What happened
Shares of First Citizens BancShares (FCNCA +1.57%) ripped nearly 48% higher as of 11:48 a.m. ET after the company announced it had acquired all of Silicon Valley Bridge Bank's deposits and loans in what looks to be an incredibly attractive deal. The bridge bank was created by the Federal Deposit Insurance Corp. (FDIC) after it took Silicon Valley Bank into receivership earlier this month.
NASDAQ: FCNCA
Key Data Points
So what
This deal is very complex and has several components to it.
- First Citizens will acquire roughly $110 billion in assets from SVB, including more than $35 billion in cash and $72 billion of loans. Citizens will also acquire roughly $56.5 billion of deposits and $34.6 billion of borrowings. The really attractive part is that First Citizens will acquire the assets at a $16.5 billion discount. The bank is also paying no premium on the deposits.
- First Citizens will also acquire the SVB Private wealth management franchise. The company is not acquiring any of the bonds held in SVB's held-to-maturity portfolio, which were trading at a huge loss.
- The deal also includes a five-year loss-sharing agreement between First Citizens and the FDIC for SVB's commercial loans, which are composed of capital call lines to venture capital and private equity funds; loans to tech, life sciences, and healthcare companies; and loans in the private bank. First Citizens will bear the first $5 billion of losses in the portfolio; beyond that, the FDIC will reimburse First Citizens for 50% of any losses. The FDIC also received a "value appreciation instrument" from First Citizens valued up to $500 million that the FDIC can exercise until April 14.
- Citizens will also have access to a liquidity facility from the FDIC. Combined with the new cash it just got from the bridge bank, First Citizens has enough liquidity to cover 175% of uninsured deposits at the pro forma company.
The FDIC estimates that the failure of SVB will result in a $20 billion loss to the FDIC's Deposit Insurance Fund, which had about $128 billion at the end of 2022. The fund is paid for by insured financial institutions themselves, through quarterly assessments.
Now what
While this deal looks like a huge win for First Citizens -- which is consistent with other recent deals involving failed banks -- analysts on the bank's conference call this morning did have some concerns about how sticky the Silicon Valley Bank (SVB) deposits would be, in light of the bank run that ultimately led to SVB's downfall. But I think a lot of clients at SVB realized that they were getting service that was hard to find elsewhere, which is why many ended up returning at least a portion of their deposits back into the bank even after it was taken into receivership.
Credit quality in SVB's loan book is another question. But the capital call lines in the global fund banking portfolio have had practically zero losses since the product's inception. I certainly think there will be some losses in the tech, life sciences, and healthcare book, but this is where the loss-sharing agreement comes into play.
The big focus for investors is that the addition of the cash, deposits, and assets at a discount will be massively accretive to (that is, they'll boost) First Citizens' earnings power and its tangible book value (TBV, a key baseline for valuing bank stocks).
At the end of 2022, First Citizens had average tangible common equity of roughly $8.3 billion. Management did not provide exact estimates for TBV accretion, but starting with the $16.5 billion discount and then factoring in potential marks related to credit and other factors, it's certainly not out of the realm of possibility that the deal could effectively double First Citizens' TBV.
Analysts seemed to estimate somewhere in the range of 50% to 100% TBV accretion, which is simply unheard of in a bank acquisition.
