Carter Bankshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Carter Bankshares is a Virginia bank holding company whose subsidiary operates 65 branches in Virginia and North Carolina. Amounts below are in millions except per-share data and ratios.
Financial and operating performance
| Metric | Q1 2024 / March 31, 2024 | Comparable / prior date |
|---|---|---|
| Net interest income | $28.4; FTE $28.6 | $40.8; FTE $41.0 in Q1 2023 |
| Net interest margin | 2.58%; FTE 2.60% | 3.95%; FTE 3.98% in Q1 2023 |
| Net income / diluted EPS | $5.8 / $0.25 | $15.9 / $0.67 in Q1 2023 |
| Interest income / interest expense | $54.0 / $25.6 | $52.0 / $11.2 in Q1 2023 |
| Noninterest income / expense | $5.0 / $26.3 | $4.7 / $23.6 in Q1 2023 |
| Credit-loss provision | $0.016 provision on loans; $0.043 recovery on unfunded commitments | $1.4 loan provision; $0.084 unfunded-commitment provision in Q1 2023 |
| Cash flow | $17.6 operating; $10.2 investing; $25.7 financing; cash increased $53.6 to $108.1 | Cash increased $34.5 in Q1 2023 |
| Total assets / portfolio loans | $4,554.9 / $3,509.1 | $4,512.5 / $3,505.9 at Dec. 31, 2023 |
| Deposits / FHLB borrowings | $3,830.5 / $310.5 | $3,721.9 / $393.4 at Dec. 31, 2023 |
| Shareholders’ equity | $359.1 | $351.2 at Dec. 31, 2023 |
Material changes and drivers
- Net income fell 63.5% year over year. Net interest income declined $12.4 million, with a $9.3 million Q1 interest-income impact attributed to the largest lending relationship being on nonaccrual. Higher funding costs were also a major factor: management reported a 155-basis-point increase in funding costs and a 12-basis-point decrease in earning-asset yield year over year.
- Interest expense rose $14.5 million year over year, reflecting higher rates and a shift toward higher-cost certificates of deposit and borrowings. Management said deposit-cost pressure began to stabilize during Q1 and expects it to continue stabilizing in coming quarters.
- Noninterest expense increased $2.7 million, led by higher FDIC insurance expense (+$1.0 million) and professional/legal fees (+$0.7 million); management linked both increases to the large nonperforming relationship.
- Deposits grew $108.6 million, mainly from certificates of deposit, while FHLB borrowings declined $82.9 million. Brokered deposits increased to $115.6 million from $70.0 million. Certificates of deposit were 44.2% of deposits, versus 42.6% at year-end.
- Portfolio loans were nearly flat overall: CRE increased $58.3 million, offset in part by lower construction and commercial-and-industrial balances. Two large CRE loan payoffs totaling $80.0 million muted growth.
- The securities portfolio declined $10.2 million to $768.8 million. It had $89.8 million of gross unrealized losses, primarily attributed by management to interest-rate and market movements rather than credit impairment; no securities credit-loss allowance was recorded. Accumulated other comprehensive loss was $69.8 million.
Credit, liquidity, capital, and outlook
- Credit concentration: Nonperforming loans were $307.3 million, or 8.76% of loans; the $301.9 million largest lending relationship represented 98.2% of nonperforming loans. It has been on nonaccrual since Q2 2023 following loan maturities and failure to pay in full. The company reported a $54.3 million valuation allowance for that relationship and a $247.6 million net carrying amount. The allowance for credit losses was $96.5 million, or 2.75% of loans; annualized net charge-offs were 0.06% of average loans.
- Liquidity: Management reported $1.31 billion of total available liquidity sources, including $538.6 million of highly liquid assets. Highly liquid assets were 11.8% of total assets; total available liquidity was 199.0% of uninsured deposits. Approximately 82.8% of deposits were estimated to be insured, leaving 17.2% uninsured. The loan-to-deposit ratio was 91.6%.
- Capital: The company reported a 9.34% leverage ratio and 12.15% total risk-based capital ratio. The Bank was categorized as well-capitalized, with a 9.27% leverage ratio and 12.07% total risk-based capital ratio; all reported Bank ratios exceeded applicable well-capitalized thresholds.
- Interest-rate outlook: Management described the balance sheet as slightly liability-sensitive. Its 12-month simulation showed estimated pretax net interest income increasing 1.5% for a +200-basis-point shock and 1.3% for a -100-basis-point shock. The company temporarily suspended +300- and +400-basis-point shock analyses, citing its view that those scenarios were not meaningful or probable for the foreseeable future. These are model estimates, not earnings guidance.
- Strategy and guidance: Management aims to move from balance-sheet restructuring toward prudent growth, primarily organic, while pursuing fee income and monitoring expenses. No quantified full-year earnings or financial guidance is provided. Management expects the nonaccrual relationship to continue weighing on net interest income and margin until resolved.
- Litigation and contingencies: The Bank is pursuing collection of approximately $301 million of matured Justice-related loans; the borrowers’ appeal was pending. Related federal litigation seeks at least $1.0 billion in damages, and the company says it cannot estimate the outcome, timing, or possible loss. A separate GLAS suit alleges approximately $226 million of transfers were fraudulent or voluntary conveyances and seeks that amount plus interest and costs; the Bank denies the claims and cites indemnity obligations supported by collateral. A related foreclosure suit also remains pending. The company cannot determine whether these matters could have a material impact.
- The company said there were no material changes to its previously disclosed risk factors. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Developments in collection efforts, appeals, collateral recovery, and valuation assumptions for the $301.9 million nonaccrual relationship, including the adequacy of its $54.3 million allowance.
- Procedural developments and potential financial exposure in the Justice and GLAS litigation; the filing does not provide a clear estimate of possible losses.
- Deposit pricing, certificate-of-deposit maturities, brokered and uninsured deposit levels, and whether management’s expected stabilization in funding costs occurs.
- Changes in net interest margin and earnings as the nonaccrual balance, market rates, and deposit mix evolve.
- Commercial real estate concentration and delinquency trends, the adequacy of the credit-loss allowance, and the extent of the securities portfolio’s unrealized losses and related liquidity implications.