8-K: Carter Bankshares Q3 2025 Net Income Dips Amid Higher Credit Provisions

Carter Bankshares reported a decrease in net income for Q3 2025, driven by a significant increase in provision for credit losses, despite growth in net interest income and loans.

Summary

• Net income for Q3 2025 was $5.419 million, a decrease from $8.510 million in Q2 2025 and $5.629 million in Q3 2024.
• Provision for credit losses significantly increased to $2.896 million in Q3 2025 from a recovery of $2.330 million in Q2 2025 and a recovery of $0.432 million in Q3 2024.
• Net interest income rose to $33.719 million in Q3 2025, up from $32.359 million in Q2 2025 and $28.798 million in Q3 2024.
• Total assets reached $4.840 billion, with gross loans growing to $3.836 billion and deposits at $4.210 billion as of September 30, 2025.
• The nonperforming loan (NPL) ratio to total portfolio loans was 6.74%, largely influenced by a single $228.6 million commercial loan relationship in nonaccrual status. Excluding this relationship, the NPL ratio was 0.78%.
• The company maintains strong capital with a Common Equity Tier 1 (CET1) ratio of 10.66% and total available liquidity of $1.2 billion.
• Diluted earnings per share for Q3 2025 was $0.24, down from $0.37 in Q2 2025.

Sentiment

Score: 5

Explanation: While the company demonstrates strong capital, liquidity, and improved efficiency, the significant increase in provision for credit losses and the resulting decline in net income and profitability ratios for the quarter are concerning. The persistent large nonperforming loan relationship remains a key overhang.

Positives

• Net Interest Income increased by $1.360 million quarter-over-quarter and $4.921 million year-over-year.
• Gross Loans increased by $88.764 million quarter-over-quarter and $239.880 million year-over-year, reaching $3.836 billion.
• Shareholders' Equity increased by $7.203 million quarter-over-quarter and $26.013 million year-over-year, reaching $412.838 million.
• Net Interest Margin (FTE) improved to 2.87% in Q3 2025, up from 2.82% in Q2 2025 and 2.59% in Q3 2024.
• Adjusted Efficiency Ratio improved to 73.37% in Q3 2025, down from 75.55% in Q2 2025 and 80.65% in Q3 2024, indicating better operational efficiency.
• Net Charge-offs/Portfolio Loans (QTD annualized) significantly decreased to 0.02% in Q3 2025 from 1.71% in Q3 2024.
• Strong capital position with a CET1 ratio of 10.66%, Total Risk-based Capital Ratio of 11.91%, and Leverage Ratio of 9.41%.
• Maintained strong liquidity with $1.2 billion in total available liquidity, covering 157.1% of uninsured deposits.
• Purchased 809,601 shares of common stock for $14.0 million at an average cost of $17.35 per share under the 2025 program.
• Deposit growth of 3.1% compared to Q3 2024, with a diversified and granular deposit base (approximately 78.2% retail customers).
• Construction loans of approximately $450 million are expected to fund over the next 12-18 months.
• Bond portfolio is 100% available-for-sale with a shorter maturity profile (average life of 4.99 years) and a higher than peer book yield of 3.33%.

Negatives

• Net Income decreased by $3.091 million quarter-over-quarter and $0.210 million year-over-year.
• Provision for Credit Losses increased significantly to $2.896 million in Q3 2025 from a recovery of $2.330 million in Q2 2025 and a recovery of $0.432 million in Q3 2024.
• Diluted Earnings Per Share (QTD) decreased to $0.24 in Q3 2025 from $0.37 in Q2 2025.
• Return on Average Assets (QTD) decreased to 0.45% in Q3 2025 from 0.72% in Q2 2025 and 0.49% in Q3 2024.
• Return on Average Shareholders' Equity (QTD) decreased to 5.24% in Q3 2025 from 8.45% in Q2 2025 and 5.99% in Q3 2024.
• Deposits decreased by $11.892 million quarter-over-quarter, though up year-over-year.
• Borrowings increased by $62.000 million quarter-over-quarter and $85.500 million year-over-year, reaching $175.500 million.
• Nonperforming Loans (NPL) / Portfolio Loans increased slightly to 6.74% in Q3 2025 from 6.69% in Q2 2025.
• A single large lending relationship with a principal balance of $228.6 million remains in nonaccrual status, representing 88.4% of total nonperforming loans.
• FHLB Borrowing Availability decreased by $191.273 million from December 31, 2024, to September 30, 2025.
• Past due loans 30-89 days increased to $3.6 million at September 30, 2025, from $4.8 million at December 31, 2024, primarily due to $8.2 million of loan maturities without internal extension completion.

Risks

• Impacts of market interest rates on economic conditions, customer behavior, net interest margin, net interest income, and deposit, loan, and securities portfolios.
• Inflation, market, and monetary fluctuations.
• Changes in trade, tariffs, monetary and fiscal policies and laws of the U.S. government, and changes in policies of the Federal Reserve, FDIC, and U.S. Department of the Treasury.
• Changes in accounting policies, practices, or guidance, including potential volatility from the adoption of Current Expected Credit Losses (CECL) methodology.
• Cyber-security threats, attacks, or events.
• Rapid technological developments and changes.
• Ability to resolve nonperforming assets and secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full.
• Changes in liquidity and capital positions.
• Concentrations of loans secured by real estate, particularly Commercial Real Estate (CRE) loans, and the potential impacts of changes in market conditions on the value of real estate collateral.
• Increased delinquency and foreclosure rates on CRE loans.
• Insufficient allowance for credit losses.
• Potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war, geopolitical conflicts, or public health events, and of any governmental and societal responses thereto.
• A change in spreads on interest-earning assets and interest-bearing liabilities.
• Regulatory supervision and oversight, including relationship with regulators and any actions that may be initiated by regulators.
• Legislation affecting the financial services industry as a whole.
• The outcome of pending and future litigation and/or 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.
• Challenges in managing internal growth and acquisitions, including the possibility that anticipated benefits cannot be fully realized or that integration will be more difficult, disruptive, or costly than anticipated.
• The soundness of other financial institutions and any indirect exposure related to large bank failures and their impact on the broader market.
• Material increases in costs and expenses.
• Reliance on significant customer relationships.
• General economic or business conditions, including unemployment levels, supply chain disruptions, slowdowns in economic growth, and government shutdowns.
• Significant weakening of the local economies in which the company operates.
• Changes in customer behaviors, including consumer spending, borrowing, and saving habits.
• Changes in deposit flows and loan demand.
• Failure to attract or retain key associates.
• Expansions or consolidations in the company's branch network, including that the anticipated benefits of branch acquisitions or optimization projects are not fully realized.
• 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 performance.

Future Outlook

The company anticipates funding approximately $450 million in construction loans over the next 12-18 months. It aims to enhance and diversify funding sources, focusing on lower-cost core relationships, and expects opportunities to lower deposit costs quickly when short-term rates ease, given that 68.6% of the retail CD portfolio matures within 12 months. Strategic initiatives include growing responsibly, providing exceptional customer experience, gaining operational efficiency, investing in human capital, brand, culture, and technology, enhancing various operational aspects, and expanding through organic growth and opportunistic acquisitions.

Management Comments

• Focused on the future. A well-capitalized franchise with momentum.
• Nurturing relationships and rewarding customers, associates, and shareholders.
• Growing responsibly with financial safety and soundness in mind is an essential practice that enables the Bank to prosper and remain independent.
• We will continue to build upon this differentiation with exceptional experiences, strong relationships, and community impact by investing in ways to improve the customer experience and gain operational efficiencies.
• Focus on maintaining a strong regulatory capital position in excess of regulatory thresholds.
• Ensure capital levels are commensurate with the Company's risk profile and strategic plan objectives.

Industry Context

The banking sector continues to navigate a dynamic interest rate environment, as evidenced by Carter Bankshares' improved net interest margin but also increased borrowing costs and a significant provision for credit losses. The focus on commercial real estate (CRE) loans, particularly with a large nonperforming relationship, highlights ongoing asset quality challenges faced by some regional banks, especially in a potentially softening real estate market. The company's strategic emphasis on deposit diversification, operational efficiency, and technology investments aligns with broader industry trends aimed at strengthening core funding, improving profitability, and enhancing customer experience amidst competitive pressures. The higher-than-peer book yield on its bond portfolio suggests effective asset management in a rising rate environment.

Comparison to Industry Standards

• The bond portfolio's book yield of 3.33% is noted as 'higher than peer book yield'.
• The company's asset quality ratios, including NPL/Portfolio Loans (6.74% or 0.78% excluding the largest NPL) and Delinquency/Portfolio Loans (0.09%), can be benchmarked against a peer group including AROW, BHB, CFFI, CCBG, CHCO, CCNE, CTBI, FCBC, GSBC, HTB, MPB, MVBF, ORRF, PFIS, FRST, RBCA.A, SHBI, SMBK, SYBT, UVSP, WASH, BHRB, THFF, PEBO.

Stakeholder Impact

• Shareholders are impacted by decreased net income and EPS, but supported by the share repurchase program and strong capital position.
• Employees are expected to benefit from investments in human capital strategies and a focus on associate experience.
• Customers are targeted for improved experience, expanded product offerings, and strengthened relationships.
• The community benefits from significant charitable donations, sponsorships, and volunteer service hours.
• Creditors are supported by the company's strong liquidity and capital positions.

Next Steps

• Funding of approximately $450 million in construction loans over the next 12-18 months.
• Continue to enhance and diversify funding sources with a focus on lower cost/core relationships.
• Expand deposit offerings for retail and commercial customers through an established product roadmap.
• Invest in human capital strategies to enhance the associate experience.
• Drive efficiency and process improvement across all levels of the organization, leveraging technology and automation.
• Make significant investments in the new brand strategy.
• Strengthen change management systems and leverage the Board's ERM Committee for risk management.
• Deepen existing relationships and acquire new relationships in current markets.
• Focus on increasing market share in target growth markets.
• Expand through organic growth and opportunistic acquisition.

Key Dates

Recommendation

The company exhibits a mixed financial performance for Q3 2025. While it maintains strong capital and liquidity positions, and shows improvements in net interest margin and efficiency, the significant increase in provision for credit losses and the resulting decline in net income and profitability ratios are notable concerns. The persistent large nonperforming loan relationship continues to weigh on asset quality metrics. The strategic initiatives are positive long-term drivers, but the immediate financial results suggest caution. A 'hold' recommendation reflects the balance between the company's underlying strengths and the current credit quality headwinds.

Keywords

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