10-Q: Carter Bankshares Q3 2025: Net Interest Income Rises

Carter Bankshares, Inc. reports a significant increase in net interest income for Q3 2025, driven by loan growth and lower funding costs, despite a provision for credit losses.

Summary

• Net income for the three months ended September 30, 2025, was $5.4 million ($0.24 diluted EPS), a slight decrease from $5.6 million ($0.24 diluted EPS) in Q3 2024.
• Net income for the nine months ended September 30, 2025, increased to $22.9 million ($1.00 diluted EPS) from $16.2 million ($0.70 diluted EPS) in 9M 2024.
• Net interest income (GAAP) increased by $4.9 million (17.1%) to $33.7 million for Q3 2025 and by $10.9 million (12.8%) to $96.2 million for 9M 2025.
• Net interest margin (GAAP) improved by 28 basis points to 2.86% for Q3 2025 and by 21 basis points to 2.78% for 9M 2025.
• Total assets grew by $180.9 million to $4.84 billion at September 30, 2025, compared to December 31, 2024.
• Total portfolio loans increased by $210.8 million (7.8% annualized) to $3.84 billion at September 30, 2025.
• Total deposits increased by $56.9 million (1.8% annualized) to $4.21 billion, including $55.9 million from a branch acquisition.
• Nonperforming loans decreased by $0.7 million to $258.6 million, representing 6.74% of total portfolio loans (down from 7.15% at December 31, 2024).
• The Allowance for Credit Losses (ACL) to total portfolio loans was 1.92% at September 30, 2025, down from 2.09% at December 31, 2024.
• A provision for credit losses of $2.9 million was recorded for Q3 2025, compared to a recovery of $(0.4) million in Q3 2024.
• The company repurchased 809,601 shares of its common stock for $14.0 million during the nine months ended September 30, 2025.

Sentiment

Score: 6

Explanation: The filing presents a mixed but generally stable picture. Strong net interest income growth and improved margins are positive, driven by effective balance sheet management in a declining rate environment. Loan growth is also robust. However, persistent credit quality issues, particularly the large nonperforming loan relationship and new CRE nonperforming loans, along with increased operating expenses, temper the overall positive sentiment. The company's well-capitalized status and share repurchase program are supportive factors.

Positives

• Net interest income saw strong growth, increasing 17.1% for Q3 2025 and 12.8% for 9M 2025.
• Net interest margin improved significantly by 28 basis points for Q3 2025 and 21 basis points for 9M 2025, driven by lower funding costs.
• Total portfolio loans experienced robust growth of $210.8 million, an annualized rate of 7.8%, during the nine months ended September 30, 2025.
• Nonperforming loans decreased by $0.7 million, leading to a reduction in the nonperforming loans to total portfolio loans ratio from 7.15% to 6.74%.
• The company completed the acquisition of two branch facilities in North Carolina, adding $55.9 million in deposits and expanding its market footprint.
• A strategic 1035 exchange of Bank Owned Life Insurance (BOLI) policies was initiated to transfer proceeds to new carriers, aiming for enhanced credit ratings and better yields.
• The company and its subsidiary bank remain 'well-capitalized' under federal banking regulatory frameworks, indicating strong financial health.
• A common share repurchase program of up to $20.0 million is in place, demonstrating a commitment to returning capital to shareholders.
• Unrealized losses on available-for-sale securities decreased by $23.6 million during the nine months ended September 30, 2025, primarily due to a decline in intermediate Treasury yields.

Negatives

• Net income for Q3 2025 slightly decreased to $5.4 million from $5.6 million in Q3 2024.
• A provision for credit losses of $2.9 million was recorded in Q3 2025, contrasting with a recovery in the prior year, due to general reserves for new loan volume and a specific reserve on a Commercial Real Estate (CRE) relationship.
• Total noninterest income decreased slightly by $0.1 million for Q3 2025.
• Total noninterest expense increased by $1.3 million for Q3 2025 and $4.9 million for 9M 2025, driven by higher professional/legal fees, occupancy, advertising, data processing, and debit card expenses.
• Noninterest-bearing deposits decreased by $28.2 million, and savings deposits decreased by $20.0 million, indicating a shift in customer preferences.
• Certificates of Deposit (CDs) decreased by $17.8 million as clients diversified into more liquid products.
• The company's largest credit relationship, with an outstanding balance of $228.6 million, remains on nonaccrual status, significantly impacting interest income.
• Two new CRE relationships totaling $24.1 million were transferred to nonperforming status during 9M 2025, including a $14.6 million office building loan with vacating government tenants.
• The balance sheet is characterized as slightly liability sensitive, which could lead to a small decrease in net interest income in a rising interest rate environment.

Risks

• Exposure to market interest rates and their impact on economic conditions, customer behavior, net interest margin, and portfolio values.
• Potential volatility in operating results due to the application of the Current Expected Credit Losses (CECL) methodology.
• Cyber-security threats, attacks, or events that could disrupt operations or compromise data.
• Challenges in resolving nonperforming assets, particularly the single large credit relationship of $228.6 million, and securing collateral on nonaccrual loans.
• Concentrations of loans secured by real estate, especially Commercial Real Estate (CRE) loans (53.8% of total portfolio loans), and geographic concentrations in specific states and property types.
• Increased delinquency and foreclosure rates on CRE loans due to market conditions.
• Risk of an insufficient allowance for credit losses to absorb expected losses.
• Potential adverse effects from unusual events such as weather-related disasters, geopolitical conflicts, or public health events on borrowers, collateral values, and liquidity.
• Regulatory supervision and oversight, including potential actions by regulators.
• Increasing price and product/service competition in the financial services industry.
• The possibility that anticipated benefits from acquisitions, such as the recent branch purchase, may not be fully realized or that integration could be more difficult or costly.
• Reliance on significant customer relationships, particularly the largest credit relationship which is nonperforming.
• Significant weakening of local economies where the company operates.
• Changes in customer behaviors, including consumer spending, borrowing, and saving habits.
• Re-emergence of turbulence in global financial and real estate markets impacting performance and access to capital.
• Legacy underwriting standards that over-relied on loan-to-value rather than income characteristics, which can be compromised during real estate cycles.

Future Outlook

Management's strategic plan focuses on shifting from balance sheet restructuring to prudent growth, primarily organic, but also considering opportunistic acquisitions. The company aims to increase fee income while closely monitoring operating expenses. The balance sheet is positioned as liability sensitive, which is expected to help reduce future funding costs if the Federal Open Market Committee (FOMC) continues to cut short-term rates, as forecasted for the remainder of 2025 and into 2026. The company is also evaluating the impact of new federal tax legislation (H.R. 1) on future periods, which may allow for more favorable deductibility of certain business expenses starting in 2025.

Management Comments

• Our goal is to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate.
• We believe this strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit this strategic vision.
• We believe that the Bank's strong capital and liquidity positions support this strategy.
• The Company will seek to increase fee income while closely monitoring operating expenses.
• The Company is focused on executing this strategy to successfully support the new brand and grow its business in its current markets as well as any new markets it may enter.
• We believe it is well secured based on the net carrying value of the credit relationship and it has appropriately reserved for expected credit losses with respect to all such loans based on information currently available.
• However, the Company cannot give any assurance as to the timing or amount of future payments or collections on such loans, the timing of any credit administration or collection efforts, or that the Company will ultimately collect all amounts contractually due.
• Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.
• We believe having a balanced mix of floating and fixed rate securities is an important strategy during any economic cycle.
• This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (FOMC) continue cutting short-term rates in the future.

Industry Context

The banking industry is currently navigating a period of declining interest rates, with the Federal Reserve implementing rate cuts. This environment generally benefits liability-sensitive banks, like Carter Bankshares, by reducing their funding costs and improving net interest margins. The company's focus on organic growth and opportunistic acquisitions aligns with broader trends among regional banks seeking to expand market share and diversify their operations. The ongoing challenges with nonperforming commercial real estate (CRE) loans, particularly in office sectors, reflect wider industry concerns regarding CRE valuations and tenant demand shifts. The emphasis on brand enhancement and customer experience is a common strategy for community banks to differentiate themselves in a competitive financial landscape.

Comparison to Industry Standards

• The company's capital ratios (e.g., Common Equity Tier 1 Ratio of 10.66% for the Company and 10.46% for the Bank) indicate it is 'well-capitalized' under Basel III regulatory frameworks, which is a positive assessment against industry regulatory standards.
• The company's investment in a NASDAQ-listed mutual fund focused on community development and affordable housing is eligible for investment credit under the Community Reinvestment Act, aligning with industry practices for community engagement.
• The filing notes that its Federal Home Loan Bank (FHLB) stock is non-marketable and redeemable at par, which is a standard characteristic of FHLB stock, distinguishing it from traditional equity investments.

Corporate Governance

Legal Proceedings

• The company is subject to various legal and administrative proceedings and claims in the normal course of business.
• As of September 30, 2025, the company is not involved in any material pending or threatened legal proceedings other than those occurring in the ordinary course of business.

Related Party Transactions

• Deposits for certain directors, executive officers, and their affiliates totaled $2.714 million at September 30, 2025, and $2.305 million at December 31, 2024.

Stakeholder Impact

• Shareholders: The share repurchase program indicates management's commitment to returning capital. Net income growth for 9M 2025 and improved EPS are positive, but ongoing nonperforming loan issues pose a risk to future profitability and share value.
• Employees: The branch acquisition added 10 new associates. New guiding principles and brand refresh initiatives aim to strengthen company culture and empower employees.
• Customers: Expansion into new North Carolina markets through the branch acquisition and the introduction of new products and services are intended to enhance customer offerings.
• Communities: The company's investment in a mutual fund focused on community development and affordable housing contributes to Community Reinvestment Act (CRA) efforts. The new purpose statement emphasizes creating opportunities for people and businesses to prosper.

Next Steps

• Continue to dedicate significant resources to the resolution of nonaccrual loans, especially the largest credit relationship, to protect the company, bank, and shareholders.
• Monitor valuation inputs for up to one year after the May 23, 2025, branch acquisition date for potential adjustments to provisional amounts.
• Evaluate the impact of Accounting Standards Update (ASU) 2023-09 on income tax disclosures for its effective date of January 1, 2025.
• Prepare for the effective date of ASU 2024-04 (Debt with Conversion and Other Options) for public business entities on January 1, 2026.
• Prepare for the effective date of ASU 2024-03/2025-01 (Expense Disaggregation Disclosures) for annual reporting periods beginning after December 15, 2026, and interim periods after December 15, 2027.
• Continue executing the three-year strategic plan to refine brand image, innovate brand experiences, and introduce new products and services.
• Closely monitor the $14.6 million Commercial Real Estate (CRE) loan in northern Virginia as government agency tenants are expected to vacate in Q4 2025.
• Market for sale the warehouse facilities in North Carolina (part of the $9.5 million CRE relationship) with sales expected to close in Q4 2025.
• Continue share repurchases under the $20.0 million program through May 1, 2026.
• Evaluate the impact of H.R. 1, the One Big Beautiful Bill Act, on future periods, particularly regarding business expense deductibility.

Key Dates

Recommendation

While Carter Bankshares demonstrates strong net interest income growth and improved margins, driven by effective balance sheet management in a declining rate environment, significant credit quality concerns persist. The large nonperforming loan relationship, though reduced by curtailment payments, remains a substantial exposure, and new Commercial Real Estate (CRE) loans are moving to nonaccrual status. The increase in provision for credit losses in Q3 2025 highlights these ongoing challenges. The share repurchase program is a positive for shareholders, and the company is well-capitalized. However, the unresolved credit issues and increased operating expenses warrant a cautious 'Hold' stance until there is clearer resolution on the nonperforming assets and a sustained trend of improved asset quality.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Carter Bankshares, CARE, Net Interest Income, Loan Growth, Deposits, Nonperforming Loans, Credit Quality, Capital Ratios, Stock Repurchase, Branch Acquisition, Commercial Real Estate, Interest Rate Risk, Liquidity