Citizens Valley Bank (FCNCA) has bought Silicon Valley Bank, ending the drama that has prompted a global conversation about banking and risk.
FCNCA shares soared on the news, and for good reason: they are certainly getting Silicon Valley Bank’s assets at virtually no price at all.
The structure of the deal is quite interesting: First Citizens is getting about $110 billion of assets, including $35 billion in cash and $72 billion of loans. In exchange, it is also assuming $93.6 billion of liabilities. FCNCA also is putting up zero cash of its own, resulting in a total purchase price of negative $16.5 billion.
No wonder FCNCA shares soared.
All bank shares rose as well, with the banking system working as intended: SVB account holders are made whole, FCNCA management and shareholders get amply rewarded for taking on a risk others don’t want to, and SVB management fired for being either incompetent or very lucky.
Looking ahead, investors are going to be curious about what assets FCNCA has acquired and whether they’re really as valuable as current consensus claims, but the real drama is on the other side of the ledger and remarking to market their liabilities. That won’t be easy; just look at what it now has on its books: $56.5 billion of SVB deposits, $35 billion five-year promissory note to the FDIC at 3.5%,
as well as the loans SVB has thrown out over the years. FCNCA bears the risk of the first $5 billion of losses on that portfolio, and half of the losses thereafter. If there are no additional losses, First Citizens has to give the FDIC money back up to $1.5 billion; the FDIC also gets a “value appreciation instrument” giving it some capital gains in FCNCA stock, capped at $500 million in profits total.
Is this a bounty or a curse? Really digging into the portfolio would be essential to answer that question.
Arguably the basic problem at SVB was that it had a portfolio of long-term assets (loans, Treasury bonds, etc.) supported by rickety short-term financing: SVB was funded mainly by deposits, almost all of which exceeded the FDIC’s deposit insurance cap of $250,000 per account. When depositors got nervous, they took out a lot of money all at once — $42 billion in one day — and SVB didn’t have enough money to pay them.
The basic fix for this is pretty much to get some long-term funding — ideally cheap long-term funding, since SVB loaded up on long-dated assets back when interest rates were very low, and would be losing money if it had to borrow at 5% to fund them. And that is in fact what happened. SVB’s $90 billion securities portfolio now belongs to the FDIC, which is the US government and gets very cheap funding.
And its loan portfolio now belongs to First Citizens, which is paying for it by borrowing $35 billion from the FDIC for five years at 3.5% interest. As the loans pay off, First Citizens will send the money to the FDIC,[6] but there is no rush; the long-term financing from the FDIC means that First Citizens doesn’t need to worry about getting cash before its loans mature. Also the money is cheap: The US government can borrow for five years at about 3.58%, but First Citizens is doing a bit better borrowing from the government.
Of course the other $56.5 billion of First Citizens’ financing comes from SVB’s depositors who haven’t taken their money out yet. That … might be shorter-term money? As of Dec. 31, 2022, Silicon Valley Bank had about $173 billion of deposits, of which about $165 billion were not insured by the Federal Deposit Insurance Corp., mostly because they exceeded the $250,000 cap on FDIC insurance.[7] As of this morning, after its bank run, it had about $56.5 billion of deposits. I don’t know how many of those deposits are uninsured, but I would be surprised if people were flocking to Silicon Valley bank to deposit money in the last couple of weeks, so my guess is that no more than $8 billion of deposits (the rough number as of Dec. 31) are insured, and the remaining $48.5 billion are not. For the last two weeks, SVB has been, and has advertised itself as, the safest bank in the US: It was essentially the only bank where all deposits, even those way above the FDIC’s $250,000 deposit-insurance cap, were guaranteed by the FDIC.[8] Now, uh, things are back to normal I guess? “All deposits assumed by First–Citizens Bank & Trust Company will continue to be insured by the FDIC up to the insurance limit,” says the FDIC’s announcement, which is a limit that did not exist at SVB last week.