10-K
1
tm214043d1_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2020
̈ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
file number: 001-39731
CARTER
BANKSHARES, INC.
(Exact name of registrant
as specified in its charter)
1300 Kings Mountain Road, Martinsville, Virginia 24112
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including
area code: (276) 656-1776
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $1 par value CARE Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of
the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ̈ Nox
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.Yes ̈ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No ̈
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).Yes ̈ No ̈
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ̈ Accelerated filer x Emerging growth company ̈
Non-accelerated filer ̈ Smaller reporting company ̈
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ̈
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ̈ No x
The
aggregate market value of Carter Bankshares, Inc.’s common stock held by non-affiliates, computed by reference
to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of June 30,
2020 was $198,774,712.
There
were 26,428,501 shares of common stock of Carter Bankshares, Inc. outstanding as of March 5, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the definitive Proxy Statement of Carter Bankshares, Inc., to be filed pursuant to Regulation 14A for the 2021 annual
meeting of shareholders to be held June 23, 2021, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business 4
Item 1A. Risk Factors 22
Item 1B. Unresolved Staff Comments 35
Item 2. Properties 35
Item 3. Legal Proceedings 35
Item 4. Mine Safety Disclosures 35
PART II
Item 6. Selected Financial Data 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 82
Item 8. Financial Statements and Supplementary Data 84
Item 9A. Controls and Procedures 145
Item 9B. Other Information 146
PART III
Item 10. Directors, Executive Officers and Corporate Governance 147
Item 11. Executive Compensation 147
Item 14. Principal Accounting Fees and Services 149
PART IV
Item 15. Exhibits and Financial Statement Schedules 149
CARTER BANKSHARES, INC. AND SUBSIDIARIES
PART 1
ITEM 1. BUSINESS
General
Carter
Bankshares, Inc. (the “Company”) is a holding company headquartered in Martinsville, Virginia with assets
of $4.2 billion at December 31, 2020. The Company is the parent company of its wholly owned subsidiary, Carter Bank &
Trust (the “Bank”). The Bank is an insured, Virginia state-chartered commercial bank which operates branches in Virginia
and North Carolina and is the fourth largest state chartered commercial bank headquartered in Virginia, operating 92 branches
across both states. The Bank provides a full range of financial services with retail, commercial banking products and insurance
products.
Holding Company Reorganization
The
Company was incorporated on October 7, 2020, by and at the direction of the board of directors of the Bank, for the
sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate
reorganization transaction (the “Reorganization”). On November 9, 2020, the Bank entered into an Agreement
and Plan of Reorganization (the “Reorganization Agreement”) with the Company and CBT Merger Sub, Inc. (the
“Merger Sub”), a wholly-owned subsidiary of the Company, pursuant to which the Reorganization would be effected. Effective
at 7:00 p.m. on November 20, 2020 (the “Effective Time”), under the terms of the Reorganization Agreement
and pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act (the “VSCA”), the
Bank merged with the Merger Sub and survived such merger as a wholly-owned subsidiary of the Company. Prior to the
Effective Time, the Company had no material assets and had not conducted any business or operations except for activities related
to the Company’s organization and the Reorganization.
At
the Effective Time, under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1
of the VSCA, each of the outstanding shares of the Bank’s common stock, par value $1.00 per share, formerly
held by its shareholders was converted into and exchanged for one newly issued share of the Company’s common stock, par
value $1.00 per share, and the Bank became the Company’s wholly-owned subsidiary. The shares of the Company’s common
stock issued to the Bank’s shareholders were issued without registration under the Securities Act of 1933, as amended (the
“Act”), pursuant to the exemption from registration provided by Section 3(a)(12) of the Act. Pursuant
to Section 13.1-719.1 of the VSCA, the Reorganization did not require approval of the Bank’s shareholders.
In the Reorganization, each shareholder
of the Bank received securities of the same class, having substantially the same designations, rights, powers, preferences, qualifications,
limitations and restrictions, as those that the shareholder held in the Bank.
Prior to the Effective Time, the Bank’s
common stock was registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). The Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof,
it filed annual and quarterly reports, proxy statements and other information with the Federal Deposit Insurance Corporation (“FDIC”).
Upon consummation of the Reorganization, the Company’s common stock was deemed to be registered under Section 12(b) of
the Exchange Act, pursuant to Rule 12g-3(a) promulgated thereunder, and the Company now files annual reports, proxy
statements and other information with the Securities and Exchange Commission (the “SEC”).
The Company’s common stock is traded
on the Nasdaq Global Select Market (“NASDAQ”) under the ticker symbol “CARE.”
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Operations
The Bank earns revenue primarily from
interest on loans and securities and fees charged for financial services provided to our customers. The Bank incurs expenses for
the cost of deposits, provision for loan losses and other operating costs such as salaries and employee benefits, data processing,
occupancy and tax expense.
Our mission is that the Bank strives to
be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities
the Bank is privileged to serve. Our strategic plan focuses on restructuring the balance sheet to provide more diversification
and higher yielding assets to increase the net interest margin. Another area of focus is the transformation of the infrastructure
of the Bank to provide a foundation for operational efficiency and provide new products and services for our customers that will
ultimately increase noninterest income.
Our focus continues to be on loan and
deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence on higher cost
certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring
our operating expenses. The Bank is focused on executing our strategy to successfully build our brand and grow our business in
our markets. The Bank’s net interest margin has benefited due to our strategy to deploy our excess cash into higher yielding
and diversified investment securities and purchased loans, as well as, the runoff of higher cost deposits.
The Bank offers a full range of deposit
services including LIFETIME FREE CHECKING, interest checking accounts, savings accounts, retirement accounts and other deposit
accounts of various types, ranging from money market accounts to longer-term CDs. These products and services are available to
our personal and business customers. The transaction accounts and time CDs are tailored to each of the Bank's principal markets
at competitive rates. All deposit accounts are insured by the FDIC up to the maximum amount allowed by law. The Dodd-Frank Act,
signed into law on July 21, 2010, makes permanent the $250,000 limit for federal deposit insurance and the coverage limit
applies per depositor, per insured depository institution for each account ownership.
The Bank also offers a full range of commercial
and personal loans. Commercial loans include both secured and unsecured loans. Consumer loans include residential mortgage, secured
and unsecured loans for financing automobiles, home improvements, education, overdraft protection, personal investments and credit
cards. The Bank also makes real estate construction and acquisition loans, and originates and holds fixed and variable rate mortgage
loans. In addition, the Bank now offers home equity lines of credit to its customers.
The Bank's lending activities are subject
to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type
of loan or the nature of the borrower (including the borrower's relationship to the Bank), in general the Bank is subject to a
“loan to one” borrower limit of an amount equal to 15% of the Bank's unimpaired capital and surplus. The Bank may
not make loans to any director, officer, employee or 10% shareholder of the Bank unless the loan is approved by the Company’s
Board of Directors (the “Board”) and is made on terms not more favorable than are made available to a person not affiliated
with the Bank.
Other
bank services include safe deposit boxes, direct deposit of payroll and social security checks and debit cards. Online banking
products including a full suite of digital tools including: online and mobile banking, online account opening, bill pay, eStatements,
mobile deposit, Zelle®,
CardValet®, digital wallet, and
MoneyPass® network of ATMs. Treasury
and corporate cash management services are also available to our business customers. The Bank also provides title insurance and
other financial institution-related products and services. The Bank has no current plans to exercise trust powers.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
The Bank has one wholly owned subsidiary,
CB&T Investment Company (“the Investment Company”), which was chartered effective April 1, 2019. The Investment
Company was formed to hold and manage a group of investments previously owned by the Bank and to provide additional latitude to
purchase other investments.
The Company is a Virginia business corporation
subject to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and examination by,
and the regulations and reporting requirements of, the Board of Governors of the Federal Reserve System (“FRB”). The
Company’s principal office is the same as the Bank’s principal office and is located at 1300 Kings Mountain Road,
Martinsville, Virginia 24112. The Company’s telephone number at that address is (276) 656-1776. The Company’s website
address is www.cbtcares.com.
Competition
The Bank experiences significant competition
in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings
associations, insurance companies, governmental agencies, credit unions, brokerage firms and other non-bank lenders including
mortgage companies and consumer finance companies. Competition for deposits comes from other commercial banks, savings associations,
money market and mutual funds, credit unions, insurance companies and brokerage firms. Some of the financial organizations competing
with the Bank have greater financial resources than the Bank. Certain of these financial organizations also have greater geographic
coverage and some offer bank and bank-related services which the Bank does not offer.
Human Capital Management
Our employees are the engine that drives
our mission to be the preferred lifetime financial partner for the communities in which we are privileged to serve. Our core values
of building lasting relationships, inclusivity, and optimism are key to building and maintaining a team-oriented environment with
employees that are engaged in open communication to help each other serve, learn, and grow. Our investment in competitive compensation,
health benefits, wellness programs, and a focus on healthy work-life integration allows our employees to provide a high level
of professional service to our customers. At Carter Bankshares, Inc., caring is what we’ll always do best.
Demographics
As of December 31, 2020, we employed
828 full-time and part-time employees across our two-state footprint. No employees are represented by a collective bargaining unit.
For fiscal year 2020, we hired 81 employees. Our voluntary separation turnover rate was 18.8% in fiscal year 2020.
Compensation, Benefits, and Wellness
Our compensation strategy includes the
development of job descriptions that are reviewed annually. We use market-based compensation and benefits data to provide competitive
salaries and benefits for our employees. We offer paid leave, health benefits, wellness programs, a 401(k) program with matching
and year-end employer contributions, restricted stock awards for high performing employees, flexible spending accounts, and employee
assistance programs to all eligible employees. We bring in external professionals who conduct wellness programs, especially during
the COVID-19 pandemic, to help our employees remain focused on their health and wellness.
Employee Performance and Development
The development and performance of our
employees is centered on open dialogue that provides the teammate with our expectations for their role and management the opportunity
to understand their insight on careers and aspirations. Our performance review process uses core competencies and a standardized
rating system to measure performance. Employees are provided the opportunity at the start of the review cycle to perform a self-assessment
including comments. These self-assessments are available for their leaders to review as they develop the overall performance rating.
The performance review is used as input for the merit increase process.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
The Bank developed a standard New Employee
Orientation (NEO) program that employees attend on their first day of employment. The Human Resources team, along with various
departments, provide a standard first-day program so new employees receive consistent information to jump start their new opportunity
with the Bank. Employees also complete an average of 15 hours of regulatory and compliance training each year, in addition to
training specific to their job duties and responsibilities. Leadership programs have been developed and conducted to provide leaders
with the tools and resources they need to develop their employees and build high-performing teams. Employees are given opportunities
to attend webinars and enroll in outside classes to enrich their professional goals.
Diversity, Equity, and Inclusion
We strive to promote inclusion through
our core company values and behaviors. We use various communication channels to develop an engaged workforce and create an inclusive
workplace.
Here is a snapshot of our diversity metrics
as of December 31, 2020:
Gender % of Total
Generation % of Total
Generation Z (1997 and later) 5.00 %
Silent Generation (before 1946) 1.10 %
Ethnicity % of Total
American Indian / Alaskan Native 0.24 %
Black or African American 8.33 %
Hispanic or Latino 1.69 %
Two or more races 1.45 %
We
continue our commitment to equal employment opportunities by focusing on attracting, developing and retaining a diverse
workforce.
Talent Acquisition
We focus on fairness and equitable approaches
to create an environment where all of our employees can develop and thrive. Our efforts include ongoing reviews of our selection
and hiring practices alongside a continued focus on pay equity analysis to offer our employees’ salaries based on their
experience, knowledge, skills, abilities, and fit for the job duties and responsibilities.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Our talent acquisition program uses various
external partners to reach a diverse population of candidates. We review the levels of engagement and inclusion of our current
workforce through surveys, including external benchmarks from organizations like the Best Companies Group. In the most recent
survey, our employees expressed a high degree of feeling they belong within the organization.
Supervision and Regulation
General
Bank holding companies, banks and their
affiliates are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company
and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory authorities including, but not limited to, the Virginia
Bureau of Financial Institutions (the “Bureau”), the FDIC, the FRB, the Internal Revenue Service (“IRS”),
federal and state taxing authorities, and the SEC.
The
following summary briefly describes significant provisions of currently applicable federal and state laws and certain regulations
and the potential impact of such provisions. This summary is not complete, and we refer you to the particular statutory or regulatory
provisions or proposals for more information. Because regulation of financial institutions changes regularly and is the subject
of constant legislative and regulatory debate, we cannot forecast how federal and state regulation and supervision of financial
institutions may change in the future and affect the Company’s and the Bank’s operations.
Regulatory Reform
The financial crisis of 2008, including
the downturn of global economic, financial and money markets and the threat of collapse of numerous financial institutions, and
other events led to the adoption of numerous laws and regulations that apply to, and focus on, financial institutions. The most
significant of these laws is the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),
which was enacted on July 21, 2010 and, in part, was intended to implement significant structural reforms to the financial
services industry. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including changes
that have significantly affected the business of all bank holding companies and banks, including the Company and the Bank. Some
of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act's mandates are discussed
further below.
In May 2018, the Economic Growth,
Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was enacted to reduce the regulatory burden on certain
banking organizations, including community banks, by modifying or eliminating certain federal regulatory requirements. While the
EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory
framework for small depository institutions with assets of less than $10 billion as well as for larger banks with assets above
$50 billion. In addition, the EGRRCPA included regulatory relief for community banks regarding regulatory examination cycles,
call reports, application of the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, qualified mortgages,
and risk weights for certain high-risk commercial real estate loans. However, federal banking regulators retain broad discretion
to impose additional regulatory requirements on banking organizations based on safety and soundness and U.S. financial system
stability considerations.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
The Company and the Bank continue to experience
ongoing regulatory reform. These regulatory changes could have a significant effect on how we conduct business. The specific implications
of the Dodd-Frank Act, the EGRRCPA, and other potential regulatory reforms cannot yet be fully predicted and will depend to a
large extent on the specific regulations that are to be adopted in the future. Certain aspects of the Dodd-Frank Act and the EGRRCPA
are discussed below in more detail.
Regulation of the Company and the
Bank
As a bank holding company, the Company
is subject to the Bank Holding Company Act of 1956 (the “BHCA”) and regulation and supervision by the FRB. Pursuant
to the BHCA, the FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable grounds to believe that continuation of such activity or ownership
constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The FRB and the FDIC have adopted guidelines and released interpretative materials that establish operational and managerial standards
to promote the safe and sound operation of banks and bank holding companies. These standards relate to the institution’s
key operating functions, including but not limited to capital management, internal controls, internal audit systems, information
systems, data and cybersecurity, loan documentation, credit underwriting, interest rate exposure and risk management, vendor management,
executive management and its compensation, corporate governance, asset growth, asset quality, earnings, liquidity and risk management.
The BHCA generally limits the activities
of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is
closely related to banking or to managing or controlling banks, and permits interstate banking acquisitions subject to certain
conditions, including national and state concentration limits. The FRB has jurisdiction under the BHCA to approve any bank or
non-bank acquisition, merger or consolidation proposed by a bank holding company. A bank holding company must be “well capitalized”
and “well managed” to engage in an interstate bank acquisition or merger, and banks may branch across state lines
provided that the law of the state in which the branch is to be located would permit establishment of the branch if the bank were
a state bank chartered by such state. Bank holding companies and their subsidiaries are also subject to restrictions on transactions
with insiders and affiliates, as further discussed below. Finally, the Company is subject to the periodic reporting requirements
of the Exchange Act, including, but not limited to, filing annual, quarterly and other current reports with the SEC.
The Bank is subject to supervision, regulation
and examination by the Bureau and the Bank’s primary federal regulator, the FDIC. Federal and state laws and regulations
generally applicable to financial institutions regulate, among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches,
mergers, consolidations and dividends. The system of supervision and regulation applicable to the Bank establishes a comprehensive
framework for its operations and is intended primarily for the protection of the FDIC’s deposit insurance funds and the
depositors, rather than the shareholders of the Bank. The Bank is not a member of the Federal Reserve System.
Banking Acquisitions; Changes in
Control
The BHCA and related regulations require,
among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct
or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it
already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank
holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed
bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits
expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party
to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution
that is a party to the transaction and of the combined institution after the transaction, the parties’ managerial resources
and risk management and governance processes and systems, the parties’ compliance with the Bank Secrecy Act and anti-money
laundering requirements, and the acquiring institution’s performance under the Community Reinvestment Act and its compliance
with fair housing and other consumer protection laws.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Subject to certain exceptions, the BHCA
and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances,
no notice of disapproval) prior to any person or company’s acquiring “control” of a bank or bank holding company.
A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the
management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured
depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25%
of any class of voting securities of an insured depository institution and either the institution has registered its securities
with the SEC under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting
securities immediately after the acquisition. The Company’s common stock is registered under Section 12 of the Exchange
Act.
On April 1, 2020, the FRB’s
new rule for determining whether a company has control over a bank or other company for purposes of the BHCA, and the control
presumptions promulgated under Regulation Y, became effective. The new rule provides specific guidance for the FRB’s
approach to certain control evaluations, including a tiered framework incorporating a series of presumptions based on ownership
of a class of voting securities. A company may be presumed to be in control of a target second company based on five levels of
ownership of voting securities: (i) less than five percent; (ii) five percent; (iii) ten percent; (iv) 15
percent; (v) 25 percent; and (vi) with a presumption triggered at levels below 25 percent, depending on whether any
of nine types of relationships exist (i.e., directors and director service positions, business relationships and business terms,
officer/employee interlocks, contractual powers, proxy contests involving directors, and total equity ownership) and, at the same
time, ownership of a class of voting securities exceeds certain thresholds. As was the case prior to the new rule, a presumption
of control (once triggered) does not automatically result in a control determination under the BHCA as such presumptions may be
rebutted. The new rule applies only to questions of control under the BHCA, but does not extend to the Change in Bank Control
Act.
In addition, Virginia law requires the
prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares
of a Virginia bank or a Virginia bank holding company, or (ii) the acquisition by any other person of control of a Virginia
bank holding company or a Virginia bank.
Certain Transactions by Insured
Banks with their Affiliates
There are statutory restrictions related
to the extent bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered
transactions” with their insured depository institution (i.e., banking) subsidiaries. In general, an “affiliate”
of a bank includes the bank’s parent holding company and any subsidiary thereof. However, an “affiliate” does
not generally include the bank’s operating subsidiaries. A bank (and its subsidiaries) may not lend money to, or engage
in other covered transactions with, its non-bank affiliates if the aggregate amount of covered transactions outstanding involving
the bank, plus the proposed transaction, exceeds the following limits: (a) in the case of any one such affiliate, the aggregate
amount of covered transactions of the bank and its subsidiaries cannot exceed 10 percent of the bank’s capital stock and
surplus; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the bank and its subsidiaries
cannot exceed 20 percent of the bank’s capital stock and surplus. “Covered transactions” are defined to include
a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit
to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing
or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with
an affiliate that creates a credit exposure to such affiliate. Certain covered transactions are also subject to collateral security
requirements.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Covered transactions as well as other
types of transactions between a bank and a bank holding company must be on market terms, which means that the transaction must
be conducted on terms and under circumstances that are substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with or involving nonaffiliates or, in the absence of comparable transactions,
that in good faith would be offered to or would apply to nonaffiliates. Moreover, certain amendments to the BHCA provide that,
to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements
in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Regulatory Capital Requirements
All financial institutions are required
to maintain minimum levels of regulatory capital. The FDIC establishes risk-based and leveraged capital standards for the financial
institutions they regulate. The FDIC also may impose capital requirements in excess of these standards on a case-by-case basis
for various reasons, including financial condition or actual or anticipated growth.
As of December 31, 2020 and 2019,
the Bank qualified as a “well capitalized” institution (see Note 21) of the Notes to Consolidated Financial Statements
filed herewith). Under the risk-based capital requirements, through December 31, 2015, the Bank was required to maintain
a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital was required to be
“Tier 1 capital,” which consists principally of common and certain qualifying preferred shareholders’ equity,
less certain intangibles and other adjustments. The remainder, “Tier 2 capital,” consists of a limited amount of subordinated
and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss reserve.
The federal regulatory agencies established
a minimum leveraged capital ratio (Tier 1 capital to period end total average assets). These guidelines provided for a minimum
leverage capital ratio of 4%. The guidelines also provided that banking organizations experiencing internal growth or making acquisitions
were expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance
on intangible assets.
In response to the COVID-19 Pandemic,
the federal bank regulatory authorities issued an interim final rule in March 2020 to provide banking organizations
that are required to implement ASU 2016-13, Measurement of Credit Losses on Financial Instruments before the end of 2020 the option
to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative
benefit to regulatory capital provided during the two-year delay.
On August 26, 2020, the federal banking
agencies adopted a final rule that allows the Company to phase in the impact of adopting the Current Expected Credit Losses
(“CECL”) methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory
capital provided during the two-year delay. This final rule is substantially similar to the interim final rule issued
in March 2020. Refer to the section titled Capital Resources in Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” of this Form 10-K for information regarding the impact of this final
rule on the Company’s regulatory capital.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Basel III Capital Framework
The FRB and the FDIC have adopted rules to
implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating
risk-weighted assets and risk-based capital measurements (collectively, the “Basel III Final Rules”) that apply to
banking institutions they supervise. For the purposes of the Basel III Final Rules, (i) common equity tier 1 capital (CET1)
consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally
of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust
preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated
debt and preferred stock, and limited amounts of an institution’s allowance for loan losses. Each regulatory capital classification
is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules. The Basel III Final Rules also
establish risk weightings that are applied to many classes of assets held by community banks, importantly including applying higher
risk weightings to certain commercial real estate loans.
The Basel III Final Rules and minimum
capital ratios required to be maintained by banks were effective January 1, 2015. The Basel III Final Rules also include
a requirement that banks maintain additional capital (the “capital conservation buffer”), which was phased in beginning
January 1, 2016 and was fully phased-in effective January 1, 2019. The Basel III Final Rules and fully phased-in
capital conservation buffer require banks to maintain a:
The Basel III Final Rules provide
deductions from and adjustments to regulatory capital measures, primarily to CET1, including deductions and adjustments that were
not applied to reduce CET1 under historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets
dependent upon future taxable income, and significant investments in non-consolidated financial entities must be deducted from
CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
As of December 31, 2020, the Bank met all capital adequacy requirements under the Basel III Final Rules, including the capital
conservation buffer on a fully phased-in basis as if such requirements were in effect as of that date.
Community Bank Leverage Ratio
As a result of the EGRRCPA, the federal
banking agencies were required to develop a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital
to average total consolidated assets) for banking organizations with assets of less than $10 billion, such as the Bank. On October 29,
2019, the federal banking agencies issued a final rule that implements the Community Bank Leverage Ratio Framework (the “CBLRF”).
To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance
sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%. A bank that elects the CBLRF and has
a leverage ratio greater than 9% will be considered to be in compliance with Basel III capital requirements and exempt from the
complex Basel III calculations. A bank that falls out of compliance with the CBLRF will have a two-quarter grace period to come
back into full compliance, provided that its leverage ratio remains above 8% (a bank will be deemed well-capitalized during the
grace period). The CBLRF became available for banking organizations to use as of March 31, 2020 (with the flexibility for
banking organizations to subsequently opt into or out of the CBLRF, as applicable). As of December 31, 2020, the Bank has
not elected to apply the CBLRF.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Dividend Limitations
The Company is a legal entity that is
separate and distinct from the Bank. A significant portion of the revenues of the Company result from dividends paid to it by
the Bank. Both the Company and the Bank are subject to laws and regulations that limit the payment of dividends, including limits
on the sources of dividends and requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated
that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after
providing for all expenses, losses, interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings
retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In addition,
FRB supervisory guidance indicates that the FRB may have safety and soundness concerns if a bank holding company pays dividends
that exceed earnings for the period in which the dividend is being paid. Further, the Federal Deposit Insurance Act (“FDIA”)
prohibits insured depository institutions such as the Bank from making capital distributions, including paying dividends, if,
after making such distribution, the institution would become undercapitalized as defined in the statute. We do not expect that
any of these laws, regulations or policies will materially affect the ability of the Company or the Bank to pay dividends.
Insurance of Accounts, Assessments
and Regulation by the FDIC
Deposits with the Bank are insured through
the Deposit Insurance Fund (“DIF”) of the FDIC. As a DIF-insured institution, the Bank is subject to FDIC rules and
regulations as administrator of the DIF. The Dodd-Frank Act made permanent the current standard maximum deposit insurance amount
of $250,000. The FDIC coverage applies per depositor, per insured depository institution, for each account ownership category.
The FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions.
The FDIC is authorized to prohibit any
DIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat
to the insurance fund. Also, the FDIC may initiate enforcement actions against banks after first giving the institution’s
primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository
institution, including the Bank, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe
or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation,
order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period
from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in
termination of the Bank’s deposit insurance.
The actual assessment to be paid by each
DIF member is based on the institution’s assessment risk classification and whether the institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns.
The DIF is funded by assessments on banks
and other depository institutions calculated based on average consolidated total assets minus average tangible equity (defined
as Tier 1 capital). As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target
“designated reserve ratio” (described in more detail below) of 2% for the DIF and, in lieu of dividends, provides
for a lower assessment rate schedule when the reserve ratio reaches 2% and 2.5%. An institution's assessment rate is based on
a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers
the institution’s weighted average CAMELS component rating, and is subject to further adjustments including those related
to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets). At December 31,
2020, total base assessment rates for institutions that have been insured for at least five years range from 1.5 to 30 basis points
applying to banks with less than $10 billion in assets.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
The Dodd-Frank Act transferred to the
FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve
ratio.” The Federal Deposit Insurance Act (“FDIA”) requires that the FDIC consider the appropriate level for
the DIF on at least an annual basis. As of December 31, 2020, the DIF was 2% and the minimum DIF was 1.35%.
Banks with less than $10 billion in total
consolidated assets (such as the Bank) receive credits to offset the portion of their assessments that help to raise the reserve
ratio to 1.35%. The FDIC will automatically apply such a bank’s credits to reduce its regular DIF assessment up to the entire
amount of the assessment. The FDIC will remit any such remaining credits in a lump sum to the appropriate bank following application
to the bank’s regular DIF assessment for four quarterly assessment periods.
In June 2020, the FDIC adopted a
final rule that generally removes the effect of lending by financial institutions under the Small Business Administration’s
Paycheck Protection Program (“PPP”) when calculating a bank’s deposit insurance assessment by providing an offset
to the bank’s total assessment amount for the increase in the assessment base attributable to the bank’s participation
in the PPP. This final rule began applying to FDIC deposit insurance assessments during the second quarter of 2020.
Community Reinvestment
The Community Reinvestment Act (the “CRA”)
imposes on financial institutions, including the Bank an affirmative obligation to help meet the credit needs of their local communities,
including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial
institution’s efforts in helping meet community credit needs currently are evaluated as part of the examination process
pursuant to regulations adopted by the federal banking agencies. Under the regulation, a financial institution’s efforts
in helping meet its community’s credit needs are evaluated, based on the particular institution’s total assets, according
to three-pronged test of lending, investment and service in the community. The grade received by a bank is considered in evaluating
mergers, acquisitions and applications to open a branch or facility. To the best knowledge of the Bank, it is meeting its obligations
under the CRA. The Bank received a rating of “satisfactory” on its most recent CRA examination dated October 23,
2020.
Federal Home Loan Bank of Atlanta
The Bank is a member of the Federal Home
Loan Bank (“FHLB”) of Atlanta, which is one of 12 regional FHLBs that provide funding to their members for making
housing loans as well as for affordable housing and community development loans. Each FHLB serves as a reserve, or central bank,
for the members within its assigned region. Each FHLB makes loans to members in accordance with policies and procedures established
by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain stock in the FHLB. At December 31,
2020, the Bank owned $5.1 million of FHLB stock.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Consumer Protection
The Consumer Financial Protection Bureau
(the “CFPB”) is the federal regulatory agency responsible for implementing, examining and enforcing compliance with
federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions.
The CFPB supervises and regulates providers of consumer financial products and services, and has rulemaking authority in connection
with numerous federal consumer financial protection laws (for example, but not limited to, the Truth-in-Lending Act (“TILA”)
and the Real Estate Settlement Procedures Act (“RESPA”)).
Because the Company and the Bank are smaller
institutions (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue
to be applied to the Company by the FRB and the Bank by the FDIC. However, the CFPB may include its own examiners in regulatory
examinations by a smaller institution’s principal regulators and may require smaller institutions to comply with certain
CFPB reporting requirements. In addition, regulatory positions taken by the CFPB and administrative and legal precedents established
by CFPB enforcement activities, including in connection with supervision of larger banks, could influence how the FRB and the
FDIC apply consumer protection laws and regulations to financial institutions that are not directly supervised by the CFPB. The
precise effect of the CFPB’s consumer protection activities on the Company and the Bank cannot be determined with certainty.
Mortgage Banking Regulation
In connection with making mortgage loans,
the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit
discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases
restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to
mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services
rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on
race, gender, geographical distribution and income level. The Bank’s mortgage origination activities are subject to the
Equal Credit Opportunity Act (“ECOA”), TILA, the Home Mortgage Disclosure Act, RESPA, the Home Ownership Equity Protection
Act, and the regulations promulgated under these acts, among other additional state and federal laws, regulations and rules.
The Bank’s mortgage origination
activities are also subject to Regulation Z, which implements TILA. Certain provisions of Regulation Z require mortgage lenders
to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for
a mortgage loan has a reasonable ability to repay the loan according to its terms. Alternatively, a mortgage lender can originate
“qualified mortgages,” which are generally defined as mortgage loans without negative amortization, interest-only
payments, balloon payments, terms exceeding 30 years, and points and fees paid by a consumer equal to or less than 3% of the total
loan amount. Under the EGRRCPA, most residential mortgage loans originated and held in portfolio by a bank with less than $10
billion in assets will be designated as “qualified mortgages.” Higher-priced qualified mortgages (e.g., sub-prime
loans) receive a rebuttable presumption of compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime
loans) are deemed to comply with the ability-to-repay rules. The Bank predominantly originates mortgage loans that comply with
Regulation Z’s “qualified mortgage” rules.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 1. BUSINESS (continued)
Brokered Deposits
Section 29 of the FDIA and FDIC regulations
generally limit the ability of any bank to accept, renew or roll over any brokered deposit unless it is “well capitalized”
or, with the FDIC’s approval, “adequately capitalized.” However, as a result of the EGRRCPA, the FDIC undertook
a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits, and interest rate caps
applicable to banks that are less than “well capitalized.” On December 15, 2020, the FDIC issued final rules that