10-Q: Carter Bankshares Reports Strong Q2 Earnings Growth

Carter Bankshares, Inc. reported significant increases in net income and net interest income for the second quarter and first half of 2025, driven by loan growth and improved asset quality metrics.

Summary

• Net income for the three months ended June 30, 2025, increased to $8.5 million ($0.37 diluted EPS) from $4.8 million ($0.21 diluted EPS) in the same period of 2024.
• Net income for the six months ended June 30, 2025, rose to $17.5 million ($0.76 diluted EPS) from $10.6 million ($0.46 diluted EPS) in the same period of 2024.
• Net interest income increased by $4.3 million (15.2%) to $32.4 million for the three months ended June 30, 2025, and by $6.0 million (10.6%) to $62.5 million for the six months ended June 30, 2025, compared to the prior year periods.
• The company recorded a recovery for credit losses of $2.3 million for the three months and $4.4 million for the six months ended June 30, 2025, compared to provisions in the prior year.
• Total portfolio loans increased by $122.3 million, or 6.8% on an annualized basis, to $3.747 billion at June 30, 2025, compared to December 31, 2024.
• Nonperforming loans decreased by $8.8 million to $250.6 million at June 30, 2025, representing 6.69% of total portfolio loans, down from 7.15% at December 31, 2024.
• The Allowance for Credit Losses (ACL) to total portfolio loans ratio was 1.90% at June 30, 2025, down from 2.09% at December 31, 2024.
• Total deposits increased by $68.8 million to $4.222 billion at June 30, 2025, including $55.9 million from a branch acquisition.
• The company repurchased 547,332 shares of common stock at a total cost of $9.1 million, with a weighted average cost of $16.70 per share, under a new $20.0 million repurchase program authorized through May 1, 2026.
• The company completed the acquisition of two leased branch facilities and associated deposits in Mooresville and Winston-Salem, North Carolina, from First Reliance Bank on May 23, 2025.

Sentiment

Score: 7

Explanation: The sentiment is positive due to strong earnings growth, improved net interest income, a recovery in credit loss provisions, and a reduction in nonperforming loans. The stock repurchase program and strategic branch acquisition also contribute positively. However, the continued high concentration of nonperforming loans from a single relationship and increased operating expenses temper the overall sentiment, preventing a 'strong buy' score.

Positives

• Net income significantly increased by 77.1% for the three months and 64.5% for the six months ended June 30, 2025, year-over-year.
• Net interest income grew by 15.2% for the quarter and 10.6% for the six-month period, indicating strong core banking performance.
• The company recorded a recovery in the provision for credit losses, reflecting improved credit quality and curtailment payments on a large nonperforming loan.
• Nonperforming loans decreased by $8.8 million, and the nonperforming loans to total portfolio loans ratio improved to 6.69% from 7.15%.
• The Allowance for Credit Losses (ACL) to nonperforming loans ratio increased to 28.34% from 29.15%, indicating a more conservative reserve coverage relative to NPLs.
• Total portfolio loans increased by $122.3 million, or 6.8% annualized, demonstrating healthy loan growth.
• Total deposits increased by $68.8 million, including a strategic branch acquisition that added $55.9 million in deposits.
• The company maintains strong capital ratios, remaining 'well-capitalized' under regulatory frameworks.
• A new $20.0 million common stock repurchase program was authorized and partially executed, signaling confidence in valuation and returning capital to shareholders.
• The balance sheet is liability-sensitive, positioning the company favorably for potential future declines in interest rates.

Negatives

• Total noninterest income decreased by $0.6 million (11.3%) for the three months ended June 30, 2025, primarily due to lower insurance commissions and other noninterest income.
• Total noninterest expense increased by $1.9 million (6.8%) for the three months and $3.6 million (6.8%) for the six months ended June 30, 2025, driven by occupancy, professional/legal fees, advertising, and data processing costs.
• The company incurred $386 thousand in merger-related costs during the six months ended June 30, 2025, primarily for professional fees related to the branch acquisition.
• The company recorded $0.4 million in write-downs on Other Real Estate Owned (OREO) for the three months ended June 30, 2025, and $0.5 million for the six months ended June 30, 2025.
• Past due loans (30-89 days) increased by $11.4 million to $16.2 million at June 30, 2025, primarily due to performing CRE loans that matured but were not yet extended or renewed, and increases in residential mortgages and construction loans.

Risks

• Market interest rates and their impacts on economic conditions, customer behavior, net interest margin, and portfolios.
• Inflation, market, and monetary fluctuations.
• Changes in trade, tariffs, monetary and fiscal policies and laws of the U.S. government and related impacts.
• Cyber-security threats, attacks, or events.
• Ability to resolve nonperforming assets and secure collateral on loans, particularly the single large credit relationship.
• Changes in liquidity and capital positions.
• Concentrations of loans secured by real estate, especially Commercial Real Estate (CRE) loans, and potential impacts of market condition changes on collateral value.
• Increased delinquency and foreclosure rates on CRE loans.
• Insufficient allowance for credit losses.
• Potential adverse effects of unusual and infrequently occurring events (e.g., weather disasters, geopolitical conflicts, public health events).
• Changes in spreads on interest-earning assets and interest-bearing liabilities.
• Regulatory supervision and oversight, including relationship with regulators.
• Legislation affecting the financial services industry.
• Outcome of pending and future litigation and/or governmental proceedings.
• Increasing price and product/service competition.
• Ability to introduce competitive new products and services on a timely, cost-effective basis.
• Managing internal growth and acquisitions, including integration difficulties or higher costs.
• Soundness of other financial institutions and indirect exposure 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 economic slowdowns.
• Significant weakening of local economies where operations occur.
• Changes in customer behaviors, including 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 failure to realize anticipated benefits.
• Deterioration of the housing market and reduced demand for mortgages.
• Re-emergence of turbulence in global financial and real estate markets impacting performance directly and indirectly.

Future Outlook

The company's strategic plan focuses on prudent organic growth and opportunistic acquisitions, aiming to increase fee income while closely monitoring operating expenses. The balance sheet is positioned to benefit from potential future short-term interest rate cuts by the Federal Open Market Committee (FOMC) due to its liability-sensitive nature. The company continues to dedicate significant resources to resolving its large nonaccrual loan relationship.

Management Comments

• Our goal is to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate.
• We believe this strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit this strategic vision.
• We believe that the Bank's strong capital and liquidity positions support this strategy.
• In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses.
• The Company is focused on executing this strategy to successfully support the new brand and grow its business in its current markets as well as any new markets it may enter.
• The Company believes it is well secured based on the net carrying value of the credit relationship and it has appropriately reserved for expected credit losses with respect to all such loans based on information currently available.
• We cannot give any assurance as to the timing or amount of future payments or collections on such loans, the timing of any credit administration or collection efforts, or that the Company will ultimately collect all amounts contractually due.

Industry Context

The banking industry continues to navigate a dynamic interest rate environment. Carter Bankshares' liability-sensitive balance sheet positions it favorably for potential future interest rate cuts, which could boost net interest income. The focus on organic growth and strategic acquisitions aligns with broader trends among regional banks seeking to expand their footprint and diversify revenue streams. The ongoing management of a large nonperforming loan is a common challenge for banks with legacy portfolios, and the company's progress on curtailment payments and reserve adjustments is a positive sign in this context. The reduction in unrealized losses on securities reflects a broader market trend of declining intermediate Treasury yields.

Comparison to Industry Standards

• The Return on Average Assets (ROAA) of 0.72% for Q2 2025 and 0.75% for YTD Q2 2025, while improved, remains below the industry average for community banks, which often target 1.0% or higher. For example, many well-performing regional banks aim for ROAA in the 1.0-1.5% range.
• The Return on Average Shareholders' Equity (ROAE) of 8.45% for Q2 2025 and 8.85% for YTD Q2 2025, while improved, is also below the typical industry benchmark of 10-12% for healthy banks. Larger, more diversified banks like JPMorgan Chase or Bank of America often achieve ROAEs in the mid-teens.
• The Nonperforming Loans to Total Portfolio Loans ratio of 6.69% at June 30, 2025, remains significantly higher than the industry average for U.S. banks, which typically ranges from 0.5% to 1.5%. This is largely due to the single large credit relationship.
• The Allowance for Credit Losses to Nonperforming Loans ratio of 28.34% indicates a relatively low coverage of nonperforming assets compared to many peers, where this ratio often exceeds 50% or even 100% for stronger asset quality. For instance, banks with robust credit quality might have ACL/NPL ratios well over 100%.
• The Net Interest Margin (FTE) of 2.82% for Q2 2025 and 2.76% for YTD Q2 2025 is competitive within the current banking environment, especially for a liability-sensitive bank. Many regional banks are experiencing NIM compression, so an increase is positive.
• The loan portfolio's concentration in Commercial Real Estate (53.4% of total portfolio loans) is higher than many diversified banks, which typically maintain CRE exposure below 40-45% of their total loan book, reflecting a higher concentration risk compared to peers like Truist Financial or PNC Financial Services Group.

Legal Proceedings

• In the normal course of business, the company is subject to various legal and administrative proceedings and claims. As of June 30, 2025, no material pending or threatened legal proceedings other than those in the ordinary course of business.

Stakeholder Impact

• Shareholders: Benefit from increased net income, improved EPS, and the common stock repurchase program, which can enhance shareholder value.
• Employees: The branch acquisition welcomed 10 new associates, indicating potential growth opportunities, though overall salaries and employee benefits decreased due to deferred compensation and a new cost study.
• Customers: Benefit from the expansion of the branch network into new North Carolina markets, offering broader access to financial services.
• Creditors: Improved asset quality metrics, particularly the reduction in nonperforming loans and strong capital ratios, enhance the company's creditworthiness.
• Communities: The company's investment in a mutual fund for community development and its new brand identity focused on creating opportunities for people and businesses suggest a positive impact on the communities it serves.

Next Steps

• Continue executing the three-year strategic plan focusing on brand enhancement and prudent organic growth.
• Seek to increase fee income while closely monitoring operating expenses.
• Continue dedicating resources to the resolution of the large nonaccrual loan relationship.
• Evaluate the impact of ASU 2023-09 (Income Taxes) on consolidated financial statements, effective January 1, 2025.
• Evaluate the impact of H.R. 1, the One Big Beautiful Bill Act, on future tax periods.
• Monitor valuation inputs for up to one year after the May 23, 2025, acquisition date for potential adjustments to provisional amounts.
• Continue to assess the tolerance and reasonableness of the CECL modeling process and challenge certain elements of forecasts when appropriate.
• Consider changes to the interest rate mix strategy for the securities portfolio if the Federal Reserve continues reducing short-term interest rates.

Key Dates

Recommendation

While Carter Bankshares demonstrated strong earnings growth and improved asset quality metrics, particularly the reduction in nonperforming loans and a recovery in credit loss provisions, significant concentration risk remains with the large nonaccrual credit relationship. The stock repurchase program is a positive signal for capital management. However, the high nonperforming loan ratio relative to industry peers and the need for continued expense management suggest that while the company is moving in the right direction, it still faces material challenges. A 'hold' recommendation is appropriate, acknowledging the positive momentum while recognizing the ongoing risks and the need for sustained improvement in asset quality and efficiency to warrant a 'buy' rating.

Keywords

Banking, Financial Services, Community Bank, SEC Filing, 10-Q, Earnings Report, Net Interest Income, Loan Growth, Deposits, Nonperforming Loans, Allowance for Credit Losses, Capital Ratios, Stock Repurchase, Branch Acquisition, Commercial Real Estate, Interest Rate Risk, Virginia, North Carolina