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CIT CIT

Filed: 19 Feb 21, 5:05pm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

    

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2020

or

   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number:001-31369

CIT GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

65-1051192

(IRS Employer Identification 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:

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Trading Symbols

 

Name of Exchange

Common Stock, par value $0.01 per share

 

CIT

 

New York Stock Exchange

5.625% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share

 

CITPRB

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 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 No

 

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 No

 

Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted 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 such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

At February 5, 2021, there were 98,707,907 shares of CIT's common stock, par value $0.01 per share, outstanding.

 

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 ($20.73 per share, 97,809,180 shares of common stock outstanding), which occurred on June 30, 2020, was $2,027,584,301. 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 No

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III.

 

 

 


 

 

CONTENTS

 

Part One

 

 

Item 1.

Business Overview

3

 

Where You Can Find More Information

19

Item 1A.

Risk Factors

22

Item 1B.

Unresolved Staff Comments

37

Item 2.

Properties

37

Item 3.

Legal Proceedings

37

Item 4.

Mine Safety Disclosures

37

 

 

 

Part Two

 

 

Item 5.

Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

38

Item 6.

Selected Financial Data

39

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

40

Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

40

Item 8.

Financial Statements and Supplementary Data

102

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

183

Item 9A.

Controls and Procedures

183

Item 9B.

Other Information

184

 

 

 

Part Three

Item 10.

Directors, Executive Officers and Corporate Governance

185

Item 11.

Executive Compensation

185

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

185

Item 13.

Certain Relationships and Related Transactions, and Director Independence

185

Item 14.

Principal Accountant Fees and Services

185

 

 

 

Part Four

Item 15.

Exhibits and Financial Statement Schedules

186

Signatures

 

188

 

 

 

1

CIT ANNUAL REPORT 2020


 

 

 

PART ONE

Glossary of Abbreviations and Acronyms

 

The following is a list of certain abbreviations and acronyms we use throughout this document, including the notes to the financial statements. You may find it helpful to refer back to this table.

Acronym

Definition

Acronym

Definition

AACL

Adjusted Allowance for Credit Losses

HAMP

Home Affordable Modification Program

ACL

Allowance for Credit Losses

HECM

Home Equity Conversion Mortgage

AEA

Average Earnings Assets

HFI

Held for Investment

AFS

Available for Sale

HFS

Held for Sale

AHFS

Assets Held for Sale

HOA

Home Owners Association

ALCO

Asset Liability Committee

HTM

Held to Maturity

ALLL

Allowance for Loan and Lease Losses

HQLA

High-Quality Liquid Assets

ALM

Asset and Liability Management

HQL securities

High-Quality Liquid securities

AML

Anti-money Laundering

HUD

U.S. Department of Housing and Urban Development

AOCI

Accumulated Other Comprehensive Income

IT

Information Technology

AOL

Average Operating Leases

LCM

Legacy Consumer Mortgages

ASC

Accounting Standards Codification

LCR

Liquidity Coverage Ratio

ASR

Accelerated Share Repurchase Program

LGD

Loss Given Default

ASU

Accounting Standards Update

LIBOR

London Inter-Bank Offered Rate

BHC

Bank Holding Company

LIHTC

Low Income Housing Tax Credit

BOLI

Bank Owned Life Insurance

LMI

Low- and Moderate-Income

BPS

Basis point(s); 1bp=0.01%

LOCOM

Lower of the Cost or Market Value

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act

LSA

Loss Sharing Agreement

CCAR

Comprehensive Capital Analysis and Review

LTV

Loan-to-Value

CCB

Capital Conservation Buffer

MBS

Mortgage-Backed Securities

CCC

Corporate Credit Committee

MD&A

Management Discussion and Analysis

CDI

Core Deposit Intangibles

MOB

Mutual of Omaha Bank

CECL

Current Expected Credit Losses

MSR

Mortgage Servicing Rights

CEO

Chief Executive Officer

NFM

Net Finance Margin

CFO

Chief Financial Officer

NFR

Net Finance Revenue

CET1

Common Equity Tier 1 Capital

NII Sensitivity

Net Interest Income Sensitivity

CFP

Contingency Funding Plan

NIM

Net Interest Margin

CFPB

Consumer Financial Protection Bureau

NOLs

Net Operating Loss Carryforwards / Carryback

CFTC

Commodities Futures Trading Commission

OCC

Office of the Comptroller of the Currency

CPRA

California Privacy Rights Act

OCI

Other Comprehensive Income

CRA

Community Reinvestment Act

OFAC

Office of Foreign Assets Control

COVID-19

Novel Coronavirus disease

OLA

Orderly Liquidation Authority

CRO

Chief Risk Officer

OREO

Other Real Estate Owned

CTA

Currency Translation Adjustment

OTTI

Other than Temporary Impairment

DCF

Discounted Cash Flows

PAA

Purchase Accounting Adjustments

DIF

Deposit Insurance Fund

PB

Primary Beneficiary

DPA

Deferred Purchase Agreement

PCI

Purchased Credit-Impaired

DTA/DTL

Deferred Tax Asset / Deferred Tax Liability

PCD

Purchased Credit Deteriorated

EPS

Earnings Per Share

PD

Probability of Obligor Default

ERC

Enterprise Risk Committee

PLM

Problem Loan Management

EVE Sensitivity

Economic Value of Equity Sensitivity

RCC

Risk Control Committee

FASB

Financial Accounting Standards Board

RMC

Risk Management Committee

FCB

First-Citizens Bank & Trust Company

RMG

Risk Management Group

FCPA

Foreign Corrupt Practices Act

ROAEA

Return on Average Earning Assets

FDIA

Federal Deposit Insurance Act

ROTCE

Return on Tangible Common Stockholders' Equity

FDIC

Federal Deposit Insurance Corporation

ROU

Right of Use

FDICIA

FDIC Improvement Act of 1991

RWA

Risk Weighted Assets

FHA

Federal Housing Administration

SBA

Small Business Administration

FHC

Financial Holding Company

SEC

Securities and Exchange Commission

FHLB

Federal Home Loan Bank

SFR

Single Family Residential

FICO

Fair, Isaac Corporation

SIFI

Systemically Important Financial Institution

FINRA

Financial Industry Regulatory Authority

SOFR

Secured Overnight Financing Rate

FNMA

Federal National Mortgage Association

TBV

Tangible Book Value

FRB

Board of Governors of the Federal Reserve System

TCE

Tangible Common Stockholders' Equity

FRBNY

Federal Reserve Bank of New York

TDR

Troubled Debt Restructuring

FV

Fair Value

UPB

Unpaid Principal Balance

GAAP

Accounting Principles Generally Accepted in the U.S.

VA

Valuation Allowance

GLBA

Gramm-Leach-Bliley Act

VIE

Variable Interest Entity

 

2

CIT ANNUAL REPORT 2020


 

 

Item 1. Business Overview

BUSINESS DESCRIPTION

CIT Group Inc. is a bank holding company ("BHC") and a financial holding company ("FHC"). CIT Group Inc., together with its subsidiaries (collectively "we", "our", "CIT" or the "Company"), has $53.9 billion of earning assets and $43.1 billion of deposits at December 31, 2020. CIT was formed in 1908 and provides financing, leasing and advisory services, principally to middle-market companies in a wide variety of industries, primarily in North America. We also provide banking and related services to commercial and individual customers through our banking subsidiary, CIT Bank, N.A. ("CIT Bank" or the "Bank"), which includes a regional branch network of 80 branches and its online bank.  

CIT is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Federal Reserve Bank of New York ("FRBNY") under the U.S. Bank Holding Company Act of 1956, as amended. CIT Bank is regulated by the Office of the Comptroller of the Currency of the U.S. Department of the Treasury ("OCC"). In addition, CIT Bank, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation (“FDIC”).

On January 1, 2020, we acquired Mutual of Omaha Bank (“MOB”), the savings bank subsidiary of Mutual of Omaha Insurance Company and Omaha Financial Holdings, Inc. (“OFHI”). CIT paid approximately $1 billion as consideration, comprised of $850 million in cash and approximately 3.1 million shares of CIT Group Inc. common stock (valued at approximately $141 million at the time of closing). Total assets acquired were approximately $8.4 billion and deposits were approximately $7.0 billion. See Note 2 – Acquisitions and Discontinued Operations in Item 8. Financial Statements and Supplementary Information (“Item 8”) in this Annual Report on Form 10-K as of or for the year ended December 31, 2020 (“2020 Form 10-K”) for additional information.

On October 16, 2020, First Citizens BancShares, Inc. (“First Citizens”), the parent company of First-Citizens Bank & Trust Company (“FCB”), and CIT Group Inc. jointly announced that they entered into a definitive agreement by and among First Citizens, FCB, FC Merger Subsidiary IX, Inc. and CIT, under which the companies will combine in an all-stock merger (the “Merger Agreement”). Under the terms of the Merger Agreement, CIT stockholders will receive 0.062 shares of First Citizens Class A common stock for each share of CIT common stock they own. First Citizens stockholders will own approximately 61% and CIT stockholders will own approximately 39% of the combined company. The Merger Agreement contains customary representations and warranties and customary covenants, such as non-solicitation obligations and other provisions, including a break-up fee of $64 million payable in certain circumstances. The Merger Agreement also provides certain termination rights for CIT and First Citizens, including, among others, if the merger has not been completed by October 15, 2021. The combined bank will be regulated by the North Carolina Commissioner of Banks, the FDIC, and the Federal Reserve Bank of Richmond.

 

The Board of Directors of the combined company will consist of 14 directors, the current 11 First Citizens Board members and 3 CIT Board members, including Ellen Alemany, Chairwoman and Chief Executive Officer (“CEO”) of CIT, Michael A. Carpenter, and Vice Admiral John R. Ryan, USN (Ret.).

The combined company will operate under the First Citizens name and will be headquartered in Raleigh, N.C., and will maintain significant operations in California, Nebraska, Arizona, Florida, and South Carolina, as well as in New York and New Jersey. The pro forma organization will include over $100 billion in assets and over $80 billion in deposits.

On February 9, 2021, CIT and First Citizens received the approvals of the stockholders of CIT and First Citizens necessary to complete the merger of the companies.  The merger is expected to close in the first half of 2021, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals.

3

CIT ANNUAL REPORT 2020


 

BUSINESS SEGMENTS

As of December 31, 2020, we manage our business and report our financial results in two operating segments: Commercial Banking and Consumer Banking, and a non-operating segment, Corporate.

SEGMENT

 

DIVISIONS

 

MARKETS AND SERVICES

Commercial Banking

 

Commercial Finance

Business Capital

Real Estate Finance

Rail

 

Commercial Finance, Business Capital, and Real Estate Finance provide lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries.

Commercial Finance also provides asset-based lending, factoring, receivables management products and supply chain financing. Offers low-cost Homeowners’ Association (“HOA”) deposits.

Rail provides equipment leasing and secured financing to railroads and shippers.

Consumer Banking

 

Consumer and Community Banking

Legacy Consumer Mortgages ("LCM")

 

Consumer and Community Banking includes a full suite of deposit products, single family residential (“SFR”) loans, and Small Business Administration (“SBA”) loans, as well as community development investments and loans.

LCM consists of acquired SFR loans that are in run-off.

Corporate

 

 

 

Earning assets primarily include investment securities and interest-bearing cash.

 

 

 

 

Certain items are not allocated to operating segments and are included in Corporate. Some of the more significant and recurring items that are not allocated to operating segments include interest income on investment securities, income on bank owned life insurance (“BOLI”), a portion of interest expense primarily related to corporate funding costs, mark-to-market adjustments on foreign currency hedges, restructuring charges, intangible assets amortization expenses, gain/loss on debt extinguishments, as well as certain unallocated interest income and other costs.

We set underwriting standards for each business and employ portfolio risk management models to achieve desired portfolio demographics. Our collection and servicing operations are organized by business and geography to provide efficient client interfaces and uniform customer experiences.

Information about our segments is also included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Item 8, Note 24 — Business Segment Information.

COMMERCIAL BANKING

Commercial Banking provides a range of lending, leasing and deposit products, as well as ancillary products that include interest rate risk management and foreign exchange products, and services, including factoring, cash management, capital markets, asset management, and advisory services, primarily to small and medium-sized companies, as well as to the rail industry. Revenue is generated from interest earned on loans, rent on equipment leased, fees and other revenue from lending and leasing activities, banking services, and capital markets transactions, along with commissions earned on factoring and related activities. We source our commercial lending business primarily through direct marketing to borrowers, lessees, manufacturers, vendors and distributors, and through referral sources and other intermediaries. Periodically we buy participations in syndications of loans and lines of credit and purchase loans on a whole-loan basis.

Commercial Banking is comprised of four divisions, Commercial Finance, Business Capital, Rail, and Real Estate Finance. Complementary businesses and assets from MOB were included with Commercial Finance and Real Estate Finance. In addition, the HOA deposits were included in Commercial Banking.

Description of Divisions

Commercial Finance provides a range of commercial lending, leasing and deposit products, as well as ancillary services and products, including cash management, capital markets and advisory services, primarily to small and middle market companies in a wide range of industries, including aerospace & defense, communication, power and energy, entertainment, gaming, healthcare, industrials, maritime, restaurants, retail, services and technology. Loans offered are primarily senior secured loans collateralized by accounts receivable, inventory, machinery and equipment, transportation equipment and/or intangibles, and 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 collateral-backed loans, asset-based loans or cash flow loans. Loans are originated through relationships with private equity sponsors, or through direct relationships, led by originators with extensive experience in their respective industries. We also provide asset management services for which we collect management fees and partner in joint ventures.

In addition, through our Commercial Services business, we provide factoring, receivable management, and secured financing to businesses (our clients, who are generally 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 factor).

4

CIT ANNUAL REPORT 2020


 

Business Capital provides leasing and equipment financing to small businesses and middle market companies in a wide range of industries on both an indirect and direct basis through integrated vendor platforms. In our indirect business, we assist manufacturers and distributors in growing sales, profitability and customer loyalty by providing customized, value-added finance solutions to their commercial clients. In our direct financing and leasing business, we provide financing solutions for our borrowers and lessees. Additionally, through Small Business Solutions, our on-line credit lending platform, we provide small business unsecured loans and equipment financing. Our lending platform allows small businesses to access commercial loans and leases, including both capital and operating leases, through a highly automated credit approval, documentation and funding process.

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, provide financing to reposition existing properties, and originate construction loans to highly experienced and well capitalized developers.

Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. 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 service products; open-top hopper cars for coal and aggregates; boxcars for paper and auto parts; and centerbeams and flat cars for lumber. The rail portfolio is discussed further in the Concentrations section of the MD&A.

Key Risks

Key risks faced by the divisions include credit, business, market and asset risk. Credit risks associated with secured financings relate to the ability of our borrower to repay our loan and the value of the collateral underlying the loan should the borrower default on its obligations. Business risks include the demand for services that is broadly affected by the overall level of economic growth and is more specifically affected by the overall level of economic activity in CIT's target industries. Changes in supply and demand of products and services affect the pricing CIT can earn in the market. New business volume in Commercial Banking is affected by CIT's ability to maintain and develop relationships with its equity sponsors, clients, vendor partners, distributors and resellers. Commercial Banking is also exposed to market risk related to its syndication activity, which could expose CIT 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.

The products and services provided by Commercial Services involve two types of credit risk: customer and client. A customer is the account debtor and obligor on trade accounts receivable that have been factored with and assigned to the factor. The most prevalent risk in factoring transactions for Commercial Services is customer credit risk, which relates to the financial inability of a customer to pay undisputed factored trade accounts receivable. A client is the counterparty to Commercial Services on any factoring, financing, or receivables purchasing agreement to sell trade receivables to Commercial Services, and generally is a manufacturer or importer of goods. While less significant than customer credit exposure, client credit risk relates to a decline in the creditworthiness of a borrowing client, their consequent inability to repay their loan, and the possible insufficiency of the underlying collateral (including the customer accounts receivable) to cover any loan repayment shortfall.

Commercial Services is also subject to a variety of other risks, including operational risk, due to the high transaction volume, business risks related to competitive pressures from other banks, boutique factors, and credit insurers, and seasonal risks due to retail trends. These pressures create 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 factoring services for credit protection.

The primary risks for Rail are asset risk (resulting from ownership of the railcars and related equipment on operating lease) and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying rail equipment that is leased. Rail invests in long-lived equipment, railcars and locomotives, which have economic useful lives of approximately 40 to 50 years. This equipment is then leased to commercial end-users with lease terms of typically three to five 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 generally is recognized through changes to lease income streams from fluctuations in lease rates and/or utilization. Asset risk may also change depreciation, 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. However, asset values are not typically impacted by short-term market/cyclical fluctuations given the long-lived nature of rail assets. Asset risk is primarily related to the Rail division, and to a lesser extent, Business Capital and Commercial Finance.

Credit risk in the leased equipment portfolio results from the potential default of lessees, driven either by obligor specific or industry-wide conditions and is economically less significant than asset risk for Rail, 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 statement of operations 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.

5

CIT ANNUAL REPORT 2020


 

CONSUMER BANKING

Consumer Banking is comprised of two divisions: Consumer and Community Banking and LCM. Consumer and Community Banking includes Retail Banking, Consumer Lending, SBA Lending, and community development lending and investments. Complementary businesses and assets from MOB were included with Consumer and Community Banking. Revenue is generated from interest earned on residential mortgages, small business loans and from fees for banking services. We source our Consumer Lending business through our branch network and industry referrals, as well as direct digital marketing efforts. Periodically we purchase loans on a whole-loan basis. We source our SBA loans through a network of SBA originators. We also make community development investments and loans that support the construction of affordable housing in our communities in line with our CRA initiatives.

Consumer and Community Banking offers consumer mortgage lending and deposit products to its consumer customers. The division offers conforming and jumbo residential mortgage loans throughout the United States. Mortgage loans are primarily originated through CIT Bank branches and retail referrals, employee referrals, internet leads, direct marketing and a correspondent lending channel. Additionally, loans are purchased through whole loan and portfolio acquisitions. Consumer 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 a network of retail branches predominantly in Southern California and an online direct channel. We offer a broad range of deposit and lending products along with payment solutions to meet the needs of our clients (both individuals and small businesses), including checking, savings, money market, individual retirement accounts, and time deposits.

The division also originates qualified SBA 504 loans and 7(a) loans and supports community development activities through lending and investments. SBA 504 loans generally provide growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. SBA 7(a) loans provide working capital, acquisition of inventory, machinery, equipment, furniture, and fixtures, the refinance of outstanding debt subject to any program guidelines, and acquisition of businesses, including partnership buyouts.

LCM includes acquired SFR mortgages from the OneWest Bank acquisition that are in run-off or being sold. Certain of these loans were covered by loss sharing agreements (“LSAs”) with the Federal Deposit Insurance Corporation (“FDIC”) against certain future losses sustained on these loans. Covered Loans were previously acquired by OneWest Bank, N.A. in connection with the LSAs for the FDIC-assisted acquisitions of IndyMac Federal Bank, FSB (“IndyMac”) (expired March 2019), First Federal Bank of California, FSB (“First Federal”) (expired December 2019), and La Jolla Bank, FSB (“La Jolla”) (expired February 2020). All of the LSAs have expired at December 31, 2020 and there are no covered loans.

Key Risks

Key risks in Consumer Banking include credit, collateral 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, primarily single-family residential homes. Therefore, collateral risk relates to the potential decline in value of the property securing the loan. A majority of the loans are concentrated in Southern California, resulting in geographic concentration risk related to a potential downturn in the economic conditions or a potential natural disaster, such as earthquakes, mudslides, or wildfires, in that region.

 

See Risk Factors in Item 1A. and the Risk Management section in the MD&A for further discussions on risk.

CIT BANK, N.A.

CIT Bank raises deposits through its regional branch network of 80 branches, its online bank (visit cit.com), from retail and institutional customers through commercial channels, and, to a lesser extent, broker channels. CIT Bank's existing suite of deposit products includes checking, savings, money market, individual retirement accounts and time deposits.

CIT Bank provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across select industries through its Commercial Finance, Business Capital, Real Estate Finance, and Rail divisions. The Bank also offers residential mortgage lending and deposits to its customers through its Consumer and Community Banking division. To help fulfill its community reinvestment act (“CRA”) obligations, CIT Bank provides equity investments, loans to support affordable housing and other community development activities, as well as grants and service-related activities, throughout its assessment area in Southern California.

CIT Bank's loans and leases are primarily commercial loans, consumer loans and operating lease equipment. CIT Bank's operating lease portfolio consists primarily of leased railcars and related equipment.

At year-end, CIT Bank remained well capitalized, maintaining capital ratios above required levels.

See discussion regarding the merger with FCB earlier in this section.

6

CIT ANNUAL REPORT 2020


 

INFORMATION SECURITY

Information security, including cybersecurity, is a high priority for CIT. Recent highly publicized events have highlighted the importance of cybersecurity, including cyberattacks against financial institutions, governmental agencies and other organizations that resulted in the compromise of personal and/or confidential information, the theft or destruction of corporate information, and demands for ransom payments to release corporate information encrypted by so-called “ransomware.” A successful cyberattack could harm CIT’s reputation and/or impair its ability to provide services to its customers.

CIT has developed policies and technology designed to (i) protect both our own and our clients’ information from cyberattacks or other corruption or loss, (ii) reasonably assure the continuity of CIT’s business in the event of disruptions of CIT’s or its vendors’ critical systems, and (iii) comply with regulatory requirements relating to the protection of customer information (see Regulation – Privacy Provisions and Customer and Client Information below). For additional information on CIT’s cybersecurity and business continuity programs, see the Risk Management section of the MD&A.

DISCONTINUED OPERATIONS

At December 31, 2020, there were no assets or liabilities of discontinued operations. Discontinued operations are discussed in Item 8, Note 2Acquisition and Discontinued Operations.

 

HUMAN CAPITAL

CIT believes that our employees are our most important asset. We have therefore developed a human capital strategy which fosters the wellbeing, development and engagement of our workforce as a matter of corporate culture and contemporary business practice to aid us in attracting, developing, leading and retaining talent.

The following principles guide our Human Capital Framework:

 

Focusing on a balanced combination of building and acquiring diverse talent who are culture carriers and can help us to achieve superior long-term financial results;

 

Incorporating a Total Rewards approach which is attractive, competitive, retentive, equitable, shareholder aligned, risk balanced and promotes community engagement;

 

Enabling our business leaders to lead their teams by building custom programs and operational tools tailored to specific needs;

 

Developing policies, plans and practices that are cost effective, data driven, integrated, supported by self-service technology and reinforced with frequent communication;

 

Utilizing ongoing benchmarking to ensure alignment with external market trends and our business strategy.

As of the end of the 2020 fiscal year, we employed approximately 4,500 people, including contract employees. Our strong employee base, along with their commitment to our Pride Pledge and core values - Be Empowered; Be Collaborative; Be Inclusive; Be Agile; Be an Achiever - provides the foundation of our company’s success.  

The following figures are as of December 31, 2020:

Employees (includes active and all employees on leave)

4,163

4,085 full-time

78 part-time

Contingent Workers

   363

 

 

 

Oversight and Governance

CIT believes a commitment to effective corporate governance and high ethical standards promotes long-term performance. CIT is proud of the diversity of backgrounds, perspectives, expertise, geographic reach, tenure and ethnicity found on its Board of Directors. All members of CIT’s Board of Directors are independent, except for the Chairwoman and CEO.

As part of its common recurring activities, the Compensation Committee of the Board of Directors is responsible for discussing, evaluating and reviewing regular updates from management in the area of CIT’s human capital, including with respect to diversity and inclusion.

 

Learning & Development

CIT invests in developing its employees through various training and educational programs, focusing on new hire on-boarding and readiness, leadership development, sales enablement, product knowledge, compliance and ethics and technical and professional skills.

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CIT ANNUAL REPORT 2020


 

In 2020, CIT shifted to providing its training virtually to support employees working from home due to COVID-19.

 

Diversity & Inclusion

More perspectives bring greater innovation. At CIT, we welcome a diverse group of employees to create a better workplace and innovative products for our clients. CIT is committed to fostering an environment where all employees bring their best selves to work, feeling included, empowered and able to thrive.

CIT is committed to providing an inclusive environment where all individuals have the right to work in a professional atmosphere that promotes equal employment opportunities and prohibits discriminatory practices by employees (including managers and co-workers) or contingent workers.

Diversity & Inclusion (D&I) at CIT is a strategic imperative, rooted in our core values and reinforced in our performance management process. CIT’s D&I program, Be You @CIT, includes a focus on employee programs that drive inclusion, community partnerships to support diversity, leadership initiatives to drive action and efforts in supplier diversity. Initiatives are driven by an Executive Diversity Council and four Employee Resource Groups (ERGs), which are chartered with a focus on Women, Veterans, LGBTQ+ and Black employees, and open to all employees. Our continuing progress in building an inclusive culture was recognized by the Human Rights Campaign Foundation, which designated CIT as a Best Place to Work for LGBTQ Equality in 2020.

CIT is proud of the diversity of our Board of Directors in gender, race, ethnicity and experience, with women comprising a third of the board and people of color also comprising a third of the Board. CIT also has a strong Executive Management Committee with more than 30% gender diversity.

Total Rewards

CIT has a “pay-for-performance” philosophy that forms the foundation of decisions regarding incentive compensation of CIT’s employees. This compensation philosophy and the compensation program in place are central to CIT’s ability to attract, retain and motivate individuals who can achieve superior long-term financial results.

CIT is also committed to making it easier for employees to stay healthy by offering a comprehensive benefits program with high-quality, consumer-driven plans, health spending accounts and flexible options to protect employees and their families. Employees can balance work and personal life with paid time off, flexible work arrangements and programs for employee and family support. We also provide peace of mind with insurance including Life and Accidental Death & Dismemberment for employees and eligible dependents, along with Business Travel Accident Insurance, protection through our short- and long-term disability plan, and a generous parental leave program.

Employees are able to gain skills and knowledge needed to grow their careers with the support of our tuition reimbursement program and plan for retirement with our 401(k) plan and company match.

Eligible employees are encouraged to further their ownership of CIT stock by purchasing shares of CIT common stock at a 15% discounted price through our CIT Employee Stock Purchase Plan.

 

Volunteering

Social responsibility is core to CIT’s culture. We are committed to making positive and lasting impacts in our communities through our business activities and our volunteer and charitable efforts. We are a vital part of the communities where we live and work, and every CIT employee is encouraged to volunteer their time and talent to nonprofit organizations. CIT supports these efforts by providing eight hours of paid time off to all employees annually to devote to volunteer efforts.

 

 

COMPETITION

We operate in highly competitive markets. Our competitors include global and regional commercial banks, community banks, as well as captive finance companies, leasing companies, business development companies, other non-bank lenders and financial technology companies, or “fintechs,” which may offer bank-like products or services that compete directly with our products and services. In most of our business lines, we have a few large competitors that have significant market share and many smaller niche competitors. Many of our competitors have substantial financial, technological, and marketing resources.

Our customer value proposition is primarily based on financing terms, industry expertise, transaction structuring, technology driven solutions, 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 or (ii) receive lower returns or incur higher credit losses if we match our competitors’ product structure, pricing, or terms. We tend not to compete on price, but rather on industry experience, asset and equipment knowledge, and customer service.

 

REGULATION

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CIT ANNUAL REPORT 2020

 


 

We are regulated pursuant to U.S. federal banking laws, regulations, and policies. 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 BHCs and their bank and non-bank subsidiaries, including the power to impose substantial fines, limit dividends and other capital distributions, 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 Group Inc. is a BHC and elected to be treated as an FHC under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). CIT Bank is chartered as a national bank by the OCC and is a member bank of the Federal Reserve System. CIT and CIT Bank are subject to certain limitations on our activities, transactions with affiliates, and payment of dividends, and certain standards for capital and liquidity, safety and soundness, and incentive compensation, among other matters. The principal regulator of CIT Group Inc. and its non-bank subsidiaries is the FRB and the principal regulator of CIT Bank and its subsidiaries is the OCC. Both CIT Group Inc. and CIT Bank are subject to the jurisdiction of the Consumer Financial Protection Bureau (“CFPB”).

Certain of our subsidiaries are subject to the jurisdiction of other governmental agencies and self-regulated organizations. CIT Capital Securities LLC is a broker-dealer registered with the Securities and Exchange Commission ("SEC") and a member of the Financial Industry Regulatory Authority (“FINRA”), a self-regulated organization. CIT Asset Management LLC is a registered investment adviser subject to the jurisdiction of the SEC. Our insurance operations are primarily conducted through The Equipment Insurance Company and CIT Insurance Agency, Inc. Each company is licensed to enter into insurance contracts and is subject to regulation and examination by state insurance regulators.

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was signed into law. Among other changes, the EGRRCPA amended provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to increase the threshold for applicability of the enhanced prudential standards for BHCs from $50 billion to $250 billion. The EGRRCPA’s increased threshold took effect immediately for BHCs with total consolidated assets of less than $100 billion, including CIT. As a result, certain of the enhanced prudential standards required under Sections 165 and 166 of the Dodd-Frank Act are not applicable to CIT.

Upon completion of the Company’s pending merger with First Citizens, the Company expects that the combined institution will have more than $100 billion in total consolidated assets. Therefore, subject to transitional provisions, the combined company is expected to be classified as a Category IV banking institution under the Tailoring Rules (defined below) and subject to the requirements applicable to Category IV institutions. As a Category IV institution, the combined company would be subject to additional regulatory requirements, including capital planning requirements, including as part of the Federal Reserve’s comprehensive capital analysis and review (“CCAR”) process, biennial supervisory stress testing and the stress capital buffer rule, which would replace the static 2.5% component of the capital conservation buffer with a capital buffer that is based on supervisory stress test results and the combined company’s planned common stock dividends. In addition, the combined company would be subject to enhanced liquidity and risk management standards including quarterly liquidity stress tests and a liquidity buffer.

Banking Supervision and Regulation

Permissible Activities

As a BHC, CIT Group Inc. may engage in the business of 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. As an FHC, CIT Group Inc. may also engage in 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, including that the FHC and each of its U.S. depository institution subsidiaries remain “well-capitalized” and “well-managed.”

A depository institution subsidiary is considered “well-capitalized” if it satisfies the requirements 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 “satisfactory” in its most recent examination. If an FHC ceases to be well-capitalized and well-managed, the FHC must enter into a non-public confidential agreement 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 new 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 timely return to compliance, the FRB may require divestiture of the FHCs 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 company engaged in such financial activities if any of its insured depository institution subsidiaries fails to maintain a “satisfactory” rating under the Community Reinvestment Act (“CRA”), as described below under “Community Reinvestment Act.”

Activities that are “financial in nature” include securities underwriting, dealing and market making, advising mutual funds and investment companies, insurance underwriting and agency, merchant 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

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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 and conducts only limited business involving the expanded activities available to an FHC.

Capital Requirements

The Company and the Bank are subject to risk-based requirements and rules issued by the FRB, OCC, and FDIC (the “Basel III Rules”) that are based upon the final framework of the Basel Committee on Banking Supervision (the “Basel Committee”) for strengthening capital and liquidity regulation. Under the Basel III Rules, the Company and the Bank apply the Standardized Approach in measuring their risk-weighted assets (“RWA”) and regulatory capital.

Under the Basel III Rules, the Company and the Bank are subject to minimum capital ratios for common equity tier 1 (“CET1”) capital, Tier 1 capital, and Total capital of 4.5%, 6.0% and 8.0%, respectively. The Basel III Rules also include a “capital conservation buffer” (“CCB”) of 2.5%, composed entirely of CET1 capital, in addition to the minimum capital to RWA ratios. The CCB is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to RWA above the minimum but below the CCB will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall and the institution’s "eligible retained income" (since March 2020, defined as the greater of (i) net income for the four preceding quarters, net of distributions and associated tax effects not reflected in net income; and (ii) the average of net income over the preceding four quarters).

As of January 1, 2020, CIT is required to maintain the following risk-based capital ratios:

 

Minimum Capital Requirements January 1, 2020

 

CET 1

 

Tier 1

Capital

 

Total

Capital

Stated minimum ratios

4.5

%

 

6.0

%

 

8.0

%

Capital conservation buffer

2.5

%

 

2.5

%

 

2.5

%

Effective minimum ratios

7.0

%

 

8.5

%

 

10.5

%

The Company and CIT Bank meet all capital requirements under the Basel III Rules, including the CCB. The table in the MD&A (Regulatory Capital section) presents CIT's and CIT Bank's capital ratios.

The Company and CIT Bank are also required to maintain a minimum Tier 1 leverage ratio (Tier 1 capital to a quarterly average of non-risk weighted total assets) of 4%. The Company and CIT Bank are not subject to the Basel III Rule’s countercyclical buffer or the supplementary leverage ratio.

The Basel III Rules provide for several 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 carryforwards net of any related valuation allowance. Mortgage servicing rights (“MSRs”), DTAs arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. In November 2017, the federal bank regulators revised the Basel III Rules to extend the transitional treatment of certain DTAs, MSRs, investments in non-consolidated financial institutions and minority interests for non-advanced approaches banking organizations, such as the Company and the Bank, until April 1, 2020, when the revisions to simplify the capital requirements relating to the threshold deductions for those items took effect.

The Company and CIT Bank, as non-advanced approaches banking organizations, made a one-time, permanent election under the Basel III Rules to exclude the effects of certain components of accumulated other comprehensive income (“AOCI”) included in shareholders’ equity under U.S. GAAP (for example, mark-to-market of securities held in the available-for-sale (“AFS”) portfolio) in determining regulatory capital ratios.

Under the Basel III Rules, certain off-balance sheet commitments and obligations are converted into RWA, that, together with on-balance sheet assets, are the base against which regulatory capital is measured. The Basel III Rule defined the risk-weighting categories for BHCs and banks that follow the Standardized Approach based on a risk-sensitive analysis, depending on the nature of the exposure. Risk weights range from 0% for U.S. government and agency securities, to as high as 1,250% for such exposures as certain tranches of securitizations or unsettled security/commodity transactions. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee's Standardized Approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card and home equity lines of credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2023, with an aggregate output floor phasing in through January 1, 2028. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company or CIT Bank. The impact of Basel IV on the Company and CIT Bank will depend on whether, and how, it is implemented by the federal bank regulators.

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Current Expected Credit Losses Transitional Provisions

In June 2016, FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which revises the methodology for estimating credit losses on financial assets measured at amortized cost (including loans and held-to-maturity debt securities), net investments in finance leases, available for sale debt securities and unfunded loan commitments. Under this guidance, the current expected credit losses (“CECL”) model is based on lifetime expected credit losses, rather than incurred losses, and requires the recognition of these lifetime losses in the allowance for credit losses, or allowance for off-balance sheet credit exposures, at the time of origination or purchase. The Company adopted this new guidance effective January 1, 2020.

During 2020, the OCC, FRB and FDIC collectively adopted a rule that allows banking organizations to delay for two years the impact of CECL’s effect on regulatory capital, followed by a three-year transition period. During the first two years of the five-year transition period, CIT will delay the day one impact of CECL to retained earnings plus a scaling factor of 25 percent of the change in the Adjusted Allowance for Credit Losses (“AACL”) from initial CECL implementation to the end of the current quarter, excluding the impact of the initial non-PCD charge related to MOB. After the initial two-year delay period, there will be a three-year transition period starting January 1, 2022. The day one impact of CECL and the 25% scaling factor of the change in non-PCD ACL from Day 1 to the end of the second year will be phased out as follows: 75 percent of transitional benefits are recognized in regulatory capital in year three; 50 percent in year four; and 25 percent in year five. After year five, CIT expects to have fully reversed out the temporary regulatory capital benefits from the two-year delay and three-year transition period. These changes are only applicable to regulatory capital. There was no impact to the balance sheet or the statement of operations.

Regulatory Expectations for Capital Planning

CIT is required to maintain a comprehensive and effective capital planning process and is subject to Federal Reserve guidance in supervision and regulation letter, SR 09-4  “Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies” (“SR 09-4”). Under SR 09-4, a BHC is expected to inform and consult with the FRB before (i) declaring and paying a dividend that could raise safety and soundness concerns, (ii) redeeming or repurchasing regulatory capital instruments when the BHC is experiencing financial weakness, or (iii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such instrument during the quarter in which the redemption or repurchase occurs. BHCs are expected to advise the FRB sufficiently in advance of such capital actions to provide reasonable opportunity for supervisory review and possible objection.  

In certain circumstances, CIT’s repurchases of its common stock may be subject to a prior approval or notice requirement under the regulations or policies of the FRB. Any redemption or repurchase of preferred stock or subordinated debt remains subject to prior supervisory approval.

In July 2020, the FRB issued Attachment C “Situations in Which Holding Companies May Expect Expedited Consultation” to SR 09-4, which provides clarity regarding the process that the Federal Reserve uses when consulting with holding companies as described in SR 09-4.

Liquidity Requirements

In line with international liquidity standards established by the Basel Committee to ensure that banking entities address both short-term and long-term funding needs, the federal banking agencies set minimum liquidity requirements for large banking organizations, including minimum levels of unencumbered high-quality liquid assets. In 2014, the federal banking regulators adopted a joint final rule implementing a liquidity coverage ratio (“LCR”), calculated as the ratio of a banking entity’s high-quality liquid assets to its total net cash outflows over 30 consecutive calendar days, for large and internationally active U.S. banking entities. The final rule applied 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.

In October 2019, the federal bank regulators issued final rules under the EGRRCPA for tailoring the criteria for determining the applicability of capital and liquidity requirements for large U.S. banking organizations (the “Tailoring Rules”). Under the Tailoring Rules, banking organizations with less than $100 billion in total consolidated assets, including the Company, are not subject to the LCR.

Nevertheless, the federal bank regulators have indicated that the capital planning and risk management practices of financial institutions with assets of less than $100 billion will continue to be reviewed through the regular supervisory process. The Company and CIT Bank maintain a liquidity risk management and monitoring process designed to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stress environments, subject to the regular supervisory review process. See “MD&A – Risk Management – Liquidity Risk”.

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 (i) 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, (ii) the acquisition of all or substantially all of the assets of any bank or savings association by any subsidiary of a BHC other than a bank, or (iii) the merger

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or consolidation 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 regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues, including the capital position of the combined organization, convenience and needs factors, including the applicant's CRA record, the effectiveness of the subject organizations in combating money laundering activities, and the transaction's effect on the stability of the U.S. banking or financial system. In addition, a FHC must obtain prior approval of the FRB before acquiring certain non-bank financial companies with assets exceeding $10 billion. As discussed in the Business Description section, our merger with FCB is pending regulatory approvals.

Dividends

CIT Group Inc. is a legal entity separate and distinct from CIT Bank and CIT’s other subsidiaries. Its primary sources of cash are interest on intercompany loans to its subsidiaries and dividends from its subsidiaries.

It is the policy of the FRB that a BHC generally pay dividends on common stock out of net income available to common shareholders over the past year, only if the prospective rate of earnings retention appears consistent with capital needs, asset quality, and overall financial condition, and the BHC is not in danger of failing to meet its minimum regulatory capital adequacy ratios. 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.

The ability of CIT Group Inc. to pay dividends on common stock may be affected by various factors, including regulatory capital requirements. Capital and non-capital standards established for depository institutions under the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended (“FDICIA”) may limit the ability of CIT Bank to pay dividends to CIT Group Inc. The right of CIT Group Inc., its stockholders, 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 Group Inc.’s other subsidiaries.

OCC regulations limit CIT Bank’s ability to pay 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 a dividend in either of the prior two years exceeded that year’s net income, the excess will 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.

Volcker Rule

Provisions of the Dodd-Frank Act, commonly known as the “Volcker Rule,” prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds and other private funds that are offered within specified exemptions to the Investment Company Act, known as “covered funds,” subject to certain exemptions. In November 2019, the OCC, FDIC, FRB, SEC, and Commodity Futures Trading Commission (“CFTC”) (together, the “Volcker Rule Regulators”) approved revisions to the regulations implementing the Volcker Rule (the “2019 Final Rule”), effective January 1, 2020, with mandatory compliance by January 1, 2021. The revisions implement the compliance programs requirements based on the trading size of an institution’s trading operations, which builds on the relief granted by the EGRRCPA.

The 2019 Final Rule established three tiers of banking entities, based on the dollar amount of trading assets and liabilities (excluding obligations of or guaranteed by the United States or its agencies and certain U.S. government owned or sponsored enterprises). Each banking entity must establish its compliance program based on whether it has significant trading assets and liabilities ($20 billion or more), moderate trading assets and liabilities ($1 billion or more but less than $20 billion), or limited trading assets and liabilities (less than $1 billion). Banking entities with limited trading assets and liabilities, such as CIT, have a rebuttable presumption of reliance, are not subject to CEO attestation requirements, and may implement the prohibitions and other requirements of the permitted trading activity into their existing internal policies and procedures.

In June 2020, the Volcker Rule Regulators finalized amendments to the Volcker Rule covered funds regulations, effective October 1, 2020. The amendments modified the provisions for certain existing covered fund exclusions, including loan securitizations and public welfare and small business funds, and added certain additional covered fund exclusions, including credit funds and venture capital funds.

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 Treasury, after consultation with the President of the United States, 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 systemic 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 certain modifications to reflect differences between depository institutions and non-bank financial companies and to reduce disparities between the treatment of creditors' claims under the U.S. Bankruptcy Code and in an OLA proceeding compared to those that would exist under the resolution model for insured depository institutions.

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An Orderly Liquidation Fund will fund OLA liquidation proceedings 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 financial companies with total consolidated assets of $50 billion or more. If an orderly liquidation is triggered, CIT Group Inc. could face assessments for the Orderly Liquidation Fund. We do not yet have an indication of the potential level of such assessments.

Prompt Corrective Action

The FDICIA, among other things, establishes five capital categories 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, 2020.

 

Prompt Corrective Action Ratios — December 31, 2020

 

Well

Capitalized(1)

 

Adequately

Capitalized

CET 1

6.5

%

 

4.5

%

Tier 1 Capital

8.0

%

 

6.0

%

Total Capital

10.0

%

 

8.0

%

Tier 1 Leverage(2)

5.0

%

 

4.0

%

(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 subject to the 3% supplemental leverage ratio requirement, which became effective on January 1, 2018.

CIT Bank's capital ratios were all in excess of minimum requirements to be deemed well capitalized at December 31, 2020.

The 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 institutions 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 “undercapitalized” 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 parent 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 (i) concentrations of credit risk, (ii) interest rate risk, and (iii) risks from non-traditional activities, along with an institution'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 examination rating with respect to certain matters.

Brokered Deposits

An insured depository institution, such as CIT Bank, generally is prohibited from accepting, renewing or rolling over brokered deposits unless the institution is well-capitalized under the prompt corrective action framework described above, or unless it is adequately capitalized and obtains a waiver from the FDIC. In addition, less than well-capitalized banks are subject to restrictions on the interest rates they may pay on deposits. In December 2020, the FDIC issued a proposed rule that is designed to bring the brokered deposits regulations in line with modern deposit taking methods and that may change the amount of deposits that would be classified as brokered.

Source of Strength Doctrine and Support for Subsidiary Banks

FRB policy and, after the Dodd-Frank Act, the BHC Act requires BHCs such as CIT Group Inc. 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 Group Inc. may not be able to provide such support without adversely affecting its ability to meet other obligations. If CIT Group Inc. 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 depositors and to certain other indebtedness of the subsidiary bank, including intercompany loans from the BHC to its subsidiary banks and senior and subordinated debt securities issued by the subsidiary banks to the BHC. 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

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the bank will be entitled to priority payment in respect of that commitment.

Enforcement Powers of Federal Banking Agencies

The FRB and other U.S. banking agencies have broad enforcement 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 directors, to administrative sanctions and potentially substantial civil and criminal penalties.

FDIC Deposit Insurance

Deposits of CIT Bank are insured by the DIF up to $250,000 for each depositor. The DIF is funded by fees assessed on insured depository institutions, including CIT Bank.

The FDIC uses a two scorecard system, one scorecard for most large institutions with more than $10 billion in assets, such as CIT Bank, and another scorecard for "highly complex" institutions with over $50 billion in assets that are directly or indirectly controlled by a U.S. parent with over $500 billion in assets. Each scorecard has a performance score and a loss-severity score that is combined to produce a total score, which is translated into an initial assessment 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, Earnings, 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 based upon significant 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 institutions, such as CIT Bank, the initial base assessment rate ranges from three to thirty basis points (0.03% – 0.30%) on an annualized basis. After the effect of potential base rate adjustments, the total base assessment rate could range from one and a half to forty basis points (0.015% – 0.40%) on an annualized basis. The total base assessment rate is multiplied by the institution’s assessment base, which is the average consolidated total assets minus average tangible equity, to determine the FDIC assessment fees.

The FDIC will, at least semi-annually, update its income and loss projections for the DIF and, if necessary, propose rules to further increase assessment rates.

Under the Federal Deposit Insurance Act ("FDIA"), the FDIC may terminate an institution’s 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 Group Inc, and its other subsidiaries and affiliates (“Affiliate Transactions”), are regulated pursuant to Sections 23A and 23B of the Federal Reserve Act and the FRB's Regulation W. These laws and regulations limit the types and amounts of Affiliate Transactions, including loans and other extensions of credit. Extensions of credit include credit exposure arising from repurchase and reverse repurchase agreements, and securities borrowing and derivative transactions. These laws and regulations also restrict certain other Affiliate Transactions that may otherwise take place, such as the purchase of existing loans or other assets. Affiliate Transactions generally must be on an arms-length basis and, in the case of extensions of credit, be secured by specified amounts and types of collateral. These laws and regulations generally do not apply to transactions between CIT Bank and its subsidiaries.

Most of CIT Bank’s covered transactions over the last 10 years have involved the purchase of railcars from CIT Group Inc.’s non-bank subsidiaries. During 2015, 2016 and 2018 CIT Bank purchased railcars from non-bank subsidiaries of CIT Group Inc. The aggregate remaining covered value of the railcar transfers to CIT Bank was $766 million at December 31, 2020. Several non-bank subsidiaries of CIT have entered into transactions to sell assets to CIT Bank from time to time. Each of these transactions by CIT Bank with non-bank subsidiaries of CIT constitute transactions with affiliates and are subject to the volume, asset quality, deal terms and other limits set forth in Sections 23A and 23B of the Federal Reserve Act and Regulation W.

Safety and Soundness Standards

The FDICIA requires the federal bank regulatory agencies to prescribe safety and soundness standards, by regulations or guidelines, as the agencies deem appropriate. Guidelines 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 risk exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify 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 disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies have 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

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material respect to implement an acceptable compliance 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 liabilities 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 disaffirmance 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 institution, 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 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, governing disclosures of credit terms to consumer borrowers;

 

the Home Mortgage Disclosure Act and Regulation C, 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, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

the Fair Credit Reporting Act and Regulation V, governing the use and provision of information to consumer 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;

 

the Real Estate Settlement Procedures Act and Regulation X, 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; and

 

the guidance of the various federal agencies charged with the responsibility of implementing such laws.

Deposit operations also are subject to consumer protection laws and regulation, such as:

 

the Truth in Savings Act and Regulation DD, which require disclosure of deposit terms to consumers;

 

Regulation CC, which relates to the availability of deposit funds to consumers;

 

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 subpoenas of financial records; and

 

the Electronic Funds Transfer Act and Regulation E, which governs electronic deposits to and withdrawals 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 consumers. Additionally, CIT Bank is subject to a variety of regulatory and contractual obligations imposed by credit owners, insurers and guarantors of the mortgages we originate and service. 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") and other government programs in which we participate.

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Consumer Financial Protection Bureau ("CFPB") Supervision

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 has jurisdiction over CIT, CIT Bank, and other subsidiaries with respect to matters that relate to these laws and consumer financial services and products and periodically conducts examinations.

The CFPB has adopted a number of significant rules that 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 mortgages 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 originating 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 business, result in increased compliance costs and affect the streams of revenue of such business.

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, providing credit to low- and moderate-income (“LMI”) individuals and communities within its assessment area. 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 community, 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 FHC 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 FHC must have received a rating of at least "satisfactory" in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of applications to acquire, merge, or consolidate with another banking 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. CIT Bank received a rating of "Satisfactory" on its most recent published CRA examination by the OCC dated August 6, 2018 and released December 5, 2019.

In May 2020, the OCC issued revisions to its CRA regulations, which expand the types of activities that qualify for CRA credit; revise how banks delineate their CRA assessment areas; and establish new standards for evaluating banks with more than $500 million in assets. The new rule is effective October 1, 2020 with compliance by banks that are subject to the general performance standards (banks over $2.5 billion in assets) to comply by January 1, 2023. In September 2020, the FRB issued a notice of proposed rulemaking requesting comments on how to modernize its CRA regulatory and supervisory framework, with comments due February 16, 2021. To date, the FDIC has not committed to either approach nor issued proposed rulemaking. The impact on CIT Bank from any changes to the CRA regulations will depend on how they are implemented and applied.

On November 1, 2019, as part of the process to acquire MOB, CIT announced a Community Benefits Plan developed in collaboration with the California Reinvestment Coalition (“CRC”) and the National Community Reinvestment Coalition (“NCRC”). Through the plan, CIT Bank agreed to fund $7.75 billion in CRA qualified lending and investments over a four-year term, covering the period of January 1, 2020 through December 31, 2023. Of the $7.75 billion commitment, $6.5 billion over the four-year plan period will be within California for statewide CRA lending and investments, with sub-targets for specified multi-family, small business and mortgage lending. Outside of California, the Bank has committed $1.25 billion over the four-year term in CRA qualified lending and investments to communities where the bank will have physical branches. The Plan sets forth additional goals for supplier diversity, and the addition of a new branch in California, which will serve LMI customers in a neighborhood of color.

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Incentive Compensation

The federal banking agencies have issued comprehensive guidance intended to ensure that the incentive compensation 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 organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively 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 oversight by the organization's board of directors.

In 2016, pursuant to the Dodd-Frank Act, the federal banking agencies and the SEC issued proposed rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (including CIT and CIT Bank) based on the same three principles in the existing guidance. These rules have not yet been adopted.

Anti-Money Laundering ("AML") and Economic Sanctions

In the U.S., the Bank Secrecy Act (the “BSA”), as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions, including banks, to detect and deter money laundering 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 regulatory authorities. Financial institutions are subject to Customer Due Diligence requirements, issued by the Financial Crimes Enforcement Network (“FinCEN”), to identify and verify the identity of natural persons, known as beneficial owners, who own, control, and profit from legal entity customers when those customers open accounts. 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 administered 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, terrorists, 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.

In January 2021, the Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering laws. Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards by the U.S. Department of the Treasury for evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-related authority, including a significant expansion in the available sanctions for certain BSA violations. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.

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 other jurisdictions in which it may do business, which often prohibit 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 implemented policies, procedures, and internal controls that are designed to comply with such laws, rules, and regulations.

Privacy Provisions, Customer and Client Information, and Cybersecurity

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 the Gramm-Leach-Bliley Act (“GLBA”) and the Fair and Accurate Credit Transactions Act of 2003 in the U.S., and various laws in other jurisdictions in which it may do business. Federal banking regulators, as required under the GLBA, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties, requiring disclosure of privacy policies to consumers and, in some circumstances, allowing consumers to prevent disclosure of certain personal information to nonaffiliated third parties. Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act that have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different affiliated companies for cross-selling products and services between those affiliated companies.

In addition, privacy and data protection are areas of increasing state legislative focus, and several states have recently enacted consumer privacy laws that impose compliance obligations with respect to personal information. For example, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including for information that is collected, processed, sold or disclosed pursuant to the GLBA. In August 2020, the California Office of Administrative Law approved the California Attorney General’s regulations to implement the CCPA. These

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regulations went into effect immediately. In November 2020, voters in the State of California approved the California Privacy Rights Act (“CPRA”), a ballot measure that amends and supplements the CCPA by creating the California Privacy Protection Agency, a watchdog privacy agency to be appointed shortly after the CPRA’s enactment. The CPRA also modifies the CCPA by expanding both the scope of businesses covered by the law and certain rights relating to personal information and its use, collection, and disclosure by covered businesses. In addition, similar laws have and may be adopted by other states where the Company does business.

In December 2020, the federal bank regulatory agencies released a proposed rule regarding notification requirements for banking organizations related to significant computer security incidents. Under the proposal, a bank holding company, such as the Company, and a national bank, such as CIT Bank, would be required to notify the Federal Reserve or OCC, respectively, within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The effects of this rulemaking on the Company and CIT Bank will depend on the final form of the rule and how it is implemented.

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 licensing 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 administration of loans; and

 

regulate the use and reporting of information related to a borrower'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 financing and leasing operations, including for aircraft, 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. Department 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 preempted 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 regulations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with respect to, among other things: licensing companies and agents to transact business; establishing statutory capital and reserve requirements and the solvency 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, distribution arrangements and payment of inducements; approving 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. Our Vermont insurance captive subsidiary is required to file reports, generally including detailed annual financial statements, with the insurance regulatory authority, and its operations and accounts are subject to periodic examination by such authorities.

Changes to laws of states and countries in which we do business could affect the operating environment in substantial and unpredictable 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.

 

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WHERE YOU CAN FIND MORE INFORMATION

The SEC maintains an Internet site at www.sec.gov, on which interested parties can electronically access our Annual Reports 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 Statements.

Our Annual Reports 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 annual Proxy Statements, are available free of charge on the Company's Internet site at www.cit.com as soon as reasonably practicable after such materials are electronically 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, and the Risk Management Committee, and our Code of Business Conduct are available, free of charge, on our internet site at www.cit.com/about/us/governance, 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 incorporated by reference into this Form 10-K, unless we have specifically incorporated it by reference.

GLOSSARY OF TERMS

Accretable Yield reflects the excess of cash flows expected to be collected (estimated fair value at acquisition date) over the recorded investment of Purchase Credit Impaired (“PCI”) Loans and Investments 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 principal and interest payments and collateral values. Upon adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related ASUs, on January 1, 2020, the concept of PCI was eliminated, thereby eliminating the concept of Accretable Yield. See Item 8, Note 1 — Business and Summary of Significant Accounting Policies.

Adjusted Allowance for Credit Losses (“AACL”) is a regulatory measure that includes only the allowances that have been charged against earnings or retained earnings, which excludes allowances on PCD assets. The Revised CECL Transition Rule utilizes AACL in the calculation of the 25% scaling factor transition amount. The scaling factor is calculated by multiplying 25% by the difference between the AACL at CECL adoption and the AACL as of the end of the quarter during the first two years of the transition.

Allowance for Credit Losses (“ACL”) reflects the estimated credit losses over the full remaining expected life of the portfolio. See CECL below. For presentation purposes, the previously reported 2019 allowance for loan losses (“ALLL”) has been re-labeled as ACL in certain tables and text in this document.

Assets Held for Sale ("AHFS") include loans and operating lease equipment that we no longer have the intent or ability to hold until maturity. As applicable, AHFS also includes a component of goodwill associated with portfolios or businesses held for sale.

Available Cash consists of the unrestricted portions of ‘Cash and due from banks’ and ‘Interest-bearing cash’, excluding cash not accessible for liquidity, such as vault cash and deposits in transit.

Available-for-sale ("AFS") is a classification that pertains to debt securities. We classify debt securities as AFS when they are not considered trading securities, securities carried at fair value, or held-to-maturity securities. AFS securities are included in investment securities in the balance sheet.

Average Earning Assets ("AEA") is a non-GAAP measure that is computed using daily balances of Earning Assets. We use this average for certain key profitability ratios, including return on AEA, and Net Finance Revenue as a percentage of AEA (Net Finance Margin) for the respective period.

Average Loans is computed using daily balances and is used to measure the rate of return on loans and the rate of net charge-offs, for the respective period.

Average Operating Leases ("AOL") is computed using daily balances and is used to measure the rate of return on our operating lease portfolio for the respective period.

Capital Conservation Buffer (“CCB”) is the excess 2.5% of each of the capital tiers that banks are required to hold in accordance with Basel III rules, above the minimum CET 1 Capital, Tier 1 capital and Total capital requirements, designed to absorb losses during periods of economic stress.

Common Equity Tier 1 ("CET1"), Additional Tier 1 Capital, Tier 1 Capital, Tier 2 Capital, and Total Capital are regulatory capital measures as defined in the capital adequacy guidelines issued by the Federal Reserve. CET1 is common stockholders' equity reduced by capital deductions such as goodwill, intangible assets and DTAs that arise from net operating loss and tax credit carryforwards 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 including, non-cumulative preferred stock. Total Capital consists of Tier 1 Capital and Tier 2 Capital, which includes subordinated debt, and qualifying allowance for credit losses and other reserves.

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Current Expected Credit Losses (“CECL”) introduces a forward-looking “expected loss” model to estimate credit losses over the full remaining expected life of the portfolio, rather than the incurred loss model under previous U.S. GAAP standards. Estimates under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forecasts regarding the collectability of reported amounts. Generally, the model requires that an ACL be estimated and recognized for financial assets measured at amortized cost within its scope.

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.

Deposit Betas represents the correlation, or relative rate change, between changes in the rates paid on deposits and changes in overall market interest rates.

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.

Earning Assets is a non-GAAP measure that is the sum of loans (as defined below, less the credit balances of factoring clients), operating lease equipment, net of accumulated depreciation, AHFS, interest-bearing cash, investment securities, and securities purchased under agreements to resell, all as of a specific date.

Economic Value of Equity Sensitivity ("EVE Sensitivity") measures the net impact of hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments.

FICO Score is a credit bureau-based industry standard score developed by the Fair Isaac Corporation (“FICO”) that predicts the likelihood of borrower default. We use FICO scores in underwriting and assessing risk in our consumer lending portfolio.

Gross Yield is calculated as finance revenue (interest income plus rental income on operating leases) divided by AEA and derives the revenue yield generated over the respective period.

High Quality Liquid Securities (“HQL securities”) consist of readily-marketable, unpledged securities, as well as securities pledged but not drawn against at the FHLB and available for sale, and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements.  

Impaired Loan is a loan for which, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to the contractual terms of the loan.

Interest income includes interest earned on loans, interest-bearing cash balances, debt investments and dividends on investments.

Lease — finance is an agreement in which the party who owns the property (lessor), which is CIT as part of our finance business, permits 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. Finance leases are commonly known as sales-type leases and direct finance leases.

Lease — operating is a lease in which CIT retains ownership of the asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence.

Liquid Assets includes Available Cash and HQL securities.

Loans include loans, finance lease receivables, and factoring receivables, and do not include amounts contained within AHFS.

Loans and Leases include Loans, operating lease equipment, net, and AHFS, all measured as of a specific date.

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 calculated as the total loan obligations (unpaid principal balance) secured by collateral divided by the fair value of the collateral.

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 AHFS.

Net Efficiency Ratio is a non-GAAP measure that measures the level of operating expenses to our revenue generation over a period of time. It is calculated by dividing operating expenses, excluding intangible assets amortization and restructuring charges, by Total Net Revenue. This calculation may differ from other financial institutions' ratio due to the inclusion of operating lease revenue and associated expenses, and the exclusion of the noted item.

Net Finance Revenue ("NFR") is a non-GAAP measurement reflecting Net Interest Revenue (defined below) plus net operating lease revenue (rental income on operating lease equipment less depreciation on operating lease equipment and maintenance and other operating lease expenses). When divided by AEA, the product is defined as Net Finance Margin ("NFM"). NFM is a

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non-GAAP measurement. These are key measures used by management in the evaluation of the financial performance of our business.

Net Interest Income Sensitivity ("NII Sensitivity") measures the net impact of hypothetical changes in interest rates on forecasted NFR, for our interest rate sensitive assets, liabilities and off-balance sheet instruments, assuming a static balance sheet over a twelve-month period.

Net Interest Revenue reflects interest and fees on loans, interest on interest-bearing cash, and interest/dividends on investments less interest expense on deposits and borrowings.

Net Operating Loss Carryforward / Carryback ("NOLs") is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. 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 transaction, whether it acts as the agent or a participant, and in certain instances, it includes asset purchases from third parties.

Non-accrual Loans include loans greater than or equal to $500,000 that are individually evaluated and determined to be impaired, as well as loans 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 loans also include loans with revenue recognition on a cash basis because of deterioration in the financial position of the borrower.

Non-performing Assets include Non-accrual Loans, OREO, and repossessed assets.

Other Non-Interest Income includes (1) fee income, including fees on lines of credit, letters of credit, capital market related fees, agent and advisory fees and servicing fees, (2) factoring commissions (3) gains and losses on leasing equipment, net of impairments, (4) BOLI income, (5) property tax income, (6) gains and losses on investment securities, net of impairments, and (7) other income.

Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.

Purchased Credit-Impaired (“PCI”) Loans and PCI Investments are loans and investments that at the time of an acquisition were considered impaired, because there was evidence of credit deterioration since origination of the loan and investment and it was probable that all contractually due amounts (principal and interest) would not be collected. Upon adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related ASUs, on January 1, 2020, the concept of PCI was eliminated and replaced by purchase credit deteriorated accounting. See Item 8, Note 1 — Business and Summary of Significant Accounting Policies.

Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain HQL securities that are available for secured funding at the FHLB.

Purchase Accounting Adjustments (“PAA”) reflect the fair value adjustments to acquired assets and liabilities assumed in a business combination.

Purchased Credit Deteriorated (“PCD”) financial assets are acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. Previously reported PCI loans under ASC 310-30 transitioned to PCD loans upon adoption of CECL.

Regulatory Credit Classifications used by CIT are as follows:

 

Pass — These assets do not meet the criteria for classification in one of the following categories;

 

Special Mention — These assets exhibit potential weaknesses that deserve management's close attention and if left uncorrected, 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 in full unlikely, based on current facts, conditions, and values; and

 

Loss — These assets are considered uncollectible and of little or no value and are generally charged off.

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Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.

Residual Values represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the value to which the asset is depreciated at the end of its estimated useful life.

Right of Use Asset (“ROU Asset”) represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.

Risk Weighted Assets ("RWA") is the denominator to which CET1, Tier 1 Capital and Total 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). RWA items 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 loans with the intent to sell a portion, or the entire balance, of these assets to other institutions. We earn and recognize fees and/or gains on sales, which are reflected in other non-interest income, for acting as arranger or agent in these transactions.

Tangible Book Value ("TBV") is a non-GAAP measure that excludes goodwill and intangible assets from common stockholders' equity. We use TBV in measuring tangible book value per common share as of a specific date.

Total Net Revenue is a non-GAAP measure that is the sum of NFR and other non-interest income and is used to calculate the efficiency ratio.

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.

Variable Interest Entity ("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 significant decisions affecting the entity'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 assumption of underwriting risk in certain transactions in addition to interest income. We recognize yield-related origination fees in interest income over the life of the lending transaction and recognize yield-related prepayment fees when the loan is prepaid.

Item 1A. Risk Factors

 

The operation of our business, and the economic and regulatory climate in the U.S. and other jurisdictions in which we do business involve various elements of risk and uncertainty. You should carefully consider the risks and uncertainties described below before deciding 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 immaterial, could have a material adverse effect on our business, financial condition, and results of operations.

Merger-Related Risks

Failure to complete the merger with First Citizens could negatively affect our stock price and our future business and financial results.

If our pending merger with First Citizens is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, we would be subject to a number of risks, including the following:

 

we may experience negative reactions from the financial markets, including negative effects on our stock price

 

we may experience negative reactions from our customers and vendors

 

we will have incurred substantial expenses and will be required to pay certain costs relating to the merger, including legal, accounting, and other fees, whether or not the merger is completed

 

our management team will have devoted substantial time and resources to matters relating to the merger, and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to CIT, which could cause CIT to lag competitor advances.

 

In addition, if the Merger Agreement is terminated and CIT seeks another merger or business combination, the market price of our common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration First Citizens has agreed to provide in the merger.

 

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We will be subject to uncertainties while our merger with First Citizens is pending, which could adversely affect our business.

 

Uncertainty about the effect of the merger on our employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that transact business with us to seek to change their existing business relationships with us. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving corporation following the merger.

 

The Merger Agreement may be terminated and our merger with First Citizens may not be completed.

 

The Merger Agreement is subject to a number of customary closing conditions, including the receipt of regulatory approvals and the requisite approvals of CIT’s and First Citizens’ stockholders (which stockholder approvals were obtained on February 9, 2021). Conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, we and/or First Citizens may elect to terminate the Merger Agreement under certain circumstances.

 

Our ability to complete our pending merger with First Citizens is subject to various regulatory approvals, which may impose conditions that could adversely affect us.

 

Before our pending merger with First Citizens may be completed, we must obtain federal and state regulatory approvals, including approval of the FRB, the FDIC, and the North Carolina Commissioner of Banks. These regulators may impose conditions on the completion of the merger, and any such conditions could have the effect of delaying completion of the merger or causing a termination of the Merger Agreement. There can be no assurance as to whether regulatory approval will be received, the timing of that approval, or whether any conditions will be imposed.

 

Shareholder litigation could prevent or delay the closing of our pending merger with First Citizens or otherwise negatively affect our business and operations.

 

We may incur additional costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with our pending merger with First Citizens. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the merger.

 

Because the market price of First Citizens’ common stock may fluctuate, our stockholders cannot be certain of the precise value of the merger consideration they may receive in our pending merger with First Citizens.

 

At the time our pending merger with First Citizens is completed, each issued and outstanding share of our common stock (other than certain shares held by us or First Citizens) will be converted into the right to receive 0.062 shares of First Citizens’ class A common stock. There will be a time lapse between each of the date of the proxy statement/prospectus for the stockholders’ meeting to approve the merger, the date on which our stockholders vote to approve the merger, and the date on which our stockholders are entitled to receive shares of First Citizens’ common stock actually receive such shares. The market value of First Citizens’ common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in First Citizens’ businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of our and First Citizens’ control. The actual value of the shares of First Citizens’ common stock received by our shareholders will depend on the market value of shares of First Citizens’ common stock at the time the merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the Merger Agreement.

Strategic Risks

Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. The extent to which the COVID-19 pandemic will negatively affect our business, financial condition, liquidity, capital and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness and acceptance of any vaccines, the direct and indirect impact of the pandemic on our employees, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.

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Although financial markets have rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed some improvement during the second half of 2020, many of the circumstances that arose or became more pronounced after the onset of the COVID-19 pandemic persisted at the end of the year, including (i) sudden and significant declines, and significant increases in volatility, in financial markets; (ii) ratings downgrades, credit deterioration and defaults in many industries, including transportation, natural resources, retail, hospitality and commercial real estate; (iii) customers drawing on credit lines to increase liquidity; (iv) the federal funds rate and yields on U.S. Treasury securities near zero; and (v) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. In addition, many of our customers, counterparties and third-party service providers have been, and may further be, affected by “stay-at-home” orders, market volatility, supply chain disruption, and other factors that increase their risks of business disruption or that may otherwise affect their ability to repay loans, perform under the terms of any agreements with us or provide other essential services. As a result, our credit, operational and other risks are generally expected to remain elevated until the pandemic subsides.

Although we have a business continuity plan that is designed to provide for our continuing operation in case of potentially disruptive events, such as a global pandemic, there can be no guarantee that our plan will continue to effectively address some or all of the effects of the COVID-19 pandemic. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, failures in systems or technology or other restrictions in connection with the pandemic, or if we are unable to maintain service in our branches, lockboxes, or other operations that cannot be operated remotely.

Depending on the duration and severity of the pandemic going forward, the conditions noted above could continue for an extended period and these or other adverse developments may occur or reoccur. We continue to monitor the sectors that are most susceptible to economic uncertainty as a result of the COVID-19 pandemic. The COVID-19 pandemic has significantly reduced demand for goods and service for many of our customers and other businesses in sectors that we service. In the retail sector, our exposure is primarily in the factoring business, principally in trade receivables, and to a lesser extent in the commercial real estate business. In the hospitality and transportation sectors, we have loan exposures to the restaurant, lodging, gaming, maritime, aviation and rail industries. The significant declines in the price of, and demand for, oil and gas may have negative effects on not only our loan exposures in the exploration and production sector, but may also lead to a decreased demand for our railcars, and could have a significant adverse effect on the demand for ships that are collateral for our loans. Further, we have exposure to small businesses through both equipment loans and leases and through SBA loans, which could be adversely affected by the extensive closure of businesses in many states during the COVID-19 pandemic. We also have exposure to single family residential mortgages, which could be adversely affected by job losses due to the economic dislocation resulting from the COVID-19 pandemic. Further, we have implemented several forms of temporary relief to our consumer and commercial customers, including payment deferrals, suspension of foreclosures and evictions, and fee waivers for ATM transactions, overdrafts, and early withdrawal of certificates of deposit, which may adversely affect our revenue and results of operations or result in higher rates of default and increased credit losses in future periods.

The effects of the COVID-19 pandemic on economic and market conditions have increased demands on credit facilities that we provide to our customers, which could have an adverse impact on our liquidity. In addition, these adverse developments may negatively affect our capital and leverage ratios. We previously announced that we were suspending repurchases of our common stock in connection with our acquisition of Mutual of Omaha Bank until our target 10.5% CET1 capital ratio was reached, which we originally projected to occur by the end of 2020. The COVID-19 pandemic adversely affected our ability to reach the 10.5% target by the end of 2020, and, even if that target is reached at a later date, may cause us to continue suspension of repurchases or further reduce capital distributions to preserve capital and liquidity to meet our customers’ needs. Long-term adverse effects could also prevent us from satisfying minimum regulatory capital ratios. Further, although we continue to monitor our capital and liquidity, including through stress testing, there can be no guarantee that we will be able to accurately predict our future capital and liquidity needs.

In addition to the potential impact on industries that we serve, we are also potentially impacted by increased cybersecurity attacks. In times of economic stress, there are typically increased attempts at cybersecurity attacks to exploit potential weaknesses. For example, there currently are increased attempts at phishing attacks, in which attackers pose as known persons or authorities to entice employees to reveal their network credentials. Although we have significant resources dedicated to cybersecurity, there is no guarantee that we will not fall victim to phishing attacks or other cybersecurity attacks, which could lead to unauthorized access to confidential customer information or disruption of our technology and systems.

Further, like most organizations, we are susceptible to key man risk, meaning the risk that key members of our executive management team, such as our Chairwoman and CEO, our CFO, the leaders of our two operating segments, our Chief Risk Officer, our Chief Credit Officer, or our Chief Technology and Operations Officer become ill or are incapacitated. Although we have management succession plans in place, there is no guarantee that those plans will be successfully implemented or will succeed.

Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown, and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. Other negative effects of COVID-19 that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time. It is likely, however, that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides. Until the pandemic subsides, we may experience increased draws on lines of credit, reduced revenues in certain commercial business lines and increased credit losses in our lending portfolios. Even after the pandemic subsides, the U.S. economy as well as most other major economies may struggle to reopen their economies and may continue to experience a recession, and we anticipate our businesses would be materially and adversely affected by a prolonged or double-dip recession in the U.S. and other major markets.

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If the assumptions and analyses underlying our strategy and business plan are incorrect, including with respect to market conditions, capital and liquidity, business strategy, and operations, 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, credit ratings, revenue growth, earnings, interest margins, expense levels, cash flow, credit losses, liquidity and financing sources, lines of business and geographic scope, acquisitions and divestitures, equipment residual values, capital expenditures, retention of key employees, and the overall strength and stability of general economic 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. Accordingly, our actual financial condition and results of operations may differ materially from what we have forecast, and we may not be able to reach our goals and targets. 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 buying or selling a business or assets, or entering into a new business initiative, which may have an adverse effect on our business or results of operations.

As part of our strategy and business plan, we may consider buying or selling a business or assets in order to manage our business, the products and services we offer, our asset levels, credit exposures, or liquidity position. There are a number of risks inherent in purchase 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 business or assets that are considered non-strategic or high risk, that we overpay for an acquisition or receive inadequate consideration for a disposition, or that we fail to properly integrate an acquired company or to realize the anticipated benefits from the transaction. We acquired MOB on January 1, 2020, and we sold (i) NACCO SAS, our European rail car leasing business in October 2018, and (ii) our Financial Freedom servicing business, including our reverse mortgage portfolio, in May 2018.

In engaging in business acquisitions, CIT may decide to pay a premium over book and market values to complete the transaction, which may result in 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 business or assets, we could become more susceptible to economic downturns and competitive pressures.

Integrating the operations of an acquired entity can be difficult. As a result, CIT may not be able to fully achieve its strategic objectives and planned operating efficiencies in an acquisition. If we fail to realize the expected revenue increases, cost savings, increases in geographic 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 an adverse effect on our business, financial condition, and results of operations.

When we sell a business or assets, the agreement between the Company and the buyer typically contains representations and warranties, including with regard to the conduct of the business, the servicing practices, and compliance with laws and regulations, among others, and the agreement typically contains certain indemnifications to allocate risks among the parties and may be subject to certain caps and limitations. CIT may also retain certain pre-closing liabilities, including the cost of legacy and future litigation matters related to pre-closing actions. The terms of any agreement, including any representations and warranties, indemnifications or retained liabilities, may subject us to ongoing risks after the sale is completed and could have an adverse effect on our business, financial condition, and results of operations.

In addition, as part of its ongoing business, CIT from time to time enters into new business initiatives, and 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 performance, or otherwise, or may require higher expenditures than anticipated to generate new business volume. The expense initiatives may not reduce expenses as much as anticipated, whether due to delays in implementation, higher than expected or unanticipated 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 initiatives or the projected expense reductions from efficiency improvements, its results of operations and profitability may be adversely affected.

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 geographic region. We have a wide variety of competitors that include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, community banks, internet banks, leasing companies, hedge funds, business development companies, insurance companies, mortgage companies, manufacturers and vendors. Some of our non-bank competitors are not subject to the same extensive regulation we are and, therefore, may have greater flexibility in competing for business. In particular, the activity and prominence of so-called marketplace lenders and other technological financial service companies (or fintechs) have grown significantly over recent years and are expected to continue growing.

We compete on the basis of pricing (including the interest rates charged on loans or paid on deposits and the pricing for equipment leases), product terms and structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns). The ability to access and use technology in the delivery of products and services to our customers is an increasingly important competitive factor in the financial services

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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, which could result in reduced net finance revenue and profitability and lower returns. On the other hand, if we meet those competitive pressures, it is possible that we could incur significant additional expense, experience lower returns due to compressed net finance revenue, 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 requirements or supervisory expectations, there could be an adverse effect on our business, results of operations, and financial condition.

As a banking organization, CIT’s capital and liquidity are subject to regulation and supervision by banking regulators. Although the enhanced prudential supervision requirements imposed on large BHCs under the Tailoring Rules do not apply to CIT, the banking regulators, pursuant to their regular supervisory process, could require CIT to maintain more and higher quality capital than previously. The banking regulators could also require CIT to hold higher levels of liquidity or high-quality liquid assets (“HQLA”), thereby limiting our ability to invest in longer-term other assets at higher yields. 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, limiting our ability to pay dividends or otherwise return capital to shareholders, or requiring the raising of additional capital, which may be dilutive to shareholders. If we are unable to maintain sufficient capital or adequate liquidity, it may have a material adverse effect on our business, results of operations and financial condition.

Our Revolving Credit Facility also includes terms that require us to comply with regulatory capital requirements and maintain a Tier 1 regulatory capital ratio of at least 9.0%. If we are unable to satisfy these or any of the other relevant terms of the Revolving Credit Facility, the lenders could elect to terminate the Revolving Credit Facility and require us to repay outstanding borrowings. In such event, unless we can refinance the indebtedness coming due and replace the Revolving Credit Facility, we may not have adequate liquidity for our business needs, which may have an 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 reasons, it could adversely affect our future business operations.

CIT’s liquidity is essential for the operation of our business. Our liquidity, and our ability to fund our activities through bank deposits or wholesale funding markets, could be affected by a number of factors, including market conditions, our capital structure and capital levels, our credit ratings, and the performance of our business. An adverse change in any of those factors, and particularly 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 deposit markets or wholesale funding markets. Further, an adverse change in the performance of our business could have a negative impact on our operating cash flow. Our liquidity may also be impaired by unforeseen outflows of cash or collateral, such as occurred during the first quarter of 2020 when corporate customers drew on revolving credit facilities at a historic pace in response to the COVID-19 pandemic. CIT’s credit ratings are subject to ongoing review by the rating agencies, which consider a number of factors, including CIT’s own financial strength, performance, prospects, and operations, as well as factors not within our control, including conditions affecting the financial services industry generally. See the "Funding and Liquidity — Debt Ratings" section of the MD&A for additional discussion of CIT’s credit ratings.  There can be no assurance that we will maintain or improve our current ratings, some of which are below investment grade at the holding company level. If we experience a substantial, unexpected, or prolonged change in the level or cost of liquidity, or fail to generate sufficient cash flow to satisfy our obligations, either as a result of a downgrade in our credit ratings or for any other reason, 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 deposits at CIT Bank or if our aggregate amount of deposits decreases.

CIT Bank currently has a retail branch network and an on-line bank, which offer a variety of deposit products to retail customers. CIT Bank also offers a range of deposit products to commercial clients. Our ability to raise deposits and offer competitive interest rates on deposits is dependent on CIT Bank's capital levels, the size of its branch network, the quality and scope of its online banking platform, and its ability to attract lower cost demand deposits. Federal banking law generally prohibits a bank from accepting, renewing or rolling over brokered deposits, 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. We are likely to face significant competition for deposits from larger BHCs who are similarly seeking larger and more stable pools of funding and from new entrants to online banking. If CIT Bank fails to expand and diversify its deposit-taking capability, or if CIT Bank's aggregate amount of deposits decreases due to economic uncertainty, a migration of deposits to the largest banks, or for other reasons, 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 Group Inc. is a legal entity separate and distinct from its subsidiaries, including CIT Bank, and relies on interest and 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 to CIT Group Inc. At CIT Group Inc., routine payment of dividends from earnings that can be

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sustained on a recurring basis would not typically require consultation with the regulators. However, regulatory guidance states that a BHC should consult with regulators in circumstances where the declaration and payment of a dividend could raise concerns about the safe and sound operation of the BHC and its depository institution subsidiaries, where the dividend declared for a period is not supported by earnings for that period, and where a BHC plans to declare a material increase in its common stock dividend. In certain circumstances, CIT Group Inc.’s repurchases of its common stock may be subject to a prior approval or notice requirement under the regulations or policies of the FRB.

Credit and Asset Risks

Our allowance for credit losses may prove inadequate.

The quality of our loans and leases depends on the creditworthiness of our customers, their ability to fulfill their obligations to us, and the value of the underlying collateral. We maintain a consolidated allowance for credit losses on our loans to provide for loan defaults and non-performance. The amount of our allowance reflects management's judgment of current expected credit losses over the life of the portfolio. However, the economic environment is dynamic, and our portfolio credit quality could decline in the future.

Our allowance for credit 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 equipment, real estate, or accounts receivable taken as collateral, or if the value of equipment, real estate, or other collateral deteriorates significantly, our allowance for credit losses may prove inadequate, which could have a material adverse effect on our business, results of operations, and financial condition.

We could be adversely affected by the actions and changes in the commercial soundness of other financial institutions.

CIT’s ability to engage in routine funding transactions could be adversely affected by the actions and changes in the commercial soundness of other financial institutions. Financial institutions are interrelated as a result of syndications, trading, clearing, counterparty, or other relationships. CIT has exposure to many different industries and counterparties, and it routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, private equity funds, hedge funds, vendors, and other institutional clients. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, 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 counterparty or client. In addition, CIT’s credit risk may be impacted if the collateral held by it cannot be realized or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to CIT. There is no assurance that any such losses would not adversely affect CIT, possibly materially.

Our Rail business is concentrated by industry and our retail banking business is concentrated geographically, and any downturn in the rail 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 Rail business is diversified by customer and geography, it is concentrated in one industry. If there is a significant downturn in shipping by railcar, it could have a material adverse effect on our business and results of operations.

A majority of CIT Bank’s retail branch network and a majority of its consumer mortgage loans are located in Southern California. Although our other businesses are national in scope, these other businesses also have a significant presence within the Southern California geographic market. Adverse conditions in the Southern California geographic market, such as inflation, unemployment, recession, market disruption, natural or man-made 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.

We may not be able to realize our entire investment in the equipment we lease to our customers.

Our loans and leases include a significant portion of leased equipment, including but not limited to 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 important 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 equipment’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 equipment, excessive use of the equipment, recession or other adverse economic conditions, it could adversely affect the current values or the residual values of such equipment. For example, as the price of or demand for crude oil, coal, or other commodities goes up or down, whether due to changes in production levels, general economic conditions, concerns over climate change, or other reasons, it may affect the demand for railcars used to ship such commodities and the lease rates for such railcars, which could affect the residual values of such railcars. Further, if certain commodities cause more wear and tear on railcars, such as increased corrosion, it may increase maintenance and repair costs, which could affect the residual values of such railcars.

Certain equipment residual values, including railcar residuals, are dependent on the manufacturers’ or vendors’ warranties, reputation, and other factors, including demand and market conditions and liquidity. Residual values for certain equipment, including rail and medical equipment, may also be affected by changes in laws or regulations that mandate design changes or

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additional safety features. For example, regulations issued by the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) in the U.S. and Transport Canada (“TC”) in Canada in 2015, and supplemented by the Fixing America’s Surface Transportation Act (“FAST Act”) in the U.S., 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 a flammable liquid. 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. Consequently, 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. Finance 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.

Market Risks

Investment in and revenues in foreign jurisdictions are subject to various risks and requirements associated with transacting business in foreign countries.

We conduct limited business operations in certain foreign jurisdictions, and we engage in certain cross border lending and leasing transactions. An economic recession or downturn, increased competition, or business disruption associated with the political or regulatory environments in the international markets in which we do business could adversely affect us.

In addition, our limited foreign lending and leasing transactions are sometimes denominated 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 international loan and lease transactions and the level of international revenues that we generate from such transactions. Reported results from our foreign loan and lease transactions may fluctuate from period to period due to exchange rate movements in relation to the U.S. dollar.

Foreign countries have various compliance requirements for tax filings, which are required in order to obtain and maintain licenses to transact business and may be different in some respects from tax laws and regulations of the U.S. If we are unable to properly complete and file our tax filings, tax authorities in the applicable jurisdiction may restrict our ability to do business.

Furthermore, both our domestic and international loan and lease transactions 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, anti-bribery rules under the FCPA and other federal statutes. Under trade sanction and anticorruption laws, the government may seek to impose modifications to business 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 severe criminal and civil fines, penalties and other sanctions. If any of the risks described above materialize, it could adversely impact our business, operating results and financial condition.

We may be adversely affected by significant changes in interest rates.

We rely on 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 (i) interest and rental income on our loans and leases and interest expense on deposits and other borrowings, depreciation on our operating lease equipment and maintenance and other operating lease expenses. Prevailing economic conditions, 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 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 requirements, generally pay higher rates of return than financial institutions.

Any significant change in market interest rates may result in a change in net finance margin and net finance revenue. A substantial portion of our loans and other financing products, a portion of our investment portfolio, and a portion of our deposits and other borrowings, bear interest at floating interest rates. As interest rates increase, periodic 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 payment transactions, resulting in payment defaults and loan impairments. As interest rates rise, the yield on any floating rate securities in our investment portfolio will increase but the market value of securities with fixed-rate interest payments will fall. 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 fall, the market value of fixed-rate investment securities will rise but the yield on any floating-rate securities in our investment portfolio will fall.  As interest rates rise and fall over time, any significant change in market rates may result in a change in net finance revenue, particularly if the interest rates we pay on our deposits and other borrowings and the interest rates we charge our customers do not change uniformly either due to timing or differences in reference rates, which may have a material adverse effect on our business, operating results and financial condition.

During the first quarter of 2020, the Federal Reserve reduced the targeted Federal Funds rate to between zero and 0.25%. In addition, some foreign central banks have moved to a negative interest rate environment, which has exerted downward pressure on the profitability of banks in those regions. The Company’s financial condition could be damaged if this interest rate trend

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extends to the United States.

Reforms to and uncertainty regarding LIBOR and certain other indices may adversely affect our business.

The U.K. Financial Conduct Authority announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts as soon as practicable and in any event by December 31, 2021. It is not possible to know whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments. Uncertainty as to the nature and effect of such reforms and actions, and the potential or actual discontinuance of benchmark quotes, may adversely affect the value of, return on and trading market for our financial assets and liabilities that are based on or are linked to benchmarks, including any LIBOR-based securities, loans and derivatives, or our financial condition or results of operations. Furthermore, there can be no assurances that we and other market participants will be adequately prepared for an actual discontinuation of benchmarks, including LIBOR, that may have an unpredictable impact on contractual mechanics (including, but not limited to, interest rates to be paid to or by us) and cause significant disruption to financial markets that are relevant to our business segments, particularly Commercial Banking, among other adverse consequences, which may result in negative impacts to our financial condition or results of operations.

Regulators and industry groups have, among other things, published recommended fallback language for LIBOR-linked financial instruments, and identified recommended alternatives for certain reference rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR). We continue to monitor industry and regulatory developments and have a transition program in place to manage the implementation of alternative reference rates. Though the usage of, methodologies for, and proposals around alternative reference rates continue to evolve, it is not possible at this time to predict what the ultimate acceptance will be and what the effect of this transition may be on the markets for floating-rate financial instruments.

Compliance, Regulatory and Legal Risks

Although we are not subject to the enhanced prudential supervision requirements applicable to banking organizations over $100 billion in assets, we may still be adversely affected by the increased scrutiny applicable to large regional banking organizations.

As a BHC with total consolidated assets of less than $100 billion, CIT Group Inc. is not subject to the FRB’s enhanced prudential standards. However, the FRB has stated that it will continue to supervise and regulate financial institutions to ensure the safety and soundness of individual institutions and the stability of the broader banking system, and the capital planning and risk management practices of financial institutions with assets of less than $100 billion, including CIT Group Inc., will continue to be reviewed through the regular supervisory process. CIT Group Inc. has dedicated significant time, effort, and expense over time to comply with regulatory and supervisory standards and requirements imposed by our regulators, either through rulemaking or the supervisory process, and we expect to continue to do so. If we fail to develop at a reasonable cost the systems and processes necessary to comply with the standards and requirements 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. CIT is subject to the comprehensive, consolidated supervision of the FRB and CIT Bank is subject to supervision by the OCC, in each case including risk-based and leverage capital requirements, information reporting requirements, consumer protection laws and regulations, financial crimes monitoring, and others. Further, CIT Bank is subject to regulation in certain instances by the FDIC, due to its insured deposits, and the CFPB. This regulatory oversight is established to protect depositors, consumer borrowers, federal deposit insurance funds and the banking system as a whole, and is not intended to protect debt and equity security holders. The financial condition and results of operations of a BHC (including its depository institution subsidiaries) that fails to satisfy applicable regulatory requirements and that has elected to be treated as an FHC, including maintaining its status as well managed and well capitalized and meeting the supervisory standards set by banking regulators, could be adversely affected, and the BHC may be restricted in its ability to undertake certain capital actions (such as declaring dividends or repurchasing outstanding shares) or to engage in certain activities or acquisitions.

These laws and regulations may impose significant assessments on CIT. Because our deposits are insured by the FDIC, we are subject to FDIC deposit insurance assessments. We generally are unable to control the amount of our assessments, and we may be required to pay higher FDIC assessments in the future than we currently do if increases are required to meet the FDIC’s designated reserve ratio, or if there is an increase in the number of bank failures. In addition, CIT could be required to pay risk-based assessments to the Orderly Liquidation Fund if there are future liquidations of systemically important BHCs or non-bank financial companies. Any increase in our FDIC insurance assessments or any assessments related to the Orderly Liquidation Fund could adversely affect our business, financial condition, or results of operations. See the “Regulation – Banking Supervision and Regulation – FDIC Deposit Insurance” and “Regulation – Banking Supervision and Regulation – Orderly Liquidation Authority” sections of Item 1. Business Overview for additional discussion of FDIC deposit insurance and Orderly Liquidation Fund assessments.

Furthermore, the FRB and other U.S. banking agencies have broad enforcement powers with respect to BHCs and insured depository institutions, such as CIT and CIT Bank, including the power to impose cease and desist orders and/or substantial fines and other penalties. Failure to comply with applicable laws or regulations could subject CIT or CIT Bank, as well as their

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officers and directors, to administrative sanctions and potentially substantial civil and criminal penalties. Regulators also have broad authority to enforce AML and sanctions laws. Failure to comply with AML and sanctions laws or to maintain an adequate compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when considering approval of applications to acquire, merge, or consolidate with another banking institution, or to engage in other expansionary activities. There have been a number of significant enforcement actions by regulators, as well as state attorneys general and the Department of Justice, against banks, broker-dealers and non-bank financial institutions with respect to AML and sanctions laws and some have resulted in substantial penalties, including criminal pleas. Any violation of law or regulation, possibly even inadvertent or unintentional violations, could result in the fines, sanctions or other penalties described above, which could have significant reputational or other consequences and could have a material adverse effect on our business, financial condition and results of operations. See the “Regulation – Banking Supervision and Regulation” section of Item 1. Business Overview for additional discussion of the laws and regulations applicable to CIT and CIT Bank.

Proposals for legislation to further regulate, restrict, and tax certain financial services activities are continually being introduced in the United States Congress and in state legislatures. In addition, the agencies regulating the financial services industry periodically issue new regulations and adopt changes to their existing regulations. We have experienced, and may in the future experience, increased costs in connection with any change to applicable legal and regulatory requirements, as any change may necessitate adjustments to the Company’s existing regulatory compliance and risk management infrastructure and could result in increased competition. In addition, we expect that we will remain subject to extensive regulation and supervision, and that the level of scrutiny and the enforcement environment may fluctuate over time, based on numerous factors, including changes in the U.S. presidential administration or one or both houses of Congress and public sentiment regarding financial institutions (which can be influenced by scandals and other incidents that involve participants in the industry). We are unable to predict the form or nature of any future changes to statutes or regulation, including the interpretation or implementation thereof. Changes to our supervision or regulation could significantly affect our ability to conduct certain of our businesses in a cost-effective manner, restrict the type of activities in which we are permitted to engage, impact our business strategy (including our ability to return capital) or subject us to stricter and more conservative capital, leverage, liquidity, and risk management 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 Aviation Lending, 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 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. Department 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. Similar governmental agencies issue similar rules and regulations in other countries in which we do business. In 2015, the PHMSA and 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 specified time frame. In addition, the U.S. Congress enacted the FAST Act, which, among other things, expanded the scope of tank cars classified as carrying 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 addition, state agencies regulate some aspects of rail and maritime operations with respect to health and safety matters not otherwise preempted by federal law. Our business operations and our equipment financing and leasing portfolios may be adversely impacted by rules and regulations promulgated by governmental and industry agencies, which could require substantial modification, maintenance, or refurbishment of our 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.

Several states have recently enacted consumer privacy laws that impose compliance obligations with respect to personal information. For example, the CCPA was enacted in June 2018, and became effective for certain companies conducting business in California on January 1, 2020. The CCPA imposes significant requirements on covered companies with respect to consumer data privacy rights. In November 2020, voters in the State of California approved the CPRA, a ballot measure that amends and supplements the CCPA by creating the California Privacy Protection Agency, a watchdog privacy agency to be appointed shortly after the CPRA’s enactment. The CPRA also modifies the CCPA by expanding both the scope of businesses covered by the law and certain rights relating to personal information and its use, collection, and disclosure by covered businesses. Compliance with the CCPA, the CPRA as it phases in, and other state statutes, common law, or regulations designed to protect consumer, employee, or applicant personal data could potentially require substantive technology infrastructure and process changes across many of CIT’s businesses. Non-compliance with the CCPA, CPRA, or similar laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action, and/or reputational harm. CIT cannot predict whether any pending or future legislation will be adopted, or the substance and impact of any legislation on CIT. Future legislation could result in substantial costs to CIT and could have an adverse effect on our business, financial condition and results of operations.

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 an 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 and regulatory 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 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

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with certainty 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. The actual results from resolving Litigation matters may involve substantially higher costs and expenses than the amounts reserved or amounts estimated to be reasonably possible, or judgments may be rendered, or fines or penalties assessed in matters for which we have no reserves or have not estimated reasonably possible losses. 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 and/or our affiliates are involved from time to time in information-gathering requests, investigations and proceedings by various governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies.

We and/or our affiliates are involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies, regarding our customers and businesses. Because our businesses are complex and subject to continuing change, and because they are subject to extensive regulation by federal, state and foreign authorities, the outcome of any of these requests, reviews, investigations and proceedings and their impact on us can be difficult to predict. In addition, a violation of law or regulation by another financial institution may give rise to an inquiry or investigation by regulators or other authorities of the same or similar practices by us. For example, an event of improper sales practices at other financial institutions, including the opening of fraudulent customer accounts, has prompted close scrutiny of consumer banking practices by regulators and the media.

Moreover, the complexity of the federal and state regulatory and enforcement regimes in the U.S. means that a single event or topic may give rise to numerous and overlapping investigations and regulatory proceedings. Such matters may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, injunctions or other actions, amendments and/or restatements of our SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures.

There has been a trend of large settlements with governmental agencies that may adversely affect the outcomes for other financial institutions, to the extent they are used as a template for other settlements in the future. In some cases, governmental authorities have required criminal pleas or other extraordinary terms as part of such settlements with other financial institutions. The uncertain regulatory enforcement environment makes it difficult to estimate probable losses, which can lead to substantial disparities between legal reserves and actual settlements or penalties.

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 affordable 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 authorities 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.

Operational Risks

The preparation of our financial statements requires the use of estimates that may vary from actual results.

The preparation of our financial statements in conformity with GAAP requires management to make difficult, subjective or complex judgments about matters that are uncertain, which include assumptions and estimates of current risks and future trends, all of which may undergo material changes. Materially different amounts could be reported under different conditions or using different assumptions or estimates. Because of the inherent uncertainty of estimates involved in preparing our financial statements, we may be required to undertake one or a number of actions that include, but are not limited to, increasing our allowance (and/or sustaining losses that are significantly higher than reserves); recognizing significant impairment charges to goodwill; or increasing our accrued income taxes. Any of these actions could have a material adverse effect on our financial condition and results of operations. See the “Critical Accounting Estimates” section of the MD&A for additional discussion of our accounting estimates.

In particular, our critical accounting estimates include the ACL, including the impact of CECL accounting due to the impact of the pandemic from COVID-19, realizability of deferred tax assets, and goodwill impairment. The quality of our loans and leases depends on the creditworthiness of our customers and their ability to fulfill their obligations to us. We maintain a consolidated ACL on our loans to provide for loan defaults and non-performance. The amount of our ACL reflects management's judgment of losses inherent in the portfolio. CECL introduced many new methodologies and assumptions for the reserving process, most notably assumptions for macroeconomic forecasts and future cash flows.

Our ACL 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 ACL may prove inadequate, which could have a material adverse effect on our business, results of operations, and financial condition.

See Note 1Business and Significant Accounting Policies in Item 8 and the “Critical Accounting Estimates” section of the

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MD&A for additional discussions.

Management reviews our intangible assets for impairment in accordance with GAAP on an annual basis, or more often as warranted by changes in events or circumstances. See Note 25Goodwill and Other Intangible Assets in Item 8 and the “Critical Accounting Estimates” section of the MD&A for additional discussion of goodwill impairment testing.

If the models that we use in our business are poorly designed and/or implemented, our business or results of operations may be adversely affected.

We rely on quantitative models to measure risks and to estimate certain financial values, including valuations associated with acquisitions. 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 financial instruments and balance sheet items. Poorly designed or implemented models or gaps in model risk management process present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information, or lack compensating controls. Also, information 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 shareholders, could be affected adversely if their perception is that the quality of the models used to generate the relevant information or necessary compensating controls is insufficient.

We are party to various financing arrangements, 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 are party to various financing arrangements, commercial contracts and other arrangements, such as securitization transactions, derivatives transactions, funding facilities, 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 representations 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 counterparty. 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 governing 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 environmental 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 environmental 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 vendors and service providers in conducting our operations, and certain operational failures, including internal or external fraud, operational errors, or systems malfunctions, 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 recordkeeping 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 (including intrusion into or degradation of systems or technology by cyber attackers), we could be materially adversely affected. We are similarly dependent on our employees. 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 parties 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, capacity constraints of their own systems or employees, or cyber security attacks through their systems to our systems. 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, reputational damage, or regulatory intervention, which could have a material adverse effect on our business.

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In addition, there is the risk that our controls and procedures as well as business continuity and data security systems 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 hardware, software, and service providers. 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 international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency 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.

Our framework for managing risks may not be effective in mitigating risk and loss.

Our risk management framework seeks to mitigate risk and loss. We have established processes and procedures intended to identify, measure, monitor, report, analyze, and mitigate the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, legal and compliance risk, strategic risk, reputational risk, and operational risk related to our employees, systems and vendors, among others. Any system of control and any system to reduce risk exposure, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.

A failure in our internal controls or our systems or strategies to mitigate risk could have a significant negative impact not only on our earnings, but also our reputation with customers, regulators and investors, which is critical to our ability to attract and retain customers and highly-skilled management and employees. Our reputation can be damaged as a result of any number of circumstances, including, among others, employee misconduct, regulatory action or litigation. Moreover, whereas negative public opinion once was primarily driven by adverse news coverage in traditional media, the advent and expansion of social media creates the potential for rapid and widespread dissemination of inaccurate, misleading, or false information that could damage our reputation and affect our ability to attract and retain customers and employees.

If our risk management framework proves ineffective, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk, and we could incur litigation, negative regulatory consequences, reputational damages or other adverse consequences and we could suffer unexpected losses that may affect our financial condition or results of operations.

See the “Risk Management” section of the MD&A for additional discussion of our risk management framework and related risks.

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 services to our customers, or if we implement technology that is susceptible to information security breaches or cyber security attacks, it may have a material adverse effect on our business.

We face risks of data breaches and cybersecurity attacks that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.

The use of computing devices is critical to our operations and businesses and those of our customers, service providers and vendors. The importance of computing devices has continued to increase, particularly in light of work-from-home arrangements implemented in response to the COVID-19 pandemic. As a result, we face cybersecurity risks, both directly and through our third party service providers, including denial of service attacks, hacking, social engineering attacks targeting our colleagues and customers, malware intrusion or data corruption attempts, ransomware, and identity theft, that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure. Information security risks, including privacy risk for large financial institutions such as CIT, have generally increased in recent years, in part because of the proliferation of new technologies, the implementation of work-from-home arrangements, the use of the Internet and telecommunications technologies to conduct financial transactions, 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 processing, transmission and storage of confidential information in our computer systems and networks. Our businesses rely on our digital technologies, computer and email systems, software, and networks to conduct their operations. Our technologies, systems, networks, and our customers' devices have and may become the target of cyber-attacks or data breaches that, if successful, 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 information 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 various companies, including in the retail, financial services, media and entertainment, social media, and other industries, and personal, proprietary, and public e-mail systems in which the perpetrators gained unauthorized access to confidential information and customer data, or locked data from access and use through encryption and demanded ransom to unlock the data (ransomware), often through the introduction of computer viruses or malware, cyber-attacks, phishing, social engineering, or other means. Recently, there have also been a series of Business Email Compromise (“BEC”) incidents on public companies. In a BEC incident, fraudsters use spoofed or compromised email accounts to trick an organization’s personnel into effectuating wire transfers to financial accounts controlled by the fraudsters.

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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 overall functioning of the financial system could adversely affect, directly or indirectly, aspects of our business.

Since January 1, 2018, we have not experienced any material data breaches involving either proprietary or customer, employee, or applicant information. However, if we, or our third-party service providers, are the victim of a successful cyber-attack or other data breach in the future, either the Company or its customers may suffer material losses. While CIT maintains insurance coverage that may, subject to policy terms and conditions, including significant deductibles, cover certain aspects of cyber risk, such insurance coverage may be insufficient to cover all losses. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the risk that protective measures in place, despite their sophistication, may be defeated, the prominent size and scale of CIT and its role in the financial services industry, our plans to continue to implement our online banking channel strategies and develop additional remote connectivity solutions to serve our customers (including on-line and mobile applications), our geographic footprint, the outsourcing of some of our business operations, and the continued uncertain global economic environment. We have expended significant resources to develop cybersecurity systems and other protective measures. 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 mitigate any cybersecurity vulnerabilities. The inherent limitations in investigating and remediating an information security incident could also further increase the cost and consequences of such incident. We expect that any investigation of an information security incident would be inherently unpredictable and that there would be some passage of time before the completion of any investigation and before full and reliable information is available to us. During such time we may not know the extent of any harm to us or our customers, or how best to remediate the incident, and certain errors or actions could be repeated and compounded before they are discovered and remediated.

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, or a failure to adequately disclose such disruptions, failures, cyber-attacks, or security breaches to our customers, suppliers, or vendors or to the financial markets, could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, remediation costs, including preventative costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

General Risk Factors

There are risks associated with CIT’s common stock that may affect its market price or make it difficult to resell.

The market price of our common stock may be volatile, and can fluctuate significantly in response to a number of factors, including, among others:

 

Our operating results and financial condition, including whether our operating results vary from expectations of management, securities analysts or investors;

 

Operating results and stock price performance of our peers;

 

Our creditworthiness or changes in our credit ratings;

 

Developments in our business or the financial services industry;

 

Marketplace perceptions of us and/or our competitors;

 

Technological developments;

 

Regulatory changes;

 

Whether we declare or fail to declare dividends on our common stock or preferred stock;

 

Changes in executive management;

 

Changes in the financial markets or economy; and

 

Geopolitical conditions, such acts or threats of terrorism or military conflicts.

The market price of our common stock may be subject to fluctuations unrelated to our operating performance. Increased volatility as a result of these or other causes could result in a decline in the market price of our common stock.

In addition, federal and state banking law, including regulatory approval requirements, impose significant restrictions on the acquisition of direct or indirect control over a BHC or an insured depository institution, such as CIT and CIT Bank. These laws may be perceived by the market as having an anti-takeover effect, and may prevent a non-negotiated takeover or change in control of the Company. These laws could result in CIT being less attractive to a potential acquirer and/or could affect the price that investors are willing to pay for our common stock.

If we fail to maintain adequate internal control over financial reporting, it could result in a material misstatement of the Company's annual or interim financial statements.

Management of CIT is responsible for establishing and maintaining 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. As of December 31, 2020, the Company reported no material weaknesses, as disclosed in Item 9A. Controls and Procedures. However, if we identify material weaknesses 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 financial condition.

34

CIT ANNUAL REPORT 2020


 

Changes in accounting standards or interpretations could materially impact our reported earnings and financial condition.

The FASB, the SEC and other regulatory agencies periodically change the financial accounting and reporting standards that govern the preparation of CIT's consolidated 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 retroactively, potentially resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.

See Note 1 - Business and Summary of Significant Accounting Policies – Recent Accounting Pronouncements in Item 8 for a discussion of accounting pronouncements that could impact CIT and its business.

We may be adversely affected by natural disasters, acts or threats of terrorism, pandemics and other catastrophic conditions or events that are beyond our control.

We have a nationwide business with customers and operation centers in multiple states, some of which are known for being vulnerable to natural disasters and other risks, including tornadoes, hurricanes, earthquakes, fires, floods, and droughts. These types of natural catastrophic events have at times disrupted the local economies and our customers, business and facilities.  In addition, catastrophic events occurring in other regions of the world may have an impact on our customers, and in turn on our business. Our business continuity and disaster recovery plans may not be successful upon the occurrence of one of these scenarios, and a significant catastrophic event anywhere in the world could materially adversely affect our business, operating results, and financial condition.

Terrorist attack, threats of terrorism, or other hostilities may disrupt our business and operations or those of our customers. In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending, which could harm our business and operations. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers. This could have a material adverse impact on our business, operating results, and financial condition, and may result in increased volatility in the market price of our common stock.

The COVID-19 pandemic has contributed to (i) sudden and significant declines, and significant increases in volatility, in financial markets; (ii) ratings downgrades, credit deterioration and defaults in many industries, including transportation, natural resources, retail, hospitality and commercial real estate; (iii) customers drawing on credit lines to increase liquidity; and (iv) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. In addition, many of our customers, counterparties and third-party service providers have been, and may further be, affected by “stay-at-home” orders, market volatility, supply chain disruption, and other factors that increase their risks of business disruption or that may otherwise affect their ability to repay loans, perform under the terms of any agreements with us or provide other essential services. As a result, our credit, operational and other risks are generally expected to increase until the pandemic subsides.

Although we have a business continuity plan that is designed to provide for our continuing operation in case of potentially disruptive events, such as a global pandemic, there can be no guarantee that our plan will effectively address some or all of the effects of the COVID-19 pandemic, a recurrence or worsening of the COVID-19 pandemic, or another future pandemic event or global health emergency. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, failures in systems or technology or other restrictions in connection with the pandemic, or if we are unable to maintain service in our branches, lockboxes, or other operations that cannot be operated remotely.

We may be adversely affected by deterioration in economic conditions that is general in scope or affects specific industries, products or geographic areas.

Weak economic conditions are likely to have a negative impact on our business and results of operations. Prolonged economic weakness or other adverse economic or financial developments in the U.S. or global economies in general, or affecting specific industries, 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 and collect 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 investment 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 operating results. A deterioration in economic conditions could result in a reduction in wholesale market liquidity for financial instruments, negatively impacting our financial condition.

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 or other economic factors, such as increased tariffs, may adversely affect their ability to repay their loans and leases with us. Similarly, a decline in railroad shipping volumes may adversely affect our rail business, the value of our 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 significant 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.

35

CIT ANNUAL REPORT 2020


 

We are also affected by the economic and other policies adopted by various governmental authorities in the U.S. and other jurisdictions in reaction to economic conditions. Changes in monetary policies of the FRB directly impact our cost of funds for lending, raising capital, and investment activities, and may impact the value of financial instruments 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.

We may be adversely affected by global political and economic uncertainties.

Global financial markets, including the United States, face political and economic uncertainties that may delay investment and hamper economic activity. International events, such as trade disputes, separatist movements, leadership changes, and political and military conflicts, could adversely affect global financial activity and markets and could negatively affect the U.S. economy. The results of the 2020 federal elections in the U.S. could lead to additional political stalemate or disruption, or significant policy changes, which could negatively impact financial markets or macroeconomic conditions. Changes in monetary or other policies by the FRB or other major central banks could increase the risk of recession or negatively impact asset values and credit spreads. The uncertainty surrounding the terms of the U.K.’s exit from the European Union (“EU”), or Brexit, could negatively impact markets and cause weaker macroeconomic conditions that extend beyond the U.K. and the EU. Any of these potential negative effects on financial markets and economic activity could lead to reduced revenues, increased costs, increased credit risks and volatile markets, and could have a material adverse effect on our business, operating results, and financial condition.

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 do business. 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.

These changes could affect our regulatory capital ratios as calculated in accordance with the Basel III Rules. The exact impact is dependent upon the effects an amendment has on our net DTAs arising from NOL and tax credit carryforwards, versus our net DTAs related to temporary timing differences, as the former is a deduction from capital (the numerator to the ratios), while the latter is included in RWA (the denominator). See "Regulation — Banking Supervision and Regulation — Capital Requirements" section of Item 1. Business Overview for further discussion regarding the impact of DTAs on regulatory capital.

In addition, our ability to continue to record our DTAs is dependent on our ability to realize their value through future projected earnings. Future changes in tax laws or regulations could adversely affect our ability to record our DTAs. Loss of part or all of our DTAs would have a material adverse effect on our financial condition and results of operations. See the “Critical Accounting Estimates - Realizability of Deferred Tax Assets” section of the MD&A for additional discussion regarding our DTAs.

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 executive officers and management, financial, compliance, technical, marketing, sales, and support employees. Competition for qualified executive officers and employees can be challenging, and CIT cannot ensure success in attracting or retaining such individuals. This competition can lead to increased expenses in many areas. If we fail to attract and retain qualified executive officers and employees, it could have a material adverse effect on our ability to compete or operate our business successfully, or to meet our operations, risk management, compliance, regulatory, funding and financial reporting requirements.

In 2016, the federal bank regulators and the SEC jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions. The agencies have taken no action on the proposed rules since they were introduced, and it cannot be determined at this time whether or when a final rule will be adopted. Compliance with such a final rule, if approved, may substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to successfully compete with certain financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees. If this were to occur, our business, financial condition and results of operations could be adversely affected.

36

CIT ANNUAL REPORT 2020


 

Item 1B. Unresolved Staff Comments

There are no unresolved SEC staff comments.

Item 2. Properties

CIT primarily operates in North America. CIT occupies approximately 1.7 million square feet of space, which includes office space and our branch network, the majority of which is leased.

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.

See Note 22 — Contingencies in Item 8, which is incorporated by reference into this item.

Item 4.  Mine Safety Disclosure

Not applicable

 

37

CIT ANNUAL REPORT 2020


 

 

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."

Holders of Common Stock — As of December 30, 2020, there were 44,260 beneficial holders of common stock.

Dividends — Dividend information is included in the Capital section of the MD&A.

Shareholder Return — The following graph shows the annual cumulative total shareholder return for common stock during the period from December 31, 2015 to December 31, 2020. 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 as of December 31, 2015. Each of the indices shown assumes that all dividends paid were reinvested.

CIT STOCK PERFORMANCE DATA

 

 

 

12/31/2015

 

 

12/31/2016

 

 

12/31/2017

 

 

12/31/2018

 

 

12/31/2019

 

 

12/31/2020

 

CIT

 

$

100.00

 

 

$

109.52

 

 

$

128.05

 

 

$

101.17

 

 

$

123.96

 

 

$

103.49

 

S&P 500

 

$

100.00

 

 

$

111.95

 

 

$

136.38

 

 

$

130.39

 

 

$

171.44

 

 

$

202.97

 

S&P Banks

 

$

100.00

 

 

$

124.31

 

 

$

152.34

 

 

$

127.30

 

 

$

179.02

 

 

$

154.41

 

S&P Financials

 

$

100.00

 

 

$

122.75

 

 

$

149.93

 

 

$

130.38

 

 

$

172.22

 

 

$

169.18

 

 

Securities Authorized for Issuance Under Equity Compensation Plans — Our CIT Group Inc. 2016 Omnibus Incentive Plan was approved by shareholders in 2016 and replaced the Amended and Restated CIT Group Inc. Long-Term Incentive Plan (the “Prior Plan”). No new equity awards may be granted under the Prior Plan. 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 plans approved by shareholders

N/A

 

N/A

 

2,700,052*

*

Excludes 2,123,831 shares underlying outstanding awards granted to employees and/or directors that are unvested and/or unsettled.

During 2020, we had no equity compensation plans that were not approved by shareholders. For further information on our equity compensation plans, including the weighted average exercise price, see Note 20— Retirement, Postretirement and Other Benefit Plans in Item 8.

38

CIT ANNUAL REPORT 2020


 

Issuer Purchases of Equity Securities — There were no repurchases of our common stock during the three months ended December 31, 2020. Securities information is included in the Capital section of the MD&A and Note – 14 Stockholders’ Equity in Item 8.

Unregistered Sales of Equity SecuritiesOn January 1, 2020, we issued approximately 3.1 million shares of unregistered common stock in connection with the acquisition of MOB. There were no sales of common stock during 2020, 2019 and 2018. There were issuances of common stock under equity compensation plans and an employee stock purchase plan, both of which are subject to registration statements.

 

Item 6. Selected Financial Data

Select Data (dollars in millions, except per share amounts)

 

At or for the Years Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Select Statements of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest revenue

$

1,065.7

 

 

$

1,064.8

 

 

$

1,075.3

 

 

$

1,117.9

 

 

$

1,158.3

 

Provision for credit losses

 

800.3

 

 

 

110.8

 

 

 

171.0

 

 

 

114.6

 

 

 

194.7

 

Total non-interest income

 

1,351.4

 

 

 

1,272.9

 

 

 

1,382.8

 

 

 

1,371.6

 

 

 

1,182.2

 

Total non-interest expenses

 

2,320.2

 

 

 

1,603.0

 

 

 

1,650.1

 

 

 

2,183.3

 

 

 

2,124.9

 

(Loss) income from continuing operations, net of tax

 

(615.3

)

 

 

529.4

 

 

 

472.1

 

 

 

259.4

 

 

 

(182.6

)

Net (loss) income

 

(615.3

)

 

 

529.9

 

 

 

447.1

 

 

 

468.2

 

 

 

(848.0

)

Net (loss) income available to common shareholders

 

(646.4

)

 

 

511.0

 

 

 

428.2

 

 

 

458.4

 

 

 

(848.0

)

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per common share - continuing operations

$

(6.57

)

 

$

5.27

 

 

$

3.82

 

 

$

1.52

 

 

$

(0.90

)

Diluted (loss) income per common share

 

(6.57

)

 

 

5.27

 

 

 

3.61

 

 

 

2.80

 

 

 

(4.20

)

Book value per common share

 

52.71

 

 

 

61.37

 

 

 

55.70

 

 

 

53.25

 

 

 

49.50

 

Tangible book value per common share

 

51.34

 

 

 

56.77

 

 

 

51.15

 

 

 

49.58

 

 

 

45.41

 

Dividends declared per common share

 

1.40

 

 

 

1.30

 

 

 

0.82

 

 

 

0.61

 

 

 

0.60

 

Dividend payout ratio

 

NM

 

 

 

24.7

%

 

 

22.7

%

 

 

21.8

%

 

NM

 

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return (available to common shareholders; continuing operations) on average common stockholders' equity(1)(2)

 

NM

 

 

 

9.03

%

 

 

7.30

%

 

 

3.53

%

 

 

NM

 

Return (available to common shareholders; continuing operations) on average tangible common stockholders' equity(1)(2)

 

NM

 

 

 

10.20

%

 

 

8.20

%

 

 

7.72

%

 

 

3.17

%

Net finance revenue as a percentage of average earning assets

 

2.37

%

 

 

3.10

%

 

 

3.41

%

 

 

3.43

%

 

 

3.60

%

Return (available to common shareholders; continuing operations) on average earning assets(1)

 

NM

 

 

 

1.10

%

 

 

1.00

%

 

 

0.53

%

 

 

NM

 

Average total equity to average total asset ratio

 

10.1

%

 

 

12.2

%

 

 

13.8

%

 

 

16.1

%

 

 

17.0

%

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans including receivables pledged

$

36,144.6

 

 

$

30,998.9

 

 

$

30,795.4

 

 

$

29,113.9

 

 

$

29,535.9

 

Allowance for loan losses

 

(1,063.8

)

 

 

(482.6

)

 

 

(489.7

)

 

 

(431.1

)

 

 

(432.6

)

Operating lease equipment, net

 

7,836.6

 

 

 

7,319.7

 

 

 

6,970.6

 

 

 

6,738.9

 

 

 

7,486.1

 

Goodwill

 

-

 

 

 

369.9

 

 

 

369.9

 

 

 

369.9

 

 

 

685.4

 

Total cash and deposits

 

4,011.7

 

 

 

2,685.6

 

 

 

1,795.6

 

 

 

1,718.7

 

 

 

6,430.6

 

Investment securities

 

6,889.0

 

 

 

6,276.8

 

 

 

6,233.8

 

 

 

6,469.9

 

 

 

4,491.1

 

Assets of discontinued operation

 

-

 

 

 

-

 

 

 

249.8

 

 

 

501.3

 

 

 

13,220.7

 

Total assets

 

58,106.6

 

 

 

50,832.8

 

 

 

48,537.4

 

 

 

49,278.7

 

 

 

64,170.2

 

Deposits

 

43,071.6

 

 

 

35,139.5

 

 

 

31,239.5

 

 

 

29,569.3

 

 

 

32,304.3

 

Borrowings

 

5,837.3

 

 

 

6,473.4

 

 

 

8,118.8

 

 

 

8,974.4

 

 

 

14,935.5

 

Liabilities of discontinued operation

 

-

 

 

 

-

 

 

 

297.0

 

 

 

509.3

 

 

 

3,737.7

 

Total common stockholders’ equity

 

5,197.9

 

 

 

5,814.0

 

 

 

5,621.6

 

 

 

6,995.0

 

 

 

10,002.7

 

Credit Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans as a percentage of loans

 

1.63

%

 

 

1.05

%

 

 

0.92

%

 

 

0.76

%

 

 

0.94

%

Net charge-offs as a percentage of average loans

 

1.14

%

 

 

0.39

%

 

 

0.39

%

 

 

0.39

%

 

 

0.37

%

Allowance for loan losses as a percentage of loans

 

2.94

%

 

 

1.56

%

 

 

1.59

%

 

 

1.48

%

 

 

1.46

%

Capital Ratios(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio (fully phased-in)

 

10.0

%

 

 

12.0

%

 

 

12.0

%

 

 

14.4

%

 

 

13.8

%

Tier 1 capital ratio (fully phased-in)

 

11.0

%

 

 

13.2

%

 

 

12.7

%

 

 

15.1

%

 

 

13.8

%

Total capital ratio (fully phased-in)

 

13.2

%

 

 

15.4

%

 

 

14.8

%

 

 

16.2

%

 

 

14.6

%

(1)

See Non-GAAP Financial Measures for a reconciliation of non-GAAP to GAAP financial information.

(2)

2017 and prior periods are adjusted to reflect an estimated reduction in equity for Commercial Air, that was transferred to discontinued operations and sold.

NM – Not meaningful

39

CIT ANNUAL REPORT 2020


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

CIT Group Inc. is a bank holding company ("BHC") and a financial holding company ("FHC"). CIT Group Inc., together with its subsidiaries (collectively "we", "our", "CIT" or the "Company"), is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Federal Reserve Bank of New York ("FRBNY") under the U.S. Bank Holding Company Act of 1956, as amended. CIT Bank, N.A. is regulated by the Office of the Comptroller of the Currency of the U.S. Department of the Treasury ("OCC"). In addition, CIT Bank, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation (“FDIC”). More information about the Company is available at cit.com.

Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk ("MD&A") contains financial terms that are relevant to our business, and a Glossary of key terms is included at the end of Item 1. Business Overview. Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of the Company. These are identified in their initial usage and referenced to "Non-GAAP Financial Measurements”. See "Non-GAAP Financial Measurements" for a reconciliation of these financial measures to comparable financial measures in accordance with U.S. GAAP, a description of the measure and explanation why we use and believe the measure to be useful to the users of our financial information.

Throughout this MD&A we reference specific "Notes" to our financial statements. These Notes are included in Item 8. Financial Statements and Supplementary Data (“Item 8”).

SIGNIFICANT TRANSACTIONS:

Mutual of Omaha Bank Acquisition

On January 1, 2020, CIT acquired Mutual of Omaha Bank (“MOB”), the savings bank subsidiary of Mutual of Omaha Insurance Company and Omaha Financial Holdings, Inc. (“OFHI”). CIT paid approximately $1 billion as consideration, comprised of approximately $850 million in cash and approximately 3.1 million shares of CIT Group Inc. common stock (valued at approximately $141 million at the time of closing). Sale of the shares was prohibited prior to July 1, 2020, and thereafter, sales are limited to transfers of no more than 125,000 shares in any 24-hour period and block trades not exceeding 50% of the shares received as the stock consideration. Some key items related to the acquisition are as follows:

 

Leading up to the completion of the MOB Acquisition, during 2019, CIT Bank issued $550 million of senior unsecured bank notes and CIT issued $100 million of Tier 2 qualifying subordinated notes as well as $200 million of Tier 1 qualifying preferred stock to fund the cash portion of the purchase price.

 

MOB’s total assets acquired were $8.3 billion, which mainly consisted of approximately $6.3 billion of loans and approximately $1.7 billion of investment securities. Loans consisted of commercial and industrial loans and real estate loans, which were included in our Commercial Banking segment and consumer loans (primarily correspondent residential mortgages), in our Consumer Banking segment.

 

Deposits acquired were $7.0 billion and included approximately $4.5 billion of homeowner’s association (“HOA”) deposits. CIT also acquired 25 bank branches, primarily in the Southwest, Midwest and Southeast.

 

Accretion of purchase accounting adjustments on the acquired commercial loans essentially offset amortization on consumer loans. Net accretion after 2020 is expected to be minimal.

 

As discussed in Critical Accounting Estimates, while no allowance for loan losses was carried over, CIT recorded an Allowance for Credit Losses (“ACL”) for non-purchase credit deteriorated (“non-PCD”) loans through an increase to the provision for credit losses.

 

CIT recorded goodwill of $115 million, representing the excess of the purchase price over the fair value of the net assets acquired, and $103 million of intangible assets, which increased amortization expense by approximately $10 million in 2020. See Note 2 — Acquisition and Discontinued Operations in Item 8 for information on the adjustment to goodwill after the acquisition date.

Financial data prior to the acquisition has not been restated to include the acquisition, and therefore is not directly comparable to 2020. See Note 2 — Acquisition and Discontinued Operations in Item 8 for additional information.

The consolidated financial statements include the effects of Purchase Accounting Adjustments (“PAA”) upon completion of the MOB Acquisition. We recorded the assets acquired and liabilities assumed in this transaction at their estimated fair values as of the closing date and the Company’s results of operations include the results of the acquisition beginning with the closing date.  We recorded consideration paid in excess of the net fair values of the acquired assets, intangible assets and assumed liabilities as Goodwill. Accretion and amortization of certain PAA are included in the Consolidated Statements of Operations, primarily impacting Net Finance Revenue (“NFR”) (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 effective yield method. Intangible assets were recorded related to the valuation of core deposits and other intangible assets. Intangible assets have finite lives and are amortized on an accelerated or straight-line basis, as appropriate, over the estimated useful lives and recorded in non-interest expenses, as detailed in Note 2 — Acquisition and Discontinued Operations and Note 25 — Goodwill and Intangible Assets in Item 8.

40

CIT ANNUAL REPORT 2020


 

First Citizens BancShares, Inc. Merger Announcement

On October 16, 2020, First Citizens BancShares, Inc. (“First Citizens”), the parent company of First-Citizens Bank & Trust Company (“FCB”), and CIT Group Inc. jointly announced that they entered into a definitive agreement by and among First Citizens, FCB, FC Merger Subsidiary IX, Inc. and CIT, under which the companies will combine in an all-stock merger (the “Merger Agreement”). Under the terms of the Merger Agreement, CIT stockholders will receive 0.062 shares of First Citizens Class A common stock for each share of CIT common stock they own. First Citizens stockholders will own approximately 61% and CIT stockholders will own approximately 39% of the combined company. The Merger Agreement contains customary representations and warranties and customary covenants, such as non-solicitation obligations and other provisions, including a break-up fee of $64 million payable in certain circumstances. The Merger Agreement also provides certain termination rights for CIT and First Citizens, including, among others, if the merger has not been completed by October 15, 2021. The combined bank will be regulated by the North Carolina Commissioner of Banks, the FDIC, and the Federal Reserve Bank of Richmond.

The Board of Directors of the combined company will consist of 14 directors, the current 11 First Citizens Board members and 3 CIT Board members, including Ellen Alemany, Chairwoman and Chief Executive Officer (“CEO”) of CIT, Michael A. Carpenter, and Vice Admiral John R. Ryan, USN (Ret.).

The combined company will operate under the First Citizens name and will be headquartered in Raleigh, N.C., and will maintain significant operations in California, Nebraska, Arizona, Florida, and South Carolina, as well as in New York and New Jersey. The pro forma organization will include over $100 billion in assets and over $80 billion in deposits.

On February 9, 2021, CIT and First Citizens received the approvals of the stockholders of CIT and First Citizens necessary to complete the merger of the companies. The merger is expected to close in the first half of 2021, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals.

SUMMARY OF 2020 FINANCIAL RESULTS

The following table summarizes the Company’s results in accordance with U.S. GAAP as included in the Condensed Consolidated Statements of Operations. We similarly provide results that exclude noteworthy items, which are described and reconciled to GAAP in the Non-GAAP Financial Measurements section at the end of the MD&A. As explained further in the Non-GAAP Financial Measurements section, we exclude noteworthy items to reflect how management views the underlying performance of the business.

Our financial results and trends during 2020 reflect the effects of the continued global pandemic from the novel strain of coronavirus disease 2019 (“COVID-19”), which began in the first quarter, and the adverse impact on the macroeconomic environment.

Results for 2020 reflect building credit reserves due to the impact of the COVID-19 pandemic, along with the adoption of CECL. The provision for credit losses of $800 million reflected the economic stress and the associated impact on the ACL. In addition, the pandemic and its ensuing adverse impact on the macroeconomic environment were contributing factors that led to a $441 million after-tax impairment of goodwill in 2020, which was primarily related to goodwill recorded with the OneWest and MOB Acquisitions.

Despite the impact from the global pandemic, average loans and leases increased by 20% from 2019, primarily due to the MOB Acquisition.

Results of Operations (dollars in millions, except per share amounts)

 

2020

 

 

2019

 

 

2018

 

GAAP Results

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations available to common shareholders

$

(646.4

)

 

$

510.5

 

 

$

453.2

 

Income (loss) from discontinued operations, net of taxes

 

-

 

 

 

0.5

 

 

 

(25.0

)

Net (Loss) income available to common shareholders

$

(646.4

)

 

$

511.0

 

 

$

428.2

 

Diluted (loss) income per common share

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations available to common shareholders

$

(6.57

)

 

$

5.27

 

 

$

3.82

 

Income (loss) from discontinued operations, net of taxes

 

-

 

 

 

-

 

 

 

(0.21

)

Diluted (Loss) income per common share available to common shareholders

$

(6.57

)

 

$

5.27

 

 

$

3.61

 

Average number of common shares — diluted (thousands)

 

98,405

 

 

 

96,921

 

 

 

118,777

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Results, excluding noteworthy items

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations available to common shareholders

$

(68.9

)

 

$

490.2

 

 

$

479.6

 

Income (loss) from discontinued operations, net of taxes

 

-

 

 

 

0.5

 

 

 

(11.2

)

Net (Loss) income available to common shareholders

$

(68.9

)

 

$

490.7

 

 

$

468.4

 

Diluted (loss) income per common share

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations available to common shareholders

$

(0.70

)

 

$

5.06

 

 

$

4.04

 

Income (loss) from discontinued operations, net of taxes

 

-

 

 

 

-

 

 

 

(0.10

)

Diluted (Loss) income per common share available to common shareholders

$

(0.70

)

 

$

5.06

 

 

$

3.94

 

2020 loss to common shareholders was $646 million or $6.57 per diluted common share. Excluding noteworthy items, the loss to

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CIT ANNUAL REPORT 2020


 

common shareholders1, of $69 million or $0.70 per diluted common share, primarily reflected the high provision for credit losses, including the build-up of the ACL related to the forecasted macroeconomic environment and adoption of CECL. Noteworthy items related to (i) goodwill impairments, (ii) the integration of MOB, (iii) the pending merger with FCB, (iv) a facilities impairment charge, (v) a deferred tax asset  adjustment primarily related to the sale of Commercial Air in 2017, and (vi) a reversal of compensation expense related to the Company’s stock-based compensation.

Current year NFR2 benefited from the addition of MOB but was adversely impacted by the macroeconomic environment and Federal Reserve interest rate reductions of 150 bps in March 2020. Although the reduction in interest rates benefited our deposit costs, this cost benefit was more than offset by the impact on our floating rate loan portfolio, as well as on our interest-bearing cash and investment securities. NFR was down compared to 2019. Average outstanding deposit costs decreased compared to 2019, reflecting a benefit from the addition of lower-cost MOB deposits and rate reduction strategies across all deposit channels. Net operating lease revenue, a component of NFR, was down from 2019 primarily due to lower rental revenue resulting from lower rail car utilization and continued lease rates compression, as well as higher maintenance costs and depreciation, partially offset by an increase in average operating leases. See Net Finance Revenue section for more details.

Other non-interest income was up from 2019, primarily due to higher gains on asset sales, BOLI income and the benefit from the addition of MOB, which drove higher fee income from the addition of our Community Association Banking business. Factoring commissions were below the year-ago level. See Non-Interest Income section for more details.

Operating expenses and operating expenses excluding noteworthy items and intangible asset amortization3, were up compared to 2019 driven by the MOB Acquisition. See Non-interest expense section for further details. Noteworthy items for 2020 are discussed below. 2019 included two noteworthy items, a facilities impairment charge and a restructuring charge.

The deterioration of the macroeconomic environment because of the COVID-19 pandemic and the related effects on CIT’s results of operations and decrease in our stock price triggered goodwill impairment assessments in 2020, which contributed to pre-tax impairment charges of $485 million. See Note 25 – Goodwill and Intangible Assets in Item 8 and Non-Interest Expense and Critical Accounting Estimates sections for more details.

On a per diluted common share basis, the results compared to the year-ago quarter also reflect an increase in the average number of diluted common shares outstanding due to the issuance of approximately 3.1 million common shares for the MOB Acquisition.

Financial results for the 2020 fourth quarter included the following noteworthy items:

 

$102 million (after tax) ($1.03 per diluted common share) in goodwill impairment charge resulting in part from the valuation implied in the proposed merger with First Citizens.

 

$21 million (after tax) ($0.22 per diluted common share) increase to the income tax provision due to an adjustment to the deferred tax asset, primarily related to the sale of the commercial air business in 2017.

 

$13 million (after-tax) ($0.14 per diluted common share) facilities impairment and termination charges resulting from the exit from leased facilities as part of our strategy to optimize our branch footprint and streamline office locations.

 

$9 million (after-tax) ($0.09 per diluted common share) related to First Citizen’s merger costs.

 

$7 million (after-tax) ($0.07 per diluted common share) in merger and integration costs related to the MOB Acquisition.

Financial results for the 2020 third quarter included the following noteworthy items:

 

$9 million (after tax) ($0.09 per diluted common share) in merger and integration costs related to the MOB Acquisition.

 

$9 million (after tax) ($0.09 per diluted common share) reversal of compensation expense due to a decrease in the probability of achievement of certain performance conditions related to the Company’s stock-based compensation.

Financial results for the 2020 second quarter included the following noteworthy items:

 

$24 million (after-tax) ($0.24 per diluted common share) restructuring charge, primarily related to compensation and benefits expenses and contract terminations.

 

$13 million (after tax) ($0.13 per diluted common share) in merger and integration costs related to the MOB Acquisition.

Financial results for the 2020 first quarter included the following noteworthy items:

 

$339 million (after-tax) ($3.46 per diluted common share) in goodwill impairment charges, primarily related to goodwill recorded for the OneWest Bank acquisition.

 

$37 million (after tax) ($0.37 per diluted common share) charge to the day 1 provision for credit losses from the MOB Acquisition.

 

$14 million (after tax) ($0.14 per diluted common share) in merger and integration costs related to the MOB Acquisition.

 

1 

Loss to common shareholders excluding noteworthy items is a non-GAAP measure. See “Non-GAAP Financial Measurements” for a reconciliation of non-GAAP to GAAP financial information.

2 

Net finance revenue is a non-GAAP measure. See “Non-GAAP Financial Measurements” for a reconciliation of non-GAAP to GAAP financial information.

3 

Total operating expenses, excluding intangible asset amortization and noteworthy items is a non-GAAP measurement. See Non-Interest Expenses for a table that provides a reconciliation to the GAAP measurement (total operating expenses). See “Non-GAAP Financial Measurements” for a description of the balance and usage.

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CIT ANNUAL REPORT 2020


 

 

The following table reflects the impact of noteworthy items on our GAAP results for the year ended December 31, 2020. See similar reconciliations for the years ended December 31, 2019 and 2018 in the “Non-GAAP Financial Measurements” section.

Results of Operations for the Year Ended December 31, 2020 (dollars in millions, except per share amounts)

 

Net Income (Loss) Available to Common Shareholders

 

 

 

Year Ended December 31, 2020

 

 

 

 

 

 

 

Per Share

 

GAAP Results

 

$

(646.4

)

 

$

(6.57

)

Goodwill impairment

 

 

440.5

 

 

 

4.48

 

MOB merger and integration costs

 

 

42.6

 

 

 

0.43

 

MOB day 1 provision for credit losses

 

 

36.7

 

 

 

0.37

 

Restructuring charges

 

 

23.6

 

 

 

0.24

 

Deferred tax asset adjustment

 

 

21.2

 

 

 

0.22

 

Facilities impairment costs

 

 

13.4

 

 

 

0.14

 

FCB merger costs

 

 

8.5

 

 

 

0.09

 

Performance Stock Units expense reversal

 

 

(9.0

)

 

 

(0.09

)

Non-GAAP Results (EPS balances may not sum due to rounding)

 

$

(68.9

)

 

$

(0.70

)

STRATEGIES

Our strategies and accomplishments to simplify, strengthen and grow CIT in 2020 were as follows:

Pillars

 

Strategies

 

Accomplishments

Grow Core Businesses

 

Deepen client relationships

Provide value-added products and services to our clients

Closed the acquisition of MOB on January 1, 2020; provides lower-cost stable HOA deposits and builds on our commercial banking strengths

Average loans and leases in 2020 up 20% from 2019, reflecting the MOB Acquisition. Excluding MOB, 5% growth in core average loans and leases4 in 2020

Announced the merger with First Citizens, creating a Top 20 U.S. Bank with over $100 billion in assets

Optimize

Balance Sheet

 

Enhance funding and deposits

Average outstanding deposit costs decreased 83 bps during 2020, reflecting rate reductions across all channels and average deposit growth in lower cost HOA and Commercial channels

Grew HOA deposits over 20% during year

 

Enhance Operating Efficiency

 

Maintain vigilance on expenses

Improve operating leverage

Remain disciplined and focused on continuous improvement in operating efficiency

Realized net cost reductions previously committed to achieve in 2021

 

Maintain Strong

Risk Management

 

Maintain credit discipline focusing on strong collateral and structure

Maintain strong liquidity and capital risk management practices

Well capitalized – CET1 ratio of 10.0%, well in excess of capital conservation buffer (“CCB”)

Robust liquidity– Liquid Assets5 of $10 billion or 18% of total assets

Diverse sources of stable deposits across channels.

Strong allowance for credit losses (“ACL”) – 2.94% of total loans

Maintained proactive portfolio management and disciplined underwriting standards

 

 

4 

Core loans and leases is net of credit balances of factoring clients and excludes MOB, LCM, and NSP; see “Non-GAAP Financial Measurements” for a reconciliation of non-GAAP to GAAP financial information.

5 

Liquid Assets includes Available Cash (unrestricted portions of cash, excluding amounts not accessible for liquidity, such as vault cash and deposits in transit) and High Quality Liquid Securities (readily marketable, unpledged securities, as well as pledged but not drawn against at the FHLB and available for sale and generally is comprised of Treasury and Agency securities held outright or via reverse repurchase agreements).

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CIT ANNUAL REPORT 2020


 

 

Our strategies for 2021 continue to build upon those in 2020, with a key focus on closing the merger with FCB and integrating our combined operations. We will continue to support our employees, customers and communities.

PERFORMANCE MEASUREMENTS

The following chart reflects key performance indicators evaluated and used by management and included throughout this MD&A, certain of which are based on Non-GAAP balances as discussed in the Non-GAAP Financial Measurements section:

KEY PERFORMANCE INDICATORS

MEASUREMENTS

Asset Generation — originate new business and grow earning assets.

-New business volumes;

-Loans and leases (included in earning assets); and

-Earning assets.

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 non-interest income;

-Net finance margin;

-Operating lease revenue and as a percentage of average operating lease equipment; and

-Asset yields; and

-Funding costs.

Credit Risk Management — accurately evaluate creditworthiness of customers, maintain high-quality assets and balance income potential with loss expectations.

-Net charge-offs and as a percentage of average loans;

-Non-accrual loans and as a percentage of loans;

-Classified assets and delinquent balances; and

-Allowance for credit losses 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; and

-Gains and losses on equipment sales.

Expense Management — maintain efficient operating platforms and related infrastructure.

-Operating expenses and trends; 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

-Net income and pre-tax income as a percentage of average tangible common stockholders' equity (“ROTCE”).

Capital Management — remain well-capitalized while prudently deploying capital.

-Common Equity Tier 1 (“CET1”), Tier 1 and Total capital ratios;

-Tier 1 Leverage Ratio; and

-Book value and Tangible book value per share.

Liquidity Management — maintain access to appropriate funding at competitive rates to meet obligations as they come due.

-Levels of high-quality liquid assets;

-Committed and available funding facilities;

-Debt maturity profile and ratings; and

-Funding mix.

Manage Market Risk — measure and manage risk to statement of operations 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”).

COVID-19 PANDEMIC RESPONSE

Since December 2019, the outbreak of COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally, resulting in an economic slowdown and a significant increase in unemployment, particularly in the travel, hospitality, restaurant and entertainment sectors. Global equity and credit markets have experienced significant volatility and weakness. Governments and central banks have responded with significant monetary and fiscal policy measures designed to stabilize economic conditions and the functioning of the global financial markets. While the second half of 2020 included loosening of government-imposed lockdowns in varying degrees in the US, and worldwide, the duration and impact of the COVID-19 pandemic is still evolving, as are the government and central bank interventions. In addition, some local governments in the US have imposed, or may reimpose, stricter stay-at-home orders or other lockdown measures in response to resurging cases of COVID-19 in affected areas, following earlier lifting of social distancing restrictions.

CIT implemented our comprehensive business continuity plan in the first quarter of 2020 and will continue to monitor and adapt our plans to meet this evolving situation.

Most of our employees have successfully worked remotely throughout the pandemic, leveraging the significant hardware and software upgrades that we have made over the last few years. We continued reduced density and social distancing protocols for employees in branches and lockbox operations. For our employees, we have provided enhanced benefits for COVID-19 testing and care as part of our health plans. We implemented a supplemental pay plan, through July 31, 2020, for employees who were unable to work remotely in service to our customers. Although we continue to work remotely, our teams have remained connected through frequent communications, video conferences, and engagement routines, such as virtual Town Halls. We have developed workplace re-entry plans with proper protocols.  We will continue to monitor infection rates and vaccination progress, and we will provide employees with advance notice prior to re-entry requests.

We have worked to keep our branches accessible throughout this event, with modified service hours. We have taken various measures to maintain a clean and sanitized environment in our branches and adhere to recommended social distancing by limiting the number of customers in the branches.

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CIT ANNUAL REPORT 2020


 

Relief Measures for Our Commercial Customers

CIT continues to engage proactively with our commercial clients to understand the possible financial impact the COVID-19 pandemic is having on their businesses and to provide our expertise. The following key relief measures have been implemented and offered to our commercial customers:

Qualifying commercial customers impacted by COVID-19 were generally offered up to 90 days of deferred payments. Based on the facts and circumstances of the borrower, deferrals could include both principal and interest, interest only, or principal only. On a case by case basis, where requested, borrowers were offered an additional deferral of up to 90 days. After the deferral period, CIT will apply its credit policies, and amounts deferred must be repaid based on modified terms, including adding the unpaid amounts to the end of the contract term, spread throughout the remaining term, or other arrangements made on a case by case basis.

In addition, certain commercial customers were offered covenant relief based on the facts and circumstances of the borrower.

Refer to the table below for a summary of the key data points related to the COVID-19 loan modifications.

Included within Title I of the CARES Act, as amended, was a provision for SBA funding of small business loans through the Paycheck Protection Program (“PPP”) for small businesses to keep the