There’s a dispute among analysts about the value of last spring’s acquisition of Silicon Valley Bank by Raleigh-based First Citizens Bancshares.
Christopher Marinac, director of research at Janney, says the North Carolina bank essentially got SVB for free. Stephen Scouten, managing director at Piper Sandler, disagrees. “I don’t think they got it for free,” he says. “I think they were paid $16 billion to take it.”
The news hit the tape late on Sunday, March 26. Shares of the bank had closed at $582.55 on the previous Friday. On Monday, they ended the day at about $896. By the start of 2024, the stock traded for $1,420, a 250% gain from pre-SVB days. The company’s market value now tops $20 billion.
It was the second time that First Citizens had essentially doubled in size in the previous three years, after the October 2020 purchase of New York-based CIT Group. First Citizens is now the 13th largest U.S. bank by assets with more than $214 billion, up from $49.9 billion in 2020 before the CIT deal.
“It was a fantastic financial transaction,” says Scouten.
First Citizens Bank President Peter Bristow is more measured. “It was very accretive for us,” he says, while noting that nothing is certain. “You go in and take a little risk. There is the risk of the unknown.”
It’s a wonderful life
The 1947 Christmas classic, “It’s a Wonderful Life,” could be viewed as a commentary on the risks inherent in a banking system where banks keep a sliver of capital on hand against potential lending losses and customer withdrawals. Early in the film, a rumored bank failure triggers a run on Jimmy Stewart’s Bailey Savings & Loan, and he is forced to explain to a gaggle of angry depositors why their money is not sitting in the vault. The answer is that it’s at work in the community, building houses and providing capital for business investment.
A similar problem bedeviled SVB last March, though on a much larger scale. While Stewart was able to placate his depositors, then-Silicon Valley Bank President Greg Becker could not. In just two days, SVB went from an industry darling to the second-largest bank failure in U.S. history.
Stewart’s bank operated in an era before the federal government insured bank deposits. Not so SVB, but insurance limits effectively meant that many of its depositors risked losing substantial sums when the bank collapsed. While SVB held billions in investment grade bonds, those holdings lost value on a mark-to-market basis as the U.S. Federal Reserve lifted the federal funds rate from around zero to more than 5% over a little more than a year. (Bond prices move down as interest rates move up). This created a classic mismatch of assets and liabilities. Depositors noticed and asked to get their money back.
Stewart was ultimately bailed out by the townspeople. In the case of SVB, it was First Citizens Bank that swooped in to rescue depositors with significant support from the Federal Deposit Insurance Corporation (FDIC). That support included a $70 billion line of credit and a backstop on SVB losses in excess of $5 billion. The FDIC is on the hook for half of those potential losses.
“When you have voting control, you can run it (the bank) more like a family office,” says Scouten, referring to North Carolina’s Holding family, which controls more than 50% of the voting power at First Citizens through the bank’s Class B common shares. Its actual stock holdings are about 20% of the total. “That allowed them to be nimble.”
First Citizens, the biggest family owned U.S. bank, has made a habit of buying distressed banks since the real-estate depression caused hundreds of bank failures 15 years ago. Since 2009, it has acquired more than 20 banks in FDIC-supported deals, according to Bloomberg Law, though most were relatively small. That changed with the purchase of New York City-based CIT in 2020 in a $2.2 billion all-stock deal, which lifted First Citizens into the first rank of regional banks with more than $100 billion in assets. In addition to expertise in commercial lending and equipment finance, the acquisition included OneWest, a regional bank based in Southern California, which CIT acquired in 2015.
By the FDIC’s count, First Citizens beat out about 20 bidders who made offers for all or part of SVB, including several small regional banks and private equity firms like giants Apollo and Blackstone. Less enthusiastic were the country’s four largest banks: JPMorgan, Bank of America, Citigroup and Wells Fargo.
“There are asset and deposit share considerations for the largest banks in the country,” analyst Marinac notes. “These trigger discussions with the FDIC and Federal Reserve over whether there would be a concentration of assets/deposits that excludes competition. This includes the `Asset Cap’ at Wells Fargo, which specifically limits Wells’ balance sheet growth.”
Instead of SVB, JPMorgan targeted San Francisco-based First Republic, which it acquired in a government-assisted acquisition last May.
Of the other two banks Marinac says, “I simply do not think Bank of America or Citigroup was interested in SVB unless they were expressly told to bid by the FDIC and/or the Fed, which I do not believe occurred.”
First Citizens, on the other hand, had both interest and the favor of the FDIC, he adds. “First Citizens has a long and positive history with the FDIC doing small failed bank transactions. Then, the company had a strong early execution on the CIT Group merger, which gave them extremely high credibility with the FDIC to handle a large bank transaction such as SVB. The FDIC ultimately chose First Citizens as a ‘known and trusted partner’ instead of a private equity group that has no history of completing FDIC-assisted transactions.”
A key worry at the time was the stickiness of the SVB deposit base. The bank was highly exposed to a relatively narrow slice of the market – technology companies and venture capital and private equity firms in and around Silicon Valley.
“This was really about retaining as much of the deposits as you can,” says Marinac. Adds Scouten, “There were expectations for massive outflows. That didn’t happen.”
In a July conference call, Bristow noted that about 1,500 companies whose deposits had fallen below 10% of their March 8 balances had recommitted and had more than 100% of their pre-collapse funds back at the bank. SVB deposits as of Sept. 30, 2023, were about $40 billion, compared with $56 billion when the deal was announced, and down from about $212 billion at year-end 2022. Bristow says that the bank is now “stable on deposits” and “seeing a lot of customer wins and win-backs which is huge for us.” Some runoff is to be expected as companies withdraw funds to finance their businesses. SVB had about 43,000 active deposit accounts at the end of the third quarter.
A second worry was retaining talent. Bankers never tire of remarking that theirs is a “relationship business,” and that is true at both SVB and First Citizens. Things seem to have stabilized following an early rush for the exits that saw 42 SVB bankers defect to banking giant HSBC, triggering a lawsuit, and a few more depart for Moelis, a New York-based investment banking boutique.
“The core people who created the business are still there,” Bristow says. He points to the appointment of 30-year SVB veteran Marc Cadieux as president and the return of Jennifer Friel Goldstein to head business development and strategic initiatives for life sciences and healthcare. Her return was met with a “clap of joy when she walked in the room,” he notes.
In September, the bank launched a new nationwide ad campaign, “Yes, SVB,” to remind customers that it is still around.
Still, the occasional skeptic can be found, at least as it pertains to the near-term opportunities in venture debt. Venture debt is typically a short-term loan made to an early-stage, high-growth venture capital-backed company. It is secured in part by the expectation of future growth and further access to VC funding, and may include warrants. The benefit is that it is non-dilutive (or less dilutive); the downside is it tends to be expensive and may come with restrictive covenants.
SVB’s venture debt footprint is likely to be smaller over the next few years as current portfolio loans roll off, says Zack Ellison, founder and managing partner at Applied Real Intelligence, a venture debt lending shop in Santa Monica, California. While not specifically referring to SVB, he adds that the credit quality for loans made over the last several years is deteriorating. Referring to loans made in 2021, he says, “Almost all those companies have seen their valuations plummet.”
For now, SVB’s business remains cyclically slow, consistent with the rest of the industry. A resurgence in initial public offerings (IPOs) would allow some of the bank’s venture capital clients to monetize their investment. Bristow says he is “optimistic it will get better in 2024 though we’re not expecting anything great in the first half. As long as valuations stay down, it makes it hard to get deals done.” He adds, “We’re well positioned to be there when things pick up.”
As First Citizens expands its reach into Silicon Valley, one question is the impact on its home state and the Research Triangle area’s technology and life sciences ecosystem. It hasn’t been a historical strength for the bank.
Bristow sees opportunities in those sectors, while noting that building on SVB’s expertise in the Triangle will take a little while. “The CIT leveraging is happening now. We’re seeing the effects of that in Raleigh in big, big ways. In time, the same thing will happen on the tech innovation and life sciences side.” Already, he adds, “because of these two transactions we’re seeing deals we wouldn’t have seen before.”
Janney’s Marinac also sees potential synergies. “There is more than one success story coming out of the Research Triangle Park,” he says. “First Citizens has been a part of that. They know how to take RTP to the next level. They are a very pragmatic company, and they think way out in the future.”
Some analysts see the potential for more upside in First Citizens stock on the heels of last spring’s hockey stick-like jump. A Piper Sandler report in October had an “Overweight” rating (the equivalent to a “Buy”) with a price target of $1,750 while noting that “stability around the SVB portfolio (was) forming.” Janney carried a “Buy” rating on the stock as of Nov. 2, with an $1,800 “fair value” estimate. Key factors include the expectations for significant stock buy-backs in 2024 driven by excess capital and a continued rise in tangible book value.
While the deal’s early risk may be over, First Citizens has noted that the SVB loan portfolio could decline by $5 billion to $7 billion over the next few quarters. “Realistically you’re going to lose some (deposits). These businesses are start-ups and they will burn cash,” Marinac says.
Still, it’s hard to argue with the results so far. If phase one was to stabilize the bank, phase two is to leverage SVB’s historic position as what Bristow describes as the “No. 1 bank in the innovation economy” to begin generating organic growth. That will depend in part on factors beyond First Citizens’ control, in particular a revival in tech investing. But First Citizens can afford to wait, according to Marinac. “They’re (First Citizens) thinking if we don’t get a turn until 2025 or even as far as 2026, we’re OK with that because we want to continue to grow the business with what we have,” he says. “We saw examples of that with CIT in 2022.”
Whatever else, the acquisition has so far proven enormously profitable for the bank and its shareholders. And there’s the potential for more upside over the coming years, say analysts. In addition to the financial windfall, “you hoped there was some incremental long-term strategic benefit” when the deal closed, says Scouten. “You’re starting to see that as well.” ■
