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First Citizens Bank (FCNCA) has acquired the failed Silicon Valley Bank (SVB), effective March 27. The Federal Deposit Insurance Corporation (FDIC) stepped in to insure bank deposits up to $250,000 and agreed to further cover customers beyond the FDIC limit to calm the public’s fears and limit the chances of a run on other banks. A run occurs when too many people withdraw their deposits at once, and the bank is unable to produce the cash to meet those demands. This is what happened with SVB, resulting in its failure on March 10.
Here is what the takeover of the SVB by First Citizens entails:
- The 17 branches of SVB will begin operating as First Citizens Bank branches on Monday, March 27.
- First Citizens acquired the deposits and loans of SVB, a deal worth about $72 billion at an estimated $16.5 billion discount.
- The FDIC has retained $90 billion of SVB assets which will be sold separately.
- The FDIC received appreciation rights in First Citizens stock up to $500 million.
- The FDIC and First Citizens will share in profits and losses on the loans in the sale.
- The FDIC expects the SVB failure will draw down the insurance fund by roughly $20 billion.
Nearly all bank stocks have been hit by selling in recent weeks amid the banking failures. FCNCA is no exception.
The stock is down 38% from its early 2022 all-time high and 31% below its 2023 high.
Regarding the FCNCA stock, our analysts commented that the discount received on the loans and deposits purchased from SVB likely plays out favorably for First Citizens over the long run, helping to bolster their earnings per share. However, this is still a troubling time for banks. The entire sector is being sold off, and if more banks fail, First Citizens stock is likely to sell off along with the rest of them. The deeper the selloff, the more alluring the risk/reward becomes though.
Purchasing amidst a sector-wide selloff is always a risk/reward play. Buying now means there is a potential for further declines. The stock fell about 65% from 2006 to 2009 as the financial crisis unfolded. The stock has already dropped as much as 46% on the current decline (before bouncing last week).
So while the price could decline more, up to 30% in a worst-case (like 2008) scenario, the stock price has rallied more than 300% after each decline of more than 40% (before another 40% or greater decline occurred). That’s good upside potential over the long term, but expect lots of volatility in the short term.
Those not interested in holding through the volatility can wait till the storm settles and likely still be able to pick the stock up at a decent price and participate in the continued long-term uptrend.