8-K: Carter Bankshares Reports Strong Fourth Quarter Earnings, Despite Ongoing Loan Challenges

Carter Bankshares, Inc. announced a net income of $8.3 million for the fourth quarter of 2024, a significant improvement compared to the previous quarter and the same period last year, despite continued challenges with a large nonperforming loan relationship.

Summary

• Carter Bankshares, Inc. reported a net income of $8.3 million, or $0.36 diluted earnings per share (EPS), for the fourth quarter of 2024, compared to $5.6 million, or $0.24 diluted EPS, in the third quarter of 2024 and a net loss of $1.9 million, or $(0.08) per share, in the fourth quarter of 2023.
• For the full year 2024, net income was $24.5 million, or $1.06 diluted EPS, compared to $23.4 million, or $1.00 diluted EPS, for 2023.
• Pre-tax pre-provision income was $5.6 million for the fourth quarter of 2024, $6.8 million for the third quarter of 2024, and $1.6 million for the fourth quarter of 2023.
• The company's financial results were significantly impacted by loans in the 'Other' segment, primarily related to the Justice Entities, which have been on nonaccrual status since the second quarter of 2023.
• Interest income was negatively impacted by $7.9 million and $9.4 million during the fourth quarter of 2024 and 2023, respectively, due to these nonaccrual loans, with a total negative impact of $65.1 million since the second quarter of 2023.
• Nonperforming loans decreased by $28.4 million to $259.3 million at December 31, 2024, compared to September 30, 2024, primarily due to $28.9 million in curtailment payments from the largest nonperforming credit relationship.
• The allowance for credit losses to total portfolio loans decreased to 2.09% at December 31, 2024, from 2.25% at September 30, 2024, and 2.77% at December 31, 2023.
• Total portfolio loans increased by $29.0 million, or 3.2% annualized, to $3.6 billion at December 31, 2024, from September 30, 2024.
• Total deposits increased by $68.4 million, or 6.7% annualized, compared to September 30, 2024, and by $431.5 million, or 11.6%, compared to December 31, 2023.
• Net interest income totaled $29.1 million, an increase of $0.4 million, or 1.2%, compared to the prior quarter, and an increase of $1.7 million, or 6.3%, compared to the year-ago quarter.
• The net interest margin decreased one basis point to 2.58% for the fourth quarter of 2024, compared to 2.59% for the prior quarter, but increased nine basis points from the year-ago quarter.
• The efficiency ratio was 83.6% for the fourth quarter of 2024, compared to 80.2% for the third quarter of 2024 and 94.8% for the fourth quarter of 2023.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the improved quarterly earnings and reduction in nonperforming loans, but tempered by the ongoing challenges with the large nonperforming loan relationship and higher efficiency ratio. The company's forward-looking statements are optimistic, but the risks associated with the nonperforming loans and economic conditions are significant.

Positives

• The company achieved a significant increase in net income in the fourth quarter of 2024 compared to the previous quarter and the same period last year.
• Nonperforming loans decreased due to curtailment payments, indicating progress in resolving problem loans.
• The company experienced growth in total portfolio loans and deposits.
• Net interest income increased both compared to the prior quarter and the year-ago quarter.
• The company's cost of funds declined due to Federal Reserve rate cuts.
• The company is expanding its presence in North Carolina through branch acquisitions.
• The company's capital and liquidity levels remain strong.
• The company is well positioned to benefit from further interest rate declines due to its liability-sensitive balance sheet.

Negatives

• The company's financial results continue to be significantly impacted by a large nonperforming loan relationship, which has been on nonaccrual status since the second quarter of 2023.
• Interest income was negatively impacted by $7.9 million in the fourth quarter of 2024 due to nonaccrual loans.
• The efficiency ratio increased to 83.6% in the fourth quarter of 2024, indicating higher operating expenses relative to income.
• Net interest margin decreased slightly compared to the previous quarter.
• The company's net interest income and net interest margin continue to be significantly impacted by the large nonperforming lending relationship.
• The company's loan production was primarily in construction lending, which has a lag time before it is fully funded and earning interest.

Risks

• The company's financial performance is heavily influenced by the resolution of its largest nonperforming credit relationship, and there is no assurance of the timing or amount of future payments or collections.
• The company is exposed to risks related to market interest rates, inflation, and changes in government policies.
• The company faces potential risks from cyber-security threats and rapid technological changes.
• There are risks associated with concentrations of loans secured by real estate, particularly commercial real estate.
• The company could face increased delinquency and foreclosure rates on commercial real estate loans.
• The company may have an insufficient allowance for credit losses.
• The company is exposed to potential adverse effects from unusual events such as weather-related disasters, terrorist acts, and public health events.
• The company faces risks related to regulatory supervision and oversight, as well as legislation affecting the financial services industry.
• The company is exposed to the outcome of pending and future litigation and/or governmental proceedings.
• The company faces increasing price and product/service competition.
• The company may not be able to fully realize the anticipated benefits from acquisitions.
• The company is exposed to the soundness of other financial institutions and any indirect exposure related to recent large bank failures.
• The company faces risks related to general economic or business conditions, including unemployment levels and supply chain disruptions.
• The company is exposed to changes in customer behaviors, deposit flows, and loan demand.
• The company may fail to attract or retain key associates.
• The company faces risks related to expansions or consolidations in its branch network.
• The company is exposed to deterioration of the housing market and reduced demand for mortgages.
• The company is exposed to re-emergence of turbulence in significant portions of the global financial and real estate markets.

Future Outlook

The company believes it is well positioned for a strong 2025 and expects that its net interest margin will return to a more normalized level once the large nonperforming lending relationship is fully resolved. The company also anticipates that further declines in interest rates should continue to positively benefit its net interest margin.

Management Comments

• The Bank produced a strong fourth quarter on multiple fronts.
• We believe this as a crucial step toward optimizing our operations in Winston-Salem because it gives us an immediate presence in the market, and we are gaining further market share in Mooresville.
• We believe that the transaction will improve our profitability and deliver positive returns to our shareholders.
• 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, and loan production was solid in the fourth quarter.
• Our loan production pipeline also remains strong.
• Deposit growth is occurring in most categories, with the majority of growth coming from increases in interest checking and CD accounts.
• Our cost of funds declined in the fourth quarter as a result of the recent Federal Reserve rate cuts in the third and fourth quarters of 2024.
• Our balance sheet is slightly liability sensitive and is well positioned so that further declines in interest rates should continue to positively benefit our net interest margin.
• We also expect that our net interest margin will return to a more normalized level once the large nonperforming lending relationship is fully resolved.
• 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 the Company, the Bank, and shareholders.
• We believe we are well positioned for a strong 2025.

Industry Context

The announcement reflects a mixed performance in the banking sector, with Carter Bankshares showing resilience in the face of ongoing challenges with nonperforming loans. The company's strategic branch acquisitions and focus on deposit growth align with industry trends of consolidation and customer base expansion. The impact of Federal Reserve rate cuts on the company's cost of funds and net interest margin is also a key factor in the current economic environment for banks.

Comparison to Industry Standards

• Carter Bankshares' net interest margin of 2.58% is below the average for US banks, which is closer to 3.0% in the current environment, indicating the impact of the non-performing loans.
• The efficiency ratio of 83.6% is higher than the industry average, which is typically in the 50-60% range for well-performing banks, suggesting that the company has higher operating costs relative to its income.
• The nonperforming loan ratio of 7.15% is significantly higher than the industry average, which is typically below 1%, highlighting the company's challenges with its loan portfolio.
• Compared to regional banks like Truist Financial (TFC) and Regions Financial (RF), Carter Bankshares has a smaller asset base and a higher nonperforming loan ratio, indicating a higher risk profile.
• The company's deposit growth of 11.6% year-over-year is strong compared to the industry average, which is closer to 5-7%, suggesting a successful strategy in attracting deposits.
• The company's loan growth of 3.4% year-over-year is in line with the industry average, indicating a stable lending activity.
• The company's capital ratios are within regulatory requirements, but the higher nonperforming loan ratio may raise concerns among investors and regulators.

Stakeholder Impact

• Shareholders will benefit from the improved earnings and the company's strategic initiatives.
• Employees may see increased job security and opportunities due to the company's growth.
• Customers will benefit from the expanded branch network and the company's focus on deposit growth.
• Suppliers and creditors will benefit from the company's strong financial position and growth prospects.

Next Steps

• The company will continue to focus on resolving the large nonperforming lending relationship.
• The company will continue to manage the structure and pricing of its deposit and borrowing portfolios to reduce future funding costs.
• The company will continue to integrate the newly acquired branches in North Carolina.
• The company will continue to monitor and manage its loan portfolio and credit risk.
• The company will continue to monitor and manage its capital and liquidity positions.

Key Dates

Keywords

bank, financial results, net income, nonperforming loans, interest income, deposits, loan portfolio, credit losses, net interest margin, efficiency ratio