First Citizens' bull run continues on early Silicon Valley Bank impact

First Citizens BancShares Inc. shares have continued their rapid ascent six weeks into the bank's transformational acquisition of the failed Silicon Valley Bank.

In the weeks after the deal, deposit outflows from Silicon Valley Bank were worse than First Citizens initially anticipated, and it is expecting further runoff as SVB's venture capital-focused clients burn through cash during a stagnant fundraising environment for startups.

But First Citizens delivered on expectations for a massive, instantaneous boost to its book value and projections for a similarly strong lift to earnings.

"The SVB acquisition was a home run financially in terms of immediate [tangible book value (TBV)] accretion and future EPS accretion," Chairman and CEO Frank Holding Jr. said May 10 during First Citizens' first earnings report since the deal.

Doubling TBV

The positive outlook is driven by a pretax $13.13 billion bargain gain on the deal, under which First Citizens assumed $106.60 billion of assets and $93.47 billion of liabilities after purchase accounting adjustments. That compares with a gain of $431 million on First Citizens' below-book-value merger of equals with CIT Group Inc. in early 2022.

The SVB transaction delivered a 106% increase in First Citizens' TBV to $1,213.82 per share at March 31. First Citizens projected 2023 EPS of $150 to $161 including earnings from SVB and the realization of about half of anticipated cost savings — 67% to 89% higher than its projection for the bank without SVB.

SVB has experienced client attrition, and First Citizens expects SVB's loans to continue to contract, reflecting paydowns of borrowing to bridge rounds of venture capital fundraising, with activity in legacy operations providing an offset.

First Citizens also said that about 60% of $650 million in anticipated acquisition expenses are for retaining personnel. SVB's concentration on the venture capital universe is largely new to First Citizens, which is focused on "running SVB as SVB to maintain the competitive advantage it has in the innovation economy," Holding said.

More deposit outflows

First Citizens said that SVB deposits fell to about $41.3 billion at April 14 from about $56.0 billion as of March 27, the day after the acquisition, reflecting clients going to other financial institutions and shifting into alternatives off SVB's balance sheet. SVB deposits were about stable through May 5, but First Citizens forecast further SVB outflows of about $8 billion through the rest of the year, reflecting projections for clients' cash burn.

The bank expects to offset that decline with a $10 billion increase in deposits in its direct bank. President Peter Bristow said the direct bank funding costs about 4.75%, compared to about 1.5% in the SVB deposit portfolio.

The shift helps explain an increase in First Citizens' projection for its cumulative deposit beta, or the increase in its deposit costs relative to underlying interest rates across the rate increase cycle, to 31%, up from 25% previously.

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Room to beat forecast

Executives said the bank could exceed its earnings forecast if more SVB clients return and the venture capital funding environment improves, or if the Federal Reserve rate cuts included in its outlook do not materialize. It is asset sensitive in part because of about $35 billion of borrowing from the Federal Deposit Insurance Corp. at a rate of 3.5% as a part of the deal.

"We are cautiously optimistic that we will not see the level of loan or deposit runoff included in our projections," CFO Craig Nix said.

Client cash burn "could turn around quickly if there were some sort of change in" the environment, Bristow said.

In a note on May 10, Piper Sandler analyst Stephen Scouten forecast First Citizens EPS of $182.15 in 2023, well above the bank's projection, reflecting expectations that the Fed will keep rates higher for longer this year, and that the bank will use its strong capital levels to buy back significant amounts of its stock.

"We are currently slated to take a combined capital plan to our board for approval in late July," Nix said.