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We came across a bearish thesis on First Citizens BancShares, Inc. (FCNCA) on Waterboy’s Substack by Waterboy Investing. In this article, we will summarize the bulls’ thesis on FCNCA. First Citizens BancShares, Inc.’s share was trading at $2059.01 as of Oct 21st. FCNA’s trailing and forward P/E were 11.33 and 11.47 respectively according to Yahoo Finance.
A view of a busy banking hall, customers engaging with banking staff to conduct their financial transactions.
First Citizens BancShares ($FCNCA), the largest family-owned bank in the United States, has demonstrated prudent management for decades, including profitability during the Great Financial Crisis. This disciplined approach has allowed the bank to seize opportunities when others faltered, notably through its acquisition of Silicon Valley Bank (SVB) for $0.5 billion in cash. In this transaction, First Citizens gained $72 billion in high-quality, short-duration loans, $56 billion in deposits, $16 billion in equity, and $35 billion in cash from the FDIC, to be repaid over five years at a fixed rate of 3.5%. Additionally, a loss-sharing agreement with the FDIC mitigates risks associated with SVB’s loan portfolio, which is primarily composed of short-term, high-quality loans that First Citizens is well-positioned to manage.
The savvy acquisition strategy of CEO Frank Holding Jr. is evident in a series of successful purchases following the financial crisis, which include Temecula Valley Bank and CIT Group, among others. Under Holding’s leadership, First Citizens has become the nation’s top-performing bank, achieving this status through consistent underwriting profits and strategic acquisitions. A key advantage lies in their access to approximately $30 billion in low-cost funding from the FDIC, which enables them to borrow at 3.5% and lend at a higher rate to the Federal Reserve. However, reliance on this funding could raise concerns about the bank’s long-term performance, particularly as these assets comprise roughly 15% of their portfolio.
Despite these strengths, recent data suggests emerging vulnerabilities within the bank. Although reports indicate a decrease in commercial and industrial (C&I) delinquencies which stood at 1.40%, this is misleading due to a rise in “performing” loan modifications, which masks the true delinquency rate of 2.13%. Moreover, the bank appears to be under-reserved, maintaining a lower provision for losses while reporting higher income than warranted which is concerning raising questions about the robustness of its capital position. Additionally, with First Citizens ranked #19 among its peers for Percentage Provision for losses, there is a concern that loan quality is deteriorating and that losses will ultimately impact the income statement.