Posted on by

First Citizens BancShares, Inc. (FCNCA): A Bear Case Theory

First Citizens BancShares, Inc. (FCNCA): A Bear Case Theory

We came across a bearish thesis on First Citizens BancShares, Inc. (FCNCA) on Waterboy’s Substack from Waterboy Investing. In this article, we summarize the bulls’ thesis on FNCCA. First Citizens BancShares, Inc. stock was trading at $2059.01 on October 21stst. According to Yahoo Finance, FCNA’s trailing and forward P/E ratios were 11.33 and 11.47, respectively.

A view of a busy banking hall where customers interact with bank employees to process their financial transactions.

First Citizens BancShares ($FCNCA), the largest family-owned bank in the United States, has demonstrated decades of prudent management, including profitability during the Great Financial Crisis. This disciplined approach has allowed the bank to seize opportunities when others failed, most notably its acquisition of Silicon Valley Bank (SVB) for $0.5 billion in cash. Through this transaction, First Citizens received $72 billion in high-quality, short-term loans, $56 billion in deposits, $16 billion in equity capital, and $35 billion in cash from the FDIC, over a period of Must be repaid over five years at a fixed interest rate of 3.5%. Additionally, a loss-sharing agreement with the FDIC mitigates the risks associated with SVB’s loan portfolio, which consists primarily of short-term, high-quality loans that First Citizens is well positioned to manage.

CEO Frank Holding Jr.’s shrewd acquisition strategy is evident in a series of successful post-financial crisis purchases, including Temecula Valley Bank and CIT Group. Under the holding’s leadership, First Citizens has become the best-performing bank in the country, achieving this status through consistent underwriting profits and strategic acquisitions. A key advantage is their access to about $30 billion in low-cost FDIC funding, which allows them to borrow at 3.5% and lend to the Federal Reserve at a higher interest rate. However, reliance on this funding could raise concerns about the bank’s long-term performance, particularly since these assets represent approximately 15% of its portfolio.

Despite these strengths, recent data points to emerging vulnerabilities within the bank. Although reports indicate a decline in commercial and industrial (C&I) delinquencies, which stood at 1.40%, this is misleading as there is an increase in “performing” loan modifications that obscures the actual delinquency rate of 2.13%. Furthermore, the bank appears to be under-reserved as it maintains a lower provision for losses while reporting higher than justified returns, raising concerns about the robustness of its capital position. Additionally, there are concerns that credit quality will deteriorate and that losses will ultimately impact the income statement, as First Citizens ranks 19th among its peers in loss reserve percentage.