First Citizens BancShares (FCNCA 2.25%), a nearly $54 billion asset regional bank based in North Carolina, has seen the price of its shares more than double over the last year from roughly $400 per share to now around $847. Even with the impressive run the banking sector has been on this year, this type of growth far exceeds the general sector. With such a big run up, can First Citizens shares keep appreciating to new highs?
A financially attractive acquisition
The big reason First Citizens' shares began to soar during the pandemic is because the bank announced that it plans to acquire another regional bank called CIT Group (CIT +0.00%), a $61 billion asset bank with most of its branches in California, as well as a few branches in other states like Arizona, Nebraska, and Nevada. The acquisition would bring First Citizens over $100 billion in assets and also give the bank a substantial commercial lending portfolio from CIT. First Citizens can likely improve the profitability of that portfolio with its low-cost deposit base.
But a big reason investors loved this acquisition is because of how financially attractive it was. First Citizens announced the acquisition of CIT Group in October 2020 for an implied value of $21.91 per share, valuing CIT Group at just 44% of tangible book value (TBV), which is a bank's equity minus intangible assets and goodwill. So, right away you know First Citizens got a great deal because it is essentially buying CIT Group for a price that says CIT is worth just half of the value of its tangible assets.
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As a result, the acquisition is expected to boost First Citizens' tangible book value per share (TBVPS) by roughly 30%, which is massive. Many bank acquisitions dilute TBV or are minimally accretive. Once the deal is complete, First Citizens projects TBVPS to jump from $363 to nearly $470 per share. Unlike other sectors, banks are often valued on a price-to-tangible book basis, where investors look at a bank's stock price relative to the value of the tangible assets on its books. So, prior to the acquisition, shareholders valued First Citizens slightly over TBV.
But keep in mind, this is also during the pandemic when the banking sector was beaten down -- before the pandemic, First Citizens traded closer to 160% TBV. The idea is that if you think First Citizens should trade for a certain valuation based on TBV, and then TBV jumps 30%, the stock price can often jump in tandem to maintain the valuation or reach a new valuation.
Another exciting part of the deal is that the addition of CIT Group is expected to be nearly 53% accretive to First Citizens' earnings, another uncharacteristically large number in bank acquisitions. This means that First Citizens in 2022 will see its earnings jump 53% from what they would have been on a stand-alone basis with the addition of CIT. A large part of this is powered by the nearly $250 million of expenses management expects to strip out of the combined bank's expense base, which is equivalent to roughly 10% of combined expenses.
Can First Citizens' shares go higher?
First Citizens is currently trading at around $850 per share. The bank's TBVPS at the end of the first quarter of this year was $405.59, which does not include CIT because the acquisition hasn't closed yet. This means investors are valuing First Citizens at roughly 209% tangible book value, which is a high valuation. However, I think it's rather obvious that investors are valuing the company with the CIT acquisition baked in. In this case, you would look at TVBPS at $470 per share, which means First Citizens is trading at 180% tangible book value. That's much more reasonable when you consider what First Citizens traded at prior to the pandemic, and the fact that most bank valuations are up since then.
There's also a chance that once First Citizens completes the acquisition of CIT, its TBVPS could be higher than $470, considering First Citizens expected its TBVPS to be $363 at the end of the first quarter and it was nearly $406. If TBVPS is higher than $470, then it's reasonable to assume investors could continue to run up the stock to value the bank at a level they think is appropriate, and I think 180% of tangible book value is an appropriate valuation for First Citizens. But at this point, I think First Citizens is fairly valued right now. Wait until the acquisition is complete to see what TBVPS for the combined company is and to make sure First Citizens has achieved or is on pace to achieve its targeted cost savings. Then there may be more room to run.
