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 is provided as a supplement to, and should be read in conjunction with, The Company’s Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:
•Important Note Regarding Forward-Looking Statements
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Estimates
•Overview and Strategy
•Results of Operations and Financial Condition
◦Earnings Summary
◦Financial Condition
◦Liquidity and Capital Resources
◦Contractual Obligations
◦Off-Balance Sheet Arrangements
This section reviews the Company’s financial condition and results of operations and highlights material changes in its financial condition and results of operations as of and for the three and six month periods ended June 30, 2026 and June 30, 2025. 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.
Important Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include statements relating to the financial consequences of the Loan Sale Transaction, Insurance Transaction and Portfolio Repositioning, including the expected enhancement of future earnings, asset yields, and net interest income from the Portfolio Repositioning, our expansion in the Carolinas and the anticipated results of such expansion, our financial condition, market conditions, results of operations, plans, including our strategic plan, brand strategy, and guiding principles and the anticipated results of the foregoing, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, loan pipeline and nonaccrual and nonperforming loans (“NPL”). Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.
These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company’s control. Although the Company believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Actual results may differ significantly from those expressed in or implied by these forward-looking statements. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of:
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•market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s net interest margin, net interest income, funding costs and its deposit, loan and securities portfolios;
•inflation, market and monetary fluctuations;
•changes in trade policies, tariffs, monetary and fiscal policies and laws of the U.S. government and the related impacts on economic conditions and financial markets, and changes in policies of the Federal Reserve, FDIC and U.S. Department of the Treasury;
•changes in accounting policies, practices, or guidance, for example, our adoption of Current Expected Credit Losses (“CECL”) methodology, including potential volatility in the Company’s operating results due to application of the CECL methodology;
•cyber-security threats, attacks or events;
•rapid technological developments and changes, including emerging issues related to the development and use of artificial intelligence that could give rise to legal or regulatory action or increase cybersecurity threats;
•our ability to resolve our nonperforming assets and our ability to secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full;
•changes in the Company’s liquidity and capital positions;
•concentrations of loans secured by real estate, particularly commercial real estate loans, and the potential impacts of changes in market conditions on the value of real estate collateral;
•increased delinquency and foreclosure rates on commercial real estate loans;
•an insufficient allowance for credit losses;
•the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other geopolitical conflicts or public health events (such as pandemics), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on macroeconomic conditions; the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;
•a change in spreads on interest-earning assets and interest-bearing liabilities;
•regulatory supervision and oversight, including our relationship with regulators and any actions that may be initiated by our regulators;
•legislation affecting the financial services industry as a whole, and the Company and the Bank, in particular and changes impacting the rulemaking, supervision, examination and enforcement priorities of the federal banking agencies;
•the outcome of pending and future litigation and/or governmental proceedings;
•increasing price and product/service competition;
•the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;
•managing our internal growth and acquisitions;
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•the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating acquired operations will be more difficult, disruptive or more costly than anticipated;
•the soundness of other financial institutions and any indirect exposure related to large bank failures and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with those failed banks may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;
•material increases in costs and expenses;
•reliance on significant customer relationships;
•general economic or business conditions, including unemployment levels, supply chain disruptions, slowdowns in economic growth, government shutdowns and geopolitical instability and tensions;
•significant weakening of the local economies in which the Company operates;
•changes in customer behaviors, including consumer spending, borrowing and saving habits;
•changes in deposit flows and loan demand;
•our failure to attract or retain key associates;
•expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch acquisitions or the Company’s branch network optimization project are not fully realized in a timely manner or at all;
•deterioration of the housing market and reduced demand for mortgages; and
•turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.
Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, and any of the Company’s subsequent filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Company cautions you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and the Company undertakes no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made, except as required by law.
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 quarterly 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. These non-GAAP measures should be read along with the accompanying tables that provide reconciliations of GAAP to non-GAAP financial measures.
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
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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.
These reconciliations are provided in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.
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 Company’s critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2026 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in its Annual Report on Form 10-K for the year ended December 31, 2025 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.
Overview and Strategy
Carter Bankshares, Inc. (the “Company”) is a financial holding company, as of October 27, 2025, headquartered in Martinsville, Virginia with assets of $4.8 billion at June 30, 2026. 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 63 branches in Virginia and North Carolina. The Bank became a member of the Federal Reserve System on November 13, 2025. The Company provides a full range of commercial banking, consumer banking, mortgage and other services through the Bank. 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 (the “Branch Purchase”). In connection with the Branch Purchase, the Bank acquired $55.9 million in deposits, along with cash and premises and equipment 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 or recovery for credit losses, compensation and benefits, occupancy and equipment, technology and data processing, regulatory assessments, and other operating expenses.
As part of its three-year strategic plan, the Company is working to elevate brand awareness by leveraging its core strengths: exceptional service and lasting customer relationships. We believe these core strengths set the Company apart in a competitive
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
landscape. The multi-year initiative aims for sustainable growth through innovation, operational excellence, and a continual focus on customer experience. A key strategy is expanding consumer and business banking to meet customers’ evolving needs. Recent milestones include comprehensive rebranding, new product and service launches, modernization of locations, and upgrades to digital platforms, which we believe have led to deeper customer engagement and increased community impact. The Company’s brand identity remains rooted in customers, associates, and communities, reflecting the Company’s dedication to delivering superior value and lasting success.
The Company’s goal is to shift from balance-sheet restructuring to a prudent growth strategy when appropriate. We anticipate this strategy will primarily focus on organic growth, but the Company will also consider opportunistic acquisitions that align with this strategy. We believe the Bank’s strong capital and liquidity positions support this approach. The Company will seek to grow loans and deposits and increase fee income. At the same time, it will closely monitor operating expenses.
The Company is executing this strategy to support its brand and grow its business in its current markets. It will also apply this approach when entering new markets.
Following the successful Loan Sale Transaction during the first quarter of 2026, the Company entered the second quarter with enhanced liquidity and a substantially improved risk profile. During the second quarter of 2026, the Company completed the sale of its membership interest in Bearing Insurance Group, LLC (the “Insurance Transaction”) to an unaffiliated third party and used a portion of the proceeds from the Insurance Transaction to execute a strategic repositioning of a portion of its available-for-sale investment securities portfolio (the “Portfolio Repositioning”).
During the second quarter of 2026, the Company expanded its presence in the Carolinas by opening a loan production office in Greenville, South Carolina, its first physical location in the state. The office supports the Company’s strategic growth initiative by providing commercial banking services to businesses throughout the Upstate South Carolina region and reflects managements’ continued focus on expanding its commercial banking franchise in attractive growth markets.
Three strategic milestones during the first half of 2026:
Credit Risk Transformation
On March 26, 2026, the Bank completed the Loan Sale Transaction of all loans subsequently reduced to judgments related to various entities in which James C. Justice, II has an interest (such loans, subsequently reduced to judgments, the “Judgments”). The Loan Sale Transaction was completed as an absolute, “as-is, where-is” sale to an unaffiliated third party.
The Company received consideration of $289.5 million in cash in the Loan Sale Transaction. Immediately prior to the Loan Sale Transaction, the Judgments had an outstanding aggregate principal amount of $209.5 million, all of the Judgments were nonperforming and on nonaccrual status, and the Company had recorded a specific reserve with respect to the Judgments of $18.0 million as of December 31, 2025. Management’s continued focus on the resolution of this relationship has improved overall asset quality, reduced credit concentration risk and helped to optimize capital and liquidity.
Loan Sale Transaction Summary
•Received consideration of $289.5 million in cash in the Loan Sale Transaction, during the first quarter of 2026;
•Recognized a net gain on the Loan Sale Transaction of $80.0 million, comprised of:
◦$65.0 million gain on the Loan Sale Transaction; and
◦$15.0 million net recovery;
•Released $18.0 million of specific reserves related to the Judgments;
•The Loan Sale Transaction was accretive to diluted earnings per share by $3.50 for the first quarter of 2026; and
•The Loan Sale Transaction increased book value per share by $3.49 for the first quarter of 2026.
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Balance Sheet Optimization
On May 1, 2026, the Company announced that it had completed the Insurance Transaction to an unaffiliated third party, effective May 1, 2026. The Company recognized a pre-tax gain of $35.9 million on the Insurance Transaction, which was recognized by the Company in its financial results for the second quarter of 2026.
Insurance Transaction Summary
•Recognized a net gain (pre-tax) from the Insurance Transaction of $35.9 million;
•The Insurance Transaction was accretive to diluted earnings per share by $1.30 for the quarter; and
•The Insurance Transaction increased tangible book value per share by $1.28.
As a result of the successful completion of the Insurance Transaction and the Loan Sale Transaction during the second and first quarters of 2026, respectively, the Company generated approximately $100.9 million of aggregate nonrecurring gains during the first six months of 2026. These gains afforded an opportunity to optimize the Company’s balance sheet, improve future earnings potential and enhance interest rate risk positioning. As part of this process, the Company completed a strategic Portfolio Repositioning, which is discussed below, during the second quarter of 2026, resulting in a pre-tax loss of $12.5 million. The Portfolio Repositioning is expected to enhance future earnings performance through improved asset yields and balance sheet positioning.
Positioning for Future Earnings Growth
In the Portfolio Repositioning, the Company sold $139.4 million in book value of securities available-for-sale with a weighted average yield of 2.28% and representing approximately 18.7% of the Company’s securities portfolio, and purchased approximately $88.5 million of securities available-for-sale with a weighted average yield of approximately 5.27%. All of the securities purchased were rated AAA or AA by a recognized credit rating agency. The Company expects to use the remaining proceeds from the Portfolio Repositioning to fund organic loan growth during the remainder of 2026.
Results of Operations and Financial Condition
Earnings Summary
Highlights for the Three Months Ended June 30, 2026
•Net interest income totaled $40.0 million, an increase of $7.6 million, or 23.5% compared to the same period in 2025, despite approximately $132.6 million in commercial real estate loan payoffs during the second quarter of 2026;
•Net interest margin, increased 58 basis points to 3.38%, compared to 2.80% for the same period in 2025;
•The provision for credit losses was $2.0 million, compared to a recovery for credit losses of $2.3 million for the same period in 2025;
•Total noninterest income increased $23.8 million to $28.7 million compared to the same period in 2025 primarily due to the net gain recognized from the Insurance Transaction, during the second quarter of 2026, partially offset by the $12.5 million of losses on sales of securities recognized in connection with the Portfolio Repositioning during the second quarter of 2026;
•Total noninterest expense increased $0.7 million to $30.0 million compared to the same period in 2025; and
•Income tax provision increased $6.2 million to $8.3 million compared to $2.1 million for the same period in 2025.
Highlights for the Six Months Ended June 30, 2026
◦Net interest income totaled $75.9 million, an increase of $13.4 million, or 21.4% compared to the same period in 2025;
◦Net interest margin, increased 49 basis points to 3.23%, compared to 2.74% for the same period in 2025;
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◦The recovery for credit losses was $31.9 million, compared to a recovery for credit losses of $4.4 million for the same period in 2025;
◦Total noninterest income increased $87.9 million to $99.7 million compared to the same period in 2025 primarily attributable to the $65.0 million gain from the Loan Sale Transaction during the first quarter of 2026 and the $35.9 million net gain recognized from the Insurance Transaction during the second quarter of 2026, partially offset by the $12.5 million of losses on sales of securities recognized in connection with the Portfolio Repositioning during the second quarter of 2026;
◦Total noninterest expense increased $3.7 million to $61.0 million compared to the same period in 2025; and
◦Income tax provision increased $28.3 million to $32.6 million compared to $4.3 million for the same period in 2025.
Balance Sheet Highlights (period-end balances, June 30, 2026 compared to December 31, 2025)
•The available-for-sale securities portfolio decreased $51.3 million and is currently 13.3% of total assets compared to 14.3% of total assets;
•Total portfolio loans decreased $145.0 million primarily due to the Loan Sale Transaction in the first quarter of 2026, partially offset by net loan growth during the first half of the year;
•The portfolio loans to deposit ratio was 89.0%, compared to 92.1%;
•Nonperforming loans (“NPLs”) decreased by $206.4 million to $37.6 million compared to $244.0 million due to the Loan Sale Transaction and NPLs to total portfolio loans were 1.01% compared to 6.29%;
•The allowance for credit losses to total portfolio loans was 1.48%, compared to 1.84%, primarily reflecting the reversal of specific reserves of $18.0 million related to the Judgments;
•Total deposits decreased $13.3 million, or 0.64%, on an annualized basis, to $4.2 billion, compared to December 31, 2025; and
•FHLB borrowings decreased $178.5 million, reflecting the repayment of borrowings utilizing proceeds from the Loan Sale Transaction.
The Company reported net income of $28.9 million, or $1.31 diluted earnings per share, and $114.7 million, or $5.18 diluted earnings per share for the three and six months ended June 30, 2026, respectively, compared to net income of $8.5 million, or $0.37 diluted earnings per share, and $17.5 million, or $0.76 diluted earnings per share, for the three and six months ended June 30, 2025, respectively.
Three Months Ended June 30, Six Months Ended June 30,
PERFORMANCE RATIOS 2026 2025 2026 2025
Return on Average Assets 2.39 % 0.72 % 4.75 % 0.75 %
Return on Average Shareholders' Equity 22.01 % 8.45 % 48.08 % 8.85 %
Portfolio Loans to Deposit Ratio 88.97 % 88.75 % 88.97 % 88.75 %
Allowance for Credit Losses to Total Portfolio Loans 1.48 % 1.90 % 1.48 % 1.90 %
Nonperforming Loans to Total Portfolio Loans 1.01 % 6.69 % 1.01 % 6.69 %
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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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.
Interest and dividend income, yield on interest-earning assets, 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.
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) Three Months Ended June 30, Six Months Ended June 30,
2026 2025 2026 2025
Interest and Dividend Income (GAAP) $ 61,491 $ 57,747 $ 120,676 $ 113,754
Tax Equivalent Adjustment 237 171 391 349
Interest and Dividend Income (FTE) (Non-GAAP) $ 61,728 $ 57,918 $ 121,067 $ 114,103
Average Earning Assets 4,736,054 4,634,635 $ 4,742,159 $ 4,594,591
Yield on Interest-earning Assets (GAAP) 5.21 % 5.00 % 5.13 % 4.99 %
Yield on Interest-earning Assets (FTE) (Non-GAAP) 5.23 % 5.01 % 5.15 % 5.01 %
Net Interest Income (GAAP) $ 39,950 $ 32,359 $ 75,884 $ 62,497
Tax Equivalent Adjustment 237 171 391 349
Net Interest Income (FTE) (Non-GAAP) $ 40,187 $ 32,530 $ 76,275 $ 62,846
Average Earning Assets 4,736,054 4,634,635 $ 4,742,159 $ 4,594,591
Net Interest Margin (GAAP) 3.38 % 2.80 % 3.23 % 2.74 %
Net Interest Margin (FTE) (Non-GAAP) 3.40 % 2.82 % 3.24 % 2.76 %
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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 periods presented:
(Dollars in Thousands) Three Months Ended June 30, 2026 Three Months Ended June 30, 2025
Average Balance Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate
ASSETS
Interest-Bearing Deposits with Banks $ 291,575 $ 2,712 3.73 % $ 58,006 $ 643 4.45 %
Tax-Free Investment Securities2 37,890 488 5.17 % 11,622 85 2.93 %
Taxable Investment Securities 671,139 5,323 3.18 % 818,588 6,796 3.33 %
Total Securities 709,029 5,811 3.29 % 830,210 6,881 3.32 %
Commercial Real Estate 2,155,650 31,936 5.94 % 1,986,702 30,522 6.16 %
Commercial & Industrial2 251,682 3,769 6.01 % 204,287 3,404 6.68 %
Residential Mortgage 820,831 8,739 4.27 % 811,414 8,581 4.24 %
Other Consumer 25,246 285 4.53 % 27,883 389 5.60 %
Construction 473,565 8,348 7.07 % 429,511 7,358 6.87 %
Other — — — % 278,194 — — %
Total Loans1 3,726,974 53,077 5.71 % 3,737,991 50,254 5.39 %
Other Restricted Stock, at Cost 8,476 128 6.06 % 8,428 140 6.66 %
Total Interest-Earning Assets 4,736,054 $ 61,728 5.23 % 4,634,635 $ 57,918 5.01 %
Noninterest Earning Assets 120,968 126,303
Total Assets $ 4,857,022 $ 4,760,938
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand $ 900,160 $ 3,400 1.51 % $ 805,749 $ 3,661 1.82 %
Money Market 511,221 2,522 1.98 % 536,366 3,510 2.62 %
Savings 325,283 130 0.16 % 347,863 129 0.15 %
Certificates of Deposit 1,872,499 15,350 3.29 % 1,885,486 16,759 3.57 %
Total Interest-Bearing Deposits 3,609,163 21,402 2.38 % 3,575,464 24,059 2.70 %
FHLB Borrowings — — — % 108,753 1,186 4.37 %
Other Borrowings 10,775 139 5.17 % 10,713 143 5.35 %
Total Borrowings 10,775 139 5.17 % 119,466 1,329 4.46 %
Total Interest-Bearing Liabilities 3,619,938 21,541 2.39 % 3,694,930 25,388 2.76 %
Noninterest-Bearing Liabilities 710,174 662,168
Shareholders' Equity 526,910 403,840
Total Liabilities and Shareholders' Equity $ 4,857,022 $ 4,760,938
Net Interest Income2 $ 40,187 $ 32,530
Net Interest Margin2 3.40 % 2.82 %
Net Interest Spread 2.84 % 2.25 %
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%.
Net interest income for the three months ended June 30, 2026 increased $7.6 million, or 23.5%, to $40.0 million, compared to $32.4 million for the same period in 2025. On a fully taxable equivalent (“FTE”) basis (non-GAAP), net interest income increased $7.7 million, or 23.5%, to $40.2 million, compared to $32.5 million for the second quarter of 2025.
The increase was primarily attributable to higher average interest-earning assets, led by growth in the commercial real estate, commercial and industrial, construction, and residential mortgage loan portfolios, as well as a reduction in the average costs of interest-bearing liabilities. The average yield on total interest-earning assets increased 22 basis points to 5.23% from 5.01% primarily as a result of the redeployment of funds from the Loan Sale Transaction, while the average cost of total interest-bearing liabilities declined 37 basis points to 2.39% from 2.76%, primarily due to continued reductions in funding costs, as well as stabilization in deposit pricing, partially reflecting the broader interest rate environment, resulting in expansion of the net interest margin to 3.40%, compared to 2.82% for the second quarter of 2025.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average loan balances decreased compared to the prior-year quarter, as a result of the Loan Sale Transaction, and the average yield on total loans improved to 5.71% from 5.39%, reflecting higher market interest rates on new originations and portfolio mix. While average security balances declined from the prior-year period, the Company’s strategic balance sheet initiatives, including the second quarter Portfolio Repositioning of a portion of the available-for-sale securities portfolio into higher-yielding investments, are expected to enhance future interest income. In addition, interest-bearing deposits with banks increased from the prior-year period due to elevated liquidity following the Company’s strategic transactions completed during the first half of 2026.
Funding costs continued to improve during the quarter as the average costs of interest-bearing liabilities declined to 2.39% from 2.76%, and the Company eliminated FHLB borrowings outstanding compared to the prior-year quarter, further reducing interest expense.
(Dollars in Thousands) Six Months Ended June 30, 2026 Six Months Ended June 30, 2025
Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate
ASSETS
Interest-Bearing Deposits with Banks $ 184,375 $ 3,405 3.72 % $ 62,670 $ 1,391 4.48 %
Tax-Free Investment Securities2 24,769 571 4.65 % 11,642 169 2.93 %
Taxable Investment Securities 702,290 10,905 3.13 % 813,269 13,451 3.34 %
Total Securities 727,059 11,476 3.18 % 824,911 13,620 3.33 %
Commercial Real Estate 2,148,588 63,623 5.97 % 1,941,884 59,702 6.20 %
Commercial & Industrial2 245,345 7,715 6.34 % 205,771 6,624 6.49 %
Residential Mortgage 825,567 17,467 4.27 % 811,584 17,080 4.24 %
Other Consumer 25,882 564 4.39 % 28,104 808 5.80 %
Construction 470,567 16,444 7.05 % 434,919 14,626 6.78 %
Other 102,574 — — % 277,279 — — %
Total Loans1 3,818,523 105,813 5.59 % 3,699,541 98,840 5.39 %
Other Restricted Stock, at Cost 12,202 373 6.16 % 7,469 252 6.80 %
Total Interest-Earning Assets 4,742,159 $ 121,067 5.15 % 4,594,591 $ 114,103 5.01 %
Noninterest Earning Assets 125,430 124,048
Total Assets $ 4,867,589 $ 4,718,639
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand $ 859,541 $ 6,109 1.43 % $ 775,490 $ 7,047 1.83 %
Money Market 539,003 5,497 2.06 % 530,944 6,829 2.59 %
Savings 326,206 241 0.15 % 351,473 242 0.14 %
Certificates of Deposit 1,884,958 31,110 3.33 % 1,901,751 34,964 3.71 %
Total Interest-Bearing Deposits 3,609,708 42,957 2.40 % 3,559,658 49,082 2.78 %
FHLB Borrowings 79,575 1,556 3.94 % 89,400 1,888 4.26 %
Other Borrowings 10,822 279 5.20 % 10,566 287 5.48 %
Total Borrowings 90,397 1,835 4.09 % 99,966 2,175 4.39 %
Total Interest-Bearing Liabilities 3,700,105 44,792 2.44 % 3,659,624 51,257 2.82 %
Noninterest-Bearing Liabilities 686,538 661,308
Shareholders' Equity 480,946 397,707
Total Liabilities and Shareholders' Equity $ 4,867,589 $ 4,718,639
Net Interest Income2 $ 76,275 $ 62,846
Net Interest Margin2 3.24 % 2.76 %
Net Interest Spread 2.71 % 2.19 %
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%.
Net interest income for the six months ended June 30, 2026 increased $13.4 million, or 21.4% to $75.9 million, compared to $62.5 million for the same period in 2025. On an FTE basis (non-GAAP), net interest income increased $13.4 million, or 21.4%, to $76.3 million, compared to $62.8 million for the same period in 2025.
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The increase was primarily driven by growth in average interest-earning assets and lower funding costs. Average interest-earning assets increased to $4.7 billion from $4.6 billion, while the average yield on interest-earning assets increased 14 basis points to 5.15% from 5.01%. At the same time, the average cost of total interest-bearing liabilities declined 38 basis points to 2.44% from 2.82%, contributing to an increase in the net interest margin to 3.24%, compared to 2.76% for the same period in 2025.
Average loan balances increased across the commercial real estate, commercial and industrial, construction and residential mortgage portfolios, with the average yield on total loans improving to 5.59% from 5.39%. While average securities balances declined from the prior-year period, the Company’s strategic balance sheet initiatives, including the second quarter Portfolio Repositioning into higher-yielding investments, are expected to enhance future interest income. Average interest-bearing deposits with banks also increased as excess liquidity generated from the Company’s strategic transactions was deployed into higher-yielding interest-bearing accounts.
Interest expense declined as deposit pricing improved and average FHLB borrowings were lower than the prior-year period, reflecting the Company’s continued emphasis on optimizing its funding mix and reducing overall funding costs.
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:
Three Months Ended June 30, 2026 Compared to Three Months Ended June 30, 2025 Six Months Ended June 30, 2026 Compared to Six Months Ended June 30, 2025
(Dollars in Thousands) Volume3 Rate3 Increase/ (Decrease) Volume3 Rate3 Increase/ (Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks $ 2,188 $ (119) $ 2,069 $ 2,283 $ (269) $ 2,014
Tax-free Investment Securities2 301 102 403 265 137 402
Taxable Investment Securities (1,180) (293) (1,473) (1,758) (788) (2,546)
Total Securities (879) (191) (1,070) (1,493) (651) (2,144)
Commercial Real Estate 2,531 (1,117) 1,414 6,181 (2,260) 3,921
Commercial & Industrial2 734 (369) 365 1,248 (157) 1,091
Residential Mortgages 100 58 158 295 92 387
Other Consumer (35) (69) (104) (60) (184) (244)
Construction 772 218 990 1,231 587 1,818
Other — — — — — —
Total Loans1 4,102 (1,279) 2,823 8,895 (1,922) 6,973
Other Restricted Stock, at Cost 1 (13) (12) 147 (26) 121
Total Interest-Earning Assets $ 5,412 $ (1,602) $ 3,810 $ 9,832 $ (2,868) $ 6,964
Interest Paid on:
Interest-Bearing Demand $ 399 $ (660) $ (261) $ 709 $ (1,647) $ (938)
Money Market (159) (829) (988) 103 (1,435) (1,332)
Savings (8) 9 1 (18) 17 (1)
Certificates of Deposit (114) (1,295) (1,409) (306) (3,548) (3,854)
Total Interest-Bearing Deposits 118 (2,775) (2,657) 488 (6,613) (6,125)
Federal Home Loan Bank Borrowings (593) (593) (1,186) (198) (134) (332)
Federal Funds Purchased — — — — — —
Other Borrowings 1 (5) (4) 7 (15) (8)
Total Borrowings (592) (598) (1,190) (191) (149) (340)
Total Interest-Bearing Liabilities $ (474) $ (3,373) $ (3,847) $ 297 $ (6,762) $ (6,465)
Change in Net Interest Margin (FTE) 2 $ 5,886 $ 1,771 $ 7,657 $ 9,535 $ 3,894 $ 13,429
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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Provision (Recovery) 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 loan 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.
The following table presents information regarding the provision (recovery) for credit losses and net (recoveries) / charge-offs for the periods presented:
(Dollars in Thousands) Three Months Ended June 30, Six Months Ended June 30,
2026 2025 $ Change 2026 2025 $ Change
Provision (Recovery) for Credit Losses $ 2,010 $ (2,330) $ 4,340 $ (31,907) $ (4,355) $ (27,552)
Recovery for Unfunded Loan Commitments (554) (335) (219) (772) (449) (323)
Total Provision (Recovery) for Credit Losses on Loans 1,456 (2,665) 4,121 (32,679) (4,804) (27,875)
Provision for Securities — — — — — —
Total Provision (Recovery) for Credit Losses $ 1,456 $ (2,665) $ 4,121 $ (32,679) $ (4,804) $ (27,875)
Net Loan (Recoveries) / Charge-offs $ (657) $ 165 $ (822) $ (15,586) $ 222 $ (15,808)
Net Loan (Recoveries) / Charge-offs (annualized) / Average Portfolio Loans (0.07) % 0.02 % (0.82) % 0.01 %
During the three months ended June 30, 2026, the Company recorded a provision for credit losses of $2.0 million, compared to a recovery of $2.3 million for the same period in 2025. The provision for the quarter ended June 30, 2026 was primarily attributable to a commercial and industrial credit relationship consisting of three loans that transferred to NPL status during the quarter, resulting in the establishment of a $3.1 million specific reserve. This increase was partially offset by $0.7 million net recoveries received during the period. During the six months ended June 30, 2026, the Company recorded a recovery for credit losses of $31.9 million, compared to a recovery of $4.3 million for the same period in 2025. The recovery for credit losses during the six months ended June 30, 2026 primarily reflects the release of previously established specific reserves of $18.0 million, as well as a $15.0 million net recovery associated with the Judgments, in each case related to the Loan Sale Transaction. This recovery was offset by the previously mentioned $3.1 million specific reserve recorded in the second quarter. The recovery for credit losses in the first six months of 2025 was primarily driven by a decline in the Other segment reserve rate, specifically the Company’s former largest nonperforming credit relationship due to curtailment payments received during the period.
The Company also recorded a recovery for unfunded loan commitments of $0.6 million and $0.8 million for the three and six months ended June 30, 2026, respectively compared to $0.3 million and $0.4 million for the same periods in 2025, respectively. The increases from the three and six months ended June 30, 2025 were primarily due to a reduction in unfunded loan commitments, which is reflective of the increase in construction loans in the loan composition.
As a result of these factors, the allowance for credit losses to total portfolio loans declined to 1.48% at June 30, 2026 from 1.90% at June 30, 2025. While the Company recorded a provision for credit losses during the second quarter of 2026, the year-to-date recovery for credit losses, primarily driven by the first quarter of 2026 Loan Sale Transaction and related reserve release and recovery discussed above, remained a significant contributor to earnings for the six months ended June 30, 2026.
Net recoveries totaled $0.7 million and $15.6 million for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of $0.2 million for both the three and six months ended June 30, 2025. Net recoveries (annualized) to average portfolio loans, were 0.07% and 0.82% for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of 0.02% and 0.01% for the same periods in 2025, respectively.
See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.
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Noninterest Income
(Dollars in Thousands) Three Months Ended June 30, Six Months Ended June 30,
2026 2025 $ Change % Change 2026 2025 $ Change % Change
Gain on the Insurance Transaction $ 35,949 $ — $ 35,949 NM $ 35,949 $ — $ 35,949 NM
Gain on the Loan Sale Transaction — — — NM 65,000 — 65,000 NM
Losses on Sales of Securities, net (12,531) — (12,531) NM (12,451) — (12,451) NM
Service Charges, Commissions and Fees 2,491 1,765 726 41.1 % 4,619 3,639 980 26.9 %
Debit Card Interchange Fees 2,063 1,942 121 6.2 % 4,211 4,046 165 4.1 %
Insurance Commissions 164 714 (550) (77.0) % 1,118 1,058 60 5.7 %
Bank Owned Life Insurance Income 457 357 100 28.0 % 893 698 195 27.9 %
Other 137 130 7 5.4 % 365 2,368 (2,003) (84.6) %
Total Noninterest Income $ 28,730 $ 4,908 $ 23,822 485.4 % $ 99,704 $ 11,809 $ 87,895 744.3 %
NM- Not Meaningful
Noninterest income for the three months ended June 30, 2026 totaled $28.7 million, an increase of $23.8 million compared to the same period in 2025. The increase was primarily attributable to the $35.9 million net gain recognized on the Insurance Transaction and a $0.7 million increase in service charges on deposit accounts, partially offset by the $12.5 million loss on the sale of securities recognized in connection with the Portfolio Repositioning completed during the second quarter of 2026 and a $0.6 million decline in insurance commissions. The decrease in insurance commissions primarily reflected the Insurance Transaction, which reduced ongoing insurance commission income.
For the six months ended June 30, 2026, noninterest income totaled $99.7 million, compared to $11.8 million for the same period in 2025. The increase was primarily attributable to the $65.0 million gain recognized on the Loan Sale Transaction during the first quarter of 2026, the $35.9 million net gain recognized on the Insurance Transaction during the second quarter of 2026, and a $1.0 million increase in service charges on deposit accounts. These increases were partially offset by the $12.5 million loss on the sale of securities recognized in connection with the Portfolio Repositioning during the second quarter of 2026 and the $1.9 million BOLI death benefit recognized during the first quarter of 2025.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Noninterest Expense
(Dollars in Thousands) Three Months Ended June 30, Six Months Ended June 30,
2026 2025 $ Change % Change 2026 2025 $ Change % Change
Salaries and Employee Benefits $ 14,051 $ 14,082 $ (31) (0.2) % $ 28,966 $ 27,739 $ 1,227 4.4 %
Occupancy Expense, net 4,584 4,230 354 8.4 % 9,445 8,702 743 8.5 %
FDIC Insurance Expense (241) 1,436 (1,677) (116.8) % 1,269 2,866 (1,597) (55.7) %
Other Taxes 776 922 (146) (15.8) % 1,701 1,869 (168) (9.0) %
Advertising Expense 820 708 112 15.8 % 1,746 1,619 127 7.8 %
Telephone Expense 278 307 (29) (9.4) % 570 611 (41) (6.7) %
Professional and Legal Fees 2,053 1,921 132 6.9 % 3,599 3,151 448 14.2 %
Data Processing 2,177 1,395 782 56.1 % 4,030 2,839 1,191 42.0 %
Debit Card Expense 1,072 991 81 8.2 % 2,073 1,983 90 4.5 %
Other 4,416 3,312 1,104 33.3 % 7,599 5,967 1,632 27.4 %
Total Noninterest Expense $ 29,986 $ 29,304 $ 682 2.3 % $ 60,998 $ 57,346 $ 3,652 6.4 %
Noninterest expense for the three months ended June 30, 2026 totaled $30.0 million, an increase of $0.7 million compared to the same period in 2025. The increase was primarily driven by $1.1 million of higher other noninterest expense, $0.8 million of higher data processing expense and $0.4 million of higher occupancy expense, partially offset by a $1.7 million decline in FDIC insurance expense.
FDIC insurance expense declined during the second quarter of 2026, primarily reflecting the favorable impact of the Company’s improved risk profile following the Loan Sale Transaction completed during the first quarter of 2026, which reduced FDIC assessment costs. Other noninterest expense increased primarily due to a $0.8 million write-down of an OREO property based on an updated appraisal received during the second quarter of 2026, as well as a $0.5 million write-down on a closed corporate office building. Data processing expense increased due to new and expanded service agreements implemented in early 2026. Occupancy expense increased primarily as a result of higher costs associated with service agreements, software licenses, maintenance contracts, and other infrastructure investments.
For the six months ended June 30, 2026, noninterest expense totaled $61.0 million, compared to $57.3 million for the same period in 2025, an increase of $3.7 million. The increase primarily reflected $1.6 million of higher other noninterest expense, $1.2 million of higher data processing expense, $1.2 million of higher salaries and employee benefits, $0.7 million of higher occupancy expense and $0.4 million of higher professional and legal fees, partially offset by a $1.6 million decline in FDIC insurance expense.
Consistent with the quarterly discussion above, other noninterest expense increased primarily due to the OREO property write-down and the write-down on the closed corporate office building, while data processing expense increased due to new and expanded service agreements implemented in early 2026. Occupancy expense increased primarily as a result of higher costs associated with service agreements, software licenses, maintenance contracts, and related infrastructure investments. Salaries and employee benefits increased primarily due to higher incentive compensation, increased medical benefit costs and annual merit increases, partially offset by higher deferred costs on loan originations. Professional and legal fees increased primarily due to costs associated with the Loan Sale Transaction and higher expenses related to the management of special assets. FDIC insurance expense declined as a result of the Company’s improved risk profile following the Loan Sale Transaction completed during the first quarter of 2026.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Provision for Income Taxes
The provision for income taxes increased $6.2 million and $28.3 million for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. The increases were primarily attributable to higher pre-tax income, which increased $26.6 million and $125.5 million for the three and six month periods, respectively.
For the three months ended June 30, 2026, the increase in pre-tax income was primarily driven by the Insurance Transaction, which resulted in a $35.9 million pre-tax gain, partially offset by a $12.5 million pre-tax loss recognized in connection with the strategic Portfolio Repositioning completed during the second quarter of 2026.
For the six months ended June 30, 2026, the increase in pre-tax income primarily reflected the first quarter 2026 Loan Sale Transaction, which resulted in a $65.0 million gain on sale, an $18.0 million release of specific reserves, and a $15.0 million recovery for credit losses. In addition, the second quarter Insurance Transaction resulted in a $35.9 million pre-tax gain, partially offset by the $12.5 million loss recognized in connection with the strategic Portfolio Repositioning. Comparability to the prior-year period was also affected by a $1.9 million tax-exempt gain recognized on a BOLI death benefit during the first quarter of 2025.
The effective income tax rate was 22.4% and 22.1% for the three and six months ended June 30, 2026, respectively compared to 19.9% and 19.8% for the same periods in 2025. The effective tax rates for 2026 exceeded the statutory federal tax rate of 21.0%, primarily due to state income taxes and the expiration of certain tax credits associated with historic tax credit investments. These items were partially offset by the tax benefits associated with tax-exempt interest income, BOLI income and rehabilitation tax credits. In contrast, the effective tax rate for the prior-year periods benefited from the $1.9 million tax-exempt BOLI death benefit recognized during the first quarter of 2025.
The $0.8 million reversal of a federal valuation allowance related to the realization of capital loss carryforwards from prior tax years, which were created by the exit of tax equity investments and sales of securities. Management assesses all available positive and negative evidence to estimate whether sufficient taxable income of the appropriate character would be available to utilize the capital loss carryforwards prior to their expiration. Management believes that the gains resulting from the second quarter Insurance Transaction create sufficient capital gain income to realize the entirety of the capital loss carryforwards. Consequently, the $0.8 million federal valuation allowance was reversed.
Refer to Note 12, Provision for Income Taxes, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information.
Financial Condition
June 30, 2026
Total assets were $4.8 billion at June 30, 2026, a decrease of $50.0 million, or 1.0%, from $4.9 billion at December 31, 2025. The decrease primarily reflected lower portfolio loans and available-for-sale securities partially offset by higher cash and cash equivalents, higher other real estate owned, and increased interest-bearing deposits with other financial institutions.
Total cash and cash equivalents increased $171.4 million, or 163.0%, to $276.5 million at June 30, 2026, from $105.2 million at December 31, 2025. The increase primarily reflected liquidity generated from the Loan Sale Transaction during the first quarter of 2026 and the Insurance Transaction during the second quarter of 2026. A portion of these proceeds were strategically redeployed from Federal Reserve Bank excess reserve balances into higher-yielding interest-bearing deposits with other financial institutions.
Available-for-sale securities decreased $51.3 million, or 7.4%, to $640.3 million at June 30, 2026. During the second quarter of 2026, the Company completed the Portfolio Repositioning of approximately $139.4 million of lower-yielding available-for-sale securities, recognizing a pre-tax loss while reinvesting a portion of the proceeds into higher-yielding securities. This Portfolio Repositioning is expected to enhance future net interest income and improve the overall earning asset mix. Available-for-sale securities represented 13.3% of total assets at June 30, 2026, compared to 14.3% at December 31, 2025. FHLB stock, included
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in Other Restricted Stock, at cost on the Consolidated Balance Sheets, declined $8.4 million in line with lower borrowing levels.
Portfolio loans decreased $145.0 million, or 7.5% annualized, to $3.7 billion at June 30, 2026, compared to $3.9 billion at December 31, 2025. The decline primarily reflected the first quarter Loan Sale Transaction. Excluding the Loan Sale Transaction, the Company continued to generate organic loan growth through new loan originations, partially offset by normal loan repayments and payoffs.
The allowance for credit losses decreased $16.3 million, or 22.8%, to $55.2 million at June 30, 2026. The decline primarily reflected the Loan Sale Transaction during the first quarter of 2026, including the associated release of specific reserves, partially offset by provision recorded during the second quarter related to a commercial and industrial lending relationship that migrated to nonperforming status.
Total deposits decreased $13.3 million, or 0.6% annualized, to $4.2 billion at June 30, 2026. The decrease was primarily attributable to declines in certificates of deposit and savings balances, partially offset by growth in noninterest-bearing demand deposits and interest-bearing demand deposits. The Company continues to maintain a stable and diversified deposit base.
On the funding side, the Company had no FHLB borrowings outstanding at June 30, 2026, as higher cost wholesale borrowings were repaid with proceeds from the Company’s recent strategic transactions, improving its funding profile and reducing interest expense.
Shareholders’ equity increased $119.4 million, or 28.5%, to $539.1 million at June 30, 2026. The increase was primarily attributable to net income generated during the first six months of 2026 and an improvement in accumulated other comprehensive loss primarily resulting from the Portfolio Repositioning as well as changes in the fair value of the available-for-sale securities portfolio partially offset by dividends declared and share repurchases.
At June 30, 2026, approximately 82.3% of total deposits were insured under FDIC insurance coverage limits, while approximately 17.7% of total deposits were uninsured. At December 31, 2025, approximately 81.3% of total deposits were insured under FDIC insurance coverage limits, while approximately 18.7% of total deposits were uninsured.
Securities
The following table presents the composition of available-for-sale securities at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 $ Change
U.S. Government Agency Securities $ 16,153 $ 19,375 $ (3,222)
Residential Mortgage-Backed Securities 61,450 76,773 (15,323)
Commercial Mortgage-Backed Securities 20,910 25,122 (4,212)
Other Commercial Mortgage-Backed Securities 21,261 24,254 (2,993)
Asset Backed Securities 105,594 94,797 10,797
Collateralized Mortgage Obligations 192,539 161,820 30,719
States and Political Subdivisions 166,313 234,224 (67,911)
Corporate Notes 56,082 55,247 835
Total $ 640,302 $ 691,612 $ (51,310)
The Company invests in various securities to maintain liquidity to 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 $640.3 million at June 30, 2026, a net decrease of $51.3 million from December 31, 2025. During the second quarter of 2026, the Company completed a strategic Portfolio Repositioning of a portion of its available-for-sale securities portfolio, selling approximately $139.4 million of lower-yielding securities and purchasing approximately $88.5
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million of higher-yielding securities. The Portfolio Repositioning resulted in a $12.5 million pre-tax loss and is expected to enhance future net interest income through improved portfolio yields. The Portfolio Repositioning is discussed further in the “Overview and Strategy” section. The Portfolio Repositioning, together with normal principal repayments, calls, maturities and amortization, resulted in the decline in the securities portfolio during the period. Securities represented 13.3% of total assets at June 30, 2026 compared to 14.3% at December 31, 2025.
Total gross unrealized gains in the available-for-sale portfolio were $1.6 million at June 30, 2026, offset by $43.6 million of gross unrealized losses, compared to gross unrealized gains of $0.4 million and gross unrealized losses of $54.2 million at December 31, 2025. Although increases in intermediate and long-term market interest rates during the six months ended June 30, 2026 would have increased unrealized losses on the remaining portfolio, gross unrealized losses declined overall as a result of the Company’s strategic Portfolio Repositioning, which realized a portion of previously existing unrealized losses through the sale of securities.
Management believes the unrealized losses on debt securities at June 30, 2026 are temporary and primarily attributable to changes in market interest rates since the securities were purchased rather than deterioration in credit quality. Approximately 48.0% of the securities portfolio is comprised of obligations issued by U.S. government sponsored entities that carry implicit government guarantees. States and political subdivision securities represent 26.0% of the portfolio and consist primarily of general obligation and essential purpose revenue bonds, which have historically demonstrated strong credit performance and are predominantly rated AA and AAA. The Company has the ability and intent to hold these securities until recovery of their amortized cost basis through maturity or sale.
Unrealized losses remained concentrated primarily in securities with intermediate and long-term maturities, whose market values are most sensitive to movements in the U.S. Treasury yield curve, particularly the five year and ten year maturities. During the six months ended June 30, 2026, intermediate-term Treasury yields increased, creating additional valuation pressure on the remaining securities portfolio. At June 30, 2026, the five and ten-year U.S. Treasury yields were 4.19% and 4.44%, respectively, compared to 3.73% and 4.18%, respectively, at December 31, 2025. The increase of approximately 46 basis points in the five year yield and 26 basis points in the ten year yield would generally be expected to increase unrealized losses, particularly for longer duration securities such as municipal bonds. However, the Company’s strategic Portfolio Repositioning during the period ended June 30, 2026 reduced the overall gross unrealized loss balance by realizing a portion of previously existing unrealized losses through the sale of selected securities.
Changes in intermediate and long-term interest rates, which are market driven, will continue to affect the market value of fixed rate securities. Accordingly, the Company expects ongoing fluctuations in the market values of its intermediate and long-term maturity securities as Treasury yields change. Floating rate securities generally maintained stable market values, as their coupon rates adjust in line with changes in short-term interest rates set by the Federal Reserve.
If any impairment of securities were determined to be credit related, the Company would recognize an ACL through recovery or provision for credit losses in the period an impairment is identified, while any non-credit related impairment would be recorded in accumulated other comprehensive loss, net of applicable taxes. At June 30, 2026 and December 31, 2025, the Company had no credit related impairments in its securities portfolio.
Under Basel III capital rules, most banking organizations are permitted to make a one-time election to retain the existing regulatory capital treatment for accumulated other comprehensive loss. The Company elected to retain this treatment, under which accumulated other comprehensive loss is excluded from regulatory capital. As a result, changes in unrealized gains and losses on available-for-sale securities do not affect regulatory capital levels, therefore reducing capital volatility associated with interest rate movements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Loan Composition
The following table summarizes our loan portfolio at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Commercial
Commercial Real Estate $ 2,143,362 $ 2,114,314
Commercial and Industrial 262,432 231,921
Total Commercial Loans 2,405,794 2,346,235
Consumer
Residential Mortgages 814,383 822,141
Other Consumer 25,154 28,416
Total Consumer Loans 839,537 850,557
Construction 489,263 465,613
Other — 217,155
Total Portfolio Loans 3,734,594 3,879,560
Loans Held-for-Sale 467 339
Total Loans $ 3,735,061 $ 3,879,899
The loan portfolio is the Company’s primary source of interest income and is subject to inherent credit risk, including the risk that borrowers may be unable to meet their contractual obligations. Adverse developments in a borrower’s industry or in overall economic conditions may negatively affect repayment capacity. For a discussion of risk factors relevant to the Company’s business and operations, refer to Part I, Item 1A. “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.
Total portfolio loans decreased $145.0 million to $3.7 billion at June 30, 2026, compared to December 31, 2025 largely reflecting the Loan Sale Transaction completed during the first quarter of 2026, partially offset by net loan growth during the first half of the year.
The Company actively monitors the loan portfolio in light of changing market conditions, borrower performance, and the interest rate environment. At June 30, 2026, the loan portfolio consisted of 21.0% floating rates loans that reprice monthly, 37.4% variable rate loans that reprice at least once during the life of the loan, and 41.6% fixed rate loans.
CRE loans represented 57.4% of total portfolio loans at June 30, 2026, compared to 54.5% at December 31, 2025. The CRE portfolio is monitored for potential concentrations of credit risk by market, property type and tenant exposure. Collateral securing CRE loans is geographically concentrated primarily in North Carolina, Virginia and South Carolina and includes properties within the retail/restaurant, warehouse, hospitality, multifamily, office, and long-term care sectors.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following tables present the Company's CRE loan portfolio by collateral type, including outstanding balances, loans classified as special mention or substandard, and the related percentages by collateral category as of the dates presented:
June 30, 2026
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type
Retail/Restaurant $ 529,426 $ 110 $ — $ 36,181 $ — $ 565,717 $ 56,591 21.2 %
Warehouse 483,322 — — 42,103 — 525,425 17,664 19.6 %
Hospitality 283,595 — — 27,771 — 311,366 2,742 11.6 %
Multifamily 364,039 — — 78,315 — 442,354 51,919 16.5 %
Office 202,700 — — 3,136 — 205,836 28,727 7.7 %
Land 606 — — 114,537 — 115,143 36 4.3 %
Single Family 24,135 4 63,848 30,110 — 118,097 383 4.4 %
Country Club 3,320 — — — — 3,320 — 0.1 %
Long-term Care 70,202 — — 60,353 — 130,555 — 4.9 %
Other 178,876 57 1,696 78,459 — 259,088 145 9.7 %
Total $ 2,140,221 $ 171 $ 65,544 $ 470,965 $ — $ 2,676,901 $ 158,207 100.0 %
December 31, 2025
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type
Retail/Restaurant $ 501,030 $ 114 $ — $ 49,172 $ 3,135 $ 553,451 $ 6 20.0 %
Warehouse 460,244 — — 40,472 — 500,716 9,568 18.1 %
Hospitality 280,803 — — 41,192 51,552 373,547 51,552 13.5 %
Multifamily 348,794 — — 86,679 — 435,473 5,402 15.7 %
Office 217,092 — — — 508 217,600 25,658 7.9 %
Land 809 — — 101,073 36,619 138,501 36,660 5.0 %
Single Family 33,420 — 62,072 15,144 13,367 124,003 13,460 4.5 %
Country Club 3,346 — — — 45,002 48,348 45,002 1.7 %
Long-term Care 59,409 — — 37,232 — 96,641 — 3.5 %
Other 208,907 73 — 70,835 — 279,815 — 10.1 %
Total $ 2,113,854 $ 187 $ 62,072 $ 441,799 $ 150,183 $ 2,768,095 $ 187,308 100.0 %
The decrease in the CRE loan portfolio at June 30, 2026 is primarily related to the Other segment reducing to zero due to the Loan Sale Transaction, partially offset by an increase in CRE construction loans.
CRE loans represent a concentration of credit risk within the loan portfolio. The majority of the Company’s CRE loans are originated within its core geographic markets, extended to experienced developers and sponsors, and generally supported by guaranty structures that provide recourse to individuals with demonstrated financial capacity.
Management believes its local and regional market expertise enables effective management of CRE concentration risk. This operating knowledge is derived from direct customer relationships, an understanding of borrower business models, and access to market research tools that provide data on occupancy levels, lease growth rates, and new construction activity. These market indicators are reviewed regularly by credit officers and communicated to lending teams.
The Company’s underwriting process incorporates multiple stress scenarios, primarily focused on borrower cash flow and leverage, to determine supportable loan structures and appropriate commitment levels.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Aggregate commitments to the Company’s top 10 credit relationships totaled $472.4 million, representing 12.65% of gross loans at June 30, 2026, compared to $477.6 million, or 12.31% of gross loans, at December 31, 2025. The following table reflects the impacts of the Loan Sale Transaction, which resulted in elimination of the Company’s largest nonperforming loan relationship and a meaningful decline in borrower concentration. Prior to the Loan Sale Transaction, the top 10 relationships to total gross loans at December 31, 2025 was 17.00%.
The following table summarizes our top 10 relationships and a description of industries represented at the dates presented:
For the Periods Ending
Dollars in Thousands June 30, 2026 December 31, 2025 Change June 30, 2026 % of Gross Loans June 30, 2026 % of RBC
1. Multifamily $ 58,475 $ 58,610 $ (135) 1.57 % 9.43 %
2. Retail & Office 53,637 54,838 (1,201) 1.44 % 8.65 %
3. Retail & Warehouse 47,725 38,656 9,069 1.28 % 7.70 %
4. Warehouse 47,120 47,969 (849) 1.26 % 7.59 %
5. Warehouse 44,991 46,687 (1,696) 1.20 % 7.25 %
6. Healthcare 44,779 44,779 — 1.20 % 7.22 %
7. Land & Self-Storage 44,625 47,392 (2,767) 1.19 % 7.20 %
8. Multifamily 44,504 44,842 (338) 1.19 % 7.18 %
9. Long-Term Care 43,618 46,199 (2,581) 1.17 % 7.03 %
10. Retail & Office 42,919 47,619 (4,700) 1.15 % 6.92 %
Top Ten (10) Relationships $ 472,393 $ 477,591 $ (5,198) 12.65 % 76.17 %
Total Gross Loans $ 3,735,061 $ 3,879,899 $ (144,838)
% of Total Gross Loans 12.65 % 12.31 % 0.34 %
Concentration (25% of Risk Based Capital ("RBC")) $ 155,041 $ 128,431
Unfunded loan commitments on lines of credit were $564.5 million at June 30, 2026 as compared to $643.9 million at December 31, 2025. The majority of unused commitments relate to construction lines of credit, which are expected to be funded as projects progress toward completion.
Total line of credit utilization was 55.1% at June 30, 2026, compared to 53.2% at December 31, 2025. Utilization of commercial operating lines of credit was 55.0% at June 30, 2026, compared to 52.8% at December 31, 2025.
Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s loans.
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain watch, special mention and substandard risk rated loans that fall within prescribed policy thresholds. These loans generally represent those with the highest potential risk of loss to the Company. For loans identified through this process, management establishes action plans and conducts ongoing monitoring, which includes regular communication with the borrower and loan officer, review of current financial information and other supporting documentation, evaluation of existing or proposed loan structures or modifications, and periodic reassessment of collateral values.
On a quarterly basis, the Credit Risk Committee of the Board meets to review loan portfolio metrics, approve segment concentration limits, evaluate the adequacy of the ACL, and review the results of loan review activities identified during the prior quarter. Annually, this committee also approves credit related policy changes and enhancements as they are implemented.
Additional credit risk management practices include continuous monitoring of trends within the Company’s lending footprint and ongoing evaluation of lending policies and procedures designed to support sound underwriting standards. These practices include oversight of portfolio concentrations, delinquencies trends, and the results of annual portfolio level stress testing.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The loan review department provides independent oversight of credit quality and evaluates the effectiveness of credit risk management practices. This function has primary responsibility for assessing commercial credit administration, consumer and mortgage underwriting and credit decision processes, and the appropriateness of assigned risk ratings for loans reviewed, as well as providing input into the overall loan risk rating process.
The Company’s policy is to place loans on nonaccrual status when collection of principal or interest is doubtful or, generally, when contractual principal or interest payments are 90 days or more past due. Consumer unsecured loans and secured loans are evaluated for charge-off once they become 90 days past due, and loans that reach 90 days delinquent are automatically transferred to nonaccrual status. Management, however, retains discretion at the individual loan level. A loan may be placed on nonaccrual prior to becoming 90 days past due if full collection of principal and interest is deemed unlikely. Conversely, a loan that is 90 days or more past due may be maintained in accrual status if it is well-secured and in process of collection.
Unsecured loans are generally charged-off in full, while secured loans are charged-off to the estimated fair value of the collateral, net of estimated cost to sell.
The repayment capacity of commercial borrowers is dependent on the performance of their underlying businesses and general economic conditions. Given the higher potential for loss within the commercial loan portfolio, these loans are monitored through an internal risk rating system. Risk ratings are assigned based on the borrower’s creditworthiness and are reviewed on an ongoing basis in accordance with internal policies. Loans rated special mention or substandard exhibit potential or well-defined weaknesses that are not typically present in higher quality performing loans, and therefore require heightened management attention to mitigate the risk of loss.
Nonperforming assets consist of NPLs and other real estate owned (“OREO”). The following table summarizes nonperforming assets at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 Change
Nonaccrual Loans
Commercial Real Estate $ 21,562 $ 23,861 $ (2,299)
Commercial and Industrial 13,546 1,013 12,533
Residential Mortgages 1,945 4,623 (2,678)
Other Consumer 72 25 47
Construction 436 440 (4)
Other — 214,020 (214,020)
Total Nonperforming Loans 37,561 243,982 (206,421)
Other Real Estate Owned 3,356 142 3,214
Total Nonperforming Assets $ 40,917 $ 244,124 $ (203,207)
At June 30, 2026, total nonperforming assets decreased $203.2 million to $40.9 million compared to December 31, 2025, primarily reflecting the Loan Sale Transaction, as the Judgments were previously included in the “Other” loan segment. Total nonperforming loans declined $206.4 million to $37.6 million at June 30, 2026. Commercial real estate nonperforming loans decreased $2.3 million, primarily due to the sale of a property in receivership during the first quarter of 2026. Residential mortgage nonperforming loans decreased $2.7 million as two residential mortgage loans were transferred to OREO during the first quarter of 2026. These improvements were partially offset by an increase in commercial and industrial nonperforming loans, which reflected a commercial and industrial relationship consisting of three loans with an aggregate principal balance of $13.4 million that was downgraded to substandard and placed on nonperforming status during the second quarter of 2026. This increase was partially offset by another commercial and industrial relationship that returned to accruing status during the first quarter of 2026. OREO increased to $3.4 million at June 30, 2026 from $0.1 million at December 31, 2025, primarily due to the transfer of the two residential mortgage loans during the first quarter of 2026.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following is an analysis of nonperforming loans by loan portfolio segment at the dates presented, and each segment’s relative contribution to total nonperforming loans:
June 30, 2026 December 31, 2025
(Dollars in Thousands) Amount % of NPLs Amount % of NPLs
Commercial Real Estate $ 21,562 57.4 % $ 23,861 9.8 %
Commercial and Industrial 13,546 36.1 % 1,013 0.4 %
Residential Mortgages 1,945 5.2 % 4,623 1.9 %
Other Consumer 72 0.2 % 25 — %
Construction 436 1.1 % 440 0.2 %
Other — — % 214,020 87.7 %
Balance End of Period $ 37,561 100.0 % $ 243,982 100.0 %
Closed-end installment loans, amortizing loans secured by real estate, and other loans with monthly payment schedules are considered past due when payments are two or more months in arrears. Multi-payment obligations with payment schedules other than monthly are reported as past due when a scheduled payment remains unpaid for 30 days or more. Management monitors delinquency trends on a monthly basis, including early-stage delinquencies and loans exhibiting heightened risk characteristics, to identify emerging credit deterioration.
Allowance for Credit Losses
The following is the allocation of the ACL balance by segment at the dates presented:
June 30, 2026 December 31, 2025
(Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans
Commercial Real Estate $ 22,133 57.4 % $ 22,526 54.5 %
Commercial & Industrial 5,890 7.0 % 2,790 6.0 %
Residential Mortgages 11,719 21.8 % 12,449 21.2 %
Other Consumer 569 0.7 % 638 0.7 %
Construction 14,859 13.1 % 15,020 12.0 %
Other — — % 18,068 5.6 %
Balance End of Period $ 55,170 100.0 % $ 71,491 100.0 %
The ACL decreased $16.3 million to $55.2 million, or 1.48%, of total portfolio loans at June 30, 2026 compared to $71.5 million, or 1.84%, of total portfolio loans at December 31, 2025. The decrease primarily reflects the release of reserves associated with the Loan Sale Transaction completed during the first quarter of 2026, which reduced the allowance allocated to the “Other” loan segment by $18.0 million. This decrease was partially offset by an increase in the commercial and industrial loan segment resulting from the downgrade of a $13.4 million commercial and industrial lending relationship to nonperforming status during the second quarter of 2026, for which a $3.1 million specific reserve was established.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes the credit quality ratios and their components at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses $ 55,170 $ 71,491
Total Portfolio Loans 3,734,594 3,879,560
Allowance for Credit Losses to Total Portfolio Loans 1.48 % 1.84 %
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans $ 37,561 $ 243,982
Total Portfolio Loans 3,734,594 3,879,560
Nonperforming Loans to Total Portfolio Loans 1.01 % 6.29 %
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses $ 55,170 $ 71,491
Nonperforming Loans 37,561 243,982
Allowance for Credit Losses to Nonperforming Loans 146.88 % 29.30 %
Net (Recoveries) / Charge-offs to Average Portfolio Loans
Net (Recoveries) / Charge-offs (annualized)1 $ (31,430) $ 472
Average Total Portfolio Loans 3,817,054 3,759,496
Net (Recoveries) / Charge-offs to Average Portfolio Loans (0.82) % 0.01 %
1The year-to-date net (recovery)/charge-offs (annualized) for June 30, 2026 includes the $15.0 million recovery (annualized) related to the Loan Sale Transaction.
The provision (recovery) for credit losses, which includes a provision (recovery) for losses on loans and a recovery on unfunded loan commitments, represents the amount necessary to maintain the ACL at a level that reflects management's estimate of expected credit losses in the loan portfolio as of the balance sheet date. During the three months ended June 30, 2026, the Company recognized a provision for credit losses on loans of $2.0 million and a recovery for unfunded loan commitments of $0.6 million. During the six months ended June 30, 2026, the Company recognized a recovery for credit losses on loans of $31.9 million and a recovery for unfunded loan commitments of $0.8 million, primarily reflecting the release of $18.0 million of previously established specific reserves and a $15.0 million recovery associated with the Loan Sale Transaction completed during the first quarter of 2026. As a result, the Company recognized a net recovery for credit losses during the six-month period ended June 30, 2026, contributing to a lower allowance for credit losses as a percentage of total portfolio loans at June 30, 2026.
The reserve for unfunded loan commitments is largely comprised of unfunded loan commitments related to real estate construction loans. There are three basic factors that influence the reserve rates associated with unfunded loan commitments for real estate construction loans. First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model. These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts and average portfolio life. Refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8. contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 for additional information related to the ACL Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain CRE loans. The proportion of these segments affects the weighting. Third, volume changes impact the total reserve calculation.
Net recoveries totaled $0.7 million and $15.6 million for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of $0.2 million for both the three and six month periods ended June 30, 2025. As a percentage of average portfolio loans, net recoveries were 0.07% and 0.82% for the three and six months ended June 30, 2026, respectively, compared to net charge-offs of 0.02% and 0.01% for the same periods in 2025. The six month results for 2026 included a $15.0 million recovery recognized in connection with the first quarter 2026 Loan Sale Transaction, representing the recovery of the previously charged-off principal balance associated with the “Other” segment of the loan portfolio.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes portfolio loans past due 30-89 days for the periods presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 $ Change
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate $ — $ 3 $ (3)
Commercial & Industrial 90 159 (69)
Total Commercial Loans 90 162 (72)
Consumer
Residential Mortgages 2,337 1,899 438
Other Consumer 148 267 (119)
Total Consumer Loans 2,485 2,166 319
Construction 36 908 (872)
Other — — —
Total Loans 30 to 89 Days Past Due $ 2,611 $ 3,236 $ (625)
There were no portfolio loans past due more than 90 days and still accruing at June 30, 2026 or December 31, 2025. Loans past due 30 to 89 days and still accruing decreased by $0.6 million to $2.6 million at June 30, 2026, compared to December 31, 2025.
The following tables represent credit exposures by internally assigned risk ratings at the dates presented:
June 30, 2026
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total
Pass $ 2,121,252 $ 248,879 $ 811,353 $ 25,082 $ 470,891 $ — $ 3,677,457
Special Mention 548 7 87 — 696 — 1,338
Substandard 21,562 102 2,943 72 17,676 — 42,355
Doubtful — 13,444 — — — — 13,444
Total Portfolio Loans $ 2,143,362 $ 262,432 $ 814,383 $ 25,154 $ 489,263 $ — $ 3,734,594
Performing Loans $ 2,121,800 $ 248,886 $ 812,438 $ 25,082 $ 488,827 $ — $ 3,697,033
Nonaccrual Loans 21,562 13,546 1,945 72 436 — 37,561
Total Portfolio Loans $ 2,143,362 $ 262,432 $ 814,383 $ 25,154 $ 489,263 $ — $ 3,734,594
December 31, 2025
(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total
Pass $ 2,079,579 $ 230,899 $ 816,315 $ 28,391 $ 459,071 $ 3,135 $ 3,617,390
Special Mention 10,874 9 89 — 700 — 11,672
Substandard 23,861 1,013 5,737 25 5,842 214,020 250,498
Total Portfolio Loans $ 2,114,314 $ 231,921 $ 822,141 $ 28,416 $ 465,613 $ 217,155 $ 3,879,560
Performing Loans $ 2,090,453 $ 230,908 $ 817,518 $ 28,391 $ 465,173 $ 3,135 $ 3,635,578
Nonaccrual Loans 23,861 1,013 4,623 25 440 214,020 243,982
Total Portfolio Loans $ 2,114,314 $ 231,921 $ 822,141 $ 28,416 $ 465,613 $ 217,155 $ 3,879,560
At June 30, 2026, the Company had $13.4 million of loans classified as doubtful, compared to none at December 31, 2025. The increase during the second quarter of 2026 was attributable to a change in the classification of a relationship from Substandard in May 2026 to Doubtful in June 2026. The relationship was transferred to nonaccrual status in June 2026. The borrower’s financial condition continued to deteriorate with the most recent results indicating inadequate working capital due to an exacerbated cash conversion cycle. The levels of special mention and substandard loans at June 30, 2026, compared to December 31, 2025, reflected a decrease of $10.3 million in special mention and a decrease of $208.1 million in substandard loans.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Special mention loans decreased primarily due to an upgrade of a $10.8 million CRE office building loan that was moved to watch from special mention during the first quarter of 2026.
Substandard loans decreased $208.1 million during the six months ended June 30, 2026 compared to December 31, 2025, primarily reflecting the first quarter 2026 Loan Sale Transaction. At December 31, 2025, the “Other” segment had an aggregate balance of approximately $214.0 million, which was reduced to zero upon completion of the Loan Sale Transaction. Additional reductions included the payoff of a $5.4 million construction loan, the transfer of two residential mortgage loans totaling $2.9 million to OREO, and the sale of a commercial real estate property in receivership, which reduced the related substandard loan balance by $1.5 million. In addition, a commercial and industrial borrower relationship consisting of two loans totaling $0.9 million improved to a pass rating due to sustained payment performance. These improvements were partially offset by the downgrade of a $17.2 million construction loan to substandard during the first quarter of 2026. Overall these actions resulted in a significant reduction in substandard loans despite the migration of certain credits to substandard status during the period.
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s ACL.
Deposits
The following table presents the composition of deposits at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025 $ Change % Change
Noninterest-Bearing Demand $ 655,482 $ 620,473 $ 35,009 5.64 %
Interest-Bearing Demand 866,759 808,171 58,588 7.25 %
Money Market 510,125 553,964 (43,839) (7.91) %
Savings 318,774 326,182 (7,408) (2.27) %
Certificates of Deposit 1,846,416 1,902,099 (55,683) (2.93) %
Total Deposits $ 4,197,556 $ 4,210,889 $ (13,333) (0.32) %
Deposits are the Company’s primary source of funding, and management believes its deposit base remains stable, with the ability to attract new customers while maintaining a diversified deposit mix. Total deposits decreased $13.3 million to $4.2 billion at June 30, 2026, compared to December 31, 2025. The decrease primarily reflected declines in CDs of $55.7 million, money market accounts of $43.8 million, and savings accounts of $7.4 million, partially offset by increases in interest-bearing demand deposits of $58.6 million and noninterest-bearing demand deposits of $35.0 million.
Noninterest-bearing demand deposits represented 15.6% of total deposits at June 30, 2026, compared to 14.7% at December 31, 2025, while CDs comprised 44.0% of total deposits at June 30, 2026, compared to 45.2% at December 31, 2025.
Based on the assumptions used in preparing the Company’s regulatory Call Reports, approximately 82.3% of total deposits were insured under standard FDIC insurance coverage limits at June 30, 2026, while approximately 17.7% were uninsured, compared to approximately 81.3% insured and 18.7% uninsured at December 31, 2025.
The following table presents additional information in relation to deposits at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Noninterest-Bearing Public Funds Deposits $ 38,481 $ 33,220
Interest-Bearing Public Funds Deposits 142,362 137,600
Total Deposits not Covered by Deposit Insurance1 743,449 787,114
Certificates of Deposits not Covered by Deposit Insurance 300,132 310,723
Deposits for Certain Directors, Executive Officers and their Affiliates 1,980 3,207
1These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Maturities of CDs over $250,000, excluding brokered deposits, not covered by deposit insurance at June 30, 2026 are summarized as follows:
(Dollars in Thousands) Amount Percent
Three Months or Less $ 92,750 30.9 %
Over Three Months Through Twelve Months 167,428 55.8 %
Over Twelve Months Through Three Years 38,176 12.7 %
Over Three Years 1,778 0.6 %
Total $ 300,132 100.0 %
FHLB Borrowings and Federal Funds Purchased
Information pertaining to FHLB borrowings and federal funds purchased at the dates presented are summarized in the table below:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Balance at Period End
Federal Home Loan Bank Borrowings $ — $ 178,500
Federal Funds Purchased — —
Average Balance during the Period
Federal Home Loan Bank Borrowings $ 79,575 $ 110,944
Federal Funds Purchased — —
Average Interest Rate during the Period
Federal Home Loan Bank Borrowings 3.94 % 4.19 %
Federal Funds Purchased — % — %
Maximum Month-end Balance during the Period
Federal Home Loan Bank Borrowings $ 193,500 $ 178,500
Federal Funds Purchased — —
Average Interest Rate at Period End
Federal Home Loan Bank Borrowings — % 3.89 %
Federal Funds Purchased — % — %
Borrowings represent an additional source of liquidity for the Company. FHLB borrowings decreased $178.5 million to zero at June 30, 2026, from $178.5 million at December 31, 2025, reflecting the repayment of borrowings utilizing proceeds from the Loan Sale Transaction completed during the first quarter of 2026. The Company had no overnight federal funds purchased outstanding at June 30, 2026 or December 31, 2025.
The level and composition of borrowed funds fluctuates over time based on a variety of factors, including market conditions, loan and deposit growth, investment securities activity, and capital considerations. Management actively monitors and manages borrowings to ensure they remain a reliable and cost-effective source of liquidity.
As a member of the Federal Home Loan Bank of Atlanta, the Company is required to purchase and maintain a specified level of FHLB capital stock based on asset size, outstanding borrowings, and participation in other FHLB programs. At June 30, 2026, the Company held $3.4 million of FHLB stock, compared to $11.7 million at December 31, 2025. The decrease in FHLB stock was attributable to the lower required level of stock holdings resulting from decreased FHLB borrowings.
Dividends recognized on FHLB stock totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2026, respectively, compared to $0.1 million and $0.3 million for the same periods in 2025, respectively. The investment in FHLB stock is carried at cost and evaluated for impairment based on the ultimate recoverability of its par value.
FHLB stock is non-marketable and may be redeemed only at the discretion of the FHLB. Members do not purchase stock for capital appreciation purposes, as FHLB stock can only be purchased, redeemed, or transferred at par value. Rather, ownership of FHLB stock provides members with access to the funding, liquidity, and other financial services offered by the FHLB.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Refer to Note 9, Federal Home Loan Bank Borrowings and Federal Funds Purchased, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the Company’s borrowings.
Liquidity and Capital Resources
Liquidity
Liquidity refers to the Company’s ability to meet cash and collateral obligations in a timely manner and at a reasonable cost, including funding deposit withdrawals and borrower credit demands. The Company’s Board of Directors has delegated oversight of liquidity risk management to ALCO, which is responsible for maintaining sufficient liquidity at a reasonable cost under both normal operating conditions and potential stress scenarios.
ALCO monitors and manages liquidity risk by reviewing cash flow projections, performing balance sheet stress testing, and maintaining a comprehensive contingency funding plan. This plan includes defined liquidity metrics and graduated risk tolerance levels, which are reviewed monthly. If liquidity levels reach thresholds defined as high risk, enhanced monitoring and the implementation of specific predefined action plans to reduce risk are required.
The Company’s primary source of liquidity is its stable customer deposit base. Management believes it can retain existing deposits and attract new deposits, limiting reliance on more volatile funding sources. In addition to deposits, the Company maintains access to multiple supplemental funding sources as part of its normal liquidity management strategy. At June 30, 2026, funding sources accessible to the Company included borrowing availability at the FHLB equal to 30.0% of total assets, or $1.4 billion, subject to eligible collateral pledged, of which the Company had the capacity to borrow an additional $879.5 million. During the six months ended June 30, 2026, the Company’s previously disclosed $45.0 million secured line of credit with a correspondent financial institution was decreased to $25.0 million, and during the second quarter of 2026, this line of credit was converted to an unsecured facility. In addition, a $50.0 million unsecured line of credit with an unrelated correspondent financial institution was fully reinstated. Reflecting the Company’s improved earnings performance and enhanced credit risk profile following the Loan Sale Transaction during the first quarter of 2026, the Company now maintains unsecured borrowing lines of credit totaling $105.0 million with four correspondent financial institutions, inclusive of the converted unsecured facility noted previously. The Company also continues to have access to the institutional CD market.
Additional liquidity can be provided by $500.6 million of unpledged available-for-sale investment securities at fair value at June 30, 2026. Refer to the Liquidity Sources table below for further detail regarding FHLB borrowing capacity and correspondent bank lines of credit.
As of June 30, 2026, approximately 82.3% of total deposits were insured under standard FDIC coverage limits, while 17.7% were uninsured. Management actively monitors industry and market conditions that could affect liquidity and evaluates alternative funding strategies as needed. In addition, the Company closely monitors the potential impacts of interest rate movements and market conditions on the fair value of its securities portfolio, particularly in light of evolving banking industry dynamics that may influence liquidity availability or market expectations.
Maintaining a cushion of highly liquid assets or assets that can be converted to cash quickly, with little or no loss in value, is a key component of the Company’s liquidity risk management framework. ALCO policy establishes graduated risk tolerance levels for the ratio of highly liquid assets to total assets. At June 30, 2026, the Bank had $736.5 million of highly liquid assets, consisting of $235.4 million in excess reserves at the Federal Reserve and interest-bearing deposits at other financial institutions, $0.5 million of loans held-for-sale, and $500.6 million of unpledged securities. This resulted in highly liquid assets to total assets ratio of 15.3%. Total available liquidity relative to uninsured deposits was 237.9% at June 30, 2026.
While management believes current liquidity sources are sufficient, an extended economic downturn or significant market disruption could increase reliance on more volatile or higher cost funding sources.
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The following table provides detail of liquidity sources at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Cash and Due From Banks $ 41,101 $ 36,935
Interest Bearing Deposits in Other Financial Institutions 167,427 12,134
Federal Reserve Bank Excess Reserves 68,007 56,094
Unpledged Investment Securities 500,568 402,220
Excess Pledged Securities 7,066 33,443
FHLB Borrowing Availability 879,466 609,392
Collateralized Lines of Credit — 45,000
Unsecured Lines of Credit Availability 105,000 30,000
Total Liquidity Sources $ 1,768,635 $ 1,225,218
The following table provides total liquidity sources and ratios at the dates presented:
(Dollars in Thousands) June 30, 2026 December 31, 2025
Total Liquidity Sources $ 1,768,635 $ 1,225,218
Highly Liquid Assets1 to Total Assets 15.3 % 9.7 %
Highly Liquid Assets1 to Uninsured Deposits 99.1 % 59.8 %
Total Available Liquidity to Uninsured Deposits 237.9 % 155.7 %
1 Highly liquid assets consist of $235.4 million in Federal Reserve Board excess reserves and interest-bearing deposits in other financial institutions, loans held-for-sale of $0.5 million and unpledged securities of $500.6 million.
Capital Resources
The Company reviews, on an ongoing basis, its and the Bank’s capital levels and opportunities to effectively deploy the Company’s capital or return capital to shareholders through stock repurchases or potential dividends. The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank at the dates presented:
(Dollars in Thousands) Minimum Required Basel III WellCapitalized 1 June 30, 2026 December 31, 2025
Amount Ratio Amount Ratio
Carter Bankshares, Inc.
Leverage Ratio 4.00 % NA $ 570,098 11.65 % $ 459,735 9.43 %
Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % NA 570,098 14.26 % 459,735 10.70 %
Tier 1 Capital (to Risk-weighted Assets) 8.50 % NA 570,098 14.26 % 459,735 10.70 %
Total Capital (to Risk-weighted Assets) 10.50 % NA 620,164 15.51 % 513,722 11.95 %
Carter Bank & Trust
Leverage Ratio 4.00 % 5.00 % $ 572,804 11.73 % $ 437,670 9.01 %
Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % 6.50 % 572,804 14.34 % 437,670 10.23 %
Tier 1 Capital (to Risk-weighted Assets) 8.50 % 8.00 % 572,804 14.34 % 437,670 10.23 %
Total Capital (to Risk-weighted Assets) 10.50 % 10.00 % 622,810 15.60 % 491,396 11.49 %
1 To be “well capitalized” under the prompt corrective action framework applies to the Bank only.
Total capital was $539.1 million at June 30, 2026, an increase of $119.4 million compared to December 31, 2025. The increase was primarily driven by net income of $114.7 million, a $9.2 million improvement in accumulated other comprehensive loss, reflecting favorable changes in the fair value of the available-for-sale portfolio and a $0.6 million increase related to restricted stock activity during the six months ended June 30, 2026. These increases were partially offset by $2.9 million of common stock repurchases and $2.2 million of dividends declared.
The Company and the Bank remained well capitalized at June 30, 2026, exceeding all regulatory capital requirements. The capital ratios were favorably impacted by the Loan Sale Transaction. The key capital ratios included a leverage ratio of 11.65%,
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a Common Equity Tier 1 ratio of 14.26%, a Tier 1 ratio of 14.26%, and a Total risk-based capital ratio of 15.51%, all well above regulatory well-capitalized thresholds. Management believes the Company maintains a strong capital position and has the capacity to raise additional capital if needed.
The Company and the Bank are subject to various capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements may result in mandatory and, in certain cases, discretionary actions by regulators that could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital standards that are based on quantitative measures of assets, liabilities and certain off-balance sheet items calculated in accordance with regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators regarding components, risk weightings and other factors. Prompt corrective action provisions do not apply to bank holding companies.
Regulatory capital guidelines require the maintenance of minimum capital amounts and ratios. Under Basel III capital rules, the Company and the Bank are required to maintain minimum ratios of common equity Tier 1 capital, Tier 1 capital and total capital, as well as a capital conservation buffer, which effectively increases the minimum capital levels required. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not maintain capital ratios above the required minimums plus the applicable buffer are subject to restrictions on dividends, equity repurchases and discretionary compensation.
The Basel III capital framework also provides for a “countercyclical capital buffer” applicable to certain covered institutions. This buffer is not currently applicable to the Company or the Bank.
Banking organizations with less than $15 billion in total assets are permitted to make a one-time election to exclude accumulated other comprehensive loss from regulatory capital. The Company elected to retain this treatment, which reduces volatility in regulatory capital levels.
Management believes that, as of June 30, 2026, the Company and the Bank met all applicable capital adequacy requirements, including the capital conservation buffer.
Prompt corrective action regulations establish five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. These classifications are not intended to represent overall financial condition. Institutions that are adequately capitalized require regulatory approval to accept brokered deposits, while undercapitalized institutions are subject to restrictions on capital distributions, asset growth, and expansion and are required to submit capital restoration plans.
As of June 30, 2026 and December 31, 2025, the most recent regulatory notification classified the Company and the Bank as well-capitalized under the prompt corrective action framework. Management is not aware of any conditions or events since that notification that management believes would have changed the Company and the Bank’s capital category.
Stock Repurchase Plan
On February 2, 2026, the Company announced that its Board authorized a repurchase program to purchase up to $10.0 million of the Company’s common stock in the aggregate over a period of twelve months beginning February 11, 2026, the date of receipt of non-objection from the Federal Reserve Bank of Richmond. The program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the program, and the number of shares actually purchased under the program, will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position
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and applicable legal and regulatory requirements. The repurchase program may be modified or terminated by the Board at any time. The repurchase program does not obligate the Company to purchase any particular number of shares.
During both the three and six months ended June 30, 2026, the Company repurchased 108,601 shares of its common stock at a total cost of $2.9 million and a weighted average cost per share of $26.50.
On May 20, 2025, the Company announced that its Board authorized a repurchase program to purchase up to $20.0 million of the Company’s common stock in the aggregate through May 14, 2026. The program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
The 2025 Program was fully utilized on October 30, 2025.
Contractual Obligations
As of June 30, 2026, there have been no material changes to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2025 ( the “2025 Annual Report”), except that the Company repaid its outstanding FHLB advances during the six months ended June 30, 2026, reducing its contractual debt obligations.
Off-Balance Sheet Arrangements
As of June 30, 2026, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2025 Annual Report.
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