CARTER BANKSHARES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)


Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), is intended to help the reader understand our operations,
our present business environment, and our consolidated results of operations and
financial condition and highlights material changes in our financial condition
and results of operations as of and for the three month periods ended March 31,
2022 and March 31, 2021. The MD&A is provided as a supplement to, and should be
read in conjunction with our Consolidated Financial Statements and the
accompanying notes thereto contained in Item 1 of this Quarterly Report on Form
10-Q. Certain reclassifications have been made to prior periods to place them on
a basis comparable with the current period presentation. The results of
operations reported in the accompanying Consolidated Financial Statements are
not necessarily indicative of results to be expected in future periods. The MD&A
includes the following sections:

•Important Note Regarding Forward-Looking Statements
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Policies and Estimates
•Overview
•Results of Operations and Financial Condition
•Earnings Summary
•Liquidity and Capital Resources
•Regulatory Capital Resources
•Contractual Obligations
•Off-Balance Sheet Arrangements

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we
believe are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are
typically identified by words or phrases such as "will likely result," "expect,"
"anticipate," "estimate," "forecast," "project," "intend," " believe," "assume,"
"strategy," "trend," "plan," "outlook," "outcome," "continue," "remain,"
"potential," "opportunity," "comfortable," "current," "position," "maintain,"
"sustain," "seek," "achieve" and variations of such words and similar
expressions, or future or conditional verbs such as will, would, should, could
or may. Forward-looking statements in this Quarterly Report on Form 10-Q
include, but are not limited to, statements related to the COVID-19 pandemic and
its potential additional impact on the Company, its markets and its customers,
potential asset quality and net interest income developments, and the Company's
efficiency initiatives, and may otherwise relate to our financial condition,
results of operations, plans, objectives, outlook for earnings, revenues,
expenses, capital and liquidity levels and ratios, asset levels, asset quality,
litigation to which the Company is or has been a party and the potential impacts
thereof, and other matters regarding or affecting the Company and its future
business and operations. Although we believe the assumptions upon which these
forward-looking statements are based are reasonable, any of these assumptions
could prove to be inaccurate and the forward-looking statements based on these
assumptions could be incorrect. The matters discussed in these forward-looking
statements are subject to various risks, uncertainties and other factors that
could cause actual results and trends to differ materially from those made,
projected, or implied in or by the forward-looking statements depending on a
variety of uncertainties or other factors including, but not limited to:

•changes in accounting policies, practices or guidance, including, for example, our adoption of current expected credit loss (“CECL”);

•general economic or business conditions or changes in interest rates;

•risks and technological developments;

•threats, attacks or events related to cybersecurity;

•the Company’s liquidity and capital situation;

•the potential adverse effects of unusual and infrequently occurring events, or
the prospect of these events, such as weather-related disasters, terrorist acts,
war and other military conflicts (such as the ongoing war between Russia and
Ukraine) or public health events (such as the current COVID-19 pandemic), and
the governmental and societal responses thereto;

•these potential adverse effects may include, but are not limited to, adverse effects on the ability of the Company’s borrowers to honor their obligations to the Company, on the value of collateral securing the loans, on the demand for

                                       32
--------------------------------------------------------------------------------
  Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)

Company's loans or its other products and services, on incidents of cyberattacks
and fraud, on the Company's results of operations, liquidity or capital
resources, on risks posed by reliance on third-party service providers, on other
aspects of the Company's business operations and on financial markets and
economic growth;

•the effect of steps the Company takes or has taken in response to the COVID-19
pandemic, the severity and duration of the pandemic, and the impact it has on
exacerbating many of the risks described herein and in our   Annual Report on
Form 10-K for the year ended December 31, 2021  ;

• potential claims, damages and fines related to litigation or governmental actions;

•sensitivity to the interest rate environment including a prolonged period of
low interest rates, a rapid increase in interest rates or a change in the shape
of the yield curve;

•inflation;

•the replacement of LIBOR;

•a change in spreads on interest-bearing assets and interest-bearing liabilities;

•regulatory oversight and monitoring, including non-compliance with federal and state banking agency laws and regulations;

•legislative and regulatory changes and requirements affecting the financial
services industry as a whole, and the Company, in particular; the outcome of
pending and future litigation and governmental proceedings;

•increased competition;

•the ability to continue to introduce new competitive products and services at competitive prices in a timely and cost-effective manner;

•the Company's ability to recruit and retain qualified employees and implement
adequate succession planning to mitigate the loss of key members of its senior
management team;

•the strategic plan for optimizing the Company’s branch network;

•the management of our internal growth and our acquisitions;

•the possibility that the expected benefits of the acquisitions may not be fully realized in a timely manner or at all, or that the integration of the acquired businesses may be more difficult, disruptive or more costly than expected;

•contain costs and expenses;

•use of major customer relationships;

•credit losses;

•the potential impact of climate change and related government regulations on the Company and its customers;

•deterioration of the housing market and reduction in demand for mortgage loans;

•deterioration in the overall macroeconomic conditions or the state of the
banking industry that could impact the re-emergence of turbulence in significant
portions of the global financial and real estate markets that could impact our
performance, both directly, by affecting our revenues and the value of our
assets and liabilities, and indirectly, by affecting the economy generally and
access to capital in the amounts, at the times and on the terms required to
support our future businesses.

Many of these factors, as well as other factors, are described in this Quarterly
Report, as well as in Part I, Item 1A, "Risk Factors" in our   Annual Report on
Form 10-K for the year ended December 31, 2021   and our subsequent filings with
the Securities and Exchange Commission ("SEC"). Forward-looking statements are
based on beliefs and assumptions using information available at the time the
statements are made. We caution you not to unduly rely on forward-looking
statements because the assumptions, beliefs, expectations and projections about
future events that are expressed in or implied by a forward-looking statement
may, and often do, differ materially from actual results. Any forward-looking
statement speaks only as to the date on which it is made, and we undertake no
obligation to update, revise or clarify any forward-looking statement to reflect
developments occurring after the statement is made.

Explanation of the use of non-GAAP financial measures

In addition to the results of operations presented in accordance with generally
accepted accounting principles ("GAAP") in the United States, management uses,
and this quarterly report references, net interest income on a fully taxable
equivalent, or ("FTE"), basis, which is a non-GAAP financial measure. Management
believes this measure provides information useful to investors in understanding
our underlying business, operational performance and performance trends as it
facilitates
                                       33
--------------------------------------------------------------------------------
  Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)

comparisons with the performance of other companies in the financial services
industry. The Company believes the presentation of net interest income on an FTE
basis ensures the comparability of net interest income arising from both taxable
and tax-exempt sources and is consistent with industry practice. Net interest
income is reconciled to net interest income to an FTE basis (non-GAAP) in the
Net Interest Income section of the "Results of Operations and Financial
Condition."

Although management believes that this non-GAAP financial measure enhances
investors' understanding of our business and performance, this non-GAAP
financial measure should not be considered an alternative to GAAP or considered
to be more relevant than financial results determined in accordance with GAAP,
nor is it necessarily comparable with similar non-GAAP measures which may be
presented by other companies.

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2022 have remained unchanged from the information presented in our

  Annual Report on Form 10-K   for the year ended December 31, 2021 under the
section "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and are incorporated herein by reference.

Insight

Carter Bankshares, Inc. (the "Company") is a bank holding company headquartered
in Martinsville, Virginia with assets of $4.1 billion at March 31, 2022. The
Company is the parent company of its wholly owned subsidiary, Carter Bank &
Trust (the "Bank"). The Bank is an insured, Virginia state-chartered bank, which
operates branches in Virginia and North Carolina. The Company provides a full
range of financial services with retail, and commercial banking products and
insurance. Our common stock trades on the Nasdaq Global Select Market under the
ticker symbol "CARE."

The Company earns revenue primarily from interest on loans and securities and
fees charged for financial services provided to our customers. The Company
incurs expenses for the cost of deposits, provision for credit losses and other
operating costs such as salaries and employee benefits, data processing,
occupancy and tax expense.

Our mission is to strive to be the preferred lifetime financial partner for our
customers and shareholders, and the employer of choice in the communities the
Company is privileged to serve. Our strategic plan focuses on restructuring the
balance sheet to provide more diversification and higher yielding assets to
increase the net interest margin. Another area of focus is the transformation of
the infrastructure of the Company to provide a foundation for operational
efficiency and provide new products and services for our customers that will
ultimately increase noninterest income.

We continue to focus on loan and deposit growth, with a shift in deposit mix towards lower cost core deposits, less dependent on higher cost certificates of deposit (CDs), as well as implement opportunities to increase commission income while closely monitoring our operating expenses. The Company is focused on executing this strategy to successfully build our brand and grow our business in our markets.

Results of operations and financial situation

Earnings Summary

Highlights for the Three Months Ended March 31, 2022

•Net interest income increased $1.7 million, or 6.4%, to $28.2 million for the
three months ended March 31, 2022 compared to $26.5 million for the same period
in 2021 due primarily to the ongoing reduction in funding costs;

•The provision for credit losses decreased to $0.6 million for the three months
ended March 31, 2022, compared to $1.9 million for the same period in 2021 due
to improved qualitative reserves and lower net charge-offs, partialy offset by
loan growth;

• Total non-interest income decreased $3.6 million for $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021 due to a decrease in capital gains on disposals of securities;

                                       34
--------------------------------------------------------------------------------
  Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)

•Total noninterest expense decreased $1.1 million to $22.5 million for the three
months ended March 31, 2022 compared to $23.6 million for the same period in
2021 resulting from our retail branch optimization project, higher profit
sharing and vacation carryover in the fourth quarter of 2021 as well as lower
medical costs in the first three months of 2022; and

• Increase in provision for income taxes $0.4 million for $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

We reported net income of $9.3 million, or $0.36 diluted earnings per share, for
the three months ended March 31, 2022 compared to net income of $9.4 million, or
$0.36 diluted earnings per share, for the three months ended March 31, 2021.
                                                                             Three Months Ended March 31,
PERFORMANCE RATIOS                                                            2022                   2021
Return on Average Assets                                                         0.92  %                0.92  %
Return on Average Shareholders' Equity                                           9.57  %                9.72  %
Portfolio Loans to Deposit Ratio                                                77.62  %               80.51  %
Allowance for Credit Losses to Total Portfolio Loans                             3.33  %                3.93  %


Net Interest Income

Our principal source of revenue is net interest income. Net interest income
represents the difference between the interest and fees earned on
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is affected by changes in the average balance of
interest-earning assets, interest-bearing liabilities, as well as changes in
interest rates and spreads. The level and mix of interest-earning assets and
interest-bearing liabilities is managed by our Asset and Liability Committee
("ALCO"), in order to mitigate interest rate and liquidity risks of the balance
sheet. A variety of ALCO strategies were implemented, within prescribed ALCO
risk parameters, to produce what the Company believes is an acceptable level of
net interest income.

Net interest income and the net interest margin are presented on an FTE basis.
The FTE basis (non-GAAP) adjusts net interest income and net interest margin for
the tax benefit of income on certain tax-exempt loans and securities using the
applicable federal statutory tax rate for each period (which was 21% for the
periods presented) and the dividend-received deduction for equity securities.
The Company believes this FTE basis presentation provides a relevant comparison
between taxable and non-taxable sources of interest income. Refer to the
"Explanation of Use of Non-GAAP Financial Measures" above for additional
discussion of non-GAAP measures.

Total net interest income increased $1.7 million, or 6.4%, to $28.2 million for
the three months ended March 31, 2022 compared to $26.5 million for the same
period in 2021. This increase was primarily due to the ongoing reduction in
funding costs. Net interest income, on an FTE basis (non-GAAP), increased $1.5
million, or 5.7%, to $28.5 million for the three months ended March 31, 2022
compared to $27.0 million for the same period in 2021. For the three months
ended March 31, 2022, the increase in net interest income, on an FTE basis
(non-GAAP), was driven by lower interest income of $0.4 million and lower
interest expense of $1.9 million compared to the same period in 2021. Net
interest margin increased 15 basis points to 2.88% for the three months ended
March 31, 2022 compared to 2.73% for the same period in 2021. The net interest
margin, on an FTE basis (non-GAAP), increased 13 basis points to 2.91% for the
three months ended March 31, 2022 compared to 2.78% for the same period in 2021.
The Company continues to focus on the expansion of net interest income and the
net interest margin.
                                       35

————————————————– ——————————

Contents

© Edgar Online, source Previews

Previous Tourist sites thrive on Eid vacationers
Next A new magistrate will preside over the Municipal Court of Nogales | Local News