CIT Group Inc. is adding a new funding channel with its $1 billion deal for Mutual of Omaha Bank: homeowners association deposits.
With Mutual of Omaha's $4.5 billion in HOA deposits, the New York-based company's online bank is looking to ultimately push down its average cost of funds. The HOA deposits to be acquired carry a cost of 63 basis points, "well below" CIT's current cost of deposits, CEO Ellen Alemany said during a conference call to discuss the deal. CIT had a 2.33% cost of funds in the second quarter, according to S&P Global Market Intelligence data.
"The HOA market is large and highly fragmented and growing with $50 billion in total deposits today," Alemany said on the call. "[Mutual of Omaha] will be a powerful deposit channel for us as HOA deposits are stable and highly scalable, and we believe we have significant potential to acquire share."
CIT, which is acquiring Mutual of Omaha through its Pasadena, Calif.-based banking subsidiary, CIT Bank NA, expects the deal to lower its deposit costs by about 20 basis points once it closes, which is expected to occur in the first quarter of 2020. As a whole, the company projects that the transaction will push it to reach $42.1 billion in deposits and $58.9 billion in total assets, on a pro forma basis.
The company will enter a relatively crowded field of banks operating HOA businesses. But with more than 60% of new housing coming through community associations, CIT's chief executive believes there is room to expand its soon-to-be acquired HOA business in markets such as Southern California, Florida and the Northeast.
"We felt this is a bird in hand," Alemany said. "It really makes sense for us and helps us with [these] major strategic issues. We think we got this at a very attractive price, and we're going to work to integrate this as quickly as possible."
CIT shares fell after the deal announcement, dropping 1.50% as of 10:26 a.m. ET on Aug. 13. The S&P 500 was up 1.87% at the same time.
Scott Valentin, an analyst with Compass Point Research & Trading, wrote in a research report that the shares would likely fall as most investors would have preferred CIT continue its share buyback program, which was put on pause with the Mutual of Omaha deal. CIT CFO John Fawcett said the company would resume its share repurchases once its common equity Tier 1 ratio reaches the company's 10.5% target. Investors likely also viewed CIT primarily as a seller rather than a buyer, Valentin wrote.
But executives at the company did not completely dismiss further M&A, as Alemany said CIT is prepared to "consider all forms of strategic transactions that would further enhance shareholder value."
"We think that this transaction makes us actually more valuable to anyone," Alemany said.