Carter Bank & Trust Announces Third Quarter 2018 Financial Results

Carter Bank & Trust ( the “Bank”) (OTCQX:CARE) today announced a net loss of $7.5 million, or $0.29 per share, for the third quarter of 2018, as compared to a net loss of $0.4 million, or $0.02 per share, for the third quarter of 2017. Pre-tax pre-provision earnings1 were $7.4 million in the third quarter of 2018 as compared to $8.9 million in the same period last year.

For the nine months ended September 30, 2018, net income was $8.5 million, or $0.32 earnings per share, as compared to net income of $4.4 million, or $0.17 earnings per share, in the first nine months of 2017. Pre-tax pre-provision earnings1 were $28.0 million for the nine months ended September 30, 2018 as compared to $29.1 million for the same period of 2017.

Third Quarter 2018 Financial Highlights

• Third quarter net loss of $7.5 million, or $0.29 per share, as compared to net income of $7.2 million, or $0.27 earnings per share, in the second quarter of 2018 and a net loss of $0.4 million, or $0.02 per share, over the same quarter of 2017;
• Net interest income decreased $1.1 million, or 3.8%, to $28.1 million as compared to the linked quarter, but increased $2.2 million, or 8.5%, from September 30, 2017;
• Net interest margin, on a fully taxable equivalent basis, declined 16 basis points to 3.07% over the linked quarter and increased 30 basis points over the same quarter last year, on a $161.4 million lower asset base and despite the negative impact of a lower taxable equivalent adjustment resulting from the lower corporate income tax rate;
• Provision for loan losses increased $12.0 million as compared to the second quarter of 2018 primarily due to a $10.1 million, or $0.30 per share, charge-off of a legacy commercial real estate relationship and a specific reserve of $5.4 million, or $0.16 per share, to cover potential further impairment;
• A $2.5 million, or $0.08 per share, loss on sale of other real estate owned (“OREO”) properties for one legacy commercial real estate relationship that was transferred to OREO in the first quarter of 2018;
• Solid portfolio loan growth of $54.5 million, or 7.9% on an annualized basis, despite legacy credit pay downs and charge-offs;
• Nonperforming loans declined $12.0 million from June 30, 2018 and decreased $61.3 million from September 30, 2017. Nonperforming loans as a percentage of total loans were 1.72%, 2.19% and 4.16% as of September 30, 2018, June 30, 2018 and September 30, 2017, respectively.

2018 Year-to-Date Financial Highlights

• Year-to-date net income of $8.5 million, or $0.32 earnings per share, an increase of 94% over the same period of 2017;
• Net interest margin, on a fully taxable equivalent basis, improved 35 basis points to 3.09% year-over-year;
• Net interest income increased $5.8 million, or 7.3%, to $84.8 million year-over-year;
• Provision for loan losses declined $13.5 million, or 44.3%, as compared to the same period of 2017 and
• Securities gains of $1.2 million were realized in the first nine months of 2018 to take advantage of market opportunities, as compared to securities gains of $1.1 million in the same period of 2017.

Litz H. Van Dyke, Chief Executive Officer, stated, “Our financial performance was negatively impacted this quarter by legacy credit issues including charge-offs, exiting excessive exposures and sales of OREO. Collectively, these activities, while painful in the short-term, significantly improve our credit quality metrics and our overall risk profile. These efforts also get us closer to our goals of to becoming a best-in-class performer with lower long-term credit costs. Another key to our long-term success is our IT systems upgrade, which is on target to occur in November of 2018. Testing and preparation for this upcoming conversion intensified during the third quarter. The new system will lay the foundation to provide additional products and services for our customers, operational efficiencies and cost savings throughout the organization ultimately creating value for our shareholders.”

Operating Highlights

Net interest income increased $5.8 million to $84.8 million during the first nine months of 2018 as compared to the same period of 2017. The increase in net interest income was primarily driven by a $4.7 million increase in interest income and by a decrease of $1.1 million in interest expense as compared to the same period of 2017. This is a result of seven increases by the Federal Reserve in short-term interest rates since March of 2017 as well as the intentional runoff of higher cost certificates of deposit. The net interest margin, on a fully taxable equivalent basis, increased 35 basis points to 3.09% over the past twelve months due to our deployment of excess cash into higher yielding and diversified investment securities and loans as well as the aforementioned runoff of higher cost deposits despite the decreased tax benefit from our tax-exempt securities and loans due to the aforementioned decrease in the federal corporate income tax rate.

The provision for loan losses totaled $17.0 million for the nine months ended September 30, 2018, a decrease of $13.5 million as compared to the same period of 2017. At September 30, 2018, nonperforming loans were $48.2 million, a decrease of $44.7 million from December 31, 2017 and a decrease of $61.3 million from September 30, 2017. Net charge-offs were $11.9 million in the first nine months of 2018 as compared to $29.4 million of net charge-offs in the same period of 2017. The most significant loan charge-off was in the third quarter of 2018 for one legacy commercial credit relationship of $10.1 million that experienced deterioration in collateral values as a result of a new appraisal. For 2017, $29.1 million in charge-offs were directly related to three legacy commercial real estate credit relationships. As a percentage of loans, on an annualized basis, net charge-offs were 0.57%, 1.58% and 1.49% for the periods ending September 30, 2018, December 31, 2017 and September 30, 2017, respectively. Nonperforming loans as a percentage of total loans were 1.72%, 3.46% and 4.16% as of September 30, 2018, December 31, 2017 and September 30, 2017, respectively.

Noninterest income increased $3.9 million, or 48.0%, to $12.0 million, excluding net securities gains, for the nine months ending September 30, 2018 as compared to $8.1 million in the same period of 2017. The increase in noninterest income is attributable to increased service charges of $0.8 million, $0.8 million of earnings from bank owned life insurance and $2.0 million higher income from OREO due to the acquisition of several large commercial properties generating income during the first quarter of 2018. Securities gains of $1.2 million were realized during the first nine months of 2018 to take advantage of market opportunities and reduce the credit risk of the securities portfolio.

Total noninterest expense increased $10.9 million, or 18.4%, for the first nine months of 2018 to $70.0 million as compared to $59.1 million in the same period of 2017. Increases included $6.1 million in salaries and employee benefits, $0.6 million in occupancy expense, $0.5 million in other taxes, $0.7 million in telephone expense, $0.9 million in professional and legal fees, $1.5 million in OREO expenses, $3.0 million of tax credit amortization and $0.4 million in the reserve for unfunded loan commitments included in other expense. The increase in salaries and benefits was expected and planned as investments were made in the appropriate infrastructure to support the Bank in the future. The increase in professional and legal fees was related to regulatory and compliance reviews which were completed as of June 30, 2018. The increase in OREO expense is due to the aforementioned acquired properties. Offsetting these increases were decreases of $3.6 million in data processing expenses due to the write-off of expenses that were previously capitalized and were fully expensed during 2017 and a decrease of $0.8 million in FDIC insurance expense attributable to lower FDIC assessment rates and a decrease in the assessment base.

Financial Condition

Total assets were $4.0 billion at September 30, 2018 and $4.1 billion at December 31, 2017. Total portfolio loans increased $119.8 million to $2.8 billion as of September 30, 2018 even with the reduction of several large legacy credits, which partially offset new loan growth. Nonperforming loans decreased $44.7 million to $48.2 million as of September 30, 2018 from $92.9 million at December 31, 2017 and decreased $61.3 million from $109.5 million as of September 30, 2017. The decrease in nonperforming loans is primarily due to the aforementioned charge-off of a legacy credit in the third quarter of 2018 and nonperforming credits migrating to OREO during the first quarter of 2018. OREO decreased $20.7 million as compared to June 30, 2018 due to the sale of the aforementioned properties during the third quarter of 2018 and decreased only $0.5 million as compared to December 31, 2017 due to the transfer of $13.7 million of net remaining book value on branches marketed for sale in the fourth quarter of 2017.

Federal Reserve Bank excess reserves declined $62.3 million at September 30, 2018 as compared to December 31, 2017 and declined $237.8 million from the year ago period. This excess cash was deployed into higher yielding and diversified securities, funded loan growth, and also funded the planned decrease in high cost deposits during the past twelve months.

The securities portfolio declined $162.1 million and is currently 19.5% of total assets at September 30, 2018 as compared to 23.0% of total assets at December 31, 2017. The decrease is a result of active balance sheet management in calibration with loan and deposit growth. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits as of September 30, 2018 were $3.6 billion, essentially flat as compared to December 31, 2017. Certificates of deposits increased by $55.6 million, or 2.7%, as compared to December 31, 2017 and increased $12.5 million, or 0.6%, as compared to September 30, 2017 due to recent special rate promotions during 2018. Noninterest-bearing deposits increased by $26.3 million, or 5.0%, to $556.5 million as of September 30, 2018 as compared to $530.2 million as of December 31, 2017. Noninterest-bearing deposits comprised 15.5% and 14.4% of total deposits at September 30, 2018 and December 31, 2017.

The allowance for loan losses was 1.44% of total loans as of September 30, 2018 as compared to 1.32% as of December 31, 2017. General reserves as a percentage of non-impaired loans were 1.42% at September 30, 2018 as compared to 1.58% as of December 31, 2017. The allowance for loan losses was 83.8% of nonperforming loans as of September 30, 2018 as compared to 38.0% of nonperforming loans as of December 31, 2017. In the view of management, the allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio.

The Bank remains well capitalized. The Bank’s Tier 1 Capital ratio increased to 13.43% as of September 30, 2018 as compared to 12.93% as of December 31, 2017. The Bank’s leverage ratio was 9.56% at September 30, 2018 as compared to 9.33% as of December 31, 2017. The Bank’s Total Risk-Based Capital ratio was 14.68% at September 30, 2018 as compared to 14.15% at December 31, 2017.

About Carter Bank & Trust

Headquartered in Martinsville, VA, Carter Bank & Trust is a state-chartered community bank in Virginia with $4.0 billion in assets and 105 branches in Virginia and North Carolina. For more information visit www.CarterBankandTrust.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. 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; 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.

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