Carter Bankshares, Inc. — Q2 2022 Form 10-Q
Business context and period. Carter Bankshares is a Virginia-based bank holding company whose subsidiary, Carter Bank & Trust, operates in Virginia and North Carolina. This unaudited report covers the three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $32.5 | $27.2 | $60.7 | $53.7 |
| Net interest margin (GAAP) | 3.24% | 2.75% | 3.06% | 2.74% |
| Provision for credit losses | $1.8 | $1.0 | $2.4 | $2.8 |
| Noninterest income | $5.6 | $7.2 | $10.9 | $16.2 |
| Noninterest expense | $23.4 | $27.8 | $45.9 | $51.4 |
| Net income | $10.8 | $5.4 | $20.1 | $14.8 |
| Diluted EPS | $0.44 | $0.21 | $0.80 | $0.56 |
- Balance sheet: Assets were $4.12 billion, down $10.5 million from year-end. Portfolio loans grew $185.8 million to $3.00 billion; deposits rose $54.9 million to $3.75 billion. The loans-to-deposits ratio was 79.9%.
- Credit and debt: The allowance for credit losses was $98.0 million, or 3.27% of portfolio loans, versus 3.41% at year-end. Nonperforming loans increased to $12.0 million from $7.4 million; nonperforming assets totaled $20.5 million. Net charge-offs were $0.4 million for the half-year. The company had no FHLB borrowings at June 30, compared with $7.0 million at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $70.2 million, down from $277.8 million at year-end. For the six months, operating cash flow was $26.8 million, investing cash outflow was $249.9 million, and financing cash inflow was $15.5 million. Management reported $755.6 million of highly liquid assets and $1.74 billion in total stated liquidity sources, including borrowing capacity and unpledged securities.
- Capital: Shareholders’ equity fell to $334.1 million from $407.6 million, mainly reflecting a $61.7 million after-tax decline in accumulated other comprehensive income and $32.4 million of share repurchases, partly offset by earnings. The company’s Tier 1 risk-based capital ratio was 12.70%, leverage ratio 9.96%, and total risk-based capital ratio 13.96%. The Bank remained well capitalized under regulatory standards.
Material changes versus comparable periods
- Net interest income and margin improved, supported by higher yields as rates rose, lower funding costs, and deployment of excess cash into loans and securities. Management also cited fees and enhanced pricing tied to one large credit relationship, which may not recur at the same level.
- Net income increased year over year. Lower operating expenses—including lower salaries and medical costs and the absence of prior-year OREO write-downs—partly offset lower noninterest income. Net securities gains fell to $0.1 million in Q2 and $0.1 million for the half-year, from $1.5 million and $5.1 million, respectively, in 2021.
- Loan growth was concentrated in residential mortgages, commercial real estate, and construction. Core deposits increased while certificates of deposit declined as the company intentionally ran off higher-cost CDs.
- Available-for-sale securities had $76.5 million of gross unrealized losses at June 30, versus $7.8 million at year-end, primarily attributed by management to interest-rate and market movements rather than credit deterioration. The after-tax decline in securities value drove a substantial reduction in equity through other comprehensive loss.
Outlook, commentary, risks, and unusual items
- No quantified earnings or financial guidance is provided. Management’s stated strategy is to grow loans and lower-cost core deposits, improve net interest margin, expand fee income, and control expenses. Results for interim periods are not necessarily indicative of future results.
- Management described the balance sheet as asset-sensitive: its June 30 model estimated pretax net interest income increases of 5.6%, 11.0%, 16.3%, and 21.6% under immediate rate increases of 100, 200, 300, and 400 basis points, respectively; a 100-basis-point decrease implied a 7.1% decline. These are modeled scenarios, not forecasts. The company said it was less asset-sensitive than at year-end.
- Credit risks include a deteriorated purchased syndicated C&I loan that led to a $2.6 million specific reserve and increased nonperforming loans. Hospitality exposure was approximately $380.2 million, or 12.7% of loans; management cited continuing labor and liquidity challenges for hotel borrowers. The top ten credit relationships represented $686.8 million, or 22.9% of gross loans.
- Interest-rate risk is material: rising longer-term yields caused securities fair-value losses, while higher short-term rates may benefit yields on some variable-rate assets. The company reported that 14.3% of its loan portfolio had a LIBOR-based variable index and was managing the transition to replacement benchmarks; it did not expect the transition’s financial impact to be material.
- Other disclosed risks include economic and inflation conditions, borrower and collateral performance, funding costs and deposit withdrawals, cybersecurity and third-party risks, regulation, competition, and litigation. Management reported no material pending or threatened legal proceedings and no material change in previously disclosed risk factors.
- The company repurchased 1.97 million shares for $32.4 million in the first half, completing its prior authorization. A new authorization for up to 750,000 shares was announced and received Federal Reserve non-objection in July 2022. Management stated that repurchases are discretionary.
Important facts for investors to verify
- Whether margin gains persist as deposit costs respond to rate increases, and whether income associated with the large credit relationship recurs.
- Performance, collateral coverage, and reserve adequacy for the purchased syndicated C&I loan and the broader rise in nonperforming loans.
- Whether unrealized securities losses remain noncredit-related and how they affect capital, liquidity, and potential securities sales.
- Concentration and borrower trends in hospitality, the top ten relationships, and construction lending.
- Deposit mix, uninsured deposit balances, liquidity capacity, and the effect of further loan growth or share repurchases on capital ratios.
- Execution of the LIBOR transition and any subsequent updates to interest-rate sensitivity assumptions.