CARTER BANKSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), is intended to help the reader understand Carter
Bankshares, Inc. , our operations, our present business environment, and our
consolidated results of operations and financial condition and highlights
material changes in our financial condition and results of operations as of and
for the three month periods ended March 31, 2023 and March 31, 2022 . The MD&A is
provided as a supplement to, and should be read in conjunction with, our
Consolidated Financial Statements and the accompanying notes thereto contained
in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have
been made to prior periods to place them on a basis comparable with the current
period presentation. The results of operations reported in the accompanying
Consolidated Financial Statements are not necessarily indicative of results to
be expected in future periods. The MD&A includes the following sections:
•Important Note Regarding Forward-Looking Statements
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Estimates
•Overview and Strategy
•Results of Operations and Financial Condition
•Earnings Summary
•Liquidity and Capital Resources
•Regulatory Capital Requirements
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•Off-Balance Sheet Arrangements
Important Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, 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," "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. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company's control. 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 including, but not limited to the effects of:
•market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company's loan and securities portfolios;
•inflation, market and monetary fluctuations;
•changes in trade, monetary and fiscal policies and laws of the
•changes in accounting policies, practices, or guidance, for example, our adoption of Current Expected Credit Losses ("CECL") methodology, including potential volatility in the Company's operating results due to application of the CECL methodology;
•cyber-security threats, attacks or events; rapid technological developments and changes;
•changes in the Company's liquidity and capital positions;
•concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral;
•an insufficient allowance for credit losses;
•the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war betweenRussia andUkraine ) or public health events (such as the COVID-19 pandemic), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;
•a change in spreads on interest-earning assets and interest-bearing liabilities;
•regulatory supervision and oversight, including our relationship with regulators and any actions that may be initiated by our regulators;
•legislation affecting the financial services industry as a whole (such as the Inflation Reduction Act of 2022), and the Company and the Bank, in particular;
•the outcome of pending and future litigation and/or governmental proceedings;
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
•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;
•the soundness of other financial institutions and any indirect exposure related to the closings ofSilicon Valley Bank ("SVB"), Signature Bank,Silvergate Bank and First Republic Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank,Silvergate Bank and First Republic Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;
•material increases in costs and expenses;
•reliance on significant customer relationships;
•general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth;
•significant weakening of the local economies in which we operate;
•changes in customer behaviors, including consumer spending, borrowing and saving habits;
•changes in deposit flows and loan demand;
•our failure to attract or retain key employees;
•expansions or consolidations in the Company's branch network, including that the anticipated benefits of the Company's branch network optimization project are not fully realized in a timely manner or at all;
•deterioration of the housing market and reduced demand for mortgages; and
•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 this Quarterly Report, including in Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 202 2 and any of our subsequent filings with theSecurities and Exchange Commission ("SEC"). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are prepared. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement 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, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.
Explanation of Use of Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), management uses, and this quarterly report references, interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on a fully taxable equivalent, ("FTE") basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is 35 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.
Although management believes that this non-GAAP financial measure enhances investors' understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies. Critical Accounting Estimates Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as ofMarch 31, 2023 have remained unchanged from the disclosures presented under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2022 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are incorporated herein by reference.
Overview and Strategy
Carter Bankshares, Inc. (the "Company") is a bank holding company headquartered inMartinsville, Virginia with assets of$4.4 billion atMarch 31, 2023 . The Company is the parent company of its wholly owned subsidiary,Carter Bank & Trust (the "Bank"). The Bank is anFederal Deposit Insurance Corporation ("FDIC") insured,Virginia state-chartered bank, which operates 66 branches inVirginia andNorth Carolina . The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol "CARE". The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and income tax provision. For the 2023-2025 fiscal year periods, the Company will be focusing on refining and enhancing the Bank's guiding principles to better align with the future of the Company. A new mission, vision, and set of core values are in development and the Company expects to rollout this plan in 2023. The Company's current mission is to strive to be the preferred lifetime financial partner for its customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. The vision and purpose of the Company is to enrich lives and enhance communities today, to build a better tomorrow, with values of loyalty, care, optimism, trustworthiness and innovation. The Company's Board of Directors and management believe that the Bank is at a turning point in its evolution and transformation. The Company's focus will shift from restructuring the balance sheet to pursuing a prudent growth strategy. This strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit the strategic vision. This initiative is viable given the Bank's strong capital and liquidity positions. In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses. The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter.
Results of Operations and Financial Condition
Earnings Summary
Highlights for the Three Months Ended
•Net interest income increased$12.6 million , or 44.5%, to$40.8 million for the three months endedMarch 31, 2023 compared to the same period in 2022 primarily due to an increase of 170 basis points in the yield on earning assets due to the rising interest rate environment, offset by an increase of 82 basis points in funding costs; 36 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
•The provision for credit losses increased
•Total noninterest income decreased
•Total noninterest expense increased
•Provision for income taxes increased
Balance Sheet Highlights (period-end balances,
•The securities portfolio increased
•Total portfolio loans increased
•The portfolio loans to deposit ratio was 91.9%, compared to 86.7%, due to a decrease in deposits;
•Total deposits decreased
•The Allowance for Credit Losses, ("ACL") to total portfolio loans ratio was
2.91% compared to 2.98%. The ACL on portfolio loans totaled $94.7 million at
March 31, 2023 , compared to $93.9 million with the increase driven by loan
growth, offset by declines in the other segment due to principal pay-downs; and
•On March 29, 2023 , the Company announced that its Board of Directors (the
"Board") has authorized, effective May 1, 2023 , a common share repurchase
program to purchase up to 1,000,000 shares of the Company's common stock in the
aggregate over a period of twelve months.
The Company reported net income of $15.9 million , or $0.67 diluted earnings per
common share, for the three months ended March 31, 2023 compared to net income
of $9.3 million , or $0.36 diluted earnings per common share, for the same period
in 2022.
Three Months Ended March 31,
PERFORMANCE RATIOS 2023 2022
Return on Average Assets 1.51 % 0.92 %
Return on Average Shareholders' Equity 18.89 % 9.57 %
Portfolio Loans to Deposit Ratio 91.95 % 77.62 %
Allowance for Credit Losses to Total Portfolio Loans 2.91 % 3.33 %
Net Interest Income
Our principal source of revenue is net interest income. Net interest income
represents the difference between the interest and fees earned on
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is affected by changes in the average balance of
interest-earning assets, interest-bearing liabilities, as well as changes in
interest rates and spreads. The level and mix of interest-earning assets and
interest-bearing liabilities is managed by our Asset and Liability Committee
("ALCO"), in order to mitigate interest rate and liquidity risks of the balance
sheet. A variety of ALCO strategies were implemented, within prescribed ALCO
risk parameters, to produce what the Company believes is an acceptable level of
net interest income.
Net interest income and the net interest margin are presented on an FTE basis.
The FTE basis (non-GAAP) adjusts net interest income and net interest margin for
the tax benefit of income on certain tax-exempt loans and securities using the
applicable federal statutory tax rate for each period (which was 21% for the
periods presented) and the dividend-received deduction for equity securities.
The Company believes this FTE basis presentation provides a relevant comparison
between taxable and non-
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
taxable sources of interest income. Refer to the "Explanation of Use of Non-GAAP Financial Measures" above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.
Total net interest income increased$12.6 million , or 44.5%, to$40.8 million for the three months endedMarch 31, 2023 compared to the same period in 2022 as the higher interest rate environment benefited earning asset yields given the asset sensitive positioning of the balance sheet, and the Company recognized higher yields on new loan originations and investment securities purchases. Net interest income, on an FTE basis (non-GAAP), increased$12.5 million , or 43.9% to$41.0 million for the three months endedMarch 31, 2023 , compared to$28.5 million for the same period in 2022. The increase in net interest income, on an FTE basis (non-GAAP), was driven by higher interest income of$19.2 million in the three months endedMarch 31, 2023 compared to the same period in 2022, partially offset by higher interest expense of$6.7 million for the same comparable periods. Net interest margin increased 107 basis points to 3.95% for the three months endedMarch 31, 2023 compared to the same period in 2022. Net interest margin, on an FTE basis (non-GAAP), increased 107 basis points to 3.98% for the three months endedMarch 31, 2023 compared to the same period in 2022. During the first three months of 2023 the Company continued to benefit from the rising rate environment. However, beginning in the first quarter of 2023, we started to see more pressure on our cost of funds due to the shift from deposits to higher-cost borrowings due to a decline in deposits, which may negatively impact our net interest margin in future periods. Positively impacting the first quarter of 2023 was the asset sensitivity of our balance sheet. Yields on a large portion of our loan and securities portfolios adjust as rates move up at a quicker rate than the rates our deposits and other funding sources adjust. Yields on our loan portfolio consist of 25.7% floating rate, 41.4% variable and 47.7% of the securities portfolio is floating rate and adjust as interest rates increase. This positively impacts revenue and helps mitigate increased funding costs. The first quarter of 2023 and the full year of 2022 was also positively impacted by enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods. In addition, rising market interest rates have begun to increase the Company's funding costs and will most likely continue in future periods. The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented: Three Months EndedMarch 31 , (Dollars in Thousands) 2023
2022
Interest Income (FTE)(Non-GAAP) Interest and Dividend Income (GAAP)$ 51,955 $ 32,678 Tax Equivalent Adjustment 264
298
Interest and Dividend Income (FTE) (Non-GAAP) 52,219
32,976
Average Earning Assets$ 4,186,164 $ 3,974,341 Yield on Interest-earning Assets (GAAP) 5.03 % 3.33 % Yield on Interest-earning Assets (FTE) (Non-GAAP) 5.06 % 3.36 % Net Interest Income (GAAP)$ 40,785 $ 28,222 Tax Equivalent Adjustment 264 298 Net Interest Income (FTE) (Non-GAAP) 41,049 28,520 Average Earning Assets$ 4,186,164 $ 3,974,341 Net Interest Margin (GAAP) 3.95 % 2.88 % Net Interest Margin (FTE) (Non-GAAP) 3.98 %
2.91 %
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
The following table provides information regarding the average balances,
interest and rates earned on interest-earning assets and the average balances,
interest and rates paid on interest-bearing liabilities for the periods
presented:
Three Months Ended March 31, 2023 Three Months Ended March 31, 2022
Income/ Income/
(Dollars in Thousands) Average Balance Expense Yield/Rate Average Balance Expense Yield/Rate
ASSETS
Interest-Bearing Deposits with
Banks $ 16,135 $ 200 5.03 % $ 140,080 $ 62 0.18 %
Tax-Free Investment Securities(2) 29,094 205 2.86 % 26,579 211 3.22 %
Taxable Investment Securities 920,633 7,393 3.26 % 960,645 3,732 1.58 %
Total Securities 949,727 7,598 3.24 % 987,224 3,943 1.62 %
Tax-Free Loans(1)(2) 132,742 1,053 3.22 % 154,117 1,206 3.17 %
Taxable Loans(1) 3,073,351 43,128 5.69 % 2,690,781 27,745 4.18 %
Total Loans 3,206,093 44,181 5.59 % 2,844,898 28,951 4.13 %
Federal Home Loan Bank Stock 14,209 240 6.85 % 2,139 20 3.79 %
Total Interest-Earning Assets 4,186,164 $ 52,219 5.06 % 3,974,341 $ 32,976 3.36 %
Noninterest Earning Assets 91,434 154,971
Total Assets $ 4,277,598 $ 4,129,312
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand $ 490,615 $ 497 0.41 % $ 463,980 $ 277 0.24 %
Money Market 476,798 1,254 1.07 % 510,286 284 0.23 %
Savings 642,115 165 0.10 % 705,759 178 0.10 %
Certificates of Deposit 1,281,598 5,603 1.77 % 1,308,799 3,660 1.13 %
Total Interest-Bearing Deposits 2,891,126 7,519 1.05 % 2,988,824 4,399 0.60 %
Federal Funds Purchased 14,349 176 4.97 % - - - %
Federal Home Loan Bank Borrowings 285,563 3,395 4.82 % 1,400 6 1.74 %
Other Borrowings 6,448 80 5.03 % 4,358 51 4.75 %
Total Borrowings 306,360 3,651 4.83 % 5,758 57 4.01 %
Total Interest-Bearing Liabilities 3,197,486 11,170 1.42 % 2,994,582 4,456 0.60 %
Noninterest-Bearing Liabilities 737,857 739,556
Shareholders' Equity 342,255 395,174
Total Liabilities and Shareholders'
Equity $ 4,277,598 $ 4,129,312
Net Interest Income(2) $ 41,049 $ 28,520
Net Interest Margin(2) 3.98 % 2.91 %
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.
(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal
corporate income tax rate of 21 percent.
Interest income increased $19.3 million , or 59.0%, for the three months ended
March 31, 2023 compared to the same period in 2022. Interest income, on an FTE
basis (non-GAAP), increased $19.2 million , or 58.4% for the three months ended
March 31, 2023 compared to the same period in 2022. The change was primarily due
to increases in average interest-earning assets of $211.8 million in the three
months ended March 31, 2023 compared to the same period in 2022, and higher
interest rate yields on interest-earning assets of 170 basis points for the
three months ended March 31, 2023 compared to the same period in 2022 due to the
rising interest rate environment.
For the three months ended March 31, 2023 compared to the same period in 2022,
average interest-bearing deposits with banks decreased $123.9 million as funds
were deployed into higher yielding loans, and the average rate earned increased
485 basis points. Average loan balances increased $361.2 million for the three
months ended March 31, 2023 compared to the same period in 2022. Loans provide
the greatest impact on interest income and the yield on earning assets as they
have the largest balance and the highest yield within major earning asset
categories. The average rate earned on loans increased 146 basis points for the
three months ended March 31, 2023 compared to the same period in 2022 primarily
due to increased short-term interest rates during 2022 and 2023. At March 31,
2023 , the loan portfolio was comprised of 25.7% floating rate loans which
reprice monthly, 41.4% variable rate loans that reprice at least once during the
life of the loan and 32.9% fixed rate loans that do not reprice during the life
of the loan.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
Average investment securities decreased $37.5 million for the three months ended
March 31, 2023 compared to the same period in 2022. The average rate earned on
investment securities increased 162 basis points for the three months ended
March 31, 2023 compared to the same period in 2022. The change in investment
securities is the result of active balance sheet management to deploy the
proceeds from securities maturities and principal payments into higher yielding
loans, rather than reinvesting those proceeds back into the securities
portfolio. The portfolio has been diversified as to bond types, maturities, and
interest rate structures. As of March 31, 2023 , the securities portfolio was
comprised of 47.7% variable rate securities with approximately 99.4% that will
reprice at least once over the next 12 months. Having a significant percentage
of variable rate securities is an important strategy during times of rising
interest rates because fixed-rate bond prices generally fall when interest rates
increase, which can result in unrealized losses. However, variable rate
securities do not carry as much interest rate risk so there is much less price
volatility. This variable rate structure is expected to limit the impact of
rising rates on the Company's unrealized losses on debt securities.
Interest expense increased $6.7 million for the three months ended March 31,
2023 compared to the same period in 2022 due to increases in the cost of all
interest-bearing liability categories, except savings accounts, in the higher
rate environment. Also contributing to the increased interest expense is the
shift to higher cost borrowings due to a decline in deposits and the Company's
use of higher-cost borrowings to fund growth in the loan portfolio, including a
$97.7 million decline in average interest-bearing deposits from the first
quarter of 2022 to the same period in 2023. The cost of interest-bearing
liabilities increased by 82 basis points to 1.42% for the three months ended
March 31, 2023 from the same period in 2022. Interest expense on deposits
increased $3.1 million for the three months ended March 31, 2023 compared to the
same periods in 2022 primarily due to the rates on these deposits increasing 45
basis points to 1.05%; however, the average balances on interest-bearing
deposits decreased $97.7 million from the year ago quarter. The increases in
rates included interest-bearing demand deposits up by 17 basis points, money
market accounts up by 84 basis points and CDs up by 64 basis points in response
to competitive pressures from higher market rates. The average rates paid on
savings accounts for the three months ended March 31, 2023 remained relatively
unchanged.
The average balances on borrowings increased $300.6 million for the three months
ended March 31, 2023 when compared to the same period in 2022. The cost of
borrowing increased 82 basis points for the three months ended March 31, 2023
when compared to the same period in 2022, largely due to the higher interest
rate environment. Interest expense on other borrowings increased $3.6 million
for the three months ended March 31, 2023 compared to the same periods in 2022
primarily due to the rates on these borrowings increasing 82 basis points to
4.83%.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
The following table sets forth for the periods presented a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
Three Months Ended March 31, 2023
Compared to March 31, 2022
Increase/
(Dollars in Thousands) Volume(3) Rate(3) (Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks $ (102) $ 240 $ 138
Tax-free Investment Securities(2) 19 (25) (6)
Taxable Investment Securities (162) 3,823 3,661
Total Securities (143) 3,798 3,655
Tax-free Loans(1)(2) (169) 16 (153)
Taxable Loans(1) 4,347 11,036 15,383
Total Loans 4,178 11,052 15,230
Federal Home Loan Bank Stock 192 28 220
Total Interest-Earning Assets $ 4,125 $ 15,118 $ 19,243
Interest Paid on:
Interest-Bearing Demand $ 17 $ 203 $ 220
Money Market (20) 990 970
Savings (16) 3 (13)
Certificates of Deposit (78) 2,021 1,943
Total Interest-Bearing Deposits (97) 3,217 3,120
Federal Funds Purchased 176 - 176
Federal Home Loan Bank Borrowings 3,360 29 3,389
Other Borrowings 26 3 29
Total Borrowings 3,562 32 3,594
Total Interest-Bearing Liabilities 3,465 3,249 6,714
Change in Net Interest Margin $ 660 $ 11,869 $ 12,529
(1)Nonaccruing loans are included in the daily average loan amounts
outstanding.
(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal
corporate income tax rate of 21 percent.
(3)Changes to rate/volume are allocated to both rate and volume on a
proportionate dollar basis.
Provision for Credit Losses
The Company recognizes provision for the ACL based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company's financial instruments. Similarly, the Company recognizes provision (recovery) expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. The ACL was 2.91% of total portfolio loans atMarch 31, 2023 , compared to 2.98% of total portfolio loans, atDecember 31, 2022 . The provision for credit losses increased$0.8 million to$1.4 million for the three months endedMarch 31, 2023 , when compared to the same period in 2022. The increase for the three months endedMarch 31, 2023 was primarily driven by strong loan growth, net charge-offs of$0.6 million and a$0.5 million specific reserve for a mortgage loan that was placed in nonaccrual during the quarter, offset by the reduction of$1.3 million of reserves that were allocated to the other segment due to principal pay-downs. The provision (recovery) for unfunded commitments increased$0.3 million for the three months endedMarch 31, 2023 compared to the same period in 2022 related to the provision for unfunded commitments primarily related to increases in real estate construction. Net charge-offs were$0.6 million for the three months endedMarch 31, 2023 compared to$0.2 million for the same period in 2022. During the first three months of 2023, net charge-offs were primarily included in the other consumer segment. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.07% and 0.03% for the three months 41 -------------------------------------------------------------------------------- Table of ContentsCARTER BANKSHARES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
ended 2023 and 2022, respectively. See the "Allowance for Credit Losses" section of this MD&A for additional details regarding our charge-offs.
Nonperforming loans ("NPLs") increased at March 31, 2023 by $1.7 million , or
25.9% to $8.4 million compared to $6.7 million at December 31, 2022 . The
increase was primarily due to one $2.1 million residential construction loan,
offset by pay-downs on other existing NPLs. NPLs as a percentage of total
portfolio loans were 0.26% at March 31, 2023 compared to 0.21% at December 31,
2022 . See the "Credit Quality" section of this MD&A for more detail on our NPLs.
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated
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