FCNCA - First Citizens: Panic Sellers Likely Regretted Fleeing At The Lows

2023-03-28 07:30:58 ET

Summary

• First Citizens struck a "sweetheart" deal with the FDIC, buying out Silicon Valley Bridge Bank with the FDIC's backstops.
• As such, it significantly limits the bank's credit and liquidity risks, as it aims to facilitate the continuation of legacy SVB's venture capital and private equity businesses.
• First Citizens also left SVB's problematic debt securities behind with the FDIC and didn't worsen the duration risks on its investment securities portfolio.
• Analysts project a pro forma tangible book value per share above $1K. With yesterday's more than 50% surge, most of the potential upside has been captured.
• If you bought the panic over the past two weeks, congratulations!

A " sweetheart " deal for First Citizens BancShares, Inc. ( FCNCA ) as it bought out Silicon Valley Bridge Bank or SVB ( SIVB ) from the FDIC, with a backstop against potential credit losses above the $5B threshold.

First Citizens took on about $110B in assets, including $72B in loans and $35B in cash. The bank received a discount bid of $16.5B (23% of loans acquired). In addition, First Citizens also assumed $56B in deposits, funded by a $34.6B note payable to the FDIC over five years with an interest rate of 3.5% per annum.

Notably, First Citizens left about $90B of debt securities that SVB carried on its books which was the main culprit that played an instrumental role that led to the events culminating in its downfall.

As such, First Citizens kept its total available-for-sale or AFS and held-to-maturity or HTM portfolio of $19B secure from the asset-liability mismanagement risks that SVB undertook.

CFO Craig Nix quickly pointed out on First Citizens' Investor Call , discussing the purchase and highlighting that the bank's investment securities are well managed. He articulated that its AFS securities had "a duration of 3.5 years," while its HTM portfolio had a "duration of 5 years" as of the end of 2022.

Therefore, we believe management is committed to demonstrating that SVB's most important assets (tangible and intangible) are now in good hands, without the securities risks.

First Citizens' pro forma loan book includes SVB's coveted Global Fund Banking and its Tech and Healthcare portfolio. It also took over the loan book from SVB's private banking business. First Citizens aim to position itself as "business as usual" for legacy SVB's VCs and tech-heavy entrepreneurs customers.

Notably, First Citizens assured its investors it's taking over a performing loan business with "approximately 70% of loans in low credit loss portfolios." Management added that "early-stage lending accounted for only 3% of total loans as of year-end," mitigating significant risks on its enlarged pro forma loan book of $143B.

Moreover, First Citizens managed to strike a loss-sharing agreement with the FDIC helping to limit the downside risks from a loan book that is very new to the bank, on top of its discount bid.

Accordingly, the FDIC will reimburse First Citizens for 50% of the losses if its "global lifetime commercial loan losses exceed $5 billion." In addition, FCNCA has access to a "guaranteed availability of up to $70 billion" in credit line (at market rates) to cover further deposit outflows on top of the $34.6B note with the FDIC.

As such, the bank's liquidity position has been well-bolstered to withstand significant liquidity stress, enabling First Citizens to cover its uninsured deposits by more than 175%.

Management updated investors that the deal will be accretive to EPS and tangible book value per share or TBVPS (but specific guidance wasn't provided).

Wall Street's analysts on the call highlighted a possible accretion lifting its TBVPS above $1K (Vs. pre-acquisition's TTM metric of $571.8). As such, it implies a potential upside of 75%.

However, by the time you read this, the market had already reacted (well, the market isn't dumb, right?) as it attempted to price in the deal's upside.

The more than 50% surge yesterday has closed the gap with FCNCA's pre-acquisition blended fair value estimates of $804.

Given the potential upside based on its TBVPS accretion, we believe the market is likely assessing First Citizens' execution of its strategic deal. Hence, further upside will likely depend on investors' confidence about its EPS accretion.

With the remarkable panic selloff and mean-reversion surge, FCNCA's price action has normalized toward the resistance zone that had bounded its advance over the past two years.

In other words, we believe the buying fervor over FCNCA could take a break from here as investors assess its execution prowess and integration risks.

Investors who didn't buy the panic over the past two weeks ago are encouraged to wait.

Investors who plucked the courage to bottom-fish are now sitting on well-deserved gains. In addition, the FDIC's equity appreciation rights have also reached its $500M cap (strike price of $582).

Rating: Hold.

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