Business context and reporting period
Carter Bankshares, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The Virginia-based bank holding company operates Carter Bank & Trust, an FDIC-insured commercial bank with 66 branches in Virginia and North Carolina. It reported $4.2 billion in assets.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $50.1 million | $31.6 million |
| Diluted earnings per share | $2.03 | $1.19 |
| Net interest income | $139.9 million | $111.2 million |
| Net interest margin | 3.48% | 2.80% |
| Noninterest income | $21.7 million | $28.9 million |
| Noninterest expense | $97.0 million | $102.3 million |
| Net charge-offs | $4.5 million | $23.1 million |
For fourth-quarter 2022, net income was $15.6 million and diluted EPS was $0.65, compared with $5.6 million and $0.21 in fourth-quarter 2021.
- Balance sheet: Total assets were $4.205 billion, up 1.7%. Portfolio loans grew 12.0% to $3.149 billion; deposits fell $68.1 million to $3.630 billion.
- Credit: Allowance for credit losses (ACL) was $93.9 million, or 2.98% of portfolio loans, versus 3.41% a year earlier. Nonperforming loans were $6.6 million, or 0.21% of portfolio loans.
- Cash flow: Operating activities provided $70.8 million; investing activities used $382.1 million; financing activities provided $80.4 million. Cash and cash equivalents declined $230.9 million to $46.9 million.
- Liquidity and funding: Reported liquidity sources totaled $1.509 billion, including $611.8 million of unpledged securities and $676.7 million of available FHLB borrowing capacity. Year-end FHLB borrowings were $180.6 million and federal funds purchased were $17.9 million.
- Capital: Shareholders’ equity was $328.6 million, down from $407.6 million. Company CET1 and total risk-based capital ratios were 12.61% and 13.86%, respectively; the Bank remained well capitalized.
Material changes versus the prior comparable period
- Net income rose $18.5 million, primarily as higher asset yields and lower funding costs lifted net interest income. Net interest margin increased 68 basis points.
- Noninterest income fell $7.2 million, mainly because net securities gains declined from $6.9 million to $0.05 million. Noninterest expense decreased $5.3 million, including lower OREO losses and compensation costs.
- Loans increased $336.8 million, while deposits decreased $68.1 million. The portfolio loan-to-deposit ratio rose to 86.7% from 76.0%.
- Available-for-sale securities fell $86.1 million to $836.3 million. Gross unrealized losses rose to $109.7 million from $7.8 million, largely reflecting higher interest rates; accumulated other comprehensive income moved from positive $1.7 million to a loss of $85.6 million.
- The Company repurchased 2.587 million shares for $42.9 million. Management attributed much of the decline in equity and capital ratios to securities-related accumulated losses and repurchases.
Outlook, management commentary, risks and unusual items
- Management said its focus would shift toward organic growth, with opportunistic acquisitions also under consideration. It expects more modest residential mortgage growth amid higher mortgage rates. No specific earnings or financial guidance was provided.
- Management cautioned that rising rates may increase funding costs and that higher net interest income benefited partly from enhanced pricing on one large credit relationship, whose loans may not renew or contribute as much in future periods.
- Credit exposure is concentrated in real estate: commercial-purpose real estate loans represented 50.6% of total portfolio loans, and hospitality exposure was $360.4 million, or 11.4%. Construction costs, labor constraints, inflation, economic weakness and collateral values are identified risks.
- The ACL depends on estimates and forecasts. The audit identified the ACL for the “Other” loan pool as a critical audit matter: that pool held $54.7 million, or 58% of the total ACL. Management’s scenario range for the ACL included outcomes 17% below or 27% above its base case.
- The securities portfolio’s large unrealized losses were attributed primarily to market-rate movements, not credit deterioration; the Company reported no credit-related investment impairment losses and said it intended and was able to hold the securities to recovery or maturity.
- Other notable items: a $0.5 million provision for unfunded commitments; a $1.0 million one-time associate inflationary bonus; and early adoption of accounting guidance eliminating TDR accounting, with no material financial-statement effect. The Company reported no material pending or threatened litigation beyond ordinary-course matters.
- Crowe LLP issued unqualified opinions on the financial statements and internal control over financial reporting, which it found effective as of year-end.
Most important facts an investor should verify
- Deposit trends, deposit pricing and reliance on FHLB or other wholesale funding as competition for deposits continues.
- Whether net interest margin gains persist as funding costs reset and the large credit relationship reprices or matures.
- Commercial real estate, hospitality and construction concentrations, including project costs, borrower performance and collateral values.
- The assumptions and sensitivity of the $54.7 million ACL reserve for the “Other” pool, and whether credit performance supports management’s estimate.
- The effect of the $109.7 million gross unrealized securities losses on reported equity, liquidity flexibility and capital over time.
- Capital and liquidity after share repurchases, loan growth and any further deposit outflows; also verify the terms and maturity of year-end borrowings.