Buy First Citizens Stock. It Wins When Good Banks Go Bad.

SVB flamed out spectacularly in March—the second-largest bank failure in U.S. history—and it helped trigger a regional banking crisis. But its core was solid, and its demise proved fortuitous for First Citizens, a family-run bank that bought SVB’s primary business out of receivership from the Federal Deposit Insurance Corp. 

Controlled by the Holding family since the 1930s, First Citizens has a long history of buying busted banks, including more than a dozen deals with the FDIC since the 2008-09 financial crisis. CEO Frank Holding Jr. told Barron’s that the bank built a “strong relationship” with the FDIC thanks to its conservative financial profile. “We really developed a lot of muscle memory in doing this type of work,” he says.

With $209 billion in assets, First Citizens is now the country’s 15th-largest bank, built through a series of deals including the purchases of commercial-finance company CIT Group in 2022 and SVB this year. The latter deal looks particularly smart. 

The package included assets of $110 billion—including loans of $72 billion and $35 billion in cash—as well as deposits of $56 billion. First Citizens bought the assets at a 15% discount to their market value, providing a cushion against further mark-to-market losses. Other terms included a partial backstop against credit losses above $5 billion and low-cost funding for its operations through a five-year bond issue and line of credit with the FDIC.

More important for its future: It bought a seat at the tech table. SVB has long been prized as the industry’s dominant banker. Start-ups, moguls, and venture-capital firms all banked with SVB, which was like a financial flywheel for tech firms and funds, offering basic payroll and checking accounts, advisory services, and investment banking, among other things. Except for divisions such as SVB Capital, securities, and some international businesses, all the bank’s units are now with First Citizens. 

For investors, the central question is how SVB’s business will fare since the parent company’s collapse left its management and reputation in tatters. SVB badly mismanaged its Treasury securities portfolio, which rapidly lost value as interest rates surged, burning a hole in its balance sheet and causing a run on deposits after it became known publicly. The CEO and chief financial officer are now gone, along with some other senior executives. 

The core of the bank, however, wasn’t brought down by shoddy lending, and it seems to be intact. Charge-offs for loans have remained low at 0.5%, in line with forecasts, and deposits have stabilized. Holding recently told analysts that SVB is seeing “green shoots,” including a rise in foreign exchange and international services. Executive ranks have stabilized, a “Yes, SVB” marketing campaign is trying to revive the brand, and the bank is expanding into new real-time payments and settlement services. 

First Citizens’ regional banking and commercial businesses, meanwhile, are holding up. The company reported a net interest margin of 4.1% in its third quarter, and total deposits rose 3.6% sequentially to $146 billion, compared with industry averages of 3.5% and 1.3%, respectively. Stripping out SVB, the bank grew its loan and leasing portfolio by 9% to $76 billion over the past year, with an average yield of 7.3%, fueled partly by CIT. Return on tangible equity, a key measure of investment and loan efficiency, is now an impressive 17.4%, getting a lift from the SVB acquisition. 

The stock looks reasonably priced despite its big run-up. Tangible book value has more than doubled this year to $1,297 a share, thanks largely to SVB. That has made its trailing price-to-tangible-book ratio a reasonable 1.1 times, compared with 1.3 times for the regional bank average, according to Wedbush Securities analyst David Chiaverini. He notes that the bank’s Tier 1 capital ratio of 13.2% is nearly three percentage points higher than the median regional bank’s. That should allow First Citizens to grow tangible book value by 13% over the next year, he estimates, beating most peers. 

The deal isn’t without its risks. A big one is malaise in start-up funding and venture capital as high interest rates keep deal making depressed. Holding says he’s confident it will come back. “We realized there is some cyclicality in this industry…[and] look forward to staying with this strategy for a long time,” he explains.

Nor is the bank immune to industry pressures. The composition of its loan and asset portfolio makes it highly sensitive to rates, notes Chiaverini, and if rates come down in 2025, so will margins. Nonperforming loans, meanwhile, have doubled over the past year to $900 million, though net charge-offs are still estimated to be low, at 0.5% of total loans this year. Wall Street sees earnings per share rising just 6% in 2024 and 4% in 2025, partly because margins have likely peaked in this rate cycle. Return on tangible equity is expected to decline to 13.8% next year.

Investors also need to get comfortable with the bank’s unusual ownership structure. The Holding family has a roughly 25% ownership stake in the equity and controls more than 50% of the voting rights through a special class of shares. Family members have held senior roles at the bank for decades—Holding and his brothers have run it since 1957, after taking over from their father. That has worked out well for investors; the stock has outperformed the industry over the past decade, even without SVB. But it isn’t ideal corporate governance. It could thwart a potential takeover, and makes the stock vulnerable to legal insider selling. 

“As a shareholder, I have no real rights and management is not super-talkative,” says David Ellison, portfolio manager at the
Hennessy Large Cap Financial
fund (HLFNX), which holds the stock through prior ownership of CIT Group. “That keeps the valuation lower.” 

Other investors aren’t worried. The Holding family has been buying stock consistently since 2009, according to Securities and Exchange Commission insider-transaction records. “This continued insider buying tells us that First Citizens management believes that their shares are undervalued, and they have confidence in the long-term prospects,” says Ray Lin, a portfolio manager at Fuller & Thaler Asset Management, which owns the shares. 

Some analysts see the lull in tech as a reason to buy the stock. “It is only a matter of time before private markets open up again,” said J.P. Morgan Securities analyst Steven Alexopoulos in a recent note recommending First Citizens. “When this happens, SVB should be in a good position as the bank of the innovation economy.”

Wall Street is warming up to the story. In 2021, three analysts covered First Citizens; there are now 10, with eight rating shares the equivalent of a Buy. The average price target is $1,783, implying 25% upside from a recent $1,427. A comeback in tech would likely help the bank top estimates, and it’s now a far more diversified business. The stock also looks quite reasonable on consensus forecasts, at 7.8 times 12-month forward earnings, a touch below the
SPDR S&P Bank
exchange-traded fund’s (KBE) eight times. 

It’s tough to laud a failed bank, but SVB had a stranglehold on the “innovation economy.” If it can maintain its grip, First Citizens’ magnificence should only keep growing. 

Write to Carleton English at [email protected]