The winning bidder in the government auction of Silicon Valley Bank’s key assets received several concessions to complete the deal.
First Citizens BancShares buys $72 billion in SVB assets at a discount of $16.5 billion, or 23%, according to a Sunday Edition of the Federal Deposit Insurance Corporation.
The deal doubles First Citizens’ assets and catapults it to $219 billion in total assets, according to the bank presentation. It gets all of SVB’s loans and deposits, as well as 17 branches, the FDIC said.
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But even after the deal closes, the FDIC is left to sell about $90 billion in SVB assets held in receivership. The sale excludes investment securities, meaning the FDIC is stuck with SVB bonds that have fallen in value and contributed to the company’s demise.
And the FDIC agreed to a five-year period loss sharing commercial lending deal that acquires First Citizens, as well as a $70 billion line of credit in case customers take more deposits, the North Carolina-based bank said Monday.
The FDIC is also giving First Citizens a $35 billion five-year loan at a favorable interest rate of 3.5% to help fund the deal, First Citizens said during an investor call Monday. In return, the FDIC will receive equity rights in the bank that could be worth up to $500 million.
All told, the bankruptcy of the SVB will cost the FDIC’s Deposit Insurance Fund about $20 billion, the bureau said. That makes the failure of the SVB the most expensive in history of the Deposit Insurance Fund, which began operating in 1934. The cost will be borne by higher fees for US banks that enjoy FDIC protection.
Shares of First Citizens soared 55% in Monday trading.
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The deal terms can be explained by lukewarm interest in SVB assets, it said Mark Williamsa former Federal Reserve examiner who lectures on finance at Boston University.
On March 10 and later, the government confiscated SVB extended the term for his ability. The bidding had come down to First Citizens and Valley National BancorpBloomberg reported last week.
“The deal was getting old,” Williams said. “I think the FDIC realized that the longer this went on, the more they’d have to discount it to entice someone.”
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The ongoing sales process for another ailing lender may also have cooled interest in the SVB’s assets, according to a person with knowledge of the process. Potential buyers stopped the SVB auction because they hoped to make a bid Bank of the First Republicwhat they longed for more, this person said.
In the wake of the SVB’s collapse this month, savers worried about their uninsured deposits pulled billions of dollars in cash from smaller banks and put them into financial giants including JPMorgan Chase. That led to a sell-off in regional bank stocks, and First Republic was one of the hardest hit.
The major leagues
To compensate for the outflow, JPMorgan and 10 other banks poured $30 billion into First Republic, but shares continued to fall, prompting the bank to consider strategic alternatives. On Monday, shares of First Republic rose along with other bank stocks.
In its release, First Citizens said it has made more FDIC-brokered bank takeovers since 2009 than any other lender. The bank went from $109 billion in assets at year-end to more than $200 billion following this transaction, as well as more than 550 branches in 23 states.
“Let me say that this acquisition is financially, strategically and operationally attractive,” Frank Holding, CEO of First Citizens, told analysts Monday.
Despite the security of the $70 billion FDIC line of credit, bank managers recognized the risk of deposit flight as the merger goes through. But the bank’s CFO also said he believes some SVB customers will return and bring their cash because of the stability they bring.
The deal continues the bank’s track record of acquiring distressed banks at a discount, Williams said.
“With this deal they go to the big leagues,” he said. “When other banks see fire, they run away. This bank runs towards it.”
Read more: Deposit outflow from smaller banks to finance giants like JPMorgan Chase has slowed, sources say