Executive Summary / Key Takeaways

• Strategic Pivot to Prudent Growth: Carter Bankshares is actively transitioning from balance sheet restructuring to a focused organic growth strategy, complemented by opportunistic acquisitions, particularly in expanding North Carolina markets.
• Robust Net Interest Income Growth: The company demonstrated significant net interest income growth, increasing 17.10% for the three months and 12.80% for the nine months ended September 30, 2025, driven by loan expansion and declining funding costs.
• Managing Legacy Credit Challenges: While a large nonperforming loan relationship continues to impact interest income, management has made progress with curtailment payments and believes the position is well-secured with appropriate reserves.
• Strong Capital and Liquidity Position: Carter Bankshares maintains a "well-capitalized" status, supported by increasing total capital and substantial liquidity sources, providing a solid foundation for its growth initiatives.
• Liability-Sensitive Balance Sheet: The company's balance sheet is positioned to benefit from anticipated Federal Reserve short-term interest rate reductions, offering flexibility to manage future funding costs.

A Regional Powerhouse Forges a New Path

Carter Bankshares, Inc. (NASDAQ:CARE), established in 1974 and headquartered in Martinsville, Virginia, operates as a financial holding company with its wholly-owned subsidiary, Carter Bank & Trust. With 64 branches spanning Virginia and North Carolina, the company offers a comprehensive suite of retail and commercial banking products alongside insurance services. CARE's foundational strength lies in its community-centric approach, fostering deep customer relationships that underpin its deposit base and lending activities.

The company has embarked on a multi-year strategic plan to redefine its brand and market presence. This initiative, which introduced a new purpose statement—"To create opportunities for more people and businesses to prosper"—and core values in June 2023, culminated in a new brand identity unveiled in October 2024. This strategic evolution signals a deliberate shift from a period of balance sheet restructuring towards a prudent growth strategy, emphasizing organic expansion and targeted acquisitions.

Expanding Footprint and Digital Engagement

CARE's strategic expansion is evident in its recent activities, particularly in North Carolina. On May 23, 2025, the company completed the acquisition of two leased branch facilities and approximately $55.90 million in associated deposits in Mooresville and Winston-Salem, North Carolina, from First Reliance Bankshares, Inc. This "Branch Purchase" was a calculated move to deepen its presence in key growth markets. Following this, Carter Bank further expanded its North Carolina footprint with a new Loan Production Office in Gastonia on September 16, 2025, building on recent openings in Winston-Salem and Raleigh. Brad Langs, President and Chief Strategy Officer of Carter Bank, noted that the Gastonia location "highlights our dedication to supporting thriving business communities."

In terms of technological differentiation, Carter Bankshares leverages a modern suite of digital banking services to enhance customer convenience and operational efficiency within its community banking model. These offerings include online and mobile banking, online account opening, bill pay, e-statements, mobile deposit, Zelle, CardValet, digital wallet, MoneyPass, and ATM services. While these are essential tools for contemporary banking, they primarily serve to facilitate its relationship-driven approach rather than representing proprietary, breakthrough technology. The company's investment in data processing, which saw a 21.5% increase for the nine months ended September 30, 2025, reflects its ongoing commitment to maintaining competitive digital capabilities.

Competitive Landscape and Strategic Positioning

In the regional banking sector, Carter Bankshares competes with larger institutions like Truist Financial Corporation (TFC), First Citizens BancShares, Inc. (FCNCA), and Regions Financial Corporation (RF), as well as smaller community banks and indirect competitors such as online banks and fintech companies. CARE's competitive advantage is rooted in its strong community presence and personalized service model. This localized approach fosters significant customer loyalty, which can translate into stable deposit funding and strong relationships, potentially allowing for more favorable lending terms in its core markets.

Compared to larger rivals like Truist, which benefits from greater scale and advanced technological integration, CARE differentiates itself through tailored services and direct engagement. While Truist may offer a smoother digital experience due to its extensive investments, CARE's focus on local expertise appeals to customers seeking personalized advice. Similarly, against First Citizens BancShares, known for its commercial banking and wealth management, CARE's localized branch network provides greater accessibility for regional customers. Regions Financial, with its broad southern U.S. operations, also leverages scale for wider service delivery, potentially offering faster digital transactions. CARE's strength lies in its operational execution within its core regions, though it may lag larger competitors in overall growth trajectory and innovation speed due to resource disparities.

Financially, CARE's Net Profit Margin (TTM) of 13.71% is competitive within the regional banking space. Its Price-to-Earnings (P/E) ratio of 12.49 and Price-to-Book (P/B) ratio of 0.94 suggest a potentially attractive valuation compared to some peers. For instance, TFC's P/E ratio is 11.93, FCNCA's is 10.40, and RF's is 10.84, while their P/B ratios are 0.89, 1.07, and 1.17, respectively. This indicates CARE is trading at a slight premium on P/E but a discount on P/B compared to some of its larger, more diversified competitors. The company's smaller scale, however, can lead to higher operational costs and potentially impact profitability margins and cash flow generation compared to these larger, more efficient institutions.

Financial Performance and Operational Resilience

Carter Bankshares reported a net income of $5.419 million, or $0.24 diluted earnings per share, for the third quarter of 2025, and $22.882 million, or $1.00 diluted earnings per share, for the nine months ended September 30, 2025. This compares to net income of $5.629 million, or $0.24 diluted EPS, and $16.243 million, or $0.70 diluted EPS, for the corresponding periods in 2024.

Net interest income, a primary revenue driver, increased by $4.90 million, or 17.10%, to $33.70 million for the three months ended September 30, 2025, and by $10.90 million, or 12.80%, to $96.20 million for the nine months ended September 30, 2025, compared to the same periods in 2024. This growth was largely fueled by a decrease in funding costs—45 and 28 basis points for the three and nine months, respectively—benefiting from Federal Reserve short-term interest rate reductions. During the nine months ended September 30, 2025, $1.40 billion of Certificates of Deposit (CDs) matured and repriced from an average rate of 4.22% to 3.50%, further contributing to lower interest expenses. Average loan growth of $228.80 million and $191.20 million for the three and nine months, respectively, also significantly boosted interest and dividend income.

Total portfolio loans expanded by $210.80 million, representing an annualized growth rate of 7.80%, from December 31, 2024, to September 30, 2025. This growth was observed across Commercial Real Estate (CRE), residential mortgage, construction, and other consumer portfolios. Total deposits also saw an increase of $56.90 million, including $55.90 million from the recent branch acquisition.

Noninterest income experienced a slight decrease of $0.10 million for the three months ended September 30, 2025, but increased by $1.20 million, or 7.40%, for the nine-month period. This nine-month increase was primarily driven by a $1.90 million gain on a Bank Owned Life Insurance (BOLI) death benefit recorded in the first quarter of 2025. Noninterest expenses rose by $1.30 million and $4.90 million for the three and nine months, respectively, due to higher professional and legal fees associated with the branch acquisition, increased occupancy expenses, and other noninterest expenses related to Other Real Estate Owned (OREO) properties and BOLI exchange fees. Notably, salary and employee benefits decreased due to higher salary cost deferrals linked to increased loan growth.

Liquidity and Capital Strength

Carter Bankshares maintains a robust liquidity and capital position. As of September 30, 2025, total assets stood at $4.84 billion. The company's primary funding source is a stable customer deposit base, which management believes it can retain and grow. Additional liquidity is available through $544 million in Federal Home Loan Bank (FHLB) borrowing capacity, $30 million in unsecured facilities with correspondent banks, and a $45 million fully secured facility, none of which were utilized as of September 30, 2025. Furthermore, $416.10 million in unpledged available-for-sale investment securities provide an additional liquidity buffer. The Bank's highly liquid assets to total assets ratio was 9.90%, and total available liquidity to uninsured deposits was 157.10% at September 30, 2025.

The company and its subsidiary bank remain "well-capitalized" under regulatory frameworks. Total capital increased by $28.50 million to $412.80 million at September 30, 2025, driven by net income and an $18.50 million increase in other comprehensive income from positive changes in the fair value of investment securities, partially offset by common stock repurchases totaling $14.20 million. The Bank's Tier 1 capital ratio of 10.46% and leverage ratio of 9.24% significantly exceed the regulatory "well-capitalized" guidelines of 8% and 5%, respectively.

Outlook and Key Risks

Carter Bankshares expresses optimism regarding its growth prospects, citing a healthy loan pipeline and anticipated tailwinds from construction lending expected to materialize over the next 12 to 18 months. The company's liability-sensitive balance sheet is strategically positioned to benefit from further Federal Reserve short-term interest rate reductions, offering flexibility in managing future funding costs. The recent approval for Carter Bank to become a state member bank regulated by the Federal Reserve Bank of Richmond further solidifies its regulatory standing.

However, the investment thesis is not without risks. The company's financial results continue to be significantly impacted by a single large credit relationship, with an aggregate principal balance of $228.60 million as of September 30, 2025, that remains on nonaccrual status. This relationship accounts for a substantial 88.40% of total nonperforming loans and 88.30% of total nonperforming assets. While management believes it is well-secured and has appropriately reserved for expected credit losses, the timing and amount of future payments or collections remain uncertain.

Concentration risk in Commercial Real Estate (CRE) loans is also notable, with the portfolio geographically concentrated in North Carolina, Virginia, South Carolina, West Virginia, and Georgia, and within specific industries such as retail/restaurant, warehouse, hospitality, multifamily, and office. The recent placement of a $14.60 million CRE loan in the office sector on nonaccrual status due to tenant vacancies highlights the ongoing need for close monitoring of this segment. Furthermore, potential supply chain disruptions and commodity price volatility present additional risks to the loan portfolio.

Conclusion

Carter Bankshares is strategically repositioning itself for prudent growth, leveraging its strong community banking model and expanding its footprint in attractive regional markets. The company's recent financial performance, marked by robust net interest income growth and effective management of funding costs, underscores its operational resilience in a dynamic interest rate environment. While the ongoing challenge of a large nonperforming loan relationship requires continued vigilance, management's proactive approach to reserves and collection efforts, coupled with a solid capital and liquidity foundation, provides a degree of confidence.

The company's commitment to enhancing its brand and digital offerings, alongside its disciplined underwriting standards, forms a cohesive strategy to drive future profitability. CARE's liability-sensitive balance sheet positions it favorably for anticipated rate reductions, offering a potential tailwind for net interest income. For discerning investors, Carter Bankshares represents a regional banking opportunity with a clear strategic direction, sound fundamentals, and the potential for value creation as it executes its growth initiatives and resolves legacy credit challenges.