First Citizens BancShares(FCNCA) - 2021 Q4 - Annual Report

Part I Business First Citizens BancShares, Inc. is a financial holding company whose primary subsidiary, FCB, became a top 20 U.S. bank with over $100 billion in assets after merging with CIT Group Inc. in January 2022, now operating across General Banking, Commercial Banking, and Rail segments General Overview and Business Combinations First Citizens BancShares operates through its banking subsidiary, FCB, offering a wide range of retail and commercial banking services, significantly expanding its asset base and service offerings through the transformative merger with CIT Group Inc - As of December 31, 2021, BancShares had total consolidated assets of $58.31 billion[8] - On January 3, 2022, BancShares completed its merger with CIT Group Inc. ("CIT"), which had consolidated total assets of approximately $53.2 billion at December 31, 2021, positioning the combined entity as a top 20 U.S. bank with over $100 billion in assets[8][17] - Following the CIT Merger, the company plans to report financial results in three new operating segments: General Banking, Commercial Banking, and Rail, in addition to a Corporate non-operating segment, with the majority of historical operations reflected in the General Banking segment[19][20] Competition, Geographic Locations, and Human Capital The company faces intense competition in its primary markets of North and South Carolina, where it holds the fourth-largest deposit market share, and expanded its branch network and employee base significantly post-CIT merger - FCB's primary deposit markets are North Carolina (50.8% of total deposits) and South Carolina (22.7%), where it was the fourth largest bank by deposit market share as of June 30, 2021[22] - As of December 31, 2021, BancShares operated 529 branches, with the CIT Merger adding approximately 80 branches, mainly in Southern California, bringing the total to 609 domestic offices as of January 3, 2022[26][24] Employee Statistics (as of Dec 31, 2021) | Metric | Count/Percentage | | :--- | :--- | | Total Employees | 6,846 | | Full-time Staff | ~6,578 | | Part-time Staff | ~268 | | Women Employees | ~67% | | Ethnically Diverse Employees | ~28% | - Post-CIT Merger, total employees increased to approximately 10,300[27] Regulatory Considerations As a financial holding company with over $100 billion in assets post-merger, BancShares is subject to enhanced prudential standards and extensive oversight from multiple regulatory agencies, including stricter requirements for capital planning, stress testing, and liquidity management - Following the CIT Merger, with assets exceeding $100 billion, BancShares is now subject to enhanced prudential standards as a Category IV banking organization, entailing stricter requirements for capital planning, supervisory stress testing (CCAR), and liquidity management[35][41][48] Basel III Capital Requirements & PCA Well-Capitalized Thresholds | Regulatory Capital Ratios | Basel III Minimums | Basel III Requirements (with buffer) | PCA Well-Capitalized Thresholds | | :--- | :--- | :--- | :--- | | Total risk-based capital | 8.00% | 10.50% | 10.00% | | Tier 1 risk-based capital | 6.00% | 8.50% | 8.00% | | Common equity Tier 1 | 4.50% | 7.00% | 6.50% | | Tier 1 leverage | 4.00% | 4.00% | 5.00% | - As of December 31, 2021, both BancShares and its subsidiary FCB exceeded all Basel III and well-capitalized thresholds[53][62] - As part of the CIT Merger, BancShares adopted a community benefit plan to invest $16 billion in communities served by FCB, including specific targets for low- and moderate-income and minority borrowers[70] - The company is subject to new cybersecurity rules requiring notification to its primary federal regulator no later than 36 hours after discovering a significant "computer-security incident," with compliance required by May 1, 2022[84] Risk Factors The company faces diverse risks including strategic challenges from the CIT Merger integration, significant operational threats, credit risks, market risks from economic conditions and interest rate fluctuations, and substantial compliance burdens from an evolving regulatory landscape Strategic and Operational Risks Strategic risks are dominated by the successful integration of CIT Group, with potential challenges in realizing synergies and managing expanded operations, while operational risks include significant threats from cyber-attacks, information security breaches, and the ongoing economic impacts of the COVID-19 pandemic - A primary strategic risk is the failure to realize all anticipated benefits of the CIT Merger, which depends on successfully integrating operations without disrupting customer relationships or losing key personnel[95][110][111] - The company faces significant operational risk from potential cyber-attacks, information breaches, or technology failures, which could disrupt business, result in misuse of confidential data, and cause legal or reputational harm[96][138][139] - The economic impacts of the COVID-19 pandemic continue to pose a risk, potentially affecting borrowers' creditworthiness, demand for loans, and increasing collection risk[96][145][147] Credit and Market Risks Credit risk is a core concern, with potential for losses if the company fails to effectively manage its loan portfolio or if its allowance for credit losses proves insufficient, while market risks stem from unfavorable economic conditions, interest rate fluctuations, and the transition away from LIBOR - The allowance for credit losses (ACL) may be insufficient to cover actual losses, as it relies on significant estimates that are subject to uncertainty from changing economic conditions, particularly in the wake of the COVID-19 pandemic[97][177][178] - The company has significant loan concentrations in the medical and dental industries, as well as in the rail business, which could lead to impaired earnings if these sectors face economic difficulties[180][181] - Failure to effectively manage interest rate risk could adversely affect net interest income, as rising rates could increase interest expense and negatively impact borrowers' ability to meet payment obligations[98][192][193] - The transition from LIBOR to alternative reference rates like SOFR is complex and presents risks, including potential disputes with borrowers, increased costs, and changes to market risk profiles[202][203] Liquidity, Capital, and Compliance Risks Liquidity risk centers on the ability to meet obligations, with the company's deposit base as its primary funding source, while capital adequacy risks include maintaining access to capital and meeting stringent regulatory guidelines, and compliance risks are substantial due to operating in a highly regulated industry - As a Category IV banking organization, the company is subject to enhanced liquidity risk management requirements, including liquidity stress testing and maintaining a liquidity buffer[99][212][213] - The company is subject to capital adequacy guidelines and expects to submit an annual capital plan to the Federal Reserve and undergo biennial supervisory stress testing under CCAR, which could impact its ability to make capital distributions[100][221][224] - Operating in a highly regulated industry presents significant compliance risks, as changes in laws governing operations, taxes, and corporate governance could adversely affect the company[101][228][229] - The acquisition of CIT's specialty commercial business lines, particularly the rail business, introduces new compliance risks related to safety, operations, and maintenance standards from various federal and state agencies[101][234] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[5] Properties The company is headquartered in a nine-story, 163,000 square foot building in Raleigh, North Carolina, owned by its subsidiary FCB, which also operates 529 branch offices across multiple states - The company is headquartered in a building owned by FCB in Raleigh, North Carolina[256] - As of December 31, 2021, FCB operated 529 branch offices across the Southeast, Mid-Atlantic, Midwest, and Western United States[256] Legal Proceedings The company and its subsidiaries are defendants in various legal actions arising from normal business activities, but management believes no existing legal actions are expected to be material to the consolidated financial statements - Management believes that no ongoing legal actions would be material to BancShares' consolidated financial statements[258] Mine Safety Disclosures This item is not applicable to the company - Not applicable[5] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company has two classes of common stock, Class A (FCNCA) and Class B (FCNCB), with differing voting rights, and suspended its share repurchase program after July 31, 2020, with no repurchases made in 2021 - The company has two classes of common stock: Class A (FCNCA) with one vote per share and Class B (FCNCB) with 16 votes per share[261] - Share repurchase activity was suspended after July 31, 2020, and no share repurchases occurred during 2021[263] Cumulative Total Shareholder Return (2016-2021) | Year | FCNCA | Nasdaq US Benchmark TR | KBW Nasdaq Bank Total Return Index | | :--- | :--- | :--- | :--- | | 2016 | $100 | $100 | $100 | | 2017 | $114 | $121 | $119 | | 2018 | $107 | $115 | $98 | | 2019 | $151 | $151 | $133 | | 2020 | $163 | $183 | $119 | | 2021 | $236 | $230 | $165 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2021, net income available to common shareholders increased to $528.9 million, driven by a benefit for credit losses, stable net interest income, and growth in noninterest income, while total assets grew to $58.31 billion, with the CIT merger expected to substantively change future results Financial Performance Summary (2021 vs. 2020) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net Income (Common) | $528.9M | $477.7M | +10.7% | | Diluted EPS | $53.88 | $47.50 | +13.4% | | Net Interest Income | ~$1.39B | ~$1.39B | +0.2% | | (Benefit) Provision for Credit Losses | ($36.8M) | $58.4M | Favorable | | Noninterest Income | $508.0M | $476.8M | +6.6% | | Noninterest Expense | $1.23B | $1.19B | +3.8% | - The taxable-equivalent net interest margin decreased by 51 basis points to 2.66% in 2021, primarily due to changes in earning asset mix and a decline in the yield on interest-earning assets[305] - Total deposits grew by $7.97 billion (18.4%) to $51.41 billion, driven by increases in demand deposits, checking with interest, and money market accounts from commercial customers[313] - Total loans decreased by 1.3% to $32.37 billion, mainly due to a $1.91 billion decline in SBA-PPP loans from forgiveness, which was largely offset by growth in commercial mortgages and commercial & industrial loans[311] - The company announced plans to eliminate NSF fees and significantly lower overdraft fees on consumer accounts starting mid-year 2022, which is expected to reduce future noninterest income[303][215] Quantitative and Qualitative Disclosure about Market Risk The company manages risk through a comprehensive framework with a moderate risk appetite, overseeing credit, market, and liquidity risks, with significant loan concentrations in real estate and medical/dental industries, and an asset-sensitive position to interest rate fluctuations - The company has a significant concentration of loans secured by real estate, which constituted 75.0% of total loans and leases at December 31, 2021, with collateral geographically concentrated in North Carolina (35.9%) and South Carolina (15.6%)[438][439][441] - Loans to borrowers in the medical and dental fields represented another concentration, totaling $7.09 billion, or 21.9% of total loans and leases, as of December 31, 2021[445] Net Interest Income Sensitivity Analysis (as of Dec 31, 2021) | Change in Interest Rate (bps) | Estimated % Change in NII (24 months) | | :--- | :--- | | -100 | (6.97)% | | +100 | 6.68% | | +200 | 12.87% | - Primary sources of liquidity include a branch-generated deposit portfolio, cash, and unencumbered securities totaling $16.41 billion, with contingent liquidity including $8.92 billion in FHLB borrowing capacity[460] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2021, including reports from KPMG LLP and Dixon Hughes Goodman LLP, with detailed notes covering accounting policies, the CECL adoption, and the material subsequent event of the CIT merger - The report includes an unqualified opinion on the consolidated financial statements from the independent registered public accounting firm, KPMG LLP[486] - KPMG identified the quantitative component of the allowance for credit losses (ACL) for loans evaluated on a collective basis as a Critical Audit Matter, due to the high degree of subjective and complex judgment involved in estimating probability of default (PD) and loss given default (LGD)[490][491][494] - The financial statements reflect the adoption of ASU 2016-13 (CECL) for credit losses effective January 1, 2020, which resulted in a net decrease to the ACL of $37.9 million upon adoption[481][692] - Note W, Subsequent Events, details the closing of the CIT Group Inc. merger on January 3, 2022, which is not reflected in the December 31, 2021 financial statements but will materially impact future periods, outlining the conversion of CIT common and preferred stock and the assumption of CIT's debt[859][861][862] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - None reported[5] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period[869] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2021[872] Other Information On February 22, 2022, the company filed Restated Certificates of Designation for its Series B and Series C Preferred Stock, created in connection with the CIT merger - The company filed Restated Certificates of Designation for the new BancShares Series B and Series C Preferred Stock on February 22, 2022[875] Disclosure Regarding Foreign Jurisdictions that Prevent Inspection This item is not applicable to the company - Not applicable[5] Part III Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Shareholders - Information is incorporated by reference from the 2022 Proxy Statement[5] Executive Compensation Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Shareholders - Information is incorporated by reference from the 2022 Proxy Statement[5] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Shareholders - Information is incorporated by reference from the 2022 Proxy Statement[5] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Shareholders - Information is incorporated by reference from the 2022 Proxy Statement[5] Principal Accounting Fees and Services The company's independent registered public accounting firm is KPMG LLP, with Dixon Hughes Goodman LLP as the predecessor firm, and further information regarding fees and services is incorporated by reference from the 2022 Proxy Statement - The current independent registered public accounting firm is KPMG LLP, with Dixon Hughes Goodman LLP as the predecessor firm[876] - Detailed information on fees and services is incorporated by reference from the 2022 Proxy Statement[877] Part IV Exhibits, Financial Statement Schedules This section provides an index of exhibits filed with or furnished to the SEC as part of the Form 10-K, with all required financial statement schedules omitted as they are not applicable - All financial statement schedules normally required are omitted as they are not applicable[5] - The exhibits listed in the Exhibit Index are filed with or furnished to the Commission or incorporated by reference[5] Form 10-K Summary No Form 10-K summary was provided in this report - None provided[5]