8-K: Carter Bankshares Reports Improved Third Quarter Earnings, Resolves Key Litigation

Carter Bankshares, Inc. announced a net income of $5.6 million for the third quarter of 2024, an increase from both the previous quarter and the same period last year, while also resolving a significant lawsuit.

Summary

• Carter Bankshares reported a net income of $5.6 million, or $0.24 diluted earnings per share, for the third quarter of 2024, compared to $4.8 million, or $0.21 diluted EPS, in the second quarter of 2024 and $3.6 million, or $0.16 diluted EPS, in the third quarter of 2023.
• For the nine months ended September 30, 2024, net income was $16.2 million, or $0.70 diluted EPS, compared to $25.3 million, or $1.07 diluted EPS, for the same period in 2023.
• The company's pre-tax pre-provision income was $6.8 million for the third quarter of 2024, $6.2 million for the second quarter of 2024, and $5.4 million for the third quarter of 2023.
• A lawsuit against the bank was voluntarily dismissed with prejudice, and the related parties reaffirmed the validity of their loan documents.
• Nonperforming loans decreased by $12.5 million to $287.7 million as of September 30, 2024, primarily due to $13.2 million in curtailment payments from the bank's largest nonperforming lending relationship.
• Total portfolio loans increased by $46.3 million to $3.6 billion, and total deposits increased by $203.8 million to $4.1 billion compared to the previous quarter.
• Net interest income totaled $28.8 million, a $0.7 million increase from the prior quarter, and the net interest margin increased to 2.59%.
• The efficiency ratio improved to 80.17% for the third quarter of 2024, compared to 81.62% in the second quarter of 2024 and 83.52% in the third quarter of 2023.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to improved quarterly earnings and the resolution of a lawsuit, but concerns remain about the large nonperforming loan relationship and its impact on overall profitability. The company's liability-sensitive balance sheet and higher operating costs also temper the positive outlook.

Positives

• The company's net income increased both quarter-over-quarter and year-over-year.
• The resolution of the GLAS Trust Lawsuit removes a significant legal risk.
• The reduction in nonperforming loans indicates improved asset quality.
• The growth in total portfolio loans and deposits suggests positive business momentum.
• The increase in net interest income and net interest margin shows improved profitability.
• The improved efficiency ratio indicates better cost management.
• The company's capital and liquidity levels remain strong.

Negatives

• Net income for the nine months ended September 30, 2024, was lower than the same period in 2023, at $16.2 million compared to $25.3 million.
• The company's financial results continue to be significantly impacted by a large nonperforming lending relationship, which has negatively impacted interest income by $57.2 million since the second quarter of 2023.
• The allowance for credit losses to total portfolio loans decreased to 2.25% at September 30, 2024, from 2.72% at June 30, 2024, primarily due to a $15 million charge-off.
• Net interest income decreased by $9.6 million for the nine months ended September 30, 2024, compared to the same period in 2023.
• Funding costs increased 104 basis points for the nine months ended September 30, 2024, compared to the same period in 2023.

Risks

• The company's financial performance is still significantly impacted by the large nonperforming lending relationship.
• The company is exposed to risks related to market interest rates, inflation, and changes in government policies.
• There are risks associated with cybersecurity threats and rapid technological changes.
• The company faces risks related to concentrations of loans secured by real estate, particularly commercial real estate.
• The company is exposed to potential adverse effects of unusual events such as weather-related disasters, terrorist acts, and public health events.
• The company is exposed to the risk of increasing price and product/service competition.
• The company is exposed to the risk of material increases in costs and expenses.
• The company is exposed to the risk of a significant weakening of the local economies in which it operates.

Future Outlook

The company expects an immediate decline in the cost of funds in the fourth quarter due to a recent Federal Reserve rate cut and anticipates that the net interest margin will return to a more normalized level once the large nonperforming lending relationship is fully resolved. The company also has a solid loan production pipeline providing good visibility through year end.

Management Comments

• Litz H. Van Dyke, Chief Executive Officer, stated that positive developments continued in the third quarter with respect to legal actions and the large nonperforming relationship.
• Van Dyke also stated that the company remains committed to resolving the lending relationship in a manner that best protects the company, the bank, and shareholders.
• Van Dyke noted that aside from the impact of the large nonperforming lending relationship, the company's financial performance and asset quality metrics remain solid.
• Van Dyke mentioned that the company feels positive about the fundamentals of the company and the structure of the balance sheet.

Industry Context

This announcement reflects the challenges faced by regional banks in managing nonperforming loans and navigating interest rate fluctuations. The resolution of the lawsuit is a positive development, but the ongoing impact of the large nonperforming loan relationship highlights the need for continued vigilance in asset quality management. The company's focus on deposit growth and loan production aligns with industry trends, but the liability-sensitive balance sheet could be a risk in a changing rate environment.

Comparison to Industry Standards

• Carter Bankshares' net interest margin of 2.59% is below the average for US banks, which is closer to 3.0% in the current environment, indicating room for improvement.
• The efficiency ratio of 80.17% is higher than the industry average, which is typically in the 60-70% range, suggesting that the bank has higher operating costs relative to its income.
• The nonperforming loan ratio of 8.00% is significantly higher than the industry average, which is typically below 1%, indicating a higher level of credit risk.
• Compared to peers like First National Corporation (FXNC) and Blue Ridge Bankshares (BRBS), Carter Bankshares' profitability metrics are weaker, primarily due to the impact of the large nonperforming loan relationship.
• While deposit growth is positive, the reliance on brokered CDs could be a concern compared to banks with a more stable deposit base.

Legal Proceedings

• The lawsuit filed by GLAS Trust Company, LLC was voluntarily dismissed with prejudice during the third quarter of 2024.

Related Party Transactions

• Certain of the Justice Entities executed a promissory note in favor of the Bank further evidencing this indemnification obligation as related to the Settlement Payment.

Stakeholder Impact

• Shareholders will benefit from the improved quarterly earnings and the resolution of the lawsuit.
• Employees may see improved job security due to the company's positive financial performance.
• Customers may benefit from the company's continued focus on deposit growth and loan production.
• Creditors may have increased confidence in the company's ability to meet its obligations.

Next Steps

• The company will continue to focus on resolving the large nonperforming lending relationship.
• The company expects a decline in the cost of funds in the fourth quarter due to recent interest rate cuts.
• The company will continue to manage the structure and pricing of its deposit and borrowing portfolios.
• The company will continue to monitor and manage its loan production pipeline.

Key Dates

Keywords

Carter Bankshares, Financial Results, Net Income, Nonperforming Loans, Net Interest Margin, Deposits, Loan Growth, Litigation, Efficiency Ratio, Credit Quality