Carter Bankshares, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Carter Bankshares is the parent of Carter Bank & Trust, a Virginia-chartered bank operating in Virginia and North Carolina. This unaudited report covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $29.4 | $25.4 | $83.1 | $79.0 |
| Net income (loss) | $11.2 | $(57.7) | $26.0 | $(48.8) |
| Diluted earnings (loss) per share | $0.42 | $(2.19) | $0.98 | $(1.85) |
| Net interest margin | 2.92% | 2.61% | 2.80% | 2.77% |
| Noninterest income | $6.9 | $8.0 | $23.1 | $21.0 |
| Noninterest expense | $24.7 | $87.3 | $76.0 | $134.9 |
- Balance sheet at September 30: assets $4.13 billion; portfolio loans $2.88 billion, net loans $2.78 billion; available-for-sale securities $897.5 million; deposits $3.67 billion; FHLB borrowings $30.0 million; shareholders’ equity $405.9 million.
- Cash flow, nine months: operating cash flow was $60.0 million, investing cash flow $(132.0) million, financing cash flow $55.8 million, and cash and equivalents ended at $225.8 million.
- Credit and liquidity: allowance for credit losses (ACL) was $99.3 million, or 3.44% of portfolio loans. Nonperforming loans were $8.9 million (0.31% of portfolio loans), and nonperforming assets were $22.1 million. Management reported $912.3 million of highly liquid assets and $1.69 billion in total identified liquidity sources, including available borrowing facilities.
- Capital: company Tier 1 risk-based capital ratio was 13.85% and total capital ratio 15.11%; the Bank’s corresponding ratios were 13.82% and 15.08%. The Bank was categorized as well capitalized.
Material changes versus comparable periods
- Profitability rebounded from 2020 losses, but the comparison is substantially affected by the $62.2 million goodwill impairment recorded in Q3 2020. Excluding that item is not presented here as an adjusted result.
- Net interest income rose as lower deposit funding costs and enhanced pricing on restructured loans outweighed lower yields on some earning assets. Nine-month interest expense fell $10.6 million year over year; management cited lower rates and deliberate runoff of higher-cost CDs.
- Noninterest income rose 10.1% for the nine months, aided by service charges, debit-card fees, securities gains and a branch-sale gain. It declined 13.3% in Q3, mainly due to lower securities gains and commercial loan swap fees.
- Total deposits declined $18.2 million from year-end. A $211.8 million reduction in CDs and $84.7 million of deposits transferred with branch sales were largely offset by growth in core deposits. Securities increased $118.9 million from year-end, while portfolio loans decreased $63.0 million.
- Shareholders’ equity fell $34.3 million from year-end, reflecting the $50.7 million retained-earnings reduction on CECL adoption and $10.3 million of after-tax other comprehensive loss, partly offset by $26.0 million of net income.
Outlook, commentary, risks and unusual items
- No quantitative earnings guidance is provided in the supplied filing text. Management’s stated priorities include loan and deposit growth, lower reliance on CDs, balance-sheet diversification, fee-income growth, expense control and reducing problem assets.
- The company adopted CECL on January 1, 2021. The adoption increased the loan ACL by $61.6 million and established a $2.9 million reserve for unfunded commitments; the cumulative effect reduced retained earnings by $50.7 million. Management says CECL estimates depend on subjective assumptions, forecasts and borrower conditions.
- A separately modeled “Other” loan pool consists of loans with risk attributes inconsistent with current underwriting standards. The pool drove a $51.3 million increase in expected credit losses at adoption. In Q3, the Bank sold loans with $50.2 million unpaid principal, recording $9.2 million in charge-offs and releasing $3.1 million of reserves; two remaining loans totaling $12.0 million were identified for workout and reserved.
- Troubled debt restructurings totaled $179.2 million, up from $134.2 million at year-end, including $78.0 million of restructurings involving one large relationship. Hospitality exposure was approximately $451.4 million, or 15.6% of portfolio loans; management cited labor and operating challenges that could affect borrowers, collateral values and repayment.
- The company closed 20 branches during the first nine months and sold 13; a $3.0 million write-down related to closed branches was recorded. The Justice Parties lawsuit and related collection actions were dismissed or withdrawn following a loan restructuring; management believes the matter is concluded without material adverse effect.
- Interest-rate sensitivity analysis indicated an asset-sensitive position: a modeled +100-basis-point shock corresponded to a 10.2% increase in pretax net interest income and a 9.2% increase in economic value of equity. These are model estimates, not forecasts. Management temporarily suspended modeled declining-rate scenarios.
- Other stated risks include COVID-19 effects, credit losses, interest-rate and funding changes, hospitality and commercial real estate exposure, CECL model uncertainty, competition, cyber and third-party risks, and regulatory or legal developments. Approximately 16% of the loan portfolio had LIBOR-linked variable rates; management intended to stop originating new LIBOR-based variable-rate loans by December 31, 2021.
Important facts for investors to verify
- How the $99.3 million ACL and the assumptions for the “Other” loan pool compare with subsequent credit performance and updated forecasts.
- Whether the remaining $12.0 million of challenged loans and the $179.2 million of TDRs perform as expected, and whether hospitality exposure produces further losses.
- Whether core-deposit growth continues to offset CD runoff and whether reported liquidity remains available under stress, including the collateral and conditions supporting FHLB capacity.
- How recurring earnings trend after separating the prior-year goodwill impairment and considering securities gains, restructured-loan pricing, branch-sale items and elevated charge-offs.
- Whether securities valuation changes, rate sensitivity, and the LIBOR transition affect future earnings, capital or liquidity; reported available-for-sale unrealized losses were $5.2 million at quarter-end.