<PAGE> 1
F O R M 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 12, 1997
THE CIT GROUP, INC.
(formerly "The CIT Group Holdings, Inc.")
(Exact name of each registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-1861 13-2994534
(Commission File Number) (IRS Employer Identification No.)
1211 Avenue of the Americas
New York, New York 10036
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 536-1390
<PAGE> 2
Item 5. Other Events.
On November 12, 1997, The CIT Group, Inc. (the "Company") filed
Amendment No. 2 ("Amendment No. 2") to its registration statement on Form S-2
(Commission File No. 333-36435) filed with the Securities and Exchange
Commission (the "Commission") on September 26, 1997, as amended by Amendment
No. 1 thereto filed with the Commission on October 14, 1997 (the "Registration
Statement"). The Company filed Amendment No. 2 for the purpose of updating the
Registration Statement to include the third quarter results of the Company and
other updated financial information and to include certain exhibits to the
Registration Statement.
In addition, on November 12, 1997 the Company announced that its initial
public offering of 31,500,000 shares of Class A Common Stock was priced at
$27.00 per share.
Filed herewith, as Exhibit 99.1, is the press release of the Company dated
November 12, 1997 announcing the pricing of the initial public offering of its
Class A Common Stock, which press release is hereby incorporated by reference
in its entirety.
Included below are the "Business" and "Risk Management" sections of the
prospectus, as amended by Amendment No. 2. The inclusion of such information is
for disclosure purposes only and does not constitute an offer to sell or a
solicitation of an offer to purchase the Class A Common Stock or any other
securities of the Company.
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<PAGE> 3
BUSINESS
OVERVIEW
The Company is a leading diversified finance organization offering secured
commercial and consumer financing primarily in the United States to smaller,
middle-market and larger businesses and to individuals through a nationwide
distribution network. The Company commenced operations in 1908 and has developed
a broad array of "franchise" strategic business units that focus on specific
industries, asset types and markets, which are balanced by client, industry and
geographic diversification. The Company believes that its strong credit risk
management expertise and long-standing commitment to its markets and its
customers provides it with a competitive advantage.
The Company believes that in 1996 it had the largest factoring operation and the
fourth largest equipment financing and leasing operation in the United States.
The Company also has a leading market position in recreation vehicle lending and
has significant operations in commercial finance, sales finance and home equity
lending. In addition, the Company has significant operations financing the
aerospace, construction, transportation, machine tool manufacturing and railroad
industries.
At September 30, 1997, the Company had total assets of $20.9 billion and
stockholders' equity of $2.2 billion. Net income totaled a record $239.1 million
for the nine months ended September 30, 1997 and a record $260.1 million for the
year ended December 31, 1996. Over the five years ended December 31, 1996, the
Company's net income grew at a compound annual rate of 11.6%, while total
financing and leasing assets and managed assets grew at compound annual rates of
9.7% and 11.4%, respectively. Over the three years ended December 31, 1996, net
income grew at a compound annual rate of 12.6%, and total financing and leasing
assets and managed assets grew at compound annual rates of 11.1% and 13.4%,
respectively. Such growth resulted from expansion into new lines of business,
the introduction of new products, increased profitability of existing businesses
and acquisitions.
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<PAGE> 4
The following table sets forth certain information concerning financing and
leasing assets as well as consumer finance receivables previously securitized
and currently managed by the Company at December 31 of each of the five years
ended December 31, 1996 and at September 30, 1997. "Financing and leasing
assets" are comprised of finance receivables, operating lease equipment,
consumer finance receivables held for sale and certain investments.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AT
SEPTEMBER AT DECEMBER 31,
30, ---------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Financing and leasing assets:
Commercial $16,279.1 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5
Consumer(1) 3,999.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8
Other 60.0 53.0 41.6 34.4 21.6 12.0
--------- --------- --------- --------- --------- ---------
Total financing and leasing assets $20,338.3 $18,568.0 $17,062.1 $15,765.4 $13,548.0 $12,246.3
Consumer finance receivables previously
securitized and currently managed by the
Company 1,918.3 1,437.4 916.5 306.7 175.6 43.8
--------- --------- --------- --------- --------- ---------
Total managed assets $22,256.6 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes consumer finance receivables held for sale of $654.3 million,
$116.3 million, $112.0 million, $68.7 million, $150.4 million and $0.0 million
at September 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
For the five year period ended December 31, 1996, commercial financing and
leasing assets grew at a compound annual rate of 8.2% and consumer managed
assets grew at a compound annual rate of 27.5%. The compound annual growth rates
over such five year period for total financing and leasing assets and total
managed assets were 9.7% and 11.4%, respectively.
STRATEGY
The Company has delivered consistent growth in earnings and assets over the past
five years. The Company believes that its financial performance is a product of
its core strengths, which include its array of "franchise" businesses, strong
credit risk management expertise and long-standing commitment to its markets.
The following fundamental operating principles are significant to the Company's
past success and the execution of its business strategy in the future:
- - Maintain and build leadership positions in selected markets and industries,
focusing on the United States.
- - Offer a broad selection of collateral-based credit products through multiple
channels of distribution.
- - Preserve "best in class" credit culture, coupled with collateral management
expertise.
- - Maintain a relationship-based approach to customers and business partners.
- - Practice disciplined expense management, on-going efficiency improvement and
technology investment.
- - Maintain access to multiple funding sources with strong debt ratings.
- - Retain experienced management team with long tenure in the industry and with
the Company.
- - Utilize performance-based incentive systems.
- - Encourage a corporate culture that emphasizes quality in performance and
service to customers, employees and business partners and values service to
the community.
- - Pursue growth through selective acquisitions of businesses and assets.
Using its proven strengths and capabilities, the Company pursues the following
strategies to continue its earnings and assets growth:
Leverage its existing market leadership positions to expand into new markets,
industries and products
The Company has developed an array of "franchise" strategic business units
within its two business segments, each with broad geographic reach and multiple
distribution channels. These strategic business units focus on specific
industries, asset types
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<PAGE> 5
and markets. The Company believes that its industry expertise and long-standing
commitment to its markets and customers are competitive advantages.
The Company has expanded its equipment financing and leasing business, including
its railroad equipment and business aircraft operations, and plans to seek
further growth and profitability by: (i) building additional manufacturer and
dealer/distributor relationships; (ii) expanding its sales force and marketing
reach; (iii) adding complementary products that enhance existing business
segments or products; (iv) identifying new markets that have synergy with or add
to the Company's existing strengths and capabilities; and (v) improving
marketplace presence and "brand name" recognition in consumer finance.
Maintain "best in class" credit quality and strong balance sheet
The Company has demonstrated the effectiveness of its credit risk management
system and strong credit culture. From 1990 through 1996, including the
1991-1992 economic recession, net credit losses have averaged 0.72% of average
finance receivables. The Company's strong performance has been the result of:
(i) sophisticated systems and policies which identify target markets and risk
acceptance criteria for each market; (ii) decentralized credit approval
authorities capable of responding quickly to shifting customer needs and
changing economic and market conditions; and (iii) oversight systems that
monitor credits from origination throughout the entire lending cycle. From 1992
to September 30, 1997, nonperforming assets declined from $328.0 million (2.79%
of finance receivables) to $121.3 million (0.68%). While this decline clearly is
a result of the improving economy during that period, the Company believes that
its credit discipline also contributed to this trend. Further, at September 30,
1997, the consolidated reserve for credit losses was more than two times the
current year's net credit losses (on an annualized basis). In addition, the
Company adjusts its pricing to achieve higher yields for greater risk. The
Company believes that its strong credit risk management systems and strong
credit culture will continue to support long-term profitable asset growth.
Grow the consumer businesses
The Company believes that opportunities exist to grow its consumer earnings and
assets by (i) leveraging its existing capabilities and expertise, (ii) expanding
its franchise into new markets and products, as it has done with home equity and
recreational boat lending, and (iii) establishing direct to consumer lending
capabilities across its recreation vehicle, manufactured housing and
recreational boat product lines.
In 1993, the Company entered the recreational boat market, leveraging its
ability to build dealer and manufacturer relationships, its strong credit risk
management skills and its servicing and asset management capabilities. Based
upon 1996 originations, the Company has significant operations in the $8.6
billion U.S. recreational boats market. The Company in 1997 began providing
wholesale financing of inventories to dealers of manufactured housing and
recreational boats. Wholesale financing provides dealers with inventory floor
plan financing and gives the Company greater access to retail financing
opportunities through its existing dealer relationships. The Company plans to
pursue further growth of its wholesale financing operations by offering this
product to other dealers and manufacturers with whom it has strong
relationships.
In late 1992, the Company entered the home equity lending market. The Company
had $1.9 billion in home equity finance receivables ($2.3 billion of managed
home equity finance receivables) at September 30, 1997, establishing it as a
significant market participant. These results were achieved by utilizing a
multi-channel delivery system with both direct and indirect origination
capabilities through a 28 office distribution network that provides national
coverage for the Company's products. The Company will seek further consumer
asset growth and improved profitability by expanding its sales office network
through the addition of new offices (including five new offices during late
1997), improving operating efficiencies, capitalizing on economies of scale and
expanding its consumer product offerings into new and existing markets.
Improve operating efficiency through increased scale, continued process
improvement and technology investments
The Company has developed a strong culture attuned to expense control,
continuous process improvement and investment in technology. During the past
five years, the Company has controlled the growth of its operating expenses
relative to revenue growth. The Company improved its efficiency ratio from 41.1%
in 1992 to 40.1% in the first nine months of 1997 while growing its managed
assets at an 11.9% annual rate and making substantial investments in its
consumer lending operations.
The Company seeks to become a low cost producer by building scale in businesses
in which it has significant positions and believes that it already has a
competitive advantage as a "low cost producer" in its factoring and equipment
financing and leasing businesses. Additionally, the Company seeks to increase
turnaround and efficiency with its existing manufacturer relationships through
electronic back office to back office linkages. The Company intends to maintain
its focus on expense control and efficiency through continuous process
improvement and technology investments and by utilizing its proven expense
control and efficiency expertise to expand. The Company believes the existing
infrastructure of most of its strategic business units can support further
growth.
5
<PAGE> 6
Invest in businesses that leverage existing capabilities and complement the
Company's core strengths
Over the past few years, the Company has acquired various businesses and
portfolios of finance receivables and has successfully integrated the acquired
assets, operations and personnel while leveraging the Company's proven strengths
and expertise. The Company intends to continue to actively pursue strategic
acquisition opportunities of both businesses and portfolios of assets that it
believes will enhance growth and profitability and that can be integrated into
its core franchises. A summary of the Company's key acquisitions is presented in
the table immediately below.
Dollars in millions
<TABLE>
<CAPTION>
FINANCING AND LEASING
ACQUISITION (YEAR) ASSETS ACQUIRED DESCRIPTION
- --------------------------------------------------------------- ------------------------------------------
<S> <C> <C>
Fidelcor Business Credit (1991) $474.8 Acquisition of business and existing
commercial finance receivables (renamed
"The CIT Group/ Credit Finance").
Chase Business Aircraft (1991) $128.4 Portfolio of business aircraft loans and
leases.
L B Credit (1993) $269.4 Portfolio of commercial loans and leases
secured by various types of equipment.
Barclays Commercial
Corporation -- Factoring Operations
(1994) $674.8 Acquisition of business and existing
factoring receivables (merged into The CIT
Group/Commercial Services).
Home Equity Portfolio (1996) $357.8 Portfolio of home equity closed-end loans
and home equity lines of credit.
</TABLE>
During June 1997, the Company also entered into an arrangement with Chase
pursuant to which the Company provides servicing for Chase's recreation vehicle
and recreational boat finance receivables portfolio of $1.3 billion. The Company
commenced providing portfolio services under that arrangement during August
1997. The Company also acquired the origination capabilities related to Chase's
recreation vehicle and recreational boat dealer relationships.
PRODUCT INITIATIVES
In order to improve profitability and diversify its portfolio, the Company
engages on an ongoing basis in the introduction of new products and the
expansion of its existing product offerings into new markets and industries.
These internal growth and expansion initiatives permit the Company to leverage
efficiently its existing management, expertise and infrastructure to seek
further growth and profitability. The following table presents the principal
internal growth and expansion initiatives undertaken by the Company from 1992 to
September 30, 1997.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ----------------------------------- ---------------------------------------------------------------------
<S> <C>
Home equity 1992--started de novo; $2.3 billion of managed assets at September
30, 1997.
Manufactured housing 1993--leveraged existing origination and servicing capabilities to
grow annual originations; $1.4 billion of managed assets at September
30, 1997.
Recreational boats 1993--began retail financing of new product; has $609.7 million of
managed assets at September 30, 1997.
Rail equipment 1994--separate rail group established; now generally recognized as an
established industry source of leasing general service railcars.
Wholesale inventory 1997--started de novo; offering inventory financing to manufactured
housing and recreational boat dealers.
</TABLE>
COMMERCIAL
The Company's commercial operations are diverse and provide a wide range of
financing and leasing products to small, mid-size and larger companies across a
wide variety of industries, including aerospace, retailing, construction, rail,
machine tools, business aircraft, apparel, textiles, electronics and technology,
chemicals, manufacturing and transportation. The secured lending, leasing and
factoring products of the Company's commercial operations include direct loans
and leases, operating leases, leveraged and single investor leases, secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing and factoring, debtor-in-possession and
turnaround financing and acquisition and expansion financing.
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<PAGE> 7
The Company believes that it had the largest factoring operation and the fourth
largest equipment financing and leasing operation in the United States. The
Company also has significant operations financing the aerospace, construction,
transportation, machine tool manufacturing and railroad industries.
The following table sets forth the financing and leasing assets of the Company's
commercial segment at December 31 of each of the years in the five-year period
ended December 31, 1996 and at September 30, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Equipment Financing and
Leasing $ 11,378.3 $11,321.6 $10,591.6 $ 9,631.1 $ 9,027.4 $ 7,986.0
Factoring 2,586.9 1,804.7 1,743.3 1,896.2(1) 981.9 1,010.2
Commercial Finance 2,313.9 2,033.4 2,229.7 2,161.7 1,927.8 1,826.3
--------- --------- --------- --------- --------- ---------
$ 16,279.1 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) The increase in financing and leasing assets at December 31, 1994 as
compared to December 31, 1993 was primarily attributable to the acquisition by
the Company during 1994 of the factoring operations and receivables of Barclays
Commercial Corporation. See "--Strategy."
The Company's commercial operations generate transactions through direct calling
efforts with borrowers, lessees, equipment end-users, manufacturers and
distributors and through referral sources and other intermediaries. In addition,
the Company's strategic business units also refer or cross-sell transactions to
other Company units to best meet customers' overall financing needs. The
Company's marketing efforts are supplemented by its Multi-National Marketing
Group, which promotes the Company's products to the U.S. subsidiaries of foreign
corporations in need of asset-based financing, developing business through
referrals from DKB and through direct calling efforts. The Company also buys and
sells participations in and syndications of finance receivables and/or lines of
credit. In addition, from time to time in the normal course of business, the
Company purchases finance receivables in bulk to supplement its own originations
and sells selected finance receivables and equipment under operating leases for
risk management and/or other balance sheet management purposes.
The Company believes that the key factors in the growth and profitability of its
commercial operations are: (i) the broad market coverage and industry
specialization provided by its strategic business units and specialty marketing
group; (ii) its strong credit discipline and culture; (iii) its long-standing
commitments to its markets and its customers; and (iv) its employees, who
possess extensive experience and knowledge in the industries served, credit risk
management, deal structure and management of underlying collateral and
equipment.
EQUIPMENT FINANCING AND LEASING
The Company's Equipment Financing and Leasing operations had total financing and
leasing assets of $11.4 billion at September 30, 1997, representing 55.9% of the
Company's total financing and leasing assets. The Company's Equipment Financing
and Leasing operations are conducted through two strategic business units: (i)
The CIT Group/Equipment Financing ("Equipment Financing"), which focuses on the
broad distribution of its products through manufacturers, dealer/distributors,
intermediaries and direct calling primarily with the construction,
transportation and machine tools industries; and (ii) The CIT Group/Capital
Finance ("Capital Finance"), which focuses on the direct marketing of customized
transactions relating primarily to commercial aircraft and rail equipment. At
September 30, 1997, the average Equipment Financing outstanding per customer
account was $151,000 and the average Capital Finance outstanding per customer
account was $6.3 million.
Equipment Financing and Capital Finance provide substantial value to their
customers by arranging financing terms that meet customers' individual needs.
Such financing situations may include, for example, a customer's need for
varying as opposed to fixed payment terms in order to better match its cash
flow, as well as off-balance sheet financing (where the customer treats the
financing as a lease for financial reporting or tax purposes) versus on-balance
sheet financing (where the customer owns the equipment for financial reporting
or tax purposes).
Equipment Financing and Capital Finance personnel have extensive expertise in
managing equipment over its full life cycle, including, in the case of Capital
Finance, the expertise to repossess commercial aircraft, if necessary, to obtain
required maintenance and repairs for such aircraft, and to recertify such
aircraft with appropriate authorities. Equipment Financing's and Capital
Finance's equipment and industry expertise enable them to evaluate effectively
residual value risk and to manage equipment and residual value risks by locating
alternative equipment users and/or purchasers in order to minimize such risk
and/or the risk of equipment remaining idle for extended periods of time or in
amounts that could materially impact
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<PAGE> 8
profitability. For example, beginning in 1991, the aerospace industry
experienced a series of commercial airline bankruptcies, which included several
customers of Capital Finance. However, Capital Finance was able to effectively
manage its equipment and residual value risk, including the use of short-term
operating leases, to minimize the losses in its aircraft portfolio. During the
1990s, net credit losses to Capital Finance's aircraft portfolio have totalled
less than $1.0 million. For the period 1992 through 1996, Equipment Financing
and Capital Finance have realized in excess of 100% of the aggregate booked
residual value in connection with equipment sales.
The following table sets forth certain information concerning the financing and
leasing assets of Equipment Financing and Leasing at December 31 of each of the
years in the five-year period ended December 31, 1996 and at September 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------
AT
SEPTEMBER AT DECEMBER 31,
30, ------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $ 5,639.5 $ 6,357.5 $ 6,383.4 $5,852.6 $5,607.3 $5,037.3
Finance receivables--leases 4,063.1 3,562.0 3,095.2 2,910.6 2,668.2 2,485.9
Operating lease equipment, net 1,675.7 1,402.1 1,113.0 867.9 751.9 462.8
--------- --------- --------- -------- -------- --------
Total financing and leasing assets $11,378.3 $11,321.6 $10,591.6 $9,631.1 $9,027.4 $7,986.0
========= ========= ========= ======== ======== ========
</TABLE>
On January 1, 1997, $1,519.2 million of financing and leasing assets and related
marketing and servicing operations were transferred from Capital Finance to
Equipment Financing. The transferred financing and leasing assets and operations
were considered more complementary to the Equipment Financing business and the
transfers were undertaken to increase Equipment Financing's nationwide market
reach and further utilize its existing systems and infrastructure. The transfer
has also enabled Capital Finance to focus on the specialized markets and
industries best served by its ability to handle larger customized financings of
capital equipment, particularly aerospace and rail.
Equipment Financing
Equipment Financing is the largest of the Company's strategic business units
with total financing and leasing assets of $7.7 billion at September 30, 1997,
representing 37.9% of the Company's total financing and leasing assets.
Equipment Financing offers secured equipment financing and leasing products on a
fixed- and floating-rate basis, including direct secured loans, leases,
revolving lines of credit, operating leases, sale and leaseback arrangements,
vendor financing and specialized wholesale and retail financing for distributors
and manufacturers. Equipment Financing seeks a leadership market position in
each of its key distribution channels through its experience, reputation,
financing and equipment management capabilities and long-term relationships it
has developed with its customers, manufacturers, dealers, distributors and
intermediaries.
Equipment Financing is a leading nationwide asset-based equipment lender. At
September 30, 1997, its portfolio included significant outstandings to customers
in a number of different industries, with manufacturing being the largest as a
percentage of financing and leasing assets (32%), followed by construction (22%)
and printing (7%). The Equipment Financing portfolio at September 30, 1997
included many different types of equipment, with construction equipment
comprising the largest percentage (33%), followed by transportation (11%),
manufacturing (9%) and business aircraft (9%). Equipment Financing's portfolio
included approximately 51,000 accounts. The average new financing was
approximately $215,000 with an average financing term of 62 months. At September
30, 1997, 86% of the Equipment Financing finance receivable portfolio was based
on fixed interest rates, with the remaining 14% based on variable interest
rates. At September 30, 1997, Equipment Financing's ten largest financings
constituted 5.3% of its portfolio.
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<PAGE> 9
Equipment Financing has sustained excellent growth and portfolio credit quality,
as shown in the following table.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $4,479.1 $3,859.0 $3,657.0 $3,081.7 $2,690.0 $2,112.7
Finance receivables--leases 2,703.0 1,757.8 1,272.9 1,188.0 1,191.0 981.4
Operating lease equipment, net 533.5 426.6 363.0 219.2 186.2 78.5
-------- -------- -------- -------- -------- --------
Total financing and leasing
assets $7,715.6(1) $6,043.4 $5,292.9 $4,488.9 $4,067.2 $3,172.6
======== ======== ======== ======== ======== ========
60+ days past due as a
percentage of finance
receivables 1.64% 1.86% 1.42% 1.33% 2.48% 4.05%
Net credit losses as a
percentage of average finance
receivables 0.24%(2) 0.27% 0.35% 0.46% 0.48% 0.56%
</TABLE>
- ---------------
(1) During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing.
(2) Calculated on an annualized basis.
Equipment Financing entered the operating lease business in 1991 and has grown
its operating lease portfolio to $533.5 million at September 30, 1997. Operating
lease equipment consists primarily of business aircraft, but also includes
trucks, trailers and buses, manufacturing equipment and construction equipment.
The Company believes that operating leases offer the opportunity for higher
yields from shorter term leases as compared to standard financing arrangements
or direct financing leases, and for additional revenue generated from the
remarketing, including re-leasing and sale, of operating lease equipment.
Marketing and Distribution. Equipment Financing believes that a key to its
success is its ability to effectively meet the financing needs of the customers
in its different distribution channels. Equipment Financing is headquartered in
Livingston, New Jersey, with two full service business centers in Tempe, Arizona
and Atlanta, Georgia and conducts its business through a network of 27 sales
offices in cities that include Boston, Chicago, Dallas, Los Angeles, San
Francisco and Seattle. The Tempe business center originates and services the
construction, transportation, business aircraft and certain other industries on
a nationwide basis and the Atlanta business center originates and services the
printing, machine tools, manufacturing and certain other industries on a
nationwide basis. Equipment Financing supplements its sales offices with field
sales personnel throughout the United States, which provides cost effective
market coverage.
Equipment Financing originates its products through direct calling on customers
and through its relationships with manufacturers, dealers/distributors and
intermediaries that have leading or significant sales or significant marketing
positions in their respective industries. This provides Equipment Financing with
efficient access to equipment end-users in many industries across a variety of
equipment types. Equipment Financing has developed approximately 60
manufacturer, 1,500 dealer/ distributor and 40 intermediary relationships. From
time to time, Equipment Financing also supplements its core direct origination
and manufacturer and dealer/distributor origination capabilities with
broker-generated business through a centralized operation. Equipment Financing
also (i) syndicates transactions with other lenders to facilitate the
origination of larger transactions, manage portfolio concentration risk and
enhance profitability, (ii) participates in financings arranged by other finance
companies, leasing companies and banks and (iii) from time to time acquires
portfolios of finance receivables.
Over 60% of Equipment Financing customers are multiple contract relationships,
versus single contract financings. Equipment Financing customers primarily range
from small- to middle-market companies in a range of industries and equipment
types. The Company believes that Equipment Financing's access to multiple
marketing channels allows it to use the most effective marketing channel for
generating new financings in each of its target industries (for example,
developing relationships with dealers and distributors in construction and with
manufacturers in printing).
Servicing. Equipment Financing handles all servicing through its Tempe and
Atlanta business centers. Each business center is responsible for nationwide
customer service for the industries within its purview. Equipment Financing
believes it has developed highly efficient processes and systems that enable it
to handle increasing transaction levels very cost effectively. From 1992 through
1996, Equipment Financing improved its operating expense ratio (operating
expenses divided by average earning assets) by 30%. During that time period, the
financing and leasing assets of Equipment Financing grew from $3.2 billion to
$6.0 billion.
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<PAGE> 10
Capital Finance
Capital Finance had financing and leasing assets of $3.7 billion at September
30, 1997, which represented 18.0% of the Company's total financing and leasing
assets. Capital Finance specializes in customized secured financing, including
leases, loans, operating leases, single investor leases, debt and equity
portions of leveraged leases and sale and leaseback arrangements relating
primarily to end-users of commercial aircraft and railcars. Typical Capital
Finance customers are middle-market to larger-sized companies. At September 30,
1997, approximately 87% of the Capital Finance finance receivables portfolio was
based on fixed interest rates, with the remaining 13% based on variable interest
rates.
Capital Finance's experience in specialized equipment lending began in the late
1960's. Capital Finance has provided financing to commercial airlines for over
30 years. The Capital Finance aerospace portfolio includes most of the leading
U.S. and foreign commercial airlines. Capital Finance had 222 commercial
aircraft in its portfolio at September 30, 1997, including narrow body, wide
body, cargo and commuter aircraft predominantly manufactured by The Boeing
Company and McDonnell-Douglas Corp., and, to a lesser extent, Airbus Industrie,
British Aerospace and Embraer. Capital Finance has developed strong
relationships with most major airlines and all major aircraft and aircraft
engine manufacturers, the latter of which provides Capital Finance with access
to technical information, which supports customer service and provides
opportunities to finance new business.
Capital Finance has over 25 years experience in financing the rail industry,
contributing to its knowledge of asset values, industry trends, product
structuring and customer needs. To strengthen its position in the rail financing
market, Capital Finance formed a dedicated rail equipment group in 1994. The
Capital Finance rail portfolio includes all of the U.S. and Canadian Class I
railroads and numerous shippers. The Capital Finance operating lease fleet
included over 8,100 rail cars at September 30, 1997 and primarily is comprised
of covered hopper cars used to ship grain and agricultural products and plastic
pellets, gondola cars for coal, steel coil and mill service, open hopper cars
for coal and aggregates, center beam flat cars for lumber and boxcars for paper
and auto parts.
The following table sets forth certain information concerning Capital Finance at
December 31 of or for each of the years in the five year period ended December
31, 1996 and at or for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $1,160.4 $2,498.5 $2,726.4 $2,770.9 $2,917.3 $2,924.6
Finance receivables--leases 1,360.1 1,804.2 1,822.3 1,722.6 1,477.2 1,504.5
Operating lease equipment, net 1,142.2 975.5 750.0 648.7 565.7 384.3
-------- -------- -------- -------- -------- --------
Total financing and leasing
assets $3,662.7(1) $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4
======== ======== ======== ======== ======== ========
60+ days past due as a
percentage of finance
receivables 0.42% 1.08% 1.84% -- 0.42% 2.25%
Net credit losses as a
percentage of average finance
receivables 1.51%(2) 0.91% 0.15% 0.26% 0.36% 0.74%
</TABLE>
- ---------------
(1) During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing.
(2) Calculated on an annualized basis.
The increase in net credit losses as a percentage of average finance receivables
was due to chargeoffs for nonaccrual loans secured by oceangoing shipping and
cruise line vessels in 1996 and for power generation project energy loans in the
first nine months of 1997. The Company ceased its marketing to the oceangoing
maritime and power generation project sectors in the third quarter of 1997.
10
<PAGE> 11
The following table sets forth the financing and leasing assets of Capital
Finance by industry type at December 31 of each of the years in the five-year
period ended December 31, 1996 and at September 30, 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Aerospace $1,975.3 $1,901.2 $1,900.3 $1,880.0 $1,894.9 $1,986.3
Rail 765.6 716.1 578.7 495.9 396.0 346.4
Other 921.8 2,660.9 2,819.7 2,766.3 2,669.3 2,480.2
------ ------ ------ ------ ------ ------
Total $3,662.7 $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing. The other financing and leasing assets at September 30,
1997 consisted primarily of maritime, energy and intermodal assets. Capital
Finance ceased marketing to the maritime and energy industries during the third
quarter of 1997 and is permitting its portfolio of related financing and leasing
assets to liquidate. At September 30, 1997, Capital Finance's maritime and
energy portfolios were $284.8 million and $328.5 million, respectively. In
September, 1997, Equipment Financing commenced marketing to certain sectors of
the maritime and energy industries, consisting principally of U.S. inland
waterway and energy-related equipment financing.
From 1992 through September 30, 1997, commercial airline financing and leasing
assets declined from 16.2% to 9.7% of the Company's total financing and leasing
assets. From 1992 to 1996, the Company limited the growth of the Capital Finance
aerospace portfolio due to weakness in the commercial airline industry, industry
overcapacity and declining equipment values. The Company has determined that it
is appropriate to grow the aerospace portfolio, but will continue to monitor
this growth relative to the Company's total financing and leasing assets.
Capital Finance believes that there are additional financing opportunities among
its existing aerospace and rail clients, as well as among potential new clients.
The commercial airline industry currently is in one of the more profitable
periods in its history. The Company believes that growth and profitability
prospects for the railcar industry are favorable based on its expectation that
railroads will maintain their market share of coal and grain shipments and will
have opportunities to compete more effectively with the trucking industry.
Marketing and Distribution. New business is generated by Capital Finance
through (i) direct calling efforts with equipment end-users and borrowers,
including major airlines, railroads and shippers, (ii) relationships with
aerospace, railcar and other manufacturers and (iii) intermediaries and other
referral sources. Capital Finance maintains relationships with the leading
commercial airline manufacturers in the world and several leading railcar
manufacturers in the United States. Capital Finance is headquartered in New York
City, with a full service office in New York City and additional sales offices
in two other cities.
Important elements of the Capital Finance operation are its product experience,
industry expertise, equipment knowledge, customized deal structuring and
equipment remarketing. Capital Finance employees are organized and focused both
by industry and by product (i.e., operating lease versus longer-term financing)
to bring focus and expertise to its customers and to meet their specific
financing needs. Many Capital Finance employees have extensive experience in
various capacities in the industries served by Capital Finance.
FACTORING
The CIT Group/Commercial Services ("Commercial Services") factoring operation
was, at December 31, 1996, the largest factoring operation in the United States
based on annual factoring volume. This business unit had total financing and
leasing assets of $2.6 billion at September 30, 1997, which represented 12.7% of
the Company's total financing and leasing assets. Commercial Services offers a
full range of domestic and international customized credit protection and
lending services that include factoring, working capital and term loans,
receivable management outsourcing, bulk purchases of accounts receivable, import
and export financing and letter of credit programs.
Commercial Services had a 21% U.S. market share, based on volume, of the $64.0
billion factoring market in 1996. The Company's three largest competitors
collectively had a 41% U.S. market share. Industry-wide factoring volume has
grown from $53.0 billion in 1992 to $64.0 billion in 1996, a compound annual
growth rate of approximately 4.5%. Commercial Services market share during the
same period grew from 14% to 21% as a result of its business development and
origination efforts and the acquisition of the factoring operations of Barclays
Commercial Corporation during February 1994.
11
<PAGE> 12
Commercial Services' client base consists of textile and apparel related
companies, furniture manufacturers, home furnishings organizations, importers,
wholesalers and distributors. For the year ended December 31, 1996,
approximately 70% of Commercial Services' clients (by factored volume) were in
the textile and apparel industries and 14% were manufacturers of furniture and
home furnishings. Commercial Services clients primarily are small- to
medium-sized companies. Commercial Services currently has over 850 clients who
generate annual sales ranging from $1.0 million to over $450.0 million.
Commercial Services collects receivables from more than 175,000 retail and
wholesale customers of its clients. Generally, the clients notify their
customers to make all payments on the receivables directly to Commercial
Services. Clients use Commercial Services' factoring product for various
purposes, including improving cash flow, mitigating or reducing the risk of bad
debt charge offs, increasing sales, improving management information and
converting the high fixed cost of operating a credit and collection department
into a lower and variable expense based on sales volume.
The following table sets forth certain information for Commercial Services at
December 31 of or for each of the years in the five-year period ended December
31, 1996 and at or for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED ---------------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total financing and leasing
assets $ 2,586.9 $ 1,804.7 $ 1,743.3 $ 1,896.2(1) $ 981.9 $1,010.2
Factoring volume(2) $11,280.4 $13,162.5 $12,653.3 $12,903.0(1) $7,667.4 $7,382.1
60+ days past due as a
percentage of finance
receivables 1.65% 2.65% 1.89% 1.42% 4.84%(3) 6.00%(3)
Net credit losses as a
percentage of average
finance receivables 0.74%(4) 0.89% 0.72% 0.85% 2.29%(3) 2.14%(3)
</TABLE>
- ---------------
(1) The increase in both financing and leasing assets and factoring volume was
primarily attributable to the acquisition by the Company during 1994 of the
factoring operations and then existing factoring receivables of Barclays
Commercial Corporation. See "--Strategy."
(2) Includes receivables management servicing volume.
(3) 60+ days past due as a percentage of finance receivables and net credit
losses as a percentage of average finance receivables were higher during 1992
and 1993 due to a loan to a manufacturer on non-accrual status in 1992 and 1993
which was settled in 1994.
(4) Calculated on an annualized basis.
Commercial Services generally provides financing to its clients through the
purchase of accounts receivable owed to clients by their customers, usually on a
non-recourse basis, as well as by guaranteeing amounts due under letters of
credit issued to the clients' suppliers which are collateralized by accounts
receivable and other assets. The purchase of accounts receivable is
traditionally known as "factoring" and results in the payment by the client of a
factoring fee, generally ranging from 0.3% to 2% of the factored sales volume.
On the date that Commercial Services "factors" (i.e., purchases) a customer
invoice from a client, it records the customer receivable as an asset and also
establishes a liability for the funds due to the client ("credit balances of
factoring clients"). Commercial Services also may advance funds to its clients
prior to collection of receivables, typically in an amount up to 80% of eligible
accounts receivables (as defined for that transaction), charging interest on
such advances (in addition to any factoring fees) and satisfying such advances
from receivables collections. Approximately 50% of Commercial Services' clients
obtain advances against their purchased receivables, in addition to the credit
protection, collection and management information services offered by Commercial
Services in connection with the purchase of their accounts receivable.
Commercial Services guarantees the collection of each client's pre-approved
receivables or receivables from each client's customers with pre-approved credit
lines. Payment of receivables which are credit-approved by Commercial Services
is made to the client after collection from the client's customer or, if the
receivable is not paid based solely on the customer's financial inability to
pay, payment is made to the client within a specific time after the due date of
the receivable.
All client credit balances are reduced by amounts outstanding to Commercial
Services by factoring fees charged or any outstanding advances to the client.
Interest charged on such advances is predominantly based on a spread over the
designated prime rate. In larger transactions, a spread over LIBOR is sometimes
used.
Marketing and Distribution. Commercial Services is headquartered in New York
City, with full service offices in Charlotte, Dallas, Los Angeles and New York
and sales offices in Boston, Hong Kong and Miami. Commercial Services generates
business regionally from a variety of sources, including direct calling and
referrals from existing clients and other referral sources. During 1996, the
Company added approximately 200 new client relationships through regional
marketing efforts.
12
<PAGE> 13
Servicing. Commercial Services has developed processes and systems designed to
efficiently process the very high transaction volumes related to factoring
invoices and believes that such low cost volume processing capability provides
it with a competitive advantage in the factoring business. The Company has made
efficiency improvements which utilize technology to electronically link clients
and transfer transaction data, perform basic credit surveillance routines and to
replace higher cost manual labor. Commercial Services clients can electronically
submit transactions and inquire on account status on virtually all client
orders. More than half of Commercial Services' invoices are submitted
electronically (as opposed to paper invoices or other physical means). Operating
expenses as a percent of factored volume decreased by over 27% from 1992 to
1996. Bookkeeping and collection functions are located in a service center in
Danville, Virginia.
COMMERCIAL FINANCE
At September 30, 1997, the financing and leasing assets of Commercial Finance
totaled $2.3 billion, representing 11.4% of the Company's total financing and
leasing assets. The Company's Commercial Finance operations are conducted
through two strategic business units: (i) The CIT Group/Business Credit
("Business Credit"), which provides secured financing primarily to middle-market
to larger-sized borrowers and has an average credit facility size at origination
of $22.4 million; and (ii) The CIT Group/Credit Finance ("Credit Finance"),
which provides secured financing primarily to smaller-sized to middle-market
borrowers and has an average credit facility size at origination of $6.9
million. Credit Finance borrowers are generally smaller and cover a wider range
of credit quality than those of Business Credit. While both Business Credit and
Credit Finance offer financing secured by accounts receivable, inventories and
fixed assets, Credit Finance places a higher degree of reliance on collateral
and is generally more focused on credit monitoring in its business.
The following table sets forth financing and leasing assets of Commercial
Finance at December 31 of each of the years in the five-year period ended
December 31, 1996 and at September 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
AT DECEMBER 31,
AT
SEPTEMBER 30, ------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Business Credit $ 1,435.7 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3
Credit Finance 878.2 797.8 758.7 719.6 645.7 545.0
-------- -------- -------- -------- -------- --------
Total financing and leasing assets $ 2,313.9 $2,033.4 $2,229.7 $2,161.7 $1,927.8 $1,826.3
======== ======== ======== ======== ======== ========
</TABLE>
Business Credit
Financing and leasing assets of Business Credit totaled $1.4 billion at
September 30, 1997 and represented 7.1% of the Company's total financing and
leasing assets. Business Credit offers senior revolving and term loans secured
by accounts receivable, inventories and fixed assets to middle-market and
larger-sized companies. Such loans are used by clients primarily for growth,
expansion, acquisitions, refinancings and debtor-in-possession and turnaround
financings. Business Credit sells and purchases participation interests in such
loans to and from other lenders. Customers usually range in size of annual sales
from $20.0 million to $2.0 billion, and conduct their business in a wide range
of industries. The average customer loan balance outstanding was $6.3 million at
September 30, 1997.
The following table sets forth certain information concerning Business Credit at
December 31 of or for each of the five years in the five-year period ended
December 31, 1996 and at or for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
AT OR FOR
THE NINE MONTHS AT OR FOR THE YEARS ENDED DECEMBER 31,
ENDED --------------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Total financing and leasing
assets $1,435.7 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3
60+ days past due as a
percentage of finance
receivables %0.62 1.77% 2.81% 5.53% 2.88% 2.53%
Net credit losses as a
percentage of average
finance receivables %0.19(1) 0.69% 1.82% 1.95% 1.70% 1.00%
</TABLE>
- ---------------
(1) Calculated on an annualized basis.
From 1992 through 1996, Business Credit's finance receivables have remained
relatively unchanged in amount, although business originations of new credit
lines have increased each year. In response to higher delinquencies and charge
offs in
13
<PAGE> 14
1994 and 1995, management initiated a strategy in early 1996 to diversify
portfolio credit risk by decreasing individual borrower "hold" positions
(retained or owned portion), which restricted portfolio growth. The impact of
management's decision to reduce its target hold amount is reflected in the
change in Business Credit's ten largest managed credit facilities. At September
30, 1997, the share attributable to Business Credit's ten largest managed credit
facilities represented 31% of those total approved lines, down from 49% at
September 30, 1993. Further, the largest ten credits based on actual borrowings
represented 12% of finance receivables at September 30, 1997, down from 18% at
September 30, 1993.
Business Credit has experienced a higher level of paydowns attributable to
greater availability of alternative capital and greater client liquidity due to
a strong economy, which also has restricted portfolio growth. With respect to
new originations, current market conditions have led to substantially enhanced
competition in both pricing, terms and deal structure (secured versus unsecured,
advance rates, qualifying assets, etc.) and has improved the creditworthiness of
many borrowers to the level that permits them to obtain lower cost unsecured
financing from alternative sources.
Through its variable interest rate senior revolving and term loan products,
Business Credit meets its customers' financing needs for working capital,
growth, acquisition and other financing situations otherwise not met through
bank or other unsecured financing alternatives. Business Credit typically
structures financings on a fully secured basis, though, from time to time, it
may look to a customer's cash flow to support a portion of the credit facility.
Revolving and term loans are made on a variable interest rate basis based on
published indexes such as LIBOR or a prime rate of interest.
A credit line is arranged with each borrower establishing the maximum amount the
borrower may finance, subject to the amount of underlying eligible collateral
and corresponding advance rates. At September 30, 1997, total credit facilities
to individual borrowers ranged up to $175.0 million. For the nine months ended
September 30, 1997, such credit facilities averaged $22.4 million at
origination. Amounts in excess of Business Credit's target credit line hold are
primarily syndicated or participated out to other lenders. The excess of
approved credit lines outstanding over finance receivables outstanding
represents potential additional borrowings or finance receivables that borrowers
may qualify for, subject to the availability of required collateral and
corresponding advance rates. Business Credit typically advances funds (lends) up
to 85% of eligible accounts receivable and up to 60% of eligible inventories. In
conjunction with its lending operations, Business Credit also generates
significant fees, including facility line availability, collateral management,
letter of credit and syndication fees.
Marketing and Distribution. Business Credit is headquartered in New York City,
with sales and customer service offices in Atlanta, Boston, Chicago, Dallas, Los
Angeles, New York and San Francisco. Business is originated through direct
calling efforts and intermediary and referral sources. Approximately 70% of new
business was developed through referral sources and intermediaries during the
nine months ended September 30, 1997. Business Credit has focused on increasing
the proportion of direct business origination to improve its ability to capture
or retain refinancing opportunities and to enhance finance income. As recently
as 1995, approximately 90% of new business was generated through intermediaries.
Business Credit has the capacity to respond quickly in the marketplace to
underwriting larger-sized transactions (i.e.,greater than its target hold size)
because of its restructuring and financing expertise and its syndication
capabilities, which allow it to sell down a portion of the credit facility and
reduce its credit concentration risk.
Servicing. Servicing of customer accounts is centrally performed in Business
Credit's New York office. An important competitive advantage in servicing
revolving credit facilities is the ability to handle the high transaction
volumes associated with advancing and collecting funds. Business Credit has
developed advanced servicing or "back-office" systems, providing it with a
low-cost capability to service its customers. Over half of Business Credit
borrowers communicate directly with Business Credit systems to process
transactions via its proprietary "bulletin board" interface. This allows
customers to report required transaction data electronically, to request
advances of funds and to obtain account information such as balances and
availability. Further, Business Credit borrowers typically direct the funds
collected on their own accounts receivable into lock-boxes and "blocked"
accounts controlled by Business Credit. Cleared funds are transferred directly
to Business Credit and are used to reduce the borrower's loan.
Credit Finance
Financing and leasing assets of Credit Finance totaled $878.2 million at
September 30, 1997 and represented 4.3% of the Company's total financing and
leasing assets. Credit Finance offers revolving and term loans to smaller-sized
and middle-market companies secured by accounts receivable, inventories and
fixed assets. Such loans are used by clients for working capital, refinancings,
acquisitions, leveraged buyouts, reorganizations, restructurings, turnarounds
and Chapter 11 financing and confirmation plans. Credit Finance sells
participation interests in such loans to other lenders and purchases
participation interests in such loans originated by other lenders. Credit
Finance was acquired by the Company in February 1991 and has been engaged in the
commercial financing of smaller-sized and middle-market businesses for over 48
years.
14
<PAGE> 15
Credit Finance customers generally have annual revenues ranging from $10.0
million to $200.0 million. Credit Finance lends to customers in many industries,
including the metal fabrication, distribution, food and food services, lumber
and wood products and manufacturing industries. The average customer loan
balance outstanding was $4.2 million at September 30, 1997.
The following table sets forth certain information concerning Credit Finance at
December 31 of or for each of the years in the five-year period ended December
31, 1996 and at or for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
AT OR FOR AT OR FOR THE YEARS ENDED DECEMBER 31,
THE NINE MONTHS
ENDED SEPTEMBER 30, --------------------------------------------------
1997 1996 1995 1994 1993 1992
------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Total financing and leasing assets $ 878.2 $797.8 $758.7 $719.6 $645.7 $545.0
60+ days past due as a percentage of
finance receivables -- -- 0.07% 0.46% 0.12% --
Net credit losses (recoveries) as a
percentage of average finance
receivables )(0.27%(1) 0.13% 0.36% 0.46% 0.32% --
</TABLE>
- ---------------
(1) Represents net credit recoveries, calculated on an annualized basis.
Through its variable interest rate senior revolving and term loan products,
Credit Finance meets its customers' financing needs for working capital in
growth, acquisition and other financing situations otherwise not met through
traditional bank or other unsecured financing alternatives. Revolving and term
loans are made on a variable interest rate basis based on a prime rate of
interest, with total credit facilities to individual borrowers ranging in size
from $5.0 million to up to $15.0 million. Credit facilities are established
through contractual arrangements, are typically two to three years in length and
typically include prepayment penalties. Credit Finance also has developed a
specialty division designed to meet the needs of smaller borrowers requiring
credit facilities ranging from $750,000 to $5.0 million. Further, Credit Finance
has the capacity to respond quickly in the marketplace to larger-sized
transactions (i.e., greater than its target hold size) because of its
syndication capabilities, which allow it to sell down a portion of a credit
facility and reduce its credit concentration risk.
Marketing and Distribution. Credit Finance is headquartered in New York City,
with sales and customer service offices in Chicago, Los Angeles and New York and
loan production offices in Atlanta, Boston, Charlotte, Cleveland, Dallas,
Reston, San Francisco, St. Louis and Tampa. Business is originated through the
sales and regional offices. Business also is developed through intermediaries
and referral relationships and through direct calling efforts. Credit Finance
has developed long-term relationships with selected finance companies, banks and
other lenders and with many diversified referral sources.
Servicing. Servicing of customer accounts is performed at Credit Finance's
regional service centers and national service center and includes the processing
of borrower's accounts receivable collections. Credit Finance borrowers
typically direct the funds collected on their own accounts receivable into lock
boxes controlled by Credit Finance and the funds are transferred directly to
Credit Finance to reduce the borrower's loan. As a result, Credit Finance
maintains control over such cash collections.
CONSUMER
At September 30, 1997, the Company's consumer segment financing and leasing
assets totaled $4.0 billion, representing 19.7% of the Company's total financing
and leasing assets. The consumer segments' managed assets were $5.9 billion at
September 30, 1997, representing 26.6% of total managed assets. Between January
1, 1992 and December 31, 1996, the consumer segment's managed assets grew at a
compound annual rate of 27.5%.
The Company's consumer business is focused primarily on home equity lending and
retail sales financing secured by recreation vehicles, manufactured housing and
recreational boats. Home equity lending is performed by The CIT Group/Consumer
Finance ("Consumer Finance") business unit. Sales financing for products sold
through dealers is performed by The CIT Group/Sales Financing ("Sales
Financing") business unit. During 1997, Sales Financing began to provide
wholesale inventory financing to manufactured housing and recreational boat
dealers utilizing its dealer and manufacturer relationships. Sales Financing
also provides contract servicing for securitization trusts and other third
parties through a centralized Asset Service Center ("ASC"). Additionally, in the
ordinary course of business, Consumer Finance and Sales Financing purchase loans
and portfolios of loans from banks, thrifts and other originators of consumer
loans. As an additional source of liquidity, the Company has securitized home
equity, manufactured housing, recreational boat and recreation vehicle finance
receivables and expects to continue to securitize the foregoing types of finance
receivables in the future. See "--Securitization Program" for information
concerning the Company's securitization program.
15
<PAGE> 16
The following table sets forth certain information regarding the Company's
consumer business segment at December 31 of each of the years in the five-year
period ended December 31, 1996 and at September 30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
AT
SEPTEMBER AT DECEMBER 31,
30, ------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Home equity $1,856.4 $2,005.5(2) $1,039.0 $ 570.8 $ 131.3 $ --
Sales financing 2,044.4 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8
Wholesale inventory financing 98.4 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total financing and leasing assets 3,999.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8
Consumer finance receivables previously
securitized and currently managed by
the Company 1,918.3(1) 1,437.4 916.5 306.7 175.6 43.8
-------- -------- -------- -------- -------- --------
Total managed assets 5,917.5 4,792.7 3,372.4 2,348.7 1,764.9 1,455.6
-------- -------- -------- -------- -------- --------
Consumer finance receivables serviced
for third parties 1,611.9(3) 549.2 338.2 191.5 240.5 296.5
-------- -------- -------- -------- -------- --------
Total serviced assets $7,529.4 $5,341.9 $3,710.6 $2,540.2 $2,005.4 $1,752.1
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes the initial securitization of home equity loans totaling $500.0
million in July 1997.
(2) In 1996, the Company purchased a portfolio of $357.8 million in home equity
closed-end loans and home equity lines of credit.
(3) In August 1997, the Company commenced providing servicing for Chase's
recreation vehicle and recreational boat finance receivables portfolio of
$1.3 billion.
Consumer Finance
Financing and leasing assets of Consumer Finance, which aggregated $1.9 billion
at September 30, 1997, represented 9.1% of the Company's total financing and
leasing assets. The managed assets of Consumer Finance were $2.3 billion at
September 30, 1997, or 10.5% of the total managed assets. Consumer Finance
commenced operations in December 1992. Its products include both fixed and
variable rate closed-end loans and variable rate lines of credit. The lending
activities of Consumer Finance consist primarily of originating, purchasing and
selling loans secured by first or second liens on detached, single family
residential properties. Such loans are primarily made for the purpose of
consolidating debts, refinancing an existing mortgage, funding home
improvements, paying education expenses and, to a lesser extent, purchasing a
home, among other reasons.
16
<PAGE> 17
The following table sets forth certain information concerning Consumer Finance
at December 31 of or for each of the years in the five year period ended
December 31, 1996 and at or for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
AT OR
FOR THE
NINE MONTHS
ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Number of accounts 46,900 52,617 27,122 13,200 3,496 --
Original term (months) 237 225 204 190 146 --
Total financing and leasing assets $ 1,856.4 $2,005.5 $1,039.0 $ 570.8 $131.3 $ --
Finance receivables previously
securitized and currently managed by
the Company 482.9 -- -- -- -- --
-------- -------- -------- ------ ------ ------
Total managed assets $ 2,339.3 $2,005.5 $1,039.0 $ 570.8 $131.3 $ --
======== ======== ======== ====== ====== ======
Percentage of owned finance receivables
that were 60+ days past due(1)(2) 3.41% 2.10% 1.61% 0.20% 0.02% --
Percentage of managed assets that were
60+ days past due(3) 3.00% 2.10% 1.61% 0.20% 0.02% --
Owned finance receivable net credit
losses as a percent of average owned
finance receivables(2) 0.91% 0.60% 0.18% 0.02% 0.11% --
Managed asset net credit losses as a
percent of average managed assets(3) 0.79%(4) 0.60% 0.18% 0.02% 0.11% --
</TABLE>
- ---------------
(1) Amounts include balances for which the underlying collateral currently is in
the foreclosure process.
(2) Owned finance receivables exclude consumer finance receivables held for
sale.
(3) Managed assets include consumer finance receivables held for sale.
(4) Calculated on an annualized basis.
Initially, Consumer Finance originated or purchased the majority of its home
equity loans with original terms of up to 180 months. Commencing in 1994,
Consumer Finance expanded its product offerings to include more loans with terms
of up to 360 months, as Consumer Finance believes that the longer term and
correspondingly lower monthly payment are attractive to customers who might
otherwise refinance an existing loan or obtain a new loan from a bank or other
traditional long-term lender. The increase in delinquencies and net credit
losses, as highlighted in the above table, is the result of both the seasoning
of a growing portfolio and unfavorable loss experience on certain high loan to
value loans originated prior to the establishment in the fourth quarter of 1995
of current high loan to value underwriting guidelines. A majority of these high
loan to value loans originated prior to 1995 were sold by Consumer Finance
during the second quarter of 1997. At September 30, 1997, approximately 82% of
Consumer Finance's receivables were fixed-rate and approximately 73% of Consumer
Finance's receivables were secured by first liens.
The Company believes that its network of Consumer Finance offices, located in
most major U.S. markets, enables it to provide a competitive, extensive product
offering complemented by high levels of service delivery. Through experienced
lending professionals and advanced automation afforded by technology, Consumer
Finance provides rapid turnaround time from application to loan funding, a
characteristic considered to be critical by its broker and correspondent
relationships.
Marketing and Distribution. Consumer Finance originates loans on both a direct
and indirect basis through the channels described below. New business
originations for the first nine months of 1997 were $848.9 million. New business
originations for the years ended December 1996, 1995, 1994 and 1993 were $943.9
million, $617.1 million, $481.2 million and $153.9 million, respectively.
Broker Business. Consumer Finance originates real estate loans based upon
applications received from independent mortgage brokers. Consumer Finance
directly underwrites and funds these broker loans.
At September 30, 1997, Consumer Finance had relationships with over 1,300
brokers. A nationwide network of sales executives located in 25 area offices
that are strategically located in major market areas throughout the United
States are responsible for the development and maintenance of broker
relationships as well as coordination between the broker and Consumer Finance.
Mortgage brokers participating in this program must be approved by the Company
by satisfying established
17
<PAGE> 18
requirements pertaining to experience, financial stability and licensing. After
a broker is approved, Consumer Finance conducts regular reviews of the
relationship and the broker's performance by examining the performance of loans
originated by the broker, including reviews of seasoned and unseasoned
delinquencies, and other factors, including maintenance of required regulatory
licenses and third party credit reports.
Correspondent Lending. Consumer Finance also purchases real estate loans
through its correspondent lending program on an individual basis based upon
applications that it has previously approved, or Consumer Finance may approve
the purchase of groups of such loans.
At September 30, 1997, Consumer Finance had relationships with over 250
correspondents. Consumer Finance establishes certain requirements that each
correspondent must meet pertaining to the correspondent's experience, financial
stability and licensing, and has agreements with all correspondents governing
the nature of such relationships. Substantially all loans acquired from
correspondents conform to the underwriting criteria used by Consumer Finance in
its direct marketing originations. Correspondent relationships are managed
through three regional offices that are strategically located in major market
areas throughout the United States.
Direct Marketing. Direct marketing to consumers in 44 states is performed
centrally through the Company's National Home Equity Sales Center ("NHEC")
located in Chicago. Utilizing a staff of marketing professionals, Consumer
Finance markets real estate loans directly to the consumer through print ads,
direct mail campaigns and other media. Prospective applicants either submit an
application included in the mailing or telephone their information toll free to
a Consumer Finance representative. Once an application is completed, a
preliminary approval may be given within twenty-four hours.
Bulk Purchases. Consumer Finance may, from time to time, purchase portfolios of
home equity loans from other financial institutions which originated the loans
using their own underwriting criteria. Depending upon the size of the portfolio,
Consumer Finance performs a due diligence review on either all the loans in the
portfolio or a statistical sample of loans. Due diligence generally includes
legal and credit file reviews, as well as confirmation of property values.
See "--Sales Financing" for information concerning servicing by Consumer
Finance.
Sales Financing
The financing and leasing assets of Sales Financing, which aggregated $2.1
billion at September 30, 1997, represented 10.5% of the Company's total
financing and leasing assets. The managed assets of Sales Financing were $3.6
billion at September 30, 1997, or 16.1% of the total managed assets. The lending
activities of Sales Financing consist primarily of providing nationwide retail
financing for the purchase of new and used recreation vehicles, manufactured
housing and recreational boats. Sales Financing has been a lender to the
recreation vehicles and manufactured housing industries for over 30 years and is
a leading lender for recreation vehicles and recreational boats based on 1996
origination volume. Sales Financing also provides wholesale manufactured housing
and recreational boats inventory financing. Sales Financing offers (i)
fixed-rate, fully amortizing retail sales finance loans and (ii) short-term,
variable-rate inventory finance loans and lines of credit.
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<PAGE> 19
The following table sets forth certain information with respect to owned finance
receivables and finance receivables previously securitized and currently managed
by the Company at December 31 of or for each of the years in the five-year
period ended December 31, 1996 and at or for the nine months ended September 30,
1997.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Retail recreation vehicle
Financing and leasing assets $ 873.2 $ 510.1 $ 698.5 $ 898.0 $1,022.4 $ 930.3
Finance receivables previously
securitized and currently
managed by the Company 591.1 746.8 445.7 118.3 -- --
-------- -------- -------- -------- -------- --------
$1,464.3 $1,256.9 $1,144.2 $1.016.3 $1,022.4 $ 930.3
-------- -------- -------- -------- -------- --------
Retail manufactured housing
Financing and leasing assets $1,042.7 $ 790.3 $ 561.5 $ 501.6 $ 396.7 471.8
Finance receivables previously
securitized and currently
managed by the Company 363.1 412.2 470.8 188.4 175.6 43.8
-------- -------- -------- -------- -------- --------
$1,405.8 $1,202.5 $1,032.3 $ 690.0 $ 572.3 $ 515.6
-------- -------- -------- -------- -------- --------
Retail recreational boat
Financing and leasing assets $ 128.5 $ 49.4 $ 156.9 $ 71.6 $ 38.9 $ 9.7
Finance receivables previously
securitized and currently
managed by the Company 481.2 278.4 -- -- -- --
-------- -------- -------- -------- -------- --------
$ 609.7 $ 327.8 $ 156.9 $ 71.6 $ 38.9 $ 9.7
-------- -------- -------- -------- -------- --------
Wholesale inventory financing
Financing and leasing assets $ 98.4(1) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total financing and
leasing assets 2,142.8 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8
Total finance
receivables previously
securitized and
currently managed by
the Company 1,435.4 1,437.4 916.5 306.7 175.6 43.8
-------- -------- -------- -------- -------- --------
Total managed assets $3,578.2 $2,787.2 $2,333.4 $1,777.9 $1,633.6 $1,455.6
======== ======== ======== ======== ======== ========
Percent of owned finance
receivables that were 60+ days
past due(2) 3.13% 2.47% 1.42% 0.64% 1.25% 1.26%
-------- -------- -------- -------- -------- --------
Percent of managed assets that
were 60+ days past due(3) 2.18% 1.88% 1.21% 0.69% 1.07% 1.27%
-------- -------- -------- -------- -------- --------
Owned finance receivable net
credit losses as a percent of
average owned finance
receivables(2) 1.39%(4) 0.90% 0.58% 0.68% 0.80% 0.91%
-------- -------- -------- -------- -------- --------
Managed asset net credit losses as
a percent of average managed
assets(3) 1.00%(4) 0.76% 0.55% 0.65% 0.77% 0.89%
-------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
(1) The Company began offering this product during January 1997.
(2) Owned finance receivables exclude consumer finance receivables held for
sale.
(3) Managed assets include consumer finance receivables held for sale.
(4) Calculated on an annualized basis.
Sales Financing has undertaken a number of strategic steps to bolster growth,
increase market share and improve productivity, which have resulted in annual
compound growth of 14.4% in managed assets for the five year period ended
December 31, 1996. In 1993, Sales Financing entered the retail recreational boat
lending business. The timing of this new product initiative was predicated
largely on an improving recreational boat market (recovering from the economic
downturn of the 1980's and
19
<PAGE> 20
early 1990's), as well as the withdrawal of several retail recreational boat
lenders from the market. Sales Financing places great emphasis on superior
dealer service and, as a result, has increased its marine dealer base from 125
dealers in 1993 to over 1,800 dealers (or 25% of the marketplace) at September
30, 1997. Additionally in 1995, Sales Financing realigned its sales force across
all three product lines (recreation vehicle, manufactured housing and
recreational boat) into a product management structure. The realignment has
resulted in the continued expansion of the Company's dealer base, improved focus
on needs of individual product end users and ultimately higher retail
originations.
During June 1997, the Company entered into an arrangement with Chase pursuant to
which the Company provides servicing for Chase's recreation vehicle and
recreational boat finance receivables portfolio of $1.3 billion. The Company
commenced providing portfolio services under that arrangement during August
1997.
Marketing and Distribution. Sales Financing originates retail sales finance
contracts predominantly through recreation vehicle, manufactured housing and
recreational boat dealer, broker and manufacturer relationships. At September
30, 1997, Sales Financing had over 2,700 active dealer and manufacturer
relationships. Sales Financing on occasion purchases recreation vehicle,
manufactured housing and recreational boat loans in "bulk" from other financial
institutions.
These origination channels are serviced through seven regional business centers
located strategically throughout the United States. The dealer base is serviced
and marketed with local sales personnel. Sales Financing believes that its
experience in dealer operations and finance, long standing dealer relationships
and product expertise have been instrumental in growing its dealer and broker
base.
Although Sales Financing originates finance receivables through several sources,
delivery can be categorized broadly into retail and wholesale.
Retail. Prior to accepting a retail sales finance application from a dealer,
Sales Financing must review and approve the dealer relationship. This process
includes examination of financial statements, trade references and credit
reports. Sales Financing pays origination fees for certain of its products
offered. These fees, commonly referred to as "dealer participations," are paid
by Sales Financing to the dealer and are accounted for as an adjustment to yield
over the anticipated life of the loan. Once a retail application is underwritten
and approved by a regional business center, the dealer receives the purchase
proceeds as well as any participation due. Certain events, such as early default
or payoff, may result in the dealer forfeiting a portion of a participation.
Wholesale. Working through established manufacturer relationships, Sales
Financing provides financing to manufactured housing and recreational boat
dealers for the purchase of inventory from manufacturers to be sold to the
retail buyer. Notwithstanding Sales Financing's manufacturer relationships, all
dealers participating in the wholesale program must be initially approved and
periodically reviewed by a credit officer, who examines, among other things, the
dealer's financial statements, trade references and credit reports. Once
approved, a dealer accesses credit as each inventory unit is ordered from the
manufacturer. When the manufacturer receives an order, Sales Financing is
contacted for a credit approval. Upon credit approval by Sales Financing, the
manufacturer ships the inventory to the dealer and bills Sales Financing, who
pays the invoice and charges the dealer's account. Dealers are also incentivized
to "roll-over" wholesale financing into a retail contract upon sale of the unit
to the end-user.
Servicing. The ASC centrally services and collects substantially all of the
Company's consumer finance receivables, including home equity loans, recreation
vehicle, manufactured housing, recreational boat and other receivables
(collectively, the "servicing portfolio"). The servicing portfolio includes both
loans originated or purchased by Sales Financing or Consumer Finance, as well as
loans originated or purchased by Sales Financing or Consumer Finance and
subsequently securitized with servicing retained. The servicing portfolio also
includes loans owned by third parties that are serviced by Sales Financing for a
fee on a "contract" basis. At September 30, 1997, the ASC's consumer finance
servicing portfolio aggregated approximately 339,300 loans, representing $7.5
billion, which included $2.3 billion of managed home equity finance receivables
serviced for Consumer Finance. During August 1997, the Company commenced
servicing $1.3 billion of recreation vehicle and recreational boat finance
receivables pursuant to its agreement with Chase.
Servicing and collections are performed at two locations in Oklahoma City.
Servicing responsibilities of the ASC include collecting principal and interest
payments, taxes and other payments, as applicable, from obligors. For loans
previously owned by Sales Financing that have been securitized, as well as loans
owned by other third parties, servicing responsibilities also include remitting
principal, interest and other payments to the holders of the related loans. The
ASC has responsibilities for the repossession and remarketing of collateral on
defaulted loans, and entering into workout arrangements with obligors under
certain defaulted loans. Advanced technology is used to perform many servicing
and collecting tasks. Automated tools engaged in the operation include
predictive autodialers, voice response units and automated payment processing.
20
<PAGE> 21
Securitization Program
As an additional source of liquidity, in 1992, the Company established a program
to access the public and private asset backed securitization markets. Current
products utilized in the Company's program include consumer loans secured by
manufactured housing, recreation vehicles, recreational boats and residential
real estate.
Under a typical asset backed securitization, Sales Financing or Consumer Finance
sells a "pool" of secured loans to a special purpose entity that, in turn,
issues certificates and/or notes that are collateralized by the loan pool and
that entitle the holders thereof to participate in certain loan pool cash flows.
Sales Financing or Consumer Finance retains the servicing of the securitized
loans for which it is paid a fee, and also participates in certain "residual"
loan pool cash flows (cash flows after payment of principal and interest to
certificate and/or note holders and after losses). At the date of a
securitization, Sales Financing or Consumer Finance estimates the "residual"
cash flows to be received over the life of the securitization, records the
present value of these cash flows as an asset (a retained interest in the
securitization) and recognizes a gain.
The following table sets forth each of the Company's asset backed
securitizations since inception of the program:
<TABLE>
<CAPTION>
------------------------------------------------------
Dollars in millions ORIGINAL POOL BALANCE AT
ASSET TYPE/YEAR SECURITIZED PUBLIC/PRIVATE POOL BALANCE SEPTEMBER 30, 1997
- ---------------------------------------------------------- --------------- ------------- -------------------
<S> <C> <C> <C>
Manufactured Housing 1992 Private $ 47.7 $ 11.0
Manufactured Housing 1993 Public 155.0 74.2
Manufactured Housing 1994 Private 48.3 22.2
Manufactured Housing 1995-1 Public 124.0 87.8
Manufactured Housing 1995-2 Public 199.2 167.9
Recreation Vehicle 1994 Public 150.4 54.9
Recreation Vehicle 1995-A Public 200.0 91.9
Recreation Vehicle 1995-B Public 200.0 106.9
Recreation Vehicle 1996-A Public 250.0 157.7
Recreation Vehicle 1996-B Public 240.0 179.7
Marine 1996(1) Private 545.9 481.2
Home Equity 1997-1 Private/Public 500.0 482.9
-------- --------
Total $2,660.5 $1,918.3
======== ========
</TABLE>
- ---------------
(1) Reflects a conduit program into which newly originated recreational boat
finance receivables are sold.
Substantially all recreational boat and recreation vehicle finance receivables
originated in 1997 are classified as held for sale at September 30, 1997.
At September 30, 1997, the remaining balance of retained interests in
securitizations related to the foregoing transactions aggregated $126.9 million.
The amortized cost of these assets approximates their fair value at such date.
EQUITY INVESTMENTS
The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture
Capital (together "Equity Investments") participate in merger and acquisition
transactions, purchase private equity and equity-related securities and arrange
transaction financing. Equity Investments also invests in emerging growth
opportunities in selected industries, including the life sciences, information
technology, communications and consumer products industries. Business is
developed through direct solicitation or through referrals from investment
banking firms, financial intermediaries and the Company's other business units.
Equity Investments made its first investment in 1991 and had total investments
of $60.0 million at September 30, 1997. The average individual investment size
is approximately $2.1 million at September 30, 1997.
ADDITIONAL INFORMATION REGARDING THE COMPANY
EMPLOYEES
At September 30, 1997, the Company had approximately 3,000 employees,
approximately 1,740 of whom were employed in connection with commercial
operations, 800 of whom were employed in connection with consumer operations and
460 of whom
21
<PAGE> 22
were employed in corporate functions. The Company is not subject to any
collective bargaining agreements. The Company believes that its employee
relations are good.
PROPERTIES
The operations of the Company and its subsidiaries are generally conducted in
leased office space located in numerous cities and towns throughout the United
States. Such leased office space is suitable and adequate for the needs of the
Company. The Company utilizes, or plans to utilize in the foreseeable future,
substantially all of its leased office space.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary course of
its business. The Company aggressively manages its litigation and assesses
appropriate responses to its lawsuits in light of a number of factors, including
potential impact of the actions on the conduct of the Company's operations. In
the opinion of management, none of the pending matters is expected to have a
material adverse effect on the Company's financial condition or results of
operations. However, there can be no assurance that an adverse decision in one
or more of such lawsuits will not have such a material adverse effect.
COMPETITION
The Company's markets are highly competitive and are characterized by
competitive factors that vary based upon product and geographic region. The
Company's competitors include captive and independent finance companies,
commercial banks and thrift institutions, industrial banks, leasing companies,
manufacturers and vendors. Substantial national financial services networks also
have been formed by insurance companies and bank holding companies that compete
with the Company. On a local level, community banks and smaller independent
finance and/or mortgage companies are a competitive force. Some of the Company's
competitors have substantial local market positions. Many of the competitors of
the Company are large companies that have substantial capital, technological and
marketing resources, and some of these competitors are larger than the Company
and may have access to capital at a lower cost than the Company. Also, the
Company's competitors include businesses that are not related to bank holding
companies and, accordingly, may engage in activities, for example short-term
aircraft rental and servicing, which currently are prohibited to the Company.
Competition has been enhanced in recent years by an improving economy and
growing marketplace liquidity. The markets for most of the Company's products
are characterized by a large number of competitors. However, with respect to
certain of the Company's markets, such as factoring and manufactured housing,
competition is more concentrated.
The Company competes primarily on the basis of pricing, terms and structure,
with other primary competitive factors including industry experience and client
service and relationships. From time to time, competitors of the Company seek to
compete aggressively on the basis of these factors and the Company may lose
market share to the extent it is unwilling to match its competitors' pricing and
terms in order to maintain its interest margins or maintain its credit
discipline. To the extent that the Company matches competitors' pricing or
terms, it may experience lower interest margins and/or increased credit losses.
Other primary competitive factors include industry experience and client service
and relationships. In addition, demand for the Company's products with respect
to certain industries, such as the commercial airline industry, will be affected
by demand for such industry's services and products and by industry regulations.
REGULATION
DKB is a bank holding company within the meaning of the Bank Holding Company Act
of 1956 (the "Act"), and is registered as such with the Federal Reserve. As a
result, the Company is subject to certain provisions of the Act and is subject
to examination by the Federal Reserve. In general, the Act limits the activities
in which a bank holding company and its subsidiaries may engage to those of
banking or managing or controlling banks or performing services for their
subsidiaries and to continuing activities which the Federal Reserve has
determined to be "so closely related to banking or managing or controlling banks
as to be a proper incident thereto." The Company's current principal business
activities constitute permissible activities for a nonbank subsidiary of a bank
holding company.
Two of the subsidiaries of the Company are investment companies organized under
Article XII of the New York Banking Law and, as a result, the activities of
these subsidiaries are restricted by state banking laws and these subsidiaries
are subject to examination by state banking examiners. Also, any person or
entity seeking to purchase "control" of the Company would be required to apply
for and obtain the prior approval of the Superintendent of Banks of the State of
New York. "Control" is presumed to exist if a person or entity would, directly
or indirectly, own, control or hold (with power to vote) 10% or more of the
voting stock of the Company.
The operations of the Company are subject, in certain instances, to supervision
and regulation by state and federal governmental authorities and may be subject
to various laws and judicial and administrative decisions imposing various
22
<PAGE> 23
requirements and restrictions, which, among other things, (i) regulate credit
granting activities, (ii) establish maximum interest rates, finance charges and
other charges, (iii) regulate customers' insurance coverages, (iv) require
disclosures to customers, (v) govern secured transactions and (vi) set
collection, foreclosure, repossession and claims handling procedures and other
trade practices. See "--Commercial Finance" and "--Consumer Finance" below.
In the judgment of management, existing statutes and regulations have not had a
material adverse effect on the business conducted by the Company. However, it is
not possible to forecast the nature of future legislation, regulations, judicial
decisions, orders or interpretations, nor their impact upon the future business,
results of operations or financial condition or prospects of the Company.
Commercial Finance
Although most states do not regulate commercial finance, certain states impose
limitations on interest rates and other charges and on certain collection
practices and creditor remedies and require licensing of lenders and financiers
and adequate disclosure of certain contract terms. The Company is also required
to comply with certain provisions of the Equal Credit Opportunity Act ("ECOA")
that are applicable to commercial loans.
Consumer Finance
The Company's consumer finance business is subject to detailed enforcement and
supervision by state authorities under legislation and regulations which
generally require licensing of the lender. Licenses are renewable and may be
subject to suspension or revocation for violations of such laws and regulations.
Applicable state laws generally regulate interest rates and other charges and
require certain disclosures. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices that may apply to the origination,
servicing and collection of consumer finance loans. Depending on the provision
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the Company's
ability to collect all or part of the principal of or interest on consumer
finance loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Company to damages and administrative
sanctions.
Federal laws preempt state usury ceilings on first mortgage loans and state laws
which restrict various types of alternative dwelling secured receivables, except
in those states which have specifically opted out, in whole or in part, of such
preemption. Loans may also be subject to other federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to borrowers and other parties regarding the
terms of certain of the loans; (ii) ECOA and Regulation B promulgated
thereunder, which prohibit discrimination in the extension of credit and
administration of loans on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act; (iii) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to a
borrower's credit experience; and (iv) the Fair Housing Act, which prohibits
discrimination on the basis of, among other things, familial status or handicap.
In certain circumstances, loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act"), which amended the Federal
Truth-in-Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered by a borrower from an assignee in an action under the Home
Ownership Act are the remaining amount of indebtedness plus the total amount
paid by the borrower in connection with the mortgage loan.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws may limit the ability of the
Company to collect all or part of the principal of or interest on applicable
loans, may entitle the borrower to rescind the loan and any mortgage or to
obtain a refund of amounts previously paid and, in addition, could subject the
Company to damages and administrative sanctions.
In addition, numerous other federal and state statutory provisions, including
the federal bankruptcy laws and state debtor relief laws, may also adversely
affect the Company's ability to collect the principal of or interest on certain
loans.
Federal and state legislation seeking to regulate the maximum interest rate
and/or other charges on consumer finance receivables has been introduced in the
past, and may from time to time be introduced in the future. However, it is not
possible to predict the nature of future legislation with respect to the
foregoing or its impact on the future business, results of operations, financial
condition or prospects of the Company.
23
<PAGE> 24
RISK MANAGEMENT
The Company's business activities contain elements of risk. The Company
considers the principal types of risk to be credit risk (including credit,
collateral and equipment risk), asset/liability risk (including interest rate
and liquidity risk), and, to a lesser extent, operational and legal risk.
The Company considers the management of risk essential to conducting its
commercial and consumer businesses and to maintaining profitability.
Accordingly, the Company's risk management systems and procedures are designed
to identify and analyze the Company's risks, to set appropriate policies and
limits and to continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and programs.
CREDIT RISK MANAGEMENT
The Company has developed systems specifically designed to manage credit risk in
its commercial and consumer business segments and at its strategic business
units. Financing and leasing assets are evaluated for credit and collateral risk
both during the credit granting process and periodically after the advancement
of funds.
Credit authority is delegated to each strategic business unit by the Executive
Credit Committee of the Company ("ECC"). The ECC is comprised of members of
senior management, including the Chief Executive Officer, Vice Chairman,
Executive Vice President--Credit Administration, Senior Executive Vice President
and Executive Vice President--Multi-National Marketing Group. Generally, all
non-standard transactions, transactions outside of certain established target
market definitions and transactions outside of certain risk acceptance criteria
must be approved by members of the ECC.
Each of the Company's strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the ECC. These ECC guidelines set forth risk acceptance criteria
for: (i) the acceptable maximum credit line; (ii) selected target markets and
products; (iii) the creditworthiness of borrowers, including credit history,
financial condition, adequacy of cash flow and quality of management; and (iv)
the type and value of underlying collateral and guarantees (including recourse
to dealers and manufacturers). The Company also employs a risk adjusted pricing
process where the perceived credit risk is a factor in determining the interest
rate or fees charged for the Company's financing and leasing products. As
economic and market conditions change, credit risk management practices are
reviewed and modified, if necessary, to seek to minimize the risk of credit
loss.
Compliance with established corporate policies and procedures and the credit
management processes at each strategic business unit are reviewed by the credit
audit group of the Company's internal audit department. That group examines
adherence with established credit policies and procedures and tests for
inappropriate credit practices, including whether potential problem accounts are
being detected and reported on a timely basis. The General Auditor, who oversees
the credit audit group, reports to the Chief Executive Officer of the Company
and the Audit Committee.
Commercial
The Company has developed systems specifically designed to effectively manage
credit risk in its commercial operations. The process starts with the initial
evaluation of credit risk and underlying collateral at the time of origination
and continues over the life of the finance receivable or operating lease,
including collecting past due balances and liquidating underlying collateral.
Credit personnel for the applicable strategic business unit review each
potential borrower's financial condition, results of operations, management,
industry, customer base, operations, collateral and other data such as third
party credit reports to perform a thorough evaluation of the customer's
borrowing and repayment ability. Borrowers are graded according to credit
quality based upon the Company's uniform credit grading system, which grades
both the borrower's financial condition and underlying collateral. Credit
facilities are subject to approval within the Company's overall credit approval
and underwriting guidelines and are issued commensurate with the credit
evaluation performed of each borrower.
The Company's ongoing review and monitoring of credit exposures is designed to
identify, as early as possible, those customers that may be experiencing
declining creditworthiness or financial difficulty. Commercial finance
receivables are periodically evaluated based upon credit criteria developed
under the Company's uniform credit grading system. Concentrations are monitored
by borrower, industry, geographic region and equipment type and limits are
changed by management as conditions warrant to seek to minimize the risk of
credit loss.
Periodically, the status of finance receivables greater than $500,000 to
obligors with higher (riskier) credit grades is individually reviewed with the
Asset Quality Review Committee, which is comprised of members of senior
management,
24
<PAGE> 25
including the Vice Chairman, the Executive Vice President--Credit Administration
and the Chief Financial Officer, and certain senior executives of the applicable
strategic business unit.
Equipment Financing and Leasing
Equipment Financing and Capital Finance are secured equipment lenders and
equipment lessors. Experienced credit personnel review each potential borrower's
financial condition, results of operations, management, industry, customer base,
operations, collateral and other data, such as third-party credit reports, to
perform a thorough evaluation of the customer's borrowing and repayment ability.
Borrowers are graded according to credit quality based upon the Company's
uniform credit grading system, which grades both the borrower's financial
condition and any underlying collateral. Credit facilities are subject to
approval within the Company's overall credit approval and underwriting
guidelines and are issued commensurate with the credit evaluation performed of
each borrower. Monitoring of borrowers and underlying collateral is conducted on
an ongoing basis through reports and regular field audits and evaluation of
collateral. Collateral primarily consists of equipment which is evaluated as to
value, condition, risk of obsolescence and, where applicable, estimated future
residual value. Equipment Financing and Capital Finance use their asset
management and equipment remarketing capabilities and their technical expertise
to manage their equipment collateral positions and their equipment residual
value risk. For the period 1992 through 1996, the Company has realized in excess
of 100% of the aggregate booked residual value in connection with equipment
sales. Given, however, that operating lease equipment values and direct
financing lease residual values are heavily influenced by estimates, there can
be no assurance that such values will continue to be realized by the Company
upon disposition of equipment owned by the Company and returned by lessees upon
termination of their leases. To the extent that the Company fails to realize its
operating lease equipment values and direct financing lease residual values, the
Company's results of operations and financial condition could be materially
adversely affected. See "Risk Factors -- Leasing Transactions and Equipment
Risk."
Factoring
Commercial Services requires clients to both meet its established credit
criteria and have a customer base that passes an established credit screen. This
dual credit process is required because advances made to a client are to be
repaid by collections from the client's customer base. If the customer is unable
to pay its payables to Commercial Services' client due to financial
difficulties, Commercial Services will nevertheless be responsible for payment
to the extent of its credit guarantee.
The Company's client credit teams and field examiners in the Company's various
regional offices review financial statements, cash flows, projections and
examine collateral. Upon completion, the client credit teams obtain from the
appropriate credit committee approval of a seasonal financing plan, including
advance rates against eligible receivables. Where required, third party
appraisers are utilized. The approved seasonal plan is monitored closely by the
client credit teams as advances, collateral and accounts receivable are updated
on a daily basis.
Customer credit departments located in the Company's various regional offices
analyze the customer's credit worthiness at the onset and throughout the
relationship. Frequent communications exist between the department, the client
and client credit teams regarding the credit quality of the customer base. Close
monitoring occurs through collection experience, financial analysis, frequent
visits and conversations with customers. All clients are generally required to
submit customer orders for approval. The Company has developed proprietary
systems that automatically make certain credit determinations based upon the
Company's stringent credit criteria. The balance of orders are manually reviewed
and the disposition of such orders are determined by an analyst specializing in
the customer's industry. Deterioration in the quality of the customer base leads
to a reevaluation of the client's advance rates.
Commercial Finance
In Commercial Finance, evaluation of each borrower's creditworthiness and
underlying collateral are significant to managing credit risk and controlling
loan charge-offs. The primary focus is on the availability and quality of
collateral underlying approved credit facilities and borrowings. Evaluation of
collateral includes on-site field audits and third party appraisals where
appropriate. Regular monitoring of borrowers and underlying collateral is
important to controlling credit risk and is conducted on an ongoing basis
through reports and regular field audits and evaluation of collateral. Both
Business Credit and Credit Finance have employees experienced in evaluating
accounts receivable, inventories and other collateral and utilize third parties
from time to time in evaluating and/or liquidating certain inventories and other
collateral. The credit underwriting standards of Business Credit and Credit
Finance limit their respective credit exposures to larger borrowings
(concentrations) by limiting the maximum amount each will retain or hold for its
own position. Both Business Credit and Credit Finance syndicate or sell
participation interests in loans over their respective hold limits.
25
<PAGE> 26
A credit line is arranged with each borrower establishing the maximum amount the
borrower may finance, subject to the amount of underlying eligible collateral
and corresponding advance rates. The excess of approved credit lines outstanding
over finance receivables outstanding represents potential additional borrowings
or finance receivables that borrowers may qualify for, subject to the
availability of required collateral and corresponding advance rates. Both
Business Credit and Credit Finance typically advance funds up to 85% of eligible
accounts receivable and up to 60% of eligible inventories.
Consumer
For consumer loans, management has developed and implemented proprietary
automated credit scoring models for each loan type (e.g., recreation vehicles,
manufactured housing, recreational boat and home equity) that include both
customer demographics and credit bureau characteristics. The profiles emphasize,
among other things, occupancy status, length of residence, length of employment,
debt to income ratio (ratio of total installment debt and housing expenses to
gross monthly income), bank account references, credit bureau information and
combined loan to value ratio. The models are used to assess a potential
borrower's credit standing and repayment ability considering the value or
adequacy of property offered as collateral. The Company's credit criteria
include reliance on credit scores, including those based upon both its
proprietary internal credit scoring model and external credit bureau scoring,
combined with judgment. The credit scoring models are reviewed for effectiveness
monthly utilizing statistical tools. Consumer loans are regularly evaluated
using past due, vintage curve and other statistical tools to analyze trends and
credit performance by loan type, including analysis of specific credit
characteristics and other selected subsets of the portfolios. Adjustments to
credit scorecards and lending programs are made when deemed appropriate.
Individual underwriters are assigned credit authority based upon their
experience, performance and understanding of the underwriting policies and
procedures of the Company's consumer operations and a credit approval hierarchy
exists to ensure that all applications are reviewed by an underwriter with the
appropriate level of authority.
Consumer Finance
Consumer Finance's direct originations are underwritten at the NHEC, while
broker and correspondent originations are underwritten at area and regional
offices, respectively. Credit officers evaluate an application and loan package
based upon the internally generated credit score, as well as external credit
bureau scoring (FICO score) and other characteristics of the application. Once
an application is scored and reviewed along with other risk factors, it is
either approved, declined or referred to a credit officer for further
consideration. As part of the approval process, an application is also assigned
a risk rating and applicable loan program code(s) for which the applicant is
eligible.
Collateral values are an important component of Consumer Finance's credit
approval process. Accordingly, third party property appraisals are required for
all applications. Certain third party appraisals are also subject to internal
Consumer Finance review, depending upon origination source and/or the appraised
value of the subject property.
Consumer Finance has instituted an underwriting quality control program ("QCP")
covering all origination channels. The QCP, performed on a sample basis, focuses
on overall underwriting decisions, loan documentation, appraisal
recertifications and employment reverifications.
Sales Financing
Sales Financing's retail sales finance loans are documented on standardized
forms. Typical credit approval protocol includes the submission of a potential
customer's application, manufacturer's invoice (new unit financings) and other
pertinent information to a regional business center credit officer, who then
prepares an analysis of the creditworthiness of the customer and of other
aspects of the transaction. Once an application is scored against targeted
profiles and reviewed for other risk factors, it is either approved, declined or
referred to a credit officer for further consideration. Pricing on an approved
application is also "risk adjusted," as necessary, to reflect the scoring of
that application relative to "buy rates" supplied to dealers or brokers.
Guarantors, endorsers or co-signers are not considered in the determination of
whether or not an application is approved. The credit review and approval
processes of each regional business center are subject to internal reviews and
internal audits.
Loan Loss Reserves and Credit Losses
The Company maintains a consolidated reserve for credit losses on finance
receivables at an amount which it believes is sufficient to provide adequate
protection against potential credit losses in its portfolios. The level of the
consolidated reserve for credit losses is determined principally on the basis
of: (i) current credit quality of the portfolios and trends; (ii) the current
mix of finance receivables; and (iii) historical loss experience. The
consolidated reserve for credit losses reflects management's judgment of loss
potential after considering factors such as the nature and characteristics of
obligors, economic conditions and trends, charge-off experience, delinquencies
and the value of underlying collateral and guarantees, including recourse to
dealers and manufacturers.
26
<PAGE> 27
Commercial and consumer finance receivables are reviewed to determine the
probability of loss. Charge-offs are taken after considering the above mentioned
factors. Such charge-offs are deducted from the carrying value of the related
finance receivables. To the extent that an unrecovered balance remains due, a
final charge-off is taken at the time collection efforts are no longer deemed
useful. Charge-offs from carrying value of commercial finance receivables are
determined on a case-by-case basis. Automatic charge-offs of consumer finance
receivables are recorded to the extent of shortfalls in the value of the
collateral when no contractual payments are received for 120 days, or at 180
days when partial payments have been received.
Although the Company's management considers the consolidated reserve for credit
losses reflected in the Company's consolidated balance sheet as of September 30,
1997 adequate, there can be no assurance that this consolidated reserve for
credit losses will prove to be adequate over time to cover credit losses in
connection with the Company's portfolio. This reserve may prove to be inadequate
due to unanticipated adverse changes in the economy or discrete events adversely
affecting specific customers or industries or if credit losses occurring as a
consequence of the seasoning of the Company's consumer portfolio exceed those
anticipated by the Company. The Company's results of operations and financial
condition could be materially adversely affected to the extent that the
Company's consolidated reserve for credit losses is insufficient to cover such
changes or events. See "Risk Factors -- Reserve for Credit Losses."
Analysis of Past Due Finance Receivables and Net Credit Losses
The following table sets forth information as of the dates shown concerning
total finance receivables, balances past due 60 days or more, net credit losses
and net credit losses as a percentage of average finance receivables. This
information should be read in conjunction with the discussion of the Company's
financial condition under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NET
CREDIT
LOSSES
AS A
PERCENTAGE
BALANCE PAST DUE OF
60 DAYS OR MORE NET AVERAGE
FINANCE ------------------------ CREDIT FINANCE
Dollars in millions RECEIVABLES AMOUNT PERCENT LOSSES RECEIVABLES
----------- ------ ------- ------ ----
<S> <C> <C> <C> <C> <C>
September 30, 1997:
Commercial $14,603.4 $178.1 1.22% $ 53.4 0.52%
Consumer 3,344.9 109.8 3.28 26.7 1.11
--------- ------ ---- ------ ----
$17,948.3 $287.9 1.60% $ 80.1 0.63%
========= ====== ==== ====== ====
December 31, 1996:
Commercial $13,757.6 $219.8 1.60% $ 80.4 0.59%
Consumer 3,239.0 72.5 2.24 21.1 0.75
--------- ------ ---- ------ ----
$16,996.6 $292.3 1.72% $101.5 0.62%
========= ====== ==== ====== ====
December 31, 1995:
Commercial $13,451.5 $228.7 1.70% $ 67.1 0.51%
Consumer 2,344.0 35.2 1.50 10.1 0.44
--------- ------ ---- ------ ----
$15,795.5 $263.9 1.67% $ 77.2 0.50%
========= ====== ==== ====== ====
December 31, 1994:
Commercial $12,821.2 $166.8 1.30% $ 74.8 0.62%
Consumer 1,973.2 10.1 0.51 9.4 0.55
--------- ------ ---- ------ ----
$14,794.4 $176.9 1.20% $ 84.2 0.61%
========= ====== ==== ====== ====
December 31, 1993:
Commercial $11,185.2 $199.8 1.79% $ 82.9 0.77%
Consumer 1,438.9 16.3 1.13 11.5 0.77
--------- ------ ---- ------ ----
$12,624.1 $216.1 1.71% $ 94.4 0.77%
========= ====== ==== ====== ====
December 31, 1992:
Commercial $10,359.7 $318.0 3.07% $ 85.7 0.83%
Consumer 1,411.8 17.8 1.26 12.6 0.91
--------- ------ ---- ------ ----
$11,771.5 $335.8 2.85% $ 98.3 0.84%
========= ====== ==== ====== ====
</TABLE>
27
<PAGE> 28
ASSET/LIABILITY MANAGEMENT
Management strives to manage interest rate and liquidity risk and optimize net
finance income under formal policies established and monitored by the Capital
Committee, which is comprised of members of senior management, including the
Chief Executive Officer, Vice Chairman, Chief Financial Officer and senior
representatives of DKB and Chase. Three members of the Capital Committee are
also members of the Company's Board of Directors. The Capital Committee
establishes and regularly reviews interest rate sensitivity, funding needs,
liquidity and asset-pricing to determine short-term and long-term funding
strategies, including the use of off-balance sheet derivative financial
instruments.
The Company uses off-balance sheet derivatives for hedging purposes only. The
Company does not enter into derivative financial instruments for trading or
speculative purposes. To ensure both appropriate use as a hedge and hedge
accounting treatment, all derivatives entered into are designated, according to
hedge objective, against directly issued commercial paper, a specifically
underwritten debt issue or a specific pool of assets. The Company's primary
hedge objectives include the conversion of variable rate liabilities to fixed
rates, the conversion of fixed rate liabilities to variable rates, the fixing of
spreads on variable-rate liabilities to various market indices and the
elimination of interest rate risk on finance receivables classified as held for
sale prior to securitization.
Derivative positions are managed in such a way that the exposure to interest
rate, credit or foreign exchange risk is in accordance with the overall
operating goals established by the Capital Committee. There is an approved,
diversified list of creditworthy counterparties used for derivative financial
instruments, each of whom has specific credit exposure limits. The Executive
Credit Committee approves each counterparty and its related market value and
credit exposure limit annually or more frequently if any changes are
recommended. Credit exposures for each counterparty are measured based upon
market value of the outstanding derivative instruments. Market values are
calculated periodically for each swap contract, summarized by counterparty and
reported to the Capital Committee.
Interest Rate Risk Management
Changes in market interest rates or in the relationships between short-term and
long-term market interest rates or between different interest rate indices
(i.e., basis risk) can affect the interest rates charged on interest-earning
assets differently than the interest rates paid on interest-bearing liabilities,
which can result in an increase in interest expense relative to finance income.
See "Risk Factors--Economic Factors--Interest Rate Risk".
The Capital Committee actively manages interest rate risk by changing the
proportion of fixed and floating rate debt and by utilizing primarily interest
rate swaps and, to a lesser extent, other derivative instruments to modify the
repricing characteristics of existing interest-bearing liabilities. Issuing new
debt or hedging the interest rate on existing debt through the use of interest
rate swaps and other derivative instruments are tools in managing interest rate
risk. The decision to use one or the other or a combination of both is driven by
the relationship between the relative interest rate costs and effectiveness of
the alternatives and the liquidity needs of the Company. For example, a fixed
rate, fixed term loan transaction may initially be funded by commercial paper,
resulting in interest rate risk. To reduce this risk, the Company may enter into
a hedge that has an inverse correlation to the interest rate sensitivity
created, whereby the Company would pay a fixed interest rate and receive a
commercial paper interest rate. Basis risk is similarly managed through the
issuance of new debt or the utilization of interest rate swaps or other
derivative instruments.
The Company's degree of interest rate sensitivity is continuously monitored and
simulated through computer modeling by measuring the repricing characteristics
of interest-sensitive assets, liabilities and off-balance sheet derivatives. The
results of this modeling are reviewed monthly by the Capital Committee. The
interest rate sensitivity modeling techniques employed by the Company
essentially include the creation of prospective twelve month "baseline" and
"rate shocked" net interest income simulations. At the date that interest rate
sensitivity is modeled, "baseline" net interest income is derived considering
the current level of interest-sensitive assets and related run-off (including
both contractual repayment and historical prepayment experience), the current
level of interest-sensitive liabilities and related maturities and the current
level of off-balance sheet derivatives. The "baseline" simulation also assumes
that, over the next successive twelve months, market interest rates (as of the
date of simulation) are held constant and that no new loans are extended. Once
the "baseline" net interest income is known, market interest rates, previously
held constant, are raised 100 basis points instantaneously and parallel across
the entire yield curve, and a "rate shocked" simulation is run. Interest rate
sensitivity is then measured as the difference between calculated "baseline" and
"rate shocked" net interest income.
Utilizing the Company's computer modeling, if no new fixed rate loans or leases
were extended and no actions to alter the existing interest rate sensitivity
were taken subsequent to September 30, 1997, an immediate hypothetical 100 basis
points
28
<PAGE> 29
parallel rise in the yield curve on October 1, 1997 would increase net income by
an estimated $1.6 million after-tax over the twelve months ending September 30,
1998. Although management believes that this measure provides a meaningful
estimate of the Company's interest rate sensitivity, it does not adjust for
potential changes in the credit quality, size and composition of the balance
sheet and other business developments that could affect net income. Accordingly,
no assurance can be given that actual results would not differ materially from
the potential outcome simulated by the Company's computer modeling. Further, it
does not necessarily represent management's current view of future market
interest rate movements.
The Company periodically enters into structured financings (involving both the
issuance of debt and an interest rate swap with corresponding notional principal
amount and maturity) that not only improve liquidity and reduce interest rate
risk, but result in a lower overall funding cost than could be achieved by
solely issuing debt. For example, in order to fund LIBOR interest rate-based
assets, a medium-term variable rate note based upon the U.S. federal funds rate
can be issued and coupled with an interest rate swap exchanging the U.S. federal
funds rate for a LIBOR interest rate. This creates, in effect, a lower cost
LIBOR-based medium-term obligation which also reduces the interest rate basis
risk of funding LIBOR-based assets with commercial paper or U.S. federal funds
rate-based debt.
Interest rate swaps with notional principal amounts of $4.0 billion at September
30, 1997 and $5.3 billion at December 31, 1996 were designated as hedges against
outstanding debt and were principally used to effectively convert the interest
rate on variable rate debt to a fixed rate, which sets the Company's fixed rate
term debt borrowing cost over the life of the swap and reduces the Company's
exposure to rising interest rates but reduces the Company's benefits from lower
interest rates.
Liquidity Risk
The Company manages liquidity risk by monitoring the relative maturities of
assets and liabilities and by borrowing funds, primarily in the U.S. money and
capital markets. Such cash is used to fund asset growth (including the bulk
purchase of finance receivables and the acquisition of other finance-related
businesses) and to meet debt obligations and other commitments on a timely and
cost-effective basis. The primary sources of funds are commercial paper
borrowings, medium-term notes, other term debt securities and asset-backed
securitizations. At September 30, 1997, commercial paper borrowings were $6.2
billion and amounts due on term debt within one year were $4.2 billion. If the
Company is unable to access such markets at acceptable terms, it could utilize
its bank credit lines and cash flow from operations and portfolio liquidations
to satisfy its liquidity needs. At September 30, 1997, the Company had committed
revolving bank credit lines totaling $5.0 billion, representing 81% of operating
commercial paper outstanding (commercial paper less interest-bearing deposits).
The Company believes that such credit lines should provide sufficient liquidity
to the Company under foreseeable conditions. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity" for
further information concerning the liquidity of the Company.
OPERATIONAL AND LEGAL RISKS
The Company, like all large financial institutions, is exposed to many types of
operational risks, including the potential for loss caused by a breakdown in
information, communication, transaction processing or by fraud by employees or
outsiders or unauthorized transactions by employees. The Company attempts to
mitigate operational risks, by maintaining a system of internal controls
designed to keep operational risk at appropriate levels in view of its
consolidated financial position, the characteristics of the businesses and
markets in which it operates, competitive circumstances and regulatory
considerations. The potential for material losses from operational risks in the
future cannot be excluded.
Legal risk arises from the uncertainty of enforceability, through legal or
judicial process, of obligations of the Company's customers and counterparties,
and also the possibility that changes in law or regulation could adversely
affect the Company's position. The Company seeks to minimize legal risk through
consultation with internal and external legal counsel.
YEAR 2000 COMPLIANCE
The Company has made and will continue to make certain investments in its
software applications and systems to ensure that the Company's systems function
properly to and through the year 2000. The financial impact to the Company of
such investments has not been, and is not anticipated to be, material to its
financial position or results of operations.
29
<PAGE> 30
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
c. Exhibits
99.1 Press Release, dated November 12, 1997
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE CIT GROUP, INC.
By: /s/ JOSEPH M. LEONE
----------------------------
Name: Joseph M. Leone
Title: Executive Vice President and
Chief Financial Officer
Dated: November 14, 1997
<PAGE> 32
EXHIBIT INDEX
99.1 Press Release, dated November 12, 1997
<PAGE> 1
Exhibit 99.1
THE CIT GROUP, INC.
IPO PRICED AT $27 PER SHARE
NEW YORK, NEW YORK, November 13, 1997. -- The CIT Group, Inc. announced
today that its initial public offering of 31,500,000 shares of Class A Common
Stock was priced at $27 per share. The transaction will close on Tuesday,
November 18, 1997. The Company has granted the Underwriters an option to
purchase up to an additional 4,725,000 shares of Class A Common Stock at the
offering price.
According to Albert R. Gamper, Jr., President and CEO, "It is very
gratifying to have achieved this milestone in the IPO process we began last
summer. This transaction will give CIT access to the public equity markets,
further diversifying our capital base."
The proceeds from the offering will be used to acquire from The
Dai-Ichi Kangyo Bank, Limited its option to purchase the 20 percent interest in
the Company owned by The Chase Manhattan Corporation and to exercise such
option. If the Underwriter's over-allotment option is exercised, the proceeds
therefrom will be used for general corporate purposes and for potential
acquisitions. The shares of Class A Common Stock of The CIT Group, Inc. have
been approved for listing and will begin trading tomorrow, November 13, on the
New York Stock Exchange under the symbol "CIT."
J.P. Morgan & Co. is acting as bookrunning lead manager for the
Offering. J.P. Morgan & Co. and Goldman, Sachs & Co. are acting as joint lead
managers. Morgan Stanley Dean Witter is the senior co-manager. The other
co-managers are Credit Suisse First Boston, Lehman Brothers, Merrill Lynch &
Co., Salomon Brothers, Inc. and UBS Securities. A prospectus may be obtained
from the Underwriters.
With more than $22 billion in managed assets, The CIT Group, Inc.
(www.citgroup.com) is one of the nation's largest commercial and consumer
financing companies. Founded in 1908, the Company provides diversified
financing products and services to a broad range of customers through
strategically focused business units.
This press release shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
