First Citizens BancShares’ acquisition of CIT Group, which finally reached the finish line in January, comes with a niche business the Raleigh, North Carolina, bank doesn’t plan on jettisoning just yet.
During a presentation Thursday, First Citizens executives made clear that CIT’s railcar leasing business is here to stay — and could play a role in generating much-needed income to make up for what some analysts said were disappointing forecasts about the merger’s financial impact.
As part of the deal, First Citizens inherited about $7.4 billion in railcar leasing assets. CIT had been slowly shedding the unit’s assets in recent years, as the supply-chain slowdown during the COVID-19 crisis and a dwindling reliance on coal shipments left many boxcars out of use.
But the railcar business, which makes up roughly 10% of the newly combined company’s loan and lease book, is expected to generate about 25% of its noninterest income, Chairman and CEO Frank Holding said during a presentation to analysts and investors.
“We definitely do not intend to sell rail cars at the same pace CIT was,” Holding said. “We're very pleased about prospects for rail and its impact on our revenue stream.”
The First Citizens-CIT merger was put through a
New York-based CIT has been in the railcar leasing business since before the 2008 financial crisis, when the company, which was then struggling,
Upon the closing of the CIT acquisition, First Citizens made $186 million in writedowns on real assets, primarily relating to railcars that weren’t being used as much as hoped. But to offset some of the loss, the bank also increased the value on its books of railcars that were put to use more than expected.
How executives at First Citizens manage the railcar business will be closely watched by banking analysts. Over the past few years, many banks have acquired companies that provided new sources of revenue while interest rates were historically low.
On Thursday, First Citizens estimated that its earnings per share next year will be between $75 and $79, well below the consensus expectation of $97. Brian Foran, an analyst with Autonomous, described the forecast as “painful” in a note to clients.
Shares in First Citizens, which is family controlled, declined by 4.6% on Thursday, even as the KBW Nasdaq Bank Index rose by 0.7%.
Among the more positive signs for investors: First Citizens’ management was upbeat about a share repurchase program. And the nurturing of certain onboarded businesses, including railcar leasing, could provide some lift to the company’s earnings forecast, according to Foran.
Since the First Citizens-CIT merger
“Railcar might not be a business First Citizens loves, but it’s one they now have and it seems like things are getting better,” Foran wrote.
