First Citizens BancShares, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Form 10-K for the fiscal year ended December 31, 2022, including fourth-quarter results. First Citizens BancShares is a financial holding company operating through First-Citizens Bank & Trust Company. The company provides retail and commercial banking, mortgage, wealth management, factoring, leasing, digital banking and rail-equipment financing services through 582 branches and offices in 22 states.
The January 3, 2022 merger with CIT Group substantially changed the company’s scale and business mix. BancShares began reporting General Banking, Commercial Banking, Rail and Corporate segments in 2022. Year-over-year comparisons are therefore not fully comparable because 2021 results did not include CIT.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net interest income | $2.946 billion | $1.390 billion | +112% |
| Provision for credit losses | $645 million | $(37) million benefit | Unfavorable change |
| Noninterest income | $2.136 billion | $508 million | +321% |
| Noninterest expense | $3.075 billion | $1.234 billion | +149% |
| Income before taxes | $1.362 billion | $701 million | +94% |
| Net income | $1.098 billion | $547 million | +101% |
| Net income available to common stockholders | $1.048 billion | $529 million | +98% |
| Diluted earnings per share | $67.40 | $53.88 | +25% |
| Return on average assets | 1.01% | 1.00% | +1 basis point |
| Net interest margin | 3.14% | 2.66% | +48 basis points |
Fourth-quarter 2022 net income was $257 million, or $16.67 diluted EPS, compared with $315 million and $19.25 in the third quarter. The decline primarily reflected a $55 million tax charge associated with the surrender of BOLI policies and higher credit-loss provisions. Fourth-quarter NIM was 3.36%, compared with 3.40% in the linked quarter and 2.58% in the prior-year quarter.
- Total assets were $109.3 billion at year-end, compared with $58.3 billion at year-end 2021.
- Total loans and leases were $70.8 billion, up from $32.4 billion; commercial loans represented 76% of the portfolio.
- Total deposits were $89.4 billion, up from $51.4 billion. Deposits declined during the second and third quarters as rate-sensitive customers moved funds, then increased in the fourth quarter.
- Total borrowings were $6.65 billion, compared with $1.78 billion. FHLB borrowings totaled $4.25 billion, including $1.75 billion short-term and $2.50 billion long-term.
- Cash flow from operating activities was $2.791 billion, compared with $(284) million in 2021. Investing activities provided $75 million, while financing activities used $2.686 billion, including $1.240 billion for share repurchases.
- Allowance for credit losses was $922 million, or 1.30% of loans and leases, compared with $178 million, or 0.55%, in 2021. The reserve for unfunded commitments was $106 million.
- Net charge-offs were $79 million, or 0.12% of average loans, compared with $10 million, or 0.03%, in 2021. Nonaccrual loans were $627 million and nonperforming assets were $674 million at year-end.
- Available cash and high-quality liquid securities totaled $18.24 billion. Contingent liquidity sources totaled $13.52 billion, comprising $9.22 billion of FHLB capacity, $4.20 billion of Federal Reserve capacity and a $100 million line of credit.
- BancShares’ year-end regulatory ratios remained above well-capitalized thresholds: CET1 10.08%, Tier 1 risk-based capital 11.06%, total risk-based capital 13.18% and Tier 1 leverage 8.99%.
Material changes versus the prior comparable period
- The CIT merger contributed approximately $53.8 billion of acquired assets, $39.4 billion of deposits, $32.7 billion of loans and leases, $7.8 billion of operating lease equipment and $4.5 billion of assumed borrowings.
- The transaction produced a $431 million gain on acquisition because the fair value of net assets acquired exceeded purchase consideration. The gain was not taxable.
- CIT added significant Commercial Banking and Rail activities. FY2022 included $864 million of operating-lease rental income and $104 million of factoring commissions, neither of which was material in the prior-year presentation.
- FY2022 included $513 million of “Day 2” credit-loss provision related to acquired non-PCD loans, leases and unfunded commitments, plus a $272 million initial PCD allowance established through purchase accounting.
- Merger-related expenses increased to $231 million from $29 million.
- Noninterest-bearing deposits declined as a percentage of total deposits to 27.87% from 41.64%, increasing funding-cost sensitivity.
- Available-for-sale securities had a $972 million pretax unrealized loss at year-end, compared with a $12 million loss in 2021, primarily due to higher interest rates. Management concluded the losses were not credit-related.
- The company repurchased all 1.5 million shares authorized under its 2022 program for approximately $1.24 billion.
- In late 2022, management elected to surrender $1.25 billion of BOLI policies. The decision resulted in a $55 million tax charge; proceeds were expected to improve liquidity and be reinvested in higher-yielding liquid assets.
Guidance, outlook, management commentary and risks
The filing does not provide formal earnings or revenue guidance. Management’s stated priorities are customer value, organic growth supplemented by acquisitions, lower-cost core-deposit growth, operational efficiency, merger synergies, talent retention and prudent risk management.
- Management expected continued pressure from rising interest rates on deposit pricing and funding costs, although the company remained asset-sensitive. A modeled immediate 100-basis-point increase in rates was estimated to increase 12-month NII by 3.4%; a 100-basis-point decrease was estimated to reduce NII by 4.0%.
- The Federal Reserve’s rate increases, inflation, a possible recession, geopolitical tensions and market volatility could weaken loan performance, reduce demand and increase funding costs.
- Credit risk is concentrated in commercial real estate, healthcare, commercial and industrial lending, rail and certain geographic markets. Management identified increased nonaccrual exposure in acquired non-owner-occupied commercial real estate, including office exposure.
- The ACL is highly sensitive to economic assumptions. Management’s modeled ACL scenarios ranged from approximately $685 million under an upside scenario to $1.23 billion under a downside scenario, compared with the recorded $922 million.
- BancShares became a Category IV banking organization with enhanced capital, liquidity, stress-testing and risk-management requirements. FCB is expected to submit a resolution plan when directed by the FDIC.
- Management highlighted integration, operational, cybersecurity, data privacy, third-party vendor, regulatory-compliance, litigation, climate and rail-equipment residual-value risks.
- The company continues its transition from LIBOR to alternative reference rates, primarily SOFR. Approximately 45% of loans had floating contractual reference rates, indexed primarily to LIBOR, Prime and SOFR.
- The company settled an inherited qui tam lawsuit related to HAMP, FHA and VA programs for $18.5 million in 2022. Management stated that pending litigation was not expected to materially affect consolidated financial condition, although reasonably possible litigation losses were estimated at up to $10 million above established reserves and insurance for matters that could be estimated.
Most important facts for investors to verify
- Separate the recurring earnings contribution of CIT-related businesses from one-time items, particularly the $431 million acquisition gain, $513 million Day 2 provision, $231 million merger expenses and $55 million BOLI-related tax charge.
- Monitor deposit retention, deposit beta, the mix of noninterest-bearing deposits and the cost of FHLB and other wholesale funding.
- Track nonaccrual loans, especially acquired commercial real estate and office exposure, net charge-offs, criticized assets and future ACL provisions.
- Assess the effect of unrealized securities losses and interest-rate movements on tangible capital, liquidity and regulatory ratios.
- Evaluate whether CIT integration produces the expected revenue synergies, expense savings and operational efficiencies.
- Review Rail utilization, lease repricing, residual values and industry exposure; year-end utilization was 97.7% and Rail operating lease equipment was $7.43 billion.
- Confirm the availability and collateral requirements of the stated $31.8 billion of liquid assets and contingent liquidity sources.
- Review future regulatory requirements, CCAR outcomes, capital-plan restrictions and the company’s ability to continue dividends and repurchases.