Carter Bankshares, Inc.

Company Overview

Business Model: Carter Bankshares, Inc. is a financial holding company that conducts its business solely through its wholly owned subsidiary, Carter Bank & Trust. Carter Bank & Trust is a Federal Deposit Insurance Corporation insured, Virginia state-chartered bank. The Company generates revenue primarily from interest on loans and investment securities, and from fees charged for financial services provided to customers. Its principal expenses include interest expense on deposits and borrowings, provision for credit losses, and other operating expenses such as salaries and employee benefits, data processing, FDIC insurance assessments, occupancy costs, and income tax provision. The Company offers a full range of commercial banking, consumer banking, mortgage, and insurance services. Deposit products include noninterest-bearing and interest-bearing checking accounts, savings accounts, retirement accounts, money market accounts, and certificates of deposit. Lending products encompass secured and unsecured commercial loans, commercial real estate loans, construction and acquisition loans, commercial and industrial loans, residential mortgage loans, automobile loans, home improvement loans, education loans, overdraft protection, personal loans, and credit cards. Additionally, the Company provides a full suite of digital banking services, treasury management, and corporate cash management services.

Market Position: The Company operates in a highly competitive and evolving environment for both deposits and loans, primarily across Virginia and North Carolina, with additional presence in South Carolina and Georgia. Key markets include Blacksburg, Charlottesville, Danville, Fredericksburg, Lynchburg, Martinsville, and Roanoke in Virginia, and Charlotte, Greensboro, Mooresville, Raleigh, and Winston-Salem in North Carolina. The Company believes its community banking philosophy and approach to customer relationships provide competitive advantages, particularly against larger national and regional banking institutions. It faces competition from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms, fintech companies, and other non-bank lenders, some of which possess greater financial resources, broader geographic coverage, and a wider range of services.

Recent Strategic Developments: In October 2025, Carter Bankshares, Inc. elected to become a financial holding company, and on November 13, 2025, Carter Bank & Trust became a member of the Federal Reserve System. On May 23, 2025, the Company completed the acquisition of two leased branch facilities and associated deposits in Mooresville, North Carolina and Winston-Salem, North Carolina, from First Reliance Bank, acquiring $55.9 million in deposits and welcoming ten associates. This expansion is part of a strategy to grow its footprint in North Carolina. The Company is executing a multi-year strategic plan to enhance its brand image, focusing on innovating brand experiences and aligning operations with new guiding principles: "To create opportunities for more people and businesses to prosper," supported by core values: "Build Relationships, Earn Trust, and Take Ownership." On October 30, 2024, a new brand identity was unveiled, followed by the renovation of 47 retail branch locations and seven corporate offices, and the launch of new websites in 2025. The Company aims to shift from balance-sheet restructuring to a prudent organic growth strategy, considering opportunistic acquisitions, supported by its strong capital and liquidity positions.

Geographic Footprint: The Company's primary operational regions are Virginia and North Carolina, with 51 branches in Virginia and 13 in North Carolina, totaling 64 branches. Its commercial real estate loan portfolio also has significant exposure in South Carolina, West Virginia, and Georgia.

Financial Performance

Revenue Analysis

Profitability Metrics:

• Gross Margin (Net Interest Margin GAAP): 2.82% (2025) vs 2.57% (2024)
• Operating Margin (Income Before Income Taxes / Total Revenue): 17.2% (2025) vs 13.9% (2024)
• Net Margin (Net Income / Total Revenue): 13.5% (2025) vs 11.1% (2024)

Investment in Growth:

• Capital Expenditures: $8.1 million (2025)
• Strategic Investments:
  • Acquisition of two leased branch facilities and $55.9 million in deposits from First Reliance Bank (2025).
  • Investment of $10.0 million in a market-rate, NASDAQ listed mutual fund supporting community development and affordable housing (2024).
  • Renovation of 47 retail branch locations and seven corporate offices, and launch of new websites (2025).

Business Segment Analysis

The Company operates through a single operating and reporting segment, Community Banking. All financial information is reported on a consolidated basis.

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: $20.0 million (1,124,690 shares) repurchased in 2025, fully utilizing the 2025 program by October 30, 2025.
• Dividend Payments: The Company has not historically paid dividends on its common stock.
• Future Capital Return Commitments: On February 2, 2026, the Board authorized a new repurchase program of up to $10.0 million of common stock over a twelve-month period, commencing February 11, 2026.

Balance Sheet Position:

• Cash and Equivalents: $105.2 million (as of December 31, 2025)
• Total Debt (FHLB Borrowings): $178.5 million (as of December 31, 2025)
• Debt Maturity Profile (FHLB Borrowings as of December 31, 2025):
  • 2026: $138.5 million
  • 2027: $20.0 million
  • 2028: $20.0 million
  • 2029: $0
  • 2030: $0
  • Thereafter: $0

Cash Flow Generation:

• Operating Cash Flow: $39.9 million (2025)

Operational Excellence

Production & Service Model: The Company provides a full range of commercial banking, consumer banking, mortgage, and insurance services through Carter Bank & Trust. This includes diverse deposit products (checking, savings, retirement, money market, CDs) and comprehensive lending products (secured/unsecured commercial, commercial real estate, construction, commercial and industrial, residential mortgage, auto, home improvement, education, overdraft, personal, credit cards). The Bank originates and holds both fixed-rate and variable-rate mortgage loans and offers home equity lines of credit. Digital banking services are a core offering, encompassing online and mobile banking, online account opening, bill payment, electronic statements, mobile deposit, Zelle®, credit monitoring tools, digital wallet access, and MoneyPass® ATM network access. Treasury management and corporate cash management services are available to business customers.

Supply Chain Architecture: Key Suppliers & Partners:

• Third-Party Service Providers: Relies on third-party providers for critical business functions, including technology infrastructure, data processing, payment systems, and its core operating platform.
• External Professionals: Engages external professionals for wellness programming and leverages external partners for recruitment.
• Independent Third-Party: Engages an independent third-party to validate its credit loss model.
• Correspondent Banks: 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.

Facility Network:

• Principal Executive Office: 1300 Kings Mountain Road, Martinsville, Virginia.
• Corporate Administrative Locations: Two additional locations house its operations center and various corporate functions.
• Branches: Operates 64 combined depository locations (51 in Virginia, 13 in North Carolina), with eight branches held under lease contracts.
• Loan Production Offices: Leases three loan production offices.
• Commercial Banking Office: Leases one commercial banking office.
• Other Offices: Leases one office housing various Bank functions.

Operational Metrics:

• Total Employees: 687 full-time associates (as of December 31, 2025).
• Voluntary Separation Turnover Rate: 15.1% (fiscal year 2025).
• Employee Training: Associates complete an average of approximately 15 hours of regulatory and compliance training annually, in addition to role-specific training.
• Line of Credit Utilization: 53.2% (total) and 52.8% (commercial operating lines) at December 31, 2025.

Market Access & Customer Relationships

Go-to-Market Strategy: Distribution Channels:

• Direct Sales: Conducts sales through its network of 64 branches.
• Digital Platforms: Offers a comprehensive suite of digital banking services, including online and mobile banking, online account opening, bill payment, electronic statements, mobile deposit, Zelle®, credit monitoring tools, digital wallet access, and access to the MoneyPass® ATM network.
• Channel Partners: Engages in partnerships for residential mortgage loan originations and sales.

Customer Portfolio: Enterprise Customers:

• Top 10 Credit Relationships: Aggregate commitments totaled $659.7 million, representing 17.0% of gross loans at December 31, 2025.
• Largest Credit Relationship: Loans related to the Justice Entities, operating in the hospitality, agriculture, and energy sectors, had an aggregate principal amount of $214.0 million as of December 31, 2025, representing 5.5% of total portfolio loans and 87.7% of nonperforming assets and nonperforming loans.
• Small and Mid-Sized Businesses: A significant portion of the commercial loan portfolio is directed towards small to medium-sized businesses in its markets.
• Municipalities: The Commercial & Industrial segment includes loans to local and state municipalities.

Geographic Revenue Distribution:

• Primary Markets: Virginia and North Carolina.
• Loan Portfolio Exposure: Significant exposure in the commercial real estate loan portfolio across North Carolina, Virginia, South Carolina, West Virginia, and Georgia.

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics: The Company operates in a highly competitive and constantly evolving financial services industry for both deposits and loans. Competition is influenced by interest rates, branch networks, product offerings, digital capabilities, and institutional reputation. The industry is undergoing continuous technological change, with new technology-driven products and services frequently introduced. Disintermediation, where customers increasingly bypass traditional banking relationships for alternative channels (e.g., brokerage accounts, fintech platforms), is a growing trend.

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors: The Company faces competition from a broad range of financial institutions, including national and regional banks, community banks, savings associations, credit unions, finance companies, mortgage banks, brokerage firms, financial technology companies, and insurance companies. Some of these competitors possess substantially greater financial, operational, and technological resources, broader brand recognition, and more extensive networks.

Emerging Competitive Threats: Fintech companies and other non-bank providers are increasingly offering specialized products, streamlined digital experiences, and rapid innovation, often with fewer regulatory constraints. The trend of customers bypassing traditional banking relationships for alternative digital platforms and non-bank financial products poses an ongoing threat.

Competitive Response Strategy: The Company's strategy includes leveraging its community banking philosophy, expanding its digital product and service offerings, pursuing prudent organic growth and opportunistic acquisitions, and enhancing its brand identity and customer experience. It has also implemented enhanced underwriting guardrails to manage credit risk, focusing on borrower cash flows and transaction size.

Risk Assessment Framework

Strategic & Market Risks

• Market Dynamics: The Company's business is subject to interest rate risk, with fluctuations potentially affecting earnings, cash flow, capital, and credit quality. Elevated or persistent inflation could negatively impact profitability by increasing operating costs and reducing demand. A significant portion of the commercial loan portfolio is secured by real estate (94.4%), exposing the Company to adverse changes in real estate market conditions and broader economic trends. Profitability is highly influenced by economic conditions in its primary markets (Virginia and North Carolina).
• Technology Disruption: Failure to keep pace with rapid technological change could adversely affect competitiveness and require significant investments.
• Customer Concentration: Credit risk is elevated due to relationship exposure to the Company’s largest credit relationship (Justice Entities), which constitutes 87.7% of nonperforming assets and nonperforming loans.
• Investment Securities Value: Changes in market interest rates and other conditions could cause the fair value of available-for-sale investment securities to decline, impacting shareholders' equity and regulatory capital ratios.

Operational & Execution Risks

• Supply Chain Vulnerabilities: Heavy reliance on third-party service providers for critical business functions (technology infrastructure, data processing, payment systems), making operations vulnerable to interruptions or failures by these providers.
• Cybersecurity Threats: The Company's operations are highly dependent on secure information technology systems. It faces risks from cyberattacks, data breaches, and technology failures, which could lead to financial losses, operational disruptions, regulatory scrutiny, and reputational damage.
• Model Risk: The Company uses statistical and quantitative models for decision-making and regulatory compliance. Flawed design, implementation, or use of these models, or inaccurate third-party inputs, could lead to adverse outcomes.
• OREO Management: Real estate lending activities may result in the acquisition of Other Real Estate Owned (OREO), which can increase expenses and negatively impact financial condition due to potential declines in property values and ongoing maintenance costs.
• Talent Acquisition & Retention: The Company's ability to execute its business strategy depends on attracting and retaining experienced personnel, and intense competition for qualified professionals could lead to rising compensation costs.

Financial & Regulatory Risks

• Liquidity Risks: Adverse developments in the financial services industry, including liquidity constraints or defaults by other institutions, could lead to market-wide liquidity disruptions. The Company's liquidity could be adversely affected if it were unable to access short-term funding or monetize liquid assets.
• Deposit Reliance: Dependence on customer deposits for funding. A decline in deposit balances could necessitate higher-cost funding alternatives.
• Wholesale Funding Dependence: Reliance on wholesale funding sources, such as the Federal Home Loan Bank of Atlanta, for contingency needs. Disruptions to these sources could materially affect liquidity.
• Dividend Dependency: The Company relies primarily on dividends from Carter Bank & Trust, which are subject to federal and state regulatory restrictions.
• Allowance for Credit Losses (ACL) Sufficiency: The adequacy of the ACL depends on management's estimation processes and the application of the Current Expected Credit Losses (CECL) methodology, which is sensitive to economic conditions and management assumptions, potentially leading to volatility.
• Extensive Regulation: The Company is subject to comprehensive federal and state regulation and supervision. Changes in laws or regulatory expectations could increase compliance costs, restrict business activities, or alter competitive dynamics.
• Regulatory Capital and Liquidity Requirements: Regulatory requirements could necessitate maintaining higher levels of capital and liquid assets, potentially affecting profitability and business operations.
• Internal Control Effectiveness: Failure to maintain effective internal control over financial reporting and disclosure controls could lead to material misstatements, regulatory scrutiny, and reputational harm.
• Legal Proceedings: The Company is subject to claims, litigation, and other legal proceedings in the ordinary course of business, which could expose it to significant costs and liabilities.
• Risk Management Framework: The Company's enterprise risk management program may not be fully effective in identifying or mitigating all risks.
• Monetary and Fiscal Policies: Earnings and financial condition are significantly influenced by the monetary and fiscal policies of the federal government and its agencies, particularly the Federal Reserve Board.
• ESG Scrutiny: Heightened scrutiny and evolving expectations regarding environmental, social, and governance (ESG) matters may increase costs and expose the Company to additional risks.
• AI Technologies: The development and use of Artificial Intelligence technologies by the Company or its third-party vendors present risks, including inaccurate outputs, biases, and regulatory scrutiny.
• Errors, Omissions, Fraud: The Company is subject to losses due to errors, omissions, or fraud by its associates, clients, counterparties, or other third parties.

Geopolitical & External Risks

• Climate Change: The Company is subject to physical and financial risks associated with climate change and more frequent severe weather events, which could damage real estate collateral, increase delinquency rates, disrupt operations, or lead to changes in customer preferences.

Innovation & Technology Leadership

Research & Development Focus: The Company's R&D focus is on leveraging technology to meet customer needs and enhance operational efficiencies. It continuously updates, enhances, and integrates its systems to support operational requirements, regulatory compliance, and growth initiatives, particularly in expanding mobile and internet-based products and services.

Technology Partnerships: The Company relies on third-party providers for a substantial portion of its technology environment, including core banking systems, data processing, and payment systems, indicating strategic alliances in technology.

Leadership & Governance

Executive Leadership Team

Leadership Continuity: The Company's success is significantly dependent on the leadership, experience, and expertise of its executive officers and other key personnel. Competition for qualified financial services professionals is intense.

Board Composition: The Board of Directors oversees risk management, including cybersecurity risks, and has established specialized committees: the Asset and Liability Committee (ALCO), the Investment / Interest Rate Risk Committee, the Credit Risk Committee, and the Audit Committee. The Audit Committee consists of four independent directors and reviews major financial risk exposures.

Human Capital Strategy

Workforce Composition: As of December 31, 2025, the Company employed 687 full-time associates across its two-state footprint.

Talent Management: Acquisition & Retention: The Company's compensation strategy is designed to attract and retain qualified associates, informed by market-based salary and benefits data. Recruiting efforts leverage multiple external partners. The voluntary separation turnover rate was 15.1% in fiscal year 2025. Employee Value Proposition: Offers a comprehensive benefits package including paid time off, health and wellness benefits, a 401(k) program with employer matching and contributions, flexible spending accounts, employee assistance programs, and restricted stock awards for high-performing associates. Diversity & Development: Emphasizes open communication and shared accountability to foster professional growth. New associates participate in a standardized orientation. Associates complete an average of approximately 15 hours of regulatory and compliance training annually, in addition to role-specific training. Leadership development programs are offered, and associates are encouraged to participate in external training.

Environmental & Social Impact

Social Impact Initiatives: The Company is committed to community development, evidenced by its investment in a market-rate mutual fund that focuses on expanding access to affordable housing for low and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. This investment qualifies for consideration under the Community Reinvestment Act (CRA). The Bank received a "Satisfactory" rating in its most recent CRA examination (October 23, 2023), reflecting its affirmative obligation to meet community credit needs.

Business Cyclicality & Seasonality

Demand Patterns: The Company's profitability is significantly influenced by economic conditions in its service markets. The performance of its loan portfolio, particularly commercial, real estate, and construction loans, is directly affected by economic health. The hospitality portfolio, representing 9.6% of total loans, is highly cyclical and closely tied to business and leisure travel trends, consumer spending, and broader economic conditions.

Planning & Forecasting: The Asset and Liability Committee (ALCO) utilizes an asset liability model (ALM) to forecast earnings simulations, measuring the sensitivity of net interest income to changes in interest rates. This model incorporates assumptions regarding loan growth, prepayment rates, deposit growth rates, deposit product betas, and non-maturity deposit decay rates.

Regulatory Environment & Compliance

Regulatory Framework: Carter Bankshares, Inc. is a financial holding company regulated by the Federal Reserve Board (FRB) and the Virginia Bureau of Financial Institutions (Virginia BFI). Carter Bank & Trust is a Federal Deposit Insurance Corporation (FDIC) insured, Virginia state-chartered bank and a member of the Federal Reserve System, regulated by the FRB (Richmond) and the Virginia BFI. The Company is subject to extensive federal and state laws and regulations governing permissible activities, capital adequacy, liquidity, asset quality, transactions with affiliates, corporate governance, dividend and stock repurchase limitations, consumer protection, anti-money laundering, and reporting obligations. Key regulations include Sections 23A and 23B of the Federal Reserve Act, Basel III capital framework (which the Company and Bank met as "well capitalized" as of December 31, 2025), Community Reinvestment Act (CRA rating of "Satisfactory"), and various consumer protection laws. The Company is exempt from the Volcker Rule.

Trade & Export Controls: The Company is subject to laws and regulations designed to combat money laundering and terrorist financing, including the Bank Secrecy Act and the USA PATRIOT Act. It must also comply with economic and trade sanctions administered and enforced by the Office of Foreign Assets Control (OFAC).

Legal Proceedings: In the normal course of business, the Company is subject to various legal and administrative proceedings. As of December 31, 2025, no material pending or threatened legal proceedings were outstanding other than those occurring in the ordinary course of business. Notably, a federal court lawsuit filed by James C. Justice II and related entities was dismissed with prejudice in Q2 2024, and a lawsuit by GLAS Trust Company, LLC against the Bank was dismissed with prejudice in Q3 2024.

Tax Strategy & Considerations

Tax Profile: The Company's effective tax rate was 21.6% for 2025, compared to 20.6% for 2024. The 2025 rate was higher than the statutory 21% primarily due to taxable gains ($2.4 million) and Modified Endowment Contract (MEC) penalties ($0.2 million) from the surrender of certain Bank Owned Life Insurance policies, partially offset by a tax-exempt BOLI death benefit ($1.9 million). The Company is subject to U.S. federal income tax and various state and local jurisdictions.

Insurance & Risk Transfer

Risk Management Framework: The Company maintains insurance coverage for certain risks, though it acknowledges that coverage may not be sufficient for all claims or types of proceedings. The Asset and Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk.