CARTER BANKSHARES, INC. OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand Carter
Bankshares, Inc. , our operations, and our present business environment. 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 8 of this Annual Report on Form 10-K. The MD&A includes the following
sections:
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Policies and Estimates
•Our Business
•Results of Operations and Financial Condition
•Capital Resources
•Contractual Obligations
•Off-Balance Sheet Arrangements
•Liquidity
•Inflation
•Stock Repurchase Program
This section reviews our financial condition for each of the past two years and
results of operations for each of the past three years. Certain
reclassifications have been made to prior periods to place them on a basis
comparable with the current period presentation. Some tables may include
additional time periods to illustrate trends within our Consolidated Financial
Statements and notes thereto. The results of operations reported in the
accompanying Consolidated Financial Statements are not necessarily indicative of
results to be expected in future periods.
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 annual report references, interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on a fully taxable equivalent, ("FTE") basis, which are non-GAAP financial measures. Management believes these measures provide 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 interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A for the years ended 2022, 2021 and 2020. 34
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 The Company's preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the periods presented or in future periods. We currently view the determination of the allowance for credit losses to be critical, because it is made in accordance with GAAP, is highly dependent on subjective or complex judgments, assumptions and estimates made by management and have had or is reasonably likely to have a material impact on the Company's financial condition and results of operations.
We have identified the following critical accounting estimate:
Allowance for Credit Losses ("ACL")
The ACL represents an amount which, in management's judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased by a provision or decreased by a recovery for credit losses, which is recorded as a current period operating expense. Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management. Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP. However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers. The ACL "base case" model is derived from various economic forecasts provided by widely recognized sources. Management evaluates the variability of market conditions by examining the peak and trough of economic cycles. These peaks and troughs are used to stress the base case model to develop a range of potential outcomes. Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio. For the year endedDecember 31, 2022 the range of outcomes would produce a 17% reduction or a 27% increase in reserves based on the best and worst case scenarios, respectively.
Refer to Note 1, Summary of Significant Accounting Policies, for further detailed descriptions of our estimation process and methodology related to the ACL and Note 6, Allowance for Credit Losses, of this Annual Report on Form 10-K.
Our Business and Strategy
Carter Bankshares, Inc. (the "Company") is a bank holding company headquartered inMartinsville, Virginia with assets of$4.2 billion atDecember 31, 2022 . The Company conducts its business solely through the Bank, an insured,Virginia state-chartered bank. 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 ." 35
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. For the 2023-2025 fiscal year periods, the Company will be focusing on refining and enhancing the Bank's guiding principles to better align with the future of the Company. A new mission, vision, and set of core values are in development and the Company expects to rollout this plan in 2023. The Company's current mission is to strive to be the preferred lifetime financial partner for its customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. The vision and purpose of the Company is to enrich lives and enhance communities today, to build a better tomorrow, with values of loyalty, care, optimism, trustworthiness and innovation. The Company's Board of Directors and management believe that the Bank is at a turning point in its evolution and transformation. The Company's focus will shift from restructuring the balance sheet to pursuing a growth strategy that focuses on organic growth. Another area of focus will be to consider opportunistic acquisitions that the Company believes will fit with its strategic vision. Our focus continues to be on loan and deposit growth, 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 new brand and grow our business in our current markets as well as new markets.
Results of Operations and Financial Condition
Earnings Summary
2022 Highlights
•Net interest income increased$28.7 million , or 25.9%, to$139.9 million for the full year 2022 compared to$111.2 million for the full year 2021 primarily due an increase of 61 basis points in the yield on earning assets due to the rising interest rate environment and by a reduction of nine basis points in funding costs;
•The provision for credit losses decreased
•Total noninterest income decreased$7.2 million to$21.7 million for the full year 2022 compared to$28.9 million for the full year 2021 due primarily to a reduction in gains on sales of securities; •Total noninterest expense decreased$5.3 million to$97.0 million for the full year 2022 compared to$102.3 million for the full year 2021 primarily resulting from our retail branch optimization project and the reversal of tax credit amortization due to an in-service date extension to 2023; and
•Provision for income taxes increased
Balance Sheet Highlights (period-end balances,
•The securities portfolio decreased$86.1 million and is currently 19.9% 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 and the continued decline in fair value due to rising market interest rates;
•Total portfolio loans increased
•The portfolio loans to deposit ratio was 86.7%, compared to 76.0%, since deposits decreased;
•Total deposits decreased
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) •The ACL to total portfolio loans ratio was 2.98% compared to 3.41%. The ACL on portfolio loans totaled$93.9 million atDecember 31, 2022 , compared to$95.9 million with the decrease driven by declines in the other segment due to principal pay-downs, offset by loan growth and increased qualitative reserves; •During 2022, the Company repurchased 2,587,361 shares totaling$42.9 million under its stock repurchase program at a weighted average cost of$16.59 . There were 132,232 shares available for repurchase atDecember 31, 2022 under the current repurchase program. The Company reported net income of$50.1 million , or$2.03 diluted earnings per share for the year endedDecember 31, 2022 compared to net income of$31.6 million , or$1.19 diluted earnings per share, for the year endedDecember 31, 2021 . Years Ended December 31, PERFORMANCE RATIOS 2022 2021 2020 Return on Average Assets 1.21 % 0.76 % (1.12) % Return on Average Shareholders' Equity 14.30 % 7.92 % (9.78) % Portfolio Loans to Deposit Ratio 86.74 % 76.03 % 79.99 % Allowance for Credit Losses to Total Portfolio Loans 2.98 % 3.41 % 1.83 % 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 Annual Report on Form 10-K. The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income (Loss) to interest and dividend income on an FTE basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented: Years Ended December 31, (Dollars in Thousands) 2022 2021 2020 Interest and Dividend Income (GAAP)$ 160,182 $ 133,897 $ 140,941 Tax Equivalent Adjustment 1,143 1,492 2,375 Interest and Dividend Income (FTE) (Non-GAAP) 161,325 135,389 143,316 Average Earning Assets 4,023,634 3,971,640 3,833,681 Yield on Interest-earning Assets (GAAP) 3.98 % 3.37 % 3.68 % Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.01 % 3.41 % 3.74 % Net Interest Income 139,928 111,183 105,115 Tax Equivalent Adjustment 1,143 1,492 2,375 Net Interest Income (FTE) (Non-GAAP)$ 141,071 $ 112,675 $ 107,490 Average Earning Assets 4,023,634 3,971,640 3,833,681 Net Interest Margin (GAAP) 3.48 % 2.80 % 2.74 % Net Interest Margin (FTE) (Non-GAAP) 3.51 % 2.84 % 2.80 % 37
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
Total net interest income increased$28.7 million , or 25.9% to$139.9 million for the year endedDecember 31, 2022 compared to the same period in 2021. The increase for the year endedDecember 31, 2022 compared to the same period in 2021 was primarily due to an increase in average interest-earning assets of$52.0 million and higher interest rate yields on interest-earning assets of 61 basis points due to the rising interest rate environment during fiscal year 2022. Net interest income, on an FTE basis (non-GAAP), increased$28.4 million , or 25.2%, to$141.1 million for the year endedDecember 31, 2022 compared to$112.7 million for the same period in 2021. The increases in net interest income, on an FTE basis (non-GAAP), was driven by an increase in interest income of$25.9 million and lower interest expense of$2.5 million for the year endedDecember 31, 2022 when compared to the same period in 2021. Net interest margin increased 68 basis points to 3.48% for the year endedDecember 31, 2022 compared to 2.80% for the same period in 2021. Net interest margin, on an FTE basis (non-GAAP), increased 67 basis points to 3.51% for the year endedDecember 31, 2022 compared to 2.84% for the same period in 2021. The Company continues to focus on the expansion of net interest income and net interest margin. The full year of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs. The full year of 2022 was also positively impacted by enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods. In addition, rising market interest rates may begin to increase the Company's funding costs in future periods. 38
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the years endedDecember 31 : 2022 2021 2020 Average Income/ Average Income/ Average Income/ (Dollars in Thousands) Balance Expense Yield/Rate Balance Expense Yield/Rate Balance(3) Expense Yield/Rate
ASSETS
Interest-Bearing Deposits with Banks$ 50,797 $ 341 0.67 %$ 194,492 $ 271 0.14 %$ 104,526 $ 302 0.29 %Tax-Free Investment Securities (2) 30,109 877 2.91 % 34,171 1,116 3.27 % 47,364 1,567 3.31 %Taxable Investment Securities 950,557 20,330 2.14 % 798,672 12,442 1.56 % 697,408 14,264 2.05 %Total Securities 980,666 21,207 2.16 % 832,843 13,558 1.63 % 744,772 15,831 2.13 % Tax-Free Loans (1)(2) 144,617 4,569 3.16 % 189,716 5,991 3.16 % 307,023 9,739 3.17 % Taxable Loans (1) 2,844,303 135,054 4.75 % 2,751,169 115,448 4.20 % 2,672,435 117,226 4.39 % Total Loans 2,988,920 139,623 4.67 % 2,940,885 121,439 4.13 % 2,979,458 126,965 4.26 % Federal Home LoanBank Stock 3,251 154 4.74 % 3,420 121 3.54 % 4,925 218 4.43 % Total Interest-Earning Assets 4,023,634 161,325 4.01 % 3,971,640 135,389 3.41 % 3,833,681 143,316 3.74 % Noninterest Earning Assets 117,135 170,856 276,473 Total Assets 4,140,769 4,142,496 4,110,154 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand 489,298 1,578 0.32 %$ 413,714 $ 1,007 0.24 %$ 321,036 $ 1,140 0.36 % Money Market 521,269 1,842 0.35 % 383,391 1,130 0.29 % 197,225 924 0.47 % Savings 720,682 742 0.10 % 663,382 682 0.10 % 599,637 632 0.11 % Certificates of Deposit 1,271,548 14,454 1.14 % 1,484,436 19,427 1.31 % 1,818,837 32,695 1.80 % Total Interest-Bearing Deposits 3,002,797 18,616 0.62 % 2,944,923 22,246 0.76 % 2,936,735 35,391 1.21 % FHLB Borrowings 29,849 1,163 3.90 % 25,986 313 1.20 % 30,628 361 1.18 % Federal Funds Purchased 5,711 188 3.29 % - - - % 55 1 1.82 % Other Borrowings 5,885 287 4.88 % 3,167 155 4.89 % 1,408 73 5.18 % Total Borrowings 41,445 1,638 3.95 % 29,153 468 1.61 % 32,091 435 1.36 % Total Interest-Bearing Liabilities 3,044,242 20,254 0.67 % 2,974,076 22,714 0.76 % 2,968,826 35,826 1.21 % Noninterest-Bearing Liabilities 746,117 769,401 667,914 Shareholders' Equity 350,410 399,019 473,414 Total Liabilities and Shareholders' Equity 4,140,769 4,142,496 4,110,154 Net Interest Income (2)$ 141,071 $ 112,675 $ 107,490 Net Interest Margin (2) 3.51 % 2.84 % 2.80 % (1)Nonaccruing loans are included in the daily average loan amounts outstanding. (2)Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent. (3)Loan and deposit balances include held-for-sale transactions in connection with sale of Bank branches. 39
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Interest income increased$26.3 million , or 19.6% for 2022 compared to 2021. Interest income, on an FTE basis (non-GAAP), increased$25.9 million , or 19.2%, for 2022 compared to 2021. The change was primarily due to increases in average interest-earning assets of$52.0 million for 2022, and higher interest rate yields on interest-earning assets of 60 basis points compared to 2021 due to the rising interest rate environment in fiscal year 2022. Average interest-bearing deposits with banks decreased$143.7 million in 2022, and the average rate paid increased 53 basis points for 2022 compared to 2021 as funds were deployed into higher yielding loans and securities. Average loan balances increased$48.0 million primarily influenced by the consistent loan growth in 2022 as compared to 2021. The average rate earned on loans increased 54 basis points for 2022 compared to 2021 primarily due to increased short-term interest rates during 2022. AtDecember 31, 2022 , the loan portfolio was comprised of 26.8% floating rate loans which reprice monthly, 41.2% variable rate loans that reprice at least once during the life of the loan and 32.0% fixed rate loans that do not reprice during the life of the loan. Average investment securities increased$147.8 million and the average rate earned increased 53 basis points for 2022 compared to 2021. The change in investment securities is the result of active balance sheet management to deploy excess cash combined with the continued decline in fair value. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As ofDecember 31, 2022 , the securities portfolio was comprised of 47.3% variable rate securities with approximately 45.8% 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 because fixed-rate 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$2.5 million for 2022 compared to 2021. The decrease was primarily due to the intentional runoff of higher cost certificates of deposits ("CDs") in 2021 and the first half of 2022. Interest expense on deposits decreased$3.6 million for 2022 compared to 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs. The decrease of$212.9 million or 14.3% in the average balance of CDs for 2022 compared to 2021 was primarily due to the aforementioned intentional runoff of these higher cost CDs. The average balances on our interest-bearing core deposits, including money market accounts, interest-bearing demand accounts and savings accounts increased by$137.9 million ,$75.6 million and$57.3 million , respectively, for the year endedDecember 31, 2022 , compared to the same period in 2021. The average rates paid on interest-bearing demand accounts increased eight basis points for the year endedDecember 31, 2022 and the average rate paid on money market accounts increased six basis points for the year endedDecember 31, 2022 , when compared to the same period in 2021. The average rates paid on savings accounts for the year endedDecember 31, 2022 compared to the same period in 2021 remained unchanged. Overall, the cost of interest-bearing liabilities decreased nine basis points for 2022 compared to 2021. Due to historically low market interest rates during 2021 and the first half of 2022, the Company was able to migrate away from higher rate CDs and grow lower yielding, more liquid products. During the second half of 2022 market interest rates increased quickly providing new incentives for customers to seek out higher yielding CDs. 40
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: 2022 Compared to 2021 2021 Compared to 2020 Increase/ Increase/ (Dollars in Thousands) Volume(3) Rate(3) (Decrease) Volume(3) Rate(3) (Decrease) Interest Earned on: Interest-Bearing Deposits with Banks$ (324) $ 394
(125) (114) (239) (431) (20) (451)
Taxable Investment Securities 2,664 5,224 7,888 1,884 (3,706) (1,822)
Total Securities 2,539 5,110 7,649 1,453 (3,726) (2,273)
Tax-Free Loans (1)(2) (1,425) 3 (1,422) (3,705) (43) (3,748)
Taxable Loans (1) 4,013 15,593 19,606 3,393 (5,171) (1,778)
Total Loans 2,588 15,596 18,184 (312) (5,214) (5,526)
Federal Home Loan Bank Stock (6) 39 33 (58) (39) (97)
Total Interest-Earning Assets $ 4,797 $ 21,139 $ 25,936 $ 1,260 $ (9,187) $ (7,927)
Interest Paid on:
Interest-Bearing Demand $ 205 $ 366 $ 571 $ 280 $ (413) $ (133)
Money Market 458 254 712 640 (434) 206
Savings 59 1 60 66 (16) 50
Certificates of Deposit (2,595) (2,378) (4,973) (5,352) (7,916) (13,268)
Total Interest-Bearing Deposits (1,873) (1,757) (3,630) (4,366) (8,779) (13,145)
Federal Funds Purchased 188 - 188 - (1) (1)
FHLB Borrowings 53 797 850 (56) 8 (48)
Other Borrowings 133 (1) 132 86 (4) 82
Total Borrowings 374 796 1,170 30 3 33
Total Interest-Bearing Liabilities
$ 6,296 $ 22,100
(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 (Recovery) for Credit Losses
The Company recognizes provision (recovery) for the 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 (recovery) 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 onJanuary 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-loan reserve on unfunded loan commitments. The ACL as a percentage of total portfolio loans was 2.98% atDecember 31, 2022 and 3.41% atDecember 31, 2021 . The provision (recovery) for credit losses decreased$0.9 million to$2.4 million for the year ended 2022 compared to year ended 2021. The decrease for the full year of 2022 was primarily driven by the release of$7.0 million of reserves that were allocated to the other segment due to principal pay-downs, partially offset by strong loan growth, increased qualitative reserves of$3.0 million , and net charge-offs of$4.5 million . The increase in qualitative reserves were factors attributable to the residential mortgage and commercial construction portfolios. Project costs continue to escalate due to supply chain and labor disruptions as well as increased material costs. Supply chain and labor disruptions cause the overall construction duration to increase, increasing interest costs to the borrower. The Bank has observed a handful of significant cost overruns onCommercial Real Estate , ("CRE") projects. To date, these cost overruns have either been funded by the borrower and/or project sponsors or 41
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) partially funded by the Bank within acceptable underwriting guidelines. The Company continues to monitor these trends by diligently collecting data on commercial construction projects and analyzing risk presented to the Company's loan portfolio.
A provision of
Net charge-offs were$4.5 million for the full year 2022 compared to$23.1 million for the full year 2021. During 2022, net charge-offs were primarily included in the commercial and industrial, ("C&I"), and other consumer segments. Net charge-offs of$23.1 million during the full year 2021 was primarily attributable to the resolution of five problem relationships, in which the majority of losses were anticipated and previously reserved. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.15% and 0.79% for the years ended 2022 and 2021, respectively. See the "Allowance for Credit Losses" section of this MD&A for additional details regarding our charge-offs. Nonperforming loans ("NPLs") decreased atDecember 31, 2022 by$0.8 million , or 10.2% to$6.6 million compared to$7.4 million atDecember 31, 2021 . The decrease was primarily due to a significant reduction of our largest NPL relationship in addition to pay-downs on other existing NPLs, all offset by a new NPL in the amount of$1.2 million . NPLs as a percentage of total portfolio loans were 0.21% atDecember 31, 2022 compared to 0.26% atDecember 31, 2021 . See the "Credit Quality" section of this MD&A for more detail on our NPLs. Discussion of net interest income for the year endedDecember 31, 2020 has been omitted as such discussion was provided in Part II, Item 7. "Management's Discussion and Analysis," under the heading "Net Interest Income" in the Company's Annual Report on Form 10-K for the year ended December 31, 202 1 , which was filed with the SEC on March 11, 2022, and is incorporated herein by reference. Noninterest Income Years Ended December 31, (Dollars in Thousands) 2022 2021 $ Change % Change Gain on Sales of Securities, net$ 46 $ 6,869 $ (6,823) (99.3) % Service Charges, Commissions and Fees 7,168 6,662 506 7.6 % Debit Card Interchange Fees 7,427 7,226 201 2.8 % Insurance Commissions 1,961 1,901 60 3.2 % Bank Owned Life Insurance Income 1,357 1,380 (23) (1.7) % Gains on Sales and Write-downs of Bank Premises, net 73 - 73 NM Other Real Estate Owned Income 50 90 (40) (44.4) % Commercial Loan Swap Fee Income 774 2,416 (1,642) (68.0) % Other 2,862 2,337 525 22.5 % Total Noninterest Income$ 21,718 $ 28,881 $ (7,163) (24.8) % Total noninterest income decreased$7.2 million , or 24.8%, to$21.7 million for the year endedDecember 31, 2022 when compared toDecember 31, 2021 . The decrease was primarily related to declines of$6.8 million in net security gains for the year endedDecember 31, 2022 when compared toDecember 31, 2021 . The decline in security gains during 2022 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 year endedDecember 31, 2022 also included a decrease of$1.6 million in commercial loan swap fee income due to the timing and demand for this product in the current rising interest rate environment. Offsetting the decreases were increases of$0.5 million in other noninterest income related to the unwind of two completed historic tax credit partnerships, a$0.5 million increase in service charges on deposit accounts primarily driven by volume, and$0.2 million in debit card interchange fees driven by higher customer activity.
Discussion of noninterest income for the year ended
,
which was filed with the
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Noninterest Expense Years Ended December 31, (Dollars in Thousands) 2022 2021 $ Change % Change Salaries and Employee Benefits$ 52,399 $ 54,157 $ (1,758) (3.2) % Occupancy Expense, net 13,527 13,556 (29) (0.2) % FDIC Insurance Expense 2,015 2,157 (142) (6.6) % Other Taxes 3,319 3,129 190 6.1 % Advertising Expense 1,434 952 482 50.6 % Telephone Expense 1,781 2,208 (427) (19.3) % Professional and Legal Fees 5,818 5,255 563 10.7 % Data Processing Expense 4,051 3,758 293 7.8 % Losses on Sales and Write-downs of Other Real Estate Owned, net 432 3,622 (3,190) (88.1) % Losses on Sales and Write-downs of Bank Premises, net - 231 (231) (100.0) % Debit Card Expense 2,750 2,777 (27) (1.0) % Tax Credit Amortization 621 1,708 (1,087) (63.6) % Other Real Estate Owned Expense 343 407 (64) (15.7) % Other 8,511 8,368 143 1.7 % Total Noninterest Expense$ 97,001 $ 102,285 $ (5,284) (5.2) % Total noninterest expense decreased$5.3 million to$97.0 million for the full year 2022, when compared to the full year 2021. For the full year 2022 the most significant decrease for the period was a decline of$3.2 million in losses on sales and write-downs of other real estate owned ("OREO"), net, due to nonrecurring write-downs related to closed bank branches in 2021. Also impacting the decrease was a$1.8 million decrease in salaries and employee benefits,$1.1 million decrease in tax credit amortization,$0.4 million decrease in telephone expenses and$0.2 million decrease in losses on sales and write-downs of bank premises, net. Offsetting these decreases were increases of$0.6 million in professional and legal fees,$0.5 million in advertising expenses and$0.3 million in data processing expenses. The decrease in salaries and employee benefits related to lower salaries of$1.3 million , lower medical expenses of$1.7 million , the impact from our retail branch optimization project, offset by a$1.0 million one-time inflationary bonus for associates in 2022. The decrease in tax credit amortization was primarily due to reversing amortization expense as a result of updated information from the developer which extended the in-service date to 2023 for one of the Company's historic tax credit partnerships during the third quarter of 2022. The$0.4 million decline in telephone expenses is due to the implementation of a new telephone system during 2022. The increases for the full year 2022 compared to the same period of 2021 included$0.6 million in professional and legal fees which was due to increased consulting fees in our retail and operations areas, the increase of$0.5 million in advertising expenses due to marketing efforts and timing of various promotions, as well as an increase of$0.3 million in data processing expenses related to our online banking platform.
Discussion of noninterest expense for the year ended
,
which was filed with the
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Provision for Income Taxes The provision for income taxes increased$7.5 million to$11.6 million for the year endedDecember 31, 2022 compared to$4.1 million forDecember 31, 2021 . Pre-tax income increased$26.0 million for the year ended 2022 compared to 2021. Our effective tax rate was 18.8% for the year endedDecember 31, 2022 compared to 11.5% forDecember 31, 2021 . The increase in the effective tax rate is primarily due to a higher level of pre-tax income and lower level of tax-exempt interest income and updated information from the developer extending the in-service date on a new tax credit from 2022 to 2023. 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"). Discussion of provision for income taxes for the year endedDecember 31, 2020 has been omitted as such discussion was provided in Part II, Item 7. "Management's Discussion and Analysis," under the heading "Provision for Income Taxes" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 11, 2022 , and is incorporated herein by reference. Financial ConditionDecember 31, 2022 Total assets increased$70.8 million , or 1.7%, to$4.2 billion atDecember 31, 2022 compared toDecember 31, 2021 .Federal Reserve Bank excess reserves decreased$170.9 million to$5.3 million atDecember 31, 2022 from$176.2 million atDecember 31, 2021 due to redeploying excess cash into higher yielding loans and securities. Total portfolio loans increased$336.8 million , or 12.0%, to$3.1 billion atDecember 31, 2022 compared toDecember 31, 2021 primarily due to consistent loan growth during the year. The variances in loan segments for portfolio loans related to increases of$200.0 million in residential mortgages,$147.3 million in CRE loans, and$70.6 million in construction loans, offset by decreases of$45.4 million in the other category,$35.6 million in C&I loans and$0.1 million in other consumer loans. AtJanuary 1, 2021 , the initial break-out of Other loans related to the adoption of Topic 326 totaled$379.9 million consisting of$140.8 million of CRE,$78.1 million of C&I,$50.8 million of Residential Mortgages and$110.2 million of Construction. This segment of loans has unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this segment resulted in an expected credit loss of$51.3 million at adoption. The Company had no loans held-for-sale atDecember 31, 2022 and$0.2 million atDecember 31, 2021 . Other real estate owned, ("OREO"), decreased$2.5 million atDecember 31, 2022 compared toDecember 31, 2021 due to sales and payments of OREO. Closed retail bank office carrying values increased$0.1 million and have a remaining book value of$1.1 million atDecember 31, 2022 compared to$1.0 million atDecember 31, 2021 . During 2022,$1.9 million in properties were sold and two properties totaling$0.9 million were closed and moved to OREO, but remain to be sold. OREO related to foreclosed assets decreased$2.6 million atDecember 31, 2022 compared toDecember 31, 2021 . The securities portfolio decreased$86.1 million and is currently 19.9% of total assets atDecember 31, 2022 compared to 22.3% of total assets atDecember 31, 2021 . The decrease is due to the Company's strategy of redeploying securities maturities into higher yielding loan growth, as well as the continued decline in fair value due to rising interest rates. AtDecember 31, 2022 , total gross unrealized gains in the available-for-sale portfolio were$0.3 million , offset by$109.7 million of gross unrealized losses. Refer to the "Securities" section below for further discussion of unrealized losses in the available-for-sale securities portfolio. Total deposits decreased$68.2 million to$3.6 billion atDecember 31, 2022 compared toDecember 31, 2021 . The decreases included$82.8 million decrease in CDs due to the intentional runoff of higher cost CDs, a decline of$44.6 million in noninterest-bearing demand accounts and a decrease of$6.3 million in savings accounts. These decreases were offset by an increase of$44.3 million in interest-bearing demand accounts and an increase of$21.2 million in money market accounts. AtDecember 31, 2022 , noninterest-bearing deposits comprised 19.4% of total deposits compared to 20.2% atDecember 31, 2021 . CDs comprised 34.7% of total deposits atDecember 31, 2022 and 36.3% atDecember 31, 2021 . The decline in deposit balances can be attributed to the competitive market given the rising interest rate environment. 44
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Total capital decreased by$79.0 million or 19.4% to$328.6 million atDecember 31, 2022 compared to$407.6 million atDecember 31, 2021 . The decrease in equity was primarily due to a$87.3 million , net of tax, decrease in other comprehensive loss due to declines in the fair value of available-for-sale securities, a$42.9 million decrease related to the repurchase of common stock throughDecember 31, 2022 , partially offset by net income of$50.1 million for the year endedDecember 31, 2022 that was retained by the Company. The remaining difference of$1.1 million is related to stock-based compensation expense during 2022. The ACL was 2.98% of total portfolio loans atDecember 31, 2022 compared to 3.41% as ofDecember 31, 2021 . General reserves as a percentage of total portfolio loans were 2.96% atDecember 31, 2022 compared to 3.38% atDecember 31, 2021 . The decrease in the general reserves as a percentage of total portfolio loans was primarily driven by the release of$7.0 million of reserves that were allocated to the other segment due to principal pay-downs, throughout 2022, partially offset by strong loan growth, increased qualitative reserves of$3.0 million , and net charge-offs of$4.5 million . 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 12.61% atDecember 31, 2022 compared to 14.21% atDecember 31, 2021 . Our leverage ratio was 10.29% atDecember 31, 2022 , compared to 10.62% atDecember 31, 2021 and total risk-based capital ratio was 13.86% atDecember 31, 2022 compared to 15.46% atDecember 31 , 2021.The decrease is primarily related to the aforementioned repurchase of common stock of$42.9 million throughDecember 31, 2022 . We adopted Current Expected Credit Losses ("CECL") effectiveJanuary 1, 2021 and elected to implement the regulatory agencies' capital transition relief over the permissible three-year period. 45
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Securities The following table presents the composition of available-for-sale securities for the periods presented: (Dollars in Thousands) 2022 2021 $ Change U.S. Treasury Securities$ 17,866 $ 4,413 $ 13,453 U.S. Government Agency Securities 49,764 73,534
(23,770)
Residential Mortgage-Backed Securities 103,685 110,013
(6,328)
Commercial Mortgage-Backed Securities 34,675 43,026
(8,351)
Other
8,253
Asset Backed Securities 141,383 151,450
(10,067)
Collateralized Mortgage Obligations 176,622 203,881
(27,259)
States and Political Subdivisions 228,146 262,202 (34,056) Corporate Notes 61,733 59,735 1,998Total Debt Securities $ 836,273 $ 922,400 $ (86,127) The balances and average rates of our securities portfolio are presented below as ofDecember 31 : 2022 2021 Weighted- Weighted- Average Average (Dollars in Thousands) Balance Yield Balance Yield U.S. Treasury Securities$ 17,866 1.43 %$ 4,413 1.35 % U.S. Government Agency Securities 49,764 4.29 % 73,534 1.37 % Residential Mortgage-Backed Securities 103,685 2.90 % 110,013 0.44 % Commercial Mortgage-Backed Securities 34,675 4.52 % 43,026 1.72 % Other Commercial Mortgage-Backed Securities 22,399 2.65 % 14,146 2.02 % Asset Backed Securities 141,383 4.04 % 151,450 1.70 % Collateralized Mortgage Obligations 176,622 3.56 % 203,881 0.69 % States and Political Subdivisions 228,146 2.38 % 262,202 2.41 % Corporate Notes 61,733 3.87 % 59,735 4.08 % Total Securities Available-for-Sale$ 836,273 3.24 %
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 the Company. Security purchases are subject to the Company's Investment Policy approved annually by the Board and administered through ALCO and the Company's treasury function. The securities portfolio decreased$86.1 million atDecember 31, 2022 compared toDecember 31, 2021 . Securities comprise 19.9% of total assets atDecember 31, 2022 compared to 22.3% atDecember 31, 2021 . The decrease is due to the Company's strategy of redeploying securities maturities into higher yielding loan growth, as well as the continued decline in fair value due to rising interest rates. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures. AtDecember 31, 2022 , total gross unrealized gains in the available-for-sale portfolio were$0.3 million offset by$109.7 million of gross unrealized losses. AtDecember 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 are believed to be temporary primarily because these unrealized losses are due to reductions in market value caused by upward movement in interest rates, and not related to the credit quality of these securities. Our portfolio consists of 49.2% of securities issued byUnited States government sponsored entities and carry an implicit government guarantee. States and political subdivisions comprise 29.8% of the portfolio and largely general obligation or 46
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) essential purpose revenue bonds, which have performed very well historically over all business cycles, and are rated AA andAAA . We have the intent and ability to hold these securities to maturity and expect full recovery of the amortized cost. 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 theTreasury yield curve for similar durations (i.e., 5-year and 10-yearTreasury securities). This portion of theTreasury yield curve has moved significantly upward over the past year, driving unrealized losses on these securities higher. Although theFederal Reserve continues its 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. AtDecember 31, 2021 , the 5-year and 10-yearU.S. Treasury yields were 1.26% and 1.52%, respectively. AtDecember 31, 2022 , those same bond yields were 3.99% and 3.88%, respectively. Therefore, this increase of 273 and 236 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. The effects were generally 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 withFederal 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 non-credit loss will be recognized in other comprehensive loss. AtDecember 31, 2022 andDecember 31, 2021 , the Company had no credit related net investment impairment losses.
The following table sets forth the maturities of securities at
Maturing
After One But Within After Five But Within
Within One Year Five Years Ten Years After Ten Years
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury Securities $ - - % $ 14,080 1.46 % $ 3,786 1.35 % $ - - %
U.S. Government Agency
Securities - - % 1,745 4.14 % 48,019 4.30 % - - %
Residential Mortgage-Backed
Securities(2) - - % - - % - - % 103,685 2.90 %
Commercial Mortgage-Backed
Securities(2) - - % 631 5.70 % 10,013 4.01 % 24,031 4.72 %
Other Commercial
Mortgage-Backed
Securities(2) - - % - - % - - % 22,399 2.65 %
Asset Backed Securities(2) - - % - - % 70,943 3.10 % 70,440 5.04 %
Collateralized Mortgage
Obligations(2) - - % - - % 5,354 1.34 % 171,268 3.63 %
States and Political
Subdivisions 200 5.21 % 3,453 2.19 % 82,829 2.19 % 141,664 2.49 %
Corporate Notes - - % - - % 61,733 3.87 % - - %
Total $ 200 $ 19,909 $ 282,677 $ 533,487
Weighted Average Yield(1) 5.21 % 1.94 % 3.14 % 3.34 %
(1)Weighted -average yields are calculated on a taxable-equivalent basis using
the federal statutory tax rate of 21 percent.
(2) Securities not due at a single maturity date
At December 31, 2022 the Company had no held-to-maturity securities; however, if
at a future date we classify securities as held-to-maturity, our disclosures
will show the weighted average yield for each range of maturities.
At December 31, 2022 , the Company held 54.2% fixed rate and 45.8% floating rate
securities. The floating rate securities may have a stated maturity greater than
ten years, but the interest rate generally adjusts monthly. Therefore, the
duration on these securities is short, generally less than one year, and will
therefore not be as sensitive to interest rate changes.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Refer to Note 4,
Loan Composition
The following table summarizes our loan portfolio as of the periods presented:
December 31,
(Dollars in Thousands) 2022 2021 2020 2019 2018
Commercial
Commercial Real Estate $ 1,470,562 $ 1,323,252 $ 1,453,799 $ 1,365,310 $ 1,359,036
Commercial and Industrial 309,792 345,376 557,164 621,667 661,870
Total Commercial Loans 1,780,354 1,668,628 2,010,963 1,986,977 2,020,906
Consumer
Residential Mortgages 657,948 457,988 472,170 514,538 397,280
Other Consumer 44,562 44,666 57,647 73,688 73,058
Total Consumer Loans 702,510 502,654 529,817 588,226 470,338
Construction 353,553 282,947 406,390 309,563 212,548
Other 312,496 357,900 - - -
Total Portfolio Loans 3,148,913 2,812,129 2,947,170 2,884,766 2,703,792
Loans Held-for-Sale - 228 25,437 19,714 2,559
Loans Held-for-Sale in Connection
with Sale of Bank Branches, at the
lower of cost or fair value - - 9,835 - -
Total Loans $ 3,148,913 $ 2,812,357 $ 2,982,442 $ 2,904,480 $ 2,706,351
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 this
Annual Report on Form 10-K for the year ended December 31, 2022 .
Total portfolio loans increased
The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. The Bank experienced strong growth in the residential mortgage loan portfolio during 2022. However, given the expectation of continued higher mortgage rates next year, we expect more modest growth during future periods. AtDecember 31, 2022 , the loan portfolio was comprised of 26.8% floating rate loans which reprice monthly, 41.2% variable rate loans that reprice at least once during the life of the loan, of which a majority of this loan population has one or more repricing events remaining before maturity, and 32.0% fixed rate loans. The Company carefully monitors the loan portfolio, including the potential impact on repayment capacity that our borrowers may experience given the interest rate environment. Our exposure to the hospitality industry atDecember 31, 2022 equated to approximately$360.4 million , or 11.4%, 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 could 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 48
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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$652.5 million atDecember 31, 2022 . The largest relationship of the top 10 represents 47.4% of the aggregate commitments of our top 10 credit relationships.
The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:
Dollars in Thousands For the Periods Ending
2022 % of Gross
Top Ten (10) Relationships 12/31/2022 12/31/2021 Change Loans 2022 % of RBC
1. Hospitality, agriculture & energy
$ (40,903) 9.82 % 63.94 % 2. Retail real estate & food services 55,625 56,073 (448) 1.77 % 11.51 % 3. Industrial & retail real estate 41,725 45,653 (3,928) 1.32 % 8.63 % 4. Multifamily development 40,000 36,720 3,280 1.27 % 8.27 % 5. Retail real estate 37,679 38,250 (571) 1.20 % 7.79 % 6. Hospitality 35,255 35,664 (409) 1.12 % 7.29 % 7. Multifamily & student housing 33,998 35,405 (1,407) 1.08 % 7.03 % 8. Special / limited use 33,736 33,736 - 1.07 % 6.98 % 9. Hospitality 33,587 34,463 (876) 1.06 % 6.95 % 10. Multifamily development 31,790 29,389 2,401 1.01 % 6.58 % Top Ten (10) Relationships 652,502 695,363 (42,861) 20.72 % 134.97 % Total Gross Loans 3,148,913 2,812,357 336,556 % of Total Gross Loans 20.72 % 24.73 % (4.01) % Concentration (25% of RBC)$ 120,863 $ 120,781 Unfunded commitments on lines of credit were$512.7 million atDecember 31, 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 50.3% atDecember 31, 2022 and 52.2% atDecember 31, 2021 . Unfunded commitments on commercial operating lines of credit was 49.7% atDecember 31, 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 established transaction, relationship and 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 and are based on management's risk tolerance relative to capital. 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. Although leverage is important, the Company is also focused on cash flow generation and uses multiple metrics to calculate a supportable loan amount. Supportable loan amounts have generally been more challenging given the increases in commodities pricing. 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. The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation ("FICO") scores and restricting loan amounts at lower FICO scores. Deferred costs and fees included in the portfolio balances above were$8.2 million and$4.5 million atDecember 31, 2022 andDecember 31, 2021 , respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were$161.2 thousand and$190.6 thousand atDecember 31, 2022 andDecember 31, 2021 , respectively. 49
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 has 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 atDecember 31, 2022 and$0.2 million atDecember 31, 2021 . The following tables present the maturity schedule of portfolio loan types atDecember 31, 2022 : Maturity After One After Within But Within Five But Within (Dollars in Thousands) One Year Five Years 15 Years After 15 Years Total Fixed interest rates Commercial Real Estate$ 79,588 $ 246,838
5,958 67,284 152,868 2,985 229,095
Residential Mortgages 11,086 7,308 71,857 23,853 114,104
Other Consumer 2,485 40,758 984 - 44,227
Construction 102,720 113,521 2,892 - 219,133
Other - - - - -
Portfolio Loans with Fixed Interest
Rates $ 201,837 $ 475,709 $ 294,502 $ 36,210 $ 1,008,258
Variable interest rates
Commercial Real Estate $ 47,898 $ 79,053 $ 665,031 $ 276,881 $ 1,068,863
Commercial and Industrial 27,176 27,310 22,867 3,344 80,697
Residential Mortgages 1,910 1,475 25,788 514,671 543,844
Other Consumer 335 - - - 335
Construction 49,313 76,025 7,540 1,542 134,420
Other 309,107 - - 3,389 312,496
Portfolio Loans with Variable
Interest Rates $ 435,739 $ 183,863 $ 721,226 $ 799,827 $ 2,140,655
Total Portfolio Loans $ 637,576 $ 659,572 $ 1,015,728 $ 836,037 $ 3,148,913
Refer to Note 5, Loans and Loans Held-For-Sale, in the Notes to Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K for additional
information related to our loans.
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain watch,
special mention and substandard risk rated 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
independently 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
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.
The following tables represent credit exposures by internally assigned risk
ratings as of
December 31, 2022
Commercial Real Commercial & Residential Other
(Dollars in Thousands) Estate Industrial Mortgages Consumer Construction Other Total
Pass $ 1,457,340 $ 303,893 $ 653,044 $ 44,495 $ 352,516 $ 180,745 $ 2,992,033
Special Mention 10,796 2,887 983 - 69 - 14,735
Substandard 2,426 3,012 3,921 67 968 131,751 142,145
Total Portfolio Loans $ 1,470,562 $ 309,792 $ 657,948 $ 44,562 $ 353,553 $ 312,496 $ 3,148,913
Performing Loans $ 1,468,258 $ 309,588 $ 654,683 $ 44,554 $ 352,689 $ 312,496 $ 3,142,268
Nonaccrual Loans 2,304 204 3,265 8 864 - 6,645
Total Portfolio Loans $ 1,470,562 $ 309,792 $ 657,948 $ 44,562 $ 353,553 $ 312,496 $ 3,148,913
December 31, 2021
Commercial Real Commercial & Residential Other
(Dollars in Thousands) Estate Industrial Mortgages Consumer Construction Other Total
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
Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129
Performing Loans $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732
Nonaccrual Loans 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
At December 31, 2022 and December 31, 2021 , the Company had no loans that were
risk rated as doubtful. Special mention and substandard loans at December 31,
2022 decreased $38.4 million to $156.9 million compared to $195.3 million at
December 31, 2021 , with an increase of $5.0 million in special mention and a
decrease of $43.4 million in substandard. The largest variance in special
mention was primarily related to a CRE project totaling $9.9 million that was
downgraded, offset by the payment in full on two CRE projects totaling
$6.0 million and an upgraded credit to pass status in the amount of
$1.5 million . In addition to CRE, the Company downgraded a syndicated C&I loan
totaling $2.9 million . The decrease in substandard loans primarily related to
the Other loan segment due to principal paydowns during 2022.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented:
December 31,
(Dollars in Thousands) 2022 2021
Nonperforming Loans
Commercial Real Estate $ 2,304 $ 3,337
Commercial and Industrial 204 451
Residential Mortgages 3,265 2,551
Other Consumer 8 73
Construction 864 985
Other - -
Total Nonperforming Loans 6,645 7,397
Other Real Estate Owned 8,393 10,916
Total Nonperforming Assets $ 15,038 $ 18,313
Nonperforming Loans to Total Portfolio Loans 0.21 % 0.26 %
Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned
0.48 % 0.65 %
Nonperforming assets decreased $3.3 million , or 17.9% to $15.0 million at
December 31, 2022 compared to December 31, 2021 . The decrease was primarily due
to a $2.5 million decrease in OREO, driven primarily by sales and payments.
Closed retail bank offices have a remaining book value of $1.1 million at
December 31, 2022 compared to $1.0 million at December 31, 2021 . During 2022,
six branch closures were completed and moved to OREO as part of our branch
network optimization project that aligns with our strategic goals to enhance
franchise value and improve operating efficiency. Nine properties were sold
totaling $1.9 million sold and two properties totaling $0.9 million were closed,
but remain to be sold. Organic OREO decreased $2.6 million at December 31, 2022
compared to December 31, 2021 .
NPLs decreased by $0.8 million at December 31, 2022 compared to December 31,
2021 . NPLs as a percentage of total portfolio loans were 0.21% at December 31,
2022 compared to 0.26% at December 31, 2021 .
Past Company legacy underwriting standards relied heavily on loan to value and
did not necessarily consider the income characteristics of the borrower. An
overreliance on value as a primary repayment source can become compromised
during real estate cycles. As a result, management has worked through these
legacy credits and has installed a number of underwriting guardrails that
consider the proportion of speculation, transaction limits and introduced
sensitivity analysis in order to determine supportable loan amounts. While these
guardrails do not insulate the Company from credit cycles, it should reduce the
experience of defaults. Despite economic uncertainty, increased costs and
interest rates, credit quality remains favorable.
There were no nonaccrual loans related to loans held-for-sale at
Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our nonperforming loans and OREO.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes past due loans for the dates presented:
December 31,
(Dollars in Thousands) 2022 2021
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate $ 104 $ 229
Commercial and Industrial 283 297
Total Commercial Loans 387 526
Consumer
Residential Mortgages 445 683
Other Consumer 541 461
Total Consumer Loans 986 1,144
Construction 3,464 -
Other - -
Total Loans 30 to 89 Days Past Due
Portfolio loans past due 30 to 89 days and still accruing increased$3.2 million to$4.8 million atDecember 31, 2022 compared toDecember 31, 2021 , primarily in the construction segment due to two relationships with an aggregate principal balance of$2.9 million atDecember 31, 2022 . There were no loans during the year endedDecember 31, 2022 andDecember 31, 2021 that were past due more than 90 days and still accruing. 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.
Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No. 2022-02
Prior to our adoption of ASU No. 2022-02, the Company accounted for Troubled
Debt Restructuring ("TDR") as a loan which, 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 , the Company adopted ASU 2022-02,
which eliminated TDR accounting prospectively for all restructurings occurring
on or after January 1, 2022 . Refer to Note 1, Summary of Significant Accounting
Polices, in the Notes to Consolidated Financial Statements in Item 8 of this
Annual Report on Form 10-K 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 individually
evaluate credits that have complex loan structures, even if the commitment is
less than $1.0 million . Nonaccrual loans can be returned to accruing status if
the ultimate collectability of all contractual amounts due, according to the
restructured agreement, is not in doubt and there is a period of a minimum of
six months of satisfactory payment performance by the borrower either
immediately before or after the restructuring.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Allowance for Credit Losses The following summarizes our allowance for credit loss experience atDecember 31 for each of the years presented: (Dollars in Thousands) 2022 2021 2020 Balance Beginning of Year$ 95,939 $ 54,074 $ 38,762 Impact of CECL Adoption - 61,642 - Provision for Credit Losses 2,419 3,350 18,006 Charge-offs: Commercial Real Estate - 19,662 40 Commercial and Industrial 3,436 374 66 Residential Mortgages 46 273 258 Other Consumer 1,677 2,256 3,991 Construction - 1,859 - Other - - - Total Charge-offs 5,159 24,424 4,355 Recoveries: Commercial Real Estate - 159 707 Commercial and Industrial 1 291 2 Residential Mortgages 99 168 27 Other Consumer 404 586 737 Construction 149 93 188 Other - - - Total Recoveries 653 1,297 1,661 Total Net Charge-offs 4,506 23,127 2,694 Balance End of Year$ 93,852 $ 95,939 $ 54,074 Net Charge-offs to Average Portfolio Loans 0.15% 0.79% 0.09% Allowance for Credit Losses to Total Portfolio Loans 2.98% 3.41% 1.83% Total net charge-offs decreased to$4.5 million for the year endedDecember 31, 2022 compared to$23.1 million for the year endedDecember 31, 2021 primarily in the CRE segment. The largest charge-off in 2022 was$3.4 million on a purchased syndicated C&I loan in the amount of$4.9 million , which was previously reserved for$2.6 million , transferred to held-for-sale in the third quarter of 2022 in the amount of$1.5 million and then sold in the fourth quarter of 2022. 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. 54
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following is the allocation of the ACL balance by segment as of
2022 2021
(Dollars in Thousands) Amount % of Loans Amount % of Loans
Commercial Real Estate $ 17,992 46.7 % $ 17,297 47.0 %
Commercial & Industrial 3,980 9.9 % 4,111 12.3 %
Residential Mortgages 8,891 20.9 % 4,368 16.3 %
Other Consumer 1,329 1.4 % 1,493 1.6 %
Construction 6,942 11.2 % 6,939 10.1 %
Other 54,718 9.9 % 61,731 12.7 %
Balance End of Year $ 93,852 100.0 % $ 95,939 100.0 %
The declines in the other segment were primarily due to principal pay-downs
during 2022. The ACL was $93.9 million , or 2.98%, of total portfolio loans at
December 31, 2022 compared to $95.9 million , or 3.41% of total portfolio loans
at December 31, 2021 .
The following table summarizes the credit quality ratios and their components as
of December 31 for the years presented below:
(Dollars in Thousands) 2022 2021
Allowance for Credit Losses to Total Portfolio Loans Allowance for Credit Losses
$ 93,852 $ 95,939 Total Portfolio Loans 3,148,913
2,812,129
Allowance for Credit Losses to Total Portfolio Loans 2.98 %
3.41 %
Nonperforming Loans to Total Portfolio Loans Nonperforming Loans$ 6,645 $ 7,397 Total Portfolio Loans 3,148,913
2,812,129
Nonperforming Loans to Total Portfolio Loans 0.21 %
0.26 %
Allowance for Credit Losses to Nonperforming Loans Allowance for Credit Losses
$ 93,852 $ 95,939 Nonperforming Loans 6,645
7,397
Allowance for Credit Losses to Nonperforming Loans 1,412.37 %
1,297.00 %
Net Charge-offs to Average Portfolio Loans Net Charge-offs$ 4,506 $ 23,127 Average Total Portfolio Loans 2,988,785
2,927,083
Net Charge-offs to Average Portfolio Loans 0.15 %
0.79 %
The provision (recovery) for credit losses, which includes a provision (recovery) 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 over the life of loans as of the balance sheet date. The provision for credit losses decreased$0.9 million to$2.4 million for the year ended 2022 compared to the same period in 2021. The reductions in the Other segment reserves due to principal paydowns were partially offset by charge-offs in 2022 and reserves associated with loan growth. The provision (recovery) for unfunded commitments increased$1.8 million to$0.5 million for the year ended 2022 when compared to a recovery of$1.3 million for the year ended 2021 due to the level of construction commitments as well as changes in reserve rates. The reserve for unfunded commitments is largely comprised of unfunded commitments related to real estate construction loans. There are three basic factors that influence the reserve rates associated with unfunded commitments for construction loans. First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model. These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts, average portfolio life, etc. Refer to Note 1, Summary of Significant Accounting Policies, in the Notes to 55
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to the ACL Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain CRE loans. The proportion of these segments affect the weighting. Third, volume changes impact the total reserve calculation. As a percentage of average total portfolio loans, net charge-offs were 0.15% for the year endedDecember 31, 2022 compared to 0.79% for the same period in 2021. AtDecember 31, 2022 NPLs decreased$0.8 million atDecember 31, 2022 sinceDecember 31, 2021 . NPLs as a percentage of total portfolio loans were 0.21% and 0.26% as ofDecember 31, 2022 andDecember 31, 2021 , respectively.
Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our ACL.
Deposits
The daily average balance of deposits and rates paid on deposits are summarized
in the following table for the years ended
2022 2021
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
Noninterest-Bearing Demand $ 716,645 - $ 736,974 -
Interest-Bearing Demand 489,298 0.32 % 413,714 0.24 %
Money Market 521,269 0.35 % 383,391 0.29 %
Savings 720,682 0.10 % 663,382 0.10 %
Certificates of Deposit 1,271,548 1.14 % 1,484,436 1.31 %
Total Interest-Bearing Deposits 3,002,797 0.62 % 2,944,923 0.76 %
Total Average Deposits $ 3,719,442 0.50 % $ 3,681,897 0.60 %
For the year ended December 31, 2022 , total average deposits grew $37.5 million ,
including an increase in average money market accounts of $137.9 million , or
36.0%, an increase in average interest-bearing deposits of $75.5 million , or
18.3%, and an increase in average savings accounts of $57.3 million , or 8.6%.
The increases were partially offset by a managed decrease in average CDs of
$212.9 million , or 14.3% due to the intentional runoff of higher cost CDs,
through the first half of the year, and a decline in average noninterest-bearing
demand deposits of $20.3 million . Due to historically low market interest rates
during 2021 and the first half of 2022, the Company was able to migrate away
from higher rate CDs and grow lower yielding, more liquid products. During the
second half of 2022, market interest rates increased quickly providing new
incentives for customers to seek out higher yielding CDs.
The following table presents additional information about our year-end deposits: (Dollars in Thousands)
2022 2021
Deposits from the Certificate of Deposit Account Registry Services (CDARS)
$ 922 $ 139 Noninterest-Bearing Public Funds Deposits 27,086 58,393 Interest-Bearing Public Funds Deposits 180,243 123,968 Total Deposits not Covered by Deposit Insurance(1) 378,175 396,626 Certificates of Deposits not Covered by Deposit Insurance 159,030 147,134
Deposits from Certain Directors, Executive Officers and their Affiliates
2,910 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.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Maturities of CDs over
(Dollars in Thousands) Amount Percent Three Months or Less$ 16,002 10.1 %
Over Three Months Through Twelve Months 72,505 45.6 % Over Twelve Months Through Three Years 62,836 39.5 % Over Three Years
7,687 4.8 %
Total $ 159,030 100.0 %
Refer to Note 11, Deposits, in the Notes to Consolidated Financial Statements in
Item 8 of this Annual Report on Form 10-K for additional information related to
our deposits.
Information pertaining to FHLB borrowings and federal funds purchased at
(Dollars in Thousands) 2022 2021
2020
Balance at Period End
Federal Home Loan Bank Borrowings$ 180,550 $ 7,000
Federal Funds Purchased 17,870 -
-
Average Balance during Period
Federal Home Loan Bank Borrowings 29,849 25,986
30,628
Federal Funds Purchased 5,711 -
55
Average Interest Rate during the Period
Federal Home Loan Bank Borrowings 3.90 % 1.20 %
1.18 %
Federal Funds Purchased 3.29 % - % 1.82 % Maximum Month-end Balance during the Period Federal Home Loan Bank Borrowings 180,550 35,000
35,000
Federal Funds Purchased 23,020 -
-
Average Interest Rate at Period End
Federal Home Loan Bank Borrowings 4.48 % 1.61 % 1.13 % Federal Funds Purchased 4.65 % - % - % The Company had$180.6 million FHLB borrowings atDecember 31, 2022 and$7.0 million atDecember 31, 2021 an increase of$173.6 million . The Company had$17.9 million in overnight federal funds purchased atDecember 31, 2022 and had no outstanding overnight federal funds purchased atDecember 31, 2021 . The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan growth, investment securities, deposit growth and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity. The Company held FHLB ofAtlanta stock of$9.7 million and$2.4 million atDecember 31, 2022 andDecember 31, 2021 , respectively. Dividends recorded on this restricted stock were$154 thousand and$121 thousand for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. 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 12, Federal Home Loan Bank Borrowings and Federal Funds Purchased, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our borrowings.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Capital Resources The following table summarizes ratios for the Company and Bank forDecember 31 : 2022 2021 Common Equity Tier 1 Carter Bankshares, Inc. 12.61 % 14.21 % Carter Bank and Trust 12.42 % 14.04 % Tier 1 Ratio Carter Bankshares, Inc. 12.61 % 14.21 % Carter Bank and Trust 12.42 % 14.04 % Total Risk-Based Capital Ratio Carter Bankshares, Inc. 13.86 % 15.46 % Carter Bank and Trust 13.68 % 15.29 % Leverage Ratio Carter Bankshares, Inc. 10.29 % 10.62 % Carter Bank and Trust 10.13 % 10.49 % Total shareholders' equity decreased by$79.0 million to$328.6 million atDecember 31, 2022 compared to$407.6 million atDecember 31, 2021 . The decrease was primarily due to$87.3 million , net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities and$42.9 million related to the repurchase of common stock, partially offset by net income of$50.1 million . The remaining difference of$1.1 million is related to stock-based compensation during the year endedDecember 31, 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. 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. AtDecember 31, 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. The Company continues to maintain its capital position with a leverage ratio of 10.29% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.61% compared to the regulatory guideline of 6.50% to be well-capitalized. Our risk-based Tier 1 and Total Capital ratios were 12.61% and 13.86%, respectively, which places the Company 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. 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. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common 58
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. 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.
Refer to Note 20, Capital Adequacy, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our capital.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payments. The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents, as ofDecember 31, 2022 , significant fixed and determinable contractual obligations to third parties by payment date: Payments Due In One to Less Than Three Three to More Than (Dollars in Thousands) One Year Years Five Years five Years Total
Deposits without a Stated Maturity (1)$ 2,368,807 $ - $ - $ -$ 2,368,807 Certificates of Deposits (1) 637,771 487,827 134,345 1,583 1,261,526 Federal Home Loan Bank Borrowings 180,550 - - - 180,550 Federal Funds Purchased 17,870 - - - 17,870 Operating and Capital Leases 675 1,287 1,247 9,975 13,184 Purchase Obligations 4,674 8,719 8,089 2,983 24,465 Total$ 3,210,347 $ 497,833 $ 143,681 $ 14,541 $ 3,866,402 (1) Excludes Interest Lease contracts are described in Note 8, Premises and Equipment, of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Purchase obligations primarily represent obligations under agreement with a third-party data processing vendor and communications charges.
Off-Balance Sheet Arrangements
In the normal course of business, the Company offers our customers lines of credit and letters of credit to meet their financing objectives. The undrawn or unfunded portion of these facilities do not represent outstanding balances and therefore are not reflected in our financial statements as loans receivable. The Company provides lines of credit to our clients to memorialize the commitment to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represent$373.2 million , or 59.2% and$283.9 million , or 55.3% of the commitments to extend credit identified in the table below atDecember 31, 2022 andDecember 31, 2021 , respectively. The Company provides letters of credit, generally, for the benefit or our customers to provide assurance to various municipalities that construction projects will be completed according to approved plans and specifications. These instruments involve elements of credit and interest rate risk and our exposure to credit loss, in the event the customer does not satisfy the 59
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) terms of the agreement, could be equal to the contractual amount of the obligation less the value of any collateral. The Company analyzes this risk and calculates a reserve for unfunded commitments. The same credit policies are applied in granting these facilities as those used for underwriting loans. Lines of credit to finance construction projects include a construction end date, at which time the loan is expected to convert to a mini-perm loan. A department independent of our lending group monitors construction commitments of$1.0 million or more. Lines of credit to operating companies to finance working capital include a maturity date and may include various financial covenants. Letters of credit include an expiration date unless it is a standby letter of credit which automatically renews but generally provide for a termination clause on an annual basis given sufficient notice to the beneficiary. The Company typically charges an annual fee for the issuance of letters of credit. Because letters of credit are expected to expire without being drawn upon, these commitments do not necessarily represent future cash requirements of the Company. The following table sets forth the commitments and letters of credit as ofDecember 31 : (Dollars in Thousands) 2022 2021 Commitments to Extend Credit$ 630,619 $ 513,482 Standby Letters of Credit 25,739 27,083 Total$ 656,358 $ 540,565
Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
For more details, see Note 17 - Commitments and Contingencies, in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Liquidity 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% of the Company's assets approximating$1.0 billion , subject to the amount of eligible collateral pledged, unsecured 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$611.8 million of unpledged available-for-sale investment securities as an additional source of liquidity. Please refer to the Liquidity Sources table below for available funding with the FHLB and our unsecured lines of credit with correspondent banks. An important component of our 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. AtDecember 31, 2022 , the Bank had$616.3 million in highly liquid assets, which consisted of FRB Excess Reserves and interest-bearing deposits in other financial institutions of$4.5 million , and$611.8 million in unpledged securities. This resulted in highly liquid assets to total assets ratio of 14.7% atDecember 31, 2022 . 60
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CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
The following table provides detail of liquidity sources as of
(Dollars in Thousands) 2022 2021
Cash and Due From Banks, including Interest-bearing Deposits
Unpledged Investment Securities 611,845 743,836 Excess Pledged Securities 46,305 28,417 FHLB Borrowing Availability 676,746 667,307 Unsecured Lines of Credit Availability 127,130 145,000 Total Liquidity Sources$ 1,508,895 $ 1,862,359 Inflation Management is aware of the significant effect inflation has on interest rates and can have on financial performance. The Company's ability to cope with this is best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income and expense. The mix of interest-rate sensitive assets and liabilities is monitored through ALCO in order to reduce the impact of inflation on net interest income. The effects of inflation are controlled by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.
Stock Repurchase Plan
OnJune 28, 2022 , the Company's Board authorized the adoption of a new common stock repurchase program for the purchase of up to an additional 750,000 shares of the Company's common stock from time-to-time on the open market ("2022 program"), at management's discretion, which was in addition to the existing plan approved by the Board onDecember 10, 2021 ("prior program", and together with the 2022 program, the "Company Stock Repurchase Programs.") The prior program was completed onApril 28, 2022 . The Company purchased 2,587,361 shares of its outstanding common stock on the open market at a total cost of$42.9 million , or$16.59 per share during the year endedDecember 31, 2022 under the Company Stock Repurchase Programs. The remaining shares authorized to be purchased under the 2022 program totaled 132,232 shares atDecember 31, 2022 . The Company Stock Repurchase Programs are described in Item 5, Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases ofEquity Securities , of this Annual Report on Form 10-K. 61
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