FIZN - Silver Beech Capital - First Citizens Bancshares: Taking The Road Less Traveled
2023-05-03 04:30:00 ET
Summary
- We have tracked First Citizens for several years.
- FCNCA deeply understands the rewards of operating within limits during periods of excess, or "taking the road less traveled."
- We think First Citizens is in an even superior capital position than the public market has recognized.
The following segment was excerpted from this fund letter.
First Citizens Bancshares, Inc. (NASDAQ: "FCNCA")
First Citizens Bancshares, Inc. ("First Citizens") is a 130-year-old, Raleigh, NC-based, large regional bank operated by the aptly named Holding family. Robert Powell Holding, who joined the bank as an assistant cashier in 1918, became president in 1935. Frank Holding Jr., Robert's grandson, has been Chairman and CEO since 2008 (preceded by his father, who held the role for over 50 years). Frank and his family own over 20% of First Citizens stock and have nearly 50% of the voting power.
We have tracked First Citizens for several years. Frank is a world-class banker who deeply understands the rewards of operating within limits during periods of excess, or in his own words, "taking the road less traveled." First Citizens reaped the fruits of Frank's discipline after the GFC. First Citizens entered the GFC with a strong capital position and high-quality book of assets and took no Troubled Asset Relief Program funds. Frank then led First Citizens to acquire 20 banks in the aftermath of the crisis (six failed banks almost immediately after the GFC and several failed banks thereafter). Frank has consistently expanded the First Citizens franchise in a cost-effective manner by acquiring failed banks.
We purchased shares of First Citizens after First Citizens acquired certain assets and liabilities of the failed Silicon Valley Bank ("SVB"), including 17 SVB branches and the SVB franchise, from the FDIC. Although public markets immediately recognized the acquisition's accretion to First Citizens' underlying value (shares rose over 50% on the day of the deal's announcement), we think First Citizens is in an even superior capital position than the public market has recognized.
First Citizens acquired $110 billion of SVB's assets ($35 billion cash, $72 billion loans, and $3 billion of other assets). The acquired assets were funded by $94 billion of liabilities ($56 billion of deposits, $3 billion in other liabilities, and a 5-year $35 billion loan from the FDIC with a 3.5% interest rate). The $16 billion plug between SVB's assets and liabilities equals the discount that First Citizens received from the FDIC. We would argue this is one of the most profitable and asymmetric bank deals of the modern era.
First Citizens ended 2022 with $8.8 billion of common equity. Clearly, the $16 billion discount for SVB created substantial accretion to First Citizens' common equity. The acquired SVB loans are primarily short-duration capital call lines with near-zero loss history, not riskier venture loans that SVB was infamous for when it was solvent. After acquiring SVB, First Citizens has substantial cash reserves, an FDIC back-stop, and credit loss-sharing on SVB assets. Based on our valuation analysis, which includes First Citizens incurring a "bargain gain" tax and burdening SVB loans with conservative loss estimates, we believe the SVB acquisition accreted over $8 billion to First Citizen's common equity. First Citizens also benefits from downside protection and loss-sharing provided by the FDIC.
If our valuation analysis is correct, and First Citizen's common equity rose by more than $8 billion, or nearly 100% of First Citizens' pre-transaction common equity, then the shares are materially undervalued. We look forward to investing alongside CEO Frank Holding and we have confidence he will continue to create value for shareholders.
IMPORTANT DISCLOSURESSilver Beech Capital Management, LLC ("Silver Beech") is a New York limited liability company that serves as the investment manager to Silver Beech Capital, LP (the "Fund"), a Delaware limited partnership. The principals of Silver Beech are James Hollier, who serves as the portfolio manager and managing partner of the Fund, and James Kovacs, who serves as the managing partner of the Fund. All performance results presented herein refers to the performance of an unrestricted investor in the Fund since its inception. Net performance is presented net of the highest performance allocation in effect at the time (20%) above a 6% hurdle rate, the highest actual management fees (1.0%) charged at the time, and net of other expenses, and includes the reinvestment of all dividends, interest, and capital gains. Performance for investors who subscribed on different dates, or who pay different fees would necessarily be different from the performance presented herein. The rate of return is calculated on a "time-weighted" rate of return basis, which minimizes the effect of cash flows on the investment performance of the Fund. All monthly performance data presented herein reflects unaudited data unless otherwise specified, and as such its accuracy cannot be guaranteed. Cumulative returns for the "January 1, 2021 - March 31, 2023" period include the audited returns of Silver Beech's portfolio manager prior to Fund launch. Past performance is not necessarily indicative of future results. All securities transactions involve substantial risk of loss. The material presented is compiled from sources thought to be reliable, including in certain instances, from outside sources, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect the judgment of Silver Beech and are subject to change. The information in this letter is for discussion purposes only. Nothing contained herein should be construed as an offer to sell, or a solicitation of an offer to buy or sell any security or investment strategy or a recommendation as to the advisability of investing in, purchasing or selling any security or investment strategy, which may only be made in the Fund's confidential offering memorandum and operative documents (collectively, the "Offering Documents"). Before making an investment decision with respect to the Fund, prospective investors are advised to read the Offering Documents carefully, which contain important information, including a description of the Fund's risks, investment program, fees, expenses, redemption and withdrawal limitations, standard of care and exculpation, etc. Prospective investors should also consult with their tax and financial advisors as well as legal counsel. The Offering Documents are the sole documents on which a potential investor is entitled to rely in evaluating an investment in the Fund. The information in this letter does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific prospective investor, and an investment in the Fund may not be suitable for many prospective investors. This letter is not intended to be, nor should it be construed or used as, investment, tax, or legal advice. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Silver Beech Capital - First Citizens Bancshares: Taking The Road Less Traveled