Carter Bankshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; 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 results
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.4 million; diluted EPS $0.36 | $4.4 million; diluted EPS $0.17 in Q1 2020 |
| Net interest income | $26.5 million | $27.3 million in Q1 2020 |
| Net interest margin | 2.73% GAAP; 2.78% FTE | 2.94% GAAP; 3.01% FTE in Q1 2020 |
| Noninterest income / expense | $9.0 million / $23.6 million | $7.0 million / $24.7 million in Q1 2020 |
| Total assets | $4.14 billion | $4.18 billion at December 31, 2020 |
| Portfolio loans / allowance for credit losses | $2.97 billion / $116.9 million | $2.95 billion / $54.1 million at December 31, 2020 |
| Total deposits / FHLB borrowings | $3.69 billion / $30.0 million | $3.68 billion / $35.0 million at December 31, 2020 |
| Cash and cash equivalents | $219.2 million | $241.9 million at December 31, 2020 |
| Operating cash flow | $0.4 million provided | $5.0 million used in Q1 2020 |
| Shareholders’ equity | $387.9 million | $440.2 million at December 31, 2020 |
Material changes and drivers
- Net income more than doubled year over year, primarily reflecting lower credit-loss provision, higher noninterest income, and lower operating expenses; lower net interest income partly offset those gains.
- Noninterest income benefited from $3.6 million of securities gains, up from $1.2 million in Q1 2020. The bank attributed gains to market opportunities and portfolio repositioning. Available-for-sale securities generated an $11.1 million after-tax other comprehensive loss, mainly reflecting valuation changes.
- Net interest income declined 2.7%. Lower asset yields outweighed lower funding costs: the yield on interest-earning assets fell 71 basis points, while funding costs fell 57 basis points.
- Deposits were nearly flat overall, with $102.3 million growth in core deposits offset by a $92.3 million decline in certificates of deposit, which management described as intentional runoff of higher-cost funding.
- Shareholders’ equity fell mainly because of the $50.7 million after-tax cumulative adjustment on CECL adoption and the $11.1 million after-tax securities-related other comprehensive loss, partly offset by quarterly net income.
Outlook, risks and unusual items
- CECL adoption: Effective January 1, 2021, the new expected-loss method increased the loan allowance by $61.6 million and added a $2.9 million reserve for unfunded commitments. The resulting $50.7 million after-tax reduction to retained earnings was recorded as an opening-equity adjustment. The allowance was 3.93% of portfolio loans at quarter-end.
- Credit risk: Hospitality exposure was approximately $501.5 million, or 16.9% of portfolio loans; about $320.4 million across 58 loans was on deferral. The company reported deterioration in hospitality credits and $11.7 million of expected losses associated with hospitality loans on deferral. The CECL “Other” pool, comprising $373.4 million of loans with risk attributes inconsistent with current underwriting standards, carried a $56.0 million allowance.
- At March 31, 92 customers had $407.0 million of loans under Part III deferrals, scheduled to continue through June 30, 2021. Management said repayment capacity, collateral values, and future credit losses remain uncertain.
- Nonperforming loans were $32.0 million, or 1.08% of portfolio loans; total nonperforming assets were $46.0 million. Net charge-offs were $0.7 million, or an annualized 0.10% of average portfolio loans.
- Liquidity sources included $844.7 million of highly liquid assets, $506.1 million of available FHLB borrowing capacity, $145.0 million of unsecured correspondent lines, and $626.3 million of unpledged available-for-sale securities. Management warned an extended recession and deposit withdrawals could increase reliance on more expensive or volatile funding.
- Regulatory capital ratios remained above well-capitalized thresholds. The company reported a 10.16% holding-company leverage ratio, 12.88% Tier 1 risk-based ratio, and 14.14% total risk-based capital ratio.
- Management expected branch closures and related sale transactions to be completed in Q2 2021; $9.4 million of loans and $81.6 million of deposits were held for assumption in connection with those sales. No earnings or full-year financial guidance was provided.
- Other stated risks include COVID-19 effects, interest-rate and market changes, CECL model estimates, commercial real estate concentrations, regulatory changes, and operational or cybersecurity disruptions. Management reported no material pending or threatened legal proceedings and no material changes to previously disclosed risk factors.
Investor verification points
- Assess the assumptions and sensitivity behind the CECL allowance, especially the $56.0 million reserve for the “Other” loan pool and hospitality exposures.
- Track repayment performance and credit migration among deferred hospitality and other commercial borrowers as deferrals expire.
- Separate recurring earnings from the $3.6 million securities gain and evaluate the effect of changing asset yields and deposit costs on net interest margin.
- Confirm completion and financial effects of the planned branch sales, and monitor deposit trends, liquidity capacity, and capital ratios.