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Business Combinations | 9 Months Ended
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Sep. 30, 2023
Business Combination and Asset Acquisition [Abstract] |
BUSINESS COMBINATIONS | NOTE 2 — BUSINESS COMBINATIONS Silicon Valley Bridge Bank Acquisition FCB completed the SVBB Acquisition on the SVBB Acquisition Date and acquired substantially all loans and certain other assets and assumed all customer deposits and certain other liabilities of SVBB in an FDIC-assisted transaction. BancShares has determined that the SVBB Acquisition constitutes a business combination as defined by the ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values based on preliminary valuations as of March 27, 2023. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the SVBB Acquisition and other future events that are highly subjective in nature and may require adjustments. FCB and the FDIC are awaiting conclusion of the customary final settlement process to determine whether certain assets and liabilities of SVBB will remain with the FDIC or be acquired or assumed by FCB (“Final Settlement”). While substantial progress has been made since the SVBB Acquisition Date, certain items remain pending as of September 30, 2023. The pending items primarily include certain intangible assets of a SVBB subsidiary. We continue to review information relating to events or circumstances existing at the SVBB Acquisition Date that could impact the preliminary fair value estimates. Until management finalizes its fair value estimates for the acquired assets and assumed liabilities, the preliminary gain on acquisition can be updated for a period not to exceed one year following the SVBB Acquisition Date (the “Measurement Period”). We believe the preliminary fair value estimates of assets acquired and liabilities assumed, including the affects of Measurement Period adjustments through September 30, 2023, provide a reasonable basis for determining the preliminary gain on acquisition. The fair value measurements of loans, core deposit intangibles, low-income housing tax credits, unfunded commitments, premises and equipment, and intangibles related to the Shared-Loss Agreement (as defined below) are preliminary at September 30, 2023 as we identify and assess information regarding the nature of these assets and liabilities and review the associated valuation assumptions and methodologies. Further, as described above, whether certain assets and liabilities are acquired or assumed by FCB is subject to the conclusion of Final Settlement. The tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the SVBB Acquisition Date. As such, the amounts recorded for tax assets and liabilities are considered provisional as we continue to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of the acquired assets and liabilities assumed, as well as the tax impact on the preliminary gain on acquisition. Pursuant to the terms of the SVBB Purchase Agreement, FCB acquired assets with an estimated total fair value of approximately $107.54 billion as of the SVBB Acquisition Date, primarily including $68.47 billion of loans, net of the initial ALLL for PCD loans, and $35.31 billion of cash and interest-earning deposits at banks. FCB also assumed liabilities with an estimated total fair value of approximately $61.34 billion, primarily including $56.01 billion of customer deposits. The deposits were acquired without a premium and the assets were acquired at a discount of approximately $16.45 billion pursuant to the terms of the SVBB Purchase Agreement. Further details regarding the fair values of the acquired assets and assumed liabilities are provided in the “Purchase Price Consideration; Unaudited Statement of Assets Acquired and Liabilities Assumed” table below. In connection with the SVBB Acquisition, FCB issued a five-year note of approximately $36 billion payable to the FDIC (the “Purchase Money Note”). The Purchase Money Note will be primarily secured by all loans (other than certain consumer loans and related collateral) and certain real estate and bank premises acquired by FCB from the FDIC, as well as certain other assets acquired, including specified rights under the SVBB Purchase Agreement and Shared-Loss Agreement. The interest rate is 3.50% per annum. FCB may prepay the principal of the Purchase Money Note at any time, without premium or penalty, upon notice to the FDIC. The principal amount of the Purchase Money Note is based on the book value of net assets acquired less the asset discount of $16.45 billion pursuant to the terms of the SVBB Purchase Agreement. The principal amount of the Purchase Money Note is subject to change upon Final Settlement (as defined and described above). In addition, as part of the consideration for the SVBB Acquisition, BancShares issued a Cash Settled Value Appreciation Instrument to the FDIC (the “Value Appreciation Instrument”) in which FCB agreed to make a cash payment to the FDIC equal to the product of (i) $5 million and (ii) the excess amount by which the average volume weighted price of one share of BancShares’ Class A common stock, par value $1 (“Class A Common Stock”), over the two Nasdaq trading days immediately prior to the date on which the Value Appreciation Instrument is exercised exceeds $582.55; provided that the settlement amount does not exceed $500 million. The Value Appreciation Instrument was exercisable by the holder thereof, in whole or in part, from and including March 27, 2023 to April 14, 2023. The FDIC exercised its right under the Value Appreciation Instrument on March 28, 2023 and a $500 million payment was made on April 4, 2023. FCB and the FDIC also entered into terms and conditions for a five-year, up to $70 billion line of credit to FCB (the “Credit Facility”) provided by the FDIC. During the two-year period following the SVBB Acquisition Date, FCB may draw on the Credit Facility to support liquidity, including for deposit withdrawal or runoff and to fund the unfunded commercial lending commitments acquired in the SVBB Acquisition (the “Acquired Unfunded Commitments”). The Credit Facility is secured by the loans and other extensions of credit acquired pursuant to the SVBB Acquisition, including Acquired Unfunded Commitments subsequently funded by FCB. Interest on outstanding principal will accrue at a variable rate equal to the Secured Overnight Financing Rate (“SOFR”) plus 25 basis points (but in no event less than 0.00%). In connection with the SVBB Purchase Agreement, FCB also entered into a commercial shared loss agreement with the FDIC (the “Shared-Loss Agreement”). The Shared-Loss Agreement covers an estimated $60 billion of commercial loans (collectively, the “Covered Assets”). The FDIC will reimburse FCB for 0% of losses of up to $5 billion with respect to Covered Assets and 50% of losses in excess of $5 billion with respect to Covered Assets (“FDIC Loss Sharing”) and FCB will reimburse the FDIC for 50% of recoveries related to such Covered Assets (“FCB reimbursement”). The Shared-Loss Agreement provides for FDIC Loss Sharing for five years and FCB reimbursement for eight years. The Shared-Loss Agreement extends to loans funded after the SVBB Acquisition Date that were unfunded commitments to loans at the SVBB Acquisition Date for a period of one year after the SVBB Acquisition Date. If certain conditions are met pursuant to the Shared-Loss Agreement, FCB has agreed to pay to the FDIC, 45 days after March 31, 2031 (or, if earlier, the time of disposition of all acquired assets pursuant to the Shared-Loss Agreement), a true-up amount up to $1.5 billion calculated using a formula set forth in the Shared-Loss Agreement. The following tables provide the purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the SVBB Acquisition Date. The amounts below reflect Measurement Period adjustments made since the SVBB Acquisition Date, which increased the preliminary after tax gain on acquisition by $67 million. These Measurement Period adjustments primarily relate to refined fair value estimates for acquired affordable housing tax credit investments, loans, and assets and liabilities of acquired SVBB subsidiaries. Purchase Price Consideration; Unaudited Statement of Assets Acquired and Liabilities Assumed
dollars in millions |  |  |  |  | Fair Value Purchase Price Allocation as of March 27, 2023
Purchase price consideration |  |  |  |  |
Purchase Money Note (1) |  |  |  |  | $ | 35,808
Value Appreciation Instrument |  |  |  |  | 500
Purchase price consideration |  |  |  |  | $ | 36,308
Assets |  |  |  |  |
Cash and due from banks |  |  |  |  | $ | 1,310 |
Interest-earning deposits at banks |  |  |  |  | 34,001 |
Investment securities |  |  |  |  | 385 |
Loans and leases, net of PCD ALLL |  |  |  |  | 68,468 |
Affordable housing tax credit investments |  |  |  |  | 1,273 |
Premises and equipment |  |  |  |  | 308 |
Core deposit intangibles |  |  |  |  | 230 |
Other assets |  |  |  |  | 1,564 |
Total assets acquired |  |  |  |  | $ | 107,539 |
Liabilities |  |  |  |  |
Deposits |  |  |  |  | $ | 56,014 |
Borrowings |  |  |  |  | 10 |
Deferred tax liabilities |  |  |  |  | 3,281 |
Other liabilities |  |  |  |  | 2,035 |
Total liabilities assumed |  |  |  |  | $ | 61,340 |
Fair value of net assets acquired |  |  |  |  | 46,199 |
Preliminary gain on acquisition, after income taxes (2) |  |  |  |  | $ | 9,891 |
Preliminary gain on acquisition, before income taxes (2) |  |  |  |  | $ | 13,172 |
(1) The principal amount of the Purchase Money Note is the book value of net assets acquired of approximately $52.522 billion less the asset discount of $16.450 billion pursuant to the SVBB Purchase Agreement. The $35.808 billion above is net of a fair value discount of approximately $264 million. (2) The difference between the preliminary gain on acquisition before and after taxes reflects the deferred tax liabilities recorded in the SVBB Acquisition, as presented above. The preliminary gain on acquisition of $9.89 billion included in noninterest income represents the excess of the fair value of net assets acquired over the purchase price. The following is a description of the methods used to determine the estimated fair values of the Purchase Money Note and significant assets acquired and liabilities assumed, as presented above. Purchase Money Note The fair value of the Purchase Money Note was estimated based on the income approach, which includes: (i) projecting cash flows over a certain discrete projection period and (ii) discounting those projected cash flows to present value at a rate of return that considers the relative risk of the cash flows and the time value of money. Cash and interest-earning deposits at banks For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Investment Securities Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies. Loans Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, remaining term of loan, credit quality ratings or scores, amortization status and current discount rate. Loans with similar risk characteristics were pooled together and treated in aggregate when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and required rates of return for market participants to purchase similar assets, including adjustments for liquidity and credit quality when necessary. BancShares’ accounting methods for acquired Non-PCD and PCD loans and leases are discussed in Note 1—Significant Accounting Policies and Basis of Presentation. The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the SVBB Acquisition as of the SVBB Acquisition Date. The fair value of Non-PCD loans and leases was $66.42 billion, compared to the UPB of $68.72 billion, resulting in a discount of $2.30 billion that will be accreted into income over the contractual life of the applicable loan using the effective interest method. Loans and Leases Acquired
dollars in millions | Loans and Leases
| UPB |  | Fair Value
Non-PCD loans and leases | $ | 68,719 |  |  | $ | 66,422 |
PCD loans and leases | 2,568 |  |  | 2,046 |
Total loans and leases, before PCD gross-up | $ | 71,287 |  |  | $ | 68,468 |
The following table summarizes PCD loans and leases that BancShares acquired in the SVBB Acquisition. PCD Loans and Leases
dollars in millions | Total PCD from SVBB Acquisition
UPB | $ | 2,568 |
Fair value | 2,046 |
Total fair value discount | $ | 522 |
Less: discount for loans with $0 fair value at SVBB Acquisition Date | 26 |
Less: PCD gross-up | 220 |
PCD discount (1) | $ | 276 |
(1) The PCD discount of $276 million will be accreted into income over the contractual life of the applicable loan using the effective interest method. Affordable housing tax credit investments The fair values of the affordable housing tax credit investments were determined based on discounted cash flows. The cash flow projections considered tax credits and net cash flows from operating losses and tax depreciation. The discount rate was determined using observable market data points for similar investments. Premises and equipment Fair values for furniture and fixtures, computer software and other equipment were determined using the cost approach. Core deposit intangibles The following table presents the intangible asset recorded related to the valuation of core deposits: Intangible Asset
dollars in millions | Fair Value |  | Estimated Useful Life |  | Amortization Method
Core deposit intangibles | $ | 230 |  |  | 8 years |  | Effective Yield
Certain core deposits were acquired as part of the SVBB Acquisition, which provide an additional source of funds for BancShares. The core deposit intangible represents the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. This intangible was valued using the after tax cost savings method under the income approach. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances over their estimated average remaining life. The valuation considered a dynamic approach to interest rates and alternative cost of funds. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to further discussion in Note 7—Goodwill and Core Deposit Intangibles. Other assets The following table details other assets acquired: Other Assets
dollars in millions | Fair Value
Accrued interest receivable | $ | 431
Federal Home Loan Bank stock / Federal Reserve Bank stock | 320
Fair value of derivative financial instruments, net | 458
Other | 355 |
Total other assets | $ | 1,564
The fair values of the derivative assets in the table above and derivative liabilities in the table below were valued using prices of financial instruments with similar characteristics and observable inputs. The fair value of accrued interest receivable and the remaining other assets was determined to approximate book value. Refer to further discussion in Note 12—Derivative Financial Instruments and Note 14—Fair Value. Deposits Acquired deposits were essentially all transactional deposits. Thus, we determined carrying amounts approximate fair value. Deferred Tax liability The SVBB Acquisition is an asset acquisition for tax purposes and is therefore considered a taxable transaction. The deferred tax liability for the SVBB Acquisition was calculated by applying FCB’s deferred tax rate to the book and tax basis differences on the SVBB Acquisition Date for acquired assets and assumed liabilities. Deferred taxes were not recorded for the affordable housing tax credit investments in accordance with the proportional amortization method. Other liabilities The following table details other liabilities assumed:
dollars in millions | Fair Value
Commitments to fund tax credit investments | $ | 715
Fair value of derivative financial instruments, net | 497 |
Accrued expenses and accounts payable | 262 |
Reserve for off-balance sheet credit exposures | 253 |
Accrued interest payable | 109 |
Other | 199 |
Total other liabilities | $ | 2,035
The fair value of the liability representing our commitment for future capital contributions to the affordable housing tax credit investments was determined based on discounted cash flows. Projected cash flows for future capital contributions were discounted at a rate that represented FCB’s cost of debt. Shared-Loss Agreement Intangibles Preliminary estimates indicate there is no material value to attribute to the loss indemnification asset or true-up liability. This is primarily based on evaluation of historical loss experience and the credit quality of the portfolio. Unaudited Pro Forma Information - SVBB Acquisition The amount of net interest income, noninterest income and net income of $1,335 million, $334 million and $381 million, respectively, attributable to the SVBB Acquisition were included in BancShares’ Consolidated Statement of Income for the nine months ended September 30, 2023. SVBB’s net interest income, noninterest income and net income noted above reflect management’s best estimates, based on information available at the reporting date. SVBB was only in operation from March 10 to March 27, 2023 and does not have historical financial information on which we could base pro forma information. Additionally, we did not acquire all assets or assume all liabilities of SVBB and an essential part of the SVBB Acquisition is the federal assistance governed by the SVBB Purchase Agreement and Shared-Loss Agreement, which is not reflected in the previous operations of SVBB. Therefore, it is impracticable to provide pro forma information on revenues and earnings for the SVBB Acquisition in accordance with ASC 805-10-50-2. CIT Group Inc. BancShares completed the CIT Merger on the CIT Merger Date. Pursuant to the CIT Merger Agreement, each share of CIT common stock, par value $0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, plus cash in lieu of fractional shares of Class A Common Stock. The Parent Company issued approximately 6.1 million shares of Class A Common Stock in connection with the consummation of the CIT Merger. The CIT Merger has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values as of the Merger Date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments. The following table provides the purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the Merger Date: Purchase Price Consideration and Net Assets Acquired
dollars in millions, except shares issued and price per share |  |  |  |  | Purchase Price Allocation
Common share consideration |  |  |  |  |
Shares of Class A Common Stock issued |  |  |  |  | 6,140,010 |
Price per share on January 3, 2022 |  |  |  |  | $ | 859.76 |
Common stock consideration |  |  |  |  | $ | 5,279 |
Preferred stock consideration |  |  |  |  | 541 |
Stock-based compensation consideration |  |  |  |  | 81 |
Cash in lieu of fractional shares and other consideration paid |  |  |  |  | 51 |
Purchase price consideration |  |  |  |  | $ | 5,952 |
Assets |  |  |  |  |
Cash and interest-earning deposits at banks |  |  |  |  | $ | 3,060 |
Investment securities |  |  |  |  | 6,561 |
Assets held for sale |  |  |  |  | 59 |
Loans and leases |  |  |  |  | 32,714 |
Operating lease equipment |  |  |  |  | 7,838 |
Bank-owned life insurance |  |  |  |  | 1,202 |
Intangible assets |  |  |  |  | 143 |
Other assets |  |  |  |  | 2,198 |
Total assets acquired |  |  |  |  | $ | 53,775 |
Liabilities |  |  |  |  |
Deposits |  |  |  |  | $ | 39,428 |
Borrowings |  |  |  |  | 4,536 |
Credit balances of factoring clients |  |  |  |  | 1,534 |
Other liabilities |  |  |  |  | 1,894 |
Total liabilities assumed |  |  |  |  | $ | 47,392 |
Fair value of net assets acquired |  |  |  |  | 6,383 |
Gain on acquisition |  |  |  |  | $ | 431 |
BancShares recorded a gain on acquisition of $431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The gain on acquisition was not taxable. For a description of the fair value and UPB of loans from the CIT Merger, as well as the methods used to determine the fair values of significant assets and liabilities, see Note 2 — Business Combinations in Item 8 of our 2022 Form 10-K.

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