Carter Bankshares, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Carter Bankshares is a Virginia-based bank holding company operating Carter Bank & Trust, with branches in Virginia and North Carolina. It provides retail and commercial banking and insurance services. This unaudited report covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021.
Financial results and condition
| Metric | Q3 2022 / Sept. 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $14.4 million; diluted EPS $0.59 | Q3 2021: $11.2 million; $0.42 per diluted share |
| Nine-month net income | $34.5 million; diluted EPS $1.38 | Nine months 2021: $26.0 million; $0.98 per diluted share |
| Net interest income | Q3: $37.7 million; nine months: $98.4 million | Q3 2021: $29.4 million; nine months 2021: $83.1 million |
| Net interest margin | Q3: 3.72%; nine months: 3.28% | Q3 2021: 2.92%; nine months 2021: 2.80% |
| Noninterest income | Q3: $5.2 million; nine months: $16.2 million | Q3 2021: $6.9 million; nine months 2021: $23.1 million |
| Noninterest expense | Q3: $23.5 million; nine months: $69.4 million | Q3 2021: $24.7 million; nine months 2021: $76.0 million |
| Total assets | $4.11 billion | $4.13 billion at Dec. 31, 2021 |
| Portfolio loans | $3.03 billion | $2.81 billion at Dec. 31, 2021 |
| Deposits | $3.73 billion | $3.70 billion at Dec. 31, 2021 |
| Cash and cash equivalents | $65.7 million | $277.8 million at Dec. 31, 2021 |
| FHLB borrowings | $30.0 million | $7.0 million at Dec. 31, 2021 |
| Shareholders’ equity | $314.8 million | $407.6 million at Dec. 31, 2021 |
Cash flow and liquidity. For the first nine months, operating cash flow was $47.7 million, investing cash outflow was $270.1 million, and financing cash inflow was $10.3 million. Cash and cash equivalents declined $212.1 million. Management reported $652.1 million of highly liquid assets, equal to 15.9% of total assets, plus $807.8 million of additional FHLB borrowing availability and $145 million of unsecured lines. The reported liquidity sources totaled $1.70 billion.
Credit and capital. The allowance for credit losses was $94.2 million, or 3.11% of portfolio loans, versus $95.9 million and 3.41% at year-end. Nonperforming loans were $7.0 million (0.23% of loans), and nonperforming assets were $15.1 million. The Bank remained well-capitalized: its leverage ratio was 10.06%, Common Equity Tier 1 and Tier 1 ratios were 12.74%, and total risk-based capital was 14.00%. These ratios declined from year-end, partly due to share repurchases.
Material changes versus comparable periods
- Q3 net income rose 29% and nine-month net income rose 33%, supported mainly by higher net interest income as asset yields increased and funding costs declined.
- Net interest margin increased 80 basis points in Q3 and 48 basis points for the nine-month period. Management cited the rising-rate environment, loan and securities yields, and lower funding costs.
- Noninterest income fell 24% in Q3 and 30% year to date, primarily because gains on securities sales were substantially lower. Q3 commercial loan swap fee income also declined.
- Noninterest expense decreased 5% in Q3 and 9% year to date. The comparison benefited from lower OREO write-downs, branch optimization, and a tax-credit amortization reversal related to an extended project in-service date.
- Portfolio loans grew $219.2 million, or 10.4% on an annualized basis, from year-end, led by residential mortgages, construction, and commercial real estate. Deposits grew $27.5 million as core deposits increased and higher-cost certificates of deposit ran off.
- Available-for-sale securities fell $71.2 million in carrying value; their gross unrealized losses rose to $109.7 million from $7.8 million at year-end. The resulting $88.0 million after-tax other comprehensive loss was a major factor in lower equity.
- The company repurchased 2.43 million shares for $40.1 million during the first nine months. A new authorization permits repurchases of up to 750,000 shares; 464,208 had been repurchased by September 30.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management’s strategy emphasizes loan growth, shifting deposits toward lower-cost core accounts, improving fee income, and controlling expenses. It expects more modest residential mortgage growth amid anticipated higher mortgage rates.
- Management cautioned that rising rates may increase funding costs and that fees and enhanced pricing from one large credit relationship may not recur at the same level. The company is asset-sensitive in its interest-rate simulations, but less so than at year-end; its model showed pretax net interest income increasing 4.7% under a 100-basis-point rate rise and 18.6% under a 400-basis-point rise.
- Management characterized securities’ unrealized losses as primarily rate- and market-driven rather than credit-related, stated it did not intend to sell impaired securities and did not expect to be required to sell them before recovery, and recorded no credit-loss allowance on the securities portfolio. A material credit-related impairment would affect earnings.
- Construction risks include cost inflation, supply-chain and labor disruption, delays, and cost overruns. Hospitality exposure was approximately $368.2 million, or 12.1% of loans; management noted ongoing labor and liquidity pressures at hotel borrowers. Top ten credit relationships totaled $669.8 million, or 22.1% of gross loans.
- A $4.9 million purchased syndicated C&I loan was charged down by $3.4 million during Q3, with the remaining $1.5 million transferred to held-for-sale. The company also recorded a $0.4 million gain related to an eminent-domain settlement involving a former branch during the nine-month period.
- Approximately 13.2% of the loan portfolio had LIBOR-based variable rates at quarter-end. The company had stopped originating new LIBOR-based variable-rate loans and was preparing for the benchmark transition; management did not expect a material financial impact.
- Management reported no material pending or threatened legal proceedings and no material change in previously disclosed risk factors. It identified interest rates, economic conditions, real-estate concentrations and collateral values, credit-loss estimates, liquidity and capital, cybersecurity, regulation, and litigation among relevant risks.
Important facts for investors to verify
- Whether net interest margin gains persist as deposit costs reprice and the benefit from the large credit relationship changes.
- The liquidity and capital implications of cash depletion, rising loan-to-deposit ratio (81.4%), share repurchases, and any further deposit shifts or borrowing needs.
- Whether the large unrealized securities losses remain non-credit-related and whether liquidity needs could require securities sales before recovery.
- Credit performance in construction, commercial real estate, hospitality, and the “Other” loan segment; also monitor the C&I charge-down and criticized-loan trends.
- Whether growth in core deposits continues to offset certificate-of-deposit runoff, and how uninsured deposits and their maturities evolve.
- Execution of the LIBOR transition and the effect of rates, economic conditions, and project cost pressures on earnings and credit quality.