Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is defined as the degree to
which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s
earnings or capital. For financial institutions, market risk primarily reflects exposures to changes in interest rates. Interest
rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest
rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash
flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability
and enhancement of shareholder value. However, excessive interest rate risk can threaten a financial institution’s earnings,
capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.
The ALCO utilizes an asset liability model
(“ALM”) to monitor and manage market risk through net interest income simulation for various rate shock scenarios and
economic value of equity (“EVE”), simulation for various rate shock scenarios. The rate shock scenarios used in the
ALM span over multiple time horizons and yield curve shapes and include parallel and non-parallel shifts to ensure the ALCO can
mitigate future earnings and market value fluctuations due to changes in market interest rates.
Within the context of the ALM, net interest
income rate shock simulations explicitly measure the exposure to earnings from changes in market rates of interest over a defined
time horizon. These robust simulations include assumptions of how the balance sheet will react in different rate environments including
loan pre-payment speeds, average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing
liability is to changes in market rates (betas). Under simulation analysis, our current financial position is combined with assumptions
regarding future business to calculate net interest income under various hypothetical rate scenarios. Reviewing these various measures
provides us with a more comprehensive view of our interest rate risk profile.
Net interest income rate shock simulation
results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months and 24
months of pretax net interest income. The base case and rate shock analyses are performed on a static and growth balance sheet.
A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same
product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also
include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing
demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with
optionality. Our policy guidelines limit the change in pretax net interest income over a 12-month horizon using rate shocks of
+/- 100, 200, 300 and 400 basis points. We have temporarily suspended the -300 and -400 basis point rate shock analyses. Due to
the low interest rate environment, we believe the impact to net interest income when evaluating the -300 and -400 basis point rate
shock scenarios does not provide meaningful insight into our interest rate risk position.
In order to monitor interest rate risk
beyond the 24-month time horizon of rate shocks, we also perform EVE analyses. EVE represents the present value of all asset cash
flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the
impact that market rate changes may have on our EVE. As with rate shock analysis, EVE analyses incorporate management assumptions
regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit
products. Our policy guidelines limit the change in EVE given changes in rates of +/- 100, 200, 300 and 400 basis points. We have
also temporarily suspended the EVE -100, -200, -300 and -400 basis point scenarios in 2020 due to the low interest rate environment.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
The tables below reflect the net interest
income rate shock analyses and EVE analyses results for the periods presented utilizing a static balance sheet. All percentage
changes presented are within prescribed ranges set by management.
December 31, 2020
Change in Interest Rate
% Change in Pretax
% Change in Economic
(basis points)
Net Interest Income
Value of Equity
400
39.6 %
20.1 %
300
30.7 %
17.5 %
200
21.1 %
13.8 %
100
10.7 %
8.1 %
December 31, 2019
Change in Interest Rate
% Change in Pretax
% Change in Economic
(basis points)
Net Interest Income
Value of Equity
400
24.1 %
1.4 %
300
19.1 %
2.2 %
200
13.4 %
2.9 %
100
7.1 %
2.5 %
(100 )
-8.6 %
-7.0 %
(200 )
-15.9 %
-14.1 %
The
results from the net interest income rate shock analysis are consistent with having an asset sensitive balance sheet, when adjusted
for repricing correlations (betas). The above table indicates that in a rising interest rate environment, the Company is
positioned to have increased pretax net interest income for the same asset base due to the balance sheet composition, related maturity
structures and repricing correlations to market interest rates for assets and liabilities. Conversely, in a declining interest
rate environment we are positioned to have decreased pretax net interest income for the same reasons discussed above.
In addition to rate shocks and EVE analyses,
sensitivity analyses are performed to help us identify which model assumptions are critical and cause the greatest impact on pretax
net interest income. Sensitivity analyses include changing prepayment behavior of loans and securities with optionality, repricing
correlations, and the impact of interest rate changes on non-maturity deposit products (decay rates).
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Consolidated Balance Sheets
85
Consolidated Statements of (Loss) Income
86
Consolidated Statements of Comprehensive (Loss) Income
87
Consolidated Statements of Changes in Shareholders’ Equity
88
Consolidated Statements of Cash Flows
89
Notes to Consolidated Financial Statements
91
Report of Crowe LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting
140
Report of Yount, Hyde & Barbour, Independent Registered Public Accounting Firm, on Consolidated Financial Statements
144
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(continued)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Per Share Data)
December 31,
December 31,
ASSETS
2020
2019
Cash and Due From Banks
$ 38,535
$ 41,386
Interest-Bearing Deposits in Other Financial Institutions
39,954
45,156
Federal Reserve Bank Excess Reserves
163,453
39,270
Total Cash and Cash Equivalents
241,942
125,812
Securities Available-for-Sale, at Fair Value
778,679
742,617
Loans Held-for-Sale
25,437
19,714
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value
9,835
-
Portfolio Loans
2,947,170
2,884,766
Allowance for Loan Losses
(54,074 )
(38,762 )
Portfolio Loans, net
2,893,096
2,846,004
Bank Premises and Equipment, net
85,307
85,942
Bank Premises and Equipment Held-for-Sale, net
2,293
-
Other Real Estate Owned, net
15,722
18,324
Goodwill
-
62,192
Federal Home Loan Bank Stock, at Cost
5,093
4,113
Bank Owned Life Insurance
53,997
52,597
Other Assets
67,778
48,793
Total Assets
$ 4,179,179
$ 4,006,108
LIABILITIES
Deposits:
Noninterest-Bearing Demand
$ 699,229
$ 554,875
Interest-Bearing Demand
366,201
286,561
Money Market
294,229
140,589
Savings
625,482
561,814
Certificates of Deposit
1,614,770
1,960,406
Deposits Held for Assumption in Connection with Sale of Bank Branches
84,717
-
Total Deposits
3,684,628
3,504,245
Federal Home Loan Bank Borrowings
35,000
10,000
Other Liabilities
19,377
18,752
Total Liabilities
3,739,005
3,532,997
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share, Authorized 100,000,000 Shares;
26,385,041 Outstanding at December 31, 2020 and 26,334,229 at December 31, 2019
26,385
26,334
Additional Paid-in-Capital
143,457
142,492
Retained Earnings
254,611
304,158
Accumulated Other Comprehensive Income
15,721
127
Total Shareholders' Equity
440,174
473,111
Total Liabilities and Shareholders' Equity
$ 4,179,179
$ 4,006,108
See accompanying notes to audited consolidated
financial statements.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
Years Ended December 31,
(Dollars in Thousands except Per Share Data)
2020
2019
2018
INTEREST INCOME
Loans, including fees
Taxable
$ 117,226
$ 126,939
$ 119,563
Non-Taxable
7,694
9,603
10,107
Investment Securities
Taxable
14,263
17,826
15,421
Non-Taxable
1,238
1,858
4,246
FRB Excess Reserves
224
1,484
1,589
Interest on Bank Deposits
78
1,266
1,093
Dividend Income
218
144
-
Total Interest Income
140,941
159,120
152,019
Interest Expense
Interest Expense on Deposits
35,391
46,656
38,094
Interest Expense on Federal Funds Purchased
1
-
20
Interest on Other Borrowings
434
117
-
Total Interest Expense
35,826
46,773
38,114
NET INTEREST INCOME
105,115
112,347
113,905
Provision for Loan Losses
18,006
3,404
16,870
Net Interest Income After Provision for Loan Losses
87,109
108,943
97,035
NONINTEREST INCOME
Gain on Sales of Securities, net
6,882
2,205
1,271
Service Charges, Commissions and Fees
4,668
4,962
4,081
Debit Card Interchange Fees
5,857
5,160
4,750
Insurance Commissions
1,728
1,225
1,855
Bank Owned Life Insurance Income
1,400
1,436
1,161
Other Real Estate Owned Income
340
689
2,692
Commercial Loan Swap Fee Income
4,051
-
147
Other
1,654
1,193
1,029
Total Noninterest Income
26,580
16,870
16,986
NONINTEREST EXPENSE
Salaries and Employee Benefits
52,390
52,879
49,958
Occupancy Expense, net
13,369
11,785
10,312
FDIC Insurance Expense
2,313
1,270
2,985
Other Taxes
3,151
2,847
2,571
Advertising Expense
1,633
1,445
884
Telephone Expense
2,303
2,202
2,466
Professional and Legal Fees
5,006
4,507
5,288
Data Processing
2,648
2,267
1,505
Losses on Sales and Write-downs of Other Real Estate Owned, net
1,435
4,732
8,201
Losses on Sales and Write-downs of Bank Premises, net
99
188
186
Debit Card Expense
2,565
2,753
2,785
Tax Credit Amortization
1,088
2,265
4,060
Unfunded Loan Commitment Expense
(252 )
121
127
Other Real Estate Owned Expense
657
525
2,216
Goodwill Impairment Expense
62,192
-
-
Other
8,178
8,243
6,169
Total Noninterest Expense
158,775
98,029
99,713
Income (Loss) Before Income Taxes
(45,086 )
27,784
14,308
Income Tax Provision
772
1,209
2,403
Net (Loss) Income
$ (45,858 )
$ 26,575
$ 11,905
(Loss) Earnings per Common Share
Basic (Loss) Earnings per Common Share
$ (1.74 )
$ 1.01
$ 0.45
Diluted (Loss) Earnings per Common Share
$ (1.74 )
$ 1.01
$ 0.45
Average Shares Outstanding-Basic
26,379,774
26,323,899
26,259,223
Average Shares Outstanding-Diluted
26,379,774
26,339,085
26,259,234
See accompanying notes to audited consolidated
financial statements.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME
Years Ended December 31,
(Dollars in Thousands)
2020
2019
2018
Net (Loss) Income
$ (45,858 )
$ 26,575
$ 11,905
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Securities Available-for-Sale:
Net Unrealized Gains (Losses) Arising during the Period
26,621
15,108
(8,636 )
Reclassification Adjustment for Gains included in Net (Loss) Income
(6,882 )
(2,205 )
(1,271 )
Tax Effect
(4,145 )
(2,710 )
2,081
Net Unrealized Gains (Losses) Recognized in Other Comprehensive Income (Loss)
15,594
10,193
(7,826 )
Other Comprehensive Income (Loss):
15,594
10,193
(7,826 )
Comprehensive (Loss) Income
$ (30,264 )
$ 36,768
$ 4,079
See accompanying notes to audited consolidated financial statements.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
Years Ended December 31,
(Dollars in Thousands)
Common Stock
Additional Paid-in-Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Shareholder's Equity
Balance January 1, 2018
$ 26,258
$ 142,178
$ 265,930
$ (2,240 )
$ 432,126
Net Income
-
-
11,905
-
11,905
Other Comprehensive Loss, Net of Tax
-
-
-
(7,826 )
(7,826 )
Issuance of Restricted Stock (12,413 shares)
12
(12 )
-
-
-
Recognition of Restricted Stock Compensation Expense
-
9
-
-
9
Balance December 31, 2018
$ 26,270
$ 142,175
$ 277,835
$ (10,066 )
$ 436,214
Cumulative Effect of Adopting New Lease Standard
(252 )
(252 )
Balance December 31, 2018 adjusted for Cumulative Effect
$ 26,270
$ 142,175
$ 277,583
$ (10,066 )
$ 435,962
Net Income
-
-
26,575
-
26,575
Other Comprehensive Income, Net of Tax
-
-
-
10,193
10,193
Issuance of Restricted Stock (64,458 shares)
64
(64 )
-
-
-
Recognition of Restricted Stock Compensation Expense
-
381
-
-
381
Balance December 31, 2019
$ 26,334
$ 142,492
$ 304,158
$ 127
$ 473,111
Net Loss
-
-
(45,858 )
-
(45,858 )
Other Comprehensive Income, Net of Tax
-
-
-
15,594
15,594
Dividends Declared ($0.14 per share)
-
-
(3,689 )
-
(3,689 )
Forfeiture of Restricted Stock (4,344 shares)
(4 )
4
-
-
-
Recognition of Restricted Stock Compensation Expense
-
1,016
-
-
1,016
Issuance of Restricted Stock (55,156 shares)
55
(55 )
-
-
-
Balance December 31, 2020
$ 26,385
$ 143,457
$ 254,611
$ 15,721
$ 440,174
See accompanying notes to audited consolidated
financial statements.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Dollars in Thousands)
2020
2019
2018
OPERATING ACTIVITIES
Net (Loss) Income
$ (45,858 )
$ 26,575
$ 11,905
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities
Provision for Loan Losses
18,006
3,404
16,870
Goodwill Impairment
62,192
-
-
Origination of Loans Held-for-Sale
(800,053 )
(329,932 )
(29,307 )
Proceeds From Loans Held-for-Sale
794,330
312,777
27,265
Depreciation/Amortization of Bank Premises and Equipment
6,142
5,335
3,682
(Benefit) Provision for Deferred Taxes
(1,627 )
(76 )
4,850
Net Amortization of Securities
3,441
3,953
4,704
Tax Credit Amortization
1,088
2,265
4,060
Gains on Sales of Securities, net
(6,882 )
(2,205 )
(1,271 )
Write-downs of Other Real Estate Owned
1,483
4,457
8,714
(Gains) Losses on Sales of Other Real Estate Owned, Net
(48 )
275
(513 )
Losses on Sales and Write-downs of Bank Premises
99
188
186
Increase in the Value of Life Insurance Contracts
(1,400 )
(1,436 )
(1,161 )
Recognition of Restricted Stock Compensation Expense
1,016
381
9
(Increase) Decrease in Other Assets
(22,591 )
10,094
(2,244 )
(Decrease) Increase in Other Liabilities
(1,634 )
2,231
1,653
Net Cash Provided By Operating Activities
7,704
38,286
49,402
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales
188,169
390,548
133,120
Proceeds from Maturities, Redemptions, and Pay-downs
78,852
198,154
219,223
Purchases
(277,644 )
(534,136 )
(201,240 )
Purchase of Bank Premises and Equipment, Net
(10,120 )
(8,453 )
(14,613 )
Proceeds from Sales of Bank Premises and Equipment, net
-
1,135
-
Purchase of Federal Home Loan Bank Stock
(1,062 )
(4,113 )
-
Redemption of Federal Home Loan Bank Stock
82
-
-
Loan Originations and Payments, net
(75,688 )
(185,117 )
(59,655 )
Purchases of Bank Owned Life Insurance
-
-
(50,000 )
Other Real Estate Owned Improvements
(19 )
-
(1,272 )
Proceeds from Sales and Payments of Other Real Estate Owned
4,162
12,621
28,679
Net Cash (Used In) Provided By Investing Activities
(93,268 )
(129,361 )
54,242
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts
469,507
50,459
(121,986 )
(Decrease) Increase in Certificates of Deposits
(289,124 )
(137,395 )
43,552
Proceeds from Federal Home Loan Bank Borrowings
25,000
10,000
-
Cash Dividends Paid
(3,689 )
-
-
Net Cash Provided By (Used In) Financing Activities
201,694
(76,936 )
(78,434 )
Net Increase (Decrease) in Cash and Cash Equivalents
116,130
(168,011 )
25,210
Cash and Cash Equivalents at Beginning of Period
125,812
293,823
268,613
Cash and Cash Equivalents at End of Period
$ 241,942
$ 125,812
$ 293,823
See accompanying notes to audited consolidated
financial statements.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES