8-K: Carter Bankshares Reports Strong Q2 2025 Financials Amidst Nonperforming Loan Progress

Carter Bankshares, Inc. announced improved second quarter 2025 financial results, driven by net interest margin expansion and loan growth, despite the ongoing impact of a significant nonaccrual loan relationship.

Summary

• Net income for Q2 2025 was $8.5 million, or $0.37 diluted EPS, compared to $9.0 million ($0.39 diluted EPS) in Q1 2025 and $4.8 million ($0.21 diluted EPS) in Q2 2024.
• Net interest income increased to $32.4 million in Q2 2025, up from $30.1 million in Q1 2025 and $28.1 million in Q2 2024.
• Net interest margin (FTE) expanded to 2.82% in Q2 2025, an increase of 12 basis points from the prior quarter and 26 basis points from the year-ago quarter.
• Total portfolio loans grew by $59.6 million, or 6.5% on an annualized basis, reaching $3.7 billion at June 30, 2025.
• Total deposits increased by $21.3 million to $4.2 billion at June 30, 2025, including $55.9 million from a branch acquisition.
• Nonperforming loans (NPLs) decreased by $10.9 million to $250.6 million at June 30, 2025, representing 6.69% of total portfolio loans.
• The Bank's largest nonaccrual credit relationship (Justice Entities) had an aggregate principal balance of $235.5 million at June 30, 2025, and has been negatively impacting interest income by approximately $6.7 million per quarter.
• Curtailment payments of $9.5 million were received from the Justice Entities in Q2 2025, reducing their NPL balance from $301.9 million at June 30, 2023, to $235.5 million at June 30, 2025.
• The Company completed the acquisition of two leased branch facilities and $55.9 million of associated deposits from First Reliance Bank on May 23, 2025.
• A stock repurchase program of up to $20.0 million was announced on May 20, 2025, with $9.1 million (547,332 shares at $16.70/share) repurchased as of June 30, 2025.

Sentiment

Score: 8

Explanation: The sentiment is positive due to strong core financial performance, including significant net interest income growth, margin expansion, and solid loan growth. The reduction in nonperforming loans through curtailment payments and the initiation of a stock repurchase program further bolster confidence. While a large nonaccrual loan relationship remains a drag, the Company is actively managing it and reports strong underlying fundamentals and capital position.

Positives

• Net interest income increased by 7.4% sequentially and 15.2% year-over-year, demonstrating strong core banking performance.
• Net interest margin (FTE) expanded by 12 basis points sequentially to 2.82%, driven by lower funding costs and higher yields on interest-earning assets.
• Total portfolio loans increased by 6.5% on an annualized basis, reflecting solid loan growth momentum, particularly in commercial real estate.
• Nonperforming loans decreased by $10.9 million sequentially, and the NPL ratio improved to 6.69% from 7.09% in the prior quarter.
• Significant curtailment payments of $9.5 million were received from the largest nonaccrual credit relationship, contributing to the reduction in NPLs.
• The successful acquisition of two branch facilities added $55.9 million in deposits and expanded the Company's footprint.
• The Company initiated a $20.0 million stock repurchase program, signaling confidence in its capital position and commitment to shareholder value.
• The Company remains well capitalized with strong capital ratios (Tier 1 Capital ratio of 10.87%, Leverage ratio of 9.46%, Total Risk-Based Capital ratio of 12.12%).
• The underlying adjusted net income for Q2 2025 was $9.312 million, an increase from $7.242 million in Q1 2025, indicating improved operational profitability when excluding one-time items.

Negatives

• Net income decreased sequentially from $9.0 million in Q1 2025 to $8.5 million in Q2 2025, primarily due to a non-recurring $1.9 million gain on a BOLI death benefit recorded in Q1 2025.
• The Company's financial results continue to be significantly impacted by a large nonaccrual loan relationship (Justice Entities) with an aggregate principal balance of $235.5 million, which negatively impacted interest income by $6.7 million in Q2 2025.
• Excluding deposits acquired from the branch purchase, total deposits decreased by $34.6 million compared to March 31, 2025, due to large commercial depositors repositioning funds.
• Noninterest income decreased by $2.0 million sequentially, largely due to the absence of the one-time BOLI death benefit gain from the prior quarter.
• Noninterest expense increased by $1.3 million sequentially, driven by a $0.3 million 1035 exchange fee on BOLI, higher professional and legal fees, and increased salaries and employee benefits.

Risks

• Market interest rates and their impacts on economic conditions, customer behavior, net interest margin, net interest income, and portfolios.
• Inflation, market, and monetary fluctuations.
• Changes in trade, tariffs, monetary and fiscal policies and laws of the U.S. government, and changes in policies of the Federal Reserve, FDIC, and U.S. Department of the Treasury.
• Changes in accounting policies, practices, or guidance, such as the adoption of Current Expected Credit Losses (CECL) methodology, including potential volatility in operating results.
• 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 the Company's 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 (e.g., weather-related disasters, terrorist acts, war, geopolitical conflicts, public health events) and governmental responses.
• A change in spreads on interest-earning assets and interest-bearing liabilities.
• Regulatory supervision and oversight, including the relationship with regulators and any potential actions.
• Legislation affecting the financial services industry as a whole.
• 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 integration is more difficult/costly than anticipated.
• The soundness of other financial institutions and any indirect exposure related to large bank failures.
• Material increases in costs and expenses.
• Reliance on significant customer relationships.
• General economic or business conditions, including unemployment levels, supply chain disruptions, and slowdowns in economic growth.
• Significant weakening of the local economies in which the Company operates.
• 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 Company's branch network, including that anticipated benefits 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.

Future Outlook

The Company expects continued margin expansion and solid loan growth, with a healthy loan pipeline and anticipated tailwind from prior construction lending projects coming online over the next 12 to 18 months. Management believes the Company is well positioned to benefit if the Federal Reserve reduces short-term interest rates due to the short-term nature of its CD portfolio. Despite the ongoing impact of the large nonperforming credit relationship, the Company's fundamentals, financial performance, and asset quality metrics are expected to remain solid, and management is committed to resolving this relationship to protect shareholders. The Company anticipates a strong remainder of 2025.

Management Comments

• "We are pleased to report another quarter with strong fundamentals and positive trends in the second quarter of 2025."
• "Our annualized loan growth of 6.5% 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."
• "If the Federal Reserve reduces short-term interest rates in the near term, we are well positioned to benefit given the short-term nature of our certificates of deposit (CD) portfolio."
• "We are thrilled to welcome First Reliances associates and customers to the Carter family."
• "Given our strong capital position, we believe that this program currently is the most prudent way to deliver shareholder value."
• "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."

Industry Context

The banking industry is currently navigating a dynamic interest rate environment and evolving credit quality concerns. Carter Bankshares' ability to expand its net interest margin and achieve solid loan growth, particularly in commercial real estate, indicates effective management of its asset-liability mix and strong demand in its operating footprint. The reduction in nonperforming loans, despite a significant concentration, suggests active credit risk management. The strategic branch acquisition and stock repurchase program align with broader industry trends of optimizing branch networks and returning capital to shareholders, while also reflecting confidence in the Company's financial health amidst competitive pressures.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry comparison. However, the reported net interest margin expansion and loan growth are generally positive indicators within the regional banking sector, where many institutions are facing pressures on profitability and loan demand.
• The nonperforming loan ratio of 6.69% remains significantly higher than the average for U.S. banks, which typically range below 1-2%, indicating a concentrated credit risk that the Company is actively managing through curtailment payments and specific reserves.
• The Company's capital ratios (Tier 1 Capital ratio of 10.87%, Leverage ratio of 9.46%, Total Risk-Based Capital ratio of 12.12%) indicate that it remains 'well capitalized' by regulatory standards, which is a strong position compared to industry benchmarks.

Stakeholder Impact

• Shareholders benefit from the stock repurchase program and improved underlying financial performance, though the large nonperforming loan relationship remains a key concern.
• Employees benefit from the addition of 10 new associates through the branch acquisition, indicating growth and stability.
• Customers gain from an expanded branch network and continued banking services.
• Creditors are positively impacted by the Company's strong capital and liquidity positions, indicating financial stability.

Next Steps

• Continue to add seasoned commercial lenders in key strategic growth markets.
• Expect a tailwind from prior construction lending projects coming online over the next 12 to 18 months.
• Committed to resolving the large nonperforming lending relationship in a manner that best protects the Company and shareholders in the long-term.
• Continue to utilize the stock repurchase program through May 14, 2026.

Key Dates

Recommendation

The filing reveals strong underlying operational performance, with significant year-over-year improvements in net income (adjusted for one-time items), robust net interest income growth, and expanding net interest margins. Loan growth is solid, and the Company is actively managing its significant nonperforming loan portfolio, showing progress through curtailment payments and a declining NPL balance. The initiation of a stock repurchase program signals management's confidence and commitment to shareholder value. While the large nonaccrual loan remains a notable risk, the core business strength and proactive risk management suggest a positive outlook for investors willing to monitor the resolution of this specific credit.

Keywords

Banking, Financial Results, Net Interest Income, Net Interest Margin, Loan Growth, Deposits, Nonperforming Loans, Credit Quality, Branch Acquisition, Stock Repurchase, Regional Bank, Community Bank, Commercial Real Estate, SEC Filing, Earnings