8-K: Carter Bankshares Reports Q3 2025 Earnings Amid NPL Rise

Carter Bankshares, Inc. announced third quarter 2025 net income of $5.4 million, or $0.24 diluted EPS, reflecting continued loan growth and margin expansion despite ongoing impact from a large nonperforming credit relationship.

Summary

• Net income for the third quarter of 2025 was $5.4 million, or $0.24 diluted earnings per share (EPS), a decrease from $8.5 million ($0.37 diluted EPS) in Q2 2025 and $5.6 million ($0.24 diluted EPS) in Q3 2024.
• For the nine months ended September 30, 2025, net income was $22.9 million, or $1.00 diluted EPS, compared to $16.2 million, or $0.70 diluted EPS, for the same period in 2024.
• Net interest income for Q3 2025 was $33.7 million, an increase of 4.2% from Q2 2025 and 17.1% from Q3 2024.
• Pre-tax pre-provision income for Q3 2025 was $10.4 million, up from $8.0 million in Q2 2025 and $6.8 million in Q3 2024.
• Total portfolio loans increased by $88.5 million, or 9.4% on an annualized basis, to $3.8 billion at September 30, 2025.
• Net interest margin increased six basis points to 2.86% for Q3 2025.
• Nonperforming loans (NPLs) increased by $8.1 million to $258.6 million at September 30, 2025, primarily due to a new $14.6 million commercial real estate (CRE) loan and a $0.8 million residential mortgage loan moving to nonaccrual status.
• The Justice Entities credit relationship, on nonaccrual status since Q2 2023, negatively impacted interest income by $6.5 million in Q3 2025 and $85.2 million cumulatively.
• Curtailment payments from the Justice Entities totaled $7.0 million in Q3 2025, reducing their NPL balance from $301.9 million (June 30, 2023) to $228.6 million (September 30, 2025).
• The provision for credit losses was an expense of $2.9 million in Q3 2025, compared to a recovery of $(2.3) million in Q2 2025.
• The efficiency ratio improved to 73.43% in Q3 2025 from 78.63% in Q2 2025.
• Total assets increased by $56.0 million to $4.8 billion as of September 30, 2025.
• Total deposits decreased by $11.9 million to $4.2 billion, while FHLB borrowings increased by $62.0 million to $175.5 million.
• The company repurchased 262,269 shares of common stock at a cost of $4.9 million during Q3 2025.

Sentiment

Score: 5

Explanation: The sentiment is mixed. While there are clear positives such as strong loan growth, margin expansion, and improved efficiency, these are significantly offset by a substantial quarter-over-quarter decline in net income and EPS, an increase in nonperforming loans, and the persistent negative impact of the large Justice Entities credit relationship. Management's optimistic outlook is tempered by these ongoing credit quality challenges.

Positives

• Net interest income increased by $1.4 million (4.2%) quarter-over-quarter and $4.9 million (17.1%) year-over-year.
• Net interest margin expanded by six basis points to 2.86% in Q3 2025 compared to the prior quarter.
• Total portfolio loans grew by $88.5 million, representing a strong 9.4% annualized growth rate.
• Pre-tax pre-provision income significantly increased to $10.4 million in Q3 2025 from $8.0 million in Q2 2025.
• The efficiency ratio improved to 73.43% in Q3 2025 from 78.63% in Q2 2025.
• Curtailment payments of $7.0 million were received from the Justice Entities, contributing to a reduction in their overall nonperforming loan balance.
• The company remains 'well capitalized' with strong capital ratios.
• Management expects a 'tailwind from prior construction lending' to come online over the next 12 to 18 months.
• The company is 'well positioned to benefit' from anticipated Federal Reserve short-term interest rate reductions due to its liability-sensitive balance sheet and short-term CD portfolio.

Negatives

• Net income decreased significantly to $5.4 million in Q3 2025 from $8.5 million in Q2 2025.
• Diluted EPS decreased to $0.24 in Q3 2025 from $0.37 in Q2 2025.
• Nonperforming loans (NPLs) increased by $8.1 million to $258.6 million at September 30, 2025, driven by new nonaccrual loans including a $14.6 million CRE loan.
• The Justice Entities credit relationship continues to negatively impact interest income by $6.5 million in Q3 2025 and remains a significant drag on financial and credit metrics.
• The provision for credit losses shifted from a recovery of $(2.3) million in Q2 2025 to an expense of $2.9 million in Q3 2025.
• Total deposits decreased by $11.9 million during the seasonally slow third quarter.
• FHLB borrowings increased by $62.0 million to $175.5 million to fund loan growth, indicating increased reliance on wholesale funding.
• Available-for-sale securities experienced unrealized losses of $8.0 million during the third quarter.

Risks

• Impacts of market interest rates on economic conditions, customer behavior, net interest margin, net interest income, and deposit, loan, and securities portfolios.
• Inflation, market, and monetary fluctuations.
• Changes in trade, tariffs, monetary and fiscal policies and laws of the U.S. government and related impacts on economic conditions and financial markets, and changes in policies of the Federal Reserve, FDIC, and U.S. Department of the Treasury.
• Changes in accounting policies, practices, or guidance, including potential volatility in operating results due to the application of the Current Expected Credit Losses (CECL) methodology.
• Cyber-security threats, attacks, or events.
• Rapid technological developments and changes.
• Ability to resolve nonperforming assets and secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full.
• Changes in liquidity and capital positions.
• Concentrations of loans secured by real estate, particularly CRE loans, and the potential impacts of changes in market conditions on the value of real estate collateral.
• Increased delinquency and foreclosure rates on CRE loans.
• An insufficient allowance for credit losses.
• Potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other geopolitical conflicts or public health events, and of any governmental and societal responses thereto.
• A change in spreads on interest-earning assets and interest-bearing liabilities.
• Regulatory supervision and oversight, including the relationship with regulators and any actions that may be initiated by regulators.
• Legislation affecting the financial services industry as a whole, and the Company and the Bank, in particular.
• The outcome of pending and future litigation and/or governmental proceedings.
• Increasing price and product/service competition.
• The ability to continue to introduce competitive new products and services on a timely, cost-effective basis.
• Managing internal growth and acquisitions, including the possibility that anticipated benefits cannot be fully realized or that integration will be more difficult, disruptive, or costly than anticipated.
• The soundness of other financial institutions and any indirect exposure related to large bank failures and their impact on the broader market.
• Material increases in costs and expenses.
• Reliance on significant customer relationships.
• General economic or business conditions, including unemployment levels, supply chain disruptions, slowdowns in economic growth, and government shutdowns.
• Significant weakening of the local economies in which we operate.
• Changes in customer behaviors, including consumer spending, borrowing, and saving habits.
• Changes in deposit flows and loan demand.
• Failure to attract or retain key associates.
• Expansions or consolidations in the branch network, including that anticipated benefits of branch acquisitions or optimization projects are not fully realized.
• Deterioration of the housing market and reduced demand for mortgages.
• Re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact performance.

Future Outlook

Management expects a tailwind from prior construction lending that will come online over the coming 12 to 18 months as projects progress. The company's balance sheet is slightly liability sensitive, positioning it to benefit from anticipated Federal Reserve short-term interest rate reductions in the near term, especially given the short-term nature of its certificates of deposit (CD) portfolio. Management believes the company is well positioned for a strong remainder of 2025 and continuing into 2026, despite the ongoing negative impact of the large nonperforming credit relationship.

Management Comments

• "We are pleased to report continued strong fundamentals and positive trends for the third quarter of 2025. During the quarter, we again realized margin expansion and solid loan growth throughout our footprint."
• "Our annualized loan growth of 9.4% reflects good momentum in our commercial lending platform. Our loan pipeline remains healthy and we continue to expect a tailwind from prior construction lending that will come online over the coming 12 to 18 months as projects progress."
• "The Bank continues to add seasoned commercial lenders in key strategic growth markets. Our balance sheet remains slightly liability sensitive. As the Federal Reserve reduces short-term interest rates in the near term, we believe we are well positioned to benefit especially given the short-term nature of our certificates of deposit (CD) portfolio."
• "Although our large nonperforming credit relationship continues to have a negative impact on our financial and credit metrics, aside from this impact, our fundamentals, financial performance, and asset quality metrics all remain solid. We are committed to resolving this lending relationship in a manner that best protects our Company and our shareholders in the long-term. We continue to believe we are well positioned for a strong remainder of 2025 and continuing into 2026."

Industry Context

The announcement reflects the broader banking industry's navigation of evolving interest rate environments, with Carter Bankshares positioning itself to benefit from anticipated Federal Reserve rate reductions due to its liability-sensitive balance sheet. The focus on commercial lending and adding seasoned lenders aligns with strategies to capitalize on regional economic growth. However, the persistent challenges with commercial real estate (CRE) loans and nonperforming assets, as highlighted by the increase in NPLs and the ongoing impact of the Justice Entities relationship, underscore prevalent credit quality concerns within the financial sector, particularly for regional banks with concentrated exposures.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or global benchmarks to assess the results against industry standards.

Legal Proceedings

• The company's largest credit relationship, the Justice Entities, has loans now reduced to judgments, indicating past legal proceedings for collection.
• The company lists 'the outcome of pending and future litigation and/or governmental proceedings' as a general risk factor that could cause actual results to differ materially from forward-looking statements.

Related Party Transactions

• The filing explicitly details a significant credit relationship with 'various entities in which James C. Justice, II has an interest' (collectively, the Justice Entities), which remains the Bank's largest credit relationship and comprises the significant majority of the 'Other' loan segment. This relationship has been on nonaccrual status since Q2 2023 and continues to negatively impact financial results.

Stakeholder Impact

• Shareholders: Experience a significant quarter-over-quarter decrease in net income and EPS, but also benefit from share repurchases and management's stated commitment to long-term protection. The ongoing NPL issues pose a risk to future profitability.
• Customers: Continued strong loan growth, particularly in commercial lending, suggests ongoing availability of credit and services. The addition of seasoned commercial lenders in strategic growth markets indicates an expansion of customer-facing capabilities.
• Employees: The company is adding seasoned commercial lenders, indicating growth in certain departments. Total salary expenses decreased due to higher salary cost deferrals associated with higher loan growth.
• Creditors: FHLB borrowings increased to fund loan growth, indicating reliance on these sources. The company's capital ratios remain strong, which is positive for creditors, but the increase in NPLs warrants monitoring.

Next Steps

• Continue efforts to resolve the large nonperforming credit relationship with the Justice Entities in a manner that best protects the company and shareholders.
• Monitor the progress of prior construction lending projects, which are expected to come online over the next 12 to 18 months.
• Benefit from anticipated short-term interest rate reductions by the Federal Reserve, leveraging the liability-sensitive balance sheet and short-term CD portfolio.
• Closely review commercial real estate (CRE) loans, including the $14.6 million loan secured by an office building with vacating government agency tenants in Q4 2025, for changes in valuation and other market impacts.

Key Dates

Recommendation

While Carter Bankshares demonstrated solid loan growth, margin expansion, and improved efficiency, the substantial quarter-over-quarter decline in net income and EPS, coupled with an increase in nonperforming loans (NPLs) and the persistent drag from the large Justice Entities credit relationship, presents a mixed financial picture. The company's capital position remains strong, and management expresses optimism about future rate cuts and construction lending tailwinds. However, the ongoing credit quality challenges, particularly the new nonaccrual CRE loan, warrant caution. A 'Hold' recommendation reflects the balance between these positive operational trends and the significant, unresolved credit risks impacting profitability. Investors should monitor the resolution of the nonperforming assets and the impact of future interest rate changes.

Keywords

Carter Bankshares, CARE, Financial Results, Q3 2025, Earnings, Net Income, EPS, Net Interest Income, Net Interest Margin, Loan Growth, Nonperforming Loans, Credit Quality, Banking, Regional Bank, SEC Filing, 8-K, Martinsville VA, Virginia, North Carolina, Justice Entities, Commercial Real Estate