Carter Bankshares(CARE) - 2023 Q4 - Annual Report

PART I Business Carter Bankshares, Inc. operates 65 branches in Virginia and North Carolina with $4.5 billion in assets, focusing on prudent growth and increased fee income - Carter Bankshares, Inc. is a holding company for Carter Bank & Trust, with $4.5 billion in assets and 65 branches in Virginia and North Carolina as of December 31, 2023[178] - The company's strategic goal is to transition to a prudent growth strategy, emphasizing organic growth, increased fee income, and controlled operating expenses[183][48] - The company's common stock is traded on the Nasdaq Global Select Market under the ticker symbol "CARE"[11] - As of December 31, 2023, the company employed 679 full-time associates, with a voluntary separation turnover rate of 13.8% for fiscal year 2023[207] - The company and its bank subsidiary are extensively regulated by authorities including the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and Virginia State Corporation Commission (SCC)[214][215][321] Risk Factors The company faces significant credit risk from a $301.9 million nonperforming loan, alongside concentrations in commercial real estate, operational, cybersecurity, market, liquidity, and regulatory risks - A single large lending relationship, placed on nonaccrual status in Q2 2023, comprises $301.9 million or 97.5% of the company's nonperforming loans as of December 31, 2023[2] - The company's loan portfolio has a significant concentration in commercial real estate (CRE), making it sensitive to real estate market downturns, particularly in Virginia and North Carolina[283][313] - Operational and security risks are significant due to heavy reliance on IT infrastructure, making the company vulnerable to cyber-attacks, system failures, and data breaches[135][318][319] - The business is subject to market risks, including adverse effects of interest rate changes and inflation on net interest income, asset values, and borrower creditworthiness[118][121][154] - The company faces significant litigation risk, including collection actions and lawsuits related to its largest lending relationship, potentially resulting in substantial legal costs and losses[26][363][392] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[369] Cybersecurity The company's cybersecurity plan, based on the NIST framework, is managed by the COO and IRT with Board oversight, utilizing risk assessments and testing to mitigate threats - The company's cybersecurity plan is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework[31] - Cybersecurity governance is led by the Chief Operations Officer (COO) and an Incident Response Team (IRT), with oversight from the Board's IT Steering Committee and Audit Committee[31][398][400] - Key risk management strategies include risk assessments, independent third-party penetration testing, and continuous environment monitoring[61][397] - Although the company has experienced past cybersecurity incidents, none have resulted in a material adverse effect on its business, financial condition, or operations[32] Properties As of December 31, 2023, the company operates its principal executive office and 65 depository branches across Virginia and North Carolina, primarily owned - The company operates 65 depository branches, with 53 in Virginia and 12 in North Carolina, as of December 31, 2023[374] - The principal executive office is located at 1300 Kings Mountain Road in Martinsville, Virginia[374] Legal Proceedings Information regarding legal proceedings, including significant pending litigation, is incorporated by reference from Note 18 of the financial statements - Information regarding legal proceedings is detailed in Note 18, "Commitments and Contingencies," of the financial statements[401] Mine Safety Disclosures This section is not applicable to the company - The company has no mine safety disclosures to report[375] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "CARE", with no regular dividends since 2016, and a $14.2 million share repurchase program completed in 2023 - The company's common stock trades on NASDAQ under the ticker "CARE", with 2,160 shareholders of record as of March 4, 2024[403] - The company has not declared a regular quarterly cash dividend since Q4 2016, prioritizing resources for regulatory compliance and investments[376] - The 2023 share repurchase program of 1,000,000 shares was completed as of August 31, 2023, at a total cost of $14.2 million, or an average price of $14.16 per share[38] - No shares of common stock were repurchased during the quarter ended December 31, 2023, as the 2023 program was fully exhausted[406] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased to $23.4 million in 2023 due to lower net interest income and higher noninterest expense, while nonperforming loans surged to 8.83% due to a large nonaccrual relationship 2023 Key Financial Highlights vs. 2022 (in millions, except EPS) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $23.4 million | $50.1 million | ($26.7 million) | | Diluted EPS | $1.00 | $2.03 | ($1.03) | | Net Interest Income | $122.3 million | $139.9 million | ($17.6 million) | | Provision for Credit Losses | $5.5 million | $2.4 million | $3.1 million | | Noninterest Income | $18.3 million | $21.7 million | ($3.4 million) | | Noninterest Expense | $105.5 million | $97.0 million | $8.5 million | Key Performance Ratios | Ratio | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Return on Average Assets | 0.53% | 1.21% | | Return on Average Shareholders' Equity | 6.79% | 14.30% | | Nonperforming Loans to Total Portfolio Loans | 8.83% | 0.21% | | Allowance for Credit Losses to Total Portfolio Loans | 2.77% | 2.98% | - The significant increase in nonperforming loans to 8.83% is almost entirely due to placing the company's largest lending relationship, with a principal balance of $301.9 million, on nonaccrual status in Q2 2023[388][88] - Total portfolio loans grew by $357.0 million (11.3%), primarily in the commercial real estate, residential mortgage, and construction segments[51][603] - Total deposits increased by $89.4 million, with a notable shift from noninterest-bearing and savings accounts into higher-yielding Certificates of Deposit (CDs), which grew by $325.1 million[78][606] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with its balance sheet shifting to slightly liability-sensitive as of December 31, 2023, impacting net interest income sensitivity - The company's balance sheet shifted from asset-sensitive at year-end 2022 to slightly liability-sensitive at year-end 2023[799][800] Net Interest Income Sensitivity Analysis (12-Month Horizon) | Change in Interest Rate (bps) | % Change in Pretax NII (as of Dec 31, 2023) | % Change in Pretax NII (as of Dec 31, 2022) | | :--- | :--- | :--- | | +200 | (1.1)% | 7.7% | | +100 | (0.3)% | 4.1% | | -100 | 2.4% | (5.1)% | | -200 | 4.4% | (10.7)% | Economic Value of Equity (EVE) Sensitivity Analysis | Change in Interest Rate (bps) | % Change in EVE (as of Dec 31, 2023) | % Change in EVE (as of Dec 31, 2022) | | :--- | :--- | :--- | | +200 | (4.7)% | (0.2)% | | +100 | (1.8)% | 0.8% | | -100 | 0.9% | (3.4)% | | -200 | 0.5% | (8.5)% | Financial Statements and Supplementary Data This section presents the consolidated financial statements for Carter Bankshares, Inc. and its subsidiaries, along with the independent auditor's report and detailed notes on accounting policies and disclosures Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $4,512,539 | $4,204,519 | | Portfolio Loans, net | $3,408,858 | $3,055,061 | | Securities Available-for-Sale | $779,003 | $836,273 | | Total Liabilities | $4,161,296 | $3,875,892 | | Total Deposits | $3,721,915 | $3,632,538 | | FHLB Borrowings | $393,400 | $180,550 | | Total Shareholders' Equity | $351,243 | $328,627 | - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[650] - A critical audit matter was identified concerning the allowance for credit losses for individually evaluated loans in the "Other" pool, due to significant and subjective judgments involved in estimating reserves, which totaled $54.4 million[658][659] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - There were no disagreements with accountants on accounting and financial disclosures[666] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[708] - Management's report on internal control over financial reporting concluded that the system was effective as of December 31, 2023, a conclusion supported by the independent auditor's report[669] - No material changes were made to the company's internal control over financial reporting during the quarter ended December 31, 2023[670] Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q4 2023 - No directors or officers made changes to Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q4 2023[711] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - This item is not applicable[712] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement, including the company's Code of Conduct - Required information is incorporated by reference from the proxy statement for the 2024 annual meeting of shareholders[714] - The company has adopted a Code of Conduct for directors, executive officers, and associates, available on its website[715] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2024 annual shareholders' meeting proxy statement - Required information is incorporated by reference from the "Executive Compensation" and "Director Compensation" sections of the 2024 proxy statement[716] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details for beneficial owners and management are incorporated by reference from the 2024 proxy statement, with 30,630 securities issuable and 1,538,804 available for future issuance under equity plans - Required information on security ownership is incorporated by reference from the 2024 proxy statement[717] Equity Compensation Plan Information (as of Dec 31, 2023) | Category | Number of Securities | | :--- | :--- | | Securities to be issued upon exercise of outstanding rights | 30,630 | | Securities remaining available for future issuance | 1,538,804 | Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the company's 2024 annual shareholders' meeting proxy statement - Required information is incorporated by reference from the "Related Person Transactions" and "Corporate Governance -- Director Independence" sections of the 2024 proxy statement[721] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's 2024 annual shareholders' meeting proxy statement - Required information is incorporated by reference from the "Independent Registered Public Accounting Firm" section of the 2024 proxy statement[722] PART IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including consolidated financial statements and various exhibits such as governance and compensation agreements - This item lists all financial statements and exhibits filed with the annual report, including governance documents, employment agreements, and compensation plans[724][726] Form 10-K Summary No summary is provided for the Form 10-K - No summary is provided for the Form 10-K[765]