Money Rehab with Nicole Lapin - How First Citizens' Acquisition of SVB Could Change the Startup World Forever

Episode Date: April 3, 2023

Last week, the biggest bank you've never heard of (First Citizens Bank) purchased what was left of the fallen SVB. The purchase is part of First Citizens' pretty brilliant business model of buying collapsed banks. Why is it smart to buy a bank that's failed? Nicole explains. Listen to Trade Like Einstein here: https://link.chtbl.com/63Zpqkvs

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. It's time for some money rehab. When Silicon Valley Bank, or SVB, collapsed on Friday, March 10th, the government spent the weekend scrambling to find a buyer. At first, there was a general feeling that it wouldn't be too hard. SVB had badly managed their interest rate risk by having a lot of long-term low-interest investments and high-volatility startup clients. Both of those were valuable assets on their own,

even if they were toxic together. But there were two big problems with selling SVB. One was simply that the banks that can easily afford that massive price tag were already large enough. At the end of last year, SVB had $209 billion in assets and $175 billion in deposits. That's not money you can just find in the couch cushions, right? Even after the collapse, they were still an expensive little fixer-upper of a bank. But the federal government isn't interested in the large banks like Bank of America, who could quickly come up with the cash for getting even bigger because, you know, monopolies. The second problem is that these sorts of acquisitions come with risk. When J.P. Morgan bought Bear Stearns in 2008, it ended up

paying $19 billion in fees, which it hadn't anticipated when it bought the company. The deal went so badly that the CEO of JPMorgan, Jamie Dimon, has made it very clear that he would not buy the next Bear Stearns, aka SVB. JPMorgan got burned so badly on the deal that Dimon doesn't even think the board would let him take the call to buy another struggling financial company. So the federal government needed a perfect match for SVB, a bank with the funds and experience to take on an institution as important as SVB. Because, reminder, SVB isn't a normal bank. It's a cool bank. It's a bank that had been seen as vital to American innovation. Also, again, it was somewhat of a Goldilocks situation.

to American innovation. Also, again, it was somewhat of a Goldilocks situation. The perfect bank for SVB couldn't be too big or too small. It had to be just right. So while the government had hoped to be able to sell off SVB over the weekend, it ended up swiping left for a lot longer than expected. But then along came a new match, and this one was different from the rest. It was called First Citizens Bank, owned by the Holding family. First Citizens Bank had $220 billion in assets and was number 30 on the list of the biggest commercial banks in the country, making it just big enough to afford SVB, but small enough that combining the two, especially at SVB's reduced value, would only bump its size ranking up to number 15. So First Citizens was the right size. While size does matter, it's not the only thing

that does. And here's where First Citizens really shines. Their entire business model since 2008 has been buying failed banks from the FDIC. They've purchased 22 different banks this way. This business model isn't unique to First Citizens. It's used by banks all over the country for good reason. Because instead of expanding into a new area, building a bank, hiring a staff, and advertising to attract new customers like you would when you would be creating a new branch, if you just buy a failed bank for parts, you get their buildings, you get their employees, and you get their customers. For First Citizens, this has been a solid expansion strategy and how they've grown

from a regional bank in North Carolina to a bank with locations in almost half the country. And there's more. There always is. First Citizens is located in an area of North Carolina called the Research Triangle. This is where Duke University and the University of North Carolina at Chapel Hill are located. It's home to 7,000 companies and has one of the lowest corporate tax rates in the country. To be clear, it's not Silicon Valley. Nothing is Silicon Valley, but it is poppin'. Epic Games, for example, is headquartered there, along with a number of startup companies. And First Citizens Bank has experience working with these companies and their unique type of funding. In 2002, when most areas of the country, including leading VC spots like New York City,

Silicon Valley, and Massachusetts, saw a decrease in VC funding, North Carolina saw a 25% jump in VC funding. First Citizens has made it clear that they hope to use their deal to buy SVB to bring even more venture capitalist funding into the research triangle. We'll see how successful they are, but a lot of infrastructure is in place. This deal could bring more changes to the startup market than a deal with a different bank would have. As for the deal itself, it's about as straightforward as a multi-billion dollar three-party deal can be. First Citizens got $110 billion in assets, $56 billion in deposits, and $72 billion in loans in the deal to acquire SVB. They didn't pay full price for the loans, and the FDIC knocked $16.5 billion off the price. The FDIC also got $500 million in shares of First

Citizen to back up a line of credit to help with cash flow during the transaction. Considering how the share price of First Citizens has shot up since the news was announced, those shares are looking more valuable all the time. While this deal may initially look like a bit of an odd couple, it seems like it may be one of those matches where the couple ends up balancing each other out quite nicely. Here's hoping the happy couple has a long and successful relationship. For today's tip, you can take straight to the bank. If you want to hear more about how the markets are being affected by these headlines, check out Trade Like Einstein, hosted by Peter Tuchman, aka the Einstein of Wall Street,

on Money News Network. He tapes twice a week on the floor of the New York Stock Exchange, so he really has his pulse on the markets. Check out his show in the link in the show notes. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.