Carter Bank & Trust Announces First Quarter 2020 Financial Results

MARTINSVILLE, VA / ACCESSWIRE / April 30, 2020 / Carter Bank & Trust (the "Bank") (NASDAQ:CARE) today announced net income of $4.4 million, or $0.17 diluted earnings per share, for the first quarter of 2020, as compared to net income of $3.6 million, or $0.14 diluted earnings per share, in the fourth quarter of 2019 and net income of $7.5 million, or $0.29 diluted earnings per share, for the first quarter of 2019. Pre-tax pre-provision earnings¹ were $9.5 million, $2.4 million and $9.6 million for the quarters ended March 31, 2020, December 31, 2019 and March 31, 2019, respectively.

First Quarter 2020 Financial Highlights

• First quarter net income of $4.4 million, or $0.17 diluted earnings per share, as compared to net income of $3.6 million, or $0.14 diluted earnings per share, in the fourth quarter of 2019 and net income of $7.5 million, or $0.29 diluted earnings per share, over the same quarter of 2019;
• Net interest income declined $1.2 million, or 4.1%, to $27.3 million as compared to the linked quarter primarily due to balance sheet repricing driven by the impact of the lower interest rate environment and one less day in the first quarter, offset by an seven basis point decrease in funding costs compared to the fourth quarter of 2019, and decreased $0.6 million, or 2.3%, over the same quarter in 2019;
• Net interest margin, on a fully taxable equivalent basis, declined nine basis points to 2.97% over the linked quarter and decreased 12 basis points over the same quarter last year;
• Solid portfolio loan growth of $55.1 million, or 7.6% on an annualized basis, as compared to the linked quarter, and growth of $94.3 million, or 3.3%, as compared to March 31, 2019;
• Total deposits decreased $31.3 million to $3.5 billion as of March 31, 2020 as compared to December 31, 2019 due to the intentional runoff of $72.7 million of higher cost certificates of deposits. Noninterest-bearing and interest bearing demand deposits, money market accounts and savings, increased by $41.4 million, or 2.7%, as compared to linked quarter;
• The provision for loan losses totaled $4.8 million for the period ended March 31, 2020 and $1.6 million for the same period of 2019. Included is the impact of a reserve build of $2.6 million, or $(0.08) per share, driven by economic and market conditions as a result of COVID-19;
• The Bank has elected to take advantage of Section 4014 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act provision to temporarily delay adoption of the Current Expected Credit Losses ("CECL") methodology. This delay expires at the earlier of December 31, 2020 or the date on which the national emergency declaration related to COVID-19 is terminated;
• Nonperforming loans declined $1.6 million, or 4.0% as compared to December 31, 2019 and decreased $9.1 million, or 18.4%, from March 31, 2019. Nonperforming loans as a percentage of total portfolio loans were 1.38%, 1.46% and 1.74% as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively.

Important Note Regarding Financial Results

The financial results reported in this release are subject to amendment due to a pending appraisal regarding collateral for one impaired loan relationship and the impact that the results of that appraisal may have on the Bank's financial results as of and for the periods ended December 31, 2019 and March 31, 2020. Due to the effects of the COVID-19 pandemic, the process of obtaining the independent appraisal and evaluating the collateral has been slowed. Please reference the Bank's Form 12b-25 filed with the Federal Deposit Insurance Corporation ("FDIC") on March 16, 2020.

Litz H. Van Dyke, Chief Executive Officer, stated, "We recognize that the emergence of COVID-19 and the dramatic steps we all must take to curtail its spread, will create financial and other challenges for our customers and communities in these unprecedented times. We are committed to providing financial flexibility to our individual and business customers to help them deal with the challenges from this crisis. For our customers, we have offered payment deferrals, participation in the small business Paycheck Protection Program (PPP), fee waivers, as well as other relief actions. For our employees, we've enabled approximately 20% of our workforce to work remotely. For those whose jobs are not conducive to them working remotely, we have taken significant steps to ensure their safety."

Van Dyke added, "I'm incredibly proud of the efforts our employees are making to support our customers and each other. Our priority is to be there to serve our customers while maintaining a safe environment for our employees."

Operating Highlights

Net interest income decreased $0.6 million, or 2.3%, to $27.3 million during the first quarter of 2020 as compared to the same period of 2019. The net interest margin, on a fully taxable equivalent basis, decreased 12 basis points to 2.97% over the past twelve months. The decreases in short-term interest rates had a negative impact on both net interest income and net interest margin, but are offset by a lower cost of funds. The yield on interest-earning assets decreased 18 basis points, offset by a five basis point decline in funding costs as compared to the same period of 2019.

The provision for loan losses totaled $4.8 million for the period ended March 31, 2020 and $1.6 million for the same period of 2019. The Bank was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board ("FASB") Accounting Standards Update 2016-03 and related amendments, Financial Instruments - Credit Losses (Topic 326). However, the Bank elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Included in the provision expense for the period ended March 31, 2020 is the impact of a reserve build of $2.6 million, or $(0.08) per share, driven by economic and market conditions as a result of COVID-19. This represents a 195% increase in the provision expense as compared to the same period of 2019. The Bank adjusted qualitative risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

At March 31, 2020, nonperforming loans were $40.5 million, a decrease of $1.6 million, or 4.0% as compared to December 31, 2019. Net charge-offs were $0.6 million in the first quarter of 2020 as compared to $1.3 million in the same period of 2019. As a percentage of total portfolio loans, on an annualized basis, net charge-offs were 0.08% and 0.18% for the quarters ending March 31, 2020 and 2019, respectively. Nonperforming loans as a percentage of total portfolio loans were 1.38%, 1.46% and 1.74% as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively.

Noninterest income at March 31, 2020, excluding net securities gains, increased $2.0 million, or 52.1%, as compared to the same period of 2019. The increase was primarily due to $1.0 million of higher insurance commissions, related to the adoption of ASU 2014-09, Topic 606 by our provider, $0.4 million of commercial loan interest rate swap fees, included in other income, $0.5 million of higher service charges and debit card interchange fees, which were offset by lower Other Real Estate Owned ("OREO") income of $0.2 million due to the sale of several large commercial properties over the last 12 months that generated income. Securities gains of $1.2 million and $31 thousand were realized during the first quarter of 2020 and 2019, respectively, to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio.

Total noninterest expense increased $2.6 million, or 11.9%, to $24.7 million as compared to $22.1 million in the same period of 2019. The increase was primarily driven by salaries and employee benefits and occupancy expenses. The increase of $1.5 million in salaries and benefits were primarily attributable to a $0.7 million increase of normal merit increases and a $0.7 million decrease in salary deferrals on new loan originations in the first quarter of 2020. There have not been any permanent or temporary reductions in employees as a result of COVID-19. The $0.4 million increase in occupancy expense is a result of higher depreciation for software and equipment for ancillary products and services. The $0.4 million increase in advertising is related to our deposit acquisition strategy. The $0.9 million increase in the unfunded loan commitment reserve was due to several new commitments approved during the first quarter of 2020 and increased commitments on existing lines of credit. Offsetting these increases were decreases of $0.6 million in FDIC insurance expense, legal and professional fees and data processing.

Financial Condition

Total assets were $4.0 billion at March 31, 2020 and December 31, 2019. Total portfolio loans increased $55.1 million, or 7.6% on an annualized basis, to $2.9 billion as of March 31, 2020 as compared to December 31, 2019. Nonperforming loans decreased $1.6 million to $40.5 million, or 4.0% as of March 31, 2020 as compared to $42.1 million at December 31, 2019. OREO decreased $0.2 million at March 31, 2020 as compared to December 31, 2019. Closed retail bank offices carrying values declined $0.5 million from December 31, 2019 and have a remaining book value of $2.5 million at March 31, 2020.

Federal Reserve Bank excess reserves decreased $28.2 million at March 31, 2020 as compared to December 31, 2019 due to active balance sheet management. This excess cash was deployed into higher yielding and diversified securities, funded loan growth, and also funded the planned decrease in higher cost certificates of deposits.

The securities portfolio decreased $12.6 million and is currently 18.2% of total assets at March 31, 2020 as compared to 18.5% of total assets at December 31, 2019. The decrease is a result of loan growth and active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits decreased $31.3 million to $3.5 billion as of March 31, 2020 as compared to December 31, 2019 due to the intentional runoff of $72.7 million of higher cost certificates of deposits. Core deposits, including noninterest-bearing and interest-bearing demand deposits, money market accounts and savings, increased by $41.4 million, or 2.7%, as compared to December 31, 2019. Noninterest-bearing deposits comprised 16.1% and 15.8% of total deposits at March 31, 2020 and December 31, 2019, respectively

The allowance for loan losses was 1.46% of total portfolio loans as of March 31, 2020 as compared to 1.34% as of December 31, 2019. General reserves as a percentage of total loans were 1.22% at March 31, 2020 as compared to 1.13% as of December 31, 2019. Included in the allowance is a reserve build of $2.6 million driven by economic and market conditions as a result of COVID-19. The allowance for loan losses was 106.1% of nonperforming loans as of March 31, 2020 as compared to 92.0% of nonperforming loans as of December 31, 2019. In the view of management, the allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio. For further information regarding the Bank's decision to defer CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the first quarter of 2020, please see the discussion above under Provision for Loan Losses.

The Bank is providing deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications. These deferrals typically provide deferrals of both principal and interest for up to 180 days. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and will resume principal payments once accrued interest is current. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity. As of April 28, 2020, we have had 380 commercial customers opt for deferrals with an aggregate principal balance of $1.1 billion. Approximately $454.8 million of these modifications were in the hospitality industry comprised of deferrals on 81 loans. The average deferment period for these customers has been 4.4 months.

The Bank remains well capitalized. The Bank's Tier 1 Capital ratio decreased to 13.03% as of March 31, 2020 as compared to 13.46% as of December 31, 2019. The Bank's leverage ratio was 10.47% at March 31, 2020 as compared to 10.33% as of December 31, 2019. The Bank's Total Risk-Based Capital ratio was 14.29% at March 31, 2020 as compared to 14.71% at December 31, 2019.

Total capital of $474.8 million at March 31, 2020, reflects an increase of $1.7 million as compared to December 31, 2019. The increase in equity during the first quarter of 2020 is due to net income of $4.4 million and a $0.6 million increase in other comprehensive income due to changes in fair value of investment securities. These increases were offset by $3.7 million special dividend paid in March of 2020. The remaining difference of $0.4 million is related to restricted stock activity during the quarter.

At March 31, 2020, funding sources accessible to the Bank include borrowing availability at the FHLB, equal to 25% of the Bank's assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds unsecured lines with six other correspondent financial institutions in the amount of $115.0 million and access to the institutional CD market through brokered CDs and QwickRate. In addition to the above resources, the Bank also has $605.4 million of unpledged available-for-sale investment securities as an additional source of liquidity.

About Carter Bank & Trust

Headquartered in Martinsville, VA, Carter Bank & Trust is a state-chartered community bank in Virginia and trades on the Nasdaq Global Select Market under the symbol CARE. The Bank has $4.0 billion in assets and 99 branches in Virginia and North Carolina. For more information visit www.CBTCares.com.

Important Note Regarding Non-GAAP Financial Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables in our definitions and reconciliations of GAAP to non-GAAP financial measures. This press release and the accompanying tables discuss financial measures, such as adjusted noninterest expense, adjusted efficiency ratio, and net interest income on a fully taxable equivalent basis, which are all non-GAAP measures. We believe that such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Bank's operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Investors should consider the Bank's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Bank. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Bank's results or financial condition as reported under GAAP.

Important Note Regarding Forward-Looking Statements

This information contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally 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, financial position, and other matters regarding or affecting Carter Bank & Trust and its future business and operations, and specifically including information related to the pending appraisal of collateral for one impaired loan relationship and potential impacts on the Bank's financial results. 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," "believe," "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. 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: credit losses; cyber-security concerns; rapid technological developments and changes; the Bank's liquidity and capital positions; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Bank's borrowers to satisfy their obligations to the Bank, on the value of collateral securing loans, on the demand for the Bank's loans or its other products and services, on incidents of cyberattack and fraud, on the Bank's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Bank's business operations and on financial markets and economic growth; 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; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight; legislation affecting the financial services industry as a whole, and Carter Bank & Trust, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated; containing costs and expenses; reliance on significant customer relationships; general economic or business conditions; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; 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 our filings with the FDIC. 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 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 any forward-looking statement to reflect developments occurring after the statement is made.

Carter Bank & Trust
Wendy Bell, 276-656-1776
Senior Executive Vice President & Chief Financial Officer
[email protected]

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DEFINITIONS AND RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES:

¹Pre-tax pre-provision earnings are computed as net interest income plus noninterest income minus noninterest expense before the provision for loan losses and income tax provision.

²Tangible Equity

³Net interest income has been computed on a fully taxable equivalent basis ("FTE") using a 21% federal income tax rate for the 2020 and 2019 periods.

⁴Core Efficiency Ratio (Non-GAAP)

SOURCE: Carter Bank & Trust