The Federal Deposit Insurance Corporation was originally determined not to let a buyer cherry-pick only the best assets when it found someone to acquire failed venture capital banking leader Silicon Valley Bank (SIVB, Financial). The regulator also put on hold any private equity offers, wanting the bank’s assets to stay in the hands of a publicly traded company.
However, the FDIC seems to have walked back on those convictions somewhat as the weeks have dragged on without any public companies willing to buy the failed bank in full. On March 27, the news broke that the FDIC has agreed to sell Silicon Valley Bank’s deposits and loans to First Citizens BancShares (FCNCA, Financial) at a huge discount along with a loss-sharing agreement. First Citizens’ shares soared more than 50% following the announcement, pushing close to all-time highs.
However, is this deal truly a positive development for long-term shareholders of First Citizens? The 50% price spike is nice for those existing shareholders who might have been looking for a better exit point as unease about regional bank safety remains high, but how well can First Citizens digest the purchase without endangering the safety of its existing assets? Let’s take a look.
$16.5 billion off a $72 billion purchase
The deal will see First Citizens purchase approximately $72 billion worth of Silicon Valley Bank assets (specifically deposits and loans) from the FDIC for $16.5 billion less than what they are worth, in exchange for common stock equity appreciation rights with a “potential value of up to $500 million.”
The FDIC will also share any losses from the commercial loans that First Citizens has purchased as part of the deal. All things considered, the FDIC is expected to lose approximately $20 billion as a result of this deal – and the regulator is still holding on to $90 billion in other assets and securities that it has yet to find a buyer for.
The new assets are a huge boost to First Citizens’ existing business. In its fourth quarter 2022 earnings report, First Citizens said it had more than $100 billion in assets under management. Speaking from a purely asset-focused viewpoint, First Citizens could have further upside potential.
Does this put First Citizens at risk?
The question then is, do the additional assets put First Citizens at a greater risk of not being able to pay out the necessary cash in case of a run on deposits?
Before the Silicon Valley Bank deal, First Citizens had a CET1 ratio of 11.3%, which is over the minimum requirement and about the same level as the largest banks in the U.S. After the Silicon Valley Bank deal, that is unlikely to change.
First Citizens is set to buy all of Silicon Valley Bank’s deposits and loans according to an FDIC statement on Sunday. While depositors will likely still continue their net withdrawal of funds due to the declining state of the economy, said deposits are not likely to be vulnerable to the same issue that toppled Silicon Valley Bank – namely, having to sell Treasury bonds at a heavy loss due to rising interest rates.
With the Federal Reserve signaling that rate hikes are set to slow down or even potentially stop soon, combined with the FDIC sharing any losses from the commercial loan portfolio as part of the acquisition deal, First Citizens has basically just been handed a 70% increase in its business at an incredible bargain with very little risk attached.
Are markets regaining faith in regional banks?
Much more importantly than giving First Citizens a great deal, the sale of Silicon Valley Bank’s assets is a key step in reviving the public’s faith in regional banks. The FDIC’s loss-sharing agreement further strengthens this. The message is clear that the government plans to get everyone their money in full, even if their bank collapses.
The markets do not seem completely convinced. According to GuruFocus’ aggregate chart, most bank stocks showed very little change on Monday.
However, the more important statistic to keep an eye out for is whether depositors stop yanking money from regional banks and pouring it towards the “too big to fail” banks like Bank of America (BAC, Financial). According to a March 13 study on bank fragility by four professors, titled “Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs,” as many as 186 U.S. banks may be exposed to the same kind of deposit run that Silicon Valley Bank faced.
Presumably, First Citizens is not likely to fall in this category as the FDIC has deemed it a fit custodian of Silicon Valley Bank’s assets, but if depositors keep withdrawing enough money, then regional banks (even First Citizens) could find their stock prices in overvalued territory.
Takeaway
First Citizens has struck a once-in-a-lifetime deal for a midsize bank to boost is asset portfolio by more than 70% at a $20 billion discount funded by the FDIC. As long as it does not continue to see net deposit outflows, shares of the bank could be undervalued even after their 50% spike on Monday.
First Citizens also has a much bigger location footprint than Silicon Valley Bank, so if it manages to successfully take up the mantle of the “go-to startup bank,” it could be even more of a roaring success in the next bull market.
However, deposit outflows are still a very real possibility in the near term, so it is no surprise the market is still a little cautious on the stock.
