Carter Bankshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Carter Bankshares is a Virginia-based bank holding company operating Carter Bank & Trust in Virginia and North Carolina. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net interest income | $28.2 | $26.5; up 6.4% |
| Net interest margin | 2.88% | 2.73% |
| Provision for credit losses | $0.6 | $1.9 |
| Noninterest income | $5.3 | $9.0; down 40.4% |
| Noninterest expense | $22.5 | $23.6; down 4.6% |
| Net income | $9.3 | $9.4 |
| Diluted EPS | $0.36 | $0.36 |
Net interest income growth primarily reflected lower funding costs: interest expense declined $2.0 million, while interest income declined $0.3 million. The FTE net interest margin, a non-GAAP measure, was 2.91%, versus 2.78% a year earlier. The reduction in noninterest income mainly reflected the absence of $3.6 million of net securities gains recorded in Q1 2021; Q1 2022 included a $24,000 securities loss and $0.4 million of gains on sales of bank premises. The effective tax rate rose to 12.5% from 9.0%.
Net cash provided by operating activities was $12.5 million, investing activities used $181.7 million, and financing activities used $0.6 million. Cash and cash equivalents declined $169.8 million during the quarter to $108.0 million, largely as cash was deployed into securities and loans.
Financial position, liquidity and capital
- Total assets were $4.12 billion, down $10.5 million from year-end. Portfolio loans grew $81.9 million, or 2.9%, to $2.89 billion; securities increased $59.6 million to $982.0 million.
- Deposits rose $29.8 million to $3.73 billion. Core deposits increased $89.7 million, while certificates of deposit declined $59.8 million as the company continued to run off higher-cost CDs. The portfolio-loans-to-deposits ratio was 77.62%, versus 80.51% in Q1 2021.
- There were no FHLB borrowings at quarter-end, compared with $7.0 million at December 31, 2021; the remaining advance was repaid in January. Management reported approximately $1.78 billion of total liquidity sources, including $817.4 million of unpledged securities, $693.0 million of FHLB availability and $145.0 million of unsecured lines. Highly liquid assets were $887.1 million, or 21.5% of assets.
- Shareholders’ equity fell $49.0 million to $358.6 million. The main factors were a $34.0 million after-tax securities-related other comprehensive loss and $24.6 million of share repurchases, partly offset by $9.3 million of net income.
- The allowance for credit losses was $96.4 million, or 3.33% of portfolio loans, versus 3.41% at year-end. Nonperforming loans were $7.3 million, or 0.25% of portfolio loans; nonperforming assets totaled $18.6 million, including $11.3 million of other real estate owned.
- The company reported a 10.00% leverage ratio and 14.24% total risk-based capital ratio. The Bank’s corresponding ratios were 9.91% and 14.12%; management said the Bank remained well-capitalized.
Material changes, outlook and risks
- Interest-rate-driven securities losses: Gross unrealized losses on available-for-sale securities increased to $42.2 million at March 31 from $7.8 million at year-end, contributing to the $34.0 million after-tax quarterly OCI loss. Management attributed the losses primarily to higher interest rates, reported no identified impairment, and said it generally did not intend, and was not likely to be required, to sell the affected securities before recovery of amortized cost.
- Credit and concentration exposure: Hospitality loans were approximately $406.2 million, or 14.0% of portfolio loans. Management cited improved hotel occupancy and rates since 2021, but ongoing labor constraints that could pressure operations, liquidity, collateral values and repayment. The top 10 credit relationships totaled $717.7 million, or 24.8% of gross loans; the “Other” segment represented 48.7% of those relationships.
- Repurchases: The company repurchased approximately 1.52 million shares during Q1 at an average $16.17 per share. The two-million-share authorization was fully executed by April 28, 2022. The filing’s equity note and issuer-purchase table show different Q1 share counts; see investor verification items below.
- Rate sensitivity: Management described the balance sheet as asset-sensitive: its model estimated that a 100-basis-point rate increase would raise 12-month pretax net interest income 8.3%, while a 100-basis-point decrease would lower it 5.3%. Sensitivity had declined from year-end as cash was redeployed into loans and securities.
- LIBOR transition: About 16% of loans had a variable LIBOR index. The company had stopped originating new LIBOR-indexed variable-rate loans by year-end 2021 and was reviewing fallback language and alternatives; management did not expect the transition’s financial impact to be material.
- Outlook and contingencies: No specific earnings or financial guidance was provided. Management described ongoing priorities of loan and core-deposit growth, balance-sheet diversification, higher net interest margin, fee-income growth and operating efficiency. Risks discussed include interest-rate and inflation changes, economic conditions, credit losses, COVID-19 effects, hospitality and real-estate exposure, cyber threats, regulation, LIBOR replacement, and litigation. Management reported no material pending or threatened legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Reconcile the Q1 repurchase share counts: 1,523,157 shares in the equity statement and repurchase-plan note versus 1,532,849 in the issuer-purchases table; the latter may include shares withheld for employee tax obligations.
- Assess the sensitivity of tangible and regulatory capital to further declines in available-for-sale securities, and the company’s ability to avoid realizing losses if liquidity needs change.
- Monitor hospitality borrowers, the sizeable “Other” loan segment, and the top-10 relationship concentration, including changes in risk ratings, delinquencies and collateral values.
- Track deposit mix and funding costs as higher-cost CDs run off, and confirm that stated liquidity sources remain available under stress and are supported by eligible collateral.
- Review subsequent filings for realized securities gains or losses, credit-loss allowance changes, share-count effects, and progress on LIBOR fallback arrangements.