First Citizens' Acquisition of Silicon Valley Bank: A Risky Gamble?
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Chapter 1: Overview of First Citizens and Silicon Valley Bank
Are First Citizens (FCNCA) Executives Optimistic About Profitability?
First Citizens BancShares Inc. (NASDAQ: FCNCA) has reached an agreement to take over the assets of Silicon Valley Bridge Bank N.A., as indicated in a recent press release. This entity was established by the Federal Deposit Insurance Corporation (FDIC) to manage the assets of Silicon Valley Bank post-collapse.
First Citizens will acquire $110 billion in assets, including $72 billion in loans and $56 billion in deposits. This totals an impressive $238 billion in assets, loans, and deposits.
Was This Deal a Bargain?
Interestingly, the FDIC sold these loans to First Citizens at a $16.5 billion discount, according to David Hollerith from Yahoo! Finance. This has led some critics to argue that First Citizens secured a fantastic deal.
Furthermore, First Citizens will also take control of 17 branches of Silicon Valley Bank and 55 other offices across the U.S. Notably, Silicon Valley Bank operates in some of the wealthiest areas in the nation, including the San Francisco Bay Area and Massachusetts.
The bank's assets also encompass investment banking branches in global cities such as Toronto, the Cayman Islands, Beijing, and London.
Did the FDIC Give Silicon Valley Bank Away?
In 2021, Silicon Valley Bank acquired Boston Private Financial Holdings Inc., a wealth management firm, valued at $17 billion. Boston Private serves numerous high-net-worth clients and institutions, creating a potential opportunity for First Citizens to gain $17 billion from this acquisition.
Critics argue that the sale of Silicon Valley Bank appears to be a giveaway to First Citizens. Some question why the bank wasn't nationalized or absorbed into the Federal Reserve, which could have provided the government with more control over the banking sector.
Understanding First Citizens Bank (FCNCA)
First Citizens (FCNCA) is a North Carolina-based bank holding company with a notable history of acquiring struggling financial institutions. Currently, it operates over 500 branches across 23 states. Initially established in Smithfield, North Carolina, in 1898, the bank expanded its reach significantly after 1994, acquiring various institutions.
The financial crises of 2008 and the COVID-19 pandemic positioned First Citizens as a significant player in the banking sector, allowing it to acquire weaker banks, including CIT Group in 2020 for $2.2 billion.
Did First Citizens Turn a Profit?
First Citizens Bank (FCNCA) has demonstrated profitability, reporting quarterly revenues of $1.469 billion and a gross profit of $1.231 billion as of December 31, 2022. The bank has shown remarkable growth, with quarterly revenues increasing from $485 million in December 2021 to $1.469 billion a year later.
Chapter 2: First Citizens' Growth Trajectory
First Citizens' Growth Journey
First Citizens (NASDAQ: FCNCA) is currently experiencing remarkable growth. The bank reported four consecutive quarters of over 100% revenue growth in 2022, with significant percentage increases in each quarter.
For instance, revenue growth reached 217.07% in Q1 2022, while total assets surged from $58.309 billion at the end of 2021 to $109.298 billion by year-end 2022. However, cash and short-term investments declined during the same period.
Concerns About Cash Generation
Despite its rapid growth, First Citizens is facing challenges in cash generation. For example, the bank reported an ending cash flow of only $37 million as of December 31, 2022, a steep drop from previous quarters.
This situation raises questions about the sustainability of its growth, especially given that First Citizens reported significant debts amounting to $7.64 billion by year-end 2022.
Will Silicon Valley Bank Enhance First Citizens' Value?
On paper, Silicon Valley Bank could potentially add $238 billion in value to First Citizens. However, it also introduces significant risks, primarily due to questionable loans that Silicon Valley Bank had issued.
For instance, it was reported that Silicon Valley Bank extended $219 million in loans to its own executives and directors in Q3 2022, raising concerns about its lending practices. The bank heavily relied on venture capital and the tech industry's performance, which has been volatile.
The Future of First Citizens BancShares
I view First Citizens BancShares (FCNCA) as a precarious investment due to its limited cash reserves. With $144 billion in deposits as of March 27, 2023, and only $5.543 billion in cash and short-term investments, the bank's sustainability is in question.
Consequently, I believe Mr. Market has overvalued First Citizens at $941.271 as of March 28, 2023. Investors should consider avoiding First Citizens due to the potential risk of collapse and the possibility of needing an FDIC bailout.
Ultimately, rather than resolving a banking crisis by selling Silicon Valley Bank, the FDIC may be merely postponing a more significant collapse. I foresee a potential banking crisis that could lead to the nationalization of weaker banks like First Citizens in the future.
In this video, GMA discusses First Citizens Bank's acquisition of Silicon Valley Bank and its potential implications.
This video covers the details surrounding First Citizens Bank's purchase of a substantial portion of Silicon Valley Bank following its collapse.