For some reason, my feed on Twitter ended up with some folks who talk specifically about banking. That is maybe because I was searching up if there are good takes on $KRE or the SPDR® S&P® Regional Banking ETF.
And one of them is this newsletter writer Victaurs, who writes a letter very focus on banking.
I would catch Tweets like this…
And these…
I think there might be some numbers that is not easily comprehend if you don’t see the numbers.
So I asked ChatGPT to try and simulate for me:
I created a bank that has a tangible book value (TBV) of $100, and trades at $130. So the price to tangible book value is 1.3 times (P/TBVPS). If the ROTCE is consistent and the valuation (P/TBVPS) doesn’t change, what will happen in ten years if you increase the book value by 7% and you take the rest and buy back the shares?
The Price will go up from $130 to $261 or you basically double your money in ten years.
That doesn’t always feel like fast growing…
But I think I would not able to rest my mind unless I kind of go through this with a bank example.
So I decided to review and reflect on a bank to see if I can see it in a light that Victaurs sees. It is a bank that Mr. John Huber wrote in a news letter almost 1.5 years ago First Citizens BancShares (FCNCA). The stock was trading at 8 times PE back then but its closer to 12 times PE today.
Some would consider this as a deeper dive but maybe some would consider this as a superficial take.
What is First Citizens BancShares? (Ticker: FCNCA)
FCNCA is a bank with a 125-year history in the Raleigh, NC area in the United States. Their roots will put them as a regional bank. But with the recent acquisitions, it puts them in the range of the 15th-20th largest banks by assets and market cap.
Regional banks get a very bad reputation, if you hear what is in the news. Banks in itself has a bad rep (except if you are DBS, UOB, OCBC).
FCNCA is pretty low profile in this region and you can’t find much except from people who are kind of serious about banks.
If you read a First Citizens Bancshares annual report in Feb 2014, when it trades at $224, I wonder if you wonder that in 2025 it will look like this:
Current share price sits at $2096.
That is an annualized return of 21.6% a year. Or unannualized 835% after 11 years.
The chart below tells us FCNCA’s net income and earnings per share (EPS) growth year on year:
I don’t like this chart because it is greatly distorted by what happen in 2022/2023 when FCNCA acquired Silicon Valley Bank (SVB). Their net income jumped due to accounting for it, and naturally the fall off.
But aside from 2014, what you would notice is that 9 out of the 11 years, FCNCA show positive profit growth.
I want to put EPS Growth next to it because your EPS growth can be higher by the effects of your share buyback. FCNCA started share repurchase in 2018 and you can see the gradual deviation in EPS growth.
Share purchase is a form of shareholder return and we can roughly approximate it as a buyback yield:
Some of you would prefer dividend payout and there are good reasons for that. I would go through the main reason later.
But I just want you to think about it this way:
- If we know that the market values a company based on its stream of income
- And its earnings growth surprises
- And if you have a management that is committed to buying back their shares, which means return to shareholders
How likely is the share price going to remain down… all else being equal?
You can ask what if the company decides to fxxk itself up and wouldn’t the stock be worthless? The same can be said about a company that returns with dividends. If they fxxk themselves up, your dividends will be reduced in the future, which means the share is worth less.
For that $1 that a company earns, if they return to you, it is up to you to spend or redeploy it.
When the company buys back its shares, they think they are worth it relative to other stuff. But do we agree?
If we put that $1 and buy FCNCA, we are paying close to book value for more FCNCA, but how much would that $1 earn in the future?
Why ROTCE and ROE Tells Us A Lot of Long Term Returns
Return on Equity (ROE) and Return on Tangible Equity (ROTCE) tells us the return of that $1.
Victuars focus so much on ROTCE mainly because it tells us which bank earns more relative to the book value. Tangible equity is taking total equity minus goodwill, intangibles and preferred stocks because banks frequently have non-performing loans (as a system) and they would have to sell assets to shore up the balance sheet. You cannot sell goodwill and intangibles.
It makes sense to review ROE and ROTCE together.
Here is FCNCA’s numbers:
FCNCA made a few acquisitions over the past 11 years but very little goodwill and intangibles were added. The ROE and ROTCE is added.
FCNCA ROTCE was around the 8% region. Then with acquisition and scale, it became 10%. Then 12-14% region.
Now this means that if FCNCA were to trade at 1 times tangible book value, your $1 earned from FCNCA that they use to buy back their stock is put into:
- A business that is growing in scale.
- Scaling up in efficiency.
- Earning a consistent 12-14% a year.
- That have this kind of ROTCE for a while already.
Now where are you going to buy a business like that?
I think this buy back at 12-14% ROE/ROTCE and the company able to maintain this ROTCE for long time is the magic and differentiation to paying out a dividend.
It is like there is a known potential golden goose but you think there is better things out there than this golden goose. So you rather spend your time to find another.
I think what Victaurs is harping on is that.. you cannot find so many stuff (there are a lot of small banks in the US) that is
- so homogeneous,
- that usually trades around book value
- each has different efficiency
- has a long profile of ROE/ROTCE to review
Just like REITs, if you build up your competency, you might be able to thrive here.
We can’t just say look at ROE or ROTCE if we cannot even buy at book value.
Many might have heard you should buy banks at close to 1 times book value. Typically banks can trade higher than book value. When crisis or recession comes along, they have to sell their assets at discounted prices and this is where their book value gets cut and the company bottoms out below book value.
So the 1 times book value is the pivot point between whether things have gotten frothy.
But Victaurs likely would have more nuance to this.
Here is FCNCA’s Price to Tangible Book Value:
I am calculating most of this with a price at end Feb of the year after. So if it is 2013, the price is taken in Feb 2024, at the conclusion of the financial year. You can view it as “I sat on my couch reading the annual report of 2013, on Feb 2014, and look at the stock price today”.
FCNCA typically trades above book value, but given this, and the ROTCE, how do we know the “yield” we are paying for?
We can calculate the Effective Yield which is ROTCE divide by Price-to-Tangible-Book value:
An effective yield of 9.8% means that you are earning 9.8% even though the bank is earning 13%.
And you got to think of whether 9.8% is reasonable enough. In a way, if we are thinking about investing in FCNCA, it feels… there has never been a cheaper time, aside from 2022 then today.
What is the Price Earnings Ratio?
Since we happen to be on the topic of valuation, here is the historical PE:
Again, the price is based on the End Feb for the following year.
Objective speaking, the PE based on historical is closer to 12 times currently. That number changes depending on the outstanding number of shares, and how you anticipate the earnings.
Mr. Huber said that the average PE is around 13 times in the last 20 years. If we throw out Covid, the average is closer to 15 times. FCNCA isn’t exactly cheap (not when he first wrote in Jan 2024, when the PE is 8 times).
But you got to consider what you are buying for the price.
Tangible Book Value Per Share Growth Tells Us If Value is Accumulating or Destroyed.
For a business that is simpler, that typically trades to the right or left of book value, its book value will tell us a lot. If you pay out all you earn as dividends, then your book value doesn’t grow. What you retain on your balance sheet will end up growing the book value. And you can use that to make acquisitions. But overtime, a value destroying acquisition will eventually impacted book value.
But if a firm can build up book value over time:
- It is earning and keeping money.
- It may be making good use of that money.
If we pair that with a reflection of ROTCE or ROE, it can let us know if it makes more sense to keep money with this bank or to deploy ourselves.
But book value won’t tell dilution as the company can issue a lot of shares to others. Just like REITs, where Dividend per unit tells more than dividend income, reflecting on tangible book value per share tells us more:
The chart above shows the tangible book value per share growth (pardon the title misnaming) over the years. If you own one share of FCNCA in 2013, you don’t see much dividends.
But you see the book value of your share grow by this much year after year. The above is 19.4% p.a. over 11 years.
Mr. Huber says FCNCA have compounded their book value at 13% p.a. over the past 30 years.
So if you pay for a PE of 12 times, or 8-9% Effective Yield, and they never paid it out to you, but compound your book value per share at 13-20% per year, would you be happy about it?
I think many would be even happy that the hurdle is just 10%.
How Impactful are Market Interest Rates to FCNCA’s Business?
Some of us might be wondering… How big is the impact of short term or long term rates?
I put FCNCA’s net interest margins against the US 1-year and 5-year yield so that you can have an idea of the impact. The net interest margins fluctuate but what affects things is more than interest alone.
It is also interesting that with the amount of acquisitions, this itself remain as consistent.
But it has to be said that:
- When interest rate rises, the banks earn more money.
- When interest rate falls, the banks earn less money.
Which is a weird thing why everyone is harping for the Fed to cut rates as many times because it will benefit the regional banks. I guess it is the amount of unrealized losses of the assets held on their balance sheet. But I wonder if that is a bit myopic.
If the Fed lowers the interest rates on the short end:
- But long end remains but no recession: NIM looks better and demand for loans increases. Loan growth is greater.
- But long end comes down due to demand: NIM remains the same.
- Recession and: Demand for loans fall.
I think scenario 3 is possible.
But is there a possibility where NIM goes down and demand improves? I am not sure about that. But hypothetically if FCNCA’s loan book is $137B, their NIM can go down from 3.5% to 3.1%, a loss of 0.4%. That roughly translate to about 548 million in interest income. If they grow their loan book by 7%, the increase in interest in come is 297 million. Their loan book will need to grow by 14% to make up for that loss in interest income. In the early years of 2014, they have a loan growth target of 6.5% p.a. if you look at the figures, both rates are possible given what they can do.
It is also prudent to assume that EPS can be lower.
Perhaps Growth Loans is More Important Than Interest Rates.
What will be more important is growing the loans. Since loans are pretty homogeneous, you either lend more or consolidate another bank to grow it, without giving up too much of your own equity.
I have not dive into each of the loan growth but I hazard to guess FCNCA grew a lot of loans via acquisitions:
And this is where I find what the local SG banks are trying to do but the banks they acquired has more regulatory issues.
It is not that it is easy in the US. It is difficult which is why there is a wave of deregulation.
In one week we have this:
- America First CU To Acquire $1.35B Meadows Bank In Industry’s Second-Biggest Bank Buy | 26 Jul
- East Texas Financial Corporation, Kilgore, announces plans to acquire Texas National Bancorporation, Inc. | 24 Jul
- Pinnacle Financial Partners, Synovus announce $8.6bn merger | 25 Jul
- Michigan, Georgia banks propose to buy in-state peers | 24 Jul
I could still go on but that will take up too much time. I try to simulate what will happen if the net interest margin stays at 3.2%, the bank have a ROTCE of 13% and a loan growth of 6.5% p.a.:
Net Income grows at ~10.4% CAGR, not just 6.5%, because:
- Equity compounds via retained earnings
- The return on growing equity (13%) drives exponential net income growth
Loan Book and Net Interest Income (NII) grow at 6.5%.
Net Income grows faster than loan book, due to equity compounding.
If you include share buyback and read the EPS, it might be more absurd.
With Scale and Prudence, FCNCA can be More Efficient.
The efficiency ratio takes the non-interest expense, divide by the sum of non-interest income and net interest income.
It basically shows how much you spend on things less related to lending. In a business that is very focus on lending, it allows you to see your cost control.
But also if you have improve your economies of scale.
FCNCA shows that they have integrated the acquisitions well, and have cut down on the non-interest expenses so that their efficiency improve over time.
ChatGPT gives the following range:
| Efficiency Ratio | Interpretation |
|---|---|
| ~40–50% | Very efficient (often large or tech-savvy banks) |
| ~50–60% | Average efficiency |
| >60% | Inefficient, may need cost control or revenue improvement |
This kind of shows us the struggles of smaller banks versus the larger banks.
But it also shows us where they can improve and grow their ultimate bottomline. They can still get to less than 0.50 efficiency.
Just How Leveraged is FCNCA?
With so much acquisitions made, you be wondering how they do it and whether they are bring on a lot of leverage. A “debt” which is deposits are what will match existing loans. What they have to acquire is what they retained.
FCNCA is probably in their most leverage position… which is 6.7%.
For the most part they have sizable cash holdings, which is pretty good if you can acquire something that could eventually improve so that you get 13% ROTCE.
Their Series of Acquisition and Mergers
FCNCA is not a small entity anymore and part of the reason they grew so much was through consolidation.
Here is a glimpse of that over these years:
- 2014: Merger with First Financial
- 2014: Merger with First Citizens Bancorporation
- 2015: Purchase from FDIC certain assets of Capitol City Bank & Trust (CCBT)
- 2016: Purchase from FDIC certain assets of First CornerStone Bank of King of Prussia
- 2016: Purchase from FDIC certain assets of North Milwaukee State Bank of Milwaukee
- 2016: Merger with Cordia Bancorp
- 2017: Purchase from FDIC certain assets of Guaranty Bank of Milwaukee
- 2017: Purchase from FDIC certain assets of Harvest Community Bank of Pennsville
- 2017: Merger with HomeBancorp
- 2018: Merger with Palmetto Heritage Bancshares
- 2018: Merger with Biscayne Bancshares
- 2018: Merger with Capital Commerce Bancorp
- 2019: Merger with First South Bancorp
- 2019: Merger with Entegra Financial Corp
- 2020: Merger with Community Financial Holding
- 2020: Merger with CIT Group
- 2023: Merger with Silicon Valley Bridge Bank
There are a lot of small $10 million to $30 million mergers but none as big as the CIT Group and Silicon Valley Bank size.
A lot of these are assets of failed banks from the FDIC for pennies on a dollar.
The Silicon Valley Bank Acquisition (SVB) was such a Good Deal.
SVB, once a prominent lender to tech startups and venture capital firms, collapsed in March 2023 due to a classic bank run. The bank had parked a large portion of its deposits in long-term government bonds and mortgage-backed securities during a low-interest-rate environment. As interest rates rose rapidly in 2022–2023, the market value of those bonds plummeted. When SVB announced it needed to raise capital to shore up its balance sheet, it triggered panic among its tech-heavy depositor base, who rapidly withdrew funds. Within 48 hours, the bank was taken over by regulators, marking the second-largest bank failure in U.S. history.
The collapse of SVB sent shockwaves through the regional banking sector, sparking concerns over liquidity, uninsured deposits, and poor interest rate risk management at other banks. The SPDR S&P Regional Banking ETF (KRE), which tracks a diversified group of regional banks, plummeted in the aftermath. From early March to mid-May 2023, KRE lost over 30% of its value, reflecting widespread investor fear of contagion and regulatory tightening. Other regional banks like Signature Bank and First Republic also failed or required rescue, intensifying the sector’s stress.
In March 2023, SVB was valued at $16 billion.
The following diagram shows SVB’s balance sheet before the collapse and what FCNCA acquired:
They acquired $72 billon in SVB loans at a $16.5 billion discount paying only $55.5 billion which is 23% less. These are very high-quality, short-duration loans, mostly maturing in less than a 1 year. This is basically trying to sweeten the deal so this deal can minimize impact to the depositors and financial markets. The FDIC agreed to absorb a large portion of future losses on the loan portfolio for 5-8 years. This protected FCNCA from downside risk.
As pat of the deal, the FDIC also moved cash equivalents of deposits worth up to $56B (because loans happen due to deposits) as liabilities part of the deal.
FCNCA paid zero cash upfront. Okay, technically they paid $500 million for that loan book.
This is because the deal is structured as a “purchase and assumption” transaction. This is a kind of deal the FDIC likes to structure for failed banks quickly to minimize disruption to depositors and financial markets.
Why this deal is great is because:
- If you understand some parts above if FCNCA has a 12-14% ROTCE, 3.2% NIM, what this deal basically does is double their loan book.
- They can improve their efficiency ratio.
- The FDIC insurance protects them from downside for this SVB portion.
- They get important tech clients and relationships.
- They get fee income.
- And existing shareholders did not get diluted!
SVB has been a bank that for decades earn solid ROE and had a very valuable relationship with Silicon Valley startups and technology companies. Mr. Huber spoke to a few SVB customers and also the ones who left in a panic last March.
The common comment is that the big banks don’t offer the same quality of service that SVB provides. The big banks don’t know the tech space well.
It kind of shows how different things are in the lending space, and why regional banks have unique advantages that might not be so easily replaced.
Conclusion
John Huber’s original thesis at US$1,500 for FCNCA was 3 engines:
- Modest earnings growth.
- Sizable share buybacks.
- Trading at a more reasonable PE of 12-14 times versus 7-8 times when he first wrote it.
I think 3 is off the table and if you are interested, it will depend on how you understand #1 and #2.
What Mr. Huber likes is that:
- If interest rates remains high, the company has mountains of cash.
- The management never thinks about maximizing the next year’s profits but adopt a long term mindset.
- And so they can put the cash to work by acquisition.
FCNCA is managed by the Holding Family and this is now the 3rd generation of management. They own 13% of FCNCA, which is a stake worth more than $3 billion).
I think this has been a good exercise of digesting and reflecting upon what Victaurs seems to be saying. It also helps me gain a better framing of banks in general. By sitting alone and going through things, it would help my pattern recognition in looking at banks better. This article will also be the article I come back to if I forgot about these things over the years.
I hope you gain some value out of this as much as I have.
Disclaimer: The author holds FCNCA in Crystalys. It is not a substantial sum of money by all measurement.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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