10-Q: Carter Bankshares Reports Mixed Q3 Results Amid Loan Portfolio Adjustments

Carter Bankshares experienced a slight increase in net interest income and a decrease in provision for credit losses in Q3 2024, while navigating challenges with nonperforming loans.

Summary

• Carter Bankshares reported a net income of $5.6 million, or $0.24 per diluted share, for the third quarter of 2024, compared to $3.6 million, or $0.16 per diluted share, for the same period in 2023.
• Net interest income increased by 5.1% to $28.8 million in Q3 2024, driven by a 57 basis point increase in yield on earning assets, offset by a 61 basis point increase in funding costs.
• The provision for credit losses decreased by $1.5 million in Q3 2024 compared to Q3 2023.
• Total noninterest income increased slightly to $5.4 million, while noninterest expenses also saw a minor increase to $27.4 million.
• For the nine months ended September 30, 2024, net interest income decreased by 10.1% to $85.3 million compared to the same period in 2023.
• Total deposits increased by $363.2 million, or 13.0% on an annualized basis, while Federal Home Loan Bank borrowings decreased by $303.4 million.
• Nonperforming loans decreased by $21.8 million to $287.7 million, primarily due to curtailment payments on a large nonperforming lending relationship.
• The allowance for credit losses to total portfolio loans ratio was 2.25% at September 30, 2024, compared to 2.77% at December 31, 2023.

Sentiment

Score: 4

Explanation: The document presents mixed results with some positive aspects like deposit growth and reduced nonperforming loans, but significant concerns remain regarding net interest income decline, high nonperforming loan levels, and a large charge-off. The overall sentiment is cautiously negative.

Positives

• Net interest income saw a positive increase in Q3 2024, indicating improved earnings from lending and investment activities.
• The decrease in the provision for credit losses suggests a reduced expectation of future loan losses.
• The increase in total deposits indicates strong customer confidence and funding stability.
• The reduction in nonperforming loans is a positive sign of improving asset quality.
• The company has a strong capital position with a Tier 1 capital ratio of 10.83%.

Negatives

• Net interest income decreased by 10.1% for the nine months ended September 30, 2024, compared to the same period in 2023.
• Nonperforming loans, while decreasing, remain elevated at $287.7 million.
• The allowance for credit losses to total portfolio loans ratio decreased from 2.77% to 2.25%.
• The company experienced a $15.0 million principal charge-off related to the Other segment of the loan portfolio.
• The company's largest nonperforming lending relationship continues to negatively impact interest income.

Risks

• The company's financial results are significantly impacted by a large nonperforming lending relationship.
• The company is exposed to interest rate risk, which could affect earnings and capital.
• The company faces potential risks related to changes in economic conditions and market volatility.
• The company is subject to various legal and administrative proceedings and claims.
• The company is exposed to credit risk, particularly in its commercial real estate portfolio.

Future Outlook

The company aims to shift from restructuring the balance sheet to pursuing a prudent growth strategy, focusing on organic growth and considering opportunistic acquisitions. The company will also seek to increase fee income while closely monitoring operating expenses.

Management Comments

• Management believes the ACL is adequate to absorb expected losses inherent in the loan portfolio.
• Management believes that the deposit base is stable and that the Company has the ability to attract new depositors while diversifying the deposit composition.
• Management believes that the Banks strong capital and liquidity positions support the company's strategy.

Industry Context

The company's performance is being impacted by the current interest rate environment and the challenges faced by the banking industry, including the need to manage nonperforming loans and maintain adequate capital levels. The company is also navigating the impact of a large nonperforming lending relationship, which is a significant factor in its financial results.

Comparison to Industry Standards

• The company's net interest margin of 2.59% for the nine months ended September 30, 2024, is below the industry average for banks of similar size, which is closer to 3.00%.
• The company's nonperforming loan ratio of 8.00% is significantly higher than the industry average, which is typically below 1.00%.
• The company's allowance for credit losses to total portfolio loans ratio of 2.25% is higher than the industry average, which is typically around 1.50%, reflecting the higher risk profile of its loan portfolio.
• The company's capital ratios are above the regulatory minimums, indicating a strong capital position compared to industry benchmarks.

Legal Proceedings

• The company was named as a defendant in a lawsuit filed by GLAS Trust Company LLC, which was settled in August 2024.
• A lawsuit filed against the Company and the Bank by West Virginia Governor James C. Justice II, his wife Cathy L. Justice, his son James C. Justice, III, and related entities was dismissed with prejudice.

Stakeholder Impact

• Shareholders may be concerned about the decline in net interest income and the high level of nonperforming loans.
• Employees may be affected by the company's efforts to manage expenses and improve efficiency.
• Customers may benefit from the company's focus on providing a full range of financial services.
• Creditors may be concerned about the company's exposure to credit risk and the potential for loan losses.

Next Steps

• The company will continue to focus on resolving nonperforming assets.
• The company will pursue a prudent growth strategy, focusing on organic growth and considering opportunistic acquisitions.
• The company will seek to increase fee income while closely monitoring operating expenses.

Key Dates

Keywords

net interest income, nonperforming loans, credit losses, deposits, capital, loan portfolio, interest rate risk, commercial real estate, FHLB borrowings, allowance for credit losses