First Citizens BancShares, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
First Citizens BancShares, Inc. is a Delaware financial holding company operating primarily through First-Citizens Bank & Trust Company. As of December 31, 2021, it operated 529 branches in 19 states and provided retail and commercial banking, lending, mortgage, wealth management, card, merchant and related financial services. The filing covers the year ended December 31, 2021, with comparative information for 2020 and 2019.
The CIT Group merger closed on January 3, 2022 and therefore is not included in FY2021 operating results or year-end balances. CIT had approximately $53.2 billion of assets at December 31, 2021. The merger more than doubled BancShares’ asset size, expanded commercial lending, digital banking and rail-leasing activities, and is expected to produce substantial changes in future results.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total assets | $58.31 billion | $49.96 billion | +16.7% |
| Net interest income | $1.390 billion | $1.388 billion | +0.2% |
| Net interest margin, taxable equivalent | 2.66% | 3.17% | -51 basis points |
| Noninterest income | $508.0 million | $476.8 million | +6.6% |
| Noninterest expense | $1.234 billion | $1.189 billion | +3.8% |
| Net income | $547.5 million | $491.7 million | +11.3% |
| Net income available to common shareholders | $528.9 million | $477.7 million | +10.7% |
| Earnings per common share | $53.88 | $47.50 | +13.4% |
| Return on average assets | 1.00% | 1.07% | Down 7 basis points |
| Return on average common equity | 12.84% | 12.96% | Down 12 basis points |
| Total loans and leases | $32.37 billion | $32.79 billion | -1.3% |
| Total deposits | $51.41 billion | $43.43 billion | +18.4% |
| Shareholders’ equity | $4.74 billion | $4.23 billion | +12.0% |
Credit performance improved. The company reported a $36.8 million benefit for credit losses versus a $58.4 million provision in 2020, reflecting a $45.8 million reserve release. Net charge-offs declined to $9.0 million from $22.4 million, and the net charge-off ratio fell to 0.03% from 0.07%. The allowance for credit losses declined to $178.5 million, or 0.55% of loans, from $224.3 million, or 0.68%.
Liquidity was substantial at year-end: liquid assets totaled approximately $16.41 billion, or 28.1% of consolidated assets, and contingent liquidity sources totaled approximately $13.43 billion. Total borrowings were $1.78 billion, compared with $1.89 billion in 2020. The filing reports no separate FY2021 consolidated cash-flow summary value for free cash flow; reported net cash used in operating activities was $283.8 million, net cash used in investing activities was $7.57 billion and net cash provided by financing activities was $7.83 billion.
BancShares remained well-capitalized at December 31, 2021: total risk-based capital was 14.35%, Tier 1 risk-based capital was 12.47%, common equity Tier 1 capital was 11.50% and Tier 1 leverage was 7.59%. Cash dividends to common and preferred shareholders totaled $37.0 million, and no common-stock repurchases occurred during 2021.
Material changes versus the prior comparable period
- Deposit growth of $7.97 billion funded increased overnight investments and securities purchases. Investment securities increased to $13.11 billion from $9.92 billion, while overnight investments increased to $9.11 billion from $4.35 billion.
- Loan balances declined modestly because SBA-PPP loans fell by approximately $1.91 billion to $493.8 million after approximately $3.9 billion of forgiveness. This was largely offset by growth in owner-occupied commercial mortgages and commercial and industrial loans and leases.
- Net interest income was essentially flat despite higher average earning assets because loan, securities and overnight-investment yields declined. Excess liquidity held in overnight investments reduced the net interest margin.
- Noninterest income increased primarily from wealth management, cardholder and merchant services. Mortgage income and realized gains on available-for-sale securities declined.
- Noninterest expense increased due to higher personnel costs, third-party processing fees, technology investments and CIT merger-related expenses, which rose to $29.5 million from $17.5 million.
- Nonperforming assets declined to $159.6 million, or 0.49% of loans, leases and OREO, from $242.4 million, or 0.74%.
- Other comprehensive income shifted to a $2.5 million loss from $139.0 million of income, primarily because of unrealized losses on available-for-sale securities, partly offset by pension-related gains.
Fourth-quarter 2021 performance
Fourth-quarter net income was $123.3 million, down 10.7% from $138.1 million in the fourth quarter of 2020. Net income available to common shareholders was $118.6 million, or $12.09 per share, compared with $133.4 million, or $13.59 per share. Net interest income declined 0.4% to $357.4 million, and the taxable-equivalent net interest margin declined to 2.58% from 3.02%. Noninterest income decreased to $114.3 million, while noninterest expense increased to $323.2 million. A $5.1 million credit-loss benefit partially offset the revenue and expense pressures.
Guidance, outlook, commentary and risks
Management did not provide formal earnings or revenue guidance in the filing. It expects the CIT merger to increase interest income, interest expense, noninterest income, noninterest expense and net charge-offs, while also changing capital ratios and regulatory requirements. Management expects to report General Banking, Commercial Banking, Rail and Corporate segments beginning with the first-quarter 2022 Form 10-Q.
Beginning in mid-2022, BancShares planned to eliminate consumer NSF fees and reduce consumer overdraft fees from $36 to $10. Management expects this change to significantly reduce related fee revenue; overdraft and NSF fees collected in 2021 were approximately $54.9 million.
Following the merger, BancShares expects to become a Category IV banking organization with more than $100 billion of assets, subject to enhanced prudential standards, liquidity management requirements, annual capital planning and biennial Federal Reserve supervisory stress testing, subject to transition periods. These requirements may increase costs and could constrain dividends, repurchases, acquisitions or other activities.
- Primary risks include integration execution, failure to realize CIT synergies, higher operating costs, employee retention and the complexity of managing a substantially larger organization.
- Credit risks include commercial real estate, medical and dental lending, rail-related exposures, HELOCs with junior liens, equipment residual values and potential future increases in the allowance for credit losses.
- Market risks include interest-rate changes, deposit repricing, mortgage-market conditions, unrealized investment-security losses and the transition from LIBOR to replacement reference rates.
- Liquidity risks include deposit outflows, reliance on collateralized and wholesale funding, and new enhanced liquidity requirements.
- Operational and compliance risks include cybersecurity, third-party vendors, fraud, consumer-protection enforcement, AML requirements, privacy regulation and regulation of newly acquired specialty commercial and rail businesses.
- COVID-19 effects, inflation, supply-chain disruption, economic deterioration, real-estate declines and climate-related events could adversely affect borrowers, collateral values, demand and operating costs.
The company reported no material legal proceedings, an effective system of internal control over financial reporting, and an unqualified audit opinion. The critical audit matter was the quantitative component of the allowance for credit losses, which depends on modeling, economic forecasts and significant management judgment.
Important facts for investors to verify
- Reconcile post-merger CIT fair-value marks, goodwill, loan-credit marks, deposit balances, debt and preferred-stock balances in subsequent filings; the 10-K states that CIT fair values were not yet available.
- Assess whether the planned CIT integration costs, synergies, staffing changes and new segment disclosures are tracking management’s expectations.
- Quantify the recurring earnings impact of eliminating NSF fees and reducing overdraft fees beginning in 2022.
- Monitor net interest margin sensitivity as rates rise, including deposit beta, loan repricing, securities duration and LIBOR replacement terms.
- Test the adequacy of the $178.5 million loan allowance against the company’s downside scenario, which was approximately $260 million, and against credit performance in medical, dental, real-estate, HELOC and rail portfolios.
- Review capital, liquidity and regulatory impacts of exceeding $100 billion in assets, including CCAR, liquidity-buffer and resolution-planning requirements.
- Verify the reported FY2020 comparison in the narrative section: the filing states “compared to $477.7 million, or $47.50 per share, during 2021,” but the financial statements identify those amounts as FY2020.