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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Commission File Number: 001-16715
____________________________________________________
FIRST CITIZENS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
_________________________________________________________________________________________________________________
Delaware 56-1528994
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
4300 Six Forks Road, Raleigh, North Carolina
27609
(Address of principle executive offices) (Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
________________________________________________________________________________________________________________
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class Trading Symbol Name of each exchange on which registered
Class A Common Stock, Par Value $1 FCNCA Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A FCNCP Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Class B Common Stock, Par Value $1
(Title of class)
  _________________________________________________________________________________________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes     No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes     No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No
The aggregate market value of the Registrant’s common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $2,346,993,887.
On February 22, 2021, there were 8,811,220 outstanding shares of the Registrant’s Class A Common Stock and 1,005,185 outstanding shares of the Registrant’s Class B Common Stock.
Portions of the Registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated in Part III of this report.



    Page
CROSS REFERENCE INDEX
PART I Item 1
3
Item 1A
8
Item 1B Unresolved Staff Comments None
Item 2
Item 3
Item 4 Mine Safety Disclosures N/A
PART II Item 5
Item 6
Item 7
Item 7A
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None
Item 9A
Item 9B Other Information None
PART III Item 10 Directors, Executive Officers and Corporate Governance *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters *
Item 13 Certain Relationships and Related Transactions and Director Independence *
Item 14 Principal Accounting Fees and Services *
PART IV Item 15 Exhibits, Financial Statement Schedules
(1) Financial Statements (see Item 8 for reference)
(2) All Financial Statement Schedules normally required for Form 10-K are omitted since they are not applicable, except as referred to in Item 8.
(3)
Item 16 Form 10-K Summary None
* Information required by Item 10 is incorporated herein by reference to the information that appears under the headings or captions ‘Proposal 1: Election of Directors,’ ‘Corporate Governance —Service on other Public Company Boards’ and ‘-Code of Ethics;’ ‘Committees of our Boards—Audit Committee;’ ‘Executive Officers,’ and ‘Beneficial Ownership of Our Common Stock-Delinquent Section 16(a) Reports’ from the Registrant’s Proxy Statement for the 2021 Annual Meeting of Shareholders (“2021 Proxy Statement”).
Information required by Item 11 is incorporated herein by reference to the information that appears under the headings or captions ‘Committees of our Board—Compensation Committee Report;’ and ‘—Effect of Risk Management on Compensation;’ ‘Compensation Discussion and Analysis;’ ‘Executive Compensation;’ and ‘Director Compensation’ of the 2021 Proxy Statement.
Information required by Item 12 is incorporated herein by reference to the information that appears under the captions ‘Beneficial Ownership of Our Common Stock—Directors and Executive Officers,’ ‘—Existing Pledge Arrangements,’ and ‘—Principal Shareholders’ of the 2021 Proxy Statement. The Registrant currently does not have any compensation plans under which equity securities of the Registrant are authorized for issuance to employees or directors.
Information required by Item 13 is incorporated herein by reference to the information that appears under the headings or captions ‘Corporate Governance—Director Independence’ and ‘Transactions with Related Persons’ of the 2021 Proxy Statement.
Information required by Item 14 is incorporated by reference to the information that appears under the caption ‘Proposal 3: Ratification of Appointment of Independent Accountants—Services and Fees During 2020 and 2019’ of the 2021 Proxy Statement.
2


Part I
Item 1. Business
 
General
First Citizens BancShares, Inc. (“we,” “us,” “our,” “BancShares”) was incorporated under the laws of Delaware on August 7, 1986, to become the holding company of First-Citizens Bank & Trust Company (“FCB,” or “the Bank”), its banking subsidiary. FCB opened in 1898 as the Bank of Smithfield in Smithfield, North Carolina, and later changed its name to First-Citizens Bank & Trust Company. BancShares has expanded through de novo branching and acquisitions and now operates in 19 states, providing a broad range of financial services to individuals, businesses and professionals. At December 31, 2020, BancShares had total consolidated assets of $49.96 billion.
Throughout its history, the operations of BancShares have been significantly influenced by descendants of Robert P. Holding, who came to control FCB during the 1920s. Robert P. Holding’s children and grandchildren have served as members of the Board of Directors (the “Board”), as chief executive officers and in other executive management positions and, since BancShares’ formation in 1986, have remained shareholders owning a large percentage of its common stock.
The Chairman of the Board and Chief Executive Officer, Frank B. Holding, Jr., is the grandson of Robert P. Holding. Hope Holding Bryant, Vice Chairman of BancShares, is Robert P. Holding’s granddaughter. Peter M. Bristow, President of BancShares, is the brother-in-law of Frank B. Holding, Jr. and Hope Holding Bryant.
BancShares seeks to meet the financial needs of both individuals and commercial entities in its market areas through a wide range of retail and commercial banking services. Loan services include various types of commercial, business and consumer lending. Deposit services include checking, savings, money market and time deposit accounts. BancShares’ subsidiaries also provide mortgage lending, a full-service trust department, wealth management services for businesses and individuals, and other activities incidental to commercial banking. FCB’s wholly owned subsidiaries, First Citizens Investor Services, Inc. (“FCIS”) and First Citizens Asset Management, Inc. (“FCAM”), provide various investment products and services. As a registered broker/dealer, FCIS provides a full range of investment products, including annuities, discount brokerage services and third-party mutual funds. As registered investment advisors, FCIS and FCAM provide investment management services and advice.
BancShares’ subsidiaries deliver products and services to their customers through an extensive branch network as well as digital banking, telephone banking and various ATM networks. Services offered at most offices include the taking of deposits, the cashing of checks and providing for individual and commercial cash needs. Business customers may conduct banking transactions through the use of remote image technology.
Statistical information regarding our business activities is found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Business Combinations
BancShares pursues growth through strategic acquisitions to enhance organizational value, strengthen its presence in existing markets, as well as expand its footprint in new markets. In 2020, BancShares completed the acquisition of Community Financial Holding Company, Inc. In 2019, BancShares completed the acquisitions of Entegra Financial Corp., First South Bancorp, Inc., and Biscayne Bancshares, Inc.
On October 15, 2020, BancShares and CIT Group Inc., a Delaware corporation (“CIT”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB (“Merger Sub”), and CIT, the parent company of CIT Bank, N.A., a national banking association (“CIT Bank”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the “First-Step Merger”), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the “Mergers”). The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the “Transaction”). On February 9, 2021, BancShares and CIT each held a special meeting of shareholders where they received the necessary shareholder approvals for the consummation of the Transaction from their respective shareholders.
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The Transaction will create a bank with over $100 billion in assets and combines management teams with extensive experience integrating acquired institutions. Additionally, the Transaction brings together complementary strengths with CIT’s national commercial lending franchise and our low-cost retail deposits and full suite of banking products. This also allows us to diversify our deposit strategy, combining our large branch network and CIT’s rapidly growing homeowner association business, direct bank and Southern California branches. The combined bank expects to be well-positioned to leverage its product portfolio and technology across the franchises and make additional investments in technology to enhance the customer experience and increase shareholder value.
Additional information relating to business combinations is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Business Combinations,” and Item 8. Notes to Consolidated Financial Statements, Note B, Business Combinations, in this Annual Report on Form 10-K.
Competition
The financial services industry is highly competitive. BancShares’ subsidiaries compete with national, regional and local financial services providers. In recent years, the ability of non-bank financial entities to provide services has intensified competition. Non-bank financial service providers are not subject to the same significant regulatory restrictions as traditional commercial banks. More than ever, customers have the ability to select from a variety of traditional and nontraditional alternatives. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits and customer convenience.
FCB’s primary deposit markets are North Carolina and South Carolina, which represent approximately 50.8% and 22.6%, respectively, of total FCB deposits. FCB’s deposit market share in North Carolina and South Carolina was 4.2% and 9.1%, respectively, as of June 30, 2020, based on the Federal Deposit Insurance Corporation (“FDIC”) Deposit Market Share Report, which makes FCB the fourth largest bank in both North Carolina and South Carolina. The three banks larger than FCB based on deposits in North Carolina and South Carolina as of June 30, 2020 include Bank of America, Truist Bank and Wells Fargo. These banks collectively controlled 78.8% and 46.3% of North Carolina and South Carolina deposits, respectively as of June 30, 2020.
Geographic Locations and Human Capital
As of December 31, 2020, BancShares operated 542 branches in Arizona, California, Colorado, Florida, Georgia, Kansas, Maryland, Missouri, North Carolina, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington, Wisconsin and West Virginia. Following the planned merger with CIT, we will add approximately 90 branches, primarily located in Southern California, to our branch network.
BancShares and its subsidiaries employ approximately 6,451 full-time staff and approximately 271 part-time staff for a total of 6,722 employees. Women and ethnically diverse associates make up approximately 68% and 27% of total employees, respectively, and our Executive Leadership Team includes two women.
Our ability to attract, retain and develop associates who align with our purpose is key to our success. BancShares’ human capital strategy is predicated on ensuring the organization has the right people with the right skills in the right places at the right time for the right cost to fulfill its mandate and strategic objectives. Our human resources team works to formalize the process of defining and deploying the mission-critical talent needed to align the Bank with the financial and strategic goals and objectives. Key human capital initiatives include scaling and developing talent, enhancing performance management and coaching, and accelerating inclusion, equity and diversity initiatives. The retention and integration of key CIT employees will be a significant initiative upon the expected completion of the merger. The Board monitors these initiatives and associated risks primarily through its Risk Committee.
To assist with these goals, we monitor and evaluate various metrics, specifically around attraction, retention and development of talent. Our annual voluntary turnover is relatively low compared to the industry. We believe this reflects our strong corporate culture, competitive compensation and benefit structures and commitment to career development.
Compensation and Benefits
We strive to provide robust compensation and benefits to our employees. In addition to salaries, compensation and benefit programs include a 401(k) plan with employer matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off and other employee assistance programs.
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COVID-19 Pandemic
The health and wellness of our employees is also critical to our success. In an effort to keep our employees safe during the COVID-19 pandemic, we have implemented a number of new health-related measures, including protocols governing the use of face masks and hand sanitizer, a flexible work-from-home policy, enhanced cleaning procedures at our corporate and branch offices, social-distancing protocols and limitations on in-person meeting and other gatherings.
Regulatory Considerations
Various laws and regulations administered by regulatory agencies affect BancShares’ and its subsidiaries’ corporate practices, including the payment of dividends, the incurrence of debt, and the acquisition of financial institutions and other companies. They also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, the types of business conducted and the location of offices.
Numerous statutes and regulations also apply to and restrict the activities of BancShares and its subsidiaries, including limitations on the ability to pay dividends, capital requirements, reserve requirements, deposit insurance requirements and restrictions on transactions with related persons and entities controlled by related persons. The impact of these statutes and regulations is discussed below and in the accompanying consolidated financial statements.
Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, significantly restructured the financial services regulatory environment; imposed significant regulatory and compliance changes; increased capital, leverage and liquidity requirements; and expanded the scope of oversight responsibility of certain federal agencies through the creation of new oversight bodies. For example, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws.
Effective during 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”), while largely preserving the fundamental elements of the post-Dodd-Frank Act regulatory framework, modified certain requirements of the Dodd-Frank Act as they applied to regional and community banking organizations. Certain of the significant requirements of the Dodd-Frank Act are listed below with information regarding how they apply to BancShares following the enactment of the EGRRCPA.
Capital Planning and Stress Testing. The Dodd-Frank Act mandated stress tests be developed and performed to ensure financial institutions have sufficient capital to absorb losses and support operations during multiple economic and bank scenarios. The EGRRCPA gave immediate relief from stress testing for applicable bank holding companies and therefore, BancShares is no longer required to submit company-run annual stress tests. Notwithstanding these amendments to the stress testing requirements, the federal banking agencies indicated, through inter-agency guidance, the capital planning and risk management practices of institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process. BancShares will continue to monitor its capital consistent with the safety and soundness expectations of the federal regulators through the use of internal, customized stress testing in order to support the business and its capital planning process, as well as prudent risk mitigation. In preparation for crossing the $100 billion threshold following the expected closing of the merger with CIT, BancShares is reviewing the applicable regulatory guidance in order to ensure all requirements are met in a timely manner.
The Volcker Rule. The Volcker Rule was promulgated to implement provisions of the Dodd-Frank Act. It prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. The EGRRCPA exempted many financial institutions with total consolidated assets of less than $10 billion from the Volcker Rule, but it continues to apply to BancShares and its subsidiaries. However, the Volcker Rule does not significantly impact our operations as we do not have any significant engagement in the businesses it prohibits.
Ability-to-Repay and Qualified Mortgage Rule. Creditors are required to comply with mortgage reform provisions prohibiting the origination of any residential mortgages that do not meet rigorous Qualified Mortgage standards or Ability-to-Repay standards. All mortgage loans originated by FCB meet Ability-to-Repay standards and a substantial majority also meet Qualified Mortgage standards. The EGRRCPA impact on the original Ability-to-Repay and Qualified Mortgage standards is only applicable to banks with less than $10 billion in total consolidated assets.
BancShares
General. As a financial holding company registered under the Bank Holding Company Act (“BHCA”) of 1956, as amended, BancShares is subject to supervision, regulation and examination by the Federal Reserve Board (“Federal Reserve,” or “FRB”). BancShares is also registered under the bank holding company laws of North Carolina and is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks (“NCCOB”).
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Permitted Activities. A bank holding company is limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities the Federal Reserve determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies, such as BancShares, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve), without prior approval of the Federal Reserve. Activities financial in nature include securities underwriting and dealing, serving as an insurance agent and underwriter and engaging in merchant banking.
Acquisitions. A bank holding company (“BHC”) must obtain approval from the Federal Reserve prior to directly or indirectly acquiring ownership or control of 5% of the voting shares or substantially all of the assets of another BHC or bank or prior to merging or consolidating with another BHC.
Status Requirements. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be well-capitalized and well-managed. A depository institution subsidiary is considered to be well-capitalized if it satisfies the requirements for this status under applicable Federal Reserve capital requirements. A depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve may impose limitations or conditions on the conduct of its activities.
Capital Requirements. The Federal Reserve imposes certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “Subsidiary Bank - FCB.” As of December 31, 2020, the total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 and Tier 1 leverage capital ratios of BancShares were 10.61%, 13.81%, 11.63% and 7.86%, respectively, and each capital ratio listed above exceeded the applicable minimum requirements as well as the well-capitalized standards. Subject to its capital requirements and certain other restrictions, BancShares is able to borrow money to make capital contributions to FCB and such loans may be repaid from dividends paid by FCB to BancShares.
Source of Strength. Under the Dodd-Frank Act, bank holding companies are required to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, BancShares is expected to commit resources to support FCB, including times when BancShares may not be in a financial position to provide such resources. Any capital loans made by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Safety and Soundness. The federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and to the FDIC insurance fund in the event of a depository institution default.
Limits on Dividends and Other Payments. BancShares is a legal entity, separate and distinct from its subsidiaries. Revenues of BancShares primarily result from dividends received from FCB. There are various legal limitations applicable to the payment of dividends by FCB to BancShares and to the payment of dividends by BancShares to its shareholders. The payment of dividends by FCB or BancShares may be limited by certain factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit FCB or BancShares from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending on the financial condition of FCB or BancShares, could be deemed to constitute such an unsafe or unsound practice.
Under the Federal Deposit Insurance Act, insured depository institutions, such as FCB, are prohibited from making capital distributions, including the payment of dividends, if, after making such distributions, the institution would become “undercapitalized” as such term is used in the statute. Additionally, under Basel III capital requirements, banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Based on FCB’s current
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financial condition, BancShares currently does not expect these provisions to have any material impact on its ability to receive dividends from FCB. BancShares’ non-bank subsidiaries pay dividends to BancShares periodically on a non-regulated basis.
Subsidiary Bank - FCB
General. FCB is a state-chartered bank, subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the NCCOB. Deposit obligations are insured by the FDIC to the maximum legal limits.
Capital Requirements. Bank regulatory agencies approved Basel III regulatory capital guidelines aimed at strengthening existing capital requirements through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. BancShares and FCB implemented the requirements of Basel III effective January 1, 2015, subject to a transition period for several aspects of the rule. The table below describes the minimum and well-capitalized requirements and conservation buffer.
Basel III minimum requirement Basel III conservation buffer Basel III well-capitalized
Total risk-based capital ratio 8.00% 2.50% 10.00%
Tier 1 risk-based capital ratio 6.00 2.50 8.00
Common equity Tier 1 4.50 2.50 6.50
Tier 1 leverage ratio 4.00 N/A 5.00
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with ratios above the minimum, but below the conservation buffer, will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on FCB’s consolidated financial statements. As of December 31, 2020, FCB exceeded the applicable minimum requirements as well as the well-capitalized standards.
Although FCB is unable to control the external factors influencing its business, by maintaining high levels of balance sheet liquidity, prudently managing interest rate exposures, ensuring capital positions remain strong and actively monitoring asset quality, FCB seeks to minimize the potentially adverse risks of unforeseen and unfavorable economic trends and to take advantage of favorable economic conditions and opportunities when appropriate.
Transactions with Affiliates. Pursuant to Sections 23A and 23B of the Federal Reserve Act, Regulation W and Regulation O, the authority of FCB to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between FCB and its affiliates, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to FCB, as those prevailing for comparable nonaffiliated transactions. In addition, FCB generally may not purchase securities issued or underwritten by affiliates.
FCB receives management fees from its subsidiaries and BancShares for expenses incurred for performing various functions on their behalf. These fees are charged to each company based upon the estimated cost for usage of services by that company. The fees are eliminated from the consolidated financial statements.
Community Reinvestment Act. FCB is subject to the requirements of the Community Reinvestment Act of 1977 (“CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low-and-moderate-income neighborhoods. If FCB receives a rating from the Federal Reserve of less than “satisfactory” under the CRA, restrictions would be imposed on our operating activities. In addition, in order for a financial holding company, like BancShares, to commence any new activity permitted by the BHCA or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. FCB currently has a “satisfactory” CRA rating.
Anti-Money Laundering and the United States Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) Regulation. Governmental policy in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations require financial institutions to take steps to prevent the use of their systems to facilitate the flow of illegal or illicit money or terrorist funds. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded anti-money laundering (“AML”) and financial transparency laws and regulations by imposing new compliance and due diligence obligations, including standards for verifying customer identification at account opening and
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maintaining expanded records, as well as rules promoting cooperation among financial institutions, regulators and law enforcement entities in identifying persons who may be involved in terrorism or money laundering. These rules were expanded to require new customer due diligence and beneficial ownership requirements in 2018. An institution subject to the BSA, such as FCB, must additionally provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The United States has imposed economic sanctions on transactions with certain designated foreign countries, nationals and others. As these rules are administrated by OFAC, these are generally known as the OFAC rules. Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all the relevant laws and regulations, could have serious legal and reputational consequences, including material fines and sanctions. FCB has implemented a program designed to facilitate compliance with the full extent of the applicable BSA and OFAC related laws, regulations and related sanctions.
Consumer Laws and Regulations. FCB is also subject to certain laws and regulations designed to protect consumers in transactions with banks. These laws include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Fair Housing Act and the Servicemembers Civil Relief Act. The laws and related regulations mandate certain disclosures and regulate the manner in which financial institutions transact business with certain customers. FCB must comply with these consumer protection laws and regulations in its relevant lines of business.
Available Information
BancShares does not have its own separate Internet website. However, FCB’s website (www.firstcitizens.com) includes a hyperlink to the Securities and Exchange Commission’s (“SEC”) website where the public may obtain copies of BancShares’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Interested parties may also directly access the SEC’s website (www.sec.gov), which contains reports, proxy and information statements and other information electronically filed by BancShares.
Item 1A. Risk Factors
We are subject to a number of risks and uncertainties that could have a material impact on our business, financial condition and results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities. We categorize risk into the following areas:
Strategic Risk: The risk to earnings or capital arising from business decisions or improper implementation of those decisions.
Operational Risk: The risk of loss resulting from inadequate or failed processes, people and systems or from external events.
Credit Risk: The risk a borrower will fail to perform on an obligation.
Market Risk: The risk to BancShares’ financial condition resulting from adverse movements in market rates or prices, including, but not limited to, interest rates, foreign exchange rates or equity prices.
Liquidity Risk: The risk that BancShares will be unable to meet its obligations as they come due because of an inability to (i) liquidate assets or obtain adequate funding (referred to as “Funding Liquidity Risk”), or (ii) unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (“Market Liquidity Risk”).
Capital Adequacy Risk: The risk that capital levels are inadequate to preserve the safety and soundness of BancShares, support ongoing business operations and strategies and provide support against unexpected or sudden changes in the business/economic environment.
Compliance Risk: The risk of loss or reputational harm resulting from regulatory sanctions, fines, penalties or losses due to the failure to comply with laws, rules, regulations or other supervisory requirements applicable to a financial institution.
Financial Reporting Risk: The risk that financial information is reported incorrectly, including incorrect or incomplete financial information, errors and omissions, or improper application of accounting standards.
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The risks and uncertainties management believes are material are described below. The risks listed are not the only risks BancShares faces. Additional risks and uncertainties that are not currently known or that management does not currently deem material could also have a material adverse impact on our financial condition and/or the results of our operations or our business. If such risks and uncertainties were to materialize or the likelihoods of the risks were to increase, the market price of our common stock could significantly decline.
Strategic Risks
We may be adversely affected by risks associated with completed, pending or any potential future acquisitions.
We plan to continue to grow our business organically. However, we have pursued and expect to continue to pursue acquisition opportunities that we believe support our business strategies and may enhance our profitability. We must generally satisfy a number of material conditions prior to consummating any acquisition including, in many cases, federal and state regulatory approval. We may fail to complete strategic and competitively significant business opportunities as a result of our inability to obtain required regulatory approvals in a timely manner or at all.
Acquisitions of financial institutions, assets of financial institutions, or other operating entities involve operational risks and uncertainties, and acquired companies or assets may have unknown or contingent liabilities, exposure to unexpected asset quality problems that require write downs or write-offs, or difficulty retaining key employees and customers. Additionally, acquired companies may have product lines, regulatory requirements, or operational challenges with which we are not familiar, or for which we lack management experience to expertise. These, among other issues, could negatively affect our results of operations and financial condition.
We may not be able to realize projected cost savings, synergies or other benefits associated with any such acquisition. Failure to efficiently integrate any acquired entities or assets into our existing operations could significantly increase our operating costs and have material adverse effects on our financial condition and results of operations. There can be no assurance that we will be successful in identifying, consummating, or integrating any potential acquisitions.
Specifically, on October 15, 2020, BancShares and CIT, entered into the Merger Agreement by and among BancShares, FCB, Merger Sub, and CIT, the parent company of CIT Bank. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity, and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity. The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank. On February 9, 2021, BancShares and CIT each held a special meeting of shareholders where they received the necessary shareholder approvals for the consummation of the Transaction from their respective shareholders. Subject to certain customary closing conditions, the Transaction is expected to close during the first half of 2021, and certain new risk factors have been identified as a result. These risks and the other risks associated with the Transaction have been more fully discussed in the joint proxy statement/prospectus included in the registration statement on Form S-4 filed with the SEC on December 23, 2020 in connection with the Transaction.
The consummation of the Transaction is contingent upon the satisfaction of a number of conditions, including regulatory approvals, that may be outside of our or CIT's control and that we and CIT may be unable to satisfy or obtain or which may delay the consummation of the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the Transaction or cause the parties to abandon the Transaction.
Consummation of the Transaction is contingent upon the satisfaction of a number of conditions, some of which are beyond our and CIT's control, including, among others:
authorization for listing on Nasdaq of the shares of our capital stock to be issued in the First-Step Merger, subject to official notice of issuance;
the receipt of required domestic and foreign regulatory approvals, including, among others, the approval of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the North Carolina Commissioner of Banks; and
the absence of any order, injunction, decree or other legal restraint preventing the completion of the Mergers or making the completion of the Transaction illegal.
Each party's obligation to complete the Transaction is also subject to certain additional customary conditions, including, among others:
subject to certain exceptions, the accuracy of the representations and warranties of the other party;
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performance in all material respects by the other party of its obligations under the Merger Agreement; and
receipt by each party of an opinion from its counsel to the effect that the Mergers will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.
These conditions to the closing of the Transaction may not be fulfilled in a timely manner or at all, and, accordingly, the Transaction may be delayed substantially or may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, or we or CIT may elect to terminate the Merger Agreement in certain other circumstances.
As a condition to granting required regulatory approvals, governmental entities may impose conditions, limitations or costs, require divestitures or place restrictions on our conduct after the closing of the Transaction. Such conditions or changes and the process of obtaining regulatory approvals could, among other things, have the effect of delaying completion of the Transaction or of imposing additional costs or limitations on us following the Transaction, any of which may have an adverse effect on us following the Transaction.
We and CIT are subject to lawsuits challenging the Transaction, and adverse rulings in these lawsuits may delay or prevent the Transaction from being completed or require us or CIT to incur significant costs to defend or settle these lawsuits. Any delay in completing the Transaction could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Transaction is successfully completed within its expected time frame. We have not yet incurred significant expense related to litigation, but may as litigation proceeds.
We may fail to realize all of the anticipated benefits of the Transaction, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating with CIT.
We and CIT have operated and, until the completion of the Transaction, will continue to operate, independently. The success of the Transaction, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully integrate CIT’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses. Inconsistencies in standards, controls, procedures and policies could adversely affect the combined company. The diversion of management's attention and any delays or difficulties encountered in connection with the Transaction and the integration of CIT's operations could have an adverse effect on the business, financial condition, operating results and prospects of the combined company.
If we experience difficulties in the integration process, including those listed above, we may fail to realize the anticipated benefits of the Transaction in a timely manner or at all.
While the Transaction is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.
Uncertainty about the effect of the Transaction on employees, customers and other persons with whom we or CIT have a business relationship may have an adverse effect on our business, operations and stock price. Our existing customers or existing customers of CIT could decide to no longer do business with us, CIT or the combined company, reducing the anticipated benefits of the Transaction. We and CIT are also subject to certain restrictions on the conduct of our respective businesses while the Transaction is pending. As a result, certain other projects may be delayed or abandoned, and business decisions could be deferred. Employee retention at BancShares and CIT may be challenging before or after completion of the Transaction, as certain employees may experience uncertainty about their future roles with the combined company, and these retention challenges may require us to incur additional expenses in order to retain or replace key employees. If key officers or employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, CIT or the combined company, the benefits of the Transaction could be materially diminished and we could encounter difficulties in replacing them and successfully managing new lines of business with which we do not have management experience or expertise.
We expect to incur substantial expenses related to the Transaction and the integration with CIT.
We and CIT will incur substantial expenses in connection with the Transaction and integration. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the
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elimination of duplicative expenses and the realization of economies of scale. The amount and timing of any charges to earnings as a result of Transaction or integration expenses are uncertain at present.
Our future results will suffer if we do not effectively manage our expanded operations following the Transaction.
Following the Transaction, the size and geographic and operational scope of our business will increase significantly beyond its current size and scope. The Transaction will more than double our asset size and will increase the breadth and complexity of our business with the addition of new business lines in which we have not previously engaged, and new geographic areas in which we currently have no operations and with which we lack familiarity. Our future success depends, in part, upon the ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful in this regard or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Transaction.
We encounter significant competition that may reduce our market share and profitability.
We compete with other banks and specialized financial services providers in our market areas. Our primary competitors include local, regional and national banks; credit unions; commercial finance companies; various wealth management providers; independent and captive insurance agencies; mortgage companies; and non-bank providers of financial services. Some of our larger competitors, including certain banks with a significant presence in our market areas, have the capacity to offer products and services we do not offer. Some of our non-bank competitors operate in less stringent regulatory environments, and certain competitors are not subject to federal and/or state income taxes. The fierce competitive pressures that we face adversely affect pricing for many of our products and services.
Certain provisions in our Certificate of Incorporation and Bylaws may prevent a change in management or a takeover attempt a shareholder might consider to be in their best interests.
Certain provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could delay or prevent the removal of directors and other management. The provisions could also delay or make more difficult a tender offer, merger or proxy contest a shareholder might consider to be in their best interests. For example, our Certificate of Incorporation and/or Bylaws:
allow the Board to issue and set the terms of preferred shares without further shareholder approval;
limit who can call a special meeting of shareholders; and
establish advance notice requirements for nominations for election to the Board and proposals of other business to be considered at annual meetings of shareholders.
These provisions, as well as provisions of the BHCA and other relevant statutes and regulations that require advance notice and/or applications for regulatory approval of changes in control of banks and bank holding companies, may discourage bids for our common stock at a premium over market price, adversely affecting its market price. Additionally, the fact that the Holding family holds or controls shares representing a majority of the voting power of our common stock may discourage potential takeover attempts and/or bids for our common stock at a premium over market price.
Our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our shareholders, which could limit our shareholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees or agents.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, other employees or shareholder to us or our shareholders; (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware or as to which the General Corporation Law of the State of Delaware confers jurisdiction on the Court of Chancery of the State of Delaware; or (iv) any action asserting a claim against us governed by the internal affairs doctrine. These choice of forum provisions do not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act. Accordingly, our choice of forum provisions will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our shareholders will not be deemed to have waived our compliance with these laws, rules and regulations.
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These choice of forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees or agents, which may discourage lawsuits against us and our directors, officers and other employees or agents.
If a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees.
We rely on dividends from FCB.
As a financial holding company, we are a separate legal entity from FCB. We derive most of our revenue and cash flow from dividends paid by FCB. These dividends are the primary source from which we pay dividends on our common stock and interest and principal on our debt obligations. State and federal laws impose restrictions on the dividends that FCB may pay to us. In the event FCB is unable to pay dividends to us for an extended period of time, we may not be able to service our debt obligations or pay dividends on our common stock, and the inability to receive dividends from FCB could have a material adverse effect on our business, financial condition and results of operations.
Our financial performance depends upon our ability to attract and retain clients for our products and services, which may be adversely impacted by weakened consumer and/or business confidence, and by any inability on our part to predict and satisfy customers’ needs and demands.
Our financial performance is subject to risks associated with the loss of client confidence and demand. A fragile or weakening economy, or ambiguity surrounding the economic future, may lessen the demand for our products and services. Our performance may also be negatively impacted if we fail to attract and retain customers because we are not able to successfully anticipate, develop and market products and services that satisfy market demands. Such events could impact our performance through fewer loans, reduced fee income and fewer deposits, each of which could result in reduced net income. The pandemic caused by a novel strain of coronavirus (“COVID-19”), while disruptive to our customers and the economy, has not led to a significant decline in our products and services to date, but it could if its impact on us and our customers continues or increases in the future.
New technologies, and our ability to efficiently and effectively develop, market and deliver new products and services to our customers present competitive risks.
The rapid growth of new digital technologies, including internet services, smart phones and other mobile devices, requires us to continuously evaluate our product and service offerings to ensure they remain competitive. Our success depends in part on our ability to adapt and deliver our products and services in a manner responsive to evolving industry standards and consumer preferences. New technologies by banks and non-bank service providers may create risks if our products and services are no longer competitive with then-current standards, and could negatively affect our ability to attract or maintain a loyal customer base. These risks may affect our ability to grow and could reduce our revenue streams from certain products and services, while increasing expenses associated with developing more competitive solutions. Our results of operations and financial condition could be adversely affected.
Operational Risks
We face significant operational risks in our businesses.
Safely conducting and growing our business requires that we create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways, including employee fraud, customer fraud and control lapses in bank operations and information technology. Our dependence on our employees and internal and third party automated systems to record and process transactions may further increase the risk that technical failures or system-tampering will result in losses that are difficult to detect. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain appropriate operational infrastructure and oversight can lead to loss of service to customers, legal actions and noncompliance with various laws and regulations. We have implemented internal controls that are designed to safeguard and maintain our operational and organizational infrastructure and information. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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The continued economic impacts of a COVID-19 outbreak could affect BancShares' business, financial condition and results of operations.
Beginning in early 2020, COVID-19 spread across most of the world, including the United States ( the “U.S.”). It has caused severe disruptions to the U.S. economy, regional quarantines, business shutdowns, high unemployment, disruptions to supply chains, and overall economic instability that has adversely impacted the operations, activities and business of BancShares and its customers. Effects have generally been felt across all industries, including financial services.
In response to the national public health crisis, Federal, State and Local governments continue to impose an array of restrictions on the way all businesses conduct their operations and on our customers, business partners, vendors and employees. These restrictions, along with other economic factors including inflation risks, oil price volatility, and changes in interest rates have and may continue to destabilize financial markets and negatively impact our customers’ business activities and operations, making it difficult for them to satisfy existing debt obligations. They also have led to elevated unemployment and slower consumer spending which in turn will increase our collection risk as deteriorating economic conditions correlate with lower credit quality metrics and higher customer defaults on loans. Economic pressures and uncertainty have and may continue to change consumer and business behaviors, which, in the short and long term, could affect borrowers’ creditworthiness and the demand for loans and other products and services we offer. BancShares is actively monitoring the loan portfolio to identify changes in credit risk within a specific geography, loan class, or within a particular industry concentration. Therefore, provision expense could increase as we incorporate these changes into our estimate on the allowance for credit losses.
Additionally, our operations have experienced disruptions as we operate in a remote working environment for most corporate employees and we have adjusted branch operations and corporate processes. With continued uncertainty around outbreak severity within impacted areas, there may be increased absenteeism, and lost productivity as a result of the remote workforce. We may see an increased incidence of cybersecurity threats or fraud as cyber-criminals look to profit from the disruption and potential strain on information technology and the fear of the general public. There may be disruption in critical third party services as they operate in the current environment. BancShares has a comprehensive business continuity and data security plan in place along with third party risk management, but may not be able to mitigate all of the issues identified above.
Market volatility and general uncertainty in the capital markets may also impact our business. Our access to capital and liquidity could be limited by market disruptions which could be exacerbated by delays in customer payments or significant withdrawals from customer deposit accounts. In addition, the fair value of our assets and liabilities will be impacted by the changing market environment. This could also increase liquidity and capital adequacy risks, as well as long-lived asset impairment risk.
As the government and its regulatory bodies respond to the crisis, it increases the burden on our associates to quickly respond to changing regulatory guidance. This could increase the risk of noncompliance.
The effects of the COVID-19 pandemic will heighten specific risk factors and could impact substantially all risk factors described herein. Those effects will adversely affect our business operations and results at least until the outbreak has subsided, and the negative effects on the economy, our customers and our business and results likely will continue to be felt for some time afterwards. The full extent of the impact will depend on future developments that are highly uncertain including the duration and spread of the outbreak, its severity, governmental actions to contain the virus, and the long term economic impact, both globally, as well as in our banking markets, which includes a potential recession.
A cyber attack, information or security breach, or a technology failure of ours or of a third party could adversely affect our ability to conduct our business, manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
Our businesses are highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact or on whom we rely. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.
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We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of, cyber attacks. These cyber attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of ours, our employees, our customers or of third parties, damages to systems, or other material disruption to our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Additionally, the existence of cyber attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches, whether directed at us or third parties, there can be no assurance that we will not suffer such losses or other consequences in the future. Risks are also heightened as a result of the increased remote workforce in response to the COVID-19 pandemic. Cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including financial counterparties; financial intermediaries such as clearing agents, exchanges and clearing houses; vendors; regulators; providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses.
Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.
We are exposed to losses related to fraud.
As technology continues to evolve, criminals are using increasingly more sophisticated techniques to commit and hide fraudulent activity. Fraudulent activity can come in many forms, including debit card/credit card fraud, check fraud, wire fraud, electronic scanning devices attached to ATM machines, social engineering, digital fraud and phishing attacks to obtain personal information and fraudulent impersonation of our clients through the use of falsified or stolen credentials. To counter the increased sophistication of these fraudulent activities, we have increased our investment in systems, technologies and controls to detect and prevent such fraud. Combating fraudulent activities as they evolve will result in continued ongoing investments in the future as significant fraud could adversely impact our reputation or results of operation.
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We depend on key personnel for our success.
Our success depends to a great extent on our ability to attract and retain key personnel. We have an experienced management team the Board believes is capable of managing and growing our business. Losses of, or changes in, our current executive officers or other key personnel and their expertise and services may disrupt our business and could adversely affect our financial condition, results of operations and liquidity. We have developed an Executive Officer succession plan, but we cannot be certain of its transition or implementation success. There also can be no assurance we will be successful in retaining our current executive officers or other key personnel, or hiring additional key personnel to assist in executing our growth, expansion and acquisition strategies.
We are subject to litigation risks, and our expenses related to litigation may adversely affect our results.
We are subject to litigation risks in the ordinary course of our business. Claims and legal actions, including supervisory actions by our regulators, that may be initiated against us from time to time could involve large monetary sums and significant defense costs. During the last credit crisis, we saw the number of cases and our expenses related to those cases increase. The outcomes of such cases are always uncertain until finally adjudicated or resolved.
We establish reserves for legal claims when payments associated with the claims become probable and our liability can be reasonably estimated. We may still incur legal costs for a matter even if we have not established a reserve. In addition, the actual amount paid in resolution of a legal claim may be substantially higher than any amounts reserved for the matter. The ultimate resolution of a legal proceeding, depending on the remedy sought and any relief granted, could materially adversely affect our results of operations and financial condition.
Substantial legal claims or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. We may be exposed to substantial uninsured legal liabilities and/or regulatory actions which could adversely affect our results of operations and financial condition. For additional information, see the Notes to the Consolidated Financial Statements, Note T, Commitments and Contingencies, in this Annual Report on Form 10-K.
Our business and financial performance could be impacted by natural disasters, acts of war or terrorist activities.
Natural disasters (including but not limited to earthquakes, hurricanes, tornadoes, floods, fires, and explosions), acts of war and terrorist activities could hurt our performance (i) directly through damage to our facilities or other impacts to our ability to conduct business in the ordinary course, and (ii) indirectly through such damage or impacts to our customers, suppliers or other counterparties. In particular, a significant amount of our business is concentrated in North Carolina and South Carolina, including coastal areas where our retail and commercial customers have been and in the future could be impacted by hurricanes and flooding. We could also suffer adverse results to the extent that disasters, wars, terrorist activities, riots or civil unrest affect the broader markets or economy. Our ability to minimize the consequences of such events is in significant measure reliant on the quality of our disaster recovery planning and our ability, if any, to forecast the events.
We rely on third parties.
Third party vendors provide key components of our business infrastructure, including certain data processing and information services. Their services could be difficult to quickly replace in the event of failure or other interruption in service. Failures of certain vendors to provide services could adversely affect our ability to deliver products and services to our customers. External vendors also present information security risks. We monitor significant vendor risks, including the financial stability of critical vendors. The failure of a critical external vendor could disrupt our business and cause us to incur significant expense.
The quality of our data could deteriorate and cause financial or reputational harm to the Bank.
While we have a Data Governance program, it is reliant on the execution of procedures, process controls and system functionality and there is no guarantee errors will not occur. Incomplete, inconsistent, or inaccurate data could lead to non-compliance with regulatory statutes and result in fines. Additionally, customer impact could result in reputational harm and customer attrition. Inaccurate or incomplete data presents the risk that business decisions relying on such data will prove inefficient or ineffective. Additionally, information we provide to our investors and regulators may be negatively impacted by inaccurate or incomplete data.
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Malicious action by an employee could result in harm to our customers or the Bank.
Several high-profile cases of misconduct have occurred at other financial institutions. Such an event may lead to large regulatory fines, as well as an erosion in customer confidence, which could impact our financial position. BancShares’ employees are subject to a code of ethics which requires annual review. We also have policies governing our compensation, conduct and sales practices designed to deter and respond to potential employee misconduct.
Credit Risks
If we fail to effectively manage credit risk, our business and financial condition will suffer.
We must effectively manage credit risk. There are risks inherent in making any loan, including risks of repayment, risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. There is no assurance that our loan approval procedures and our credit risk monitoring are or will be adequate to or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business, and our consolidated results of operations and financial condition.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
We maintain an allowance for credit losses (“ACL”) that is designed to cover credit losses on loans that borrowers may not repay in their entirety. An ACL is also recorded over expected losses in investment securities and unfunded commitments, though these are not significant compared to losses within the loan portfolio. We believe that we maintain an ACL at a level adequate to absorb the expected credit losses over the life of the loan portfolio, adjusted for expected contractual payments and the impact of prepayments, in compliance with applicable accounting and regulatory guidance. However, the ACL may not be sufficient to cover actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Accounting measurements related to asset impairment and the ACL require significant estimates that are subject to uncertainty and revisions driven by new information and changing circumstances. The significant uncertainties surrounding our borrowers’ abilities to conduct their businesses successfully through changing economic environments, competitive challenges and other factors complicate our estimates of the risk and/or amount of loss on any loan. Due to the degree of uncertainty and the susceptibility to change, the actual losses may vary from current estimates. We also expect fluctuations in the ACL due to economic changes nationally as well as locally within the states in which we conduct business. This is especially true as the economy reacts to the continuation of and potential recovery from the COVID-19 pandemic.
As an integral part of their examination process, our banking regulators periodically review the ACL and may require us to increase it by recognizing additional provisions for credit losses charged to expense or to decrease the allowance by recognizing loan charge-offs, net of recoveries. Any such required additional credit loss provisions or loan charge-offs could have a material adverse effect on our financial condition and results of operations.
Our concentration of loans to borrowers within the medical and dental industries could impair our earnings if those industries experience economic difficulties.
Statutory or regulatory changes, or economic conditions in the market generally, could negatively impact borrowers’ businesses and their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations. Additionally, smaller practices such as those in the dental industry generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, and generally have a heightened vulnerability to negative economic conditions. Consequently, we could be required to increase our ACL through additional provisions on our income statement, which would reduce reported net income. While medical and dental practices were initially impacted by the coronavirus pandemic, there have not been significant credit deterioration or increased provisions for these borrowers to date. See Note D, Loans and Leases, in the Notes to the Consolidated Financial Statements for additional discussion.
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Economic conditions in real estate markets and our reliance on junior liens may adversely impact our business and our results of operations.
Real property collateral values may be impacted by economic conditions in the real estate market and may result in losses on loans that, while adequately collateralized at the time of origination, become inadequately collateralized. Our reliance on junior liens is concentrated in our consumer revolving mortgage loan portfolio. Approximately two-thirds of the consumer revolving mortgage portfolio is secured by junior lien positions, and lower real estate values for collateral underlying these loans may cause the outstanding balance of the senior lien to exceed the value of the collateral, resulting in a junior lien loan becoming effectively unsecured. Inadequate collateral values, rising interest rates and unfavorable economic conditions could result in greater delinquencies, write-downs or charge-offs in future periods, which could have a material adverse impact on our results of operations and capital adequacy.
Our financial condition could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty and/or other relationships. We have exposure to numerous financial services providers, including banks, securities brokers and dealers and other financial services providers. Although we monitor the financial conditions of financial institutions with which we have credit exposure, transactions with those institutions expose us to credit risk through the possibility of counterparty default.
Market Risks
Unfavorable economic conditions could adversely affect our business.
Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. Our banking operations are located within several states but are locally oriented and community-based. Our retail and commercial banking activities are primarily concentrated within the same geographic footprint. Our markets include the Southeast, Mid-Atlantic, Midwest and Western United States, with our greatest presence in North Carolina and South Carolina. Worsening economic conditions within our markets, particularly within North Carolina and South Carolina, could have a material adverse effect on our financial condition, results of operations and cash flows. Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve. Unfavorable changes in unemployment, real estate values, interest rates and other factors could weaken the economies of the communities we serve. The COVID-19 pandemic has created volatility and uncertainty in the economy, which has and will continue to impact our business. Thus far, this includes declines in fee income and impacts on the fair value of our equity securities, but could create additional negative impacts to provision for credit losses and declines in demand for our products and services.
In addition, the political environment, the level of U.S. debt and global economic conditions can have a destabilizing effect on financial markets. Weakness in any of our market areas could have an adverse impact on our earnings, and consequently, our financial condition and capital adequacy.
Accounting for acquired assets may result in earnings volatility.
Fair value discounts that are recorded at the time an asset is acquired are accreted into interest income based on accounting principles generally accepted in the U.S. (“GAAP”). The rate at which those discounts are accreted is unpredictable and the result of various factors including prepayments and estimated credit losses. Post-acquisition credit deterioration results in the recognition of provision expense. Additionally, the income statement impact of adjustments to the indemnification asset recorded in certain FDIC-assisted transactions may occur over a shorter period of time than the adjustments to the covered assets.
Fair value discount accretion, post-acquisition impairment and adjustments to the indemnification asset may result in significant volatility in our earnings. Volatility in earnings could unfavorably influence investor interest in our common stock, thereby depressing the market value of our stock and the market capitalization of our company.
The performance of equity securities and corporate bonds in the investment portfolio could be adversely impacted by the soundness and fluctuations in the market values of other financial institutions.
Our investment securities portfolio contains certain equity securities and corporate bonds of other financial institutions. As a result, a portion of our investment securities portfolio is subject to fluctuation due to changes in the financial stability and market value of other financial institutions, as well as interest rate sensitivity to economic and market conditions. Such fluctuations could have an adverse effect on our results of operations. We have seen volatile earnings impacts related to the fair value of equity securities throughout 2020.
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Failure to effectively manage our interest rate risk could adversely affect us.
Our results of operations and cash flows are highly dependent upon net interest income. Interest rates are sensitive to economic and market conditions that are beyond our control, including the actions of the Federal Reserve Board’s Federal Open Market Committee (“FOMC”). Changes in monetary policy could influence interest income, interest expense, and the fair value of our financial assets and liabilities. If changes in interest rates on our interest-earning assets are not equal to the changes in interest rates on our interest-bearing liabilities, our net interest income and, therefore, our net income, could be adversely impacted.
As interest rates rise, our interest expense will increase and our net interest margins may decrease, negatively impacting our performance and, potentially, our financial condition. To the extent banks and other financial services providers compete for interest-bearing deposit accounts through higher interest rates, our deposit base could be reduced if we are unwilling to pay those higher rates. If we decide to compete with those higher interest rates, our cost of funds could increase and our net interest margins could be reduced. Additionally, higher interest rates will impact our ability to originate new loans. Increases in interest rates could adversely affect the ability of our borrowers to meet higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and net charge-offs, which could adversely affect our business and financial condition.
Although we maintain an interest rate risk monitoring system, the forecasts of future net interest income are estimates and may be inaccurate. Actual interest rate movements may differ from our forecasts, and unexpected actions by the FOMC may have a direct impact on market interest rates.
We may be adversely impacted by the transition from LIBOR as a reference rate
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). Subsequent announcements have delayed the potential date for certain LIBOR tenors until June 30, 2023. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, there is still uncertainty around how quickly different alternative rates will develop sufficient liquidity and industry-wide usage, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

We have loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create additional costs and risks. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, systems, contracts, valuation tools, and product design. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation and potentially introduce additional legal risks. Although our current LIBOR exposure on loans is limited to less than $5 billion, and we are currently taking steps to transition to alternative reference rates, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
The value of our goodwill may decline in the future.
At December 31, 2020, we had $350.3 million of goodwill recorded as an asset on our balance sheet. We test goodwill for impairment at least annually, comparing the estimated fair value of a reporting unit with its net book value. We also test goodwill for impairment when certain events occur, such as a significant decline in our expected future cash flows, a significant adverse change in the business climate or a sustained decline in the price of our common stock. These tests may result in a write-off of goodwill deemed to be impaired, which could have a significant impact on our financial results; however, any such write-off would not impact our regulatory capital ratios, given that regulatory capital ratios are calculated using tangible capital amounts.
The market price of our stock may be volatile.
Although publicly traded, our common stock, particularly our Class B common stock, has less liquidity and public float than many other large, publicly traded financial services companies. Lower liquidity increases the price volatility of our stock and could make it difficult for our shareholders to sell or buy our common stock at specific prices.
Excluding the impact of liquidity, the market price of our common stock can fluctuate widely in response to other factors, including expectations of financial and operating results, actual operating results, actions of institutional shareholders, speculation in the press or the investment community, market perception of acquisitions, rating agency upgrades or downgrades, stock prices of other companies that are similar to us, general market expectations related to the financial services industry and the potential impact of government actions affecting the financial services industry. For example, the closing price per share of our Class A Common stock on the Nasdaq Global Select Market ranged from a low of $282.90 to a high of $613.22 during the year ended December 31, 2020.
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Liquidity Risks
If our current level of balance sheet liquidity were to experience pressure, it could affect our ability to pay deposits and fund our operations.
Our deposit base represents our primary source of core funding and balance sheet liquidity. We normally have the ability to stimulate core deposit growth through reasonable and effective pricing strategies. However, in circumstances where our ability to generate needed liquidity is impaired, we need access to non-core funding such as borrowings from the Federal Home Loan Bank (“FHLB”) and the Federal Reserve, Federal Funds purchased lines and brokered deposits. While we maintain access to these non-core funding sources, some sources are dependent on the availability of collateral as well as the counterparty’s willingness and ability to lend.
Capital Adequacy Risks
Our ability to grow is contingent upon access to capital.
Our primary capital sources have been retained earnings and debt issued through both private and public markets. Rating agencies regularly evaluate our creditworthiness and assign credit ratings to BancShares and FCB. The ratings of the agencies are based on a number of factors, some of which are outside our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions generally affecting the financial services industry. There can be no assurance that we will maintain our current credit ratings. Rating reductions could adversely affect our access to funding sources and the cost of obtaining funding.
Based on existing capital levels, BancShares and FCB are well-capitalized under current leverage and risk-based capital standards. Our ability to grow is contingent on our ability to generate sufficient capital to remain well-capitalized under current and future capital adequacy guidelines.
We are subject to capital adequacy and liquidity guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected.
Under regulatory capital adequacy guidelines and other regulatory requirements, BancShares, together with FCB, must meet certain capital and liquidity guidelines, subject to qualitative judgments by regulators about components, risk weightings and other factors.
We are subject to capital rules issued by the Federal Reserve including required minimum capital and leverage ratios. These requirements could adversely affect our ability to pay dividends, restrict certain business activities or compel us to raise capital, each of which may adversely affect our results of operations or financial condition. See Item 1. Business of this Annual Report on Form 10-K for additional information regarding the capital requirements under the Dodd-Frank Act and Basel III.
Compliance Risks
We operate in a highly regulated industry; the laws and regulations that govern our operations, taxes, corporate governance, executive compensation and financial accounting and reporting, including changes in them or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation and supervision that govern almost all aspects of our operations. In addition to a multitude of regulations designed to protect customers, depositors and consumers, we must comply with other regulations that protect the deposit insurance fund and the stability of the U.S. financial system, including laws and regulations that, among other matters, prescribe minimum capital requirements; impose limitations on our business activities and investments; limit the dividends or distributions that we can pay; restrict the ability of our bank subsidiaries to guarantee our debt; and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations can be difficult and costly, and changes in laws and regulations often impose additional compliance costs.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations issued by the SEC and The Nasdaq Stock Market LLC (“Nasdaq”), as well as numerous other recently enacted statutes and regulations, including the Dodd-Frank Act, EGRRCPA, and regulations promulgated thereunder, have increased the scope, complexity and cost of corporate governance and reporting and disclosure practices, including the costs of completing our external audit and maintaining our internal controls. Such additional regulation and supervision may limit our ability to pursue business opportunities.
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The failure to comply with these various rules and regulations could subject us to restrictions on our business activities, including mergers and acquisitions, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our common stock.
We may be adversely affected by changes in U.S. tax laws and other laws and regulations.
Corporate tax rates affect our profitability and capital levels. The U.S. corporate tax code may be further reformed by the U.S. Congress and additional guidance may be issued by the U.S. Department of the Treasury. Changes in tax laws and regulations, and income tax rates in particular, could have an adverse impact on our financial condition and results of operations.
Financial Reporting Risks
Accounting standards may change and increase our operating costs and/or otherwise adversely affect our results.
FASB and the SEC periodically modify the standards governing the preparation of our financial statements. The nature of these changes is not predictable and could impact how we record transactions in our financial statements, which could lead to material changes in assets, liabilities, shareholders’ equity, revenues, expenses and net income. In some cases, we could be required to apply new or revised standards retroactively, resulting in changes to previously reported financial results or a cumulative adjustment to retained earnings. Implementation of new accounting rules or standards could additionally require us to implement technology changes which could impact ongoing earnings.
Our accounting policies and processes are critical to the reporting of financial condition and results of operations. They require management to make estimates about matters that are uncertain.
Accounting policies and processes are fundamental to how BancShares records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with GAAP. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in BancShares reporting materially different results than would have been reported under a different alternative.
Management has identified certain accounting policies as being critical because they require management to make difficult, subjective or complex conclusions about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. BancShares has established policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding management's judgments and the estimates pertaining to these matters, BancShares cannot guarantee that it will not be required to adjust accounting policies or restate prior period financial statements. See “Critical Accounting Policies” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our business is highly quantitative and requires widespread use of financial models for day-to-day operations; these models may produce inaccurate predictions that significantly vary from actual results.
We rely on quantitative models to measure risks and to estimate certain financial values. Such models may be used in many processes including, but not limited to, the pricing of various products and services, classifications of loans, setting interest rates on loans and deposits, quantifying interest rate and other market risks, forecasting losses, measuring capital adequacy and calculating economic and regulatory capital levels. Models may also be used to estimate the value of financial instruments and balance sheet items. Inaccurate or erroneous models present the risk that business decisions relying on the models will prove inefficient or ineffective. Additionally, information we provide to our investors and regulators may be negatively impacted by inaccurately designed or implemented models. For further information on models, see the “Risk Management” section included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
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Failure to maintain an effective system of internal control over financial reporting could have a material adverse effect on our results of operations and financial condition and disclosures.
We must have effective internal controls over financial reporting in order to provide reliable financial reports, to effectively prevent fraud and to operate successfully as a public company. If we were unable to provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of our internal controls over financial reporting, we may discover material weaknesses or significant deficiencies requiring remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We continually work to improve our internal controls; however, we cannot be certain that these measures will ensure appropriate and adequate controls over our future financial processes and reporting. Any failure to maintain effective controls or to implement any necessary improvement of our internal controls in a timely manner could, among other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, each of which could have a material adverse effect on our results of operations and financial condition and the market value of our common stock.
Item 2. Properties
BancShares’ and FCB’s headquarters facility, a nine-story building with approximately 163,000 square feet, is located in Raleigh, North Carolina. In addition, FCB occupies two separate facilities in Raleigh as well as a facility in Columbia, South Carolina, which serve as data and operations centers. As of December 31, 2020, FCB operated 542 branch offices throughout the Southeast, Mid-Atlantic, Midwest and Western United States. FCB owns many of the buildings and leases other facilities from third parties.
Additional information relating to premises, equipment and lease commitments is set forth in Note F, Premises and Equipment, of BancShares’ Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
BancShares and various subsidiaries are named as defendants in various legal actions arising from our normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions exist that would be material to BancShares’ consolidated financial statements. Additional information related to legal proceedings is set forth in Note T, Commitments and Contingencies, of BancShares’ Notes to Consolidated Financial Statements.
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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
BancShares has two classes of common stock—Class A common and Class B common. Shares of Class A common have one vote per share, while shares of Class B common have 16 votes per share. BancShares’ Class A common stock is listed on the Nasdaq Global Select Market under the symbol FCNCA. The Class B common stock is traded on the over-the-counter market and quoted on the OTC Pink Market under the symbol FCNCB. As of February 22, 2021, there were aggregates of 1,127 and 175 holders of record and individual participants in securities position listings with respect to the Class A common stock and Class B common stock, respectively. The market volume for Class B common stock is extremely limited. On many days there is no trading and, to the extent there is trading, it is generally low volume. Over-the-counter market quotations for BancShares Class B common stock represent inter-dealer prices without retail markup, markdown or commissions, and may not represent actual transaction prices.
The average monthly trading volume for the Class A common stock was 1,444,327 shares for the fourth quarter of December 31, 2020 and 1,089,723 shares for the year ended December 31, 2020. The Class B common stock monthly trading volume averaged 2,786 shares in the quarter ended December 31, 2020 and 5,268 shares for the year ended December 31, 2020.
During 2020, the Board approved a series of authorizations of share repurchases of BancShares’ Class A common stock. The shares could be repurchased from time to time at management’s discretion during the authorized periods. The authorizations did not obligate BancShares to repurchase any particular amount of shares, and repurchases were able to be suspended or discontinued at any time. Following the expiration of our latest share repurchase authorization on July 31, 2020, share repurchase activity was suspended, and there were no share repurchases during the fourth quarter of 2020. A summary of share repurchases during 2020 is disclosed below.
Shares of Class A common stock repurchased by BancShares during the year ended December 31, 2020.
Class A common stock Total Number of Class A Shares Repurchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Repurchased Under the Plans or Programs
Total repurchases in the first quarter of 2020 349,390  $ 457.10  243,000  243,200 
Total repurchases in the second quarter of 2020 346,000  367.03  346,000  265,700 
Total repurchases in the third quarter of 2020 117,700  399.83  117,700  — 
Total repurchases in the fourth quarter of 2020 —  —  —  — 
Total repurchases in 2020 813,090  $ 410.48  706,700  — 
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The following graph and table compare the cumulative total shareholder return (“CTSR”) of our Class A common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq – Banks Index and the Nasdaq – U.S. Index. Each trend line assumes $100 was invested on December 31, 2015, and dividends were reinvested for additional shares. The performance graph represents past performance and should not be considered to be an indication of future performance.
FCNCA-20201231_G1.JPG
2015 2016 2017 2018 2019 2020
FCNCA $ 100  $ 138  $ 157  $ 148  $ 208  $ 225 
Nasdaq - Banks 100 135 144 120 151 141 
Nasdaq - U.S. 100 110 142 140 190 274 
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Item 6. Selected Financial Data
Table 1
FINANCIAL SUMMARY AND SELECTED AVERAGE BALANCES AND RATIOS
(Dollars in thousands, except share data) 2020 2019 2018 2017 2016
SUMMARY OF OPERATIONS
Interest income $ 1,484,026  $ 1,404,011  $ 1,245,757  $ 1,103,690  $ 987,757 
Interest expense 95,857  92,642  36,857  43,794  43,082 
Net interest income 1,388,169  1,311,369  1,208,900  1,059,896  944,675 
Provision for credit losses 58,352  31,441  28,468  25,692  32,941 
Net interest income after provision for credit losses 1,329,817  1,279,928  1,180,432  1,034,204  911,734 
Gain on acquisitions —  —  —  134,745  5,831 
Noninterest income excluding gain on acquisitions 476,750  415,861  400,149  387,218  371,268 
Noninterest expense 1,188,685  1,103,741  1,076,971  1,012,469  937,766 
Income before income taxes 617,882  592,048  503,610  543,698  351,067 
Income taxes 126,159  134,677  103,297  219,946  125,585 
Net income 491,723  457,371  400,313  323,752  225,482 
Net income available to common shareholders $ 477,661  $ 457,371  $ 400,313  $ 323,752  $ 225,482 
Net interest income, taxable equivalent (1)
$ 1,390,765  $ 1,314,940  $ 1,212,280  $ 1,064,415  $ 949,768 
PER SHARE DATA
Net income $ 47.50  $ 41.05  $ 33.53  $ 26.96  $ 18.77 
Cash dividends 1.67  1.60  1.45  1.25  1.20 
Market price at period end (Class A) 574.27  532.21  377.05  403.00  355.00 
Book value at period end 396.21  337.38  300.04  277.60  250.82 
SELECTED PERIOD AVERAGE BALANCES
Total assets $ 46,021,438  $ 37,161,719  $ 34,879,912  $ 34,302,867  $ 32,439,492 
Investment securities 9,054,933  6,919,069  7,074,929  7,036,564  6,616,355 
Loans and leases (2)
31,605,090  26,656,048  24,483,719  22,725,665  20,897,395 
Interest-earning assets 43,351,119  34,866,734  32,847,661  32,213,646  30,267,788 
Deposits 39,746,616  32,218,536  30,165,249  29,119,344  27,515,161 
Interest-bearing liabilities 24,894,309  20,394,815  18,995,727  19,576,353  19,158,317 
Securities sold under customer repurchase agreements 632,362  530,818  555,555  649,252  721,933 
Other short-term borrowings 50,549  23,087  58,686  77,680  7,536 
Long-term borrowings 1,186,145  392,150  304,318  842,863  811,755 
Common shareholders’ equity 3,684,889  3,551,781  3,422,941  3,206,250  3,001,269 
Shareholders’ equity $ 3,954,007  $ 3,551,781  $ 3,422,941  $ 3,206,250  $ 3,001,269 
Shares outstanding 10,056,654  11,141,069  11,938,439  12,010,405  12,010,405 
SELECTED PERIOD-END BALANCES
Total assets $ 49,957,680  $ 39,824,496  $ 35,408,629  $ 34,527,512  $ 32,990,836 
Investment securities 9,922,905  7,173,003  6,834,362  7,180,256  7,006,678 
Loans and leases 32,791,975  28,881,496  25,523,276  23,596,825  21,737,878 
Deposits 43,431,609  34,431,236  30,672,460  29,266,275  28,161,343 
Securities sold under customer repurchase agreements 641,487  442,956  543,936  586,256  590,936 
Other short-term borrowings —  295,277  28,351  107,551  12,551 
Long-term borrowings 1,248,163  588,638  319,867  870,240  832,942 
Shareholders’ equity $ 4,229,268  $ 3,586,184  $ 3,488,954  $ 3,334,064  $ 3,012,427 
Shares outstanding 9,816,405  10,629,495  11,628,405  12,010,405  12,010,405 
SELECTED RATIOS AND OTHER DATA
Rate of return on average assets 1.07  % 1.23  % 1.15  % 0.94  % 0.70  %
Rate of return on average common shareholders’ equity 12.96  12.88  11.69  10.10  7.51 
Average equity to average assets ratio 8.59  9.56  9.81  9.35  9.25 
Net yield on interest-earning assets (taxable equivalent) 3.17  3.74  3.66  3.28  3.11 
Allowance for credit losses to total loans and leases:
PCD 5.18  1.35  1.51  1.31  1.70 
Non-PCD 0.62  0.77  0.86  0.93  0.98 
Total 0.68  0.78  0.88  0.94  1.01 
Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.74  0.58  0.52  0.61  0.67 
Total risk-based capital ratio 13.81  12.12  13.99  14.21  13.85 
Tier 1 risk-based capital ratio 11.63  10.86  12.67  12.88  12.42 
Common equity Tier 1 ratio 10.61  10.86  12.67  12.88  12.42 
Leverage capital ratio 7.86  8.81  9.77  9.47  9.05 
Dividend payout ratio 3.52  3.90  4.32  4.64  6.39 
Average loans and leases to average deposits 79.52  82.74  81.17  78.04  75.95 
(1) The taxable-equivalent adjustment was $2.6 million, $3.6 million, $3.4 million, $4.5 million and $5.1 million for the years 2020, 2019, 2018, 2017, and 2016, respectively.
(2) Average loan and lease balances include PCD loans, non-PCD loans and leases, loans held for sale and nonaccrual loans and leases.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. (“BancShares”) and its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”). This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes presented within this Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. See Note A, Accounting Policies and Basis of Presentation, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for more detail. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2020, the reclassifications had no effect on shareholders’ equity or net income as previously reported. 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.
Year-over-year comparisons of the financial results for 2019 and 2018 are contained in Item 7 of BancShares’ Annual Report on Form 10-K for 2019 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 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 includes statements and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, risks, uncertainties and other factors relating to our proposed merger with CIT Group Inc. (“CIT”), including the ability to obtain regulatory approvals and satisfy other conditions to the proposed transaction, and delay in closing the proposed transaction, as well as risks, uncertainties and other factors relating to the impact of COVID-19 on our business and the economy, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions affecting our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of our prior acquisitions, the risks discussed in Item 1A. Risk Factors above and other developments or changes in our business that we do not expect.
Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
CRITICAL ACCOUNTING ESTIMATES
The accounting and reporting policies of BancShares are in accordance with accounting principles generally accepted in the 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.
The following is a summary of the more critical areas where these critical assumptions and estimates could impact the financial condition, results of operations and cash flows of BancShares:
Allowance for credit losses. As of January 1, 2020, BancShares adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“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 allowance for credit losses (“ACL”). See 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
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ASC 326. See Note E, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements for additional disclosures.
The ACL represents the best estimate of expected credit losses on loans and leases as of the balance sheet date. The ACL is assessed at each balance sheet date and adjustments are recorded in provision for credit losses. Losses are estimated using historical loss rates and a projection of a reasonable and supportable macroeconomic forecast period which reverts to historical assumptions. This estimation process requires judgment in determining the amount and timing of charge-offs, economic forecast assumptions and loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as the composition of and risks within the loan portfolio, collateral values and prepayments are also considered. Loan balances considered uncollectible are charged off against the ACL. If it is probable a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement and a loss is probable, a specific valuation allowance is determined. Recoveries of amounts previously charged-off are generally credited to the ACL.
Financial Measurements. Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Certain assets and liabilities are measured at fair value on a recurring basis. Examples of recurring uses of fair value include marketable equity securities, investment securities available for sale and loans held for sale. There were no liabilities measured at fair value on a recurring basis at December 31, 2020. We also measure certain assets at fair value on a non-recurring basis. Examples include collateral-dependent loans, other real estate owned (“OREO”), goodwill and intangible assets. Assets acquired and liabilities assumed in a business combination are recognized at fair value as of the acquisition date.
Fair value is determined using different inputs and assumptions based upon the instrument being valued. Where observable market prices from transactions for identical assets or liabilities are not available, we identify market prices for similar assets or liabilities. If observable market prices are unavailable or impracticable to obtain for any such similar assets or liabilities, we look to other modeling techniques, which often incorporate unobservable inputs which are inherently subjective and require significant judgment. Fair value estimates requiring significant judgments are determined using various inputs developed by management with the appropriate skills, understanding and knowledge of the underlying asset or liability to ensure the development of fair value estimates is reasonable. Typical pricing sources used in estimating fair values include, but are not limited to, active markets with high trading volume, third-party pricing services, external appraisals, valuation models and commercial and residential evaluation reports. In certain cases, our assessments, with respect to assumptions market participants would make, may be inherently difficult to determine, and the use of different assumptions could result in material changes to these fair value measurements. See Note P, Estimated Fair Values, and Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures regarding fair value.
Income taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments. Accrued income taxes payable represents an estimate of the net amounts due to or from taxing jurisdictions based upon various estimates, interpretations and judgments.
We evaluate our effective tax rate on a quarterly basis based upon the current estimate of net income, the favorable impact of various credits, statutory tax rates expected for the year and the amount of tax liability. We file tax returns in relevant jurisdictions and settle our return liabilities.
Changes in estimated income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements. See Note O, Income Taxes, in the Notes to Consolidated Financial Statements for additional disclosures.
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CURRENT ACCOUNTING PRONOUNCEMENTS
Table 2 details ASUs issued by the FASB adopted in 2020. See Note A, Accounting Policies and Basis of Presentation, in the Notes to the Consolidated Financial Statements for more detail on the impact on the consolidated financial statements.
Table 2
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Standard Date of Adoption
ASU 2016-13 - Financial Instruments-Credit Losses (Topic 326): Measure of Credit Losses on Financial Instruments (including all subsequent ASUs on this topic)
January 1, 2020
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 1, 2020
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
January 1, 2020
ASU 2018-14 - Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
December 31, 2020
EXECUTIVE OVERVIEW
BancShares conducts its banking operations through its wholly owned subsidiary FCB, a state-chartered bank organized under the laws of the state of North Carolina.
BancShares’ 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 at 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.
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Recent Economic and Industry Developments
During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date. In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability. This uncertainty has led to volatility in the financial markets. This impact was coupled with spikes in unemployment as a result of business shutdowns that continue to impact financial institutions operationally and financially. 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, see Item 1A. Risk Factors in Part I of 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 latest real gross domestic product (“GDP”) information available, the Bureau of Economic Analysis’ revised estimate of fourth quarter 2020 GDP growth was 4.0%, up from 2.1% GDP growth in the fourth quarter 2020. The acceleration in real GDP in the fourth quarter reflected increases in exports, nonresidential fixed investment, personal consumption expenditures, residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program (“SBA-PPP”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and United States (the “U.S.”) Treasury to the public. This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020 and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria. Additionally, the Consolidated Appropriations Act 2021 was signed into law on December 27, 2020, and contained provisions for new funding of SBA-PPP loans. We began accepting applications for this round of funding in the first quarter of 2021.
There were other regulatory actions taken that may impact our business including changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts. Further legislation is expected as the government continues to mitigate the economic impact on the crisis.
The U.S. unemployment rate increased from 3.5% in December 2019 to 6.7% in December 2020. According to the U.S. Department of Labor, nonfarm payroll employment declined 9.2 million in 2020, compared to growth of 2.1 million in 2019.
During the first quarter of 2020, the FOMC lowered the federal funds rate to a target range of 0.00% to 0.25%. The FOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook. The FOMC expects to maintain this target range until labor market conditions have reached levels consistent with the FOMC’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.
The U.S. Census Bureau and the Department of Housing and Urban Development’s latest estimate for sales of new single-family homes in December 2020 was at a seasonally adjusted annual rate of 842,000, up 15.2% from the December 2019 estimate of 731,000. Purchases of existing homes in 2020 are also up 5.6% from a year ago.
Similar to the economic environment, the performance trends in the banking industry are mixed, as shown in the latest national banking results from the third quarter of 2020. FDIC-insured institutions reported a 10.7% decrease in net income compared to the third quarter of 2019 primarily a result of lower interest rates. Loan-loss provisions increased by 3.5% while noninterest expense rose by 3.0% from a year earlier. Banking industry average net interest margin (“NIM”) was 2.68% in the third quarter of 2020, down from 3.35% in the same quarter a year ago primarily due to a decline in interest-earning asset yields. Total loans increased by 4.9% over the past twelve months primarily due to growth in commercial and industrial loans. Total deposits increased 19.9%, largely driven by government stimulus.
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BANCSHARES’ COVID-19 CONTINUED MONITORING AND RESPONSE
We remain in a strong capital and liquidity position providing stability in navigating the COVID-19 crisis. Our leadership team continues to work 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. A significant majority of our branches have re-opened with enhanced safety protocols and our corporate locations remain at limited occupancy due to current virus trends.
Through December 31, 2020, we granted over 22,000 COVID-19 related loan extensions, representing loan balances of approximately $6.31 billion. Of these extensions, over 97% of have begun repayment. Delinquency trends among loans entering repayment are in line with the remainder of the portfolio. We have not seen significant declines in overall credit quality, though the impacts of the SBA-PPP and payment extensions could be delaying signs of credit deterioration.
During 2020, we originated over 23,000 SBA-PPP loans with an original balance of over $3.2 billion and an outstanding balance of $2.4 billion at December 31, 2020. We have collected all $117.2 million in SBA-PPP related loan fees per the program terms. These fees were deferred and are being recognized in interest income over the life of the respective loans. SBA-PPP loans have a stated rate of 1.00%, but with the accretion of these fees, the average yield on the portfolio was 4.33% for 2020. As of December 31, 2020, remaining net deferred fees were $41.1 million.
Table 3
SBA-PPP LOANS BY LOAN SIZE
(Dollars in thousands)
Loan Size $ of Loans % of Loans $
Less than $150,000 $ 688,354  28.6  %
$150,000 to $2,000,000 1,236,448  51.4 
Greater than $2,000,000 481,489  20.0 
Total $ 2,406,291  100.0  %
We began accepting and processing applications for forgiveness during the third quarter of 2020. Table 4 represents the forgiveness status of SBA-PPP loans as of December 31, 2020.
Table 4
SBA-PPP LOAN FORGIVENESS STATUS
(Dollars in thousands)
Forgiveness Status $ of Loans % of Total
Received by FCB $ 1,384,859  43.1  %
Submitted to SBA 1,190,171  37.1 
Approved by SBA 746,643  23.3 
Funds Received 746,442  23.2 

To date, we have received over 7,200 forgiveness decisions from the SBA, representing approximately $1.0 billion in forgiveness payments. The Consolidated Appropriations Act 2021 was signed into law during the fourth quarter of 2020 and contained provisions for new funding of SBA-PPP loans. We began accepting applications for this round of funding in January 2021 and have funded over $670 million of loans to date.
Strong Liquidity and Capital Position
We maintain a strong level of liquidity. As of December 31, 2020, liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately $9.63 billion representing 19.8% of consolidated assets as of December 31, 2020.
In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.90 billion in the form of Federal Home Loan Bank (“FHLB”) borrowing capacity, Federal Reserve Discount Window availability, federal funds lines and a committed line of credit.
At December 31, 2020, our regulatory capital ratios were well in excess of Basel III capital requirements.
29


FINANCIAL PERFORMANCE SUMMARY
Income Statement Highlights
For the year ended December 31, 2020, net income was $491.7 million, or $47.50 per share, compared to $457.4 million, or $41.05 per share, during 2019. The return on average assets was 1.07% during 2020, compared to 1.23% during 2019. The return on average shareholders’ equity was 12.96% and 12.88% for the respective periods. The $34.3 million, or 7.5% increase in net income was primarily the result of the net effect of the following:
Net interest income for the year ended 2020 increased $76.8 million, or by 5.9%, compared to the year ended 2019. The increase was due to loan growth driven largely by SBA-PPP balances, partially offset by a decrease in interest-earning asset yields.
The taxable-equivalent net interest margin was 3.17% for the year ended 2020, a decrease of 57 basis points from the year ended 2019. The decrease was primarily due to a decline in yield on interest-earning assets coupled with an increase in total borrowings, partially offset by a decline in the rate paid on interest-bearing deposits.
We recorded provision for credit losses of $58.4 million in 2020, compared to $31.4 million in 2019. Provision expense includes $36.1 million of reserve build for credit losses specifically related to the uncertainty surrounding COVID-19 and considers the potential impact of slower economic activity and elevated unemployment, as well as potential mitigants due to government stimulus and loan accommodations. The net charge-off to loans ratio was 0.07% for the year, down 4 basis points from 2019.
Noninterest income for the year ended 2020 was $476.8 million, an increase of $60.9 million, or 14.6%, from the prior year. Fair value adjustments on marketable equity securities and realized gains on available for sale securities increased by a combined $61.9 million. Mortgage income increased by $18.5 million due to increased production and sales resulting from lower mortgage interest rates. These positive impacts were partially offset by a decline in service charges on deposits of $17.5 million due to lower volume with increased deposit balances and an increase in waived fees to aid our customers during the COVID-19 pandemic.
Noninterest expense was $1.19 billion for the year ended December 31, 2020, compared to $1.10 billion for the same period in 2019. This 7.7% increase was primarily attributable to higher personnel expenses and processing fees paid to third parties reflecting continued investment in digital and technological capabilities.
Income tax expense was $126.2 million and $134.7 million for the years ended 2020 and 2019, respectively, representing effective tax rates of 20.4% and 22.7%. The decline in the effective tax rate related primarily to the decision to utilize an allowable alternative for computing our 2020 federal income tax liability. The allowable alternative provided us the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax.
Balance Sheet Highlights
During 2020, loans increased by $3.91 billion, or by 13.5% to $32.79 billion. Of this growth, $2.41 billion was related to SBA-PPP loans. Excluding SBA-PPP loans and loans from acquisitions, total loans increased $1.40 billion since December 31, 2019, or by 4.9%.
The allowance for credit losses as a percentage of total loans was 0.68% at December 31, 2020, compared to 0.78% at December 31, 2019. At December 31, 2020, BancShares’ nonperforming assets, including nonaccrual loans and OREO, increased $74.1 million to $242.4 million or 0.74% of total loans from $168.3 million or 0.58% of total loans at December 31, 2019. Of the increase in nonperforming assets, $24.9 million related to the transfer of loans in performing PCI pools to nonaccrual status under the adoption of ASC 326. A majority of the remainder of the increase related to increases within our acquired residential real estate loan portfolio.
Deposit growth continued in 2020, up $9.00 billion, or by 26.1% to $43.43 billion. This growth includes estimated deposits of $0.93 billion related to the SBA-PPP and deposits from acquisitions of $203.2 million. Excluding the impact of these deposits, total deposits increased $7.87 billion since December 31, 2019, or by 22.9%.
During the first quarter of 2020, BancShares successfully completed a $695 million capital raise which consisted of $350 million of subordinated notes and $345 million of depositary shares (the “Depositary Shares”) each representing a 1/40th interest in a share of our 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share.
30


Capital Highlights
In 2020, we returned $364.5 million of capital to shareholders through the repurchase of 813,090 shares of Class A common stock and cash dividends to common and preferred shareholders.
Total shareholders’ equity increased from $3.59 billion on December 31, 2019 to $4.23 billion on December 31, 2020. The increase was primarily due to earnings and the net proceeds of the issuance of the Depositary Shares, partially offset by share repurchases and dividends during the year.
Under Basel III capital requirements, BancShares remained well-capitalized at December 31, 2020, with a total risk-based capital ratio of 10.61%, Tier 1 risk based capital ratio of 13.81%, common Tier 1 ratio of 11.63%, Tier 1 leverage capital ratio of 7.86% and a capital conservation buffer of 5.6%.
31


BUSINESS COMBINATIONS
Recently Announced Business Combinations
CIT Group Inc.
On October 15, 2020, BancShares and CIT entered into the Merger Agreement by and among BancShares, FCB, the Merger Sub, and CIT, the parent company of CIT Bank. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub and CIT will ultimately merge with and into FCB, with FCB as the surviving entity. The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank. Subject to the fulfillment of customary closing conditions, the parties anticipate that the Transaction will close in the first half of 2021.
Completed Business Combinations
We evaluated the financial statement significance for all business combinations completed during 2020 and 2019 and concluded the completed business combinations noted below are not material to BancShares’ financial statements, individually or in aggregate, and therefore, pro forma financial data is not included.
Community Financial Holding Co. Inc.
On February 1, 2020, we completed the merger of Duluth, Georgia-based Community 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 in Georgia. The merger contributed $222.1 million in consolidated assets, which included $686 thousand of goodwill, $134.0 million in loans, and $209.3 million in deposits.
Entegra Financial Corp.
On December 31, 2019, we completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. Under the terms of the agreement, cash consideration of $30.18 for each share of common stock was paid to the shareholders of Entegra, totaling approximately $222.8 million. The merger allowed us to enhance banking efforts and expand our presence in western North Carolina. As part of the transaction, we agreed to divest certain branches, other assets and liabilities as a requirement of regulatory approval. The merger contributed $1.73 billion in consolidated assets, which included $1.03 billion in loans, and $1.33 billion in deposits.
On April 17, 2020, we completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with a fair value of $110.1 million, $2.1 million and $184.8 million, respectively. The divestiture included an 8% premium for deposits acquired that was applied as a reduction of goodwill generated as part of the merger with Entegra.
First South Bancorp, Inc.
On May 1, 2019, we completed the merger of Spartanburg, South Carolina-based First South Bancorp, Inc. (“First South Bancorp”) and its bank subsidiary, First South Bank. Under the terms of the agreement, cash consideration of $1.15 for each share of common stock was paid to the shareholders of First South Bancorp, totaling approximately $37.5 million. The merger allowed us to expand our presence and enhance banking efforts in South Carolina. The merger contributed $253.0 million in consolidated assets, which included $179.2 million in loans, and $207.6 million in deposits, as of the merger date.
Biscayne Bancshares, Inc.
On April 2, 2019, FCB completed the merger of Coconut Grove, Florida-based Biscayne Bancshares, Inc. (“Biscayne Bancshares”) and its bank subsidiary, Biscayne Bank. Under the terms of the agreement, cash consideration of $25.05 for each share of common stock was paid to the shareholders of Biscayne Bancshares, totaling approximately $118.9 million. The merger allowed us to expand our presence in Florida and enhance banking efforts in South Florida. The merger contributed $1.08 billion in consolidated assets, which included $863.4 million in loans, and $786.5 million in deposits, as of the merger date.
See Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures.
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FDIC-ASSISTED TRANSACTIONS
Between 2009 and 2017, we completed fourteen FDIC-assisted transactions with a carrying value of loans acquired in these transactions of approximately $410.4 million at December 31, 2020. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements that protected us from a substantial portion of the credit and asset quality risk we would otherwise incur.
At December 31, 2020, shared-loss protection remains for a single acquired bank related to single family residential loans of $34.5 million. Cumulative losses for all fourteen acquisitions incurred through December 31, 2020 totaled $1.21 billion. Cumulative amounts reimbursed by the FDIC through December 31, 2020 totaled $674.9 million. The shared-loss agreements for two FDIC-assisted transactions include provisions related to payments owed to the FDIC at the termination of the agreements if actual cumulative losses on covered assets are lower than originally estimated by the FDIC at the time of acquisition (“clawback liability”). As of December 31, 2020, and December 31, 2019, the estimated clawback liability was $15.6 million and $112.4 million, respectively. The reduction in the clawback liability was the result of a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions. We expect to make a clawback liability payment to the FDIC in March 2021 in the amount of $15.9 million.
Table 5 provides changes in the FDIC clawback liability for the years ended December 31, 2020 and 2019.
Table 5
FDIC CLAWBACK LIABILITY
(Dollars in thousands) 2020 2019
Beginning balance $ 112,395  $ 105,618 
Accretion 2,674  6,777 
Payments to FDIC for settlement of shared-loss agreements (99,468) — 
Ending balance $ 15,601  $ 112,395 
33


Table 6
AVERAGE BALANCE SHEETS
  2020 2019
(Dollars in thousands, taxable equivalent) Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Assets
Loans and leases(1)
$ 31,605,090  $ 1,335,008  4.18  % $ 26,656,048  $ 1,219,825  4.54  %
Investment securities:
U.S. Treasury 432,938  3,103  0.72  945,094  22,235  2.35 
Government agency 665,318  8,457  1.27  491,001  14,308  2.91 
Mortgage-backed securities 7,414,661  108,604  1.46  5,198,884  114,819  2.21 
Corporate bonds 397,322  20,349  5.12  153,841  7,945  5.16 
Other investments 144,694  4,254  2.94  130,249  2,205  1.69 
Total investment securities 9,054,933  144,767  1.60  6,919,069  161,512  2.33 
Overnight investments 2,691,096  6,847  0.25  1,291,617  26,245  2.03 
Total interest-earning assets 43,351,119  $ 1,486,622  3.40  % 34,866,734  $ 1,407,582  4.01  %
Cash and due from banks 344,938  271,466 
Premises and equipment 1,259,325  1,218,611 
Allowance for credit losses (211,413) (226,600)
Other real estate owned 53,137  45,895 
Other assets 1,224,332  985,613 
 Total assets $ 46,021,438  $ 37,161,719 
Liabilities
Interest-bearing deposits:
Checking with interest $ 8,922,902  $ 5,913  0.07  % $ 7,503,325  $ 6,018  0.08  %
Savings 2,936,593  1,217  0.04  2,604,217  1,700  0.07 
Money market accounts 7,821,266  22,504  0.29  6,025,740  23,315  0.39 
Time deposits 3,344,492  37,001  1.11  3,315,478  45,221  1.36 
Total interest-bearing deposits 23,025,253  66,635  0.29  19,448,760  76,254  0.39 
Securities sold under customer repurchase agreements 632,362  1,610  0.25  530,818  1,995  0.38 
Other short-term borrowings 50,549  1,054  2.05  23,087  671  2.87 
Long-term obligations 1,186,145  26,558  2.20  392,150  13,722  3.45 
Total interest-bearing liabilities 24,894,309  95,857  0.38  20,394,815  92,642  0.45 
Demand deposits 16,721,363  12,769,776 
Other liabilities 451,759  445,347 
Shareholders’ equity 3,954,007  3,551,781 
 Total liabilities and shareholders’ equity $ 46,021,438  $ 37,161,719 
Interest rate spread 3.02  % 3.56  %
Net interest income and net yield on interest-earning assets $ 1,390,765  3.17  % $ 1,314,940  3.74  %
(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 $85.7 million, $9.7 million, and $8.8 million for the years ended 2020, 2019, and 2018, respectively. 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 2020, 2019, and 2018, as well as state income tax rates of 3.5%, 3.9%, and 3.4% for the years ended 2020, 2019, and 2018, respectively. The taxable-equivalent adjustment was $2.6 million, $3.6 million, and $3.4 million, for the years ended 2020, 2019, and 2018, respectively.
(2)The rate/volume variance is allocated proportionally between the changes in volume and rate.

34


Table 6
AVERAGE BALANCE SHEETS (continued)
2020 2019
2018 Change from previous year due to: Change from previous year due to:
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Volume Yield/Rate
Total Change(2)
Volume Yield/Rate
Total Change(2)
$ 24,483,719  $ 1,075,682  4.36  % $ 232,398  $ (117,215) $ 115,183  $ 83,908  $ 60,235  $ 144,143 
1,514,598  28,277  1.87  (12,058) (7,074) (19,132) (10,632) 4,590  (6,042)
106,067  2,697  2.54  5,080  (10,931) (5,851) 9,787  1,824  11,611 
5,241,865  113,698  2.17  51,357  (57,572) (6,215) (191) 1,312  1,121 
104,796  5,727  5.46  12,575  (171) 12,404  2,680  (462) 2,218 
107,603  1,059  0.98  208  1,841  2,049  230  916  1,146 
7,074,929  151,458  2.14  57,162  (73,907) (16,745) 1,874  8,180  10,054 
1,289,013  21,997  1.71  28,418  (47,816) (19,398) 45  4,203  4,248 
32,847,661  $ 1,249,137  3.78  % $ 317,978  $ (238,938) $ 79,040  $ 85,827  $ 72,618  $ 158,445 
281,510 
1,164,542 
(223,300)
47,053 
762,446 
$ 34,879,912 
$ 7,278,662  $ 3,725  0.05  % $ 1,122  $ (1,227) $ (105) $ 112  $ 2,181  $ 2,293 
2,466,734  789  0.03  214  (697) (483) 44  867  911 
5,903,823  8,196  0.14  6,886  (7,697) (811) 170  14,949  15,119 
2,427,949  9,773  0.40  295  (8,515) (8,220) 3,572  31,876  35,448 
18,077,168  22,483  0.12  8,517  (18,136) (9,619) 3,898  49,873  53,771 
555,555  1,738  0.31  377  (762) (385) (77) 334  257 
58,686  1,919  3.27  788  (405) 383  (1,164) (84) (1,248)
304,318  10,717  3.48  28,558  (15,722) 12,836  3,057  (52) 3,005 
18,995,727  36,857  0.19  38,240  (35,025) 3,215  5,714  50,071  55,785 
12,088,081 
373,163 
3,422,941 
$ 34,879,912 
3.59  %
$ 1,212,280  3.66  % $ 279,738  $ (203,913) $ 75,825  $ 80,113  $ 22,547  $ 102,660 

35


RESULTS OF OPERATIONS
Net Interest Margin and Income (Taxable Equivalent Basis)
Taxable-equivalent net interest income was $1.39 billion for the year ended December 31, 2020, an increase of $75.8 million, or 5.8%, compared to 2019. Interest income increased $79.0 million and interest expense increased by $3.2 million.
Interest income earned on loans and leases was $1.34 billion during 2020, an increase of $115.2 million compared to 2019. The increase was primarily due to the impacts of SBA-PPP loans, which contributed $90.1 million, and organic loan growth, partially offset by lower yields.
Interest income earned on investment securities was $144.8 million and $161.5 million during 2020 and 2019, respectively. The $16.7 million decrease was primarily due to a 73 basis point decline in the investment yield, partially offset by higher average balances.
Interest expense on interest-bearing deposits was $66.6 million in 2020, a decrease of $9.6 million compared to 2019, primarily due to lower rates paid on money market and time deposits. Interest expense on borrowings was $29.2 million in 2020, an increase of $12.8 million compared to 2019, primarily due to an increase in average borrowings, partially offset by lower rates paid.
The year-to-date taxable equivalent net interest margin for 2020 was 3.17%, compared to 3.74% during 2019. The margin compression was primarily due to a decline in the yield on interest-earning assets coupled with an increase in total borrowings, partially offset by a decline in the rate paid on interest-bearing deposits. During 2020, yields on loans, investment securities and overnight investments decreased 36 basis points to 4.18%, 73 basis points to 1.60% and 178 basis points to 0.25%, respectively.
Average interest-earning assets increased $8.48 billion, or by 24.3% for the year ended December 31, 2020. Growth in average interest-earning assets during 2020 was primarily due to higher investment balances, the impact of SBA-PPP loans and other organic loan growth. The year-to-date taxable-equivalent yield on interest-earning assets in 2020 declined by 61 basis points to 3.40%.
Average interest-bearing liabilities increased $4.50 billion for the year ended December 31, 2020, primarily due to increased interest-bearing deposits and borrowings. The rate paid on interest-bearing liabilities decreased 7 basis points in 2020 from 0.45% to 0.38%.
Provision for Credit Losses
BancShares recorded a provision for credit losses for loans and leases of $58.4 million for the year ended December 31, 2020, compared to $31.4 million for same period in 2019. This increase was primarily due to a COVID-19-related reserve build of $36.1 million during the first half of 2020 as loss estimates consider the potential uncertainty of slower economic activity and elevated unemployment, as well as potential mitigants due to government stimulus and loan accommodations.
Noninterest Income
Table 7
NONINTEREST INCOME
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Wealth management services $ 102,776  $ 99,241  $ 97,966 
Service charges on deposit accounts 87,662  105,191  105,486 
Cardholder services, net 74,291  69,078  65,478 
Mortgage income 39,592  21,126  16,433 
Other service charges and fees 30,911  31,644  30,606 
Merchant services, net 24,122  24,304  24,504 
Insurance commissions 14,544  12,810  12,702 
ATM income 5,758  6,296  7,980 
Realized gains on investment securities available for sale, net 60,253  7,115  351 
Marketable equity securities gains (losses), net 29,395  20,625  (7,610)
Gain on extinguishment of debt —  —  26,553 
Other 7,446  18,431  19,700 
Total noninterest income $ 476,750  $ 415,861  $ 400,149 
36


For the year ended December 31, 2020, total noninterest income was $476.8 million, compared to $415.9 million for 2019, an increase of $60.9 million, or 14.6%. The change was primarily attributable to the following:
Gains on sale of investment securities available for sale increased by $53.1 million.
Mortgage income increased $18.5 million primarily due to origination volume brought about by lower mortgage rates. The production-related income was partially offset by a $4.1 million impairment of mortgage servicing rights recorded due to accelerated prepayments.
The $29.4 million net gain included realized gains on the sale equity securities of $44.6 million.
Service charges on deposit accounts decreased $17.5 million primarily due to lower volume with increased deposit balances and an increase in waived fees to aid our customers during the COVID-19 pandemic.
Other noninterest income decreased $11.0 million primarily due to acquired recoveries on PCD loans, formerly reported in noninterest income. After adoption of CECL, these are recorded as a component of the allowance for credit losses.
Noninterest Expense
Table 8
NONINTEREST EXPENSE
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Salaries and wages $ 590,020  $ 551,112  $ 527,691 
Employee benefits 132,244  120,501  118,203 
Occupancy expense 117,169  111,179  109,169 
Equipment expense 115,535  112,290  102,909 
Processing fees paid to third parties 44,791  29,552  30,017 
Merger-related expenses 17,450  17,166  6,462 
Core deposit intangible amortization 14,255  16,346  17,165 
Collection and foreclosure-related expenses 13,658  11,994  16,567 
Consultant expense 12,751  12,801  14,345 
FDIC insurance expense 12,701  10,664  18,890 
Telecommunications expense 12,179  9,391  10,471 
Advertising expense 10,010  11,437  11,650 
Other 95,922  89,308  93,432 
Total noninterest expense $ 1,188,685  $ 1,103,741  $ 1,076,971 

For the year ended December 31, 2020, total noninterest expense was $1.19 billion, compared to $1.10 billion for 2019, an increase of $84.9 million, or 7.7%. The change was primarily attributable to the following:

Personnel expense, which includes salaries, wages and employee benefits, increased by $50.7 million, primarily due to an increase in salaries and wages as a result of merit increases and additional headcount from recent acquisitions.
Processing fees paid to third parties increased $15.2 million primarily due to the continued investment in our digital banking offerings as well as processing fees related to recent acquisitions.
Other noninterest expense increased $6.6 million primarily due to increased pension costs due to a lower discount rate and a higher provision related to unfunded loan commitments as a result of the potential economic impact of COVID-19. The increase was partially offset by a decrease in travel expense.
Occupancy expense increased $6.0 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19.
Income Taxes
For 2020, income tax expense was $126.2 million compared to $134.7 million during 2019 and $103.3 million during 2018. Effective tax rates were 20.4%, 22.7% and 20.5% during the respective periods.
37


The effective tax rate for the year ended 2020 was favorably impacted by $13.9 million due to the decision to utilize an allowable alternative for computing our 2020 federal income tax liability. Without this alternative, the effective tax rate would have been approximately 22.7% for the year ended 2020. The allowable alternative provides us the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-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 $47.19 billion and $37.23 billion at December 31, 2020 and December 31, 2019, respectively. The $9.96 billion increase was primarily composed of a $3.91 billion increase in loans and leases, a $3.24 billion increase in overnight investments and a $2.75 billion increase in investment securities.
Investment Securities
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. See 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 all investment securities was $9.92 billion at December 31, 2020, an increase of $2.75 billion compared to $7.17 billion at December 31, 2019. The increase in the portfolio was primarily attributable to purchases totaling $10.64 billion, partially offset by maturities and paydowns of $3.09 billion and sales of $4.94 billion. This increase was due to excess liquidity generated by significant deposit growth during the year.
As of December 31, 2020, investment securities available for sale had a net pre-tax unrealized gain of $102.3 million, compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019. After evaluating the investment securities with unrealized losses, management concluded that no credit-related impairment existed as of December 31, 2020. 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.
On November 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.
On November 1, 2019, as part of the adoption of ASU 2019-04, mortgage-backed securities with an amortized cost of $2.08 billion were transferred from investment securities held to maturity to the available for sale portfolio. At the time of the transfer, the mortgage-backed securities had a fair value of $2.15 billion. The transfer resulted in a reclassification of unrealized losses of $72.5 million, or $55.8 million net of tax, previously frozen in AOCI. The transfer does not impact our intent and ability to hold the remainder of the held to maturity portfolio to maturity.
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Table 9 presents the investment securities portfolio at December 31, 2020 segregated by major category.
Table 9
INVESTMENT SECURITIES
December 31, 2020 December 31, 2019
(Dollars in thousands)
Composition(1)
Cost Fair
Value
Composition(1)
Cost Fair
Value
Investment securities available for sale
U.S. Treasury 5.0  % $ 499,832  $ 499,933  5.7  % $ 409,397  $ 409,999 
Government agency 7.0  706,241  701,391  9.5  684,085  682,772 
Residential mortgage-backed securities 44.5  4,369,130  4,438,103  73.4  5,269,060  5,267,090 
Commercial mortgage-backed securities 7.9  745,892  771,537  5.3  373,105  380,020 
Corporate bonds 6.1  590,870  603,279  2.8  198,278  201,566 
State, county and municipal —  —  —  1.7  118,227  118,227 
Total investment securities available for sale 70.5  6,911,965  7,014,243  98.4  7,052,152  7,059,674 
Investment in marketable equity securities 0.9  84,837  91,680  1.2  59,262  82,333 
Investment securities held to maturity
Residential mortgage-backed securities 19.1  1,877,692  1,895,381  —  —  — 
Commercial mortgage-backed securities 9.4  937,034  940,862  —  —  — 
Other 0.1  2,256  2,256  0.4  30,996  30,996 
Total investment securities held to maturity 28.6  2,816,982  2,838,499  0.4  30,996  30,996 
Total investment securities 100.0  % $ 9,813,784  $ 9,944,422  100.0  % $ 7,142,410  $ 7,173,003 
(1) Calculated as a percent of the total fair value of investment securities.
Table 10 presents the weighted average taxable-equivalent yields for investment securities held to maturity at December 31, 2020 segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields.
Table 10
WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES
December 31, 2020
Within
One Year
One to Five
Years
Five to 10
Years
After 10 Years Total
Investment securities held to maturity
Residential mortgage-backed securities(1)
—  % —  % —  % 1.13  % 1.13  %
Commercial mortgage-backed securities(1)
—  —  —  1.27  1.27 
Other investments 1.17  1.37  —  —  1.31 
Total investment securities held to maturity 1.17  % 1.37  % —  % 1.18  % 1.18  %
(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 $124.8 million at December 31, 2020, a net increase of $57.0 million since December 31, 2019. The increase is primarily due to originations of $1.08 billion driven by low interest rates, partially offset by sales of $1.05 billion.
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-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. PCD loans are purchased loans which reflect a more than insignificant credit deterioration since origination as of the date of acquisition.
Loans and leases held for investment were $32.79 billion at December 31, 2020, a net increase of $3.91 billion, representing growth of 13.5% since December 31, 2019. This increase was driven by a $4.01 billion net increase in the non-PCD portfolio offset by a $95.8 million net decrease in the PCD loan portfolio. The net increase in the non-PCD portfolio was due to $2.41 billion related to SBA-PPP loans as well as organic growth, primarily in our commercial segments. The net decrease in PCD loans was primarily due to pay downs and pay-offs, partially offset by a $19.0 million increase from the adoption of ASC 326. Excluding 2020 loans related to SBA-PPP and acquired loans, total loans grew by 4.9%.
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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, 2020 were $32.33 billion compared to $28.32 billion at December 31, 2019, representing 98.6% and 98.1% of total loans, respectively. PCD loans at December 31, 2020 were $462.9 million, compared to $558.7 million of PCI loans at December 31, 2019, representing 1.4% and 1.9% of loans, respectively.
The discount related to acquired non-PCD loans and leases at December 31, 2020 and non-PCI loans and leases at December 31, 2019 was $19.5 million and $30.9 million, respectively. The discount related to PCD loans at December 31, 2020 and PCI loans at December 31, 2019 was $45.3 million and $88.2 million, respectively. The primary driver of the decrease in PCD discount was loan payoffs as well as the adoption of ASC 326, which resulted in a $19.0 million reclassification of the credit portion of the loan discount to the ACL.
During the year ended December 31, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $11.3 million and $13.2 million, respectively. During the year ended December 31, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $59.7 million and $58.0 million, respectively.

Table 11 provides the composition of net loans and leases for the past three years.

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Table 11
LOANS AND LEASES

December 31
(Dollars in thousands) 2020
Non-PCD loans and leases:
Commercial:
Construction and land development $ 985,424 
Owner occupied commercial mortgage 11,165,012 
Non-owner occupied commercial mortgage 2,987,689 
Commercial and industrial and leases 5,013,644 
SBA-PPP 2,406,291 
Total commercial loans 22,558,060 
Consumer:
Residential mortgage 5,561,686 
Revolving mortgage 2,052,854 
Construction and land development 348,123 
Consumer auto 1,255,402 
Consumer other 552,968 
Total consumer loans 9,771,033 
Total non-PCD loans and leases 32,329,093 
PCD loans 462,882 
Total loans and leases 32,791,975 
Less allowance for credit losses (224,314)
Net loans and leases $ 32,567,661 
December 31
(Dollars in thousands) 2019 2018
Non-PCI loans and leases:
Commercial:
Construction and land development $ 1,013,454  $ 757,854 
Commercial mortgage 12,282,635  10,717,234 
Other commercial real estate 542,028  426,985 
Commercial and industrial and leases 4,403,792  3,938,730 
Other 310,093  296,424 
Total commercial loans 18,552,002  16,137,227 
Noncommercial:
Residential mortgage 5,293,917  4,265,687 
Revolving mortgage 2,339,072  2,542,975 
Construction and land development 357,385  257,030 
Consumer 1,780,404  1,713,781 
Total noncommercial loans 9,770,778  8,779,473 
Total non-PCI loans and leases $ 28,322,780  $ 24,916,700 
PCI loans $ 558,716  $ 606,576 
Total loans and leases 28,881,496  25,523,276 
Less allowance for credit losses (225,141) (223,712)
Net loans and leases $ 28,656,355  $ 25,299,564 
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Allowance for Credit Losses
During January 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, as well as further information about the adoption, under the "Recently Issued Accounting Pronouncements" section.
The ACL was $224.3 million at December 31, 2020, compared to $225.1 million and $223.7 million at December 31, 2019 and 2018, respectively. The ACL as a percentage of total loans and leases was 0.68% at December 31, 2020, compared to 0.78% and 0.88% at December 31, 2019 and 2018, respectively. The ACL as a percentage of total loans and leases excluding SBA-PPP loans, which have no associated ACL, was 0.74% at December 31, 2020.
Upon adoption of ASC 326 on January 1, 2020, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, partially offset by an increase of $19.0 million in the ACL on PCD loans. The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. This decrease was partially offset by an increase in the consumer segments due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into the ACL. At the time of adoption of ASC 326, the scope and severity of the COVID-19 pandemic and the related impacts were unknown. The economic forecasts did not project the impacts of the recession.
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. For the period ended December 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $36.1 million reserve build due to the potential economic impact of COVID-19 and its estimated potential impact on credit losses. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a reasonable and supportable forecast period of two years. Assumptions revert to the long term historic averages over a one year period. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Our model results consider baseline, adverse and upside scenarios. To calculate the ACL, we utilized the baseline scenario, which considers government stimulus and incorporates significant improvements to the most significant forecast assumptions when compared on the COVID-19-impacted levels from early in 2020.
As of December 31, 2020, the baseline forecast utilized the following significant inputs over the two-year reasonable and supportable forecast period:
Unemployment - Rates are projected to remain elevated, and will generally decrease to just below 6% by the end of 2022.
GDP Growth - Peak growth of 3.6% in the first quarter of 2021, primarily decreasing to under 3% in late 2022.
Home Pricing Index - Growth rates below 1% in early 2021 which increase to close to 4% in late 2022.
Commercial Real Estate Index - Forecasted downturn beginning 1Q21 with a maximum 20.7% drop by the end of 2021, and then slowly improving towards positive growth.
The model result was calibrated using management’s expectation of borrower performance based upon COVID-19 residual risk by industry. These loss estimates were also influenced by strong credit quality, low net charge-offs and recent credit trends, which remained relatively stable through the period ended December 31, 2020.
At December 31, 2020, the ACL on non-PCD loans and leases was $200.3 million, or 0.62% of non-PCD loans and leases, compared to $217.6 million, or 0.77%, at December 31, 2019, and $214.6 million, or 0.86%, at December 31, 2018. The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.67% at December 31, 2020. Aside from SBA-PPP loans, which have no allowance, the decrease since December 31, 2019 was primarily due to the adoption of ASC 326, partially offset by the forecasted potential economic impact of the COVID-19 pandemic on expected credit losses. The adoption of ASC 326 resulted in a decrease of 18 basis points, while the COVID-19 reserve build resulted in an increase of 11 basis points.
In the period after adoption of ASC 326, the ACL on commercial portfolios increased $26.0 million, with the largest share of the increase within the non-owner occupied commercial real estate as this portfolio contained industries hardest hit by the pandemic such as hospitality, lessors and retail. The ACL on consumer portfolios increased $13.6 million, with the largest increase within residential mortgages, due to loan growth during the year.
At December 31, 2020, the ACL on PCD loans totaled $24.0 million compared to $7.5 million at December 31, 2019 and $9.1 million, at December 31, 2018. The increase was primarily due the adoption of ASC 326, partially offset by loan payoffs.
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At December 31, 2020, the ACL on unfunded commitments was $12.8 million compared to $1.1 million at December 31, 2019 and $1.1 million, at December 31, 2018. The increase was primarily due the adoption of ASC 326.
Table 12 provides details of the ACL, provision components and net charge-off ratio by loan class for the past three years.
Table 12
ALLOWANCE FOR CREDIT LOSSES
Year ended December 31, 2020
(Dollars in thousands) Construction
and land
development
- commercial
Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial
and industrial and leases
Residential
mortgage
Revolving
mortgage
Construction and land development - consumer Consumer auto Consumer other PCD Total
Allowance for credit losses:
Balance at December 31, 2019 $ 33,213  $ 36,444  $ 11,102  $ 61,610  $ 18,232  $ 19,702  $ 2,709  $ 4,292  $ 30,301  $ 7,536  $ 225,141 
Adoption of ASC 326 (31,061) (19,316) 460  (37,637) 17,118  3,665  (1,291) 1,100  10,037  19,001  (37,924)
Balance at January 1, 2020 2,152  17,128  11,562  23,973  35,350  23,367  1,418  5,392  40,338  26,537