ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist readers in understanding Carter Bankshares, Inc.’s, operations, financial condition, and current business environment. The MD&A should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in Item 8. of this Annual Report on Form 10-K.
The MD&A includes the following sections:
• Explanation of Use of Non-GAAP Financial Measures;
• Critical Accounting Estimates;
• The Company’s Business and Strategy;
• Results of Operations and Financial Condition;
• Capital Resources;
• Contractual Obligations;
• Off-Balance Sheet Arrangements;
• Liquidity;
• Inflation; and
• Stock Repurchase Program
This section reviews the Company’s financial condition for each of the two most recent years and results of operations for each of the three most recent years. Certain prior-period amounts have been reclassified to conform to the current period presentation. In addition, certain tables may include additional periods to illustrate trends within the Company’s consolidated financial statements and related disclosures.
The results of operations presented in the consolidated financial statements are not necessarily indicative of future results.
Explanation of Use of Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), management uses, and this Annual Report contains or references, certain non-GAAP financial measures, including interest and dividend income, yield on interest earning assets, net interest income, and net interest margin on a fully taxable equivalent (“FTE”) basis.
Management believes these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Company’s operating results across periods in a meaningful manner. These measures also assist in assessing the Company’s underlying operating performance and performance trends and facilitate comparisons with other financial services companies.
The Company believes that presenting interest and dividend income, yield on interest earning assets, net interest income, and net interest margin on an FTE basis improves comparability between income derived from taxable and tax-exempt sources and is consistent with industry practice. Accordingly, GAAP measures presented in the Consolidated Statements of Income are reconciled to their corresponding FTE amounts, including:
• interest and dividend income,
• yield on interest earning assets,
• net interest income, and
• net interest margin.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
These reconciliations are provided in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A for the years ended 2025, 2024 and 2023.
While management believes these non-GAAP measures provide meaningful supplemental information, they should not be considered as an alternative to GAAP results, as more relevant than financial results prepared in accordance with GAAP, or as necessarily comparable to similarly titled measures used by other companies. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of the Company’s financial condition or results of operations as reported under GAAP. Investors are encouraged to review the Company’s GAAP financial results and all other relevant information when evaluating its performance and financial condition.
Critical Accounting Estimates
The preparation of the Company’s consolidated financial statements in accordance with GAAP requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates, and such differences could be material to the Company’s financial condition or results of operations in the period in which they become known.
Management considers the determination of the allowance for credit losses to be a critical accounting estimate. This estimate is made in accordance with GAAP and requires significant judgment, including the use of subjective and complex assumptions regarding economic conditions, borrower behavior, and credit risk. Changes in these assumptions or estimates have had a material impact on the Company’s financial condition and results of operations in the past and are reasonably likely to do so in future periods.
Allowance for Credit Losses (“ACL”)
The ACL represents management's estimate of expected credit losses over the contractual life of outstanding loans as of the balance sheet date. The ACL is determined based on an evaluation of the loan portfolio’s current risk characteristics, historical loss experience, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset in accordance with GAAP.
The ACL is reduced by charge-offs, net of recoveries, and increased by a provision or decreased by a recovery through the (recovery) provision for credit losses, which is recorded as a component of operating expense. Determining an appropriate ACL is inherently complex and requires the use of significant judgment and highly subjective assumptions. Management reviews the adequacy of the ACL on a quarterly basis and believes the allowance recorded as of December 31, 2025 reflects the best estimate of expected credit losses based on information available at that time.
Management believes it uses all relevant and available information to estimate expected future credit losses; however, actual losses may differ from those estimates. Future ACL levels may be materially impacted by changes in a number of factors, including but not limited to, the composition of the loan portfolio, changes in current and forecasted economic conditions, borrower performance, and changes in the interest rate environment. Management also periodically evaluates the need for qualitative adjustments to the ACL based on emerging risks, economic uncertainty, and other factors not fully captured in the quantitative model, including potential variances in key economic indices.
The ACL “base-case” estimate is derived using economic forecasts from widely recognized third-party sources. Management evaluates the potential variability of economic conditions by analyzing historical economic cycles, including peak and trough periods, which are used to stress the base-case estimate and develop a range of possible outcomes. Management then determines the appropriate allowance by evaluating these outcomes relative to current economic conditions and known portfolio risks.
The ACL is subject to review by various regulatory agencies as part of their examination process, and the Company periodically engages an independent third-party to validate its credit loss model. Because future events and economic conditions cannot be predicted with precision, actual results may differ materially from management’s estimates.
Refer to Note 1, Summary of Significant Accounting Policies, for further detailed descriptions of our estimation process and methodology related to the ACL and Note 7, Allowance for Credit Losses, of this Annual Report on Form 10-K.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Company’s Business and Strategy
Carter Bankshares, Inc. (the “Company”) is a financial holding company, as of October 27, 2025, headquartered in Martinsville, Virginia with assets of $4.9 billion at December 31, 2025. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured, Virginia state-chartered bank, which operates 64 branches in Virginia and North Carolina. The Company provides a full range of financial services with retail and, commercial banking products and insurance. The Company’s common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.
During 2025, the Company acquired two leased branch facilities, along with the associated deposits, located in Mooresville, North Carolina and Winston Salem, North Carolina, from First Reliance Bank (the “Branch Purchase”). In connection with the Branch Purchase, the Bank acquired $55.9 million in deposits, along with cash, personal property, and other fixed assets associated with the branch locations, and welcomed ten associates to its team. No loans were acquired as part of the Branch Purchase. The Branch Purchase closed during the second quarter of 2025.
The Company earns revenue primarily from interest on loans and investment securities and from fees charged for financial services provided to customers. Expenses consist principally of funding costs, the provision for credit losses, compensation and benefits, occupancy and equipment, technology and data processing, regulatory assessments, and other operating expenses.
Part of the Company’s current three-year strategic plan is to refine and enhance its brand image and position in the markets it serves. With this brand strategy, the Company has embarked on a multi-year implementation plan to create a brand tailored to the needs of its critical growth audiences, focusing on innovating brand experiences to exceed expectations and build a brand that stands apart. This means a commitment to aligning processes, operations, and systems around the Company’s brand while introducing new products and services, so that, over time, the Company can increase its brand awareness in the communities it serves. To strengthen and further shape the brand and culture of the Company, a new set of guiding principles was introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper, supported by our new set of core values: Build Relationships, Earn Trust, and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company. On October 30, 2024, the Company unveiled its new brand identity and, in 2025, renovated 47 retail branch locations and seven corporate offices, and launched new websites for the Company and the Bank. The brand identity is centered entirely around the people who matter most: customers and associates of the Bank and the communities it serves to help deliver on its promise of helping people experience a life lived full.
The Company’s goal is to shift from balance-sheet restructuring to pursuing a prudent growth strategy when appropriate. We believe this strategy will primarily focus on organic growth, but will also consider opportunistic acquisitions that align with this strategic vision. We believe that the Bank’s strong capital and liquidity positions support this strategy. In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses.
The Company is focused on executing this strategy to successfully support the new brand and grow its business in its current markets as well as any new markets it may enter. As part of executing this strategy, the Company continues to dedicate significant resources to the resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large credit relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank, and shareholders.
As previously disclosed, during the second quarter of 2024, a federal court lawsuit filed against the Company and the Bank by then West Virginia Governor James C. Justice II, his wife Cathy L. Justice, his son James C. Justice, III, and related entities that he and/or they own (the “Justice Entities”) was dismissed with prejudice. In connection with the dismissal of this litigation, the Justice Entities agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank. The Justice Entities have reduced the aggregate nonperforming loan balance from $301.9 million as of June 30, 2023 to $214.0 million as of December 31, 2025.
During the third quarter of 2024, the Company obtained a voluntary stipulation of dismissal with prejudice of a lawsuit filed on February 10, 2024 against the Bank in the United States District Court for the Western District of Virginia (Danville Division) (the “GLAS Trust Lawsuit”) by GLAS Trust Company, LLC, in its capacity as Note Trustee (“GLAS Trust”). In connection with the dismissal of the GLAS Trust Lawsuit, GLAS Trust and certain affiliates and parties on whose behalf it was acting
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
executed a release that waives any and all causes of action of any kind that they might claim to have against the Bank. The dismissal of the GLAS Trust Lawsuit ended all pending litigation brought against the Bank by GLAS Trust in connection with the Bank’s credit relationship with the Justice Entities. Also, in connection with the dismissal of the GLAS Trust Lawsuit, certain Justice Entities executed documents reaffirming the legality, validity and binding nature of all loan documents they have executed in favor of the Bank.
The Company tendered a payment (the “Settlement Payment”) in consideration of the voluntary dismissal of the GLAS Trust Lawsuit. Because certain of the Justice Entities had previously agreed to indemnify the Bank against the claims asserted in the GLAS Trust Lawsuit, certain of the Justice Entities executed a promissory note in favor of the Bank further evidencing this indemnification obligation as related to the Settlement Payment. This promissory note was recognized as a principal charge-off during the three months ended September 30, 2024 due to the nonperforming status of the Bank’s loans with the Justice Entities, and because the settled claims related to allegedly preferential payments made on those nonperforming loans.
The Company’s financial results continue to be significantly impacted by the single large credit relationship that the Company placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $214.0 million as of December 31, 2025. Since placement of these loans, now reduced to judgments, on nonaccrual status during the second quarter of 2023, interest income has been negatively impacted by $26.1 million, $35.1 million and $30.0 million during the years ended December 31, 2025, 2024 and 2023, respectively, or by $91.2 million in the aggregate.
Results of Operations and Financial Condition
Earnings Summary
2025 Highlights
• Net interest income increased $16.4 million, or 14.3%, to $130.8 million for the year ended December 31, 2025 compared to the same period in 2024;
• The (recovery) for credit losses was $(3.6) million for the year ended December 31, 2025, compared to a (recovery) for credit losses of $(5.0) million for the same period in 2024;
• Total noninterest income increased $1.0 million to $22.4 million for the year ended December 31, 2025 compared to the same period in 2024;
• Total noninterest expense increased $7.1 million to $117.1 million for the year ended December 31, 2025 compared to the same period in 2024; and
• Income tax provision increased $2.3 million to $8.6 million for the year ended December 31, 2025 compared to the same period in 2024.
Balance Sheet Highlights (period-end balances, December 31, 2025 compared to December 31, 2024 )
• The available-for-sale securities portfolio decreased $26.8 million and is currently 14.3% of total assets compared to 15.4% of total assets;
• Total portfolio loans increased $254.7 million, or 7.0%, due to loan growth during the year ended December 31, 2025;
• The portfolio loans to deposit ratio was 92.1%, compared to 87.3%;
• At December 31, 2025, NPLs declined by $15.4 million to $244.0 million compared to December 31, 2024. NPLs as a percentage of total portfolio loans were 6.29% compared to 7.15%;
• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 1.84% compared to 2.09%. The ACL on portfolio loans totaled $71.5 million at December 31, 2025, compared to $75.6 million at December 31, 2024;
• Total deposits increased $57.5 million, or 1.4%, to $4.2 billion at December 31, 2025, compared to December 31, 2024; and
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
• FHLB borrowings increased $108.5 million to $178.5 million at December 31, 2025 compared to $70.0 million at December 31, 2024.
The Company reported net income of $31.4 million , or $1.38 diluted earnings per share for the year ended December 31, 2025 compared to net income of $24.5 million , or $1.06 diluted earnings per share, for the year ended December 31, 2024 .
Years Ended December 31,
PERFORMANCE RATIOS
Return on Average Assets
Return on Average Shareholders' Equity
Portfolio Loans to Deposit Ratio
Allowance for Credit Losses to Total Portfolio Loans
Nonperforming Loans to Total Portfolio Loans
Allowance for Credit Losses to Nonperforming Loans
Net Interest Income
Net interest income is the Company’s primary source of revenue and represents the difference between interest and fee income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is influenced by changes in the average balances of interest-earning assets and interest-bearing liabilities, as well as changes in interest rates, asset yields, funding costs, and interest rate spreads.
The composition and mix of interest-earning assets and interest-bearing liabilities are actively managed by the Company’s Asset and Liability Committee (“ALCO”) to mitigate interest rate risk and liquidity risk within the balance sheet. ALCO utilizes a variety of strategies within established risk parameters to manage exposure to changing interest rate environments and to achieve what management believes to be an appropriate and sustainable level of net interest income.
Net interest income and net interest margin are presented on an FTE basis, which are non-GAAP financial measures. The FTE presentation adjusts net interest income and net interest margin to reflect the tax-equivalent impact of income earned on certain tax-exempt loans and securities, using the applicable federal statutory income tax rate for each period presented, which was 21%, as well as the impact of the dividends-received deduction on equity securities. Management believes that the FTE basis presentation provides a more meaningful comparison between taxable and tax-exempt sources of interest income and is consistent with industry practice.
Additional discussion regarding the Company’s uses of non-GAAP financial measures is included in the “Explanation of Use of Non-GAAP Financial Measures” section above.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table reconciles interest and dividend income, yield on interest-earning assets, net interest income, and net interest margin as reported under GAAP to the corresponding amounts presented on an FTE basis for the periods presented:
(Dollars in Thousands)
Years Ended December 31,
Interest and Dividend Income (GAAP)
Tax Equivalent Adjustment
Interest and Dividend Income (FTE) (Non-GAAP)
Average Earning Assets
Yield on Interest-earning Assets (GAAP)
Yield on Interest-earning Assets (FTE) (Non-GAAP)
Net Interest Income (GAAP)
Tax Equivalent Adjustment
Net Interest Income (FTE) (Non-GAAP)
Average Earning Assets
Net Interest Margin (GAAP)
Net Interest Margin (FTE) (Non-GAAP)
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
The following table presents average balances, interest income and expense, and average yields and rates on interest-earning assets and interest-bearing liabilities for the years ended December 31:
(Dollars in Thousands)
Average
Balance
Income/
Expense
Yield/Rate
Average
Balance
Income/
Expense
Yield/Rate
Average
Balance
Income/
Expense
Yield/Rate
ASSETS
Interest-Bearing Deposits with Banks
Tax-Free Investment Securities 2
Taxable Investment Securities
Total Securities
Commercial Real Estate
Commercial & Industrial 2
Residential Mortgages
Other Consumer
Construction
Other
Total Loans 1
Other Restricted Stock, at Cost
Total Interest-Earning Assets
Noninterest Earning Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand
Money Market
Savings
Certificates of Deposit
Total Interest-Bearing Deposits
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Other Borrowings
Total Borrowings
Total Interest-Bearing Liabilities
Noninterest-Bearing Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Net Interest Income 2
Net Interest Margin 2
Net Interest Spread
1 Nonaccruing loans are included in the daily average loan amounts outstanding.
2 Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.
Net interest income increased to $130.8 million for the year ended December 31, 2025, compared to $114.5 million for the year ended December 31, 2024. On an FTE basis (non-GAAP), net interest income increased to $131.5 million for the year ended December 31, 2025, compared to $115.2 million for the year ended December 31, 2024. The increase was primarily driven by growth in average interest-earning assets, higher yields on loans, and a reduction in the overall cost of interest-bearing liabilities. As a result, net interest margin increased 25 basis points to 2.82% for 2025 compared to 2.57% for 2024. On an FTE basis (non-GAAP), net interest margin increased 25 basis points to 2.83% for 2025 compared to 2.58% for 2024.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average interest-earning assets increased to $4.6 billion in 2025 from $4.5 billion in 2024, reflecting growth in the loan portfolio, particularly in commercial real estate (“CRE”), residential mortgages, and construction loans. Average investment securities declined compared to the prior year, reflecting active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. Noninterest-earning assets increased slightly year over year, consistent with overall balance sheet growth.
The yield on total interest-earning assets (GAAP) increased slightly to 5.00% in 2025 compared to 4.97% in 2024. The yield on total interest-earning assets (FTE)(non-GAAP) increased slightly to 5.01% in 2025 compared to 4.99% in 2024, reflecting improved loan yields driven by higher market interest rates and loan repricing activity. The yields on total loans (FTE)(non-GAAP) increased to 5.39% in 2025 from 5.32% in 2024. These increases were partially offset by lower yields on total investment securities, reflecting lower interest rates on the floating rate portion of the portfolio and changes in portfolio mix. Overall, loan growth and improved loan yields more than offset the decline in securities yields.
As of December 31, 2025, the securities portfolio was comprised of 36.3% variable rate securities with approximately 94.9% that will reprice at least once over the next 12 months. We believe having a balanced mix of variable and fixed rate securities is an important strategy, especially during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk as fixed rate securities, so there is much less price volatility. This variable rate strategy has limited the impact of past upward shifts in the yield curve on the Company’s unrealized losses on debt securities. If the Federal Reserve continues reducing short-term interest rates, the Bank may consider changes to this interest rate mix strategy going forward.
Average interest-bearing liabilities increased to $3.7 billion in 2025 from $3.5 billion in 2024, primarily due to growth in interest-bearing deposits. Average interest-bearing deposits increased to $3.6 billion in 2025 compared to $3.3 billion in 2024, led by growth in CDs, money market accounts and interest-bearing demand deposits. The cost of total interest-bearing deposits declined to 2.69% in 2025 from 2.91% in 2024, as we have lowered our deposit rate offerings on higher-yielding interest bearing demand, money market and short-term promotional CD products throughout 2025 in response to the Federal Open Market Committee’s (“FOMC”) short-term rate reduction efforts that began September 18, 2024 and continued through December 10, 2025. Average borrowings declined significantly year-over-year, resulting in a reduction in borrowing costs and contributing to a lower overall cost of interest-bearing liabilities, which decreased to 2.74% in 2025 from 3.06% in 2024.
Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 71.7% of our CD portfolio and 77.6% of our outstanding FHLB borrowings will mature and reprice over the next 12 months. This strategy gives the Company flexibility to manage the structure and pricing of its deposit and borrowing portfolios to reduce future funding costs should the FOMC continue cutting short-term rates in the future.
Discussion of net interest income for the year ended December 31, 2024 compared to the year ended December 31, 2023 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Net Interest Income” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 , which was filed with the SEC on March 7, 2025, and is incorporated herein by reference.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
2025 Compared to 2024
2024 Compared to 2023
(Dollars in Thousands)
Volume 3
Rate 3
Increase/
(Decrease)
Volume 3
Rate 3
Increase/
(Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks
Tax-free Investment Securities 2
Taxable Investment Securities
Total Securities
Commercial Real Estate
Commercial & Industrial 2
Residential Mortgages
Other Consumer
Construction
Other
Total Loans 1
Other Restricted Stock, at Cost
Total Interest-Earning Assets
Interest Paid on:
Interest-Bearing Demand
Money Market
Savings
Certificates of Deposit
Total Interest-Bearing Deposits
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Other Borrowings
Total Borrowings
Total Interest-Bearing Liabilities
Change in Net Interest Margin
1 Nonaccruing loans are included in the daily average loan amounts outstanding.
2 Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.
3 Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
(Recovery) Provision for Credit Losses
The Company records a provision or recovery for credit losses to adjust the allowance for credit losses (“ACL”) to the level deemed appropriate to absorb expected credit losses in the loan portfolio. Similarly, the Company records a provision or recovery for unfunded commitments to adjust the related reserve to the level considered appropriate to cover expected credit losses associated with those commitments. The provision or recovery for credit losses reflects management’s estimate of the ACL required to absorb expected life-of-loan losses in the loan portfolio, after consideration of net charge-offs and recoveries during the period.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table presents information regarding the recovery for credit losses and net charge-offs:
(Dollars in Thousands)
Twelve months ended December 31,
$ Change
Recovery for Credit Losses
Recovery for Unfunded Commitments
Total Recovery for Credit Losses on Loans
Provision for Securities
Total Recovery for Credit Losses
Net Loan Charge-offs
Net Loan Charge-offs / Average Portfolio Loans
The (recovery) for credit losses was $(3.6) million for the year ended December 31, 2025, compared to a (recovery) of $(5.0) million for the same period in 2024. The increases compared to the same period in 2024 was primarily driven by higher loan growth in 2025, the establishment of a new reserve of $1.0 million on a CRE loan during the fourth quarter of 2025 due to an updated appraisal, a reserve of $0.6 million on an existing CRE relationship with four loans that are under contract to sell and $12.0 million lower curtailment payments during the year ended December 31, 2025 compared to the same period in 2024. The Other segment reserve rate declined to 8.43% at December 31, 2025 from 12.01% at December 31, 2024.
The (recovery) for unfunded commitments was $(194) thousand compared to a (recovery) of $(7) thousand for the same period in 2024. The change from the prior year was primarily due to decreased unfunded commitments in construction loans.
Net charge-offs were $0.5 million for the year ended December 31, 2025 compared to $16.4 million for the year ended December 31, 2024. As a percentage of average portfolio loans, net loan charge-offs were 0.01% and 0.46% for the years ended 2025 and 2024, respectively. During the year ended December 31, 2024, net loan charge-offs were significantly impacted by the $15.0 million principal charge-off related to the Other segment of the loan portfolio.
For information regarding the $15.0 million principal charge-off related to the Other segment of the loan portfolio, see the “The Company’s Business and Strategy” section of this MD&A.
See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.
Discussion of (recovery) provision for credit losses for the year ended December 31, 2024 compared to the year ended December 31, 2023 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “(Recovery) Provision for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 , which was filed with the SEC on March 7, 2025, and is incorporated herein by reference.
Noninterest Income
Years Ended December 31,
(Dollars in Thousands)
$ Change
% Change
Gains (Losses) on Sales of Securities, net
Service Charges, Commissions and Fees
Debit Card Interchange Fees
Insurance Commissions
Bank Owned Life Insurance Income
Other
Total Noninterest Income
Total noninterest income increased $1.0 million, or 4.8%, for the year ended December 31, 2025, compared to the same period in 2024. The increase was primarily driven by other noninterest income of $2.0 million, which included a $1.9 million gain on a BOLI death benefit recognized in the first quarter of 2025. This increase was partially offset by a $1.0 million decrease in
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
insurance commission income, reflecting lower activity levels compared to the prior year.
Discussion of noninterest income for the year ended December 31, 2024 compared to the year ended December 31, 2023 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Noninterest Income” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 , which was filed with the SEC on March 7, 2025, and is incorporated herein by reference.
Noninterest Expense
(Dollars in Thousands)
Years Ended December 31,
$ Change
% Change
Salaries and Employee Benefits
Occupancy Expense, net
FDIC Insurance Expense
Other Taxes
Advertising Expense
Telephone Expense
Professional and Legal Fees
Data Processing
Debit Card Expense
Other
Total Noninterest Expense
Noninterest expense totaled $117.1 million for the year ended December 31, 2025, representing an increase of $7.1 million, or 6.4% compared to 2024. The increase was driven by higher expenses across several categories reflecting operational growth, strategic initiatives and inflationary pressures.
Total salaries and employee benefits expense was basically flat as compared to December 31, 2024 due to higher salary cost deferrals of $5.7 million as a result of updated loan origination cost studies performed in 2024 and implemented in the latter half of 2024 coupled with higher loan growth, which reduced the amount of salary expense recognized during 2025. Excluding the $5.7 million of higher salary cost deferrals, salaries and employee benefits increased $5.5 million. The increase is primarily attributable to normal merit increases, strategic new hires, higher incentives and increased medical costs during 2025.
Other noninterest expense increased $2.3 million, primarily due to $1.1 million of other real estate owned (“OREO”) related activity, $0.7 million of fees associated with 1035 exchanges, resulting from the early surrender of certain company owned life insurance policies (“BOLI”) during 2025, $0.4 million in acquisition costs and $0.2 million in amortization expense related to core deposit intangibles.
Occupancy expenses, net increased $2.0 million, driven by higher software maintenance costs, rebranding expenses, building and equipment maintenance and increased depreciation related to the Branch Purchase. Professional and legal fees rose $1.2 million, primarily attributable to acquisition-related activity, consulting costs associated with troubled and NPLs and increased expenses related to the management of special assets.
Data processing expenses increased $0.8 million, primarily reflecting inflationary cost increases related to both existing and new service agreements. Debit card expense increased $0.8 million, driven by higher miscellaneous fees and elevated costs associated with automated teller machine and debit card fraud activity. Advertising expense increased $0.6 million, primarily due to higher spending related to rebranding initiatives and expanded new account promotions and advertising campaigns.
These increases were partially offset by a $0.4 million decrease in FDIC insurance expense, primarily related to a lower assessment base resulting from decreased loan balances associated with the Company’s large nonperforming lending relationship.
Discussion of noninterest expense for the year ended December 31, 2024 compared to the year ended December 31, 2023 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Condition and Results of Operations,” under the heading “Noninterest Expense” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 , which was filed with the SEC on March 7, 2025, and is incorporated herein by reference.
Provision for Income Taxes
The provision for income taxes increased $2.3 million to $8.6 million for the year ended December 31, 2025 compared to $6.3 million for December 31, 2024. The increase was primarily attributable to a $9.1 million increase in pre-tax income from the prior year, which was largely driven by a $16.4 million increase in net interest income, partially offset by a $7.1 million increase in noninterest expense.
The effective tax rate was 21.6% for the year ended December 31, 2025 compared to 20.6% for the year ended December 31, 2024. For the period ended December 31, 2025, the annual effective tax rate was greater than the statutory rate of 21%, primarily due to the surrender of certain BOLI policies, which resulted in taxable gains of $2.4 million and $0.2 million in related Modified Endowment Contract (“MEC”) penalties, partially offset by the receipt of a $1.9 million tax-exempt BOLI death benefit.
Additional information related to the surrender of BOLI policies and the related MEC penalty is included in Note 18, Federal and State Income Taxes, in Item 8. of this Annual Report on Form 10-K.
Discussion of provision for income taxes for the year ended December 31, 2024 compared to the year ended December 31, 2023 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Provision for Income Taxes” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 , which was filed with the SEC on March 7, 2025, and is incorporated herein by reference.
Financial Condition
December 31, 2025
Total assets increased $192.7 million, to $4.9 billion at December 31, 2025 compared to $4.7 billion at December 31, 2024, reflecting balance sheet growth primarily driven by loan growth.
Total portfolio loans increased $254.7 million, or 7.0% to $3.9 billion at December 31, 2025 compared to December 31, 2024. Loan growth was led by increases in the CRE, residential mortgage, construction and commercial and industrial loan (“C&I”) portfolios, partially offset by curtailment payments within the Other loan segment and a decline in the other consumer portfolio.
The available-for-sale securities portfolio decreased $26.8 million during 2025 and represented 14.3% of total assets at December 31, 2025, compared to 15.4% of total assets at December 31, 2024. The decrease was primarily attributable to security sales, normal paydowns, amortization, and calls partially offset by new securities purchases and an improvement in unrealized losses during the year. Refer to the “Securities” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.
During the year ended December 31, 2025, the Company initiated $27.4 million in 1035 exchanges of BOLI to transfer proceeds to new insurance carriers and take advantage of enhanced credit ratings and improved yields resulting from favorable BOLI market conditions. The exchange allowed the Company to retire lower-yielding BOLI assets and reinvest the proceeds into higher yielding BOLI related assets on the balance sheet.
Total deposits increased $57.5 million to $4.2 billion at December 31, 2025 compared to December 31, 2024, which included $55.9 million related to the Branch Purchase completed during the second quarter of 2025. Deposit growth was driven by
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
increases in interest-bearing demand accounts and money market accounts, partially offset by decreases in noninterest-bearing demand accounts, savings accounts and CDs.
FHLB borrowings increased $108.5 million to $178.5 million at December 31, 2025 compared to $70.0 million at December 31, 2024, primarily to support loan growth. The Company had no outstanding federal funds purchased at December 31, 2025 or 2024.
Securities
The following table presents the composition of available-for-sale securities for the periods presented:
(Dollars in Thousands)
$ Change
U.S. Government Agency Securities
Residential Mortgage-Backed Securities
Commercial Mortgage-Backed Securities
Other Commercial Mortgage-Backed Securities
Asset Backed Securities
Collateralized Mortgage Obligations
States and Political Subdivisions
Corporate Notes
Total
The balances and average rates of our available-for-sale securities portfolio are presented below as of December 31:
(Dollars in Thousands)
Balance
Weighted-Average
Yield 1, 2
Balance
Weighted-Average
Yield 1, 2
U.S. Government Agency Securities
Residential Mortgage-Backed Securities
Commercial Mortgage-Backed Securities
Other Commercial Mortgage-Backed Securities
Asset Backed Securities
Collateralized Mortgage Obligations
States and Political Subdivisions
Corporate Notes
Total
1 Weighted-average yields on tax-exempt obligations are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent.
2 Weighted-average yields are calculated by dividing interest income (based on book yield) by the amortized cost basis of securities in each presented security category.
The Company invests in various securities to maintain liquidity satisfy various pledging requirements, enhance net interest income, and support balance sheet diversification and interest rate risk management through oversight by ALCO. Securities are subject to market risk, which could adversely affect the level of liquidity available. All security purchases are governed by the Company’s investment policy, which is approved annually by the Board of Directors and administered by ALCO and the treasury function.
The securities portfolio totaled $691.6 million at December 31, 2025, a net decrease of $26.8 million from December 31, 2024. During the year ended December 31, 2025, the Company purchased $63.7 million of securities and recognized a $28.6 million improvement in unrealized losses driven primarily by favorable movements in intermediate term U.S. Treasury yields. These increases were more than offset by $19.0 million of securities sales and $100.1 million of principal reductions resulting from normal paydowns, maturities, calls and amortization, resulting in the net decline in the securities portfolio during the year. Securities represented 14.3% of total assets at December 31, 2025 compared to 15.4% at December 31, 2024.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
As of December 31, 2025, approximately 36.3% of the securities portfolio consisted of variable rate securities, with approximately 94.9% of the portfolio repricing at least once within the next 12 months. Total gross unrealized gains in the available-for-sale portfolio were $0.4 million at December 31, 2025, offset by $54.2 million of gross unrealized losses, compared to gross unrealized gains of $0.1 million and gross unrealized losses of $82.4 million at December 31, 2024.
Management believes that unrealized losses on debt securities at December 31, 2025 are temporary and primarily attributable to changes in market interest rates since the time of purchase rather than deterioration in credit quality. Approximately 45.1% 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 comprise 33.9% and are largely general obligations and essential purpose revenue bonds, which have historically performed well across economic cycles and are predominantly rated AA and AAA. The Company has the ability and intent to hold these securities to maturity and expects to recover the full amortized cost of these investments. The Company may occasionally sell securities to take advantage of market opportunities or as part of a strategic initiative.
Unrealized losses were 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 year ended December 31, 2025, intermediate term Treasury yields declined, contributing to a reduction in unrealized losses. At December 31, 2025, the five and ten-year U.S. Treasury yields were 3.73% and 4.18%, respectively, compared to 4.38% and 4.58%, respectively, at December 31, 2024. The decline of approximately 65 basis points in the five year yield and 40 basis points in the ten year yield largely explains the improvement in unrealized losses during 2025, with longer duration securities, such as municipal bonds, experiencing the most pronounced valuation changes.
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 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 December 31, 2025 and December 31, 2024, 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 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.
During 2024, the Company purchased $10.0 million of equity securities consisting of an investment in a market-rate, NASDAQ listed mutual fund that invests primarily in high quality fixed income securities, principally government agency obligations. The fund is designed to support community development initiatives throughout the United States, with a primary focus on expanding access to affordable housing for low and moderate income borrowers and renters, including those located in majority-minority census tracts.
Although the fund invests on a national basis, individual bond investments are designated to the Company and aligned with its geographic footprint. The Company’s investment in this mutual fund qualifies for consideration under the Community Reinvestment Act (“CRA”) and supports the Company’s ongoing commitment to community development activities.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table sets forth the maturities of available-for-sale securities at December 31, 2025 and the weighted average yields of such securities.
Available-for-Sale Securities
(Dollars in Thousands)
Maturing
Within One Year
After One But Within
Five Years
After Five But Within
Ten Years
After Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
U.S. Government Agency Securities
Residential Mortgage-Backed Securities 2
Commercial Mortgage-Backed Securities 2
Other Commercial Mortgage-Backed Securities 2
Asset Backed Securities 2
Collateralized Mortgage Obligations 2
States and Political Subdivisions
Corporate Notes
Total
Weighted Average Yield 1, 3
1 Weighted-average yields on tax-exempt obligations are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent.
2 Securities not due at a single maturity date
3 Weighted-average yields are calculated by dividing interest income (based on book yield) by the amortized cost basis of securities in each presented maturity bucket and security category.
At December 31, 2025, the Company held no securities classified as held-to-maturity. If the Company were to designate securities as held-to-maturity in future periods, disclosures would include the weighted average yield by contractual maturity range, as applicable.
At December 31, 2025, approximately 63.7% of the securities portfolio consisted of fixed rate securities and 36.3% consisted of floating rate securities. Although certain floating rate securities have stated maturities exceeding ten years, their interest rates generally reprice on a monthly basis. As a result, the effective duration of these securities is relatively short, generally less than one year, which reduces their sensitivity to changes in interest rates.
Refer to Note 5, Investment Securities, in the Notes to Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K for additional information regarding the Company’s securities portfolio.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Loan Composition
The following table summarizes our loan portfolio as of the periods presented:
December 31,
(Dollars in Thousands)
Commercial
Commercial Real Estate
Commercial and Industrial
Total Commercial Loans
Consumer
Residential Mortgages
Other Consumer
Total Consumer Loans
Construction
Other
Total Portfolio Loans
Loans Held-for-Sale
Total Loans
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,” in this Annual Report on Form 10-K for the year ended December 31, 2025.
Total portfolio loans increased $254.7 million, or 7.0%, to $3.9 billion at December 31, 2025, compared to December 31, 2024. Growth was driven by increased production in the CRE, C&I, residential mortgage, and construction portfolios, partially offset by declines in the Other segment, reflecting $38.0 million of curtailment payments during 2025 and a decrease in the other consumer portfolio.
The Company actively monitors the loan portfolio in light of changing market conditions, borrower performance, and the interest rate environment. At December 31, 2025, the loan portfolio consisted of 24.1% floating rates loans that reprice monthly, 37.5% variable rate loans that reprice at least once during the life of the loan, and 38.4% fixed rate loans.
CRE loans represented 54.5% of total portfolio loans at December 31, 2025, compared to 51.6% at December 31, 2024. 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.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table presents 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:
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
Warehouse
Hospitality
Multifamily
Office
Land
Single Family
Country Club
Long-term Care
Other
Total
December 31, 2024
(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
Warehouse
Hospitality
Multifamily
Office
Land
Single Family
Country Club
Long-term Care
Other
Total
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.
Aggregate commitments to the Company’s top 10 credit relationships totaled $659.7 million, representing 17.0% of gross loans at December 31, 2025, compared to $669.2 million, or 18.5% of gross loans, at December 31, 2024. The Other segment accounted for 32.4% of the top 10 credit relationships at December 31, 2025. During the second quarter of 2023, the Company
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
placed its largest credit relationship, with a current balance of $214.0 million at December 31, 2025, on nonaccrual status, as discussed further below in the “Credit Quality” section of this MD&A.
The following table summarizes the Company’s top 10 credit relationships and the industries represented as of the dates presented:
For the Periods Ending
Dollars in Thousands
Change
2025 % of Gross Loans
2025 % of RBC
1. Hospitality, Agriculture & Energy
2. Multifamily
3. Retail & Office
4. Office & Retail
5. Warehouse
6. Retail
7. Land & Self-Storage
8. Warehouse
9. Long-Term Care
10. Multifamily
Top Ten (10) Relationships
Total Gross Loans
% of Total Gross Loans
Concentration (25% of Risk Based Capital ("RBC"))
Unfunded commitments on lines of credit totaled $643.9 million at December 31, 2025, compared to $620.8 million at December 31, 2024. 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 53.2% at December 31, 2025, compared to 53.8% at December 31, 2024. Utilization of commercial operating lines of credit was 52.8% at December 31, 2025, compared to 53.8% at December 31, 2024.
The following tables present the maturity schedule of portfolio loan types at December 31, 2025:
Maturity
(Dollars in Thousands)
Within
One Year
After One
But Within
Five Years
After
Five But Within 15 Years
After 15 Years
Total
Fixed interest rates
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Portfolio Loans with Fixed Interest Rates
Variable interest rates
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Portfolio Loans with Variable Interest Rates
Total Portfolio Loans
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Refer to Note 6, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to our 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.
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.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Nonperforming assets consist of NPLs and OREO. The following table summarizes nonperforming assets at the dates presented:
(Dollars in Thousands)
December 31, 2025
December 31, 2024
Change
Nonaccrual Loans
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total Nonperforming Loans
Other Real Estate Owned
Total Nonperforming Assets
Nonperforming Loans to Total Portfolio Loans
Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned
At December 31, 2025, total nonperforming assets decreased $15.9 million to $244.1 million compared to December 31, 2024. The decrease was primarily driven by a $15.4 million reduction in nonaccrual loans primarily within the Company’s Other segment, residential mortgages and C&I portfolios. The reduction in the Other segment was largely attributable to $38.0 million of curtailment payments received during 2025 related to the Company’s largest nonperforming credit relationship.
This decrease was partially offset by the transfer of certain loans to nonaccrual status during the year, including a $9.5 million CRE relationship consisting of four loans placed on nonaccrual status during the first quarter of 2025, a $14.3 million CRE loan placed on nonaccrual status during the third quarter of 2025, and a $0.8 million residential mortgage loan placed on nonaccrual status during the third quarter of 2025. The $14.3 million CRE loan is secured by an office building that experienced government agency tenants vacated during the fourth quarter of 2025. Although the loan was originated at a relatively low loan-to-value ratio, an updated appraisal received in the fourth quarter of 2025 resulted in the establishment of a $1.0 million specific reserve. Management believes the loan remains well-secured based on its net carrying value and continues to closely monitor this loan and other similar CRE credits for changes in valuation and other market impacts.
The $9.5 million CRE relationship placed on nonaccrual status during the first quarter of 2025 is secured by warehouse facilities located in North Carolina. The properties are currently in receivership and are being marketed for sale, with these properties under contract as of December 31, 2025. Based on updated appraisals during the fourth quarter of 2025, a specific reserve on one loan in this relationship was reduced to $0.6 million.
During the second quarter of 2023, the Company placed $301.9 million of commercial loans within the Other segment related to its largest lending relationship on nonaccrual status due to loan maturities and failure to pay in full. These loans remained on nonaccrual status at December 31, 2025 and December 31, 2024 and represented 87.7% of total NPLs and total nonperforming assets at December 31, 2025. Since June 30, 2023, cumulative curtailment payments of $87.9 million made by the Justice Entities to the Bank, have reduced the outstanding principal balance of this relationship from $301.9 million to $214.0 million at December 31, 2025.
The Company believes this credit is well secured based on its net carrying value and has appropriately reserved for expected credit losses with respect to all such loans based on information currently available. However, the Company cannot give any assurance as to the timing or amount of future payments or collections on such loans, the timing of any credit administration or collection efforts, or that the Company will ultimately collect all amounts contractually due. 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.
Based on analyses of the credit relationship and various discounted cash flow (“DCF”) valuation techniques utilized in the alternative modeling, which resulted in specific reserves with respect to these loans of $18.0 million at December 31, 2025, or 8.4% of these loans aggregate principal amount as compared to $30.3 million or 12.0% of these loans aggregate principal amount at December 31, 2024. This decline was driven by the aforementioned curtailments, updated analysis of the credit
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
relationship during the second quarter of 2025 using the DCF model with updated assumptions and inputs regarding the credit relationship, legal risk and related risks.
As the borrowers on these loans operate in the hospitality, agriculture, and energy sectors, this credit relationship is secured by, among other collateral, commercial real estate properties in these sectors including but not limited to top-tier hospitality properties. When evaluating the net carrying value of this credit relationship at December 31, 2025, the Company utilized DCF valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes.
Closed retail bank offices, recorded in OREO on the Consolidated Balance Sheets, had a book value of $0.1 million at December 31, 2025 compared to $0.7 million at December 31, 2024. During the year ended December 31, 2025, the Bank transferred three closed retail branch properties to OREO. This activity was partially offset by the sale of one branch during the second quarter of 2025 and the sale of the remaining two branches during the third quarter of 2025.
The following is an analysis of NPLs by loan portfolio segment for the dates presented, and each segment’s relative contribution to total NPLs:
December 31, 2025
December 31, 2024
(Dollars in Thousands)
Amount
% of NPLs
Amount
% of NPLs
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Balance End of Period
The Company’s legacy underwriting practices placed significant emphasis on loan to value metrics and, in certain cases, did not fully consider borrower income characteristics or the repayment capacity of collateral, particularly for speculative and land based financings. Reliance on collateral value as a primary source of repayment can be adversely affected during real estate cycles. In response, management has actively addressed these legacy credits and implemented enhanced underwriting guardrails that emphasize global borrower cash flows, repayment capability, limits on speculative exposure and transaction size, and the use of sensitivity analysis to determine supportable loan amounts. While these guardrails do not eliminate exposure to credit cycles, management believes they reduce the risk of default.
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.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes past due loans for the dates presented:
(Dollars in Thousands)
December 31, 2025
December 31, 2024
Change
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate
Commercial and Industrial
Total Commercial Loans
Consumer
Residential Mortgages
Other Consumer
Total Consumer Loans
Construction
Other
Total Loans 30 to 89 Days Past Due
There were no portfolio loans past due more than 90 days and still accruing at December 31, 2025 or December 31, 2024. Loans past due 30 to 89 days and still accruing decreased by $1.6 million to $3.2 million at December 31, 2025, compared to $4.8 million at December 31, 2024. The decrease was primarily driven by a $2.4 million CRE loan that moved to nonperforming status during the first quarter of 2025, partially offset by a $1.0 million residential mortgage loan that became past due in the third quarter of 2025 and was still 30 days past due at December 31, 2025.
The following tables represent credit exposures by internally assigned risk ratings as of December 31, 2025 and 2024:
December 31, 2025
(Dollars in Thousands)
Commercial Real Estate
Commercial & Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total
Pass
Special Mention
Substandard
Total Portfolio Loans
Performing Loans
Nonaccrual Loans
Total Portfolio Loans
December 31, 2024
(Dollars in Thousands)
Commercial Real Estate
Commercial & Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total
Pass
Special Mention
Substandard
Total Portfolio Loans
Performing Loans
Nonaccrual Loans
Total Portfolio Loans
At December 31, 2025 and December 31, 2024, the Company had no loans classified as doubtful. The levels of special mention and substandard loans at December 31, 2025, compared to December 31, 2024, reflected an increase of $4.6 million in special mention and a decrease of $16.7 million in substandard loans.
Special mention loans increased primarily due to the addition of a $10.8 million CRE office building loan that was downgraded from pass to special mention during the fourth quarter of 2025. This increase was partially offset by the payoff of a $4.4 million construction loan during the second quarter of 2025 and the downgrade of a previously mentioned $2.4 million CRE loan from special mention to substandard in the first quarter of 2025.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Substandard loans decreased primarily due to $38.0 million of curtailment payments, related to the Bank’s largest nonperforming credit relationship, received during the year ended December 31, 2025, and due to the upgrade of a $2.0 million C&I loan to special mention in the first quarter of 2025 and subsequent payoff in the third quarter of 2025. These reductions were partially offset by the downgrade of a $14.3 million CRE loan from pass to substandard in the third quarter of 2025. Also impacting the decline was the downgrade of a single borrower relationship totaling $9.5 million consisting of three CRE loans totaling $7.1 million that were downgraded from pass to substandard, along with a $2.4 million CRE loan that was downgraded from special mention to substandard in the first quarter of 2025.
Refer to Note 7, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to our NPLs and OREO.
Allowance for Credit Losses
The following is the allocation of the ACL balance by segment at December 31 for each of the years presented:
(Dollars in Thousands)
Balance Beginning of Year
(Recovery) Provision for Credit Losses
Charge-offs:
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total Charge-offs
Recoveries:
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total Recoveries
Total Net Charge-offs
Balance End of Year
Net Charge-offs to Average Portfolio Loans
Allowance for Credit Losses to Total Portfolio Loans
The following table presents the net charge-offs by average portfolio loan segments for the years ended December 31:
(Dollars in Thousands)
Commercial Real Estate
Commercial and Industrial
Residential Mortgages
Other Consumer
Construction
Other
Total
Net charge-offs were $0.5 million and $16.4 million for the years ended December 31, 2025 and December 31, 2024. As a percentage of average portfolio loans, net charge-offs were 0.01% for the year ended December 31, 2025, compared to 0.46% for the year ended December 31, 2024. During the year ended December 31, 2024, net loan charge-offs were significantly
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
impacted by the $15.0 million principal charge-off related to the Other segment of the loan portfolio, discussed in more detail above under “(Recovery) Provision for Credit Losses” and “The Company’s Business and Strategy.”
The following is the allocation of the ACL balance by segment as of December 31 for the years presented below:
(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
Commercial & Industrial
Residential Mortgages
Other Consumer
Construction
Other
Balance End of Year
The ACL was $71.5 million, or 1.84%, of total portfolio loans at December 31, 2025 compared to $75.6 million, or 2.09%, of total portfolio loans at December 31, 2024.
The following table summarizes the credit quality ratios and their components as of December 31 for the years presented below:
(Dollars in Thousands)
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses
Total Portfolio Loans
Allowance for Credit Losses to Total Portfolio Loans
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans
Total Portfolio Loans
Nonperforming Loans to Total Portfolio Loans
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses
Nonperforming Loans
Allowance for Credit Losses to Nonperforming Loans
Net Charge-offs to Average Portfolio Loans
Net Charge-offs
Average Total Portfolio Loans
Net Charge-offs to Average Portfolio Loans
The (recovery) provision for credit losses, which includes a (recovery) provision for losses on loans and a (recovery) provision on unfunded commitments, is a (recovery) or charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The (recovery) for credit losses was a (recovery) of $(3.6) million for the year ended December 31, 2025 compared to a (recovery) for credit losses of $(5.0) million for the same period in 2024. The increase compared to the same period in 2024 were primarily driven by higher loan growth in 2025, the establishment of a new reserve of $1.0 million on a CRE loan during the fourth quarter of 2025 due to an updated appraisal, a reserve of $0.6 million on an existing CRE relationship with four loans that are under contract to sell and $12.0 million lower curtailment payments during the year ended December 31, 2025 compared to the same period in 2024. These increases were partially offset by a reduction in the Other segment reserve of $12.2 million, resulting from a lower reserve rate of 8.43% at December 31, 2025 compared to 12.01% at December 31, 2024 and from $38.0 million payments received during 2025.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The (recovery) provision for unfunded commitments decreased $0.2 million for the year ended December 31, 2025 compared to the same period in 2024. The decline was due to decreased unfunded commitments in construction loans in 2025. The reserve for unfunded commitments is largely comprised of unfunded commitments related to real estate construction loans. There are three basic factors that influence the reserve rates associated with unfunded 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, average portfolio life, etc. Refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K 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 affect the weighting. Third, volume changes impact the total reserve calculation.
At December 31, 2025, NPLs decreased $15.4 million since December 31, 2024. NPLs as a percentage of total portfolio loans were 6.29% and 7.15% as of December 31, 2025 and December 31, 2024, respectively.
Refer to Note 7, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to our ACL.
Deposits
The daily average balance of deposits and rates paid on deposits are summarized in the following table for the years ended December 31:
(Dollars in Thousands)
Average Balance
Rate
Average Balance
Rate
Noninterest-Bearing Demand
Interest-Bearing Demand
Money Market
Savings
Certificate of Deposits
Total Interest-Bearing Deposits
Total Average Deposits
Deposits are the Company’s primary source of funding, and management believes the deposit base remains stable with the ability to attract new customers while continuing to diversify deposit composition. Total deposits increased at December 31, 2025, primarily due to $55.9 million of deposits assumed in connection with the Branch Purchase completed during the second quarter of 2025.
For the year ended December 31, 2025, t otal average deposits increased $287.1 million. This increase was driven by growth in average interest-bearing demand deposits of $210.9 million, or 36.1%, average CDs of $120.2 million, or 6.7%, average money market accounts of $29.9 million, or 5.8%. These increases were partially offset by decreases in average savings accounts of $56.4 million, or 14.1%, and average noninterest-bearing demand deposits of $17.5 million, or 2.7%.
The decline in savings accounts primarily reflected customer preferences shifting toward higher-yielding deposit products or the repositioning of funds into transactional deposit accounts.
At December 31, 2025 , noninterest-bearing deposits represented 14.7% of total deposits, compared to 15.3% at December 31, 2024 . CDs comprised 45.2% of total deposits at December 31, 2025 , compared to 46.3% at December 31, 2024. Based on the assumptions used in preparing regulatory call reports, approximately 81.3% of our total deposits of $4.2 billion were insured under standard FDIC insurance coverage limits at December 31, 2025, while approximately 18.7% were uninsured, compared to approximately 81.6% insured and 18.4% uninsured at December 31, 2024.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table presents additional information about our year-end deposits:
(Dollars in Thousands)
Noninterest-Bearing Public Funds Deposits
Interest-Bearing Public Funds Deposits
Total Deposits not Covered by Deposit Insurance 1
Certificates of Deposits not Covered by Deposit Insurance
Deposits for Certain Directors, Executive Officers and their Affiliates
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.
Maturities of CDs over $250,000 or more, excluding brokered deposits, not covered by deposit insurance at December 31, 2025 are summarized as follows:
(Dollars in Thousands)
Amount
Percent
Three Months or Less
Over Three Months Through Six Months
Over Six Months Through Twelve Months
Over Twelve Months
Total
Refer to Note 14, Deposits, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to our deposits.
FHLB Borrowings and Federal Funds Purchased
Information pertaining to FHLB borrowings and federal funds purchased at December 31 are summarized in the table below:
(Dollars in Thousands)
Balance at Period End
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Average Balance during the Period
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Average Interest Rate during the Period
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Maximum Month-end Balance during the Period
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Average Interest Rate at Period End
Federal Home Loan Bank Borrowings
Federal Funds Purchased
Borrowings represent an additional source of liquidity for the Company. FHLB borrowings increased $108.5 million to $178.5 million at December 31, 2025, compared to $70.0 million at December 31, 2024, which were primarily utilized to fund loan growth. The Company had no overnight federal funds purchased outstanding at December 31, 2025, or December 31, 2024.
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 December 31,
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
2025, the Company held $11.7 million of FHLB stock, compared to $6.5 million at December 31, 2024. The increase in FHLB stock was attributable to the higher required level of stock holdings resulting from increased FHLB borrowings.
Dividends recognized on FHLB stock totaled $0.6 million for the year ended December 31, 2025, compared to $1.0 million for the year ended December 31, 2024. 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 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.
Refer to Note 15, Federal Home Loan Bank Borrowings and Federal Funds Purchased, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to our borrowings.
Capital Resources
The following table summarizes ratios for the Company and the Bank at December 31:
Leverage Ratio
Carter Bankshares, Inc.
Carter Bank and Trust
Common Equity Tier 1
Carter Bankshares, Inc.
Carter Bank and Trust
Tier 1 Ratio
Carter Bankshares, Inc.
Carter Bank and Trust
Total Risk-Based Capital Ratio
Carter Bankshares, Inc.
Carter Bank and Trust
Total capital increased to $419.7 million at December 31, 2025, up $35.4 million from December 31, 2024. The increase was primarily driven by net income of $31.4 million and a $22.4 million increase in other comprehensive income related to favorable changes in the fair value of investment securities, partially offset by $20.2 million of common stock repurchases, including the related 1% excise tax, and $1.8 million of restricted stock activity.
The Company and the Bank remained well capitalized at December 31, 2025, exceeding all regulatory capital requirements. The key capital ratios included a leverage ratio of 9.43%, a Common Equity Tier 1 ratio of 10.70%, a Tier 1 ratio of 10.70%, and a Total risk-based capital ratio of 11.95%, 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.
Refer to Note 23, Capital Adequacy, in the Notes to Consolidated Financial Statements in Item 8. of this Annual Report on Form 10-K for additional information related to the Company’s and the Bank’s capital.
Contractual Obligations
In the normal course of business, the Company enters into contractual obligations that represent future cash commitments under agreements with third parties. These obligations exclude contingent contractual liabilities for which the timing or amount of future payments cannot be reasonably estimated. The Company’s contractual obligations include arrangements that may require future cash payments, the expected timing of which is disclosed in the accompanying notes to consolidated financial statements in Item 8. of this Annual Report on Form 10-K as of December 31, 2025 . These obligations primarily include: (i) operating and finance leases ( Note 9, Right-of-Use (“ROU”) Assets and Lease Liabilities); (ii) time deposits with stated maturi ty dates (Note
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
14 – De posits); (iii) Federal Home Loan Bank Borrowings and Federal Funds Purchased ( Note 15); and (iv) commitments to extend credit, standby letters of credit, and purchase obligations (Note 20, Commitments and Contingencies).
Purchase obligations primarily consist of commitments under agreements with the Company’s third-party data processing provider.
Off-Balance Sheet Arrangements
In the normal course of business, the Company provides customers with lines of credit and letters of credit to meet financing needs. The undrawn and unfunded portions of these facilities do not represent outstanding balances and, accordingly are not reflected as loans receivable in the consolidated financial statements. Lines of credit are primarily used to support construction financing commitments and revolving working capital needs of operating companies.
At December 31, 2025 and December 31, 2024 construction-related lines of credit totaled $452.8 million, or 58.7% and $445.3 million, or 53.4%, respectively, of total commitments to extend credit. Construction lines of credit generally include a defined construction end date, at which time the loan is expected to convert to a mini-perm loan. A department independent of the lending function monitors construction commitments of $1.0 million or greater, based on management’s discretion. Lines of credit to operating companies typically include stated maturity dates and may be subject to financial covenants.
The Company issues letters of credit primarily to assure municipalities that construction projects will be completed in accordance with approved plans and specifications. Letters of credit generally include expiration dates, while standby letters of credit automatically renew but typically include annual termination provisions with proper notice. The Company generally charges an annual fee for issuing letters of credit.
These off-balance sheet arrangements expose the Company to credit risk if counterparties fail to meet their contractual obligations, with potential losses generally limited to the contractual amount less any collateral. The Company evaluates this risk using the same credit policies applied to loan underwriting and maintains a reserve for unfunded commitments. Because letters of credit are expected to expire without being drawn, they do not necessarily represent future cash requirements. Due to the short-term nature of these arrangements and the credit quality of counterparties, the Company has not estimated the fair value of these off-balance sheet commitments.
The following table sets forth the commitments and letters of credit as of December 31:
(Dollars in Thousands)
Commitments to Extend Credit
Standby Letters of Credit
Total
For more details, see Note 20, Commitments and Contingencies, in Item 8. of this Annual Report on Form 10-K.
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. These include
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
borrowing capacity with the FHLB of up to approximately 30% of the Company’s total assets, or $1.5 billion, subject to eligible collateral, of which $609.4 million remained available at December 31, 2025. The Company also maintains unsecured borrowing facilities with three correspondent banks totaling $30.0 million and a fully secured facility with one other correspondent bank totaling $45.0 million. There were no outstanding borrowings under these facilities at December 31, 2025. The Company also had access to the institutional CD and brokered deposit markets.
Additional liquidity can be provided by $402.2 million of unpledged available-for-sale investment securities at fair value at December 31, 2025. Refer to the Liquidity Sources table below for further detail regarding FHLB borrowing capacity and correspondent bank lines of credit.
As of December 31, 2025, approximately 81.3% of total deposits were insured under standard FDIC coverage limits, while 18.7% 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 December 31, 2025, the Bank had $470.7 million of highly liquid assets, consisting of $68.2 million in excess reserves at the Federal Reserve and interest-bearing deposits at other financial institutions, $0.3 million of loans held-for-sale, and $402.2 million of unpledged securities. This resulted in highly liquid assets to total assets ratio of 9.7%. Total available liquidity relative to uninsured deposits was 155.7% at December 31, 2025.
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.
The following table provides detail of liquidity sources as of December 31:
(Dollars in Thousands)
Cash and Due From Banks, including Interest-bearing Deposits
Unpledged Investment Securities
Excess Pledged Securities
FHLB Borrowing Availability
Collateralized Lines of Credit
Unsecured Lines of Credit Availability
Total Liquidity Sources
The following table provides total liquidity sources and ratios as of December 31:
(Dollars in Thousands)
Total Liquidity Sources
Highly Liquid Assets 1 to Total Assets
Highly Liquid Assets 1 to Uninsured Deposits
Total Available Liquidity to Uninsured Deposits
1 Highly liquid assets consist of $68.2 million in Federal Reserve Board excess reserves and interest-bearing deposits in other financial institutions, loans held for sale of $0.3 million and $402.2 million in unpledged securities.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Inflation
Management recognizes that inflation can have a significant impact on interest rates and overall financial performance. The Company’s financial strength is measured by its ability to adapt to changes in interest rates and to effectively manage noninterest income and expense. Through its ALCO, the Company actively monitors the mix of interest-rate sensitive assets and liabilities to mitigate the effects of inflation-driven rate changes on net interest income.
The Company manages inflationary pressures by adjusting product and service pricing, introducing new products and services and controlling overhead costs. Unlike most industrial companies, financial institutions primarily hold monetary assets and liabilities; therefore, interest rate movement, rather that general inflation levels, are the more significant driver of financial performance.
Stock Repurchase Plan
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.
During the year ended December 31, 2025, the Company repurchased 1,124,690 shares of its common stock at a total cost of $20.0 million at a weighted average cost per share of $17.78. The 2025 Program was fully utilized on October 30, 2025.
On February 2, 2026, the Company announced that the 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 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.
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CARTER BANKSHARES, INC. AND SUBSIDIARIES
