Carter Bankshares, Inc. 10-K

ITEM 1. BUSINESS - (continued) staffing levels, and administrative priorities at regulatory agencies may influence the timing, scope, and manner of regulatory oversight. Any changes to such laws, regulations and policies may impose compliance costs and create obligations, including, in some cases, reporting obligations, requiring the Company and its subsidiaries to expend significant resources. The Company operates in an environment of ongoing regulatory change. These changes may affect permissible activities, compliance obligations, operational costs, strategic initiatives, and growth opportunities. The specific impact of future legislative, regulatory, or supervisory developments cannot be fully predicted and will depend on the nature, scope, and implementation of any adopted changes. Moreover, changes in the interpretation or application of existing laws, regulations or regulatory guidance by supervisory authorities or courts could have a material effect on the Company’s business, financial condition, results of operations or prospects. Regulation of the Company and the Bank As a financial holding company, the Company is subject to the BHCA, and to regulation and supervision by the FRB. The Company is also subject to applicable provisions of the Virginia bank holding company laws and is regulated and supervised by the Virginia BFI, a division of the Virginia State Corporation Commission. Under the BHCA, the FRB has authority to supervise and examine bank holding companies and their nonbank subsidiaries and to take enforcement action where it determines that the bank holding company or its subsidiaries are engaged in unsafe or unsound practices or are in violation of applicable laws and regulations. The FRB may require a bank holding company to terminate or limit activities, or to divest ownership or control of a subsidiary, if it determines that the continuation of such activities or ownership constitutes a serious risk to the financial soundness, safety, or stability of the bank holding company or its bank subsidiary. The FRB and the FDIC have adopted regulations and issued supervisory guidance, and interpretative materials that establish operational and managerial standards intended to promote the safe and sound operation of banks and bank holding companies. These standards address, among matters, capital adequacy, internal controls, internal audit systems, information technology and cybersecurity, loan documentation and credit underwriting, interest rate and liquidity risk management, third-party vendor management, executive management and compensation practices, corporate governance, asset growth, asset quality, earnings performance, and overall risk management. The BHCA and applicable Virginia law generally limit the activities of a bank holding company and its subsidiaries to banking, managing or controlling banks and activities that are closely related to banking or to managing or controlling banks. In addition, bank holding companies that qualify and elect to be financial holding companies, such as the Company, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB. These activities include securities underwriting and dealing, insurance underwriting, and making merchant banking investments. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed” as defined under applicable FRB requirements. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require the financial holding company to divest its depository institution subsidiaries or to cease engaging in any activity that is financial in nature (or incident to such financial activity) or complementary to a financial activity. For a financial holding company to start any new activity permitted by the BHCA or to acquire a company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act (the “CRA”). See below under “Community Reinvestment Act.” 12 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) The BHCA also permits interstate banking acquisitions, subject to certain conditions, including national and state concentration limits. The FRB has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger, or consolidation proposed by a bank holding company. To engage in an interstate bank acquisition or merger, a bank holding company must generally be “well capitalized” and “well managed” under applicable regulatory standards. In addition, banks may establish branches across state lines only to the extent permitted by the laws of the state in which the branch is to be located. Virginia law also requires prior notice to the Virginia BFI before a Virginia bank holding company may acquire more than five percent of the voting shares of, or otherwise gain control of, any entity that is not a bank, bank holding company, or other financial institution. The Bank is subject to comprehensive supervision, regulation, and examination by the Virginia BFI, and by its primary federal regulator, the FRB. Federal and state laws and regulations applicable to the Bank govern, among other matters, permissible business activities, investments, capital levels, reserves against deposits, lending limits, collateral requirements, branching, mergers and consolidations, dividend payments, and other corporate actions. This supervisory framework is intended primarily to protect the FDIC’s deposit insurance funds and depositors rather than shareholders. Banking Acquisitions; Changes in Control The BHCA and related regulations require the prior approval of the FRB in any case where a bank holding company proposes to: (i) acquire direct or indirect ownership or control of more than five percent of the outstanding voting stock of another bank or bank holding company, unless the acquiring company already controls a majority of such voting shares; (ii) acquire all or substantially all of the assets of another bank or bank holding company; or (iii) merge or consolidate with another bank holding company. In evaluating an application under the BHCA, the FRB considers a range of statutory factors, including the competitive effects of the proposed transaction, the financial condition of the parties and the resulting organization, post transaction capital levels, managerial resources, risk management and corporate governance practices, regulatory compliance history, compliance with the Bank Secrecy Act and anti-money laundering requirements, performance under the Community Reinvestment Act, and compliance with applicable consumer protection and fair housing laws, as well as the public benefits expected to result from the transaction. In determining whether to approve a proposed bank acquisition, the FRB will consider public or private interests that may not be aligned with those of the Company’s shareholders or non-deposit creditors. Acquisitions of the Company’s voting stock above certain thresholds are subject to prior regulatory notice or approval under federal banking laws, including the BHCA and the Change in Bank Control Act of 1978, as amended (the “CIBCA”). Under the CIBCA, a person or entity generally obtains non-objection from the FRB before acquiring the power to vote 10% or more of any class of voting stock, including the Company’s common stock. Investors should be aware of these requirements when acquiring shares of the Company’s stock. In addition, Virginia law requires the prior approval of the Virginia BFI for (i) the acquisition by a Virginia bank holding company of more than five percent of the voting shares of a Virginia bank or Virginia bank holding company, or (ii) the acquisition of control of a Virginia bank or Virginia bank holding company by any other person. 13 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) Certain Transactions by Insured Banks with their Affiliates Federal law imposes quantitative and qualitative restrictions on certain “covered transactions” between insured depository institutions and their affiliates. In general, an affiliate of a bank includes the bank’s parent bank holding company and any subsidiary thereof. A bank’s operating subsidiaries, however, are generally not treated as affiliates for these purposes. Sections 23A and 23B of the Federal Reserve Act, and the implementing regulations promulgated by the Board of Governors of the Federal Reserve Board System (Regulation W), limit the extent to which a bank and its subsidiaries may engage in “covered transactions” with nonbank affiliates. Covered transactions generally include, among other things: • loans or extensions of credit to an affiliate; • purchases of, or investment in, securities issued by an affiliate; • purchases of assets from an affiliate; • the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or entity; • the issuance of guarantees, acceptances, or letters of credit on behalf of an affiliate; • securities borrowing or lending transactions with an affiliate that create a credit exposure to the affiliate; and • derivative transactions with an affiliate that create a credit exposure to the affiliate. The aggregate amount of covered transactions between a bank and any single affiliate may not exceed 10% of the bank’s capital stock and surplus. In addition, the aggregate amount of covered transactions between a bank and all of its affiliates may not exceed 20% of the bank’s capital stock and surplus. Certain covered transactions are also subject to collateral requirements. In addition to these quantitative limits, Section 23B of the Federal Reserve Act requires that covered transactions, as well as certain other transactions between a bank and its affiliates, be conducted on market terms. Specifically, such transactions must be on terms and under circumstances that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated parties, or, in the absence of comparable transactions, on terms that in good faith would be offered to nonaffiliates. Federal law also restricts certain tying arrangements. Under these provisions, a bank holding company and its subsidiaries are generally prohibited from conditioning the extension of credit, lease or sale of property, or furnishing of any service on the requirement that a customer obtain additional products or services from the bank holding company or its affiliates, subject to certain statutory exceptions. These anti-tying restrictions are intended to promote competition and prevent unfair or anti-competitive practices. Regulatory Capital Requirements The FRB and the other federal banking agencies have issued risk-based and leverage capital guidelines applicable to U.S. banking organizations. Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Basel III Capital Framework The FRB has adopted regulations implementing the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the “Basel III Final Rules”). Under the Basel III Final Rules: • Common Equity Tier 1 (CET1) capital consists primarily of common stock, including related surplus, and retained earnings; • Tier 1 capital consists primarily of CET1 capital plus qualifying non-cumulative perpetual preferred stock and related surplus, as well as certain grandfathered cumulative preferred stocks and trust preferred securities; and 14 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) • Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for credit losses. Each regulatory capital measure is subject to specific adjustments, deductions, and limitations under the Basel III Final Rules. The Basel III Final Rules also assign risk weights to various categories of on balance sheet and off balance sheet exposures, including higher risk weightings for certain commercial real estate and other higher risk asset classes (including, for example, higher risk weightings applicable to certain commercial real estate (“CRE”) loans). The Basel III Final Rules require banks and bank holding companies to maintain the following to be considered adequately capitalized: (i) a minimum ratio of total capital to risk-weighted assets of at least 8.0%; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%; and (iii) a minimum ratio of CET1 capital to risk-weighted assets of at least 4.5%. The Basel III Final Rules also require banking organizations to maintain a “capital conservation buffer” of 2.5% of risk-weighted assets, which is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 capital to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. Each of the federal bank regulatory agencies also has established a minimum leverage capital ratio of Tier 1 capital to average adjusted assets (“Tier 1 leverage ratio”). The guidelines require a minimum Tier 1 leverage ratio of 3.0% for advanced approach banking organizations; all other banking organizations are required to maintain a minimum Tier 1 leverage ratio of 4.0%. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for Prompt Corrective Action, its Tier 1 leverage ratio must be at least 5.0%. Banking organizations that have experienced internal growth or made acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. As of December 31, 2025, the Company and the Bank met all applicable capital adequacy requirements under the Basel III Final Rules. Refer to Note 23 - Capital Adequacy, to Consolidated Financial Statements in Part II, Item 8, of this Annual Report on Form 10-K. Community Bank Leverage Ratio As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), qualifying banks with less than $10 billion in consolidated assets can elect to be subject to a nine percent leverage ratio applied using less complex leverage calculations (the “Community Bank Leverage Ratio Framework” or “CBLRF”). Banks that opt into the CBLRF and maintain a leverage ratio of greater than 9% are not subject to other risk-based and leverage capital requirements and are deemed to meet Basel III Final Rules’ well capitalized ratio requirements. In November 2025, the federal banking regulators issued a proposal that would lower the leverage ratio for purposes of the CBLRF from nine percent to eight percent. As of December 31, 2025, the Bank has not elected to apply the CBLRF, but management continues to evaluate the potential benefits and impacts of electing the CBLRF as part of the Bank’s ongoing capital management and strategic planning processes. Dividend Limitations The Company is a legal entity, separate and distinct from the Bank. A significant portion of the Company’s cash flow and revenues come from dividends paid to it by the Bank. Accordingly, the Company’s ability to pay dividends to its shareholders depends, in large part, on the Bank’s ability to generate earnings and pay dividends to the Company. Both the Company and the Bank are subject to federal and state laws and regulations that restrict the payment of dividends. These restrictions include limitations on the sources of dividends and requirements to maintain capital levels at or above applicable regulatory minimums. Under applicable Virginia banking laws and supervisory guidance, Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In addition, supervisory guidance issued by the FRB indicates that safety and soundness concerns may arise if a bank holding company pays dividends that exceed its earnings for the period in which the dividend is being paid. The Federal Deposit Insurance Act also prohibits insured depository 15 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) institutions, such as the Bank, from making capital distributions, including paying dividends, if, after making such distribution, the institution would become undercapitalized as defined in the statue. Management believes that, as of December 31, 2025, these regulatory restrictions did not materially affect the ability of the Company or the Bank to pay dividends; however, future dividend payments remain subject to, among other things, earnings performance, capital levels, regulatory requirements, and supervisory considerations. Insurance of Accounts, Assessments and Regulation by the FDIC Deposits at the Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC, generally up to the maximum standard insurance amount of $250,000 per depositor, per insured depository institution, for each account ownership category.. The FDIC has authority to examine DIF-insured institutions, require the submission or reports, and take enforcement actions to address violations of law, unsafe or unsound practices, or condition that pose a risk to the DIF. The FDIC may prohibit a DIF-insured institution from engaging in activities that it determines to present a serious risk to the DIF and may initiate enforcement actions after providing the institution’s primary federal regulator an opportunity to act. In addition, The FDIC has authority to terminate a bank’s deposit insurance if, after notice and a hearing, it determines that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition, or has violated applicable laws, regulation, or supervisory orders. In the event of termination of deposit insurance, deposits outstanding at the time of termination, less subsequent withdrawals, generally remain insured for a limited period, as determined by the FDIC. Management is not aware of any circumstances that would reasonably be expected to result in the termination of the Bank’s deposit insurance. The DIF is funded primarily through risk-based assessments levied on insured depository institutions. Assessments are generally calculated based on an institution’s average consolidated total assets minus average tangible equity (defined as Tier 1 capital). An institution’s assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS composite rating, and is subject to further adjustments including those related to levels of unsecured debt and brokered deposits. The FDIC has adopted a large-bank pricing structure, set a target “designated reserve ratio” of 2% for the DIF, and in lieu of dividends, provides for a lower assessment rate schedule, when the reserve ratio reaches 2% and 2.5%. At December 31, 2025, total base assessment rates for institutions that have been insured for at least five years range from 2.5 to 32 basis points applying to banks with less than $10 billion in assets. Community Reinvestment Act The CRA imposes an affirmative obligation on financial institutions, including the Bank, to help meet the credit needs of the communities they serve, including low and moderate-income neighborhoods, consistent with safe and sound banking practices. If the Bank receives a rating from the FRB of less than “satisfactory” under the CRA, restrictions on operating activities would be imposed. In addition, in order for a financial holding company, like the Company, to commence any new activity permitted by the BHCA, or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. The Bank received a rating of “Satisfactory” at its most recent CRA examination, dated October 23, 2023. Federal Home Loan Bank of Atlanta The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, one of 11 regional FHLBs that provide funding to member institutions for making housing, affordable housing, and community development loans. Each FHLB serves as a reserve, or central bank, for the members within its assigned region, and makes loans to its members in accordance with policies and procedures established by the Board of Directors of the applicable FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB. At December 31, 2025, the Bank owned $11.7 million of FHLB stock. Consumer Protection The Bank is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include, but are not limited to, the Truth-in-Lending Act (TILA), the Real Estate Settlement Procedures 16 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) Act (RESPA), the Electronic Funds Transfer Act (EFTA), the Equal Credit Opportunity Act (ECOA), the Home Ownership and Equity Protection Act (HOEPA), the Fair Credit and Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA) and the Home Mortgage Disclosure Act (HMDA), and their respective state law counterparts. If the Bank fails to comply with these laws and regulations, it may be subject to various penalties or enforcement actions. Failure to comply with consumer protection requirements may also result in delays in obtaining or failure to obtain any required bank regulatory approval for proposed merger or acquisition transactions. The Consumer Financial Protection Bureau (the “CFPB”) is a federal regulatory agency responsible for implementing, examining, and enforcing compliance with federal consumer financial laws for financial institutions with more than $10 billion in total assets and, to a more limited extent, smaller institutions. The CFPB supervises and regulates providers of consumer financial products and services and has rulemaking authority under numerous federal consumer financial protection laws. Because the Company and the Bank have total assets of less than $10 billion, most consumer protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act continue to be administered by the FRB with respect to the Company and the Bank. However, the CFPB may participate in regulatory examinations conducted by an institution’s primary federal regulator and may require smaller institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions adopted by the CFPB and administrative and legal precedents established through CFPB supervisory and enforcement activities may influence how the FRB applies consumer protection laws and regulations to institutions that are not directly supervised by the CFPB. The current leadership of the CFPB also has indicated intentions to rescind or revise many regulations, as well as to narrow its enforcement and supervision. Accordingly, the ultimate effect of the CFPB’s consumer protection activities on the Company and the Bank cannot be determined with certainty. Mortgage Banking Regulation In connection with its mortgage lending activities, the Bank is subject to extensive federal and state and regulations that govern, among other things, loan origination standards, prohibitions against discriminatory lending practices; property inspections and appraisals; the use of credit reports; limitations on certain loan terms, features, interest rates, and fees; and the disclosure of material information to borrowers regarding credit terms and settlement costs. These laws and regulations also limit compensation for settlement services to the reasonable value of services provided and require the collection, maintenance, and disclosure of information regarding the disposition of mortgage loan applications, including data based on race, gender, geographic distribution, and income level. The Bank’s mortgage origination activities are subject to the Equal Credit Opportunity Act, TILA, the Home Mortgage Disclosure Act, the RESPA, the Home Ownership Equity Protection Act, and the regulations promulgated under these statutes, as well as, other applicable federal and state laws and regulations. In addition, mortgage lending activities are subject to Regulation Z, which implements TILA. Certain provisions of Regulation Z require mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer has a reasonable ability to repay the mortgage loan according to its terms. Alternatively, lenders may originate “qualified mortgages,” which generally are mortgage loans without negative amortization, interest-only payments, balloon payments, loan terms exceeding 30 years, and points and fees paid by a consumer equal to or less than three percent of the total loan amount. Under the EGRRCPA, most residential mortgage loans originated and held in portfolio by the Bank, as an institution with less than $10 billion in total assets, will be designated as qualified mortgages. Higher-priced qualified mortgages (e.g., subprime loans) receive a rebuttable presumption of compliance with ability-to-repay rules, while other qualified mortgages (e.g., prime loans) are deemed to comply with those ability-to-repay rules. The Bank predominantly originates mortgage loans that comply with Regulation Z’s qualified mortgage standards. Real Estate Lending Standards and Guidance The federal regulatory agencies have adopted regulations setting forth standards for extensions of credit that are secured by real estate. Under these regulations, the Bank must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by real estate. These policies must establish loan portfolio diversification standards, 17 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The federal regulatory agencies have also jointly issued guidance on “Concentrations in Commercial Real Estate Lending,” which defines CRE loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income or the proceeds of the sale, refinancing, or permanent financing of the property. The guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of CRE lending. The guidance states that the following metrics may indicate a concentration of CRE loans, but that these metrics are neither limits nor a safe harbor: (1) total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, nonfarm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the bank’s CRE loan portfolio has increased 50% or more during the prior 36 months. Brokered Deposits Section 29 of the FDIA and FDIC regulations generally restrict a bank’s ability to accept, renew, or roll over brokered deposits unless the bank is well capitalized or, with the FDIC’s approval, adequately capitalized. On December 15, 2020, the FDIC issued rules to revise its brokered deposit regulations in light of modern deposit-taking methods. The rules established a new framework for certain provisions of the “deposit broker” definition and amended the FDIC’s interest rate methodology for calculating rates and rate caps. The rules became effective on April 1, 2021, and, to date, these changes have not had a material impact on the Company or the Bank. Prompt Corrective Action The federal banking agencies have broad authority under federal law to take prompt corrective action to address capital deficiencies and resolve problems at insured depository institutions. The extent of this authority depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” as defined under uniform regulations issued by each of the federal banking agencies regulating these institutions. An insured depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. As of December 31, 2025, the Bank was well capitalized under applicable regulatory capital standards. Incentive Compensation The Dodd-Frank Act directs the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based compensation arrangements at specified regulated financial institutions with at least $1 billion in total consolidated assets that encourage inappropriate risk taking by providing executive officers, employees, directors, or principal shareholders with excessive compensation, fees, or benefits that could result in material financial loss to the institution. In 2016, the SEC and the federal banking agencies proposed rules that would prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution. It is unclear whether this rule will be finalized. 18 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) Confidentiality and Required Disclosures of Customer Information The Company and the Bank are subject to federal and state laws and regulations governing the privacy of nonpublic personal information of consumers. The Gramm-Leach-Bliley Act and regulations issued thereunder restrict the use and disclosure of consumer nonpublic personal information by financial institutions. These requirements generally mandate that financial institutions provide customers with the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information at the beginning of the customer relationship and annually thereafter, and they limit the disclosure of customers’ nonpublic personal financial information to unaffiliated third parties unless certain conditions are met, including customer notice and, in some cases, the opportunity to opt out. Data privacy and data protection remain areas of increasing legislative and regulatory focus at the state level. Several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also implemented, or are considering implementing, comprehensive data privacy and cybersecurity laws and regulations, such as the Virginia Consumer Data Protection Act (“VCDPA”). The VCDPA provides Virginia residents with specific rights related to their personal data and imposes compliance obligations on covered entities. The Bank is exempt from the VCDPA; however, certain third-party service providers utilized by the Bank may be subject to the VCDPA. The Company and the Bank monitor developments in data privacy regulation and assess potential impacts on third-party vendor relationships and service delivery. The Company and the Bank are also subject to laws and regulations designed to combat money laundering and terrorist financing. The Bank Secrecy Act (the “BSA”) requires financial institutions to, among other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping and reporting requirements. The USA PATRIOT Act added regulations to facilitate information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering, and requires financial institutions to establish anti-money laundering programs. Regulations adopted under the BSA impose on financial institutions customer due diligence requirements, and the federal banking agencies expect that customer due diligence programs will be integrated within a financial institution’s broader BSA and anti-money laundering compliance program. In addition, the Office of Foreign Assets Control (“OFAC”), a division of the U.S. Department of the Treasury, administers and enforces economic and trade sanctions, which prohibit certain transactions with designated foreign countries, nationals and others. Financial institutions are required to identify and block prohibited transactions and report such actions to OFAC in accordance with applicable regulations. Although these laws and programs impose compliance costs and create privacy obligations and, in some cases, reporting obligations, and compliance with all of the laws, programs, and privacy and reporting obligations may require significant resources of the Company and the Bank, these laws and programs do not materially affect the Bank’s products, services or other business activities. Corporate Transparency Act The Corporate Transparency Act (“CTA”) was enacted as part of the 2021 National Defense Authorization Act and directed the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to establish a beneficial ownership information reporting regime for certain U.S. and foreign entities by January 1, 2022. The CTA requires reporting companies to disclose specific information regarding their beneficial owners and to update such information on an ongoing basis. Failure to comply with the CTA’s reporting requirements may result in civil fines and criminal penalties. The CTA imposes additional reporting requirements on entities not previously subject to such beneficial ownership disclosure regulations and also contains exemptions for several different types of entities, including among others certain banks, bank holding companies, credit unions, and insurance companies. While the Company and the Bank generally qualify for exemptions under the CTA, certain subsidiaries or third party entities with which the Company and the Bank do business may be subject to the reporting requirements. FinCEN issued a final rule implementing the CTA’s beneficial ownership reporting requirements in September 2022, which became effective January 1, 2024. The rule would have required reporting of beneficial ownership for entities that were formed or first registered prior to 2024 by January 1, 2025. In March 2025, FinCEN issued an interim final rule removing the 19 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) requirements for U.S. companies and U.S. persons to report such beneficial ownership information and indicated that it would issue a modified set of regulations regarding beneficial ownership disclosures. The Company and the Bank continue to monitor legal, regulatory and supervisory developments related to the CTA and FinCEN’s implementing regulations and will assess the ultimate impact, if any, on their operations and compliance obligations. At this point, the Company cannot predict the nature and timing of future developments related to the CTA. Cybersecurity The federal banking agencies have adopted guidelines and supervisory expectations requiring financial institutions to establish and maintain information security and cybersecurity programs under the oversight of their boards of directors. These guidelines and related regulatory materials emphasize risk management and processes related to information technology and the use of third parties in the provision of financial products and services. Regulatory expectations include the establishment of appropriate lines of defense, processes to identify and mitigate risks arising from compromised customer credentials, and business continuity and disaster recovery planning designed to support the timely recovery, resumption, and continuation of operations following a cybersecurity incident. Failure to meet applicable cybersecurity standards or supervisory expectations could result in regulatory actions and require the Company or the Bank to devote significant resources to remediation efforts. Federal and state banking agencies also continue to place increased emphasis on cybersecurity risk management as part of the supervisory examination process. The federal banking agencies adopted rules to enhance the timely reporting of cybersecurity incidents that may affect the U.S. banking system. These rules require a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after determining that a reportable computer security incident has occurred. Reportable incidents generally include those that have materially affected, or are reasonably likely to materially affect, the viability of operations, the ability to deliver banking products and services, or the stability of the financial system. A bank service provider must also notify affected banking organization customers as soon as possible upon determining that it has experienced a computer-security incident that has materially affected, or is reasonably likely to materially affect, such customers for a period of four or more hours. With increased focus on cybersecurity, the Company continues to monitor legislative, regulatory and supervisory developments related thereto. Stress Testing The federal banking agencies have established stress testing requirements for certain large or higher risk financial institutions, including bank holding companies and state-chartered banks. These requirements do not apply to the Company or the Bank. However, supervisory guidance emphasizes that all banking organizations, regardless of size, should maintain the ability to assess the potential effects of adverse economic, market, and financial conditions on their financial condition and operating performance. Consistent with this guidance, the Company and the Bank evaluate the potential impact of adverse scenarios as part of their risk management processes, including analyses related to interest rate risk, CRE loan concentrations, credit quality, and funding and liquidity management. These analyses are intended to support sound capital planning, balance sheet management, and overall risk governance. Volcker Rule The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the “Volcker Rule”). The EGRRCPA and related implementing regulations provide an exemption from the Volcker Rule for banking organizations with less than $10 billion in total assets, including their holding companies and affiliates, provided that the institution’s total trading assets and liabilities do not exceed five percent of total assets, subject to certain limited exceptions. The Company 20 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1. BUSINESS - (continued) believes that its financial condition and operations are not affected by the Volcker Rule, amendments thereto, or its implementing regulations. Call Reports All insured depository institutions, regardless of size, are required to file quarterly Reports of Condition and Income (“Call Reports”) that provide detailed financial and operational information and are used by federal banking agencies to monitor the condition, performance, and risk profile of individual institutions and the banking industry as a whole. The EGRRCPA expanded eligibility for certain institutions to use streamlined Call Report forms. In June 2019, the federal banking agencies adopted a final rule permitting insured depository institutions with less than $5 billion in total assets and limited complexity to file the most streamlined version of the quarterly Call Report and reducing the amount of data required to be reported on eligible filings. Effect of Governmental Monetary Policies As with other financial institutions, the earnings and financial condition of the Company and the Bank are influenced by general economic conditions and by the monetary policies of the FRB. These policies, which include actions affecting the availability and cost of bank reserves and credit, can significantly impact funding costs, loan demand, investment activity, deposit flows, and the rates of return earned on loans and investment securities, as well as the overall level of inflation in the United States. The FRB significantly influences interest rates and credit conditions primarily through setting target ranges for the federal funds rate, conducting open market operations in U.S. government securities, establishing the discount rate for member bank borrowing, and imposing reserve requirements on deposits. Changes in monetary policy, including changes in interest rates, affect the origination and pricing of loans, the purchase and valuation of investment securities, deposit generation and pricing, and overall net interest income. FRB monetary policies have materially affected the operating results and financial condition of community banks, including the Company and the Bank, in prior periods and are expected to continue to do so in the future. Future Regulation From time to time, legislative, regulatory, and policy initiatives are proposed by Congress, state legislatures, and federal and state regulatory agencies that could affect the powers, activities, and oversight of bank holding companies and depository institutions. Such initiatives may result in changes to existing banking statutes, regulations, or supervisory frameworks and could alter the operating environment of the Company and the Bank in significant and unpredictable ways. If enacted or implemented, these changes could increase or decrease compliance and operating costs, restrict or expand permissible business activities, affect capital or liquidity requirements, or influence the competitive dynamics among banks, savings associations, credit unions, and other financial service providers. The Company cannot predict whether any such initiatives will be adopted or, if adopted, the nature or extent of their impact. Changes in statutes, regulations, or regulatory policies applicable to the Company and the Bank could have a material effect on the Company’s business, financial condition, or results of operations. Where You Can Find More Information The Company files annual, quarterly, and current reports, proxy statements, and other information, including insider filings, with the SEC. The Company’s filings are available to the public at no cost on the SEC’s website at http://www.sec.gov. The Company also makes these filings available on its website at www.CBTCares.com as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on our website is not part of this Form 10-K nor incorporated by reference into this Form 10-K or any other filing with the SEC. In addition, copies of these materials may be obtained free of charge by contacting Investor Relations by telephone at (276) 656-1776 or by mail at Carter Bankshares, Inc., 1300 Kings Mountain Road, Martinsville, Virginia 24112. 21 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS Investments in the Company’s common stock involve risks. In addition to the other information included in this Annual Report on Form 10-K, including the discussion under “Important Note Regarding Forward-Looking Statements,” investors should carefully consider the risks described below. These risk factors highlight those risks that the Company believes are material; however, they do not necessarily include all risks the Company may face. The inclusion of a risk in the following discussion should not be interpreted to state or imply that the risk has not already materialized. The risks described below could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position, and could cause actual results to differ materially from historical results or from those anticipated in the forward-looking statements contained in this Annual Report on Form 10-K. Any such events could adversely affect the trading price of the Company’s common stock. Risks Related to Credit Nonperforming assets can take significant time to resolve and may adversely affect the Company’s results of operations and financial condition, and could result in additional losses in future periods. As of December 31, 2025, nonperforming loans (“NPLs”) totaled $244.0 million, representing 6.29%, of the Company’s loan portfolio. Loans are generally placed on nonaccrual status when the collection of principal or interest is doubtful or when interest or principal payments are 90 days or more past due based on contractual terms. The Company seeks to reduce or resolve problem assets through a variety of methods, including loan workouts, restructurings, or the sale of loans or underlying collateral. However, declines in collateral values or deterioration in a borrower’s financial condition, operating performance, or profitability, as well as actions by borrowers to delay or avoid legal processes, may impede these resolution efforts. As a result, nonperforming assets may persist for extended periods and could continue to adversely affect the Company’s business, financial condition and results of operations. The Company’s nonperforming assets (consisting of NPLs and other real estate owned, or “OREO”) adversely affect its business, financial condition and result of operations in various ways. The Company does not recognize interest income on nonaccrual loans or OREO, which reduces net income, return on assets, and return on equity. In addition, nonperforming assets increase loan administration and collection costs, negatively impact operating results and the efficiency ratio, and require significant management time and attention, which may detract from other strategic and operational priorities. If the Company acquires collateral through foreclosure or similar proceedings, the collateral must be recorded as OREO at fair value, which may result in charge-offs or valuation losses. The foreclosure and disposition process also involves legal, carrying, and other costs, which may be significant. An increase in nonperforming assets also increases the Company’s risk profile and may affect the minimum capital levels its regulators believe are appropriate in light of such risks. In addition, NPLs and OREO reduce the amount of assets eligible to be pledged as collateral for borrowings from secondary liquidity sources, which may adversely affect liquidity availability. The Company’s FDIC insurance assessment expense has increased significantly as a result of deterioration in asset quality, driven primarily by a single large nonperforming loan relationship. Asset quality is a key component in determining the applicable assessment rate. The Company’s financial results continue to be materially affected by this large credit relationship, which was placed on nonaccrual status during the second quarter of 2023, and had a net principal balance of $214.0 million as of December 31, 2025. Since the Company placed these loans on nonaccrual status, the Company has been unable to accrue approximately $91.2 million of interest income in the aggregate through December 31, 2025. The Company’s level of credit risk is elevated due to relationship exposure to the Company’s largest credit relationship. As of December 31, 2025, the Company’s largest credit relationship is loans, now reduced to judgments, related to various entities in which James. C. Justice, II has an interest (collectively, the “Justice Entities”). This relationship operates in the hospitality, agriculture and energy sectors and had loans, now reduced to judgments, outstanding with an aggregate principal amount of $214.0 million. All such loans are classified in the Other segment of the Company’s loan portfolio. During the second quarter of 2023, the Company placed these loans on nonaccrual status due to loan maturities and failure to pay in full. 22 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) This credit relationship comprises 87.7% of the Company’s nonperforming assets and NPLs and 5.5% of total portfolio loans at December 31, 2025. 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. The Company has agreed on a path of curtailment and payoff of such loans. During the year ended December 31, 2025, the Company received $38.0 million in curtailment payments and, in the aggregate, has received $87.9 million in curtailment payments since the loans were initially placed on nonperforming status. However, the Company cannot give any assurance as to the timing or amount of future payments or collections on such loans or that the Company will ultimately collect all amounts contractually due. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its NPLs, including claims that may be asserted by other purported creditors. Any deterioration of this credit relationship, including adverse changes in the financial condition of the respective borrowers or guarantors, potential claims by other creditors of the respective borrowers, further litigation with the respective borrowers or guarantors or adverse changes in the value of collateral that secures this credit relationship, could require the Company to increase its allowance for loan losses or result in significant losses to the Company, which could have a material adverse effect on the Company’s business, financial condition and results of operations. A significant portion of the Company’s commercial loan portfolio is secured by real estate, and adverse changes in the real estate market or economic conditions could adversely affect our results. A significant portion of the Company’s commercial loan portfolio is secured by real estate, which exposes the Company to risks associated with adverse changes in real estate market conditions and broader economic trends. As of December 31, 2025, approximately 94.4% of the Company’s commercial loan portfolio consisted of loans secured by real estate. Adverse economic conditions affecting occupancy levels, rental rates, or tenant demand in the markets the Company serves could increase the likelihood of borrower defaults. Real estate collateral generally serves as a secondary source of repayment in the event of borrower default. The value of this collateral may be adversely affected by changes in market demand, rental rates, capitalization rates, interest rates, or other economic factors, and may be insufficient to fully recover outstanding principal and accrued interest. As a result, declines in real estate values could lead to increased credit losses, higher provisions for credit losses, and reduced profitability. The Company’s CRE loan portfolio is concentrated primarily in North Carolina, Virginia, South Carolina, West Virginia and Georgia, with significant exposure to the retail/restaurant, warehouse, hospitality, multifamily, and office sectors. Due to this geographic and industry concentration, the Company may be more sensitive than more geographically or sector diversified institutions to economic downturns, real estate market disruptions, or localized adverse developments in these markets, which could materially and adversely affect the Company’s business, financial condition, results of operations, liquidity, and capital position. The Company relies on independent appraisals and other valuation techniques in evaluating and monitoring loans secured by real estate collateral securing a significant portion of its loan portfolio, which may not accurately describe the net value of the asset. A significant portion of the Company’s loan portfolio is secured by real estate, and the Company relies on independent third party appraisers to provide professional estimates of the value of such collateral. Appraisals are inherently subjective and represent estimates of value at a specific point in time, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real estate after the loan is made. As a result, appraisals may be affected by assumptions, incomplete information, errors in fact or judgment, or changing market conditions, which could adversely impact their reliability. If a borrower defaults on a loan secured by real estate, the Company’s recovery depends significantly on the accuracy and timeliness of the collateral valuation obtained from independent appraisers and other valuation methodologies. Appraisals are based on assumptions, comparable sales data, market conditions, and professional judgments that may prove to be inaccurate, outdated, or unavailable in stressed or illiquid markets. If an appraisal overstates the collateral’s fair value or fails to fully capture declining market conditions, the Company may not realize the estimated collateral value upon liquidation. As a result, 23 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) the Company could be unable to recover the outstanding principal and accrued interest, which may lead to higher credit losses and adversely affect the Company’s financial condition and results of operations. The Company generally obtains updated appraisals in connection with certain credit events, including requests for additional funding, material modification to loan terms, significant extensions of maturity dates, or when a loan becomes collateral dependent. Updated valuations are also typically obtained prior to foreclosure or other collection actions. However, there can be no assurance that updated appraisals will accurately reflect realizable values or that the collateral will be sufficient to mitigate potential losses. The Company also relies on appraisals and other valuation techniques to establish the value of OREO that is acquired through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, the Company’s consolidated financial statements may not reflect the correct value of OREO, and our ACL may not reflect accurate loan impairments. The Company’s concentration in commercial real estate loans, including construction loans, increases its credit risk and could adversely affect its financial condition and results of operations. The Company maintains a significant concentration in loans secured by CRE, which subjects it to heightened credit risk compared to institutions with more diversified loan portfolios. As of December 31, 2025, loans secured by commercial purpose real estate, excluding construction loans, totaled approximately $2.2 billion, or 57.1% of the Company’s total loan portfolio. These loans typically involve larger average balances. These loans often also have more complex financial and credit risks than residential real estate loans. Repayment of CRE loans generally depends on the successful operation of the underlying property and the borrower’s ability to generate sufficient cash flow, often through tenant occupancy and lease payments, to service debt obligations. Consequently, these loans are particularly sensitive to adverse changes in macroeconomic conditions, including fluctuations in supply and demand, declining property values, rising capitalization rates, and reduced rental income. Because these exposures are concentrated in a smaller number of borrowers with larger loan balances, deterioration in the performance of a limited number of loans could have a disproportionately negative impact on the Company. At December 31, 2025 the Company’s hospitality portfolio totaled approximately $373.5 million, or 9.6% of total loans. The performance of hospitality properties is highly cyclical and closely tied to business and leisure travel trends, consumer spending, and broader economic conditions, making these loans particularly vulnerable during economic downturns. The Company also held approximately $481.8 million, or 12.4% of total loans, in CRE construction loans at December 31, 2025. Construction lending is inherently riskier than lending on stabilized properties due to factors such as project delays, cost overruns driven by labor or material price increases, contractor performance issues, regulatory approvals, and the speculative nature of lease up and absorption. Additionally, repayment often depends on the borrower’s ability to complete the project on time and within budget or to secure permanent financing. A severe downturn in CRE markets could reduce demand for commercial space, increase vacancy rates, compress rental income, and negatively affect property valuations. If borrowers experience financial distress or collateral values decline, the Company may incur higher levels of delinquencies, nonperforming assets, and credit losses, which could materially and adversely affect the Company’s financial condition and results of operations. The banking regulatory agencies have expressed concerns about weaknesses in the CRE market. Banking regulators generally give CRE lending greater scrutiny and may require banks with higher levels of CRE loans to implement enhanced risk management practices, including stricter underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of CRE lending growth and exposures. If the Company’s banking regulators determine that its CRE lending activities are particularly risky and are subject to such heightened scrutiny, the Company may incur significant additional costs, be required to raise additional capital or maintain higher capital levels, or be required to restrict certain of its CRE lending activities. Furthermore, failures in the Company’s risk management policies, procedures and controls could adversely affect the Company’s ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which could have a material adverse effect on the Company’s business, financial condition and results of operations. 24 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) A significant part of the Company’s lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness. A significant portion of the Company’s commercial loan portfolio is tied to small to medium-sized businesses in its markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition. The Company’s allowance for credit losses may be insufficient to absorb expected losses in its loan portfolio, which may adversely affect its business, financial condition and results of operations. The adequacy of the Company’s allowance for credit losses (“ACL”) depends on the effectiveness of management’s estimation processes and the interpretation and application of the Current Expected Credit Losses (“CECL”) methodology. CECL requires the use of forward-looking information and significant management judgment to estimate lifetime expected credit losses, including assumptions related to economic forecasts, borrower performance, collateral values, and other market conditions. Because CECL incorporates reasonable and supportable forecasts, the ACL is inherently sensitive to changes in economic conditions and management assumptions. As a result, the Company may experience increased volatility in its ACL, particularly during periods of economic uncertainty or rapid deterioration in market conditions. There can be no assurance that the ACL will be sufficient to absorb actual credit losses. If economic conditions worsen, if specific loan segments experience elevated stress, or if borrower performance declines unexpectedly, the Company may be required to increase its ACL through additional provisions for credit losses. Such provisions would reduce earnings and could materially and adversely affect the Company’s financial condition and results of operations. The Company periodically enhances and refines its credit loss models, methodologies, and underlying assumptions as new information becomes available. However, if the assumptions, estimates, or judgments used in calculating the ACL prove to be inaccurate, or if the Company fails to identify appropriate economic indicators, or correctly estimate the timing of magnitude of future economic changes, the ACL may not adequately reflect credit losses. In addition, management evaluates the “Other” segment using discounted cash flow (“DCF”) analysis that incorporates multiple economic scenarios and probability weightings based on management’s expectations. Predicting the resolution of these loans is inherently uncertain, and the models may not fully capture the range of potential outcomes. If actual results differ materially from these estimates, the Company could incur credit losses in excess of the established ACL. The Company’s banking regulators also periodically review its ACL as part of their examination process and may require the Company to increase its allowance by recognizing additional provision for credit losses charged to expense, or to decrease the allowance by recognizing loan charge-offs which may, in turn, require additional provisions for credit losses. Any such required additional provisions for credit losses could have a material adverse effect on the Company’s financial condition and results of operations. Our real estate lending activities may result in the acquisition of OREO, which could increase expenses and negatively impact our financial condition and results of operations. Because the Company originates loans secured by real estate, it may be required to foreclose on collateral properties to protect its investment. Following foreclosure, the Company may take title to the property and assume the risks associated with real estate ownership, including the potential for declines in property values and the costs of maintaining and disposing of such assets. The amount ultimately realized from the sale of OREO properties is subject to numerous factors beyond the Company’s control, local and national economic conditions, changes in neighborhood property values, interest rate movements, real estate tax rates, operating expenses, environmental remediation requirements, and fluctuations in supply and demand for commercial and residential properties. If real estate markets weaken, the Company may be unable to sell OREO properties at prices equal to or greater than their carrying values, which could result in write-downs and additional losses. 25 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) Ownership of OREO also requires ongoing expenditures, such as property taxes, insurance maintenance, security, and other operating costs. For income producing properties, rental income may be insufficient to cover these expenses, requiring the Company to advance additional funds to preserve the value of the assets. Additionally, the Company may face liability for environmental conditions or other property related risks. For example, if hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as personal injury and property damage. Environmental laws may require the Company to incur substantial expense and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. If the Company is required to hold OREO for an extended period or dispose of properties under unfavorable market conditions, these factors could increase noninterest expense, reduce profitability, and materially and adversely affect the Company’s financial condition and results of operations. Risks Related to Market Conditions, Interest Rates and Investments The Company’s business is subject to interest rate risk and fluctuations in interest rates may adversely affect its earnings, income, cash flow, capital levels and credit quality. The Company’s business is subject to interest rate risk, and fluctuations in market interest rates may adversely affect its earnings, income, cash flow, capital levels, credit quality and financial condition. The majority of the Company’s assets and liabilities are monetary in nature, which exposes it to significant risks arising from changes in interest rates. Changes in interest rates can affect the Company’s net interest income, the fair value of interest-earnings assets and interest-bearing liabilities, liquidity and funding strategies, and asset-liability risk and related risk management strategies. The Company’s earnings are highly dependent on net interest income, which represents the difference between interest income earned on loans, investment securities and other interest-earning assets, and interest expense paid on deposits and borrowings. Differences in the timing and repricing characteristics of the Company’s assets and liabilities create interest rate sensitivity gaps. As a result, either the Company’s interest-bearing liabilities may reprice more quickly than its interest-earning assets, or vice versa. If market interest rates move in a manner that is unfavorable to the Company’s interest rate position, its net interest income and earnings could be negatively affected. Changes in market interest rates may also affect the net yield on interest-earning assets, loan origination volumes, the composition and performance of the Company’s loan and securities portfolios, and its overall funding costs, each of which may adversely impact the Company’s results of operations and financial condition. Interest rate movements also influence the demand for and origination of loans, the timing of loan prepayments, the fair value of our assets and liabilities, investment activity, deposit retention and growth, the yields earned on loans and investment securities, and the rates paid on deposits or other funding sources. Although the Company employs asset-liability management strategies designed to manage interest rate risk, these strategies may not fully mitigate the effects of significant, rapid, or unanticipated changes in interest rates. The Company is unable to predict actual fluctuations of market interest rates because many factors influencing interest rates, including inflationary pressures, economic growth or recession, labor market conditions, monetary and fiscal policy actions, geopolitical events, and instability in domestic or global financial markets, are beyond our control. In response to elevated inflation, the FRB increased the federal funds target rate significantly between March 2022 and July 2023. More recently, monetary policy has shifted toward a less restrictive stance, including rate reductions beginning in late 2024 and late 2025, following a prolonged period of elevated interest rates. However, the economic and inflationary outlook in the U.S. remains uncertain, and the Company cannot predict the timing or magnitude of future FRB monetary policy actions. Periods of declining interest rates may compress our interest rate spreads, reduce yields on interest-earning assets, increase loan prepayments, and intensify competition for deposits. Conversely, periods of rising interest rates may increase the Company’s funding costs, increase competitive pressures to raise the rates paid on deposits, reduce loan demand or increase the rate of default on existing loans, alter deposit mix, increase unrealized losses in the investment securities portfolio, and negatively affect borrower repayment capacity, potentially leading to higher credit losses. Higher interest rates also could negatively affect the value of collateral securing the Company’s loans. Declines in collateral values could reduce recovery amounts in the event of borrower defaults and increase credit losses. The Company cannot predict the timing, direction, or magnitude of future interest rate changes or the extent to which such changes may adversely affect its business, financial condition, or results of operations. 26 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) The value of the Company’s investment securities could decline. Changes in market interest rates and other market conditions could cause the fair value of our investment securities to decline. The Company holds available-for-sale investment securities that are carried at fair value, the majority of which consist of high-quality, liquid, fixed income instruments. The fair value for certain investment securities is determined using valuation techniques that require significant management judgment. As a result, the price the Company ultimately realizes upon sale of these securities may be less than their carrying value. The value of our investment securities may also decline due to factors beyond our control, including general economic and market conditions, volatility in the securities market, changes in interest rates or interest rate spreads, and actual or expected changes in inflation. Increases in market interest rates, in particular, have in the past, and may in the future result in declines in the fair value of fixed-income securities. Declines in the fair value of our available-for-sale investment securities are reflected in accumulated other comprehensive income (“AOCI”) and, therefore, may negatively affect shareholder’s equity, regulatory capital ratios, and liquidity. Although the Company does not intend to sell investment securities while in an unrealized loss position, further changes in market conditions, liquidity needs, or regulatory requirements could require the Company to sell securities at unfavorable prices, which could adversely affect its financial condition and results of operations. Inflation could negatively impact the Company’s business, its profitability, and its stock price. Inflationary pressures, as well as volatility and uncertainty related to inflation, could adversely affect our business, results of operations, financial condition, and stock price. Elevated or persistent inflation may increase operating costs for businesses and consumers and contribute to weaker economic conditions, which could reduce demand for our products and services. Higher inflation or inflation-related volatility may negatively affect the creditworthiness of our borrowers, particularly if increased costs are not offset by higher revenues or pricing power. Inflation may also adversely affect the value of our investment securities and other interest-earning assets and could contribute to increased market volatility and interest rate uncertainty. In addition, inflationary pressures may increase our operating expenses, including costs related to talent acquisition and retention, compensation, and employee benefits, as well as other noninterest expenses. If inflation remains elevated or becomes more volatile, the Company may experience pressure on net interest margins, higher credit losses, and challenges in achieving budgeted earnings or financial targets. Any failure to meet market expectations could adversely affect the market price of our common stock. Risks Related to the Company’s Operations, Cybersecurity and Technology A failure, disruption, or breach of our operational, cybersecurity, or information technology systems, or those of third-party service providers, could disrupt the Company’s business and adversely affect our results of operations, liquidity, financial condition, and reputation. Our operations rely heavily on the secure and efficient functioning of our information technology systems, data management processes, internal controls, and operational infrastructure, as well as those of third parties that support critical business functions. The Company depends on associates and third-party vendors in its day-to-day operations, and human error, misconduct, or malfeasance, system failures, or security breaches whether intentional or accidental could expose the Company to operational, financial, legal, and reputational risks. The Company processes a significant volume of customer and financial transactions daily and rely on systems supporting accounting, data processing, payment and settlement activities, electronic funds transfers, loan servicing, online and mobile banking. These systems may fail, become unavailable, or be compromised, due to various factors, including cyberattacks, ransomware or malware incidents, sudden increases in transaction volume, power or telecommunications outages, software or hardware failures, natural disasters, geopolitical or social events, or other circumstances that may be beyond our control. Any such disruption could impair our ability to process transactions, provide services to customers, or meet regulatory or contractual obligations. 27 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 1A. RISK FACTORS - (continued) The Company has implemented business continuity plans, backup systems, cybersecurity controls, and other safeguards designed to support the resilience and security of our operations. However, these measures may not be effective in preventing or mitigating all operational disruptions or security incidents. Additionally, in the event that backup systems are used, they may not process data as quickly as our primary systems and some data might not have been saved to backup systems, potentially resulting in a temporary or permanent loss of such data. In addition, our ability to control or remediate risks associated with third-party service providers is more limited than for systems and processes under our direct control, and failures or breaches involving third parties could have adverse effects on our business. The Company also continuously updates, enhances, and integrates its systems to support operational needs, regulatory requirements, and growth initiatives. These efforts involve significant costs and may create risk related to system implementation, data migration, integration challenges, or operational disruptions during transition periods. Any failure to effectively manage these risks could adversely affect our business, results of operations, liquidity, financial condition, and reputation. Cyberattacks, information security breaches, or technology failures involving our systems or those of third-party service providers could impair our ability to conduct business, manage risk exposures, and safeguard confidential information, and could adversely affect our results of operations, liquidity, financial condition, and reputation. Our business is highly dependent on the secure and efficient operation of our information technology infrastructure, computer systems, data management systems, and networks, as well as those of third parties upon whom it relies. The Company depends on digital technologies to process, transmit, store, and retrieve confidential, proprietary, and sensitive information, including customer and associate data. Cybersecurity risks for financial institutions have increased significantly in recent years due to the expanded use of digital banking channels, mobile and cloud technologies, remote work environments, the use of AI, “bots” or other automation software, which can increase the velocity and efficacy of cyberattacks, and the growing sophistication and frequency of cyber threats posed by organized crime, hackers, ransomware groups, and foreign state actors. Our systems and those of our third-party service providers may be vulnerable to a variety of cyber incidents, including malware, ransomware, phishing attacks, denial-of-service attacks, data breaches, insider misuse, and other unauthorized access or system disruptions. Customers, associates, and third parties may also access our systems using personal or remote devises that are outside of our controlled network environment, which may increase cybersecurity risks. The Company will likely face an increasing number of attempted cyberattacks as the Company expands its mobile and other internet-based products and services, as well as its usage of mobile and cloud technologies and as it provides more of these services to a greater number of retail and commercial banking customers. Financial institutions have been, and are expected to remain, target of such attacks, which could result in the unauthorized access, disclosure, loss, misuse, or destruction of confidential information, disruption of business operations, or degradation of customer services. Although the Company has not experienced a material cybersecurity incident to date, there can be no assurance that it will not experience an incident in the future. Technology failures, cyberattacks, or other information security breaches may not be prevented or detected despite our efforts and could result in material financial losses, operation disruptions, regulatory scrutiny, litigation, or reputational harm. In addition, remote work arrangements may increase exposure to cybersecurity risks if residential networks or personal devices are less secure than our office environments. The existence of cyberattacks or security breaches at third-party service providers with access to the Company’s data also may not be disclosed to the Company in a timely manner. The Company also faces risks from insider threats, as associates and contractors with authorized access to our systems may misuse information, intentionally or unintentionally. While the Company maintains policies, procedures and controls designed to mitigate insider and external threats, these measures may not be fully effective in preventing all incidents. As cyber threats continue to evolve, the Company may be required to invest significant additional resources to enhance security controls, monitor emerging risks, investigate potential incidents, and remediate vulnerabilities. Any cybersecurity or information security incident could result in loss of customers, disruption of operations, increased operating and insurance costs, regulatory investigations or enforcement actions, litigation, customer notification and credit monitoring expenses, fines or penalties, reputational damage, and other adverse consequences, any of which could materially and adversely affect our business, results of operations, liquidity, and financial condition. 28 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES