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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-03-07 compared with 2024-03-08 · 31 added, 44 removed, 255 unchanged (23% of the section changed)

3 unchanged sentences

Interest rate risk can arise from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time, depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve, where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S.

Treasuries and SOFR (basis risk).

Treasuries and Secured Overnight Financing Rate (“SOFR”) (basis risk).

Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels.

19 unchanged sentences

We have temporarily suspended the + 300 and + 400 basis point rate shock analyses.

Due to FOMC’s slowing future rate increase projections coupled with the recent increase in the Fed Funds Target Rate of 5.25% since March 17, 2022, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.

Due to the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by an aggregate of 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following tables reflect the earnings simulation results for the periods presented utilizing a forecasted static balance sheet over the next twelve months.

8 unchanged sentences

-400 6.6% 6.7%

The results from the earnings simulation imply that the Company’s balance sheet has shifted from an asset sensitive balance sheet at December 31, 2022 to a slightly liability sensitive balance sheet when at December 31, 2023.

The above table indicates that, in a rising interest rate environment, the Company is positioned to have a minimum increase in net interest income for the same asset and liability mix due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities.

However, in a declining interest rate environment, we are positioned to have a slightly more advantageous increase in net interest income for the same reasons discussed above.

Based on the ALM results presented above for the quarters ending December 31, 2023 and December 31, 2022, the Company’s balance sheet is slightly liability sensitive at December 31, 2023 versus assets sensitive at December 31, 2022.

This migration from asset sensitivity to slightly liability 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 variable rate securities and portfolio loans that are less sensitive to future market interest rate changes, 2) the addition of the Company’s largest lending relationship, with an aggregate principal amount of $301.9 million being placed on nonaccrual status as of June 30, 2023, 3) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns related to the inverted yield curve, and 4) the recent shifts in the shape of the yield curve between the two periods presented above.

The results from the earnings simulation imply that the Company’s balance sheet is slightly liability sensitive balance sheet at December 31, 2024 and December 31, 2023.

The above table indicates that, in a rising interest rate environment, the Company is positioned to have a small increase in net interest income for the same asset and liability mix due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities.

However, in a declining interest rate environment, the Company is positioned to have a slightly more advantageous increase in net interest income for the same reasons discussed above.

The liability sensitive position at December 31, 2024 is due to a variety of factors which include 1) higher than market rate unfunded loan commitments that were originated during 2024 with fixed rates that are assumed to draw down, or convert to funded loan balances during the next twelve months, 2) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns in response to the recent inverted yield curve, and 3) more aggressive non maturing deposit betas utilized in a rates down environment versus a rates up environment based on bank specific non maturing deposit rate beta assumptions observed during the most recent rate cycle.

Economic Value of Equity Modeling

7 unchanged sentences

We have temporarily suspended the + 300 and + 400 basis point rate shock analyses.

Due to the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.

Results for the economic value of equity modeling are driven primarily by the shape of the underlying yield curves and option-adjusted spreads used to discount the projected cash flows of assets and liabilities, and the assumed life span of the assets and liabilities being discounted.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following tables reflect the economic value of equity analyses results for the periods presented.

29 unchanged sentences

718,400 779,003

Loans Held-for-Sale — —

Equity Securities 10,041 —

Portfolio Loans 3,624,826 3,505,910

14 unchanged sentences

Federal Home Loan Bank Borrowings 70,000 393,400

Federal Funds Purchased — 17,870

Reserve for Unfunded Loan Commitments 3,186 3,193

1 unchanged sentence

Total Liabilities 4,274,876 4,161,296

Commitment and Contingencies - see N OTE 18.

Commitment and Contingencies - see NOTE 18.

SHAREHOLDERS’ EQUITY

32 unchanged sentences

NET INTEREST INCOME 114,457 122,310 139,928

Provision for Credit Losses 5,500 2,419 3,350

Provision (Recovery) for Unfunded Commitments 901 509 ( 1,269 )

Net Interest Income After Provision (Recovery) for Credit Losses 115,909 137,000 109,102

(Recovery) Provision for Credit Losses ( 5,039 ) 5,500 2,419

(Recovery) Provision for Unfunded Commitments ( 7 ) 901 509

Net Interest Income After (Recovery) Provision for Credit Losses 119,503 115,909 137,000

NONINTEREST INCOME

(Losses) Gains on Sales of Securities, net ( 1,521 ) 46 6,869

Gains (Losses) on Sales of Securities, net 68 ( 1,521 ) 46

Service Charges, Commissions and Fees 7,393 7,155 7,168

2 unchanged sentences

Bank Owned Life Insurance Income 1,473 1,381 1,357

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

Commercial Loan Swap Fee Income — 139 774

10 unchanged sentences

Data Processing 4,919 3,920 4,051

Losses on Sales and Write-downs of Other Real Estate Owned, net 1,100 432 3,622

Debit Card Expense 3,423 2,875 2,750

21 unchanged sentences

Net Unrealized Gains (Losses) Arising during the Period 9,270 16,370 ( 111,542 )

Reclassification Adjustment for Losses (Gains) included in Net Income 1,521 ( 46 ) ( 6,869 )

Reclassification Adjustment for (Gains) Losses included in Net Income ( 68 ) 1,521 ( 46 )

Tax Effect ( 2,284 ) ( 3,714 ) 24,270

13 unchanged sentences

(Loss) Total Shareholder's

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

Cumulative Effect of the Adoption of ASU 2016-13 — — ( 50,726 ) — ( 50,726 )

Balance January 1, 2022 $ 26,431 $ 143,988 $ 235,475 $ 1,702 $ 407,596

9 unchanged sentences

Balance December 31, 2022 $ 23,957 $ 104,693 $ 285,593 $ ( 85,616 ) $ 328,627

Cumulative Effect of the Adoption of ASU 2023-02 — — 106 — 106

Balance at January 1, 2023 23,957 104,693 285,699 ( 85,616 ) 328,733

Net Income — — 23,384 — 23,384

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

Other Comprehensive Income, Net of Tax — — — 14,177 14,177

1% Excise Tax on Stock Buybacks — ( 153 ) — — ( 153 )

Repurchase of Common Stock ( 1,132,232 shares)

6 unchanged sentences

Balance December 31, 2023 $ 22,957 $ 90,642 $ 309,083 $ ( 71,439 ) $ 351,243

Cumulative Effect of the Adoption of ASU 2023-02 — — 106 — 106

Balance at January 1, 2023 23,957 104,693 285,699 ( 85,616 ) 328,733

Net Income — — 24,523 — 24,523

Other Comprehensive Income, Net of Tax — — — 6,918 6,918

1% Excise Tax on Stock Buybacks — ( 153 ) — — ( 153 )

Repurchase of Common Stock ( 1,132,232 shares)

( 1,132 ) ( 15,284 ) — — ( 16,416 )

Forfeiture of Restricted Stock ( 15,244 shares)

14 unchanged sentences

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 6,401 2,928 2,081

(Recovery) Provision for Credit Losses, including (Recovery) Provision for Unfunded Commitments ( 5,046 ) 6,401 2,928

Origination of Loans Held-for-Sale ( 8,953 ) ( 6,758 ) ( 8,047 )

5 unchanged sentences

Gains on Sales of Loans Held-for-Sale ( 138 ) ( 109 ) ( 396 )

Losses (Gains) on Sales of Securities, net 1,521 ( 46 ) ( 6,869 )

Write-downs of Other Real Estate Owned 1,117 741 3,472

(Gains) Losses on Sales of Other Real Estate Owned, net ( 17 ) ( 309 ) 150

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

Commercial Loan Swap Derivative Income 219 ( 605 ) ( 89 )

Premiums on Branch Sales — — ( 506 )

(Gains) Losses on Sales of Securities, net ( 68 ) 1,521 ( 46 )

Unrealized Gain on Equity Securities ( 41 ) — —

Commercial Loan Swap Derivative Loss (Income) 12 219 ( 605 )

Increase in the Value of Life Insurance Contracts ( 1,473 ) ( 1,381 ) ( 1,357 )

Balance Sheet Hedge Fair Value Adjustment 125 — —

Recognition of Restricted Stock Compensation Expense 1,752 1,561 1,314

(Increase) Decrease in Other Assets ( 5,465 ) ( 3,273 ) 8,592

Increase (Decrease) in Other Liabilities 3,803 3,549 ( 1,601 )

Decrease (Increase) in Other Assets 1,614 ( 3,849 ) ( 2,914 )

Increase in Other Liabilities 1,687 3,803 3,549

Net Cash Provided By Operating Activities 36,938 46,730 70,791

4 unchanged sentences

Purchases ( 15,126 ) ( 24,938 ) ( 135,634 )

Purchase of Equity Securities ( 10,000 ) — —

Purchase of Bank Premises and Equipment, Net ( 8,133 ) ( 9,798 ) ( 5,890 )

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 ( 11,886 ) ( 7,388 ) 2,741

Loan (Originations) and Payments, net ( 359,407 ) ( 342,877 ) 67,131

Redemption (Purchase) of Federal Home Loan Bank Stock, net 15,139 ( 11,886 ) ( 7,388 )

Loan Originations, net ( 135,888 ) ( 359,407 ) ( 342,877 )

Proceeds from Sales and Payments of Other Real Estate Owned 4,199 6,794 4,840

3 unchanged sentences

Increase (Decrease) in Certificates of Deposits 337,719 325,125 ( 82,792 )

Proceeds (Repayments) from Federal Home Loan Bank Borrowings, net 212,850 173,550 ( 28,000 )

Proceeds from Federal Home Loan Bank Borrowings 1,870,000 3,441,685 300,550

Repayments on Federal Home Loan Bank Borrowings ( 2,193,400 ) ( 3,228,835 ) ( 127,000 )

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

8 unchanged sentences

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