Stock of the week: First Citizens Bank (30.03.2023)

One of the main beneficiaries of SVB's bankruptcy.

First Citizens BancShares, (FCNCA.US) has acquired part of Silicon Valley Bank from the FDIC. Significantly, it received a discount of $16.5 billion. This is a huge amount, considering that prior to the transaction FCNCA had only $8.8 billion in equity.

In addition to this significant discount, First Citizens BancShares, Inc. received several other benefits. A 5-year $35 billion credit facility bearing interest at 3.5%. 5-year Treasury bonds currently pay a coupon of 3.5%, so a loan at this level is a significant bargain. In addition, it received loss-sharing protection from the FDIC if loan losses exceed $5 billion. All this adds up to a liquidity facility of sorts that will allow First Citizens BancShares to borrow from the FDIC at the market rate. This facility is large enough to guarantee all of the uninsured deposits the FCNCA received after taking over $56.5 billion in low-cost deposits.

In conclusion, FCNCA has made a very profitable transaction. The transaction will double their equity without the need to issue shares. In addition, credit facilities and loss sharing provide downside protection.

Although FCNCA's share price rose 50% on news of the deal, it is still well below expected book value. Historically, FCNCA has been considered a well-managed bank that deserved a premium to book value.

A glance at the management

FCNCA has been led by Frank Holding, Jr. since 2008. Prior to that, Frank was president of the bank since 1999. FCNCA and its predecessor organizations have been in the Holding family since 1935. FCNCA is a well-run bank, recording a positive return on capital every year since at least 1993. Frank and his family own more than 20% of the economic interests in FCNCA. They have been net buyers of shares over the past year.  FCNCA has grown by buying distressed banks. Since the GFC, it has bought 12 banks under receivership. Most recently, they acquired CIT Group in a high-profile deal. They combined CIT's specialized commercial loan portfolio with FCNCA's strength as a deposit-collecting franchise. So far, management has delivered on the promised synergies, and the deal has been very profitable. 

Financial performance

The bank's key metrics of ROE, ROA and EPS growth look promising, as can be seen in the summary below.

Loan portfolio

The assets acquired from SVB could be a significant risk factor for FCNCA. 

More than half of SVB's loan portfolio consists of so-called capital call lines. Capital call lines are used by private equity funds to meet working capital needs between fundraising. These loans are generally low-risk because they are secured by large private portfolios at low LTV. They are also mostly at variable rates and have less than a year to maturity.

The other half of the portfolio focuses mainly on loans to high-income individuals and loans to leveraged buyout firms or early-stage startups. The portion of the portfolio centered around early-stage startups and leveraged buyouts is the riskiest, especially in the current environment. However, it is small enough that even if FCNCA were to lose all its investments, it would not lead to bank failure.

For SVB loans, some additional protection is the agreement with the FDIC to share in any losses. For any loss over $5 billion, the FDIC will cover half of the losses. 

Summary

First Citizens BancShares, Inc. must be operating in the currently least popular areas of the market. Venture capital lending, commercial real estate and regional banks are seen as highly risky. However, the deal on very favorable terms they received from the FDIC and their financial situation makes the fundamentals seem to favor the bank.

Source: xStation