First Citizens BancShares Wins The Lottery With Acquisition Of Silicon Valley Bank

Summary

• The management team at First Citizens BancShares agreed to absorb Silicon Valley Bridge Bank in a deal that will drastically increase the company's asset base.

• This move grants First Citizens significant benefits and protections while building out and growing new and existing operations, respectively.

• Add on top of this the firm's already-robust financial condition, and it's a solid prospect for investors to consider.

VioletaStoimenova

March 27th proved to be a really remarkable day for shareholders of $First Citizens BancShares(FCNCA)$ . Shares of the company roared higher, closing up 53.7%, after news broke that the business had agreed to absorb Silicon Valley Bridge Bank, N.A., which was previously owned by $SVB Financial Group(SIVBQ)$ . This move significantly increases the assets of the acquirer and it helps reduce the risk of further contagion in the banking space. Although some questions and risks might still exist in the banking sector, I believe this move does mark the beginning of the end of the crisis. It also should prove value add for investors of First Citizens BancShares and justifies a 'buy' rating on its stock even in spite of the move higher.

A look at First Citizens BancShares

In the grand scheme of things, First Citizens BancShares is not exactly a large financial institution. But it's not exactly small either. Using data from the end of the 2022 fiscal year, the company boasted assets of roughly $109.3 billion that were aggregated from the 550 branches and private banking offices that the company has set up across the US. Most of its physical presence lies in places like North and South Carolina, Virginia, and Georgia. But it also operates in other states, including, but not limited to, Tennessee, Florida, California, Texas, and more. In all, the company's physical presence touches 22 different states.

First Citizens BancShares

Like pretty much every bank, First Citizens BancShares has a set of core operations. Overwhelmingly, the company provides financial services for both consumer and commercial clients. Examples here include retail and mortgage banking, wealth management, commercial and middle market banking, factoring and leasing, and more. This is not the company's first rodeo when it comes to absorbing other financial institutions. Early last year, the company completed a merger with CIT Group Valuing that company at nearly $6 billion, a registered broker-dealer, registered investment advisor, commercial lender, and provider of other miscellaneous financial services.

First Citizens BancShares

That transaction played a significant role in increasing the company's deposits from $51.4 billion in 2021 to $89.4 billion last year, with the value of loans and leases climbing from $32.4 billion to $70.8 billion. The largest portion of the loans and leases increase was attributable to commercial and industrial loans. These expanded from $5.9 billion at the end of 2021 to $24.1 billion at the end of last year, pushing total commercial loans and leases from $22.6 billion to $53.5 billion. Meanwhile, residential mortgages grew from $6.1 billion to $13.3 billion, pushing total consumer loans and leases from $9.8 billion to $17.3 billion. At present, the company also has exposure to commercial construction loans, owner-occupied commercial mortgages, non-owner-occupied commercial mortgages, revolving mortgages for commercial properties, consumer auto loans, and other similar categories.

First Citizens BancShares

Financially speaking, First Citizens BancShares appears to be rather robust. Thanks to the aforementioned merger, net interest income for the company jumped from $1.39 billion in 2021 to $2.95 billion last year. This brought net income from $529 million to $1.05 billion. While the company does have exposure to small and medium businesses, since those make up a significant portion of its clients, there is no data that suggests that the business has the same kind of exposure that Silicon Valley Bank had to the startup community and the most vulnerable businesses out there. Whereas a significant portion of the assets owned by Silicon Valley Bank involved California and New York, First Citizens BancShares has only 17.3% of its commercial loans and leases coming from California, with an immaterial amount coming from New York. While 23.2% of its consumer loans come from California, the largest share, totaling 32.9%, comes from North Carolina. This is not to say that the company has no risk. The most important thing during this time is the amount of uninsured deposits on a firm's books. At the end of last year, this number was $29.1 billion.

Author - SEC EDGAR Data

Big benefits for First Citizens

In response to the collapse of Silicon Valley Bank, the management team at First Citizens BancShares swept in and agreed to absorb the assets in question. This move will significantly increase the size of the bank, adding about $110.1 billion in assets. This involves $72.1 billion of loans and leases, compared to the $56.5 billion in deposits that the company will be responsible for. It will also give the company the right to acquire 17 branches of Silicon Valley Bridge Bank if it so desires. But this is not an obligation for the company. What's really exciting for shareholders of First Citizens BancShares is that the move brings with it a discount on the assets of Silicon Valley Bridge Bank totaling about $16.5 billion.

First Citizens BancShares

On top of this, the company has also received an agreement from the FDIC that states that the regulator will, over the next five years, reimburse First Citizens BancShares for 50% of all losses on commercial loans associated with the transaction that are in excess of the first $5 billion. In exchange, First Citizens BancShares has granted the FDIC a value appreciation instrument that's exercisable until April 14th of this year that will grant the regulator up to $500 million in cash. As part of this transaction, First Citizens BancShares Is receiving $35.3 billion in cash, which is already baked into the aforementioned discount.

First Citizens BancShares

All combined, this would mean that the company has total liquidity that covers uninsured deposits by more than 175%. To further bolster its financial position, First Citizens BancShares has increased its borrowings from the Federal Home Loan Bank to $9 billion, Effectively increasing the company's pre-acquisition cash position from $4 billion to $10 billion. It also made other moves aimed at strengthening its financial position. And unlike some other banks during this time, the company has benefited from a $1.3 billion rise in deposits since the end of last year.

First Citizens BancShares

This transaction also will significantly change the composition of both the loans and the deposits on the company's books. It will, for instance, significantly increase the firm's wealth management operations and private banking business while reducing its exposure to mortgages and traditional commercial financing activities. On the deposit side of the equation, it will lower the firm's exposure to money market and savings activities while increasing its exposure to non-interest-bearing demand deposits. While the change in deposit structure (and the nature of its new deposit clients) might increase the risk of the firm to some degree, the growth in wealth management and private banking will effectively open new verticals and grow portions of the business that can be high-ticket items in the long run.

Takeaway

From all that I can see at this time, it looks as though First Citizens BancShares truly should benefit tremendously from this transaction. The move brings with it a large amount of cash, and granted a fantastic discount on assets. It essentially doubles the size of the bank while locking in a multi-year agreement to protect it from downside. Operationally, the transaction will accelerate the growth of the company's wealth business, while also giving it significant new exposure to the private equity and venture capital space. And with the amount of uninsured deposits covered by more than 175%, the risk of a collapse looks incredibly low. Given these factors, I would say that the company definitely warrants consideration from investors and, as such, I've decided to rate it a 'buy' at this time.

Source: Seeking Alpha