What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-07 · 811 added, 74 removed, 173 unchanged (84% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2021 and June 30, 2020.

Our MD&A should be read in conjunction with our Consolidated Financial Statements and notes thereto.

The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements related to the COVID-19 pandemic and its potential impact on the Company, its markets and its customers, potential asset quality developments, and the Company’s efficiency initiatives, pending branch sales, and deferral programs and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, litigation to which the Company is a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations.

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,” “believe,” “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.

Although we believe 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.

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 depending on a variety of uncertainties or other factors including, but not limited to:

changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”);

technological risks and developments;

cyber-security, threats, attacks or events;

rapid technological developments and changes;

the Company’s liquidity and capital positions;

the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto;

these potential adverse effects may include, without limitation, adverse effects on 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;

the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of economic recovery when the pandemic subsides and the heightened impact it has on exacerbation of many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2020;

legislative or regulatory changes and requirements, including the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as amended by the Consolidated Appropriations Act, of 2021 (the “CAA”), and other legislative and regulatory reactions to the COVID-19 pandemic;

potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, under the CARES Act, as amended by the CAA;

sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;

a change in spreads on interest-earning assets and interest-bearing liabilities;

regulatory supervision and oversight;

legislation affecting the financial services industry as a whole, and the Company, in particular;

the outcome of pending and future litigation and 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;

the Company’s strategic branch network optimization plan;

managing our internal growth and acquisitions;

the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;

containing costs and expenses;

reliance on significant customer relationships;

credit losses;

general economic or business conditions;

deterioration of the housing market and reduced demand for mortgages;

deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of 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.

Many of these factors, as well as other factors, are described throughout this Quarterly Report, including and in Part I, Item 1A,

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and any of our subsequent filings with the Securities and Exchange Commission, or (“SEC”).

Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made.

We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events 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 we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

Critical Accounting Policies and Estimates

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except we have updated our allowance for credit losses (ACL) policy and included required disclosures in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

Please refer to the CECL disclosure contained in Notes 1 and 5 to the financial statements included in this Quarterly Report on Form 10-Q.

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at June 30, 2021.

The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”).

The Bank is an insured, Virginia state-chartered bank, which operates branches in Virginia and North Carolina.

The Company provides a full range of financial services with retail, and commercial banking products and insurance.

Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE.”

The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers.

The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

Our mission is that the Company strives to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve.

Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin.

Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.

Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses.

The Company is focused on executing our strategy to successfully build our brand and grow our business in our markets.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020.

The CARES Act is an emergency stimulus measure providing assistance and relief in a variety of ways to certain individuals, businesses, and industries.

The CARES Act established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”).

In addition to the general impact of the COVID-19 pandemic has had on the Company, certain provisions of the CARES Act, as well as other legislative and regulatory relief efforts, may have a material impact on our operations.

The full extent of these impacts at the date of this filing is unknown;

however, we have disclosed the material items of which we are aware.

Many of the CARES Act’s programs are dependent upon the direct involvement of U.S.

financial institutions and will be implemented through rules and guidance adopted by federal agencies, including the U.S.

Department of the Treasury, the Federal Deposit Insurance Corporation (“FDIC”), the Board of Governors of the Federal Reserve System (“FRB” or “Federal

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Reserve”) and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Set forth below is a brief overview of certain provisions of the CARES Act and certain other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company.

The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein.

Such statutes, regulations, and policies are subject to ongoing review by U.S.

Congress and federal regulatory authorities.

Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Bank could have a material effect on the Bank.

The Bank will continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

FRB Reserve Programs and Initiatives

The CARES Act encourages the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities, including (i) a Midsize Business/Nonprofit Organization Program to provide financing to banks and other lenders to make direct loans to eligible businesses and nonprofit organizations with between 500 and 10,000 employees and (ii) the Municipal Liquidity Facility, provide liquidity to the financial system that supports states and municipalities.

On April 9, 2020, the FRB announced and solicited comments regarding the Main Street Lending Program, which would implement certain of these recommendations.

Separately, and in response to the COVID-19 pandemic, the FRB’s Federal Open Market Committee (the “FOMC”) has set the federal funds target rate – i.e., the interest rate at which depository institutions such as the Company lend reserve balances to other depository institutions overnight on an uncollateralized basis – to a historic low.

On March 16, 2020, the FOMC set the federal funds target rate at 0-0.25%.

Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

In addition, the FRB has expanded the size and scope of three existing programs to mitigate the economic impact of the COVID-19 pandemic:

(i) the Primary Market Corporate Credit Facility;

(ii) the Secondary Market Corporate Credit Facility;

and (iii) the Term Asset-Backed Securities Loan Facility.

The FRB has also established two new program facilities – the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility – to broaden its support for the flow of credit to households and businesses during the COVID-19 pandemic.

Temporary Bank Secrecy Act (“BSA”) Reporting Relief

Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has provided targeted relief from certain BSA reporting requirements and have provided updated guidance to financial institutions on complying with such requirements during the COVID-19 pandemic.

Specifically, FinCEN has (i) granted targeted relief to financial institutions participating in the PPP, stating that PPP loans to existing customers will not require reverification under applicable BSA requirements, unless reverification is otherwise required under the financial institution’s risk-based BSA compliance program, (ii) acknowledged that there may be “reasonable delays in compliance” due to the COVID-19 pandemic, and (iii) temporarily suspended implementation of its February 2020 ruling, which would have entailed significant changes to currency transaction reporting filing requirements for transactions involving sole proprietorships and entities operating under a “doing business as” or other assumed name.

The Company’s Response to COVID-19

Lending Operations

The Company elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology.

The Company was subject to the adoption of the CECL accounting method under the FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020 and has since implemented CECL January 1, 2021.

Refer to Note 1, Basis of Presentation and Note 5 Allowance for Credit Losses, of the Notes to Unaudited Consolidated Financial statements for additional disclosures related to CECL.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The Company quickly responded to the pandemic and the CARES Act, offering the option of payment deferrals, participation in the PPP, fee waivers and other relief actions to customers.

Banks have been identified as essential services and have remained open during the COVID-19 pandemic.

Since April 28, 2021, all of the Company’s branch lobbies are open.

Every opportunity is being taken to protect both customers and employees through enhanced cleaning services, social distancing and personal protective equipment requirements for both.

Approximately 20% of the Company’s workforce is working remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the Small Business Administration’s (“SBA”) 7-A loan program.

The Company became an approved SBA 7A lender in November 2019.

The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic.

Initially, $349 billion was approved and designated for the PPP in order for the Small Business Administration (“SBA”) to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses.

The Company participated in the initial round of funding through a referral relationship with a third-party, non-bank lender.

When an additional $310 billion in funds were approved and designated for the PPP, we opted to set up an internal, automated loan process utilizing our core system provider.

As of June 30, 2021 we processed either through a third-party or internally 1,102 PPP loans totaling $68.9 million, represented by $17.9 million processed in rounds one and two related to loans approved that were referred to an online small business lender, $39.9 million processed in rounds one and two and $11.1 million in round three.

The Company has continued making PPP loans pursuant to the additional PPP authorization that was contained in the December 2020 COVID-19 relief law.

The FRB implemented a liquidity facility available to financial institutions participating in the PPP.

However, we opted to fund all PPP loans through our internal liquidity sources.

These loans are fully guaranteed by the SBA and do not represent a credit risk.

We expect the vast majority of these PPP loans will be forgiven based upon a preliminary review of the loans.

As of June 30, 2021, the Company thus far has had 361 loans totaling $29.6 million fully forgiven by the SBA.

The Company provided deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications.

The Company launched successive deferral programs with short-term expirations.

The Part I program was launched in March 2020 and expired at the end of August 2020.

The deferrals in Part I typically provided deferral of both principal and interest through the expiry.

The Part II program was launched in July 2020 and expired at the end of December 2020.

The deferrals in this program were needs based and required the collection of updated financial information and in certain situations, the validation of liquidity to support the business.

Prior to the extension of the CARES Act, the Company launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021.

Borrowers who opted into the Part III program were required to provide monthly financial statements and remit payments on a quarterly basis based on excess cash flows (“recapture payment”), if any, up to their otherwise contractual payment.

In the quarter ended March 31, 2021 recapture payments due from deferral clients totaled $2.2 million and the Bank has collected $1.8 million to date.

The second quarter 2021 recapture payments are in the process of being determined.

At the end of these deferral periods, for term loans, payments will be applied to accrued interest first and will resume principal payments once accrued interest is current.

Deferred principal will be due at maturity.

For interest only loans, such as lines of credit, deferred interest will be due at maturity.

At June 30, 2021, Part III of the program expired and we expect the majority of our clients to resume regularly scheduled payments.

Our interest income could be reduced due to the COVID-19 pandemic.

In keeping with guidance from regulators, we are actively working with borrowers affected by the COVID-19 pandemic to defer their payments, interest, and fees.

Interest and fees will still accrue to income through normal GAAP accounting.

Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.

In such a scenario, interest income in future periods could be negatively impacted.

At this time, we are unable to project the significance of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Our exposure to hospitality at June 30, 2021 equated to approximately $486.4 million, or 16.7% of total portfolio loans.

These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows.

However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy levels at or below breakeven which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness.

These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

These risk considerations were factored into qualitative adjustments included in the ACL.

As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Retail Operations

The Company continues to promote digital banking options through our website.

Customers are encouraged to utilize online and mobile banking tools and our customer contact center for personal and automated telephone banking services.

Retail branches are staffed and available to assist customers by offering lobby appointments, drive-up and virtual servicing.

In March 2020, we closed all branch lobbies to customer activity, offering drive-up and appointment only services.

On October 31, 2020, we opened 36 branch lobbies and as of April 28, 2021, we opened our remaining branch lobbies.

Retail leadership continues to monitor branch traffic and local conditions daily and makes adjustments as needed.

All branches are equipped with video conferencing and online tools that enable virtual servicing.

We continue to pay all employees according to their normal work schedule, even if their hours have been reduced.

No employees have been furloughed.

Employees whose job responsibilities can be effectively carried out remotely are working from home.

Employees whose critical duties require their continued presence on-site are utilizing personal protection equipment and observing social distancing and cleaning protocols.

Our fee income for 2020 was negatively impacted due to COVID-19 by approximately $1.5 million.

Beginning on July 20, 2020, certain account fees were reinstated.

In keeping with guidance from regulators, we actively worked with customers affected by the COVID-19 pandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees.

As of June 30, 2021 we had no fee waivers specific to the COVID-19 pandemic.

We believe these reductions in fees were temporary.

Capital Resources and Liquidity

As of June 30, 2021, all of the Company’s capital ratios were in excess of all regulatory requirements.

The economic recession brought about by the COVID-19 pandemic has improved during the first six months of 2021.

We maintain access to multiple sources of liquidity.

Funding sources accessible to the Company include borrowing availability at the Federal Home Loan Bank (“FHLB”), equal to 25.0% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which $547.9 million remains available at June 30, 2021, federal funds unsecured lines with six other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered CDs.

In addition to the above resources, the Company also has $697.6 million of unpledged available-for-sale securities as an additional source of liquidity at June 30, 2021.

If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The Company is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources.

Due to the economic uncertainty, we are taking a prudent approach to capital management and have established access to the FRB’s PPP Lending Facility.

Earnings Summary

Net income increased $1.0 million, or 21.9%, and $5.9 million, or 66.8%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Net income for the three and six months ended June 30, 2021 was $5.4 million and $14.8 million, or $0.21 and $0.56 diluted earnings per share, respectively, compared to net income of $4.5 million and $8.9 million, or $0.17 and $0.34 diluted earnings per share, respectively, for the same periods in 2020.

The increase in net income for the three months ended June 30, 2021 of $1.0 million was due to lower provision for credit losses of $4.5 million as well as the release of $0.6 million for the provision for unfunded commitments, a $1.0 million increase in noninterest income and an increase in net interest income of $0.9 million offset by an increase in noninterest expense of $4.7 million and higher provision for income taxes of $1.4 million.

The increase in net income for the six months ended June 30, 2021 of $5.9 million was due to lower provision for credit losses of $7.4 million, as well as, the release of $0.9 million for the provision for unfunded commitments, and increases of $3.2 million in noninterest income and $0.2 million in net interest income offset by higher noninterest expenses of $3.7 million and an increase in the provision for income taxes of $2.1 million.

Net interest income increased $0.9 million, or 3.6%, to $27.2 million and increased $0.2 million, or 0.4%, to $53.7 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Net interest margin decreased one basis point and 11 basis points to 2.75% and 2.74% for the three and six months ended June 30, 2021, respectively, compared to 2.76% and 2.85% for the same periods in 2020.

These impacts were primarily due to the lower yields

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

on interest-earning assets, offset by a decline in the cost of interest-bearing liabilities.

Net interest margin, on a fully taxable equivalent (“FTE”) basis (non-GAAP), decreased four and 14 basis points to 2.79% and 2.78% for the three and six months ended June 30, 2021 compared to 2.83% and 2.92% for the same periods in 2020.

The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but continues to be offset by lower cost of funds.

The yield on interest-earning assets decreased 43 and 57 basis points for the three and six months ended June 30, 2021, respectively, partially offset by 47 and 52 basis points reduction in funding costs compared to the same periods in 2020.

Net interest margin is reconciled to net interest income adjusted to an FTE basis in the “Net Interest Income” section of the “Results of Operations - Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020 in this MD&A.

Also refer to the “Explanation of Use of Non-GAAP Financial Measures” for additional discussion of the non-GAAP measures.

The provision for credit losses decreased $4.5 million and $7.4 million to $1.0 million and $2.8 million for the three and six months ended June 30, 2021, respectively, compared to $5.5 million and $10.3 million for the same periods in 2020.

Provision for credit losses during the second quarter of 2021 was primarily driven by the release of $4.8 million of specific reserves in connection with the resolution of our two largest nonperforming relationships, offset by an increase to the CECL model to account for uncertainty in credit quality with respect to loans in the “Other” loan segment.

These resolutions contributed to net charge-offs for the quarter ended June 30, 2021 totaling $8.5 million;

however, $13.1 million was previously reserved.

The provision for credit losses also decreased due to qualitative adjustments of $2.6 million in the second quarter of 2020 for the decline in economic and market conditions as a result of the COVID-19 pandemic.

The first six months of 2021 provision for credit losses was primarily driven by adjustments to the CECL model to account for additional expected deterioration in credit quality with respect to loans on deferral.

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

During the first six months of 2021, management observed continued deterioration on a loan in deferral with an aggregate principal balance of $8.1 million that was not previously recognized in the Day 1 model.

This adjustment resulted in additional reserves of $1.5 million during the first quarter of 2021.

Prior to the adoption of CECL at January 1, 2021, the life-of-loss reserves on unfunded commitments was a component of noninterest expense and has not been reclassified for comparable periods.

The life-of-loss reserves on unfunded commitments totaled $2.2 million at June 30, 2021.

Net charge-offs were $8.5 million and $9.2 million for the three and six months ended June 30, 2021, respectively, compared to $1.0 million and $1.6 million for the same periods in 2020.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 1.15% and 0.63% for the three and six months ended June 30, 2021, respectively, compared to 0.14% and 0.11% for the same periods in 2020.

At June 30, 2021, nonperforming loans decreased $22.4 million to $9.6 million, compared to $32.0 million at December 31, 2020.

The decline is due to the aforementioned resolution of our two largest nonperforming credits during the second quarter of 2021 which resulted in net charge-offs of $6.3 million and $1.9 million, respectively, of which $13.1 million was previously reserved.

Nonperforming loans as a percentage of total portfolio loans were 0.33%, 1.09% and 1.37% as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively.

Total noninterest income increased $1.0 million and $3.2 million to $7.2 million and $16.2 million for the three and six months ended June 30, 2021, respectively, compared to $6.2 million and $13.0 million for the same periods in 2020.

The increase of $1.0 million for the three months ended June 30, 2021 compared to the same period in 2020 was primarily the result of increases of $1.3 million in service charges on deposit accounts due to reinstating fees that we previously waived during 2020 for customers affected by the COVID-19 pandemic, a premium of $0.5 million on the sale of four bank branches included in other income, and higher debit card interchange fees of $0.4 million due to usage.

These increases were offset by declines in net security gains of $0.8 million, lower commercial loan swap fee income of $0.4 million and lower gains on other real estate owned (“OREO”) of $0.1 million.

The fluctuations of commercial loan swap fee income were due to the timing and demand for this product in the current low interest rate environment.

The increase of $3.2 million in total noninterest income for the six months ended June 30, 2021 compared to the same period in 2020 was driven by the same variances as the second quarter period with higher net security gains of $1.6 million, service charges on deposit accounts increasing $1.5 million, debit card interchange fees up $1.0 million, a year-to-date premium of $0.5 million on the sale of four bank branches included in other income, offset by lower commercial loan swap fee income of $0.6 million and lower gains on OREO of $0.1 million.

However, for the six months ended June 30, 2021, insurance commissions declined $1.0 million compared to the prior year period.

The increase in security gains of $1.6 million for the six months ended

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

June 30, 2021, to $5.1 million, compared to $3.5 million for the same period in 2020 was due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in its securities portfolio.

Total noninterest expense increased $4.7 million and $3.7 million to $27.8 million and $51.4 million for the three and six months ended June 30, 2021, respectively, compared to $23.0 million and $47.6 million for the same periods in 2020.

The primary driver of the increase for both the three and six month periods was the nonrecurring write-down of $3.0 million for closed bank branches.

These branches were closed in the second quarter of 2021, transferred to OREO and marketed for sale resulting in the $3.0 million nonrecurring write-down.

Other variances for the three-month period ended June 30, 2021 were higher salaries and employee benefits $1.2 million due to increased medical expenses for several large critical illness claims and a $0.4 million nonrecurring severance and stay bonus for impacted employees from the branch closures in the second quarter of 2021.

Also offsetting the three-month increase was $0.4 million unfunded loan commitment expense, $0.4 million in data processing expenses due to new products and $0.2 million in tax credit amortization.

The $0.4 million decline in unfunded loan commitment expense is a result of the adoption of CECL as unfunded loan commitment expense is now recorded as part of provision for credit losses instead of noninterest expense.

Along with the above mentioned nonrecurring write-down for closed bank branches, total noninterest expense increases during the six months ended June 30, 2021 included $0.8 million higher professional and legal fees, $0.8 million higher data processing expenses due to an increase in customer accounts and new modules added to our core processor, $0.3 million increase in the amortization of tax credits, $0.3 million in occupancy expenses.

These increases were offset by decreases of $0.6 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020, lower unfunded loan commitment expense of $0.6 million and a $0.5 million decrease in other noninterest expense.

The provision for income taxes increased $1.4 million and $2.1 million to $0.9 million and $1.8 million for the three and six months ended June 30, 2021, respectively, compared to tax benefits of $0.5 million and $0.2 million for the same periods in 2020.

Pretax income increased $2.4 million and $8.0 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Our effective tax rate was 14.0% and 10.9% for the three and six months ended June 30, 2021, respectively, compared to negative 12.3% and negative 2.8% for the same periods in 2020.

The increase in the effective tax rate is primarily due to a higher level of pretax income, offset by a lower level of tax-exempt interest income.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and Bank Owned Life Insurance (“BOLI”), which are relatively consistent regardless of the level of pretax income.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses, and this quarterly report references net interest income and net interest margin on a FTE basis, each of which is a non-GAAP financial measure.

Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry.

Although management believes that these non-GAAP financial measures enhance an investor’s understanding of our business and performance, these non-GAAP financial measure should not be considered an alternative to financial measures determined in accordance with GAAP or considered to be more important than financial measures determined in accordance with GAAP, nor are they necessarily comparable to similar non-GAAP financial measures which may be presented by us or other companies.

The Company believes the presentation of net interest income on an FTE basis (non-GAAP) ensures the comparability of net interest income arising from both taxable and tax-exempt sources and we believe is consistent with industry practice.

Net interest income is reconciled to net interest income adjusted to an FTE basis (non-GAAP) in the Net Interest Income section of the "Results of Operations – Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020."

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

Net Interest Income

Our principal source of revenue is net interest income.

Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.

Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads.

The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet.

A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income.

Net interest income and the net interest margin are presented on an FTE basis (non-GAAP).

The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities.

The Company believes this FTE basis (non-GAAP)presentation provides a relevant comparison between taxable and non-taxable sources of interest income.

Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion of non-GAAP measures.

Total net interest income increased $0.9 million, or 3.6%, to $27.2 million, and $0.2 million, or 0.4%, to $53.7 million, for the three and six months ended June 30, 2021, respectively, compared to $26.3 million and $53.5 million for the same periods in 2020.

These increases were primarily due to the increase in the volume of interest-earning assets, offset by the decline in the interest rate environment.

Net interest income, on an FTE basis (non-GAAP), increased $0.7 million, or 2.6%, to $27.6 million and decreased $0.2 million, or 0.3%, to $54.6 million for the three and six months ended June 30, 2021, respectively, compared to $26.9 million and $54.8 million for the same periods in 2020.

The increase in net interest income, on an FTE basis (non-GAAP), was driven by $2.8 million and $7.8 million decreases in interest income during the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, partially offset by $3.5 million and $7.6 million decreases in interest expense during the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

These impacts were primarily due to the lower yields on interest-earning assets, offset by a decline in the cost of interest-bearing liabilities.

The net interest margin, on an FTE basis (non-GAAP), decreased four basis points and 14 basis points to 2.79% and 2.78% for the three and six months ended June 30, 2021, respectively, compared to 2.83% and 2.92% for the same periods in 2020, primarily due to the lower interest rate environment.

The lower interest rate environment and the intentional runoff of higher cost CDs has significantly contributed to lower the overall cost of funds.

The following table reconciles net interest income per the Consolidated Statements of Income to net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in Thousands) 2021 2020 2021 2020

Total Interest Income $ 33,094 $ 35,617 $ 66,051 $ 73,453

Total Interest Expense 5,891 9,355 12,319 19,927

Net Interest Income per Consolidated Statements of Net Income 27,203 26,262 53,732 53,526

Adjustment to FTE Basis 386 626 848 1,227

Net Interest Income (FTE)(non-GAAP) $ 27,589 $ 26,888 $ 54,580 $ 54,753

Net Interest Margin 2.75 % 2.76 % 2.74 % 2.85 %

Adjustment to FTE Basis 0.04 % 0.07 % 0.04 % 0.07 %

Net Interest Margin (FTE)(non-GAAP) 2.79 % 2.83 % 2.78 % 2.92 %

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Average Balance Sheet and Net Interest Income Analysis (FTE)

The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020

(Dollars in Thousands) Average Balance (3)

Income/ Expense Rate Average Balance Income/ Expense Rate

Interest-Bearing Deposits with Banks $ 190,851 $ 56 0.12 % $ 106,710 $ 26 0.10 %

Tax-Free Investment Securities (2)

33,027 273 3.32 % 49,633 416 3.37 %

Taxable Investment Securities 765,286 3,138 1.64 % 685,468 3,594 2.11 %

Total Securities 798,313 3,411 1.71 % 735,101 4,010 2.19 %

Tax-Free Loans (1)(2)

197,393 1,565 3.18 % 322,739 2,563 3.19 %

Taxable Loans (1)

2,782,802 28,417 4.10 % 2,651,873 29,577 4.49 %

Total Loans 2,980,195 29,982 4.04 % 2,974,612 32,140 4.35 %

Federal Home Loan Bank Stock 3,215 31 3.87 % 5,093 67 5.29 %

Total Interest-Earning Assets 3,972,574 $ 33,480 3.38 % 3,821,516 $ 36,243 3.81 %

Noninterest Earning Assets 170,885 288,435

Total Assets $ 4,143,459 $ 4,109,951

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 404,084 $ 234 0.23 % $ 297,815 $ 242 0.33 %

Money Market 351,820 305 0.35 % 183,542 211 0.46 %

Savings 657,803 169 0.10 % 592,193 157 0.11 %

Certificates of Deposit 1,512,923 5,052 1.34 % 1,845,294 8,627 1.88 %

Total Interest-Bearing Deposits $ 2,926,630 $ 5,760 0.79 % $ 2,918,844 $ 9,237 1.27 %

Federal Home Loan Bank Borrowings 30,000 91 1.22 % 35,000 100 1.15 %

Other Borrowings 3,514 40 4.57 % 1,245 18 5.81 %

Total Borrowings 33,514 131 1.57 % 36,245 118 1.31 %

Total Interest-Bearing Liabilities 2,960,144 5,891 0.80 % 2,955,089 9,355 1.27 %

Noninterest-bearing Liabilities 790,537 673,815

Shareholders' Equity 392,778 481,047

Total Liabilities and Shareholders' Equity $ 4,143,459 $ 4,109,951

Net Interest Income (2)

$ 27,589 $ 26,888

Net Interest Margin (2)

2.79 % 2.83 %

(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) Loan and deposit balances include held-for-assumption transactions in connection with sale of Bank branches.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Six Months Ended June 30, 2021 Six Months Ended June 30, 2020

(Dollars in Thousands) Average Balance (3)

Income/ Expense Rate Average Balance Income/ Expense Rate

Interest-Bearing Deposits with Banks $ 182,835 $ 106 0.12 % $ 84,836 $ 236 0.56 %

Tax-Free Investment Securities (2)

42,256 685 3.27 % 35,543 620 3.51 %

Taxable Investment Securities 736,926 6,125 1.68 % 698,786 8,096 2.33 %

Total Securities 779,182 6,810 1.76 % 734,329 8,716 2.39 %

Tax-Free Loans (1)(2)

210,132 3,353 3.22 % 330,298 5,223 3.18 %

Taxable Loans (1)

2,780,127 56,562 4.10 % 2,618,395 60,374 4.64 %

Total Loans 2,990,259 59,915 4.04 % 2,948,693 65,597 4.47 %

Federal Home Loan Bank Stock 4,006 68 3.42 % 4,755 131 5.54 %

Total Interest-Earning Assets 3,956,282 $ 66,899 3.41 % 3,772,613 $ 74,680 3.98 %

Noninterest Earning Assets 176,553 284,455

Total Assets $ 4,132,835 $ 4,057,068

Interest-Bearing Demand $ 391,555 $ 449 0.23 % $ 297,605 $ 688 0.46 %

Money Market 330,838 570 0.35 % 169,053 481 0.57 %

Savings 651,340 331 0.10 % 577,453 302 0.11 %

Certificates of Deposit 1,566,436 10,705 1.38 % 1,882,067 18,261 1.95 %

Total Interest-Bearing Deposits $ 2,940,169 $ 12,055 0.83 % $ 2,926,178 $ 19,732 1.36 %

Federal Funds Purchased — — — % 110 1 1.83 %

Federal Home Loan Bank Borrowings 31,934 187 1.18 % 26,209 159 1.22 %

Other Borrowings 2,914 77 5.33 % 1,363 35 5.16 %

Total Borrowings 34,848 264 1.53 % 27,682 195 1.42 %

Total Interest-Bearing Liabilities 2,975,017 12,319 0.84 % 2,953,860 19,927 1.36 %

Noninterest-bearing Liabilities 765,852 621,978

Shareholders' Equity 391,966 481,230

Total Liabilities and Shareholders' Equity $ 4,132,835 $ 4,057,068

Net Interest Income (2)

$ 54,580 $ 54,753

Net Interest Margin (2)

2.78 % 2.92 %

(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) Loan and deposit balances include held-for-assumption transactions in connection with sale of Bank branches.

Interest income decreased $2.5 million, or 7.1% and $7.4 million, or 10.1%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Interest income, on an FTE basis (non-GAAP), decreased $2.8 million, or 7.6% and $7.8 million, or 10.4%, for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

We are currently maintaining higher liquidity levels as a result of COVID-19.

The change was primarily due to increases in average interest-earning assets of $151.1 million and $183.7 million for the three and six months ended June 30, 2021, respectively, offset by lower short-term interest rates compared to the same periods in 2020.

Average interest-bearing deposits with banks increased $98.0 million for the six months ended June 30, 2021, and the average rate earned decreased 44 basis points for the six months ended June 30, 2021 compared to the same period in 2020.

Average loan balances increased $5.6 million and $41.6 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, which included PPP loan production that began in the second quarter of 2020.

Average PPP loans totaled $29.8 million through June 30, 2021.

The average rate earned on loans decreased 31 and 43 basis points for the second quarter and the first six months of 2021 compared to the same periods in 2020 primarily due to lower short-term interest rates.

Average investment securities increased $63.2 million and $44.9 million and the average rate earned decreased 48 and 63 basis points for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

The change in investment securities is the result of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures.

Interest expense decreased $3.5 million and $7.6 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

The decrease was primarily due to lower short-term interest rates in 2021 as compared to 2020 as well as the intentional runoff of higher cost CDs.

Interest expense on deposits decreased $3.5 million and $7.7 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020 primarily due to the

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

decline in the average balance of CDs and interest-bearing demand accounts.

The decrease of $332.4 million and $315.6 million in the average balance of CDs for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020 was primarily due to the intentional runoff of these higher cost CDs.

Interest-bearing demand accounts increased $106.3 million and $94.0 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

The average rate paid on interest-bearing deposits decreased 48 and 53 basis points for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020 primarily due to lower short-term interest rates.

Overall, the cost of interest-bearing liabilities decreased 47 and 52 basis points for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

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 Month Ended June 30, 2021

Compared to June 30, 2020 Six Months Ended June 30, 2021

Compared to June 30, 2020

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Interest Earned on:

Interest-bearing Deposits with Banks $ 24 $ 6 $ 30 $ 145 $ (275) $ (130)

Tax-free Investment Securities (2)

(136) (7) (143) 110 (45) 65

Taxable Investment Securities 390 (846) (456) 419 (2,390) (1,971)

Total Securities 254 (853) (599) 529 (2,435) (1,906)

Tax-free Loans (1)(2)

(987) (11) (998) (1,931) 61 (1,870)

Taxable Loans (1)

1,442 (2,602) (1,160) 3,524 (7,336) (3,812)

Total Loans 455 (2,613) (2,158) 1,593 (7,275) (5,682)

Federal Home Loan Bank Stock (21) (15) (36) (18) (45) (63)

Total Interest-earning Assets $ 712 $ (3,475) $ (2,763) $ 2,249 $ (10,030) $ (7,781)

Interest Paid on:

Interest-bearing Demand $ 73 $ (81) $ (8) $ 175 $ (414) $ (239)

Money Market 156 (62) 94 331 (242) 89

Savings 17 (5) 12 37 (8) 29

Certificates of Deposit (1,376) (2,199) (3,575) (2,746) (4,810) (7,556)

Total Interest-bearing Deposits (1,130) (2,347) (3,477) (2,203) (5,474) (7,677)

Federal Funds Purchased — — — — (1) (1)

FHLB Borrowings (15) 6 (9) (5) 33 28

Other Borrowings 27 (5) 22 1 41 42

Total Borrowings 12 1 13 (4) 73 69

Total Interest-bearing Liabilities $ (1,118) $ (2,346) $ (3,464) $ (2,207) $ (5,401) $ (7,608)

Change in Net Interest Margin $ 1,830 $ (1,129) $ 701 $ 4,456 $ (4,629) $ (173)

(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.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on unfunded commitments, is the amount to be added to the ACL, after considering loan charge-offs and recoveries, to bring the ACL to a level determined to be appropriate in management's judgment to absorb expected losses inherent in the loan portfolio.

The Company elected to defer its adoption of CECL in accordance with relief provided under the CARES Act effective January 1, 2021.

At January 1, 2021, we increased the ACL by $64.5 million for the Day 1 CECL adjustment which includes $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The provision for credit losses decreased $4.5 million to $1.0 million and $7.4 million to $2.8 million for the three and six months ended June 30, 2021, respectively, compared to $5.5 million and $10.3 million for the same periods in 2020.

The provision for unfunded commitments included a release of $0.6 million and a release of $0.9 million for the three and six months ended June 30, 2021.

For the three months ended June 30, 2021 the provision for credit losses was primarily driven by an increase of $5.7 million to the CECL model to account for uncertainty in credit quality with respect to loans in the “Other”

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

loan segment.

This increase was offset by the release of $4.8 million of specific reserves in connection with the resolution of our two largest nonperforming relationships.

These resolutions contributed to net charge-offs for the quarter ended June 30, 2021 totaling $8.5 million;

however, $13.1 million was previously reserved.

Adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral.

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

During the six months ended June 30, 2021, management observed continued deterioration on hospitality loans with aggregate principal balances of $50.9 million that are on deferral as of June 30, 2021.

This adjustment resulted in current expected credit losses of $11.7 million at June 30, 2021.

The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected credit losses of $10.2 million as of January 1, 2021.

Between the Day 1 model and the model ended June 30, 2021 a loan with a principal balance of $8.1 million experienced additional deterioration resulting in additional current expected losses of $1.5 million in the first quarter of 2021.

During the three months ended June 30, 2021, we recognized charge-offs of $8.2 million related to the resolution of our two largest nonperforming credits.

Net charge-offs were $8.5 million and $9.2 million for the three and six months ended June 30, 2021, respectively, compared to $1.0 million and $1.6 million for the same periods in 2020.

At June 30, 2021, December 31, 2020 and June 30, 2020, nonperforming loans were $9.6 million, $32.0 million and $40.6 million, respectively.

Nonperforming loans as a percentage of total portfolio loans were 0.33%, 1.09% and 1.37% as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively.

At June 30, 2021, the adoption of Topic 326 and subsequent measurement under this standard, resulted in an increase to our ACL of $55.2 million, to $109.3 million compared to $54.1 million at December 31, 2020.

The ACL as a percentage of total portfolio loans was 3.75% at June 30, 2021 and 1.83% at December 31, 2020.

Noninterest Income

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in Thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Gain on Sales of Securities, net $ 1,499 $ 2,321 $ (822) (35.4) % $ 5,109 $ 3,535 $ 1,574 44.5 %

Service Charges, Commissions and Fees 1,489 190 1,299 683.7 % 3,298 1,840 1,458 79.2 %

Debit Card Interchange Fees 1,874 1,468 406 27.6 % 3,705 2,711 994 36.7 %

Insurance Commissions 378 332 46 13.8 % 672 1,641 (969) (59.1) %

Bank Owned Life Insurance Income 342 350 (8) (2.3) % 682 703 (21) (3.0) %

Gains on Sales of Other Real Estate Owned, net — 137 (137) (100.0) % — — — NM

Other Real Estate Owned Income 4 82 (78) (94.5) % 75 221 (146) (65.8) %

Commercial Loan Swap Fee Income 742 1,125 (383) (34.1) % 961 1,548 (587) (37.9) %

Other 910 196 714 364.3 % 1,688 817 871 106.6 %

Total Noninterest Income $ 7,238 $ 6,201 $ 1,037 16.7 % $ 16,190 $ 13,016 $ 3,174 24.4 %

NM - Not Meaningful

Total noninterest income increased $1.0 million, or 16.7%, to $7.2 million for the three months ended June 30, 2021 and increased $3.2 million, or 24.4%, to $16.2 million for the six months ended June 30, 2021 compared to the same periods in 2020.

The increase of $1.0 million for the three months ended June 30, 2021 compared to the same period in 2020 was primarily the result of increases of $1.3 million in service charges on deposit accounts due to reinstating fees that we previously waived during 2020 for customers affected by the COVID-19 pandemic, a premium of $0.5 million premium on the sale of four bank branches included in other income, and higher debit card interchange fees of $0.4 million due to usage.

These increases were offset by declines in net security gains of $0.8 million, lower commercial loan swap fee income of $0.4 million and lower gains on OREO of $0.1 million.

The fluctuations of commercial loan swap fee income were due to the timing and demand for this product in the current low interest rate environment.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

For the six months ended June 30, 2021 compared to the same period in 2020, the increase of $3.2 million in total noninterest income was driven by the same variances as the second quarter period with higher net security gains of $1.6 million, service charges on deposit accounts increasing $1.5 million, debit card interchange fees up $1.0 million, a year-to-date premium of $0.5 million on the sale of four bank branches included in other income, lower commercial loan swap fee income of $0.6 million and lower gains on sale of OREO of $0.1 million.

However, insurance commissions, for the six months ended June 30, 2021, declined $1.0 million compared to the prior year period.

The increase in security gains of $1.6 million for the six months ended June 30, 2021, to $5.1 million compared to $3.5 million for the same period in 2020 was due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in its securities portfolio.

Noninterest Expense

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in Thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Salaries and Employee Benefits $ 13,686 $ 12,489 $ 1,197 9.6 % $ 26,268 $ 26,070 $ 198 0.8 %

Occupancy Expense, net 3,451 3,415 36 1.1 % 6,965 6,664 301 4.5 %

FDIC Insurance Expense 657 537 120 22.3 % 1,300 1,081 219 20.3 %

Other Taxes 718 788 (70) (8.8) % 1,480 1,534 (54) (3.5) %

Advertising Expense 220 394 (174) (44.0) % 390 1,006 (616) (61.2) %

Telephone Expense 588 573 15 2.6 % 1,188 1,147 41 3.5 %

Professional and Legal Fees 1,440 1,399 41 2.9 % 2,664 1,836 828 45.1 %

Data Processing 954 595 359 60.3 % 1,875 1,081 794 73.4 %

Losses on Sales and Write-downs of Other Real Estate Owned, net 2,603 — 2,603 NM 2,815 52 2,763 NM

Losses on Sales and Write-downs on Bank Premises, net 64 59 5 8.5 % 107 71 36 50.7 %

Debit Card Expense 713 671 42 6.3 % 1,345 1,225 120 9.8 %

Tax Credit Amortization 427 272 155 57.0 % 854 544 310 57.0 %

Unfunded Loan Commitment Expense — (383) 383 (100.0) % — 599 (599) (100.0) %

Other Real Estate Owned Expense 142 177 (35) (19.8) % 196 317 (121) (38.2) %

Other 2,096 2,037 59 2.9 % 3,917 4,407 (490) (11.1) %

Total Noninterest Expense $ 27,759 $ 23,023 $ 4,736 20.6 % $ 51,364 $ 47,634 $ 3,730 7.8 %

NM - Not Meaningful

Total noninterest expense increased $4.7 million, or 20.6%, for the three months ended June 30, 2021 and increased $3.7 million, or 7.8%, for the six months ended June 30, 2021 compared to the same periods in 2020.

The primary driver of the increase for both the three and six month periods was the nonrecurring write-down of $3.0 million for closed bank branches.

These branches were closed in the second quarter of 2021, transferred to OREO and marketed for sale resulting in the $3.0 million nonrecurring write-down.

Other variances for the three-month period ended June 30, 2021 were higher salaries and employee benefits of $1.2 million due to increased medical expenses for several large critical illness claims and a $0.4 million nonrecurring severance and stay bonus for impacted employees in the second quarter of 2021.

Also offsetting the three-month increase was $0.4 million unfunded loan commitment expense, $0.4 million in data processing expenses due to new products and $0.2 million in tax credit amortization.

Along with the above mentioned nonrecurring write-down for closed bank branches the increase during the six months ended June 30, 2021 included $0.8 million higher professional and legal fees, $0.8 million higher data processing expenses due to an increase in customer accounts and new modules added to our core processor, $0.3 million increase in the amortization of tax credits, and $0.3 million in occupancy expenses.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Provision for Income Taxes

Pretax income increased $2.4 million and $8.0 million for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Our effective tax rate was 14.0% and 10.9% for the three and six months ended June 30, 2021, respectively, compared to negative 12.3% and negative 2.8% for the same periods in 2020.

The increase in the effective tax rate is primarily due to a higher level of pretax income and a lower level of tax-exempt interest income.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and BOLI, which are relatively consistent regardless of the level of pretax income.

Financial Condition

June 30, 2021

Total assets decreased $58.7 million, to $4.1 billion at June 30, 2021 compared to $4.2 billion at December 31, 2020.

Federal Reserve Bank excess reserves decreased $61.2 million to $102.3 million at June 30, 2021 from $163.5 million at December 31, 2020 due to active balance sheet management.

Total portfolio loans decreased $30.5 million, or 2.1% on an annualized basis, to $2.9 billion at June 30, 2021 compared to December 31, 2020 primarily due to several large commercial loan payoffs.

The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326.

We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not applied to periods during 2020 and prior years, therefore showing fluctuations in all categories.

At March 31, 2021, the initial break-out of Other loans related to the adoption of Topic 326 totaled $373.4 million consisting of $136.3 million of CRE, $77.8 million of C&I, $49.6 million of Residential Mortgages and $109.7 million of Construction.

This segment of loans has unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

OREO increased $5.5 million at June 30, 2021 compared to December 31, 2020 due to 20 branches that were closed during the second quarter of 2021, and moved to OREO and marketed for sale resulting in a $3.0 million nonrecurring write-down.

These closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

Closed retail bank offices increased $8.2 million with a remaining book value of $10.7 million at June 30, 2021 compared to $2.5 million at December 31, 2020.

The securities portfolio increased $64.9 million and is currently 20.5% of total assets at June 30, 2021 compared to 18.6% of total assets at December 31, 2020.

The increase is a result of active balance sheet management.

We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits decreased $25.3 million to $3.7 billion at June 30, 2021 as compared to December 31, 2020.

The decline from December 31, 2020 was due to $84.7 million of deposits held-for-assumption in connection with the sale of four bank branches which were sold during the second quarter of 2021.

Core deposits, including noninterest-bearing and interest-bearing demand deposits, money market accounts and savings, increased by $217.0 million, or 10.9%, at June 30, 2021 compared to December 31, 2020.

Offsetting these increases was the intentional runoff of $157.6 million of higher cost CDs.

Noninterest-bearing deposits comprised 19.7% and 19.0% of total deposits at June 30, 2021 and December 31, 2020, respectively.

CDs comprised 39.8% and 43.8% of total deposits at June 30, 2021 and December 31, 2020, respectively.

Total capital decreased by $41.1 million to $399.1 million at June 30, 2021 compared to $440.2 million at December 31, 2020.

The decrease in equity was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a $5.6 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities partially offset by net income of $14.8 million for the six months ended June 30, 2021.

The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2021.

The ACL was 3.75% of total portfolio loans at June 30, 2021 compared to an allowance for loan losses of 1.83% as of December 31, 2020.

General reserves as a percentage of total portfolio loans were 3.68% at June 30, 2021 compared to 1.32% at December 31, 2020.

Management believes, the ACL is adequate to absorb expected losses inherent in the loan portfolio.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The Company remains well capitalized.

Our Tier 1 capital ratio increased to 13.40% at June 30, 2021 compared to 13.08% at December 31, 2020.

Our leverage ratio was 10.23% at June 30, 2021, compared to 10.26% at December 31, 2020 and total risk-based capital ratio was 14.66% at June 30, 2021 compared to 14.33% at December 31, 2020.

We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.

Securities Activity

The following table presents the composition of available-for-sale securities:

(Dollars in Thousands) June 30, 2021 December 31, 2020 $ Change

Treasury Securities $ 4,440 $ — $ 4,440

Government Agency Securities 3,477 — 3,477

Residential Mortgage-Backed Securities 61,894 44,724 17,170

Commercial Mortgage-Backed Securities 2,245 5,447 (3,202)

Asset Backed Securities 138,206 133,557 4,649

Collateralized Mortgage Obligations 259,810 218,359 41,451

Small Business Administration 102,674 99,145 3,529

States and Political Subdivisions 229,734 252,622 (22,888)

Corporate Notes 41,058 24,825 16,233

Total Debt Securities $ 843,538 $ 778,679 $ 64,859

The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes.

Securities are subject to market risks that could negatively affect the level of liquidity available to us.

Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by $64.9 million to $843.5 million at June 30, 2021 as compared to $778.7 million at December 31, 2020.

Securities comprise 20.5% of total assets at June 30, 2021 as compared to 18.6% at December 31, 2020.

The increase is a result of active balance sheet management.

We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

At June 30, 2021 total gross unrealized gains in the available-for-sale portfolio were $15.5 million, offset by $2.8 million of gross unrealized losses.

At December 31, 2020, total gross unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses.

Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis.

At June 30, 2021 and December 31, 2020, the Company did not record any OTTI.

The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Loan Composition

The following table summarizes our loan portfolio for the periods presented:

(Dollars in Thousands) June 30, 2021 December 31, 2020

Commercial Real Estate $ 1,337,792 $ 1,453,799

Commercial and Industrial 413,842 557,164

Total Commercial Loans 1,751,634 2,010,963

Residential Mortgages 425,642 472,170

Other Consumer 43,336 57,647

Total Consumer Loans 468,978 529,817

Construction 320,885 406,390

Other 375,157 —

Total Portfolio Loans 2,916,654 2,947,170

Loans Held-for-Sale 9,311 25,437

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value — 9,835

Total Loans $ 2,925,965 $ 2,982,442

Our loan portfolio represents our most significant source of interest income.

The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio.

Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay.

For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Total portfolio loans decreased $30.5 million, or 1.0%, to $2.9 billion at June 30, 2021 compared to December 31, 2020.

The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326.

We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not adjusted to the comparable period, therefore showing fluctuations in all categories.

At March 31, 2021 the initial break-out of Other loans related to the adoption of Topic 326 totaled $373.4 million consisting of $136.3 million of Commercial Real Estate, (“CRE”), $77.8 million of Commercial and Industrial (“C&I”), $49.6 million of Residential Mortgages and $109.7 million of Construction.

This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

Nonperforming loans decreased $22.4 million, or 70.1%, to $9.6 million at June 30, 2021 compared to $32.0 million at December 31, 2020.

These closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

Closed retail bank offices increased $8.2 million with a remaining book value of $10.7 million at June 30, 2021 compared to $2.5 million at December 31, 2020.

The commercial portfolio is monitored for potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry, investment CRE dependent on common tenants and industries or property types that are similarly impacted by external factors.

Our exposure to hospitality at June 30, 2021 equated to approximately $486.4 million, or 16.7% of total portfolio loans.

These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows.

During the second quarter of 2021, we have observed a sharp increase in occupancy and the average daily rate for our hotel clients, however our clients are now facing enormous challenges when it comes to attracting labor, which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness.

These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

As a result, our financial condition, capital levels and results of operations could be adversely affected.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Portfolio loan balances of our top 10 credit relationships were $740.7 million at June 30, 2021, with a total commitment exposure of $752.0 million.

These loans are in the hospitality, golf course, agricultural, land holdings, commercial real estate (multi-family and office/retail), energy, land development, and lumber industries.

The other segment is comprised of 49.5% of the top 10 credit relationships.

Line utilization, unused commitments, excluding consumer overdraft lines, were $409.8 million at June 30, 2021 as compared to $410.7 million at December 31, 2020.

The majority of unused commitments are for construction projects that will be drawn as the construction completes.

Total utilization, excluding consumer overdraft lines, was 53.0% at June 30, 2021, as compared to 52.2% at December 31, 2020.

Commercial line utilization was 52.9% at June 30, 2021, as compared to 51.7% at December 31, 2020.

From time to time, we have mortgage loans held-for-sale derived from two sources.

First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors.

Secondly, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing.

We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period.

Mortgage loans held-for-sale were $9.3 million and $25.4 million at June 30, 2021 and December 31, 2020, respectively.

In addition to mortgage loans held-for-sale, the Company had $9.8 million in loans held-for-sale in connection with sale of Bank branches at December 31, 2020 that all closed during the second quarter of 2021.

Credit Quality

On a monthly basis, a criticized asset committee meets to review all special mention and substandard loans within prescribed policy thresholds.

These loans typically represent the highest risk of loss to the Company.

Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations.

When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and interest risk rating trends and through stress testing of the loans in these segments.

The Company has specific loan segment limits in its loan policy.

Total commercial real estate balances should not exceed the combination of 300% of total risk based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk based capital.

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio.

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.

We also have policy limits on loan-to-cost for construction projects.

Unsecured loans pose a higher risk for the Company due to the lack of a well-defined secondary source of repayment.

Commercial unsecured loans are reserved for the best quality customers with well-established businesses, operate with low financial and operating leverage and demonstrate an ability to clear the outstanding balance on lines of credit for at least thirty consecutive days annually.

The repayment capacity of the borrower should exceed all policy and guidelines for secured loans.

If the borrower is unable to comply with this requirement and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, segmentation guidelines, and loan review findings from the previous quarter.

Annually, this same committee reviews credit related policies and policy enhancements as they become available.

Additional credit risk management practices include periodic review and update of our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing.

Our loan review serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities.

The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The Company has a loan review policy and annual scope report that details the level of loan review for commercial loans in a given year.

Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses.

In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function.

Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

• A review of the largest twenty pass-rated loan relationships, which represents approximately a quarter of total loans;

• A sampling of new loans originated to include an examination of the evidence of appropriate approval, adherence to loan policy and the completeness and accuracy of the analysis contained in the approval document;

• A sampling of large loan relationships which are defined as loan relationships with aggregate exposure of at least $2.0 million that are not part of the top 20 review;

• Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss history, document exceptions, policy exceptions and emerging trends in risk characteristics.

The Company does not typically structure these with a 30-day cleanout feature since that is difficult to measure and enforce.

Instead we usually set higher debt service standards and underwrite to the ability to amortize the loan on unsecured terms.

Allowance for Credit Losses

The ACL represents an amount which, in management's judgment, is adequate to absorb current expected credit losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs previously reserved for, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.

The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.

However, the determination of the ACL requires significant judgment, and estimates of expected losses in the loan portfolio can vary significantly from the amounts actually observed.

While management uses available information to recognize expected losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The adoption of CECL guidance did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policy.

The Company’s methodology for estimating the ACL includes:

Segmentation.

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

Specific Analysis.

A specific reserve analysis is applied to certain individually evaluated loans.

These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows.

A specific reserve is established if the fair value is less than the loan balance.

A charge-off is recognized when the loss is quantifiable.

Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”), which calculates a net present value of expected future cash flows, adjusted for the expected life of the portfolio.

Economic forecasts include but are not limited to

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product.

These forecasts are assumed to revert to the long-term average and utilized in the model to estimate the probability of default and loss given default through regression.

Model assumptions include, but are not limited to the discount rate, prepayments and curtailments.

The product of the probability of default and the loss given default is the estimated loss rate, which varies over time.

The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value.

Net present value is also impacted by assumptions related to the duration between default and recovery.

Economic forecasts spanning four quarters are utilized and then reverted to the long term average to form the estimation of expected future cash flows.

The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis.

Based on management’s review and analysis of internal, external and model risks, management may adjust the model output.

Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output, analyzes the forecast inputs in relation to the model’s calibration and makes adjustments as necessary.

This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable.

Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

At Day 1 adoption of CECL, current expected losses of $10.2 million were recorded due to economic uncertainties related to the Company's hospitality portfolio.

Between the Day 1 CECL model and the model ended June 30, 2021, additional current expected losses of $1.5 million were recognized, which resulted in a total current expected loss balance of $11.7 million as of June 30, 2021.

Certain hospitality loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

Management elected to create reserves with the adoption of the CECL model.

These reserves were developed in addition to the model’s methodology.

The model introduced a segmented portfolio of loans for discrete analysis.

This segmented pool has unique risk attributes considered inconsistent with current underwriting standards.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the incurred loss model.

With the adoption of CECL, management elected to separately evaluate certain loans from the Quantitative Analysis based on shared but unique risk attributes.

These loans are included in the Other segment of the model.

These loans were underwritten and approved based on standards that are inconsistent with our current underwriting standards, which have been enhanced by current management.

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

A general reserve of $56.0 million, which is an increase from the $4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The following tables summarize activity in the ACL during the period presented and present supplemental asset quality information as of the dates presented.

Three Months Ended June 30, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential

Mortgage Other

Consumer Construction Other (1)

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 42,342 $ 4,905 $ 5,171 $ 1,347 $ 7,106 $ 56,001 $ 116,872

Provision for Credit Losses on Loans (6,103) (185) 217 269 1,039 5,730 967

Charge-offs (8,238) (7) (22) (539) — — (8,806)

Recoveries 140 1 1 144 — — 286

Net (Charge-offs) / Recoveries (8,098) (6) (21) (395) — — (8,520)

Balance at End of Period $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319

(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

Our new segmentation breaks out Other loans from our original loan segments:

CRE, C&I, residential mortgages and construction.

The allowance balance at the beginning of period were reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Six Months Ended June 30, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential

Mortgage Other

Consumer Construction Other (1)

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 34,871 $ 3,643 $ 2,000 $ 2,479 $ 6,357 $ 4,724 $ 54,074

Impact of CECL Adoption 6,587 1,379 3,356 (877) (80) 51,277 61,642

Provision for Credit Losses on Loans (5,219) (302) 61 747 1,807 5,730 2,824

Charge-offs (8,238) (8) (217) (1,409) — — (9,872)

Recoveries 140 2 167 281 61 — 651

Net (Charge-offs) / Recoveries (8,098) (6) (50) (1,128) 61 — (9,221)

Balance at End of Period $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319

(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

Our new segmentation breaks out Other loans from our original loan segments:

CRE, C&I, residential mortgages and construction.

The allowance balance at the beginning of period were reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

June 30, 2021 December 31, 2020

Net Charge-offs to Average Portfolio Loans 0.63 % * 0.09 %

Allowance for Credit Losses to Total Portfolio Loans 3.75 % 1.83 %

The adoption of Topic 326 resulted in an increase to our ACL of $61.6 million on January 1, 2021.

The Day 1 model introduced a segmented portfolio of loans for discrete analysis.

This segmented pool had an aggregate principal balance of $380.0 million at adoption and includes unique risk attributes considered inconsistent with current underwriting standards.

Management continuously assesses underwriting standards but significantly enhanced these standards in 2018.

The analysis applied to this pool resulted in expected credit losses of $51.3 million, at adoption and is disclosed in the Other segment item in the table above.

At December 31, 2020, the aforementioned Other segment within the probable incurred loss model included $102.5 million of impaired loans and the remaining $277.5 million were not impaired and remained in their respective segments.

Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $4.7 million at December 31, 2020.

As of January 1, 2021, our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment.

This methodology produced a significantly higher level of reserves from the incurred loss model.

The model was developed with subjective assumptions that is driven by the following key factors:

prepayment speeds, timing of prepayment, loss given defaults as well as other factors.

Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to:

prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows.

Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model.

The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments.

In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations.

Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change.

Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate.

These outcomes, known as “challenger models” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be countercyclical, thereby reducing variability.

This methodology resulted in an increase in other reserves totaling $51.3 million.

The ACL increased $62.8 million to $116.9 million for the three months ended March 31, 2021 compared to $54.1 million at December 31, 2020 due to the Day 1 adoption of CECL of $61.6 million.

The first quarter 2021 was primarily driven by adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral.

The ACL increased $55.2 million to $109.3 million at June 30, 2021 compared to $54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $61.6 million.

The first six months of 2021 adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral.

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

Management observed continued deterioration on hospitality loans with aggregate principal balances of $50.9 million that are on deferral as of March 31, 2021.

This adjustment resulted in expected credit losses of $11.7 million at March 31, 2021.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

recovery has not been as sharp as management had anticipated as observed in other hospitality credits.

Hospitality loans on deferral at the end of Phase III of the deferral program, which expired on June30, 2021, had an aggregate principal balances of $50.9 million, which resulted in a current expected credit loss of $11.7 million.

This adjustment resulted in expected credit losses of $11.7 million at June 30, 2021.

The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected credit losses of $10.2 million as of January 1, 2021.

Between the Day 1 model and the model ended March 31, 2021 a loan with a principal balance of $8.1 million was recognized resulting in additional expected credit losses of $1.5 million during the three months ended March 31, 2021.

The ACL was $116.9 million, or 3.93%, of total portfolio loans at March 31, 2021, as compared to an allowance for loans losses of $54.1 million, or 1.83% of total portfolio loans at December 31, 2020.

Net charge-offs were $0.7 million in the first three months of 2021 compared to $0.6 million in the same period of 2020.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10% and 0.09% for the three months ended March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021 and December 31, 2020, nonperforming loans were consistent at $32.0 million.

Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

Between the Day 1 model and the model ended June 30, 2021 a loan with a principal balance of $8.1 million was recognized resulting in additional expected credit losses of $1.5 million during the six months ended June 30, 2021.

The ACL was $109.3 million, or 3.75%, of total portfolio loans at June 30, 2021, as compared to an allowance for loans losses of $54.1 million, or 1.83% of total portfolio loans at December 31, 2020.

Net charge-offs were $8.5 million and $9.2 million for the three and six months ended June 30, 2021, respectively, compared to $1.0 million and $1.6 million for the same periods in 2020.

The resolution of our two largest nonperforming credits resulted in charge-offs of $8.2 million during the second quarter of 2021 and were previously reserved.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.63% and 0.09% for the six months ended June 30, 2021 and year ended December 31, 2020, respectively.

Nonperforming loans decreased $22.4 million, or 70.1%, to $9.6 million at June 30, 2021 compared to $32.0 million at December 31, 2020.

Nonperforming loans as a percentage of total portfolio loans were 0.33%, 1.09% and 1.37% as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively.

Loans that amortize monthly, such as closed-end installment loans and amortizing loans secured by real estate are reported past due when the borrower is in arrears two or more monthly payments.

1 unchanged sentence

We monitor delinquency on a monthly basis for early identification of potential problem loans.

TDRs are loans that we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant.

Troubled debt restructurings (“TDRs”) are loans that we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant.

The Company strives to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status.

2 unchanged sentences

Modifications structured with deferments for significant periods are generally considered TDRs.

However, related to the COVID-19 pandemic, the Bank has modified certain loans since March 2020 without considering them TDRs if consistent with the CARES Act and guidance issued by the federal bank regulatory agencies.

However, related to the COVID-19 pandemic, we have modified certain loans since March 2020 without considering them TDRs if consistent with the CARES Act and guidance issued by the federal bank regulatory agencies.

Generally, modifications that have not been considered a TDR are relatively short-term in nature.

An accruing loan that is modified and determined to be a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period before the modification.

All TDRs are considered to be individually evaluated loans and will be reported as individually evaluated loans for the calendar year they are determined to be a TDR.

The Company individually evaluates all individually evaluated loans, which includes TDRs, greater than or equal to $1.0 million for a specific reserve unless otherwise accounted for in the CECL model.

Nonaccrual TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower subsequent to the restructuring.

TDRs are considered impaired loans and reported as a TDR in the calendar year in which they are determined.

The Company individually evaluates all impaired loans, which includes TDRs, greater than or equal to $1.0 million as individually evaluated loans unless otherwise accounted for in the CECL model.

Nonaccrual TDRs can be returned to accrual status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower subsequent to the restructuring.

As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time.

2 unchanged sentences

The loan will be reported as a nonaccrual TDR and an individually evaluated loan.

In addition, the loan could be charged down to the fair value of the

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

collateral if a confirmed loss exists.

In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists.

If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR.

For the loan’s remaining life, it will continue to be individually evaluated because the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk.

TDRs decreased $2.9 million to $131.3 million at March 31, 2021, compared to $134.2 million at December 31, 2020.

The decrease is due to principal pay-downs in the amount of $2.9 million.

Total TDRs of $24.6 million and $25.0 million were on nonaccrual at March 31, 2021 and December 31, 2020, respectively.

There were minimal commitments to lend additional funds on relationships identified as TDRs in the amount of $2.9 million as of March 31, 2021.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

TDRs decreased $24.8 million, or 18.5% to $109.4 million at June 30, 2021 compared to December 31, 2020.

The Company received $13.6 million and $16.6 million of pay-downs and had no new additions for the three and six months ended June 30, 2021, respectively.

The $24.8 million of pay-downs included $8.2 million in charge-offs for the resolution of our two largest nonperforming credits.

There were no new TDRs for the three and six months ended June 30, 2021.

TDRs of $3.2 million and $25.0 million were nonaccrual as of June 30, 2021 and December 31, 2020, respectively.

During the six months ended June 30, 2021, we modified no loans that constituted a TDR that had minimal commitments to lend additional funds.

Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes quantifiable, regardless of the delinquency status of the loan.

The Bank may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan.

The Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan.

A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral.

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The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020 $ Change

(Dollars in Thousands) June 30, 2021 December 31, 2020 $ Change

Nonperforming Loans

15 unchanged sentences

Total Nonperforming Assets $ 30,818 $ 47,726 $ (16,908)

March 31, 2021 December 31, 2020

Nonaccrual Loans and Troubled Debt Restructurings to Total Portfolio Loans 1.08 % * 1.09 %

June 30, 2021 December 31, 2020

Nonperforming Loans and Troubled Debt Restructurings to Total Portfolio Loans 0.33 % 1.09 %

Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned 1.05 % 1.61 %

Nonperforming assets decreased $1.7 million to $46.0 million at March 31, 2021 compared to $47.7 million at December 31, 2020.

The decrease was primarily related to a $1.7 million net decrease in OREO.

The decrease in OREO was primarily due to sales of properties during 2021.

Closed retail bank offices have a remaining book value of $1.9 million at March 31, 2021 and $2.5 million at December 31, 2020.

The gross amount of interest that would have been recorded under original terms, had these loans not been placed on nonaccrual status was $1.1 million during the first three months of 2021.

As of March 31, 2021, total nonaccrual loans include $3.0 thousand in loans held-for-sale in connection with sale of Bank branches.

Nonperforming assets decreased $16.9 million to $30.8 million at June 30, 2021 compared to $47.7 million at December 31, 2020.

The decrease was primarily related to the resolution of our two largest nonperforming credits, offset by a 5.5 million net increase in OREO.

The increase in OREO was primarily due to closed retail offices during the second quarter of 2021.

Closed retail bank offices have a remaining book value of $10.7 million at June 30, 2021 and $2.5 million at December 31, 2020.

The gross amount of interest that would have been recorded under original terms had these loans not been placed on nonaccrual status was $0.8 million and $1.9 million during the three and six months ended June 30, 2021, respectively.

There were $7 thousand nonaccrual loans related to loans held-for-sale at December 31, 2020.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by the COVID-19 pandemic that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019.

The provisions of the CARES Act dealing with temporary relief related to TDRs was extended pursuant to the CAA, which was signed into law on December 27, 2020.

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We are currently applying this guidance to qualifying loan modifications.

At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 will have on our financial condition, results of operations and allowance for credit losses.

At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 will have on our financial condition, results of operations and ACL.

CARTER BANKSHARES, INC.

1 unchanged sentence

The following table summarizes loans past due 30-89 days for the periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020

(Dollars in Thousands) June 30, 2021 December 31, 2020

Loans 30 to 89 Days Past Due

6 unchanged sentences

Construction 16 284

Other 3,544 —

Total Loans 30 to 89 Days Past Due $ 6,904 $ 6,411

Loans past due 30 to 89 days or more and still accruing, including held-for-sale loans, increased $0.2 million to $6.6 million at March 31, 2021 compared to $6.4 million at December 31, 2020.

Loans past due 30 to 89 days or more and still accruing, including held-for-sale loans, increased $0.5 million to $6.9 million at June 30, 2021 compared to $6.4 million at December 31, 2020.

The variances in loan segments for past due 30 to 89 days is primarily related to the adoption of Topic 326.

1 unchanged sentence

The $3.5 million included in the other segment is to one relationship and was previously included in commercial and industrial loans at December 31, 2020.

The following table presents the composition of deposits for the periods presented:

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2021 December 31,

9 unchanged sentences

We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition.

Total deposits at March 31, 2021 increased $6.9 million, or 0.2%, from December 31, 2020.

Noninterest-bearing deposits increased by $34.1 million, or 4.9%, to $733.3 million as of March 31, 2021 as compared to $699.2 million at December 31, 2020.

Money market accounts increased $28.8 million, or 9.8%, during the first three months of 2021 compared to December 31, 2020, due to our deposit acquisition strategy.

Savings accounts increased $21.2 million, or 3.4%, at March 31, 2021 compared to December 31, 2020 due to promotions.

Interest-bearing demand deposits increased $18.2 million, or 5.0% to $384.4 million at March 31, 2021 compared to December 31, 2020.

Offsetting these increases was a decrease of $92.3 million, or 5.7%, in CDs at March 31, 2021 compared to December 31, 2020 due to intentional runoff of these higher cost CDs.

Noninterest-bearing deposits comprised 19.9% and 19.0% of total deposits at March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021, $81.6 million of deposits were held-for-assumption in connection with the sale of Bank branches that are expected to close in the second quarter of 2021.

Total deposits at June 30, 2021 decreased $25.3 million, or 0.7%, from December 31, 2020.

The decrease in deposits primarily related to the $157.6 million, or 9.8%, decline in CDs at June 30, 2021 compared to December 31, 2020 due to the intentional runoff of higher cost CDs, and $84.7 million of deposits held-for-assumption, at December 31, 2020, in connection with the sale of four bank branches which were sold during the second quarter of 2021.

These decreases were offset by increases in our core deposits of $111.7 million in money market accounts due to our deposit acquisition strategy, a $48.5 million increase in interest-bearing demand deposits, a $35.8 million increase in savings accounts due to promotions and an increase of $21.0 million in noninterest-bearing demand accounts.

Noninterest-bearing deposits comprised 19.7% and 19.0% of total deposits at June 30, 2021 and December 31, 2020, respectively.

CARTER BANKSHARES, INC.

2 unchanged sentences

Borrowings are an additional source of liquidity for the Company.

FHLB borrowings were $30.0 million and $35.0 million at March 31, 2021 and December 31, 2020, respectively.

FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at March 31, 2021 and December 31, 2020.

Total loans pledged as collateral were $781.3 million and $804.2 million at March 31, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both March 31, 2021 and December 31, 2020.

The Bank continues to methodically pledge additional eligible loans, with the ultimate expectation to have full pledging by year end 2021.

The Company is eligible to borrow up to an additional $506.1 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25% of the Company’s assets, as of March 31, 2021.

FHLB borrowings were $30.0 million and $35.0 million at June 30, 2021 and December 31, 2020, respectively.

Total loans pledged as collateral were $846.4 million and $804.2 million at June 30, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both June 30, 2021 and December 31, 2020.

The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year.

The Bank is eligible to borrow up to an additional $547.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25.0% of the Company’s assets, as of June 30, 2021.

The Company had the capacity to borrow up to an additional $510.5 million from the FHLB at December 31, 2020.

Information pertaining to long-term FHLB borrowings is summarized in the following table:

(Dollars in Thousands) March 31, 2021 December 31, 2020

(Dollars in Thousands) June 30, 2021 December 31, 2020

Balance at Period End $ 30,000 $ 35,000

3 unchanged sentences

Average Interest Rate at Period End 1.15 % 1.13 %

The Company held FHLB Atlanta stock of $3.2 million and $5.1 million at March 31, 2021 and December 31, 2020, respectively.

Dividends recorded on this restricted stock were $37 thousand and $64 thousand for the three months ended March 31, 2021 and March 31, 2020, respectively.

The Company held FHLB Atlanta stock of $3.2 million and $5.1 million at June 30, 2021 and December 31, 2020, respectively.

Dividends recorded on this restricted stock were $31 thousand and $68 thousand for the three and six months ended June 30, 2021, respectively.

Dividends recorded on this restricted stock were $67 thousand and $131 thousand for the three and six months ended June 30, 2020, respectively.

The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

16 unchanged sentences

Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified.

Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, and the brokered deposit market.

In addition to the lines referenced above, the Company also has its available-for-sale investment securities portfolio as an additional source of liquidity.

Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, access to the institutional CD market, and the brokered deposit market.

In addition to the lines referenced above, the Company also has $697.6 million of unpledged available-for-sale investment securities as an additional source of liquidity.

CARTER BANKSHARES, INC.

3 unchanged sentences

ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high.

At March 31, 2021, the Bank had $844.7 million in highly liquid assets, which consisted of $65.6 million in interest-bearing deposits in other financial institutions, $110.6 million in FRB Excess Reserves, $626.3 million in unpledged securities, $32.7 million in mortgage loans held-for-sale and $9.4 million in loans held-for-sale in connection with sale of Bank branches.

This resulted in highly liquid assets to total assets ratio of 20.4% at March 31, 2021.

At June 30, 2021, the Bank had $881.7 million in highly liquid assets, which consisted of $72.5 million in interest-bearing deposits in other financial institutions, $102.3 million in FRB Excess Reserves, $697.6 million in unpledged securities, $9.3 million in mortgage loans held-for-sale.

This resulted in highly liquid assets to total assets ratio of 21.4% at June 30, 2021.

If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The following table provides detail of liquidity sources as of the periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020

(Dollars in Thousands) June 30, 2021 December 31, 2020

Cash and Due From Banks $ 41,850 $ 38,535

7 unchanged sentences

Regulatory Capital Requirements

Total shareholders’ equity decreased by $52.3 million to $387.9 million at March 31, 2021 compared to $440.2 million at December 31, 2020.

Total shareholders’ equity decreased by $41.1 million to $399.1 million at June 30, 2021 compared to $440.2 million at December 31, 2020.

The decrease was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a $5.6 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities partially offset by net income of $14.8 million.

The remaining difference is related to stock-based compensation during the three months ended March 31, 2021.

The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2021.

The Company and the Bank are subject to various capital requirements administered by the federal banking regulators.

8 unchanged sentences

If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At March 31, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the institutions category.

At March 31, 2021, the Bank continues to maintain its capital position with a leverage ratio of 10.17% as compared to the regulatory guideline of 5.0% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.88% compared to the regulatory guideline of 6.5% to be well-capitalized.

At June 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the institution’s category.

At June 30, 2021, the Bank continues to maintain its capital position with a leverage ratio of 10.21% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 13.37% compared to the regulatory guideline of 6.50% to be well-capitalized.

The Bank’s risk-based Tier 1 and Total Capital ratios were 13.37% and 14.63%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively.

6 unchanged sentences

The capital conservation buffer was phased in at the rate of 0.625% per year and was 2.5% on January 1, 2019.

Management believes as of March 31, 2021 and December 31, 2020, the Company and the Bank met all capital adequacy requirements to which we are subject and satisfied the applicable capital conservation buffer requirements.

Management believes as of June 30, 2021 and December 31, 2020, the Company and the Bank met all capital adequacy requirements to which we are subject and satisfied the applicable capital conservation buffer requirements.

The following table summarizes risk-based capital amounts and ratios for the Company and the Bank for the dates presented:

1 unchanged sentence

Capitalized Well

Capitalized March 31, 2021 December 31, 2020

Capitalized June 30, 2021 December 31, 2020

Amount Ratio Amount Ratio

16 unchanged sentences

Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19.

The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period.

Contractual Obligations

As of March 31, 2021, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

As of June 30, 2021, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

As of March 31, 2021, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance-Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

As of June 30, 2021, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance-Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

CARTER BANKSHARES, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis