Carter Bank & Trust Announces Third Quarter 2020 Financial Results

MARTINSVILLE, VA / ACCESSWIRE / October 29, 2020 / Carter Bank & Trust (the "Bank") (NASDAQ:CARE) today announced a net loss of $57.7 million, or $2.19 per share, for the third quarter of 2020 due to a one-time goodwill impairment charge of $62.2 million ($2.36 per share) that was recorded in the third quarter of 2020. Net income, excluding this one-time charge, was $4.5 million, or $0.17 diluted earnings per share as compared to net income of $4.5 million, or $0.17 diluted earnings per share, in the second quarter of 2020 and net income of $7.6 million, or $0.29 diluted earnings per share, for the third quarter of 2019. Pre-tax pre-provision earnings¹, excluding goodwill impairment, were $8.3 million, $9.4 million and $9.4 million for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

For the nine months ended September 30, 2020, the Bank realized a net loss of $48.8 million, or $1.85 per share. Net income, excluding the one-time goodwill impairment charge, was $13.4 million, or $0.51 diluted earnings per share as compared to net income of $23.0 million, or $0.87 diluted earnings per share in the first nine months of 2019. Pre-tax pre-provision earnings¹, excluding goodwill impairment, were $27.2 million and $28.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Third Quarter 2020 Financial Highlights

• Net interest income declined $0.8 million, or 3.1%, to $25.4 million as compared to the linked quarter primarily due to balance sheet repricing driven by the impact of the lower interest rate environment, offset by a 13 basis point decrease in funding costs compared to the second quarter of 2020, and decreased $2.6 million, or 9.4%, over the same quarter in 2019;
• Net interest margin, on a fully taxable equivalent basis, declined 13 basis points to 2.66% over the linked quarter and decreased 35 basis points over the same quarter last year;
• A one-time goodwill impairment charge of $62.2 million ($2.36 per share) was recorded in the third quarter of 2020. The impairment charge is a non-cash charge that does not affect regulatory capital ratios, liquidity, or our overall financial strength;
• Eight retail branch banking offices were closed during the third quarter of 2020 as part of our branch optimization project. Five of these branches were moved to other real estate owned ("OREO") and marketed for sale resulting in a $1.1 million write-down;
• Portfolio loan growth totaled $28.6 million, or 3.9% on an annualized basis, as compared to the linked quarter, and growth of $82.2 million, or 2.8%, as compared to September 30, 2019;
• Total deposits increased $7.1 million to $3.6 billion as of September 30, 2020 as compared to the linked quarter and growth of $91.8, or 2.6%, as compared to September 30, 2019. Noninterest-bearing and interest-bearing demand deposits, money market accounts and savings, increased by $70.2 million, or 3.9%, as compared to linked quarter and increased $350.5 million, or 23.4%, as compared to September 30, 2019;
• The provision for loan losses totaled $2.9 million for the quarter ended September 30, 2020, $5.5 million for the quarter ending June 30, 2020 and $1.4 million for the same quarter of 2019. Included in the third quarter provision for loan losses was an increase in qualitative loss factors as a result of the estimated economic impact of COVID-19 of $3.6 million, or $(0.11) per share, offset by an decrease to our quantitative reserves due to decreases in historic loss rates which were partially offset by an increase in loan volume;
• Nonperforming loans declined $1.6 million, or 4.0% as compared to December 31, 2019 and decreased $6.6 million, or 14.1%, from September 30, 2019. Nonperforming loans as a percentage of total portfolio loans were 1.35%, 1.37% and 1.62% as of September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

"Obviously we are disappointed in having to take a goodwill impairment charge in the third quarter. Fortunately this is more of an accounting entry than a reflection of the financial performance of the Bank. While a significant negative impact to earnings, the impairment is a non-cash charge and has no impact on regulatory capital or our liquidity. Regulatory capital levels as well as our liquidity remain strong." stated Litz H. Van Dyke, Chief Executive Officer. "We continue to provide direct financial flexibility to our individual and business customers, to offer our products and services through multiple delivery channels, to show our trademark caring and empathy to every customer, and to provide a safe environment for both employees and customers."

Van Dyke continued, "I again commend our associates for their commitment, performance and professionalism during these difficult times. We continue to open accounts, make loans, and process transactions. We experienced growth in both loans and lower cost deposits in the third quarter. While the economy has shown some signs of improvement in the third quarter, there still remain headwinds and tremendous uncertainty around the continuing impacts from COVID-19. We continue to work on improving the operating fundamentals of the Bank by focusing on resolving legacy credit issues, expense control, margin improvement, and optimizing our branch network. While we expect uncertainty and challenges ahead due to the pandemic, we are confident in our team, technology, products/services, risk management, and strong capital/liquidity position."

Operating Highlights

Net interest income decreased $5.0 million, or 5.9%, to $79.0 million during the first nine months of 2020 as compared to the same period of 2019. The net interest margin, on a fully taxable equivalent basis, decreased 24 basis points to 2.80% 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 49 basis points, offset by a 28 basis point decline in funding costs as compared to the same period of 2019.

The provision for loan losses totaled $13.2 million for the nine month period ended September 30, 2020 and $4.4 million for the same period of 2019. The Bank was subject to the adoption of the Current Expected Credit Losses ("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 Coronavirus Aid, Relief, and Economic Security ("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 nine months ended September 30, 2020 is the estimated economic impact of COVID-19 of $9.6 million, or $(0.29) per share, driven by economic and market conditions as a result of COVID-19. This represents a 201% 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 September 30, 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 $2.0 million in the first nine months of 2020 as compared to $3.3 million in the same period of 2019. As a percentage of total portfolio loans, on an annualized basis, net charge-offs were 0.09% and 0.15% for the periods ending September 30, 2020 and 2019, respectively. Nonperforming loans as a percentage of total portfolio loans were 1.35%, 1.37% and 1.62% as of September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

Noninterest income at September 30, 2020, excluding net securities gains, increased $4.3 million, or 40.0%, for the nine months ending September 30, 2020 as compared to the same period of 2019. The increase was primarily due to $3.1 million of commercial loan swap fee income as result of the high demand for this product in the current low interest rate environment, $1.0 million of higher insurance commissions, related to the adoption of ASU 2014-09, Topic 606 by our provider, $0.4 million of higher debit card interchange fees, which were offset by lower service charges on deposit accounts of $0.2 million due to COVID-19 fee waivers. OREO income declined $0.3 million due to the sale of several large commercial properties over the last 12 months that generated income. Securities gains of $5.9 million and $1.6 million were realized during the first nine months of 2020 and 2019, respectively, to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio.

Total noninterest expense increased $67.4 million, or 99.8%, to $134.9 million for the nine months ending September 30, 2020 as compared to the same period of 2019. This increase was primarily due to the aforementioned goodwill impairment charge of $62.2 million. Excluding the impact of the goodwill impairment charge, noninterest expense increased $5.2 million, or 7.7%, to $72.7 million. The increase was primarily driven by salaries and employee benefits and occupancy expenses. The increase of $1.3 million in salaries and benefits were primarily attributable to a $0.7 million increase of normal merit increases and a $0.6 million decrease in salary deferrals on new loan originations in the first nine months of 2020. There have not been any permanent or temporary reductions in employees as a result of COVID-19. The $1.4 million increase in occupancy expense is a result of higher depreciation for software and equipment for ancillary products and services. FDIC insurance increased $0.9 million primarily due to the $1.1 million one-time credit for eligible institutions available in the third quarter of 2019. The $0.7 million increase in advertising is related to our deposit acquisition strategy. Losses on Sales and Write-downs of Other Real Estate Owned increased $0.8 million due to the aforementioned write-down of $1.1 million on five closed retail branch offices moved to OREO in the third quarter of 2020.

Financial Condition

Total assets were $4.1 billion at September 30, 2020 and $4.0 billion at December 31, 2019. Total portfolio loans increased $101.2 million, or 3.5%, to $3.0 billion as of September 30, 2020 as compared to December 31, 2019. Nonperforming loans decreased $1.6 million to $40.5 million, or 4.0% as of September 30, 2020 as compared to $42.1 million at December 31, 2019. OREO decreased $1.9 million at September 30, 2020 as compared to December 31, 2019. Closed retail bank offices have a remaining book value of $2.5 million at September 30, 2020 and $3.0 million at December 31, 2019.

Federal Reserve Bank excess reserves increased $67.9 million at September 30, 2020 as compared to December 31, 2019 due to maintaining higher liquidity levels as a result of COVID-19.

The securities portfolio increased $35.4 million and is currently 18.8% of total assets at September 30, 2020 as compared to 18.5% of total assets at December 31, 2019. The increase is a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits increased $109.5 million to $3.6 billion as of September 30, 2020 as compared to December 31, 2019. Core deposits, including noninterest-bearing and interest-bearing demand deposits, money market accounts and savings, increased by $307.3 million, or 19.9%, as compared to December 31, 2019. Offsetting these increases was the intentional runoff of $197.8 million of higher cost certificates of deposits. Noninterest-bearing deposits comprised 18.4% and 15.8% of total deposits at September 30, 2020 and December 31, 2019, respectively.

The allowance for loan losses was 1.67%, 1.60% and 1.34% of total portfolio loans as of September 30, 2020, June 30, 2020 and December 31, 2019, respectively. General reserves as a percentage of total portfolio loans were 1.40%, 1.33% and 1.13% at September 30, 2020, June 30, 2020 and December 31, 2019, respectively. Included in the allowance for loan losses is the estimated economic impact of COVID-19 of $9.6 million, or $(0.29) per share, driven by economic and market conditions as a result of COVID-19. The allowance for loan losses was 123.5% of nonperforming loans as of September 30, 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 nine months of 2020, please see the discussion above under Provision for Loan Losses.

The Bank provides deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications. The Bank launched a deferral program in March 2020 that ran through August 2020 (Part I). The deferrals in the initial program typically provided deferral of both principal and interest for up to 180 days. The Bank is providing deferrals in another program that launched in August 2020 and runs through December 2020 (Part II). The deferrals in this program is needs based and requires the collection of updated financial information. The majority of the deferrals in the second program will be principal only deferrals. 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 October 27, 2020, we have had 116 loans opt for deferrals under Part II of the program which continues through December 31, 2020, with an aggregate principal balance of $381.1 million. The weighted average deferment period for these customers is 3.98 months. Approximately $321.8 million of these modifications were in the hospitality industry, comprised of deferrals on 58 loans. We have participated in the Paycheck Protection Program ("PPP") passed by Congress. As of September 30, 2020, we had 962 PPP loans approved totaling $55.8 million. These PPP loans generated $1.5 million in fees which will be recognized in income when the loan is forgiven or over the remaining life of the loan.

A one-time goodwill impairment charge of $62.2 million ($2.36 per share) was recorded as of September 30, 2020. The Bank performed an interim impairment analysis of goodwill as of September 30, 2020 due to the continued decline in our stock price primarily related to the economic fallout of COVID-19. The impairment charge is a non-cash charge that does not affect regulatory capital ratios, liquidity, or our overall financial strength.

The Bank remains well capitalized. The Bank's Tier 1 Capital ratio was 13.08% as of September 30, 2020 as compared to 13.58% as of December 31, 2019. The Bank's leverage ratio was 10.12% at September 30, 2020 as compared to 10.33% as of December 31, 2019. The Bank's Total Risk-Based Capital ratio was 14.33% at September 30, 2020 as compared to 14.83% at December 31, 2019.

Total capital of $434.8 million at September 30, 2020, reflects a decrease of $38.3 million as compared to December 31, 2019. The decrease in equity during the first nine months of 2020 is due to a net loss of $48.8 million and a $13.4 million increase in other comprehensive income due to changes in fair value of investment securities. The net decrease also included the $3.7 million special dividend paid in March of 2020. The remaining difference of $0.8 million is related to restricted stock activity during the first nine months.

At September 30, 2020, funding sources accessible to the Bank include borrowing availability at the Federal Home Loan Bank ("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. In addition to the above resources, the Bank also has $651.6 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 $4.1 billion in assets and 91 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 and asset quality. 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; 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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