Carter Bankshares, Inc. (CARE) is a bank holding company headquartered in Martinsville, Virginia, with assets of $4.6 billion as of March 31, 2024. The company's wholly-owned subsidiary, Carter Bank & Trust, is an FDIC-insured, Virginia state-chartered bank that operates 65 branches across Virginia and North Carolina. The bank provides a full range of financial services, including retail and commercial banking products, as well as insurance offerings.

In the fiscal year ended December 31, 2023, Carter Bankshares reported annual net income of $23,384,000 and annual revenue of $214,698,000. The company's annual operating cash flow was $46,730,000, while its annual free cash flow reached $36,932,000. These strong financial results demonstrate the company's ability to generate consistent earnings and cash flow, even in the face of challenging market conditions.

For the three months ended March 31, 2024, Carter Bankshares reported net income of $5,811,000, or $0.25 per diluted share. This represents a decrease compared to the same period in the prior year, when the company reported net income of $15,941,000, or $0.67 per diluted share. The decline in quarterly earnings was primarily due to a $9.3 million negative impact on interest income resulting from the company's largest lending relationship being placed on nonaccrual status during the second quarter of 2023.

Despite this temporary setback, the company's management remains focused on executing a prudent growth strategy that leverages its strong capital and liquidity positions. The company is dedicated to resolving the nonaccrual loans related to its largest lending relationship in a manner that best protects the interests of the company, the bank, and its shareholders.

Business Overview

Carter Bankshares operates through its subsidiary, Carter Bank & Trust, which provides a diverse range of financial services to individuals and businesses in its Virginia and North Carolina markets. The bank's loan portfolio is primarily composed of commercial real estate (49.3% of total loans), commercial and industrial (7.3%), residential mortgages (22.5%), and construction loans (11.3%) as of March 31, 2024.

The company's commercial real estate portfolio is well-diversified by property type, with the largest concentrations in retail/restaurant (18.9% of CRE portfolio), warehouse (16.9%), and hospitality (14.9%) as of March 31, 2024. The bank's underwriting process focuses on cash flow analysis, leverage, and market conditions to mitigate concentration risks in this segment.

The residential mortgage portfolio has experienced modest growth in recent quarters, reflecting the company's cautious approach in the current interest rate environment. The construction loan portfolio, which represents 11.3% of total loans, is closely monitored, with the bank maintaining strict underwriting standards and loan-to-cost limits to manage risk in this segment.

Liquidity

As of March 31, 2024, Carter Bankshares reported total assets of $4.6 billion, an increase of $42.4 million from December 31, 2023. The company's loan portfolio increased by $3.2 million, or 0.4% on an annualized basis, during the first quarter of 2024, with growth primarily in the commercial real estate and residential mortgage segments.

The company's securities portfolio decreased by $10.2 million to $768.8 million, or 16.9% of total assets, as of March 31, 2024, due to ongoing maturities, principal curtailments, and changes in market values driven by fluctuations in intermediate treasury yields. The company has not made any new securities purchases during the first quarter of 2024, instead deploying liquidity generated from the securities portfolio into higher-yielding loans.

Carter Bankshares maintains a strong liquidity position, with $1.3 billion in total liquidity sources as of March 31, 2024, including $538.6 million in highly liquid assets. The company's highly liquid assets to total assets ratio was 11.8% at the end of the first quarter, and its total available liquidity to uninsured deposits ratio was 199.0%.

The company's deposit base remains stable and diversified, with total deposits increasing by $108.6 million, or 2.9%, during the first quarter of 2024. Noninterest-bearing deposits comprised 17.5% of total deposits as of March 31, 2024, while certificates of deposit accounted for 44.2% of the deposit mix.

Capital Strength and Asset Quality

Carter Bankshares' capital position remains strong, with the company's Tier 1 capital ratio at 10.89% and its total risk-based capital ratio at 12.15% as of March 31, 2024. The bank's Tier 1 capital ratio was 10.80%, and its total risk-based capital ratio was 12.07% at the end of the first quarter.

The company's asset quality metrics have been impacted by the placement of its largest lending relationship, totaling $301.9 million, on nonaccrual status during the second quarter of 2023. As a result, nonperforming loans as a percentage of total portfolio loans increased to 8.76% as of March 31, 2024, compared to 8.83% at the end of 2023.

The company's allowance for credit losses (ACL) was $96.5 million, or 2.75% of total portfolio loans, as of March 31, 2024, compared to $97.1 million, or 2.77%, at the end of 2023. Management believes the ACL is adequate to absorb expected losses in the loan portfolio, despite the elevated level of nonperforming loans.

Risks and Challenges

Carter Bankshares faces several risks and challenges that could impact its future performance. The company's largest lending relationship, which was placed on nonaccrual status in the second quarter of 2023, represents a significant concentration risk and could continue to negatively impact the company's earnings and asset quality if not resolved in a timely and favorable manner.

Additionally, the company's exposure to the commercial real estate market, which accounts for nearly half of its loan portfolio, makes it vulnerable to any downturn in that sector. The company's ability to manage its credit risk, maintain adequate capital levels, and navigate the evolving interest rate environment will be critical to its long-term success.

Outlook and Conclusion

Despite the challenges faced by Carter Bankshares, the company's management remains focused on executing a prudent growth strategy that leverages its strong capital and liquidity positions. The company is dedicated to resolving the nonaccrual loans related to its largest lending relationship in a manner that best protects the interests of the company, the bank, and its shareholders.

Looking ahead, the company's ability to generate consistent earnings, maintain a strong balance sheet, and effectively manage its risks will be key to its long-term success. Investors should closely monitor the company's progress in resolving the nonaccrual loans, as well as its ability to navigate the evolving interest rate environment and any potential changes in the commercial real estate market.

Overall, Carter Bankshares appears to be a resilient regional bank with a diversified business model and a focus on prudent growth. While the company faces some near-term challenges, its strong capital position, ample liquidity, and experienced management team suggest that it is well-positioned to weather the current market conditions and capitalize on future opportunities.