What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 397 added, 348 removed, 636 unchanged (54% 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;

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 cyberattacks 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 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, as supplemented by the risk factor disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021;

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, 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;

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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”).

Many of these factors, as well as other factors, are described throughout this Quarterly Report, including and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and our subsequent filings with the Securities and Exchange Commission (“SEC”).

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

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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):

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 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.

Please refer to the CECL disclosure contained in Notes 1 and 5 to the consolidated 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 a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at September 30, 2021.

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

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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 earns revenue primarily from interest on loans, 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.

CARTER BANKSHARES, INC.

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

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.

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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.

We continuously work to maintain and improve credit quality and the reduction of problem assets.

We are 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.

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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.

In addition to the general impact that 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;

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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.

financial institutions, 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 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.

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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:

In addition, the FRB 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;

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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.

The FRB also established two new program facilities – the Money Market Mutual

CARTER BANKSHARES, INC.

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

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

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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.

We continue to take precautions to protect both customers and employees through enhanced cleaning services, social distancing and personal protective equipment requirements for both.

A portion of the Company’s workforce continues to work remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the SBA 7-A loan program.

The Bank became an approved SBA 7-A 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.

Initially, $349 billion was approved and designated for the PPP in order for the 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.

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

The Bank 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.

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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.

Prior to the extension of the CARES Act, the Bank 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”).

In the quarter ended March 31, 2021, recapture payments due from deferral clients totaled $2.8 million and of this the Bank received $2.0 million.

A number of customers opted out of the deferral program after the first quarter.

As a result, the second quarter 2021 recapture payments due from deferral clients totaled $1.2 million and of this the Bank received $0.8 million.

Following the expiration of the deferral programs on June 30, 2021, for term loans

CARTER BANKSHARES, INC.

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

payments will be applied to accrued interest first and after accrued interest is current, payments will be applied to principal.

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.

As of September 30, 2021 all but $6.5 million of loans resumed regularly scheduled payments.

Cumulative deferred interest totaled $11.0 million as of June 30, 2021 but has been reduced to $2.8 million as of September 30, 2021.

Through the first two rounds of PPP, we had approved 515 loan applications totaling $39.9 million through our internal lending program, of which 498 loans totaling $38.5 million have been fully forgiven by the SBA as of September 30, 2021.

The $39.9 million in PPP loans originated during the first two rounds of PPP generated $1.5 million in fees, which will be recognized in income as loans are forgiven, or over the remaining life of the loan for any portion that is not forgiven.

We had an additional 451 loans approved that were referred to an online small business lender, totaling $17.9 million during the first two rounds of PPP.

On December 22, 2020 Congress passed legislation that was signed into law on December 27, 2020, making available a third round of PPP funding.

We provided access to the program through our internal lending program for our current business customers.

As of September 30, 2021, we had approved 136 loan applications totaling $11.1 million, of which 87 loans totaling $6.4 million have been fully forgiven by the SBA.

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

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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.

Our exposure to the hospitality industry at September 30, 2021 equated to approximately $451.4 million, or 15.6% 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.

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

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

Retail Operations

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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.

In March 2020, we closed all branch lobbies to customer activity, offering drive-up and appointment only services due to the COVID-19 pandemic.

Since April 28, 2021, all of our branch lobbies have been open.

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.

We continue to pay all employees according to their normal work schedule, even if their hours were reduced and no employees were furloughed.

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

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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.

As of September 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.

As of September 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 nine months ended September 30, 2021.

CARTER BANKSHARES, INC.

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

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.

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 $555.9 million remains available at September 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 $724.7 million of unpledged available-for-sale securities as an additional source of liquidity at September 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.

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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.

Net income increased $68.9 million and $74.8 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Net income for the three and nine months ended September 30, 2021 was $11.2 million and $26.0 million, or $0.42 and $0.98 per diluted share, respectively, compared to net losses of $57.7 million and $48.8 million, or $2.19 and $1.85 per share, respectively, for the same periods in 2020.

The net loss was recognized during the third quarter of 2020 related to a one-time charge resulting from goodwill impairment.

This impairment charge reduced net income by $62.2 million resulting in the net loss for the period.

The increase in net income for the three and nine months ended September 30, 2021 of $68.9 million and $74.8 million was mainly due to the above mentioned goodwill impairment, as well as, lower provision for credit losses for both periods.

The total provision for credit losses decreased $3.4 million and $11.7 million for the three and nine months ended September 30, 2021, respectively compared to the same periods in 2020.

Included in the total provision for credit losses for the three and nine months ended September 30, 2021 was the release of $0.1 million and $0.9 million for the provision for unfunded commitments, which was included in other expense prior to the January 1, 2021 adoption of CECL.

Net interest income increased $4.0 million, or 15.6%, to $29.4 million and increased $4.2 million, or 5.3%, to $83.1 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Net interest margin increased 31 basis points and three basis points to 2.92% and 2.80% for the three and nine months ended September 30, 2021, respectively, compared to 2.61% and 2.77% for the same periods in 2020.

These impacts were primarily due to higher yields on interest-earning assets due to the positive impact of significant late fees and enhanced pricing on restructured loans related to one large credit relationship during the period and a decline in the cost of interest-bearing liabilities.

Net interest margin, on a fully taxable equivalent (“FTE”) basis (non-GAAP), increased 29 and one basis points to 2.96% and 2.84% for the three and nine months ended September 30, 2021 compared to 2.67% and 2.83% 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.

The yield on interest-earning assets decreased four and 39 basis points for the three and nine months ended September 30, 2021, respectively, partially offset by a 41 and 48 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 Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 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.

The provision for credit losses, excluding unfunded, decreased $3.3 million and $10.8 million to $(0.4) million and $2.4 million for the three and nine months ended September 30, 2021, respectively, compared to $2.9 million and $13.2 million for the same periods in 2020.

Provision for credit losses during the three months ended September 30, 2021 was primarily driven by the release of $3.1 million to the ACL due to the sale of two relationships that included nine loans during the third quarter of 2021 with an aggregate unpaid principal balance of $50.2 million that were previously reserved.

This decrease was offset by the increase of $1.6 million of special qualitative reserves in connection with increased uncertainty in credit quality with respect to two loans with an aggregate unpaid balance of $12.0 million in the commercial real estate loan segment.

During the three and nine months ended September 30, 2021, management observed that $62.0 million of loans that were previously in the deferral program were recovering at rates much lower than peers.

Accordingly, management sold $50.2 million of these loans during the three months ended September 30, 2021 and has developed a workout strategy with the remaining two loans with an aggregate

CARTER BANKSHARES, INC.

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

unpaid balance of $12.0 million.

The qualitative reserves were established given the uncertainty of the future performance of these borrowers.

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 life-of-loss reserves on unfunded commitments totaled $2.1 million at September 30, 2021.

Net charge-offs were $9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020.

The increase in net charge-offs in the third quarter of 2021 was primarily due to $9.2 million charge-offs related to the aforementioned sale of two relationships that included nine loans that had been previously reserved.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 1.30% and 0.85% for the three and nine months ended September 30, 2021, respectively, compared to 0.05% and 0.09% for the same periods in 2020.

At September 30, 2021, we had low nonperforming loans, with such nonperforming loans decreasing $23.1 million to $8.9 million, compared to $32.0 million at December 31, 2020.

The decline is due to the aforementioned resolution of our two largest nonperforming relationships 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 0.31%, 1.09% and 1.35% as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively.

Total noninterest income decreased $1.1 million and increased $2.1 million to $6.9 million and $23.1 million for the three and nine months ended September 30, 2021, respectively, compared to $8.0 million and $21.0 million for the same periods in 2020.

The decrease of $1.1 million for the three months ended September 30, 2021 compared to the same period in 2020 was primarily the result of declines in net security gains of $1.0 million and lower commercial loan swap fee income of $0.5 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

The increase of $2.1 million in total noninterest income for the nine months ended September 30, 2021 compared to the same period in 2020 was driven by service charges on deposit accounts increasing $1.9 million, debit card interchange fees increased $1.2 million, higher net security gains of $0.5 million and a year-to-date gain of $0.5 million on the sale of four bank branches included in other income.

Offsetting these increases were lower commercial loan swap fee income of $1.1 million and lower insurance commissions of $1.0 million compared to the prior year period.

The fluctuations in security gains is due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in its securities portfolio.

Total noninterest expense decreased $62.6 million and $58.9 million to $24.7 million and $76.0 million for the three and nine months ended September 30, 2021, respectively, compared to $87.3 million and $134.9 million for the same periods in 2020.

The most significant decrease for both the three and nine month periods was driven by the one-time charge resulting from goodwill impairment of $62.2 million recorded in the third quarter of 2020.

Also impacting the variances for both the three and nine months ended September 30, 2021 compared to the same periods in 2020 were the nonrecurring write-downs for closed bank branches and unfunded loan commitment expense.

Losses on sales and write-downs of Other Real Estate Owned (“OREO”), net decreased $0.7 million and increased $2.1 million for the three and nine months ended September 30, 2021.

The $0.7 million decrease for the three-month period included a $0.6 million loss on the sale of OREO on 13 properties during the third quarter of 2021.

For the nine-months ended September 30, 2021, the increase of $2.1 million in losses on sales and write-downs of OREO was related to the nonrecurring write-down of $3.0 million for closed bank branches that were closed in the second quarter of 2021, transferred to OREO and marketed for sale resulting in the nonrecurring write-down.

These write-downs were offset by $0.4 million in gains associated with the sale of four of the OREO properties.

The $0.3 million increase for the three-month period of 2021 and the $0.3 million decline in the nine-month period of 2021, in unfunded loan commitment expense compared to the same periods in 2020, 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 variances, total noninterest expense increases during the nine months ended September 30, 2021 included $1.0 million higher data processing expenses due to an increase in customer accounts and new modules added to our core processor, $0.6 million higher professional and legal fees, $0.5 million increase in the amortization of tax credits, $0.3 million in FDIC insurance expense and $0.2 million in occupancy expenses.

These increases were offset by a decrease of $0.8 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020.

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.

The provision for income taxes increased $0.1 million and $2.1 million to $0.9 million and $2.7 million for the three and nine months ended September 30, 2021, respectively, compared to $0.9 million and $0.6 million for the same periods in 2020.

Pre-tax income increased $68.9 million and $76.9 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

A full goodwill impairment charge in the amount of $62.2 million was recorded in the third quarter of 2020.

Our effective tax rate was 7.7% and 9.5% for the three and nine months ended September 30, 2021, respectively, compared to negative 1.5% and negative 1.3% for the same periods in 2020.

The nondeductible goodwill impairment charge was the reason for the decreased effective tax rate for the three and nine period ended September 30, 2020.

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)

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, each on a fully taxable equivalent, or FTE, basis, which are non-GAAP financial measures.

Management believes net interest income and net interest margin on an FTE basis provide information useful to investors in understanding our underlying business, operational performance and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry.

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

Management 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 Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020."

RESULTS OF OPERATIONS

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

Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

Net Interest Income

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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).

Net interest income and the net interest margin are presented on an FTE basis.

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.

The Company believes this FTE basis 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.

Total net interest income increased $4.0 million, or 15.6%, to $29.4 million, and $4.2 million, or 5.3%, to $83.1 million, for the three and nine months ended September 30, 2021, respectively, compared to $25.4 million and $79.0 million for the same periods in 2020.

These increases were primarily due to the increase in the volume of interest-earning assets, enhanced pricing on restructured loans related to one large credit relationship, offset by the decline in the interest rate environment.

Net interest income, on an FTE basis (non-GAAP), increased $3.7 million, or 14.2%, to $29.7 million and $3.5 million, or 4.4%, to $84.3

CARTER BANKSHARES, INC.

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

million for the three and nine months ended September 30, 2021, respectively, compared to $26.0 million and $80.8 million for the same periods in 2020.

For the three months ended September 30, 2021, the increase in net interest income, on an FTE basis (non-GAAP), was driven by higher interest income of $0.7 million and lower interest expense of $3.0 million compared to the same period in 2020.

For the nine months ended September 30, 2021 the increase in net interest income, on a FTE basis (non-GAAP), was due to lower interest income of $7.1 million, offset by a decrease of $10.6 million in interest expense compared to the same periods in 2020.

Net interest margin increased 31 basis point and three basis points to 2.92% and 2.80% for the three and nine months ended September 30, 2021, respectively, compared to 2.61% and 2.77% for the same periods in 2020.

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

The net interest margin, on an FTE basis (non-GAAP), increased 29 basis points and one basis point to 2.96% and 2.84% for the three and nine months ended September 30, 2021, respectively, compared to 2.67% and 2.83% 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,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2021 2020 2021 2020

1 unchanged sentence

Total Interest Expense 5,512 8,550 17,831 28,477

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

Net Interest Income per Consolidated Statements of Net Income (Loss) 29,401 25,436 83,133 78,962

Adjustment to FTE Basis 330 599 1,178 1,826

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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

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate

Interest-Bearing Deposits with Banks $ 191,047 $ 76 0.16 % $ 124,886 $ 32 0.10 %

31 unchanged sentences

(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

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

(Dollars in Thousands) Average Balance (3)

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Total Assets $ 4,141,281 $ 4,096,645

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 402,663 $ 727 0.24 % $ 308,617 $ 926 0.40 %

18 unchanged sentences

(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.

Interest income increased $0.9 million, or 2.7% and decreased $6.5 million, or 6.0%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Interest income, on an FTE basis (non-GAAP), increased $0.7 million, or 1.9% and decreased $7.1 million, or 6.5%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

We are currently maintaining higher liquidity levels as a result of COVID-19 and resulting government stimulus programs.

The change was primarily due to increases in average interest-earning assets of $113.4 million and $160.1 million for the three and nine months ended September 30, 2021, respectively, offset by lower short-term interest rates compared to the same periods in 2020.

Average interest-bearing deposits with banks increased $87.3 million for the nine months ended September 30, 2021, and the average rate earned decreased 23 basis points for the nine months ended September 30, 2021 compared to the same period in 2020.

Average loan balances decreased $66.8 million, due to the loan sale, and increased $5.1 million for the three and nine months ended September 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 $24.5 million through September 30, 2021.

The average rate earned on loans decreased 20 and 22 basis points for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 primarily due to lower short-term interest rates.

Average investment securities increased $115.9 million and $68.8 million and the average rate earned decreased 37 and 54 basis points for the three and nine months ended September 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

Interest expense decreased $3.0 million and $10.6 million for the three and nine months ended September 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 certificates of deposit (“CDs”).

Interest expense on deposits decreased $3.0 million and $10.7 million for the three and nine months ended September 30, 2021, respectively, compared to

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 same periods in 2020 primarily due to the decline in the average balance of CDs.

The decrease of $365.8 million or 20.3% and $332.6 million or 17.9% in the average balance of CDs for the three and nine months ended September 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 $94.1 million and $94.0 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

The average rate paid on interest-bearing deposits decreased 42 and 49 basis points for the three and nine months ended September 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 41 and 48 basis points for the three and nine months ended September 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

Three Month Ended September 30, 2021

Compared to September 30, 2020 Nine Months Ended September 30, 2021

Compared to September 30, 2020

(Dollars in Thousands) Volume (3)

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

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

Federal Home Loan Bank Borrowings (15) 3 (12) 19 (3) 16

Other Borrowings 26 (4) 22 67 (3) 64

9 unchanged sentences

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”

The provision for credit losses decreased $3.3 million to $(0.4) million and $10.8 million to $2.4 million for the three and nine months ended September 30, 2021, respectively, compared to $2.9 million and $13.2 million for the same periods in 2020.

The provision for unfunded commitments included a release of $0.1 million and a release of $0.9 million for the three and nine months ended September 30, 2021.

For the three months ended September 30, 2021, the decrease in the provision for credit

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.

losses was primarily driven by the release of $3.1 million to the ACL due to nine loans within two performing relationships.

These loans were included in the commercial real estate loan segment, during the third quarter of 2021 with an aggregate

unpaid principal balance of $50.2 million that were previously reserved.

During the three and nine months ended September 30, 2021, management observed that $62.0 million of loans that were previously in the deferral program were recovering at rates much lower than peers.

Accordingly, management sold $50.2 million of these loans during the three months ended September 30, 2021 and has developed a workout strategy with the remaining two loans with an aggregate unpaid balance of $12.0 million.

The qualitative reserves were established given the uncertainty of the future performance of these borrowers.

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

Management reviewed and analyzed the monthly operating statements of commercial clients in the Part III deferral program.

The deferral program expired June 30, 2021.

The majority of our clients in the deferral program experienced recoveries starting in the spring of 2021.

Based on the ongoing review of operating statements, management identified a lag in recovery with respect to loans with an aggregate principal balance of $62.0 million.

These loans were addressed throughout the nine months ended September 30, 2021 as additional information was received and analyzed as follows.

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

In the quarter ended March 31, 2021 the model recognized the deterioration of a loan with a principal balance of $8.1 million which resulted in current expected losses of $1.5 million and an additional $0.6 million standard qualitative general reserve.

In the third quarter ended September 30, 2021, the Bank sold these loans with an unpaid principal balance of $50.2 million which resulted in charge-offs totaling $9.2 million and a net release of reserves of $3.1 million.

Additionally, in the third quarter ended September 30, 2021, the model recognized the deterioration of loans with an aggregate principal balance of $12.0 million, which resulted in current expected losses of $1.6 million.

In summary, out of the $398.5 million in the deferral program as of June 30, 2021, only $12.0 million of these loans remain a concern for the quarter ended September 30, 2021 and have been adequately reserved.

Net charge-offs were $9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020.

During the three months ended September 30, 2021, the increase in net charge-offs was primarily due to $9.2 million in charge-offs related to the aforementioned sale of two relationships that included nine loans that had been previously reserved.

At September 30, 2021, we had low nonperforming loans, with such nonperforming loans decreasing $23.1 million to $8.9 million, compared to $32.0 million at December 31, 2020.

Nonperforming loans as a percentage of total portfolio loans were 0.31%, 1.09% and 1.35% as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively.

At September 30, 2021, the adoption of Topic 326 and subsequent measurement under this standard, resulted in an increase to our ACL of $45.2 million, to $99.3 million compared to $54.1 million at December 31, 2020.

The ACL as a percentage of total portfolio loans was 3.44% at September 30, 2021 and 1.83% at December 31, 2020.

CARTER BANKSHARES, INC.

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

Noninterest Income

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

Three Months Ended September 30, Nine Months Ended September 30,

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

4 unchanged sentences

Bank Owned Life Insurance Income 349 351 (2) (0.6) % 1,031 1,054 (23) (2.2) %

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

Other Real Estate Owned Income 7 58 (51) (87.9) % 82 279 (197) (70.6) %

2 unchanged sentences

Total Noninterest Income $ 6,915 $ 7,975 $ (1,060) (13.3) % $ 23,105 $ 20,991 $ 2,114 10.1 %

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.

Total noninterest income decreased $1.1 million, or 13.3%, to $6.9 million for the three months ended September 30, 2021 and increased $2.1 million, or 10.1%, to $23.1 million for the nine months ended September 30, 2021 compared to the same periods in 2020.

The decrease of $1.1 million for the three months ended September 30, 2021 compared to the same period in 2020 was related to declines in net security gains of $1.0 million and lower commercial loan swap fee income of $0.5 million due to the timing and demand for this product in the current low interest rate environment.

These decreases were offset by increases of $0.5 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 and higher debit card interchange fees of $0.2 million due to usage.

For the nine months ended September 30, 2021 compared to the same period in 2020, the increase of $2.1 million in total noninterest income was driven by increases in service charges on deposit accounts of $1.9 million, debit card interchange fees of $1.2 million, a year-to-date gain of $0.5 million on the sale of four bank branches included in other income and higher net security gains of $0.5 million.

The increase in security gains of $0.5 million for the nine months ended September 30, 2021, to $6.5 million compared to $5.9 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.

The above increases were offset by lower commercial loan swap fee income of $1.1 million, a decline in insurance commissions of $1.0 million and lower OREO income of $0.2 million.

Noninterest Expense

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

Three Months Ended September 30, Nine Months Ended September 30,

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

7 unchanged sentences

Data Processing 1,018 836 182 21.8 % 2,893 1,917 976 50.9 %

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 of Other Real Estate Owned, net 608 1,305 (697) (53.4) % 3,423 1,357 2,066 152.2 %

Losses on Sales and Write-downs on Bank Premises, net 7 17 (10) (58.8) % 114 88 26 29.5 %

3 unchanged sentences

Other Real Estate Owned Expense 84 94 (10) (10.6) % 280 411 (131) (31.9) %

Goodwill Impairment Expense — 62,192 (62,192) (100.0) % — 62,192 (62,192) (100.0) %

Other 2,326 1,907 419 22.0 % 6,243 6,314 (71) (1.1) %

Total Noninterest Expense $ 24,685 $ 87,300 $ (62,615) (71.7) % $ 76,049 $ 134,934 $ (58,885) (43.6) %

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)

Total noninterest expense decreased $62.6 million, or 71.7%, for the three months ended September 30, 2021 and decreased $58.9 million, or 43.6%, for the nine months ended September 30, 2021 compared to the same periods in 2020.

The most significant decrease for both the three and nine month periods was driven by a one-time charge resulting from goodwill impairment of $62.2 million recorded in the third quarter of 2020.

Also impacting the decrease for the three months ended September 30, 2021 was $0.7 million lower losses on sales and write-downs of OREO, net, a decrease in professional and legal fees of $0.2 million, lower salaries and employee benefits of $0.2 million and lower advertising expenses of $0.2 million.

Offsetting these decreases were increases of $0.4 million in other noninterest expense, which included a finder’s fee for the sale of the two credit relationships, $0.3 million increase in unfunded loan commitment expense related to the reclass to the provision for credit losses as a result of the adoption of Topic 326, a $0.2 million increase in data processing expense and $0.2 million in tax credit amortization.

Along with the above mentioned one-time goodwill impairment charge of $62.2 million, the decrease in total noninterest expense for the nine months ended September 30, 2021 included an increase for a nonrecurring write-down of $3.0 million for closed bank branches included in losses on sales and write-downs of OREO, net.

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.

Also decreasing for the period was $0.8 million in in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020, $0.3 million lower unfunded loan commitment expense and $0.1 million lower OREO expenses.

Offsetting these decreases for the nine months ended September 30, 2021 were increases of $1.0 million in data processing expenses due to an increase in customer accounts and new modules added to our core processor, $0.6 million higher professional and legal fees, $0.5 million increase in the amortization of tax credits, $0.3 million in higher FDIC insurance expenses and a $0.2 million increase in occupancy expenses.

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.

Pre-tax income increased $68.9 million and $76.9 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

A full goodwill impairment charge in the amount of $62.2 million was recorded in the third quarter of 2020.

Our effective tax rate was 7.7% and 9.5% for the three and nine months ended September 30, 2021, respectively, compared to negative 1.5% and negative 1.3% for the same periods in 2020.

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

The nondeductible goodwill impairment charge was the reason for the decreased effective tax rate for the three and nine period ended September 30, 2020.

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 pre-tax 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.

September 30, 2021

Total assets decreased $45.1 million, to $4.1 billion at September 30, 2021 compared to $4.2 billion at December 31, 2020.

Federal Reserve Bank excess reserves decreased $42.2 million to $121.3 million at September 30, 2021 from $163.5 million at December 31, 2020 due to active balance sheet management.

Total portfolio loans decreased $63.0 million, or 2.9% on an annualized basis, to $2.9 billion at September 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.

1 unchanged sentence

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.

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 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.

OREO decreased $2.5 million at September 30, 2021 compared to December 31, 2020 due to 20 branch closures that were completed and 13 of those that were sold as part of our branch network optimization project that aligns with our strategic goals

CARTER BANKSHARES, INC.

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

to enhance franchise value and improve operating efficiency.

Closed retail bank offices increased $0.3 million and have a remaining book value of $2.8 million at September 30, 2021 compared to $2.5 million at December 31, 2020.

The securities portfolio increased $118.8 million and is currently 21.7% of total assets at September 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.

Total deposits decreased $18.2 million to $3.7 billion at September 30, 2021 as compared to December 31, 2020.

The decline from December 31, 2020 was due to the intentional runoff of $211.8 million of higher cost CDs and $84.7 million of deposits held-for-assumption in connection with the sale of four bank branches, which were completed during the second quarter of 2021.

Offsetting these decreases was an increase of $278.3 million, or 14.0% in core deposits, which includes noninterest-bearing and interest-bearing demand deposits, money market accounts and savings accounts.

At September 30, 2021, noninterest-bearing deposits comprised 19.7% compared to 19.0% of total deposits at December 31, 2020, respectively.

CDs comprised 38.3% and 43.8% of total deposits at September 30, 2021 and December 31, 2020, respectively.

Total capital decreased by $34.3 million to $405.9 million at September 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 $10.3 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 $26.0 million for the nine months ended September 30, 2021.

The remaining difference of $0.7 million is related to stock-based compensation during the nine months ended September 30, 2021.

The ACL was 3.44% of total portfolio loans at September 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 3.35% at September 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.

Our Tier 1 capital ratio increased to 13.85% at September 30, 2021 compared to 13.08% at December 31, 2020.

Our leverage ratio was 10.48% at September 30, 2021, compared to 10.26% at December 31, 2020 and total risk-based capital ratio was 15.11% at September 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.

1 unchanged sentence

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

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

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

Treasury Securities $ 4,419 $ — $ 4,419

11 unchanged sentences

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 securities portfolio increased by $118.8 million to $897.5 million at September 30, 2021 as compared to $778.7 million at December 31, 2020.

Securities comprise 21.7% of total assets at September 30, 2021 as compared to 18.6% at December 31,

CARTER BANKSHARES, INC.

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

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 September 30, 2021 total gross unrealized gains in the available-for-sale portfolio were $12.0 million, offset by $5.2 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.

At September 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

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

Commercial Real Estate $ 1,346,953 $ 1,453,799

13 unchanged sentences

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

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

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, as supplemented by the risk factor disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

Total portfolio loans decreased $63.0 million, or 2.1%, to $2.9 billion at September 30, 2021 compared to December 31, 2020.

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

1 unchanged sentence

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.

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 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.

Nonperforming loans decreased $23.1 million, or 72.3%, to $8.9 million at September 30, 2021 compared to $32.0 million at December 31, 2020.

The decline from December 31, 2020 is due to the resolution of our two largest nonperforming credits during the second quarter of 2021.

OREO decreased $2.5 million at September 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 one-time write-down.

During the first nine months of 2021, 20 branch closures were completed and 13 were sold 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 $0.3 million and have a remaining book value of $2.8 million at September 30, 2021 compared to $2.5 million at December 31, 2020.

CARTER BANKSHARES, INC.

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

The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations.

Our exposure to the hospitality industry at September 30, 2021 equated to approximately $451.4 million, or 15.6% 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.

Starting in the second quarter of 2021, we have observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines through the pandemic.

However our clients are now facing enormous challenges when it comes to attracting labor, which impedes their ability to turnover rooms resulting in occupancy constraints.

This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements forcing 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 pay property expenses, capital improvements and/or 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.

Aggregate commitments to our top 10 credit relationships were $747.0 million at September 30, 2021.

The Other segment represents 47.4% of the top 10 credit relationships.

The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:

Dollars in Thousands For the Periods Ending Change 9/30/2021 % of Gross Loans 9/30/2021 % of RBC

September 30, 2021 December 31, 2020

Hospitality, agriculture & energy $354,240 $375,990 ($21,750) 12.26 % 74.07 %

Hospitality 63,855 61,691 2,164 2.21 % 13.35 %

Retail real estate & food services 56,258 55,373 885 1.95 % 11.76 %

Industrial & retail real estate 47,425 41,439 5,986 1.64 % 9.92 %

Multifamily, lumber & retail 44,008 35,322 8,686 1.52 % 9.20 %

Hospitality 37,584 37,435 149 1.30 % 7.86 %

Multifamily development 36,720 40,874 (4,154) 1.27 % 7.68 %

Retail real estate 36,619 35,388 1,231 1.27 % 7.66 %

Multifamily & student housing 35,749 38,787 (3,038) 1.24 % 7.47 %

Hospitality 34,591 36,086 (1,495) 1.20 % 7.23 %

Top Ten (10) Relationships 747,049 758,385 (11,336) 25.86 % 156.20 %

Total Gross Loans 2,889,046 2,982,442 (93,396)

% of Total Gross Loans 25.86 % 25.43 % 12.14 %

Concentration (25% of RBC) $119,565 $116,300

Line utilization, unused commitments, excluding consumer overdraft lines, were $394.4 million at September 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.

Total utilization, excluding consumer overdraft lines, was 55.4% at September 30, 2021, as compared to 52.2% at December 31, 2020.

Commercial line utilization was 55.6% at September 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.

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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.

Mortgage loans held-for-sale were $4.9 million and $25.4 million at September 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.

CARTER BANKSHARES, INC.

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

Credit Quality

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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.

Commercial unsecured loans are reserved for the best quality customers with well-established businesses that 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.

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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.

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 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.

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

CARTER BANKSHARES, INC.

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

Allowance for Credit Losses

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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.

Economic forecasts include but are not limited to 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.

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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.

The Day 1 CECL model and the model ended September 30, 2021, recognized the deterioration of loans with an aggregate principal balance of $42.8 million, which resulted in current expected losses of $10.2 million.

In the third quarter

CARTER BANKSHARES, INC.

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

ended September 30, 2021, the bank sold these loans with an unpaid principal balance of $50.2 million, which resulted in charge-offs totaling $9.2 million and a net release of reserves of $3.1 million.

Certain 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.

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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.

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, and iii) land acquisition loans without a defined source of amortization.

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

Three Months Ended September 30, 2021

(Dollars in Thousands) Commercial

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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

Nine Months Ended September 30, 2021

(Dollars in Thousands) Commercial

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

June 30, 2021 December 31, 2020

CARTER BANKSHARES, INC.

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

September 30, 2021 December 31, 2020

Net Charge-offs to Average Portfolio Loans 0.85 % * 0.09 %

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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.

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, and iii) land acquisition loans without a defined source of amortization.

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

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

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.

The ACL increased $45.2 million to $99.3 million at September 30, 2021 as compared to an allowance for loan losses of $54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $61.6 million.

During the nine 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.

The decrease in the provision for credit losses was primarily driven by a decrease of $3.1 million to the ACL due to the sale of two performing relationships that included nine loans during the third quarter of 2021 with an aggregate unpaid principal balance of $50.2 million that were previously reserved.

The nine loans were comprised of six loans, a resort loan and other commercial assets.

Management monitored loans in the deferral program monthly.

The deferral program expired as of June 30, 2021.

During the three months ended September 30, 2021, management observed that $62.0 million of loans in the deferral program were recovering at rates much lower than peers.

Accordingly, management sold $50.2 million of these loans in the third quarter of 2021 and has developed a workout strategy with the remaining two loans with an aggregate unpaid balance of $12.0 million.

The qualitative reserves were established given the uncertainty of the future performance of these borrowers.

The ACL was $99.3 million, or 3.44%, of total portfolio loans at September 30, 2021, as compared to an allowance for loan losses of $54.1 million, or 1.83% of total portfolio loans at December 31, 2020.

Net charge-offs were $9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020.

During the third quarter of 2021, nine loans within two performing relationships were sold with an aggregate unpaid principal balance of $50.0 million that were previously reserved.

This sale resulted in charge-offs of $9.2 million during the third quarter of 2021 and was previously reserved.

As a percentage

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 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.

of average portfolio loans, on an annualized basis, net charge-offs were 0.85% and 0.09% for the nine months ended September 30, 2021 and year ended December 31, 2020, respectively.

Nonperforming loans decreased $23.1 million, or 72.3%, to $8.9 million at September 30, 2021 compared to $32.0 million at December 31, 2020.

Nonperforming loans as a percentage of total portfolio loans were 0.31%, 1.09% and 1.35% as of September 30, 2021, December 31, 2020 and September 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.

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This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the long extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk.

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

The loan will be reported as a nonaccrual TDR and an individually evaluated loan if the principal balance is equal to or greater than $1.0 million.

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

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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 increased $45.0 million, or 33.5% to $179.2 million at September 30, 2021 compared to $134.2 million at December 31, 2020.

The Company had $78.0 million new additions offset by $24.8 million of principal pay-downs and $8.2 million in charge-offs for the resolution of our two largest nonperforming credits during the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, the Company had five loans that were modified totaling $78.0 million.

These loans were included in the Other category and restructured with enhanced pricing and collateral position of the relationships, during the third quarter of 2021.

TDRs of $3.2 million and $25.0 million as of September 30, 2021 and December 31, 2020, respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming.

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

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.

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.

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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CARTER BANKSHARES, INC.

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

Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO.

The following table summarizes nonperforming assets for the dates presented:

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

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

Nonperforming Loans

15 unchanged sentences

Total Nonperforming Assets $ 22,132 $ 47,726 $ (25,594)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Nonperforming Loans and Troubled Debt Restructurings to Total Portfolio Loans 0.31 % 1.09 %

Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned 0.76 % 1.61 %

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.

Nonperforming assets decreased $25.6 million to $22.1 million at September 30, 2021 compared to $47.7 million at December 31, 2020.

The decrease was primarily related to the resolution of our two largest nonperforming relationships, offset by a $2.5 million decrease in OREO.

The decrease in OREO, from December 31, 2021, was primarily due to the sale of the closed retail offices during the second quarter of 2021.

Closed retail bank offices have a remaining book value of $2.8 million at September 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

CARTER BANKSHARES, INC.

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

and nine months ended September 30, 2021, respectively.

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

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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.

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

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

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

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

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

Loans 30 to 89 Days Past Due

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Total Loans 30 to 89 Days Past Due $ 8,836 $ 6,404

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.

Portfolio loans past due 30 to 89 days or more and still accruing increased $2.4 million to $8.8 million at September 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.

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CARTER BANKSHARES, INC.

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

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

(Dollars in Thousands) June 30,

(Dollars in Thousands) September 30,

2021 December 31,

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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 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.

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

Total deposits at September 30, 2021 decreased $18.2 million, or 0.5%, from December 31, 2020.

The decrease in deposits primarily related to the $211.8 million, or 13.1%, decline in CDs at September 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, including $137.9 million in money market accounts due to our deposit acquisition strategy, a $66.9 million increase in interest-bearing demand deposits, a $50.6 million increase in savings accounts due to promotions and an increase of $22.9 million in noninterest-bearing demand accounts.

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

Federal Home Loan Bank Borrowings (“FHLB”)

Borrowings are an additional source of liquidity for the Company.

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

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.

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

Total loans pledged as collateral were $908.7 million and $804.2 million at September 30, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both September 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 Bank is eligible to borrow up to an additional $555.9 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 September 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) June 30, 2021 December 31, 2020

(Dollars in Thousands) September 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 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 Company held FHLB Atlanta stock of $3.2 million and $5.1 million at September 30, 2021 and December 31, 2020, respectively.

Dividends recorded on this restricted stock were $30 thousand and $98 thousand for the three and nine months ended September 30, 2021, respectively.

Dividends recorded on this restricted stock were $39 thousand and $170 thousand for the three and nine months ended September 30, 2020, respectively.

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

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Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB.

Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise.

Members do not purchase stock in the FHLB for the same reasons that traditional

CARTER BANKSHARES, INC.

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

equity investors acquire stock in an investor-owned enterprise.

Rather, members purchase stock to obtain access to the products and services offered by the FHLB.

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In addition to the lines referenced above, the Company also has $724.7 million of unpledged available-for-sale investment securities as an additional source of liquidity.

CARTER BANKSHARES, INC.

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

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets.

1 unchanged sentence

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

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.

At September 30, 2021, the Bank had $912.3 million in highly liquid assets, which consisted of $61.4 million in interest-bearing deposits in other financial institutions, $121.3 million in FRB Excess Reserves, $724.7 million in unpledged securities and $4.9 million in mortgage loans held-for-sale.

This resulted in a highly liquid assets to total assets ratio of 22.1% at September 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) June 30, 2021 December 31, 2020

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

Cash and Due From Banks $ 43,061 $ 38,535

7 unchanged sentences

Regulatory Capital Requirements

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

Total shareholders’ equity decreased by $34.3 million to $405.9 million at September 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 $10.3 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-

CARTER BANKSHARES, INC.

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

sale securities partially offset by net income of $26.0 million.

The remaining difference of $0.7 million is related to stock-based compensation during the nine months ended September 30, 2021.

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

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

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.

At September 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.

At September 30, 2021, the Bank continues to maintain its capital position with a leverage ratio of 10.45% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 13.82% compared to the regulatory guideline of 6.50% to be well-capitalized.

The Bank’s risk-based Tier 1 and Total Capital ratios were 13.82% and 15.08%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively.

We believe that we have the ability to raise additional capital, if necessary.

CARTER BANKSHARES, INC.

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

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.

2 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 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.

Management believes as of September 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 June 30, 2021 December 31, 2020

Capitalized (1)

September 30, 2021 December 31, 2020

Amount Ratio Amount Ratio

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Total Capital (to Risk-weighted Assets) 8.00 % 10.00 % 477,229 15.08 % 464,578 14.31 %

(1) To be “well capitalized” under the prompt corrective action provisions in the Basel III framework.

“Well capitalized” applies to the Bank only.

The Company was incorporated on October 7, 2020, by and at the direction of the Board of Directors of the Bank, for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate reorganization transaction (the “Reorganization”).

The Reorganization was completed on November 20, 2020 pursuant to an Agreement and Plan of Reorganization among the Bank, the Company and CBT Merger Sub, Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company.

CARTER BANKSHARES, INC.

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

a wholly-owned subsidiary of the Company.

In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for one newly issued share of the Company’s common stock.

6 unchanged sentences

Contractual Obligations

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.

As of September 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 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.

As of September 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital.

For financial institutions, market risk primarily reflects exposures to changes in interest rates.

Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels.

Interest rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash flows themselves, as rates change.

Accepting this risk is a normal part of banking and can be an important source of profitability and enhancement of shareholder value.

However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity and solvency.

Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.

The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk through net interest income simulation for various rate shock scenarios and economic value of equity (“EVE”), simulation for various rate shock scenarios.

The rate shock scenarios used in the ALM span over multiple time horizons and yield curve shapes and include parallel and non-parallel shifts to ensure the ALCO can mitigate future earnings and market value fluctuations due to changes in market interest rates.

Within the context of the ALM, net interest income rate shock simulations explicitly measure the exposure to earnings from changes in market rates of interest over a defined time horizon.

These robust simulations include assumptions of how the balance sheet will react in different rate environments including loan pre-payment speeds, average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in market rates (betas).

Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios.

Reviewing these various measures provides us with a more comprehensive view of our interest rate risk profile.

Net interest income rate shock simulation results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months and 24 months of pretax net interest income.

The base case and rate shock analyses are performed on a static and growth balance sheet.

A static balance sheet is a no growth balance sheet in which all maturing and/or

CARTER BANKSHARES, INC.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis