FIRST CITIZENS BANCSHARES, INC.
Management's discussion and analysis ("MD&A") of earnings and related financial
data is presented to assist in understanding the financial condition and results
of operations of First Citizens BancShares, Inc. (the "Parent Company" and when
including all of its subsidiaries on a consolidated basis, "BancShares", "we,"
"us," or "our") and its banking subsidiary, First-Citizens Bank & Trust Company
("FCB"). Unless otherwise noted, the terms "we," "us," "our," and "BancShares"
in this section refer to the consolidated financial position and consolidated
results of operations for BancShares.
This MD&A is expected to provide our investors with a view of BancShares'
financial condition and results of operations from our management's perspective.
This MD&A should be read in conjunction with the audited consolidated financial
statements and related notes presented in this Annual Report on Form 10-K.
Intercompany accounts and transactions have been eliminated. Refer to further
detail in Note A, Accounting Policies and Basis of Presentation, of the Notes to
the Consolidated Financial Statements included in this Annual Report on Form
10-K. Although certain amounts for prior years have been reclassified to conform
to statement presentations for 2021, the reclassifications had no effect on
shareholders' equity or net income as previously reported.
On January 3, 2022 , BancShares completed its largest acquisition to date with
the merger with CIT Group Inc. ("CIT") and its subsidiary CIT Bank, N.A ., a
national banking association ("CIT Bank ") pursuant to the terms and subject to
the conditions set forth in the Agreement and Plan of Merger (as amended, the
"Merger Agreement"). CIT had consolidated total assets of approximately $53.2
billion at December 31, 2021 . We expect substantive changes to our future
results due to the merger with CIT (the "CIT Merger"). Some key anticipated
reporting impacts related to the CIT Merger include, but are not limited to: (i)
increases in our interest income from the loans acquired in the CIT Merger and
expected originations and funding of similar types of loans, (ii) increases in
interest expense from deposits and debt assumed from CIT, (iii) higher
non-interest income generated from the legacy CIT activity, plus an added
revenue stream from the operating lease equipment, (iv) higher non-interest
expenses related to the added employees as well as the depreciation and
maintenance costs on the operating lease portfolio, and (v) higher net
charge-offs due to the loans acquired in the CIT Merger and expected
originations and funding of similar types of loans. We also expect changes in
our regulatory capital ratios due to (i) increases in risk weighted assets from
the assets acquired in the CIT Merger and (ii) increases in regulatory capital,
primarily related the conversion of common and preferred stock and the
assumption of subordinated debt in connection with the CIT Merger. The CIT
Merger is described further in the "Business Combinations" section of this MD&A
and in Item 1. Business included in this Annual Report on Form 10-K.
Year-over-year comparisons of the financial results for 2020 and 2019 are
contained in Item 7. of BancShares' Annual Report on Form 10-K for 2020 filed
with the Securities and Exchange Commission ("SEC") on February 24, 2021 and
available through FCB's website www.firstcitizens.com or the SEC's EDGAR
database.
FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 regarding the financial condition, results of operations, business plans
and future performance of BancShares. Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "plans," "projects," "targets,"
"designed," "could," "may," "should," "will" or other similar words and
expressions are intended to identify these forward-looking statements. These
forward-looking statements are based on BancShares' current expectations and
assumptions regarding BancShares' business, the economy, and other future
conditions.
Because forward-looking statements relate to future results and occurrences,
they are subject to inherent risks, uncertainties, changes in circumstances and
other factors that are difficult to predict. Many possible events or factors
could affect BancShares' future financial results and performance and could
cause the actual results, performance or achievements of BancShares to differ
materially from any anticipated results expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
general competitive, economic, political, and market conditions, the impacts of
the global COVID-19 pandemic on BancShares' business, and customers, the
financial success or changing conditions or strategies of BancShares' customers
or vendors, fluctuations in interest rates, actions of government regulators,
the availability of capital and personnel, the failure to realize the
anticipated benefits of BancShares' previously announced acquisition
transaction(s), including the recently-completed CIT Merger discussed further in
the "Business Combinations" section of this MD&A, and the risks discussed in
Item 1A. Risk Factors of this Annual Report on Form 10-K and other developments
or changes in our business that we do not expect.
34
--------------------------------------------------------------------------------Except to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
CRITICAL ACCOUNTING ESTIMATES
The accounting and reporting policies of BancShares are in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and are described in Note A, Accounting Policies and Basis of Presentation, of the Notes to the Consolidated Financial Statements. The preparation of financial statements in conformity with GAAP requires us to exercise judgment in determining many of the estimates and assumptions utilized to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Our financial position and results of operations could be materially affected by changes to these estimates and assumptions. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for credit losses ("ACL") are considered to be critical accounting estimates as these policies involve considerable judgment and estimation by management. The ACL represents management's best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of prepayment expectations. Prepayment assumptions were developed through a review of BancShares' historical prepayment activity and considered forecasts of relevant economic conditions, as well as prepayment assumptions utilized in other modeling activities. Estimates for loan losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to provision for credit losses. Loan balances considered uncollectible are charged-off against the ACL. Forecasted loss given defaults (LGDs) are adjusted for expected recoveries and realized recoveries of amounts previously charged-off are credited to the ACL. While management utilizes its best judgment and information available, the ultimate adequacy of our ACL is dependent upon a variety of factors beyond our control which are inherently difficult to predict, the most significant being the economic scenario forecast used in the models. Our ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario and theDecember 31, 2021 ACL forecast was calculated using the consensus baseline scenario. Results ranged from approximately$170 million in the upside scenario to approximately$260 million in the severely adverse scenario. Our recorded ACL atDecember 31, 2021 totaled$178.5 million . Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Current economic conditions and forecasts can change which could affect the anticipated amount of estimated credit losses and therefore the appropriateness of the ACL. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACL because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Refer to Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for discussion of our accounting policies for the ACL and the implementation impact of ASC 326. Refer to Note E, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements for additional disclosures. 35 --------------------------------------------------------------------------------
CURRENT ACCOUNTING PRONOUNCEMENTS
Table 1 below lists the Accounting Standard Updates ("ASUs") issued by the
Table 1
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Standard Date of Adoption
FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
January 1, 2021 Income Taxes. ASU 2020-01 - Clarifying the Interactions betweenInvestments-Equity Securities (Topic 321),Investments-Equity Method and Joint Ventures (TopicJanuary 1, 2021 323), and Derivatives and Hedging (Topic 815) FASB ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables -January 1, 2021 Nonrefundable Fees and Other Costs ASU 2020-10, Codification ImprovementsJanuary 1, 2021 EXECUTIVE OVERVIEW
Our earnings and cash flows are primarily derived from our commercial and retail
banking activities. We gather deposits from retail and commercial customers and
we secure funding through various non-deposit sources. We invest the liquidity
generated from these funding sources in interest-earning assets, including
loans, investment securities and overnight investments. We also invest in bank
premises, computer hardware and software and furniture and equipment used to
conduct our commercial and retail banking business. We provide treasury
management services, cardholder and merchant services, wealth management
services and other products and services typically offered by commercial banks.
The fees generated from these products and services are a primary source of
noninterest income and an essential component of our total revenue.
Our strong financial position enables us to pursue growth through strategic
acquisitions to enhance organizational value by providing opportunities to grow
capital and increase earnings. These transactions allow us to strengthen our
presence in existing markets as well as expand our footprint into new markets.
With interest rates near historical lows, our ability to generate earnings and
shareholder value has been challenging. While our balance sheet is asset
sensitive overall, we seek to reduce volatility and minimize the risk to
earnings from interest rate movements in either direction. Additionally, our
initiatives focus on growth of noninterest income sources, management of
noninterest expenses, optimization of our branch network and further
enhancements to our technology and delivery channels.
In lending, we continue to focus our activities within our core competencies of
retail, small business, medical, commercial and commercial real estate lending
to build a diversified portfolio. Our low to moderate risk appetite continues to
govern all lending activities.
We also pursue noninterest income through enhanced credit card offerings and
wealth management and merchant services. We have recently redesigned our credit
card programs to offer more competitive products, intended to both increase the
number of accounts and frequency of card usage. Enhancements include more
comprehensive reward programs and improved card benefits. In wealth management,
we have broadened our products and services to better align with the specialized
needs and desires of those customers. Services include holistic financial
planning, business owner advisory services and enhanced private banking
offerings.
Our goals are to increase efficiencies and control costs while effectively
executing an operating model that best serves our customers' needs. We seek the
appropriate footprint and staffing levels to take advantage of the revenue
opportunities in each of our markets. Management is pursuing opportunities to
improve operational efficiency and increase profitability through expense
control, while continuing enterprise sustainability projects to improve the
operating environment. Such initiatives include the automation of certain manual
processes, elimination of duplicated and outdated systems, enhancements to
existing technology, implementation of new digital technologies, outsourcing to
third party service providers and actively managing personnel expenses and
discretionary spending. We routinely review vendor agreements and third party
contracts for cost savings.
36
--------------------------------------------------------------------------------The CIT Merger is addressed in the "Business Combinations" section of this MD&A.
Economic and Industry Updates
The COVID-19 pandemic that began in 2020 has caused significant disruptions to
the domestic and global economies which continue to date. In response to the
outbreak, governments imposed restrictions resulting in business shutdowns,
regional quarantines, disruptions of supply chains, changes in consumer behavior
and overall economic instability.
Indicators of economic activity have begun to return to pre-pandemic levels, but
as 2021 progressed variants to COVID-19 led to a significant rise in cases. This
uncertainty contributed to continued volatility in the financial markets, and
supply and demand imbalances related to the pandemic and the reopening of the
economy have continued to contribute to elevated levels of inflation. For a
discussion of the risks we face with respect to the COVID-19 pandemic, the
associated economic uncertainty, the steps taken to mitigate the pandemic and
the resulting economic contraction, refer to Item 1A. Risk Factors included in
this Annual Report on Form 10-K.
Various external factors influence the focus of our business efforts and the
results of our operations can change significantly based on those external
factors. Based on the real gross domestic product ("GDP") information available
(Bureau of Economic Analysis ("BEA") release, January 2022 ), the BEA's revised
estimate for GDP showed an annual rate increase of 6.9% percent in the fourth
quarter of 2021, in contrast to a decrease of 4.0% percent in 2020. In
accordance with this BEA release, the increase in real GDP primarily reflected
increases in private inventory investment, exports, personal consumption
expenditures, and nonresidential fixed investment. Imports, which are a
subtraction in the calculation of GDP, increased. The fourth quarter GDP
continued to reflect the ongoing impact of the COVID-19 pandemic, including
continued restrictions and disruptions in operations of businesses in certain
areas of the United States . In the fourth quarter of 2021, government assistance
payments in the form of forgivable loans to businesses, grants to state and
local governments, and social benefits to households all decreased as provisions
of several federal programs expired or tapered off. The full economic effects of
the COVID-19 pandemic were not quantified in the GDP estimate for the fourth
quarter because the impacts are generally embedded in source data and cannot be
separately identified.
The
During the first quarter of 2020, theFOMC lowered the federal funds rate to a target range of 0.00% to 0.25%. TheFOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook. In its release inJanuary 2022 , theFOMC said it seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, theFOMC kept the target range for the federal funds rate at 0.00% to 0.25%. The release stated that, with inflation well above 2 percent and a strong labor market, theFOMC expects it will soon be appropriate to raise the target range for the federal funds rate. TheU.S. Census Bureau and theDepartment of Housing and Urban Development's latest estimate for sales of new single-family homes inDecember 2021 was at a seasonally adjusted annual rate of 811,000, down 14% from theDecember 2020 estimate of 943,000. Purchases of existing homes in 2021 are up 8.5% from a year ago.
COVID-19 Monitoring and Response
Throughout the outbreak of the "COVID-19" pandemic, we remained in a strong
capital and liquidity position providing stability to our employees, customers
and shareholders. Our leadership team worked quickly to identify and enact
appropriate measures in an effort to protect the welfare of our employees and
soundness of the organization, while continuing to support our customers.
37
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The Small Business Administration Paycheck Protection Program ("SBA-PPP") is one
of the centerpieces of the Coronavirus Aid Relief and Economic Security Act (the
"CARES Act"), which was passed on March 27, 2020 in response to COVID-19 and was
supplemented with subsequent legislation. Overseen by the U.S. Treasury
Department , the SBA-PPP offered cash-flow assistance to nonprofit and small
business employers through guaranteed loans for expenses incurred between
February 15, 2020 , and August 8, 2020 ("Round 1"). Borrowers are eligible for
forgiveness of principal and accrued interest on SBA-PPP loans to the extent
that the proceeds were used to cover eligible payroll costs, interest costs,
rent, and utility costs over a period of between eight and 24-weeks after the
loan was made as long as the borrower retains its employees and their
compensation levels. The CARES Act authorized the SBA to temporarily guarantee
these loans. The SBA began processing forgiveness payments during the fourth
quarter of 2020. The Consolidated Appropriations Act 2021 was signed into law
during the fourth quarter of 2020 and contained provisions for a second round of
funding of SBA-PPP loans ("Round 2"). BancShares originated a total of $3.2
billion of Round 1 loans and $1.2 billion of Round 2 loans. As of December 31,
2021 , the total remaining balance of SBA-PPP loans was $493.8 million , net of
deferred fees, primarily due to $3.9 billion of forgiveness. To date, we have
not seen declines in overall credit quality, though the impacts of these actions
and other government stimulus could be delaying signs of credit deterioration
Strong Liquidity and Capital Position
We maintain a strong level of liquidity. As ofDecember 31, 2021 , liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately$16.41 billion , representing 28.1% of consolidated assets as ofDecember 31, 2021 . In addition to liquid assets, we had contingent sources of liquidity totaling approximately$13.43 billion in the form ofFederal Home Loan Bank ("FHLB") borrowing capacity, Federal Reserve Discount Window availability, federal funds lines and a committed line of credit. AtDecember 31, 2021 , our regulatory capital ratios were well in excess ofBasel III requirements as further addressed in the Shareholders' Equity and Capital Adequacy discussion in this MD&A.
Changes to Approach for Nonsufficient Funds and Overdraft Fees
As previously announced, we plan to change our approach for nonsufficient fund
("NSF") and overdraft fees. Beginning mid-year 2022, we plan to eliminate our
NSF fees and significantly lower our overdraft fees from $36 to $10 on consumer
accounts. We believe these changes are necessary to remain competitive in the
current marketplace.
FINANCIAL PERFORMANCE SUMMARY
Income Statement Highlights
For the year ended December 31, 2021 , net income available to common
shareholders was $528.9 million , or $53.88 per share, compared to $477.7
million , or $47.50 per share, during 2021. The return on average assets was
1.00% during 2021, compared to 1.07% during 2020. The return on average common
shareholders' equity was 12.84% and 12.96% for 2021 and 2020, respectively. The
$51.2 million , or 10.7% increase in net income available to common shareholders
was primarily the result of the net effect of the following:
•Net interest income for the year ended December 31, 2021 increased $2.2
million , or by 0.2%, compared to the year ended December 31, 2020 . While total
net interest income did not fluctuate significantly year over year, there were
individual components that did fluctuate. The items positively impacting net
interest income included increased loan, investment and overnight balances, as
well as lower deposit rates and an increase in SBA-PPP income. These increases
were largely offset by a decline in the yield on interest-earning assets.
•The taxable-equivalent net interest margin was 2.66% for the year ended
December 31, 2021 , a decrease of 51 basis points from the year ended December
31, 2020 . The margin decline was primarily due to changes in earning asset mix
and a decline in the yield on interest-earning assets, partially offset by lower
rates paid on interest-bearing deposits and increased fee income from SBA-PPP
loans.
•The benefit for credit losses was $36.8 million for the year ending December
31, 2021 , compared to a provision for credit losses of $58.4 million for 2020.
Credit losses in 2021 were favorably impacted by a $45.8 million reserve
release, primarily driven by improvement in macroeconomic factors, continued
strong credit performance, and low net charge-offs, while 2020 included a $35.9
million reserve build, primarily related to uncertainties surrounding the
COVID-19 pandemic. The net charge-off to average loans ratio was 0.03% for 2021,
down 4 basis points from 0.07% in 2020.
•Noninterest income for the year ended December 31, 2021 was $508.0 million , an
increase of $31.3 million , or 6.6%, from 2020. The favorable changes from the
prior year were primarily driven by improvements in revenue related to
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--------------------------------------------------------------------------------wealth, card, and merchant, partially offset by lower realized gains on sales of available for sale securities and a decline in mortgage income.
•Noninterest expense was$1.23 billion for the year endedDecember 31, 2021 , compared to$1.19 billion for 2020. This increase was primarily attributable to higher personnel expenses and other operating expenses such as processing fees to third parties, and merger-related expenses. These increases were partially offset by declines in other expense categories, such as collection and foreclosure-related expenses. •Income tax expense was$154.2 million and$126.2 million for the years endedDecember 31, 2021 and 2020, respectively, representing effective tax rates of 22.0% and 20.4%, respectively. Balance Sheet Highlights •Total loans were$32.37 billion as ofDecember 31, 2021 , a decrease of$420.5 million or 1.3% compared to$32.79 billion as ofDecember 31, 2020 . The decrease was primarily due to declines of$1.91 billion or 79.5% in SBA-PPP loans, which were primarily due to forgiveness of approximately$3.9 billion , partially offset by originations and recognition of deferred fees. The decrease in SBA-PPP loans was largely offset by increases of$827.6 million in owner occupied commercial mortgages and$697.0 million in commercial and industrial. These increases are primarily due to growth in commercial lines, equipment leasing, and our government lending portfolios.
•The allowance for credit losses as a percentage of total loans was 0.55% as of
•Total deposits increased by$7.97 billion , or 18.4%, to$51.41 billion as ofDecember 31, 2021 from$43.43 billion as ofDecember 31, 2020 . The increases were primarily composed of$3.39 billion in demand deposits,$2.10 billion in checking with interest, and$1.96 billion in money market. The growth in deposits is composed of a mix of new clients and existing clients and is generally from our commercial customers.
Capital Highlights
•For the year endedDecember 31, 2021 , we returned$37.0 million of capital to shareholders through the distribution of cash dividends to common and preferred shareholders. •Total shareholders' equity increased$508.0 million or 12.0% to$4.74 billion as ofDecember 31, 2021 from$4.23 billion as ofDecember 31, 2020 . The increase was primarily due to net income, partially offset by common and preferred dividends during the year. •Under Basel III capital requirements, BancShares remained well-capitalized atDecember 31, 2021 , with a total risk-based capital ratio of 14.35%, Tier 1 risk-based capital ratio of 12.47%, common equity Tier 1 risk-based ratio of 11.50%, and Tier 1 leverage ratio of 7.59%. 39 --------------------------------------------------------------------------------
BUSINESS COMBINATIONS
CIT Group Inc.
OnJanuary 3, 2022 , BancShares completed the CIT Merger pursuant to the Merger Agreement. The CIT Merger brings together FCB's retail franchise and full suite of banking products with CIT's nationwide commercial lending and direct digital banking. Due to the timing of the CIT Merger, the balances and results of operations of CIT are not included in BancShares' reported financial results in this Annual Report on Form 10-K. Refer to further discussion in Note W, Subsequent Events, in the Notes to the Consolidated Financial Statements and Item 1. Business included in this Annual Report on Form 10-K. The CIT Merger will be accounted for as a business combination. The assets and liabilities of CIT will be recorded at fair value. Due to the timing of the CIT Merger, the fair value estimates of CIT's assets and liabilities are not available to disclose in this Annual Report on Form 10-K as of and for the year endedDecember 31, 2021 . AtDecember 31, 2021 , the book value of CIT's total assets was approximately$53.2 billion , which primarily consisted of approximately$32.8 billion of loans,$8.0 billion of operating lease assets,$6.8 billion of investment securities and$3.0 billion of cash. AtDecember 31, 2021 , the book value of CIT's total liabilities was approximately$46.9 billion , which primarily consisted of approximately$39.4 billion of deposits,$3.7 billion senior unsecured notes and$495 million subordinated unsecured notes. Pursuant to the Merger Agreement, the Boards of Directors of the Parent Company and FCB now consist of 14 directors, (i) 11 of whom were members of the legacy Board of Directors of the Parent Company, and (ii) three of whom were selected from among the former Board of Directors of CIT, includingEllen R. Alemany , former Chairwoman and Chief Executive Officer of CIT,Michael A. Carpenter , and Vice AdmiralJohn R. Ryan , USN (Ret.).
Common Stock Conversion
Pursuant to the Merger Agreement, each share of CIT common stock, par value$0.01 per share ("CIT Common Stock"), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares (the "Exchange Ratio" and such shares, the "Merger Consideration") of the Parent Company's Class A Common Stock, par value$1.00 per share ("Class A Common Stock"), plus, cash in lieu of fractional shares of Class A Common Stock.The Parent Company issued approximately 6.1 million shares of its Class A Common Stock in connection with the consummation of the CIT Merger. The closing share price of the Class A Common Stock on the Nasdaq Global Select Market was$859.76 onJanuary 3, 2022 . There were approximately 8,800 fractional shares for which the Parent Company paid cash of approximately$7.2 million . Preferred Stock Conversion Pursuant to the terms of the Merger Agreement, each issued and outstanding share of fixed-to-floating rate non-cumulative perpetual preferred stock, series A, par value$0.01 per share, of CIT ("CIT Series A Preferred Stock") and each issued and outstanding share of 5.625% non-cumulative perpetual preferred stock, series B, par value$0.01 per share, of CIT ("CIT Series B Preferred Stock"), converted into the right to receive one share of a newly created series of preferred stock, series B, of the Parent Company ("BancShares Series B Preferred Stock") and one share of a newly created series of preferred stock, series C, of the Parent Company ("BancShares Series C Preferred Stock" and together with the BancShares Series B Preferred Stock, the "New BancShares Preferred Stock"), respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The non-callable period for the New BancShares Preferred Stock was extended for five years toJanuary 4, 2027 . There are 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of$1,000 per share, resulting in a total liquidation preference of$325 million . There are 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of$25 per share, resulting in a total liquidation preference of$200 million . The New BancShares Preferred Stock qualifies as Tier 1 capital.
Restricted Stock Conversion
Pursuant to the terms of the Merger Agreement, (i) each restricted stock unit
("RSU") award or performance stock unit ("PSU") award in respect of shares of
CIT Common Stock, including any deferred RSU award (each, a "CIT Award")
outstanding, other than a CIT Director RSU Award (defined below), automatically
converted into a RSU in respect of a number of shares of Class A Common Stock (a
"BancShares Award") equal to (a) the number of shares of CIT Common Stock
subject to such CIT Award based on target level performance multiplied by (b)
the Exchange Ratio, subject to the same terms and conditions applicable to the
existing CIT Award (except, in the case of PSU awards, for any performance goals
or metrics), and (ii) each RSU award in respect of shares of CIT Common Stock
that (a) was outstanding and unvested, (b) was held by a member of the Board of
40
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Directors of CIT, (c) automatically vested upon close of the CIT Merger in
accordance with its terms, and (d) was not subject to a deferral election (each,
a "CIT Director RSU Award") automatically converted into the right to receive
the applicable Merger Consideration.
Assumption of
In connection with the CIT Merger, FCB assumed the following issued and outstanding series of CIT debt securities: (i)$1.25 billion 5.00% Senior Unsecured Notes due 2022 (the "2022 Notes"), (ii)$750 million 5.00% Senior Unsecured Notes due 2023 (the "2023 Notes"); (iii)$500 million 4.750% Senior Unsecured Notes due 2024 (the "2024 Notes"); (iv)$500 million 3.929% Senior Unsecured Fixed-to-Floating Rate Notes due 2024; (v)$500 million 5.250% Senior Unsecured Notes due 2025 (the "2025 Notes"); (vi)$550 million 2.969% Senior Unsecured Fixed-to-Floating Rate Notes due 2025; (vii)$500 million 6.00% Senior Notes due 2036; (viii)$400 million 6.125% Subordinated Notes due 2028; and (ix)$100 million 4.125% Fixed-to-Floating Rate Subordinated Notes due 2029.
Redemption of Assumed Senior Unsecured Notes
As part of its liability management to reduce higher debt costs, onJanuary 24, 2022 BancShares announced FCB's intention, and onFebruary 24, 2022 , completed, a redemption of approximately$2.9 billion of senior unsecured notes that were assumed in the CIT Merger. Using excess liquidity, FCB redeemed all of the outstanding$1.1 billion aggregate principal amount of the 2022 Notes,$750 million aggregate principal amount of the 2023 Notes,$500.0 million aggregate principal amount of the 2024 Notes, and$500 million aggregate principal amount of the 2025 Notes.
Expected Impact to Segment Reporting
As ofDecember 31, 2021 , we manage our business and report our financial results as a single segment. Due to the CIT Merger, we intend to begin reporting multiple segments in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2022 . We plan to report financial results in three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. We will also conform prior period comparisons to the new segment presentation. Based on the planned approach for segment disclosures to be implemented during the first quarter of 2022, the substantial majority of BancShares' operations for historical periods prior to the CIT Merger will be reflected in the General Banking segment. This is further addressed in the "Business Combinations" section of Item 1. Business in this Annual Report on Form 10-K.
OnFebruary 1, 2020 , we completed the merger ofDuluth, Georgia -basedCommunity Financial Holding Company, Inc. ("Community Financial") and its bank subsidiary,Gwinnett Community Bank , into FCB. Under the terms of the agreement, total cash consideration of$2.3 million was paid to the shareholders of Community Financial. The merger allowed us to expand our presence and enhance banking efforts inGeorgia . The merger contributed$221.4 million in consolidated assets (when including purchase accounting adjustments), which included$686 thousand of goodwill,$134.0 million in loans, and$209.3 million in deposits.
Refer to Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures.
FDIC-ASSISTED TRANSACTIONS
BancShares completed fourteenFDIC -assisted transactions between 2009 and 2017. Nine of the fourteenFDIC -assisted transactions included shared-loss agreements which, for their terms, protected us from a substantial portion of the credit and asset quality risk we would otherwise have incurred.FDIC -assisted transactions may include provisions related to payments owed to theFDIC at the termination of the agreements if actual cumulative losses on covered assets are lower than originally estimated by theFDIC at the time of acquisition ("Clawback Liability"). There was no Clawback Liability remaining atDecember 31, 2021 as FCB remitted the final payment of$16.1 million to theFDIC during the first quarter of 2021. 41 -------------------------------------------------------------------------------- Table 2 provides changes in the FDIC Clawback Liability for the years endedDecember 31, 2021 and 2020. Table 2 FDIC CLAWBACK LIABILITY (Dollars in thousands) 2021 2020 Beginning balance$ 15,601 $ 112,395 Accretion 502 2,674
Payments to
(99,468) Ending balance $ -$ 15,601 Table 3 AVERAGE BALANCE SHEETS 2021 2020 Interest Interest (Dollars in thousands, taxable Average Income/ Yield/ Average Income/ Yield/ equivalent) Balance Expense Rate Balance Expense Rate Assets Loans and leases(1)(2)$ 32,860,019 $ 1,297,012 3.91 %$ 31,605,090 $ 1,335,008 4.18 % Investment securities(2): U.S. Treasury 235,849 1,573 0.67 432,938 3,103 0.72 Government agency 822,177 7,323 0.89 665,318 8,457 1.27 Mortgage-backed securities 8,833,957 103,534 1.17 7,414,661 108,604 1.46 Corporate bonds 608,299 30,940 5.09 397,322 20,349 5.12 Other investments 110,468 2,005 1.82 144,694 4,254 2.94 Total investment securities 10,610,750 145,375
1.37 9,054,933 144,767 1.60
Overnight investments 8,348,903 10,997 0.13 2,691,096 6,847 0.25
Total interest-earning assets 51,819,672 $ 1,453,384 2.78 % 43,351,119 $ 1,486,622 3.40 %
Cash and due from banks 349,721 344,938
Premises and equipment 1,243,052 1,259,325
Allowance for credit losses (202,260) (211,413)
Other real estate owned 44,252 53,137
Other assets 1,728,384 1,224,332
Total assets $ 54,982,821 $ 46,021,438
Liabilities
Interest-bearing deposits:
Checking with interest $ 11,257,713 $ 5,645 0.05 % $ 8,922,902 $ 5,913 0.07 %
Savings 3,846,732 1,291 0.03 2,936,593 1,217 0.04
Money market accounts 9,707,747 9,722 0.10 7,821,266 22,504 0.29
Time deposits 2,647,697 16,582 0.63 3,344,492 37,001 1.11
Total interest-bearing deposits 27,459,889 33,240 0.12 23,025,253 66,635 0.29
Securities sold under customer repurchase agreements 660,288 1,312 0.20 632,362 1,610 0.25 Other short-term borrowings - - - 50,549 1,054 2.05 Long-term obligations 1,225,661 26,124
2.12 1,186,145 26,558 2.20
Total interest-bearing liabilities 29,345,838 60,676 0.21 24,894,309 95,857 0.38 Demand deposits 20,798,697 16,721,363 Other liabilities 377,564 451,759 Shareholders' equity 4,460,722 3,954,007 Total liabilities and shareholders' equity$ 54,982,821 $ 46,021,438 Interest rate spread 2.57 % 3.02 % Net interest income and net yield on interest-earning assets$ 1,392,708 2.66 %$ 1,390,765 3.17 % (1)Loans and leases include non-PCD and PCD loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were$110.1 million ,$85.7 million , and$9.7 million for the years ended 2021, 2020, and 2019, respectively. (2)Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0% for 2021, 2020, and 2019, as well as state income tax rates of 3.3%, 3.5%, and 3.9% for the years ended 2021, 2020, and 2019, respectively. The taxable-equivalent adjustment was$2.4 million ,$2.6 million , and$3.6 million , for the years ended 2021, 2020, and 2019, respectively.
(3)The rate/volume variance is allocated proportionally between the changes in volume and rate.
42
--------------------------------------------------------------------------------
Table 3
AVERAGE BALANCE SHEETS (continued)
2021 2020
2019 Change from previous year due to: Change from previous year due to:
Interest
Average Income/ Yield/ Total Total
Balance Expense Rate Volume Yield/Rate Change(3) Volume Yield/Rate Change(3)
$ 26,656,048 $ 1,219,825 4.54 % $ 44,393 $ (82,389) $ (37,996) $ 232,399 $ (117,216) $ 115,183
945,094 22,235 2.35 (1,408) (122) (1,530) (12,058) (7,074) (19,132)
491,001 14,308 2.91 1,994 (3,128) (1,134) 5,080 (10,931) (5,851)
5,198,884 114,819 2.21 20,629 (25,699) (5,070) 51,357 (57,572) (6,215)
153,841 7,945 5.16 10,805 (214) 10,591 12,575 (171) 12,404
130,249 2,205 1.69 (1,039) (1,210) (2,249) 209 1,840 2,049
6,919,069 161,512 2.33 30,981 (30,373) 608 57,163 (73,908) (16,745)
1,291,617 26,245 2.03 14,425 (10,275) 4,150 28,418 (47,816) (19,398)
34,866,734 $ 1,407,582 4.01 % $ 89,799 $ (123,037) $ (33,238) $ 317,980 $ (238,940) $ 79,040
271,466
1,218,611
(226,600)
45,895
985,613
$ 37,161,719
$ 7,503,325 $ 6,018 0.08 % $ 1,816 $ (2,084) $ (268) $ 1,122 $ (1,227) $ (105)
2,604,217 1,700 0.07 381 (307) 74 214 (697) (483)
6,025,740 23,315 0.39 5,455 (18,237) (12,782) 6,886 (7,697) (811)
3,315,478 45,221 1.36 (7,663) (12,756) (20,419) 295 (8,515) (8,220)
19,448,760 76,254 0.39 (11) (33,384) (33,395) 8,517 (18,136) (9,619)
530,818 1,995 0.38 75 (373) (298) 377 (762) (385)
23,087 671 2.87 (1,054) - (1,054) 788 (405) 383
392,150 13,722 3.45 (1,297) 863 (434) 27,393 (14,557) 12,836
20,394,815 92,642 0.45 (2,287) (32,894) (35,181) 37,075 (33,860) 3,215
12,769,776
445,347
3,551,781
$ 37,161,719
3.56 %
$ 1,314,940 3.74 % $ 92,086 $ (90,143) $ 1,943 $ 280,905 $ (205,080) $ 75,825
43--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Interest Margin and Income (Taxable Equivalent Basis)
Taxable-equivalent net interest income was
Interest income earned on loans and leases was$1.30 billion for the year endedDecember 31, 2021 , a decrease of$38.0 million compared to 2020. The decrease was primarily due to lower loan yields driven by a full year of a lower rate environment, partially offset by growth in loans, excluding SBA-PPP loans, and an increase in SBA-PPP interest and fee income. Interest income earned on investment securities was$145.4 million and$144.8 million for the year endingDecember 31, 2021 and 2020, respectively. The increase was primarily due to the higher average investment balances, partially offset by a decline in the overall portfolio yield. During 2021, excess liquidity was used to invest in$2.0 billion ofUS Treasury securities. Interest expense on interest-bearing deposits was$33.2 million for the year endedDecember 31, 2021 , a decrease of$33.4 million compared to 2020, primarily due to lower rates paid on money market and time deposits. We were able to maintain competitive rates, while also growing our money market deposits. Interest expense on borrowings was$27.4 million for the year endedDecember 31, 2021 , a decrease of$1.8 million compared to 2020, primarily due to a decrease in the rate paid. The taxable equivalent net interest margin for the year endedDecember 31, 2021 was 2.66%, compared to 3.17% for the year endingDecember 31, 2020 . The margin decline of 51 basis points was primarily due to changes in the earning asset mix as a result of excess liquidity, (primarily resulting from deposit inflows) being maintained in overnight investments which decreased the margin by 37 basis points, a decline in the yield on loans which decreased the margin by 23 basis points, and a decline in the yield on investment securities and overnight investments which decreased the margin by 6 basis points. These declines in margin were partially offset by lower rates paid on interest-bearing deposits which increased the margin by 9 basis points and increased fee recognition from SBA-PPP loans which increased the margin by 5 basis points. During the year endedDecember 31, 2021 , yields on loans, investment securities and overnight investments decreased 27 basis points to 3.91%, 23 basis points to 1.37% and 12 basis points to 0.13%, respectively, compared to 2020. Average interest-earning assets increased$8.47 billion or 19.5% for the year endedDecember 31, 2021 compared to 2020. Growth in average interest-earning assets during 2021 was primarily due to increases in average balances of overnight investments, investment securities, and loans. The taxable-equivalent yield on interest-earning assets was 2.78% for the year endedDecember 31, 2021 , a decline of 62 basis points compared to 3.40% for 2020. Average interest-bearing liabilities for the year endedDecember 31, 2021 were$29.35 billion , an increase of$4.45 billion compared to$24.89 billion for 2020. The increase is primarily due to growth in interest-bearing deposits. The average rate paid on interest-bearing liabilities was 0.21% for the year endedDecember 31, 2021 , a decrease of 17 basis points compared to 0.38% for 2020.
Credit Losses
The benefit for credit losses was$36.8 million for the year endingDecember 31, 2021 , compared to a provision for credit losses of$58.4 million for 2020. Credit losses in 2021 were favorably impacted by a$45.8 million reserve release, primarily driven by improvement in macroeconomic factors, continued strong credit performance, and low net charge-offs, while 2020 included a$35.9 million reserve build, primarily related to uncertainties surrounding the COVID-19 pandemic. Net charge-offs for the year endingDecember 31, 2021 were$9.0 million , a decrease of$13.5 million compared to$22.4 million in 2020. The net charge-off to average loans ratio was 0.03% for the year endingDecember 31, 2021 , a decline of 4 basis points from 0.07% for 2020. 44 --------------------------------------------------------------------------------
Noninterest Income
Table 4
NONINTEREST INCOME
Year ended December 31
(Dollars in thousands) 2021 2020 2019
Wealth management services $ 128,788 $ 102,776 $ 99,241
Service charges on deposit accounts 94,756 87,662 105,191
Cardholder services, net 86,684 74,291 69,078
Other service charges and fees 35,923 30,911 31,644
Merchant services, net 33,140 24,122 24,304
Mortgage income 30,508 39,592 21,126
Insurance commissions 15,556 14,544 12,810
ATM income 6,002 5,758 6,296
Marketable equity securities gains, net 34,081 29,395 20,625
Realized gains on investment securities available for
sale, net 33,119 60,253 7,115
Other 9,445 7,446 18,431
Total noninterest income $ 508,002 $ 476,750 $ 415,861 For the year ended
•Wealth management services income increased by$26.0 million , primarily due to growth in assets under management resulting in higher advisory and transaction fees. •Service charges on deposit accounts increased by$7.1 million and other service charges and fees increased$5.0 million as impacts from the COVID-19 pandemic abated and service charges trended back toward pre-pandemic levels. We recently announced our intent to eliminate our NSF fees and significantly lower our overdraft fees from$36 to$10 on consumer accounts beginning mid-year 2022. This could reduce our income from service charges on deposit accounts.
•Cardholder services income increased
•Merchant services increased by$9.0 million , primarily due to an increase in volume, as well as a decrease in processing rates paid as a result of changes in service providers.
•A
The increases in noninterest income were partially offset by a$27.1 million decrease in realized gains on sales of available for sale securities, primarily due to lower sales volume and the interest rate environment, and a$9.1 million decline in mortgage income, primarily due to lower production volume driven by higher mortgage rates and increased competition. 45 --------------------------------------------------------------------------------
Noninterest Expense
Table 5
NONINTEREST EXPENSE
Year ended December 31
(Dollars in thousands) 2021 2020 2019
Salaries and wages $ 623,194 $ 590,020 $ 551,112
Employee benefits 135,659 132,244 120,501
Occupancy expense 117,180 117,169 111,179
Equipment expense 119,171 115,535 112,290
Processing fees paid to third parties 59,743 44,791 29,552
Merger-related expenses 29,463 17,450 17,166
Core deposit intangible amortization 10,948 14,255 16,346
Collection and foreclosure-related expenses 5,442 13,658 11,994
Consultant expense 12,507 12,751 12,801
FDIC insurance expense 14,132 12,701 10,664
Telecommunications expense 12,714 12,179 9,391
Advertising expense 9,763 10,010 11,437
Other 83,594 95,922 89,308
Total noninterest expense $ 1,233,510 $ 1,188,685 $ 1,103,741 For the year ending
•Personnel expense, which includes salaries, wages and employee benefits, increased by$36.6 million , primarily due to an increase in salaries and wages as a result of annual merit increases, increases in revenue-driven incentives, and an increase in temporary personnel costs, largely attributable to transitioning customers to the new business online banking platform.
•Processing fees paid to third parties increased
•Merger-related expenses increased
•These increases were partially offset by decreases totaling
Income Taxes
Income tax expense was$154.2 million and$126.2 million for the years endedDecember 31, 2021 and 2020, respectively, representing effective tax rates of 22.0% and 20.4%, respectively. Income tax expense for 2021 and 2020 was favorably impacted by$2.3 million and$13.9 million , respectively, due to BancShares' decision in the second quarter of 2020 to utilize an allowable alternative for computing its 2021 and 2020 federal income tax liability. The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior yearFDIC -assisted acquisitions that was applicable when these amounts were originally subjected to tax.
INTEREST-EARNING ASSETS
Interest-earning assets include overnight investments, investment securities and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.
Interest-earning assets totaled
46
--------------------------------------------------------------------------------The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares' objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. Refer to Note A, Accounting Policies and Basis of Presentation, and Note C, Investments, in the Notes to Consolidated Financial Statements for additional disclosures regarding investment securities. The carrying value of total investment securities was$13.11 billion atDecember 31, 2021 , an increase of$3.19 billion compared to$9.92 billion atDecember 31, 2020 . The increase in the portfolio was primarily attributable to purchases totaling$7.78 billion , partially offset by maturities and paydowns of$3.26 billion and sales of$1.40 billion . This increase was due to excess liquidity generated by significant deposit growth during the year. AtDecember 31, 2021 , investment securities available for sale had a net pre-tax unrealized loss of$11.8 million , compared to a net pre-tax unrealized gain of$102.3 million atDecember 31, 2020 . After evaluating the investment securities with unrealized losses, management concluded that no credit-related impairment existed as ofDecember 31, 2021 . Investment securities classified as available for sale are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income ("AOCI"), net of deferred taxes. OnOctober 1, 2021 , mortgage-backed securities with an amortized cost of$451.7 million were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of$439.02 million and a weighted average contractual maturity of approximately 5 years. The unrealized loss on these securities at the date of transfer was$12.7 million , or$9.7 million net of tax, and was reported as a component of AOCI. This unrealized loss is amortized over the remaining expected life of the securities as an adjustment of yield. OnNovember 1, 2020 , mortgage-backed securities with an amortized cost of$1.46 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of$1.47 billion and a weighted average contractual maturity of 18 years. The unrealized gain on these securities at the date of transfer was$5.9 million , or$4.5 million net of tax, and was reported as a component of AOCI. This unrealized gain is accreted over the remaining expected life of the securities as an adjustment of yield.
Table 6 presents the investment securities portfolio by major category at
Table 6
INVESTMENT SECURITIES
December 31, 2021 December 31, 2020
Fair Fair
(Dollars in thousands) Composition(1) Cost Value Composition(1) Cost Value
Investment securities available for
sale
U.S. Treasury 15.4 % $ 2,006,788 $ 2,004,970 5.0 % $ 499,832 $ 499,933
Government agency 6.1 797,725 798,760 7.0 706,241 701,391
Residential mortgage-backed
securities 36.2 4,756,977 4,728,413 44.5 4,369,130 4,438,103
Commercial mortgage-backed
securities 8.1 1,071,309 1,062,749 7.9 745,892 771,537
Corporate bonds 4.7 582,420 608,535 6.1 590,870 603,279
State, county and municipal - - - - - -
Total investment securities
available for sale 70.5 9,215,219 9,203,427 70.5 6,911,965 7,014,243
Investment in marketable equity
securities 0.7 72,894 97,528 0.9 84,837 91,680
Investment securities held to
maturity
Residential mortgage-backed
securities 17.6 2,322,529 2,306,262 19.1 1,877,692 1,895,381
Commercial mortgage-backed
securities 11.1 1,484,916 1,451,380 9.4 937,034 940,862
Other 0.1 2,008 2,008 0.1 2,256 2,256
Total investment securities held to
maturity 28.8 3,809,453 3,759,650 28.6 2,816,982 2,838,499
Total investment securities 100.0 % $ 13,097,566 $ 13,060,605 100.0 % $
9,813,784
47
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Table 7 presents the weighted average taxable-equivalent yields for investment
securities held to maturity by major category at December 31, 2021 with ranges
of contractual maturities. The weighted average yield on the portfolio is
calculated using security-level annualized yields.
Table 7
WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES
December 31, 2021
Within One to Five Five to 10
One Year Years Years After 10 Years Total
Investment securities held to
maturity
Residential mortgage-backed
securities(1) - % - % - % 1.23 % 1.23 %
Commercial mortgage-backed
securities(1) - - - 1.47 1.47
Other investments 0.94 - - - 0.94
Total investment securities held
to maturity 0.94 % - % - % 1.33 % 1.33 %
(1)Residential mortgage-backed and commercial mortgage-backed securities, which
are not due at a single maturity date, have been included in maturity groupings
based on the contractual maturity. The expected life will differ from
contractual maturities because borrowers have the right to prepay the underlying
loans.
Loans and Leases
Loans held for sale were $98.7 million as of December 31, 2021 , a net decrease
of $26.1 million compared to $124.8 million as of December 31, 2020 . The
decrease is primarily due to sales of $1.00 billion , loans held for sale
exchanged for investment securities of $230.5 million , partially offset by
originations of $1.12 billion and transfers from loans held for investment to
loans held for sale of $87.8 million .
Total loans were $32.37 billion as of December 31, 2021 , a decrease of $420.5
million or 1.3% compared to $32.79 billion as of December 31, 2020 . The decrease
was primarily due to declines of $1.91 billion or 79.5% in SBA-PPP loans, which
were primarily due to forgiveness of approximately $3.9 billion , partially
offset by originations and recognition of deferred fees. The decrease in SBA-PPP
loans was largely offset by increases of $827.6 million in owner occupied
commercial mortgages and $697.0 million in commercial and industrial. These
increases are primarily due to growth in commercial lines, equipment leasing,
and our government lending portfolios.
Loans and leases held for investment are classified differently, dependent on
whether they are originated or purchased, and if purchased, whether or not the
loans reflect more than insignificant credit deterioration since origination as
of the date of acquisition. Non-purchased credit deteriorated ("non-PCD") loans
consist of loans which were originated by us or purchased from other
institutions that did not reflect more than insignificant credit deterioration
at acquisition. Purchased credit deteriorated ("PCD") loans are purchased loans
which reflect a more than insignificant credit deterioration since origination
as of the date of acquisition. The net decrease of $125.3 million in PCD loans
as of December 31, 2021 compared to December 31, 2020 was primarily due to pay
downs and payoffs.
We report non-PCD and PCD loan portfolios separately, with the non-PCD portfolio
further divided into commercial and consumer segments. Non-PCD loans and leases
at December 31, 2021 were $32.03 billion compared to $32.33 billion at
December 31, 2020 , representing 99.0% and 98.6% of total loans, respectively.
PCD loans at December 31, 2021 were $337.6 million , compared to $462.9 million
at December 31, 2020 , representing 1.0% and 1.4% of loans, respectively.
The discount related to acquired non-PCD loans and leases at December 31, 2021
and December 31, 2020 was $11.4 million and $19.5 million , respectively. The
discount related to PCD loans at December 31, 2021 and December 31, 2020 was
$29.0 million and $45.3 million , respectively. The primary driver of the
decrease in PCD discount was loan payoffs.
During the year ended December 31, 2021 and 2020, accretion income on purchased
non-PCD loans and leases was $8.0 million and $11.3 million , respectively.
During the year ended December 31, 2021 and 2020, interest and accretion income
on purchased PCD loans and leases was $44.3 million and $59.7 million ,
respectively.
48
--------------------------------------------------------------------------------
Table 8 provides the composition of net loans and leases for the past three
years.
Table 8
LOANS AND LEASES
December 31
(Dollars in thousands) 2021 2020
Non-PCD loans and leases:
Commercial:
Construction and land development $ 1,111,797 $ 985,424
Owner occupied commercial mortgage 11,992,625 11,165,012
Non-owner occupied commercial mortgage 2,971,393 2,987,689
Commercial and industrial and leases 5,710,652 5,013,644
SBA-PPP 493,821 2,406,291 Total commercial loans 22,280,288 22,558,060 Consumer: Residential mortgage 5,679,919 5,561,686 Revolving mortgage 1,795,005 2,052,854 Construction and land development 399,570 348,123 Consumer auto 1,331,388 1,255,402 Consumer other 547,728 552,968 Total consumer loans 9,753,610 9,771,033 Total non-PCD loans and leases 32,033,898 32,329,093 PCD loans 337,624 462,882 Total loans and leases 32,371,522 32,791,975 Less allowance for credit losses (178,493) (224,314) Net loans and leases$ 32,193,029 $ 32,567,661 December 31 (Dollars in thousands) 2019 Non-PCI loans and leases: Commercial: Construction and land development$ 1,013,454 Commercial mortgage 12,282,635 Other commercial real estate 542,028 Commercial and industrial and leases 4,403,792 Other 310,093 Total commercial loans 18,552,002 Noncommercial: Residential mortgage 5,293,917 Revolving mortgage 2,339,072 Construction and land development 357,385 Consumer 1,780,404 Total noncommercial loans 9,770,778 Total non-PCI loans and leases$ 28,322,780 PCI loans$ 558,716 Total loans and leases 28,881,496 Less allowance for credit losses (225,141) Net loans and leases$ 28,656,355 49
--------------------------------------------------------------------------------
Allowance for Credit Losses
DuringJanuary 2020 , we adopted ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), which changed the methodology, accounting policies, and inputs used in determining the ACL. Refer to Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for a discussion of the methodology used in the determination of the ACL. The ACL was$178.5 million atDecember 31, 2021 , compared to$224.3 million and$225.1 million atDecember 31, 2020 and 2019, respectively. The ACL as a percentage of total loans and leases was 0.55% atDecember 31, 2021 , compared to 0.68% and 0.78% atDecember 31, 2020 and 2019, respectively. The decrease in the ACL as ofDecember 31, 2021 compared toDecember 31, 2020 was primarily driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management's expectations over a forecast period of two years. For most pools, BancShares uses a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. BancShares' ACL forecasts consider a range of economic scenarios from an upside scenario to a severely adverse scenario, but theDecember 31, 2021 ACL forecast was calculated using the consensus baseline scenario. This scenario showed improvements in the most significant economic factors compared to what was used to generate theDecember 31, 2020 ACL. These loss estimates were also influenced by our strong credit quality and low net charge-offs.
As of
Unemployment - Expected to improve to below 4% by the end of 2022, slightly increasing to just above 4% in the first quarter of 2023, stabilizing below 4% through the remainder of 2023
GDP Growth - Peak quarter over quarter annualized growth of just under 7% in the fourth quarter of 2021, decreasing to below 3% in the second half of 2022 and thereafter
Home Pricing Index - Year over year growth rates of approximately 7% during 2022, declining to below 3% by the second half of 2023
Commercial Real Estate Index - Slight downturn in year over year change in the second quarter of 2022, relatively flat throughout the rest of 2022, followed by continued growth reaching 9% in the second and third quarters of 2023. AtDecember 31, 2021 , the ACL allocated to non-PCD loans and leases was$163.7 million , or 0.51% of non-PCD loans and leases, compared to$200.3 million , or 0.62%, atDecember 31, 2020 , and$217.6 million , or 0.77%, atDecember 31, 2019 . Aside from SBA-PPP loans, which have no allowance, the decrease atDecember 31, 2021 compared toDecember 31, 2020 was primarily due to continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.52% atDecember 31, 2021 compared to 0.67% atDecember 31, 2020 . AtDecember 31, 2021 , the ACL on PCD loans totaled$14.8 million compared to$24.0 million atDecember 31, 2020 and$7.5 million , atDecember 31, 2019 . The decrease atDecember 31, 2021 compared toDecember 31, 2020 was primarily due to a$9.2 million reserve release for the year endedDecember 31, 2021 , driven primarily by continued strong credit performance, low net charge-offs, improvement in macroeconomic factors, and lower PCD loan balances.
At
50
--------------------------------------------------------------------------------Table 9 provides details of the ACL, provision components and net charge-off ratio by loan class for the past three years.
Table 9
ALLOWANCE FOR CREDIT LOSSES
Year Ended December 31, 2021
(Dollars in thousands) Commercial Consumer PCD Total
Allowance for credit losses:
Balance at January 1, 2021 80,842 119,485 23,987 224,314
Benefit for credit losses (1,228) (21,278) (14,329) (36,835)
Charge-offs (15,924) (17,181) (2,317) (35,422)
Recoveries 7,523 11,452 7,461 26,436
Balance at December 31, 2021 $ 71,213 $ 92,478 $ 14,802 $ 178,493
Net charge-off (recovery) ratio 0.04 % 0.06 % (1.28) % 0.03 %
Net charge-offs (recoveries) $ 8,401 $ 7,048 $ (5,144) $ 8,986
Average loans 22,550,607 9,797,112 402,277 32,749,996
Year Ended December 31, 2020
Commercial Consumer PCD Total
Balance at December 31, 2019 $ 142,369 $ 75,236 $ 7,536 $ 225,141
Adoption of ASC 326 (87,554) 30,629 19,001 (37,924)
Balance at January 1, 2020 54,815 105,865 26,537 187,217
Provision (benefit) 37,763 27,791 (7,202) 58,352
Initial allowance on PCD loans - - 1,193 1,193
Charge-offs (17,586) (24,219) (3,300) (45,105)
Recoveries 5,850 10,048 6,759 22,657
Balance at
0.06 % 0.15 % (0.67) % 0.07 %
Net charge-offs (recoveries) $ 11,736 $ 14,171 $ (3,459) $ 22,448
Average loans 21,282,535 9,617,600 517,121 31,417,256
Year Ended December 31, 2019
(Dollars in thousands) Commercial Consumer PCI Total
Balance at January 1, 2019 $ 139,043 $ 75,525 9,144 223,712
Provision (benefit) 13,386 19,663 (1,608) 31,441
Charge-offs (14,744) (28,283) - (43,027)
Recoveries 4,684 8,331 - 13,015
Balance at December 31, 2019 $ 142,369 $ 75,236 $ 7,536 $ 225,141
Net charge-off ratio 0.06 % 0.22 % - % 0.11 %
Net charge-offs $ 10,060 $ 19,952 $ - $ 30,012
Average loans 16,875,800 9,182,570 537,131 26,595,501
Table 10 provides trends of the ACL ratios for the past three years.
Table 10 ALLOWANCE FOR CREDIT LOSSES RATIOS (Dollars in thousands) 2021 2020 2019
Allowance for credit losses to total loans and leases: 0.55 %
0.68 % 0.78 %
Allowance for credit losses $ 178,493 $ 224,314 $ 225,141
Total loans and leases 32,371,522 32,791,975 28,881,496
Allowance for credit losses to non-PCD loans and
leases: 0.51 % 0.62 % 0.77 %
Allowance for credit losses on non-PCD loans and leases
$ 200,327 $ 217,605 Total non-PCD loans and leases 32,033,898 32,329,093 28,322,780 Allowance for credit losses to PCD loans: 4.38 % 5.18 % 1.35 % Allowance for credit losses on PCD loans$ 14,802 $ 23,987 $ 7,536 Total PCD loans 337,624 462,882 558,716 51
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Table 11 details the allocation of the ACL among the various loan types. See Note E, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements for additional disclosures regarding the ACL.
Table 11
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
December 31
2021 2020
Allowance for
Allowance for Percentof loans loan and lease Percent of loans (dollars in thousands)
credit losses to total loans losses to total loans
Non-PCD loans and leases
Commercial:
Construction and land development $ 4,465 3.4 % $ 6,746 3.0 %
Owner occupied commercial mortgage 21,964 37.0 23,665 34.0
Non-owner occupied commercial mortgage 14,149 9.2 22,652 9.1
Commercial and industrial and leases 30,635 17.7 27,779 15.3
SBA-PPP - 1.5 - 7.3
Total commercial loans and leases 71,213 68.8 80,842 68.7
Consumer:
Residential mortgage 32,865 17.5 44,098 17.0
Revolving mortgage 16,750 5.6 24,757 6.3
Construction and land development 976 1.2 1,731 1.1
Consumer auto 5,762 4.1 9,460 3.8
Consumer other 36,125 1.7 39,439 1.7
Total consumer loans 92,478 30.1 119,485 29.9
Total non-PCD loans and leases 163,691 98.9 200,327 98.6
PCD loans 14,802 1.1 23,987 1.4
Total loans and leases $ 178,493 100.0 % $ 224,314 100.0 %
December 31
2019
Allowance for
loan and lease Percent of loans
(dollars in thousands) losses to total loans
Non-PCI loans and leases
Commercial:
Construction and land development $ 33,213 3.5 %
Commercial mortgage 45,335 42.5
Other commercial real estate 2,211 1.9
Commercial and industrial and leases 59,374 15.3
Other 2,236 1.1
Total commercial loans and leases 142,369 64.3
Noncommercial:
Residential mortgage 18,232 18.3
Revolving mortgage 19,702 8.1
Construction and land development 2,709 1.2
Consumer 34,593 6.2
Total noncommercial loans 75,236 33.8
Total non-PCI loans and leases 217,605 98.1
PCI loans 7,536 1.9
Total loans and leases $ 225,141 100.0 %
52--------------------------------------------------------------------------------
Nonperforming Assets
Nonperforming assets include nonaccrual loans and OREO resulting from both non-PCD and PCD loans. Non-PCD loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable that principal or interest is not fully collectable. When non-PCD loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. Non-PCD loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time as to both principal and interest and there is no longer concern as to the collectability of principal and interest. Accretion of income for PCD loans is discontinued when we are unable to estimate the amount or timing of cash flows. PCD loans may begin or resume accretion of income when information becomes available that allows us to estimate the amount and timing of future cash flows. OREO includes foreclosed property and branch facilities that we have closed but not sold. Net book values of OREO are reviewed at least annually to evaluate if write-downs are required. The level of review is dependent on the value and type of the collateral, with higher value and more complex properties receiving a more detailed review. Changes to the value of the assets between scheduled valuation dates are monitored through communication with brokers and monthly reviews by the asset manager assigned to each asset. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information. Since OREO is carried at the lower of cost or market value, less estimated selling costs, book value adjustments are only recorded when fair values have declined. Decisions regarding write-downs are based on factors including appraisals, previous offers received on the property, market conditions and the number of days the property has been on the market.
Table 12 provides details on nonperforming assets and other risk elements.
Table 12
NONPERFORMING ASSETS
December 31
(Dollars in thousands, except ratios) 2021 2020 2019
Nonaccrual loans and leases:
Non-PCD $ 90,690 $ 136,544 $ 114,946
PCD 29,616 54,939 6,743
Total nonaccrual loans 120,306 191,483 121,689
Other real estate owned 39,328 50,890 46,591
Total nonperforming assets $ 159,634 $ 242,373 $ 168,280
Accruing loans and leases 90 days or more past due:
Non-PCD $ 6,382 $ 5,507 $ 3,291
PCD 543 355 24,257
Ratio of total nonperforming assets to total loans, leases and other real estate owned
0.49 0.74 0.58 Ratio of nonaccrual loans and leases to total loans and leases
0.37 0.58 0.42 Ratio of allowance for credit losses to nonaccrual loans and leases
148.4 117.1 185.0
Troubled Debt Restructurings
A loan is considered a troubled debt restructuring ("TDR") when both of the
following occur: (1) a modification to a borrower's debt agreement is made and
(2) a concession is granted for economic or legal reasons related to a
borrower's financial difficulties that otherwise would not be granted. TDR
concessions could include deferrals of interest, modifications of payment terms,
or, in certain limited instances, forgiveness of principal or interest. Acquired
loans are classified as TDRs if a modification is made subsequent to
acquisition. We further classify TDRs as performing and nonperforming.
Performing TDRs accrue interest at the time of restructure and continue to
perform based on the restructured terms. Nonperforming TDRs do not accrue
interest and are included with other nonperforming assets within nonaccrual
loans and leases in Table 12 above.
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The Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus was published by
banking regulators in April 2020 to clarify expectations around loan
modifications and the determination of TDRs for borrowers experiencing
COVID-19-related financial difficulty. BancShares applied this regulatory
guidance during its TDR identification process for short-term loan forbearance
agreements as a result of COVID-19 and in most cases is not recording these as
TDRs. Refer to Note A, Accounting Policies and Basis of Presentation, in the
Notes to Consolidated Financial Statements for discussion of our accounting
policies for TDRs.
We selectively agree to modify existing loan terms to provide relief to
customers who are experiencing financial difficulties or other circumstances
that could affect their ability to meet debt obligations. Typical modifications
include short-term deferral of interest or modification of payment terms. TDR
not accruing interest at the time of restructure are included as nonperforming
loans. TDRs accruing at the time of restructure and continuing to perform based
on the restructured terms are considered performing loans.
Table 13 provides further details on performing and nonperforming TDRs for the
last three years.
Table 13
TROUBLED DEBT RESTRUCTURINGS
December 31
(Dollars in thousands) 2021 2020 2019
Accruing TDRs:
Non-PCD $ 117,380 $ 139,747 $ 111,676
PCD 29,401 17,617 17,074
Total accruing TDRs $ 146,781 $ 157,364 $ 128,750
Nonaccruing TDRs:
Non-PCD 37,832 43,470 42,331
PCD 9,935 7,346 111
Total nonaccruing TDRs $ 47,767 $ 50,816 $ 42,442
All TDRs:
Non-PCD 155,212 183,217 154,007
PCD 39,336 24,963 17,185
Total TDRs $ 194,548 $ 208,180 $ 171,192
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold
under customer repurchase agreements, FHLB borrowings, subordinated debt, and
other borrowings. Interest-bearing liabilities totaled $31.78 billion at
December 31, 2021 , compared to $27.31 billion at December 31, 2020 . The $4.48
billion increase was primarily due to an increase in interest-bearing deposits
of $4.58 billion , partially offset by a decrease in total borrowings of $106.2
million .
Deposits
We strive to maintain a strong liquidity position, and therefore a focus on core
deposit retention remains a key business objective. We believe traditional bank
deposit products remain an attractive option for many customers, as evidenced by
the significant deposit growth the industry has experienced over the past 18
months. As economic conditions improve, we recognize that our liquidity position
could be adversely affected as bank deposits are withdrawn. Our ability to fund
future loan growth is significantly dependent on our success at retaining
existing deposits and generating new deposits at a reasonable cost.
Total deposits increased by $7.97 billion , or 18.4%, to $51.41 billion as of
December 31, 2021 from $43.43 billion as of December 31, 2020 . The increases
were primarily due to increases of $3.39 billion in demand deposits, $2.10
billion in checking with interest, and $1.96 billion in money market. The growth
in deposits is coming from a mix of new clients and existing clients and is
generally from our commercial customers.
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Table 14 provides deposit balances as of
Table 14
DEPOSITS
December 31
(Dollars in thousands) 2021 2020
Demand $ 21,404,808 $ 18,014,029
Checking with interest 12,694,389 10,591,687
Money market 10,590,106 8,632,713
Savings 4,235,824 3,304,167
Time 2,480,967 2,889,013
Total deposits $ 51,406,094 $ 43,431,609 Table 15 provides the expected maturity of time deposits in excess of
Table 15 MATURITIES OF TIME DEPOSITS IN EXCESS OF$250,000 December 31 (Dollars in thousands) 2021 2020 Time deposits maturing in: Three months or less$ 224,156 $ 136,200 Over three months through six months 115,507 118,496 Over six months through 12 months 84,996 86,260 More than 12 months 154,862 311,956 Total$ 579,521 $ 652,912
We estimate total uninsured deposits were
Borrowings
At
Table 16
BORROWINGS
December 31
(Dollars in thousands) 2021 2020
Securities sold under customer repurchase agreements
Federal Home Loan Bank borrowings 644,659 655,175 Subordinated debt SCB Capital Trust I 9,817 9,779 FCB/SC Capital Trust II 17,798 17,664 FCB/NC Capital Trust III 88,145 88,145 Macon Capital Trust I 14,433 14,433
3.375 % Fixed-to-Floating Rate Subordinated Notes due 2030 347,371
346,541
Other subordinated debt - 27,956
Total subordinated debt 477,564 504,518
Other borrowings 72,155 88,470
Total borrowings $ 1,783,479 $ 1,889,650
55--------------------------------------------------------------------------------The Parent Company owns four special purpose entities - SCB Capital Trust I, FCB/SC Capital Trust II,FCB/NC Capital Trust III and Macon Capital Trust I (the "Trusts"), which mature in 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. OnMarch 4, 2020 , we completed a public offering of$350 million aggregate principal amount of our 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030, which are redeemable starting with the interest payment dueMarch 15, 2025 , subject to obtaining the prior approval of theFederal Reserve to the extent such approval is then required under the rules of theFederal Reserve , or earlier upon the occurrence of certain events. In conjunction with the CIT Merger, FCB assumed approximately$3.7 billion senior unsecured notes (principal balance) and$500 million subordinated unsecured notes (principal balance). OnFebruary 24, 2022 , FCB redeemed approximately$2.9 billion of senior unsecured notes, leaving approximately$900 million of senior unsecured debt and$500 million of subordinated unsecured debt outstanding. Refer to Note W, Subsequent Events, in the Notes to Consolidated Financial Statements for further discussion of the redemption of this debt.
Commitments and Contractual Obligations
Table 17 identifies significant obligations and commitments as ofDecember 31, 2021 representing required and potential cash outflows. See Note T, Commitments and Contingencies, for additional information regarding total commitments. Loan commitments and standby letters of credit are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used. Table 17 COMMITMENTS AND CONTRACTUAL OBLIGATIONS Type of obligation Payments due by period (Dollars in thousands) Less than 1 year 1-3 years 3-5 years Thereafter Total Contractual obligations: Time deposits$ 1,937,216 $ 306,928 $ 56,970 $ 179,853 $ 2,480,967 Short-term borrowings 589,101 - - - 589,101 Long-term obligations 82,735 131,271 2,649 977,723 1,194,378
Total contractual obligations
$ 59,619 $ 1,157,576 $ 4,264,446 Commitments: Loan commitments$ 6,391,757 $ 2,086,781 $ 769,469 $ 3,763,147 $ 13,011,154 Standby letters of credit 100,520 15,916 212 - 116,648 Affordable housing partnerships 28,407 13,658 556 795 43,416 Total commitments$ 6,520,684 $ 2,116,355 $ 770,237 $ 3,763,942 $ 13,171,218 CRA Investment Commitment Prior to the CIT Merger, CIT announced a Community Benefits Plan developed in collaboration with theCalifornia Reinvestment Coalition ("CRC") and theNational Community Reinvestment Coalition ("NCRC"). Through the plan,CIT Bank agreed to fund$7.75 billion in CRA qualified lending and investments over a four-year term, covering the period ofJanuary 1, 2020 throughDecember 31, 2023 . Of the$7.75 billion commitment,$6.5 billion over the four-year plan period will be withinCalifornia for statewide CRA lending and investments, with sub-targets for specified multi-family, small business and mortgage lending. Outside ofCalifornia ,CIT Bank had committed$1.25 billion over the four-year term in CRA qualified lending and investments to communities where it will have physical branches. In conjunction with the CIT Merger, BancShares agreed to honor the CRA commitments.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
We are committed to effectively managing our capital to protect our depositors,
creditors and shareholders. We continually monitor the capital levels and ratios
for BancShares and FCB to ensure they exceed the requirements imposed by
regulatory authorities and to ensure they are appropriate, given growth
projections, risk profile and potential changes in the regulatory environment.
Failure to meet certain capital requirements may result in actions by regulatory
agencies, which could have a material impact on our consolidated financial
statements.
56
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During 2021, the Parent Company did not repurchase any Class A common stock.
During 2020, the Parent Company repurchased a total of 813,090 shares of Class A
common stock, or 8.4% of outstanding Class A shares as of December 31, 2019 , for
$333.8 million at an average cost per share of $410.48 . There were no
repurchases of Class B common stock or preferred stock during the year ended
December 31, 2021 or 2020. All share repurchases were executed under previously
approved authorities.
Upon expiration of the most recent share repurchase authorization on
During 2020 and 2019, the share repurchases included 45,000 and 100,000 shares, respectively, of Class A common stock purchased fromElla Anna Holding , as trustee of her revocable trust.Mrs. Holding is the widow of the Parent Company's former Executive Vice Chairman,Frank B. Holding , and the mother ofFrank B. Holding , Jr. andHope H. Bryant , our Chairman and Chief Executive Officer and Vice Chairman, respectively. In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of its Class A Common Stock. The closing share price of the Class A Common Stock on the Nasdaq Global Select Market was$859.76 onJanuary 3, 2022 . Additionally, CIT Series A and B Preferred Stock was converted into the rights to receive BancShares Series B and C Preferred Stock, respectively. In connection with the consummation of the CIT Merger, the Parent Company issued (a) 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of$1,000 per share, resulting in a total liquidation preference of$325 million , and (b) 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of$25 per share, resulting in a total liquidation preference of$200 million . The issuance of Class A Common Stock and the conversion of preferred stock is further discussed in the "Business Combinations" section of this MD&A. 57 --------------------------------------------------------------------------------
Table 18 provides information on capital adequacy for BancShares and FCB as of
Table 18
ANALYSIS OF CAPITAL ADEQUACY
December 31, 2021 December 31, 2020
Basel III PCA well-capitalized
(Dollars in thousands) Requirements thresholds Amount Ratio Amount Ratio
BancShares
Total risk-based capital 10.50 % 10.00 % $ 5,041,686 14.35 % $ 4,577,212 13.81 %
Tier 1 risk-based capital 8.50 8.00 4,380,452 12.47 3,856,086 11.63
Common equity Tier 1 7.00 6.50 4,040,515 11.50 3,516,149 10.61
Tier 1 leverage 4.00 5.00 4,380,452 7.59 3,856,086 7.86
FCB
Total risk-based capital 10.50 % 10.00 4,857,960 13.85 4,543,496 13.72
Tier 1 risk-based capital 8.50 8.00 4,651,226 13.26 4,276,870 12.92
Common equity Tier 1 7.00 6.50 4,651,226 13.26 4,276,870 12.92
Tier 1 leverage 4.00 5.00 4,651,226 8.07 4,276,870 8.72
Federal banking agencies approved regulatory capital guidelines ("Basel III")
aimed at strengthening previous capital requirements for banking organizations.
Basel III became effective for BancShares on January 1, 2015 and the associated
capital conservation buffers of 2.5% were fully phased in by January 1, 2019 .
The capital conservation buffer is designed to absorb losses during periods of
economic stress. Additionally, federal banking agencies have developed Prompt
Corrective Action ("PCA") thresholds for regulatory capital ratios. Failure to
meet regulatory capital requirements may result in certain actions by regulators
which could have a direct material effect on our consolidated financial
statements. Table 18 demonstrates that the regulatory capital ratios for
BancShares and FCB exceed the Basel III requirements and the PCA
well-capitalized thresholds as of December 31, 2021 and 2020. At December 31,
2021 , BancShares and FCB had total risk-based capital ratio conservation buffers
of 6.35% and 5.85%, respectively, which are in excess of the fully phased in
Basel III conservation buffer of 2.50%. The capital ratio conservation buffers
represent the excess of the regulatory capital ratio as of December 31, 2021
over the Basel III minimum. The Basel III minimums, conservation buffers, and
requirements are discussed further in the "Capital Requirements" section in Item
1. Business included in this Annual Report on Form 10-K.
At December 31, 2021 and 2020, BancShares had additional Tier 1 Capital of
$339.9 million , which consists of 5.375% non-cumulative perpetual preferred
stock, series A. BancShares had Tier 2 capital totaling $661.2 million and
$721.1 million at December 31, 2021 and 2020, respectively. FCB had Tier 2
capital totaling $206.7 million and $266.6 million at December 31, 2021 and
2020, respectively. Tier 2 capital consists of the allowance for credit losses
(up to 1.25% of risk weighted assets), trust preferred securities, and
qualifying subordinated debt. Under Basel III regulations, when subordinated
debt is within five years of its scheduled maturity date, issuers must discount
the amount included in Tier 2 capital by 20% each year until the debt matures.
Once the subordinated debt is within one year of its scheduled maturity date,
none of the subordinated debt qualifies as Tier 2 capital.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
RISK MANAGEMENT
Risk is inherent in any business. BancShares has defined a moderate risk
appetite, a balanced approach to risk taking, with a philosophy which does not
preclude higher risk business activities balanced with acceptable returns while
meeting regulatory objectives. Through the comprehensive Risk Management
Framework and Risk Appetite Framework, senior management has primary
responsibility for day-to-day management of the risks we face with
accountability of and support from all associates. Senior management applies
various strategies to reduce the risks to which BancShares may be exposed, with
effective challenge and oversight by management committees. In addition, our
Board of Directors (the "Board") strives to ensure the business culture is
integrated with the Risk Management program and policies, procedures and metrics
for identifying, assessing, monitoring and managing risk are part of the
decision-making process. The Board's role in risk oversight is an integral part
of our overall Risk Management Framework and Risk Appetite Framework. The Board
administers its risk oversight function primarily through the Board Risk
Committee.
58
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The Board Risk Committee structure is designed to allow for information flow,
effective challenge and timely escalation of risk-related issues. The Board Risk
Committee is directed to monitor and advise the full Board regarding risk
exposures, including Credit, Market, Capital, Liquidity, Operational,
Compliance, Asset, Strategic and Reputational risks; review, approve, and
monitor adherence to the Risk Appetite Statement and supporting risk tolerance
levels via a series of established metrics; and evaluate, monitor and oversee
the adequacy and effectiveness of the Risk Management Framework and Risk
Appetite Framework. The Board Risk Committee also reviews: reports of
examination by and communications from regulatory agencies; the results of
internal and third party testing and qualitative and quantitative assessments
related to risk management; and any other matters within the scope of the Board
Risk Committee's oversight responsibilities. The Board Risk Committee monitors
management's response to certain risk-related regulatory and audit issues. In
addition, the Board Risk Committee may coordinate with the Audit Committee and
the Compensation, Nominations and Governance Committee for the review of
financial statements and related risks, compensation risk management and other
areas of joint responsibility.
In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.
Enactment of the EGRRCPA significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run. BancShares will continue to monitor and stress test its capital and liquidity consistent with the safety and soundness expectations of the federal regulators. Refer to the "Regulatory Considerations" section of Item 1. Business included in this Annual Report on Form 10-K for further discussion.
Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an appropriate ACL that accounts for expected credit losses in the loan and lease portfolio. Our ACL estimate as ofDecember 31, 2021 , included extensive reviews of the changes in credit risk associated with the uncertainties around economic forecasts and the overall economic impact of COVID-19. Expected loss estimates within each portfolio considered the potential impact of economic activity, as well as potential mitigating impact from the government stimulus and loan modification programs. These loss estimates additionally considered BancShares industry risk, historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen significant deterioration as ofDecember 31, 2021 . We maintain a well-diversified loan and lease portfolio and seek to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries. Despite our focus on diversification, several characteristics of our loan portfolio subject us to significant risk, such as our concentrations of real estate secured loans, revolving mortgage loans and medical- and dental-related loans. We have historically carried a significant concentration of real estate secured loans, but actively mitigate exposure through underwriting policies which primarily rely on borrower cash flow rather than underlying collateral values. When we do rely on underlying real property values, we favor financing secured by owner-occupied real property and, as a result, a large percentage of our real estate secured loans are owner occupied. AtDecember 31, 2021 , loans secured by real estate were$24.28 billion , or 75.0%, of total loans and leases compared to$23.56 billion , or 71.8% atDecember 31, 2020 , and$22.38 billion , or 77.5%, atDecember 31, 2019 . Similar to our branch footprint, the collateral of loans secured by real estate is concentrated withinNorth Carolina andSouth Carolina . AtDecember 31, 2021 , real estate located inNorth Carolina andSouth Carolina represented 35.9% and 15.6%, respectively, of all real estate used as collateral. 59 --------------------------------------------------------------------------------
Table 19 provides the geographic distribution of real estate collateral by state.
Table 19
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE COLLATERAL
December 31, 2021
Percent of real estate secured loans with
Collateral location collateral located in the state
North Carolina 35.9
South Carolina 15.6
California 11.8
Florida 7.0
Georgia 6.5
Virginia 6.3
Washington 3.7
Texas 3.1
Tennessee 1.5
All other locations 8.6
Among real estate secured loans, our revolving mortgage loans ("Home Equity
Lines of Credit" or "HELOCs") present a heightened risk due to long commitment
periods during which the financial position of individual borrowers or
collateral values may deteriorate significantly. In addition, a large percentage
of our HELOCs are secured by junior liens. Substantial declines in collateral
values could cause junior lien positions to become effectively unsecured. HELOCs
secured by real estate were $1.82 billion , or 5.6%, of total loans at
December 31, 2021 , compared to $2.09 billion , or 6.4%, at December 31, 2020 , and
$2.38 billion , or 8.2%, at December 31, 2019 .
Except for loans acquired through mergers and acquisitions, we have not
purchased HELOCs in the secondary market, nor have we originated these loans to
customers outside of our market areas. All originated HELOCs were underwritten
by us based on our standard lending criteria. The HELOC portfolio consists of
variable rate lines of credit which allow customer draws during a specified
period of the line of credit, with a portion switching to an amortizing term
following the draw period. Approximately 83.1% of the revolving mortgage
portfolio relates to properties in North Carolina and South Carolina .
Approximately 36.6% of the loan balances outstanding are secured by senior
collateral positions while the remaining 63.4% are secured by junior liens.
We actively monitor the portion of our HELOCs in the interest-only period and
when they will mature. Approximately 89.4% of outstanding balances at
December 31, 2021 , require interest-only payments, while the remaining require
monthly payments equal to the greater of 1.5% of the outstanding balance, or
$100 . When HELOCs switch from interest-only to fully amortizing, including
principal and interest, some borrowers may not be able to afford the higher
monthly payments. We have not experienced a significant increase in defaults as
a result of these increased payments. In the normal course of business, we will
work with each borrower as they approach the revolving period maturity date to
discuss options for refinance or repayment.
Loans and leases to borrowers in medical, dental or related fields were $7.09
billion as of December 31, 2021 , which represents 21.9% of total loans and
leases, compared to $5.54 billion or 16.9% of total loans and leases at
December 31, 2020 , and $5.16 billion or 17.9% of total loans and leases at
December 31, 2019 . The credit risk of this industry concentration is mitigated
through our underwriting policies which emphasize reliance on adequate borrower
cash flow rather than underlying collateral value and our preference for
financing secured by owner-occupied real property. Except for this single
concentration, no other industry represented more than 10% of total loans and
leases outstanding at December 31, 2021 .
Interest rate risk management
Interest rate risk ("IRR") results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes.
We assess our short-term IRR by forecasting net interest income over 24 months
under various interest rate scenarios and comparing those results to forecasted
net interest income, assuming stable rates. IRR scenarios modeled include, but
are not limited to, immediate, parallel rate shocks, interest rate ramps,
changes in the shape of the yield curve and changes in the relationships of our
rates to market rates.
60
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The composition of our interest rate sensitive assets and liabilities generally
results in a net asset-sensitive position, concentrated in the middle of the
yield curve, mostly driven by moves in the federal funds rate, whereby our
assets will reprice faster than our liabilities. Interest rate sensitive assets
generally consist of interest-bearing cash, investment securities, and
commercial and consumer loans. Approximately 27% of our commercial and consumer
loans have floating contractual reference rates. These floating rate loans are
indexed to the following rates (with approximate percentages of each floating
rate loan portfolio relative to the total floating rate loan portfolio included
in parenthesis), Prime (41%), LIBOR (34%), Secured Overnight Financing Rate
("SOFR") (12%) and US Treasury (13%).
Table 20 provides the impact on net interest income over 24 months resulting
from various instantaneous interest rate shock scenarios as of December 31, 2021
and 2020.
Table 20
NET INCOME SENSITIVITY SIMULATION ANALYSIS
Estimated (decrease) increase in net interest income
Change in interest rate (basis points) December 31, 2021 December 31, 2020
-100 (6.97) % (6.24) %
+100 6.68 8.09
+200 12.87 14.57
Net interest income sensitivity metrics at
Long-term interest rate risk exposure is measured using the economic value of
equity ("EVE") sensitivity analysis to study the impact of long-term cash flows
on earnings and capital. EVE represents the difference between the sum of the
present value of all asset cash flows and the sum of the present value of the
liability cash flows. EVE sensitivity analysis involves discounting cash flows
under different interest rate scenarios. The base-case measurement and its
sensitivity to shifts in the yield curve allow management to measure longer-term
repricing and option risk in the balance sheet.
Table 21 presents the EVE profile as of
Table 21
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS
Estimated (decrease) increase in EVE
Change in interest rate (basis points) December 31, 2021 December 31, 2020
-100 (13.68) % (21.20) %
+100 6.10 12.18
+200 5.93 15.71
The EVE metrics at
We do not typically utilize interest rate swaps, floors, collars or other
derivative financial instruments to attempt to hedge our overall balance sheet
rate sensitivity and interest rate risk. Our simulations do not account for
other business developments, including the CIT Merger, that could affect net
interest income and EVE, or for management actions that could affect net
interest income and EVE or that could be taken to change our risk profile.
Accordingly, we can give no assurance that actual results would not differ
materially from the estimated outcomes of our simulations.
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--------------------------------------------------------------------------------Table 22 provides loan maturity distribution information.
Table 22
LOAN MATURITY DISTRIBUTION
At
Within One to Five Five to 15
(Dollars in thousands) One Year Years Years After 15 years Total
Commercial:
Construction and land development
3,194,733 7,924,721 369,680 11,992,625
Non-owner occupied commercial
mortgage 234,654 1,343,459 1,359,985 33,295 2,971,393
Commercial and industrial and leases 1,231,000 2,861,414 1,563,114 55,124 5,710,652
SBA-PPP 43,116 450,705 - - 493,821
Total commercial loans and leases 2,159,576 8,245,366 11,318,976 556,370 22,280,288
Consumer:
Residential mortgage 84,375 391,917 1,543,399 3,660,228 5,679,919
Revolving mortgage 113,575 211,084 91,455 1,378,891 1,795,005
Construction and land development 16,623 104,655 18,104 260,188 399,570
Consumer auto 9,784 625,953 695,651 - 1,331,388
Consumer other 305,972 121,327 74,655 45,774 547,728
Total consumer loans 530,329 1,454,936 2,423,264 5,345,081 9,753,610
PCD loans 32,719 95,715 139,102 70,088 337,624
Total loans and leases $ 2,722,624 $ 9,796,017 $ 13,881,342 $ 5,971,539 $ 32,371,522 Table 23 provides information regarding the sensitivity of loans and leases to changes in interest rates.
Table 23
LOAN INTEREST RATE SENSITIVITY
Loans maturing after one year with
Variable interest
(Dollars in thousands) Fixed interest rates rates
Commercial:
Construction and land development $ 575,787 $ 388,695
Owner occupied commercial mortgage 10,638,067 851,067
Non-owner occupied commercial mortgage 2,369,125 367,614
Commercial and industrial and leases 3,844,074 635,578
SBA-PPP 450,705 -
Total commercial loans and leases 17,877,758 2,242,954
Consumer:
Residential mortgage 2,761,276 2,834,268
Revolving mortgage 32,766 1,648,664
Construction and land development 103,947 279,000
Consumer auto 1,321,604 -
Consumer other 194,726 47,030
Total consumer loans 4,414,319 4,808,962
PCD loans 138,614 166,291
Total loans and leases $ 22,430,691 $ 7,218,207
Liquidity risk management
Liquidity risk is the risk an institution is unable to generate or obtain
sufficient cash or its equivalents on a cost-effective basis to meet commitments
as they fall due. The most common sources of liquidity risk arise from
mismatches in the timing and value of on-balance sheet and off-balance sheet
cash inflows and outflows. In general, on-balance sheet mismatches generate
liquidity risk when the effective maturity of assets exceeds the effective
maturity of liabilities. A commonly cited example of a balance sheet liquidity
mismatch is when long-term loans (assets) are funded with short-term borrowings
(liabilities). Other forms of liquidity risk include market constraints on the
ability to convert assets into cash at expected levels, an inability to access
funding sources at sufficient levels at a reasonable cost and changes in
economic conditions or exposure to credit, market, operational, legal and
reputation risks affecting an institution's liquidity risk profile.
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--------------------------------------------------------------------------------We utilize various limit-based measures to monitor, measure and control liquidity risk across three different types of liquidity:
•Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
•Structural - Measures the amount by which illiquid assets are supported by long-term funding; and
•Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner. We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our branch-generated deposit portfolio due to the generally stable balances and low cost. Additional sources include cash at theFederal Reserve Bank and various other correspondent bank accounts and unencumbered securities, which totaled$16.41 billion atDecember 31, 2021 , compared to$9.63 billion atDecember 31, 2020 . Another source of available funds is advances from the FHLB ofAtlanta . Outstanding FHLB advances were$644.7 million as ofDecember 31, 2021 , and we had sufficient collateral pledged to secure$8.92 billion of additional borrowings. Further, in the current year,$4.81 billion in non-PCD loans with a lendable collateral value of$3.95 billion were used to create additional borrowing capacity at theFederal Reserve Bank . We also maintain Federal Funds and other credit lines, which had$556.0 million of available capacity atDecember 31, 2021 .
FOURTH QUARTER ANALYSIS
For the quarter endedDecember 31, 2021 , net income was$123.3 million compared to$138.1 million for the corresponding quarter of 2020, a decrease of$14.8 million or 10.7%. The decrease was primarily the result of lower net interest income, lower noninterest income and higher noninterest expenses, partially offset by lower provision expense. Earnings per share were$12.09 for the fourth quarter of 2021 compared to$13.59 for the same period a year ago. Net interest income was$357.4 million , a decrease of$1.3 million , or 0.4%, compared to the fourth quarter of 2020. This was primarily due to a decline in the yield on loans and a decrease in interest and fee income on SBA-PPP loans, largely offset by organic loan growth, higher investment and overnight balances and yields, as well as lower rates on interest-bearing deposits. SBA-PPP loans contributed$26.5 million in interest and fee income for the fourth quarter of 2021 compared to$42.2 million for the same quarter in 2020. The taxable-equivalent net interest margin for the fourth quarter of 2021 was 2.58%, a decrease of 44 basis points from 3.02% in the same quarter in the prior year. The margin decline was primarily due to changes in earning asset mix driven by excess liquidity and higher balances in overnight investments, a decline in the yield on loans and lower income on SBA-PPP loans. These declines were partially offset by lower rates paid on interest-bearing deposits and higher investment yields. Income tax expense was$30.3 million in the fourth quarter of 2021, compared to$36.6 million in the fourth quarter of 2020. The effective tax rates were 19.7% and 21.0% during each of these respective periods. Provision for credit losses was a net benefit of$5.1 million during the fourth quarter of 2021, compared to$5.4 million in expense for the fourth quarter of 2020. The$10.5 million decrease was favorably impacted by a$4.7 million reserve release driven primarily by continued strong credit performance, low net charge-offs and improvement in macroeconomic factors. The net recovery ratio was 0.01% for the fourth quarter of 2021, compared to 0.06% for the fourth quarter of 2020. Noninterest income was$114.3 million for the fourth quarter of 2021, a decrease of$12.5 million from the same period of 2020. Contributing to the decline was a$15.9 million reduction in fair market value adjustments on marketable equity securities, a$6.0 million decrease in mortgage income due to reductions in gain on sale and production volume driven by higher mortgage rates and increased competition and a$5.3 million decline in realized gains on available for sale securities. These declines were partially offset by a$5.3 million increase in wealth management services due to growth in assets under management resulting in higher advisory and transaction fees, a$3.6 million increase in service charges on deposit accounts, a$2.6 million increase in cardholder services, net, and a$1.2 million increase in both merchant services, net and other service charges and fees. Noninterest expense was$323.2 million for the fourth quarter of 2021, an increase of$17.8 million from the same quarter last year. This was primarily due to increases of$9.9 million in salaries and wages (resulting from annual merit and higher revenue-based incentives),$4.5 million in CIT merger-related expenses,$3.7 million in processing fees paid to third parties (resulting from our continued investments in digital and technology to support revenue-generating businesses and improve internal processes), and temporary personnel costs. 63
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