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 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, 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). 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.
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.
62
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)
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.
December 31, 2022 December 31, 2021
Change in Interest Rate
(basis points) % Change in Pretax
Net Interest Income % Change in Economic
Value of Equity % Change in Pretax
Net Interest Income % Change in Economic
Value of Equity
400 14.5 % (4.7) % 43.6 % 24.6 %
300 11.2 % (2.1) % 33.1 % 20.6 %
200 7.7 % (0.2) % 22.5 % 15.4 %
100 4.1 % 0.8 % 11.4 % 8.6 %
-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). 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.
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).
63
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Consolidated Balance Sheets
65
Consolidated Statements of Income (Loss)
66
Consolidated Statements of Comprehensive (Loss) Income
68
Consolidated Statements of Changes in Shareholders’ Equity
69
Consolidated Statements of Cash Flows
70
Notes to Consolidated Financial Statements
72
Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173 ), on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting
118
64
Table of Contents
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,
2022 December 31,
2021
ASSETS
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
Portfolio Loans 3,148,913 2,812,129
Allowance for Credit Losses ( 93,852 ) ( 95,939 )
Portfolio Loans, net 3,055,061 2,716,190
Bank Premises and Equipment, net 72,114 75,297
Other Real Estate Owned, net 8,393 10,916
Federal Home Loan Bank Stock, at Cost 9,740 2,352
Bank Owned Life Insurance 56,734 55,378
Other Assets 119,335 73,186
Total Assets $ 4,204,519 $ 4,133,746
LIABILITIES
Deposits:
Noninterest-Bearing Demand $ 703,334 $ 747,909
Interest-Bearing Demand 496,948 452,644
Money Market 484,238 463,056
Savings 684,287 690,549
Certificates of Deposit 1,261,526 1,344,318
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
Total Liabilities 3,875,892 3,726,150
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 Per Share, Authorized 100,000,000 Shares;
Outstanding - 23,956,772 shares at December 31, 2022, and
26,430,919 shares at December 31, 2021
23,957 26,431
Additional Paid-in Capital 104,693 143,988
Retained Earnings 285,593 235,475
Accumulated Other Comprehensive (Loss) Income ( 85,616 ) 1,702
Total Shareholders' Equity 328,627 407,596
Total Liabilities and Shareholders' Equity $ 4,204,519 $ 4,133,746
See accompanying notes to audited Consolidated Financial Statements.
65
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended December 31,
(Dollars in Thousands except, Per Share Data) 2022 2021 2020
INTEREST INCOME
Loans, including fees
Taxable $ 135,055 $ 115,448 $ 117,226
Non-Taxable 3,609 4,733 7,694
Investment Securities
Taxable 20,330 12,442 14,263
Non-Taxable 693 882 1,238
FRB Excess Reserves 312 169 224
Interest on Bank Deposits 29 102 78
Dividend Income 154 121 218
Total Interest Income 160,182 133,897 140,941
Interest Expense
Interest Expense on Deposits 18,616 22,246 35,391
Interest Expense on Federal Funds Purchased 188 — 1
Interest on Other Borrowings 1,450 468 434
Total Interest Expense 20,254 22,714 35,826
NET INTEREST INCOME 139,928 111,183 105,115
Provision for Credit Losses 2,419 3,350 18,006
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
Gain on Sales of Securities, net 46 6,869 6,882
Service Charges, Commissions and Fees 7,168 6,662 4,668
Debit Card Interchange Fees 7,427 7,226 5,857
Insurance Commissions 1,961 1,901 1,728
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
Commercial Loan Swap Fee Income 774 2,416 4,051
Other 2,862 2,337 1,654
Total Noninterest Income 21,718 28,881 26,580
NONINTEREST EXPENSE
Salaries and Employee Benefits 52,399 54,157 52,390
Occupancy Expense, net 13,527 13,556 13,369
FDIC Insurance Expense 2,015 2,157 2,313
Other Taxes 3,319 3,129 3,151
Advertising Expense 1,434 952 1,633
Telephone Expense 1,781 2,208 2,303
Professional and Legal Fees 5,818 5,255 5,006
Data Processing 4,051 3,758 2,648
Losses on Sales and Write-downs of Other Real Estate Owned, net 432 3,622 1,435
Losses on Sales and Write-downs of Bank Premises, net — 231 99
Debit Card Expense 2,750 2,777 2,565
Tax Credit Amortization 621 1,708 1,088
Unfunded Loan Commitment Expense — — ( 252 )
Other Real Estate Owned Expense 343 407 657
Goodwill Impairment Expense — — 62,192
Other 8,511 8,368 8,178
Total Noninterest Expense 97,001 102,285 158,775
Income (Loss) Before Income Taxes 61,717 35,698 ( 45,086 )
Income Tax Provision 11,599 4,108 772
66
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )
Earnings (Loss) per Common Share:
Basic Earnings (Loss) per Common Share $ 2.03 $ 1.19 $ ( 1.74 )
Diluted Earnings (Loss) per Common Share $ 2.03 $ 1.19 $ ( 1.74 )
Average Shares Outstanding-Basic 24,595,789 26,342,729 26,379,774
Average Shares Outstanding-Diluted 24,595,789 26,342,729 26,379,774
See accompanying notes to audited Consolidated Financial Statements.
67
Table of Contents
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) 2022 2021 2020
Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )
Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period ( 111,542 ) ( 10,877 ) 26,621
Reclassification Adjustment for Gains included in Net Income (Loss) ( 46 ) ( 6,869 ) ( 6,882 )
Tax Effect 24,270 3,727 ( 4,145 )
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income ( 87,318 ) ( 14,019 ) 15,594
Other Comprehensive (Loss) Income: ( 87,318 ) ( 14,019 ) 15,594
Comprehensive (Loss) Income $ ( 37,200 ) $ 17,571 $ ( 30,264 )
See accompanying notes to audited Consolidated Financial Statements.
68
Table of Contents
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, 2020 $ 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 — — —
Issuance of Restricted Stock ( 55,156 shares)
55 ( 55 ) ) — — —
Recognition of Restricted Stock Compensation Expense — 1,016 — — 1,016
Balance December 31, 2020 $ 26,385 $ 143,457 $ 254,611 $ 15,721 $ 440,174
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 )
Forfeiture of Restricted Stock ( 6,205 shares)
( 6 ) ) 6 — — —
Issuance of Restricted Stock ( 82,490 shares)
82 ( 82 ) ) — — —
Recognition of Restricted Stock Compensation Expense — 1,040 — — 1,040
Balance December 31, 2021 $ 26,431 $ 143,988 $ 235,475 $ 1,702 $ 407,596
Net Income — — 50,118 ) — 50,118
Other Comprehensive Loss, Net of Tax — — — ( 87,318 ) ( 87,318 )
Repurchase of Common Stock ( 2,587,361 shares)
( 2,587 ) ( 40,340 ) — — ( 42,927 )
Forfeiture of Restricted Stock ( 14,141 shares)
( 14 ) ) ( 142 ) — — ( 156 )
Issuance of Restricted Stock ( 127,355 shares)
127 ( 127 ) — — —
Recognition of Restricted Stock Compensation Expense — 1,314 — — 1,314
Balance December 31, 2022 $ 23,957 $ 104,693 $ 285,593 $ ( 85,616 ) $ 328,627
See accompanying notes to audited Consolidated Financial Statements.
69
Table of Contents
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) 2022 2021 2020
OPERATING ACTIVITIES
Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 2,928 2,081 18,006
Goodwill Impairment — — 62,192
Origination of Loans Held-for-Sale ( 8,047 ) ( 480,372 ) ( 800,053 )
Proceeds From Loans Held-for-Sale 10,184 505,946 794,592
Depreciation/Amortization of Bank Premises and Equipment 6,063 6,229 6,142
Provision (Benefit) for Deferred Taxes 3,630 3,114 ( 1,627 )
Net Amortization of Securities 5,749 4,798 3,441
Tax Credit Amortization 621 1,708 1,088
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
(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 ) —
Increase in the Value of Life Insurance Contracts ( 1,357 ) ( 1,380 ) ( 1,400 )
Recognition of Restricted Stock Compensation Expense 1,314 1,040 1,016
(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
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales 19,777 197,056 188,169
Proceeds from Maturities, Redemptions, and Pay-downs 84,693 110,196 78,852
Purchases ( 135,634 ) ( 466,648 ) ( 277,644 )
Purchase of Bank Premises and Equipment, Net ( 5,890 ) ( 8,484 ) ( 10,120 )
Proceeds from Sales of Bank Premises and Equipment, net 408 — —
Net Cash Paid in Branch Sales — ( 73,923 ) —
Proceeds from Sale of Portfolio Loans — 52,320 —
(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 )
Other Real Estate Owned Improvements — — ( 19 )
Proceeds from Sales and Payments of Other Real Estate Owned 4,840 13,256 4,162
Net Cash Used In Investing Activities ( 382,071 ) ( 106,355 ) ( 93,268 )
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts 14,649 369,730 469,507
Decrease in Certificates of Deposits ( 82,792 ) ( 276,899 ) ( 289,124 )
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 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
Cash and Cash Equivalents at End of Period $ 46,869 $ 277,799 $ 241,942
See accompanying notes to audited Consolidated Financial Statements.
70
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES