10-Q: Carter Bankshares Reports Q1 2024 Results, Net Income Impacted by Nonperforming Loan

Carter Bankshares' first quarter 2024 net income was significantly impacted by a large commercial loan moving to nonaccrual status, despite growth in deposits and loans.

Summary

• Carter Bankshares reported a net income of $5.8 million, or $0.25 per diluted share, for the first quarter of 2024, a decrease from $15.9 million, or $0.67 per diluted share, in the same period of 2023.
• The decrease in net income was primarily due to a $9.3 million negative impact on interest income from a large commercial loan relationship being placed on nonaccrual status.
• Net interest income decreased by 30.3% to $28.4 million, primarily due to a 155 basis point increase in funding costs and a 12 basis point decrease in yield on earning assets.
• Total deposits increased by $108.6 million, or 11.6% annualized, to $3.8 billion, driven by growth in certificates of deposit.
• Total portfolio loans increased by $3.2 million, or 0.4% annualized, to $3.5 billion, with growth in commercial real estate and residential mortgages.
• Nonperforming loans represented 8.76% of total portfolio loans, primarily due to the aforementioned large commercial loan relationship.
• The allowance for credit losses to total portfolio loans ratio was 2.75%, compared to 2.77% at the end of the previous quarter.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with strong deposit growth but significant challenges in profitability and asset quality. The impact of the nonperforming loan and related litigation is a major concern, leading to a negative sentiment overall.

Positives

• Total deposits increased by $108.6 million, or 11.6% annualized, indicating strong deposit growth.
• Total portfolio loans increased by $3.2 million, or 0.4% annualized, showing some loan growth.
• The company has a diversified deposit base with 78.8% retail deposits.
• The company has access to additional liquidity through the FHLB and other correspondent banks.
• The company is well capitalized with a Tier 1 capital ratio of 10.89%.

Negatives

• Net interest income decreased by 30.3% due to increased funding costs and decreased yield on earning assets.
• Net income decreased significantly due to a large commercial loan moving to nonaccrual status.
• Nonperforming loans represent a high percentage of total portfolio loans at 8.76%.
• Total noninterest expense increased by $2.7 million.
• The company's balance sheet is slightly liability sensitive.

Risks

• The company's financial results are significantly impacted by a single large nonperforming loan relationship.
• The company faces ongoing litigation related to the nonperforming loan relationship.
• The company is exposed to interest rate risk, particularly with a liability-sensitive balance sheet.
• The company is exposed to credit risk, particularly in its commercial real estate portfolio.
• The company is exposed to market risk, particularly with fluctuations in the value of its securities portfolio.

Future Outlook

The company is focusing on refining its brand image, pursuing a prudent growth strategy, and resolving nonaccrual loans. The company expects to continue to dedicate significant resources to resolving the nonaccrual loans and related litigation.

Management Comments

• The company's goal is to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate.
• The company believes 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.

Industry Context

The results reflect challenges faced by regional banks in the current interest rate environment, including increased funding costs and pressure on net interest margins. The company's focus on resolving nonperforming loans and managing credit risk is consistent with industry trends.

Comparison to Industry Standards

• The company's net interest margin of 2.60% is below the industry average for regional banks, which is closer to 3.00% or higher, indicating the impact of the nonperforming loan and higher funding costs.
• The nonperforming loan ratio of 8.76% is significantly higher than the industry average, which is typically below 1.00%, highlighting the severity of the company's asset quality issues.
• The company's capital ratios are above regulatory minimums, but the Tier 1 capital ratio of 10.89% is lower than some peers, which may be closer to 12.00% or higher.
• The company's loan growth of 0.4% annualized is below the industry average for regional banks, which is closer to 2.00% or higher, indicating the company's focus on managing risk rather than growth.
• The company's deposit growth of 11.6% annualized is above the industry average, which is closer to 5.00% or lower, indicating the company's success in attracting deposits.

Legal Proceedings

• The Bank is engaged in collection proceedings against various related entities owned and/or controlled by James C. Justice, II, Cathy L. Justice and James C. Justice, III.
• The Collection Defendants filed motions to set aside confessions of judgment, which were denied by the Martinsville Circuit Court.
• The Collection Defendants have filed a notice of appeal regarding the Martinsville Circuit Courts order.
• The Company, the Bank, and individual directors were named as defendants in a lawsuit filed by the Collection Defendants in the United States District Court for the Southern District of West Virginia.
• The Bank was named as a defendant in a lawsuit filed by The Greenbrier Sporting Club Development Company, Inc. and The Greenbrier Sporting Club, Inc. related to a deed of trust.
• The Bank was named as a defendant in a lawsuit filed by GLAS Trust Company LLC related to financing transactions with Bluestone Resources, Inc.

Stakeholder Impact

• Shareholders are negatively impacted by the decrease in net income and earnings per share.
• Employees may be impacted by the company's focus on cost management.
• Customers may be impacted by changes in the company's products and services.
• Creditors may be impacted by the company's credit risk profile.

Next Steps

• The company will continue to focus on resolving the nonaccrual loans and related litigation.
• The company will pursue a prudent growth strategy when appropriate.
• The company will continue to monitor and manage its liquidity and capital positions.

Key Dates

Keywords

net interest income, nonperforming loans, credit losses, deposits, loans, capital, interest rate risk, commercial real estate, financial results, bank