CARTER BANKSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), is intended to help the reader understand our operations,
our present business environment, and our consolidated results of operations and
financial condition and highlights material changes in our financial condition
and results of operations as of and for the three and six month periods ended
June 30, 2022 and June 30, 2021 . The MD&A is provided as a supplement to, and
should be read in conjunction with our Consolidated Financial Statements and the
accompanying notes thereto contained in Item 1 of this Quarterly Report on Form
10-Q. Certain reclassifications have been made to prior periods to place them on
a basis comparable with the current period presentation. The results of
operations reported in the accompanying Consolidated Financial Statements are
not necessarily indicative of results to be expected in future periods. The MD&A
includes the following sections:
•Important Note Regarding Forward-Looking Statements
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Estimates
•Overview
•Results of Operations and Financial Condition
•Earnings Summary
•Liquidity and Capital Resources
•Regulatory Capital Requirements
•Contractual Obligations
•Off-Balance Sheet Arrangements
Important Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are typically identified by words or phrases such as "will likely result," "expect," "anticipate," "estimate," "forecast," "project," "intend," " believe," "assume," "strategy," "trend," "plan," "outlook," "outcome," "continue," "remain," "potential," "opportunity," "comfortable," "current," "position," "maintain," "sustain," "seek," "achieve" and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements related to current and future market conditions and interest rates, the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company's efficiency initiatives, and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, and other matters regarding or affecting the Company and its future business and operations. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:
•changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss ("CECL");
•general economic or business conditions, or changes in interest rates;
•technological risks and developments;
•cyber-security threats, attacks or events;
•the Company's liquidity and capital positions;
•the potential adverse effects of unusual and infrequently occurring events, or the prospect of these events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war betweenRussia and 35 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
•these potential adverse effects may include, without limitation, adverse effects on: (1) the ability of the Company's borrowers to satisfy their obligations to the Company; (2) the value of collateral securing loans; (3) the demand for the Company's loans or its other products and services; (4) incidents of cyberattacks and fraud; (4) the Company's results of operations, liquidity or capital resources; (5) risks posed by reliance on third-party service providers; (6) other aspects of the Company's business operations; and (7) on financial markets and economic growth; •the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the COVID-19 pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ;
•potential claims, damages, and fines related to litigation or government actions;
•sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; •inflation; •the replacement of LIBOR;
•a change in spreads on interest-earning assets and interest-bearing liabilities;
•regulatory supervision and oversight, including the failure to comply with state and federal banking agency laws and regulations;
•legislative and regulatory changes and requirements affecting the financial services industry as a whole, and the Company, in particular;
•the outcome of pending and future litigation and governmental proceedings;
•increased competition;
•the ability to continue to introduce competitive new products and services at competitive prices and on a timely, cost-effective basis;
•the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team;
•the Company's strategic branch network optimization plan;
•managing our internal growth and acquisitions;
•the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;
•containing costs and expenses;
•reliance on significant customer relationships;
•credit losses;
•the potential impact of climate change and related government regulation on the Company and its customers;
•deterioration of the housing market and reduced demand for mortgages; and
•deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described in this Quarterly Report, as well as in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and our subsequent filings with theSecurities and Exchange Commission ("SEC"). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made. 36 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Explanation of Use of Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), management uses, and this quarterly report references, net interest income on a fully taxable equivalent, or ("FTE"), basis, which is a non-GAAP financial measure. Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income on an FTE basis (non-GAAP) is reconciled to net interest income (GAAP) in the Net Interest Income section under the heading "Results of Operations and Financial Condition." Although management believes that this non-GAAP financial measure enhances investors' understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies. Critical Accounting Estimates Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as ofJune 30, 2022 have remained unchanged from the disclosures presented under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are incorporated herein by reference.
Overview
Carter Bankshares, Inc. (the "Company") is a bank holding company headquartered inMartinsville, Virginia with assets of$4.1 billion atJune 30, 2022 . The Company is the parent company of its wholly owned subsidiary,Carter Bank & Trust (the "Bank"). The Bank is an insured,Virginia state-chartered bank, which operates branches inVirginia andNorth Carolina . The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol "CARE". The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense. Our mission is to strive to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin. Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.
Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits ("CDs"), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses. The Company is focused on executing this strategy to successfully build our brand and grow our business in our markets.
37
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Results of Operations and Financial Condition
Earnings Summary
Highlights for the Three Months Ended
•Net interest income increased$5.3 million , or 19.3%, to$32.5 million for the three months endedJune 30, 2022 compared to$27.2 million for the same period in 2021 primarily due an increase of 34 basis points in earning assets due to the rising interest rate environment and a reduction of 21 basis points in funding costs;
•The provision for credit losses increased to
•Total noninterest income decreased$1.6 million to$5.6 million for the three months endedJune 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;
•Total noninterest expense decreased
•Provision for income taxes increased
Highlights for the Six Months Ended
•Net interest income increased$6.9 million , or 12.9%, to$60.7 million for the six months endedJune 30, 2022 compared to the same period in 2021 due primarily to the ongoing reduction in funding costs;
•The provision for credit losses decreased to
•Total noninterest income decreased$5.3 million to$10.9 million for the six months endedJune 30, 2022 compared to$16.2 million for the same period in 2021 due primarily to a reduction in gains on sales of securities; •Total noninterest expense decreased$5.4 million to$45.9 million for the six months endedJune 30, 2022 compared the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and reversals of vacation carryover in the first quarter of 2022 as well as lower medical costs in the first half of 2022; and
•Provision for income taxes increased
Balance Sheet Highlights (period-end balances,
•The securities portfolio decreased$15.4 million and is currently 22.0% of total assets compared to 22.3% of total assets. The decrease is due to the Company's strategy of redeploying securities maturities into higher yielding loan growth.
•Total portfolio loans increased
•The portfolio loans to deposit ratio was 79.9%, compared to 76.0%, as loan growth outpaced deposit growth;
•Total deposits increased
•The ACL to total portfolio loans ratio was 3.27% compared to 3.41%. The ACL on portfolio loans totaled$98.0 million atJune 30, 2022 , compared to$95.9 million with the increase driven primarily by the deterioration of one purchased syndicated C&I loan which resulted in a$2.6 million specific reserve and loan growth partially offset by a decline in the other segment due to principal pay downs; 38 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) •During the second quarter of 2022, the Company's Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares of the Company's common stock, subject to theFederal Reserve's non-objection letter, which was received onJuly 26, 2022 . We reported net income of$10.8 million or$0.44 diluted earnings per share for the three months endedJune 30, 2022 and$20.1 million , or$0.80 diluted earnings per share, for the six months endedJune 30, 2022 compared to net income of$5.4 million , or$0.21 diluted earnings per share and$14.8 million , or$0.56 diluted earnings per share, for the same periods in 2021. Three Months Ended June 30, Six Months Ended June 30, PERFORMANCE RATIOS 2022 2021 2022 2021 Return on Average Assets 1.04 % 0.53 % 0.98 % 0.72 % Return on Average Shareholders' Equity 12.51 % 5.55 % 10.95 % 7.62 % Portfolio Loans to Deposit Ratio 79.87 % 79.70 % 79.87 % 79.70 % Allowance for Credit Losses to Total Portfolio Loans 3.27 % 3.75 % 3.27 % 3.75 % Net Interest Income Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by ourAsset and Liability Committee ("ALCO"), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income. Net interest income and the net interest margin are presented on an FTE basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities. The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the "Explanation of Use of Non-GAAP Financial Measures" above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q. Total net interest income increased$5.3 million , or 19.3% to$32.5 million and$6.9 million , or 12.9%, to$60.7 million for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021. These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs. Net interest income, on an FTE basis (non-GAAP), increased$5.2 million , or 18.7%, to$32.8 million and$6.7 million , or 12.3% to$61.3 million for the three and six months endedJune 30, 2022 , respectively, compared to$27.6 million and$54.6 million for the same periods in 2021. The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of$3.8 million and$3.3 million in the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021, offset by lower interest expense of$1.4 million and$3.4 million in the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021. Net interest margin increased 49 basis points to 3.24% and 32 basis points to 3.06% for the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021. Net interest margin, on an FTE basis (non-GAAP), increased 48 basis points to 3.27% and 31 basis points to 3.09% for the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021. The Company continues to focus on the expansion of net interest income and the net interest margin. The second quarter and first six months of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs. The second quarter and first six months of 2022 was also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods. 39 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (Dollars in Thousands) 2022 2021 2022 2021 Interest Income (FTE)(Non-GAAP) Interest and Dividend Income (GAAP)$ 36,961
293 386 591 848
Interest and Dividend Income (FTE)
(Non-GAAP) 37,254 33,480 70,230 66,899
Average Earning Assets $ 4,020,589
3.69 % 3.34 % 3.51 % 3.37 %
Yield on Interest-earning Assets (FTE)
(Non-GAAP) 3.72 % 3.38 % 3.54 % 3.41 %
Net Interest Income (GAAP) $ 32,459
293 386 591 848
Net Interest Income (FTE) (Non-GAAP) 32,752 27,589 61,272 54,580
Average Earning Assets $ 4,020,589
3.24 % 2.75 % 3.06 % 2.74 %
Net Interest Margin (FTE) (Non-GAAP) 3.27 % 2.79 % 3.09 % 2.78 %
40
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
The following table provides information regarding the average balances,
interest and rates earned on interest-earning assets and the average balances,
interest and rates paid on interest-bearing liabilities for the periods
presented:
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Income/ Income/
(Dollars in Thousands) Average Balance Expense Rate Average Balance Expense Rate
ASSETS
Interest-Bearing Deposits with Banks$ 30,606 $ 61 0.80 %$ 190,851 $ 56 0.12 % Tax-Free Investment Securities(2) 33,873 237 2.81 % 33,027 273 3.32 % Taxable Investment Securities 975,352 4,452 1.83 % 765,286 3,138 1.64 %Total Securities 1,009,225 4,689 1.86 % 798,313 3,411 1.71 % Tax-Free Loans(1)(2) 147,060 1,159 3.16 % 197,393 1,565 3.18 % Taxable Loans(1) 2,831,384 31,323 4.44 % 2,782,802 28,417 4.10 % Total Loans 2,978,444 32,482 4.37 % 2,980,195 29,982 4.04 % Federal Home Loan Bank Stock 2,314 22 3.81 % 3,215 31 3.87 % Total Interest-Earning Assets 4,020,589$ 37,254 3.72 % 3,972,574$ 33,480 3.38 % Noninterest Earning Assets 120,540 170,885 Total Assets$ 4,141,129 $ 4,143,459 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand$ 487,567 $ 343 0.28 %$ 404,084 $ 234 0.23 % Money Market 528,211 310 0.24 % 351,820 305 0.35 % Savings 735,438 189 0.10 % 657,803 169 0.10 % Certificates of Deposit 1,270,569 3,570 1.13 % 1,512,923 5,052 1.34 % Total Interest-Bearing Deposits 3,021,785 4,412 0.59 % 2,926,630 5,760 0.79 % Federal Funds Purchased 3,033 4 0.53 % - - - % Federal Home Loan Bank Borrowings 6,594 10 0.61 % 30,000 91 1.22 % Other Borrowings 6,205 76 4.91 % 3,514 40 4.57 % Total Borrowings 15,832 90 2.28 % 33,514 131 1.57 % Total Interest-Bearing Liabilities 3,037,617 4,502 0.59 % 2,960,144 5,891 0.80 % Noninterest-Bearing Liabilities 757,831 790,537 Shareholders' Equity 345,681 392,778 Total Liabilities and Shareholders' Equity$ 4,141,129 $ 4,143,459 Net Interest Income(2)$ 32,752 $ 27,589 Net Interest Margin(2) 3.27 % 2.79 % (1)Nonaccruing loans are included in the daily average loan amounts outstanding. (2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. 41 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Six Months Ended June 30, 2022 Six Months Ended Six Months Ended June 30, 2021 Average Income/ Average Income/ (Dollars in Thousands) Balance Expense Rate Balance Expense Rate
ASSETS
Interest-Bearing Deposits with Banks $ 85,040$ 123 0.29 % $ 182,835$ 106 0.12 % Tax-Free Investment Securities(2) 30,246 448 2.99 % 42,256 685 3.27 % Taxable Investment Securities 968,039 8,184 1.70 % 736,926 6,125 1.68 %Total Securities 998,285 8,632 1.74 % 779,182 6,810 1.76 % Tax-Free Loans(1)(2) 150,569 2,365 3.17 % 210,132 3,353 3.22 % Taxable Loans(1) 2,761,471 59,068 4.31 % 2,780,127 56,562 4.10 % Total Loans 2,912,040 61,433 4.25 % 2,990,259 59,915 4.04 % Federal Home Loan Bank Stock 2,227 42 3.80 % 4,006 68 3.42 % Total Interest-Earning Assets 3,997,592$ 70,230 3.54 % 3,956,282$ 66,899 3.41 % Noninterest Earning Assets 137,661 176,553 Total Assets$ 4,135,253 $ 4,132,835 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 475,838$ 620 0.26 % $ 391,555$ 449 0.23 % Money Market 519,298 594 0.23 % 330,838 570 0.35 % Savings 720,681 367 0.10 % 651,340 331 0.10 % Certificates of Deposit 1,289,578 7,230 1.13 % 1,566,436 10,705 1.38 % Total Interest-Bearing Deposits 3,005,395 8,811 0.59 % 2,940,169 12,055 0.83 % Federal Funds Purchased 1,525 4 0.53 % - - - % Federal Home Loan Bank Borrowings 4,011 16 0.80 % 31,934 187 1.18 % Other Borrowings 5,287 127 4.84 % 2,914 77 5.33 % Total Borrowings 10,823 147 2.74 % 34,848 264 1.53 % Total Interest-Bearing Liabilities 3,016,218 8,958 0.60 % 2,975,017 12,319 0.84 % Noninterest-Bearing Liabilities 748,744 765,852 Shareholders' Equity 370,291 391,966 Total Liabilities and Shareholders' Equity$ 4,135,253 $ 4,132,835 Net Interest Income(2)$ 61,272 $ 54,580 Net Interest Margin(2) 3.09 % 2.78 % (1)Nonaccruing loans are included in the daily average loan amounts outstanding. (2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. Interest income increased$3.9 million , or 11.7% and$3.6 million , or 5.4%, for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021. Interest income, on an FTE basis (non-GAAP), increased$3.8 million , or 11.3% and$3.3 million , or 5.0% for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021. The change was primarily due to increases in average interest-earning assets of$48.0 million and$41.3 million in the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 34 basis points and 13 basis points for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022. For the three and six months endedJune 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased$160.2 million and$97.8 million , respectively, and the average rate earned increased 68 and 17 basis points, respectively, as funds were deployed into higher yielding loans and securities. Average loan balances decreased$1.8 million and$78.2 million for the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021 due to large commercial paydowns in 2021. Average Paycheck Protection Program ("PPP") loans totaled$0.4 million as ofJune 30, 2022 compared to$29.8 million as ofJune 30, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by theSmall Business Administration . The average rate earned on loans increased 33 and 21 basis points for the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during the first half of 2022. AtJune 30, 2022 , the loan portfolio was comprised of 29.6% floating rate loans which reprice monthly, 39.5% variable rate loans that reprice at least once during the life of the loan and 30.9% fixed rate loans that do not reprice during the life of the loan.
Average investment securities increased
42
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
respectively, compared to the same periods in 2021 and the average rate earned
on investment securities increased 15 basis points for the three months ended
June 30, 2022 and decreased two basis points for the six months ended June 30,
2022 , when compared to the same periods in 2021. The change in investment
securities is the result of active balance sheet management to deploy excess
cash. Our portfolio has been diversified as to bond types, maturities, and
interest rate structures. As of June 30, 2022 , the securities portfolio was
comprised of 47.4% variable rate securities with approximately 47.1% that will
reprice at least once over the next 12 months. Having a significant percentage
of variable rate securities is an important strategy during times of rising
interest rates. Bond prices generally fall when interest rates increase, which
can result in unrealized losses. However, variable rate securities do not carry
as much interest rate risk so there is much less price volatility. This variable
rate structure is expected to limit the impact of rising rates on the Company's
unrealized losses on debt securities.
Interest expense decreased $1.4 million and $3.4 million for the three and six
months ended June 30, 2022 , respectively, when compared to the same periods in
2021. The decrease was primarily due to the intentional runoff of higher cost
CDs in 2021 and the first half of 2022. Interest expense on deposits decreased
$1.3 million and $3.2 million for the three and six months ended June 30, 2022 ,
respectively, when compared to the same periods in 2021 primarily due to the
decline in the average balance of CDs and the reduction in average rates paid on
CDs.
The average balances on CDs decreased $242.4 million or 16.0% and $276.9
million , or 17.7% for the three and six months ended June 30, 2022 ,
respectively, when compared to the same periods in 2021 primarily due to the
aforementioned intentional runoff of these higher cost CDs. The average balances
on our core deposits including money market accounts, interest-bearing demand
accounts and savings accounts all increased by $176.4 million , $83.5 million and
$77.6 million , respectively, for the three months ended June 30, 2022 , and by
$188.5 million , $84.3 million and $69.3 million , respectively, for the six
months ended June 30, 2022 , when compared to the same periods in 2021. The
average rates paid on these core deposit accounts remained relatively unchanged
except the average rate paid on money market accounts, which decreased 11 and 12
basis points for the three and six months ended June 30, 2022 , respectively,
when compared to the same periods in 2021.
The average balances on borrowings decreased $17.7 million and $24.0 million for
the three and six months ended June 30, 2022 , respectively, when compared to the
same periods in 2021 due to prepayments and scheduled maturities. As a result,
the cost of interest-bearing liabilities decreased 21 and 24 basis points for
the three and six months ended June 30, 2022 , respectively, when compared to the
same periods in 2021.
43
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
The following table sets forth for the periods presented a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
Compared to June 30, 2021 Compared to June 30, 2021
Increase/ Increase/
(Dollars in Thousands) Volume(3) Rate(3) (Decrease) Volume(3) Rate (Decrease)
Interest Earned on:
Interest-Bearing Deposits with
Banks $ (82) $ 87 $ 5 $ (79) $ 96 $ 17
Tax-free Investment Securities(2) 7 (43) (36) (182) (55)
(237)
Taxable Investment Securities 930 384 1,314 1,952 107 2,059Total Securities 937 341 1,278 1,770 52 1,822 Tax-free Loans(1)(2) (397) (9) (406) (936) (52) (988) Taxable Loans(1) 503 2,403 2,906 (382) 2,888 2,506 Total Loans 106 2,394 2,500 (1,318) 2,836 1,518 Federal Home Loan Bank Stock (9) - (9) (33) 7 (26) Total Interest-Earning Assets$ 952 $ 2,822 $ 3,774 $ 340 $ 2,991 $ 3,331 Interest Paid on: Interest-Bearing Demand$ 53 $ 56 $ 109 $ 105 $ 66 $ 171 Money Market 123 (118) 5 256 (232) 24 Savings 20 - 20 35 1 36 Certificates of Deposit (745) (737) (1,482) (1,723) (1,752)
(3,475)
Total Interest-Bearing Deposits (549) (799) (1,348) (1,327) (1,917) (3,244) Federal Funds Purchased 4 - 4 4 - 4 Federal Home Loan Bank Borrowings (49) (32) (81) (125) (46) (171) Other Borrowings 33 3 36 58 (8) 50 Total Borrowings (12) (29) (41) (63) (54) (117) Total Interest-Bearing Liabilities$ (561) $ (828) $ (1,389) $ (1,390) $ (1,971) $ (3,361) Change in Net Interest Margin$ 1,513 $ 3,650 $ 5,163 $ 1,730 $ 4,962 $
6,692
(1)Nonaccruing loans are included in the daily average loan amounts outstanding. (2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3)Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
Provision for Credit Losses
The Company recognizes provision expense for the allowance for credit losses
("ACL") based on the difference between the existing balance of ACL reserves and
the ACL reserve balance necessary to adequately absorb expected credit losses
associated with the Company's financial instruments. Similarly, the Company
recognizes provision expense for unfunded commitments based on the difference
between the existing balance of reserves for unfunded commitments and the
reserve balance for unfunded commitments necessary to adequately absorb expected
credit losses associated with those commitments. The Company adopted ASU 2016-03
on January 1, 2021 , and increased the ACL by $64.5 million for the Day 1
adjustment which included $61.6 million to the ACL and $2.9 million related to
the life-of-loss reserve on unfunded loan commitments.
The ACL was 3.27% of total portfolio loans at June 30, 2022 , compared to 3.41%
of total portfolio loans, at December 31, 2021 . The provision for credit losses
increased $0.8 million to $1.8 million for the three months ended June 30, 2022
and decreased $0.4 million to $2.4 million for the six months ended June 30,
2022 , when compared to the same periods in 2021. The increase for the three
months ended June 30, 2022 was primarily driven by loan growth, the
deterioration of one purchased syndicated C&I loan which resulted in a $2.6
million specific reserve and partially offset by a decline in the other segment
due to $15.4 million principal pay-downs. These increases were partially offset
by downward pressure on the challenger model's long-term averages.
The provision for unfunded commitments increased $0.9 million for both the three
and six months ended June 30, 2022 compared to the same periods in 2021 due to
increased commitment volume in construction, partially offset by a decrease in
the reserve rates.
44
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.
Noninterest Income
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Gains on Sales of Securities,
net $ 76 $ 1,499 $ (1,423) (94.9) % $ 52 $ 5,109 $ (5,057) (99.0) %
Service Charges, Commissions and
Fees 1,749 1,489 260 17.5 % 3,702 3,298 404 12.2 %
Debit Card Interchange Fees 1,850 1,874 (24) (1.3) % 3,782 3,705 77 2.1 %
Insurance Commissions 568 378 190 50.3 % 837 672 165 24.6 %
Bank Owned Life Insurance Income 334 342 (8) (2.3) % 668 682 (14) (2.1) %
(Losses) Gains on Sales and
Write-downs of Bank Premises,
net (37) - (37) NM 346 - 346 NM
Other Real Estate Owned Income 12 4 8 200.0 % 22 75 (53) (70.7) %
Commercial Loan Swap Fee Income 756 742 14 1.9 % 756 961 (205) (21.3) %
Other 296 910 (614) (67.5) % 774 1,688 (914) (54.1) %
Total Noninterest Income $ 5,604 $ 7,238 $ (1,634) (22.6) % $ 10,939 $ 16,190 $ (5,251) (32.4) %
Total noninterest income decreased $1.6 million , or 22.6%, to $5.6 million for
the three months ended June 30, 2022 and decreased $5.3 million , or 32.4%, to
$10.9 million for the six months ended June 30, 2022 when compared to the same
periods in 2021. These decreases were primarily related to declines in net
security gains of $1.4 million and $5.1 million in the three and six months
ended June 30, 2022 , respectively. The decline in security gains was due to the
rising interest rate environment resulting in lower securities prices in the
market that discouraged sales.
Changes in total noninterest income for the three months ended June 30, 2022
also included a decrease of $0.6 million in other noninterest income offset by
increases of $0.3 million in services charges, commissions and fees and $0.2
million in insurance commissions. The decrease in other noninterest income for
the three months ended June 30, 2022 when compared to the same period in 2021
was also related to a premium of $0.5 million on the sale of four bank branches
in the second quarter of 2021. The increase in service charges, commission and
fees for the three months ended June 30, 2022 when compared to the same period
in 2021 was primarily due to the seasonality of certain fees in the second
quarter of 2022 and the higher insurance commissions was due to increased
customer activity.
Changes in total noninterest income for the six months ended June 30, 2022 also
included decreases of $0.9 million in other noninterest income and $0.2 million
in commercial loan swap fee income offset by increases of $0.4 million in
service charges, commissions and fees, $0.3 million in gains on sales and
write-downs of bank premises, net, and $0.2 million in insurance commissions.
Similar to the decline during the three month period ended June 30, 2022 , the
decline in other noninterest income for the six months ended June 30, 2022 was
similarly related to premiums on the sale of bank branches; however, the decline
in commercial loan swap fee income was related to the timing and demand for this
product in the current rising interest rate environment. The increases in
service charges, commissions and fees and insurance commission for the six
months ended June 30, 2022 compared to the same period in 2021 was driven by
seasonality and increased customer activity. The $0.3 million gains on sales and
write-downs of bank premises, net for the six months ended June 30, 2022 was due
to a $0.4 million eminent domain settlement on a previously closed branch in the
first quarter of 2022.
45
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Noninterest Expense
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Salaries and Employee Benefits $ 12,444 $ 13,686 $ (1,242) (9.1) % $ 24,201 $ 26,268 $ (2,067) (7.9) %
Occupancy Expense, net 3,296 3,451 (155) (4.5) % 6,648 6,965 (317) (4.6) %
FDIC Insurance Expense 629 657 (28) (4.3) % 997 1,300 (303) (23.3) %
Other Taxes 819 718 101 14.1 % 1,623 1,480 143 9.7 %
Advertising Expense 267 220 47 21.4 % 506 390 116 29.7 %
Telephone Expense 454 588 (134) (22.8) % 942 1,188 (246) (20.7) %
Professional and Legal Fees 1,202 1,440 (238) (16.5) % 2,421 2,664 (243) (9.1) %
Data Processing 842 954 (112) (11.7) % 1,683 1,875 (192) (10.2) %
(Gains) Losses on Sales and
Write-downs of Other Real Estate
Owned, net (60) 2,603 (2,663) (102.3) % 99 2,815 (2,716) (96.5) %
Losses on Sales and Write-downs on
Bank Premises, net - 64 (64) (100.0) % - 107 (107) (100.0) %
Debit Card Expense 659 713 (54) (7.6) % 1,292 1,345 (53) (3.9) %
Tax Credit Amortization 615 427 188 44.0 % 1,230 854 376 44.0 %
Other Real Estate Owned Expense 141 142 (1) (0.7) % 182 196 (14) (7.1) %
Other 2,102 2,096 6 0.3 % 4,097 3,917 180 4.6 %
Total Noninterest Expense $ 23,410 $ 27,759 $ (4,349) (15.7) % $ 45,921 $ 51,364 $ (5,443) (10.6) %
Total noninterest expense decreased $4.3 million and $5.4 million for the three
and six months ended June 30, 2022 , respectively, when compared to the same
periods in 2021. The primary driver for both these decreases was $2.7 million
for losses on sales and write-downs of OREO, net. This nonrecurring write-down
of $3.0 million was related to the closing of bank branches in the second
quarter of 2021 that were transferred to OREO and marketed for sale.
Another driver of the decrease in noninterest expense for the three-month period
ended June 30, 2022 when compared to the prior period in 2021 was the $1.2
million decrease in salaries and employee benefits, which was related to lower
medical expenses of $0.8 million and a decrease of $0.4 million related to our
retail branch optimization project. Decreases of $0.2 million in professional
and legal fees and $0.2 million in occupancy expense, net, in the three-month
period ended June 30, 2022 when compared to the same period also impacted the
decline in noninterest expense for the three months ended June 30, 2022 when
compared to the same period in 2021.
The decrease in noninterest expense for the six-month period ended June 30, 2022
when compared to the same period in 2021 was primarily driven by a $2.1 million
decline in salaries and employee benefits and lower medical expenses and our
retail branch optimization project. Other decreases during the six-months ended
June 30, 2022 included a $0.3 million decrease in occupancy expense, net, a $0.3
million decrease in FDIC insurance expense and a $0.2 million decrease in
professional and legal fees offset by an increase of $0.4 million in tax credit
amortization. The decrease in FDIC expense was due to improved financial metrics
of the Bank that are used to perform the assessment. The increase for the tax
credit amortization related to a new historic tax credit that began in early
2022.
Provision for Income Taxes
The provision for income taxes increased $0.9 million and $1.3 million to $1.8
million and $3.1 million for the three and six months ended June 30, 2022 ,
respectively, when compared to the same periods in 2021. Pre-tax income
increased $6.3 million and $6.6 million for the three and six months ended
June 30, 2022 , respectively, when compared to the same periods in 2021. The
effective tax rate was 14.3% and 13.4% for the three and six months ended
June 30, 2022 , respectively, compared to 14.0% and 10.9% for the same periods in
2021. The increase in the effective tax rate is primarily due to a higher level
of pre-tax income and a lower level of tax-exempt interest income. The Company
ordinarily generates an annual effective tax rate that is less than the
statutory rate of 21% due to benefits resulting from tax-exempt interest income,
tax credit projects and bank owned life insurance ("BOLI"), which are relatively
consistent regardless of the level of pre-tax income.
46
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Financial Condition
June 30, 2022
Total assets decreased $10.5 million , to $4.1 billion at June 30, 2022 compared
to December 31, 2021 . Federal Reserve Bank excess reserves decreased $149.9
million to $26.3 million at June 30, 2022 from $176.2 million at December 31,
2021 due to redeploying excess cash into higher yielding loans and securities.
Total portfolio loans increased $185.8 million , or 13.3% on an annualized basis,
to $3.0 billion at June 30, 2022 compared to $2.8 billion at December 31, 2021
primarily due to higher loan growth in the first half of 2022. During 2021, loan
growth was muted by large commercial loan payoffs and loan sales. The variances
in loan segments for portfolio loans related to increases of $101.3 million in
residential mortgages, $65.9 million in commercial real estate loans, $39.8
million in construction loans and $3.4 million in other consumer loans offset by
decreases of $15.7 million in the other category and $8.9 million in C&I loans.
Other real estate owned, ("OREO"), decreased $2.5 million at June 30, 2022
compared to December 31, 2021 due to our branch network optimization project
that aligns with our strategic goals to enhance franchise value and improve
operating efficiency. Closed retail bank offices have a remaining book value of
$1.0 million at June 30, 2022 and December 31, 2021 .
The securities portfolio decreased $15.4 million and is currently 22.0% of total
assets at June 30, 2022 compared to 22.3% of total assets at December 31, 2021 .
The decrease is due to the Company's strategy of redeploying securities
maturities into higher yielding loan growth. At June 30, 2022 , total gross
unrealized gains in the available-for-sale portfolio were $0.6 million , offset
by $76.5 million of gross unrealized losses. Refer to the "Securities Activity"
section below for further discussion of unrealized losses in the
available-for-sale securities portfolio. The Bank was able to take advantage of
increased interest rates available in most bond categories, while keeping its
balance of purchasing a mix of both fixed and floating rate instruments.
Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared
to December 31, 2021 . The increases included $92.6 million in money market
accounts, $46.6 million in interest-bearing demand accounts and $43.2 million in
savings accounts offset by the intentional decline of $83.9 million in CDs and a
decline of $43.6 million in noninterest-bearing demand accounts. At June 30,
2022 , noninterest-bearing deposits comprised 18.8% of total deposits compared to
20.2% at December 31, 2021 and 19.7% at June 30, 2021 . CDs comprised 33.6%,
36.3% and 39.8% of total deposits at June 30, 2022 , December 31, 2021 and
June 30, 2021 , respectively.
Total capital decreased by $73.5 million to $334.1 million at June 30, 2022
compared to $407.6 million at December 31, 2021 . The decrease in equity was
primarily due to a $61.7 million , net of tax, decrease in other comprehensive
loss due to changes in the fair value of available-for-sale securities, a $32.4
million decrease related to the repurchase of common stock through June 30,
2022 , partially offset by net income of $20.1 million for the six months ended
June 30, 2022 . The remaining difference of $0.5 million is related to
stock-based compensation during the six months ended June 30, 2022 .
The ACL was 3.27% of total portfolio loans at June 30, 2022 compared to 3.41% as
of December 31, 2021 . General reserves as a percentage of total portfolio loans
were 3.15% at June 30, 2022 compared to 3.38% at December 31, 2021 . Management
believes, the ACL is adequate to absorb expected losses inherent in the loan
portfolio.
The Company remains well capitalized. Our Tier 1 capital ratio decreased to
12.70% at June 30, 2022 compared to 14.21% at December 31, 2021 . Our leverage
ratio was 9.96% at June 30, 2022 , compared to 10.62% at December 31, 2021 and
total risk-based capital ratio was 13.96% at June 30, 2022 compared to 15.46% at
December 31 , 2021.The decrease is related to the aforementioned repurchase of
common stock of $32.4 million through June 30, 2022 . We adopted CECL effective
January 1, 2021 and elected to implement the regulatory agencies' capital
transition relief over the permissible three-year period.
47
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Securities Activity
The following table presents the composition of available-for-sale securities:
December 31,
(Dollars in Thousands) June 30, 2022 2021 $ Change
U.S. Treasury Securities $ 18,275 $ 4,413 $ 13,862
U.S. Government Agency Securities 3,080 3,478 (398)
Residential Mortgage-Backed Securities 110,437 110,013 424
Commercial Mortgage-Backed Securities 40,351 4,168 36,183
Asset Backed Securities 82,433 81,863 570
Collateralized Mortgage Obligations 284,225 287,614 (3,389)
Small Business Administration 53,697 108,914 (55,217)
States and Political Subdivisions 245,105 262,202 (17,097)
Corporate Notes 69,431 59,735 9,696
Total Debt Securities $ 907,034 $ 922,400 $ (15,366)
The Company invests in various securities in order to maintain a source of
liquidity, to satisfy various pledging requirements, to increase net interest
income and as a tool of the ALCO to diversify and reposition the balance sheet
for interest rate risk purposes. Securities are subject to market risks that
could negatively affect the level of liquidity available to us. Security
purchases are subject to our investment policy that is approved annually by our
Board and administered through ALCO and our treasury function.
The securities portfolio decreased by $15.4 million to $907.0 million at
June 30, 2022 compared to $922.4 million at December 31, 2021 . Securities
comprise 22.0% of total assets at June 30, 2022 compared to 22.3% at
December 31, 2021 . The decrease is a result of redeploying securities maturities
into higher yielding loan growth during the second quarter of 2022. We have
further diversified the securities portfolio as to bond types, maturities and
interest rate structures. As of June 30, 2022 , the securities portfolio was
comprised of 47.4% variable rate securities with approximately 47.1% that will
reprice at least once over the next 12 months.
At June 30, 2022 total gross unrealized gains in the available-for-sale
portfolio were $0.6 million , offset by $76.5 million of gross unrealized losses.
At December 31, 2021 , total gross unrealized gains in the available-for-sale
portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.
The unrealized losses on debt securities were primarily attributable to changes
in interest rates, and not related to the credit quality of these securities.
The Company's investment securities with intermediate and long-term maturities
were the largest driver of these gross unrealized losses, as the market values
of these securities are significantly impacted by the Treasury yield curve for
similar durations (i.e., 5- and 10-year Treasury securities). This portion of
the Treasury yield curve has moved significantly upward over the past six
months, driving unrealized losses on these securities higher. Although the
Federal Reserve is in the middle of an aggressive effort to raise short-term
interest rates to combat inflation, the Company does not expect higher
short-term rates to adversely impact the fair values of the Company's investment
securities to the same extent as increases in longer-term rates. The Company
expects that higher short-term rates may improve yields on certain of the
Company's variable rate securities within the next six to twelve months.
At December 31, 2021 , the 5-year and 10-year U.S. Treasury yields were 1.26% and
1.52%, respectively. At June 30, 2022 , those same bond yields were 3.01% and
2.98%, respectively. Therefore, this increase of 175 and 146 basis points,
respectively in the intermediate part of the yield curve largely caused the
reduction in bond prices for fixed rate bonds in that maturity range. Note, the
effects were greater for longer maturity bonds, such as municipal bonds. On the
other hand, floating rate bonds largely held consistent values, as those
interest rates adjust in line with Federal Reserve interest rate hikes.
Should the impairment of any of these securities become credit related, the cost
basis of the investment will be reduced and the resulting loss will be
recognized in net income in the period the credit related impairment is
identified, while any noncredit loss will be recognized in other comprehensive
income. At June 30, 2022 and December 31, 2021 , the Company had no credit
related net investment impairment losses.
Refer to Note 3,
48
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Loan Composition
The following table summarizes our loan portfolio for the periods presented:
(Dollars in Thousands) June 30, 2022 December 31, 2021
Commercial
Commercial Real Estate $ 1,389,117 $ 1,323,252
Commercial and Industrial 336,477 345,376
Total Commercial Loans 1,725,594 1,668,628
Consumer
Residential Mortgages 559,313 457,988
Other Consumer 48,033 44,666
Total Consumer Loans 607,346 502,654
Construction 322,731 282,947
Other 342,225 357,900
Total Portfolio Loans 2,997,896 2,812,129
Loans Held-for-Sale - 228
Total Loans $ 2,997,896 $ 2,812,357
Our loan portfolio represents our most significant source of interest income.
The risk that borrowers are unable to pay such obligations is inherent in the
loan portfolio. Other conditions such as downturns in the borrower's industry or
the overall economic climate can significantly impact the borrower's ability to
pay. For a discussion of the risk factors relevant to our business and
operations, please refer to Part I, Item 1A, "Risk Factors," contained in our
Annual Report on Form 10-K for the year ended
Total portfolio loans increased$185.8 million , or 13.3% on an annualized basis, to$3.0 billion atJune 30, 2022 compared toDecember 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios. The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. AtJune 30, 2022 , the loan portfolio was comprised of 29.6% floating rates which reprice monthly, 39.5% variable rates that reprice at least once during the life of the loan and the remaining 30.9% are fixed rate loans. The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment. Our exposure to the hospitality industry atJune 30, 2022 equated to approximately$380.2 million , or 12.7% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic. However, our clients continue to face challenges with respect to labor, which we believe impedes their ability to turnover rooms resulting in occupancy constraints. This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. Contractual payments have been restored since the expiration of our deferral program onJune 30, 2021 . These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. As a result, our financial condition, capital levels and results of operations could be adversely affected.
Aggregate commitments to our top 10 credit relationships were
49
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:
For the Periods Ending June 30, 2022 June 30, 2022
Dollars in Thousands June 30, 2022 December 31, 2021 Change % of Gross Loans % of RBC
1. Hospitality, agriculture & $338,790 $350,010 ($11,220 ) 11.30 % 73.47 %
energy
2. Retail real estate & food 56,492 56,073 419 1.88 % 12.25 %
services
3. Industrial & retail real 44,503 45,653 (1,150) 1.48 % 9.65 %
estate
4. Multifamily development 40,000 36,720 3,280 1.33 % 8.68 %
5. Retail real estate 37,355 38,250 (895) 1.25 % 8.10 %
6. Hospitality 35,234 35,664 (430) 1.17 % 7.64 %
7. Multifamily & student 34,675 35,405 (730) 1.16 % 7.52 %
housing
8. Hospitality 34,046 34,463 (417) 1.14 % 7.38 %
9. Special/limited use 33,736 33,736 - 1.13 % 7.32 %
10. Multifamily development 31,992 29,389 2,603 1.07 % 6.94 %
Top Ten (10) Relationships 686,823 695,363 (8,540) 22.91 % 148.95 %
Total Gross Loans 2,997,896 2,812,357 185,539
% of Total Gross Loans 22.91 % 24.73 % (1.82) %
Concentration (25% of RBC) $115,277 Unfunded commitments on lines of credit were$430.8 million atJune 30, 2022 as compared to$433.1 million atDecember 31, 2021 . The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 53.6% atJune 30, 2022 and 52.2% atDecember 31, 2021 . Unfunded commitments on commercial operating lines of credit was 54.3% atJune 30, 2022 and 51.7% atDecember 31, 2021 . We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry while actively managing concentrations. When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments. The Company has specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio. In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects. Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. Deferred costs and fees included in the portfolio balances above were$6.6 million and$4.5 million atJune 30, 2022 andDecember 31, 2021 , respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were$176.5 thousand and$190.6 thousand atJune 30, 2022 andDecember 31, 2021 , respectively. From time to time, we have mortgage loans held-for-sale derived from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. There were no mortgage loans held-for-sale atJune 30, 2022 and$0.2 million atDecember 31, 2021 .
Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans.
50
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain special
mention and substandard loans within prescribed policy thresholds. These loans
typically represent the highest risk of loss to the Company. Action plans are
established and these loans are monitored through regular contact with the
borrower and loan officer, review of current financial information and other
documentation, review of all loan or potential loan restructures or
modifications and the regular re-evaluation of assets held as collateral.
On a quarterly basis, the Credit Risk Committee of the Board meets to review our
loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and
findings from Loan Review identified in the previous quarter. Annually, this
same committee approves credit related policies and policy enhancements as they
become available.
Additional credit risk management practices include continuous reviews of trends
in our lending footprint and our lending policies and procedures to support
sound underwriting practices, concentrations, delinquencies and annual portfolio
stress testing. Our Loan Review department serves as a mechanism to individually
monitor credit quality and assess the effectiveness of credit risk management
practices to provide oversight of all lending activities. The loan review
function has the primary responsibility for assessing commercial credit
administration and credit decision functions of consumer and mortgage
underwriting, as well as providing input to the loan risk rating process. Our
policy is to place loans in all categories in nonaccrual status when collection
of interest or principal is doubtful, or generally when interest or principal
payments are 90 days or more past due based on contractual terms. Consumer
unsecured loans and secured loans are evaluated for charge-off after the loan
becomes 90 days past due. Unsecured loans are fully charged-off and secured
loans are charged-off to the estimated fair value of the collateral less the
cost to sell.
Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented:
(Dollars in Thousands) June 30, 2022 December 31, 2021 $ Change Nonperforming Loans Commercial Real Estate$ 3,258 $ 3,337$ (79) Commercial and Industrial 5,210 451 4,759 Residential Mortgages 2,555 2,551 4 Other Consumer 6 73 (67) Construction 1,000 985 15 Other - - - Total Nonperforming Loans 12,029 7,397 4,632 Other Real Estate Owned 8,432 10,916 (2,484) Total Nonperforming Assets$ 20,461 $ 18,313$ 2,148 Nonperforming assets increased$2.1 million to$20.5 million atJune 30, 2022 compared toDecember 31, 2021 . The increase was primarily due to a$4.6 million increase in nonperforming loans due to the deterioration of a purchased syndicated C&I loan totaling$4.9 million , offset by a$2.5 million decrease in OREO. Closed retail bank offices have a remaining book value of$1.0 million at bothJune 30, 2022 andDecember 31, 2021 . During the first quarter of 2022, two branch closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. In addition, two former closed offices were also moved to OREO. During the first six months of 2022, a total of four branch offices were sold. Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans. 51 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No. 2022-02
Prior to our adoption of ASU No. 2022-02, we accounted for a Troubled Debt
Restructuring ("TDRs") as a loan that we, for economic or legal reasons related
to a borrower's financial difficulties, granted a concession to the borrower
that we would not otherwise grant. The Company strives to identify borrowers in
financial difficulty early and work with them to modify terms and conditions
before their loan defaults and/or is transferred to nonaccrual status. Modified
terms that might have been considered a TDR generally included extension of
maturity dates at a stated interest rate lower than the current market rate for
a new loan with similar characteristics, reductions in contractual interest
rates or principal deferment. While unusual, there may have been instances of
principal forgiveness. Short-term modifications that were considered
insignificant were generally not considered a TDR unless there were other
concessions granted. On April 1, 2022 , we adopted ASU 2022-02, which eliminated
TDR accounting prospectively for all restructurings occurring on or after
January 1, 2022 . Refer to Note 1, Basis of Presentation, in the Notes to
Consolidated Financial Statements in Item 1 of this Quarterly Report on Form
10-Q for additional information related to ASU No. 2022-02.
Generally, the Company individually evaluates all loans experiencing financial
difficulty, with a commitment greater than or equal to $1.0 million for
individually evaluated loan reserves. In addition, the Company may evaluate
credits that have complex loan structures for impairment, even if the commitment
is less than $1.0 million . Nonaccrual TDRs can be returned to accruing status if
the ultimate collectability of all contractual amounts due, according to the
restructured agreement, is not in doubt and there is a period of a minimum of
six months of satisfactory payment performance by the borrower either
immediately before or after the restructuring.
52
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Allowance for Credit Losses
The following is the allocation of the ACL balance by segment for the periods
presented:
June 30, 2022 December 31, 2021
% of Loans in each % of Loans in each
Category to Total Category to Total
(Dollars in Thousands) Amount Portfolio Loans Amount Portfolio Loans
Commercial Real Estate $ 17,808 46.3 % $ 17,297 47.0 %
Commercial & Industrial 5,688 11.2 % 4,111 12.3 %
Residential Mortgages 5,155 18.7 % 4,368 16.3 %
Other Consumer 1,719 1.6 % 1,493 1.6 %
Construction 6,832 10.8 % 6,939 10.1 %
Other 60,779 11.4 % 61,731 12.7 %
Balance End of Year $ 97,981 100.0 % $ 95,939 100.0 %
The following table summarizes the credit quality ratios and their components as
of
(Dollars in Thousands) June
30, 2022
$ 97,981 $ 95,939 Total Portfolio Loans 2,997,896 2,812,129 Allowance for Credit Losses to Total Portfolio Loans 3.27 % 3.41 % Nonperforming Loans to Total Portfolio Loans Nonperforming Loans$ 12,029 $ 7,397 Total Portfolio Loans 2,997,896 2,812,129 Nonperforming Loans to Total Portfolio Loans 0.40 % 0.26 %
Allowance for Credit Losses to Nonperforming Loans Allowance for Credit Losses
$ 97,981 $ 95,939 Nonperforming Loans 12,029 7,397 Allowance for Credit Losses to Nonperforming Loans 814.54 % 1,297.00 % Net Charge-offs to Average Portfolio Loans Net Charge-offs (annualized) $ 811 $ 23,127 Average Total Portfolio Loans 2,911,872 2,927,083 Net Charge-offs to Average Portfolio Loans 0.03 % 0.79 % See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the table above. The net charge-offs of$23.1 million for the full year 2021 was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved. The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses increased$0.8 million to$1.8 million for the three months endedJune 30, 2022 and decreased$0.4 million to$2.4 million for the six months endedJune 30, 2022 compared to the same periods in 2021. The increase for the three months endedJune 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a$2.6 million specific reserve and partially offset by a decline in the other segment primarily due to$15.4 million principal pay-downs. The provision for unfunded commitments increased$0.9 million for both the three and six months endedJune 30, 2022 when compared to the same periods in 2021 due to increased commitment volume in construction offset by the reserve rates. Net charge-offs were$0.2 million and$0.4 million for the three and six months endedJune 30, 2022 , respectively, when compared to the same periods in 2021. During the three months endedJune 30, 2021 , we recognized charge-offs of$8.2 million related to the resolution of our two largest nonperforming credits. As a percentage of average total portfolio loans, on an 53 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) annualized basis, net charge-offs were 0.03% for both the three and six months endedJune 30, 2022 compared to 1.15% and 0.63% for the same periods in 2021. AtJune 30, 2022 , nonperforming loans increased$4.6 million , or 62.6%, to$12.0 million sinceDecember 31, 2021 . Nonperforming loans as a percentage of total portfolio loans were 0.40% and 0.26% as ofJune 30, 2022 andDecember 31, 2021 , respectively.
The ACL was 3.27% of total portfolio loans at
The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:
June 30, 2022
Commercial Real Commercial and Residential Other Total Portfolio
(Dollars in Thousands) Estate Industrial Mortgage Consumer Construction Other Loans
Pass $ 1,372,820 $ 328,459 $ 555,030 $ 47,964 $ 321,548 $ 180,792 $ 2,806,613
Special Mention 12,961 - 970 - 73 3,185 17,189
Substandard 3,336 8,018 3,313 69 1,110 158,248 174,094
Doubtful - - - - - - -
Loss - - - - - - -
Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896
Performing $ 1,385,859 $ 331,267 $ 556,758 $ 48,027 $ 321,731 $ 342,225 $ 2,985,867
Nonperforming 3,258 5,210 2,555 6 1,000 - 12,029
Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896
December 31, 2021
Commercial Real Commercial and Residential Other Total Portfolio
(Dollars in Thousands) Estate Industrial Mortgage Consumer Construction Other Loans
Pass $ 1,314,576 $ 337,294 $ 453,894 $ 44,554 $ 281,241 $ 185,247 $ 2,616,806
Special Mention 5,260 8 553 - 604 3,281 9,706
Substandard 3,416 8,074 3,541 112 1,102 169,372 185,617
Doubtful - - - - - - -
Loss - - - - - - -
Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129
Performing $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732
Nonperforming 3,337 451 2,551 73 985 - 7,397
Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129
Special mention, substandard and doubtful loans at June 30, 2022 decreased $4.0
million to $191.3 million compared to $195.3 million at December 31, 2021 . The
increase in special mention related to one large CRE loan that downgraded from
pass and the decrease in substandard loans related to paydowns in the other loan
category during the second quarter of 2022.
Additionally, refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL.
54
--------------------------------------------------------------------------------
Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Deposits
The following table presents the composition of deposits for the periods
presented:
June 30, December 31,
(Dollars in Thousands) 2022 2021 $ Change % Change
Noninterest-Bearing Demand $ 704,323 $ 747,909 $ (43,586) (5.8) %
Interest-Bearing Demand 499,282 452,644 46,638 10.3 %
Money Market 555,621 463,056 92,565 20.0 %
Savings 733,704 690,549 43,155 6.2 %
Certificate of Deposits 1,260,463 1,344,318 (83,855) (6.2) %
Total Deposits $ 3,753,393 $ 3,698,476 $ 54,917 1.5 %
Deposits are our primary source of funds. We believe that our deposit base is
stable and that we have the ability to attract new depositors while diversifying
the deposit composition. Total deposits at June 30, 2022 increased $54.9
million , or 1.5%, from December 31, 2021 . The increase in deposits primarily
related to an increase in our core deposits of $138.8 million , or 11.9% on an
annualized basis. Our core deposits include noninterest-bearing demand accounts,
interest-bearing demand deposits, money market accounts and savings accounts.
The decrease of $83.9 million , or 6.2% in CDs at June 30, 2022 compared to
December 31, 2021 is due to the intentional runoff of higher cost CDs.
Noninterest-bearing deposits comprised 18.8% and 20.2% of total deposits at
June 30, 2022 and December 31, 2021 , respectively.
The following table presents additional information in relation to deposits:
June 30, December 31,
(Dollars in Thousands) 2022 2021
Deposits from the Certificate of Deposit Account Registry Services (CDARS)
$ 922 $ 139 Noninterest-Bearing Public Funds Deposits 24,129 58,393 Interest-Bearing Public Funds Deposits 165,808 123,968 Total Deposits not Covered by Deposit Insurance(1) 426,331 396,626 Certificates of Deposits not Covered by Deposit Insurance 137,350 147,134
Deposits for Certain Directors, Executive Officers and their Affiliates
2,866 3,032
(1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.
Maturities of CDs over
(Dollars in Thousands) Amount Percent Three Months or Less$ 11,961 8.7 % Over Three Months Through Twelve Months 57,332 41.7 % Over Twelve Months Through Three Years 44,452 32.4 % Over Three Years 23,605 17.2 % Total$ 137,350 100.0 % 55
-------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Federal Home Loan Bank Borrowings ("FHLB")
Borrowings are an additional source of liquidity for the Company. We had no FHLB
borrowings at
Information pertaining to FHLB advances is summarized in the following table: (Dollars in Thousands) June 30, 2022 December 31, 2021 Balance at Period End $ - $ 7,000 Average Balance during the Period$ 4,011 $
25,986
Average Interest Rate during the Period 0.80 % 1.20 % Maximum Month-end Balance during the Period$ 20,000 $
35,000
Average Interest Rate at Period End - %
1.61 %
The Company held FHLB Atlanta stock of$2.1 million and$2.4 million atJune 30, 2022 andDecember 31, 2021 , respectively. Dividends recorded on this restricted stock were$22 thousand and$42 thousand for the three and six months endedJune 30, 2022 compared to$31 thousand and$68 thousand for the same periods in 2021. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB ofAtlanta . The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members' asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.
Refer to Note 8, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings.
Liquidity and Capital Resources
Liquidity is defined as a financial institution's ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company's Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO's goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. The Company's primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company's assets approximating$1.0 billion , subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of$145.0 million , access to the institutional CD market, and the brokered deposit market. In addition to the lines referenced above, the Company also has$728.5 million of unpledged available-for-sale investment securities as an additional source of liquidity. An important component of the Company's ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. AtJune 30, 2022 , the Bank had$755.6 million in highly liquid assets, 56 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
which consisted of
If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
The following table provides detail of liquidity sources as of the periods presented:
(Dollars in Thousands) June 30, 2022 December 31, 2021 Cash and Due From Banks$ 43,194 $ 36,698 Interest-bearing Deposits in Other Financial Institutions 745 64,905 Federal Reserve Bank Excess Reserves 26,301 176,196 Unpledged Investment Securities 728,515 743,836 Excess Pledged Securities 22,861 28,417 FHLB Borrowing Availability 773,628 667,307 Unsecured Lines of Credit 145,000 145,000 Total Liquidity Sources$ 1,740,244 $ 1,862,359
Regulatory Capital Requirements
Total shareholders' equity decreased by$73.5 million to$334.1 million atJune 30, 2022 compared to$407.6 million atDecember 31, 2021 . The decrease in equity was primarily due to a$61.7 million , net of tax, decline in other comprehensive loss due to changes in the fair value of available-for-sale securities due to unrealized losses driven by increases in market interest rates, a$32.4 million decrease related to the repurchase of common stock throughJune 30, 2022 , partially offset by net income of$20.1 million for the six months endedJune 30, 2022 . The remaining difference of$0.5 million is related to stock-based compensation during the six months endedJune 30, 2022 . The Company and the Bank are subject to various capital requirements administered by the federal banking regulators. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. AtJune 30, 2022 andDecember 31, 2021 , the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. AtJune 30, 2022 , the Bank continues to maintain its capital position with a leverage ratio of 9.93% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.67% compared to the regulatory guideline of 6.50% to be well-capitalized. The Bank's risk-based Tier 1 and Total Capital ratios were 12.67% and 13.93%, respectively, which places the Bank above the federal bank regulatory agencies' well-capitalized guidelines of 8.00% and 10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary. TheBasel rules also permit banking organizations with less than$15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels. 57 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.
The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank for the dates presented:
Minimum Required Well June 30, 2022 December 31, 2021
(Dollars in Thousands) Basel III Capitalized(1) Amount Ratio Amount Ratio
Carter Bankshares, Inc.
Leverage Ratio 4.00 % NA $ 419,491 9.96 % $ 443,940 10.62 %
Common Equity Tier 1 (to
Risk-weighted Assets) 7.00 % NA 419,491 12.70 % 443,940 14.21 %
Tier 1 Capital (to Risk-weighted
Assets) 8.50 % NA 419,491 12.70 % 443,940 14.21 %
Total Capital (to Risk-weighted
Assets) 10.50 % NA 461,107 13.96 % 483,124 15.46 %
Carter Bank & Trust
Leverage Ratio 4.00 % 5.00 % $ 418,300 9.93 % $ 438,533 10.49 %
Common Equity Tier 1 (to
Risk-weighted Assets) 7.00 % 6.50 % 418,300 12.67 % 438,533 14.04 %
Tier 1 Capital (to Risk-weighted
Assets) 8.50 % 8.00 % 418,300 12.67 % 438,533 14.04 %
Total Capital (to Risk-weighted
Assets) 10.50 % 10.00 % 459,905 13.93 % 477,710 15.29 %
(1)To be "well capitalized" under the prompt corrective action provisions in the Basel III framework. "Well capitalized" applies to the Bank only.
InDecember 2018 , theOffice of the Comptroller of the Currency , (the "OCC"), theFederal Reserve System , ("FRB"), and theFederal Deposit Insurance Corporation , ("FDIC"), approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations' implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. OnMarch 27, 2020 , the regulators issued interim final rule ("IFR"), "Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances" in response to the disrupted economic activity from the spread of COVID-19. The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effectiveJanuary 1, 2021 and elected to implement the capital transition relief over the permissible three-year period.
Contractual Obligations
As ofJune 30, 2022 , there have been no material changes outside the ordinary course of business to the information about the Company's contractual obligations and cash commitments disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Contractual Obligations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Off-Balance Sheet Arrangements
As ofJune 30, 2022 , there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021. 58
--------------------------------------------------------------------------------
Table of ContentsCARTER BANKSHARES, INC.
© Edgar Online, source
