CARE — Q2 2026 Financial Report Analysis

Overview

Carter Bankshares, the holding company for Carter Bank (63 branches in Virginia and North Carolina, $4.8 billion in assets), reported second-quarter 2026 net income of $28.9 million, or $1.31 per diluted share, up from $8.5 million ($0.37) a year earlier. That jump is almost entirely a one-off: a $35.9 million pre-tax gain from selling its stake in Bearing Insurance Group, partly offset by a $12.5 million loss from deliberately selling low-yielding bonds. Strip those and other non-recurring items out and the company's own adjusted net income was $11.6 million ($0.53 per share), up 24.5% from $9.3 million ($0.41).

The real story is underneath: the bank is earning noticeably more on its balance sheet now that it has sold the $209.5 million of defaulted loans tied to entities of James C. Justice II, which had sat on its books earning nothing. Net interest income — what the bank earns on loans and bonds minus what it pays depositors and lenders — rose 23.5% to $40.0 million.

At a glance

• Net interest margin 3.38% (vs 2.80% a year ago). The margin is net interest income as a share of the bank's interest-earning assets; a 58 basis-point (0.58 percentage point) gain is a large move for a bank in one year, and it came from both higher asset yields and cheaper funding.
• Adjusted EPS $0.53 vs $0.41 (+29%). This is the cleaner read on recurring profit; GAAP EPS of $1.31 includes the insurance-sale gain, which the company says added $1.30 per share on its own.
• Nonperforming loans $37.6 million, 1.01% of loans (vs $250.6 million, 6.69%). Nonperforming loans are ones where the borrower has stopped paying as agreed. The year-on-year collapse is the Justice loan sale; the figure did, however, rise from $24.0 million in March because a new $13.4 million business-loan relationship went bad.

Key metrics

The efficiency ratio is noninterest expense divided by revenue — lower is better, and it shows how many cents the bank spends to earn a dollar. The GAAP figure is flattered by the insurance gain; the company's adjusted version (62.66%) removes it. Carter's CET1 ratio equals its Tier 1 ratio because it has no other Tier 1 instruments; the year-ago figure is the company's reported Tier 1 risk-based ratio. The company does not report a return on tangible common equity; its reported return on average equity was 22.01% (annualized) including the gain.

Takeaway: The headline EPS is mostly a gain on an asset sale, but the part that will repeat is also improving: selling $209.5 million of loans that paid nothing, repaying all $113.5 million of Federal Home Loan Bank borrowings, and swapping 2.28%-yielding bonds for ~5.27% ones lifted the margin to 3.38% and adjusted EPS by 29%. The question for the next few quarters is whether loan growth can put the remaining cash to work before the new nonperforming business loan grows into a pattern.

What changed: the Justice loans are gone

For several years Carter's results were dominated by a single borrower group — entities controlled by James C. Justice II — whose loans had been reduced to court judgments and placed on nonaccrual (no longer earning interest). On March 26, 2026, the bank sold all of them "as-is" to an unaffiliated third party for $289.5 million in cash, against an outstanding principal balance of $209.5 million. The first-quarter results booked a $65.0 million gain on the sale, plus an $18.0 million release of reserves already set aside and $15.0 million of recoveries, which is why Q1 2026 net income was $85.8 million.

Q2 is the first full quarter without those loans, and the average-balance table shows why that matters: a year ago, $278.2 million of average loans earned nothing; in Q2 2026 that line was zero. The yield on total loans rose from 5.39% to 5.71% — but much of that is this mix effect, not better pricing. Yields on the bank's biggest category, commercial real estate, actually fell from 6.16% to 5.94%, and commercial and industrial (business) loan yields fell from 6.68% to 6.01%.

The cash also paid down expensive borrowings. Federal Home Loan Bank advances, $113.5 million a year ago at a 4.37% cost, are now zero, and the average cost of interest-bearing deposits fell from 2.70% to 2.38%. Interest expense dropped from $25.4 million to $21.5 million while interest income rose from $57.7 million to $61.5 million.

After the quarter ended, on August 17, 2026, the company said the lawsuit the Justice parties filed against Carter in April over those loans had been voluntarily dismissed with prejudice (meaning it cannot be refiled). Legal fees tied to that litigation were one reason professional and legal fees rose to $2.1 million in Q2.

The two Q2 one-offs

• Insurance sale (+$35.9 million pre-tax): Carter sold its membership interest in Bearing Insurance Group effective May 1. The company says this added $1.30 to the quarter's diluted EPS and $1.28 to tangible book value per share. The cost is a small, permanent loss of fee income: insurance commissions were $164,000 this quarter versus $714,000 a year ago.
• Bond repositioning (−$12.5 million pre-tax): Carter sold $139.4 million of available-for-sale securities (about 18.7% of its bond portfolio) yielding 2.28% and bought about $88.5 million of AAA/AA-rated securities yielding about 5.27%. Selling bonds bought when rates were low locks in a loss now in exchange for higher interest income later. On the figures given, the replacement bonds earn roughly $1.5 million a year more than the full $139.4 million sold, before counting what the leftover ~$51 million earns once lent out — so the payback on the $12.5 million loss is several years, not quarters, unless that cash goes into loans.

What the headline numbers hide

• GAAP vs adjusted gap. GAAP net income of $28.9 million vs adjusted $11.6 million. The company's adjustments remove the $35.9 million insurance gain, add back the $12.5 million securities loss, $1.3 million of OREO (foreclosed property) write-downs and small items, then apply a $4.6 million tax effect. The adjustments look reasonable — they run in both directions — but note that OREO write-downs have now recurred in several quarters ($0.6 million in Q1, $1.3 million in Q2), so treating them as non-recurring is generous.
• The provision turned into a cost. Carter set aside $2.0 million for credit losses this quarter after releasing $2.3 million a year earlier. That was driven by a commercial and industrial relationship of three loans totaling $13.4 million that was downgraded and placed on nonperforming status. Reserve coverage of nonperforming loans fell from 219% in March to 147% in June. One relationship is not a trend, but it is a new problem credit that appeared within a quarter of the Justice exposure leaving.
• Loan growth is mostly a removal effect. Portfolio loans are down 0.3% year on year; the company's +6.45% "adjusted" growth figure excludes the sold Justice loans. Quarter on quarter, loans grew just $6.1 million because about $132.6 million of commercial real estate loans paid off. About $0.6 million of the quarter's interest income came from loan prepayment penalties, which also helped the margin and won't necessarily repeat.
• Cash conversion. Year-to-date operating cash flow was $43.4 million versus GAAP net income of $114.7 million — but that gap is expected, because the cash from the loan and insurance sales shows up as investing cash flow, not operating. Against adjusted net income of $20.2 million, operating cash flow looks healthy.
• Buybacks and tax. Average diluted shares fell 4.2% (to 21.84 million from 22.81 million), so roughly 4 points of the 29% adjusted-EPS growth came from a smaller share count rather than higher profit. The company bought back 108,601 shares for $2.9 million during the quarter. The effective tax rate was higher, not lower (22.4% vs 19.9%), so tax was not a tailwind.
• Expenses are creeping up underneath. Noninterest expense rose only 2.3% year on year, but that includes a $1.7 million drop in FDIC insurance expense (a benefit of the cleaner loan book, including a $0.2 million credit this quarter). Data processing rose 56% to $2.2 million and other expense rose to $4.4 million, partly from $1.3 million of property write-downs.

Funding and capital

Deposits were $4.20 billion, down $37.7 million from March. About 44% of them are certificates of deposit (time deposits), which reprice as they mature — useful if rates fall, and the main reason funding costs are coming down gradually rather than all at once. About 82.3% of deposits are within FDIC insurance limits, so the bank has relatively little of the uninsured-deposit concentration that caused trouble for some regional banks in 2023.

Capital rose sharply: the CET1 ratio (core equity as a share of risk-weighted assets, the main regulatory capital measure) was 14.26%, up from 10.87% a year ago and 10.70% at the end of 2025, and the leverage ratio was 11.65%. Book value per share climbed 36% to $24.33. That is a lot of excess capital for a bank this size, which is what gives management room to grow loans, buy back shares, or both.

Outlook

Management did not give numerical guidance. It said it expects the bond repositioning to keep lifting earnings through higher asset yields, that it plans to use the remaining sale proceeds to fund loan growth during the rest of 2026, and that construction lending commitments already made should fund over the next 12 to 18 months. It also pointed to growing small-business and commercial and industrial lending.

Our read: the margin gains from removing non-earning loans and repaying borrowings are structural and should hold, but most of that one-time step-up is now in the numbers — further margin expansion depends on CD repricing and on actually deploying the roughly $276.5 million of cash on hand into loans while CRE payoffs keep running. The adjusted efficiency ratio of 62.66% is a clear improvement on 75.55% but still middling for a community bank. Watch three things in the Q3 report: whether quarter-on-quarter loan growth turns meaningfully positive, whether the $13.4 million problem relationship stays isolated, and whether legal and professional costs fall now that the Justice lawsuit has been dismissed.

This is the first Carter Bankshares report we have published, so there is no previous outlook to check against.

Source: Carter Bankshares Form 10-Q for the quarter ended June 30, 2026, and the company's Q2 2026 earnings release (Form 8-K Exhibit 99.1, July 23, 2026). Adjusted net income, adjusted EPS and the adjusted efficiency ratio are the company's own non-GAAP measures.