CIT Group's (CIT) recent announcement that its bank unit plans to purchase $785 million of outstanding commercial loans from Flagstar Bancorp (FBC) drew positive reviews from analysts who want the company to find productive uses for its large pile of cash.
The specialty lender said last week that it would pay $779 million — or slightly under book value — for the portfolio, which mainly consists of asset-based loans, equipment leases and commercial real estate loans. It would be CIT's second portfolio acquisition in a year and its largest deal since the company emerged from bankruptcy in early 2010.
Mike Turner, a research analyst at Compass Point Research & Trading, said the deal, expected to close this quarter, would help improve CIT's "underleveraged, inefficient balance sheet."
"They've got money they need to put to work," he said.
CIT Bank, based in Salt Lake City, has deposits of $8.6 billion, including more than $4 billion in Internet deposits, as the parent company looks to become more dependent on its bank for funding.
CIT's Tier one capital ratio has fallen over the last three years. But at 26%, CIT's Tier one ratio is still about twice as high as that of the U.S. banking industry as a whole.
Moshe Orenbuch, an analyst with Credit Suisse, said that CIT's operating costs are currently too high, and expanding its balance sheet is one way to address that problem. The Flagstar loans, based in the Northeast United States, appear to fit well with CIT's existing corporate finance portfolio, he said.
"CIT is looking for complementary assets, assets in businesses where they're already involved. And I think that's what this represents," Orenbuch said.
Flagstar, of Troy, Mich., returned to profitability last year after four consecutive years of losses. It is winding down its operations in New England, and refocusing on Michigan, in an effort to reduce risk.
The credit quality of the Flagstar portfolio is very good, said Peter Connolly, president of CIT corporate finance.
"I think any time we see good-quality assets for sale, it will pique our interest," he said.
In March, CIT announced the purchase of a $200 million aircraft loan portfolio from a European bank.
Asked whether CIT will be looking for more portfolio acquisitions, Connolly responded: "Would we like to? Sure, but they're few and far between."
Investors responded positively to the Flagstar purchase, with CIT's shares climbing 2.6% after the deal was announced Jan. 2.
While CIT is looking to grow its portfolio, it is also being eyed as a potential acquisition target. In September, one analyst suggested that Wells Fargo (WFC) should consider buying CIT. An acquisition would cap a rapid turnaround after CIT's funding dried up during the financial crisis, leading the company to file for bankruptcy in November 2009.
CIT chief executive John Thain, the former CEO at Merrill Lynch, declined to comment on potential suitors during the company's most recent earnings call with analysts.
Analysts said that CIT makes sense as an acquisition target, in part because the company's specialty, commercial lending, is an area where loan demand is relatively strong. The fact that CIT is overcapitalized is another factor working in its favor. Still, there are hurdles to be overcome. "I think CIT's wanting to get their ducks in a row," Turner said. "And I am cognizant of the fact that the pool of potential buyers isn't huge."
Orenbuch said that the influence of regulators may also be a factor working against another bank's purchase of CIT.
"CIT would be a much more attractive acquisition target if you didn't have the Fed running around saying that big banks shouldn't be bigger," he said.