Carter Bankshares, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Carter Bankshares is a Virginia-based bank holding company operating Carter Bank & Trust, with 66 branches in Virginia and North Carolina. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in millions unless stated otherwise.
Key financial results
- Q2 earnings: Net income was $5.7 million, or $0.24 per diluted share, versus $10.8 million, or $0.44 per share, in Q2 2022. Six-month net income was $21.6 million, or $0.91 per share, compared with $20.1 million, or $0.80 per share.
- Net interest income and margin: Q2 net interest income was $26.7 million, down 17.7% year over year; GAAP net interest margin was 2.51%, versus 3.24%. For the first six months, net interest income was $67.5 million, up 11.2%, and margin was 3.22%, versus 3.06%. Management attributed the Q2 decline principally to $11.3 million of interest not recognized after a major borrower relationship went on nonaccrual, along with sharply higher funding costs.
- Other income and expenses: Q2 noninterest income was $5.0 million, down 10.3%; noninterest expense was $25.5 million, up 9.1%. Six-month totals were $9.8 million and $49.1 million, respectively. The six-month provision for credit losses was $1.5 million, compared with $2.4 million in 2022.
- Assets and loans: Total assets were $4.384 billion, up $179.5 million from year-end. Portfolio loans grew $181.5 million to $3.330 billion, driven mainly by commercial real estate and residential mortgages. Available-for-sale securities were $821.4 million, down $14.9 million.
- Credit quality: The allowance for credit losses was $94.1 million, or 2.83% of portfolio loans, versus $93.9 million, or 2.98%, at year-end. Nonperforming loans rose to $310.7 million, or 9.33% of loans, from $6.6 million, or 0.21%, primarily because of a single $301.9 million lending relationship placed on nonaccrual.
- Deposits, funding and liquidity: Deposits declined 1.5% to $3.577 billion. A $243.3 million decrease in demand, money market and savings accounts was partly offset by $190.0 million of certificate-of-deposit growth. CDs represented 40.6% of deposits; management estimated 11.7% of deposits were uninsured. FHLB borrowings increased to $407.1 million from $180.6 million; federal funds purchased were $7.9 million. Reported total liquidity sources were $1.359 billion, and highly liquid assets were $611.3 million, or 13.9% of assets.
- Capital and cash flow: Shareholders’ equity was $344.2 million, up from $328.6 million at year-end. Company Tier 1 and total risk-based capital ratios were 11.46% and 12.72%; the Bank’s were 11.34% and 12.60%. For the six months, operating cash flow was $29.6 million, investing cash flow was $(176.4) million, and financing cash flow was $153.2 million; cash and cash equivalents ended at $53.3 million.
Material changes and unusual items
- The largest lending relationship—borrowers in hospitality, agriculture and energy—matured without full payment. The Bank placed the related $301.9 million of loans on nonaccrual in Q2, filed confessions of judgment, and recorded a $53.6 million valuation allowance. Management said it believes the loans are adequately secured and reserved based on information available, but cannot predict the timing or amount of collections.
- The borrowers filed motions seeking to set aside the confessions of judgment, alleging, among other matters, anti-tying violations and breaches of contractual and fiduciary duties. The Bank disputes the allegations and intends to pursue collection. The litigation is at an early stage; the Company cannot estimate the likelihood or range of a possible loss.
- Available-for-sale securities had $105.8 million of gross unrealized losses at June 30, 2023, compared with $109.7 million at year-end. Management attributed these mainly to interest-rate and market movements, reported no credit-related impairment, and said it did not intend—and was not more than likely required—to sell the securities before recovery.
- The Company repurchased 583,824 shares during the six months for approximately $8.2 million at an average $13.96 per share. A new authorization permits repurchases of up to 1 million shares through May 1, 2024.
- The Company early adopted ASU 2023-02 for qualifying historic tax-credit investments, recording a $0.1 million transitional increase to retained earnings. The adoption changed the presentation of investment amortization from noninterest expense to income tax expense.
Outlook, management commentary and risks
Management described a shift from balance-sheet restructuring toward prudent growth, primarily organic, while also considering suitable acquisitions. It plans to pursue loan and deposit growth, increase fee income and monitor expenses, while dedicating resources to resolving nonaccrual loans. No specific earnings or financial guidance was provided. Management cautioned that funding costs may continue to rise and that net interest income and margin may remain under pressure if the large relationship stays on nonaccrual and is not repaid; rising funding costs may also outpace asset-yield benefits later in 2023. The bank reported an asset-sensitive balance sheet, though less so than at year-end.
Key risks include collection and collateral outcomes for the major nonaccrual relationship, concentration in commercial real estate and other large borrowers, deposit pricing and flows, interest-rate and securities-value movements, and broader economic conditions. Approximately 5.3% of the loan portfolio still used one-month LIBOR as its variable-rate index at June 30; the Company selected one-month term SOFR as its replacement and said the transition’s financial impact was not expected to be material.
Important facts for investors to verify
- Developments in the $301.9 million borrower relationship, including collections, collateral values, litigation and whether additional reserves or losses are required.
- Effects of nonaccrual status and deposit repricing on net interest income, margin and earnings in subsequent quarters.
- Deposit mix, uninsured balances, borrowing levels and available liquidity as loan growth and funding needs evolve.
- Changes in nonperforming loans, the allowance for credit losses, and capital ratios; reported capital ratios declined from year-end.
- Whether unrealized securities losses remain non-credit-related and whether the portfolio can be held until recovery without liquidity pressure.
- Progress and financial effects of the LIBOR-to-SOFR transition and the share repurchase program.