8-K: Carter Bankshares Reports Mixed Q1 2024 Results Amidst Large Non-Performing Loan Impact

Carter Bankshares, Inc. announced a net income of $5.8 million for the first quarter of 2024, significantly impacted by a large non-performing loan.

Summary

• Carter Bankshares reported a net income of $5.8 million, or $0.25 per diluted share, for the first quarter of 2024.
• This compares to a net loss of $(1.9) million, or $(0.08) per share, in the fourth quarter of 2023, and a net income of $15.9 million, or $0.67 per share, in the first quarter of 2023.
• The company's results were significantly affected by a $301.9 million loan relationship placed on nonaccrual status in the second quarter of 2023, which reduced interest income by $9.3 million in Q1 2024 and $39.3 million cumulatively.
• Net interest income increased by $1.0 million, or 3.6%, compared to the previous quarter, but decreased by $12.4 million, or 30.3%, compared to the first quarter of 2023.
• Total portfolio loans increased by $3.2 million from the previous quarter to $3.5 billion, but increased by $260.2 million, or 8.0%, compared to the same period last year.
• Total deposits increased by $108.6 million compared to the previous quarter and $293.5 million compared to the same period last year.
• Nonperforming loans to total portfolio loans were 8.76% at the end of Q1 2024, compared to 0.26% in Q1 2023, primarily due to the large non-performing loan.
• The efficiency ratio was 78.5% for the quarter, compared to 51.8% in the first quarter of 2023, also impacted by the non-performing loan.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant impact of the large non-performing loan on the company's financial results, despite some positive aspects like deposit growth and strong capital levels. The uncertainty around the resolution of the NPL also contributes to the negative sentiment.

Positives

• Net interest income increased by $1.0 million, or 3.6%, compared to the fourth quarter of 2023.
• Total portfolio loans increased by $3.2 million compared to the previous quarter.
• Total deposits increased by $108.6 million compared to the previous quarter.
• The company's capital and liquidity levels remain strong.
• Loan production was solid, although muted by two large commercial real estate loan payoffs.
• The company believes its bond portfolio is well-positioned for a period of higher interest rates.
• The company is pursuing all remedies to resolve the large non-performing loan.
• The company's balance sheet is positioned to benefit when the Federal Reserve begins to cut short-term interest rates.
• Nonperforming loans decreased $2.2 million to $307.3 million since December 31, 2023.

Negatives

• The large non-performing loan of $301.9 million significantly impacted financial results.
• Interest income was negatively impacted by $9.3 million in Q1 2024 due to the non-performing loan.
• Net interest income decreased by $12.4 million, or 30.3%, compared to the first quarter of 2023.
• The net interest margin decreased 138 basis points compared to the first quarter of 2023.
• Nonperforming loans to total portfolio loans were 8.76%, a significant increase from 0.26% in Q1 2023.
• The efficiency ratio was 78.5%, up from 51.8% in Q1 2023.
• Funding costs increased 155 basis points compared to the same quarter of 2023.
• Lending pipelines have slowed.

Risks

• The company faces risks related to market interest rates, inflation, and changes in government policies.
• Cybersecurity threats and rapid technological changes pose potential risks.
• The company's ability to resolve nonperforming assets and secure collateral is uncertain.
• Concentrations of loans secured by real estate, particularly commercial real estate, present risks.
• The company is exposed to potential adverse effects from unusual events like weather disasters, terrorist acts, and public health events.
• The outcome of pending litigation, including a lawsuit by West Virginia Governor James C. Justice, II, is uncertain.
• The company faces increasing price and product/service competition.
• There is a risk that the anticipated benefits from acquisitions may not be fully realized.
• The company is exposed to risks related to the soundness of other financial institutions.
• General economic conditions, including unemployment and supply chain disruptions, pose risks.
• Changes in customer behaviors and deposit flows could impact the company.
• The company faces risks related to attracting and retaining key employees.
• Deterioration of the housing market and reduced demand for mortgages could impact the company.
• Re-emergence of turbulence in global financial and real estate markets could impact the company.

Future Outlook

The company expects moderate loan growth this year and anticipates that the net interest margin will return to a more normalized level once the large non-performing loan relationship is resolved. They also believe their balance sheet is positioned to benefit from future Federal Reserve interest rate cuts.

Management Comments

• We continue to feel positive about the fundamentals of the Company and the structure of our balance sheet.
• Capital and liquidity levels continue to be strong.
• Loan production was again solid in the quarter, but was muted somewhat by two large commercial real estate loans that paid off during the quarter.
• We believe our bond portfolio is well positioned to outperform many of our peers in what appears to be a protracted period of higher interest rates.
• We expect that our net interest margin will return to a more normalized level once the large nonperforming loan (NPL) relationship is resolved.
• Obviously, the large NPL continues to have a negative impact on our financial results. However, aside from this issue, our financial performance for the quarter was solid.
• We remain confident in the condition and positioning of our Company.
• We believe that we are well positioned for a prosperous future.
• We continue to be confident that we will successfully resolve the large NPL, although we cannot give any assurance regarding the timeline for resolution.

Industry Context

The results reflect the challenges faced by regional banks in the current economic environment, particularly with rising interest rates and the impact of large non-performing loans. The company's focus on resolving the NPL and managing its balance sheet is consistent with industry trends.

Comparison to Industry Standards

• The company's nonperforming loan ratio of 8.76% is significantly higher than the industry average, which is typically below 1%.
• The efficiency ratio of 78.5% is also higher than the industry average for well-performing banks, which is often in the 50-60% range.
• The net interest margin of 2.60% is lower than the industry average, which is typically around 3-3.5%, reflecting the impact of the non-performing loan and higher funding costs.
• Compared to peers like First National Corporation (FXNC) and Blue Ridge Bankshares (BRBS), which have reported lower nonperforming loan ratios and higher net interest margins, Carter Bankshares is underperforming due to the large NPL.
• The company's loan growth of 8% year-over-year is moderate compared to some peers that have seen double-digit growth, but this is likely due to the company's focus on managing risk and resolving the NPL.

Legal Proceedings

• The company is involved in a lawsuit filed against the Bank and its directors by West Virginia Governor James C. Justice, II, his wife Cathy Justice, his son James C. Justice, III and various related entities concerning their lending relationship with the Bank.
• There are other lawsuits related to the large NPL relationship.

Stakeholder Impact

• Shareholders are negatively impacted by the reduced profitability and increased risk due to the large non-performing loan.
• Employees may be affected by potential cost-cutting measures or changes in strategy.
• Customers may experience changes in loan availability or interest rates.
• Suppliers and creditors may be impacted by the company's financial performance.

Next Steps

• The company will continue to pursue all remedies to resolve the large non-performing loan.
• The company will focus on managing its balance sheet and reducing funding costs.
• The company will monitor the interest rate environment and its impact on margins.
• The company will continue to explore alternatives for repayment or resolution with respect to the non-performing loans.

Key Dates

Keywords

non-performing loans, net interest income, financial results, loan growth, deposits, interest rates, credit quality, bank, capital, liquidity