Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
million of higher-yielding securities. The Portfolio Repositioning resulted in a $12.5 million pre-tax loss and is expected to enhance future net interest income through improved portfolio yields. The Portfolio Repositioning is discussed further in the “Overview and Strategy” section. The Portfolio Repositioning, together with normal principal repayments, calls, maturities and amortization, resulted in the decline in the securities portfolio during the period. Securities represented 13.3% of total assets at June 30, 2026 compared to 14.3% at December 31, 2025.
Total gross unrealized gains in the available-for-sale portfolio were $1.6 million at June 30, 2026, offset by $43.6 million of gross unrealized losses, compared to gross unrealized gains of $0.4 million and gross unrealized losses of $54.2 million at December 31, 2025. Although increases in intermediate and long-term market interest rates during the six months ended June 30, 2026 would have increased unrealized losses on the remaining portfolio, gross unrealized losses declined overall as a result of the Company’s strategic Portfolio Repositioning, which realized a portion of previously existing unrealized losses through the sale of securities.
Management believes the unrealized losses on debt securities at June 30, 2026 are temporary and primarily attributable to changes in market interest rates since the securities were purchased rather than deterioration in credit quality. Approximately 48.0% of the securities portfolio is comprised of obligations issued by U.S. government sponsored entities that carry implicit government guarantees. States and political subdivision securities represent 26.0% of the portfolio and consist primarily of general obligation and essential purpose revenue bonds, which have historically demonstrated strong credit performance and are predominantly rated AA and AAA. The Company has the ability and intent to hold these securities until recovery of their amortized cost basis through maturity or sale.
Unrealized losses remained concentrated primarily in securities with intermediate and long-term maturities, whose market values are most sensitive to movements in the U.S. Treasury yield curve, particularly the five year and ten year maturities. During the six months ended June 30, 2026, intermediate-term Treasury yields increased, creating additional valuation pressure on the remaining securities portfolio. At June 30, 2026, the five and ten-year U.S. Treasury yields were 4.19% and 4.44%, respectively, compared to 3.73% and 4.18%, respectively, at December 31, 2025. The increase of approximately 46 basis points in the five year yield and 26 basis points in the ten year yield would generally be expected to increase unrealized losses, particularly for longer duration securities such as municipal bonds. However, the Company’s strategic Portfolio Repositioning during the period ended June 30, 2026 reduced the overall gross unrealized loss balance by realizing a portion of previously existing unrealized losses through the sale of selected securities.
Changes in intermediate and long-term interest rates, which are market driven, will continue to affect the market value of fixed rate securities. Accordingly, the Company expects ongoing fluctuations in the market values of its intermediate and long-term maturity securities as Treasury yields change. Floating rate securities generally maintained stable market values, as their coupon rates adjust in line with changes in short-term interest rates set by the Federal Reserve.
If any impairment of securities were determined to be credit related, the Company would recognize an ACL through recovery or provision for credit losses in the period an impairment is identified, while any non-credit related impairment would be recorded in accumulated other comprehensive loss, net of applicable taxes. At June 30, 2026 and December 31, 2025, the Company had no credit related impairments in its securities portfolio.
Under Basel III capital rules, most banking organizations are permitted to make a one-time election to retain the existing regulatory capital treatment for accumulated other comprehensive loss. The Company elected to retain this treatment, under which accumulated other comprehensive loss is excluded from regulatory capital. As a result, changes in unrealized gains and losses on available-for-sale securities do not affect regulatory capital levels, therefore reducing capital volatility associated with interest rate movements.
58
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Loan Composition
The following table summarizes our loan portfolio at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Commercial
Commercial Real Estate $ 2,143,362 $ 2,114,314
Commercial and Industrial 262,432 231,921
Total Commercial Loans 2,405,794 2,346,235
Consumer
Residential Mortgages 814,383 822,141
Other Consumer 25,154 28,416
Total Consumer Loans 839,537 850,557
Construction 489,263 465,613
Other — 217,155
Total Portfolio Loans 3,734,594 3,879,560
Loans Held-for-Sale 467 339
Total Loans $ 3,735,061 $ 3,879,899
The loan portfolio is the Company’s primary source of interest income and is subject to inherent credit risk, including the risk that borrowers may be unable to meet their contractual obligations. Adverse developments in a borrower’s industry or in overall economic conditions may negatively affect repayment capacity. For a discussion of risk factors relevant to the Company’s business and operations, refer to Part I, Item 1A. “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 .
Total portfolio loans decreased $145.0 million to $3.7 billion at June 30, 2026, compared to December 31, 2025 largely reflecting the Loan Sale Transaction completed during the first quarter of 2026, partially offset by net loan growth during the first half of the year.
The Company actively monitors the loan portfolio in light of changing market conditions, borrower performance, and the interest rate environment. At June 30, 2026, the loan portfolio consisted of 21.0% floating rates loans that reprice monthly, 37.4% variable rate loans that reprice at least once during the life of the loan, and 41.6% fixed rate loans.
CRE loans represented 57.4% of total portfolio loans at June 30, 2026, compared to 54.5% at December 31, 2025. The CRE portfolio is monitored for potential concentrations of credit risk by market, property type and tenant exposure. Collateral securing CRE loans is geographically concentrated primarily in North Carolina, Virginia and South Carolina and includes properties within the retail/restaurant, warehouse, hospitality, multifamily, office, and long-term care sectors.
59
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following tables present the Company's CRE loan portfolio by collateral type, including outstanding balances, loans classified as special mention or substandard, and the related percentages by collateral category as of the dates presented:
June 30, 2026
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type
Retail/Restaurant $ 529,426 $ 110 $ — $ 36,181 $ — $ 565,717 $ 56,591 21.2 %
Warehouse 483,322 — — 42,103 — 525,425 17,664 19.6 %
Hospitality 283,595 — — 27,771 — 311,366 2,742 11.6 %
Multifamily 364,039 — — 78,315 — 442,354 51,919 16.5 %
Office 202,700 — — 3,136 — 205,836 28,727 7.7 %
Land 606 — — 114,537 — 115,143 36 4.3 %
Single Family 24,135 4 63,848 30,110 — 118,097 383 4.4 %
Country Club 3,320 — — — — 3,320 — 0.1 %
Long-term Care 70,202 — — 60,353 — 130,555 — 4.9 %
Other 178,876 57 1,696 78,459 — 259,088 145 9.7 %
Total $ 2,140,221 $ 171 $ 65,544 $ 470,965 $ — $ 2,676,901 $ 158,207 100.0 %
December 31, 2025
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type
Retail/Restaurant $ 501,030 $ 114 $ — $ 49,172 $ 3,135 $ 553,451 $ 6 20.0 %
Warehouse 460,244 — — 40,472 — 500,716 9,568 18.1 %
Hospitality 280,803 — — 41,192 51,552 373,547 51,552 13.5 %
Multifamily 348,794 — — 86,679 — 435,473 5,402 15.7 %
Office 217,092 — — — 508 217,600 25,658 7.9 %
Land 809 — — 101,073 36,619 138,501 36,660 5.0 %
Single Family 33,420 — 62,072 15,144 13,367 124,003 13,460 4.5 %
Country Club 3,346 — — — 45,002 48,348 45,002 1.7 %
Long-term Care 59,409 — — 37,232 — 96,641 — 3.5 %
Other 208,907 73 — 70,835 — 279,815 — 10.1 %
Total $ 2,113,854 $ 187 $ 62,072 $ 441,799 $ 150,183 $ 2,768,095 $ 187,308 100.0 %
The decrease in the CRE loan portfolio at June 30, 2026 is primarily related to the Other segment reducing to zero due to the Loan Sale Transaction, partially offset by an increase in CRE construction loans.
CRE loans represent a concentration of credit risk within the loan portfolio. The majority of the Company’s CRE loans are originated within its core geographic markets, extended to experienced developers and sponsors, and generally supported by guaranty structures that provide recourse to individuals with demonstrated financial capacity.
Management believes its local and regional market expertise enables effective management of CRE concentration risk. This operating knowledge is derived from direct customer relationships, an understanding of borrower business models, and access to market research tools that provide data on occupancy levels, lease growth rates, and new construction activity. These market indicators are reviewed regularly by credit officers and communicated to lending teams.
The Company’s underwriting process incorporates multiple stress scenarios, primarily focused on borrower cash flow and leverage, to determine supportable loan structures and appropriate commitment levels.
60
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Aggregate commitments to the Company’s top 10 credit relationships totaled $472.4 million, representing 12.65% of gross loans at June 30, 2026, compared to $477.6 million, or 12.31% of gross loans, at December 31, 2025. The following table reflects the impacts of the Loan Sale Transaction, which resulted in elimination of the Company’s largest nonperforming loan relationship and a meaningful decline in borrower concentration. Prior to the Loan Sale Transaction, the top 10 relationships to total gross loans at December 31, 2025 was 17.00%.
The following table summarizes our top 10 relationships and a description of industries represented at the dates presented:
For the Periods Ending
Dollars in Thousands June 30, 2026 December 31, 2025 Change June 30, 2026 % of Gross Loans June 30, 2026 % of RBC
1. Multifamily $ 58,475 $ 58,610 $ (135) 1.57 % 9.43 %
2. Retail & Office 53,637 54,838 (1,201) 1.44 % 8.65 %
3. Retail & Warehouse 47,725 38,656 9,069 1.28 % 7.70 %
4. Warehouse 47,120 47,969 (849) 1.26 % 7.59 %
5. Warehouse 44,991 46,687 (1,696) 1.20 % 7.25 %
6. Healthcare 44,779 44,779 — 1.20 % 7.22 %
7. Land & Self-Storage 44,625 47,392 (2,767) 1.19 % 7.20 %
8. Multifamily 44,504 44,842 (338) 1.19 % 7.18 %
9. Long-Term Care 43,618 46,199 (2,581) 1.17 % 7.03 %
10. Retail & Office 42,919 47,619 (4,700) 1.15 % 6.92 %
Top Ten (10) Relationships $ 472,393 $ 477,591 $ (5,198) 12.65 % 76.17 %
Total Gross Loans $ 3,735,061 $ 3,879,899 $ (144,838)
% of Total Gross Loans 12.65 % 12.31 % 0.34 %
Concentration (25% of Risk Based Capital ("RBC")) $ 155,041 $ 128,431
Unfunded loan commitments on lines of credit were $564.5 million at June 30, 2026 as compared to $643.9 million at December 31, 2025. The majority of unused commitments relate to construction lines of credit, which are expected to be funded as projects progress toward completion.
Total line of credit utilization was 55.1% at June 30, 2026, compared to 53.2% at December 31, 2025. Utilization of commercial operating lines of credit was 55.0% at June 30, 2026, compared to 52.8% at December 31, 2025.
Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s loans.
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain watch, special mention and substandard risk rated loans that fall within prescribed policy thresholds. These loans generally represent those with the highest potential risk of loss to the Company. For loans identified through this process, management establishes action plans and conducts ongoing monitoring, which includes regular communication with the borrower and loan officer, review of current financial information and other supporting documentation, evaluation of existing or proposed loan structures or modifications, and periodic reassessment of collateral values.
On a quarterly basis, the Credit Risk Committee of the Board meets to review loan portfolio metrics, approve segment concentration limits, evaluate the adequacy of the ACL, and review the results of loan review activities identified during the prior quarter. Annually, this committee also approves credit related policy changes and enhancements as they are implemented.
Additional credit risk management practices include continuous monitoring of trends within the Company’s lending footprint and ongoing evaluation of lending policies and procedures designed to support sound underwriting standards. These practices include oversight of portfolio concentrations, delinquencies trends, and the results of annual portfolio level stress testing.
61
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The loan review department provides independent oversight of credit quality and evaluates the effectiveness of credit risk management practices. This function has primary responsibility for assessing commercial credit administration, consumer and mortgage underwriting and credit decision processes, and the appropriateness of assigned risk ratings for loans reviewed, as well as providing input into the overall loan risk rating process.
The Company’s policy is to place loans on nonaccrual status when collection of principal or interest is doubtful or, generally, when contractual principal or interest payments are 90 days or more past due. Consumer unsecured loans and secured loans are evaluated for charge-off once they become 90 days past due, and loans that reach 90 days delinquent are automatically transferred to nonaccrual status. Management, however, retains discretion at the individual loan level. A loan may be placed on nonaccrual prior to becoming 90 days past due if full collection of principal and interest is deemed unlikely. Conversely, a loan that is 90 days or more past due may be maintained in accrual status if it is well-secured and in process of collection.
Unsecured loans are generally charged-off in full, while secured loans are charged-off to the estimated fair value of the collateral, net of estimated cost to sell.
The repayment capacity of commercial borrowers is dependent on the performance of their underlying businesses and general economic conditions. Given the higher potential for loss within the commercial loan portfolio, these loans are monitored through an internal risk rating system. Risk ratings are assigned based on the borrower’s creditworthiness and are reviewed on an ongoing basis in accordance with internal policies. Loans rated special mention or substandard exhibit potential or well-defined weaknesses that are not typically present in higher quality performing loans, and therefore require heightened management attention to mitigate the risk of loss.
Nonperforming assets consist of NPLs and other real estate owned (“OREO”). The following table summarizes nonperforming assets at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 Change
Nonaccrual Loans
Commercial Real Estate $ 21,562 $ 23,861 $ (2,299)
Commercial and Industrial 13,546 1,013 12,533
Residential Mortgages 1,945 4,623 (2,678)
Other Consumer 72 25 47
Construction 436 440 (4)
Other — 214,020 (214,020)
Total Nonperforming Loans 37,561 243,982 (206,421)
Other Real Estate Owned 3,356 142 3,214
Total Nonperforming Assets $ 40,917 $ 244,124 $ (203,207)
At June 30, 2026, total nonperforming assets decreased $203.2 million to $40.9 million compared to December 31, 2025, primarily reflecting the Loan Sale Transaction, as the Judgments were previously included in the “Other” loan segment. Total nonperforming loans declined $206.4 million to $37.6 million at June 30, 2026. Commercial real estate nonperforming loans decreased $2.3 million, primarily due to the sale of a property in receivership during the first quarter of 2026. Residential mortgage nonperforming loans decreased $2.7 million as two residential mortgage loans were transferred to OREO during the first quarter of 2026. These improvements were partially offset by an increase in commercial and industrial nonperforming loans, which reflected a commercial and industrial relationship consisting of three loans with an aggregate principal balance of $13.4 million that was downgraded to substandard and placed on nonperforming status during the second quarter of 2026. This increase was partially offset by another commercial and industrial relationship that returned to accruing status during the first quarter of 2026. OREO increased to $3.4 million at June 30, 2026 from $0.1 million at December 31, 2025, primarily due to the transfer of the two residential mortgage loans during the first quarter of 2026.
62
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following is an analysis of nonperforming loans by loan portfolio segment at the dates presented, and each segment’s relative contribution to total nonperforming loans:
June 30, 2026 December 31, 2025
(Dollars in Thousands) Amount % of NPLs Amount % of NPLs
Commercial Real Estate $ 21,562 57.4 % $ 23,861 9.8 %
Commercial and Industrial 13,546 36.1 % 1,013 0.4 %
Residential Mortgages 1,945 5.2 % 4,623 1.9 %
Other Consumer 72 0.2 % 25 — %
Construction 436 1.1 % 440 0.2 %
Other — — % 214,020 87.7 %
Balance End of Period $ 37,561 100.0 % $ 243,982 100.0 %
Closed-end installment loans, amortizing loans secured by real estate, and other loans with monthly payment schedules are considered past due when payments are two or more months in arrears. Multi-payment obligations with payment schedules other than monthly are reported as past due when a scheduled payment remains unpaid for 30 days or more. Management monitors delinquency trends on a monthly basis, including early-stage delinquencies and loans exhibiting heightened risk characteristics, to identify emerging credit deterioration.
Allowance for Credit Losses
The following is the allocation of the ACL balance by segment at the dates presented:
June 30, 2026 December 31, 2025
(Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans
Commercial Real Estate $ 22,133 57.4 % $ 22,526 54.5 %
Commercial & Industrial 5,890 7.0 % 2,790 6.0 %
Residential Mortgages 11,719 21.8 % 12,449 21.2 %
Other Consumer 569 0.7 % 638 0.7 %
Construction 14,859 13.1 % 15,020 12.0 %
Other — — % 18,068 5.6 %
Balance End of Period $ 55,170 100.0 % $ 71,491 100.0 %
The ACL decreased $16.3 million to $55.2 million, or 1.48%, of total portfolio loans at June 30, 2026 compared to $71.5 million, or 1.84%, of total portfolio loans at December 31, 2025. The decrease primarily reflects the release of reserves associated with the Loan Sale Transaction completed during the first quarter of 2026, which reduced the allowance allocated to the “Other” loan segment by $18.0 million. This decrease was partially offset by an increase in the commercial and industrial loan segment resulting from the downgrade of a $13.4 million commercial and industrial lending relationship to nonperforming status during the second quarter of 2026, for which a $3.1 million specific reserve was established.
63
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes the credit quality ratios and their components at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses $ 55,170 $ 71,491
Total Portfolio Loans 3,734,594 3,879,560
Allowance for Credit Losses to Total Portfolio Loans 1.48 % 1.84 %
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans $ 37,561 $ 243,982
Total Portfolio Loans 3,734,594 3,879,560
Nonperforming Loans to Total Portfolio Loans 1.01 % 6.29 %
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses $ 55,170 $ 71,491
Nonperforming Loans 37,561 243,982
Allowance for Credit Losses to Nonperforming Loans 146.88 % 29.30 %
Net (Recoveries) / Charge-offs to Average Portfolio Loans
Net (Recoveries) / Charge-offs (annualized) 1
$ (31,430) $ 472
Average Total Portfolio Loans 3,817,054 3,759,496
Net (Recoveries) / Charge-offs to Average Portfolio Loans (0.82) % 0.01 %
1 The year-to-date net (recovery)/charge-offs (annualized) for June 30, 2026 includes the $15.0 million recovery (annualized) related to the Loan Sale Transaction.
The provision (recovery) for credit losses, which includes a provision (recovery) for losses on loans and a recovery on unfunded loan commitments, represents the amount necessary to maintain the ACL at a level that reflects management's estimate of expected credit losses in the loan portfolio as of the balance sheet date. During the three months ended June 30, 2026, the Company recognized a provision for credit losses on loans of $2.0 million and a recovery for unfunded loan commitments of $0.6 million. During the six months ended June 30, 2026, the Company recognized a recovery for credit losses on loans of $31.9 million and a recovery for unfunded loan commitments of $0.8 million, primarily reflecting the release of $18.0 million of previously established specific reserves and a $15.0 million recovery associated with the Loan Sale Transaction completed during the first quarter of 2026. As a result, the Company recognized a net recovery for credit losses during the six-month period ended June 30, 2026, contributing to a lower allowance for credit losses as a percentage of total portfolio loans at June 30, 2026.
The reserve for unfunded loan commitments is largely comprised of unfunded loan commitments related to real estate construction loans. There are three basic factors that influence the reserve rates associated with unfunded loan commitments for real estate construction loans. First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model. These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts and average portfolio life. Refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8. contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 for additional information related to the ACL Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain CRE loans. The proportion of these segments affects the weighting. Third, volume changes impact the total reserve calculation.
Net recoveries totaled $0.7 million and $15.6 million for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of $0.2 million for both the three and six month periods ended June 30, 2025. As a percentage of average portfolio loans, net recoveries were 0.07% and 0.82% for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of 0.02% and 0.01% for the same periods in 2025. The six month results for 2026 included a $15.0 million recovery recognized in connection with the first quarter 2026 Loan Sale Transaction, representing the recovery of the previously charged-off principal balance associated with the “Other” segment of the loan portfolio.
64
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes portfolio loans past due 30-89 days for the periods presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 $ Change
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate $ — $ 3 $ (3)
Commercial & Industrial 90 159 (69)
Total Commercial Loans 90 162 (72)
Consumer
Residential Mortgages 2,337 1,899 438
Other Consumer 148 267 (119)
Total Consumer Loans 2,485 2,166 319
Construction 36 908 (872)
Other — — —
Total Loans 30 to 89 Days Past Due $ 2,611 $ 3,236 $ (625)
There were no portfolio loans past due more than 90 days and still accruing at June 30, 2026 or December 31, 2025. Loans past due 30 to 89 days and still accruing decreased by $0.6 million to $2.6 million at June 30, 2026, compared to December 31, 2025.
The following tables represent credit exposures by internally assigned risk ratings at the dates presented:
June 30, 2026
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total
Pass $ 2,121,252 $ 248,879 $ 811,353 $ 25,082 $ 470,891 $ — $ 3,677,457
Special Mention 548 7 87 — 696 — 1,338
Substandard 21,562 102 2,943 72 17,676 — 42,355
Doubtful — 13,444 — — — — 13,444
Total Portfolio Loans $ 2,143,362 $ 262,432 $ 814,383 $ 25,154 $ 489,263 $ — $ 3,734,594
Performing Loans $ 2,121,800 $ 248,886 $ 812,438 $ 25,082 $ 488,827 $ — $ 3,697,033
Nonaccrual Loans 21,562 13,546 1,945 72 436 — 37,561
Total Portfolio Loans $ 2,143,362 $ 262,432 $ 814,383 $ 25,154 $ 489,263 $ — $ 3,734,594
December 31, 2025
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total
Pass $ 2,079,579 $ 230,899 $ 816,315 $ 28,391 $ 459,071 $ 3,135 $ 3,617,390
Special Mention 10,874 9 89 — 700 — 11,672
Substandard 23,861 1,013 5,737 25 5,842 214,020 250,498
Total Portfolio Loans $ 2,114,314 $ 231,921 $ 822,141 $ 28,416 $ 465,613 $ 217,155 $ 3,879,560
Performing Loans $ 2,090,453 $ 230,908 $ 817,518 $ 28,391 $ 465,173 $ 3,135 $ 3,635,578
Nonaccrual Loans 23,861 1,013 4,623 25 440 214,020 243,982
Total Portfolio Loans $ 2,114,314 $ 231,921 $ 822,141 $ 28,416 $ 465,613 $ 217,155 $ 3,879,560
At June 30, 2026, the Company had $13.4 million of loans classified as doubtful, compared to none at December 31, 2025. The increase during the second quarter of 2026 was attributable to a change in the classification of a relationship from Substandard in May 2026 to Doubtful in June 2026. The relationship was transferred to nonaccrual status in June 2026. The borrower’s financial condition continued to deteriorate with the most recent results indicating inadequate working capital due to an exacerbated cash conversion cycle. The levels of special mention and substandard loans at June 30, 2026, compared to December 31, 2025, reflected a decrease of $10.3 million in special mention and a decrease of $208.1 million in substandard loans.
65
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Special mention loans decreased primarily due to an upgrade of a $10.8 million CRE office building loan that was moved to watch from special mention during the first quarter of 2026.
Substandard loans decreased $208.1 million during the six months ended June 30, 2026 compared to December 31, 2025, primarily reflecting the first quarter 2026 Loan Sale Transaction. At December 31, 2025, the “Other” segment had an aggregate balance of approximately $214.0 million, which was reduced to zero upon completion of the Loan Sale Transaction. Additional reductions included the payoff of a $5.4 million construction loan, the transfer of two residential mortgage loans totaling $2.9 million to OREO, and the sale of a commercial real estate property in receivership, which reduced the related substandard loan balance by $1.5 million. In addition, a commercial and industrial borrower relationship consisting of two loans totaling $0.9 million improved to a pass rating due to sustained payment performance. These improvements were partially offset by the downgrade of a $17.2 million construction loan to substandard during the first quarter of 2026. Overall these actions resulted in a significant reduction in substandard loans despite the migration of certain credits to substandard status during the period.
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s ACL.
Deposits
The following table presents the composition of deposits at the dates presented:
(Dollars in Thousands) June 30,
2026 December 31,
2025 $ Change % Change
Noninterest-Bearing Demand $ 655,482 $ 620,473 $ 35,009 5.64 %
Interest-Bearing Demand 866,759 808,171 58,588 7.25 %
Money Market 510,125 553,964 (43,839) (7.91) %
Savings 318,774 326,182 (7,408) (2.27) %
Certificates of Deposit 1,846,416 1,902,099 (55,683) (2.93) %
Total Deposits $ 4,197,556 $ 4,210,889 $ (13,333) (0.32) %
Deposits are the Company’s primary source of funding, and management believes its deposit base remains stable, with the ability to attract new customers while maintaining a diversified deposit mix. Total deposits decreased $13.3 million to $4.2 billion at June 30, 2026, compared to December 31, 2025. The decrease primarily reflected declines in CDs of $55.7 million, money market accounts of $43.8 million, and savings accounts of $7.4 million, partially offset by increases in interest-bearing demand deposits of $58.6 million and noninterest-bearing demand deposits of $35.0 million.
Noninterest-bearing demand deposits represented 15.6% of total deposits at June 30, 2026, compared to 14.7% at December 31, 2025, while CDs comprised 44.0% of total deposits at June 30, 2026, compared to 45.2% at December 31, 2025.
Based on the assumptions used in preparing the Company’s regulatory Call Reports, approximately 82.3% of total deposits were insured under standard FDIC insurance coverage limits at June 30, 2026, while approximately 17.7% were uninsured, compared to approximately 81.3% insured and 18.7% uninsured at December 31, 2025.
The following table presents additional information in relation to deposits at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Noninterest-Bearing Public Funds Deposits $ 38,481 $ 33,220
Interest-Bearing Public Funds Deposits 142,362 137,600
Total Deposits not Covered by Deposit Insurance 1
743,449 787,114
Certificates of Deposits not Covered by Deposit Insurance 300,132 310,723
Deposits for Certain Directors, Executive Officers and their Affiliates 1,980 3,207
1 These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.
66
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Maturities of CDs over $250,000, excluding brokered deposits, not covered by deposit insurance at June 30, 2026 are summarized as follows:
(Dollars in Thousands) Amount Percent
Three Months or Less $ 92,750 30.9 %
Over Three Months Through Twelve Months 167,428 55.8 %
Over Twelve Months Through Three Years 38,176 12.7 %
Over Three Years 1,778 0.6 %
Total $ 300,132 100.0 %
FHLB Borrowings and Federal Funds Purchased
Information pertaining to FHLB borrowings and federal funds purchased at the dates presented are summarized in the table below:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Balance at Period End
Federal Home Loan Bank Borrowings $ — $ 178,500
Federal Funds Purchased — —
Average Balance during the Period
Federal Home Loan Bank Borrowings $ 79,575 $ 110,944
Federal Funds Purchased — —
Average Interest Rate during the Period
Federal Home Loan Bank Borrowings 3.94 % 4.19 %
Federal Funds Purchased — % — %
Maximum Month-end Balance during the Period
Federal Home Loan Bank Borrowings $ 193,500 $ 178,500
Federal Funds Purchased — —
Average Interest Rate at Period End
Federal Home Loan Bank Borrowings — % 3.89 %
Federal Funds Purchased — % — %
Borrowings represent an additional source of liquidity for the Company. FHLB borrowings decreased $178.5 million to zero at June 30, 2026, from $178.5 million at December 31, 2025, reflecting the repayment of borrowings utilizing proceeds from the Loan Sale Transaction completed during the first quarter of 2026. The Company had no overnight federal funds purchased outstanding at June 30, 2026 or December 31, 2025.
The level and composition of borrowed funds fluctuates over time based on a variety of factors, including market conditions, loan and deposit growth, investment securities activity, and capital considerations. Management actively monitors and manages borrowings to ensure they remain a reliable and cost-effective source of liquidity.
As a member of the Federal Home Loan Bank of Atlanta, the Company is required to purchase and maintain a specified level of FHLB capital stock based on asset size, outstanding borrowings, and participation in other FHLB programs. At June 30, 2026, the Company held $3.4 million of FHLB stock, compared to $11.7 million at December 31, 2025. The decrease in FHLB stock was attributable to the lower required level of stock holdings resulting from decreased FHLB borrowings.
Dividends recognized on FHLB stock totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2026, respectively, compared to $0.1 million and $0.3 million for the same periods in 2025, respectively. The investment in FHLB stock is carried at cost and evaluated for impairment based on the ultimate recoverability of its par value.
FHLB stock is non-marketable and may be redeemed only at the discretion of the FHLB. Members do not purchase stock for capital appreciation purposes, as FHLB stock can only be purchased, redeemed, or transferred at par value. Rather, ownership of FHLB stock provides members with access to the funding, liquidity, and other financial services offered by the FHLB.
67
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Refer to Note 9, Federal Home Loan Bank Borrowings and Federal Funds Purchased, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s borrowings.
Liquidity and Capital Resources
Liquidity
Liquidity refers to the Company’s ability to meet cash and collateral obligations in a timely manner and at a reasonable cost, including funding deposit withdrawals and borrower credit demands. The Company’s Board of Directors has delegated oversight of liquidity risk management to ALCO, which is responsible for maintaining sufficient liquidity at a reasonable cost under both normal operating conditions and potential stress scenarios.
ALCO monitors and manages liquidity risk by reviewing cash flow projections, performing balance sheet stress testing, and maintaining a comprehensive contingency funding plan. This plan includes defined liquidity metrics and graduated risk tolerance levels, which are reviewed monthly. If liquidity levels reach thresholds defined as high risk, enhanced monitoring and the implementation of specific predefined action plans to reduce risk are required.
The Company’s primary source of liquidity is its stable customer deposit base. Management believes it can retain existing deposits and attract new deposits, limiting reliance on more volatile funding sources. In addition to deposits, the Company maintains access to multiple supplemental funding sources as part of its normal liquidity management strategy. At June 30, 2026, funding sources accessible to the Company included borrowing availability at the FHLB equal to 30.0% of total assets, or $1.4 billion, subject to eligible collateral pledged, of which the Company had the capacity to borrow an additional $879.5 million. During the six months ended June 30, 2026, the Company’s previously disclosed $45.0 million secured line of credit with a correspondent financial institution was decreased to $25.0 million, and during the second quarter of 2026, this line of credit was converted to an unsecured facility. In addition, a $50.0 million unsecured line of credit with an unrelated correspondent financial institution was fully reinstated. Reflecting the Company’s improved earnings performance and enhanced credit risk profile following the Loan Sale Transaction during the first quarter of 2026, the Company now maintains unsecured borrowing lines of credit totaling $105.0 million with four correspondent financial institutions, inclusive of the converted unsecured facility noted previously. The Company also continues to have access to the institutional CD market.
Additional liquidity can be provided by $500.6 million of unpledged available-for-sale investment securities at fair value at June 30, 2026. Refer to the Liquidity Sources table below for further detail regarding FHLB borrowing capacity and correspondent bank lines of credit.
As of June 30, 2026, approximately 82.3% of total deposits were insured under standard FDIC coverage limits, while 17.7% were uninsured. Management actively monitors industry and market conditions that could affect liquidity and evaluates alternative funding strategies as needed. In addition, the Company closely monitors the potential impacts of interest rate movements and market conditions on the fair value of its securities portfolio, particularly in light of evolving banking industry dynamics that may influence liquidity availability or market expectations.
Maintaining a cushion of highly liquid assets or assets that can be converted to cash quickly, with little or no loss in value, is a key component of the Company’s liquidity risk management framework. ALCO policy establishes graduated risk tolerance levels for the ratio of highly liquid assets to total assets. At June 30, 2026, the Bank had $736.5 million of highly liquid assets, consisting of $235.4 million in excess reserves at the Federal Reserve and interest-bearing deposits at other financial institutions, $0.5 million of loans held-for-sale, and $500.6 million of unpledged securities. This resulted in highly liquid assets to total assets ratio of 15.3%. Total available liquidity relative to uninsured deposits was 237.9% at June 30, 2026.
While management believes current liquidity sources are sufficient, an extended economic downturn or significant market disruption could increase reliance on more volatile or higher cost funding sources.
68
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table provides detail of liquidity sources at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Cash and Due From Banks $ 41,101 $ 36,935
Interest Bearing Deposits in Other Financial Institutions 167,427 12,134
Federal Reserve Bank Excess Reserves 68,007 56,094
Unpledged Investment Securities 500,568 402,220
Excess Pledged Securities 7,066 33,443
FHLB Borrowing Availability 879,466 609,392
Collateralized Lines of Credit — 45,000
Unsecured Lines of Credit Availability 105,000 30,000
Total Liquidity Sources $ 1,768,635 $ 1,225,218
The following table provides total liquidity sources and ratios at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Total Liquidity Sources $ 1,768,635 $ 1,225,218
Highly Liquid Assets 1 to Total Assets
15.3 % 9.7 %
Highly Liquid Assets 1 to Uninsured Deposits
99.1 % 59.8 %
Total Available Liquidity to Uninsured Deposits 237.9 % 155.7 %
1 Highly liquid assets consist of $235.4 million in Federal Reserve Board excess reserves and interest-bearing deposits in other financial institutions, loans held-for-sale of $0.5 million and unpledged securities of $500.6 million.
Capital Resources
The Company reviews, on an ongoing basis, its and the Bank’s capital levels and opportunities to effectively deploy the Company’s capital or return capital to shareholders through stock repurchases or potential dividends. The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank at the dates presented:
(Dollars in Thousands) Minimum Required
Basel III Well
Capitalized 1
June 30, 2026 December 31, 2025
Amount Ratio Amount Ratio
Carter Bankshares, Inc.
Leverage Ratio 4.00 % NA $ 570,098 11.65 % $ 459,735 9.43 %
Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % NA 570,098 14.26 % 459,735 10.70 %
Tier 1 Capital (to Risk-weighted Assets) 8.50 % NA 570,098 14.26 % 459,735 10.70 %
Total Capital (to Risk-weighted Assets) 10.50 % NA 620,164 15.51 % 513,722 11.95 %
Carter Bank & Trust
Leverage Ratio 4.00 % 5.00 % $ 572,804 11.73 % $ 437,670 9.01 %
Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % 6.50 % 572,804 14.34 % 437,670 10.23 %
Tier 1 Capital (to Risk-weighted Assets) 8.50 % 8.00 % 572,804 14.34 % 437,670 10.23 %
Total Capital (to Risk-weighted Assets) 10.50 % 10.00 % 622,810 15.60 % 491,396 11.49 %
1 To be “well capitalized” under the prompt corrective action framework applies to the Bank only.
Total capital was $539.1 million at June 30, 2026, an increase of $119.4 million compared to December 31, 2025. The increase was primarily driven by net income of $114.7 million, a $9.2 million improvement in accumulated other comprehensive loss, reflecting favorable changes in the fair value of the available-for-sale portfolio and a $0.6 million increase related to restricted stock activity during the six months ended June 30, 2026. These increases were partially offset by $2.9 million of common stock repurchases and $2.2 million of dividends declared.
The Company and the Bank remained well capitalized at June 30, 2026, exceeding all regulatory capital requirements. The capital ratios were favorably impacted by the Loan Sale Transaction. The key capital ratios included a leverage ratio of 11.65%,
69
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
a Common Equity Tier 1 ratio of 14.26%, a Tier 1 ratio of 14.26%, and a Total risk-based capital ratio of 15.51%, all well above regulatory well-capitalized thresholds. Management believes the Company maintains a strong capital position and has the capacity to raise additional capital if needed.
The Company and the Bank are subject to various capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements may result in mandatory and, in certain cases, discretionary actions by regulators that could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital standards that are based on quantitative measures of assets, liabilities and certain off-balance sheet items calculated in accordance with regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators regarding components, risk weightings and other factors. Prompt corrective action provisions do not apply to bank holding companies.
Regulatory capital guidelines require the maintenance of minimum capital amounts and ratios. Under Basel III capital rules, the Company and the Bank are required to maintain minimum ratios of common equity Tier 1 capital, Tier 1 capital and total capital, as well as a capital conservation buffer, which effectively increases the minimum capital levels required. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not maintain capital ratios above the required minimums plus the applicable buffer are subject to restrictions on dividends, equity repurchases and discretionary compensation.
The Basel III capital framework also provides for a “countercyclical capital buffer” applicable to certain covered institutions. This buffer is not currently applicable to the Company or the Bank.
Banking organizations with less than $15 billion in total assets are permitted to make a one-time election to exclude accumulated other comprehensive loss from regulatory capital. The Company elected to retain this treatment, which reduces volatility in regulatory capital levels.
Management believes that, as of June 30, 2026, the Company and the Bank met all applicable capital adequacy requirements, including the capital conservation buffer.
Prompt corrective action regulations establish five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. These classifications are not intended to represent overall financial condition. Institutions that are adequately capitalized require regulatory approval to accept brokered deposits, while undercapitalized institutions are subject to restrictions on capital distributions, asset growth, and expansion and are required to submit capital restoration plans.
As of June 30, 2026 and December 31, 2025, the most recent regulatory notification classified the Company and the Bank as well-capitalized under the prompt corrective action framework. Management is not aware of any conditions or events since that notification that management believes would have changed the Company and the Bank’s capital category.
Stock Repurchase Plan
On February 2, 2026, the Company announced that its Board authorized a repurchase program to purchase up to $10.0 million of the Company’s common stock in the aggregate over a period of twelve months beginning February 11, 2026, the date of receipt of non-objection from the Federal Reserve Bank of Richmond. The program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the program, and the number of shares actually purchased under the program, will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position
70
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
and applicable legal and regulatory requirements. The repurchase program may be modified or terminated by the Board at any time. The repurchase program does not obligate the Company to purchase any particular number of shares.
During both the three and six months ended June 30, 2026, the Company repurchased 108,601 shares of its common stock at a total cost of $2.9 million and a weighted average cost per share of $26.50.
On May 20, 2025, the Company announced that its Board authorized a repurchase program to purchase up to $20.0 million of the Company’s common stock in the aggregate through May 14, 2026. The program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
The 2025 Program was fully utilized on October 30, 2025.
Contractual Obligations
As of June 30, 2026 , there have been no material changes to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2025 ( the “2025 Annual Report”), except that the Company repaid its outstanding FHLB advances during the six months ended June 30, 2026, reducing its contractual debt obligations .
Off-Balance Sheet Arrangements
As of June 30, 2026, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2025 Annual Report.
71
Table of Contents
CARTER BANKSHARES, INC. AND SUBSIDIARIES
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.