'Take-under' deal for Silicon Valley Bank fuels $9.5 billion profit for First Citizens Bancshares

By Steve Gelsi

It was the highest quarterly profit in the bank's 125-year history, according to a source familiar with the company

The $9.5 billion profit posted by First Citizens Bancshares Inc. from a one-time gain on its acquisition of Silicon Valley Bank stands out as the second-largest profit among all banks in the second quarter and is much higher than in any previous quarter for the company.

In an eventful period for the sector that saw the collapse of three banks, First Citizens Bancshares (FCNCA)posted the profit on May 10. It was the highest quarterly profit in the bank's 125-year history, according to a source familiar with the company.

Also read: First Citizens grows bigger with Silicon Valley Bank deal, but not big enough to move to next regulatory level

The profit stemmed from accounting of the bank's so-called take-under deal for Silicon Valley Bank, with the Federal Insurance Deposit Corp. as seller. In traditional takeover acquisitions, one bank buys another at a premium, said Tim Coffey, a regional-bank analyst at Janney Montgomery Scott LLC.

"Basically, a bank that buys another for less than fair market value books the difference as a gain to equity (which flows through the income statement)," Coffey said in an email to MarketWatch.

In a typical takeover deal, a given bank with $100 million in net assets and $10 million in equity might be acquired by another bank for $15 million in a deal that would create $5 million of goodwill on the buyer's balance sheet to account for the payment above the acquired bank's value of equity.

In a take-under deal in which a bank with $100 million of assets and $10 million in equity is seized by the FDIC and sold for $5 million to a buyer bank, that $5 million discount on the value of the acquired bank's equity flows through the income statement of the acquiring bank as a one-time gain and boosts the equity on its balance sheet.

It's possible for a take-under deal to happen without the involvement of the FDIC if a bank buys another bank for less than its book value. One example was BayCom Corp.'s (BCML) acquisition of Pacific Enterprise Bancorp, which closed in early 2022 and resulted in a bargain purchase gain of $1.6 million, Coffey said.

The collapse of Silicon Valley Bank was the second-largest bank failure of all time, with assets of $209 billion when it was announced, but it was surpassed by the collapse of First Republic Bank with $229 billion in assets on May 1.

First Republic was acquired by JPMorgan Chase & Co .(JPM), which is booking a post-tax gain of $2.6 billion, not including $2 billion of post-tax restructuring costs over the next 18 months, as a result of the deal.

Prior to this year, no major take-under deals had taken place since the global financial crisis of 2008.

A spokesperson for First Citizens declined to provide any additional commentary beyond the bank's call with analysts on May 10 and its announcement of the Silicon Valley Bank deal on March 26. On that day, First Citizens' stock rocketed 52% to its largest one-day gain ever as investors calculated the boost to the bank's total book value from the deal.

All told, First Citizens' stock has risen 68% in 2023, compared with a loss of 28.7% by the SPDR S&P Regional Banking exchange-traded fund (KRE) and a 13.9% rise by the S&P 500 .

Octavio Marenzi, CEO of financial-sector consulting firm Opimas, said he does not compile complete lists of regional-bank earnings, but with the earnings figure from First Citizens, the quarter ranks as an unusually lucrative one for the sector.

"I would bet that $9.5 billion in profits must be the best regional-bank result ever," Marenzi said. "Indeed, that would be very respectable earnings for a money-center bank."

For comparison, the two largest U.S. banks, JPMorgan Chase and Bank of America Corp. (BAC), reported first-quarter profits of $12.6 billion and $8.2 billion, respectively. Wells Fargo & Co. (WFC) posted net income of $4.99 billion for the first quarter, while Morgan Stanley (MS) earned $3 billion in the quarter and Goldman Sachs Group Inc. (GS) earned $3.2 billion. PNC Financial Services Group Inc. (PNC), one of the largest super-regional banks, booked first-quarter earnings of $1.69 billion.

First Citizens acquired Silicon Valley Bank at an asset discount of $16.45 billion, the company said on May 10. After breaking out about $483 million for adjustments and other items, the bank reduced its asset discount to $13.6 billion from $16.45 billion. The bank booked a total gain of $9.8 billion on the deal, after recognizing a $500 million payment to the FDIC.

"Reported net income for the quarter was obviously boosted by the gain on acquisition and we were pleased with adjusted net income as well," the bank said. Breaking out the gain and other items, the bank's adjusted first-quarter profit fell to $292 million, or $20.09 a share, from $306 million, or $20.94 a share, in the year-ago quarter.

As part of the deal, the FDIC held about $90 billion in Silicon Valley Bank securities and other assets in receivership for disposition.

With its massive one-time gain now counted, First Citizens' profits are expected to return to less lofty levels.

For the second quarter, analyst are projecting net income of $445 million and revenue of $2.38 billion, as well as adjusted earnings of $45.60 a share, according to estimates compiled by FactSet. The bank reports its second-quarter profit on Aug. 1.

Silicon Valley Bank, Signature Bank and First Republic Bank all failed this year in the largest bank blowup since the global financial crisis. The three banks were formerly components of the S&P 500.

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Also read:FDIC set to levy big banks to pay for $15.8 billion bailout of Silicon Valley, Signature Banks

-Steve Gelsi

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06-22-23 0819ET

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