To Our Shareholders:
Dear Stockholder:
This will be the ninth Annual Stockholder’s Meeting for Carter Bank & Trust since the combination of 10
previously independent commercial banks into one bank, which took place on December 29, 2006.
I am pleased to report the bank continues to experience substantial growth in investments, loans, total
assets, total deposits, total capital and net income. The following chart details this growth over the last eight years:
(in 000’s)
12-31-2006
12-31-2014 $ Increase
% Increase
Investments
965,859
1,997,472
1,031,613
107%
Loans
1,408,153
2,320,621
912,468
65%
Total Assets
2,690,178
4,629,941
1,939,763
72%
Total Deposits
2,371,550
4,213,957
1,842,407
78%
Total Capital
289,292
397,894
108,602
38%
Net Income
12,215
33,460
21,245
174%
When the decision was made to consolidate the 10 banks, no one anticipated the economic turmoil the
country would face over the next several years. The depth of the downturn, resulting in high unemployment,
mas-sive federal deficits and an ever increasing regulatory burden has made it extremely difficult to operate. The length
and severity of the recession has placed a tremendous burden on the economy. All of this has occurred, in the
writer’s opinion, as a result of the lack of leadership in Washington and the failure to enforce the regulations
already passed. With Congress being dysfunctional, about the only thing coming out of Washington are new
reg-ulations and executive orders which, for the most part, are extremely costly to the bank and provide no real benefit
to our customers and stockholders. The Dodd Frank Act, the Consumer Federal Protection Bureau, the Basel III
accords and the Affordable Care Act ( better known as ObamaCare) were not even anticipated when we merged.
These four items have had a tremendous impact on the bank and are continuing to increase our costs as we spend
an enormous amount of time and effort to comply with their many requirements. I do not see any relief in the near
future and am extremely pessimistic as to the long term effects all of these regulatory changes emanating from
Washington will have on the economy. We are already seeing a substantial reduction in the number of banks. The
large banks are closing offices in rural areas at an unprecedented rate. This country has thrived because of its
di-verse economy and the ability of small businesses to grow and prosper all of which has been helped tremendously
by the community banks of this country. The problems we experienced which created this mess were the result
of big bank activities. It is ironic that Congress has passed laws and regulations which have allowed large banks
to continue to grow and prosper while making it very difficult for small banks to survive. Congress has not solved
the “too big to fail” concept but has created a “too small to survive” category.
While I have been reviewing with you the bank’s results since the merger in 2006 to date, it’s ironic that
if we were attempting to start a new bank today it would not be possible. Your bank has just completed its fortieth
year and I feel it is important to review the results we have achieved. Please consider the following data and the
impact we have had on the communities we serve, the jobs we’ve created, the loans we have made to finance
homes, new business, etc., the increase in value of your stock, the dividends we have paid and the amount of taxes
we have paid to the government. In my opinion, your bank and its activities have had a major impact on the
com-munities we serve.
Please review the following data which represents the growth of the bank from December 13, 1974 to
December 31, 2014.
12-13-74
12-31-14
Number of Offices
1
123
States
Virginia
Virginia and North Carolina
Number of Employees
8
953
Total Assets
$1.2 million
$4.630 billion
Total Loans
$0.00
$2.321 billion
Total Deposits
$0.00
$4.214 billion
Total Capital and Reserves $1.2 million
$422 million
Dividends Paid
$0.00
$10.5 million (2014 only)
Federal Income Taxes Paid $0.00
$9.825 million (2014 only)
The number of banks in this country has declined substantially from 1974 to date. While we were able to
start and operate 10 separate banks over the years it is important to understand that there have been only two new
bank charters issued since 2010. The net result is very simple. If we tried to do today what we started in 1974 it
could not be done. Think of the negative economic impact this will have on our country in the future. Congress
and the regulators have done a disservice to the country by allowing this to happen. In my opinion, the large cities
and population areas will not be hurt, but it will have a devastating effect on the rural areas, small towns and cities
which have been the bank’s market area since we opened.
As the December 31, 2014 Consolidated Balance Sheets reflect when compared to December 31, 2013, the
bank decreased its investment securities and FRB Excess Reserves $326 million. We are extremely pleased that
we are experiencing increased loan demand and have been able to increase loans $306 million from last year. In
spite of the reduction in investments, your bank continues to be extremely liquid with a very conservative
ment portfolio. We are extremely pleased that we were able to take the proceeds from the reduction of our
invest-ment portfolio and deploy them in loans at higher yields. Over the long run this will enhance the earnings of the
bank. We are continuing to adhere to our usual high quality credit standards and believe we will be able to increase
loans further.
The bank’s total deposits at December 31, 2014 reflect a $56 million decrease over December 31, 2013.
Lifetime Free Checking, Interest-Bearing Demand and Regular Passbook Savings had a net increase of $10 million
while Certificates of Deposit had a net decrease of $66 million. All of our deposits come from our customer base
and are considered core deposits. The bank does not have any brokered deposits and does not accept deposits from
non-customers outside our trade area.
Our deposit growth has slowed as a result of the low interest rate environment and the lack of economic
growth in several of our markets. This slow down in my opinion is good for the bank as the deposit growth we
had been experiencing was exceeding the bank’s capital growth. This pause will allow the bank’s capital growth
to catch up with our deposit growth. As I have discussed previously, a new regulation called Basel III, which
covers a bank’s capital requirements and classification of its assets into “risk-based assets”, became effective
Jan-uary 1, 2015. Our first call report, March 31, 2015, was submitted using the new Basel III requirements. While
Basel III will be phased in over several years, it is going to have a major effect on your bank.
The bank’s Consolidated Statements of Income for December 31, 2014 reflect the results of the above
changes in the bank’s asset structure when compared with December 31, 2013. Taxable interest income on loans
declined $368,000 as a result of lower average interest rates. Non-taxable interest income on municipal loans
in-creased $1.655 million as a result of inin-creased volume. As a result of the changes in the bank’s investment
port-folio, the four categories of investment income reflected a net decrease of $1.848 million compared to the prior
year. As a result, total interest income declined $561,000 over December 31, 2013.
The average interest rates paid on interest-bearing deposits declined this year as compared to last and
as a result total interest expense declined $7.5 million. This resulted in net interest income increasing $6.9
mil-lion or 7.30%.
The bank’s Non-Interest Income increased $1.743 million. Debit Card Income increased $307,000
based on increased volume and ORE Income increased $1.808 million while Service Charge and Other
Non-Interest Income had a net decrease of $253,000. In addition, there was an $119,000 Profit on Securities in 2013
as compared to $0 profit this year.
Our Total Non-Interest Expense increased $211,000 over the prior year. While Salaries and Employee
Benefits declined $1.540 million, ORE Expense increased $919,000 and Debit Card Expense increased
$148,000. The other four Non-Interest Expense categories had a net increase of $684,000.
As a result of the above, Income before Income Taxes increased $8.129 million or 23.1%. Income Tax
Expense increased $745,000 or 8.2%. As a result net income for the year is $33.460 million, an increase of
$7.384 million or 28.3% over the prior year. This results in Net Income per share of $1.27 versus $0.99 for the
prior year.
Your bank is well capitalized with a balance sheet that is extremely conservative. Net loan losses as of
December 31, 2014 were $250,000 compared to $679,000 for December 31, 2013. Our loan losses continue to
be extremely low considering the volume of loans we have outstanding.
Mr. William B. Sumner, an original organizing director for Blue Ridge Savings and Loan Association
in March of 1978, will not stand for re-election to the Board for health reasons. Bill has been an important and
faithful director for 37 years. We will miss his wise counsel and dedication to the growth and prosperity of the
bank. He will be sorely missed.
Your continued support is greatly appreciated and I assure you on behalf of all employees, officers and
directors that we are working diligently toward making the bank even more successful in the future than it has
been in the past. I thank you for your continued support and invite you to visit any of our convenient offices.
Very truly yours,
Worth Harris Carter, Jr.
Chairman of the Board & President
General. Carter Bank & Trust (“Carter Bank & Trust” or sometimes the “Bank”) is a banking institution, incorporated under Virginia law. The Bank is a non-member state bank regulated by the FDIC and State Bureau of Financial Institutions. Effective December 29, 2006, ten banking institutions, each of which had been in business for a number of years, were merged into Carter Bank & Trust concurrently (the “Bank Merger”). The ten merged banks (each a “Merged Bank” and collectively, the “Merged Banks”), and their respective main office locations, were:
Blue Ridge Bank, N.A. - Floyd, Virginia Central National Bank - Lynchburg, Virginia Community National Bank - South Boston, Virginia First National Bank - Rocky Mount, Virginia First National Exchange Bank - Roanoke, Virginia Mountain National Bank - Galax, Virginia
Patrick Henry National Bank - Martinsville, Virginia Patriot Bank, N.A. - Fredericksburg, Virginia Peoples National Bank - Danville, Virginia Shenandoah National Bank - Staunton, Virginia
The main office of Carter Bank & Trust is in Martinsville, Virginia. All officers and employees of the Merged Banks have continued as officers and employees of Carter Bank & Trust. Worth Harris Carter, Jr., who served as Chairman of the Board and President of each of the Merged Banks, serves as Chairman of the Board and President of Carter Bank & Trust.
Carter Bank & Trust, with total assets at December 31, 2014 in excess of $4.6 billion, is one of the largest state chartered commercial banks head-quartered in Virginia, operating 123 branches in Virginia and North Carolina.
As a result of the Bank Merger, Carter Bank & Trust owns 100% of the capital stock of The Mortgage Company of Virginia, Inc. (“MCOV”). MCOV, in turn, owns 100% of the capital stock of Bank Services of Virginia, Inc. (“BSVA”) and 100% of the capital stock of Bank Services Insurance, Inc. and 50% of the capital stock of Coresoft, Inc. The historical financial information on Carter Bank & Trust and the combined financial statement of condition on Carter Bank & Trust is presented on a consolidated basis and includes MCOV and its subsidiaries as of and for the periods then ended.
In addition to the above merger of the ten banks, the merger of Bank Building Corporation into Carter Bank & Trust was consummated on April 30, 2008. The merger resulted in the Bank acquiring 46 branch offices, which had previously been owned by Bank Building Corporation and leased to the Bank. In addition, four other income producing commercial investment properties, and various lots and land owned by Bank Builiding Corporation were also acquired by the Bank.
Market Area. Carter Bank & Trust conducts a general commercial banking business in its two-state service area of Virginia and North Carolina, and focuses on serving the banking needs of small-to-medium sized businesses, professional concerns and individuals.
Goals and Strategy. The Bank’s goal is to be a leading financial institution in its market area by opening new offices and providing a full array of banking services. Management believes that the on-going consolidation of the banking industry has created an opportunity for community-based lenders like the Bank that emphasize retail lending and superior customer service. The Bank’s business strategy is to target individuals, businesses and professionals in its service area for loans, deposits, and other financial services and to explore selected opportunities to establish branches in areas that demographically compliment the Bank’s existing customer base.
Deposits and Loan Products. 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 certificates of deposit. The transaction accounts and time certificates are tailored to each of the Bank’s principal markets at competitive rates. All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law. The Dodd-Frank Act, signed into law by President Obama 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 secured and unsecured loans for financing automobiles, home improvements, education and personal investments. The Bank also makes real estate construction and acquisition loans and originates and holds fixed and variable rate mortgage loans.
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 Board of Directors 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, travelers checks, direct deposit of payroll and social security checks, and automated drafts for var-ious accounts. The Bank has no current plans to exercise trust powers.
The Mortgage Company of Virginia, Inc. As a result of the Bank Merger, the assets of MCOV have been transferred to Carter Bank & Trust, the business operations of MCOV have been entirely absorbed by Carter Bank & Trust and MCOV has no employees and no separate business of its own.
Bank Services of Virginia, Inc. As a result of the Bank Merger, all the business operations of BSVA, other than its courier services, have been ab-sorbed by Carter Bank & Trust. The only employees of BSVA are those persons working in the courier operations.
Bank Services Insurance, Inc. Bank Services Insurance, Inc. is a fully operational, licensed general insurance agency which provides insurance agency services to bank customers and other third-parties.
Description of Business
Description of Business
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Carter Bank & Trust commenced business on December 29, 2006, when each of the ten Merged Banks were merged into Carter Bank & Trust.Except for the historical information contained in this report, the matters set forth herein include Forward-Looking Statements within the mean-ing of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These Forward-Lookmean-ing Statements include, among other things, statements of goals, plans, intentions and expectations, regarding or based upon desired business strategies, general economic conditions, interest rates, developments in local and national markets, and other matters, which, by their nature, are subject to significant un-certainties. Because of these uncertainties and the assumptions upon which this report is based, actual future developments with respect to the business of the Bank may differ materially from those contemplated by such statements.
Critical Accounting Policies.The accounting and reporting policies of the Bank conform to Generally Accepted Accounting Principles (GAAP) in the United States of America and to general practices within the banking industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We believe the most significant of these estimates involves the allowance for loan losses because of its potential impact on our overall performance. We have described our policies in this area below. A summary of the Bank's significant accounting policies can be found in the Notes to the Consolidated Financial Statements.
Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the acquired net assets. Accounting standards require an assessment of the goodwill value if qualitative factors indicate an impairment of the value. The Bank has elected to forego this step and has moved directly to the two-step testing process. Testing is conducted in two steps: identifying if there is an impairment and if necessary, identifying the amount of the impairment. If the fair value of the reporting unit is greater than its book value, no goodwill impairment exists. However, if the book value of the reporting unit is greater than its determined fair value, goodwill impairment may exist and further testing is required to determine the amount, if any, of the actual impairment loss. The results of the analysis performed during the fourth quarter of 2014 determined that no impairment was evident.
In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. The Bank maintains an allowance for loan losses to absorb probable losses in the loan portfolio based on a quarterly analysis of the portfolio. This analysis determines an appropriate level of the allowance for loan losses by considering factors affecting loan losses, including specific losses, levels and trends in impaired and non-performing loans, historical loan loss experience, current economic conditions, volume, growth and composition of the portfolio, and other relevant factors. The Bank records a provision for loan losses to maintain the allowance at an ad-equate level. The provision expense could increase or decrease each quarter based upon the results of management's analysis.
The amount of the allowance represents management's estimate of expected losses from existing loans based upon specific allocations for individual lending relationships and historical loss experience. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation requires management to make estimates of the amounts and timing of future cash flows on impaired loans, which consists primarily of nonac-crual and restructured loans. Actual losses for these loans can vary significantly from these estimates.
Accounting Treatment of the Mergers. Under GAAP, at the time of the merger, the Bank Merger was required to be treated as a “purchase” transaction for accounting purposes. Thus, for accounting purposes, the Bank Merger was required to be treated as if one of the Merged Banks was the “acquiring” bank that acquired the other Merged Banks. For this purpose, Peoples National Bank, which was the largest of the Merged Banks in terms of shareholders’ equity, was designated as the “acquiring” bank in the Bank Merger for accounting purposes. As a result, under GAAP, purchase accounting adjustments were required to be made with respect to each of the Merged Banks other than Peoples National Bank.
The merger of Bank Building Corporation into Carter Bank & Trust was accounted for in the manner required by GAAP, which required that all business combinations be accounted for by the “purchase” method of accounting. Under the purchase method of accounting, the assets and liabilities of Bank Building were recorded at their fair values and the excess of the purchase price over the fair value of net assets was al-located to goodwill. Financial statements of Carter Bank & Trust issued after the consummation of the merger reflected such values and were not restated retroactively to reflect the historical position or results of operations of Bank Building Corporation.
Financial Statements Presentation. It is important that readers of this Management’s Discussion and Analysis understand that the financial information presented herein and in the financial statements is not simply an arithmetic combination of accounts of the respective Merged Banks as of and for the periods indicated.
The prior financial statements of each of the Merged Banks did not consolidate financial statements of the Mortgage Company of Virginia, Inc. (MCOV) and its subsidiaries, Bank Services of Virginia, Inc. (BSVA) and Bank Services Insurance, Inc., because each of the respective Merged Banks owned only a 10% interest in MCOV.
The Bank holds a variable interest in a joint venture. Coresoft, Inc. is a software company formed to develop and market a core system to be utilized by Carter Bank & Trust. The amortized cost of the software at December 31, 2014 was $5,473,000 and $6,673,000 at December 31, 2013 and is carried as a loan on Carter Bank & Trust’s balance sheet. Carter Bank & Trust and Murthy Veeraghanta (head of Vsoft Group), individually, each own 50% in the Corporation. At December 31, 2014 the Bank’s investment in the venture was $1,000 included in total Other Assets on the balance sheet. Coresoft, Inc. financial statements have not been consolidated as of year end 2014 due to the fact that the other party has primary control and risk of loss.
Summary of Operations.Net income for 2014 equaled $33,460,000 or $1.27 per share compared to net income for 2013 of $26,076,000 or $0.99 per share. Net income for 2012 equaled $30,347,000 or $1.16 per share.
Net Interest Income. Net interest income was $101.4 million for 2014, $94.5 million for 2013 and $100.3 million for 2012.
Net interest income increased $6.9 million, or 7.3%. Interest and fees on loans increased $1.3 million. Taxable interest and fee income on loans decreased $368,000 and non-taxable income increased $1.65 million, or 26.5%. Interest on U. S Government Securities increased while all other categories decreased.
As a result, our total interest income decreased $561,000 compared to the prior year. Our deposit base continued to
ex-hibit considerable strength and all increases came from our customer base and are considered core deposits. Our total
interest expense declined $7.5 million when compared with the prior year. Net interest income increased $6.9 million The
following table shows the changes in interest income and interest expense resulting from changes in volume and
changes in rates for each category of interest-earning assets and interest-bearing liabilities for 2014/2013 and
2013/2012:
2014
2013
2012
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Asset/Liability Balance Expense Cost Balance Expense Cost Balance Expense Cost
Real Estate Loans... $1,588,848 $82,502 5.19% $1,455,427 $82,220 5.65% $1,487,641 $92,724 6.23% Consumer Loans... 36,435 3,702 10.16% 38,727 3,818 9.86% 26,267 3,085 11.74% Commercial Loans ... 525,415 16,647 3.17% 404,353 15,526 3.84% 332,617 18,771 5.64% Total Loans ... 2,150,698 102,851 4.78% 1,898,507 101,564 5.35% 1,846,525 114,580 6.21% Investment Securities... 1,878,585 43,181 2.30% 1,861,251 44,562 2.39% 1,310,251 40,568 3.10% FRB Excess Reserves ... 180,197 695 0.39% 470,275 1,162 0.25% 659,369 1,674 0.25% Total Earning Assets... 4,209,480 146,727 3.49% 4,230,033 147,288 3.48% 3,816,145 156,822 4.11% Interest-Bearing Transaction
Accounts ... 219,441 1,162 0.53% 206,875 1,403 0.68% 195,828 1,398 0.71% Savings/MMA Accounts ... 982,802 9,018 0.92% 927,282 9,011 0.97% 717,431 9,587 1.34% Certificates of Deposit
$250,000 and Over ... 491,311 6,633 1.35% 444,751 6,805 1.53% 409,705 7,211 1.76% Other Certificates of Deposit... 2,095,383 28,517 1.36% 2,207,061 35,569 1.61% 1,434,751 38,303 1.88% Total Deposits ... 3,788,937 45,330 1.20% 3,785,969 52,788 1.39% 3,361,828 56,499 1.68% Total Interest-Bearing Liabilities.... $3,788,937 $45,330 1.20% $3,785,969 $52,788 1.39% $3,361,828 $56,499 1.68%
Net Interest Income ... $101,397 $94,500 $100,323
Net Yield on Earning Assets ... 2.41% 2.23% 2.63%
2014 vs 2013 2013 vs 2012
(Dollars in thousands) Increase Change Due To Increase Change Due To
Asset/Liability (Decrease) Rate Volume (Decrease) Rate Volume
Real Estate Loans ... $282 $(7,308) $7,538 $(10,504) $(8,442) $(2,007) Consumer Loans ... (116) 109 (226) 733 (728) 1,463 Commercial Loans... 1,121 (3,520) 4,649 (3,245) (7,278) 4,046 Total Loans... 1,287 (10,719) 11,961 (13,016) (16,448) 3,502 Investment Securities ... (1,381) (1,691) 414 3,994 (13,215) 17,081 FRB Excess Reserves ... (467) 252 (725) (512) — (473)
Total Earrning Assets... (561) (12,158) 11,650 (9,534) (29,663) 20,110
Interest-Bearing Transactions Accounts (241) (329) 85 5 (62) 79
Savings Accounts/MMA Accounts... 7 (491) 539 (576) (3,431) 2,812
Certificats of Deposit
Certificates of Deposit $250,000 and Over (172) (884) 712 (406) (1,023) 617 Other Certificates of Deposit ... (7,052) (5,238) (1,798) (2,734) (5,959) 3,162 Total Deposits... (7,458) (6,942) (462) (3,711) (10,475) 6,670 Total Interest-Bearing Liabilities ... $(7,458) $(6,942) $(462) $(3,711) $(10,475) $6,670
Change in Net Interest Income... $6,897 $(5,823)
The following table details the average balances and cost and yield data for the earning assets and interest-bearing
liabilities:
Loans.
Total net loans for Carter Bank & Trust equaled $2.3 billion at December 31, 2014 and $2.0 billion at December 31,
2013. Loans outstanding for the five year period ending December 31 are summarized as follows:
(Dollars in thousands)
2014
2013
2012
2011
2010
Secured by Real Estate
Construction Loans ... $ 356,123 $ 194,560 $ 281,672 $ 266,300 $ 240,764
Secured by 1-4 Residential Family Property ...
155,294
160,384
166,493
165,812
175,758
Secured by Farmland (including farm residential and
other improvements) ...
58,641
2,425
2,037
13,958
28,365
Secured by Multi-Family...
125,302
122,084
122,759
140,582
77,903
Secured by NonFarm NonResidential Property ...
987,579
984,876
886,278
887,007
860,020
Loans to individuals for Household, Family and Other
Personal Expenditures ...
57,535
27,707
27,009
28,955
40,654
Commercial, Industrial, and Agricultural ...
248,187
252,159
212,822
192,023
115,110
Obligations (other than securities) of States and Political
Subdivisions ...
331,752
270,389
216,229
250,388
281,597
All Other...
318
272
287
360
345
Gross Loans ... 2,320,731 2,014,856 1,915,586 1,945,385 1,820,516
Less: Unearned Income ...
(110)
(190)
(592)
(1,601)
(1,873)
Allowance for Loan Losses ...
(24,142)
(21,392)
(19,371)
(17,176)
(15,443)
Total Loans, Net ... $ 2,296,479 $1,993,274 $1,895,623 $1,926,608 $1,803,200
Our loan portfolio continues to remain concentrated in loans secured by real estate and remains flexible in the
matu-rity of the loan portfolio. At year end 2014, 52% of loans have adjustable interest rates. In addition, the combination of
adjustable-rate and fixed rate loans that adjust or mature within one year equaled 39% of the total portfolio at year end
2014.
Allowance and Provision for Loan Losses.
The Allowance for Loan Losses represents management's estimation of the
amount necessary to absorb future losses in the loan portfolio. On the Consolidated Balance Sheets, the Allowance for
Loan Losses are deducted from Total Loans so that the net amount shown represents the estimated realizable total loans.
The Provision for Loan Losses is the amount charged to expense to maintain the Allowance at an adequate level.
In the view of management, the Allowance for Loan Losses is adequate to meet the loss contingency based on
experi-ence factors and a review of the loan portfolio.
The following table presents, by portfolio segment, the changes in the allowance for loan losses and the allocation of
the allowance for loan losses for the year ended December 31, 2014:
Obligations
Real
Consumer
Commercial
of States and
(Dollars in thousands
)
Estate
Loans
& Industrial
Political Sub. Total
Allowance for Loan Losses:
Balance: Beginning of Year...$13,797
$4,412
$3,183
$—
$21,392
Provision Charged to Expense... 1,500
900
600
—
3,000
Losses Charged Off ...
(89)
(82)
(166)
—
(337)
Recoveries ...
36
—
51
—
87
There have been no losses in Obligations of States and Political Subdivisons since the Bank began making loans in 1974.
The Board elected not to allocate a provision for those loans for that reason.
Based on management’s analysis of the loan portfolio, including nonaccrual and impaired loans, the Provision for Loan
Losses for Carter Bank & Trust for 2014, 2013, and 2012 equaled $3,000,000, $2,700,000,and $2,400,000, respectively.
December 31
(Dollars in thousands)
2014
2013
2012
2011
2010
Balance Beginning of Year ... $21,392 $19,371 $17,176 $15,443 $14,296
Provision for Loan Losses ...
3,000
2,700
2,400
1,800
1,500
Net Loan Losses
Real Estate Loans ...
53
629
113
(17)
41
Consumer Loans ...
115
52
115
124
230
Commercial Loans ...
82
(2)
(23)
(40)
82
Total Net Loan Losses ...
250
679
205
67
353
Balance ... $24,142 $21,392 $19,371 $17,176 $15,443
Net Loan Losses to Average Loans ....
0.01%
0.04%
0.01%
0.00%
0.02%
Allowance for Loan Losses to
Year-End Loans...
1.04%
1.06%
1.01%
0.88%
0.85%
Non-accrual loans are those loans contractually past due 90 days or more on which no interest is being accrued.
Other real estate owned consists of real estate acquired through foreclosure. These properties are reviewed quarterly
and reduced to an estimated realizable value at that time.
Information concerning nonaccrual loans and other real estate owned is presented in the following table:
The following table presents the volume of loans contractually past due for 90 days or more on which
in-terest continues to be accrued. These loans are believed to be well collateralized and present little or no
likelihood of loss of principal
D
ecember 31
(Dollars in thousands)
2014
2013
2012
2011
2010
Real Estate Loans ...
$1,270
$6,072
$7,045 $6,987 $3,302
Consumer Loans ...
55
—
1
15
9
Commercial Loans...
15
—
—
108
6
Total Loans 90 Days or More Past Due
$1,340
$6,072
$7,046 $7,110 $3,317
December 31
(Dollars in thousands)2014
2013
2012
2011
2010
Non-accrual Loans
Real Estate ... $24,692
$15,212
$9,377
$ 9,457 $13,091
Consumer ...
164
58
19
15
48
Commercial ...
40
90
96
95
—
Total Non-accrual Loans ...
24,896
15,360
9,492
9,567
13,139
Real Estate Owned Other Than
Bank Premises ...
43,829
44,934
39,882
14,080
14,859
Total Non-performing Assets... $68,725
$60,294 $49,374
$23,647 $27,998
Allowance for Loan Losses to
Non-performing Assets...
35%
35%
39%
73%
55%
TDR’s exist whenever the Company makes a concession to a customer based on the customer’s financial
distress that would not have otherwise been made in the normal course of business.
Non-Interest Income and Expense.
Non-interest Income equaled $14.6 million for 2014, $12.9 million for 2013 and $12.8
million for 2012. The principal component of non-interest income is service charges, commissions and fees, which equaled
$4.7 million for 2014 and 2013 and $5.0 million for 2012. The largest increase was in ORE Income, which increased $1.8
million due to the stabilization of operations at one hotel held in the Bank’s ORE portfolio. Non-interest expense equaled
$69.7 million for 2014, $69.5 million for 2013 and $69.9 million for 2012. Salaries and employee benefits, which is the largest
of these expenses, equaled $36.6 million for 2014, $38.2 million for 2013 and $40 million for 2012.
Income taxes on 2014 earnings amounted to $9,825,000, resulting in an effective tax rate of 22.7%, compared to 25.83%
in 2013 and 23.04% in 2012. The major difference between the statutory rate and the effective rate results from income that
is not taxable for federal income tax purposes. The primary non-taxable income is that of muncipal securities and loans.
Investments.
The total investment portfolio for Carter Bank & Trust was $2.0 billion for 2014, $2.3 billion for 2013, and $2.2
billion for 2012. In 2013, the Bank increased its Investment Portfolio by increasing its investment in U.S. Agencies $56.8
mil-lion, States and Political Subdivisions $39.3 million and Investment Grade Corporate Securities $63.4 million. In 2012, the
Bank increased its investment portfolio by increasing its investment in Investment Grade Corporate Securities $69.5 million
and U.S. Agencies $507 million. The change in allocation reduced the Fed Funds Sold position and placed the funds in higher
yielding assets which has had a positive influence on the Bank’s net interest margin and earnings and will continue to do so
in the future.
The carrying value of securities pledged to secure public deposits was $445,313,000, $435,715,000, and $414,137,000
as of December 31, 2014, 2013, and 2012 respectively.
The table below presents the Bank’s investments excluding excess reserves with the Federal Reserve Bank of $169
million, $403 million, and $414 million at December 31, 2014, 2013, and 2012, respectively.
Gross Gross Gross Weighted
(Dollars in thousands) Amortized Unrealized Unrealized Fair Average
December 31, 2014 Cost Gains Losses Value Yield
U. S. Agency Securities... $ 952,698 $ 132 $(14,170) $ 938,660 1.57%
Mortgage-Backed Securities... 368 6 - 374 2.36%
States and Political Subdivisions ... 358,102 17,167 (912) 374,357 3.75% Corporate Notes ... 517,096 10,641 (1,442) 526,295 3.15% Total... $1,828,264 $27,946 $(16,524) $1,839,686 2.36% December 31, 2013
U. S. Agency Securities... $ 967,622 $ 488 $(45,444) $ 922,666 1.57%
Mortgage-Backed Securities... 419 8 - 427 2.58%
States and Political Subdivisions ... 382,347 14,696 (4,497) 392,546 3.67% Corporate Notes ... 570,032 17,471 (4,098) 583,405 2.95% Total... $1,920,420 $32,663 $(54,039) $1,899,044 2.32% December 31, 2012
U. S. Agency Securities... $ 910,807 $ 3,695 $(2,718) $ 911,784 1.49%
Mortgage-Backed Securities... 549 14 - 563 2.38%
States and Political Subdivisions ... 343,006 27,661 (158) 370,509 3.88% Corporate Notes ... 506,612 25,072 (355) 531,329 4.09% Total... $1,760,974 $56,442 $(3,231) $1,814,185 2.71%
Deposits.
Total deposits for Carter Bank & Trust for 2014 equaled $4.2 billion, $4.3 billion for 2013, and $4.1 billion for 2012.
In 2014, LIFETIME FREE CHECKING, Regular Passbook Savings and Certificates of Deposit $100,000 or more increased,
while all other categories decreased. In 2013, LIFETIME FREE CHECKING decreased $23 million while all other categories
increased $232 million. The Bank’s customer and deposit growth continues to exhibit considerable strength and all deposit
increases have come from our customer base and are considered core deposits. The Bank does not maintain any brokered
deposits and does not accept deposits from non-customers outside the trade area.
The following tables provide the average balance and cost rate of interest-bearing deposits in addition to maturities of
cer-tificates of deposit of $250,000 and greater for the periods indicated. See Note 15 in the Notes to Consolidated Financial
Statements for additional information on deposits.
Contractual Obligations
. The Bank leases offices from non-related parties under various terms. Rental expenses for
these leases was $137,000 in 2014, $140,000 in 2013 and $157,000 in 2012.
Future minimum rental payments under these leases are as follows: (Dollars in thousands)
Payments due by period
Less Than More than
Total 1 Year 1-3 Years 3-5 Years 5 years
Operating Leases ... $892 $137 $273 $217 $265
Off-Balance Sheet Arrangements.
The Bank enters into certain off-balance sheet arrangements in the normal course of
business to meet the financing needs of customers. These off-balance sheet arrangements include commitments to extend
credit and standby letters of credit. Commitments to extend credit, which amounted to approximately $88,207,000,
$129,111,000, and $149,047,000 at December 31, 2014, 2013 and 2012 respectively, represent agreements to lend to
cus-tomers with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire
with-out being funded, the total commitment amounts do not necessarily represent future liquidity requirements. Standby letters
of credit are conditional commitments issued by the Bank guaranteeing the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing arrangements. The Bank had outstanding letters of
credit in the amount of $25,806,000, $25,446,000, and $9,561,000 at December 31, 2014, 2013,and 2012, respectively.
Capital.
The federal regulatory agencies use risk-based capital ratios to analyze the adequacy of a bank's capital. These
ratios weigh bank assets from 0% to 100% depending upon the risks inherent in each type of asset. The Bank meets all
re-quirements for a well-capitalized bank as defined by the regulatory agencies. The following table presents the key risk-based
capital ratios beginning with 2010 and ending with 2014. Additional details regarding capital may be found in the Notes to
Consolidated Financial Statements.
Maturities of CDs $250,000 and Greater at
(Dollars in thousands) December 31, 2014
Amount Percent
Three Months or Less ... $ 104,122 20.97% Over Three Months Through Twelve Months 217,911 43.90% Over Twelve Months Through Three Years . 58,814 11.85% Over Three Years ... 115,589 23.28% Total ... $496,436 100.00%
For the Years Ended December 31,
Average Balance Average Cost Rate
(Dollars in thousands) 2014 2013 2012 2014 2013 2012
Noninterest-Bearing Demand Deposits ... $ 458,266 $ 413,456 $ 457,199 — — —
Interest-Bearing Transaction Accounts ... 219,441 206,875 195,828 0.53% 0.68% 0.71% Savings/MMA Accounts ... 982,802 927,282 717,431 0.92% 0.97% 1.34% Certificates of Deposit
$250,000 and Over... 491,311 444,751 409,705 1.35% 1.53% 1.76% Other Certificates of Deposits ... 2,095,383 2,207,061 2,038,864 1.36% 1.61% 1.88% Total Interest-Bearing Deposits... 3,788,937 3,785,969 3,361,828 1.20% 1.39% 1.68% Total Deposits ... $4,247,203 $4,199,425 $3,819,027 1.07% 1.27% 1.51%
2014 2013 2012 2011 2010
Tier 1 Ratio... 11.26% 11.20% 11.14% 10.94% 10.95% Total Risk-Based Capital Ratio…… 12.07% 11.98% 11.89% 11.65% 11.65% Leverage Ratio ... 7.32% 6.62% 6.59% 7.01% 6.74%
(Dollars in thousands) Within One to Over
Use of Funds One Year Five Years Five Years Total
Investment Securities... $ 140,764 $ 1,266,362 $ 421,138 $ 1,828,264 FRB Excess Reserves ... 169,208 — — 169,208 Loans ... 921,736 788,841 610,154 2,320,731 Total Earning Assets ... $ 1,231,708 $ 2,055,203 $ 1,031,292 $ 4,318,203 Deposits
Interest-Bearing Demand... $ 455,417 $ — $ — $ 455,417 Savings ... 724,593 — — 724,593 Time Deposits
Certificates of Deposit $250,000 and Over 322,033 174,403 — 496,436 Other... 961,504 1,117,741 — 2,079,245 Total Interest-Bearing Deposits ... 2,463,547 1,292,144 — 3,755,691 Total Interest-Bearing Liabilities ... $ 2,463,547 $ 1,292,144 $ — $ 3,755,691 Maturity/Rate Sensitivity Gap Per Period.... $ (1,231,839) $ 763,059 $ 1,031,292 $ 562,512 Cumulative Maturity/Rate Sensitivity Gap... $ (1,231,839) $ (468,780) $ 562,512
Liquidity.
Liquidity is our ability to fund both loans and investments in the normal course of business and to provide
adequate protection for unexpected deposit withdrawals or other demands for funds without incurring a significant
negative impact on profitability. Our primary source of day-to-day liquidity lies in the combination of cash, deposit
bal-ances, checks in process of collection, deposit growth and federal funds sold. Federal funds are excess funds that
are sold to other banks, generally on a one-day basis. The Federal Reserve Bank now pays the target fed funds rate
on the balance of the excess reserves. Normal funds from the repayment of loans and investments augment these
funds.
Our secondary source of liquidity lies in our investments. While our investments are categorized as
held-to-maturity, they consist of short-term United States Government Agencies, that are readily marketable, State and
Mu-nicipal Securities, and Investment Grade Corporate Securities. As reflected in the following Interest Sensitivity
Analysis, over half of our investment securities mature in five years or less.
Effects of Inflation.
The effect of changing prices is typically different for financial institutions than for other entities
because a financial institution’s assets and liabilities are monetary in nature. Interest rates are significantly impacted
by inflation, but neither the timing nor the magnitude of the changes is directly related to price-level indices. The
most significant effect of inflation is on other expenses that tend to rise during periods of greater inflation. The
con-solidated financial statements reflect the impact of inflation on interest rates, loan demand and deposits.
Return on Assets and Equity.
The following table sets forth the return on average assets, return on average
share-holders’ equity and average equity to assets for the three years ended December 31:
2014 2013 2012
Return on Average Assets... 0.73% 0.57% 0.73% Return on Average Equity ... 8.80% 7.09% 8.74% Average Equity to Assets ... 8.25% 7.98% 8.33% Dividend Payout ... 31.50% 40.40% 34.48%
Interest Sensitivity Analysis.
The frequency with which interest rates on earning assets and interest bearing
lia-bilities change has a significant impact on net interest income. We use a variety of traditional and on-balance-sheet
tools to manage our interest rate risk. Gap analysis as well as simulation modeling forecasting future balance sheet
and income statement behavior are two ways interest rate risk is managed. The following table presents the
antici-pated changes based on the contractual maturity of each instrument. Expected maturities may differ from contractual
maturities as both borrowers and depositors may have the right to call or prepay obligations with or without call or
prepayment penalties.
The following table shows information for Carter Bank & Trust as of December 31, 2014:
Selected Financial Information.
The consolidated selected financial data is set forth below for the five years
end-ing with 2014.
(Dollars in thousands, except per share data At or for the Years Ended December 31,
Five-Year Selected Financial Data 2014 2013 2012 2011 2010
Balance sheet Summary (at end of period)
Total Assets ... $4,629,941 $4,661,811 $4,442,296 $3,970,407 $3,706,069
Earning Assets... 4,293,951 4,317,028 4,070,124 3,628,781 3,363,791
Loans (net of unearned income) 2,320,621 2,014,666 1,914,994 1,943,784 1,818,643
Allowance for Loan Losses ... 24,142 21,392 19,371 17,176 15,443
Goodwill and Other Intangibles 62,308 69,755 77,203 84,681 92,160
Noninterest-bearing Deposits . 458,266 434,173 457,199 501,706 355,805 Interest-bearing Deposits... 3,755,691 3,835,480 3,603,796 3,108,283 2,999,332 Total Deposits ... 4,213,957 4,269,653 4,060,995 3,609,989 3,355,137 Other Liabilities ... 18,090 17,221 21,937 20,859 29,068 Total Liabilities ... 4,232,047 4,286,874 4,082,932 3,630,886 3,386,141 Undivided Profits... 229,458 206,501 190,928 171,085 151,492
Total Shareholders' Equity... 397,894 374,937 359,364 339,521 319,928
Summary of Earnings Interest and Fees on Loans:
Taxable ... $94,956 $95,324 $107,965 $103,953 $102,150
Non-Taxable ... 7,895 6,240 6,615 8,668 11,430
Income Tax Expense ... 9,825 9,080 10,775 8,185 4,275
Net Income... 33,460 26,076 30,347 30,095 22,783
Net Income Per Share
Basic and Diluted ... $1.27 $0.99 $1.16 $1.15 $0.87
Selected Ratios
Return on average assets... 0.73% 0.57% 0.73% 0.82% 0.66%
Return on average equity... 8.80% 7.09% 8.74% 9.08% 7.20%
Average equity to average assets 8.25% 7.98% 8.33% 9.08% 9.22%
Risk based capital... 12.07% 11.98% 11.89% 11.65% 11.65%
Consolidated Balance Sheets
(Dollars in Thousands Except Per Share Data)
December 31
2014
2013
See Notes to Consolidated Financial Statements.
ASSETS:
Investment Securities (Fair Value $1,839,686 in 2014
and $1,899,044 in 2013)...
$1,828,264
$1,920,420
FRB Excess Reserves...
169,208
403,334
Loans (Net of Unearned Income) ...
2,320,621
2,014,666
Less: Allowance for Loan Losses...
(24,142)
(21,392)
Net Loans...
2,296,479
1,993,274
Cash and Due from Banks ...
73,183
75,293
Bank Premises and Equipment - Net ...
101,705
103,979
Real Estate Owned Other Than Bank Premises - Net ...
43,829
44,934
C B & T Real Estate Holdings, Inc...
13,793
13,863
Other Assets...
41,172
36,959
Core Deposit Intangible...
2,447
9,861
Goodwill and Other Intangibles ...
59,861
59,894
TOTAL ASSETS ...
$4,629,941
$4,661,811
LIABILITIES:
Deposits:
LIFETIME FREE CHECKING...
$458,266
$ 434,173
Interest-Bearing Demand ...
455,417
515,624
Regular Passbook Savings ...
724,593
678,250
Time Deposits:
Certificates of Deposit $250,000 and Over ...
496,436
440,087
Other ...
2,079,245
2,201,519
TOTAL DEPOSITS ...
4,213,957
4,269,653
Other Liabilities...
18,090
17,221
TOTAL LIABILITIES ...
$4,232,047
$4,286,874
SHAREHOLDERS’ EQUITY:
Common Stock, Par Value Per Share $1.00; 100,000,000 shares authorized:
26,257,761 shares issued and outstanding in 2014 and 2013...
$ 26,258
$ 26,258
Surplus ...
142,178
142,178
Undivided Profits ...
229,458
206,501
TOTAL SHAREHOLDERS’ EQUITY ...
397,894
374,937
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY...
$4,629,941
$4,661,811
Consolidated Balance Sheets
Years Ended December 31
2014
2013
2012
Consolidated Statements of Income
(Dollars in Thousands Except Per Share Data)
INTEREST INCOME:
Interest and Dividends on Securities:...
U.S. Agency Securities and Other ... $ 15,216
$ 14,322
$ 8,975
States and Political Subdivisions ...
12,814
13,385
12,711
Other Securities ...
15,151
16,855
18,882
Interest on FRB Excess Reserves ...
695
1,162
1,674
Interest and Fees on Loans:
Taxable ...
94,956
95,324
107,965
Non-Taxable ...
7,895
6,240
6,615
TOTAL INTEREST INCOME ... 146,727
147,288
156,822
INTEREST EXPENSE:
Interest on Time Deposits $250,000 and Over...
6,633
6,805
7,211
Interest on Other Deposits ...
38,697
45,983
49,288
TOTAL INTEREST EXPENSE...
45,330
52,788
56,499
NET INTEREST INCOME... 101,397
94,500
100,323
Provision for Loan Losses...
3,000
2,700
2,400
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ...
98,397
91,800
97,923
NON-INTEREST INCOME:
Service Charges, Commission and Fees...
4,682
4,733
4,955
Gain on Securities...
—
119
—
Debit Card Income ...
4,144
3,837
3,237
ORE Income...
3,358
1,550
1,611
Other Non-Interest Income...
2,420
2,622
2,964
TOTAL NON-INTEREST INCOME...
14,604
12,861
12,767
NON-INTEREST EXPENSE:
Salaries and Employee Benefits ...
36,650
38,190
39,647
Occupancy Expense ...
8,070
8,132
7,939
FDIC Assessment ...
3,417
3,453
2,808
Amortization Expense ...
7,448
7,449
7,478
Debit Card Expense ...
2,082
1,934
1,441
ORE Expense...
3,142
2,223
2,192
Other Non-Interest Expense...
8,907
8,124
8,063
TOTAL NON-INTEREST EXPENSE ...
69,716
69,505
69,568
INCOME BEFORE INCOME TAXES...
43,285
35,156
41,122
Income Tax Expense...
9,825
9,080
10,775
NET INCOME ... $33,460
$26,076
$30,347
NET INCOME PER SHARE:
Basic and Diluted ... $ 1.27
$ 0.99
$ 1.16
Average Common Shares Outstanding:
Basic and Diluted ... 26,257,761
26,257,761
26,257,761
Consolidated Statements of Income
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Years Ended December 31
2014
2013
2012
Cash Flows From Operating Activities:
Net Income... $ 33,460
$ 26,076
$30,347
Adjustments to reconcile to net income to net
cash provided by operating activities:
Provision for Loan Losses...
3,000
2,700
2,400
Depreciation of Premises and Equipment ...
3,068
3,392
3,336
Profit on Sale of Securities...
—
(119)
—
Amortization of Core Deposit Intangible ...
7,414
7,415
7,414
Amortization of lntangible...
33
33
64
Benefit for Deferred Income Taxes...
(3,777)
(2,781)
(1,140)
Decrease in Unearned Income ...
(80)
(402)
(1,009)
Decrease (Increase) in Other Assets...
(4,213)
2,539
1,139
Increase (Decrease) in Other Liabilities...
4,646
(1,935)
2,218
Net Cash Provided by Operating Activities...
43,551
36,918
44,769
Cash Flows From Investing Activities:
Purchase of Investment Securities ...
—
(485,509)
(1,004,633)
Proceeds from Maturities, Calls and Redemptions of...
Investment Securities...
92,156
326,182
383,579
Net Purchase of Bank Premises and Equipment...
(794)
(1,244)
(48)
Net Increase in Short-Term Loans Outstanding, Net...
(2,979)
(59,719)
(29,235)
Longer-Term Loans Originated or Purchased ... (410,246)
(333,527)
(214,466)
Principal Collected on Longer-Term Loans ... 107,100
293,297
273,295
Sale (purchase) of Other Real Estate...
1,105
(5,052)
(25,802)
Decrease in C B & T Real Estate Holdings, Inc...
70
266
209
Net Cash Used in Investing Activities ... (213,588)
(265,306)
(617,101)
Cash Flows From Financing Activities:
Net Change in Demand and Savings Accounts...
10,229
129,980
163,568
Increase in Time Deposits ... 1,581,123
1,751,711
1,845,269
Payments on Matured Time Deposits...(1,647,048)
(1,673,033)
(1,557,831)
Repayments on Mortgage Payable ...
—
—
(38)
Cash Dividends... (10,503)
(10,503)
(10,504)
Net Cash (Used In) Provided by Financing Activities ... (66,199)
198,155
440,464
Net Change in Cash and Cash Equivalents ... (236,236)
(30,233)
(131,868)
Cash and Cash Equivalents - Beginning of Year ... 478,627
508,860
640,728
Cash and Cash Equivalents - End of Year... $242,391
$478,627
$508,860
Supplementary Disclosures of Cash Flow Information:
Interest Paid ... $45,330
$ 53,168
$ 56,518
Income Taxes Paid...
9,783
14,356
7,400
Transfer of Loans to Foreclosed Assets...
480
2,915
27,457
Loans to Facilitate the Sale of Real Estate Owned...
736
151
2,276
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in Thousands Except Per Share Data)
Balance, December 31, 2011...
26,257,761
$26,258
$142,178
$171,085
$339,521
Net Income ...
—
—
—
30,347
30,347
Cash Dividends,
Declared and Paid ($ 0.40 per share) ....
—
—
—
(10,504)
(10,504)
Balance, December 31, 2012...
26,257,761
$26,258
$142,178
$190,928
$359,364
Net Income ...
—
—
—
26,076
26,076
Cash Dividends,
Declared and Paid ($ 0.40 per share) ....
—
—
—
(10,503)
(10,503)
Balance, December 31, 2013...
26,257,761
$26,258
$142,178
$206,501
$374,937
Net Income ...
—
—
—
33,460
33,460
Cash Dividends,
Declared and Paid ($ 0.40 per share) ....
—
—
—
(10,503)
(10,503)
Balance, December 31, 2014...
26,257,761
$26,258
$142,178
$229,458
$397,894
See Notes to Consolidated Financial Statements.
TOTAL
COMMON STOCK UNDIVIDED SHAREHOLDERS’
SHARES AMOUNT SURPLUS PROFITS EQUITY
1. ORGANIZATION AND NATURE OF BUSINESS
Carter Bank & Trust and Subsidiaries (the Bank) is a banking institution, incorporated under Virginia law. The main office is located in Martinsville, Virginia. The Bank is a non-member state bank, regulated by the FDIC and State Bureau of Financial Institutions.
The Bank conducts a general commercial banking business in its two-state service area of Virginia and North Carolina and focuses on serving the banking needs of small-to-medium sized businesses, professional concerns and individuals.
Effective December 29, 2006, ten banking institutions, each of which had been in business for a number of years, were merged into Carter Bank & Trust. The ten merged banks (merged banks) and their respective main office locations were:
Blue Ridge Bank, N. A. - Floyd, Virginia Central National Bank - Lynchburg, Virginia Community National Bank - South Boston, Virginia First National Bank - Rocky Mount, Virginia First National Exchange Bank - Roanoke, Virginia Mountain National Bank - Galax, Virginia
Patrick Henry National Bank - Martinsville, Virginia Patriot Bank, N. A. - Fredericksburg, Virginia Peoples National Bank - Danville, Virginia Shenandoah National Bank - Staunton, Virginia
The merger was recorded in conformity with Generally Accepted Accounting Principles (“GAAP”). Accounting principles required one of the banks to be identified as the purchaser and therefore, Peoples National Bank was deemed the acquirer. The nine banks merged in were recorded at their fair value at the date of the merger.
As a result of the merger, the Bank owns 100% of the common stock of The Mortgage Company of Virginia, Inc. (MCOV) and MCOV in turn owns 100% of the common stock of Bank Services of Virginia, Inc. (BSVA) and Bank Services Insurance, Inc. (BSI).
All officers and employees of the merged banks have continued as officers and employees of Carter Bank & Trust.
In addition to the above merger of the ten banks, the merger between Carter Bank & Trust and Bank Building Corporation was con-summated on April 30, 2008. The merger resulted in the Bank acquiring 46 branch offices which had previously been owned by Bank Building Corporation and leased to the Bank. In addition, four income producing commercial investment properties, and various lots and land owned by Bank Building Corporation were also acquired. These four income producing properties are owned by Carter Bank & Trust’s wholly-owned subsidiary, C B & T Real Estate Holdings, Inc. Regulators required these assets to be carried in a sep-arate wholly-owned subsidiary rather than owned directly by the Bank.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION & CONSOLIDATION
The preparation of the consolidated financial statements include the accounts and results of operations of the Bank, MCOV and C B & T Real Estate Holdings, Inc. All significant intercompany transactions and balances are eliminated in the consolidation. RECLASSIFICATION
Certain reclassifications have been made to amounts previously reported in 2013 to conform with the 2014 presentation. No material reclassifications were made.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and as-sumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determi-nation of the allowance for loan losses, fair value of other real estate owned and impairment of goodwill.
CASH AND CASH EQUIVALENTS
The Bank considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess reserves as cash equivalents for the purposes of the consolidated statements of cash flows. Federal funds are customarily sold for one-day periods. The FRB pays the target fed funds rate on the FRB excess reserves.
Notes to Consolidated Financial Statements
(Dollars in Thousands in Charts Except for Per Share Data)INVESTMENT SECURITIES
The Bank classifies its securities as held-to-maturity. These investment securities are stated at cost or unpaid principal adjusted for amortization of premiums and accretion of discounts using the interest method. The carrying value of these assets is not adjusted for temporary declines in value since the Bank has the ability to hold these securities until maturity. Gains or losses realized from sales are recognized by the use of specific identification method. The Bank has the positive intent and ability to hold these securities until maturity. Declines in the fair value of held to maturity securities below their cost that are deemed to be other than temporary are re-flected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are recorded at the amount of the loan disbursed to borrowers plus the applicable amount, if any, of unearned income and other charges, less payments received. Income earned on loans is recognized by methods which generally result in level rates of return on principal amounts outstanding. The net amount of nonrefundable loan origination fees approximates the direct costs associated with the lending process.
The allowance for loan losses is an estimate of losses inherent in the loan portfolio as determined by management taking into consid-eration historical loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry stan-dards and averages, and general economic conditions. Ultimate losses may vary from current estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the periods in which they become reasonably es-timable.
A loan is considered to be impaired when it is probable that the Bank will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. A performing loan may be considered impaired. The allowance for loan losses related to loans identified as impaired is primarily based on the excess of the loan’s current outstanding principal balance over the estimated fair value of the related collateral, less cost to sell. For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance exceeds the current estimate of the future cash flows on the loan discounted at the loan’s original effective interest rate. Interest on impaired loans is recognized when cash is received.
Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or a portion of a loan is clas-sified as doubtful or is partially charged off, the loan is generally clasclas-sified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest is unlikely.
While a loan is classified as nonaccrual and the probablility of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the probability of collecting the recorded loan balance is ex-pected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in ac-cordance with the contractual terms of interest and principal.
During the quarterly evaluation of the allowance for loan losses, particular characteristics associated with a segment of the loan portfolio are also considered. These characteristics are detailed below:
Commercial loans not secured by real estate carry risks associated with the successful operation of a business, and the repayments of these loans depend on the profitability and cash flows of the business. Additional risk relates to the value of collateral where depreciation occurs and the valuation is less precise.
Loans secured by commercial real estate also carry risks associated with the success of the business and the ability to generate a positive cash flow sufficient to service debts. Real estate security diminishes risks only to the extent that a market exists for the subject collateral.
Residential real estate loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. In instances where construction is in process, these loans carry risks that a project will not be completed as scheduled and bud-geted and that the value of the collateral may, at any point be less than the principal amount of the loan. Additional risks may occur if the general contractor, who may not be a loan customer, is unable to finish the project as planned due to financial pressures unrelated to the project.
