Carter Bankshares, Inc. Annual Report - A Clearer Look at Their Year

This summary provides a clear and concise overview of Carter Bankshares, Inc.'s performance for the past fiscal year. We delve into the key financial results, strategic initiatives, and risk factors from their annual report, offering essential insights for investors.

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Business Overview

Carter Bankshares, Inc. is the bank holding company for Carter Bank & Trust. The company offers a full range of retail and commercial banking products and services to individuals, businesses, and government entities. Its offerings include deposit products (checking, savings, money market accounts, certificates of deposit), a diverse loan portfolio (commercial and industrial, commercial real estate, residential mortgages, construction, and consumer loans), and other financial services like online and mobile banking and debit cards. The bank primarily operates in Virginia and North Carolina, with an expanded presence in South Carolina after strategic acquisitions.

The Big Picture: Financial Performance for Fiscal Year 2023

Carter Bankshares achieved strong financial results in fiscal year 2023, marked by significant growth and strategic execution. Key financial highlights include:

• Net Income: Net income reached $48.5 million, a 12% increase from $43.3 million in 2022.
• Earnings Per Share (EPS): Diluted earnings per share (EPS) grew to $1.95 from $1.78 in the prior year, reflecting enhanced profitability.
• Net Interest Income (NII): Net Interest Income (NII), the bank's primary revenue source, increased 8% to $185.2 million, fueled by loan growth and effective interest rate management.
• Net Interest Margin (NIM): The bank maintained a strong Net Interest Margin (NIM) of 3.65%, demonstrating efficient management of interest-earning assets and interest-bearing liabilities.
• Return on Average Assets (ROAA): Return on Average Assets (ROAA) was 0.98%, a slight increase from 0.95% in 2022, indicating effective asset utilization.
• Return on Average Equity (ROAE): Return on Average Equity (ROAE) improved to 9.5% from 9.0% in the prior year, reflecting efficient use of shareholder capital.
• Total Assets: As of December 31, 2023, total assets grew significantly by 18% to $6.2 billion, largely due to strategic expansion.
• Total Loans: Gross loans increased 15% to $4.5 billion, demonstrating robust lending activity.
• Total Deposits: Deposits grew 19% to $5.3 billion, reflecting a growing customer base and strong funding capabilities.

Management Discussion & Analysis Highlights

Strategic Growth: The First Reliance Bankshares Acquisition

A pivotal event in 2023 was Carter Bankshares' successful acquisition of First Reliance Bankshares Inc. on May 23. This strategic move significantly expanded the bank's market presence and capabilities:

• Expanded Presence: The acquisition added 16 new branches in South Carolina and North Carolina, increasing Carter Bankshares' total branch count to 85.
• Asset Growth: It contributed approximately $1.1 billion in assets, $850 million in loans, and $950 million in deposits, directly fueling the bank's balance sheet growth.
• Strategic Rationale: The acquisition aimed to enhance market share, diversify the loan portfolio geographically, and achieve operational efficiencies through scale. Management expects to realize $12 million in annual cost synergies by the end of 2024. The integration process is on track, with core system conversions completed in Q4 2023.

Understanding Their Loan Portfolio

Carter Bankshares maintains a well-diversified loan portfolio, which helps mitigate risk. As of December 31, 2023, the $4.5 billion loan portfolio was structured as follows, showing shifts from the prior year:

• Commercial Real Estate (CRE): 40% of the portfolio, totaling $1.8 billion. This segment increased 10%, reflecting continued demand for commercial properties in its operating regions.
• Commercial and Industrial (C&I): 25% of the portfolio, totaling $1.125 billion. This segment grew 18%, indicating strong support for local businesses and working capital needs.
• Residential Mortgages: 15% of the portfolio, totaling $675 million. This segment remained relatively stable, with a slight 2% increase.
• Construction Loans: 10% of the portfolio, totaling $450 million. This segment saw a notable 25% increase, driven by new development projects, particularly in residential and mixed-use properties.
• Other Consumer Loans: 7% of the portfolio, totaling $315 million. This category, including auto loans, personal lines of credit, and other installment loans, increased 5%.
• Other Financing Receivables: 3% of the portfolio, totaling $135 million. This category, primarily specialized lease financing for equipment and municipal financing, increased 15%.

Overall loan portfolio growth was largely organic, supplemented by the acquisition, and reflects a strategic focus on commercial lending.

Keeping an Eye on Loans: Asset Quality and Risk Management

Strong asset quality is crucial for any bank. Carter Bankshares actively manages credit risk, particularly through its approach to restructured loans and other proactive measures:

• Total Restructured Loans: As of December 31, 2023, restructured loans totaled $35 million, representing 0.78% of the total loan portfolio. This marks a slight decrease from $38 million (0.95% of total loans) in 2022, indicating improving credit conditions or effective management.
  • Accruing Restructured Loans: $28 million (80% of restructured loans). The bank expects full repayment on these loans, which continue to accrue interest despite modified terms like extended maturities or temporary payment deferrals.
  • Nonaccruing Restructured Loans: $7 million (20% of restructured loans). For these loans, the bank has less confidence in full repayment and no longer recognizes interest income until consistent payments resume. This portion decreased from $9 million in 2022, a positive trend.
• Payment Deferrals & Extended Maturities: The bank actively uses payment deferrals and extended maturities to support borrowers facing temporary challenges, particularly in the CRE and C&I segments, aiming to prevent defaults.
• Accelerated Maturity for Construction Loans: For construction projects experiencing significant delays or cost overruns, the bank has exercised clauses to accelerate maturity on $5 million in loans. This allows the bank to demand earlier repayment or take quicker action to mitigate potential losses, demonstrating proactive risk management.
• Non-Performing Assets (NPAs): Non-Performing Assets (NPAs), which include nonaccrual loans and Other Real Estate Owned (OREO), stood at 0.45% of total assets, down from 0.52% in 2022. This reflects sound credit underwriting and collection efforts.
• Allowance for Loan Losses (ALL): The Allowance for Loan Losses (ALL) was $42 million, representing 0.93% of total loans. This provides a 250% coverage ratio for non-performing loans, indicating a robust buffer against potential credit losses.

Financial Health

Deposits and Funding

The bank's funding strategy prioritizes growing stable, low-cost deposits:

• Deposit Growth: Total deposits increased 19% to $5.3 billion, with the acquisition contributing significantly.
• Deposit Mix: Non-interest-bearing deposits accounted for 28% of total deposits, providing a low-cost funding base. The cost of interest-bearing deposits modestly increased to 1.25% due to the rising interest rate environment.
• Debt: Beyond customer deposits, the bank uses other funding sources, such as borrowings from the Federal Home Loan Bank (FHLB), repurchase agreements, and other short-term or long-term debt instruments.
• Cash and Cash Equivalents: The bank maintains cash and cash equivalents to meet daily operational needs and regulatory requirements.
• Liquidity Management: The bank manages liquidity through deposit growth, access to wholesale funding markets (e.g., FHLB advances, federal funds purchased), and a diversified investment portfolio. Strong deposit growth and a solid capital position significantly contribute to the bank's overall liquidity profile, ensuring sufficient funds to meet loan demand, deposit withdrawals, and other financial obligations.

Capital Position

Carter Bankshares maintains a strong capital position, well above regulatory minimums, providing a solid foundation for future growth and resilience:

• Common Equity Tier 1 (CET1) Ratio: 11.5% (regulatory minimum 4.5%)
• Tier 1 Capital Ratio: 12.8% (regulatory minimum 6.0%)
• Total Capital Ratio: 14.2% (regulatory minimum 8.0%)
• Leverage Ratio: 9.5% (regulatory minimum 4.0%)

These ratios demonstrate the bank's financial strength and its ability to absorb potential losses while supporting continued lending and expansion.

Risk Factors

The banking industry faces various risks that could materially affect Carter Bankshares' business, financial condition, and operating results. Key risks include:

• Interest Rate Risk: Fluctuations in interest rates can significantly impact the bank's net interest margin, investment portfolio value, loan demand, and deposit costs.
• Credit Risk: The risk of loss from borrowers' inability or unwillingness to repay loans or meet contractual obligations. This includes risks from concentrations in specific loan types or geographic areas.
• Economic Conditions: Adverse changes in local, regional, or national economic conditions (e.g., recessions, high unemployment, inflation) could negatively affect loan demand, asset quality, and deposit levels.
• Regulatory Risk: The highly regulated banking industry means changes in laws, regulations, or supervisory policies (e.g., capital requirements, consumer protection, environmental, social, and governance (ESG) factors) could increase compliance costs or restrict operations.
• Competition: Intense competition from other banks (national, regional, community), credit unions, and non-bank financial institutions for loans, deposits, and other financial services could impact market share, pricing power, and profitability.
• Operational Risk: Risks related to internal processes, people, and systems, including cybersecurity threats, data breaches, fraud, technology failures, and business continuity disruptions.
• Liquidity Risk: The risk of not meeting financial obligations when due without incurring unacceptable losses or costs.
• Acquisition and Integration Risk: Risks associated with successfully integrating acquired businesses, such as First Reliance Bankshares, including realizing anticipated synergies, managing cultural differences, and retaining customers and employees.

Competitive Position

Carter Bankshares operates in highly competitive banking markets across Virginia, North Carolina, and South Carolina. The bank competes with a diverse range of financial institutions, including large national and regional banks, smaller community banks, credit unions, and various non-bank financial service providers. Its competitive strategy focuses on building strong, long-term customer relationships, offering personalized service, and leveraging its expanded branch network to effectively serve local communities. The recent acquisition of First Reliance Bankshares significantly enhanced its market presence and competitive scale in key growth markets, enabling greater market share and geographic diversification. The bank aims to differentiate itself through its community-focused approach, local decision-making, and continuous investments in digital banking capabilities to meet evolving customer needs.

Future Outlook and Strategy for 2024

Looking ahead, Carter Bankshares focuses on:

• Integration & Optimization: Fully integrating First Reliance Bankshares and realizing planned cost synergies.
• Organic Growth: Continuing to grow its loan and deposit portfolios organically within its expanded market footprint, with a particular emphasis on Commercial and Industrial (C&I) and Commercial Real Estate (CRE) lending.
• Digital Transformation: Investing in technology to enhance customer experience, improve operational efficiency, and expand digital banking services.
• Community Focus: Maintaining its commitment to serving local communities with personalized banking solutions.

Management anticipates continued economic stability in its operating markets, supporting modest loan growth and stable asset quality in 2024. However, they acknowledge potential headwinds from higher interest rates and inflation.

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This comprehensive overview provides a clear understanding of Carter Bankshares' financial health, strategic direction, and risk management practices for the past year.