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 betweenRussia andUkraine ) 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 ContentsCARTER 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 endedDecember 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 endedDecember 31, 2021 and our subsequent filings with theSecurities 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
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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
Annual Report on Form 10-K for the year endedDecember 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 inMartinsville, Virginia with assets of$4.1 billion atMarch 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 inVirginia andNorth 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
•Net interest income increased$1.7 million , or 6.4%, to$28.2 million for the three months endedMarch 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 endedMarch 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
34 -------------------------------------------------------------------------------- Table of ContentsCARTER 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 endedMarch 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
We reported net income of$9.3 million , or$0.36 diluted earnings per share, for the three months endedMarch 31, 2022 compared to net income of$9.4 million , or$0.36 diluted earnings per share, for the three months endedMarch 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 ourAsset 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 endedMarch 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 endedMarch 31, 2022 compared to$27.0 million for the same period in 2021. For the three months endedMarch 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 endedMarch 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 endedMarch 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
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