Carter Bankshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Carter Bankshares is a Virginia-based bank holding company; its subsidiary, Carter Bank & Trust, operates 64 branches in Virginia and North Carolina. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $27.4 million; net interest margin 2.52% | Q3 2022: $37.7 million; margin 3.72% |
| Net income / diluted EPS | $3.6 million / $0.16 | Q3 2022: $14.4 million / $0.59 |
| Nine-month net income / diluted EPS | $25.3 million / $1.07 | Nine months 2022: $34.5 million / $1.38 |
| Total assets | $4,452.2 million | December 31, 2022: $4,204.5 million |
| Portfolio loans | $3,410.9 million | December 31, 2022: $3,148.9 million |
| Deposits | $3,556.2 million | December 31, 2022: $3,630.3 million |
| FHLB borrowings | $514.1 million; weighted-average rate 5.29% | December 31, 2022: $180.6 million; 4.48% |
| Allowance for credit losses (ACL) | $94.5 million; 2.77% of loans | December 31, 2022: $93.9 million; 2.98% |
| Nonperforming loans | $308.3 million; 9.04% of loans | December 31, 2022: $6.6 million; 0.21% |
| Shareholders’ equity | $330.6 million | December 31, 2022: $328.6 million |
For the first nine months, operating cash flow was $38.9 million, investing cash outflow was $255.5 million, and financing cash inflow was $225.2 million. Cash and cash equivalents ended at $55.4 million, up $8.5 million from year-end 2022. The filing reports $1.216 billion in total available liquidity sources, including $580.4 million in unpledged securities, $357.6 million of additional FHLB capacity and $145.0 million in unsecured lines. Highly liquid assets were 13.4% of total assets; available liquidity was 306.8% of uninsured deposits.
The Bank remained well capitalized: September 30 ratios were 9.59% leverage, 11.08% Common Equity Tier 1 and Tier 1, and 12.34% total risk-based capital. These ratios declined from year-end 2022 levels. The available-for-sale securities portfolio had $120.5 million of gross unrealized losses, versus $109.7 million at year-end; management attributed these primarily to interest-rate and market movements, not credit impairment, and said it did not intend to sell the securities or expect to be required to sell before recovery.
Material changes versus comparable periods
- Q3 net interest income fell 27.4% year over year; nine-month net interest income fell 3.6%. Higher interest income from rising asset yields was outweighed by sharply higher funding costs and reduced interest accrual on the largest borrower relationship.
- That relationship—commercial loans with approximately $301.9 million principal—was placed on nonaccrual in Q2 after maturities and failure to pay in full. Management estimated foregone interest income of $9.3 million in Q3 and $20.6 million for the first nine months. It represented 97.9% of nonperforming loans.
- Deposits declined $74.2 million from year-end, as $324.2 million of demand, money-market and savings balances ran off, partly offset by a $250.0 million increase in certificates of deposit. CDs rose to 42.5% of deposits.
- FHLB borrowings increased $333.6 million net during the first nine months. The portfolio loan-to-deposit ratio rose to 95.9% from 86.7% at year-end.
- Noninterest expense rose 16.3% in Q3 and 10.1% for the nine-month period. Reported drivers included FDIC insurance, compensation, other expense, and property write-downs. Noninterest income was nearly flat in Q3 but declined 7.1% over nine months.
- Net charge-offs were $2.0 million for nine months, down from $4.1 million in the comparable 2022 period; the ACL balance was broadly stable while its ratio to loans declined.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or financial guidance. Management aims to shift from balance-sheet restructuring toward prudent growth, principally organic, while pursuing fee income and monitoring expenses. It expects funding costs and the largest relationship’s nonaccrual status to continue pressuring net interest income and margin; management cautioned that higher asset yields may not offset those pressures in Q4 2023. Interest-rate simulations showed the balance sheet had shifted from asset-sensitive at year-end 2022 to slightly liability-sensitive at September 2023.
The $301.9 million relationship operates in hospitality, agriculture and energy. The company recorded a $53.6 million specific valuation allowance, based on discounted cash-flow analysis, and stated it believes the exposure is adequately reserved and secured. Collections and litigation are ongoing, but the company cannot predict timing or amount of recovery. The borrower-related entities and individuals are contesting the Bank’s confessions of judgment, alleging, among other matters, anti-tying violations, breach of contract and tortious interference. The Bank denies the allegations and intends to enforce the notes and related agreements; the litigation is in an early stage and the company cannot estimate the outcome or any possible loss.
Other notable items include $0.6 million of Q3 write-downs on three legacy OREO properties, $0.2 million of nonrecurring expense and $0.2 million of write-downs on two closed branches. The company repurchased 1,132,232 shares for $16.4 million during the first nine months; the 2023 authorization was exhausted August 31. Management identifies interest-rate and liquidity risk, loan and real-estate concentrations, credit losses, litigation, deposit competition, and economic conditions among relevant risks.
Important facts for investors to verify
- Progress, collateral values, reserve adequacy, cash collections and legal developments for the $301.9 million nonaccrual relationship.
- Deposit retention and mix, uninsured deposit levels, certificate maturities, and continued reliance on higher-cost FHLB funding.
- Whether net interest margin stabilizes as funding costs reprice and loan yields adjust; review the disclosed rate-sensitivity assumptions.
- Trends in criticized loans, delinquencies, charge-offs, construction and commercial real-estate exposures, and the ACL relative to problem loans.
- Liquidity and capital ratios after loan growth, securities valuation changes and share repurchases; confirm available borrowing capacity and collateral eligibility.
- Outcome and potential financial consequences of the collection litigation, which the filing says cannot yet be estimated.