CIT buys itself wiggle room with Mutual of Omaha Bank deal

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Ellen Alemany, who spent the last three years tackling a multitude of issues at CIT Group, is on the verge of a bank acquisition and newfound flexibility.

The $50.6 billion-asset company agreed on Tuesday to buy Mutual of Omaha Bank for $1 billion.

Alemany, who took the helm at CIT in April 2016, has a simple strategy to succeed in a lower-rate environment. CIT plans to double the amount of deposits in Mutual of Omaha Bank's homeowners association business to $9 billion over the next five to seven years, then leverage the low-cost liquidity to make more middle-market commercial loans.

At the same time, Alemany said during a conference call to discuss the deal that buying the $8.3 billion-asset Mutual of Omaha Bank would put CIT in a better position if it decides to sell itself.

"We think that this transaction makes us actually more valuable to anyone," Alemany, who is also CIT's chairman, said when asked if the deal rules the New York company out as an acquisition candidate.

"We were prepared to consider all forms of strategic transactions that would further enhance shareholder value, and we're very open to partners ... in the future," she added.

If anything, the deal is more proof that CIT is turning the corner. Since becoming CEO, Alemany has divested more than $14 billion in noncore assets and reduced CIT's annual operating expenses by $150 million.

The expectation is that Mutual of Omaha Bank will help CIT maintain that momentum as it continues to de-risk and become a more traditional commercial bank. Mutual of Omaha Bank would be the first bank acquisition for CIT since it paid $3.4 billion in August 2015 for the parent of the $22.6 billion-asset OneWest Bank.

Two-thirds of Mutual of Omaha Bank’s deposits are tied to homeowners associations, which need banks to hold residents' dues for property improvements and other expenses. Nearly half of the bank’s deposits are money market accounts or savings accounts; another 38% are direct-deposit accounts.

The deal would lower CIT’s funding costs from 1.97% to 1.77%, while its loan-to-deposit ratio would improve from 109% to 101%, excluding the impact of certain correspondent loans and mortgage warehouse lines at Mutual of Omaha Bank.

Mutual of Omaha Bank, which was part of the insurance giant, has 3,200 commercial clients and $3.9 billion in commercial loans across the country. Mutual of Omaha Bank would also provide CIT with its first operations in five markets — Las Vegas; Denver; Phoenix; Tampa, Fla.; and Reno, Nev. — where the population is expected to grow by 5% or more over the next five years, based on data from S&P Global Market Intelligence.

CIT, which would add 33 commercial banking managers from Mutual of Omaha Bank, plans to hire more bankers to expand in Southern California, Florida and New York City.

"These teams really lead with deposit-taking and they really understand" cross-selling, Alemany said during the call. "So we believe we'll have some good growth on the commercial banking side of the business."

The deal's premium, equal to 138% of Mutual of Omaha Bank's tangible book value, is low compared with the 159% average for other deals announced this year, according to Compass Point Research & Trading.

Still, it was Alemany's frank response about M&A that surprised some industry observers.

Vincent Caintic, a Stephens analyst, disagreed with the assertion that Mutual of Omaha Bank would make CIT a more attractive seller.

"It seemed odd to me that a bank would buy both [CIT and Mutual of Omaha Bank] together rather than buy them separately," Caintic said. "I'm struggling to see what the synergies are between the two franchises."

"The deal itself is certainly a surprise to shareholders who thought CIT would be a seller," said Robert Bolton, president of Iron Bay Capital. "But over the long haul this will make them worth more in an eventual sale."

Previously, Alemany has discussed the potential for a merger of equals involving CIT.

During CIT's first-quarter earnings call in April, she pointed out that MOEs could create value without the buyer having to pay a premium.

"We've had lots of discussions with our board where we're all interested in maximizing long-term shareholder value, and we're very open to any type of a transaction," she said during the earnings call.

More companies are having internal discussions about MOEs, Bolton said.

"In some aspects that may mean losing some outright independence down the road," Bolton said. "From a diversified revenue perspective, companies are constantly on the quest for different revenue streams that complement growth and replace challenges to traditional" net interest margins.

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