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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-10 compared with 2022-03-11 · 54 added, 47 removed, 232 unchanged (30% of the section changed)

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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 ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk by simulating various rate shock scenarios and analyzing the results of the rate shocks on the Company’s projected net interest income (“NII”) and economic value of equity (“EVE”).

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.

Within the context of the ALM, NII 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 prepayment speeds, the average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in the market rates (betas).

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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 -200, -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 -200, -300, and -400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position.

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.

NII rate shock simulation results are compared to a base case NII result to provide an estimate of the impact that simulated market rate changes may have on 12 months and 24 months of pretax NII.

The base case earnings scenario together with various rate shock earning scenarios are modeled utilizing both 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 over a prescribed index.

Parallel rate shock analyses assume an immediate parallel shift in market interest rates across all horizons of the yield curve and also include management’s 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 embedded optionality.

Our policy guidelines limit the change in pretax NII over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points.

To monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE rate shock simulations using the same assumptions used in the NII rate shock simulations discussed above.

EVE represents the present value of all asset cash flows discounted with related market interest rates minus the present value of all liability cash flows which are also discounted with related market interest rates.

The impact of a changing interest rate environment on the Company’s projected EVE is analyzed by shocking market interest rates, then modeling the impact of the rate shock on both the cash flow of assets and liabilities, and the underlying discount rate utilized in the present value calculation of the assets and liabilities.

Market rate shock results are then compared to base case simulation results to determine the impact that market rate changes may have on our EVE.

As with NII rate shock analyses, EVE rate shock analyses incorporate management’s assumptions regarding prepayment behavior of fixed rate loans and securities with embedded 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 -200, -300, and -400 basis point scenarios in 2021 and 2020 due to the low interest rate environment.

CARTER BANKSHARES, INC.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following tables reflect the net interest income rate shock analyses and EVE analyses results for the periods presented utilizing a forecasted static balance sheet over the next twelve months.

The following tables reflect the NII rate shock analyses and EVE analyses results for the periods presented utilizing a forecasted static balance sheet over the next twelve months.

All percentage changes presented are within prescribed ranges set by management.

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-100 (5.1) % (3.4) % (2.4) % (7.0) %

-200 (10.7) % (8.5) % (3.2) % (11.5) %

-300 (17.3) % (16.0) % (3.3) % 0.9 %

-400 (23.5) % (28.0) % (3.3) % 14.3 %

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).

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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.

Based on the ALM results presented above for the quarters ending December 31, 2022 and December 31, 2021, the Company’s balance sheet is less asset sensitive at December 31, 2022 than it previously was at December 31, 2021.

This migration in asset sensitivity is due to 1) lower yielding, floating rate excess cash positions held in federal reserve bank and interest-bearing deposits in other financial institutions that are more sensitive to future market interest rate changes which were deployed into higher yielding, fixed and floating rate securities and portfolio loans that are less sensitive to future market interest rate changes, and 2) the recent shifts in the shape of the yield curve between the two periods presented 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 NII.

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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Consolidated Statements of Income (Loss)

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Changes in Shareholders’ Equity

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2022 December 31,

Cash and Due From Banks $ 36,698 $ 38,535

Interest-Bearing Deposits in Other Financial Institutions 64,905 39,954

Federal Reserve Bank Excess Reserves 176,196 163,453

Total Cash and Cash Equivalents 277,799 241,942

Cash and Due From Banks, including Interest-Bearing Deposits of $ 4,505 at December 31, 2022 and $ 241,101 at December 31, 2021

$ 46,869 $ 277,799

Securities Available-for-Sale, at Fair Value 836,273 922,400

Loans Held-for-Sale — 228

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value — 9,835

Portfolio Loans 3,148,913 2,812,129

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Bank Premises and Equipment, net 72,114 75,297

Bank Premises and Equipment Held-for-Sale, net — 2,293

Other Real Estate Owned, net 8,393 10,916

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Certificates of Deposit 1,261,526 1,344,318

Deposits Held for Assumption in Connection with Sale of Bank Branches — 84,717

Total Deposits 3,630,333 3,698,476

Federal Home Loan Bank Borrowings 180,550 7,000

Federal Funds Purchased 17,870 —

Other Liabilities 47,139 20,674

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Common Stock, Par Value $ 1.00 Per Share, Authorized 100,000,000 Shares;

26,430,919 Outstanding at December 31, 2021 and 26,385,041 at December 31, 2020

Outstanding - 23,956,772 shares at December 31, 2022, and

26,430,919 shares at December 31, 2021

23,957 26,431

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Retained Earnings 285,593 235,475

Accumulated Other Comprehensive Income 1,702 15,721

Accumulated Other Comprehensive (Loss) Income ( 85,616 ) 1,702

Total Shareholders' Equity 328,627 407,596

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Provision for Credit Losses 2,419 3,350 18,006

Provision for Unfunded Commitments ( 1,269 ) — —

Net Interest Income After Provision for Credit Losses 109,102 87,109 108,943

Provision (Recovery) for Unfunded Commitments 509 ( 1,269 ) —

Net Interest Income After Provision (Recovery) for Credit Losses 137,000 109,102 87,109

NONINTEREST INCOME

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Bank Owned Life Insurance Income 1,357 1,380 1,400

Gains on Sales and Write-downs of Bank Premises, net 73 — —

Other Real Estate Owned Income 50 90 340

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Income Tax Provision 11,599 4,108 772

Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575

CARTER BANKSHARES, INC.

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )

Earnings (Loss) per Common Share:

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Years Ended December 31,

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( 87,318 ) ( 14,019 ) 15,594

Comprehensive Income (Loss) $ 17,571 $ ( 30,264 ) $ 36,768

Comprehensive (Loss) Income $ ( 37,200 ) $ 17,571 $ ( 30,264 )

See accompanying notes to audited Consolidated Financial Statements.

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Balance January 1, 2020 $ 26,334 $ 142,492 $ 304,158 $ 127 $ 473,111

Net Income — — 26,575 — 26,575

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 — — —

Issuance of Restricted Stock ( 55,156 shares)

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Balance December 31, 2020 $ 26,385 $ 143,457 $ 254,611 $ 15,721 $ 440,174

Net Loss — — ( 45,858 ) — ( 45,858 )

Other Comprehensive Income, Net of Tax — — — 15,594 15,594

Dividends Declared ($ 0.14 per share)

Net Income — — 31,590 — 31,590

Other Comprehensive Loss, Net of Tax — — — ( 14,019 ) ( 14,019 )

Cumulative Effect For Adoption of Credit Losses — — ( 50,726 ) — ( 50,726 )

Repurchase of Common Stock ( 30,407 shares)

( 30 ) ( 433 ) — — ( 463 )

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Other Comprehensive Loss, Net of Tax — — — ( 87,318 ) ( 87,318 )

Cumulative Effect For Adoption of Credit Losses — — ( 50,726 ) ) — ( 50,726 )

Repurchase of Common Stock ( 2,587,361 shares)

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Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities

Provision for Credit Losses, including Provision for Unfunded Commitments 2,081 18,006 3,404

Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 2,928 2,081 18,006

Goodwill Impairment — — 62,192

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Tax Credit Amortization 621 1,708 1,088

Gains on Sales of Mortgage Loans Held-for-Sale ( 365 ) ( 262 ) ( 114 )

Gains on Sales of Loans Held-for-Sale ( 396 ) ( 365 ) ( 262 )

Gains on Sales of Securities, net ( 46 ) ( 6,869 ) ( 6,882 )

Write-downs of Other Real Estate Owned 741 3,472 1,483

Losses (Gains) on Sales of Other Real Estate Owned, Net 150 ( 48 ) 275

Losses on Sales and Write-downs of Bank Premises 231 99 188

(Gains) Losses on Sales of Other Real Estate Owned, net ( 309 ) 150 ( 48 )

(Gains) Losses on Sales and Write-downs of Bank Premises, net ( 73 ) 231 99

Change in Fair Market Value of Commercial Loan Swap Derivative ( 605 ) ( 89 ) 214

Premiums on Branch Sales — ( 506 ) —

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Recognition of Restricted Stock Compensation Expense 1,314 1,040 1,016

Decrease (Increase) in Other Assets 9,346 ( 22,591 ) 10,094

(Decrease) Increase in Other Liabilities ( 2,675 ) ( 1,634 ) 2,231

(Increase) Decrease in Other Assets ( 3,273 ) 8,361 ( 18,723 )

Increase (Decrease) in Other Liabilities 3,549 ( 1,601 ) ( 5,716 )

Net Cash Provided By Operating Activities 70,791 77,538 7,704

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Proceeds from Sale of Portfolio Loans — 52,320 —

Redemption (Purchase) of Federal Home Loan Bank Stock 2,741 ( 980 ) ( 4,113 )

(Purchase) Redemption of Federal Home Loan Bank Stock, net ( 7,388 ) 2,741 ( 980 )

Loan (Originations) and Payments, net ( 342,877 ) 67,131 ( 75,688 )

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Decrease in Certificates of Deposits ( 82,792 ) ( 276,899 ) ( 289,124 )

(Repayments) Proceeds from Federal Home Loan Bank Borrowings ( 28,000 ) 25,000 10,000

Stock Repurchase Plan Settlements ( 157 ) — —

Proceeds (Repayments) from Federal Home Loan Bank Borrowings, net 173,550 ( 28,000 ) 25,000

Proceeds (Repayments) from Federal Funds Purchased, net 17,870 — —

Repurchase of Common Stock ( 42,927 ) ( 157 ) —

Cash Dividends Paid — — ( 3,689 )

Net Cash Provided By (Used In) Financing Activities 64,674 201,694 ( 76,936 )

Net Increase (Decrease) in Cash and Cash Equivalents 35,857 116,130 ( 168,011 )

Net Cash Provided By Financing Activities 80,350 64,674 201,694

Net (Decrease) Increase in Cash and Cash Equivalents ( 230,930 ) 35,857 116,130

Cash and Cash Equivalents at Beginning of Period 277,799 241,942 125,812

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk