10-Q: Carter Bankshares Reports Mixed Q2 Results Amidst Loan Resolution Efforts

Carter Bankshares reports a slight increase in net interest income for Q2 2024, but faces ongoing challenges from a large non-performing loan and increased expenses.

Summary

• Carter Bankshares experienced a mixed second quarter in 2024, with net interest income increasing slightly compared to the same period last year, but a decrease in net income.
• Net interest income rose to $28.1 million, a 5.2% increase, driven by higher yields on earning assets, but this was offset by a 98 basis point increase in funding costs.
• The company's provision for credit losses increased by $0.4 million compared to Q2 2023.
• Noninterest income saw a modest increase of $0.5 million, reaching $5.5 million.
• However, noninterest expenses also increased by $1.9 million, totaling $27.4 million.
• The company's net income for the quarter was $4.8 million, or $0.21 per diluted share, down from $5.7 million, or $0.24 per diluted share, in Q2 2023.
• For the first six months of 2024, net interest income decreased by 16.3% to $56.5 million, primarily due to a large non-performing loan.
• The provision for credit losses decreased by $1.0 million to $0.5 million for the first six months of 2024.
• Total deposits increased by $159.4 million, or 8.61% on an annualized basis, while Federal Home Loan Bank borrowings decreased by $155.4 million.
• Nonperforming loans decreased by $9.3 million to $300.2 million, primarily due to curtailment payments on the large non-performing loan.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like deposit growth and a decrease in nonperforming loans, but the negative impacts of the large non-performing loan and increased expenses weigh heavily on the overall sentiment. The company is facing significant challenges and the outlook is uncertain.

Positives

• Net interest income increased in Q2 2024 compared to the same period last year.
• The company saw growth in total deposits.
• Nonperforming loans decreased due to curtailment payments on a large non-performing loan.
• The company's securities portfolio is diversified with a significant portion in variable rate securities.

Negatives

• Net income decreased in Q2 2024 compared to the same period last year.
• Noninterest expenses increased significantly in Q2 2024.
• Net interest income decreased for the first six months of 2024 compared to the same period in 2023.
• The company continues to be impacted by a large non-performing loan.
• The company's funding costs increased significantly.

Risks

• The company's financial results are significantly impacted by a large non-performing loan.
• The company faces risks related to changes in interest rates and their impact on the loan and securities portfolios.
• There are risks associated with concentrations of loans secured by real estate, particularly commercial real estate.
• The company is subject to various legal and administrative proceedings, including litigation related to the largest non-performing loan relationship.
• The company faces risks related to cyber-security threats and rapid technological developments.

Future Outlook

The company is focusing on refining its brand image, pursuing a prudent growth strategy, and resolving nonaccrual loans. The company believes its strong capital and liquidity positions support this strategy. The company will seek to increase fee income while closely monitoring operating expenses.

Management Comments

• The Company's goal is to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate.
• We believe that the Banks strong capital and liquidity positions support this strategy.
• The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter.
• The Company continues to dedicate significant resources to the ultimate resolution of the Companys nonaccrual loans, the significant majority of which are related to a single large lending relationship.

Industry Context

The banking industry is currently facing challenges related to interest rate fluctuations, credit quality, and regulatory scrutiny. Carter Bankshares' results reflect these broader trends, particularly the impact of rising interest rates on funding costs and the need to manage credit risk effectively. The company's focus on resolving non-performing loans and managing expenses is consistent with industry best practices.

Comparison to Industry Standards

• Carter Bankshares' net interest margin of 2.56% (FTE) for the three months ended June 30, 2024, is below the average for many regional banks, which have seen margins compress due to rising funding costs.
• The company's nonperforming loan ratio of 8.46% is significantly higher than the industry average, reflecting the impact of the large non-performing loan relationship.
• The company's capital ratios remain above regulatory minimums, indicating a strong capital position compared to some peers.
• The company's deposit growth of 8.61% annualized is above average for the industry, indicating a strong ability to attract and retain deposits.
• Compared to other regional banks, Carter Bankshares is facing more significant challenges related to asset quality, as evidenced by the high nonperforming loan ratio and the need for a higher allowance for credit losses.

Legal Proceedings

• The Bank has been engaged in a variety of collection proceedings against James C. Justice, II, Cathy L. Justice, James C. Justice, III and various Justice Entities.
• On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Collection Defendants.
• On May 12, 2023 and June 7, 2023, the Collection Defendants filed motions to set aside the confessions of judgment that the Bank had filed.
• On February 21, 2024, the Martinsville Circuit Court issued final orders denying such motions.
• On February 26, 2024, the Collection Defendants filed a notice of appeal regarding the Martinsville Circuit Courts order denying such motions.
• On July 3, 2024, the Collection Defendants withdrew their notices of appeal.
• On November 10, 2023, the Company, the Bank, and the individual directors of the Company and the Bank were named as defendants in a lawsuit filed in the United States District Court for the Southern District of West Virginia by the Collection Defendants.
• On December 6, 2023, the Company and the Bank filed a motion to transfer venue of the Justice Federal Court Litigation to the United States District Court for the Western District of Virginia.
• That motion was granted on April 24, 2024.
• On June 26, 2024 the Justice Federal Court Litigation was dismissed with prejudice.
• On February 7, 2024, the Bank was named as a defendant in a lawsuit filed in the Circuit Court of Greenbrier County, West Virginia by The Greenbrier Sporting Club Development Company, Inc. and The Greenbrier Sporting Club, Inc.
• On or about February 6, 2024, a notice of sale was published in multiple newspapers regarding the proposed sale by the Trustee of certain real estate encumbered by the Trust Deed.
• On February 16, 2024, the Bank voluntarily cancelled the proposed sale by the Trustee of the real estate encumbered by the Trust Deed.
• On June 28, 2024 the Justice Foreclosure Litigation was dismissed with prejudice.
• On February 12, 2024, the Bank was named as a defendant in a lawsuit filed in the United States District Court for the Western District of Virginia by GLAS Trust Company LLC.
• On March 29, 2024, the Bank filed a motion to dismiss the original complaint filed by GLAS due to lack of subject matter jurisdiction and failure to assert facts sufficient to support the claims alleged by GLAS.
• Subsequently, GLAS filed an amended complaint on April 19, 2024.
• On May 13, 2024, the Bank filed a motion to dismiss the amended complaint filed by GLAS on similar grounds.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the ongoing challenges related to the large non-performing loan.
• Employees may be affected by the company's cost-cutting measures and restructuring efforts.
• Customers may experience changes in service offerings and pricing.
• Creditors may be concerned about the company's ability to repay its debts.
• Suppliers may be affected by changes in the company's purchasing patterns.

Next Steps

• The company will continue to focus on resolving nonaccrual loans.
• The company will pursue a prudent growth strategy.
• The company will seek to increase fee income while closely monitoring operating expenses.

Key Dates

Keywords

net interest income, nonperforming loans, credit losses, deposits, interest rates, commercial real estate, capital, liquidity, securities, FHLB borrowings