under the terms of the mortgage or note. A maturity event other than death is also referred to as a mobility event. The level of any required allowance for loan losses on reverse mortgage loans is based on the Company’s estimate of the fair value of the property at the maturity event based on current conditions and trends. The allowance for loan losses assessment on uninsured reverse mort- gage loans is performed on a pool basis and is based on the Company’s estimate of the future fair value of the properties at the maturity event based on current conditions and trends. Other Allowance Factors If commercial or consumer loan losses are reimbursable by the FDIC under the loss sharing agreement, the recorded provision is partially offset by any benefit expected to be derived from the related indemnification asset subject to management’s assess- ment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. See Indemni- fication Assets later in this section. With respect to assets transferred from HFI to AHFS, a charge-off is recognized to the extent carrying value exceeds the fair value and the difference relates to credit quality. An approach similar to the allowance for loan losses is utilized to calculate a reserve for losses related to unfunded loan commit- ments along with deferred purchase commitments associated with the Company’s factoring business. A reserve for unfunded loan commitments is maintained to absorb estimated probable losses related to these facilities. The adequacy of the reserve is determined based on periodic evaluations of the unfunded credit facilities, including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The reserve for unfunded loan commit- ments is recorded as a liability on the Consolidated Balance Sheet. Net adjustments to the reserve for unfunded loan commit- ments are included in the provision for credit losses. The allowance policies described above relate to specific and non-specific allowances, and the impaired finance receivables and charge-off policies that follow are applied across the portfo- lio segments and loan classes therein. Given the nature of the Company’s business, the specific allowance is largely related to the NAB and TIF segments. The non-specific allowance, which considers the Company’s internal system of probability of default and loss severity ratings for commercial loans, among other factors, is applicable to both commercial and consumer portfolios. Additionally, portions of the NAB and LCM segments also utilize methodologies under ASC 310-30 for PCI loans, as discussed below. PCI Loans See Purchased Credit-Impaired Loans in Financing and Leasing Assets for description of allowance factors. Past Due and Non-Accrual Loans A loan is considered past due for financial reporting purposes if default of contractual principal or interest exists for a period of 30 days or more. Past due loans consist of both loans that are still accruing interest as well as loans on non-accrual status. Loans are placed on non-accrual status when the financial condi- tion of the borrower has deteriorated and payment in full of principal or interest is not expected or the scheduled payment of principal and interest has been delinquent for 90 days or more, unless the loan or finance lease is both well secured and in the process of collection. PCI loans are written down at acquisition to their fair value using an estimate of cash flows deemed to be probable of collection. Accordingly, such loans are no longer classified as past due or non-accrual even though they may be contractually past due because we expect to fully collect the new carrying values of these loans. Due to the nature of reverse mortgage loans (i.e., there are no required contractual payments due from the borrower), they are considered current for purposes of past due reporting and are excluded from reported non-accrual loan balances. When a loan is placed on non-accrual status, all previously accrued but uncollected interest is reversed. All future interest accruals, as well as amortization of deferred fees, costs, purchase premiums or discounts are suspended. Where there is doubt as to the recoverability of the original outstanding investment in the loan, the cost recovery method is used and cash collected first reduces the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is collected. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of Finance Receivables Impairment of Long-Lived Assets CIT ANNUAL REPORT 2015 117 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. Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable, with the esti- mated value 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 observable market prices. Impaired finance receivables of $500 thousand or greater that are placed on non-accrual status, largely in Commercial Banking, Commercial Real Estate, Commercial Services, and classes within TIF, are subject to periodic individual review by the Company’s problem loan management (“PLM”) function. The Company excludes certain loan and lease portfolios from its impaired finance receivables disclosures as charge-offs are typically deter- mined and recorded for such loans beginning at 90-180 days of contractual delinquency. These include small-ticket loan and lease receivables, largely in Equipment Finance and NSP, and consumer loans, including single family residential mortgages, in NAB and LCM that have not been modified in a TDR, as well as short-term factoring receivables in Commercial Services. Charge-off of Finance Receivables Charge-offs on loans are recorded after considering such factors as the borrower’s financial condition, the value of underlying col- lateral and guarantees (including recourse to dealers and manufacturers), and the status of collection activities. Such charge-offs are deducted from the carrying value of the related finance receivables. This policy is largely applicable in the Com- mercial Banking, Equipment Finance, Commercial Real Estate, Commercial Services and Transportation Finance loan classes. In general, charge-offs of large ticket commercial loans ($500 thousand or greater) are determined based on the facts and circumstances related to the specific loan and the underlying borrower and the use of judgment by the Company. Charge-offs of small ticket commercial finance receivables are recorded beginning at 90-150 days of contractual delinquency. Charge-offs of Consumer loans are recorded beginning at 120 days of delin- quency. The value of the underlying collateral will be considered when determining the charge-off amount if repossession is assured and in process. Charge-offs on loans originated are reflected in the provision for credit losses. Charge-offs are recognized on consumer loans for which losses are reimbursable under loss sharing agreements with the FDIC, with a provision benefit recorded to the extent applicable via an increase to the related indemnification asset. In the event of a partial charge-off on loans with a PAA, the charge- off is first allocated to the respective loan’s discount. Then, to the extent the charge-off amount exceeds such discount, a provision for credit losses is recorded. Collections on accounts charged off in the post- acquisition or post-emergence periods are recorded as recoveries in the provision for credit losses. Collections on accounts that exceed the balance recorded at the date of acqui- sition are recorded as recoveries in other income. Collections on accounts previously charged off prior to transfer to AHFS are recorded as recoveries in other income. A review for impairment of long-lived assets, such as operating lease equipment, is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount to future undis- counted net cash flows expected to be generated. If an asset is impaired, the impairment is the amount by which the carrying amount exceeds the fair value of the asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment and published appraisal data), are considered both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when the pro- jected fair value at the end of the lease term is below the projected book value at the end of the lease term. Assets to be disposed of are included in AHFS in the Consolidated Balance Sheet and reported at the lower of the cost or fair market value less disposal costs (“LOCOM”). Securities Purchased Under Resale Agreements Securities purchased under agreements to resell (reverse repos) generally do not constitute a sale or purchase of the underlying securities for accounting purposes and, therefore are treated as collateralized financing transactions. These agreements are recorded at the amounts at which the securities were acquired. See Note 13 — Fair Value for discussion of fair value. The Com- pany’s reverse repos are short-term securities secured by the underlying collateral, which, along with the cash investment, are maintained by a third-party. CIT’s policy is to obtain collateral with a market value in excess of the principal amount under resale agreements. To ensure that the market value of the underlying collateral remains sufficient, the collateral is valued on a daily basis. Collateral typically consists of government-agency securities, corporate bonds and mortgage- backed securities. These securities financing agreements give rise to minimal credit risk as a result of the collateral provisions, therefore no allowance is considered necessary. In the event of counterparty default, the financing agreement provides the Company with the right to liq- uidate the collateral held. Interest earned on these financing agreements is included in other interest and dividends in the statement of income. Investments Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securi- ties, investment securities carried at fair value with changes recorded in net income, or as held-to-maturity (“HTM”) securities are classified as available-for-sale (“AFS”) securities. Debt and equity securities classified as AFS are carried at fair value with changes in fair value reported in accumulated other comprehen- sive income (“AOCI”), a component of stockholders’ equity, net of applicable income taxes. Credit-related declines in fair value that are determined to be OTTI are immediately recorded in earnings. Realized gains and losses on sales are included in other Item 8: Financial Statements and Supplementary Data 118 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS income on a specific identification basis, and interest and dividend income on AFS securities is included in other interest and dividends. Debt securities classified as HTM represent securities that the Company has both the ability and the intent to hold until matu- rity, and are carried at amortized cost. Interest on such securities is included in other interest and dividends. Debt and marketable equity security purchases and sales are recorded as of the trade date. Mortgage-backed security investments acquired in the OneWest Transaction were originally recorded at their fair value on the acquisition date and classified as either securities AFS or securi- ties carried at fair value with changes recorded in net income. Debt securities classified as AFS that had evidence of credit dete- rioration as of the acquisition date and for which it was probable that the Company would not collect all contractually required principal and interest payments were classified as PCI debt secu- rities. Subsequently, the accretable yield (based on the cash flows expected to be collected in excess of the recorded investment or fair value) is accreted to interest income using an effective inter- est method pursuant to ASC 310-30 for PCI securities and securities carried at fair value with changes recorded in net income. The Company uses a flat interest rate forward curve for purposes of applying the effective interest method to PCI securi- ties. On a quarterly basis, the cash flows expected to be collected are reviewed and updated. The expected cash flow estimates take into account relevant market and economic data as of the end of the reporting period including, for example, for securities issued in a securitization, underlying loan-level data, and structural features of the securitization, such as subordina- tion, excess spread, overcollateralization or other forms of credit enhancement. OTTI with credit-related losses are recognized as permanent write-downs, while other changes in expected cash flows (e.g., significant increases and contractual interest rate changes) are recognized through a revised accretable yield in subsequent periods. The non-accretable discount is recorded as a reduction to the investments and will be reclassified to accre- table discount should expected cash flows improve or used to absorb incurred losses as they occur. Equity securities without readily determinable fair values are gen- erally carried at cost or the equity method of accounting and periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary. Equity method investments are recorded at cost, adjusted to reflect the Company’s portion of income, loss or dividend of the investee. All other non-marketable equity investments are carried at cost and periodically assessed for OTTI. Evaluating Investments for OTTI An unrealized loss exists when the current fair value of an indi- vidual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities, while such losses related to HTM securities are not recorded, as these investments are carried at their amortized cost. Unrealized losses on securities carried at fair value would be recorded through earnings as part of the total change in fair value. The Company conducts and documents periodic reviews of all securities with unrealized losses to evaluate whether the impair- ment is other than temporary. The Company accounts for investment impairments in accordance with ASC 320-10-35-34, Investments — Debt and Equity Securities: Recognition of an Other- Than-Temporary Impairment. Under the guidance for debt securities, OTTI is recognized in earnings for debt securities that the Company has an intent to sell or that the Company believes it is more-likely-than- not that it will be required to sell prior to the recovery of the amortized cost basis. For debt securities classified as HTM that are considered to have OTTI that the Company does not intend to sell and it is more likely than not that the Company will not be required to sell before recovery, the OTTI is separated into an amount representing the credit loss, which is recognized in other income in the Consolidated State- ment of Income, and the amount related to all other factors, which is recognized in OCI. OTTI on debt securities and equity securities classi- fied as AFS and non-marketable equity investments are recognized in other income in the Consolidated Statements of Income in the period determined. Impairment is evaluated and to the extent it is credit related amounts are reclassified out of AOCI to other income. If it is not credit related then, the amounts remain in AOCI. Amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium. Regardless of the classification of the securities as AFS or HTM, the Company assesses each investment with an unreal- ized loss for impairment. Factors considered in determining whether a loss is temporary include: - - - the length of time that fair value has been below cost; the severity of the impairment or the extent to which fair value has been below cost; the cause of the impairment and the financial condition and the near-term prospects of the issuer; - activity in the market of the issuer that may indicate adverse - credit conditions; and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The Company’s review for impairment generally includes identifi- cation and evaluation of investments that have indications of possible impairment, in addition to: - analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; - discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having OTTI and those that would not support OTTI; and - documentation of the results of these analyses, as required under business policies. Investments in Restricted Stock The Company is a member of, and owns capital stock in, the Federal Home Loan Bank (“FHLB”) of San Francisco and the FRB. As a condi- tion of membership, the Company is required to own capital stock in the FHLB based upon outstanding FHLB advances and FRB stock based on a specified ratio relative to the Company’s capital. FHLB and FRB stock may only be sold back to the member institutions at its carry- CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 119 ing value and cannot be sold to other parties. For FHLB stock, cash dividends are recorded within interest income when declared by the FHLB. For FRB stock, the Company is legally entitled (without declara- tion) to a specified dividend paid semi-annually. Dividends are recorded in other interest and dividends in the Consolidated State- ments of Income. Due to the restricted ownership requirements, the Company accounts for its investments in FHLB and FRB stock as a nonmar- ketable equity stock accounted for under the cost method and reviews the investment for impairment at least annually, or when events or circumstances indicate that their carrying amounts may not be recoverable. The Company’s impairment evaluation con- siders the long-term nature of the investment, the liquidity position of the member institutions, its recent dividend declara- tions and the intent and ability to hold this investment for a period of time sufficient to ultimately recover the Company’s recorded investment. Indemnification Assets Prior to the acquisition of OneWest Bank by CIT, OneWest Bank, was party to certain shared loss agreements with the FDIC related to its acquisitions of IndyMac Federal Bank, FSB (“IndyMac”), First Federal Bank of California, FSB (“First Federal”) and La Jolla Bank, FSB (“La Jolla”). As part of CITs acquisition of OneWest Bank, CIT is now party to these loss sharing agreements with the FDIC. The loss sharing agreements generally require CIT Bank, N.A. to obtain FDIC approval prior to transferring or selling loans and related indemnification assets. Eligible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modifications, charge-off of loan balance or liq- uidation of collateral). Reimbursements approved by the FDIC are usually received within 60 days of submission. The IndyMac transaction encompassed multiple loss sharing agreements that provided protection from certain losses related to purchased SFR loans and reverse mortgage proprietary loans. In addition, CIT is party to the FDIC agreement to indemnify OneWest Bank, subject to certain requirements and limitations, for third party claims from the Government Sponsored Enter- prises (“GSEs” or “Agencies”) related to IndyMac selling representations and warranties, as well as liabilities arising from the acts or omissions (including, without limitation, breaches of servicer obligations) of IndyMac as servicer. The loss sharing arrangements related to the First Federal and La Jolla transactions also provide protection from certain losses related to certain purchased assets, specifically the SFR loans. All of the loss sharing agreements are accounted for as indemnification assets and were initially recognized at estimated fair value as of the acquisition date based on the discounted present value of expected future cash flows under the respective loss sharing agreements pursu- ant to ASC 805. As of the acquisition date, the First Federal loss share agreement had a zero fair value given the expiration of the commercial loan portion in December 2014 and management’s expectation not to reach the first stated threshold for the SFR mortgage loan portion, which expires in December 2019. As of the acquisition date, the La Jolla loss share agreement had a negligible indemnification asset value. Under the La Jolla loss share agreement, the FDIC indemnifies the eligible credit losses for SFR and commercial loans. Unlike SFR mortgage loan claim submissions, which do not take place until the loss is incurred through the conclusion of the foreclosure process, com- mercial loan claims are submitted to and paid by the FDIC at the time of charge-off. Similar to the First Federal agreement, the commercial loan portion expired prior to the acquisition date (expired March 2015). On a subsequent basis, the indemnification asset is measured on the same basis of accounting as the indemnified loans (e.g., as PCI loans under the effective yield method). A yield is determined based on the expected cash flows to be collected from the FDIC over the recorded investment. The expected cash flows on the indemnification asset are reviewed and updated on a quarterly basis. Changes in expected cash flows caused by changes in market interest rates or by prepayments of principal are recognized as adjustments to the effective yield on a prospective basis in inter- est income. In some cases, the cash flows expected to be collected from the indemnified loans may improve so that the related indemnification asset is no longer expected to be fully recovered. For PCI loans with an associated indemnification asset, if the increase in expected cash flows is recognized through a higher yield, a lower and potentially negative yield (i.e. due to a decline in expected cash flows in excess of the cur- rent carrying value) is applied to the related indemnification asset to mirror an accounting offset for the indemnified loans. Any negative yield is determined based on the remaining term of the indemnification agreement. Both accretion (positive yield) and amortization (negative yield) from the indemnification asset are recognized in interest income on loans over the lesser of the con- tractual term of the indemnification agreement or the remaining life of the indemnified loans. A decrease in expected cash flows is recorded in the indemnification asset for the portion that previ- ously was expected to be reimbursed from the FDIC resulting in an increase in the Provision for credit losses that was previously recorded in the Allowance for loan losses. In connection with the IndyMac transaction, the Company has an indemnification receivable for estimated reimbursements due from the FDIC for loss exposure arising from breach in origination and servicing obligations associated with covered reverse mort- gage loans prior to March 2009 pursuant to the loss share agreement with the FDIC. The indemnification receivable uses 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. In connection with the La Jolla transaction, the Company recorded a separate FDIC true-up liability for an estimated payment due to the FDIC at the expiry of the loss share agreement, given the estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses originally estimated by the FDIC at inception of the loss share agreement. There is no FDIC true-up liability recorded in connection with the First Federal transaction based on the projected loss estimates at this time. There is also no FDIC true-up liability recorded in connection with the IndyMac transaction as it was not required. This liability represents contingent consideration to the FDIC and is re-measured at estimated fair value on a quarterly basis, with the changes in fair value recognized in noninterest expense. For further discussion, see Note 5 — Indemnification Assets. Item 8: Financial Statements and Supplementary Data 120 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill and Intangible Assets The Company’s goodwill primarily represented the excess of the purchase prices paid for acquired businesses over the respective fair value of net asset values acquired. The goodwill was assigned to reporting units at the date the goodwill was initially recorded. Once the goodwill was assigned to the reporting unit level, it no longer retained its association with a particular transaction, and all of the activities within the reporting unit, whether acquired or internally generated, are available to support the value of goodwill. A portion of the Goodwill balance also resulted from the excess of reorganization equity value over the fair value of tangible and identifiable intangible assets, net of liabilities, in connection with the Company’s emergence from bankruptcy in December 2009. Goodwill is not amortized but it is subject to impairment testing at the reporting unit on an annual basis, or more often if events or circumstances indicate there may be impairment. The Com- pany follows guidance in ASC 350, Intangibles — Goodwill and Other that includes the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step impairment test. Examples of qualitative factors to assess include macroeconomic conditions, industry and market considerations, market changes affecting the Company’s products and services, overall financial performance, and company specific events affecting operations. If the Company does not perform the qualitative assessment or upon performing the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, CIT would be required to perform the first step of the two-step goodwill impairment test for that report- ing unit. The first step involves comparing the fair value of the reporting unit with its carrying value, including goodwill as mea- sured by allocated equity. If the fair value of the reporting unit exceeds its carrying value, goodwill in that unit is not considered impaired. However, if the carrying value exceeds its fair value, step two must be performed to assess potential impairment. In step two, the implied fair value of the reporting unit’s goodwill (the reporting unit’s fair value less its carrying amount, excluding goodwill) is compared with the carrying amount of the goodwill. An impairment loss would be recorded in the amount that the carrying amount of goodwill exceeds its implied fair value. Reporting unit fair values are primarily estimated using dis- counted cash flow models. See Note 26 — Goodwill and Intangible Assets for further details. Intangible assets relate to acquisitions and the remaining amount from fresh start accounting (“FSA”) adjustments. Intangible assets have finite lives and as detailed in Note 26 — Goodwill and Intangible Assets, depending on the component, are amor- tized on an accelerated or straight line basis over the estimated useful lives. Amortization expense for the intangible assets is recorded in operating expenses. The Company reviews intangible assets for impairment annually or when events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is recognized by writing down the asset to the extent that the carrying amount exceeds the estimated fair value, with any impairment recorded in operating expense. Other Assets Tax Credit Investments As a result of the OneWest Transaction, the Company has invest- ments in limited liability entities that were formed to operate qualifying affordable housing projects, and other entities that make equity investments, provide debt financing or support community-based investments in tax-advantaged projects. Cer- tain affordable housing investments qualify for credit under the Community Reinvestment Act (“CRA”), which requires regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, particularly in neighbor- hoods with low or moderate incomes. These tax credit investments provide tax benefits to investors primarily through the receipt of federal and/or state income tax credits or tax ben- efits in the form of tax deductible operating losses or expenses. The Company invests as a limited partner and its ownership amount in each limited liability entity varies. As a limited partner, the Company is not the PB as it does not meet the power crite- rion, i.e., no power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has no direct ability to unilaterally remove the general partner. Accord- ingly, the Company is not required to consolidate these entities on its financial statements. For further discussion on VIEs, see Note 10 — Borrowings. These tax credit investments, including the commitment to contribute additional capital over the term of the investment, were recorded at fair value at the acquisition date pursuant to ASC 805 — Business Combinations. On a subsequent basis, these investments are accounted for under the equity method. Under the equity method, the Company’s investments are adjusted for the Company’s share of the investee’s net income or loss for the period. Any dividends or distributions received are recorded as a reduction of the recorded investment. The tax credits generated from investments in affordable housing projects and other tax credit investments are recognized on the consolidated financial statements to the extent they are utilized on the Company’s income tax returns through the tax provision. Tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or conditions indi- cate that it is deemed probable that the Company will not recover its investment. Potential indicators of impairment might arise when there is evidence that some or all tax credits previ- ously claimed by the limited liability entities would be recaptured, or that expected remaining credits would no longer be available to the limited liability entities. If an investment is determined to be impaired, it is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent recoveries in value. These investments are included within other assets and any impairment loss would be recognized in other income. FDIC Receivable In connection with the OneWest Transaction, the Company has a receivable from the FDIC representing a secured interest in cer- tain homebuilder, home construction and lot loans. The secured interest entitles the Company to 40% of the underlying cash flows. The Company elected to measure the FDIC Receivable at CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 121 estimated fair value under the fair value option. The fair value is estimated based on cash flows expected to be collected from the Company’s participation interest in the underlying collateral. The modeled underlying cash flows include estimated amounts expected to be collected from repayment of loan principal and interest and net proceeds from property liquidations through the clean up call date (when the portfolio falls below 10% of the origi- nal unpaid principal balance or March 2016) controlled by the FDIC whereby the underlying assets shall be sold six months from the earliest call date (September 2016). These cash flows are off- set by amounts paid for servicing expenses, management fees, and liquidation expenses. The Company recognizes interest income on the FDIC receivable on an effective yield basis over the expected remaining life under the accretable yield method pursuant to ASC 310-30. The gains and losses from changes in the estimated fair value of the asset is recorded separately in other income. For further discussion, see Note 13 — Fair Value. Other Real Estate Owned Other real estate owned (“OREO”) represents collateral acquired from the foreclosure of secured loans and is being actively mar- keted for sale. These assets are initially recorded at the lower of cost or market value less disposition costs. Estimated market value is generally based upon independent appraisals or broker price opinions, which are then modified based on assumptions and expectations that are determined by management. Any write-down as a result of differences between carrying and mar- ket value on the date of transfer from loan classification is charged to the allowance for credit losses. Subsequently, the assets are recorded at the lower of its carrying value or estimated fair value less disposition costs. If the property or other collateral has lost value subsequent to foreclosure, a valuation allowance (contra asset) is established, and the charge is recorded in other income. OREO values are reviewed on a quarterly basis and subsequent declines in estimated fair value are recognized in earnings in the current period. Holding costs are expensed as incurred and reflected in operating expenses. Upon disposition of the property, any difference between the proceeds received and the carrying value is booked to gain or loss on disposition recorded in other income. Property and Equipment Property and equipment are included in other assets and are car- ried at cost less accumulated depreciation and amortization. Depreciation is expensed using the straight-line method over the estimated service lives of the assets. Estimated service lives gen- erally range from 3 to 7 years for furniture, fixtures and equipment and 20 to 40 years for buildings. Leasehold improve- ments are amortized over the term of the respective lease or the estimated useful life of the improvement, whichever is shorter. Servicing Advances The Company is required to make servicing advances in the nor- mal course of servicing mortgage loans. These advances include customary, reasonable and necessary out-of-pocket costs incurred in the performance of its servicing obligation. They include advances related to mortgage insurance premiums, fore- closure activities, funding of principal and interest with respect to mortgage loans held in connection with a securitized transaction and taxes and other assessments which are or may become a lien upon the mortgage property. Servicing advances are generally reimbursed from cash flows collected from the loans. As the servicer of securitizations of loans or equipment leases, the Company may be required to make servicing advances on behalf of obligors if the Company determines that any scheduled payment was not received prior to the end of the applicable collection period. Such advances may be limited by the Company based on its assessment of recoverability of such amounts in subsequent collection periods. The reimbursement of servicing advances to the Company is generally prioritized over the distribution of any payments to the investors in the securitizations. A receivable is recognized for the advances that are expected to be reimbursed, while a loss is recognized in operating expenses for advances that are not expected to be reimbursed. Advances not collected are generally due to payments made in excess of the limits established by the investor or as a result of servicing errors. For loans serviced for others, servicing advances are accrued through liquidation regardless of delinquency status. Any accrued amounts that are deemed uncollectible at liquidation are written off against existing reserves. Any amounts outstanding 180 days post liquidation are written off against established reserves. Due to the Company’s planned exit of third party servic- ing operations, the servicing advances for third party serviced reverse mortgage loans are designated as Assets of discontinued operations held for sale. Derivative Financial Instruments The Company manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. The Company also offers derivative products to its customers in order for them to manage their interest rate and currency risks. The Company does not enter into derivative financial instruments for speculative purposes. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, and impos- ing margin, reporting and registration requirements for certain market participants. Since the Company does not meet the defi- nition of a Swap Dealer or Major Swap Participant under the Dodd-Frank Act, the reporting and clearing obligations, which became effective April 10, 2013, apply to a limited number of derivative transactions executed with its lending customers in order to manage their interest rate risk. Derivatives utilized by the Company may include swaps, forward settle- ment contracts and options contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified under- lying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instru- ment, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time. Item 8: Financial Statements and Supplementary Data 122 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk man- agement objectives and strategies for undertaking various hedges. Upon executing a derivative contract, the Company des- ignates the derivative as either a qualifying hedge or non- qualifying hedge. The designation may change based upon management’s reassessment of circumstances. Upon de-designation or termination of a hedge relationship, changes in fair value of the derivative is reflected in earnings. The Company utilizes cross-currency swaps and foreign currency forward contracts to hedge net investments in foreign operations. These transactions are classified as foreign currency net invest- ment hedges with resulting gains and losses reflected in AOCI. For hedges of foreign currency net investment positions, the “forward” method is applied whereby effectiveness is assessed and measured based on the amounts and currencies of the indi- vidual hedged net investments versus the notional amounts and underlying currencies of the derivative contract. For those hedging relationships where the critical terms of the underlying net investment and the derivative are identical, and the credit-worthiness of the counterparty to the hedging instrument remains sound, there is an expectation of no hedge ineffective- ness so long as those conditions continue to be met. The Company also enters into foreign currency forward contracts to manage the foreign currency risk associated with its non-U.S. subsidiaries’ funding activities and designates these as foreign currency cash flow hedges for which certain components are reflected in AOCI and others recognized in noninterest income when the underlying transaction impacts earnings. The company uses foreign currency forward contracts, interest rate swaps, cross currency interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges. The Company also provides interest rate derivative contracts to support the business requirements of its customers (“customer- related positions”). The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein the Company acts as a seller of these derivative con- tracts to its customers. To mitigate the market risk associated with these customer derivatives, the Company enters into similar offsetting positions with broker-dealers. All derivative instruments are recorded at their respective fair value. Derivative instruments that qualify for hedge accounting are presented in the balance sheet at their fair values in other assets or other liabilities, with changes in fair value (gains and losses) of cash flow hedges deferred in AOCI, a component of equity. For qualifying derivatives with periodic interest settle- ments, e.g. interest rate swaps, interest income or interest expense is reported as a separate line item in the statement of income. Derivatives that do not qualify for hedge accounting are also presented in the balance sheet in other assets or other liabilities, but with their resulting gains or losses recognized in other income. For non-qualifying derivatives with periodic inter- est settlements, the Company reports interest income with other changes in fair value in other income. Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. The fair value of the derivative is reported on a gross-by-counterparty basis. Valuations of deriva- tive assets and liabilities reflect the value of the instrument including the Company’s and counterparty’s credit risk. CIT is exposed to credit risk to the extent that the counterparty fails to perform under the terms of a derivative. Losses related to credit risk are reflected in other income. The Company manages this credit risk by requiring that all derivative transactions entered into as hedges be conducted with counterparties rated invest- ment grade at the initial transaction by nationally recognized rating agencies, and by setting limits on the exposure with any individual counterparty. In addition, pursuant to the terms of the Credit Support Annexes between the Company and its counter- parties, CIT may be required to post collateral or may be entitled to receive collateral in the form of cash or highly liquid securities depending on the valuation of the derivative instruments as mea- sured on a daily basis. Fair Value Fair Value Hierarchy CIT measures the fair value of its financial assets and liabilities in accordance with ASC 820 Fair Value Measurements, which defines fair value, establishes a consistent framework for measuring fair value and requires disclosures about fair value measurements. The Com- pany categorizes its financial instruments, based on the significance of inputs to the valuation techniques, according to the following three-tier fair value hierarchy: - Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain other securities that are highly liquid and are actively traded in over-the-counter markets; - Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes derivative contracts and certain loans held-for-sale; - Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using valuation models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes highly structured or long-term derivative contracts and structured finance securities where independent pricing information cannot be obtained for a significant portion of the underlying assets or liabilities. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 123 Valuation Process The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company gen- erally determines the estimated fair value of Level 3 assets and liabilities by using internally developed models and, to a lesser extent, prices obtained from third-party pricing services or broker dealers (collectively, third party vendors). The Company’s internally developed models primarily consist of discounted cash flow techniques, which require the use of rel- evant observable and unobservable inputs. Unobservable inputs are generally derived from actual historical performance of similar assets or are determined from previous market trades for similar instruments. These unobservable inputs include discount rates, default rates, loss severity and prepayment rates. Internal valua- tion models are subject to review prescribed by the Company’s model validation policy that governs the use and control of valua- tion models used to estimate fair value. This policy requires review and approval of significant models by the Company’s model review group, who are independent of the business units and perform model validation. Model validation assesses the adequacy and appropriateness of the model, including reviewing its processing components, logic and output results and support- ing model documentation. These procedures are designed to provide reasonable assurance that the model is appropriate for its intended use and performs as expected. Periodic re-assessments of models are performed to ensure that they are continuing to perform as designed. The Company updates model inputs and methodologies periodically as a result of the monitor- ing procedures in place. Procedures and controls are in place to ensure new and existing models are subject to periodic validations by the Independent Model Validation Group (IMV). Oversight of the IMV is provided by the Model Governance Committee (“MGC”). All internal valu- ation models are subject to ongoing review by business unit level management. More complex models, such as those involved in the fair value analysis, are subject to additional oversight, at least quarterly, by the Company’s Valuation Reserve Working Group (“VRWG”), which consists of senior management, which reviews the Company’s valuations for complex instruments. For valuations involving the use of third party vendors for pricing of the Company’s assets and liabilities, or those of potential acquisitions, the Company performs due diligence procedures to ensure information obtained and valuation techniques used are appropriate. The Company monitors and reviews the results (e.g. non-binding broker quotes and prices) from these third party ven- dors to ensure the estimated fair values are reasonable. Although the inputs used by the third party vendors are generally not avail- able for review, the Company has procedures in place to provide reasonable assurance that the relied upon information is com- plete and accurate. Such procedures may include, as available and applicable, comparison with other pricing vendors, corrobo- ration of pricing by reference to other independent market data and investigation of prices of individual assets and liabilities. Fair Value Option Certain MBS securities acquired in the OneWest Transaction are carried at fair value with changes recorded in net income. Unrealized gains and losses are reflected as part of the overall changes in fair value. The Company recognizes interest income on an effective yield basis over the expected remaining life under the accretable yield method pursu- ant to ASC 310-30. Unrealized and realized gains or losses are reflected in other income. The determination of fair value for these securities is discussed in Note 13 — Fair Value. In connection with the OneWest Transaction, the Company acquired a receivable from the FDIC representing a secured interest in certain homebuilder, home construction and lot loans. The secured interest entitles the Company to 40% of the underlying cash flows. The Com- pany elected to measure the FDIC Receivable at estimated fair value under the fair value option. The Company recognizes interest income on the FDIC receivable on an effective yield basis over the expected remaining life under the accretable yield method pursuant to ASC 310- 30. The gains and losses from changes in the estimated fair value of the asset is recorded separately in other income. For further discussion regarding the determination of fair value, see Note 13 — Fair Value. Income Taxes Deferred tax assets and liabilities are recognized for the expected future taxation of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabili- ties are determined based on the differences between the book values and the tax basis of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the reported amount of any net deferred tax assets of a reporting entity if, based upon the relevant facts and circumstances, it is more likely than not that some or all of the deferred tax assets will not be realized. Additionally, in certain situations, it may be appropriate to write-off the deferred tax asset against the valua- tion allowance. This reduces the valuation allowance and the amount of the respective gross deferred tax asset that is dis- closed. A write-off might be appropriate if there is only a remote likelihood that the reporting entity will ever utilize its respective deferred tax assets, thereby eliminating the need to disclose the gross amounts. The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign juris- dictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a beneficial income tax position will be sus- tained upon examination by the taxing authorities based on the technical merits of the tax position. An income tax benefit is rec- ognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the most likely outcome result- ing from examination given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new informa- tion available to assess the likelihood of the outcome. Liabilities for uncertain income tax positions are included in current taxes payable, which is reflected in accrued liabilities and payables. Accrued interest and penalties for unrecognized tax positions are recorded in income tax expense. Item 8: Financial Statements and Supplementary Data 124 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Comprehensive Income/Loss Other Comprehensive Income/Loss includes unrealized gains and losses, unless other than temporarily impaired, on AFS investments, foreign currency translation adjustments for both net investment in foreign operations and related derivatives designated as hedges of such investments, changes in fair values of derivative instruments designated as hedges of future cash flows and certain pension and postretirement benefit obligations, all net of tax. Foreign Currency Translation In addition to U.S. operations, the Company has operations in Canada, Europe and other jurisdictions. The functional currency for foreign operations is generally the local currency, other than in the Aerospace business in which the U.S. dollar is typically the functional currency. The value of assets and liabilities of the for- eign operations is translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates dur- ing the year. The resulting foreign currency translation gains and losses, as well as offsetting gains and losses on hedges of net investments in foreign operations, are reflected in AOCI. Transac- tion gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency are included in Other income. Pension and Other Postretirement Benefits CIT has both funded and unfunded noncontributory defined ben- efit pension and postretirement plans covering certain U.S. and non-U.S. employees, each of which is designed in accordance with the practices and regulations in the related countries. Recognition of the funded status of a benefit plan, which is measured as the difference between plan assets at fair value and the benefit obligation, is included in the balance sheet. The Company recog- nizes as a component of Other Comprehensive Income, net of tax, the net actuarial gains or losses and prior service cost or credit that arise during the period but are not recognized as components of net periodic benefit cost in the Statements of Income. Variable Interest Entities A VIE is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make signifi- cant decisions affecting the entity’s operations; and/or have equity owners that do not have an obligation to absorb the enti- ty’s losses or the right to receive the entity’s returns. The Company accounts for its VIEs in accordance with Account- ing Standards Update (“ASU”) No. 2009-16, Transfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets and ASU No. 2009-17, Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 requires qualified special purpose entities to be evaluated for consolidation and also changed the approach to determining a VIE’s PB and required companies to more frequently reassess whether they must con- solidate VIEs. The PB is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive ben- efits from the VIE that could potentially be significant to the VIE. To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s eco- nomic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers, collateral managers, servicers, or owners of call options or liquidation rights over the VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could poten- tially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capi- talization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company. The Company performs on-going reassessments of: (1) whether any entities previously evaluated under the majority voting- interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Company’s involvement with a VIE cause the Company’s con- solidation conclusion regarding the VIE to change. When in the evaluation of its interest in each VIE it is determined that the Company is considered the PB, the VIE’s assets, liabilities and non- controlling interests are consolidated and included in the Consolidated Financial Statements. See Note 10 — Borrowings for further details. Non-interest Income Non-interest income is recognized in accordance with relevant authoritative pronouncements and includes rental income on operating leases and other income. Other income includes (1) factoring commissions, (2) gains and losses on sales of equip- ment, (3) fee revenues, including fees on lines of credit, letters of credit, capital markets related fees, agent and advisory fees, ser- vice charges on deposit accounts, and servicing fees on loans CIT services for others, (4) gains and losses on loan and portfolio sales, (5) gains and losses on OREO sales, (6) gains and losses on investments, (7) gains and losses on derivatives and foreign cur- rency exchange, (8) impairment on assets held for sale, and (9) other revenues. Other revenues include items that are more episodic in nature, such as gains on work-out related claims, recoveries on acquired loans or loans charged off prior to transfer to AHFS, proceeds received in excess of carrying value on non- CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 125 accrual accounts held for sale that were repaid or had another workout resolution, insurance proceeds in excess of carrying value on damaged leased equipment, and also includes income from joint ventures. Non-interest Expenses Non-interest expense is recognized in accordance with relevant authoritative pronouncements and includes deprecation on oper- ating lease equipment, maintenance and other operating expenses, loss on debt extinguishment and operating expenses. Operating expenses consists of (1) compensation and benefits, (2) technology costs, (3) professional fees, (4) net occupancy expenses, (5) provision for severance and facilities exiting activi- ties, (6) advertising and marketing, (7) amortization of intangible assets, and (8) other expenses. Stock-Based Compensation Compensation expense associated with equity-based awards is recognized over the vesting period (requisite service period), generally three years, under the “graded vesting” attribution method, whereby each vesting tranche of the award is amortized separately as if each were a separate award. The cost of awards granted to directors in lieu of cash is recognized using the single grant approach with immediate vesting and expense recognition. Expenses related to stock-based compensation are included in operating expenses. Earnings per Share (“EPS”) Basic EPS is computed by dividing net income by the weighted- average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding increased by the weighted-average potential impact of dilutive securities. The Company’s potential dilutive instruments primarily include restricted unvested stock grants and performance stock grants. The dilutive effect is computed using the treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the EPS computation as the result would have an anti-dilutive effect. Accounting for Costs Associated with Exit or Disposal Activities A liability for costs associated with exit or disposal activities, other than in a business combination, is recognized when the liability is incurred. The liability is measured at fair value, with adjustments for changes in estimated cash flows recognized in earnings. Consolidated Statements of Cash Flows Unrestricted cash and cash equivalents includes cash and interest-bearing deposits, which are primarily overnight money market investments and short term investments in mutual funds. The Company maintains cash balances principally at financial institutions located in the U.S. and Canada. The balances are not insured in all cases. Cash and cash equivalents also include amounts at CIT Bank, which are only available for the bank’s fund- ing and investment requirements. Cash inflows and outflows from customer deposits are presented on a net basis. Most factoring receivables are presented on a net basis in the Statements of Cash Flows, as factoring receivables are generally due in less than 90 days. Cash receipts and cash payments resulting from purchases and sales of loans, securities, and other financing and leasing assets are classified as operating cash flows in accordance with ASC 230-10-45-21 when these assets are originated/acquired and designated specifically for resale. Activity for loans originated or acquired for investment purposes, including those subsequently transferred to AHFS, is classified in the investing section of the statement of cash flows in accordance with ASC 230-10-45-12 and 230-10-45-13. The vast majority of the Company’s loan originations are for investment purposes. Cash receipts resulting from sales of loans, beneficial interests and other financing and leasing assets that were not specifically origi- nated and/or acquired and designated for resale are classified as investing cash inflows regardless of subsequent classification. The cash flows related to investment securities and finance receivables (excluding loans held for sale) purchased at a pre- mium or discount are as follows: - CIT classifies the entire cash flow, including the premium, as investing outflow in the period of acquisition and on a subsequent basis, the premium amortization is classified in investing as a positive adjustment under a constructive receipts model. Under the constructive receipts model, similar to the cumulative earnings approach, CIT compares the cash receipts to the investment from inception to date. The Company first allocates cash receipts to operating activities based on earned interest income, with the remaining allocated to Investing activities when received in cash. - CIT classifies the entire cash flow, net of the discount, as investing outflow in the period of acquisition and on a subsequent basis, the discount accretion is classified in investing as a negative adjustment under a constructive receipts model. The Company first allocates cash receipts to operating activities based on earned interest income, with the remaining allocated to Investing activities when received in cash. Restricted cash includes cash on deposit with other banks that are legally restricted as to withdrawal and primarily serve as col- lateral for certain servicer obligations of the Company. Because the restricted cash result from a contractual requirement to invest cash balances as stipulated, CIT’s change in restricted cash balances is classi- fied as cash flows from (used for) investing activities. Activity of discontinued operations is included in various line items of the Statements of Cash Flows and summary items are disclosed in Note 2 — Acquisition and Disposition Activities. In preparing the interim financial statements for the quarter ended September 30, 2015, the Company discovered and cor- rected an immaterial error impacting the classification of certain immaterial balances between line items and categories pre- sented in the Consolidated Statements of Cash Flows. The amounts presented comparatively for the years ended December 31, 2014 and 2013 have been revised for these mis- classifications. For the years ended December 31, 2014 and 2013, the errors resulted in an overstatement of net cash flows provided Item 8: Financial Statements and Supplementary Data 126 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by operations of $108 million and $133 million, respectively, and an understatement of net cash flows provided by financing activi- ties of $108 million and $133 million, respectively. The errors had no impact on the Company’s reported “Increase (decrease) in unrestricted cash and cash equivalents” or “Unrestricted cash and cash equivalents” for any period. NEW ACCOUNTING PRONOUNCEMENTS ASU No. 2016-02, Leases (Topic 842) In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and com- parability of accounting for lease transactions. The ASU 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 rec- ognition 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 liabil- ity 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, requir- ing 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 stan- dard 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. ASU 2016-01: Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities FASB issued an update that addresses certain aspects of recogni- tion, measurement, presentation and disclosure of financial instruments. The main objective is enhancing the reporting model for financial instruments to provide users of financial state- ments with more decision-useful information. The amendments to current GAAP are summarized as follows: - Supersede current guidance to classify equity securities into different categories (i.e. trading or available-for-sale); - 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; - Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment (similar to goodwill); - 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; - Require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; - 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; - 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; 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 Update 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. Business Combinations In September 2015, FASB issued ASU 2015-16, which eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Two major impacts are the measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Prior period infor- mation is not revised and additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The measurement period is a reasonable time period after the acquisition date when the acquirer may adjust the provisional amounts recognized for a business combination if the necessary information is not available by the end of the reporting period in which the acquisition occurs. This may occur, for example, when appraisals are required to determine the fair value of plant and equipment or identifiable intangible assets acquired, or when a business combination is consummated near the end of the acquirer’s reporting period. The measurement period ends as soon as the acquirer receives the information it was seeking, or learns that more information is not obtainable. But in any event, the measurement period cannot continue for more than one year from the acquisition date. An entity will apply the changes prospectively to adjustments of provisional amounts that occur after the effective date of December 15, 2015. As permitted, CIT early adopted this ASU. Measurement period adjustments recognized subsequent to the OneWest Bank acquisition were recognized. See Note 2 — Acquisition and Disposition Activities. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 127 Debt Issuance Costs On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issu- ance 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). In August 2015, FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measure- ment of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, an update to clarify ASU 2015-03, which did not address the balance sheet pre- sentation of debt issuance costs that are either (1) incurred before a debt liability is recognized (e.g. before the debt pro- ceeds 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. This standard became effective upon issuance and should be adopted concurrent with the adoption of ASU 2015-03. In accordance with the new guidance, CIT will reclassify deferred debt costs previously included in other assets to borrowings in the 2016 first quarter and conform prior periods. The adoption of this guidance is not expected to have a significant impact on CIT’s financial statements or disclosures. Amendments to the Consolidation Analysis The FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, in February 2015 to improve targeted areas of the con- solidation standard and reduce the number of consolidation models. The new guidance changes the way reporting enter- prises 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 enter- prise 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 though a contractual arrangement. Under ASU 2015-02: - More limited partnerships and similar entities will be evaluated for consolidation under the revised consolidation requirements that apply to VIEs. - Fees paid to a decision maker or service provider are less likely to be considered a variable interest in a VIE. - 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. - 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. - The deferral of consolidation requirements for certain investment companies and similar entities of the VIE in ASU 2009-17 is eliminated. The anticipated impacts of the new update include: - A new consolidation analysis is required for VIEs, including - many limited partnerships and similar entities that previously were not considered VIEs. 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. - Limited partnerships and similar entities that are not VIEs will - not be consolidated by the general partner. It is less likely that decision makers or service providers involved with a VIE will be required to consolidate the VIE. - Entities for which decision making rights are conveyed through a contractual arrangement are less likely to be considered VIEs. - 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. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015 (i.e. January 1, 2016). A reporting enterprise is permitted to apply either a modified retrospective approach or full retrospective application. The adoption of this guidance on January 1, 2016 did not have a signifi- cant impact on CIT’s financial statements or disclosures. Extraordinary and Unusual Items The FASB issued ASU 2015-01, Extraordinary and Unusual Items, in January 2015 as part of FASB’s simplification initiative, which eliminates the concept of extraordinary item 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 extraordi- nary 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 infre- quently. So, although the Company will no longer need to determine whether a transaction or event is both unusual in nature and infre- quently occurring, CIT will still need to assess whether items are unusual in nature or infrequent to determine if the additional presen- tation and disclosure requirements for these items apply. For all entities, ASU 2015-01 is effective for annual periods begin- ning after December 15, 2015 and interim periods within those annual periods. Adoption of this guidance is not expected to have a significant impact on CIT’s financial statements or disclosures. Item 8: Financial Statements and Supplementary Data 128 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern The FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, in August 2014. This ASU 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 evaluat- ing 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). 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. Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period The FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Perfor- mance Target Could Be Achieved after the Requisite Service Period, in June 2014. The ASU 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 condi- tion 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. Entities may apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) ret- rospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period pre- sented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transi- tion is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within those years. Adop- tion of this guidance did not have a significant impact on CIT’s financial statements or disclosures. Revenue Recognition The FASB issued ASU No. 2014-09 — Revenue from Contracts with Customers, in June 2014, which 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 pre- pared 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which 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 retrospec- tive application will need to apply the standard to amounts they report for 2016 and 2017 on the face of their full year 2018 finan- cial statements. CIT is currently reviewing the impact of adoption and has not determined the method of adoption (full retrospec- tive approach or a modified retrospective approach) or the effect of the standard on its ongoing financial reporting. NOTE 2 — ACQUISITION AND DISPOSITION ACTIVITIES ACQUISITIONS During 2015 and 2014, the Company completed the following significant business acquisitions. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 129 OneWest Transaction Effective as of August 3, 2015, CIT acquired IMB, the parent com- pany 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 approxi- mately 168,000 restricted stock units of CIT (valued at approximately $8 million at the time of closing). Total consider- ation 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. Consideration and Net Assets Acquired (dollars in millions) Purchase price Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value Cash and interest bearing deposits Investment securities Assets held for sale Loans HFI Indemnification assets Other assets Assets of discontinued operation Deposits Borrowings Other liabilities Liabilities of discontinued operation Total fair value of identifiable net assets Intangible assets Goodwill The acquisition was accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations. 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 acqui- sition 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. The assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. No allowance for loan losses was carried over and no allowance was created at acquisition. Original Purchase Price $ 3,391.6 $ 4,411.6 1,297.3 20.4 13,598.3 480.7 676.6 524.4 (14,533.3) (2,970.3) (221.1) (676.9) $ 2,607.7 $ $ 185.9 598.0 Measurement Period Adjustments $ $ – – – – (32.7) (25.3) 45.7 – – – – (31.5) $(43.8) $(21.2) $ 65.0 Adjusted Purchase Price $ 3,391.6 $ 4,411.6 1,297.3 20.4 13,565.6 455.4 722.3 524.4 (14,533.3) (2,970.3) (221.1) (708.4) $ 2,563.9 $ $ 164.7 663.0 The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future events that are highly subjective in nature and may require adjustments, which can be updated throughout the year following the acquisition (the “Measurement Period”). Subsequent to the acquisition, management continued to review information relating to events or circumstances existing at the acquisition date. This review resulted in adjustments to the acquisition date valuation amounts, which increased the goodwill balance to $663.0 million. This goodwill increase was primarily related to decreases in certain acquired loan fair value estimates, a decrease to the estimated fair value of acquired indemnification and intangible assets, as well as the valuation of certain pre-acquisition reverse mortgage servicing liabilities. As of December 31, 2015, management anticipates that its con- tinuing review could result in additional adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments would be material. Cash and Interest Bearing Deposits Acquired cash and interest bearing deposits of $4.4 billion include cash on deposit with the FRB and other banks, vault cash, deposits in transit, and highly liquid investments with original maturities of three months or less. Given the short-term nature and insignificant risk of changes in value because of changes in interest rates, the carrying amount of the acquired cash and inter- est bearing deposits was determined to equal fair value. Investment Securities In connection with the OneWest acquisition, the Company acquired a portfolio of mortgage-backed securities (MBS) valued at approximately $1.3 billion as of the acquisition date. This MBS portfolio contains various senior and subordinated non-agency MBS, interest-only, and agency securities. Approximately $1.0 billion of the MBS securities were classified as PCI as of the acquisition date due to evidence of credit deterioration since issuance and for which it is probable that the Company would not collect all principal and interest payments that were contractually Item 8: Financial Statements and Supplementary Data 130 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS required at the time of purchase. These securities were initially classified as available-for-sale upon acquisition; however, upon further review following the filing of the Company’s September 30, 2015 Form 10-Q, management determined that $373.4 million of these securities should have been classified as securities carried at fair value with changes recorded in net income as of the acquisition date, and in the fourth quarter of 2015 management corrected this immaterial error impacting clas- sification of investment securities. The acquisition date fair value of the securities was based on market quotes, where available, or on discounted cash flow tech- niques using assumptions for prepayment rates, market yield requirements and credit losses where market quotes were not available. Future prepayment rates were estimated based on cur- rent and expected future interest rate levels, collateral seasoning and market forecasts, as well as relevant characteristics of the col- lateral underlying the securities, such as loan types, prepayment penalties, interest rates and recent prepayment experience. Loan Portfolio The acquired loan portfolio, with an aggregate Unpaid Principal Balance (“UPB”) of $15.8 billion and a fair value (“FV”) of $13.6 billion, including the affects of the measurement period adjustments, at the acquisition date, is comprised of various types of loan products, including SFR loans, other acquired loans, jumbo mortgages, commercial real estate loans, Small Business Administration (“SBA”) loans, repurchased GNMA loans, reverse mortgages and commercial and industrial loans. - Single Family Residential — At the acquisition date, OneWest owned a legacy portfolio of SFR loans that had been acquired by OneWest through various portfolio purchases. The UPB and FV at the acquisi- tion date were $6.2 billion and $4.8 billion, respectively. - Other Acquired Loans — This loan portfolio consists mainly of commercial real estate loans secured by various property types, including multifamily, retail, office and other. The UPB and FV at the acquisition date were $1.4 billion and $1.2 billion, respectively. - Jumbo Mortgages — At the acquisition date, OneWest owned a portfolio of recently originated Jumbo Mortgages. The Jumbo Mortgages consist of three different product types: fixed rate, adjustable rate mortgage (“ARM”) and home equity lines of credit (“HELOC”). The UPB and FV at the acquisition date were both $1.4 billion. - Commercial Real Estate — At the acquisition date, OneWest owned a portfolio of recently originated commercial real estate (“CRE”) loans. The CRE loan portfolio consists of loans secured by various property types, including hotel, multifamily, retail, and other. The UPB and FV at the acquisition date were both $2.0 billion. - SBA — At the acquisition date, OneWest owned a portfolio of recently originated SBA loans. The SBA loan portfolio primarily consists of loans provided to small business borrowers and guaranteed by the SBA. The UPB and FV at the acquisition date were both $278 million. - Repurchased GNMA Loans — At the acquisition date, OneWest held a portfolio of loans repurchased from GNMA securitizations under its servicer repurchase program. GNMA allows servicers to repurchase loans from securitization pools after the borrowers have been delinquent for three payments. After repurchase, servicers can work to rehabilitate the loan, and subsequently resell the loan into another GNMA pool. The UPB and FV at the acquisition date were both $78 million. The eight major loan products, including Reverse Mortgages and Commercial & Industrial Loans discussed below, were further stratified into approximately ninety cohorts based on common risk characteristics. Specific valuation assumptions were then applied to these stratifications in the determination of fair value. The stratification of the SFR portfolio cohorts was largely based on product type, while the cohorts for the other products were based on a combination of product type, the Company’s prob- ability of default risk ratings and selected industry groupings. For the SFR portfolio, a waterfall analysis was performed to deter- mine if a loan was PCI. This waterfall analysis was comprised of a series of tests which considered the status of the loan (delinquency, foreclosure, etc.), the payment history of the borrowers over the prior two years, collateral coverage of the loan based on the loan-to-value ratio (“LTV”), and changes in borrower FICO scores. Loans that “passed” each of the tests were considered non-PCI and all others were deemed to have some impairment and, thus, classified as PCI. The PCI determination for the other asset classes was largely based on the Company’s probability of default risk ratings. The above acquired loan portfolios were valued using the direct method of the income approach. The income approach derives an estimate of value based on the present value of the projected future cash flows of each loan using a discount rate which incorporates the relevant risks associated with the asset and time value of money. To perform the valuation, all credit and market aspects of these loans were evaluated, and the appropriate performance assumptions were determined for each portfolio. In general, the key cash flow assump- tions relating to the above acquired loan portfolios were: prepayment rate, default rate, severity rate, modification rate, and the recovery lag period, as applicable. Reverse Mortgages — OneWest Bank held a portfolio of jumbo reverse mortgage loans. The reverse mortgage loan portfolio consists of loans made to elderly borrowers in which the bank makes periodic advances to the borrower, and, in return, at some future point the bank could take custody of the home upon occurrence of a maturity event. A maturity event includes such events as the death of the borrower, the relocation of the bor- rower, or a refinancing of the mortgage. The UPB and FV at the acquisition date were $1.1 billion and $811 million, respectively. The reverse mortgage portfolio was valued using the direct method of the income approach. As approximately 97 percent of the uninsured reverse mortgage portfolio had an LTV ratio less than 90 percent, the entire uninsured portfolio was classified as non-PCI. To perform the valuation for the reverse mortgage port- folio we considered all credit aspects of the mortgage portfolio (e.g., severity), selected appropriate performance assumptions related to advances, interest rates, prepayments (e.g., mortality), home price appreciation, actuarial and severity, projected cash flows utilizing the selected assumptions, and ultimately per- formed a discounted cash flow analysis on the resulting projections. The key terminal cash flow projections were based on two assumptions: (1) the prepayment rate, and (2) the severity. Reverse mortgage borrowers prepay, or terminate, their loans upon a termination event such as the death or relocation of the CIT ANNUAL REPORT 2015 131 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS borrower. Such mortality and mobility events, respectively, consti- tute the prepayment rate for reverse mortgages. Commercial and Industrial Loans — OneWest had recently origi- nated a portfolio of commercial and industrial (C&I) loans. The C&I loan portfolio consists of term loans and lines of credit provided to businesses across different industries. The UPB and FV at the acquisi- tion date were $3.3 billion and $3.1 billion, respectively. The non-PCI portion of the C&I portfolio was valued using the indirect method of the income approach. The indirect method was selected as it is the most common method used in the valua- tion of commercial loans, which are valued based on an all-in discount rate. To perform the valuation, we considered all credit risks of the non-PCI portion of the C&I portfolio within the dis- count rate, selecting an all-in discount rate which fully captures the risk associated with the loan rating. The PCI portion of the C&I portfolio was valued by applying valu- ation marks based on CIT’s PD and LGD framework and supporting those prices by using the direct method of the income approach. To perform the valuation, a recovery analysis was applied based on the probability of default and loss given default assigned to each loan. The direct method was used for the PCI loans in order to capture either the existing defaulted, or near defaulted, nature of the loans. The table below summarizes the key valuation input assumptions by major product type: Discount Rate Severity Rate Prepayment Rate Default Rate Product Type SFR Range 4.6%-11.9% Other Acquired Loans 5.1%-10.0% Jumbo Mortgages 3.3%-4.4% Commercial Real Estate 4.2%-5.0% SBA Repurchased GNMA Reverse Mortgages C&I Loans 5.1%-7.3% T + 0.9% 10.5% 5.3%-8.4% Weighted Avg. 6.9% 6.0% 3.4% 4.5% 5.1% 2.1% 10.5% 5.8% Range (1) 36.6%-60.9% 0.0%-10.0% 15.0%-35.0% 25.0% 0.0%-13.5% (2) NA Weighted Avg. (1) 45.7% 2.7% 16.6% 25.0% 6.4% (2) NA Range (1) 1.0%-6.0% 10.0%-18.0% 1.5%-6.0% 2.0%-5.0% 0.0%-7.3% (3) NA Weighted Avg. (1) Range (1) Weighted Avg. (1) 3.4% 14.0% 4.6% 4.9% 3.4% (3) NA 0.2%-82.4% 10.9% 0.0%-0.2% 0.6%-14.7% 3.0%-24.9% 0.0%-8.8% NA(4) NA 0.0% 1.6% 3.4% 4.2% NA NA (1) SFR Severity, Prepayment and Default Rates were based on portfolio historic delinquency migration and loss experience. (2) Reverse mortgage severity rates were based on housing price index (HPI ) and LTV. (3) Reverse mortgage prepayment rates were based on mobility and mortality curves. (4) NA means not applicable. Indemnification Assets As part of the OneWest Transaction, CIT is party to loss share agree- ments with the FDIC, which provide for the indemnification of certain losses within the terms of these agreements. These loss share agree- ments are related to OneWest Bank’s previous acquisitions of IndyMac, First Federal and La Jolla. The loss sharing agreements generally require CIT Bank, N.A. to obtain FDIC approval prior to transferring or selling loans and related indemnification assets. Eli- gible losses are submitted to the FDIC for reimbursement when a qualifying loss event occurs (e.g., loan modification, charge-off of loan balance or liquidation of collateral). In connection with the Indy- Mac transaction, the Company recorded an indemnification receivable for estimated reimbursements due from the FDIC for loss exposure arising from breach in origination and servicing obligations associated with covered reverse mortgage loans prior to March 2009 pursuant to the loss share agreement with the FDIC. The indemnifica- tion receivable is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to man- agement’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount (pur- suant to ASC 805-25-27). The loss share agreements cover the SFR loans acquired from IndyMac, First Federal, and La Jolla. In addition, the IndyMac loss share agreement covers the reverse mortgage loans. The IndyMac agreement was signed on March 19, 2009 and the SFR indemnification expires on the tenth anniversary of the agree- ment. The First Federal loss share agreement was signed on December 18, 2009 and expires on the tenth anniversary of the agreement. The La Jolla loss share agreement was signed on February 19, 2010 and expires on the tenth anniversary of the agreement. These agreements are accounted for as indemnifica- tion assets which were recognized as of the acquisition date at their assessed fair value of $455.4 million, including the affects of the measurement period adjustments. The First Federal and La Jolla loss share agreements also include certain true-up provi- sions for amounts due to the FDIC if actual and estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses originally estimated at the time of OneWest Bank’s acquisition of the covered loans. Upon acquisition, CIT established a separate liability for these amounts due to the FDIC associated with the La Jolla loss share agree- ment at the assessed fair value of $56.3 million. The indemnification assets were valued using the direct method of the income approach. The income approach derives an esti- mate of value based on the present value of the projected future cash flows allocated to each of the loss share agreements using a discount rate which incorporates the relevant risks associated with the asset and time value of money. To perform the valuation, we made use of the projected losses for each of the relevant loan portfolios, as discussed in each loan portfolio section above, as well as the contractual terms of the loss share agreements. As the Item 8: Financial Statements and Supplementary Data 132 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS indemnification assets relate to cash flows to be received from the FDIC, a government agency, we considered a discount rate reflective of the risk of the FDIC. Conversely, as true-up payments to be made in the future are liabilities, we selected a discount rate reflective of CIT’s borrowing rates for a similar term. Goodwill and Intangible Assets The goodwill recorded is attributable to advancing CIT’s bank deposit strategy, by expanding the Company’s products and ser- vices offered to small and middle market customers, improving CIT’s competitive position in the financial services industry and related synergies that are expected to result from the acquisition. The amount of goodwill recorded represents the excess of the purchase price over the estimated fair value of the net assets acquired by CIT, including intangible assets. Subsequent to the acquisition, management continued to review information relat- ing to events or circumstances existing at the acquisition date. This review resulted in adjustments to the acquisition date valua- tion amounts during the measurement period, which increased the goodwill balance to $663.0 million. See Note 26 — Goodwill and Intangible Assets for a description of goodwill recognized, along with the reporting units within the NAB and LCM segments that recorded goodwill. Goodwill related to this transaction is not deductible for income tax purposes. The intangible assets recorded related primarily to the valuation of existing core deposits, customer relationships and trade names recorded in conjunction with the OneWest Transaction. Intangible assets acquired, as of August 3, 2015 consisted of the following, including the affects of the measurement period adjustments: Intangible Assets (dollars in millions) Intangible Assets Core deposit intangibles Trade names Customer relationships Other Total Fair Value $126.3 36.4 20.3 2.9 Measurement Period Adjustments $ − (16.3) (3.7) (1.2) Adjusted Fair Value $126.3 20.1 16.6 1.7 Estimated Useful Life Amortization Method 7 years 10 years 10 years 3 years Straight line Straight line Accelerated Straight line $185.9 $(21.2) $164.7 - Core Deposit Intangibles — Certain core deposits were acquired as part of the transaction, which provide an additional source of funds for CIT. The core deposit intangibles represent the costs saved by CIT by acquiring the core deposits and not needing to source the funds elsewhere. This intangible was val- ued using the income approach: cost savings method. - OneWest Trade Name — OneWest’s brand is recognized in the Financial Services industry, as such, OneWest’s brand name reputa- tion and positive brand recognition embodied in its trade name was valued using the income approach: relief from royalty method. - Customer Relationships — Certain commercial borrower cus- tomer relationships were acquired as part of the transaction. The acquired customer relationships were valued using the income approach: multi-period excess earnings method. - Other — Relates to certain non-competition agreements which limit specific employees from competing in related businesses of CIT. This intangible was valued using the income approach: with-and-without method. See Note 26 — Goodwill and Intangible Assets, for further discussion of the accounting for goodwill and other intangible assets. Other Assets Acquired other assets of $0.7 billion, including the affects of the measurement period adjustments, include items such as invest- ment tax credits, OREO, deferred federal and state tax assets, property, plant and equipment (“PP&E”), and an FDIC receivable, as well as accrued interest and other receivables. - Investment tax credits — As of the acquisition date, OneWest’s most significant tax credit investments were in several funds spe- cializing in the financing and development of low-income housing (“LIHTC”). Our fair value analysis of the LIHTC investments took into account the ongoing equity installments regularly allocated to the underlying tax credit funds, along with changes to projected tax benefits and the impact this has on future capital contributions. CIT’s assessment of the investment tax credits primarily consisted of applying discount rates ranging from 4% − 6% to projected cash flows. As a result of this analysis, CIT determined that the fair value of the tax credit assets was approximately $114 million (the fair value of associated future funding commitments is separately recorded as a liability at its fair value of $19.3 million). At acquisi- tion, OneWest also held smaller investments in funds promoting film production and renewable energy; these were recorded at their acquisi- tion fair value of approximately $21 million based on CIT’s consideration of market based indications of value. - OREO — A portfolio of real estate assets acquired over time as part of the foreclosure process associated with mortgages on real estate. OREO assets primarily include single family resi- dences, and also include land, multi-family, medical office, and condominium units. OREO assets are actively marketed for sale and carried by OneWest at the lower of its carrying amount or estimated fair value less disposition costs. Estimated fair value is generally based upon broker price opinions and independent appraisals, modified based on assumptions and expectations deter- mined by management. CIT reviewed the OREO carried in other assets and concluded that the net book value of $132.4 million at the acquisition date was a reasonable approximation of fair value. - Property Plant and Equipment — The operations of the Company are supported by various property, plant and equip- ment (“PP&E”) assets. The PP&E assets broadly include real and personal property used in the normal course of the compa- ny’s daily operations. CIT considered the income, market, and CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 133 cost approaches in estimating the fair value of the PP&E. The owned real estate assets were valued under the income approach to derive property level fair value estimates. The underlying assets, including the land, buildings, site improve- ments, and leases-in-place were discretely valued using the cost and market approaches. Furniture and fixtures were reviewed and it was found that the depreciated book value was a reasonable proxy for fair value. Based on our analysis, the fair value of the PP&E was estimated at $61.4 million. The valuation resulted in a premium of approximately $23.6 million. - FDIC Receivable — CIT acquired a receivable with the FDIC rep- resenting a secured interest in certain homebuilder, home construction and lot loans. The secured interest entitles the Com- pany to 40% of the underlying cash flows. The Company recorded this receivable at its estimated acquisition date fair value of $54.8 million. The fair value was estimated based on cash flows expected to be collected from the Company’s participation interest in the underlying collateral modeled through the clean up call date (when the portfolio falls below 10% of the original unpaid principal bal- ance or March 2016) controlled by the FDIC, whereby the underlying assets shall be sold in six months from the earliest call date (September 2016). The underlying cash flows include esti- mated amounts expected to be collected from repayment of loan principal and interest and net proceeds from property liquidations. These cash flows are offset by amounts paid for servicing expenses, management fees, and liquidation expenses. Deposits Deposits of $14.5 billion included $8,327.6 million with no stated maturities and Certificates of Deposit (CDs) that totaled $6,205.7 million. For deposits with no stated maturities (primarily checking and savings deposits), fair value was assumed to equal the carrying value, therefore no PAA was recorded. The CDs had maturities ranging from 3 months to 5 years and were valued using the indirect method of the income approach, which was based on discounting the cash flows associated with the CDs. Value under the indirect method was a function of the projected contractual cash flows of the fixed term deposits and a credit adjusted discount rate, as observed from similar risk instruments, based on the platform in which the deposit was originated. In order to best capture the features and risks, CDs were grouped along two dimensions, maturity groups, based on the remaining term of the fixed deposits (e.g., 0 to 1 year, 1 to 2 years, etc.) and origination channel (e.g., Branch or Online). Contractual cash flows of each CD group were projected, related to interest accrual and principal and interest repayment, for the CDs over the remaining term of each deposit pool. Upon the maturity of each group, the accumulated interest and principal are repaid to the depositor. Each underlying fixed term CD had a contractual interest rate, and the weighted average interest rate for each group was cal- culated. The weighted average interest rate of each group was used to forecast the accumulated interest to be repaid at maturity. The applicable discount rate for each group of CDs reflected the maturity and origination channel of that group. The selected discount rate for all channels other than Branch was based on the observed difference in OneWest Bank origination rates between channels, added to the selected Branch channel rate of the same maturity. The discount rates ranged from 0.25 percent to 1.38 percent. The valuation resulted in a PAA premium of $29.0 million. Borrowings Borrowings of $3.0 billion at the acquisition date consisted of FHLB advances that included fixed rate credit (“FRC”), adjustable rate credit (“ARC”), and overnight (“Fed Funds Overnight”) bor- rowing. The FHLB advances were valued using the indirect method of the income approach, which is based on discounting the cash flows associated with the borrowing. Value under the indirect method is a function of the projected contractual cash flows of the FHLB borrowing and a discount rate matching the type of FHLB borrowing, as observed from recent FHLB advance rates. The applicable discount rate for each borrowing type was observed based on rates published by the FHLB. Each FHLB borrowing has a contractual interest rate, interest pay- ment terms, and a stated maturity date; therefore, cash flows of each FHLB borrowing was projected to match its contractual terms of repayment, both principal and interest, and then discounted to the valuation date. For Fed Funds Overnight borrowing, as these borrow- ings are settled overnight, the Fair Value is assumed to be equal to the outstanding balance, as the interest rate resets to the market rate overnight. The applicable discount rate for each borrowing ranged from 0.22 percent to 0.89 percent. The valuation resulted in a PAA premium of $6.8 million. Other Liabilities Other liabilities include various amounts accrued for compensation related costs, a separate reserve for credit losses on off-balance sheet commitments, liabilities associated with economic hedges, and commitments to invest in the LIHTC noted above. Consideration Holdback Liability In connection with the OneWest acquisition, the parties negoti- ated four separate holdbacks related to selected trailing risks, totaling $116 million, which reduced the cash consideration paid at closing. Any unapplied holdback funds at the end of the respective holdback periods, which range from 1 — 5 years, are payable to the former OneWest Bank shareholders. Unused funds for any of the four holdbacks cannot be applied against another holdback amount. The range of potential holdback to be paid is from $0 to $116 million. Based on management’s estimate of the probability of each holdback, it was determined that the prob- able amount of holdback to be paid was $62.4 million. See Note 13 — Fair Value. The amount expected to be paid was dis- counted based on CIT’s cost of funds. This contingent consideration was measured at fair value at the acquisition date. Mortgage Servicing Rights CIT acquired certain reverse mortgage servicing rights (“MSRs”) accounted for as a servicing liability with an acquisition date fair value of approximately $10 million, which are included in discon- tinued operations. MSRs are accounted for as separate assets or liabilities only when servicing is contractually separated from the underlying mortgage loans 1) by sale or securitization of the loans with servicing retained or 2) by separate purchase or assumption of the servicing. Under the servicing agreements, the Company performs certain accounting and reporting functions for the benefit of the related mortgage investors. For performing such services, the Company receives a servicing fee. MSRs repre- sent a contract for the right to receive future revenue associated with the servicing of financial assets and thus are considered a Item 8: Financial Statements and Supplementary Data 134 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS non-financial asset. The acquisition date estimated fair value was based on observable market data and to the extent such informa- tion is not available, CIT determined the estimated fair value of the MSRs using discounted cash flow techniques using a third- party valuation model. Estimates of fair value involve several assumptions, including market expectations of future prepayment rates, interest rates, discount rates, servicing costs and default rates, all of which are subject to change over time. Assumptions are evaluated for reasonableness in comparison to actual perfor- mance, available market and third party data. CIT will evaluate the acquired MSRs for potential impairment using stratification based on one or more predominant risk characteristics of the underlying financial assets such as loan vintage. The MSRs are amortized in proportion to and over the period of estimated net servicing income and the amortization is recorded as an offset to Loan servicing fee, net. The amortization of MSRs is analyzed at least quarterly and adjusted to reflect changes in prepayment speeds, delinquency rates, as well as other factors. CIT will recog- nize OTTI when it is probable that all or part of the valuation allowance for impairment (recognized under LOCOM) will not be recovered within the foreseeable future. For this purpose, the foreseeable future shall not exceed a period of two years. The Company will assess a servicing asset or liability for OTTI when conditions exist or events occur indicating that OTTI may exist (e.g., a severe or extended decline in estimated fair value). Unaudited Pro Forma Information Upon closing the transaction and integrating OneWest Bank, effective August 3, 2015, separate records for OneWest Bank as a stand-alone business have not been maintained as the operations have been integrated into CIT. At year-end 2015, the Company no longer has the ability to break out the results of the former OneWest entities in a reliable manner. The pro forma information presented below reflects management’s best estimate, based on information available at the reporting date. The following table presents certain unaudited pro forma infor- mation for illustrative purposes only, for the year ended December 31, 2015 and 2014 as if OneWest Bank had been acquired on January 1, 2014. The unaudited estimated pro forma information combines the historical results of OneWest Bank with the Company’s consolidated historical results and includes cer- tain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma infor- mation is not indicative of what would have occurred had the acquisition taken place on January 1, 2014. Further, the unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value by OneWest Bank prior to the acquisition, which in turn did not require an allowance for loan losses. The pro forma financial information does not include the impact of possible business changes or synergies. The prepara- tion of the pro forma financial information includes adjustments to conform accounting policies between OneWest Bank and CIT, specifically related to (1) adjustments to remove the fair value adjustments previously recorded by OneWest Bank on $4.4 billion of loan balances and record income on a level yield basis, reflecting the adoption of ASC 310-20 and ASC 310-30 for loans, depending on whether the loans were determined to be purchased credit impaired; and (2) adjustments to remove the fair value adjustments previously recorded by OneWest Bank on $500 million of borrowings and record interest expense in accor- dance with ASC 835-30. The pro forma financial information in the table below reflects the total impact ($1,022 million) of income tax benefits recognized by the Company in 2014 and 2015 ($375 million and $647 million for the year ended December 31, 2014 and 2015, respectively) in the 2014 period, assuming for the purpose of preparing the pro forma information that the acquisition of OneWest Bank had occurred on January 1, 2014. These tax benefits, which related to the reduction in the Company’s deferred tax asset valuation allowance, do not have a continuing impact. Similarly, in connec- tion with the OneWest Transaction, CIT incurred acquisition and integration costs recognized by the Company during the year ended December 31, 2014 and 2015 of approximately $5 million and $55 million, respectively. For the purpose of preparing the pro forma information, these acquisition and integration costs have been reflected as if the acquisition had occurred on January 1, 2014. Additionally, CIT expects to achieve operating cost savings and other business synergies as a result of the acqui- sition that are not reflected in the pro forma amounts that follow. Therefore, actual results may differ from the unaudited pro forma information presented and the differences could be material. Unaudited Pro Forma (dollars in millions) Years Ended December 31, 2015 $3,131.4 636.1 2014 $3,247.4 1,708.2 Net finance revenue Net income Nacco Acquisition On January 31, 2014, CIT acquired 100% of the outstanding shares of Paris-based Nacco SAS (“Nacco”), an independent full service railcar lessor in Europe. The purchase price was approxi- mately $250 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date, resulting in $77 million of goodwill. The purchase included approximately $650 million of assets (operating lease equipment), comprised of more than 9,500 railcars, including tank cars, flat cars, gondolas and hopper cars, and liabilities, including secured debt of $375 million. Direct Capital Acquisition On August 1, 2014, CIT Bank acquired 100% of the outstanding shares of Capital Direct Group and its subsidiaries (“Direct Capi- tal”), a U.S. based lender providing equipment financing to small and mid-sized businesses operating across a range of industries. The purchase price was approximately $230 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date resulting in approximately $170 million of goodwill. The assets acquired included finance receivables of approximately $540 million, along with existing secured debt of $487 million. In addition, intangible assets of approximately $12 million were recorded relating mainly to the valuation of existing customer relationships and trade names. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 135 DISCONTINUED OPERATIONS Student Lending On April 25, 2014, the Company completed the sale of its student lending business, along with certain secured debt and servicing rights. The business was in run-off and $3.4 billion in portfolio assets were classified as assets held for sale as of December 31, 2013. Income from the discontinued operation for the year ended December 31, 2014, reflected the benefit of proceeds received in excess of the net carrying value of assets and liabilities sold. The interest expense primarily reflected the acceleration of FSA accretion on the extinguishment of the debt, while the gain on sale mostly reflects the excess of purchase price over net assets, and amounts received for the sale of servicing rights. The 2014 interest expense allocated to the discontinued opera- tion corresponded to debt of approximately $3.2 billion, net of $224 million of FSA. The debt included $0.8 billion that was repaid using a portion of the cash proceeds. Operating expenses included in the discontinued operation consisted of direct expenses of the student lending business that were separate from ongoing CIT operations and did continue subsequent to disposal. In connection with the classification of the student lending busi- ness as a discontinued operation, certain indirect operating expenses that previously had been allocated to the business have instead been allocated to Corporate and Other as part of continuing operations and are not included in the summary of discontinued operations presented in the table below. The total incremental pretax amounts of indirect overhead expense that were previously allocated to the student lending business and remain in continuing operations were approximately $2.2 million for the year ended December 31, 2014. There were no assets or liabilities related to the student loan business at December 31, 2015. 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, as amended by ASU 2014-08, the Finan- cial Freedom business is reflected as discontinued operations as of the August 3, 2015 acquisition date and as of December 31, 2015. The business includes the entire third party servicing of reverse mortgage operations, which consist of personnel, sys- tems 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 Fannie Mae, secured bor- rowings and contingent liabilities. In addition, continuing operations includes a portfolio of reverse mortgages, which are maintained in the Legacy Consumer Mortgage segment, which are serviced by Financial Freedom. Based on the Company’s con- tinuing assessment of market participants costs to service in response to recent information from bidders and contemplation of recent industry servicing practice changes, the Company’s value for the reverse MSRs was a negative $10 million at December 31, 2015, which is unchanged from the acquisition date fair value from the OneWest acquisition. 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 HUD and FHA and in servicing agreements with the applicable counterpar- ties, such as Fannie Mae and other investors. Under these agreements, the servicer may be liable for failure to perform its ser- vicing obligations, which could include fees imposed for failure to comply with foreclosure timeframe requirements established by ser- vicing 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. While the Company believes that such accrued liabilities are adequate, it is reasonably possible that such liabilities could ulti- mately exceed the Company’s reserve for probable and reasonably estimable losses by up to $40 million as of December 31, 2015. Separately, a corresponding indemnification receivable from the FDIC of $66 million is recognized for the loans covered by indem- nification agreements with the FDIC reported in continuing operations as of December 31, 2015. The indemnification receiv- able is measured using the same assumptions used to measure the indemnified item (contingent liability) subject to manage- ment’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. Condensed Balance Sheet of Discontinued Operations (dollars in millions) December 31, 2015 Net Finance Receivables(1) Other assets(2) Assets of discontinued operations Secured borrowings(1) Other liabilities(3) Liabilities of discontinued operations $449.5 51.0 $500.5 $440.6 255.6 $696.2 (1) Net finance receivables includes $440.2 million of securitized balances and $9.3 million of additional draws awaiting securitization at December 31, 2015. 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 and other accrued liabilities. A measurement period adjustment was recorded at year-end to increase certain pre-acquisition reverse mortgage servicing liabilities by approximately $32 million. Item 8: Financial Statements and Supplementary Data 136 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The results from discontinued operations, net of tax, for the year ended December 31, 2015, reflects activities of the reverse mortgage servicing business while the results for the years ended December 31, 2014 and 2013 reflect the student lending business. Condensed Statements of Operation (dollars in millions) Interest income(1) Interest expense(1) Other income Operating expenses(2) (Loss) income from discontinued operation before benefit (provision) for income taxes Benefit (provision) for income taxes(3) (Loss) income from discontinued operations, net of taxes Gain on sale of discontinued operations Years Ended December 31, 2015 $ 4.3 (4.4) 16.7 (33.7) (17.1) 6.7 (10.4) – 2014 $ 27.0 (248.2) (2.1) (3.6) (226.9) (3.4) (230.3) 282.8 2013 $130.7 (77.2) 0.9 (14.5) 39.9 (8.6) 31.3 – (Loss) income from discontinued operation, net of taxes $(10.4) $ 52.5 $ 31.3 (1) Includes amortization for the premium associated with the HECM loans and related secured borrowings for the year ended December 31, 2015. (2) For the year ended December 31, 2015, operating expense is comprised of $11.4 million in salaries and benefits, $6.4 million in professional services and $15.6 million for other expenses such as data processing, premises and equipment, legal settlement, and miscellaneous charges. (3) The Company’s tax rate for discontinued operations is 39% for the year ended December 31, 2015. Condensed Statement of Cash Flows (dollars in millions) NOTE 3 — LOANS Net cash flows used for operations Net cash flows provided by investing activities $18.5 27.9 Year Ended December 31, 2015 The following tables and data as of December 31, 2015 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 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) Commercial Loans Direct financing leases and leveraged leases Total commercial Consumer Loans Total finance receivables Finance receivables held for sale Finance receivables and held for sale receivables(1) December 31, 2015 December 31, 2014 $ 21,382.7 3,427.5 24,810.2 6,861.5 31,671.7 1,985.1 $ 33,656.8 $ 14,878.5 4,616.5 19,495.0 – 19,495.0 779.9 $ 20,274.9 (1) Assets held for sale on the Balance Sheet includes finance receivables and operating lease equipment primarily related to portfolios in Canada, China and the U.K. 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. In preparing the interim financial statements for the quarter ended September 30, 2015 and the year end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the classification of balances for Commercial loans and Direct financing leases and leverage leases in the amount of $480 million as of December 31, 2014. The reclassification had no impact on the Company’s Balance Sheet and Statements of Operations or Cash Flows for any period. CIT ANNUAL REPORT 2015 137 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents finance receivables by segment, based on obligor location: Finance Receivables (dollars in millions) Transportation & International Finance North America Banking Legacy Consumer Mortgages Non-Strategic Portfolios December 31, 2015 December 30, 2014 Domestic $ 815.1 22,371.4 5,421.9 – Foreign $2,727.0 329.7 6.6 – Total $ 3,542.1 22,701.1 5,428.5 – Domestic $ 812.6 14,645.1 – – Foreign $2,746.3 1,290.9 – 0.1 Total $ 3,558.9 15,936.0 – 0.1 Total $28,608.4 $3,063.3 $31,671.7 $15,457.7 $4,037.3 $19,495.0 The following table presents selected components of the net investment in finance receivables: Components of Net Investment in Finance Receivables (dollars in millions) Unearned income Equipment residual values Unamortized premiums / (discounts) Accretable yield on PCI loans Net unamortized deferred costs and (fees)(1) Leveraged lease third party non-recourse debt payable (1) Balance relates to NAB and TIF segments. December 31, 2015 December 31, 2014 $ (870.4) 662.8 (34.0) 1,294.0 42.9 (154.0) $(1,037.8) 684.2 (22.0) – 48.5 (180.5) In preparing the interim financial statements for the quarter ended March 31, 2015, the Company discovered and corrected an immate- rial error impacting the disclosure of unearned income in the amount of approximately $170 million as of December 31, 2014. Certain of the following tables present credit-related information at the “class” level in accordance with ASC 310-10-50, Disclo- sures 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 consid- ered 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. The definitions of the commercial loan ratings are as follows: - Pass — finance receivables in this category do not meet the criteria for classification in one of the categories below. - 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. - 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. Item 8: Financial Statements and Supplementary Data 138 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 commer- cial 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: December 31, 2015 Transportation & International Finance Aerospace Rail Maritime Finance International Finance Total TIF North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Consumer Banking Total NAB Total Commercial December 31, 2014 Pass Special Mention Classified- accruing Classified- non-accrual PCI Loans Total $ 1,635.7 $ 65.0 $ 46.2 $ 15.4 $ 118.9 1,309.0 653.0 3,716.6 8,700.1 4,337.6 5,143.3 1,739.0 21.4 1.4 162.0 77.6 306.0 662.5 318.0 97.6 212.8 – 19,941.4 $23,658.0 1,290.9 $1,596.9 0.6 207.4 50.7 304.9 404.1 153.3 18.6 180.3 – 756.3 $1,061.2 – – 46.6 62.0 131.5 65.4 3.6 0.4 – 200.9 $262.9 – – – – – 71.6 – 99.5 – – $ 1,762.3 120.9 1,678.4 827.9 4,389.5 9,969.8 4,874.3 5,362.6 2,132.5 21.4 171.1 $171.1 22,360.6 $26,750.1 Transportation & International Finance Aerospace Rail Maritime Finance International Finance Total TIF North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Total NAB Non-Strategic Portfolios Total Commercial $ 1,742.0 $ 11.4 $ 43.0 $ 0.1 $ 127.5 1,026.4 820.2 3,716.1 6,199.0 4,129.1 1,692.0 2,084.1 14,104.2 288.7 1.4 – 107.9 120.7 561.0 337.8 76.6 278.8 1,254.2 18.4 1.1 – 58.0 102.1 121.8 180.4 – 197.3 499.5 10.5 $18,109.0 $1,393.3 $ 612.1 – – 37.1 37.2 30.9 70.0 – – 100.9 22.4 $160.5 $ – – – – – – – – – – – – $ 1,796.5 130.0 1,026.4 1,023.2 3,976.1 6,912.7 4,717.3 1,768.6 2,560.2 15,958.8 340.0 $20,274.9 CIT ANNUAL REPORT 2015 139 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 bal- ance 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 portfo- lio 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 differ- ence 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. Covered Loans are discussed further in Note 5 — Indemni- fication Assets. Included in the consumer loan balances as of December 31, 2015, were loans with terms that permitted negative amortization with an unpaid principal balance of $966 million. Consumer Loan LTV Distributions at December 31, 2015 (dollars in millions) Single Family Residential Reverse Mortgage Greater than 125% $ 1.1 $ 395.6 $ Covered Loans Non-covered Loans Non-PCI PCI Non-PCI PCI Total Single Family Residential Covered Loans Non-PCI 3.6 449.3 1,621.0 – 619.9 552.1 829.3 – 0.5 0.2 14.3 1,416.0 8.2 $15.7 $ 412.9 $ 14.9 11.4 11.1 – 638.6 1,027.1 3,877.4 8.2 1.0 2.5 26.5 432.6 – Non-covered loans Non-PCI $ 3.9 6.5 37.4 312.5 – PCI $39.3 17.0 7.0 11.1 – Total Reverse Mortgages Total Consumer Loans $ 44.2 $ 457.1 26.0 70.9 756.2 – 664.6 1,098.0 4,633.6 8.2 $2,075.0 $2,396.9 $1,439.2 $53.1 $5,964.2 $462.6 $360.3 $74.4 $897.3 $6,861.5 101% — 125% 80% — 100% Less than 80% Not Applicable(1) Total (1) Certain Consumer Loans do not have LTV’s, including the Credit Card portfolio. There are no prior period balances in the above table as the Company did not have consumer loans prior to the acquisition of OneWest Bank. The following table summarizes the covered loans, all of which are in the LCM segment: Covered Loans (dollars in millions) LCM loans HFI at carrying value PCI $2,396.9 Non-PCI $2,537.6 Total $4,934.5 Item 8: Financial Statements and Supplementary Data 140 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Past Due and Non-accrual Loans The table that follows presents portfolio delinquency status, regardless of accrual/non-accrual classification: Finance and Held for Sale Receivables — Delinquency Status (dollars in millions) Past Due 30 – 59 Days Past Due 60 – 89 Days Past Due 90 Days or Greater Total Past Due Current(1) PCI Loans(2) Total Finances Receivable December 31, 2015 Transportation & International Finance Aerospace Rail Maritime Finance International Finance Total TIF North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Consumer Banking Total NAB Legacy Consumer Mortgages Single family residential mortgages Reverse mortgages Total LCM Total December 31, 2014 Transportation & International Finance Aerospace Rail Maritime Finance International Finance Total TF North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services Total NAB Non-Strategic Portfolios Total $ 1.4 8.5 – 8.6 18.5 1.6 86.3 1.9 54.8 1.2 145.8 15.8 – 15.8 $ – $ 15.4 $ 16.8 $ 1,745.5 $ 2.0 – 20.3 22.3 0.3 32.9 – 1.7 – 34.9 1.7 – 1.7 2.1 – 31.7 49.2 20.5 27.6 0.7 1.2 0.4 12.6 108.3 – 1,678.4 60.6 90.0 767.3 4,299.5 22.4 146.8 2.6 57.7 1.6 9,888.2 4,727.5 5,260.5 2,074.8 1,444.4 – – – – – 71.6 – 99.5 – – $ 1,762.3 120.9 1,678.4 827.9 4,389.5 9,982.2 4,874.3 5,362.6 2,132.5 1,446.0 50.4 231.1 23,395.4 171.1 23,797.6 4.1 – 4.1 21.6 2,080.7 2,450.0 – 843.0 74.4 21.6 2,923.7 2,524.4 4,552.3 917.4 5,469.7 $180.1 $58.9 $103.7 $342.7 $30,618.6 $2,695.5 $33,656.8 $ – 5.2 – 43.9 49.1 4.4 93.7 – 62.2 160.3 16.4 $ – $ 1.9 – 7.0 8.9 – 32.9 – 3.3 36.2 6.9 0.1 4.2 – 21.6 25.9 0.5 14.9 – 0.9 16.3 9.6 $ 0.1 $ 1,796.4 $ 11.3 118.7 – 1,026.4 72.5 83.9 950.7 3,892.2 4.9 141.5 – 66.4 6,907.8 4,575.8 1,768.6 2,493.8 212.8 15,746.0 32.9 307.1 $225.8 $52.0 $ 51.8 $329.6 $19,945.3 $ – – – – – – – – – – – – $ 1,796.5 130.0 1,026.4 1,023.2 3,976.1 6,912.7 4,717.3 1,768.6 2,560.2 15,958.8 340.0 $20,274.9 (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. CIT ANNUAL REPORT 2015 141 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 regard- ing 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 Finance Receivables on Non-Accrual Status (dollars in millions) process of collection or (2) real estate mortgage loans or con- sumer 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 (repossessed assets and OREO) and loans 90 days or more past due and still accruing. Transportation & International Finance Aerospace International Finance Total TIF North America Banking Commercial Banking Equipment Finance Commercial Real Estate Consumer Banking Total NAB Legacy Consumer Mortgages Single family residential mortgages Total LCM Non-Strategic Portfolios Total Repossessed assets and OREO Total non-performing assets Commercial loans past due 90 days or more accruing Consumer loans past due 90 days or more accruing Total Accruing loans past due 90 days or more 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. Loans in Process of Foreclosure The table below summarizes the residential mortgage loans in the process of foreclosure and OREO as of December 31, 2015: (dollars in millions) PCI Non-PCI Loans in process of foreclosure OREO December 31, 2015 $320.0 71.0 $391.0 $118.0 December 31, 2015 December 31, 2014 Held for Investment Held for Sale Total Held for Investment Held for Sale Total $ 15.4 $ – $ 15.4 $ 0.1 $ – $ 0.1 46.6 46.6 11.0 9.4 – 0.4 46.6 62.0 131.5 65.4 3.6 0.4 22.4 22.5 30.9 70.0 – – 20.8 200.9 100.9 – 15.4 120.5 56.0 3.6 – 180.1 4.2 4.2 – 0.6 0.6 – $199.7 $68.0 – – – $123.4 4.8 4.8 – $267.7 127.3 $395.0 15.6 0.2 $ 15.8 14.7 14.7 – – – – – – – 22.4 $37.1 37.1 37.2 30.9 70.0 – – 100.9 – – 22.4 $160.5 0.8 $161.3 10.3 – $ 10.3 Impaired Loans The Company’s policy is to review for impairment finance receiv- ables 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 factor- ing 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. 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 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. Item 8: Financial Statements and Supplementary Data 142 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired Loans (dollars in millions) December 31, 2015 With no related allowance recorded: Transportation & International Finance International Finance North America Banking Commercial Banking Equipment Finance Commercial Real Estate Commercial Services With an allowance recorded: Transportation & International Finance Aerospace International Finance North America Banking Commercial Banking Equipment Finance Total Impaired Loans(1) Total Loans Impaired at Acquisition Date and Convenience Date(2) Total December 31, 2014 With no related allowance recorded: International Finance Commercial Banking Equipment Finance Commercial Services Non-Strategic Portfolios With an allowance recorded: Aerospace International Finance Commercial Banking Equipment Finance Commercial Services Total Impaired Loans(1) Total Loans Impaired at Convenience Date(2) Total Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment(3) $ – $ – $ 15.4 2.3 0.2 4.0 15.4 – 102.6 9.7 149.6 22.8 5.7 0.8 4.0 15.4 – 112.1 11.7 172.5 2,695.5 3,977.3 – – – – – 0.4 – 22.7 4.7 27.8 4.9 $2,845.1 $4,149.8 $32.7 $ 10.2 $ 17.0 $ 1.2 5.6 4.2 – – 6.0 29.6 – – 56.8 1.2 $ 58.0 $ 1.2 6.8 4.2 – – 6.0 34.3 – – 69.5 15.8 85.3 – – – – – – 1.0 11.4 – – 12.4 0.5 $12.9 $ 5.2 6.5 4.0 0.7 4.0 5.0 7.3 53.2 5.4 91.3 1,108.0 $1,199.3 $ 10.1 104.9 5.8 6.9 3.4 9.0 3.4 43.5 0.8 2.8 190.6 26.4 $ 217.0 (1) Interest income recorded for the years ended December 31, 2015 and December 31, 2014 while the loans were impaired were $1.5 million and $10.1 million, of which $0.5 and $0.7 million was interest recognized using cash-basis method of accounting for each year, respectively. (2) Details of finance receivables that were identified as impaired at the Acquisition Date and Convenience Date are presented under Loans Acquired with Deteriorated Credit Quality. (3) Average recorded investment for the year ended December 31, 2015 and year ended December 31, 2014. 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 prob- ability 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, CIT ANNUAL REPORT 2015 143 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: - Instances where the primary source of payment is no longer sufficient to repay the loan in accordance with terms of the loan document; - Lack of current financial data related to the borrower or guarantor; - Delinquency status of the loan; - Borrowers experiencing problems, such as operating losses, marginal working capital, inadequate cash flow, excessive financial leverage or business interruptions; - Loans secured by collateral that is not readily marketable or that has experienced or is susceptible to deterioration in realizable value; and - 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 deter- mined 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 mea- surement of impairment: - “Orderly liquidation value” is the basis for collateral valuation; - Appraisals are updated annually or more often as market conditions warrant; and - Appraisal values are discounted in the determination of impairment if the: - appraisal does not reflect current market conditions; or - 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 acqui- sition date of OneWest Bank. 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 at December 31, 2015 (dollars in millions)(1) North America Banking Commercial Banking Commercial Real Estate Legacy Consumer Mortgages Single family residential mortgages Reverse mortgages Unpaid Principal Balance $ 118.4 173.3 3,598.2 87.4 $3,977.3 Carrying Value $ 71.6 99.5 2,450.0 74.4 $2,695.5 Allowance for Loan Losses $ $ 2.5 0.6 1.4 0.4 4.9 (1) PCI loans prior to the OneWest Transaction were not significant and are not included. An accretable yield is measured as the excess of the cash flows expected to be collected, estimated at the acquisition date, over the recorded investment (estimated fair value at acquisition) and is recognized in interest income over the remaining life of the loan, or pool of loans, on an effective yield basis. The difference between the cash flows contractually required to be paid, mea- sured 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. Item 8: Financial Statements and Supplementary Data 144 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes commercial PCI loans, which are monitored for credit quality based on internal risk classifications as of December 31, 2015. See previous table Consumer Loan LTV Distributions for credit quality metrics on consumer PCI loans. (dollars in millions) Commercial Banking Commercial Real Estate Total 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, PCI Loans at Acquisition Date (dollars in millions) Contractually required payments, including interest(1) Less: Non-accretable difference Cash flows expected to be collected(2) Less: Accretable yield Fair value of loans acquired at acquisition date December 31, 2015 Non-criticized Criticized $ 6.4 34.9 $41.3 $ 65.2 64.6 $129.8 Total $ 71.6 99.5 $171.1 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 following table provides details on PCI loans acquired in con- nection with the OneWest Transaction on August 3, 2015. Consumer $ 6,882.7 (2,970.7) 3,912.0 (1,222.9) $ 2,689.1 Commercial $ 417.2 (188.1) 229.1 (31.9) $ 197.2 Total $ 7,299.9 (3,158.8) 4,141.1 (1,254.8) $ 2,886.3 (1) During the quarter ended December 31, 2015, Management determined that $15.0 million (UPB) of PCI loans as of the acquisition date should have been classified as HFI loans. This reclassification reduced the fair value of the PCI loans acquired from the OneWest Transaction by $14.5 million. In addition, the Company recognized a measurement period adjustment totaling $16.5 million as a reduction to the acquired PCI loans with an increase to the recognized goodwill from the OneWest Transaction, which resulted in a decrease of non-accretable difference by $35.7 million and an increase of $53.0 million of accretable yield. (2) Represents undiscounted expected principal and interest cash flows at acquisition. Changes in the accretable yield for PCI loans for the period from August 3, 2015 (the date of the OneWest transaction) to December 31, 2015 are summarized below: (dollars in millions) Balance at August 3, 2015 Accretion into interest income Reclassification from non-accretable difference Disposals and Other Balance at December 31, 2015 Troubled Debt Restructurings Accretable Yield $1,254.8 (81.3) 126.9 (6.4) $1,294.0 The Company periodically modifies the terms of finance receiv- ables 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. Specifi- cally, the Company’s policies on TDR identification include the following examples of indicators used to determine whether the borrower is in financial difficulty: - Borrower is in default with CIT or other material creditor - Borrower has declared bankruptcy - Growing doubt about the borrower’s ability to continue as a going concern - Borrower has (or is expected to have) insufficient cash flow to service debt - Borrower is de-listing securities - Borrower’s inability to obtain funds from other sources - 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: - Assets used to satisfy debt are less than CIT’s recorded investment in the receivable - Modification of terms – interest rate changed to below market rate - Maturity date extension at an interest rate less than market rate - The borrower does not otherwise have access to funding for debt with similar risk characteristics in the market at the restructured rate and terms - Capitalization of interest - Increase in interest reserves - Conversion of credit to Payment-In-Kind (PIK) - Delaying principal and/or interest for a period of three months or more - Partial forgiveness of the balance. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 con- sidered as part of homogenous pools and are included in the determination of the non-specific allowance. - The nature of modifications qualifying as TDR’s based upon recorded investment at December 31, 2015 was comprised of payment deferrals for 13% and covenant relief and/or other for 87%. December 31, 2014 TDR recorded investment was com- prised of payment deferrals for 35% and covenant relief and/or other for 65%. CIT ANNUAL REPORT 2015 145 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 pay- ment 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; how- ever, the exact concession type and resulting financial effect are usually not finalized and do not take effect until the loan is per- manently modified. The trial period terms are developed in accordance with our proprietary programs or the U.S. Treasury’s Making Homes Affordable 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. At December 31, 2015, the loans in trial modification period were $26.2 million under HAMP, $0.1 million under 2MP and $5.2 mil- lion 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 require- ments and are then permanently modified at the end of the trial period. Our allowance process considers the impact of those modifi- cations that are probable to occur. The recorded investment of TDRs, excluding those classified as PCI, at December 31, 2015 and December 31, 2014 was $40.2 million and $17.2 million, of which 63% and 75%, respec- tively, were on non-accrual. NAB and TIF receivables accounted for 70% and 28%, respectively, of the total TDRs at December 31, 2015 and 91% and 9%, respectively, at December 31, 2014, and there were $1.4 million and $0.8 million, respectively, of commit- ments to lend additional funds to borrowers whose loan terms have been modified in TDRs. Recorded investment related to modifications qualifying as TDRs that occurred during the years ended December 31, 2015 and 2014 were $31.6 million and $10.3 million, respectively. The recorded investment at the time of default of TDRs that experi- ence a payment default (payment default is one missed payment), during the years ended December 31, 2015 and 2014, and for which the payment default occurred within one year of the modification totaled $4.3 million and $1.0 million, respec- tively. The December 31, 2015 defaults related to NAB and NSP. 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 2015 amounts, the overall nature and impact of modification programs were comparable in the prior year. - 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; - 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 occur- ring during the quarters ended December 31, 2015 and 2014 was not significant; - Debt forgiveness, or the reduction in amount owed by bor- rower, 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 the years ended December 31, 2015 and 2014 was not significant, as debt forgiveness is a relatively small component of the Com- pany’s modification programs; and - 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 the out- standing balance of $897.3 million at December 31, 2015 related to the reverse mortgage portfolio, of which $812.6 million is unin- sured. The uninsured reverse mortgage portfolio consists of approximately 1,960 loans with an average borrowers’ age of 82 years old and an unpaid principal balance of $1,113.4 million at December 31, 2015. There is currently overcollateralization in the portfolio, as the realizable collateral value (the lower of col- lectible principal and interest, or estimated value of the home) exceeds the outstanding book balance at December 31, 2015. Reverse mortgage loans were recorded at fair value on the acqui- sition date. Subsequent to that, we account for uninsured reverse mortgages, which are the vast 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.” The remain- ing amounts are accounted for in accordance with PCI guidance. See Note 1 — Business and Summary of Significant Accounting Policies for further details. To determine the carrying value of these reverse mortgages as of December 31, 2015, the Company Item 8: Financial Statements and Supplementary Data 146 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS used a proprietary model which uses actual cash flow informa- tion, actuarially determined mortality assumptions, likelihood of prepayments, and estimated future collateral values (determined by applying externally published market index). In addition, driv- ers 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 apprecia- tion on a loan-level basis. As of December 31, 2015, the Company’s estimated future advances to reverse mortgagors are as follows: Estimated Future Advances to Reverse Mortgagors (dollars in millions) Year Ending: 2016 2017 2018 2019 2020 Years 2021 – 2025 Years 2026 – 2030 Years 2031 – 2035 Thereafter Total(1),(2) $17.2 14.2 11.7 9.6 7.8 21.3 6.5 1.7 0.4 $90.4 (1) This table does not take into consideration cash inflows including pay- ments 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 December 31, 2015, the Company is responsible for funding up to a remaining $48 million of the total amount. Refer to the Indemnification Asset footnote for more information on this agreement and the Compa- ny’s responsibilities toward this reverse mortgage portfolio. From the acquisition date through December 31, 2015, any changes to the portfolio value as a result of re-estimated cash flows due to changes in actuarial assumptions or actual or expected appreciation or depreciation in property values was immaterial to the portfolio as a whole. Serviced Loans In conjunction with the OneWest Transaction, the Company ser- vices HECM reverse mortgage loans sold to Agencies (Fannie Mae) and securitized in GNMA HMBS pools. HECM loans trans- ferred into the HMBS program have not met all of 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. As servicer of HECM loans, the Company either chooses to repur- chase the loan out of the HMBS pool upon reaching a maturity event (i.e., borrower’s death or the property ceases to be the bor- rower’s principal residence) or is required to repurchase the loan once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. These HECM loans are repurchased at a price equal to the unpaid principal balance out- standing 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 as described elsewhere in this document. Cash activity relating to loans repurchased would gen- erally be reflected in the investing section of the Statement of Cash Flows, while cash activity for the related debt would be reflected as financing transactions. For the period from August 3, 2015 (the date of the OneWest transaction) to December 31, 2015, the Company repurchased $39.1 million (unpaid principal balance) of additional HECM loans, of which $26.5 million were classified as AHFS and the remaining $12.6 million were classified as HFI. As of December 31, 2015, the Company had an outstanding balance of $118.1 million of HECM loans, of which $20.2 million (unpaid prin- cipal balance) is classified as AHFS with a remaining purchase discount of $0.1 million, $87.6 million is classified as HFI accounted for as PCI loans with an associated remaining pur- chase discount of $13.2 million. Serviced loans also include $10.3 million that are classified as HFI, which are 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 esti- mated 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 methodol- ogy for assessing the appropriateness of this reserve is similar to the allowance process for outstanding loans. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Loan Losses and Recorded Investment in Finance Receivables (dollars in millions) Transportation & International Finance North America Banking Legacy Consumer Mortgages Non-Strategic Portfolios Corporate and Other Total CIT ANNUAL REPORT 2015 147 Year Ended December 31, 2015 Balance — December 31, 2014 Provision for credit losses Other(1) Gross charge-offs(2) Recoveries Balance — December 31, 2015 Allowance balance at December 31, 2015 Loans individually evaluated for impairment Loans collectively evaluated for impairment Loans acquired with deteriorated credit quality(3) Allowance for loan losses Other reserves(1) Finance receivables at December 31, 2015 Loans individually evaluated for impairment Loans collectively evaluated for impairment Loans acquired with deteriorated credit quality(3) Ending balance Percent of loans to total loans Year Ended December 31, 2014 Balance — December 31, 2013 Provision for credit losses Other(1) Gross charge-offs(2) Recoveries Balance — December 31, 2014 Allowance balance at December 31, 2014 Loans individually evaluated for impairment Loans collectively evaluated for impairment Loans acquired with deteriorated credit quality(3) Allowance for loan losses Other reserves(1) Finance receivables at December 31, 2014 Loans individually evaluated for impairment Loans collectively evaluated for impairment Loans acquired with deteriorated credit quality(3) Ending balance $ $ $ $ $ 46.8 20.3 (0.9) (35.3) 8.5 39.4 0.4 39.0 – 39.4 0.2 $ 299.6 $ 135.2 (10.1) (129.5) 19.0 314.2 27.4 283.7 3.1 314.2 42.9 $ $ $ $ $ $ $ $ 15.4 134.2 3,526.7 22,395.8 – 171.1 – 5.0 1.9 (1.2) 0.9 6.6 – 4.8 1.8 6.6 – – 2,904.1 2,524.4 $3,542.1 $22,701.1 $5,428.5 11.2% 71.7% 17.1% $ 303.8 $ $ $ $ $ $ $ 46.7 38.3 (0.5) (44.8) 7.1 46.8 1.0 45.8 – 46.8 0.3 17.6 62.0 (10.0) (75.2) 19.0 299.6 11.4 287.7 0.5 299.6 35.1 40.6 $ $ $ $ $ 3,541.3 15,894.2 – 1.2 $3,558.9 $15,936.0 $ $ $ $ $ $ – – – – – – – – – – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ $ – – – – – – – – – – – – – – – 0% 5.6 (0.4) – (7.5) 2.3 – – – – – – – 0.1 – 0.1 $ $ $ $ $ $ $ $ $ $ $ $ $ – – – – – – – – – – – – – – – $ 346.4 160.5 (9.1) (166.0) 28.4 360.2 27.8 327.5 4.9 360.2 43.1 $ $ $ $ 149.6 28,826.6 2,695.5 $31,671.7 0% 100% – $ 356.1 0.2 (0.2) – – – – – – – – – – – – 100.1 (10.7) (127.5) 28.4 346.4 12.4 333.5 0.5 346.4 35.4 58.2 19,435.6 1.2 $ $ $ $ $ $19,495.0 Percentage of loans to total loans 18.3% 81.7% 0% 0% 0% 100% (1) “Other reserves” represents additional credit loss reserves for unfunded lending commitments, letters of credit and for deferred purchase agreements, all of which is recorded in Other liabilities. “Other” also includes changes relating to loans under the indemnification provided by the FDIC, sales and foreign cur- rency translations. (2) Gross charge-offs of amounts specifically reserved in prior periods included $21 million and $13 million charged directly to the Allowance for loan losses for the years ended December 31, 2015 and December 31, 2014, respectively. In 2015, $15 million related to NAB and $6 million to TIF. In 2014, $13 million related to NAB. Gross charge-offs included $13 million charged directly to the Allowance for loan losses for the year ended December 31, 2014, all of which related to NAB. (3) Represents loans considered impaired as part of the OneWest transaction and are accounted for under the guidance in ASC 310-30 (Loans and Debt Securi- ties Acquired with Deteriorated Credit Quality). Item 8: Financial Statements and Supplementary Data 148 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 — INDEMNIFICATION ASSETS The Company acquired the indemnifications provided by the FDIC under the loss sharing agreements from previous transac- tions entered into by OneWest Bank. The loss share agreements with the FDIC relates to the FDIC-assisted transactions of IndyMac Federal Bank in March 2009 (“IndyMac Transaction”), First Federal Bank of California in December 2009 (“First Federal Transaction”) and La Jolla Bank in February 2010 (“La Jolla Bank Transaction”). Eligible losses are submitted to the FDIC for reim- bursement when a qualifying loss event occurs (e.g., loan modification, charge-off of loan balance or liquidation of collat- eral). Reimbursements approved by the FDIC are received usually within 60 days of submission. In connection with the lndyMac, First Federal and La Jolla Transactions, the FDIC indemnified the Company against certain future losses. For the IndyMac Transaction, First Federal Transaction and La Jolla Transaction the loss share agreement covering SFR mortgage loans is set to expire March 2019, December 2019 and February 2020, respectively. In addition, in connection with the IndyMac Transaction, the Company recorded an indemnification receivable for estimated reimbursements due from the FDIC for loss exposure arising from breach in origination and servicing obligations associated with covered reverse mortgage loans prior to March 2009 pursuant to the loss share agreement with the FDIC. Below are the estimated fair value and range of value on an undiscounted basis for the indemnification assets associated with the FDIC-assisted transactions as of the acquisition date (August 3, 2015) pursuant to ASC 805, Business Combinations. (dollars in millions) IndyMac Transaction La Jolla Transaction First Federal Transaction August 3, 2015 Range of Value Low $ $ – – – – High $4,596.8 85.3 – $4,682.1 Fair Value(1) $455.0 0.4 – $455.4 (1) During the quarter ended December 31, 2015, the Company recognized a measurement period adjustment totaling $25.2 million ($24.9 million for IndyMac and $0.3 million for La Jolla) as a reduction to the Indemnification asset with an increase to the recognized goodwill from the OneWest Transaction. As of the acquisition date, the indemnification related to the First Federal Transaction is zero as the covered losses are not pro- jected to meet the threshold for FDIC reimbursement. The fair value of the indemnification assets associated with the IndyMac Transaction and La Jolla Transaction totaled $455.4 million for projected credit losses covered by the loss share agreement with a potential maximum value of $4.7 billion. The estimated maxi- mum value (high end) represents the maximum claims eligible under the respective shared-loss agreement as of the acquisition date on an undiscounted basis with the low end representing no eligible submissions. In addition, as of the acquisition date, the Company separately recognized a net receivable of $13.0 million (recorded in other assets) associated with the IndyMac Transaction for the claim sub- missions filed with the FDIC and a net payable of $17.4 million (recorded in other liabilities) for the amount due to the FDIC for previously submitted claims for commercial loans that were later recovered by investor (e.g., guarantor payments, recoveries) associated with the La Jolla Transaction. The indemnification asset is carried on the same measurement basis as the indemnified item (i.e. mirror accounting principal), subject to management’s assessment of collectability and any contractual limitations. Accounting for the indemnification assets is discussed in detail in Note 1 — Business and Summary of Significant Accounting Policies. Below provides the carrying value of the recognized indemnifica- tion assets and related receivable/payable balance with the FDIC associated with indemnified losses under the IndyMac and La Jolla Transactions as of December 31, 2015. (dollars in millions) Loan indemnification Reverse mortgage indemnification Agency claims indemnification Total Receivable with (Payable to) the FDIC December 31, 2015 IndyMac Transaction La Jolla Transaction $338.6 10.3 65.6 $414.5 $ 18.6 $ 0.3 – – $ 0.3 $(1.9) Total $338.9 10.3 65.6 $414.8 $ 16.7 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IndyMac Transaction There are three components to the Indy Mac indemnification pro- gram described below: 1. SFR Mortgages, 2. Reverse Mortgages, and 3. Certain Servicing Obligations. Single Family Residential (SFR) Mortgage Loan Indemnification Asset The FDIC indemnifies the Company against certain credit losses on SFR mortgage loans based on specified thresholds as follows: CIT ANNUAL REPORT 2015 149 Loss Threshold First Loss Tranche FDIC Loss Percentage 0% CIT Loss Percentage 100% Under Stated Threshold 80% 20% Meets or Exceeds Stated Threshold 95% 5% Comments The first $2.551 billion (First Loss Tranche) of losses based on the unpaid principal balances as of the transaction date are borne entirely by the Company without reimbursement from the FDIC. Losses based on the unpaid principal balances as of the transaction date in excess of the First Loss Tranche but less than $3.826 billion (Stated Threshold) are reimbursed 80% by the FDIC with the remaining 20% borne by the Company. Losses based on the unpaid principal balances as of the transaction date that equal or exceed $3.826 billion (Stated Threshold) are reimbursed 95% by the FDIC with the remaining 5% borne by the Company. Prior to the OneWest acquisition, the cumulative losses of the SFR portfolio exceeded the first loss tranche ($2.551 billion) effec- tive December 2011 with the excess losses reimbursed 80% by the FDIC. As of December 31, 2015, the Company projects the cumulative losses will reach the final loss threshold of “meets or exceeds stated threshold” ($3.826 billion) in April 2017 at which time the excess losses will be reimbursed 95% by the FDIC. The following table summarizes the submission of qualifying losses (net of recoveries) for reimbursement from the FDIC since incep- tion of the loss share agreement: Submission of Qualifying Losses for Reimbursement (dollars in millions) Unpaid principal balance Cumulative losses incurred Cumulative claims Cumulative reimbursement December 31, 2015 $4,372.8 3,623.4 3,608.4 802.6 As part of this indemnification agreement, the Company must continue to modify loans under certain U.S. government pro- grams, or other programs approved by the FDIC. Final settlement on the remaining indemnification obligations will occur at the earlier of the sale of the portfolio or the expiration date, March 2019. Reverse Mortgage Indemnification Asset Under the loss share agreement, the FDIC agreed to indemnify against losses on the first $200.0 million of funds advanced post March 2009, and to fund any advances above $200.0 million. Final settlement on the remaining indemnification obligation will occur at the earlier of the sale of the portfolio, payment of the last shared-loss loan, or final payment to the purchaser in settlement of all remaining loss share obligations under the agreement, which can occur within the six month period prior to March 2019. As of December 31, 2015, $152.4 million had been advanced on the reverse mortgage loans. Prior to the OneWest acquisition, the cumulative loss submissions and reimbursements totaled $1.8 million from the FDIC. From August 3, 2015 (the acquisition date of OneWest Bank) through December 31, 2015, the Company was reimbursed $0.4 million from the FDIC for the cumulative losses incurred. Indemnification from Certain Servicing Obligations Subject to certain requirements and limitations, the FDIC agreed to indemnify the Company, among other things, for third party claims from the Agencies related to the selling representations and warranties of IndyMac as well as liabilities arising from the acts or omissions, including, without limitation, breaches of ser- vicer obligations of IndyMac for SFR mortgage loans and reverse mortgage loans as follows: SFR mortgage loans sold to the Agencies - The FDIC indemnified the Company through March 2014 for third party claims made by Fannie Mae or Freddie Mac relating to any liabilities or obligations imposed on the seller of mort- gage loans with respect to mortgage loans acquired by Fannie Mae or Freddie Mac from IndyMac. This indemnification was in addition to the contractual protections provided by both Fannie Mae and Freddie Mac, through the respective servicing transfer agreements executed upon the FDICs sale of such mortgage servicing rights to OneWest Bank. Under these con- tracts, each of the GSEs agreed to not enforce any such claims arising from breaches that would otherwise be imposed on the seller of such mortgage loans. - The FDIC indemnified the Company through March 2014 for third party claims made by GNMA, relating to any liabilities or obligations imposed on the seller of mortgage loans with respect to mortgage loans acquired by GNMA from IndyMac. - The FDIC indemnified the Company for third party claims from the Agencies or others arising from certain servicing errors of IndyMac commenced within two years from March 2009 or three years from March 2009 if the claim was brought by FHLB. The FDIC indemnification for third party claims made by the Agencies for servicer obligations expired as of the acquisition Item 8: Financial Statements and Supplementary Data 150 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS date; however, for any claims, issues or matters relating to the servicing obligations that are known or identified as of the end of the expired term, the FDIC indemnification protection continues until resolution of such claims, issues or matters. The Company had no submitted claims from acquisition date through December 31, 2015. Prior to the OneWest acquisition, the cumulative loss submissions and reimbursements totaled $5.7 million from the FDIC to cover third party claims made by the Agencies for SFR loans. Reverse mortgage loans sold to the Agencies The FDIC indemnifies the Company through March 2019 for third party claims made by the Agencies relating to any liabilities or obligations imposed on the seller of HECM loans acquired by the Agencies from IndyMac resulting from servicing errors or servic- ing obligations prior to March 2019. The Company had no submitted claims from acquisition date through December 31, 2015. Prior to the OneWest acquisition, the cumulative loss submissions totaled $11.2 million and reim- bursements totaled $10.7 million from the FDIC to cover third party claims made by the Agencies for reverse mortgage loans. First Federal Transaction The FDIC agreed to indemnify the Company against certain losses on SFR and commercial loans based on established thresh- olds as follows: Loss Threshold First Loss Tranche FDIC Loss Percentage 0% CIT Loss Percentage 100% Under Stated Threshold 80% 20% Meets or Exceeds Stated Threshold 95% 5% Comments The first $932 million (First Loss Tranche) of losses based on the unpaid principal balances as of the transaction date are borne entirely by the Company without reimbursement from the FDIC. Losses based on the unpaid principal balances as of the transaction date in excess of the First Loss Tranche but less than $1.532 billion (Stated Threshold) are reimbursed 80% by the FDIC with the remaining 20% borne by the Company. Losses based on the unpaid principal balances as of the transaction date that equal or exceed $1.532 billion (Stated Threshold) are reimbursed 95% by the FDIC with the remaining 5% borne by the Company. The loss thresholds apply to the covered loans collectively. As of the OneWest Transaction, the loss share agreements covering the SFR mortgage loans remain in effect (expiring in December 2019) while the agreement covering commercial loans expired (in December 2014). However, pursuant to the terms of the shared- loss agreement, the loss recovery provisions for commercial loans extend for three years past the expiration date (December 2017). As of December 31, 2015, the Company has not met the thresh- old ($932 million) to receive reimbursement for any losses incurred related to the First Federal Transaction. The following table summarizes the submission of qualifying losses for reim- bursement from the FDIC since inception of the loss share agreement: Submission of Qualifying Losses for Reimbursement (dollars in millions) Unpaid principal balance(1) Cumulative losses incurred Cumulative claims Cumulative reimbursement SFR $1,456.8 408.5 407.2 – December 31, 2015 Commercial $ – 9.0 9.0 – Total $1,456.8 417.5 416.2 – (1) Due to the expiration of the loss share agreement covering commercial loans in December 2014, the outstanding unpaid principal balance eligible for reim- bursement is zero. As reflected above, the cumulative losses incurred have not reached the First Loss Tranche ($932 million) for FDIC reimburse- ment and the Company does not project to reach the specified level of losses. Accordingly, no indemnification asset was recog- nized in connection with the First Federal Transaction. losses do not exceed a specified level by December 2019. As the Company does not project to reach the First Loss Tranche ($932 million) for FDIC reimbursement, the Company does not expect that such true-up payment will be required for the First Federal portfolio. Separately, as part of the loss sharing agreement, the Company is required to make a true-up payment to the FDIC in the event that CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS La Jolla Transaction The FDIC agreed to indemnify the Company against certain losses on SFR, and commercial loans HFI based on established thresholds as follows: CIT ANNUAL REPORT 2015 151 Loss Threshold Under Stated Threshold FDIC Loss Percentage 80% CIT Loss Percentage 20% Meets or Exceeds Stated Threshold 95% 5% Comments Losses based on unpaid principal balance up to the Stated Threshold ($1.007 billion) are reimbursed 80% by the FDIC with the remaining 20% borne by the Company. Losses based on unpaid principal balance at or in excess of the Stated Threshold ($1.007 billion) are reimbursed 95% by the FDIC with the remaining 5% borne by the Company. The loss thresholds apply to the covered loans collectively. As of the OneWest Transaction, the loss share agreements covering the SFR mortgage loans remain in effect (expiring in February 2020) while the agreement covering commercial loans expired (in March 2015). However, pursuant to the terms of the shared-loss agreement, the loss recovery provisions for commercial loans extend for three years past the expiration date (March 2018). Pursuant to the loss sharing agreement, the Company’s cumula- tive losses since acquisition date are reimbursed by the FDIC at 80% until the stated threshold ($1.007 billion) is met. The follow- ing table summarizes the submission of cumulative qualifying losses (net of recoveries) for reimbursement from the FDIC since inception of the loss share agreement: Submission of Qualifying Losses for Reimbursement (dollars in millions) Unpaid principal balance(1) Cumulative losses incurred Cumulative claims Cumulative reimbursement SFR $89.3 56.2 56.2 45.0 December 31, 2015 Commercial $ – 359.5 359.5 287.6 Total $ 89.3 415.7 415.7 332.6 (1) Due to the expiration of the loss share agreement covering commercial loans in March 2015, the outstanding unpaid principal balance eligible for reim- bursement is zero. As part of the loss sharing agreement, the Company is required to make a true-up payment to the FDIC in the event that losses do not exceed a specified level by the tenth anniversary of the agreement (February 2020). The Company currently expects that such payment will be required based upon its forecasted loss estimates for the La Jolla portfolio as the actual and estimated cumulative losses of the acquired covered assets are projected to be lower than the cumulative losses. As of December 31, 2015, an obligation of $56.9 million has been recorded as a FDIC true-up Operating Lease Equipment (dollars in millions) Commercial aircraft (including regional aircraft) Railcars and locomotives Other equipment Total(1) liability for the contingent payment measured at estimated fair value. Refer to Note 13 — Fair Value for further discussion. NOTE 6 — OPERATING LEASE EQUIPMENT The following table provides the net book value (net of accumu- lated depreciation of $2.4 billion at December 31, 2015 and $1.8 billion at December 31, 2014) of operating lease equipment, by equipment type. December 31, 2015 December 31, 2014 $ 9,708.6 6,591.9 316.5 $16,617.0 $ 8,890.1 5,714.0 326.3 $14,930.4 (1) Includes equipment off-lease of $614.7 million and $183.2 million at December 31, 2015 and 2014, respectively, primarily consisting of rail and aerospace assets. Item 8: Financial Statements and Supplementary Data 152 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents future minimum lease rentals due on non-cancelable operating leases at December 31, 2015. Excluded from this table are variable rentals calculated on asset usage lev- els, re-leasing rentals, and expected sales proceeds from remarketing equipment at lease expiration, all of which are com- ponents of operating lease profitability. Minimum Lease Rentals Due (dollars in millions) NOTE 7 — INVESTMENT SECURITIES Investments include debt and equity securities. The Company’s debt securities include residential mortgage-backed securities (“MBS”), U.S. Government Agency securities, U.S. Treasury secu- rities, and supranational and foreign government securities. Equity securities include common stock and warrants, along with restricted stock in the FHLB and FRB. $1,943.5 1,663.8 1,368.9 1,087.9 839.0 2,695.4 $9,598.5 Years Ended December 31, 2016 2017 2018 2019 2020 Thereafter Total Investment Securities (dollars in millions) Available-for-sale securities Debt securities Equity securities Held-to-maturity securities Debt securities(1) Securities carried at fair value with changes recorded in net income Debt securities(2) Non-marketable investments(3) Total investment securities December 31, 2015 December 31, 2014 $2,007.8 14.3 300.1 339.7 291.9 $1,116.5 14.0 352.3 – 67.5 $2,953.8 $1,550.3 (1) Recorded at amortized cost. (2) These securities were initially classified as available-for-sale upon acquisition; however, upon further review, after filing of the Company’s September 30, 2015 Form 10-Q management determined that these securities as of the acquisition date should have been classified as securities carried at fair value with changes recorded in net income and in the fourth quarter of 2015 management corrected this immaterial error impacting classification of investment securities. (3) Non-marketable investments include securities of the FRB and FHLB carried at cost of $263.5 million at December 31, 2015 and $15.2 million at December 31, 2014. The remaining non-marketable investments include ownership interests greater than 3% in limited partnership investments that are accounted for under the equity method, other investments carried at cost, which include qualified Community Reinvestment Act (CRA) investments, equity fund holdings and shares issued by customers during loan work out situations or as part of an original loan investment, totaling $28.4 million and $52.3 million at December 31, 2015 and December 31, 2014, respectively. Realized investment gains totaled $8.1 million, $39.7 million, and $8.9 million for the years ended 2015, 2014, and 2013, respectively. In addition, the Company maintained $6.8 billion and $6.2 billion of interest bearing deposits at December 31, 2015 and December 31, 2014, respectively, which are cash equivalents and are classified separately on the balance sheet. The following table presents interest and dividends on interest bearing deposits and investments: Interest and Dividend Income (dollars in millions) Interest income – investments/reverse repos Interest income – interest bearing deposits Dividends – investments Total interest and dividends Year Ended December 31, 2015 $43.8 17.2 10.4 $71.4 2014 $14.1 17.7 3.7 $35.5 2013 $ 8.9 16.6 3.4 $28.9 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities Available-for-Sale The following table presents amortized cost and fair value of securities AFS. Debt Securities AFS — Amortized Cost and Fair Value (dollars in millions) CIT ANNUAL REPORT 2015 153 December 31, 2015 Debt securities AFS Mortgage-backed Securities U.S. government agency securities Non-agency securities U.S. government agency obligations Supranational and foreign government securities Total debt securities AFS Equity securities AFS Total securities AFS December 31, 2014 Debt securities AFS U.S. Treasury securities U.S. government agency obligations Supranational and foreign government securities Total debt securities AFS Equity securities AFS Total securities AFS Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 148.4 $ 573.9 996.8 300.1 2,019.2 14.4 $2,033.6 $ 200.0 904.2 12.3 1,116.5 14.0 $1,130.5 $ $ $ – 0.4 – – 0.4 0.1 0.5 – – – – 0.2 0.2 $ (0.9) $ 147.5 (7.2) (3.7) – (11.8) (0.2) $(12.0) $ – – – – (0.2) $ (0.2) 567.1 993.1 300.1 2,007.8 14.3 $2,022.1 $ 200.0 904.2 12.3 1,116.5 14.0 $1,130.5 The following table presents the debt securities AFS by contractual maturity dates: Debt Securities AFS — Amortized Cost and Fair Value Maturities (dollars in millions) Mortgage-backed securities – U.S. government agency securities Due after 10 years Total Mortgage-backed securities – non agency securities After 5 but within 10 years Due after 10 years Total U.S. government agency obligations After 1 but within 5 years Total Supranational and foreign government securities Due within 1 year Total Total debt securities available-for-sale December 31, 2015 Amortized Cost Fair Value Weighted Average Yield $ 148.4 148.4 $ 147.5 147.5 $ 27.2 $ 27.2 546.7 573.9 $ 996.8 996.8 $ 300.1 300.1 $2,019.2 539.9 567.1 $ 993.1 993.1 $ 300.1 300.1 $2,007.8 3.28% 3.28% 4.92% 5.72% 5.68% 1.16% 1.16% 0.39% 0.39% Item 8: Financial Statements and Supplementary Data 154 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the gross unrealized losses and estimated fair value of AFS securities aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position. Debt Securities AFS — Estimated Unrealized Losses (dollars in millions) Less than 12 months 12 months or greater December 31, 2015 Fair Value Gross Unrealized Loss $ 147.0 495.5 943.0 1,585.5 0.2 $1,585.7 $ (0.9) (7.2) (3.7) (11.8) (0.2) $(12.0) Fair Value $ $ – – – – – – Gross Unrealized Loss $ $ – – – – – – Less than 12 months 12 months or greater December 31, 2014 Fair Value $0.2 $0.2 Gross Unrealized Loss $(0.2) $(0.2) Fair Value – $ – Gross Unrealized Loss – $ – Changes in the accretable yield for PCI securities for the period from August 3, 2015 (the date of the OneWest transaction) to December 31, 2015 are summarized below: Changes in Accretable Yield (dollars in millions) Balance at August 3, 2015 Accretion into interest income Reclassifications to non-accretable difference Disposals & Other Balance at December 31, 2015 Total $204.4 (13.5) (1.7) (0.2) $189.0 Debt securities AFS Mortgage-backed securities U.S. government agency securities Non-agency securities U.S. government agency obligations Total debt securities AFS Equity securities AFS Total securities available-for-sale Equity securities AFS Total securities available-for-sale Purchased Credit-Impaired AFS Securities In connection with the OneWest acquisition, the Company classi- fied AFS mortgage-backed securities as PCI due to evidence of credit deterioration since issuance and for which it was probable that the Company will not collect all principal and interest pay- ments contractually required at the time of purchase. Accounting for these PCI securities is discussed in Note 1 — Business and Summary of Significant Accounting Policies. The following table provides detail of the acquired PCI securities classified as AFS in connection with the OneWest Transaction on August 3, 2015. PCI Securities at Acquisition Date (dollars in millions) Contractually required payments, including interest Less: Non-accretable differences Cash flows expected to be collected(2) Less: Accretable yield Total(1) $1,025.4 (209.7) 815.7 (204.4) Fair value of securities acquired at acquisition date $ 611.3 (1) During the quarter ended December 31, 2015, Management determined that $373.4 million of AFS securities as of the acquisition date should have been classified as securities carried at fair value with changes recorded in net income and in the fourth quarter of 2015 management corrected this immaterial error impacting classification of investment securities. This reduced the fair value of the PCI AFS Securities acquired from the OneWest Transaction by $370.8 million. The adjustment resulted in a reduction of contractually required payments by $606.4 mil- lion, non-accretable difference by $141.6 million and accretable yield by $94.0 million. (2) Represents undiscounted expected principal and interest cash flows at acquisition. CIT ANNUAL REPORT 2015 155 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair value of PCI securities was $559.6 million with a par value of $717.1 million as of December 31, 2015. The Company did not own any PCI securities as of December 31, 2014. Securities Carried at Fair Value with Changes Recorded in Net Income These securities were initially classified as available-for-sale upon acquisition; however, upon further review following the filing of the Company’s September 30, 2015 Form 10-Q, management determined that $373.4 million of these securities as of the acqui- sition date should have been classified as securities carried at fair value with changes recorded in net income as of the acquisition date, with the remainder classified as available-for-sale, and in the fourth quarter of 2015 management corrected this immaterial error impacting classification of investment securities. Securities Carried at Fair Value with changes Recorded in Net Income (dollars in millions) December 31, 2015 Mortgage-backed Securities – Non-agency Total securities held at fair value through net income Amortized Cost $ $ 343.8 343.8 Gross Unrealized Gains Gross Unrealized Losses $ $ 0.3 0.3 $ $ (4.4) (4.4) Fair Value $339.7 $339.7 Securities Carried at Fair Value with changes Recorded in Net Income – Amortized Cost and Fair Value Maturities (dollars in millions) Mortgage-backed securities – non agency securities After 5 but within 10 years Due after 10 years Total Debt Securities Held-to-Maturity December 31, 2015 Amortized Cost $ $ 0.5 343.3 343.8 Fair Value $ 0.5 339.2 $ 339.7 Weighted Average Yield 9.80% 4.85% 4.85% The carrying value and fair value of securities HTM at December 31, 2015 and December 31, 2014 were as follows: Debt Securities HTM — Carrying Value and Fair Value (dollars in millions) December 31, 2015 Mortgage-backed securities U.S. government agency securities State and municipal Foreign government Corporate – foreign Total debt securities held-to-maturity December 31, 2014 Mortgage-backed securities U.S. government agency securities State and municipal Foreign government Corporate – foreign Total debt securities held-to-maturity Carrying Value $147.2 37.1 13.5 102.3 $300.1 $156.3 48.1 37.9 110.0 $352.3 Gross Unrealized Gains Gross Unrealized Losses $ 1.1 – – 4.5 $ 5.6 $ 2.5 0.1 0.1 9.0 $ $ $ (2.6) (1.6) – – (4.2) (1.9) (1.8) – – $11.7 $ (3.7) Fair Value $145.7 35.5 13.5 106.8 $301.5 $156.9 46.4 38.0 119.0 $360.3 Item 8: Financial Statements and Supplementary Data 156 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the debt securities HTM by contractual maturity dates: Debt Securities HTM — Amortized Cost and Fair Value Maturities (dollars in millions) December 31, 2015 Mortgage-backed securities – U.S. government agency securities After 5 but within 10 years Due after 10 years Total State and municipal Due within 1 year After 1 but within 5 years After 5 but within 10 years Due after 10 years Total Foreign government Due within 1 year After 1 but within 5 years Total Corporate – Foreign securities Due within 1 year After 1 but within 5 years Total Total debt securities held-to-maturity Debt Securities HTM — Estimated Unrealized Losses (dollars in millions) Amortized Cost $ 1.3 145.9 147.2 0.7 1.5 0.8 34.1 37.1 11.2 2.3 13.5 0.7 101.6 102.3 $300.1 Fair Value $ 1.3 144.4 145.7 0.7 1.5 0.8 32.5 35.5 11.2 2.3 13.5 0.7 106.1 106.8 $301.5 Weighted Average Yield 2.09% 2.53% 2.52% 1.81% 2.26% 2.70% 2.28% 2.28% 0.20% 2.43% 0.58% 6.07% 4.51% 4.52% 3.12% Mortgage-backed securities U.S. government agency securities State and municipal Total securities held-to-maturity Mortgage-backed securities U.S. government agency securities State and municipal Total securities held-to-maturity Less than 12 months 12 months or greater December 31, 2015 Fair Value $ $ 62.2 3.1 65.3 Gross Unrealized Loss $ $ (0.9) (0.1) (1.0) Fair Value $ $ 40.7 28.2 68.9 Gross Unrealized Loss $ $ (1.7) (1.5) (3.2) Less than 12 months 12 months or greater December 31, 2014 Fair Value $ $ − − − Gross Unrealized Loss $ $ − − − Fair Value $ $ 55.1 36.3 91.4 Gross Unrealized Loss $ $ (1.9) (1.8) (3.7) CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 157 Other Than Temporary Impairment As discussed in Note 1 — Business and Summary of Significant Accounting Policies, the Company conducted and documented its periodic review of all securities with unrealized losses, which it per- forms to evaluate whether the impairment is other than temporary. For PCI securities, management determined certain PCI securities with unrealized losses were deemed credit-related and recog- nized OTTI credit-related losses of $2.8 million as permanent write-downs for the year ended December 31, 2015. There were no PCI securities in 2014 and 2013. NOTE 8 — OTHER ASSETS The following table presents the components of other assets. Other Assets (dollars in millions) Current and deferred federal and state tax assets(1) Deposits on commercial aerospace equipment Tax credit investments and investments in unconsolidated subsidiaries(2) Property, furniture and fixtures Fair value of derivative financial instruments Deferred debt costs and other deferred charges OREO and repossessed assets Tax receivables, other than income taxes Other(3)(4) Total other assets The Company reviewed debt securities AFS and HTM with unreal- ized losses and determined that the unrealized losses were not OTTI. The unrealized losses were not credit-related and the Com- pany does not have an intent to sell and believes it is not more- likely-than-not that the Company will have to sell prior to the recovery of the amortized cost basis. The Company reviewed equity securities classified as AFS with unrealized losses and determined that the unrealized losses were not OTTI. The unrealized losses were not credit-related. There were no unrealized losses on non-marketable investments. December 31, 2015 $1,252.5 December 31, 2014 $ 483.5 696.0 223.9 197.2 140.7 129.6 127.3 98.2 529.5 736.3 73.4 126.4 168.0 148.1 0.8 102.0 268.2 $3,394.9 $2,106.7 (1) The increase is primarily due to the reversal of the deferred tax asset valuation ($647 million) in the third quarter of 2015. See Note 19 — Income Taxes (2) Included in this balance are affordable housing investments of $108.4 million as of December 31, 2015 that provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. As a limited partner, the Company has no significant influence over the operations. In 2015, the Company recognized pre-tax losses of $5.2 million related to these affordable housing investments. In addition, the Company recognized total tax benefits of $8.7 mil- lion, which included tax credits of $6.7 million recorded in income taxes. The Company is periodically required to provide additional financial support during the investment period. The Company’s liability for these unfunded commitments was $15.7 million at December 31, 2015. See Note 10 — Borrowings. (3) Other includes executive retirement plan and deferred compensation, tax receivables other than income, prepaid expenses and other miscellaneous assets. (4) Other also includes servicing advances. In connection with the OneWest Transaction, the Company acquired the servicing obligations for residential mort- gage loans. As of December 31, 2015, the loans serviced for others total $17.4 billion for reverse mortgage loans and $87.4 million for single family mortgage loans. The Company’s loan servicing activities require the Company to hold cash in custodial accounts that are not included in the financial state- ments in the amount of $66.7 million as of December 31, 2015. NOTE 9 — DEPOSITS The following table presents detail on the type, maturities and weighted average interest rates of deposits. Deposits (dollars in millions) Deposits Outstanding Weighted average contractual interest rate Weighted average remaining number of days to maturity(1) (1) Excludes deposit balances with no stated maturity. Daily average deposits Maximum amount outstanding Weighted average contractual interest rate for the year The following table provides further detail of deposits. December 31, 2015 December 31, 2014 $ 32,782.2 1.26% 864 days $ 15,849.8 1.69% 1,293 days Year Ended December 31, 2015 Year Ended December 31, 2014 $ 23,277.8 32,899.6 1.45% $ 13,925.4 15,851.2 1.59% Item 8: Financial Statements and Supplementary Data 158 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deposits — Rates and Maturities (dollars in millions) Deposits – no stated maturity Non-interest-bearing checking Interest-bearing checking Money market Savings Other Total checking and savings deposits Certificates of deposit, remaining contractual maturity: Within one year One to two years Two to three years Three to four years Four to five years Over five years Total certificates of deposit Premium / discount Purchase accounting adjustments Total Deposits December 31, 2015 Amount Average Rate – 0.52% 0.78% 0.93% NM 1.14% 1.36% 1.71% 2.32% 2.30% 3.16% $ 866.2 3,123.7 5,560.5 4,840.5 169.6 $14,560.5 $ 7,729.1 3,277.5 1,401.5 2,039.1 1,620.1 2,134.6 18,201.9 (1.0) 20.8 $32,782.2 1.26% NM Not meaningful — includes certain deposits such as escrow accounts, security deposits, and other similar accounts. The following table presents the maturity profile of other time deposits with a denomination of $100,000 or more. Certificates of Deposit $100,000 or More (dollars in millions) December 31, 2015 December 31, 2014 U.S. certificates of deposits: Three months or less After three months through six months After six months through twelve months After twelve months Total U.S. Bank Non-U.S. certificates of deposits $ 1,476.5 1,462.6 2,687.2 9,245.8 $14,872.1 $ – $ 340.9 330.8 757.8 2,590.3 $4,019.8 $ 57.0 CIT ANNUAL REPORT 2015 159 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 — BORROWINGS The following table presents the carrying value of outstanding borrowings. Borrowings (dollars in millions) Senior Unsecured(1) Secured borrowings: Structured financings FHLB advances Total Borrowings December 31, 2015 December 31, 2014 CIT Group Inc. Subsidiaries Total $10,677.7 $ – $10,677.7 – – 4,743.8 3,117.6 4,743.8 3,117.6 $10,677.7 $7,861.4 $18,539.1 Total $11,932.4 6,268.7 254.7 $18,455.8 (1) Senior Unsecured Notes at December 31, 2015 were comprised of $8,188.6 million unsecured notes, $2,450.0 million Series C Notes, and $39.1 million other unsecured debt. The following table summarizes contractual maturities of borrowings outstanding, which excludes PAA discounts, original issue discounts, and FSA discounts. Contractual Maturities — Borrowings as of December 31, 2015 (dollars in millions) 2016 2017 2018 2019 2020 Thereafter $ – $2,944.5 $2,200.0 $2,750.0 $ 750.0 1,412.7 1,948.5 810.2 15.0 655.6 1,150.0 355.8 – 342.0 – $2,051.4 1,159.7 – Contractual Maturities $10,695.9 4,736.0 3,113.5 $3,361.2 $3,769.7 $4,005.6 $3,105.8 $1,092.0 $3,211.1 $18,545.4 Senior unsecured notes Structured financings FHLB advances Unsecured Borrowings Revolving Credit Facility The following information was in effect prior to the 2016 Revolving Credit facility amendment. See Note 30 — Subsequent Events for changes to this facility. There were no outstanding borrowings under the Revolving Credit Facility at December 31, 2015 and December 31, 2014. The amount available to draw upon at December 31, 2015 was approximately $1.4 billion, with the remaining amount of approxi- mately $0.1 billion being utilized for issuance of letters of credit to customers. The Revolving Credit Facility has a total commitment amount of $1.5 billion and the maturity date of the commitment is January 27, 2017. The total commitment amount consists of a $1.15 billion revolving loan tranche and a $350 million revolving loan tranche that can also be utilized for issuance of letters of credit to customers. The applicable margin charged under the facility is 2.50% for LIBOR-based loans and 1.50% for Base Rate loans. The Revolving Credit Facility may be drawn and prepaid at the option of CIT. The unutilized portion of any commitment under the Revolving Credit Facility may be reduced permanently or ter- minated by CIT at any time without penalty. The Revolving Credit Facility is unsecured and is guaranteed by eight of the Company’s domestic operating subsidiaries. The facility was amended in January 2014 to modify the covenant requiring a minimum guarantor asset coverage ratio and the cri- teria for calculating the ratio. The amended covenant requires a minimum guarantor asset coverage ratio ranging from 1.25:1.0 to the current requirement of 1.5: 1.0 depending on the Company’s long-term senior unsecured debt rating. The Revolving Credit Facility is subject to a $6 billion minimum consolidated net worth covenant of the Company, tested quar- terly, and also limits the Company’s ability to create liens, merge or consolidate, sell, transfer, lease or dispose of all or substan- tially all of its assets, grant a negative pledge or make certain restricted payments during the occurrence and continuance of an event of default. Senior Unsecured Notes Senior Unsecured Notes include notes issued under the “shelf” regis- tration filed in March 2012 that matured in the first quarter of 2015, and Series C Unsecured Notes. In January 2015, the Company filed a new shelf that expires in January 2018. The notes issued under the shelf reg- istration rank equal in right of payment with the Series C Unsecured Notes and the Revolving Credit Facility. The following tables present the principal amounts of Senior Unsecured Notes issued under the Company’s shelf registration and Series C Unsecured Notes by maturity date. Item 8: Financial Statements and Supplementary Data 160 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Senior Unsecured Notes (dollars in millions) Maturity Date May 2017 August 2017 March 2018 April 2018* February 2019* February 2019 May 2020 August 2022 August 2023 Weighted average rate and total * Series C Unsecured Notes The Indentures for the Senior Unsecured Notes and Series C Unsecured Notes limit the Company’s ability to create liens, merge or consolidate, or sell, transfer, lease or dispose of all or substantially all of its assets. Upon a Change of Control Trigger- ing Event as defined in the Indentures for the Senior Unsecured Notes and Series C Unsecured Notes, holders of the Senior Unsecured Notes and Series C Unsecured Notes will have the right to require the Company, as applicable, to repurchase all or a portion of the Senior Unsecured Notes and Series C Unsecured Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of such repurchase. Secured Borrowings FHLB Advances As a member of the FHLB of San Francisco, CIT Bank, N.A. can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. The interest rates charged by the FHLB for advances typically vary depending upon FHLB Advances with Pledged Assets Summary (dollars in millions) Rate (%) 5.000% Date of Issuance May 2012 Par Value $ 1,208.7 4.250% 5.250% 6.625% 5.500% 3.875% 5.375% 5.000% 5.000% 5.02% August 2012 March 2012 March 2011 February 2012 February 2014 May 2012 August 2012 August 2013 1,735.8 1,500.0 700.0 1,750.0 1,000.0 750.0 1,250.0 750.0 $10,644.5 maturity, the cost of funds of the FHLB, and the collateral provided for the borrowing and the advances are secured by certain Bank assets and bear either a fixed or floating interest rate. The FHLB advances are collateralized by a variety of consumer and commercial loans, including SFR mortgage loans, multi-family mortgage loans, commercial real estate loans, certain foreclosed properties and certain amounts receiv- able under a loss sharing agreement with the FDIC. During October 2015, a subsidiary of CIT Bank, N.A. received approval to withdraw its membership from the FHLB Des Moines and at December 31, 2015, there were no advances outstanding with FHLB Des Moines. As of December 31, 2015, the Company had $5.7 billion of financ- ing availability with the FHLB, of which $2.6 billion was unused and available. FHLB Advances as of December 31, 2015 have a weighted average rate of 0.84%. The following table includes the outstanding FHLB Advances, and respective pledged assets. The acquisition of OneWest Bank added $3.0 billion of FHLB Advances as of the acquisition date, which were recorded with a $6.8 million premium purchase accounting adjustment. December 31, 2015 December 31, 2014 FHLB Advances Pledged Assets FHLB Advances Pledged Assets $3,117.6 $6,783.1 $254.7 $309.6 Total Structured Financings Set forth in the following table are amounts primarily related to and owned by consolidated VIEs. Creditors of these VIEs received ownership and/or security interests in the assets. These entities are intended to be bankruptcy remote so that such assets are not available to creditors of CIT or any affiliates of CIT until and unless the related secured borrowings have been fully dis- charged. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings. Structured financings as of December 31, 2015 had a weighted average rate of 3.40%, which ranged from 0.75% to 6.11%. CIT ANNUAL REPORT 2015 161 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Structured Financings and Pledged Assets Summary(1) (dollars in millions) Rail(2) Aerospace(2) International Finance Subtotal – Transportation & International Finance Commercial Banking Commercial Services Equipment Finance Subtotal – North America Banking Total December 31, 2015 December 31, 2014 Secured Borrowing Pledged Assets Secured Borrowing Pledged Assets $ 920.1 2,137.5 295.2 3,352.8 – 331.4 1,059.6 1,391.0 $4,743.8 $1,336.1 $1,179.7 $ 1,575.7 3,732.2 401.6 5,469.9 0.2 1,378.6 1,366.4 2,745.2 2,411.7 545.0 4,136.4 – 334.7 1,797.6 2,132.3 3,914.4 730.6 6,220.7 – 1,644.6 2,352.8 3,997.4 $8,215.1 $6,268.7 $10,218.1 (1) As part of our liquidity management strategy, the Company pledges assets to secure financing transactions (which include securitizations), and for other pur- poses as required or permitted by law while CIT Bank, N.A. also pledges assets to secure borrowings from the FHLB and access the FRB discount window. (2) At December 31, 2015, the GSI TRS related borrowings and pledged assets, respectively, of $1.1 billion and $1.8 billion were included in Transportation & International Finance. The GSI TRS is described in Note 11 — Derivative Financial Instruments. FRB CIT Bank, N.A. has a borrowing facility with the FRB Discount Window that can be used for short-term, typically overnight, bor- rowings. The borrowing capacity is determined by the FRB based on the collateral pledged. There were no outstanding borrowings with the FRB Discount Window as of December 31, 2015 or December 31, 2014; how- ever, $2.7 billion was pledged as collateral at December 31, 2015. At December 31, 2015 pledged assets (including collateral for FHLB advances and FRB discount window) totaled $17.7 billion, which included $12.2 billion of loans (including amounts held for sale), $4.6 billion of operating lease assets, $0.8 billion of cash, and $0.1 billion of investment securities. Not included in the above are liabilities of discontinued opera- tions at December 31, 2015 consisting of $440.6 million of secured borrowings related to HECM loans securitized in the form of GNMA HMBS, which were sold prior to the OneWest Transaction to third parties. See Note 2 — Acquisitions and Disposition Activities. Variable Interest Entities (“VIEs”) Below describes the results of the Company’s assessment of its variable interests to determine its current status with regards to being the primary beneficiary of a VIE. Consolidated VIEs The Company utilizes VIEs in the ordinary course of business to support its own and its customers’ financing needs. Each VIE is a separate legal entity and maintains its own books and records. The most significant types of VIEs that CIT utilizes are ’on balance sheet’ secured financings of pools of leases and loans originated by the Company where the Company is the primary beneficiary. The Company originates pools of assets and sells these to special purpose entities, which, in turn, issue debt instruments backed by the asset pools or sells individual interests in the assets to inves- tors. CIT retains the servicing rights and participates in certain cash flows. These VIEs are typically organized as trusts or limited liability companies, and are intended to be bankruptcy remote, from a legal standpoint. The main risks inherent in structured financings are deterioration in the credit performance of the vehicle’s underlying asset portfo- lio and risk associated with the servicing of the underlying assets. Lenders typically have recourse to the assets in the VIEs and may benefit from other credit enhancements, such as: (1) a reserve or cash collateral account that requires the Company to deposit cash in an account, which will first be used to cover any defaulted obligor payments, (2) over-collateralization in the form of excess assets in the VIE, or (3) subordination, whereby the Company retains a subordinate position in the secured borrowing, which would absorb losses due to defaulted obligor payments before the senior certificate holders. The VIE may also enter into deriva- tive contracts in order to convert the debt issued by the VIEs to match the underlying assets or to limit or change the risk of the VIE. With respect to events or circumstances that could expose CIT to a loss, as these are accounted for as on balance sheet, the Com- pany records an allowance for loan losses for the credit risks associated with the underlying leases and loans. The VIE has an obligation to pay the debt in accordance with the terms of the underlying agreements. Generally, third-party investors in the obligations of the consoli- dated VIEs have legal recourse only to the assets of the VIEs and do not have recourse to the Company beyond certain specific provisions that are customary for secured financing transactions, such as asset repurchase obligations for breaches of representa- tions and warranties. In addition, the assets are generally restricted to pay only such liabilities. Unconsolidated VIEs Unconsolidated VIEs include GSE securitization structures, private-label securitizations and limited partnership interests where the Company’s involvement is limited to an investor inter- est where the Company does not have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and limited partnership interests. As a result of the OneWest Transaction, the Company has certain contractual obligations related to the HECM loans and the GNMA HMBS securitizations. The Company, as servicer of these Item 8: Financial Statements and Supplementary Data 162 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HECM loans, is currently obligated to fund future borrower advances, which include fees paid to taxing authorities for bor- rowers’ unpaid taxes and insurance, mortgage insurance premiums and payments made to borrowers for line of credit draws on HECM loans. In addition, the Company capitalizes the servicing fees and interest income earned and is obligated to fund guarantee fees associated with the GNMA HMBS. The Com- pany periodically pools and securitizes certain of these funded advances through issuance of HMBS to third-party security hold- ers, which did not qualify for sale accounting and rather, are treated as financing transactions. As a financing transaction, the HECM loans and related proceeds from the issuance of the HMBS recognized as secured borrowings remain on the Compa- ny’s Consolidated Balance Sheet. Due to the Company’s planned exit of third party servicing, HECM loans of $449.5 million were included in Assets of discontinued operations and the associated secured borrowing of $440.6 million (including an unamortized premium balance of $13.2 million) were included in Liabilities of discontinued operations at December 31, 2015. As servicer, the Company is required to repurchase the HECM loans once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount or when the property forecloses to OREO, which reduces the secured borrow- ing balance. Additionally the Company services $189.6 million of HMBS outstanding principal balance at December 31, 2015 for transferred loans securitized by IndyMac for which OneWest Bank prior to the acquisition had purchased the mortgage servicing Assets and Liabilities in Unconsolidated VIEs (dollars in millions) rights (“MSRs”) in connection with the IndyMac Transaction. The carrying value of the MSRs was not significant at December 31, 2015. As the HECM loans are federally insured by the FHA and the secured borrowings guaranteed to the investors by GNMA, the Company does not believe maximum loss exposure as a result of its involvement is material or quantifiable. For Agency and private label securitizations where the Company is not the servicer, the maximum exposure to loss represents the recorded investment based on the Company’s beneficial interests held in the securitized assets. These interests are not expected to absorb losses or receive benefits that are significant to the VIE. As a limited partner, the nature of the Company’s ownership interest in tax credit equity investments is limited in its ability to direct the activities that drive the economic performance of the entity, as these entities are managed by the general or managing partner. As a result, the Company was not deemed to be the pri- mary beneficiary of these VIEs. The table below presents the carrying value of the associated assets and liabilities and the associated maximum loss exposure that would be incurred under hypothetical circumstances, such that the value of its interests and any associated collateral declines to zero and at the same time assuming no consideration of recovery or offset from any economic hedges. The Company believes the possibility is remote under this hypothetical sce- nario; accordingly, this required disclosure is not an indication of expected loss. Agency securities Non agency securities – Other servicer Tax credit equity investments Total Assets Commitments to tax credit investments Total Liabilities Maximum loss exposure(1) Unconsolidated VIEs Carrying Value December 31, 2015 Securities $ 147.5 906.8 – $1,054.3 – – $ $1,054.3 Partnership Investment $ – – 125.0 $125.0 15.7 $ 15.7 $125.0 (1) Maximum loss exposure to the unconsolidated VIEs excludes the liability for representations and warranties, corporate guarantees and also excludes servic- ing advances. NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS As part of managing economic risk and exposure to interest rate and foreign currency risk, the Company primarily enters into derivative transactions in over-the-counter markets with other financial institutions. The Company does not enter into derivative financial instruments for speculative purposes. certain market participants. Since the Company does not meet the definition of a Swap Dealer or Major Swap Participant under the Act, the reporting and clearing obligations apply to a limited number of derivative transactions executed with its lending cus- tomers in order to manage their interest rate risk. The Dodd-Frank Act (the “Act”) includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, and imposing margin, reporting and registration requirements for See Note 1 — Business and Summary of Significant Accounting Policies for further description of the Company’s derivative trans- action policies. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents fair values and notional values of derivative financial instruments: Fair and Notional Values of Derivative Financial Instruments(1) (dollars in millions) CIT ANNUAL REPORT 2015 163 Qualifying Hedges Foreign currency forward contracts – net investment hedges Total Qualifying Hedges Non-Qualifying Hedges Interest rate swaps(2) Written options Purchased options Foreign currency forward contracts Total Return Swap (TRS) Equity Warrants Interest Rate Lock Commitments Credit derivatives Total Non-qualifying Hedges Total Hedges (1) Presented on a gross basis. (2) Fair value balances include accrued interest. Total Return Swaps (“TRS”) Two financing facilities between two wholly-owned subsidiaries of CIT and Goldman Sachs International (“GSI”) are structured as total return swaps (“TRS”), under which amounts available for advances are accounted for as derivatives. Pursuant to applicable accounting guidance, the unutilized por- tion of the TRS is accounted for as a derivative and recorded at its estimated fair value. The CIT Financial Ltd. (“CFL”) facility is $1.5 billion and the CIT TRS Funding B.V. (“BV”) facility is $625 million. The aggregate “notional amounts” of the total return swaps derivative of $1,152.8 million at December 31, 2015 and $1,091.9 million at December 31, 2014 represent the aggregate unused portions under the CFL and BV facilities and constitute derivative financial instruments. These notional amounts are cal- culated as the maximum aggregate facility commitment amounts, currently $2,125.0 million, less the aggregate actual adjusted qualifying borrowing base outstanding of $972.2 million at December 31, 2015 and $1,033.1 million at December 31, 2014 under the CFL and BV Facilities. The notional amounts of the derivatives will increase as the adjusted qualifying borrowing base decreases due to repayment of the underlying asset-backed December 31, 2015 December 31, 2014 Notional Amount Asset Fair Value Liability Fair Value Notional Amount Asset Fair Value Liability Fair Value $ 787.6 787.6 $ 45.5 45.5 $ (0.3) $1,193.1 (0.3) 1,193.1 $ 74.7 74.7 $ – – 4,645.7 3,346.1 2,342.5 1,624.2 1,152.8 1.0 9.9 37.6 45.1 0.1 2.2 47.8 – 0.3 0.1 – (38.9) (2.5) (0.1) (6.6) (54.9) – – (0.3) 1,902.0 2,711.5 948.4 2,028.8 1,091.9 1.0 – – 15.6 – 0.8 77.2 – 0.1 – – (23.6) (2.7) – (12.0) (24.5) – – – 13,159.8 $13,947.4 95.6 $141.1 (103.3) 8,683.6 $(103.6) $9,876.7 93.7 $168.4 (62.8) $(62.8) securities (ABS) to investors. If CIT funds additional ABS under the CFL or BV Facilities, the aggregate adjusted qualifying bor- rowing base of the total return swaps will increase and the notional amount of the derivatives will decrease accordingly. Valuation of the derivatives related to the GSI facilities is based on several factors using a discounted cash flow (“DCF”) method- ology, including: - Funding costs for similar financings based on current market conditions; - Forecasted usage of the long-dated facilities through the final maturity date in 2028; and - Forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. Based on the Company’s valuation, a liability of $54.9 million and $24.5 million was recorded at December 31, 2015 and December 31, 2014, respectively. The increases in the liability of $30.4 million and $14.8 million for the years ended December 31, 2015 and 2014, respectively, were recognized as a reduction to Other Income. Item 8: Financial Statements and Supplementary Data 164 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impact of Collateral and Netting Arrangements on the Total Derivative Portfolio The following tables present a summary of our derivative portfo- lio, which includes the gross amounts of recognized financial assets and liabilities; the amounts offset in the consolidated bal- ance sheet; the net amounts presented in the consolidated Offsetting of Derivative Assets and Liabilities (dollars in millions) balance sheet; the amounts subject to an enforceable master net- ting arrangement or similar agreement that were not included in the offset amount above, and the amount of cash collateral received or pledged. Substantially all of the derivative transac- tions are under an International Swaps and Derivatives Association (“ISDA”) agreement. Gross Amounts not offset in the Consolidated Balance Sheet December 31, 2015 Derivative assets Derivative liabilities December 31, 2014 Derivative assets Derivative liabilities Gross Amount of Recognized Assets (Liabilities) Gross Amount Offset in the Consolidated Balance Sheet Net Amount Presented in the Consolidated Balance Sheet Derivative Financial Instruments(1) Cash Collateral Pledged/ (Received)(1)(2) Net Amount $ 141.1 (103.6) $ 168.4 (62.8) $ $ – – – – $ 141.1 (103.6) $ 168.4 (62.8) $ (9.7) 9.7 $(13.6) 13.6 $ (82.7) 31.8 $(137.3) 8.7 $ 48.7 (62.1) $ 17.5 (40.5) (1) The Company’s derivative transactions are governed by ISDA agreements that allow for net settlements of certain payments as well as offsetting of all con- tracts (“Derivative Financial Instruments”) with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. We believe our ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure. In conjunction with the ISDA agreements, the Company has entered into collateral arrangements with its counterparties which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties. (2) Collateral pledged or received is included in Other assets or Other liabilities, respectively. The following table presents the impact of derivatives on the statements of income. Derivative Instrument Gains and Losses (dollars in millions) Derivative Instruments Qualifying Hedges Gain / (Loss) Recognized 2015 2014 2013 Years Ended December 31, Foreign currency forward contracts – cash flow hedges Other income $ Total Qualifying Hedges Non Qualifying Hedges Cross currency swaps Interest rate swaps Interest rate options Foreign currency forward contracts Equity warrants TRS Total Non-qualifying Hedges Total derivatives-income statement impact Other income Other income Other income Other income Other income Other income – – – 3.6 1.6 116.5 0.2 (30.4) 91.5 $ 91.5 $ – – 4.1 7.2 (2.4) 118.1 (0.7) (14.8) 111.5 $111.5 $ 0.7 0.7 11.5 19.1 – (12.1) 0.8 (3.9) 15.4 $ 16.1 CIT ANNUAL REPORT 2015 165 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the changes in AOCI relating to derivatives: Changes in AOCI Relating to Derivatives (dollars in millions) Contract Type Year Ended December 31, 2015 Foreign currency forward contracts – net investment hedges Total Year Ended December 31, 2014 Foreign currency forward contracts – cash flow hedges Foreign currency forward contracts – net investment hedges Cross currency swaps – net investment hedges Total Year Ended December 31, 2013 Foreign currency forward contracts – cash flow hedges Foreign currency forward contracts – net investment hedges Cross currency swaps – net investment hedges Total Derivatives- effective portion reclassified from AOCI to income Hedge ineffectiveness recorded directly in income Total income statement impact Derivatives- effective portion recorded in OCI Total change in OCI for period $ 33.8 $ 33.8 $ – (18.1) – $(18.1) $ 0.7 (7.7) (0.1) $ (7.1) $ $ $ $ $ $ – – – – – – – – – – $ 33.8 $ 33.8 $128.4 $128.4 $ 94.6 $ 94.6 $ – $ 0.2 $ 0.2 (18.1) – $(18.1) 111.1 1.1 $112.4 129.2 1.1 $130.5 $ 0.7 $ 0.6 $ (0.1) (7.7) (0.1) 5.8 10.0 $ (7.1) $ 16.4 13.5 10.1 $ 23.5 NOTE 12 — OTHER LIABILITIES The following table presents components of other liabilities: (dollars in millions) Equipment maintenance reserves Accrued expenses and accounts payable Current and deferred federal and state taxes Security and other deposits Accrued interest payable Valuation adjustment relating to aerospace commitments Other(1) Total other liabilities December 31, 2015 $1,012.4 December 31, 2014 $ 960.4 628.1 363.1 263.0 209.6 73.1 609.4 478.3 319.1 368.0 243.7 121.2 398.1 $3,158.7 $2,888.8 (1) Other consists of fair value of derivative financial instruments, liabilities for taxes other than income, contingent liabilities and other miscellaneous liabilities. Item 8: Financial Statements and Supplementary Data 166 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 — FAIR VALUE Fair Value Hierarchy The Company is required to report fair value measurements for specified classes of assets and liabilities. See Note 1 — “Business and Summary of Significant Accounting Policies” for fair value measurement policy. objective specifically requires the use of fair value are set forth in the tables below. Disclosures that follow in this note exclude assets and liabilities classified as discontinued operations. Financial Assets and Liabilities Measured at Estimated Fair Value on a Recurring Basis The Company characterizes inputs in the determination of fair value according to the fair value hierarchy. The fair value of the Company’s assets and liabilities where the measurement The following table summarizes the Company’s assets and liabili- ties measured at estimated fair value on a recurring basis, including those management elected under the fair value option. Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in millions) Total Level 1 Level 2 Level 3 December 31, 2015 Assets Debt Securities AFS $2,007.8 $ Securities carried at fair value with changes recorded in net income Equity Securities AFS FDIC receivable Derivative assets at fair value – non-qualifying hedges(1) Derivative assets at fair value – qualifying hedges 339.7 14.3 54.8 95.6 45.5 – – 0.3 – – – $1,440.7 $ 567.1 – 14.0 – 95.6 45.5 339.7 – 54.8 – – Total $2,557.7 $ 0.3 $1,595.8 $ 961.6 Liabilities Derivative liabilities at fair value – non-qualifying hedges(1) Derivative liabilities at fair value – qualifying hedges Consideration holdback liability FDIC True-up Liability Total December 31, 2014 Assets $ (103.3) (0.3) (60.8) (56.9) $ (221.3) $ $ – – − – – $ (47.8) $ (55.5) (0.3) − – – (60.8) (56.9) $ (48.1) $(173.2) Debt Securities AFS Equity Securities AFS(2) Derivative assets at fair value – non-qualifying hedges(1) Derivative assets at fair value – qualifying hedges Total Liabilities Derivative liabilities at fair value – non-qualifying hedges(1) Total $1,116.5 $212.3 $ 904.2 14.0 93.7 74.7 0.2 – – 13.8 93.7 74.7 $1,298.9 $212.5 $1,086.4 $ $ – – – – – $ $ (62.8) (62.8) $ $ – – $ $ (36.2) (36.2) $ (26.6) $ (26.6) (1) Derivative fair values include accrued interest (2) In preparing the year-end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the fair value leveling for Equity Securities AFS as of December 31, 2014. $13.8 million has been reclassified from Level 1 to Level 2. Debt and Equity Securities Classified as AFS and securities car- ried at fair value with changes recorded in Net Income — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1, Level 2 or Level 3 inputs. Debt securities classified as AFS included investments in U.S. federal government agency and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Certain equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. For Agency pass-through MBS, which are classified as Level 2, the Company generally determines estimated fair value utilizing prices obtained from independent broker dealers and recent trading activity for similar assets. Debt securities classified as AFS and securities carried at fair value with changes recorded in net income represent non-Agency MBS, the market for such securi- ties is not active and the estimated fair value was determined using a discounted cash flow technique. The significant unob- servable assumptions, which are verified to the extent possible using broker dealer quotes, are estimated by type of underlying collateral, including credit loss assumptions, estimated prepay- CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 167 ment speeds and appropriate discount rates. Given the lack of observable market data, the estimated fair value of the non- agency MBS is classified as Level 3. FDIC Receivable — The Company elected to measure its receiv- able under a participation agreement with the FDIC in connection with the IndyMac Transaction at estimated fair value under the fair value option. The participation agreement provides the Company a secured interest in certain homebuilder, home construction and lot loans, which entitle the Company to a 40% share of the underlying loan cash flows. The receivable is valued by first grouping the loans into similar asset types and stratifying the loans based on their underlying key features such as product type, current payment status and other economic attributes in order to project future cash flows. Projected future cash flows are estimated by taking the Compa- ny’s share (40%) of the future cash flows from the underlying loans and real estate properties that include proceeds and interest off- set by servicing expenses and servicing fees. Estimated fair value of the FDIC receivable is based on a discounted cash flow tech- nique using significant unobservable inputs, including prepayment rates, default rates, loss severities and liquidation assumptions. To determine the estimated fair value, the cash flows are dis- counted using a market interest rate that represents an overall weighted average discount rate based on the underlying collat- eral specific discount rates. Due to the reduced liquidity that exists for such loans and lack of observable market data avail- able, this requires the use of significant unobservable inputs; as a result these measurements are classified as Level 3. Derivative Assets and Liabilities — The Company’s financial derivatives include interest rate swaps, floors, caps, forwards and credit derivatives. These derivatives are valued using models that incorporate inputs depending on the type of derivative, such as, interest rate curves, foreign exchange rates and volatility. Readily observable market inputs to models can be validated to external sources, including industry pricing services, or corroborated through recent trades, broker dealer quotes, yield curves, or other market-related data. As such, these derivative instruments are valued using a Level 2 methodology. In addition, these derivative values incorporate an assessment of the risk of coun- terparty nonperformance, measured based on the Company’s evaluation of credit risk. The fair values of the TRS derivative, written options on certain CIT Bank CDs and credit derivatives were estimated using Level 3 inputs. FDIC True-up Liability — In connection with the La Jolla Transaction, the Company recognized a FDIC True-up liability due to the FDIC 45 days after the tenth anniversary of the loss sharing agreement (the maturity) because the actual and esti- mated cumulative losses on the acquired covered PCI loans are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition. The FDIC True-up liability was recorded at estimated fair value as of the acquisition date and is remea- sured to fair value at each reporting date until the contingency is resolved. The FDIC True-up liability was valued using the dis- counted cash flow method based on the terms specified in the loss-sharing agreements with the FDIC, the actual FDIC payments collected and significant unobservable inputs, including a risk- adjusted discount rate (reflecting the Company’s credit risk plus a liquidity premium), prepayment and default rates. Due to the sig- nificant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3. Consideration Holdback Liability — In connection with the OneWest acquisition, the parties negotiated four separate hold- backs related to selected trailing risks, totaling $116 million, which reduced the cash consideration paid at closing. Any unap- plied Holdback funds at the end of the respective holdback periods, which range from 1 – 5 years, are payable to the former OneWest shareholders. Unused funds for any of the four hold- backs cannot be applied against another holdback amount. The range of potential holdback to be paid is from $0 to $116 million. Based on management’s estimate of the probability of each hold- back it was determined that the probable amount of holdback to be paid was $62.4 million. The amount expected to be paid was discounted based on CIT’s cost of funds. This contingent consid- eration was measured at fair value at the acquisition date and is re-measured at fair value in subsequent accounting periods, with the changes in fair value recorded in the statement of income, until the related contingent issues are resolved. Gross payments, which are determined based on the Company’s probability assessment, are discounted at a rate approximating the Compa- ny’s average coupon rate on deposits and borrowings. Due to the significant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3. Item 8: Financial Statements and Supplementary Data 168 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize information about significant unobservable inputs related to the Company’s categories of Level 3 finan- cial assets and liabilities measured on a recurring basis as of December 31, 2015. Quantitative Information about Level 3 Fair Value Measurements — Recurring (dollars in millions) Estimated Fair Value Valuation Technique(s) Unobservable Inputs Range of Inputs Significant Weighted Average Financial Instrument December 31, 2015 Assets Securities – AFS $ 567.1 Discounted cash flow Securities carried at fair value with changes recorded in net income 339.7 Discounted cash flow FDIC Receivable 54.8 Discounted cash flow Discount Rate Prepayment Rate Default Rate Loss Severity Discount Rate Prepayment Rate Default Rate Loss Severity Discount Rate Prepayment Rate Default Rate Loss Severity 0.0% – 94.5% 2.7% – 20.8% 0.0% – 9.5% 0.2% – 83.5% 0.0% − 19.9% 2.5% − 22.4% 0.0% − 5.9% 3.8% − 39.0% 7.8% – 18.4% 2.0% – 14.0% 6.0% – 36.0% 20.0% – 65.0% 6.4% 9.2% 4.1% 36.4% 6.3% 11.5% 4.1% 25.1% 9.4% 3.6% 10.8% 31.6% 4.1% 53.8% 3.0% Total Assets Liabilities FDIC True-up liability Consideration holdback liability $ 961.6 $ (56.9) Discounted cash flow (60.8) Discounted cash flow Discount Rate Payment Probability Discount Rate 4.1% – 4.1% 0% – 100% 3.0% – 3.0% Derivative liabilities - non qualifying (55.5) Market Comparables(1) Total Liabilities $(173.2) (1) The valuation of these derivatives is primarily related to the GSI facilities which is based on several factors using a discounted cash flow methodology, includ- ing a) funding costs for similar financings based on current market conditions; b) forecasted usage of long-dated facilities through the final maturity date in 2018; and c) forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion. The level of aggregation and diversity within the products dis- closed in the tables results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. For instruments backed by residential real estate, diversity in the portfolio is reflected in a wide range for loss severity due to vary- ing levels of default. The lower end of the range represents high performing loans with a low probability of default while the higher end of the range relates to more distressed loans with a greater risk of default. The valuation techniques used for the Company’s Level 3 assets and liabilities, as presented in the previous tables, are described as follows: - Discounted cash flow — Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in the estimated fair value amount. The Company utilizes both the direct and indirect valuation methods. Under the direct method, contractual cash flows are adjusted for expected losses. The adjusted cash flows are discounted at a rate which considers other costs and risks, such as market risk and liquidity. Under the indirect method, contractual cash flows are discounted at a rate which reflects the costs and risks associated with the likelihood of generating the contractual cash flows. - Market comparables — Market comparable(s) pricing valuation techniques are used to determine the estimated fair value of certain instruments by incorporating known inputs such as recent transaction prices, pending transactions, or prices of other similar investments which require significant adjustment to reflect differences in instrument characteristics. Significant unobservable inputs presented in the previous tables are those the Company considers significant to the estimated fair value of the Level 3 asset or liability. The Company considers unobservable inputs to be significant if, by their exclusion, the estimated fair value of the Level 3 asset or liability would be sig- nificantly impacted based on qualitative factors such as nature of the instrument, type of valuation technique used, and the signifi- cance of the unobservable inputs on the values relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the tables. - Default rate — is an estimate of the likelihood of not collecting contractual amounts owed expressed as a constant default rate. - Discount rate — is a rate of return used to present value the future expected cash flows to arrive at the estimated fair value of an instrument. The discount rate consists of a benchmark rate component and a risk premium component. The bench- mark rate component, for example, LIBOR or U.S. Treasury rates, is generally observable within the market and is necessary to appropri- ately reflect the time value of money. The risk premium component reflects the amount of compensation market participants require due CIT ANNUAL REPORT 2015 169 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity. - Loss severity — is the percentage of contractual cash flows lost in the event of a default. - Prepayment rate — is the estimated rate at which forecasted prepayments of principal of the related loan or debt instrument are expected to occur, expressed as a constant prepayment rate (“CPR”). - Payment Probability — is an estimate of the likelihood the con- sideration holdback amount will be required to be paid expressed as a percentage. As reflected above, the Company generally uses discounted cash flow techniques to determine the estimated fair value of Level 3 assets and liabilities. Use of these techniques requires determina- tion of relevant inputs and assumptions, some of which represent significant unobservable inputs and assumptions and as a result, changes in these unobservable inputs (in isolation) may have a significant impact to the estimated fair value. Increases in the probability of default and loss severities will result in lower esti- mated fair values, as these increases reduce expected cash flows. Increases in the discount rate will result in lower estimated fair values, as these increases reduce the present value of the expected cash flows. Alternatively a change in one unobservable input may result in a change to another unobservable input due to the interrelation- ship among inputs, which may counteract or magnify the estimated fair value impact from period to period. Generally, the value of the Level 3 assets and liabilities estimated using a dis- counted cash flow technique would decrease (increase) upon an increase (decrease) in discount rate, default rate, loss severity or weighted average life inputs. Discount rates are influenced by market expectations for the underlying collateral performance, and therefore may directionally move with probability and sever- ity of default; however, discount rates are also impacted by broader market forces, such as competing investment yields, sec- tor liquidity, economic news, and other macroeconomic factors. There is no direct interrelationship between prepayments and discount rate. Prepayment rates generally move in the opposite direction of market interest rates. Increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values. The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3): Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities Measured on a Recurring Basis (dollars in millions) December 31, 2014 Included in earnings Included in comprehensive income Impairment Purchases Paydowns Balance as of December 31, 2015 December 31, 2013 Included in earnings Balance as of December 31, 2014 Securities- AFS $ – (2.9) (6.8) (2.8) 619.4 (39.8) $567.1 $ $ – – – Securities carried at fair value with changes recorded in net income FDIC Receivable Derivative liabilities- non-qualifying(1) FDIC True-up Liability Consideration holdback Liability $ – (2.5) – – 373.4 (31.2) $ – 3.4 – – 54.8 (3.4) $(26.6) $ – $ (28.9) (0.6) – – – – – – (56.3) – $339.7 $54.8 $(55.5) $(56.9) $ $ – – – $ $ – – – $ (9.7) $ (16.9) $(26.6) $ – – – – – – – (60.8) – $(60.8) $ $ – – – (1) Valuation of the derivatives related to the GSI facilities and written options on certain CIT Bank CDs. The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in the observability of key inputs to a fair value measurement may result in a transfer of assets or liabilities between Level 1, 2 and 3. The Company’s policy is to recognize transfers in and transfers out as of the end of the reporting period. For the years ended December 31, 2015 and 2014, there were no transfers into or out of Level 1, Level 2 and Level 3. Financial Assets Measured at Estimated Fair Value on a Non- recurring Basis Certain assets or liabilities are required to be measured at esti- mated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. In determining the esti- mated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. This was determined by examining the changes in market factors relative to instrument specific factors. Item 8: Financial Statements and Supplementary Data 170 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets and liabilities acquired in the OneWest Transaction were recorded at fair value on the acquisition date. See Note 2 — Acquisition and Disposition Activities for balances and assump- tions used in the valuations. The following table presents financial assets measured at estimated fair value on a non-recurring basis for which a non-recurring change in fair value has been recorded in the current year: Carrying Value of Assets Measured at Fair Value on a Non-recurring Basis (dollars in millions) Assets December 31, 2015 Assets held for sale Other real estate owned and repossesed assets Impaired loans Total December 31, 2014 Assets held for sale Impaired loans(1) Total Fair Value Measurements at Reporting Date Using: Total Level 1 Level 2 Level 3 $1,648.3 127.3 127.6 $1,903.2 $ 949.6 35.6 $ 985.2 $ $ $ $ – – – – – – – $31.0 $1,617.3 – – 127.3 127.6 $31.0 $1,872.2 $ $ – – – $ 949.6 35.6 $ 985.2 Total (Losses) $(32.0) (5.7) (21.9) $(59.6) $(73.6) (12.4) $(86.0) (1) In preparing the year-end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the carrying amount and total losses related to Impaired Loans in the amount of $22.4 million (carrying amount) and $7.5 million (total losses) as of December 31, 2014. Assets of continuing operations that are measured at fair value on a non-recurring basis are as follows: Loans are transferred from held for investment to AHFS at the lower of cost or fair value. At the time of transfer, a write-down of the loan is recorded as a charge-off, if applicable. Once classified as AHFS, the amount by which the carrying value exceeds fair value is recorded as a valuation allowance. Assets Held for Sale — Assets held for sale are recorded at the lower of cost or fair value on the balance sheet. As there is no liquid secondary market for the other assets held for sale in the Company’s portfolio, the fair value is estimated based on a bind- ing contract, current letter of intent or other third-party valuation, or using internally generated valuations or discounted cash flow technique, all of which are Level 3 inputs. In those instances where third party valuations were utilized, the most significant assumptions were the discount rates which ranged from 4.4% to 13.0%. The estimated fair value of assets held for sale with impair- ment at the reporting date was $1,652.5 million. Other Real Estate Owned — Other real estate owned represents collateral acquired from the foreclosure of secured real estate loans. Other real estate owned is measured at LOCOM less dis- position costs. Estimated fair values of other real estate owned are reviewed on a quarterly basis and any decline in value below cost is recorded as impairment. Estimated fair value is generally based upon broker price opinions or independent appraisals, adjusted for costs to sell. The estimated costs to sell are incre- mental direct costs to transact a sale, such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The range of inputs in estimating appraised value or the sales price was 4.5% to 42.7% with a weighted average of 5.9%. The significant unobservable input is the appraised value or the sales price and thus is classified as Level 3. As of the reporting date, OREO estimated fair value was $128.6 million . Impaired Loans — Impaired finance receivables of $500,000 or greater that are placed on non-accrual status are subject to peri- odic individual review in conjunction with the Company’s ongoing problem loan management (PLM) function. 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. Impairment is measured as the shortfall between estimated value and recorded investment in the finance receivable, with the estimated value 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 observable market prices. The significant unobservable inputs result in the Level 3 classification. As of the reporting date, the carrying value of impaired loans approximates fair value. Fair Value Option FDIC Receivable The Company has made an irrevocable option to elect fair value for the initial and subsequent measurement of the FDIC receiv- able acquired by OneWest Bank in the IndyMac Transaction, as it was determined at the time of election that this treatment would allow a better economic offset of the changes in estimated fair values of the loans. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the differences between the esti- mated fair value carrying amount of those assets measured at estimated fair value under the fair value option, and the aggre- gate unpaid principal amount the Company is contractually entitled to receive or pay respectively: CIT ANNUAL REPORT 2015 171 (dollars in millions) FDIC Receivable The gains and losses due to changes in the estimated fair value of the FDIC receivable under the fair value option are included in earnings for the period from August 3, 2015 (the date of the One- West transaction) to December 31, 2015 and are shown in the Financial Assets and Liabilities Measured at Estimated Fair Value on a Recurring Basis section of this Note. Securities Carried at Fair Value with Changes Recorded in Net Income These securities were initially classified as available-for-sale upon acquisition; however, upon further review following the filing of the Company’s September 30, 2015 Form 10-Q, management determined that $373.4 million of these securities should have been classified as securities carried at fair value with changes recorded in net income as of the acquisition date, with the remainder classified as available-for-sale, and in the fourth quarter of 2015 man- agement corrected this immaterial error impacting classification of investment securities. As of December 31, 2015, the non-agency MBS Financial Instruments (dollars in millions) December 31, 2015 Financial Assets December 31, 2015 Estimated Fair Value Carrying Amount Aggregate Unpaid Principal Estimated Fair Value Carrying Amount Less Aggregate Unpaid Principal $54.8 $204.5 $(149.7) securities carried at fair value with changes recorded in net income totaled approximately $340 million. The acquisition date fair value of the securities was based on market quotes, where available, or on discounted cash flow tech- niques using assumptions for prepayment rates, market yield requirements and credit losses where market quotes were not available. Future prepayment rates were estimated based on cur- rent and expected future interest rate levels, collateral seasoning and market forecasts, as well as relevant characteristics of the col- lateral underlying the securities, such as loan types, prepayment penalties, interest rates and recent prepayment experience. Fair Values of Financial Instruments The carrying values and estimated fair values of financial instru- ments presented below exclude leases and certain other assets and liabilities, which are not required for disclosure. Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Cash and interest bearing deposits $ 8,301.5 $8,301.5 $ – $ Derivative assets at fair value – non-qualifying hedges Derivative assets at fair value – qualifying hedges Assets held for sale (excluding leases) Loans (excluding leases) Investment securities(1) Indemnification assets(2) Other assets subject to fair value disclosure and unsecured counterparty receivables(3) Financial Liabilities Deposits(4) Derivative liabilities at fair value – non-qualifying hedges Derivative liabilities at fair value – qualifying hedges Borrowings(4) Credit balances of factoring clients Other liabilities subject to fair value disclosure(5) 95.6 45.5 738.8 28,244.2 2,953.8 348.4 1,004.5 (32,813.8) (103.3) (0.3) (18,717.1) (1,344.0) (1,943.5) – – 21.8 – 11.5 – – – – – – – – 95.6 45.5 55.8 975.5 1,678.7 – – – – – – 669.1 $ 8,301.5 95.6 45.5 746.7 26,509.1 27,484.6 1,265.0 323.2 2,955.2 323.2 1,004.5 1,004.5 (32,972.2) (32,972.2) (47.8) (0.3) (55.5) – (103.3) (0.3) (16,358.2) (2,808.8) (19,167.0) – – (1,344.0) (1,943.5) (1,344.0) (1.943.5) Item 8: Financial Statements and Supplementary Data 172 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments (dollars in millions) (continued) December 31, 2014 Financial Assets Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Cash and interest bearing deposits $ 7,119.7 $7,119.7 $ – $ Derivative assets at fair value – non-qualifying hedges Derivative assets at fair value – qualifying hedges Assets held for sale (excluding leases)(6) Loans (excluding leases)(7) Securities purchased under agreements to resell Investment securities(8) Other assets subject to fair value disclosure and unsecured counterparty receivables(3) Financial Liabilities Deposits(4) Derivative liabilities at fair value – non-qualifying hedges Borrowings(4) Credit balances of factoring clients Other liabilities subject to fair value disclosure(5) 93.7 74.7 67.0 14,859.6 650.0 1,550.3 809.5 (15,891.4) (62.8) (18,657.9) (1,622.1) (1,811.8) – – – – – 247.8 – – – – – – 93.7 74.7 8.0 1,585.4 650.0 1,173.1 – – – – – 59.2 $ 7,119.7 93.7 74.7 67.2 12,995.6 14,581.0 – 137.4 650.0 1,558.3 809.5 809.5 (15,972.2) (15,972.2) (36.2) (26.6) (62.8) (15,906.3) (3,338.1) (19,244.4) – – (1,622.1) (1,811.8) (1,622.1) (1,811.8) (1) Level 3 estimated fair value includes debt securities AFS ($567.1 million), debt securities carried at fair value with changes recorded in net income ($339.7 million), non-marketable investments ($291.9 million), and debt securities HTM ($66.3 million). (2) The indemnification assets included in the above table does not include Agency claims indemnification ($65.6 million) and Loan indemnification ($0.7) million, as they are not considered financial instruments. (3) Other assets subject to fair value disclosure primarily include accrued interest receivable and miscellaneous receivables. These assets have carrying values that approximate fair value generally due to the short-term nature and are classified as Level 3. The unsecured counterparty receivables primarily consist of amounts owed to CIT from GSI for debt discount, return of collateral posted to GSI and settlements resulting from market value changes to asset-backed securities underlying the GSI Facilities. Amounts as of December 31, 2014 have been conformed to the current presentation. (4) Deposits and borrowings include accrued interest, which is included in “Other liabilities” in the Balance Sheet. (5) Other liabilities subject to fair value disclosure include accounts payable, accrued liabilities, customer security and maintenance deposits and miscellaneous liabilities. The fair value of these approximate carrying value and are classified as level 3. Amounts as of December 31, 2014 have been conformed to the current presentation. (6) In preparing the year-end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the fair value leveling for assets held for sale (excluding leases) as of December 31, 2014. $8.0 million has been reclassified from Level 3 to Level 2. (7) In preparing the interim financial statements for the quarter ended September 30, 2015 and the year-end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the carrying value and estimated Level 3 fair value relating to the Loans (excluding leases) line item in the amount of $480.1 million; with an estimated fair value using Level 3 inputs of $504.8 million as of December 31, 2014. (8) In preparing the year-end financial statements as of December 31, 2015, the Company discovered and corrected an immaterial error impacting the fair value leveling for Investment Securities as of December 31, 2014. $203.3 million of debt securities HTM and $13.8 million Equity Securities AFS have been reclassi- fied from Level 1 to Level 2. The methods and assumptions used to estimate the fair value of each class of financial instruments are explained below: tives that utilized Level 3 inputs. See Note 11 — Derivative Financial Instruments for notional principal amounts and fair values. Cash and interest bearing deposits — The carrying values of cash and interest bearing deposits are at face amount. The impact of the time value of money from the unobservable discount rate for restricted cash is inconsequential as of December 31, 2015 and December 31, 2014. Accordingly cash and cash equivalents and restricted cash approximate estimated fair value and are classi- fied as Level 1. Derivatives — The estimated fair values of derivatives were calcu- lated using observable market data and represent the gross amount receivable or payable to terminate, taking into account current mar- ket rates, which represent Level 2 inputs, except for the TRS derivative, written options on certain CIT Bank CDs and credit deriva- Securities purchased under agreements to resell — The esti- mated fair values of securities purchased under agreements to resell were calculated internally based on discounted cash flows that utilize observable market rates for the applicable maturity and which represent Level 2 inputs. Investment Securities — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1 or Level 2 inputs. Debt securities classified as AFS included invest- ments in U.S. federal government agency and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Debt securities carried at fair value with changes recorded in net income include non-agency MBS where the market for such securities is not active; therefore the CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 173 estimated fair value was determined using a discounted cash flow technique which is a Level 3 input. Certain equity securities classi- fied as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. Debt securities classified as HTM include government agency securities and foreign government treasury bills and were valued using Level 1 or Level 2 inputs. For debt securities HTM where no market rate was available, Level 3 inputs were utilized. Debt securities HTM are securities that the Com- pany has both the ability and the intent to hold until maturity and are carried at amortized cost and periodically assessed for OTTI, with the cost basis reduced when impairment is deemed to be other-than-temporary. Non-marketable equity investments uti- lize Level 3 inputs to estimate fair value and are generally recorded under the cost or equity method of accounting and are periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary. For investments in limited partnership equity interests (included in other assets), we use the net asset value provided by the fund manager as an appropriate measure of fair value. Assets held for sale — Assets held for sale are recorded at the lower of cost or fair value on the balance sheet. Of the assets held for sale above, $21.1 million carrying amount was valued using quoted prices, which are Level 1 inputs, and $51.1 million carrying amount at December 31, 2015 was valued using Level 2 inputs. As there is no liquid secondary market for the other assets held for sale in the Company’s portfolio, the fair value is esti- mated based on a binding contract, current letter of intent or other third-party valuation, or using internally generated valua- tions or discounted cash flow technique, all of which are Level 3 inputs. Commercial loans are generally valued individually, which small ticket commercial loans are value on an aggregate portfolio basis. Loans — Within the Loans category, there are several types of loans as follows: - Commercial Loans — Of the loan balance above, approxi- mately $1.0 billion at December 31, 2015 and $1.6 billion at December 31, 2014, was valued using Level 2 inputs. As there is no liquid secondary market for the other loans in the Compa- ny’s portfolio, the fair value is estimated based on discounted cash flow analyses which use Level 3 inputs at both December 31, 2015 and December 31, 2014. In addition to the characteristics of the underlying contracts, key inputs to the analysis include interest rates, prepayment rates, and credit spreads. For the commercial loan portfolio, the market based credit spread inputs are derived from instruments with compa- rable credit risk characteristics obtained from independent third party vendors. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is mean- ingful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of the loans. The fair value of loans at December 31, 2015 was $27.5 billion, which was 97.3% of carrying value. The fair value of loans at December 31, 2014 was $14.6 billion, which was 98.2% of carrying value. - Impaired Loans — The value of impaired loans is estimated using the fair value of collateral (on an orderly liquidation basis) if the loan is collateralized, the present value of expected cash flows utilizing the current market rate for such loan, or observ- able market price. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is mean- ingful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of impaired loans relative to contractual amounts owed (unpaid principal balance or “UPB”) from customers. As of December 31, 2015, the UPB related to impaired loans totaled $172.5 million. Including related allowances, these loans are carried at $121.8 million, or 70.6% of UPB. Of these amounts, $33.3 million and $21.9 million of UPB and carrying value, respectively, relate to loans with no specific allowance. As of December 31, 2014 the UPB related to impaired loans, includ- ing loans for which the Company was applying the income recognition and disclosure guidance in ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality), totaled $85.3 million and including related allowances, these loans were carried at $45.1 million, or 53% of UPB. Of these amounts, $29.2 million and $21.2 million of UPB and carrying value relate to loans with no specific allowance. The difference between UPB and carrying value reflects cumulative charge-offs on accounts remaining in process of collection, FSA discounts and allowances. See Note 3 — Loans for more information. - PCI loans — These loans are valued by grouping the loans into performing and non-performing groups and stratifying the loans based on common risk characteristics such as product type, FICO score and other economic attributes. Due to a lack of observable market data, the estimated fair value of these loan portfolios was based on an internal model using unobserv- able inputs, including discount rates, prepayment rates, delinquency roll-rates, and loss severities. Due to the signifi- cance of the unobservable inputs, these instruments are classified as Level 3. - Jumbo Mortgage Loans — The estimated fair value was deter- mined by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, these loans are classified as Level 3. Indemnification Assets — The Company’s indemnification assets relating to the SFR loans purchased in the OneWest Bank Trans- action are measured on the same basis as the related indemnified item, the underlying SFR and commercial loans. The estimated fair values reflect the present value of expected reim- bursements under the indemnification agreements based on the loan performance discounted at an estimated market rate, and classified as Level 3. See “Loans Held for Investment” above for more information. Deposits — The estimated fair value of deposits with no stated maturity such as: demand deposit accounts (including custodial deposits), money market accounts and savings accounts is the amount payable on demand at the reporting date. In preparing the interim financial statements for the quarter ended September 30, 2015, the Company discovered and corrected an immaterial error impacting the fair value balance related to deposit balances with no stated maturity in the amount of Item 8: Financial Statements and Supplementary Data 174 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $134 million as of December 31, 2014. The fair value of these deposits should equal the carrying value. The estimated fair value of time deposits is determined using a discounted cash flow analysis. The discount rate for the time deposit accounts is derived from the rate currently offered on alternate funding sources with similar maturities. Discount rates used in the present value calculation are based on the Company’s average current deposit rates for similar terms, which are Level 3 inputs. Borrowings - Unsecured debt — Approximately $10.7 billion par value at December 31, 2015 and $12.0 billion par value at December 31, 2014 were valued using market inputs, which are Level 2 inputs. - Structured financings — Approximately $5.1 billion par value at December 31, 2015 and $3.3 billion par value at December 31, 2014 were valued using market inputs, which are Level 2 inputs. Where market estimates were not available for approximately $2.7 billion and $3.2 billion par value at December 31, 2015 and December 31, 2014, respectively, values were estimated using a NOTE 14 — STOCKHOLDERS’ EQUITY discounted cash flow analysis with a discount rate approximat- ing current market rates for issuances by CIT of similar debt, which are Level 3 inputs. - FHLB Advances — Estimated fair value is based on a dis- counted cash flow model that utilizes benchmark interest rates and other observable market inputs. The discounted cash flow model uses the contractual advance features to determine the cash flows with a zero spread to the forward FHLB curve, which are discounted using observable benchmark interest rates. As the model inputs can be observed in a liquid market and the model does not require significant judgment, FHLB advances are classified as Level 2. Credit balances of factoring clients — The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances (typically 90 days or less) as of December 31, 2015 and December 31, 2014. Accordingly, credit balances of factoring clients approximate estimated fair value and are classified as Level 3. In conjunction with the OneWest Transaction, consideration paid included the issuance of approximately 30.9 million shares of CIT Group Inc. common stock, which came out of Treasury shares. A roll forward of common stock activity is presented in the following table. Common Stock – December 31, 2014 Common stock issuance – acquisition(1) Restricted stock issued Repurchase of common stock Shares held to cover taxes on vesting restricted shares and other Employee stock purchase plan participation Common Stock – December 31, 2015 (1) Excludes approximately 1.0 million of unvested RSUs. We declared and paid dividends totaling $0.60 per common share during 2015. We declared and paid cash dividends totaling $0.50 per common share during 2014. Accumulated Other Comprehensive Income/(Loss) Total comprehensive income was $1,048.4 million for the year ended December 31, 2015, compared to $1,069.7 million for the Issued 203,127,291 – 1,273,708 – – 46,770 204,447,769 Less Treasury (22,206,716) 30,946,249 – (11,631,838) (533,956) – (3,426,261) Outstanding 180,920,575 30,946,249 1,273,708 (11,631,838) (533,956) 46,770 201,021,508 year ended December 31, 2014 and $679.8 million for the year ended December 31, 2013, including accumulated other compre- hensive loss of $142.1 million and $133.9 million at December 2015 and 2014, respectively. The following table details the components of Accumulated Other Comprehensive Loss, net of tax: Components of Accumulated Other Comprehensive Income (Loss) (dollars in millions) December 31, 2015 Income Taxes Net Unrealized Gross Unrealized December 31, 2014 Income Taxes Net Unrealized Gross Unrealized Foreign currency translation adjustments Changes in benefit plan net gain (loss) and prior service (cost)/credit Unrealized net gains (losses) on available for sale securities Total accumulated other comprehensive loss $ (29.8) $(35.9) $ (65.7) $ (75.4) $ – $ (75.4) (76.3) (11.4) 7.0 4.3 (69.3) (7.1) (58.7) – 0.2 – (58.5) – $(117.5) $(24.6) $(142.1) $(134.1) $0.2 $(133.9) CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table details the changes in the components of Accumulated Other Comprehensive Income (Loss), net of income taxes: Changes in Accumulated Other Comprehensive Loss by Component (dollars in millions) CIT ANNUAL REPORT 2015 175 Foreign currency translation adjustments Changes in benefit plan net gain (loss) and prior service (cost) credit Changes in fair values of derivatives qualifying as cash flow hedges Unrealized net gains (losses) on available for sale securities $(75.4) (70.8) 80.5 9.7 $(65.7) $(49.4) (41.8) 15.8 (26.0) $(75.4) $(58.5) (12.8) 2.0 (10.8) $(69.3) $(24.1) (42.5) 8.1 (34.4) $(58.5) $ $ – – – – – $(0.2) 0.2 – 0.2 $ – Total AOCI $(133.9) (90.7) 82.5 (8.2) $(142.1) $ (73.6) (84.7) 24.4 (60.3) $ – (7.1) – (7.1) $(7.1) $ 0.1 (0.6) 0.5 (0.1) $ – $(133.9) Balance as of December 31, 2014 AOCI activity before reclassifications Amounts reclassified from AOCI Net current period AOCI Balance as of December 31, 2015 Balance as of December 31, 2013 AOCI activity before reclassifications Amounts reclassified from AOCI Net current period AOCI Balance as of December 31, 2014 Other Comprehensive Income/(Loss) The amounts included in the Statement of Comprehensive Income (Loss) are net of income taxes. Foreign currency translation reclassification adjustments impacting net income were $80.5 million for 2015, $15.8 million for 2014 and $8.4 million for 2013. The change in income taxes associated with foreign currency translation adjustments was $(35.9) million for the year ended December 31, 2015 and there were no taxes associated with foreign currency translation adjustments for 2014 and 2013. The changes in benefit plans net gain/(loss) and prior service (cost)/ credit reclassification adjustments impacting net income was $2.0 million, $8.1 million and $(0.2) million for the years ended December 31, 2015, 2014 and 2013, respectively. The change in income taxes associated with changes in benefit plans net gain/(loss) and prior service (cost)/credit was $6.8 million for the year ended December 31, 2015 was not significant for the prior year periods. There were no reclassification adjustments impacting net income related to changes in fair value of derivatives qualifying as cash flow hedges for the year ended December 31, 2015 and were insignificant for 2014 and 2013. There were no income taxes associated with changes in fair values of derivatives qualifying as cash flow hedges for the years ended December 31, 2015, 2014 and 2013. There were no reclassification adjustments impacting net income related to unrealized gains (losses) on available for sale securities for the year ended December 31, 2015 compared to $0.5 million for 2014 and $0.8 million for 2013. The change in income taxes associated with net unrealized gains on available for sale securi- ties was $4.3 million, $0.2 million and $1.3 million for the years ended December 31, 2015, 2014 and 2013. The Company has operations in Canada and other countries. The functional currency for foreign operations is generally the local cur- rency. The value of assets and liabilities of these operations is translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates during the year. The resulting foreign cur- rency translation gains and losses, as well as offsetting gains and losses on hedges of net investments in foreign operations, are reflected in AOCI. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency are recorded in Other Income. Reclassifications Out of Accumulated Other Comprehensive Income (dollars in millions) Foreign currency translation adjustments gains (losses) Changes in benefit plan net gain/(loss) and prior service (cost)/credit gains (losses) Unrealized net gains (losses) on available for sale securities Total Reclassifications out of AOCI Years Ended December 31, Gross Amount 2015 Tax Net Amount Gross Amount 2014 Tax Net Amount $73.4 $ 7.1 $80.5 $15.8 $ – $15.8 2.3 (0.3) – – 2.0 – 8.1 – 0.8 (0.3) 8.1 0.5 $75.7 $ 6.8 $82.5 $24.7 $(0.3) $24.4 Affected Income Statement line item Other Income Operating Expenses Other Income Item 8: Financial Statements and Supplementary Data 176 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 — REGULATORY CAPITAL CIT acquired the assets and liabilities of OneWest Bank in August 2015, as described in Note 2 — Acquisition and Disposition Activities. The impact of the acquisition is reflected in the balances and ratios as of December 31, 2015 for both CIT and CIT Bank, N.A. The Company and the Bank are each subject to various regulatory capital requirements administered by the FRB and the OCC. Quanti- tative measures established by regulation to ensure capital adequacy require that the Company and the Bank each maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. We compute capital ratios in accordance with Federal Reserve capital guidelines and OCC capital guidelines for assessing adequacy of capital for the Company and CIT Bank, respectively. At December 31, 2015, the regulatory capital guidelines applicable to the Company and CIT Bank were based on the Basel III Final Rule. At December 31, 2014, the regulatory capital guidelines that were applicable to the Company and CIT Bank were based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I). The calculation of the Company’s regulatory capital ratios are subject to review and consultation with the FRB, which may result in refinements to amounts reported at December 31, 2015. The following table summarizes the actual and minimum required capital ratios: Tier 1 Capital and Total Capital Components(1) (dollars in millions) Tier 1 Capital Total stockholders’ equity(2) Effect of certain items in accumulated other comprehensive loss excluded from Tier 1 Capital and qualifying noncontrolling interests Adjusted total equity Less: Goodwill(3) Disallowed deferred tax assets Disallowed intangible assets(3) Investment in certain subsidiaries Other Tier 1 components(4) Common Equity Tier 1 Capital Tier 1 Capital Tier 2 Capital Qualifying allowance for credit losses and other reserves(5) Less: Investment in certain subsidiaries Other Tier 2 components(6) Total qualifying capital Risk-weighted assets Common Equity Tier 1 Capital (to risk-weighted assets): Actual Effective minimum ratios under Basel III guidelines(7) Tier 1 Capital (to risk-weighted assets): Actual Effective minimum ratios under Basel III and Basel I guidelines(7) Total Capital (to risk-weighted assets): Actual Effective minimum ratios under Basel III and Basel I guidelines(7) Tier 1 Leverage Ratio: Actual Required minimum ratio for capital adequacy purposes CIT CIT Bank December 31, 2015 $10,978.1 December 31, 2014 $ 9,068.9 December 31, 2015 $ 5,606.4 December 31, 2014 $ 2,716.4 76.9 11,055.0 (1,130.8) (904.5) (53.6) NA (0.1) 8,966.0 8,966.0 403.3 NA – $ 9,369.3 $69,563.6 12.9% 4.5% 12.9% 6.0% 13.5% 8.0% 13.5% 4.0% 53.0 9,121.9 (571.3) (416.8) (25.7) (36.7) (4.1) 8,067.3 8,067.3 7.0 5,613.4 (830.8) – (58.3) NA – 4,724.3 4,724.3 (0.2) 2,716.2 (167.8) – (12.1) – – 2,536.3 2,536.3 381.8 (36.7) – $ 8,412.4 $55,480.9 374.7 NA – $ 5,099.0 $36,843.8 245.1 – 0.1 $ 2,781.5 $19,552.3 NA NA 14.5% 6.0% 15.2% 10.0% 17.4% 4.0% 12.8% 4.5% 12.8% 6.0% 13.8% 8.0% 10.9% 4.0% NA NA 13.0% 6.0% 14.2% 10.0% 12.2% 4.0% NA – Balance is not applicable under the respective guidelines. (1) The 2015 presentation reflects the risk-based capital guidelines under Basel III, which became effective on January 1, 2015. The December 31, 2014 presen- tation reflects the risk-based capital guidelines under the then effective Basel I. (2) See Consolidated Balance Sheets for the components of Total stockholders’ equity. (3) Goodwill and disallowed intangible assets adjustments include the respective portion of deferred tax liability in accordance with guidelines under Basel III. (4) Includes the Tier 1 capital charge for nonfinancial equity investments under Basel I. (5) “Other reserves” represents additional credit loss reserves for unfunded lending commitments, letters of credit, and deferred purchase agreements, all of which are recorded in Other Liabilities. (6) Banking organizations are permitted to include in Tier 2 Capital up to 45% of net unrealized pretax gains on available-for-sale equity securities with readily determinable fair values. (7) Required ratios under Basel III Final Rule currently in effect. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 177 As it currently applies to CIT, the Basel III Final Rule: (i) introduces a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandates that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expands the scope of the deductions from and adjustments to capital as compared to the prior regulations. Prior to 2015, the Company had been subject to the guidelines under Basel I. The Basel III Final Rule also prescribed new approaches for risk weightings. Of these, CIT will calculate risk weightings using the Standardized Approach. This approach expands the risk- weighting categories from the former four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk- sensitive number of categories, depending on the nature of the exposure, ranging from 0% for U.S. government and agency secu- rities to as high as 1,250% for such exposures as mortgage backed securities, credit-enhancing interest-only strips or unsettled security/commodity transactions. The Basel III Final Rule established new minimum capital ratios for CET1, Tier 1 capital, and Total capital of 4.5%, 6.0% and 8.0%, respectively. In addition, the Basel III Final Rule also introduced a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital con- servation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk- weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. This buffer will be implemented beginning January 1, NOTE 16 — EARNINGS PER SHARE 2016 at the 0.625% level and increase by 0.625% on each subse- quent January 1, until it reaches 2.5% on January 1, 2019. With respect to CIT Bank, the Basel III Final Rule revises the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the previous 6%); and (iii) eliminating the prior provision that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and requiring a minimum Tier 1 leverage ratio of 5.0%. The Basel III Final Rule does not change the total risk-based capital requirement for any PCA category. As non-advanced approaches banking organizations, the Com- pany and CIT Bank will not be subject to the Basel III Final Rule’s countercyclical buffer or the supplementary leverage ratio. An FHC’s status will also depend upon its maintaining its status as “well-capitalized” and “well-managed” under applicable FRB regulations. If an FHC ceases to meet these capital and manage- ment requirements, the FRB’s regulations provide that the FHC must enter into an agreement with the FRB to comply with all applicable capital and management requirements. The Company and CIT Bank have met all capital requirements under the Basel III Final Rule, including the capital conservation buffer. CIT Bank’s capital ratios were all in excess of minimum guidelines for well capitalized at December 31, 2015. Neither CIT nor CIT Bank is subject to any order or written agreement regarding any capital requirements. The reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented below: (dollars in millions, except per share amounts; shares in thousands) Earnings / (Loss) Income from continuing operations Income (loss) from discontinued operations Net income Weighted Average Common Shares Outstanding Basic shares outstanding Stock-based awards(1) Diluted shares outstanding Basic Earnings Per common share data Income from continuing operations Income (loss) from discontinued operation Basic income per common share Diluted Earnings Per common share data Income from continuing operations Income (loss) from discontinued operation Years Ended December 31, 2015 2014 2013 $ 1,067.0 $ 1,077.5 $ 644.4 (10.4) 52.5 31.3 $ 1,056.6 $ 1,130.0 $ 675.7 185,500 888 186,388 $ $ $ 5.75 (0.05) 5.70 5.72 (0.05) 188,491 972 189,463 $ $ $ 5.71 0.28 5.99 5.69 0.27 200,503 1,192 201,695 $ $ $ 3.21 0.16 3.37 3.19 0.16 Diluted income per common share (1) Represents the incremental shares from in-the-money non-qualified restricted stock awards, performance shares, and stock options. Weighted average 5.96 5.67 $ $ $ 3.35 restricted shares, performance shares and options that were out-of-the money and excluded from diluted earnings per share totaled 2.0 million for the year ended December 31, 2015. Item 8: Financial Statements and Supplementary Data 178 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — NON-INTEREST INCOME The following table sets forth the components of non-interest income: Non-interest Income (dollars in millions) Rental income on operating leases Other Income: Factoring commissions Fee revenues Gains on sales of leasing equipment Gains on investments Loss on OREO sales Gains (losses) on derivatives and foreign currency exchange (Loss) gains on loan and portfolio sales Impairment on assets held for sale Other revenues Total other income Total non-interest income NOTE 18 — NON-INTEREST EXPENSES The following table sets forth the components of Non-interest expenses: Non-interest Expense (dollars in millions) Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses: Compensation and benefits Professional fees Technology Provision for severance and facilities exiting activities Net occupancy expense Advertising and marketing Intangible assets amortization Other expenses Total operating expenses Loss on debt extinguishments Total non-interest expenses NOTE 19 — INCOME TAXES Years Ended December 31, 2015 $2,152.5 2014 $2,093.0 2013 $1,897.4 116.5 108.6 101.1 0.9 (5.4) (32.9) (47.3) (59.6) 37.6 219.5 120.2 93.1 98.4 39.0 – (37.8) 34.3 (100.7) 58.9 305.4 122.3 101.5 130.5 8.2 – 1.0 48.8 (124.0) 93.0 381.3 $2,372.0 $2,398.4 $2,278.7 Years Ended December 31, 2015 $ 640.5 231.0 2014 $ 615.7 196.8 2013 $ 540.6 163.1 594.0 141.0 109.8 58.2 50.7 31.3 13.3 170.0 1,168.3 2.6 533.8 535.4 80.6 85.2 31.4 35.0 33.7 1.4 140.7 941.8 3.5 69.1 83.3 36.9 35.3 25.2 – 185.0 970.2 – $2,042.4 $1,757.8 $1,673.9 The following table presents the U.S. and non-U.S. components of income (loss) before (benefit)/provision for income taxes: Income (Loss) From Continuing Operations Before Benefit (Provision) for Income Taxes (dollars in millions) U.S. operations Non-U.S. operations Income from continuing operations before benefit/(provision) for income taxes Years Ended December 31, 2015 $238.8 339.7 2014 $342.4 338.4 2013 $374.2 360.0 $578.5 $680.8 $734.2 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The (benefit) provision for income taxes is comprised of the following: (Benefit) Provision for Income Taxes (dollars in millions) CIT ANNUAL REPORT 2015 179 Current U.S. federal income tax provision Deferred U.S. federal income tax provision/(benefit) Total federal income tax (benefit)/provision Current state and local income tax provision Deferred state and local income tax (benefit)/provision Total state and local income tax (benefit)/provision Total non-U.S. income tax provision Total (benefit)/provision for income taxes Continuing operations Discontinued operations Total (benefit)/provision for income taxes Years Ended December 31, $ 2015 0.3 (563.6) (563.3) 5.8 (20.0) (14.2) 82.4 $(495.1) $(488.4) (6.7) $(495.1) $ 2014 0.9 (405.6) (404.7) 6.9 2.1 9.0 1.2 $(394.5) $(397.9) 3.4 $(394.5) 2013 $ 0.1 18.9 19.0 6.0 1.0 7.0 66.5 $92.5 $83.9 8.6 $92.5 A reconciliation from the U.S. Federal statutory rate to the Company’s actual effective income tax rate is as follows: Percentage of Pretax Income Years Ended December 31 (dollars in millions) Continuing Operations Federal income tax rate Increase (decrease) due to: State and local income taxes, net of federal income tax benefit Lower tax rates applicable to non-U.S. earnings International income subject to U.S. tax Unrecognized tax expense (benefit) Deferred income taxes on international unremitted earnings Valuation allowances International tax settlements Other Effective Tax Rate – Continuing operations Discontinued Operation Federal income tax rate Increase (decrease) due to: State and local income taxes, net of federal income tax benefit Lower tax rates applicable to non-U.S. earnings International income subject to U.S. tax Valuation Allowances Effective Tax Rate – Discontinued operation Total Effective Tax Rate Effective Tax Rate 2015 Income tax expense (benefit) $ 202.4 Pretax Income $578.5 Percent Pretax of pretax (loss) income 35.0% $680.8 2014 Income tax expense (benefit) $ 238.3 2013 Percent Pretax of pretax (loss) (loss) 35.0% $734.2 Income tax expense (benefit) $ 256.9 Percent of pretax income (loss) 35.0% (8.7) (1.5) 9.0 1.3 6.2 0.8 (88.7) (15.3) (99.7) (14.6) (97.1) (13.2) 50.2 4.5 30.2 8.7 0.8 5.2 (693.8) (120.0) (3.5) 19.0 (0.6) 3.2 46.0 (269.2) (7.8) (313.3) (1.1) (0.1) 6.8 (39.5) (1.2) (46.0) (0.2) – 55.7 0.3 (24.7) (100.6) (11.2) (1.6) 7.6 – (3.4) (13.7) (1.5) (0.2) $(488.4) (84.5)% $(397.9) (58.4)% $ 83.9 11.4% $ (17.1) $ (6.0) 35.0% $ 55.9 $ 19.6 35.0% $ 39.9 $ 14.0 35.0% (0.7) 3.7 (0.1) (0.1) 0.7 1.7 1.5 2.7 15.3 38.5 – – – – – – (2.7) (14.9) (4.7) (26.7) $ (6.7) 38.7% $(495.1) (88.2)% $ 3.4 6.2% $(394.5) (53.5)% (17.9) (3.5) $ 8.6 $ 92.5 (44.9) (8.8) 21.5% 11.9% Item 8: Financial Statements and Supplementary Data 180 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are presented below: Components of Deferred Income Tax Assets and Liabilities (dollars in millions) Deferred Tax Assets: Net operating loss (NOL) carry forwards Loans and direct financing leases Basis difference in loans Provision for credit losses Accrued liabilities and reserves FSA adjustments – aircraft and rail contracts Deferred stock-based compensation Other Total gross deferred tax assets Deferred Tax Liabilities: Operating leases Basis difference in mortgage backed securities Basis difference in federal home loan bank stock Non-U.S. unremitted earnings Unrealized foreign exchange gains Goodwill and intangibles Other Total deferred tax liabilities Total net deferred tax asset before valuation allowances Less: Valuation allowances December 31, 2015 2014 $ 2,779.4 $ 2,837.0 18.5 288.2 164.3 183.1 27.1 46.1 126.5 3,633.2 48.5 – 163.7 91.7 46.1 29.5 135.1 3,351.6 (1,953.7) (1,797.6) (145.4) (33.0) (145.9) (47.3) (123.8) (40.7) (2,489.8) 1,143.4 (341.0) – – (162.0) (19.3) (62.4) (32.6) (2,073.9) 1,277.7 (1,122.4) Net deferred tax asset (liability) after valuation allowances $ 802.4 $ 155.3 2009 Bankruptcy CIT filed prepackaged voluntary petitions for relief under the U.S. bankruptcy Code on November 1, 2009 and emerged from bank- ruptcy on December 10, 2009. As a consequence of the bankruptcy, CIT realized cancellation of indebtedness income (“CODI”) which generally reduced certain favorable tax attributes of CIT existing at that time. CIT tax attribute reductions included a reduction to the Company’s U.S. federal net operating loss carry-forwards (“NOLs”) of approximately $4.3 billion and the tax bases in its assets of $2.8 billion. CIT’s reorganization in 2009 constituted an ownership change under Section 382 of the Internal Revenue Code, which placed an annual dollar limit on the use of the remaining pre-bankruptcy NOLs. In general, the Company’s annual limitation on use of pre- bankruptcy NOLs is approximately $265 million per annum. NOLs arising in post-emergence years are not subject to this limitation absent another ownership change as defined by Section 382. The acquisition of OneWest Bank created no further annual dollar limit under Section 382. Net Operating Loss Carry-forwards As of December 31, 2015, CIT has deferred tax assets (“DTAs”) totaling $2.8 billion on its global NOLs. This includes: (1) a DTA of $2.0 billion relating to its cumulative U.S. federal NOLs of $5.7 billion, after the CODI reduction of tax attributes described in the section above; (2) DTAs of $0.4 billion relating to cumulative state NOLs of $8.0 billion, including amounts of reporting entities that file in multiple jurisdictions, and (3) DTAs of $0.4 billion relating to cumulative non-U.S. NOLs of $3.1 billion. Of the $5.7 billion U.S. federal NOLs, approximately $2.9 billion relate to the pre-emergence bankruptcy period and are subject to the Section 382 limitation discussed above, of which approxi- mately $1.2 billion is no longer subject to the limitation. There was little change in the U.S. federal NOLs from the prior year as a result of minimal amount of taxable income for the current year, primarily due to accelerated tax depreciation on the operating lease portfolios. The U.S. federal NOL’s will expire beginning in 2027 through 2033. Approximately $260 million of state NOLs will expire in 2016. While most of the non-U.S. NOLs have no expira- tion date, a small portion will expire over various periods, including an insignificant amount expiring in 2016. The determination of whether or not to maintain the valuation allowances on certain reporting entities’ DTAs requires significant judgment and an analysis of all positive and negative evidence to determine whether it is more likely than not that these future benefits will be realized. ASC 740-10-30-18 states that “future realization of the tax benefit of an existing deductible temporary difference or NOL carry-forward ultimately depends on the exis- tence of sufficient taxable income within the carryback and carry- forward periods available under the tax law.” As such, the Company considered the following potential sources of taxable income in its assessment of a reporting entity’s ability to recog- nize its net DTA: CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 181 - Taxable income in carryback years, - Future reversals of existing taxable temporary differences (deferred tax liabilities), - Prudent and feasible tax planning strategies, and - Future taxable income forecasts. Through the second quarter of 2014, the Company generally maintained a full valuation allowance against its net DTAs. During the third quarter of 2014, management concluded that it was more likely than not that the Company will generate sufficient future taxable income within the applicable carry-forward periods to realize $375 million of its U.S. net federal DTAs. This conclu- sion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evi- dence which included consideration of: - The U.S. group transitioned into a 3-year (12 quarter) cumula- tive normalized income position in the third quarter of 2014, resulting in the Company’s ability to significantly increase the reliance on future taxable income forecasts. - Management’s long-term forecast of future U.S. taxable income supporting partial utilization of the U.S. federal NOLs prior to their expiration, and - U.S. federal NOLs not expiring until 2027 through 2033. The forecast of future taxable income for the Company reflects a long-term view of growth and returns that management believes is more likely than not of being realized. For the U.S. state valuation allowance, the Company analyzed the state net operating loss carry-forwards for each reporting entity to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the existing valua- tion allowance was still required on the U.S. state DTAs on net operating loss carry-forwards. Accordingly, no discrete adjust- ment was made to the U.S. State valuation allowance in 2014. The negative evidence supporting this conclusion was as follows: - Certain separate U.S. state filing entities remaining in a three year cumulative loss, and - State NOLs expiration periods varying in time. Additionally, during 2014, the Company reduced the U.S. federal and state valuation allowances in the normal course as the Com- pany recognized U.S. taxable income. This taxable income reduced the DTA on NOLs, and, when combined with a concur- rent increase in net deferred tax liabilities, which are mainly related to accelerated tax depreciation on the operating lease portfolios, resulted in a reduction in the net DTA and correspond- ing reduction in the valuation allowance. This net reduction was further offset by favorable IRS audit adjustments and the favor- able resolution of an uncertain tax position related to the computation of cancellation of debt income “CODI” coming out of the 2009 bankruptcy, which resulted in adjustments to the NOLs. As of December 31, 2014, the Company retained a valua- tion allowance of $1.0 billion against its U.S. net DTAs, of which approximately $0.7 billion was against its DTA on the U.S. federal NOLs and $0.3 billion was against its DTA on the U.S. state NOLs. The ability to recognize the remaining valuation allowances against the DTAs on the U.S. federal and state NOLs, and capital loss carry-forwards was evaluated on a quarterly basis to deter- mine if there were any significant events that affected our ability to utilize the DTAs. If events were identified that affected our ability to utilize our DTAs, the analysis was updated to determine if any adjustments to the valuation allowances were required. Such events included acquisitions that support the Company’s long-term business strategies while also enabling it to accelerate the utilization of its net operating losses, as evidenced by the acquisition of Direct Capital Corporation in 2014 and the acquisi- tion of OneWest Bank in 2015. During the third quarter of 2015, Management updated the Com- pany’s long-term forecast of future U.S. federal taxable income to include the anticipated impact of the OneWest Bank acquisition. The updated long-term forecast supports the utilization of all of the U.S. federal DTAs (including those relating to the NOLs prior to their expiration). Accordingly, Management concluded that it is more likely than not that the Company will generate sufficient future taxable income within the applicable carry-forward periods to enable the Company to reverse the remaining $690 million of U.S. federal valuation allowance, $647 million of which was recorded as a discrete item in the third quarter, and the remain- der of which was included in determining the annual effective tax rate as normal course in the third and fourth quarters of 2015 as the Company recognized additional U.S. taxable income related to the OneWest Bank acquisition. The Company also evaluated the impact of the OneWest Bank acquisition on its ability to utilize the NOLs of its state income tax reporting entities and concluded that no additional reduction to the U.S. state valuation allowance was required in 2015. These state income tax reporting entities include both combined uni- tary state income tax reporting entities and separate state income tax reporting entities in various jurisdictions. The Com- pany analyzed the state net operating loss carry-forwards for each of these reporting entities to determine the amounts that are expected to expire unused. Based on this analysis, it was determined that the valuation allowance was still required on U.S. state DTAs on certain net operating loss carry-forwards. The Company retained a valuation allowance of $250 million against the DTA on the U.S. state NOLs at December 31, 2015. The Company maintained a valuation allowance of $91 million against certain non-U.S. reporting entities’ net DTAs at December 31, 2015. The reduction from the prior year balance of $141 million was primarily attributable to the sale of various inter- national entities resulting in the transfer of their respective DTAs and associated valuation allowances, and the write-off of approxi- mately $28 million of DTAs for certain reporting entities due to the remote likelihood that they will ever utilize their respective DTAs. In January 2016, the Company sold its U.K. equipment leasing business. Thus, in the first quarter of 2016, there will be a reduction of approximately $70 million to the respective U.K. reporting entities’ net DTAs along with their associated valuation allowances. In the evaluation process related to the net DTAs of the Company’s other international reporting entities, uncertain- ties surrounding the future international business operations have made it challenging to reliably project future taxable income. Management will continue to assess the forecast of future taxable income as the business plans for these international reporting entities evolve and evaluate potential tax planning strategies to utilize these net DTAs. Item 8: Financial Statements and Supplementary Data 182 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Post-2015, the Company’s ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, valuation allowances may be adjusted accordingly. Indefinite Reinvestment Assertion During the third quarter of 2015, Management’s changed its intent to indefinitely reinvest its unremitted earnings in China and certain subsidiaries in Canada. This decision was driven by Man- agement announcements in the third quarter to sell its operations in China and certain lending operations in Canada. As of December 31, 2015, Management continues to assert its intent to indefinitely reinvest its international earnings for international subsidiaries in select jurisdictions. If the undistributed earnings of the select international subsidiaries were distributed, additional domestic and international income tax liabilities would result. Liabilities for Unrecognized Tax Benefits However, it is not practicable to determine the amount of such taxes because of the variability of multiple factors that would need to be assessed at the time of any assumed distribution. During 2015, the Company increased its deferred tax liabilities for international withholding taxes by $6.5 million and reduced the U.S. Federal deferred income tax liabilities by $3.3 million. The net change in the deferred tax liabilities included $28 million for the establishment of deferred tax liabilities for withholding and income taxes due to Management’s decision to no longer assert its intent to indefinitely reinvest its unremitted earnings in China, partially offset by the recognition of $24.3 million of deferred income tax liabilities due to the sale of Mexico. As of December 31, 2015, the Company has a recorded deferred tax liability of $146 million for U.S. and non-U.S. taxes associated with the potential future repatriation of undistributed earnings of cer- tain non-U.S. subsidiaries. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Unrecognized Tax Benefits (dollars in millions) Balance at December 31, 2014 Additions for tax positions related to prior years Reductions for tax positions of prior years Income Tax Audit Settlements Expiration of statutes of limitations Foreign currency revaluation Balance at December 31, 2015 Liabilities for Unrecognized Tax Benefits $ 53.7 35.1 (9.6) (17.0) (9.9) (5.6) Interest/ Penalties $13.3 18.2 (0.3) (3.1) (8.3) (1.8) Grand Total $ 67.0 53.3 (9.9) (20.1) (18.2) (7.4) $ 46.7 $18.0 $ 64.7 During the year ended December 31, 2015, the Company recorded a net $2.3 million reduction on uncertain tax positions, including interest, penalties, and net of a $7.4 million decrease attributable to foreign currency revaluation. The majority of the net reduction related to prior years’ uncertain tax positions and primarily comprised of the following items: 1) a $29 million increase associated with an uncertain tax position taken on cer- tain prior-year non-U.S. income tax returns, 2) a $24 million increase from pre-acquisition uncertain tax positions of OneWest assumed by the Company partially offset by 3) a $9 million tax benefit resulting from the receipt of a favorable tax ruling on an uncertain tax position taken on a pre-acquisition tax status filing position by Direct Capital and, 4) a $18 million tax benefit from expiration of statutes of limitations related to uncertain tax posi- tions taken on certain prior year non-U.S. tax returns. Of the $24 million increase mentioned above related to the OneWest trans- action, $9 million was fully offset by a corresponding decrease to goodwill included in the purchase price accounting adjustments. During the year ended December 31, 2015, the Company recog- nized $4.7 million net income tax expense relating to interest and penalties on its uncertain tax positions, net of a $1.8 million decrease attributable to foreign currency translation. The change in balance is mainly related to the interest and penalties associ- ated with the above mentioned uncertain tax position taken on certain prior-year international income tax returns. As of December 31, 2015, the accrued liability for interest and penalties is $18.0 million. The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax expense. The entire $64.7 million of unrecognized tax benefits including interest and penalties at December 31, 2015 would lower the Company’s effective tax rate, if realized. The Company believes that the total unrecognized tax benefits before interest and penalties may decrease, in the range of $10 to $15 million, from resolution of open tax matters, settlements of audits, and the expiration of various statutes of limitations prior to December 31, 2016. Income Tax Audits On February 13, 2015, the Company and the Internal Revenue Service (IRS) concluded the audit examination of the Company’s U.S. federal income tax returns for the taxable years ended December 31, 2008 through December 31, 2010. The audit settlement resulted in no addi- tional regular or alternative minimum tax liability. A new IRS examination will commence in 2016 for the taxable years ending December 31, 2011 through December 31, 2013. IMB Holdco LLC, the parent company of OneWest Bank, and its subsidiaries, which was acquired on August 3, 2015 by CIT, are currently under examination by the Internal Revenue Service for taxable years ended December 31, 2012 and December 31, 2013. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 183 While ongoing, the examination is expected to result in a signifi- cant cash tax refund, which was reflected in the acquisition date balance sheet. Management believes this audit will not have a material impact on the financial statements. IMB Holdco LLC and its subsidiaries is also under examination by the California Franchise Tax Board (“FTB”) for tax years 2009 through 2013. The FTB has completed its audit of the 2009 return and has issued a notice of proposed assessment. The issues raised by California were anticipated by the Company, and the Company believes it has provided adequate reserves in accor- dance with ASC 740 for any potential adjustments. An appeal for 2009 has been filed with the California Board of Equalization and the Company expects resolution of the issues during 2016. As of the financial statement date, the State of California has not pro- posed final adjustments to the Company’s tax returns for 2010 through 2013. The Company does not anticipate any issues being raised by California that would have a material impact on the financial statements. The Company and its subsidiaries are under examination in vari- ous states, provinces and countries for years ranging from 2005 through 2013. Management does not anticipate that these exami- nation results will have any material financial impact. NOTE 20 — RETIREMENT, POSTRETIREMENT AND OTHER BENEFIT PLANS CIT provides various benefit programs, including defined benefit retire- ment and postretirement plans, and defined contribution savings incentive plans. A summary of major plans is provided below. Retirement and Postretirement Benefit Plans Retirement Benefits CIT has both funded and unfunded noncontributory defined ben- efit pension plans covering certain U.S. and non-U.S. employees, each of which is designed in accordance with practices and regu- lations in the related countries. Retirement benefits under defined benefit pension plans are based on an employee’s age, years of service and qualifying compensation. The Company’s largest plan is the CIT Group Inc. Retirement Plan (the “Plan”), which accounts for 80% of the Company’s total pen- sion projected benefit obligation at December 31, 2015. The Company also maintains a U.S. noncontributory supplemental retirement plan, the CIT Group Inc. Supplemental Retirement Plan (the “Supplemental Plan”), for participants whose benefit in the Plan is sub- ject to Internal Revenue Code limitations, and an Executive Retirement Plan, which has been closed to new members since 2006. In aggregate, these two plans account for 18.4% of the total pension projected ben- efit obligation at December 31, 2015. Effective December 31, 2012, the Company amended the Plan and the Supplemental Plan to freeze benefits earned. Due to the freeze, future service cost accruals and credits for services were discontinued under both plans. However, accumulated balances under the cash balance formula continue to receive periodic interest, subject to certain government limits. The interest credit was 2.55%, 3.63%, and 2.47% for the years ended December 31, 2015, 2014, and 2013, respectively. At December 31, 2015, all Plan participants are vested in both plans. Upon termination or retirement, participants under the “cash balance” formula have the option of receiving their benefit in a lump sum, deferring their payment to age 65 or converting their vested benefit to an annuity. Traditional formula participants can only receive an annuity upon a qualifying retirement. Postretirement Benefits CIT provides healthcare and life insurance benefits to eligible retired employees. U.S. retiree healthcare and life insurance ben- efits account for 40.8% and 55.0% of the total postretirement benefit obligation, respectively. For most eligible retirees, health- care is contributory and life insurance is non-contributory. The U.S. retiree healthcare plan pays a stated percentage of most medical expenses, reduced by a deductible and any payments made by the government and other programs. The U.S. retiree healthcare benefit includes a maximum limit on CIT’s share of costs for employees who retired after January 31, 2002. All post- retirement benefit plans are funded on a pay-as-you-go basis. Effective December 31, 2012, the Company amended CIT’s post- retirement benefit plans to discontinue benefits. Due to the freeze, future service cost accruals were reduced. CIT no longer offers retiree medical, dental and life insurance benefits to those who did not meet the eligibility criteria for these benefits by December 31, 2013. Employees who met the eligibility require- ments for retiree health insurance by December 31, 2013 will be offered retiree medical and dental coverage upon retirement. To receive retiree life insurance, employees must have met the eligi- bility criteria for retiree life insurance by, and must have retired from CIT on or before, December 31, 2013. Item 8: Financial Statements and Supplementary Data 184 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Obligations and Funded Status The following tables set forth changes in benefit obligation, plan assets, funded status and net periodic benefit cost of the retirement plans and postretirement plans: Obligations and Funded Status (dollars in millions) Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Plan amendments, curtailments, and settlements Actuarial (gain) / loss Benefits paid Other(1) Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of period Actual return on plan assets Employer contributions Plan settlements Benefits paid Other(1) Fair value of plan assets at end of period Funded status at end of year(2)(3) Retirement Benefits Post-Retirement Benefits 2015 2014 2015 2014 $ 463.6 0.2 $ 452.4 0.2 $ 38.6 – $ 38.8 – 16.9 (2.4) (10.9) (21.3) (0.6) 445.5 359.9 (12.3) 12.8 (1.1) (21.3) (0.1) 20.2 (29.5) 50.4 (25.8) (4.3) 463.6 356.9 28.5 33.7 (29.3) (25.8) (4.1) 1.4 – (1.6) (4.9) 1.6 35.1 – – 3.3 – (4.9) 1.6 1.6 – 0.8 (4.3) 1.7 38.6 – – 2.5 – (4.3) 1.8 337.9 $(107.6) 359.9 $(103.7) – $(35.1) – $(38.6) (1) Consists of the following: plan participants’ contributions and currency translation adjustments. (2) These amounts were recognized as liabilities in the Consolidated Balance Sheet at December 31, 2015 and 2014. (3) Company assets of $85.9 million and $91.0 million as of December 31, 2015 and December 31, 2014, respectively, related to the non-qualified U.S. executive retirement plan obligation are not included in plan assets but related liabilities are in the benefit obligation. During 2015, the Company entered into a buy-in/buy-out transac- tion in Germany with an insurance company that is expected to result in a full buy-out of the related pension plan in 2016. This contract did not meet the settlement requirements in ASC 715, Compensation — Retirement Benefits as of the year ended December 31, 2015 and resulted in a $1.2 million actuarial loss that is included in the net actuarial gain of $10.9 million as of December 31, 2015, as the plan’s pension liabilities were valued at their buy-in value basis. The accumulated benefit obligation for all defined benefit pen- sion plans was $445.5 million and $463.1 million, at December 31, 2015 and 2014, respectively. Information for those defined benefit plans with an accumulated benefit obligation in excess of plan assets is as follows: Defined Benefit Plans with an Accumulated Benefit Obligation in Excess of Plan Assets (dollars in millions) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets December 31, 2015 $439.3 439.3 331.7 2014 $463.6 463.1 359.9 CIT ANNUAL REPORT 2015 185 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net periodic benefit cost and other amounts recognized in AOCI consisted of the following: Net Periodic Benefit Costs and Other Amounts (dollars in millions) Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net loss/(gain) Settlement and curtailment (gain)/loss Net periodic benefit cost (credit) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net loss / (gain) Amortization, settlement or curtailment recognition of net (loss) / gain Amortization, settlement or curtailment recognition of prior service credit Total recognized in OCI Total recognized in net periodic benefit cost and OCI Retirement Benefits 2014 $ 0.2 20.2 (20.8) – 7.5 2015 $ 0.2 16.9 (20.1) – 2.6 – (0.4) 2.9 10.0 2013 $ 0.5 17.8 (18.9) – 1.0 0.2 0.6 20.9 42.6 (17.1) (2.6) (10.4) (1.1) – 18.3 – 32.2 – (18.2) $ 17.9 $ 42.2 $(17.6) Post-Retirement Benefits 2015 – $ 1.4 – (0.5) (0.3) – 0.6 (1.5) 0.3 0.5 (0.7) $(0.1) 2014 – $ 1.6 – (0.5) (0.7) – 0.4 1.0 0.7 0.5 2.2 $ 2.6 2013 $ 0.1 1.6 – (0.6) (0.2) (0.3) 0.6 (2.5) 0.1 1.4 (1.0) $(0.4) The amounts recognized in AOCI during the year ended December 31, 2015 were net losses (before taxes) of $18.3 million for retirement benefits. The net losses (before taxes) include losses of $39.5 million, netted by gains of $18.6 million. The losses include asset losses of $32.4 million, demographic experi- ence losses of $3.4 million; losses of $2.5 million due to the US retirement benefit plans’ interest crediting rate’s 25 basis points increase to 2.75% at December 31, 2015, and the actuarial loss related to the German plan buy-in transaction of $1.2 million. The gains were primarily driven by the impacts of the 25 basis point increase in the U.S. benefit plans’ discount rate from 3.75% to 4.00% at December 31, 2015 resulting in a gain of $11.9 million, and the adoption of the new Society of Actuaries’ improvement scale MP-2015 for the U.S. benefit plans resulting in a gain of $6.0 million. The estimated net loss for CIT’s retirement benefits that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $2.7 million. The post retirement AOCI net gains (before taxes) of $0.7 million during the year ended December 31, 2015 include gains of $2.5 million, netted by losses of $0.9 million. The gains were pri- marily driven by the impacts of the updated healthcare assumptions of $1.1 million and the 25 basis points increase in the post retirement plans’ discount rate from 3.75% to 4.00% at December 31, 2015 resulting in a gain of $1.0 million. The losses were primarily driven by actuarial losses on benefit payments. The estimated prior service credit and net gain for CIT’s post- retirement benefits that will be amortized from AOCI into net periodic benefit cost over the next fiscal year is $0.5 million and $0.8 million, respectively. The amounts recognized in AOCI during the year ended December 31, 2014 were net losses (before taxes) of $32.2 million for retirement benefits. Changes in assumptions, primarily the discount rate and mortality tables, accounted for $46.8 million of the overall net retirement benefits AOCI losses. The discount rate for the Plan and the Supplemental Plan decreased 100 basis points to 3.75% at December 31, 2014, and the rate for the executive retirement plan decreased 75 basis points to 3.75% at December 31, 2014. This decline in the discount rate accounted for $33.5 million of the net AOCI loss for retirement benefits. Additionally, the adoption of the new Society of Actuaries’ mortality table and improvement scale RP-2014/SP-2014 resulted in an increase in retirement benefit obligations of $10.2 million. Partially offsetting these losses were the settlement of the U.K. pension scheme, which resulted in $8.0 million of loss amortiza- tion and settlement charges recorded during 2014, and U.S. asset gains of $7.7 million. The postretirement AOCI net losses (before taxes) of $2.2 million during the year ended December 31, 2014 were primarily driven by a 75 basis point decrease in the U.S. postretirement plan discount rate from 4.50% at December 31, 2013 to 3.75% at December 31, 2014. The amounts recognized in AOCI during the year ended December 31, 2013 were net gains (before taxes) of $18.2 million for retirement benefits. The net retirement benefits AOCI gains were primarily driven by a reduction in benefit obligations of $17.1 million resulting from changes in assumptions. The discount rate for the U.S. pension and postretirement plans increased by 100 basis points from 3.75% at December 31, 2012 to 4.75% at December 31, 2013 and accounted for the majority of the AOCI gains arising from assumption changes. The postretirement AOCI net gains (before taxes) of $1.0 million during the year ended December 31, 2013 were primarily driven by a 75 basis point increase in the discount rate from 3.75% at December 31, 2012 to 4.50% at December 31, 2013. Item 8: Financial Statements and Supplementary Data 186 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assumptions Discount rate assumptions used for pension and post-retirement benefit plan accounting reflect prevailing rates available on high- quality, fixed-income debt instruments with maturities that match the benefit obligation. The rate of compensation used in the actuarial model is based upon the Company’s long-term plans for any increases, taking into account both market data and historical increases. Expected long-term rate of return assumptions on assets are based on projected asset allocation and historical and expected future returns for each asset class. Independent analysis of historical and projected asset returns, inflation, and interest rates are provided by the Company’s investment consultants and actu- aries as part of the Company’s assumptions process. The weighted average assumptions used in the measurement of benefit obligations are as follows: Weighted Average Assumptions Discount rate Rate of compensation increases Health care cost trend rate Pre-65 Post-65 Ultimate health care cost trend rate Year ultimate reached Retirement Benefits Post-Retirement Benefits 2015 3.97% – (1) (1) (1) (1) 2014 3.74% 0.09% (1) (1) (1) (1) 2015 3.99% (1) 6.70% 8.20% 4.50% 2037 2014 3.74% (1) 7.20% 7.30% 4.50% 2029 The weighted average assumptions used to determine net periodic benefit costs are as follows: Weighted Average Assumptions Discount rate Expected long-term return on plan assets Rate of compensation increases Healthcare rate trends have a significant effect on healthcare plan costs. The Company uses both external and historical data to determine healthcare rate trends. An increase (decrease) of one- percentage point in assumed healthcare rate trends would increase (decrease) the postretirement benefit obligation by $0.8 million and ($0.7 million), respectively. The service and interest cost are not material. Plan Assets CIT maintains a “Statement of Investment Policies and Objec- tives” which specifies guidelines for the investment, supervision and monitoring of pension assets in order to manage the Compa- ny’s objective of ensuring sufficient funds to finance future retirement benefits. The asset allocation policy allows assets to be invested between 15% to 35% in Equities, 35% to 65% in Fixed-Income, 15% to 25% in Global Asset Allocation, and 5% to 10% in Alternative Investments. The asset allocation follows a Liability Driven Investing (“LDI”) strategy. The objective of LDI is to allocate assets in a manner that their movement will more closely track the movement in the benefit liability. The policy pro- vides specific guidance on asset class objectives, fund manager guidelines and identification of prohibited and restricted transac- tions. It is reviewed periodically by the Company’s Investment Committee and external investment consultants. Retirement Benefits Post-Retirement Benefits 2015 3.74% 5.75% 0.09% 2014 4.58% 5.74% 3.03% 2015 3.74% (1) (1) 2014 4.50% (1) (1) Members of the Investment Committee are appointed by the Chief Executive Officer and include the Chief Financial Officer as the committee Chairman, and other senior executives. There were no direct investments in equity securities of CIT or its subsidiaries included in pension plan assets in any of the years presented. Plan investments are stated at fair value. Common stock traded on security exchanges as well as mutual funds and exchange traded funds are valued at closing market prices; when no trades are reported, they are valued at the most recent bid quotation (Level 1). Investments in Common Collective Trusts and Short Term Investment Funds are carried at fair value based upon net asset value (“NAV”) (Level 2). Funds that invest in alternative assets that do not have quoted market prices are valued at esti- mated fair value based on capital and financial statements received from fund managers (Level 3). Given the valuation of Level 3 assets is dependent upon assumptions and expectations, management, with the assistance of third party experts, periodi- cally assesses the controls and governance employed by the investment firms that manage Level 3 assets. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tables below set forth asset fair value measurements. Fair Value Measurements (dollars in millions) Level 2 Level 3 CIT ANNUAL REPORT 2015 187 December 31, 2015 Cash Mutual Fund Common Collective Trust Common Stock Exchange Traded Funds Short Term Investment Fund Partnership Hedge Fund Insurance Contracts December 31, 2014 Cash Mutual Fund Common Collective Trust Common Stock Exchange Traded Funds Short Term Investment Fund Partnership Hedge Fund Level 1 $ 1.7 67.9 – 19.7 24.6 – – – – $ – – 183.1 – – 1.7 – – – $113.9 $184.8 $ 5.8 $ 72.0 – 19.6 25.7 – – – – – 200.1 – – 1.5 – – $123.1 $201.6 Total Fair Value $ 1.7 67.9 183.1 19.7 24.6 1.7 7.7 25.3 6.2 $337.9 $ 5.8 72.0 200.1 19.6 25.7 1.5 9.7 25.5 $359.9 $ – – – – – – 7.7 25.3 6.2 $39.2 $ – – – – – – 9.7 25.5 $35.2 The table below sets forth changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 2015: Fair Value of Level 3 Assets (dollars in millions) December 31, 2014 Realized and Unrealized losses Purchases, sales, and settlements, net December 31, 2015 Change in Unrealized Losses for Investments still held at December 31, 2015 Total $35.2 (2.2) 6.2 $39.2 $ (2.2) Partnership Hedge Funds Insurance Contracts $ 9.7 (2.0) – $ 7.7 $(2.0) $25.5 (0.2) – $25.3 $ (0.2) $ – – 6.2 $6.2 $ – Contributions Estimated Future Benefit Payments The Company’s policy is to make contributions so that they exceed the minimum required by laws and regulations, are con- sistent with the Company’s objective of ensuring sufficient funds to finance future retirement benefits and are tax deductible. CIT currently does not expect to have a required minimum contribu- tion to the U.S. Retirement Plan during 2016. For all other plans, CIT currently expects to contribute $9.0 million during 2016. Projected Benefits (dollars in millions) For the years ended December 31, 2016 2017 2018 2019 2020 2021-2025 The following table depicts benefits projected to be paid from plan assets or from the Company’s general assets calculated using current actuarial assumptions. Actual benefit payments may differ from projected benefit payments. Retirement Benefits $ 26.0 25.8 25.9 26.4 28.6 138.4 Gross Postretirement Benefits $ 3.0 2.9 2.9 2.8 2.7 12.0 Medicare Subsidy $0.3 0.3 0.3 0.3 0.4 0.8 Item 8: Financial Statements and Supplementary Data 188 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Savings Incentive Plan CIT has a number of defined contribution retirement plans cover- ing certain of its U.S. and non-U.S. employees designed in accordance with conditions and practices in the respective coun- tries. The U.S. plan, which qualifies under section 401(k) of the Internal Revenue Code, is the largest and accounts for 88% of the Company’s total defined contribution retirement expense for the year ended December 31, 2015. Generally, employees may con- tribute a portion of their eligible compensation, as defined, subject to regulatory limits and plan provisions, and the Com- pany matches these contributions up to a threshold. During 2015, the Board of Directors of the Company approved amendments to reduce the Company match on eligible contributions effective January 1, 2016. Participants are also eligible for an additional discretionary company contribution. The cost of these plans totaled $19.0 million, $21.6 million and $24.9 million for the years ended December 31, 2015, 2014, and 2013, respectively. Stock-Based Compensation In December 2009, the Company adopted the Amended and Restated CIT Group Inc. Long-Term Incentive Plan (the “LTIP”), which provides for grants of stock-based awards to employees, executive officers and directors, and replaced the Predecessor CIT Group Inc. Long-Term Incentive Plan (the “Prior Plan”). The number of shares of common stock that may be issued for all pur- poses under the LTIP is 10,526,316. Currently under the LTIP, the issued and unvested awards consists mainly of Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”). Compensation expense related to equity-based awards are mea- sured and recorded in accordance with ASC 718, Stock Compensation. The fair value of RSUs and PSUs are based on the fair market value of CIT’s common stock on the date of grant. Compensation expense is recognized over the vesting period (requisite service period), which is generally three years for restricted stock/units, under the graded vesting method, whereby each vesting tranche of the award is amortized separately as if each were a separate award. Compensation expenses for PSUs that cliff vest are recognized over the vesting period, which is generally three years, and on a straight-line basis. Operating expenses includes $72.9 million of compensation expense related to equity-based awards granted to employees or members of the Board of Directors for the year ended December 31, 2015, includ- ing $72.6 million related to restricted and retention stock and unit awards and the remaining related to stock purchases. Compensation expense related to equity-based awards included $48.8 million in 2014 and $52.5 million in 2013. Total unrecognized compensation cost related to nonvested awards was $27.4 million at December 31, 2015. That cost is expected to be recognized over a weighted average period of 1.5 years. Employee Stock Purchase Plan In December 2010, the Company adopted the CIT Group Inc. 2011 Employee Stock Purchase Plan (the “ESPP”), which was approved by shareholders in May 2011. Eligibility for participation in the ESPP includes employees of CIT and its participating sub- sidiaries who are customarily employed for at least 25 hours per week, except that any employees designated as highly compen- sated are not eligible to participate in the ESPP. The ESPP is available to employees in the United States and to certain international employees. Under the ESPP, CIT is authorized to issue up to 2,000,000 shares of common stock to eligible employ- ees. Eligible employees can choose to have between 1% and 10% of their base salary withheld to purchase shares quarterly, at a purchase price equal to 85% of the fair market value of CIT com- mon stock on the last business day of the quarterly offering period. The amount of common stock that may be purchased by a participant through the ESPP is generally limited to $25,000 per year. A total of 46,770, 31,497 and 25,490 shares were purchased under the plan in 2015, 2014 and 2013, respectively. Restricted Stock Units and Performance Stock Units Under the LTIP, RSUs and PSUs are awarded at no cost to the recipient upon grant. RSUs are generally granted annually at the discretion of the Company, but may also be granted during the year to new hires or for retention or other purposes. RSUs granted to employees and members of the Board during 2015 and 2014 generally were scheduled to vest either one third per year for three years or 100% after three years. During 2015, reten- tion RSUs scheduled to vest 100% after nine months were granted to certain key employees in connection with the acquisi- tion of OneWest Bank. Beginning in 2014, RSUs granted to employees were also subject to performance-based vesting based on the Company’s pre-tax income results. A limited num- ber of vested stock awards are scheduled to remain subject to transfer restrictions through the first anniversary of the grant date for members of the Board who elected to receive stock in lieu of cash compensation for their retainer. Certain RSUs granted to directors, and in limited instances to employees, are designed to settle in cash and are accounted for as “liability” awards as pre- scribed by ASC 718. The values of these cash-settled RSUs are re-measured at the end of each reporting period until the award is settled. The Company awarded two forms of PSUs to certain senior executives during 2015, versus one form during 2014. The first form of 2015 PSUs, “2015 PSUs-ROA/EPS,” are broadly similar to the design on the 2014 PSU awards, which may be earned at the end of a three-year performance period from 0% to 150% of tar- get based on performance against two pre-established performance measures: fully diluted EPS (weighted 75%) and pre- tax ROA (weighted 25%). The second form of 2015 PSUs, “2015 PSUs-ROTCE,” are earned in each year during a three-year per- formance period from 0% to a maximum of 150% of target based on pre-tax ROTC as follows: (1) one-third based on the pre-tax ROTCE for the first year of the performance period; (2) one-third based on the average pre-tax ROTCE for the first two years of the performance period; and (3) one-third based on the three-year average ROTCE during the performance period. Performance measures have a minimum threshold level of performance that must be achieved to trigger any payout; if the threshold level of performance is not achieved, then no portion of the PSU target will be payable. Achievement against either performance mea- sures is calculated independently of the other performance measure and each measure is weighted equally. The fair value of restricted stock and RSUs that vested and settled in stock during 2015, 2014 and 2013 was $56.2 million, $42.8 million and $38.6 million, respectively. The fair value of RSUs that vested and settled in cash during 2015, 2014 and 2013 was $0.2 million, $0.2 million and $0.4 million, respectively. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize restricted stock and RSU activity for 2015 and 2014: Stock and Cash — Settled Awards Outstanding Stock-Settled Awards Cash-Settled Awards CIT ANNUAL REPORT 2015 189 Unvested at beginning of period Vested / unsettled awards at beginning of period PSUs – granted to employees PSUs – incremental for performance above 2012-14 targets RSUs – granted to employees RSUs – granted to directors Forfeited / cancelled Vested / settled awards Vested / unsettled awards Unvested at end of period December 31, 2014 Number of Shares 2,268,484 25,255 445,020 102,881 2,001,931 28,216 (173,903) (1,273,961) (39,626) 3,384,297 Weighted Average Grant Date Value $44.22 40.38 45.88 45.88 45.36 46.22 45.30 42.50 40.46 $45.55 Unvested at beginning of period 2,219,463 $41.51 Vested / unsettled Stock Salary at beginning of period PSUs – granted to employees RSUs – granted to employees RSUs – granted to directors Forfeited / cancelled Vested / settled awards Vested / unsettled Stock Salary Awards Unvested at end of period NOTE 21 — COMMITMENTS 15,066 138,685 905,674 35,683 (107,445) (913,387) (25,255) 41.46 47.77 47.71 43.07 43.87 41.70 40.38 2,268,484 $44.22 Number of Shares 6,353 1,082 Weighted Average Grant Date Value $41.99 39.05 – – – 6,166 – (3,978) – 9,623 5,508 2,165 – – 4,046 – (4,284) (1,082) 6,353 – – – 46.42 – 40.85 – $44.97 $41.93 39.05 – – 42.01 – 41.20 39.05 $41.99 The accompanying table summarizes credit-related commitments, as well as purchase and funding commitments: Commitments (dollars in millions) Financing Commitments Financing assets Letters of credit Standby letters of credit Other letters of credit Guarantees Deferred purchase agreements Guarantees, acceptances and other recourse obligations Purchase and Funding Commitments Aerospace purchase commitments Rail and other purchase commitments December 31, 2015 Due to Expire Within One Year After One Year Total Outstanding December 31, 2014 Total Outstanding $1,646.3 5,739.3 $7,385.6 $ 4,747.9 38.2 18.3 1,806.5 0.7 448.7 747.1 277.1 – – – 315.3 18.3 360.1 28.3 1,806.5 1,854.4 0.7 2.8 9,169.4 151.1 9,618.1 898.2 10,820.4 1,323.2 Item 8: Financial Statements and Supplementary Data 190 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financing Commitments Commercial Financing commitments, referred to as loan commitments or lines of credit, reflect CIT’s agreements to lend to its customers, sub- ject to the customers’ compliance with contractual obligations. Included in the table above are commitments that have been extended to and accepted by customers, clients or agents, but on which the criteria for funding have not been completed of $859 million at December 31, 2015 and $355 million at December 31, 2014. Financing commitments also include credit line agreements to Commercial Services clients that are cancel- lable by us only after a notice period. The notice period is typically 90 days or less. The amount available under these credit lines, net of the amount of receivables assigned to us, was $406 million at December 31, 2015 and $112 million at December 31, 2014. As financing commitments may not be fully drawn, may expire unused, may be reduced or cancelled at the customer’s request, and may require the customer to be in com- pliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements. The table above includes approximately $1.7 billion of undrawn financing commitments at December 31, 2015 and $1.3 billion at December 31, 2014 for instances where the customer is not in compliance with contractual obligations, and therefore CIT does not have the contractual obligation to lend. At December 31, 2015, substantially all undrawn financing com- mitments were senior facilities. Most of the Company’s undrawn and available financing commitments are in the Commercial Banking division of NAB. The OneWest Transaction added over $1 billion of commercial lines of credit. The table above excludes uncommitted revolving credit facilities extended by Commercial Services to its clients for working capital purposes. In connection with these facilities, Commercial Services has the sole discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and whether to honor any specific advance requests made by its clients under these credit facilities. Consumer Financing commitments in the table above include $50 million associated with discontinued operations at December 31, 2015, consisting of HECM reverse mortgage loan commitments. In conjunction with the OneWest Transaction, the Company is committed to fund draws on certain reverse mortgages in con- junction with loss sharing agreements with the FDIC. The FDIC agreed to indemnify the Company for losses on the first $200 mil- lion of draws that occur subsequent to the purchase date. In addition, the FDIC agreed to fund any other draws in excess of the $200 million. The Company’s net exposure for loan commit- ments on the reverse mortgage draws on those purchased loans was $48 million at December 31, 2015. See Note 5 — Indemnifi- cation Assets for further discussion on loss sharing agreements with the FDIC. In addition, as servicer of HECM loans, the Com- pany is required to repurchase the loan out of the GNMA HMBS securitization pools once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. Also included was the Company’s commitment to fund draws on certain home equity lines of credit (“HELOCs”). Under the HELOC participation and servicing agreement entered into with the FDIC, the FDIC agreed to reimburse the Company for a portion of the draws that the Company made on the purchased HELOCs. Letters of Credit In the normal course of meeting the needs of clients, CIT some- times enters into agreements to provide financing and letters of credit. Standby letters of credit obligate the issuer of the letter of credit to pay the beneficiary if a client on whose behalf the letter of credit was issued does not meet its obligation. These financial instruments generate fees and involve, to varying degrees, ele- ments of credit risk in excess of amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, CIT generally requires collateral and in some cases additional forms of credit support from the client. Deferred Purchase Agreements A Deferred Purchase Agreement (“DPA”) is provided in conjunc- tion with factoring, whereby CIT provides a client with credit protection for trade receivables without purchasing the receiv- ables. The trade receivable terms are generally ninety days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, then CIT purchases the receivable from the client. The outstanding amount in the table above is the maximum potential exposure that CIT would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring CIT to purchase all such receivables from the DPA clients. The table above includes $1,720 million and $1,775 million of DPA credit protection at December 31, 2015 and December 31, 2014, respectively, related to receivables which have been presented to us for credit protection after shipment of goods has occurred and the customer has been invoiced. The table also includes $87 million and $79 million available under DPA credit line agreements, net of the amount of DPA credit protection provided at December 31, 2015 and December 31, 2014, respectively. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period. The notice period is typically 90 days or less. The methodology used to determine the DPA liability is similar to the methodology used to determine the allowance for loan losses associated with the finance receivables, which reflects embedded losses based on various factors, including expected losses reflecting the Company’s internal customer and facility credit rat- ings. The liability recorded in Other Liabilities related to the DPAs totaled $4.4 million and $5.2 million at December 31, 2015 and December 31, 2014, respectively. Purchase and Funding Commitments CIT’s purchase commitments relate primarily to purchases of commercial aircraft and rail equipment. Commitments to pur- chase new commercial aircraft are predominantly with Airbus Industries (“Airbus”) and The Boeing Company (“Boeing”). CIT may also commit to purchase an aircraft directly from an airline. Aerospace equipment purchases are contracted for specific mod- CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CIT ANNUAL REPORT 2015 191 els, using baseline aircraft specifications at fixed prices, which reflect discounts from fair market purchase prices prevailing at the time of commitment. The delivery price of an aircraft may change depending on final specifications. Equipment purchases are recorded at the delivery date. The estimated commitment amounts in the preceding table are based on contracted pur- chase prices reduced for pre-delivery payments to date and exclude buyer furnished equipment selected by the lessee. Pur- suant to existing contractual commitments, 139 aircraft remain to be purchased from Airbus, Boeing and Embraer at December 31, 2015. Aircraft deliveries are scheduled periodically through 2020. Commitments exclude unexercised options to order addi- tional aircraft. The Company’s rail business entered into commitments to pur- chase railcars from multiple manufacturers. At December 31, 2015, approximately 6,800 railcars remain to be purchased from manufacturers with deliveries through 2018. Rail equipment pur- chase commitments are at fixed prices subject to price increases for certain materials. Other vendor purchase commitments primarily relate to Equip- ment Finance. Other Commitments The Company has commitments to invest in affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand. As of December 31, 2015, these commitments were $15.7 million. These commitments are recorded in accrued expenses and Other liabilities. In addition, as servicer of HECM loans, the Company is required to repurchase loans out of the GNMA HMBS securitization pools once the outstanding principal balance is equal to or greater than 98% of the maximum claim amount. Refer to Note 3 — Loans for further detail regarding the purchased HECM loans due to this servicer obligation. NOTE 22 — CONTINGENCIES Litigation CIT is involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regula- tory, and arbitration proceedings relating to matters that arise in connection with the conduct of its business (collectively, “Litiga- tion”). In view of the inherent difficulty of predicting the outcome of Litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, CIT cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, CIT estab- lishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can be reasonably estimated. Based on currently available information, CIT believes that the results of Litigation that is currently pending, taken together, will not have a material adverse effect on the Company’s financial condition, but may be material to the Company’s operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such mat- ters may be substantially higher than the amounts reserved. For certain Litigation matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses in excess of established reserves and insurance. For other matters for which a loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation where losses are reasonably possible, management currently estimates the aggregate range of reasonably possible losses as up to $185 million in excess of established reserves and insurance related to those matters, if any. This estimate represents reason- ably possible losses (in excess of established reserves and insurance) over the life of such Litigation, which may span a cur- rently indeterminable number of years, and is based on information currently available as of December 31, 2015. The mat- ters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent the Company’s maximum loss exposure. The foregoing statements about CIT’s Litigation are based on the Company’s judgments, assumptions, and estimates and are nec- essarily subjective and uncertain. The Company has several hundred threatened and pending judicial, regulatory and arbitra- tion proceedings at various stages. Several of the Company’s Litigation matters are described below. LAC-ME´ GANTIC, QUEBEC DERAILMENT On July 6, 2013, a freight train including five locomotives and seventy-two tank cars carrying crude oil derailed in the town of Lac-Me´ gantic, Quebec. Nine of the tank cars were owned by The CIT Group/Equipment Financing, Inc. (“CIT/EF”) (a wholly-owned subsidiary of the Company) and leased to Western Petroleum Company (“WPC”), a subsidiary of World Fuel Services Corp. (“WFS”). Two of the locomotives were owned by CIT/EF and leased to Montreal, Maine & Atlantic Railway, Ltd. (“MMA”), a subsidiary of Rail World, Inc., the railroad operating the freight train at the time of the derailment. The derailment was followed by explosions and fire, which resulted in the deaths of over forty people and an unknown num- ber of injuries, the destruction of more than thirty buildings in Lac-Me´ gantic, and the release of crude oil on land and into the Chaudie` re River. The extent of the property and environmental damage has not yet been determined. Twenty lawsuits were filed in Illinois by representatives of the deceased in connection with the derailment. The Company was named as a defendant in seven of the Illinois lawsuits, together with 13 other defendants, including WPC, MMA (who was dismissed without prejudice as a result of its chapter 11 bankruptcy filing on August 7, 2013), and the lessors of the other locomotives and tank cars. Liability could be joint and several among some or all of the defendants. All but two of these cases were consolidated in the U.S. District Court in the Northern District of Illinois and transferred to the U.S. District Court in Maine. The Company was named as an additional defen- dant in a class action in the Superior Court of Quebec, Canada. Item 8: Financial Statements and Supplementary Data 192 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The plaintiffs in the U.S. and Canadian actions asserted claims of negligence and strict liability based upon alleged design defect against the Company in connection with the CIT/EF tank cars. The Company has rights of indemnification and defense against its lessees, WPC and MMA (a debtor in bankruptcy), and also has rights as an additional insured under liability coverage main- tained by the lessees. On July 28, 2014, the Company commenced a lawsuit against WPC in the U.S. District Court in the District of Minnesota to enforce its rights of indemnification and defense. In addition to its indemnification and insurance rights against its lessees, the Company and its subsidiaries main- tained contingent and general liability insurance for claims of this nature. The Lac-Me´ gantic derailment triggered a number of regulatory investigations and actions. The Transportation Safety Board of Canada issued its final report on the cause(s) of the derailment in September 2014. In addition, Quebec’s Environment Ministry has issued an order to WFS, WPC, MMA, and Canadian Pacific Rail- way (which allegedly subcontracted with MMA) to pay for the full cost of environmental clean-up and damage assessment related to the derailment. Effective on November 4, 2015, the Company settled all claims that have been or could be asserted in the various pending law- suits with MMA’s U.S. bankruptcy trustee and the Canadian bankruptcy monitor. In addition, the Company settled its indem- nification claims against the lessees. The settlements, net of insurance and indemnification recoveries and existing reserves were not material. BRAZILIAN TAX MATTERS Banco Commercial Investment Trust do Brasil S.A. (“Banco CIT”), CIT’s Brazilian bank subsidiary, was sold in a stock sale in the fourth quarter of 2015, thereby transferring the legal liabilities of Banco CIT to the buyer. Under the terms of the stock sale, CIT remains liable for indemnification to the buyer for any losses resulting from certain tax appeals relating to disputed local tax assessments on leasing services and importation of equipment (the “ICMS Tax Appeals”) . ICMS Tax Appeals Notices of infraction were received relating to the payment of Imposto sobre Circulaco de Mercadorias e Servicos (“ICMS”) taxes charged by states in connection with the importation of equipment. The state of São Paulo claims that Banco CIT should have paid it ICMS tax for tax years 2006 – 2009 because Banco CIT, the purchaser, was located in São Paulo. Instead, Banco CIT paid ICMS tax to the states of Espirito Santo where the imported equipment arrived. A regulation issued by São Paulo in Decem- ber 2013 reaffirms a 2009 agreement by São Paulo to conditionally recognize ICMS tax payments made to Espirito Santo. One of the pending notices of infraction against Banco CIT related to taxes paid to Espirito Santo was extinguished in May 2014. Another assessment related to taxes paid to Espirito Santo in the amount of 71.1 million Reais ($18.0 million) was upheld in a ruling issued by the administrative court in May 2014. That ruling has been appealed. Another assessment related to taxes paid to Espirito Santo in the amount of 5.8 million Reais ($1.5 million) is pending. Petitions seeking recognition of the taxes paid to Espirito Santo have been filed in a general amnesty program. The amounts claimed by São Paulo collectively for open ICMS tax assessments and penalties are approximately 76.9 mil- lion Reais ($19.4 million) for goods imported into the state of Espirito Santo from 2006 – 2009. ISS Tax Appeals Notices of infraction were received relating to the payment of Imposto sobre Serviços (“ISS”), charged by municipalities in con- nection with services. The Brazilian municipalities of Itu and Cascavel claim that Banco CIT should have paid them ISS tax on leasing services for tax years 2006 – 2011. Instead, Banco CIT paid the ISS tax to Barueri, the municipality in which it is domi- ciled in São Paulo, Brazil. The disputed issue is whether the ISS tax should be paid to the municipality in which the leasing com- pany is located or the municipality in which the services were rendered or the customer is located. One of the pending ISS tax matters was resolved in favor of Banco CIT in April 2014. The amounts claimed by the taxing authorities of Itu and Cascavel collectively for open tax assessments and penalties are approxi- mately 533,000 Reais (approximately $135,000). Favorable legal precedent in a similar tax appeal has been issued by Brazil’s high- est court resolving the conflict between municipalities. ICMS Tax Rate Appeal A notice of infraction was received relating to São Paulo’s chal- lenge of the ICMS tax rate paid by Banco CIT for tax years 2004 – 2007. São Paulo alleges that Banco CIT paid a lower rate of ICMS tax on imported equipment than was required (8.8% instead of 18%). Banco CIT challenged the notice of infraction and was par- tially successful based upon the type of equipment imported. Banco CIT has commenced a judicial proceeding challenging the unfavorable portion of the administrative ruling. The amount claimed by São Paulo for tax assessments and penalties is approximately 4 million Reais (approximately $1.0 million). HUD OIG INVESTIGATION In 2009, OneWest Bank acquired the reverse mortgage loan port- folio and related servicing rights of Financial Freedom Senior Funding Corporation, including HECM loans, from the FDIC as Receiver for IndyMac Federal Bank. HECM loans are insured by the Federal Housing Administration (“FHA”), administered by the Department of Housing and Urban Development (“HUD”). Sub- ject to certain requirements, the loans acquired from the FDIC are covered by indemnification agreements. In addition, Financial Freedom is the servicer of HECM loans owned by the Federal National Mortgage Association (FNMA) and other third party investors. In the third and fourth quarters of 2015, HUD’s Office of Inspector General (“OIG”), served subpoenas on the Company regarding HECM loans. The subpoenas request documents and other information related to the servicing of HECM loans and the curtailment of interest payments on HECM loans. The Company is responding to the subpoenas and does not have sufficient information to make an assessment of the outcome or the impact of the HUD OIG investigation. CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Servicer Obligations NOTE 23 — LEASE COMMITMENTS CIT ANNUAL REPORT 2015 193 As a servicer of residential mortgage loans, the Company is exposed to contingent obligations for breaches of servicer obli- gations as set forth in industry regulations established by HUD and FHA and in servicing agreements with the applicable coun- terparties, such as Fannie Mae and other investors, which could include fees imposed for failure to comply with foreclosure time- frame requirements. The Company has established reserves for contingent servicing- related liabilities associated with continuing operations. While the Company believes that such accrued liabilities are adequate, it is reasonably possible that such losses could ultimately exceed the Company’s liability for probable and reasonably estimable losses by up to approximately $5 million. Indemnification Obligations In connection with the OneWest acquisition, CIT assumed the obliga- tion to indemnify Ocwen Loan Servicing, LLC (“Ocwen”) against certain claims that may arise from servicing errors which are deemed attributable to the period prior to June 2013, when OneWest sold its servicing business to Ocwen, such as repurchase demands, non- recoverable servicing advances and compensatory fees imposed by the GSEs for servicer delays in completing the foreclosure process within the prescribed timeframe established by the servicer guides or agreements. The Company’s indemnification obligations to Ocwen, exclusive of losses or repurchase obligations and certain Agency fees, are limited to an aggregate amount of $150.0 million and expire three years from closing (February 2017). Ocwen is responsible for liabilities arising from servicer obligations following the service trans- fer date because substantially all risks and rewards of ownership have been transferred, except for certain Agency fees or loan repurchase amounts on foreclosures completed on or before 90 days following the applicable transfer date. As of December 31, 2015, the cumula- tive indemnification obligation totaled approximately $47.0 million, which reduced the Company’s $150.0 million maximum potential indemnity obligation to Ocwen. Because of the uncertainty in the ultimate resolution and estimated amount of the indemnification obligation, it is reasonably possible that the obligation could exceed the Company’s recorded liability by up to approximately $15 million. In addition, CIT assumed OneWest Bank’s obligations to indem- nify Specialized Loan Servicing, LLC (“SLS”) against certain claims that may arise that are attributable to the period prior to Septem- ber 2013, the servicing transfer date, when OneWest sold a portion of its servicing business to SLS, such as repurchase demands and non-recoverable servicing advances. SLS is respon- sible for substantially all liabilities arising from servicer obligations following the service transfer date. Lease Commitments The following table presents future minimum rental payments under non-cancellable long-term lease agreements for premises and equipment at December 31, 2015: Future Minimum Rentals (dollars in millions) Years Ended December 31, 2016 2017 2018 2019 2020 Thereafter Total $ 56.6 47.0 44.7 41.7 35.2 80.0 $305.2 In addition to fixed lease rentals, leases generally require pay- ment of maintenance expenses and real estate taxes, both of which are subject to escalation provisions. Minimum payments include $67.1 million ($14.1 million for 2016) which will be recorded against the facility exiting liability when paid and there- fore will not be recorded as rental expense in future periods. Minimum payments have not been reduced by minimum sub- lease rentals of $60.3 million due in the future under non- cancellable subleases which will be recorded against the facility exiting liability when received. See Note 27 — “Severance and Facility Exiting Liabilities” for the liability related to closing facilities. Rental expense for premises, net of sublease income (including restructuring charges from exiting office space), and equipment, was as follows. The 2015 balances include five months of activity related to OneWest Bank. (dollars in millions) Premises Equipment Total Years Ended December 31, 2015 $30.6 6.4 $37.0 2014 $20.1 3.4 $23.5 2013 $19.0 3.0 $22.0 NOTE 24 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Steven Mnuchin, a Director and Vice Chairman of CIT and CIT Bank and previously the Chairman and CEO of IMB and Chairman of OneWest Bank, is also Chairman, CEO, and principal owner of Dune Capital Management LP, a privately owned investment firm (“Dune Capital”). Through Dune Capital, Mr. Mnuchin owns or controls interests in several entities that have made various investments in the media and entertainment industry, including Ratpac-Dune Entertainment LLC, a film investment business (“Ratpac-Dune”) and Relativity Media LLC, a media production and distribution company (“Relativity”). CIT Bank was a lender and participant in a $300 million credit facility provided to Ratpac-Dune, which is led by Bank of America and was entered into prior to the OneWest Transaction. As of September 30, 2015, CIT Bank had a commitment in the facility of $17.8 million. CIT Bank sold its interest in the loan on October 14, 2015 and it is no longer a related party transaction. Item 8: Financial Statements and Supplementary Data 194 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On October 2, 2014, Mr. Mnuchin purchased certain classes of equity interests in and was appointed as co-chairman of the Board of Relativity Holdings LLC (“Relativity“). As a result, several revolving credit facilities and term loan facilities that previously existed among OneWest Bank and certain other banks, as lend- ers, and certain subsidiaries and affiliates of Relativity (the ”Borrowers“), including one revolving credit facility that was increased in size after October 2, 2014, and certain deposits of the Borrowers with OneWest Bank, were considered to be related party transactions. Prior to October 2, 2014, James Wiatt, a direc- tor of both IMB and OneWest Bank, was also a director of Relativity. After Mr. Mnuchin joined the Board of Relativity on October 2, 2014, all subsequent actions between OneWest Bank and the Borrowers were approved by the full Board of OneWest Bank, excluding Mr. Mnuchin and Mr. Wiatt. As of December 31, 2015, the contractual loan commitments by CIT Bank, N.A. (for- merly OneWest Bank) to the Borrowers was $39.9 million, of which $38.5 million was outstanding, and the deposit totaled $40.7 million. Effective as of May 29, 2015, Mr. Mnuchin ceased to be co-chairman of the Board of Relativity. Relativity filed a volun- tary petition under Chapter 11 of the United States Bankruptcy Code on July 30, 2015 seeking protection for itself and certain of its subsidiaries. During the third quarter of 2015, Strategic Credit Partners Holdings LLC (the ”JV“), a joint venture between CIT Group Inc. (”CIT“) and TPG Special Situations Partners (”TSSP“), was formed. The JV will extend credit in senior-secured, middle- market corporate term loans, and, in certain circumstances, be a participant to such loans. Participation could be in corporate loans originated by CIT. The JV may acquire other types of loans, such as subordinate corporate loans, second lien loans, revolving loans, asset backed loans and real estate loans. During the year ended December 31, 2015, loans of $70 million were sold to the joint venture, while our investment is $4.6 million at December 31, 2015. CIT also maintains an equity interest of 10% in the JV. During 2014, the Company formed two joint ventures (collectively ”TC-CIT Aviation“) between CIT Aerospace and Century Tokyo Leasing Corporation (”CTL“). CIT records its net investment under the equity method of accounting. Under the terms of the agreements, TC-CIT Aviation will acquire commercial aircraft that will be leased to airlines around the globe. CIT Aerospace is responsible for arranging future aircraft acquisitions, negotiating leases, servicing the portfolio and administering the entities. Ini- tially, CIT Aerospace sold 14 commercial aircraft to TC-CIT Aviation in transactions with an aggregate value of approximately $0.6 billion, including nine aircraft sold in 2014 and five aircraft sold in the first quarter of 2015 these five aircraft were sold at an aggregate amount of $240 million). In addition to the initial 14 commercial aircraft, CIT sold 5 commercial aircraft with an aggre- gate value of $226 million in the year ended December 31, 2015. CIT also made and maintains a minority equity investment in TC-CIT Aviation in the amount of approximately $50 million. CTL made and maintains a majority equity interest in the joint venture and is a lender to the companies. CIT invests in various trusts, partnerships, and limited liability cor- porations established in conjunction with structured financing transactions of equipment, power and infrastructure projects. CIT’s interests in these entities were entered into in the ordi- nary course of business. Other assets included approximately $224 million and $73 million at December 31, 2015 and December 31, 2014, respectively, of investments in non- consolidated entities relating to such transactions that are accounted for under the equity or cost methods. The combination of investments in and loans to non-consolidated entities represents the Company’s maximum exposure to loss, as the Company does not provide guarantees or other forms of indemnification to non-consolidated entities. As of December 31, 2015, a wholly-owned subsidiary of the Com- pany subserviced loans for a related party with unpaid principal balances of $204.5 million. NOTE 25 — BUSINESS SEGMENT INFORMATION Management’s Policy in Identifying Reportable Segments CIT’s reportable segments are comprised of divisions that are aggregated into segments primarily based upon industry catego- ries, geography, target markets and customers served, and, to a lesser extent, the core competencies relating to product origina- tion, distribution methods, operations and servicing and the nature of their regulatory environment. This segment reporting is consistent with the presentation of financial information to the Board of Directors and executive management. Types of Products and Services Effective upon completion of the OneWest Transaction, CIT manages its business and reports financial results in four operat- ing segments: (1) Transportation & International Finance (TIF); (2) North America Banking (NAB); (3) Legacy Consumer Mortgages (LCM); and (4) Non-Strategic Portfolios (NSP). Portions of the operations of the acquired OneWest Bank are included in the NAB segment (previously North American Commercial Finance) and in a new segment, LCM. The activities in NAB related to OneWest Bank are included in Commercial Real Estate, Commercial Banking and Consumer Banking. The Company also created a new segment, LCM, which includes consumer loans that were acquired by OneWest Bank from the FDIC and that CIT may be reimbursed for a portion of future losses under the terms of a loss sharing agreement with the FDIC. The addition of OneWest Bank in segment reporting did not affect CIT’s historical consolidated results of operations. With the announced changes to CIT management, along with the Company’s exploration of alternatives for the commercial aero- space business, the Company will further refine segment reporting effective January 1, 2016. TIF offers secured lending and leasing products to midsize and larger companies across the aerospace, rail and maritime indus- tries. The segment’s international finance division, which includes corporate lending and equipment financing businesses in China, was transferred to AHFS. Revenues generated by TIF include rents collected on leased assets, interest on loans, fees, and gains from assets sold. NAB provides a range of lending, leasing and deposit products, as well as ancillary products and services, including factoring, cash management and advisory services, to small and medium- sized companies and consumers in the U.S. and in Canada. The CIT ANNUAL REPORT 2015 195 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS segment’s Canada business was transferred to AHFS. Lending products include revolving lines of credit and term loans and, depending on the nature and quality of the collateral, may be referred to as asset-based loans or cash flow loans. These are pri- marily composed of senior secured loans collateralized by accounts receivable, inventory, machinery & equipment, real estate, and intangibles, to finance the various needs of our cus- tomers, such as working capital, plant expansion, acquisitions and recapitalizations. Loans are originated through direct rela- tionships with borrowers or through relationships with private equity sponsors. The commercial banking group also originates qualified Small Business Administration (”SBA“) 504 and 7(a) loans. Revenues generated by NAB include interest earned on loans, rents collected on leased assets, fees and other revenue from banking and leasing activities and capital markets transac- tions, and commissions earned on factoring and related activities. NAB, through its 70 branches and on-line channel, also offers deposits and lending to borrowers who are buying or refinancing homes and custom loan products tailored to the clients’ financial needs. Products include checking, savings, certificates of deposit, residential mortgage loans, and investment advisory services. Consumer Banking also includes a private banking group that offers banking services to high net worth individuals. LCM holds the reverse mortgage and SFR mortgage portfolios acquired in the OneWest Transaction. Certain of these assets and related receivables include loss sharing arrangements with the FDIC, which will continue to reimburse CIT Bank, N.A. for certain losses realized due to foreclosure, short-sale, charge-offs or a restructuring of a single family residential mortgage loan pursu- ant to an agreed upon loan modification framework. NSP holds portfolios that we no longer considered strategic, which had all been sold as of December 31, 2015. The Company sold the Mexico and Brazil businesses in 2015, which combined included approximately $0.3 billion of assets held for sale. In con- junction with the closing of these transactions, we recognized a loss on sale, essentially all of which, $70 million pre-tax, was related to the recognition of CTA loss related to the Mexico and Brazil portfolios and the tax effect included in the provision for income taxes. Corporate and Other Certain items are not allocated to operating segments and are included in Corporate & Other. Some of the more significant items include interest income on investment securities, a portion of interest expense, primarily related to corporate liquidity costs (interest expense), mark-to-market adjustments on non-qualifying derivatives (Other Income), restructuring charges for severance and facilities exit activities (operating expenses), certain intan- gible asset amortization expenses (other expenses) and loss on debt extinguishments. Item 8: Financial Statements and Supplementary Data 196 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment Profit and Assets For the year ended December 31, 2015, amounts also include the acquired business activities of OneWest Bank for five months. Segment Pre-tax Income (Loss) (dollars in millions) For the year ended December 31, 2015 TIF NAB LCM NSP Corporate & Other Total CIT Interest income Interest expense Provision for credit losses Rental income on operating leases Other income Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses / loss on debt extinguishment Income (loss) from continuing operations before (provision) benefit for income taxes Select Period End Balances Loans Credit balances of factoring clients Assets held for sale Operating lease equipment, net For the year ended December 31, 2014 Interest income Interest expense Provision for credit losses Rental income on operating leases Other income Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses / loss on debt extinguishment $ 285.4 $ 987.8 $ 152.9 $ 33.6 $ 53.2 $ 1,512.9 (645.6) (20.3) 2,021.7 97.1 (558.4) (284.9) (135.2) 113.3 267.9 (82.1) (231.0) – (35.1) (5.0) – 0.4 – – (29.3) – 17.5 (89.4) – – (108.6) (1,103.5) – – (56.5) – – (160.5) 2,152.5 219.5 (640.5) (231.0) (293.8) (660.7) (42.9) (33.4) (140.1) (1,170.9) $ 655.1 $ 206.1 $ 70.3 $(101.0) $(252.0) $ 578.5 $ 3,542.1 $22,701.1 $5,428.5 $ – (1,344.0) 889.0 16,358.0 1,162.2 259.0 $ 289.4 $ 832.4 $ (650.4) (38.3) 1,959.9 69.9 (519.6) (285.4) (62.0) 97.4 318.0 (81.7) (196.8) – (301.9) (499.7) – – – – $ – – – – $31,671.7 (1,344.0) 2,092.4 16,617.0 $ 90.5 $ 14.2 $ 1,226.5 (82.1) 0.4 35.7 (57.6) (14.4) – (68.3) (0.2) – (24.9) – – (1,086.2) (100.1) 2,093.0 305.4 (615.7) (196.8) (74.6) (69.1) (945.3) $(102.1) $(148.3) $ 680.8 $ 0.1 $ – 380.1 – – – – – $19,495.0 (1,622.1) 1,218.1 14,930.4 – 41.2 – – – – – – – – – – – – – – Income (loss) from continuing operations before (provision) benefit for income taxes $ 612.2 $ 319.0 Select Period End Balances Loans Credit balances of factoring clients Assets held for sale Operating lease equipment, net $ 3,558.9 $15,936.0 – (1,622.1) 815.2 14,665.2 22.8 265.2 $ $ CIT ANNUAL REPORT 2015 197 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment Pre-tax Income (Loss) (dollars in millions) (continued) For the year ended December 31, 2013 TIF NAB LCM Interest income Interest expense Provision for credit losses Rental income on operating leases Other income Depreciation on operating lease equipment Maintenance and other operating lease costs Operating expenses / loss on debt extinguishment $ 254.9 $ 828.6 $ (585.5) (18.7) 1,682.4 82.2 (433.3) (163.0) (284.3) (35.5) 104.0 306.5 (75.1) – (255.3) (479.5) Income (loss) from continuing operations before (provisions) benefit for income taxes $ 563.7 $ 364.7 Select Period End Balances Loans Credit balances of factoring clients Assets held for sale Operating lease equipment, net Geographic Information $ 3,494.4 $14,693.1 – (1,336.1) 158.5 12,778.5 38.2 240.5 $ $ – – – – – – – – – – – – – NSP $ 157.2 (130.2) (10.8) 111.0 (14.6) (32.2) (0.1) (143.1) Corporate & Other Total CIT $ 14.5 $ 1,255.2 (60.9) (1,060.9) 0.1 – 7.2 – – (64.9) 1,897.4 381.3 (540.6) (163.1) (92.3) (970.2) $ (62.8) $(131.4) $ 734.2 $ 441.7 $ – 806.7 16.4 – – – – $18,629.2 (1,336.1) 1,003.4 13,035.4 The following table presents information by major geographic region based upon the location of the Company’s legal entities. Geographic Region (dollars in millions) U.S.(1) Europe Other foreign(2) (3) Total consolidated 2015 2014 2013 2015 2014 2013 2015 2014 2013 2015 2014 Total Assets(1) $55,550.4 $34,985.8 $34,121.0 $ 8,390.9 $ 7,950.5 $ 7,679.6 $ 3,557.5 $ 4,943.7 $ 5,338.4 $67,498.8 $47,880.0 Total Revenue from continuing operations Income from continuing operations before benefit (provision) for income taxes Income from continuing operations before attribution of noncontrolling interests $2,565.3 $2,174.3 $2,201.7 $ 769.2 $ 857.7 $ 807.4 $ 550.4 $ 592.9 $ 524.8 $3,884.9 $3,624.9 $238.8 $342.4 $374.2 $149.0 $161.2 $167.3 $190.7 $177.2 $192.7 $578.5 $680.8 $ 808.7 $ 740.9 $ 354.6 $ 101.0 $ 175.4 $ 121.5 $ 157.2 $ 162.4 $ 174.2 $1,066.9 $1,078.7 $ 650.3 (1) Includes Assets of discontinued operation of $500.5 million at December 31, 2015, none at December 31, 2014 and $3,821.4 million at December 31, 2013. (2) Includes Canada region results which had income before income taxes of $131.9 million in 2015, and $72.6 million in 2014, and $79.5 million in 2013 and $47,139.0 $3,533.9 $734.2 2013 income before noncontrolling interest of $98.2 million in 2015, $57.4 million in 2014, and $69.2 million in 2013. (3) Includes Caribbean region results which had income before income taxes of $42.2 million in 2015, and $161.0 million in 2014, and $103.3 million in 2013 and income before noncontrolling interest of $48.9 million in 2015, $161.7 million in 2014, and $103.4 million in 2013. Item 8: Financial Statements and Supplementary Data 198 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 — GOODWILL AND INTANGIBLE ASSETS The following table summarizes goodwill balances by segment: Goodwill (dollars in millions) December 31, 2013 Additions, Other activity(1) December 31, 2014 Additions(2) Other activity(3) December 31, 2015 TIF $183.1 68.9 252.0 – (7.0) $245.0 NAB $151.5 167.8 319.3 376.1 (29.0) $666.4 $ LCM – – – 286.9 – $286.9 Total $ 334.6 236.7 571.3 663.0 (36.0) $1,198.3 (1) Includes adjustments related to purchase accounting and foreign exchange translation. (2) Includes measurement period adjustments related to the OneWest transaction, as described below. (3) Includes adjustments related to transfer to held for sale and foreign exchange translation. The December 31, 2014 goodwill included amounts from CIT’s emergence from bankruptcy in 2009, and its 2014 acquisitions of Capital Direct Group and its subsidiaries (”Direct Capital“), and Nacco, an independent full service railcar lessor. On January 31, 2014, CIT acquired 100% of the outstanding shares of Paris-based Nacco, an independent full service railcar lessor in Europe. The purchase price was approximately $250 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date, resulting in $77 million of goodwill. On August 1, 2014, CIT Bank acquired 100% of Direct Capital, a U.S. based lender providing equipment financing to small and mid- sized businesses operating across a range of industries. The purchase price was approximately $230 million and the acquired assets and liabilities were recorded at their estimated fair values as of the acquisition date resulting in approximately $170 million of goodwill. In addition, intangible assets of approximately $12 million were recorded relating mainly to the valuation of existing customer relationships and trade names. The 2015 addition relates to the OneWest Transaction. On August 3, 2015 CIT acquired 100% of IMB HoldCo LLC, the parent company of OneWest Bank. The purchase price was approxi- mately $3.4 billion and the acquired assets and liabilities were recorded during the third quarter 2015 at their estimated fair value as of the acquisition date resulting in $598 million of good- will recorded in the third quarter of 2015. The determination of estimated fair values required management to make certain esti- mates about discount rates, future expected cash flows (that may reflect collateral values), market conditions and other future Intangible Assets (dollars in millions) events that are highly subjective in nature and may require adjustments, which can be updated throughout the year follow- ing the acquisition. Subsequent to the acquisition, management continued to review information relating to events or circum- stances existing at the acquisition date. This review resulted in adjustments to the acquisition date valuation amounts, which increased the goodwill balance to $663.0 million. $286.9 million of the goodwill balance is associated with the LCM business seg- ment. As the LCM segment is currently running off, we expect that the goodwill balance will become impaired in the future as the cash flows generated by the segment decrease over time. The remaining goodwill was allocated to the Commercial Bank- ing, Consumer Banking and Commercial Real Estate reporting units in NAB. Additionally, intangible assets of approximately $165 million were recorded relating mainly to the valuation of core deposit intangibles, trade name and customer relationships, as detailed in the table below. Once goodwill has been assigned, it no longer retains its associa- tion with a particular event or acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of goodwill. Intangible Assets The following table presents the gross carrying value and accu- mulated amortization for intangible assets, excluding fully amortized intangible assets. Core deposit intangibles Trade names Operating lease rental intangibles Customer relationships Other Total intangible assets Gross Carrying Amount $126.3 27.4 35.1 23.9 2.1 December 31, 2015 December 31, 2014 Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount $ (7.5) $118.8 $ – $ – $ – (3.0) (24.2) (3.2) (0.6) 24.4 10.9 20.7 1.5 7.4 42.7 7.2 0.5 (0.5) (31.2) (0.4) – 6.9 11.5 6.8 0.5 $214.8 $(38.5) $176.3 $57.8 $(32.1) $25.7 CIT ANNUAL REPORT 2015 199 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The addition to intangible assets in 2015 reflects the OneWest Bank Transaction. The largest component related to the valuation of core deposits. Core deposit intangibles (”CDIs“) represent future benefits arising from non-contractual customer relation- ships (e.g., account relationships with the depositors) acquired from the purchase of demand deposit accounts, including inter- est and non-interest bearing checking accounts, money market and savings accounts. CDIs have a finite life and are amortized on a straight line basis over the estimated useful life of seven years. Amortization expense for the intangible assets is recorded in Operating expenses. In preparing the interim financial statements for the quarter ended September 30, 2015, the Company discovered and cor- rected an immaterial error impacting the accumulated amortization on the intangible assets which resulted in a decrease of $35 million in the intangible asset accumulated amor- tization as of December 31, 2014. In addition, we have excluded fully amortized intangible assets from all amounts. The following table presents the changes in intangible assets: Intangible Assets Rollforward (dollars in millions) December 31, 2013 Additions Amortization, Other(1) December 31, 2014 Additions(2) Amortization(1) Other(3) December 31, 2015 $ Customer Relationships – 7.2 (0.4) $ 6.8 16.6 (2.7) – $20.7 Core Deposit Intangibles – $ – – – 126.3 (7.5) – $118.8 $ $ Trade Names – 7.8 (0.9) $ 6.9 20.1 (2.4) (0.2) $24.4 Operating Lease Rental Intangibles $20.3 (3.6) (5.2) $11.5 4.4 (5.0) – $10.9 Other – $ 0.5 – $ 0.5 1.7 (0.7) – $ 1.5 Total $ 20.3 11.9 (6.5) $ 25.7 169.1 (18.3) (0.2) $176.3 (1) Includes amortization recorded in operating expenses and operating lease rental income. (2) Includes measurement period adjustments related to the OneWest Transaction. (3) Includes foreign exchange translation and other miscellaneous adjustments. Intangible assets prior to the OneWest Transaction included the operating lease rental intangible assets comprised of amounts related to net favorable (above current market rates) operating leases. The net intangible asset will be amortized as an offset to rental income over the remaining life of the leases, generally 5 years or less. The intangible assets also include approximately $9.5 million, net, related to the valuation of existing customer relationships and trade names recorded in conjunction with the acquisition of Direct Capital in 2014. Accumulated amortization totaled $38.5 million at December 31, 2015, primarily related to intangible assets recorded prior to the OneWest Transaction. Projected amortization for the years ended December 31, 2016 through December 31, 2020 is approximately $29.0 million, $26.6 million, $26.1 million, $25.6 million, and $25.0 million, respectively. NOTE 27 — SEVERANCE AND FACILITY EXITING LIABILITIES The following table summarizes liabilities (pre-tax) related to closing facilities and employee severance: Severance and Facility Exiting Liabilities (dollars in millions) December 31, 2013 Additions and adjustments Utilization December 31, 2014 Additions and adjustments Utilization December 31, 2015 Severance Facilities Number of Employees 125 150 (228) 47 74 (68) 53 Liability $ 17.7 28.8 (37.8) 8.7 38.7 (10.5) $ 36.9 Number of Facilities 15 2 (5) 12 2 (6) 8 Liability $33.3 (2.2) (7.4) 23.7 1.6 (6.2) $19.1 Total Liabilities $ 51.0 26.6 (45.2) 32.4 40.3 (16.7) $ 56.0 CIT continued to implement various organization efficiency and cost reduction initiatives, such as our international rationalization activities and CIT announced a reorganization of management in the 2015 fourth quarter. The severance additions primarily relate to employee termination benefits incurred in conjunction with these initiatives. The facility additions primarily relate to location closings and consolida- tions in connection with these initiatives. These additions, along with charges related to accelerated vesting of equity and other benefits, were recorded as part of the $58.2 million and $31.4 million provi- sions for the years ended December 31, 2015 and 2014, respectively. Item 8: Financial Statements and Supplementary Data 200 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 28 — PARENT COMPANY FINANCIAL STATEMENTS The following tables present the Parent Company only financial statements: Condensed Parent Company Only Balance Sheets (dollars in millions) Assets: Cash and deposits Cash held at bank subsidiary Securities purchased under agreements to resell Investment securities Receivables from nonbank subsidiaries Receivables from bank subsidiaries Investment in nonbank subsidiaries Investment in bank subsidiaries Goodwill Other assets Total Assets Liabilities and Equity: Borrowings Liabilities to nonbank subsidiaries Other liabilities Total Liabilities Total Stockholders’ Equity Total Liabilities and Equity December 31, 2015 December 31, 2014 $ 1,014.5 15.3 – 300.1 8,951.4 35.6 4,998.8 5,606.4 319.6 2,158.9 $ 1,432.6 20.3 650.0 1,104.2 10,735.2 321.5 6,600.1 2,716.4 334.6 1,625.2 $23,400.6 $25,540.1 $10,677.7 $11,932.4 1,049.7 695.1 $12,422.5 10,978.1 $23,400.6 3,924.1 614.7 $16,471.2 9,068.9 $25,540.1 Condensed Parent Company Only Statements of Income and Comprehensive Income (dollars in millions) Income Interest income from nonbank subsidiaries $ 435.1 $ 560.3 $ 636.6 Years Ended December 31, 2015 2014 2013 Interest and dividends on interest bearing deposits and investments Dividends from nonbank subsidiaries Dividends from bank subsidiaries Other income from subsidiaries Other income Total income Expenses Interest expense Interest expense on liabilities to subsidiaries Other expenses Total expenses Income (loss) before income taxes and equity in undistributed net income of subsidiaries Benefit for income taxes Income before equity in undistributed net income of subsidiaries Equity in undistributed net income of bank subsidiaries Equity in undistributed net income of nonbank subsidiaries Net income Other Comprehensive income (loss) income, net of tax Comprehensive income 3.2 630.3 459.2 (138.8) 128.8 1.4 526.8 39.4 (62.4) 103.8 2.0 551.1 15.5 35.3 (4.6) 1,517.8 1,169.3 1,235.9 (570.7) (43.9) (267.2) (881.8) 636.0 827.2 1,463.2 (248.1) (158.5) 1,056.6 (8.2) $1,048.4 (649.6) (166.4) (199.4) (686.9) (199.6) (220.4) (1,015.4) (1,106.9) 153.9 769.6 923.5 83.8 122.7 1,130.0 (60.3) $ 1,069.7 129.0 367.9 496.9 95.9 82.9 675.7 4.1 679.8 $ CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Parent Company Only Statements of Cash Flows (dollars in millions) CIT ANNUAL REPORT 2015 201 Cash Flows From Operating Activities: Net income Equity in undistributed earnings of subsidiaries Other operating activities, net Net cash flows (used in) provided by operations Cash Flows From Investing Activities: Decrease (increase) in investments and advances to subsidiaries Acquisitions Decrease (increase) in Investment securities and securities purchased under agreements to resell Net cash flows provided by (used in) investing activities Cash Flows From Financing Activities: Proceeds from the issuance of term debt Repayments of term debt Repurchase of common stock Dividends paid Net change in advances from subsidiaries Net cash flows (used in) provided by financing activities Net (decrease) increase in unrestricted cash and cash equivalents Unrestricted cash and cash equivalents, beginning of period Unrestricted cash and cash equivalents, end of period Years Ended December 31, 2015 2014 2013 $ 1,056.6 $ 1,130.0 $ 675.7 406.6 (588.6) 874.6 620.1 (1,559.5) 1,454.1 514.7 (206.5) (735.4) 188.1 (92.6) – 342.3 249.7 – 991.3 (1,256.7) (1,603.0) (531.8) (114.9) 91.0 (1,812.4) (423.1) 1,452.9 (775.5) (95.3) 902.1 (580.4) (142.6) 1,595.5 (178.8) (88.2) 408.7 21.0 – (1,346.2) (1,325.2) 735.2 (60.5) (193.4) (20.1) 728.2 1,189.4 272.9 1,322.6 $ 1,029.8 $ 1,452.9 $ 1,595.5 Item 8: Financial Statements and Supplementary Data 202 CIT ANNUAL REPORT 2015 CIT GROUP AND SUBSIDIARIES — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 29 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following data presents quarterly data: Selected Quarterly Financial Data (dollars in millions) For the year ended December 31, 2015 Interest income Interest expense Provision for credit losses Rental income on operating leases Other income Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses Loss on debt extinguishment Benefit (provision) for income taxes Net loss attributable to noncontrolling interests, after tax Loss from discontinued operations, net of taxes Net income Net income per diluted share For the year ended December 31, 2014 Interest income Interest expense Provision for credit losses Rental income on operating leases Other income Depreciation on operating lease equipment Maintenance and other operating lease expenses Operating expenses Loss on debt extinguishment Benefit (provision) for income taxes Net loss (income) attributable to noncontrolling interests, after tax Income (loss) from discontinued operation, net of taxes Net income Net income per diluted share NOTE 30 — SUBSEQUENT EVENTS Revolving Credit Facility Amendment On February 17, 2016 the Revolving Credit Facility was amended to extend the maturity date of the commitments to January 26, 2018, reduce the required minimum guarantor coverage from 1.50:1.0 to 1.375:1.0, and to include Fitch Ratings as a designated Rating Agency within the facilities terms and conditions. The total commitment amount is $1.5 billion consisting of a $1.15 billion Unaudited Fourth Quarter Third Quarter Second Quarter First Quarter $ 510.4 (286.7) (57.6) 550.9 30.4 (166.8) (79.6) (357.8) (2.2) 10.2 – (6.7) $ 144.5 $ 0.72 $ 306.2 (276.9) (15.0) 546.5 116.4 (153.2) (49.7) (248.8) (3.1) 28.3 1.3 (1.0) $ 251.0 $ 1.37 $ 437.7 (280.3) (49.9) 539.3 39.2 (159.1) (55.9) (333.9) (0.3) 560.0 – (3.7) $ 693.1 $ 3.61 $ 308.3 (275.2) (38.2) 535.0 24.2 (156.4) (46.5) (234.5) – 401.2 (2.5) (0.5) $ 514.9 $ 2.76 $ 283.8 (265.2) (18.4) 531.7 63.5 (157.8) (49.4) (235.0) (0.1) (37.8) – – $ 115.3 $ 0.66 $ 309.8 (262.2) (10.2) 519.6 93.7 (157.3) (49.0) (225.0) (0.4) (18.1) (5.7) 51.7 $ 246.9 $ 1.29 $ 281.0 (271.3) (34.6) 530.6 86.4 (156.8) (46.1) (241.6) – (44.0) 0.1 – $ 103.7 $ 0.59 $ 302.2 (271.9) (36.7) 491.9 71.1 (148.8) (51.6) (233.5) – (13.5) 5.7 2.3 $ 117.2 $ 0.59 revolving loan tranche and a $350 million revolving loan tranche that can also be utilized for the issuance of letters of credit. On the closing date, no amounts were drawn under the Revolving Credit Facility. However, there was approximately $0.1 billion uti- lized for the issuance of letters of credit. Any amounts drawn under the facility will be used for general corporate purposes. The Revolving Credit Agreement is unsecured and is guaranteed by certain of the Company’s domestic operating subsidiaries. CIT ANNUAL REPORT 2015 203 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Under the supervision of and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2015. On August 3, 2015, the Company acquired IMB HoldCo LLC in a purchase business combination. Management has excluded the acquired business from its assessment of the effectiveness of disclosure controls and procedures as of December 31, 2015. Based on such evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and proce- dures were effective. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal con- trol over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial state- ments for purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding pre- vention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future peri- ods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compli- ance with the policies or procedures may deteriorate. Management of CIT, including our principal executive officer and principal financial officer, conducted an evaluation of the effec- tiveness of the Company’s internal control over financial reporting as of December 31, 2015 using the criteria set forth by the Com- mittee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013). On August 3, 2015, the Company acquired IMB HoldCo LLC in a purchase business combination. Management has excluded the acquired business from its annual assessment of the effectiveness of internal control over financial reporting as of December 31, 2015. IMB HoldCo LLC is a wholly-owned subsidiary that repre- sented approximately 33% and 10% of our total consolidated assets and total consolidated revenue, respectively, as of and for the year ended December 31, 2015. Management concluded that the Company’s internal control over financial reporting, was effec- tive as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013). The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. MATERIAL WEAKNESS IN THE ACQUIRED BUSINESS’S INTER- NAL CONTROL OVER FINANCIAL REPORTING As discussed above, on August 3, 2015 the Company acquired IMB HoldCo LLC in a purchase business combination and has excluded the acquired entity from the December 31, 2015 evalua- tion of the effectiveness of internal control over financial reporting and disclosure controls and procedures. However, man- agement has identified a material weakness in the Financial Freedom reverse mortgage servicing business of IMB HoldCo LLC, which is reported in discontinued operations as of December 31, 2015 related to Home Equity Conversion Mort- gages (HECM) Interest Curtailment Reserve as described below. A material weakness is a deficiency, or combination of deficien- cies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Com- pany’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of the Company’s financial statements included in this annual report on Form 10-K, we iden- tified errors in the estimation process of the HECM interest curtailment reserve that resulted in a measurement period adjustment. In conjunction with the identification of the errors, management determined that a material weakness existed in the acquired business’s internal control over financial reporting related to the HECM Interest Curtailment Reserve. Specifically, controls are not adequately designed and maintained to ensure the key judg- ments and assumptions developed from loan file reviews or other historical experience are accurately determined, valid and autho- rized; the data used in the estimation process is complete and Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 204 CIT ANNUAL REPORT 2015 accurate; and the assumptions, judgments, and methodology continue to be appropriate. This control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. The identification of this control deficiency resulted in adjustments to the calculation of the HECM Interest Curtailment reserve. After performing analysis of the underlying data and assumptions, the reserve was adjusted to reflect the results of this analysis. Management concluded that the amounts and disclosures within the Company’s quarterly and annual finan- cial statements since the acquisition of IMB Holdco LLC are not materially misstated In response to the material weakness described above, the Company is in the process of designing procedures and controls to remediate the mate- rial weakness, with oversight from the Board of Directors. This remediation plan includes the following elements: 1) Implement a data quality control program. 2) Enhance controls over documentation of detailed data sources. Item 9B. Other Information None 3) Simplify the reserve estimation process and improve gover- nance, controls and documentation. Management believes that the new or enhanced controls, when implemented and when tested for a sufficient period of time, will remediate the material weakness described above. However, the Company cannot provide any assurance that these remediation efforts will be successful. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART THREE Item 10. Directors, Executive Officers and Corporate Governance The information called for by Item 10 is incorporated by reference from the information under the captions “Directors”, “Corporate Governance” and “Executive Officers” in our Proxy Statement for our 2016 annual meeting of stockholders. CIT ANNUAL REPORT 2015 205 Item 11. Executive Compensation The information called for by Item 11 is incorporated by reference from the information under the captions “Director Compensation”, “Executive Compensation”, including “Compensation Discussion and Analysis” and “2016 Compensation Committee Report” in our Proxy Statement for our 2016 annual meeting of stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information called for by Item 12 is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for our 2016 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information called for by Item 13 is incorporated by reference from the information under the captions “Corporate Governance- Director Independence” and “Related Person Transactions Policy” in our Proxy Statement for our 2016 annual meeting of stockholders. Item 14. Principal Accountant Fees and Services The information called for by Item 14 is incorporated by reference from the information under the caption “Proposal 2 — Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement for our 2016 annual meeting of stockholders. Item 10. Directors, Executive Officers and Corporate Governance 206 CIT ANNUAL REPORT 2015 PART FOUR Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed with the Securities and Exchange Commission as part of this report (see Item 8): 1. The following financial statements of CIT and Subsidiaries: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2015 and December 31, 2014. Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013. Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013. Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013. Notes to Consolidated Financial Statements. 2. All schedules are omitted because they are not applicable or because the required information appears in the Consolidated Finan- cial Statements or the notes thereto. (b) Exhibits 2.1 2.2 3.1 3.2 4.1 4.2 4.3 4.4 4.5 Agreement and Plan of Merger, by and among CIT Group Inc., IMB HoldCo LLC, Carbon Merger Sub LLC and JCF III HoldCo I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 25, 2014). Amendment No. 1, dated as of July 21, 2015, to the Agreement and Plan of Merger, by and among CIT Group Inc., IMB HoldCo I L.P., Carbon Merger Sub LLC and JCF III HoldCo I L.P., dated as of July 21, 2014 (incorporated by reference to Exhibit 2.1 to Form 8-K filed July 27, 2015). Third Amended and Restated Certificate of Incorporation of the Company, dated December 8, 2009 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 9, 2009). Amended and Restated By-laws of the Company, as amended through July 15, 2014 (incorporated by reference to Exhibit 99.1 to Form 8-K filed July 16, 2014). Indenture dated as of January 20, 2006 between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) for the issuance of senior debt securities (incorporated by reference to Exhibit 4.3 to Form S-3 filed January 20, 2006). First Supplemental Indenture dated as of February 13, 2007 between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) for the issuance of senior debt securities (incorporated by reference to Exhibit 4.1 to Form 8-K filed on February 13, 2007). Third Supplemental Indenture dated as of October 1, 2009, between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) relating to senior debt securities (incorporated by reference to Exhibit 4.4 to Form 8-K filed on October 7, 2009). Fourth Supplemental Indenture dated as of October 16, 2009 between CIT Group Inc. and The Bank of New York Mellon (as successor to JPMorgan Chase Bank N.A.) relating to senior debt securities (incorporated by reference to Exhibit 4.1 to Form 8-K filed October 19, 2009). Framework Agreement, dated July 11, 2008, among ABN AMRO Bank N.V., as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as amended by the Deed of Amendment, dated July 19, 2010, among The Royal Bank of Scotland N.V. (f/k/a ABN AMRO Bank N.V.), as arranger, Madeleine Leasing Limited, as initial borrower, CIT Aerospace International, as initial head lessee, and CIT Group Inc., as guarantor, as supplemented by Letter Agreement No. 1 of 2010, dated July 19, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, as amended and supplemented by the Accession Deed, dated July 21, 2010, among The Royal Bank of Scotland N.V., as arranger, Madeleine Leasing Limited, as original borrower, and Jessica Leasing Limited, as acceding party, as supplemented by Letter Agreement No. 2 of 2010, dated July 29, 2010, among The Royal Bank of Scotland N.V., as arranger, CIT Aerospace International, as head lessee, and CIT Group Inc., as guarantor, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets (incorporated by reference to Exhibit 4.11 to Form 10-K filed March 10, 2011). 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 CIT ANNUAL REPORT 2015 207 Form of All Parties Agreement among CIT Aerospace International, as head lessee, Madeleine Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.12 to Form 10-K filed March 10, 2011). Form of ECA Loan Agreement among Madeleine Leasing Limited, as borrower, various financial institutions, as original ECA lenders, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, and CIT Aerospace International, as servicing agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.13 to Form 10-K filed March 10, 2011). Form of Aircraft Head Lease between Madeleine Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.14 to Form 10-K filed March 10, 2011). Form of Proceeds and Intercreditor Deed among Madeleine Leasing Limited, as borrower and lessor, various financial institutions, ABN AMRO Bank N.V., Paris Branch, as French national agent, ABN AMRO Bank N.V., Niederlassung Deutschland, as German national agent, ABN AMRO Bank N.V., London Branch, as British national agent, ABN AMRO Bank N.V., London Branch, as ECA facility agent, ABN AMRO Bank N.V., London Branch, as security trustee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2008 and 2009 fiscal years (incorporated by reference to Exhibit 4.15 to Form 10-K filed March 10, 2011). Form of All Parties Agreement among CIT Aerospace International, as head lessee, Jessica Leasing Limited, as borrower and lessor, CIT Group Inc., as guarantor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, CIT Aerospace International, as servicing agent, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.16 to Form 10-K filed March 10, 2011). Form of ECA Loan Agreement among Jessica Leasing Limited, as borrower, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.17 to Form 10-K filed March 10, 2011). Form of Aircraft Head Lease between Jessica Leasing Limited, as lessor, and CIT Aerospace International, as head lessee, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.18 to Form 10-K filed March 10, 2011). Form of Proceeds and Intercreditor Deed among Jessica Leasing Limited, as borrower and lessor, various financial institutions, as original ECA lenders, Citibank International plc, as French national agent, Citibank International plc, as German national agent, Citibank International plc, as British national agent, The Royal Bank of Scotland N.V., London Branch, as ECA facility agent, The Royal Bank of Scotland N.V., London Branch, as security trustee, and Citibank, N.A., as administrative agent, relating to certain Export Credit Agency sponsored secured financings of aircraft and related assets during the 2010 fiscal year (incorporated by reference to Exhibit 4.19 to Form 10-K filed March 10, 2011). Indenture, dated as of March 30, 2011, between CIT Group Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed June 30, 2011). First Supplemental Indenture, dated as of March 30, 2011, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of 5.250% Note due 2014 and the Form of 6.625% Note due 2018) (incorporated by reference to Exhibit 4.2 to Form 8-K filed June 30, 2011). Third Supplemental Indenture, dated as of February 7, 2012, between CIT Group Inc., the Guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (including the Form of Notes) (incorporated by reference to Exhibit 4.4 of Form 8-K dated February 13, 2012). Item 15. Exhibits and Financial Statement Schedules 208 CIT ANNUAL REPORT 2015 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* Registration Rights Agreement, dated as of February 7, 2012, among CIT Group Inc., the Guarantors named therein, and JP Morgan Securities LLC, as representative for the initial purchasers named therein (incorporated by reference to Exhibit 10.1 of Form 8-K dated February 13, 2012). Amended and Restated Revolving Credit and Guaranty Agreement, dated as of January 27, 2014 among CIT Group Inc., certain subsidiaries of CIT Group Inc., as Guarantors, the Lenders party thereto from time to time and Bank of America, N.A., as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 28, 2014). Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (incorporated by reference to Exhibit 4.1 of Form 8-K filed March 16, 2012). First Supplemental Indenture, dated as of March 15, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.25% Senior Unsecured Note due 2018) (incorporated by reference to Exhibit 4.2 of Form 8-K filed March 16, 2012). Second Supplemental Indenture, dated as of May 4, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.000% Senior Unsecured Note due 2017 and the Form of 5.375% Senior Unsecured Note due 2020) (incorporated by reference to Exhibit 4.2 of Form 8-K filed May 4, 2012). Third Supplemental Indenture, dated as of August 3, 2012, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 4.25% Senior Unsecured Note due 2017 and the Form of 5.00% Senior Unsecured Note due 2022) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 3, 2012). Fourth Supplemental Indenture, dated as of August 1, 2013, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 5.00% Senior Unsecured Note due 2023) (incorporated by reference to Exhibit 4.2 to Form 8-K filed August 1, 2013). Fifth Supplemental Indenture, dated as of February 19, 2014, among CIT Group Inc., Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, security registrar and authenticating agent (including the Form of 3.875% Senior Unsecured Note due 2019) (incorporated by reference to Exhibit 4.2 to Form 8-K filed February 19, 2014). Second Amended and Restated Revolving Credit and Guaranty Agreement, dated as of February 17, 2016, among CIT Group Inc., certain subsidiaries of CIT Group Inc., as Guarantors, the Lenders party thereto from time to time and Bank of America, N.A., as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 18, 2016). Amended and Restated CIT Group Inc. Long-Term Incentive Plan (as amended and restated effective December 10, 2009) (incorporated by reference to Exhibit 4.1 to Form S-8 filed January 11, 2010). CIT Group Inc. Supplemental Retirement Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.27 to Form 10-Q filed May 12, 2008). CIT Group Inc. Supplemental Savings Plan (As Amended and Restated Effective as of January 1, 2008) (incorporated by reference to Exhibit 10.28 to Form 10-Q filed May 12, 2008). New Executive Retirement Plan of CIT Group Inc. (As Amended and Restated as of January 1, 2008) (incorporated by reference to Exhibit 10.29 to Form 10-Q filed May 12, 2008). Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (One Year Vesting) (incorporated by reference to Exhibit 10.35 to Form 10-Q filed August 9, 2010). Form of CIT Group Inc. Long-term Incentive Plan Stock Option Award Agreement (Three Year Vesting) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed August 9, 2010). Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Initial Grant) (incorporated by reference to Exhibit 10.39 to Form 10-Q filed August 9, 2010). Form of CIT Group Inc. Long-term Incentive Plan Restricted Stock Unit Director Award Agreement (Annual Grant) (incorporated by reference to Exhibit 10.40 to Form 10-Q filed August 9, 2010). Amended and Restated Employment Agreement, dated as of May 7, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.35 to Form 10-K filed March 2, 2009). CIT ANNUAL REPORT 2015 209 10.10* 10.11** 10.12** 10.13** 10.14** 10.15 10.16 10.17* 10.18* 10.19* 10.20* 10.21 10.22* 10.23* 10.24* 10.25* 10.26* 10.27* 10.28* 10.29* 10.30* Amendment to Employment Agreement, dated December 22, 2008, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 2, 2009). Airbus A320 NEO Family Aircraft Purchase Agreement, dated as of July 28, 2011, between Airbus S.A.S. and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.35 of Form 10-Q/A filed February 1, 2012). Amended and Restated Confirmation, dated June 28, 2012, between CIT TRS Funding B.V. and Goldman Sachs International, and Credit Support Annex and ISDA Master Agreement and Schedule, each dated October 26, 2011, between CIT TRS Funding B.V. and Goldman Sachs International, evidencing a $625 billion securities based financing facility (incorporated by reference to Exhibit 10.32 to Form 10-Q filed August 9, 2012). Third Amended and Restated Confirmation, dated June 28, 2012, between CIT Financial Ltd. and Goldman Sachs International, and Amended and Restated ISDA Master Agreement Schedule, dated October 26, 2011 between CIT Financial Ltd. and Goldman Sachs International, evidencing a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 9, 2012). ISDA Master Agreement and Credit Support Annex, each dated June 6, 2008, between CIT Financial Ltd. and Goldman Sachs International related to a $1.5 billion securities based financing facility (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 11, 2008). Form of CIT Group Inc. Long-Term Incentive Plan Performance Stock Unit Award Agreement (with Good Reason) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed May 10, 2012). Form of CIT Group Inc. Long-Term Incentive Plan Performance Stock Unit Award Agreement (without Good Reason) (incorporated by reference to Exhibit 10.37 to Form 10-Q filed May 10, 2012). Assignment and Extension of Employment Agreement, dated February 6, 2013, by and among CIT Group Inc., C. Jeffrey Knittel and C.I.T. Leasing Corporation (incorporated by reference to Exhibit 10.34 to Form 10-Q filed November 6, 2013). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.36 to Form 10-K filed March 1, 2013). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.37 to Form 10-K filed March 1, 2013). CIT Employee Severance Plan (Effective as of November 6, 2013) (incorporated by reference to Exhibit 10.37 in Form 10-Q filed November 6, 2013). Stockholders Agreement, by and among CIT Group Inc. and the parties listed on the signature pages thereto, dated as of July 21, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 25, 2014). Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Nelson Chai and Attached Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to Form 8-K filed July 25, 2014). Extension to Term of Employment Agreement, dated January 2, 2014, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 6, 2014). Amendment to Employment Agreement, dated January 16, 2015, between CIT Group Inc. and C. Jeffrey Knittel (incorporated by reference to Exhibit 10.29 to Form 10-K filed February 20, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2013) (incorporated by reference to Exhibit 10.30 to Form 10-K filed February 20, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2013) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.31 to Form 10-K filed February 20, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (2014) (incorporated by reference to Exhibit 10.32 to Form 10-K filed February 20, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Restricted Stock Unit Award Agreement (with Performance Based Vesting) (Executives with Employment Agreements) (2014) (incorporated by reference to Exhibit 10.33 to Form 10-K filed February 20, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (incorporated by reference to Exhibit 10.30 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2013) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.31 to Form 10-Q filed August 5, 2015). Item 15. Exhibits and Financial Statement Schedules 210 CIT ANNUAL REPORT 2015 10.31* 10.32* 10.33* 10.34* 10.35* 10.36* 10.37* 10.38* 10.39* 10.40 12.1 21.1 23.1 24.1 31.1 31.2 32.1*** 32.2*** 101.INS Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.32 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2014) (incorporated by reference to Exhibit 10.33 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with ROTCE and Credit Provision Performance Measures) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.35 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (incorporated by reference to Exhibit 10.36 to Form 10-Q filed August 5, 2015). Form of CIT Group Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (2015) (with Average Earnings per Share and Average Pre-Tax Return on Assets Performance Measures) (Executives with Employment Agreements) (incorporated by reference to Exhibit 10.37 to Form 10-Q filed August 5, 2015). Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Steven T. Mnuchin (incorporated by reference to Exhibit 10.2 to Form 8-K filed July 25, 2014). Retention Letter Agreement, dated July 21, 2014, between CIT Group Inc. and Joseph Otting and Attached Restricted Stock Award Agreements (incorporated by reference to Exhibit 10.3 to Form 8-K filed July 25, 2014). Offer Letter, dated October 27, 2015, between CIT Group Inc. and Ellen R. Alemany, including Attached Exhibits. (incorporated by reference to Exhibit 10.39 to Form 10-Q filed November 13, 2016). Nomination and Support Agreement dated February 18, 2016 by and between J.C. Flowers & Co. LLC and CIT Group Inc. (incorporated by reference to Exhibit 99.1 to Form 8-K filed February 22, 2016). CIT Group Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges. Subsidiaries of CIT Group Inc. Consent of PricewaterhouseCoopers LLP. Powers of Attorney. Certification of John A. Thain pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. Certification of E. Carol Hayles pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Commission, as promulgated pursuant to Section 13(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. Certification of John A. Thain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Certification of E. Carol Hayles pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. XBRL Instance Document (Includes the following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.) 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. Indicates a management contract or compensatory plan or arrangement. Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for granting confidential treatment pursuant to the Securities Exchange Act of 1934, as amended. * ** *** This information is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not incorporated by reference into any filing under the Securities Act of 1933. CIT ANNUAL REPORT 2015 211 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 4, 2016 CIT GROUP INC. By: /s/ John A. Thain John A. Thain Chairman and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 4, 2016 in the capacities indicated below. NAME /s/ John A. Thain John A. Thain Chairman and Chief Executive Officer and Director Ellen R. Alemany* Ellen R. Alemany Vice Chairman and Director Michael J. Embler* Michael J. Embler Director Alan Frank* Alan Frank Director William M. Freeman* William M. Freeman Director David M. Moffett* David M. Moffett Director Steven T. Mnuchin* Steven T. Mnuchin Vice Chairman and Director R. Brad Oates* R. Brad Oates Director Marianne Miller Parrs* Marianne Miller Parrs Director NAME Gerald Rosenfeld* Gerald Rosenfeld Director John R. Ryan* John R. Ryan Director Sheila A. Stamps* Sheila A. Stamps Director Seymour Sternberg* Seymour Sternberg Director Peter J. Tobin* Peter J. Tobin Director Laura S. Unger* Laura S. Unger Director /s/ E. Carol Hayles E. Carol Hayles Executive Vice President and Chief Financial Officer /s/ Edward K. Sperling Edward K. Sperling Executive Vice President and Controller /s/ James P. Shanahan James P. Shanahan Senior Vice President, Chief Regulatory Counsel, Attorney-in-Fact * Original powers of attorney authorizing Robert J. Ingato, Christopher H. Paul, and James P. Shanahan and each of them to sign on behalf of the above- mentioned directors are held by the Corporation and available for examination by the Securities and Exchange Commission pursuant to Item 302(b) of Regulation S-T. 212 CIT ANNUAL REPORT 2015 EXHIBIT 12.1 CIT Group Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (dollars in millions) Earnings: Net income (loss) (Benefit) provision for income taxes – continuing operations (Income) loss from discontinued operation, net of taxes Income (loss) from continuing operations, before benefit (provision) for income taxes Fixed Charges: Years Ended December 31, 2015 2014 2013 2012 2011 $1,056.6 $1,130.0 $ 675.7 $ (592.3) $ 14.8 (488.4) 10.4 (397.9) (52.5) 83.9 (31.3) 116.7 56.5 157.0 69.1 578.6 679.6 728.3 (419.1) 240.9 Interest and debt expenses on indebtedness 1,103.5 1,086.2 1,060.9 2,665.7 2,504.2 Interest factor: one-third of rentals on real and personal properties Total fixed charges for computation of ratio Total earnings before provision for income taxes and fixed charges Ratios of earnings to fixed charges 11.3 1,114.8 7.3 7.8 8.2 9.3 1,093.5 1,068.7 2,673.9 2,513.5 $1,693.4 $1,773.1 $1,797.0 1.52x 1.62x 1.68x $2,254.8 (1) $2,754.4 1.10x (1) Earnings were insufficient to cover fixed charges by $419.1 million for the year ended December 31, 2012. CIT ANNUAL REPORT 2015 213 EXHIBIT 31.1 CERTIFICATIONS I, John A. Thain, certify that: 1. I have reviewed this Annual Report on Form 10-K of CIT Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 4, 2016 /s/ John A. Thain John A. Thain Chairman and Chief Executive Officer CIT Group Inc. 214 CIT ANNUAL REPORT 2015 EXHIBIT 31.2 CERTIFICATIONS I, E. Carol Hayles, certify that: 1. I have reviewed this Annual Report on Form 10-K of CIT Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 4, 2016 /s/ E. Carol Hayles E. Carol Hayles Executive Vice President and Chief Financial Officer CIT Group Inc. CIT ANNUAL REPORT 2015 215 EXHIBIT 32.1 Certification Pursuant to Section 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of CIT Group Inc. (“CIT”) on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Thain, the Chief Executive Officer of CIT, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that; (i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIT. Dated: March 4, 2016 /s/ John A. Thain John A. Thain Chairman and Chief Executive Officer CIT Group Inc. The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document. 216 CIT ANNUAL REPORT 2015 EXHIBIT 32.2 Certification Pursuant to Section 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of CIT Group Inc. (“CIT”) on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, E. Carol Hayles, the Chief Financial Officer of CIT, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that; (i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIT. Dated: March 4, 2016 /s/ E. Carol Hayles E. Carol Hayles Executive Vice President and Chief Financial Officer CIT Group Inc. The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document. CIT Group Inc. Founded in 1908, CIT (NYSE: CIT) is a financial holding company with more than $65 billion in assets. Its principal bank subsidiary, CIT Bank, N.A., (Member FDIC, Equal Housing Lender) has more than $30 billion of deposits and more than $40 billion of assets. It provides financing, leasing and advisory services principally to middle-market companies across a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation sector. It also offers products and services to consumers through its Internet bank franchise and a network of retail branches in Southern California, operating as OneWest Bank, a division of CIT Bank, N.A. cit.com CIT Bank Founded in 2000, CIT Bank (Member FDIC, Equal Housing Lender) is the U.S. commercial bank subsidiary of CIT Group Inc. (NYSE: CIT). It provides lending and leasing to the small business, middle-market and transportation sectors. CIT Bank (BankOnCIT.com) offers a variety of savings options designed to help customers achieve their financial goals. As of December 31, 2015, it had approximately $43 billion of deposits and more than $33 billion of assets. TRANSPORTATION AND INTERNATIONAL FINANCE Business Aircraft Finance CIT Business Aircraft Finance provides financing solutions to business jet operators. Serving clients around the globe, we provide financing that is tailored to our clients’ unique business requirements. Products include term loans, leases, pre-delivery financing, fractional share financing and vendor/ manufacturer financing. Commercial Air CIT Commercial Air is one of the world’s leading aircraft leasing organizations and provides leasing and financing solutions—including operating leases, capital leases, loans and structuring, and advisory services—for commercial airlines worldwide. We own and finance a fleet of more than 300 commercial aircraft with about 100 customers in approximately 50 countries. International Finance CIT International Finance offers equipment financing and leasing to small- and middle-market businesses in China. Maritime Finance CIT Maritime Finance offers senior secured loans, sale- leasebacks and bareboat charters to owners and operators of oceangoing cargo vessels, including tankers, bulkers, container ships, car carriers, and offshore vessels and drilling rigs. Rail CIT Rail is an industry leader in offering customized leasing and financing solutions and a highly efficient, diversified fleet of railcar assets to freight shippers and carriers throughout North America and Europe. NORTH AMERICA BANKING Commercial Banking Commercial Banking (previously known as Corporate Finance) provides a range of lending and deposit products, as well as ancillary services, including cash management and advisory services, to small- and medium-size businesses. Loans offered are primarily senior secured loans collateralized by accounts receivable, inventory, machinery & equipment and/or intangibles that are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature and quality of the collateral, may be asset-based loans or cash flow loans. Loans are originated through direct relationships, led by individuals with significant experience in their respective industries, or through relationships with private equity sponsors. We provide financing to customers in a wide range of industries, including Commercial & Industrial, Communications & Technology, Entertainment & Media, Energy and Healthcare. The division also originates qualified SBA 504 loans (generally for buying a building, ground-up construction, building renovation or the purchase of heavy machinery and equipment) and 7(a) loans (generally for working capital or financing leasehold improvements). Additionally, the division offers a full suite of deposit and payment solutions to small- and medium-size businesses. Commercial Real Estate CIT Real Estate Finance provides senior secured commercial real estate loans to developers and other commercial real estate professionals. We focus on properties with a stable cash flow and originate construction loans to highly experienced and well-capitalized developers. Commercial Services CIT Commercial Services is a leading provider of factoring services in the United States. We provide credit protection, accounts receivable management services and asset-based lending to manufacturers and importers that sell into retail channels of distribution, including apparel, textile, furniture, home furnishings and consumer electronics. Consumer Banking Consumer Banking offers mortgage loans, deposits and private banking services to its consumer customers. The division offers jumbo residential mortgage loans and conforming residential mortgage loans, primarily in Southern California. Mortgage loans are primarily originated through leads generated from the retail branch network, private bankers and the commercial business units. Mortgage lending includes product specialists, internal sales support and origination processing, structuring and closing. Retail banking is the primary deposit-gathering business of CIT Bank and operates through 70 retail branches in Southern California and an online direct channel. We offer a broad range of deposit and lending products to meet the needs of our clients (both individuals and small businesses), including checking, savings, certificates of deposit, residential mortgage loans and investment advisory services. We also offer banking services to high net worth individuals. Equipment Finance CIT Equipment Finance provides leasing and equipment financing solutions to small businesses and middle-market companies in a wide range of industries including Technology, Office Imaging, Healthcare, Industrial and Franchise. We assist manufacturers and distributors in growing sales, profitability and customer loyalty by providing customized, value-added finance solutions to their commercial customers. The LendEdge platform, in our Direct Capital business, allows small businesses to access financing through a highly automated credit approval, documentation and funding process. We offer loans and both capital and operating leases. EXECUTIVE MANAGEMENT Waters Inc. Chief Executive Officer and Chairwoman-Elect Capital Management LP Steven T. Mnuchin Chairman and Chief Executive Officer of Dune GLOBAL HEADQUARTERS BOARD OF DIRECTORS INVESTOR INFORMATION CORPORATE HEADQUARTERS Chief Executive Officer and Chairwoman-Elect Corporate Information 11 West 42nd Street New York, NY 10036 Telephone: (212) 461-5200 One CIT Drive Livingston, NJ 07039 Telephone: (973) 740-5000 Number of employees: 4,934 as of December 31, 2015 Number of beneficial shareholders: 48,184 as of February 6, 2016 COMMITTEE Ellen R. Alemany Bryan D. Allen Executive Vice President, Chief Human Resources Officer Matthew Galligan President, CIT Real Estate Finance E. Carol Hayles Executive Vice President, Chief Financial Officer James L. Hudak President, CIT Commercial Finance Robert J. Ingato Executive Vice President, General Counsel and Secretary C. Jeffrey Knittel Finance Raymond D. Matsumoto Executive Vice President, Chief Administrative Officer Kelley Morrell Executive Vice President, Chief Strategy Officer Robert C. Rowe Executive Vice President, Chief Risk Officer Steven Solk President, CIT Business Capital Stacey Goodman Executive Vice President, Chief Information Officer and Operations Officer John A. Thain Chairman of the Board Ellen R. Alemany 5M of CIT Group Inc. Michael J. Embler 1M, 3M Former Chief Investment Officer of Franklin Mutual Advisors LLC Alan Frank William M. Freeman 2M, 3M Executive Chairman of General Stock Exchange Information In the United States, CIT common stock is listed on the New York Stock Exchange under the ticker symbol “CIT.” Shareowner Services For shareowner services, including address changes, security transfers and general shareowner inquiries, please contact Computershare. By writing: P.O. Box 43006 Providence, RI 02940-3006 By visiting: Contact By calling: https://www-us.computershare.com/investor/ Retired Partner of Deloitte & Touche LLP Computershare Shareowner Services LLC David M. Moffett 2M Former Chief Executive Officer of the Federal (800) 231-5469 Telecommunication Home Loan Mortgage Corporation device for the hearing impaired (800) 851-9677 U.S. & Canada (201) 680-6578 Other countries R. Brad Oates 4M Chairman and Managing Partner of Stone Advisors LP Marianne Miller Parrs 1C, 5M Retired Executive Vice President and Chief Financial Officer of International Paper Company Gerald Rosenfeld 4C Vice Chairman of Lazard Ltd. For general shareowner information and online access to your shareowner account, visit Computershare’s website: computershare. com Form 10-K and Other Reports A copy of Form 10-K and all quarterly filings on Form 10-Q, Board Committee Charters, Corporate Governance Guidelines and the Code of Business Conduct are available without charge at cit.com, or upon written request to: Vice Admiral John R. Ryan, USN (Ret.) 2M, 3M, 6 CIT Investor Relations President and Chief Executive Officer of the One CIT Drive Center for Creative Leadership Livingston, NJ 07039 Sheila A. Stamps 4M, 5M For additional information, Retired Executive Vice President of Corporate please call (866) 54CITIR or Strategy and Investor Relations at Dreambuilder email investor.relations@cit.com. INVESTOR INQUIRIES Barbara Callahan Senior Vice President (973) 740-5058 barbara.callahan@cit.com cit.com/investor MEDIA INQUIRIES Matt Klein Vice President (973) 597-2020 matt.klein@cit.com cit.com/media Seymour Sternberg 2C Retired Chairman of the Board and Chief Executive Officer of New York Life Insurance Company Peter J. Tobin 4M, 5C Retired Special Assistant to the President of St. John’s University and Retired Chief Financial Officer of The Chase Manhattan Corporation Laura S. Unger 1M, 3C Independent Consultant, Former Commissioner of the U.S. Securities and Exchange Commission 1 Audit Committee 2 Compensation Committee 3 Nominating and Governance Committee 4 Risk Management Committee 5 Regulatory Compliance Committee 6 Lead Director C Committee Chairperson M Committee Member President, Transportation & International Investments LLC The NYSE requires that the Chief Executive Officer of a listed company certify annually that he or she was not aware of any violation by the company of the NYSE’s corporate governance listing standards. Such certification was made by John A. Thain on June 10, 2015. Certifications by the Chief Executive Officer and the Chief Financial Officer of CIT pursuant to section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to CIT’s Annual Report on Form 10-K. Printed on recycled paper C I T A N N U A L R E P O R T 2 0 1 5 CIT Annual Report 2015 Building Long-Term Value cit.com 35116_CIT_cvr.pdf pg 1 April 7, 2016 16:10:32