Business Context and Reporting Period
First Citizens BancShares, Inc. is a bank holding company operating through First-Citizens Bank & Trust Company. The company provides retail and commercial banking, lending, mortgage, wealth management, trust, investment and merchant services through 542 branches in 19 states. This Form 10-K covers the fiscal year ended December 31, 2020, including fourth-quarter 2020 results.
At December 31, 2020, consolidated assets were $49.96 billion, deposits were $43.43 billion and the company had approximately 6,722 employees.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $491.7 million | $457.4 million | 7.5% increase |
| Net income available to common shareholders | $477.7 million | $457.4 million | 4.4% increase |
| Earnings per common share | $47.50 | $41.05 | 15.7% increase |
| Net interest income | $1.388 billion | $1.311 billion | 5.9% increase |
| Taxable-equivalent net interest margin | 3.17% | 3.74% | 57 basis-point decline |
| Provision for credit losses | $58.4 million | $31.4 million | 85.6% increase |
| Noninterest income | $476.8 million | $415.9 million | 14.6% increase |
| Noninterest expense | $1.189 billion | $1.104 billion | 7.7% increase |
| Return on average assets | 1.07% | 1.23% | Decline |
| Return on average common equity | 12.96% | 12.88% | Increase |
| Net cash provided by operating activities | $340.0 million | $540.3 million | Decline |
Loan and lease balances increased 13.5% to $32.79 billion, including $2.41 billion of SBA Paycheck Protection Program loans. Excluding SBA-PPP loans and acquired loans, loans increased 4.9%. Deposits rose 26.1% to $43.43 billion, while total borrowings increased to $1.89 billion from $1.33 billion.
The allowance for credit losses was $224.3 million, or 0.68% of total loans, compared with 0.78% at year-end 2019. Nonperforming assets increased to $242.4 million, or 0.74% of loans, from $168.3 million, or 0.58%.
Liquidity remained strong. Liquid assets totaled approximately $9.63 billion, or 19.8% of consolidated assets, with approximately $11.90 billion of additional contingent liquidity sources. Shareholders’ equity increased to $4.23 billion. BancShares’ year-end regulatory ratios were 13.81% total risk-based capital, 11.63% Tier 1 risk-based capital, 10.61% common equity Tier 1 and 7.86% Tier 1 leverage; both BancShares and FCB were well-capitalized.
Fourth-Quarter 2020 Results
- Net income was $138.1 million, up 35.5% from $101.9 million in the fourth quarter of 2019.
- Earnings per share were $13.59 versus $9.55.
- Net interest income increased 9.7% to $358.7 million, aided by SBA-PPP interest and fee income of $42.2 million.
- Taxable-equivalent net interest margin declined to 3.02% from 3.59%.
- Provision for credit losses declined to $5.4 million from $7.7 million, and the quarterly net charge-off ratio was 0.07%.
- Noninterest income increased to $126.8 million, while noninterest expense increased to $305.4 million.
Material Changes Versus the Prior Comparable Period
- Net income increased despite substantial margin compression, primarily because of loan growth, SBA-PPP fee accretion, higher securities gains and stronger mortgage production.
- Average interest-earning assets increased 24.3%, but the taxable-equivalent net yield declined from 3.74% to 3.17% as asset yields fell in the low-rate environment.
- Noninterest income benefited from $60.3 million of realized gains on available-for-sale securities, compared with $7.1 million in 2019, and from higher mortgage income. Service charges on deposits declined by $17.5 million.
- Noninterest expense rose by $84.9 million, mainly from personnel costs, technology and third-party processing fees, acquisitions and COVID-19-related cleaning and operating measures.
- The company adopted CECL under ASC 326 on January 1, 2020. The adoption reduced the allowance for credit losses by $37.9 million and increased retained earnings by $36.9 million after tax-related effects.
- BancShares issued $350 million of subordinated notes and $345 million of depositary shares representing Series A preferred stock. It repurchased 813,090 Class A shares for $333.8 million and suspended repurchases after July 31, 2020.
- Accumulated other comprehensive income improved from a $126.7 million loss to $12.3 million of income, primarily due to securities and pension-related changes.
Guidance, Outlook, Risks and Unusual Items
No formal earnings or revenue guidance is provided. Management emphasizes continued expense discipline, technology and digital investment, branch optimization, growth in wealth management, mortgage, card and merchant services, and maintenance of strong capital and liquidity.
On October 15, 2020, BancShares agreed to acquire CIT Group. Shareholders approved the transaction on February 9, 2021, and closing was expected in the first half of 2021, subject to customary closing conditions and regulatory approvals. Management expects the transaction to create a bank with more than $100 billion of assets, but identified significant integration, regulatory, litigation, employee-retention, systems and execution risks. The transaction is expected to substantially increase the company’s scale and regulatory complexity.
- COVID-19 remained the principal near-term economic risk. BancShares granted more than 22,000 loan extensions covering approximately $6.31 billion of balances; more than 97% had begun repayment by year-end. Management had not observed significant overall credit deterioration but cautioned that payment extensions and SBA-PPP support could delay visible deterioration.
- The 2020 CECL reserve included a $36.1 million COVID-19-related reserve build. Future provisions remain sensitive to unemployment, GDP, real estate values, commercial real estate conditions and government support.
- Real estate-secured loans represented 71.8% of total loans, with significant concentrations in North Carolina and South Carolina. Medical and dental-related loans totaled $5.54 billion, or 16.9% of loans.
- Approximately 62.7% of revolving mortgage balances were secured by junior liens, exposing the company to collateral-value and borrower-payment risks.
- The company remains exposed to interest-rate changes, LIBOR transition risk, cybersecurity and technology failures, regulatory compliance, litigation, vendor dependence and potential goodwill impairment.
- The company expected to pay approximately $15.9 million to the FDIC in March 2021 under a shared-loss clawback obligation.
- Income tax expense benefited by $13.9 million from an alternative method for calculating the 2020 federal tax liability. Without that benefit, management estimated the effective tax rate would have been approximately 22.7% rather than 20.4%.
Most Important Facts for Investors to Verify
- Completion timing, regulatory approvals, final terms and integration costs of the CIT transaction.
- Whether COVID-19-related payment deferrals and SBA-PPP forgiveness continue to mask emerging credit deterioration.
- Future allowance-for-credit-loss provisions, nonperforming assets, charge-offs and performance of commercial real estate, medical/dental and junior-lien portfolios.
- Sustainability of earnings gains from securities sales, marketable equity securities and SBA-PPP fee accretion versus recurring banking revenue.
- Future net interest margin trends as interest rates, deposit costs, liquidity balances and borrowings change.
- Capital and liquidity requirements after the company crosses the $100 billion asset threshold following the CIT transaction.
- Potential expenses, contingencies and regulatory or litigation developments related to the merger, FDIC clawback obligations and other commitments.