8-K: Carter Bankshares Reports Mixed Second Quarter Results Amidst Loan Curtailment

Carter Bankshares, Inc. announced a net income of $4.8 million for the second quarter of 2024, impacted by a large nonperforming loan, but showing positive trends in loan growth and deposit increases.

Summary

• Carter Bankshares reported a net income of $4.8 million, or $0.21 diluted earnings per share, for the second quarter of 2024, down from $5.8 million in the previous quarter and $5.7 million in the same quarter of 2023.
• The company's pre-tax pre-provision income was $6.2 million for the second quarter of 2024, compared to $7.2 million in the first quarter of 2024 and $6.2 million in the second quarter of 2023.
• For the six months ended June 30, 2024, net income was $10.6 million, or $0.46 diluted EPS, compared to $21.6 million, or $0.91 diluted EPS, for the same period in 2023.
• Pre-tax pre-provision income for the first six months of 2024 was $13.4 million, down from $28.1 million in the same period of 2023.
• A lawsuit against the company by the Justice Entities was dismissed, and a loan curtailment plan has begun, reducing the nonperforming loan balance from $301.9 million to $294.1 million.
• Interest income was negatively impacted by $9.1 million in the second quarter of 2024 and $11.3 million in the second quarter of 2023 due to a large nonperforming loan, with a total negative impact of $48.4 million since the second quarter of 2023.
• Nonperforming loans decreased by $7.1 million to $300.2 million compared to the previous quarter, primarily due to $7.8 million in curtailment payments.
• Total portfolio loans increased by $40.5 million to $3.5 billion, representing a 4.6% annualized growth rate.
• Total deposits increased by $50.8 million to $3.9 billion, representing a 5.3% annualized growth rate.
• Net interest income decreased by $0.3 million to $28.1 million compared to the first quarter of 2024, but increased by $1.4 million compared to the second quarter of 2023.
• The net interest margin decreased by four basis points to 2.56% compared to the first quarter of 2024, but increased by two basis points compared to the second quarter of 2023.
• The efficiency ratio was 81.62% for the second quarter of 2024, compared to 78.46% in the first quarter of 2024 and 80.46% in the second quarter of 2023.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the continued impact of the large nonperforming loan on financial results, despite some positive developments like loan and deposit growth and the dismissal of the lawsuit. The company is facing significant challenges, but management is expressing confidence in the long-term outlook.

Positives

• The dismissal of the lawsuit by the Justice Entities and the commencement of a loan curtailment plan are positive developments.
• Nonperforming loans decreased by $7.1 million, indicating an improvement in asset quality.
• Total portfolio loans increased by $40.5 million, showing growth in lending activities.
• Total deposits increased by $50.8 million, reflecting customer confidence and growth in the deposit base.
• The company's capital and liquidity levels remain strong.
• The company believes its bond portfolio is well-positioned for a period of higher interest rates.
• The company's balance sheet is positioned to benefit if the Federal Reserve begins to cut short-term interest rates.
• Noninterest income increased by $0.5 million, or 9.7%, from the first quarter of 2024.

Negatives

• Net income decreased compared to both the previous quarter and the same quarter of the previous year.
• The large nonperforming loan relationship continues to significantly impact financial results, particularly net interest income.
• Net interest margin decreased by four basis points compared to the previous quarter.
• The efficiency ratio increased to 81.62%, indicating higher operating costs.
• Interest income was negatively impacted by $9.1 million in the second quarter of 2024 due to the nonperforming loan.
• Funding costs increased 127 basis points for the six months ended June 30, 2024 compared to the same period in 2023.
• Noninterest expense increased by $1.2 million, or 4.5%, from the first quarter of 2024.

Risks

• The large nonperforming loan relationship continues to pose a significant risk to the company's financial performance.
• Changes in market interest rates could impact the company's loan and securities portfolios.
• Inflation and market fluctuations could affect the company's profitability.
• Regulatory changes and supervision could impact the company's operations.
• The company faces competition from other financial institutions.
• The company's ability to resolve nonperforming assets and secure collateral on loans is uncertain.
• The company is exposed to risks related to cyber-security threats and technological changes.
• The company is exposed to risks related to economic conditions, including unemployment levels and supply chain disruptions.
• The company is exposed to risks related to changes in customer behaviors, including consumer spending, borrowing and saving habits.

Future Outlook

The company expects that its net interest margin will return to a more normalized level once the large nonperforming lending relationship is fully resolved, and anticipates that its balance sheet is positioned to benefit if the Federal Reserve begins to cut short-term interest rates. The company is expecting moderate loan growth this year.

Management Comments

• Litz H. Van Dyke, Chief Executive Officer, stated that the dismissal of the lawsuit was a favorable outcome and that the company remains committed to resolving the lending relationship in a manner that best protects the company, the bank, and shareholders.
• Van Dyke also noted that while the large nonperforming lending relationship continues to negatively impact financial results, the company's financial performance for the second quarter was solid and its asset quality remains strong across all credit metrics.
• Van Dyke mentioned that the company feels positive about the fundamentals of the company and the structure of its balance sheet, with strong capital and liquidity levels.

Industry Context

The results reflect the challenges faced by regional banks in managing nonperforming loans and interest rate pressures. The company's focus on resolving the large nonperforming loan and managing funding costs is consistent with industry trends.

Comparison to Industry Standards

• Carter Bankshares' net interest margin of 2.56% is below the average for US banks, which is closer to 3.0% in the current environment, indicating the impact of the non-performing loan.
• The efficiency ratio of 81.62% is higher than the industry average, which is typically in the 60-70% range, suggesting higher operating costs compared to peers.
• The company's nonperforming loan ratio of 8.46% is significantly higher than the industry average, which is typically below 1%, highlighting the impact of the large nonperforming loan relationship.
• Compared to peers like First National Corporation (FXNC) and Blue Ridge Bankshares (BRBS), which have reported lower nonperforming loan ratios and higher net interest margins, Carter Bankshares is underperforming in these key metrics.
• The loan growth of 4.6% annualized is moderate compared to some peers that have seen higher growth rates, but is positive in the current environment.
• The deposit growth of 5.3% annualized is also moderate, but is positive in the current environment.

Legal Proceedings

• The lawsuit filed against the Company and the Bank by the Justice Entities was dismissed with prejudice.

Stakeholder Impact

• Shareholders are impacted by the decrease in net income and diluted EPS.
• Employees may be impacted by the company's efforts to manage costs.
• Customers may be impacted by changes in interest rates and deposit products.
• Creditors may be impacted by the company's efforts to manage its loan portfolio.

Next Steps

• The company will continue to work on curtailing and resolving the large nonperforming loan relationship.
• The company will focus on managing funding costs and improving net interest margin.
• The company will continue to monitor the impact of interest rate changes on its balance sheet.
• The company will continue to pursue moderate loan growth.

Key Dates

Keywords

Carter Bankshares, Financial Results, Nonperforming Loans, Net Income, Net Interest Margin, Loan Growth, Deposit Growth, Efficiency Ratio, Capital Ratios, Litigation, Loan Curtailment