Carter Bankshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2020. Carter Bankshares is the parent of Carter Bank & Trust, operating in Virginia and North Carolina.
Key financial metrics
| Metric | Q2 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $5.4 million; diluted EPS $0.21 | Q2 2020: $4.5 million; $0.17 per share |
| Six-month net income | $14.8 million; diluted EPS $0.56 | First half 2020: $8.9 million; $0.34 per share |
| Net interest income | Q2: $27.2 million; first half: $53.7 million | Q2 2020: $26.3 million; first half 2020: $53.5 million |
| Net interest margin | Q2: 2.75%; first half: 2.74% | Q2 2020: 2.76%; first half 2020: 2.85% |
| Noninterest income / expense | Q2: $7.2 million / $27.8 million; first half: $16.2 million / $51.4 million | Q2 2020: $6.2 million / $23.0 million; first half 2020: $13.0 million / $47.6 million |
| Total assets | $4.12 billion | $4.18 billion at December 31, 2020 |
| Portfolio loans / deposits | $2.92 billion / $3.66 billion | Loans: $2.95 billion / deposits: $3.68 billion at December 31, 2020 |
| Allowance for credit losses (ACL) | $109.3 million; 3.75% of portfolio loans | $54.1 million; 1.83% at December 31, 2020 |
| Cash and cash equivalents | $216.7 million | $241.9 million at December 31, 2020 |
| Shareholders’ equity | $399.1 million | $440.2 million at December 31, 2020 |
| FHLB borrowings | $30.0 million | $35.0 million at December 31, 2020 |
Cash flow and liquidity
For the first half of 2021, operating activities provided $23.4 million, investing activities used $97.4 million, and financing activities provided $48.7 million. Cash and cash equivalents declined by $25.3 million. The investing outflow included $73.9 million net cash paid in branch sales and $215.2 million of securities purchases, partly offset by loan repayments and securities proceeds.
Management reported $1.62 billion in total liquidity sources, including $881.7 million in highly liquid assets, $547.9 million of additional FHLB borrowing capacity, and $145.0 million in unsecured correspondent lines. Highly liquid assets were 21.4% of total assets. Management said capital ratios exceeded regulatory requirements; the company’s total risk-based capital ratio was 14.66% and leverage ratio 10.23%.
Material changes and management commentary
- Net income rose 21.9% in Q2 and 66.8% in the first half year over year. Lower credit-loss provision was a major contributor; net interest income was nearly flat for the half year.
- Net interest margin declined year over year, as lower asset yields more than offset lower funding costs. Management cited the low-rate environment and intentional runoff of higher-cost certificates of deposit.
- Noninterest income increased, helped by restored customer fees, higher debit-card interchange income, securities gains, and a $0.5 million premium from selling four branches. Securities gains were $5.1 million for the first half, versus $3.5 million a year earlier.
- Noninterest expense increased, principally reflecting a $3.0 million nonrecurring write-down of closed branches transferred to other real estate owned (OREO), as well as higher data-processing and professional fees. Twenty branches closed in Q2 as part of the network optimization plan.
- Deposits shifted toward core accounts: core deposits increased about $217 million, while certificates of deposit fell $157.6 million. Total deposits also declined partly because $84.7 million of deposits associated with the four branch sales left the balance sheet.
- Portfolio loans declined $30.5 million from year-end, primarily due to large commercial loan payoffs. The loan-segment comparison is affected by the company’s new CECL-related “Other” category.
Credit, outlook, risks, and unusual items
- The company adopted CECL on January 1, 2021. The initial allowance increase was $61.6 million, with an additional $2.9 million reserve for unfunded commitments; the cumulative reduction to retained earnings was $50.7 million. The large “Other” loan segment reflects loans with risk attributes inconsistent with current underwriting standards and carried a $61.7 million ACL at June 30.
- Q2 net charge-offs were $8.5 million, versus $1.0 million in Q2 2020, largely associated with resolving the two largest nonperforming credits. Nonperforming loans fell to $9.6 million from $32.0 million at year-end. OREO rose to $21.3 million, including closed branches.
- Hospitality exposure was approximately $486.4 million, or 16.7% of portfolio loans. Hospitality loans still on deferral at June 30 totaled $50.9 million and carried $11.7 million of expected credit losses. Management cited improved hotel occupancy and rates, but warned of labor shortages, potential borrower liquidity needs, and collateral-value risks. The final payment-deferral program expired June 30; management expected most borrowers to resume scheduled payments.
- PPP activity totaled 1,102 loans and $68.9 million processed through June 30; 361 loans totaling $29.6 million had been fully forgiven by the SBA. Management expected most PPP loans to be forgiven.
- No specific earnings or financial guidance was provided. Management described strategic priorities including balance-sheet diversification, loan and core-deposit growth, fee-income development, and operating efficiency. Results remain exposed to credit conditions, interest rates, the pandemic and its effects, liquidity and funding conditions, and execution of branch and efficiency initiatives.
- A lawsuit filed May 31, 2021 by the Justice parties alleges claims concerning the Bank’s lending relationship and seeks $421 million in damages, plus punitive damages and other relief. The Bank and directors deny the allegations and are defending the matter. Motions to dismiss or transfer were pending; management said it could not estimate the likelihood or range of loss.
- Other notable items: the first-half decline in equity included the CECL adoption adjustment and a $5.6 million after-tax decline in accumulated other comprehensive income, mainly from available-for-sale securities. The company reported no material change in internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- How the CECL “Other” segment, hospitality reserves, and future credit-loss estimates develop; compare allowance coverage with charge-offs and nonperforming assets.
- Whether borrowers emerging from deferrals resume payments as expected, especially hospitality borrowers, and whether labor or collateral pressures worsen.
- The status and potential financial exposure of the $421 million lawsuit, including any developments affecting the Bank’s defenses or ability to estimate a loss.
- Whether core-deposit growth and lower CD balances persist, and how liquidity and net interest margin respond to interest-rate changes.
- Progress and realized cost savings from branch closures and optimization, including the sale of closed locations and remaining OREO.