* Federal Reserve terminates 2009 agreement with CIT
* Co announces $200 mln share buyback program
* Shares up 7 pct to their highest in more than two years
(Adds source comments, share buyback announcement, updates share price)
By Aman Shah and Jessica Toonkel
May 30 (Reuters) - The Federal Reserve Bank of New York removed restrictions on small-business lender CIT Group Inc (CIT.N), imposed after the financial crisis, paving the way for a higher capital return to the company's shareholders and giving it more room to expand.
CIT shares rose as much as 7.4 percent to their highest in more than two years after Thursday's announcement that the agreement under which it has been operating since August 2009 has been terminated. [ID:nBw306004a]
The agreement gave the Federal Reserve broad powers over CIT's capital plans and risk management.
"(This) is confirmation that CIT has met all the terms of the written agreement, there's nothing lurking out there that investors should be concerned about," Janney Capital Markets analyst Sameer Gokhale told Reuters.
"In my view, the fact that they have actually got the written agreement lifted now increases the likelihood that they can finally start to return capital," Gokhale said.
Later on Thursday, CIT said it would repurchase up to $200 million of its common stock through Dec. 31, 2013. [ID:nBw306506a]
BTIG analyst Mark Palmer said CIT, led by former Merrill Lynch CEO John Thain, could return more than $2 billion to shareholders, given its current capital ratio levels.
The company was forced to take $2.3 billion in bailout money from the U.S. Treasury as bad loans, including from subprime mortgages, led to it losing access to debt funding during the financial crisis.
CIT suspended its dividend in April 2009 and filed for bankruptcy seven months later.
BTIG's Palmer said in a note that CIT was an attractive acquisition target and a Canadian bank with excess capital may be drawn to its relatively high-yielding commercial assets and small-business lending portfolio.
The termination of the New York Fed agreement does not necessarily make a sale any easier, sources familiar with the company said on Thursday, saying this gives the company more leverage to seek a higher price.
"A more expensive CIT doesn't make it a better takeover target," said one of the sources, who wished to remain anonymous because he is not permitted to speak to the media.
A more likely scenario would be that CIT would buy another bank, the sources said, but even that could prove difficult given regulators' increased scrutiny of bank mergers and acquisitions.
However, Janney's Gokhale said the removal of the Fed regulations could potentially make it easier for CIT to pursue 'transformational' deals like buying branch-based banks.
"It is possible that (at the right price) the company may eventually be interested in buying a smaller bank in order to gain access to a branch-based deposit franchise," Gokhale noted.
Thain would ultimately like to be part of something bigger, one of the sources said.
"The good news is that the perception of being handcuffed is done and the ability to return some capital to shareholders is there," this person said.
"It allows CIT to dream a bit bigger."
CIT shares closed up 5 percent at $46.90 on the New York Stock Exchange on Thursday.
(Editing by Sreejiraj Eluvangal)
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