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BUSINESS COMBINATIONS | 6 Months Ended
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Jun. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [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 determined that the SVBB Acquisition constitutes a business combination as defined by Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values based on 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. Management has finalized its fair value estimates for the acquired assets and assumed liabilities. The final fair value estimates included adjustments for information relating to events or circumstances existing at the SVBB Acquisition Date that impacted the preliminary fair value estimates within the allowable period not to exceed one year following the SVBB Acquisition Date (“Measurement Period Adjustments”). We recorded Measurement Period Adjustments during 2023. There were no Measurement Period Adjustments during the six months ended June 30, 2024. Pursuant to the terms of the SVBB Purchase Agreement, FCB acquired assets with a 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 purchased credit deteriorated (“PCD”) loans, and $35.31 billion of cash and interest-earning deposits at banks. FCB also assumed liabilities with a total fair value of approximately $61.42 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 “Fair Value Purchase Price Allocation” table below. 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 covered an estimated $60 billion of commercial loans (collectively, the “Covered Assets”) at the time of acquisition. 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 within one year of the SVBB Acquisition Date that were unfunded commitments to loans at 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. As noted below, estimates indicated there is no material value to attribute to the loss indemnification asset or true-up liability. In connection with the SVBB Acquisition, FCB issued a five-year $35 billion note payable to the FDIC (the “Original Purchase Money Note”), and entered into binding terms and conditions for an up to $70 billion line of credit provided by the FDIC for related risks and liquidity purposes (the “Initial Liquidity Commitment”). At such time, FCB and the FDIC agreed to negotiate additional terms and documents augmenting and superseding the Original Purchase Money Note and Initial Liquidity Commitment, and on November 20, 2023, FCB and the FDIC entered into new financing agreements for those purposes. On November 20, 2023, the Original Purchase Money Note was amended and restated, dated as of March 27, 2023 and maturing March 27, 2028 (the “Purchase Money Note”), adjusting the principal amount to approximately $36.07 billion. FCB and the FDIC, as lender and as collateral agent, also entered into an Advance Facility Agreement, dated as of March 27, 2023, and effective as of November 20, 2023 (the “Advance Facility Agreement”), providing total advances available through March 27, 2025 of up to $70 billion (subject to the limits described below) solely to provide liquidity to offset deposit withdrawal or runoff of former SVBB deposit accounts and to fund the unfunded commercial lending commitments acquired in the SVBB Acquisition. Borrowings outstanding under the Advance Facility Agreement are limited to an amount equal to the value of loans and other collateral obtained from SVBB plus the value of any other unencumbered collateral agreed by the parties to serve as additional collateral, reduced by the amount of principal and accrued interest outstanding under the Purchase Money Note and the accrued interest on the Advance Facility Agreement. Interest on any outstanding principal amount accrues at a variable rate equal to the three-month weighted average of the Daily Simple Secured Overnight Financing Rate (“SOFR”) plus 25 basis points (“bps”) (but in no event less than 0.00%). Obligations of FCB under the Advance Facility Agreement are subordinated to its obligations under the Purchase Money Note. See the “Pledged Assets” section in Note 4—Loans and Leases. Purchase Price Consideration for the SVBB Acquisition As consideration for the SVBB Acquisition, FCB issued the Purchase Money Note with a principal amount of $36.07 billion (fair value of $35.81 billion). FCB pledged specified assets as collateral security for the Purchase Money Note and the Advance Facility Agreement, including loans purchased from the FDIC as receiver to SVBB, the related loan documents and collections, accounts established for collections and disbursements, any items credited thereto, such additional collateral (if any) as the parties may agree to in the future, and proceeds thereof. The interest rate on the Purchase Money Note accrues at a rate of 3.50% per annum. There are no scheduled principal payments under the Purchase Money Note. FCB may voluntarily prepay principal under the Purchase Money Note without premium or penalty, twice per month. The principal amount of the Purchase Money Note is based on the carrying value of net assets acquired less the asset discount of $16.45 billion pursuant to the terms of the SVBB Purchase Agreement. 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 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 FDIC exercised its right under the Value Appreciation Instrument on March 28, 2023 and a $500 million payment was made on April 4, 2023. The following table provides the final purchase price allocation, including Measurement Period Adjustments, to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the SVBB Acquisition Date. Fair Value Purchase Price Allocation
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 available for sale |  |  |  |  | 385 |
Loans and leases, net of the initial PCD ALLL |  |  |  |  | 68,468 |
Affordable housing tax credit and other unconsolidated 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 |  |  |  |  | 3,364 |
Other liabilities |  |  |  |  | 2,035 |
Total liabilities assumed |  |  |  |  | $ | 61,423 |
Fair value of net assets acquired |  |  |  |  | 46,116 |
Gain on acquisition, after income taxes (2) (3) |  |  |  |  | $ | 9,808 |
Gain on acquisition, before income taxes (2) |  |  |  |  | $ | 13,172 |
(1) The principal amount of the Purchase Money Note is the carrying value of net assets acquired of approximately $52.52 billion less the asset discount of $16.45 billion pursuant to the SVBB Purchase Agreement. The $35.81 billion above is net of a fair value discount of approximately $264 million. (2) The difference between the gain on acquisition before and after taxes reflects the deferred tax liabilities recorded in the SVBB Acquisition. (3) The $9.81 billion gain on acquisition includes Measurement Period Adjustments, whereas the $9.88 billion gain on acquisition in the Consolidated Statements of Income for the six months ended June 30, 2023, was preliminary as Measurement Period Adjustments were recorded after June 30, 2023. The gain on acquisition of $9.81 billion, net of income taxes of $3.36 billion, was recorded in noninterest income during the year ended December 31, 2023, and 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 of the Notes to the Consolidated Financial Statements in our 2023 Form 10-K. The following table presents the unpaid principal balance (“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 Loans 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 |
Non-credit discount (1) | $ | 276 |
(1) The non-credit 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 intangible The following table presents the core deposit intangible recorded related to the valuation of core deposits: Core Deposit Intangible
dollars in millions | Fair Value |  | Estimated Useful Life |  | Amortization Method
Core deposit intangible | $ | 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. 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 and Federal Reserve Bank stock | 320
Fair value of derivative financial instruments | 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. 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 PAM. The tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes. 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 | 497 |
Reserve for off-balance sheet credit exposures | 253 |
Accrued interest payable | 109 |
Other | 461 |
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 Estimates indicated 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. Pro Forma Information - SVBB Acquisition 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 unaudited pro forma information on revenues and earnings for the SVBB Acquisition in accordance with ASC 805-10-50-2. Net interest income, noninterest income and net income of $700 million, $183 million and $224 million, respectively, attributable to the SVBB Acquisition were included in BancShares’ Consolidated Statement of Income for the six months ended June 30, 2023.

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