ITEM 1A. RISK FACTORS
Investments in the Company’s common
stock involve risk. In addition to the other information set forth in this Report, including the information addressed under “Forward-Looking
Statements,” investors in the Company’s common stock should carefully consider the factors discussed below. The following
discussion highlights the risks that we believe are material to the Company, but does not necessarily include all risks that we
may face. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results
of operations, and capital position, and could cause the Company’s actual results to differ materially from its historical
results or the results contemplated by the forward-looking statements contained in this Report, in which case the trading price
of the Company’s common stock could decline.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic and resulting
adverse economic conditions have already adversely impacted the Company’s business and results, and could have a more material
adverse impact on our business, financial condition and results of operations.
The ongoing COVID-19 global and national
health emergency has caused significant disruption in the United States and international economies and financial markets. The
spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school
shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and
overall economic and financial market instability. In March 2020, almost all states, including Virginia, where the Company
is headquartered, and North Carolina, in which the Company has significant operations, issued “stay-at-home orders”
and declared states of emergency. Many state and local governments began implementing phased regulations and guidelines for reopening
communities and economies, often with reduced capacity and social distancing restrictions. However, recently, many state and local
governments have implemented additional restrictions in light of the significant COVID-19 resurgence.
Although banks have generally been permitted
to continue operating, the COVID-19 pandemic has caused disruptions to the Company’s business and could cause material disruptions
to our business and operations in the future. Impacts to our business have included decreased operating effectiveness due to additional
health and safety precautions we implemented at our branches and the transition of 20% of our workforce to home locations, decreases
in customer traffic in our branches and increases in requests for forbearance and loan modifications. Further, loan payment deferment
programs that we have implemented and government stimulus programs, like the PPP, may mask credit deterioration in our loan portfolio
by making less applicable standard measures of developing financial weakness in a client or portfolio, such as past due monitoring
and non-accrual assessments. To the extent that commercial and social restrictions remain in place or increase, the Company’s
expenses, delinquencies, charge-offs, foreclosures and credit losses could materially increase, and we could experience
reductions in interest and fee income. In addition, we anticipate that potential declines in credit quality could significantly
affect the adequacy of our allowance for loan losses, which we expect could lead to increases in the provision for loan losses
and related declines in our net income.
Unfavorable economic conditions and increasing
unemployment figures may also make it more difficult for the Company to maintain deposit levels and loan origination volume
and to obtain additional financing. Furthermore, such conditions have and may continue to cause the value of our
Company’s investment portfolio and of collateral associated with our existing loans to decline. In addition, in March 2020,
the FRB lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in part as a result of the pandemic.
A prolonged period of very low interest rates could reduce the Company’s net interest income and have a material adverse
impact on our cash flows and the market value of our investments or the manner in which we redeploy proceeds from maturing investments.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
While we have taken and continue to take
precautions to protect the safety and well-being of our employees and customers, no assurance can be given that the steps we’ve
taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption to our employees’ ability
to provide customer support and service. The continued or renewed spread of COVID-19 could negatively impact the availability
of key personnel necessary to conduct the Company’s business, the business and operations of our third-party service providers
who perform critical services for the Company’s business, or the businesses of many of our customers and borrowers. If COVID-19
is not successfully contained, we could experience a material adverse effect on its business, financial condition, results of
operations and cash flow.
Among the factors outside the Company’s
control that are likely to affect the impact the COVID-19 pandemic will ultimately have on the Company’s business are, without
limitation:
· the pandemic’s course and severity;
· the uncertainty regarding new variants of COVID-19 that have emerged;
· the speed and efficacy of vaccine and treatment developments;
The ongoing COVID-19 pandemic has resulted
in severe volatility in the financial markets and meaningfully lower stock prices for many companies, including the Company’s
common stock. Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock may continue to experience
volatility and declines.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
The Company continues to monitor the COVID-19
pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as
to its ultimate impact on the Company. However, if the COVID-19 pandemic continues to spread or otherwise result in a continuation
or worsening of the current economic and commercial environments, our business, financial condition, results of operations and
cash flows could be materially adversely affected.
The full effects of the COVID-19 pandemic
may have a material adverse effect on the Company in numerous ways.
While the scope, duration, and full effects
of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic
activity, adversely affected the functioning of financial markets, impacted interest rates and increased economic and market uncertainty.
If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors
identified in Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse impact on us
in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk and human capital.
· Our liquidity and regulatory capital could be adversely impacted.
Even
after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover.It
is uncertain how long this recovery will take. As a result, we anticipate our business may be adversely affected during this recovery.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Risks Related to Credit
A large percentage of the Company’s
loans are secured by real estate, and an adverse change in the real estate market may result in losses and adversely affect our
profitability.
Approximately 79% of the Company’s
loan portfolio as of December 31, 2020, was comprised of loans secured by real estate. An adverse change in the economy affecting
values of real estate generally or in the market areas we serve specifically could impair the value of the Company’s collateral
and its ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, the amounts
the Company receives upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan.
As a result, the Company’s profitability and financial condition could be negatively impacted by an adverse change in the
real estate market.
The Company relies on independent appraisals
to determine the value of the real estate which secures a significant portion of our loans, and the values indicated by such appraisals
may not be realizable if foreclose on such loans is forced.
A significant portion of the Company’s
loan portfolio consists of loans secured by real estate. We rely on independent appraisers to estimate the value of such real
estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment that adversely
affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the
real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the loans may be more
or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is
less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan.
The Company’s level of credit
risk is increased due to the level of commercial real estate loans in its portfolio.
Approximately 49% of the Company’s
loan portfolio as of December 31, 2020, was comprised of loans secured by commercial purpose real estate, including loans
related to hotels, strip malls and apartments. These loans generally carry larger loan balances and involve a greater degree of
financial and credit risk than loans secured by residential real estate. Repayment of these loans is often dependent on the success
of the borrower’s underlying business and the borrower’s ability to generate a positive cash flow sufficient to service
its debts. The increased financial and credit risk associated with these loans is a result of several factors, including the concentration
of principal in a limited number of loans and to borrowers in similar lines of business, the size of the loan balances, general
economic conditions affecting values of real estate, and the existence of a market for the subject collateral. The ongoing adverse
economic effects of the COVID-19 pandemic will likely exacerbate the financial and credit risk associated with these loans.
The Company’s exposure to hospitality
at December 31, 2020 equated to approximately $497.2 million, or 16.9% 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.
However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy
levels at or below breakeven, which has caused, and may continue to cause, them to draw on their existing lines of credit with
other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness,
and is expected to adversely impact the value of collateral. These developments, together with the current economic conditions
generally, may impact the value of real estate collateral in hospitality and other commercial real estate exposures. As a result,
we anticipate that our financial condition, capital levels and results of operations could be adversely affected.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Allowance for loan losses may be insufficient.
All borrowers carry the potential to default
and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowance for loan losses, which is
a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate
of probable credit losses that have been incurred within the existing portfolio of loans. Management believes the allowance is
adequate to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses
reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current
loan portfolio quality, present economic conditions and unidentified losses in the current loan portfolio. The determination of
the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make
significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification
of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance
for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase
in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different than those
of management. An increase in the allowance for loan losses results in a decrease in net income or losses, and possibly risk-based
capital, and may have a material adverse effect on our financial condition and results of operations.
The adoption of ASU 2016-13, Measurement
of Credit Losses on Financial Instruments, referred to as CECL, will result in a significant change in how the Company recognizes
credit losses. If the assumptions or estimates used in adopting the new standard are incorrect or needs to change, there may be
a material adverse impact on the results of operations and financial condition.
The Company has elected to take advantage
of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology. The Company was subject
to the adoption of the CECL accounting method under Financial Accounting Standards Board (the “FASB”) Accounting Standards
Update (“ASU”) 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, we
elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the
outbreak of COVID-19 ends or December 31, 2020 which was later extended to January 1, 2022. The Company intends to adopt
in the first quarter of 2021 as allowed under the provisions of the CARES Act.
CECL replaces the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to form credit loss estimates. The measurement of expected credit losses is to be based
on historical loss experience, current conditions and reasonable and supportable forecasts that affect the collectability of the
reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically
thereafter. This differs significantly from the incurred loss mode required under current GAAP, which delays recognition until
it is probable a loss has been incurred. Upon origination of a loan, the estimate of expected credit losses, and any subsequent
changes to such estimate, will be recorded through provision for loan losses in our Consolidated Statements of (Loss) Income.
The CECL model may create more volatility in the level of our allowance for loan losses.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
The CECL model permits the use of judgment
in determining the approach most appropriate for the Company, based on facts and circumstances. Changes in economic conditions
affecting borrowers, new information on our loans, and other factors, both within and outside of our control, may require an increase
to the allowance for loan losses. We may underestimate our expected losses and fail to maintain an allowance for loan losses sufficient
to account for these losses. We will continue to periodically review and update our CECL methodology, models and the underlying
assumptions, estimates and assessments we use to establish our allowance for loan losses under the CECL standard to reflect our
view of current conditions and reasonable and supportable forecasts. We will implement further enhancements or changes to our
methodology, models and the underlying assumptions, estimates and assessments, as needed. If the assumptions or estimates we use
in adopting the new standard are incorrect or we need to change our underlying assumptions and estimates, there may be a material
adverse impact on our results of operation and financial condition. For further information on our anticipated adoption of the
CECL standard, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7 of this Form 10-K.
Our real estate lending business can
result in increased costs associated with Other Real Estate Owned (“OREO”).
Because we originate loans secured by
real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate
such property, in which case we are exposed to the risks inherent in the ownership of real estate. We use methods for valuing
collateral for impaired loans and OREO that are in compliance with Accounting Standards Codification (“ASC”) Topic
310 Receivables. The methods require the use of assumptions that are subject to change based on events impacting real estate values.
The amount that we may realize after a default is dependent upon factors outside of our control, including, but not limited to,
general or local economic conditions, environmental cleanup liability, neighborhood values, interest rates, real estate tax rates,
operating expenses of the mortgaged properties, and supply of and demand for properties. Certain expenditures associated with
the ownership of income producing real estate, principally real estate taxes and maintenance costs, may adversely affect the net
cash flows generated by the real estate. Therefore, the cost of operating income-producing real property may exceed the rental
income earned from such property, and we may have to advance funds to protect our investment or we may be required to dispose
of the real property at a loss.
Risks Related to Our Operations
A failure in or breach of our operational
or security systems or infrastructure, or those of third parties, could disrupt the Company’s businesses, and adversely
impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
The Company’s operational and
security systems, infrastructure, including our computer systems, data management, and internal processes, as well as those of
third parties, are integral to our business. We rely on our employees and third parties in our day-to-day and ongoing operations,
who may, as a result of human error, misconduct or malfeasance, or failure or breach of third-party systems or infrastructure,
expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our
ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.
In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited
than with our own systems.
The Company handles a substantial volume
of customer and other financial transactions every day. Our financial, accounting, data processing, check processing, electronic
funds transfer, loan processing, online and mobile banking, backup or other operating or security systems and infrastructure may
fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or
partially beyond our control. This could adversely affect our ability to process these transactions or provide these services.
There could be sudden increases in customer transaction volume, electrical, telecommunications or other major physical infrastructure
outages, natural disasters, events arising from local or larger scale political or social matters, including terrorist acts, and
cyber-attacks. We continuously update these systems to support our operations and growth. This updating entails significant costs
and creates risk associated with implementing new systems and integrating them with existing ones. Operational risk exposures
could adversely impact our results of operations, liquidity and financial condition, and cause reputational harm.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
A cyber-attack, information or security
breach, or a technology failure of ours or of a third-party could adversely affect the Company’s ability to conduct business
or manage exposure to risk, resulting in the disclosure or misuse of confidential or proprietary information, increase costs to
maintain and update our operational systems, security systems, and infrastructure, and adversely impact results of operations,
liquidity and financial condition, as well as cause reputation harm.
The Company’s business is highly
dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third
parties with whom we interact. Cyber security risks for financial institutions have significantly increased in recent years in
part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external
parties, including foreign state actors. Our operations rely on the secure processing, transmission, storage and retrieval of
confidential, proprietary and other information in our computer and data management systems and networks, and in the computer
and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems,
software, and networks to conduct our operations. In addition, to access our network, products and services, our customers and
third parties may use personal mobile devices or computing devices that are outside of our network environment.
Financial services institutions have been
subject to, and are likely to continue to be the target of, cyber-attacks, including computer viruses, malicious or destructive
code, phishing attacks, denial of service or other security breaches that could result in the unauthorized release, gathering,
monitoring, misuse, loss or destruction of confidential, proprietary and other information of the institution, its employees or
customers or of third parties, or otherwise materially disrupt network access or business operations. For example, denial of service
attacks has been launched against a number of large financial institutions and several large retailers have disclosed substantial
cyber security breaches affecting debit and credit card accounts of their customers. We have not experienced cyber security incidents
in the past, but there is no assurance that we will not experience an attack in the future. Technology failures, cyber-attacks
or other information or security breaches can cause material losses or other material consequences.
In addition to external threats, insider
threats also represent a risk to us. Insiders, having legitimate access to our systems and the information contained in them,
have the opportunity to make inappropriate use of the systems and information. We have policies, procedures and controls in place
designed to prevent or limit this risk, but we cannot guarantee that policies, procedures and controls fully mitigate this risk.
As cyber threats continue to evolve, we
may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate
and remediate any information security vulnerabilities or incidents. Any of these matters could result in our loss of customers
and business opportunities, significant disruption to our operations and business, misappropriation or destruction of our confidential
information and /or that of our customers, or damage to computers or systems of our customers and/or third parties, and could
result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention,
loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance
costs. In addition, any of the matters described above could adversely impact our results of operations and financial condition.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
The
Company relies on third-party providers and other suppliers for a number of services that are important to our business. An interruption
or cessation of an important service by any third-party could have a material adverse effect on our business.
The Company is dependent for the majority
of our technology, including our core operating system, on third-party providers. If these companies were to discontinue providing
services to us, we may experience significant disruption to our business. In addition, each of these third parties faces the risk
of cyber-attack, information breach or loss, or technology failure. If any of our third-party service providers experience such
difficulties, or if there is any other disruption in our relationships with them, we may be required to find alternative sources
of such services. We are dependent on these third-party providers securing their information systems, over which we have no control,
and a breach of their information systems could adversely affect our ability to process transactions, service our clients or manage
our exposure to risk and could result in the disclosure of sensitive, personal customer information, which could have a material
adverse impact on our business through damage to our reputation, loss of customer business, remedial costs, additional regulatory
scrutiny or exposure to civil litigation and possible financial liability. Assurance cannot be provided that we could negotiate
terms with alternative service sources that are as favorable or could obtain services with similar functionality as found in our
existing systems without the need to expend substantial resources, if at all, thereby resulting in a material adverse impact on
our business and results of operations.
The Company is dependent on its management
team, and the loss of its senior executive officers or other key employees could impair its relationship with its customers and
adversely affect its business and financial results.
We believe that our growth and future
success will depend in large part on the skills of our executive officers. We also depend upon the experience of the senior officers
and other key personnel and their relationship with the communities they serve. The loss of the services of one or more of these
officers or key personnel could have an adverse impact on the business of the Company because of their skills, knowledge of the
market, years of industry experience and the difficulty promptly finding qualified replacement personnel.
Risks Related to Interest Rates
and Investments
The Company’s business is subject
to interest rate risk and fluctuations in interest rates may adversely affect its earnings and capital levels.
The majority of our assets are monetary
in nature and, as a result, we are subject to significant risk from changes in interest rates. Changes in interest rates can impact
our net interest income as well as the valuation of our assets and liabilities. Also, our earnings are significantly dependent
on net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities,
and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect we will experience “gaps”
in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be
more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market
interest rates should move contrary to our position, this “gap” will work against us and our earnings may be negatively
affected.
During the calendar year ending December 31,
2020, the Federal Open Market Committee (“FOMC”) took unprecedented measures to mitigate the potential disruption
in the economy due to the COVID-19 pandemic and keep credit markets functioning properly. On March 3, 2020 and again
on March 16, 2020, the FOMC announced two rapid rate decreases in the target federal funds rate of 0.50% and 1.00%, respectively,
resulting in a target federal funds rate of 0.00% - 0.25% for the balance of the calendar year. At December 31, 2020, U.S.
Treasury yields continued to remain low across shorter maturities of the yield curve with the one-year U.S. Treasury yield at
0.09% and the five-year U.S. Treasury yield at 0.36%. In addition, the summary of economic projections released by the FOMC from
their December 2020 meeting indicated the members of the FOMC expect short-term rates to likely remain unchanged through
at least 2023.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
During the fourth quarter of 2020, yields
on longer term U.S. Treasuries began to rise, indicating the market’s expectation of a potential future recovery. The ten-year
U.S. Treasury yield increased from its all-time low of 0.52% at August 4, 2020 to 0.93% at December 31, 2020. On February 25,
2021, the ten-year U.S. Treasury yield continued its ascent closing at 1.54%, which was the highest ten-year U.S. Treasury yield
since the onset of the COVID-19 pandemic in mid-March 2020.
A decrease in the general level of interest
rates may, among other things, lead to an increase in prepayments on loans and increased competition for deposits. Conversely,
an increase in the general level of interest rates may also, among other things, reduce the demand for loans and our ability to
originate loans or increase the rate of default on existing loans. Accordingly, changes in the general level of market interest
rates may affect net yield on interest-earning assets, loan origination volume, loan portfolios, and funding costs which impact
our overall results.
Although our asset-liability management
strategy is designed to control our risk from changes in the general level of market interest rates, market interest rates will
be affected by many factors outside of our control, including inflation, recession, changes in unemployment, other economic conditions,
money supply and international disorder and instability in domestic and foreign financial markets. It is possible that significant
or unexpected changes in interest rates may take place in the future, and we cannot always accurately predict the nature or magnitude
of such changes or how such changes may affect our business.
Uncertainty relating to LIBOR calculation
process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive
of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling
banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Intercontinental Exchange, Inc.,
the company that administers LIBOR, has stated that it intends to cease the publication of one week and two month LIBOR rates
immediately after the LIBOR publication on December 31, 2021, and the remaining LIBOR rates immediately following the LIBOR
publication on June 30, 2023, and will consult on such intentions. It is not possible to predict what rate or rates may
become accepted alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based
securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR's role in determining
market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other
reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact
the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to
implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur
significant expenses in effecting the transition. Furthermore, failure to adequately manage this transition process with our customers
could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from
LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition
and results of operations.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Risks Related to Our Business Strategy
Our profitability depends significantly
on local economic conditions.
Our success depends primarily on the general
economic conditions of the geographic markets in which we operate, primarily in Virginia and North Carolina. The local economic
conditions in the areas where we operate have a significant impact on our commercial, real estate and construction loans, the
ability of our borrowers to repay their loans and the value of the collateral securing these loans and on customer demand for
loans, deposits and other bank products. A significant decline in general economic conditions, including a decline caused by the
COVID-19 pandemic, inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic calamities,
unemployment or other factors, all of which are beyond our control, could impact these local economic conditions and negatively
affect our financial results.
We face strong competition from financial
services companies and other companies that offer banking services which could negatively affect our business.
We conduct our banking operations primarily
in Virginia and North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Christiansburg, Martinsville, Danville,
Greensboro, Fayetteville, and Mooresville. Increased competition in these markets may result in reduced loans and deposits. Ultimately,
we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services
that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also
face competition from many other types of financial institutions, including without limitation, savings and loan institutions,
finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In
particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage
by enabling them to maintain numerous banking locations and ATMs, conduct extensive promotional and advertising campaigns and
offer a wider range of products, services and technologies.
Additionally, banks and other financial
institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending
limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans
and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven
products and services. Technological innovation continues to contribute to greater competition in domestic and international financial
services markets as technological advances enable more companies to provide financial services. We also face competition from
out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in our market areas.
If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios
or may be required to increase the rates we pay on deposits or lower the rates we offer on loans and results of operations and
financial condition may otherwise be adversely affected.
Our customers may increasingly decide
not to use the Bank to complete their financial transactions, which would have a material adverse impact on our financial condition
and operations.
Technology and other changes are allowing
parties to complete financial transactions through alternative methods that have historically involved banks. For example, customers
can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, or general-purpose
reloadable prepaid cards. Customers can also complete transactions such as paying bills and/or transferring funds directly without
the assistance of banks. We face increasing competition from fintech companies, as trends toward digital financial transactions
have accelerated during the COVID-19 pandemic. The process of eliminating banks as intermediaries, known as “disintermediation,”
could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.
The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on
our financial condition and results of operations.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Risks Related to Regulatory Compliance
and Legal Matters
We are subject to extensive government regulation and supervision.
Banking regulations are primarily intended
to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These
regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes
to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the
types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services
and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement
and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the
revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputational damage. In
this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with
respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual
and perceived compliance failures. See “Supervision and Regulation” included in Item 1. Business of this Report
for a more detailed description of the certain regulatory requirements applicable to the Bank.
The Basel III Final Rules require
higher levels of capital and liquid assets, which could adversely affect our net income and return on equity.
The Basel III Final Rules are complex
and create additional compliance burdens, especially for community banks. The Basel III Final Rules require bank holding
companies and their subsidiaries, such as us, to maintain significantly more capital as a result of higher required capital levels
and more demanding regulatory capital risk weightings and calculations. The stricter capital requirements were fully implemented
on January 1, 2019. See “Supervision and Regulation” included in Item 1. Business of this Report for a more
detailed description of the Basel III Final Rules applicable to us.
As a result of the Basel III Final Rules,
many community banks could be forced to limit banking operations, activities and growth of loan portfolios, in order to focus
on retention of earnings to improve capital levels. We believe that we maintain sufficient levels of Tier 1 and Common Equity
Tier 1 capital to comply with the Basel III Final Rules. However, we can offer no assurances with regard to the ultimate effect
of the Basel III Final Rules, and satisfying increased capital requirements imposed by the Basel III Final Rules may require
us to limit our banking operations, raise additional capital, retain net income or reduce dividends to improve regulatory capital
levels, which could negatively affect our business, financial condition and results of operations. In addition, we could be subject
to regulatory actions if we were unable to comply with such requirements.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Failure to maintain effective systems of internal control
over financial reporting and disclosure controls and procedures could have a material adverse effect on our results of operation
and financial condition.
Effective internal controls over financial
reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent
fraud and to operate successfully as a public company. We are required to establish and maintain an adequate internal control
structure over financial reporting. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating
results would be harmed. As part of our ongoing monitoring of internal control, we may discover material weaknesses or significant
deficiencies in our internal control that require remediation, such as the material weakness related to appraisal requirements
that we identified in 2019 and remediated during 2020. A “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our inability to maintain the operating
effectiveness of the controls described above could result in a material misstatement to our financial statements or other disclosures,
which could have an adverse effect on our business, financial condition or results of operations. In addition, any failure to
maintain effective controls or to timely effect any necessary improvement of our internal and disclosure controls could, among
other things, require significant investments of management time, funds and other resources in remediation efforts, result in
losses from fraud or error or harm to our reputation, or cause investors to lose confidence in our reported financial information,
all of which could have a material adverse effect on our results of operation and financial condition.
Our risk management framework may not
be effective in mitigating risk and loss.
We maintain an enterprise risk management
program that is designed to identify, quantify, monitor, report and control the risks we face. These risks include, but are not
limited to, interest rate, credit, liquidity, operational, reputation, legal, compliance, economic and litigation risk. Although
we assess our risk management program on an ongoing basis and make identified improvements to it, we can offer no assurances that
this approach and risk management framework (including related controls) will effectively mitigate the risks listed above or limit
losses that we may incur. If our risk management program has flaws or gaps, or if our risk management controls do not function
effectively, our results of operations, financial condition or business may be adversely affected.
Our earnings are significantly affected
by the fiscal and monetary policies of the federal government and its agencies.
The policies of the FRB affect us significantly.
The FRB regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate
of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments
we hold. Those policies determine, to a significant extent, our cost of funds for lending and investing. Changes in those policies
are beyond our control and are difficult to predict. FRB policies can also affect our borrowers, potentially increasing the risk
that they may fail to repay their loans. For example, a tightening of the money supply by the FRB could reduce the demand for
a borrower's products and services. This could adversely affect the borrower’s earnings and ability to repay a loan, which
could have a material adverse effect on our financial condition and results of operations.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Risks Related to Liquidity
We rely substantially on deposits obtained
from customers in our target markets to provide liquidity and support growth.
Our primary funding and liquidity source
to support our business strategies is a stable customer deposit base. Deposit levels may be affected by a number of factors, including
interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and
general economic conditions. If our deposit levels fall, we could lose a relatively low-cost source of funding and our interest
expense would likely increase as we obtain alternative funding to replace lost deposits. If local customer deposits are not sufficient
to fund our normal operations and growth, we will look to outside sources, such as Fed Funds lines with other financial institutions
or additional borrowings with the FHLB. We may also seek to raise funds through the issuance of shares of our common stock, or
other equity or equity-related securities, or debt securities including subordinated notes as additional sources of liquidity.
If we are unable to access funding sufficient to support our business operations and growth strategies or are only able to access
such funding on unattractive terms, we may not be able to implement our business strategies which may negatively affect our financial
performance.
Our
ability to meet contingency funding needs, in the event of a crisis that causes a disruption to our core deposit base, is dependent
on access to wholesale markets, including funds provided by the FHLB of Atlanta.
We own stock in the FHLB of Atlanta, in
order to qualify for membership in the FHLB system, which enables us to borrow on our line of credit with the FHLB that is secured
by a blanket lien on select commercial loans, residential mortgages and investment securities available-for-sale and is estimated
to be equal to 25% of our assets approximating $1.0 billion, with available borrowing capacity subject to the amount of eligible
collateral pledged at any given time. Changes or disruptions to the FHLB or the FHLB system in general may materially impact our
ability to meet short and long-term liquidity needs or meet growth plans. Additionally, we cannot be assured that the FHLB will
be able to provide funding to us when needed, nor can we be certain that the FHLB will provide funds specifically to us, should
our financial condition and/or our regulators prevent access to our line of credit. The inability to access this source of funds
could have a materially adverse effect on our ability to meet our customer’s needs. Our financial flexibility could be severely
constrained if we were unable to maintain our access to funding or if adequate financing is not available at acceptable interest
rates.
Risks Related to Owning Our Stock
The market price of our common stock
may fluctuate significantly in response to a number of factors.
Our operating results may fluctuate due
to a variety of factors, many of which are outside of our control, including the changing U.S. economic environment and changes
in the commercial and residential real estate market, any of which may cause our stock price to fluctuate. If our operating results
fall below the expectation of investors or securities analysts, the price of our common stock could decline substantially.
Our stock price can fluctuate significantly
in response to a variety of factors including, among other things:
· volatility of stock market prices and volumes in general;
· changes in market valuations of similar companies;
· changes in the conditions of credit markets;
· additions or departures of key members of management;
· fluctuations in our quarterly or annual operating results; and
· changes in analysts’ estimates of financial performance.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
1A. RISK FACTORS – (continued)
Future issuances of the Company’s
common stock could adversely affect the market price of the common stock and could be dilutive.
The Company is not restricted from issuing
additional shares of common stock, and may issue securities that are convertible into or exchangeable for, or that represent the
right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that
such issuances might occur, including in connection with acquisitions by the Company, could materially adversely affect the market
price of the shares of common stock and could be dilutive to shareholders. Because the Company’s decision to issue equity
securities in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing,
or nature of possible future stock issuances. Accordingly, the Company’s shareholders bear the risk that future stock issuances
will reduce market prices and dilute their stock holdings in the Company.
Common stock is equity and is subordinate
to the Company’s existing and future indebtedness and effectively subordinated to all the indebtedness and other non-equity
claims against the Bank.
Shares of the Company’s common stock
are equity interests and do not constitute indebtedness. As such, shares of the common stock will rank junior to all of the Company’s
indebtedness and to other non-equity claims against the Company and its assets available to satisfy claims against it, including
in the event of the Company’s liquidation. The Company is permitted to incur additional debt. Upon liquidation, lenders
and holders of the Company’s debt securities would receive distributions of the Company’s available assets prior to
holders of the Company’s common stock. Furthermore, the Company’s right to participate in a distribution of assets
upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors, including holders
of any depositors of the Bank or any debt issued by the Bank.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments.
ITEM 2. PROPERTIES
The Company’s principal executive
office is located at 1300 Kings Mountain Road in Martinsville, Virginia. There are also two other corporate administrative locations
that house its operations center and various other corporate functions. We offer our community banking services through 92 combined
depository locations in Virginia and North Carolina at December 31, 2020. Seventy offices are located in Virginia and twenty-two
are located in North Carolina. Two of these depository banking locations are held under lease contracts, one of which is held-for-sale
in connection with sale of Bank branches. The branch sale is expected to occur in the second quarter of 2021. In addition, the
Bank leases a loan production office and a commercial banking office. Management believes the terms of the various leases are
consistent with market standards and were arrived at through arm’s length bargaining. The leases are described in Note 8
of the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2020, no material
legal proceedings were pending or threatened against the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock and Dividends
The Company’s common stock trades
on NASDAQ, under the ticker symbol “CARE.” As of the close of business on March 5, 2021, we had 2,437 shareholders
of record.
Dividends
On October 14, 2016, prior to the
Reorganization, the board of directors of the Bank (the "Bank Board") determined that it was prudent not to declare
a quarterly cash dividend on the Bank's common stock beginning in the fourth quarter of 2016. Given the Bank’s history of
paying a quarterly cash dividend on its common stock, this decision was an extremely difficult one and one that the Bank Board
did not take lightly. However, the Bank Board believed this decision was necessary and appropriate as the Bank committed, and
now the Company commits additional resources to assist with regulatory compliance, preserve capital during the COVID-19 pandemic,
and makes significant investments in new technology and human resources. While recognizing the importance of dividends to its
shareholders, the Board of Directors of the Company (the “Board”) has determined that preservation of capital is of
paramount importance at this time.
The Bank Board announced on February 11,
2020 the declaration of a special one-time cash dividend of $0.14 per share. This dividend was paid on March 3, 2020 to shareholders
of record as of February 18, 2020. The Bank Board emphasized that this was a one-time dividend and there are no immediate
plans to reinstate a quarterly dividend. The amount and timing of future dividends, if any, remain subject to the discretion of
the Company’s Board and will depend upon a number of factors, including future earnings, financial condition, liquidity
and capital requirements of the Company, applicable governmental regulations and other factors deemed relevant by the Board. With
respect to the special one-time cash dividend, the Bank Board believed that it was appropriate to return some of our excess capital
to our shareholders since our recent strategy of capital retention has resulted in capital levels that are well above the well-capitalized
levels of federal banking regulatory agencies.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)
Five-Year Cumulative Total Return
The following chart compares the cumulative
total shareholder return on our common stock with the cumulative total return of the NASDAQ Composite Index and SNL Bank and Thrift
Index, which includes the stocks of banks, thrifts and bank and financial holding companies listed on all major exchanges (NYSE,
AMEX, NASDAQ) S&P Global Market Intelligence’s coverage universe.
Period Ending
(1) An
investment in Carter Bankshares, Inc. prior to November 2020 represents an investment in Carter Bank & Trust.
Repurchases of Shares of Common Stock
Neither the Company nor the Bank repurchased
any shares of its common stock during 2020.
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 6. SELECTED
FINANCIAL DATA
The tables below summarize selected consolidated
financial data as of the dates or for the periods presented and should be read in conjunction with Management’s Discussion