CIT Group's motivation for buying OneWest Bank can be summed up in one word: funding.
Specifically, CIT, a business lender, needs lower-cost core deposits to fund its loans and OneWest has them in abundance. Nearly one-third of CIT Bank's deposits are brokered, so its cost of funds is substantially higher than that of many lenders.
"OneWest may not have the lowest deposit costs, but they are far lower than CIT's, and so the franchise was more attractive to them than it may have been to a traditional bank," said Sameer Gokhale, an analyst at Janney Montgomery Scott. "That's the reason they are buying it."
More broadly, the deal the largest yet in banking in 2014 is further proof that buyers are once again after deposits as they look to grow loans organically and position themselves for a rise in interest rates. Several deals announced so far this year have involved buyers with high loan-to-deposit ratios picking up underlevered banks for the additional cash to lend.
Of course, deposits are what have driven mergers and acquisitions traditionally, but that hasn't been the case over the last few years. In fact, several analysts noted the opposing motivations between CIT's deal for OneWest and PacWest's acquisition of CapitalSource, the biggest deal of 2013. "It is a little bit of a reversal. PacWest was after asset growth last year and CIT is after cheaper funds this year," said Chris Marinac, an analyst at FIG Partners.
At the time, Matt Wagner, chief executive of PacWest, said most sellers had little to offer him.
"I am going to end up with a bunch of excess deposits," he said.
CIT, a specialty lender based in New York, announced last week that it would pay $3.4 billion in cash and stock to acquire OneWest, a $22 billion-asset bank in Pasadena, Calif., that was chartered in 2009 to buy the assets of the failed IndyMac.
Priced at 120% of OneWest's tangible book value, the deal is attractive for CIT compared to where pricing is going the average deal in the second quarter was priced at 149% of tangible book.
Still, CIT is paying a 6.2% premium on OneWest's core deposits, which observers said is well above market rates.
"Any deposit premium over 5% is considered very good," for the seller, said Ken Thomas, an independent bank consultant and economist. "This is a strong restatement of the importance of core funding. The smart money knows its value."
In a research note, Janney Montgomery Scott's Gokhale said that CIT's funding costs are 3.3% overall compared to 80 basis points for OneWest. Furthermore, he noted that the deposit costs of CIT's bank unit are 1.6%, roughly double that of OneWest.
"The acquisition of OneWest should allow CIT to marry its higher-yielding loan origination franchise with OneWest's lower-cost funding base," he wrote.
Apart from lowering its funding costs, the acquisition would help CIT better deal with the burdens of becoming a systemically important financial institution. With $48.6 billion of assets, CIT was fast approaching regulators' $50 billion-asset threshold anyway, and buying a bank OneWest's size would help CIT absorb the additional regulatory costs that come with being a SIFI.
In a conference call announcing the deal, John Thain, CIT's chairman and chief executive, said the acquisition would meet several of his previously stated objectives.
"We said that we needed to make our bank bigger. We told you we needed core retail deposits, both to diversify the funding of our bank and to lower the cost of funding in our bank," he said. "We also said that any transaction we would propose would be attractive to our shareholders. I believe that the acquisition of OneWest ... satisfies all of those criteria."
Calls to OneWest were not returned, but in the conference call, Thain said that the deal is a win for OneWest's investors. The alternative would have been to take privately held OneWest public and this "transaction basically monetizes their stock faster," Thain said.
The market clearly liked the deal. CIT's stock is up nearly 13% since the deal was announced on July 22.