What changed in this filing

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Item 1. Financial Statements

2022-08-03 compared with 2022-05-05 · 677 added, 320 removed, 1119 unchanged (47% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in Thousands) 2022 2021

9 unchanged sentences

Gains on Sales of Mortgage Loans Held-for-Sale ( 119 ) ( 184 )

Losses (Gains) on Sales of Securities, net 24 ( 3,610 )

Gains on Sales of Securities, net ( 52 ) ( 5,109 )

Write-downs of Other Real Estate Owned 432 3,211

Losses on Sales of Other Real Estate Owned, Net 28 73

Gains on Sales of Other Real Estate Owned, Net ( 333 ) ( 396 )

(Gains) Losses on Sales and Write-downs of Bank Premises ( 346 ) 107

Commercial Loan Swap Derivative Income ( 443 ) ( 153 )

Premiums on Branch Sales — ( 506 )

Increase in the Value of Life Insurance Contracts ( 668 ) ( 682 )

1 unchanged sentence

Increase in Other Assets ( 2,040 ) ( 10,678 )

Increase (Decrease) in Other Liabilities 7,542 ( 2,279 )

Decrease in Other Liabilities ( 1,882 ) ( 3,573 )

Net Cash Provided By Operating Activities 26,798 23,437

5 unchanged sentences

Purchase of Bank Premises and Equipment, Net ( 2,528 ) ( 3,248 )

Net Cash Paid in Branch Sales — ( 73,923 )

Proceeds from Sales of Bank Premises and Equipment, net 408 —

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Decrease in Certificates of Deposits ( 83,855 ) ( 164,049 )

Payments on Federal Home Loan Bank Borrowings ( 7,000 ) ( 5,000 )

Payments on Federal Home Loan Bank Borrowings, net ( 7,000 ) ( 5,000 )

Repurchase of Common Stock ( 32,415 ) —

Net Cash (Used In) Provided by Financing Activities ( 562 ) 1,893

Net Cash Provided by Financing Activities 15,502 48,696

Net Decrease in Cash and Cash Equivalents ( 207,559 ) ( 25,291 )

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Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,879 2,027

Stock Repurchase Settled in Subsequent Period ( 1,262 ) —

See accompanying notes to unaudited consolidated financial statements.

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Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 related changes, and changes in the financial condition of borrowers.

The Company did not adopt any new accounting standards in the first quarter of 2022 that had a material impact to our financial statements.

Accounting Statements Issued but Not Yet Adopted

Accounting Standards Adopted in 2022

In March 2022, the FASB issued ASU No.

2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications now will be evaluated to determine if they result in a new loan or a continuation of the existing loan.

The amendments in this ASU also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases.

We are currently evaluating the impact of the updated guidance on our Consolidated Financial Statements and write-offs.

2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan.

The amendments in this ASU also required that entities disclose current-period gross charge-offs by year of origination for loans and leases.

The amendments in this ASU are effective January 1, 2023, with early adoption permitted.

The Company plans to early adopt this ASU in 2022.

The Company evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU on April 1, 2022 on a prospective basis, effective dated as of January 1, 2022.

This change did not have a material effect on our consolidated financial statements.

Refer to Note 4, Loans and Loans Held-For-Sale for disclosures for debtors experiencing financial difficulty and Note 5, Allowance for Credit Losses for vintage disclosures related to gross charge-offs by loan segment by year of origination, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information on the adoption of these amendments.

Allowance for Credit Losses Policy

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of restructured loans or charge-off policy.

The Company’s methodology for estimating the ACL includes:

Segmentation.

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

Specific Analysis.

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

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

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

A charge-off is recognized when the loss is

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

quantifiable.

Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”) for quantitative analysis that are part of the Company’s ACL methodology.

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 are utilized in the model to estimate the probability of default and loss given default through regression.

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

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

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

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

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

Qualitative Analysis.

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

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

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

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

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the prior model.

With the adoption of CECL management elected to evaluate certain loans based on shared but unique risk attributes.

The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards.

The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors:

prepayment speeds, timing of contractual payments, discount rate, as well as other factors.

The discount rate is reflective of the inherent risk in the Other segment.

A substantial change in these assumptions could cause a significant impact to the model causing volatility.

Management reviews the model output for appropriateness and subjectively makes adjustments as needed.

The analysis applied to this pool resulted in an allowance of $ 51.3 million upon adoption and is disclosed in the Other segment line item.

Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, 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 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.

Management may also consider a number of other factors to determine when a charge-off is appropriate.

These factors may include, but are not limited to:

• The status of a bankruptcy proceeding

• The value of collateral and probability of successful liquidation;

• The status of adverse proceedings or litigation that may result in collection

Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due.

Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments.

Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more.

We monitor delinquency on a monthly basis, including early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans.

Loan Restructurings:

In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan.

Management strives to identify borrowers in financial difficulty early and work with them to modify their

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

loan to more affordable terms before their loan reaches nonaccrual status.

These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type.

These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.

Accounting Standards Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No.

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As it pertains to the U.S.

dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

settings through June 30, 2023.

dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023.

In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk.

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Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR.

As of March 31, 2022, approximately 16.0 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

As of June 30, 2022, approximately 14.3 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

We ceased originating new LIBOR based variable rate loans by December 31, 2021 per the ARRC’s guidance.

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NOTE 2 – EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number shares of common stock outstanding during the period.

Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented:

Three Months Ended March 31,

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

(Dollars in Thousands, except share and per share data) 2022 2021 2022 2021

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The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) Amortized

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Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400

The Company did no t have securities classified as held-to-maturity at March 31, 2022 or December 31, 2021.

The Company did no t have securities classified as held-to-maturity at June 30, 2022 or December 31, 2021.

The following table shows the composition of gross and net realized gains and losses for the periods presented:

Three Months Ended March 31,

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

(Dollars in Thousands) 2022 2021 2022 2021

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Gross Realized Losses ( 132 ) ( 66 ) ( 156 ) ( 85 )

Net Realized (Losses) Gains ( 24 ) 3,610

Net Realized Gains 76 1,499 52 5,109

Tax Impact $ 16 $ 318 $ 11 $ 1,076

Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold.

The net realized (losses) gains above reflect reclassification adjustments in the calculation of Other Comprehensive Loss.

The net realized (losses) gains are included in noninterest income as (losses) gains on sales of securities, net in the Consolidated Statements of Income.

The net realized gains above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income.

The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income.

The tax impact is included in income tax provision in the Consolidated Statements of Income.

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Securities not due at a single maturity date are shown separately.

March 31, 2022

June 30, 2022

(Dollars in Thousands) Amortized

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Total Debt Securities $ 982,966 $ 907,034

At March 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

At June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

Government and its Agencies, in an amount greater than 10% of shareholders’ equity.

The carrying value of securities pledged for various regulatory and legal requirements was $ 164.6 million at March 31, 2022 and $ 178.6 million at December 31, 2021.

The carrying value of securities pledged for various regulatory and legal requirements was $ 178.5 million at June 30, 2022 and $ 178.6 million at December 31, 2021.

CARTER BANKSHARES, INC.

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NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

March 31, 2022

Available-for-sale securities with unrealized losses at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

June 30, 2022

Less Than 12 Months 12 Months or More Total

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Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 )

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended March 31, 2022 as the Company did no t have securities classified as held-to-maturity at March 31, 2022.

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses (“ACL”) on its investment securities during the quarter ended June 30, 2022 as the Company did no t have securities classified as held-to-maturity at June 30, 2022.

The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

Securities are evaluated for other than temporary impairment, (“OTTI”), quarterly and more frequently if economic or market concerns warrant.

Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, the credit quality of the issuer, and whether the Company intends to sell the security or may be required to sell the security prior to maturity.

The Company has reviewed all securities for OTTI.

As of March 31, 2022 and December 31, 2021, no OTTI has been identified for any investment securities in our portfolio.

We do not believe any individual unrealized loss as of March 31, 2022 represents an OTTI.

At March 31, 2022, there were 436 securities in an unrealized loss position and at December 31, 2021, there were 268 securities in an unrealized loss position.

The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities.

All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security.

We generally do not intend to sell and it is not likely that we will be required to sell any of the securities in an unrealized loss position before recovery of amortized cost.

As of June 30, 2022, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis.

The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and unprecedented market volatility.

These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities.

The fair value is expected to recover as the securities approach their maturity date or repricing date.

As of June 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit and therefore no allowance for credit losses has been recognized on the Company’s securities.

Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

During the three and six months ended June 30, 2022 and 2021, the Company had no credit related net investment impairment losses.

CARTER BANKSHARES, INC.

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(Dollars in Thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Commercial Real Estate

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Total Loans $ 2,997,896 $ 2,812,357

Troubled Debt Restructurings (“TDR”)

The following table summarizes the Company’s TDRs as of the dates presented:

March 31, 2022 December 31, 2021

(Dollars in Thousands) Performing

TDRs Nonperforming

TDRs Performing

TDRs Nonperforming

Loan Restructurings

On April 1, 2022, the Company adopted the accounting guidance in ASU No.

2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of troubled debt restructurings (TDRs).

Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan.

Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above.

Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater;

otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.

For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

The following table shows the amortized cost basis as of June 30, 2022 and December 31, 2021 for the loans restructured to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:

Restructured Loans

June 30, 2022 December 31, 2021

(Dollars in Thousands) Number of Contracts Amortized Cost Basis (1)

% of Total Class of Financing Receivable Number of Contracts Amortized Cost Basis (1)

% of Total Class of Financing Receivable

Accruing Restructured Loans

Commercial Real Estate — $ — — % — $ — — %

Commercial and Industrial — — — % 1 14 — %

Total Commercial TDRs 2,250 3,014 5,264 2,693 2,742 5,435

Residential Mortgages — — — % — — — %

Other Consumer — — — % — — — %

Total Consumer TDRs — — — — — —

Construction — — — % — — — %

Other — — — % 5 78,022 21.80 %

Total TDRs $ 171,478 $ 3,822 $ 175,300 $ 172,592 $ 3,550 $ 176,142

In order to maximize the collection of loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would be appropriate.

Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt.

A loan is a TDR if both of the following exist:

1) the debtor is experiencing financial difficulties, and 2) a creditor has granted a concession to the debtor that it would not normally grant.

Nonaccrual loans that are modified can be placed back on accrual status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

As of March 31, 2022, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs decreased $ 0.9 million, or 0.5 % to $ 175.3 million at March 31, 2022 compared to December 31, 2021.

D uring the three months ended March 31, 2022, t he Company had one new TDR totaling $ 0.3 million in the commercial real estate segment, offset by $ 1.2 million of principal pay-downs.

This new TDR loan was restructured with enhanced payment terms as a result of a forbearance agreement.

TDRs of $ 3.8 million and $ 3.6 million as of March 31, 2022 and December 31, 2021 , respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming.

During the three months ended March 31, 2022, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

Total Accruing Restructured Loans — $ — — % 6 $ 78,036 21.80 %

Nonaccrual Restructured Loans

Commercial Real Estate 1 $ 300 0.02 % 1 $ 2,742 0.21 %

Commercial and Industrial — — — % — — — %

Residential Mortgages — — — % — — — %

Other Consumer — — — % — — — %

Construction — — — % 1 808 0.29 %

Other — — — % — — — %

Total Nonaccrual Restructured Loans 1 $ 300 0.02 % 2 $ 3,550 0.23 %

Total Restructured Loans 1 $ 300 0.02 % 8 $ 81,586 20.86 %

(1) Excludes accrued interest receivable of $ 2.9 thousand at June 30, 2022 and $ 0.5 million at December 31, 2021.

In the first quarter of 2022 the Bank recognized a loan modification of a commercial real estate loan as a restructured loan.

The borrower’s objective was to redevelop the property for a purpose that temporarily lacks feasibility due to the COVID-19 pandemic.

In the interim the property is leased, albeit at a lower rate than originally forecasted.

The Bank reduced the regularly scheduled principal and interest payments to accommodate the rental income until the property can be redeveloped.

This loan is not considered significant and is included in the Bank’s ACL model in the general pool of the CRE segment for reserve purposes.

For the year ended December 31, 2021 the Bank modified six loans to borrowers experiencing financial difficulty.

Of these six accruing loans, five are related through common guarantors.

The Bank improved economic terms, improved collateral position via cross collateralization and actually shortened the maturity of these loans in connection with a global workout agreement.

Payment terms include interest only, there were no modifications to the original rate.

These loans are included in the Bank’s ACL model in the “Other” segment for reserve purposes.

CARTER BANKSHARES, INC.

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NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

There were no TDR payment defaults during the three months ended March 31, 2022 or March 31, 2021.

For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.

The specific reserve portion of the ACL on TDRs, if required, is determined by discounting the restructured cash flow at the original effective rate of the loan before modification or is based on the fair value of the collateral less cost to sell, if repayment of the loan is collateral dependent.

If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance as a component of the ACL or charges off the individually evaluated loan balance if it determines that such amount is a quantifiable loss.

This method is used consistently for all segments of the portfolio.

The following table presents nonperforming assets as of the dates presented:

Nonperforming Assets

(Dollars in Thousands) March 31, 2022 December 31, 2021

Nonperforming Assets

Nonaccrual loans $ 3,475 $ 3,847

Nonaccrual TDRs 3,822 3,550

Total Nonaccrual Loans 7,297 7,397

Other Real Estate Owned, or (“OREO”) 11,253 10,916

Total Nonperforming Assets $ 18,550 $ 18,313

As of March 31, 2022 and December 31, 2021, the Company had $ 854.9 thousand and $ 254.0 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 24.7 thousand at March 31, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate included in OREO.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the six months ended June 30, 2022:

Payment Status (Amortized Cost Basis)

(Dollars in Thousands) Current 30-89 Days Past Due 90+ Days Past Due

Accruing Restructured Loans

Commercial Real Estate $ — $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction — — —

Total Accruing Restructured Loans $ — $ — $ —

Nonaccrual Restructured Loans

Commercial Real Estate $ 300 $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction — — —

Total Nonaccrual Restructured Loans $ 300 $ — $ —

Total Restructured Loans (1)

$ 300 $ — $ —

(1) Excludes accrued interest receivable of $ 2.9 thousand at June 30, 2022.

As of June 30, 2022, the Company had no commitments to lend any additional funds on restructured loans.

As of June 30, 2022 the Company had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

For purposes of this disclosure, a default occurs when, within 12 months of the original modification, either a full or partial charge-off occurs or the loan becomes 90 days or more past due.

As of June 30, 2022 and December 31, 2021, the Company had $ 1.0 million and $ 0.3 million, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 24.0 thousand at June 30, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate loans included in OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

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Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

These loans are also made to local and state municipalities for

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company.

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The primary source of repayment for these loans is the income of the borrower.

The condition of the local economy, in particular the unemployment rate, is an important indicator of

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

risk for this segment.

The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.

The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Credit Quality Indicators:

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• Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $ 2.0 million or more;

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

• A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $ 2.0 million or more but not included in the top twenty LLRs;

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The Company’s internally assigned grades are as follows:

Pass – The Company uses six grades of pass.

Pass – The Company uses six grades of pass, including its watch rating.

Generally, a pass rating indicates that the loan is currently performing and is of high quality.

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The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

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Total Commercial Real Estate $ 201,249 $ 179,014 $ 152,964 $ 174,105 $ 252,998 $ 397,728 $ 31,059 $ 1,389,117

YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ —

Commercial and Industrial

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Total Commercial and Industrial $ 21,454 $ 50,582 $ 44,896 $ 10,896 $ 35,777 $ 161,083 $ 11,789 $ 336,477

YTD Gross Charge-offs $ — $ — $ — $ — $ 22 $ — $ — $ 22

Residential Mortgages

3 unchanged sentences

Total Residential Mortgages $ 107,475 $ 172,332 $ 83,199 $ 55,059 $ 74,891 $ 46,434 $ 19,923 $ 559,313

YTD Gross Charge-offs $ — $ — $ — $ — $ — $ 23 $ — $ 23

Other Consumer

3 unchanged sentences

Total Other Consumer $ 6,963 $ 6,821 $ 8,413 $ 487 $ 280 $ 24,720 $ 349 $ 48,033

YTD Gross Charge-offs $ 34 $ 297 $ 184 $ 225 $ 26 $ 60 $ — $ 826

Pass $ 51,136 $ 141,951 $ 68,062 $ 11,531 $ 20,843 $ 17,849 $ 10,176 $ 321,548

2 unchanged sentences

Total Construction $ 51,136 $ 141,951 $ 68,198 $ 11,531 $ 20,937 $ 18,802 $ 10,176 $ 322,731

YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ —

Pass $ — $ — $ — $ — $ — $ 180,792 $ — $ 180,792

2 unchanged sentences

Total Other Loans $ — $ — $ — $ — $ 87,329 $ 254,896 $ — $ 342,225

YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ —

Total Portfolio Loans

3 unchanged sentences

Total Portfolio Loans $ 388,277 $ 550,700 $ 357,670 $ 252,078 $ 472,212 $ 903,663 $ 73,296 $ 2,997,896

Current YTD Period:

YTD Gross Charge-offs $ 34 $ 297 $ 184 $ 225 $ 48 $ 83 $ — $ 871

CARTER BANKSHARES, INC.

8 unchanged sentences

Total Commercial Real Estate $ 195,670 $ 165,100 $ 215,889 $ 295,599 $ 119,444 $ 293,168 $ 38,382 $ 1,323,252

YTD Gross Charge-offs $ — $ — $ 10,471 $ 1,424 $ 6,577 $ 1,190 $ — $ 19,662

Commercial and Industrial

3 unchanged sentences

Total Commercial and Industrial $ 55,187 $ 50,087 $ 15,956 $ 43,121 $ 26,373 $ 150,656 $ 3,996 $ 345,376

YTD Gross Charge-offs $ — $ 109 $ 261 $ 3 $ — $ 1 $ — $ 374

Residential Mortgages

3 unchanged sentences

Total Residential Mortgages $ 155,892 $ 91,023 $ 64,690 $ 74,076 $ 8,828 $ 50,242 $ 13,237 $ 457,988

YTD Gross Charge-offs $ — $ — $ — $ 172 $ — $ 101 $ — $ 273

Other Consumer

3 unchanged sentences

Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666

YTD Gross Charge-offs $ 152 $ 661 $ 905 $ 247 $ 170 $ 121 $ — $ 2,256

Pass $ 140,639 $ 82,523 $ 24,336 $ 9,739 $ 5,328 $ 3,407 $ 15,269 $ 281,241

2 unchanged sentences

Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947

YTD Gross Charge-offs $ — $ — $ 1,859 $ — $ — $ — $ — $ 1,859

Pass $ — $ — $ — $ — $ 122,848 $ 62,399 $ — $ 185,247

2 unchanged sentences

Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ —

Total Portfolio Loans

3 unchanged sentences

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

Current YTD Period:

YTD Gross Charge-offs $ 152 $ 770 $ 13,496 $ 1,846 $ 6,747 $ 1,413 $ — $ 24,424

CARTER BANKSHARES, INC.

2 unchanged sentences

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented.

March 31, 2022

June 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

56 unchanged sentences

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) Current

10 unchanged sentences

Total $ 2,983,309 $ 2,441 $ 117 $ 2,558 $ 12,029 $ 2,997,896

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

December 31, 2021

11 unchanged sentences

Total $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129

Loans past due 90 days or more and still accruing were zero at March 31, 2022 and December 31, 2021.

There were no loans past due 90 days or more and still accruing at June 30, 2022 and December 31, 2021.

Loans past due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days or more and still accruing decreased $ 0.8 million to $ 0.9 million at March 31, 2022 compared to $ 1.7 million at December 31, 2021 in all loan categories except construction, which increased $ 0.2 million.

There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2022 or December 31, 2021.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan as of March 31, 2022.

For the three months ended March 31, 2022, the amount of interest income on nonaccrual loans was immaterial.

March 31, 2022

Loans past due 30 to 89 days or more and still accruing increased $ 0.9 million to $ 2.6 million at June 30, 2022 compared to $ 1.7 million at December 31, 2021.

There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 2022 or December 31, 2021.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan for the periods presented.

June 30, 2022

(Dollars in Thousands) Beginning of

10 unchanged sentences

Total Portfolio Loans $ 7,397 $ 12,029 $ — $ —

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status, but is considered a TDR.

Impaired loans with a commitment of $ 1.0 million or more are individually evaluated.

During the three months ended March 31, 2022, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

As of and for the December 31, 2021

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

Still Accruing

Commercial Real Estate $ 21,891 $ 3,337 $ — $ —

Commercial and Industrial 456 451 — —

Residential Mortgages 4,135 2,551 — —

Other Consumer 184 73 — —

Construction 5,331 985 808 —

Other — — — —

Total Portfolio Loans $ 31,997 $ 7,397 $ 808 $ —

A loan is considered to be experiencing financial difficulty when it is transferred to nonaccrual status.

Loans experiencing financial difficulty with a commitment of $ 1.0 million or more are individually evaluated.

During the three and six months ended June 30, 2022 and the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

CARTER BANKSHARES, INC.

2 unchanged sentences

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented.

Changes in the fair value of the types of collateral for individually evaluated loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss on loans or a reversal of the provision for credit loss on loans in the period of change.

Type of Collateral

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(Dollars in Thousands) Real Estate Real Estate

6 unchanged sentences

The following tables present activity in the ACL for the periods presented:

Three Months Ended March 31, 2022

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential

Mortgage Other

Consumer Construction Other Total

Three Months Ended June 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

Allowance for Credit Losses on Loans:

5 unchanged sentences

Balance at End of Period $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981

Three Months Ended March 31, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential

Mortgage Other

Consumer Construction Other Total

Six Months Ended June 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939

Provision for Credit Losses on Loans 511 1,598 714 829 ( 256 ) ( 952 ) 2,444

Charge-offs — ( 22 ) ( 23 ) ( 826 ) — — ( 871 )

Recoveries — 1 96 223 149 — 469

Net (Charge-offs) / Recoveries — ( 21 ) 73 ( 603 ) 149 — ( 402 )

Balance at End of Period $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended June 30, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

Allowance for Credit Losses on Loans:

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

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

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

Recoveries 140 1 1 144 — — 286

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

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

Six Months Ended June 30, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ — $ 54,074

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

4 unchanged sentences

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

The adoption of ASU 2016-13 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021 to the ACL and $ 2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The adoption of ASU 2016-13 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021 and $ 2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The increase primarily included an expected credit loss of $ 51.3 million established based on a modified discounted cash flow method on expected cash flow changes in the future for the Other segment.

4 unchanged sentences

Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis.

Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, impaired loans, OREO, and certain other assets.

Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date.

64 unchanged sentences

OREO and other repossessed assets marked to fair value are classified as Level 3.

At March 31, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

At June 30, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

CARTER BANKSHARES, INC.

2 unchanged sentences

Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) Carrying

46 unchanged sentences

We have invested in subordinated debt of other financial institutions.

We have three securities totaling $ 11.1 million that are considered to be Level 3 securities at March 31, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 11.1 million at March 31, 2022 is attributable to a change in the fair value level of an existing security in the amount of $ 2.9 million, offset by the change in calculated fair value of $ 0.4 million.

We have three securities totaling $ 11.0 million that are considered to be Level 3 securities at June 30, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 11.0 million at June 30, 2022 is attributable to a change in the fair value level of an existing security in the amount of $ 2.9 million, offset by the change in calculated fair value of $ 0.4 million.

The existing security was previously valued by an independent third party based upon a trade desktop evaluation, but is now performed internally using the same approach applied to the other Level 3 securities.

5 unchanged sentences

Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value

5 unchanged sentences

Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777

Individually evaluated loans had a net carrying amount of $ 1.8 million at March 31, 2022 with a valuation allowance of $ 0.9 million.

Individually evaluated loans had a net carrying amount of $ 4.1 million at June 30, 2022 with a valuation allowance of $ 3.5 million.

Individually evaluated loans had a net carrying amount of $ 1.8 million at December 31, 2021 with a valuation allowance of $ 1.0 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 11.3 million as of March 31, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.1 million write-downs recorded on OREO for the three months ended March 31, 2022 and for the same period in 2021.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.4 million as of June 30, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.4 million write-downs recorded on OREO for the six months ended June 30, 2022 and $ 3.2 million for the same period in 2021.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:

March 31, 2022

June 30, 2022

(Dollars in Thousands) Fair

4 unchanged sentences

Individually Evaluated Loans $ 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 %

Individually Evaluated Loans 2,367 Estimated Enterprise Value Pending Sales agreements from Potential Buyers 8.3 % 8.3 %

Total Individually Evaluated Loans $ 4,144

OREO $ 7,420 Appraisals Estimated Selling Costs 10.0 % 10.0 %

OREO 627 Executed Sales Agreement Estimated Selling Costs 5.0 % 5.0 %

OREO 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

19 unchanged sentences

Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgement to adjust the baseline discount rate when appropriate.

The carrying values and estimated fair values of our financial instruments at March 31, 2022 and December 31, 2021 are presented in the following tables.

Fair values for March 31, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

The carrying values and estimated fair values of our financial instruments at June 30, 2022 and December 31, 2021 are presented in the following tables.

Fair values for June 30, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet.

3 unchanged sentences

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair Value Measurements at March 31, 2022

Fair Value Measurements at June 30, 2022

(Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total

46 unchanged sentences

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented:

Fair Values of Derivative Instruments

Asset Derivatives (Included in Other Assets)

March 31, 2022 December 31, 2021

Fair Value of Derivative Assets

(Included in Other Assets)

June 30, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

3 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 69 $ 445,007 $ 17,854 66 $ 446,490 $ 3,508

Fair Values of Derivative Instruments

Liability Derivatives (Included in Other Liabilities)

March 31, 2022 December 31, 2021

Fair Value of Derivative Liabilities

(Included in Other Liabilities)

June 30, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

6 unchanged sentences

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the income recognized on derivatives for the periods presented:

For the Three Months Ended March 31,

The following table indicates the income (loss) recognized on derivatives for the periods presented:

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

(Dollars in Thousands) 2022 2021 2022 2021

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans 139 ( 276 ) 443 153

Total Derivative Income $ 304 $ 429

Total Derivative Income (Loss) $ 139 $ ( 276 ) $ 443 $ 153

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted.

1 unchanged sentence

The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented:

Asset Derivatives (Included in Other Assets) Liability Derivatives (Included in Other Liabilities)

(Dollars in Thousands) March 31,

Derivative Assets

(Included in Other Assets) Derivative Liabilities

(Included in Other Liabilities)

(Dollars in Thousands) June 30,

2022 December 31,

2021 March 31,

2021 June 30,

2022 December 31,

9 unchanged sentences

Borrowings serve as an additional source of liquidity for the Company.

Federal Home Loan Bank, or (“FHLB”) borrowings were zero at March 31, 2022 and $ 7.0 million at December 31, 2021.

The Company had no Federal Home Loan Bank (“FHLB”) borrowings at June 30, 2022 and $ 7.0 million at December 31, 2021.

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.

Total loans pledged as collateral were $ 1.1 billion at both March 31, 2022 and December 31, 2021.

There were no securities available-for-sale pledged as collateral at both March 31, 2022 and December 31, 2021.

Total loans pledged as collateral were $ 1.2 billion at June 30, 2022 and $ 1.1 billion at December 31, 2021.

There were no securities available-for-sale pledged as collateral at both June 30, 2022 and December 31, 2021.

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

The Company is eligible to borrow up to an additional $ 693.0 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 March 31, 2022.

The Company is eligible to borrow up to an additional $ 773.6 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, 2022.

The Company had the capacity to borrow up to an additional $ 667.3 million from the FHLB at December 31, 2021.

The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021

(Dollars in Thousands) June 30, 2022 December 31, 2021

Long-term Borrowings $ — $ 7,000

Weighted Average Interest Rate — % 1.61 %

During the year ending December 31, 2021 the Company prepaid four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

During the year ended December 31, 2021 the Company prepaid four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

One FHLB advance totaling $ 3.0 million was repaid at maturity in the fourth quarter of 2021.

The remaining FHLB advances totaling $ 25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the borrowings totaling $ 43 thousand at December 31, 2021.

The FHLB borrowing of $ 7.0 million was prepaid in January 2022 outside of its scheduled maturity.

There were no new FHLB borrowings during the three months ended March 31, 2022.

The FHLB borrowing of $ 7.0 million was prepaid in January 2022 outside of its scheduled maturity and had unamortized prepayment fees related to the early repayment of the borrowing of $ 18 thousand.

CARTER BANKSHARES, INC.

3 unchanged sentences

The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs.

Lines of credit for construction projects represented 54.1 % and 55.3 %, of the commitments to extend credit at March 31, 2022 and December 31, 2021, respectively.

Lines of credit for construction projects represented 61.3 % and 55.3 %, of the commitments to extend credit at June 30, 2022 and December 31, 2021, respectively.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party.

1 unchanged sentence

The following table sets forth our commitments and letters of credit as of the dates presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021

Commitments to Extent Credit $ 493,765 $ 513,482

(Dollars in Thousands) June 30, 2022 December 31, 2021

Commitments to Extend Credit $ 504,476 $ 513,482

Standby Letters of Credit 25,885 27,083

8 unchanged sentences

The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:

Three Months Ended March 31,

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

(Dollars in Thousands) 2022 2021 2022 2021

3 unchanged sentences

Balance after Adoption of ASU 2016-13 $ 1,547 $ 2,770 $ 1,783 $ 3,052

Provision for Unfunded Commitments ( 236 ) ( 282 )

Provision (Recovery) for Unfunded Commitments 269 ( 603 ) 33 ( 885 )

Total $ 1,816 $ 2,167 $ 1,816 $ 2,167

Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments.

The provision for unfunded commitments was a release of $ 0.2 million for the three months ended March 31, 2022 and $ 0.3 million for the three months ended March 31, 2021.

An expense of $ 0.3 million was recorded during the period for the provision for unfunded commitments, which resulted in an increase of $ 0.9 million for both the three and six months ended June 30, 2022 compared to the release of $ 0.6 million and $ 0.9 million for the same periods in 2021.

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

The following table presents the change in components of other comprehensive loss for the periods presented, net of tax effects:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

(Dollars in Thousands) Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) I NCOME

The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:

(Dollars in Thousands) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized (Losses) Gains Arising during the period $ ( 35,002 ) $ 7,350 $ ( 27,652 ) $ 8,456 $ ( 1,776 ) $ 6,680

Reclassification Adjustment for Gains included in Net Income ( 76 ) 16 ( 60 ) ( 1,499 ) 315 ( 1,184 )

Other Comprehensive (Loss) Income $ ( 35,078 ) $ 7,366 $ ( 27,712 ) $ 6,957 $ ( 1,461 ) $ 5,496

(Dollars in Thousands) Six Months Ended June 30, 2022 Six Months Ended June 30, 2021

Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount

Net Unrealized Losses Arising during the period $ ( 78,034 ) $ 16,387 $ ( 61,647 ) $ ( 2,038 ) $ 428 $ ( 1,610 )

Reclassification Adjustment for Losses (Gains) included in Net Income 24 ( 5 ) 19 ( 3,610 ) 758 ( 2,852 )

Reclassification Adjustment for Gains included in Net Income ( 52 ) 11 ( 41 ) ( 5,109 ) 1,073 ( 4,036 )

Other Comprehensive Loss $ ( 78,086 ) $ 16,398 $ ( 61,688 ) $ ( 7,147 ) $ 1,501 $ ( 5,646 )

NOTE 11 – STOCK REPURCHASE PLAN

On December 13, 2021, announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months .

During the quarter ended March 31, 2022, 1,523,157 shares of common stock had been repurchased under this program at an average price of $ 16.17 per share.

During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $ 0.5 million, or an average of $ 15.22 per share.

As of April 28, 2022, the repurchase program to purchase up to two million shares of the Company’s common stock was fully executed.

On June 28, 2022, the Company announced that the Board of Directors (“Board”) authorized a common stock repurchase program to purchase an additional 750,000 shares of its common stock in open market transactions, at prices that are accretive to continuing shareholders in the aggregate over a period of 12 months, subject to the non-objection letter from the Federal Reserve Bank of Richmond, which was received on July 26, 2022.

On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months .

During the six months ended June 30, 2022, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $ 32.4 million, or an average price of $ 16.46 per share.

During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $ 0.5 million, or an average price of $ 15.22 per share.

As of April 28, 2022, the repurchase program to purchase up to 2,000,000 shares of the Company’s common stock was fully executed.

The specific timing, price and quantity of repurchases will be at the Company’s discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance.

2 unchanged sentences

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”), is intended to help the reader understand our operations, our present business environment, and 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 month periods ended March 31, 2022 and March 31, 2021.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand our operations, our present business environment, and 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, 2022 and June 30, 2021.

The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q.

4 unchanged sentences

• Explanation of Use of Non-GAAP Financial Measures

• Critical Accounting Policies and Estimates

• Critical Accounting Estimates

• Results of Operations and Financial Condition

1 unchanged sentence

• Liquidity and Capital Resources

• Regulatory Capital Resources

• Regulatory Capital Requirements

• Contractual Obligations

3 unchanged sentences

Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements related to the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, 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, litigation to which the Company is or has been a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations.

Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements related to current and future market conditions and interest rates, the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, 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, and other matters regarding or affecting the Company and its future business and operations.

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.

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• the Company’s liquidity and capital positions;

• the potential adverse effects of unusual and infrequently occurring events, or the prospect of these events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and Ukraine) or public health events (such as the current COVID-19 pandemic), and the 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

CARTER BANKSHARES, INC.

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

Company's loans or its other products and services, on incidents of cyberattacks and fraud, on the Company’s results of operations, liquidity or capital resources, 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, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 ;

Ukraine) or public health events (such as the current COVID-19 pandemic), and the governmental and societal responses thereto;

• these potential adverse effects may include, without limitation, adverse effects on:

(1) the ability of the Company's borrowers to satisfy their obligations to the Company;

(2) the value of collateral securing loans;

(3) the demand for the Company's loans or its other products and services;

(4) incidents of cyberattacks and fraud;

(4) the Company’s results of operations, liquidity or capital resources;

(5) risks posed by reliance on third-party service providers;

(6) other aspects of the Company's business operations;

and (7) 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 COVID-19 pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 ;

• potential claims, damages, and fines related to litigation or government actions;

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• deterioration of the housing market and reduced demand for mortgages;

• deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

• 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 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 in this Quarterly Report, as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent filings with the Securities and Exchange Commission (“SEC”).

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Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

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 on a fully taxable equivalent, or (“FTE”), basis, which is a non-GAAP financial measure.

Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates

CARTER BANKSHARES, INC.

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

comparisons with the performance of other companies in the financial services industry.

Explanation of Use of Non-GAAP Financial Measures

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

Management believes this measure provides 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.

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

Net interest income is reconciled to net interest income to an FTE basis (non-GAAP) in the Net Interest Income section of the "Results of Operations and Financial Condition."

Net interest income on an FTE basis (non-GAAP) is reconciled to net interest income (GAAP) in the Net Interest Income section under the heading "Results of Operations and Financial Condition."

Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at March 31, 2022.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at June 30, 2022.

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

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

CARTER BANKSHARES, INC.

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

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended March 31, 2022

• Net interest income increased $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021 due primarily to the ongoing reduction in funding costs;

• The provision for credit losses decreased to $0.6 million for the three months ended March 31, 2022, compared to $1.9 million for the same period in 2021 due to improved qualitative reserves and lower net charge-offs, partialy offset by loan growth;

• Total noninterest income decreased $3.6 million to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021due to a reduction in gains on sales of securities;

Highlights for the Three Months Ended June 30, 2022

• Net interest income increased $5.3 million, or 19.3%, to $32.5 million for the three months ended June 30, 2022 compared to $27.2 million for the same period in 2021 primarily due an increase of 34 basis points in earning assets due to the rising interest rate environment and a reduction of 21 basis points in funding costs;

• The provision for credit losses increased to $1.8 million for the three months ended June 30, 2022, compared to $1.0 million for the same period in 2021;

• Total noninterest income decreased $1.6 million to $5.6 million for the three months ended June 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $4.3 million to $23.4 million for the three months ended June 30, 2022 compared to the same period in 2021;

• Provision for income taxes increased $0.9 million to $1.8 million for the three months ended June 30, 2022 compared to $0.9 million for the same period in 2021.

Highlights for the Six Months Ended June 30, 2022

• Net interest income increased $6.9 million, or 12.9%, to $60.7 million for the six months ended June 30, 2022 compared to the same period in 2021 due primarily to the ongoing reduction in funding costs;

• The provision for credit losses decreased to $2.4 million for the six months ended June 30, 2022, compared to $2.8 million for the same period in 2021;

• Total noninterest income decreased $5.3 million to $10.9 million for the six months ended June 30, 2022 compared to $16.2 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $5.4 million to $45.9 million for the six months ended June 30, 2022 compared the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and reversals of vacation carryover in the first quarter of 2022 as well as lower medical costs in the first half of 2022;

• Provision for income taxes increased $1.3 million to $3.1 million for the six months ended June 30, 2022 compared to $1.8 million for the same period in 2021.

Balance Sheet Highlights (period-end balances, June 30, 2022 compared to December 31, 2021)

• The securities portfolio decreased $15.4 million and is currently 22.0% of total assets compared to 22.3% of total assets.

The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth.

• Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, primarily due to higher loan growth in the first half of 2022;

• The portfolio loans to deposit ratio was 79.9%, compared to 76.0%, as loan growth outpaced deposit growth;

• Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021;

• The ACL to total portfolio loans ratio was 3.27% compared to 3.41%.

The ACL on portfolio loans totaled $98.0 million at June 30, 2022, compared to $95.9 million with the increase driven primarily by the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and loan growth partially offset by a decline in the other segment due to principal pay downs;

CARTER BANKSHARES, INC.

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

• Total noninterest expense decreased $1.1 million to $22.5 million for the three months ended March 31, 2022 compared to $23.6 million for the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and vacation carryover in the fourth quarter of 2021 as well as lower medical costs in the first three months of 2022;

• Provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

We reported net income of $9.3 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2022 compared to net income of $9.4 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2021.

Three Months Ended March 31,

• During the second quarter of 2022, the Company’s Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares of the Company’s common stock, subject to the Federal Reserve’s non-objection letter, which was received on July 26, 2022.

We reported net income of $10.8 million or $0.44 diluted earnings per share for the three months ended June 30, 2022 and $20.1 million, or $0.80 diluted earnings per share, for the six months ended June 30, 2022 compared to net income of $5.4 million, or $0.21 diluted earnings per share and $14.8 million, or $0.56 diluted earnings per share, for the same periods in 2021.

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

PERFORMANCE RATIOS 2022 2021 2022 2021

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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 $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021.

This increase was primarily due to the ongoing reduction in funding costs.

Net interest income, on an FTE basis (non-GAAP), increased $1.5 million, or 5.7%, to $28.5 million for the three months ended March 31, 2022 compared to $27.0 million for the same period in 2021.

For the three months ended March 31, 2022, the increase in net interest income, on an FTE basis (non-GAAP), was driven by lower interest income of $0.4 million and lower interest expense of $1.9 million compared to the same period in 2021.

Net interest margin increased 15 basis points to 2.88% for the three months ended March 31, 2022 compared to 2.73% for the same period in 2021.

The net interest margin, on an FTE basis (non-GAAP), increased 13 basis points to 2.91% for the three months ended March 31, 2022 compared to 2.78% for the same period in 2021.

Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Total net interest income increased $5.3 million, or 19.3% to $32.5 million and $6.9 million, or 12.9%, to $60.7 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs.

Net interest income, on an FTE basis (non-GAAP), increased $5.2 million, or 18.7%, to $32.8 million and $6.7 million, or 12.3% to $61.3 million for the three and six months ended June 30, 2022, respectively, compared to $27.6 million and $54.6 million for the same periods in 2021.

The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of $3.8 million and $3.3 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $1.4 million and $3.4 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin increased 49 basis points to 3.24% and 32 basis points to 3.06% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin, on an FTE basis (non-GAAP), increased 48 basis points to 3.27% and 31 basis points to 3.09% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The Company continues to focus on the expansion of net interest income and the net interest margin.

The second quarter and first six months of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs.

The second quarter and first six months of 2022 was also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship.

Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods.

CARTER BANKSHARES, INC.

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

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 March 31,

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

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

(Dollars in Thousands) 2022 2021 2022 2021

Total Interest Income $ 32,678 $ 32,957

Total Interest Expense 4,456 6,428

Net Interest Income per Consolidated Statements of Net Income 28,222 26,529

Adjustment to FTE Basis 298 462

Interest Income (FTE)(Non-GAAP)

Interest and Dividend Income (GAAP) $ 36,961 $ 33,094 $ 69,639 $ 66,051

Tax Equivalent Adjustment 293 386 591 848

Interest and Dividend Income (FTE) (Non-GAAP) 37,254 33,480 70,230 66,899

Average Earning Assets $ 4,020,589 $ 3,972,574 $ 3,997,592 $ 3,956,282

Yield on Interest-earning Assets (GAAP) 3.69 % 3.34 % 3.51 % 3.37 %

Yield on Interest-earning Assets (FTE) (Non-GAAP) 3.72 % 3.38 % 3.54 % 3.41 %

Net Interest Income (GAAP) $ 32,459 $ 27,203 $ 60,681 $ 53,732

Tax Equivalent Adjustment 293 386 591 848

Net Interest Income (FTE) (Non-GAAP) 32,752 27,589 61,272 54,580

Net Interest Margin 2.88 % 2.73 %

Adjustment to FTE Basis 0.03 % 0.05 %

Average Earning Assets $ 4,020,589 $ 3,972,574 $ 3,997,592 $ 3,956,282

Net Interest Margin (GAAP) 3.24 % 2.75 % 3.06 % 2.74 %

Net Interest Margin (FTE) (Non-GAAP) 3.27 % 2.79 % 3.09 % 2.78 %

CARTER BANKSHARES, INC.

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

Average Balance Sheet and Net Interest Income Analysis (FTE)

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

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

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

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Total Interest-Bearing Deposits 3,021,785 4,412 0.59 % 2,926,630 5,760 0.79 %

Federal Funds Purchased 3,033 4 0.53 % — — — %

Federal Home Loan Bank Borrowings 6,594 10 0.61 % 30,000 91 1.22 %

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(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

Interest income decreased $0.3 million, or 0.8%, for the three months ended March 31, 2022 compared to the same period in 2021.

Interest income, on an FTE basis (non-GAAP), decreased $0.4 million, or 1.3% for the three months ended March 31, 2022 compared to the same period in 2021.

The change was primarily due to increases in average interest-earning assets of $34.5 million for the three months ended March 31, 2022, offset by a lower interest rate yield of eight basis points compared to

CARTER BANKSHARES, INC.

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

the same period in 2021.

Average interest-bearing deposits with banks decreased $34.7 million and the average rate earned increased six basis points for the three months ended March 31, 2022 compared to the same period in 2021.

Average loan balances decreased $155.5 million for the three months ended March 31, 2022 compared to the same periods in 2021 due to large commercial paydowns in 2021.

Average Paycheck Protection Program (“PPP”) loans totaled $0.6 million as of March 31, 2022 compared to $31.2 million as of March 31, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.

The average rate earned on loans increased eight basis points for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the increase in short-term interest rates mid-March 2022.

At March 31, 2022, the loan portfolio was comprised of 31.0% floating rates which reprice monthly, 39.0% variable rates that reprice at least once during the life of the loan and the remaining 30.0% are fixed rate loans.

Average investment securities increased $227.4 million and the average rate earned decreased 19 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

Six Months Ended June 30, 2022 Six Months Ended Six Months Ended June 30, 2021

(Dollars in Thousands) Average

Balance Income/

Expense Rate Average

Balance Income/

Interest-Bearing Deposits with Banks $ 85,040 $ 123 0.29 % $ 182,835 $ 106 0.12 %

Tax-Free Investment Securities (2)

30,246 448 2.99 % 42,256 685 3.27 %

Taxable Investment Securities 968,039 8,184 1.70 % 736,926 6,125 1.68 %

Total Securities 998,285 8,632 1.74 % 779,182 6,810 1.76 %

Tax-Free Loans (1)(2)

150,569 2,365 3.17 % 210,132 3,353 3.22 %

Taxable Loans (1)

2,761,471 59,068 4.31 % 2,780,127 56,562 4.10 %

Total Loans 2,912,040 61,433 4.25 % 2,990,259 59,915 4.04 %

Federal Home Loan Bank Stock 2,227 42 3.80 % 4,006 68 3.42 %

Total Interest-Earning Assets 3,997,592 $ 70,230 3.54 % 3,956,282 $ 66,899 3.41 %

Noninterest Earning Assets 137,661 176,553

Total Assets $ 4,135,253 $ 4,132,835

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 475,838 $ 620 0.26 % $ 391,555 $ 449 0.23 %

Money Market 519,298 594 0.23 % 330,838 570 0.35 %

Savings 720,681 367 0.10 % 651,340 331 0.10 %

Certificates of Deposit 1,289,578 7,230 1.13 % 1,566,436 10,705 1.38 %

Total Interest-Bearing Deposits 3,005,395 8,811 0.59 % 2,940,169 12,055 0.83 %

Federal Funds Purchased 1,525 4 0.53 % — — — %

Federal Home Loan Bank Borrowings 4,011 16 0.80 % 31,934 187 1.18 %

Other Borrowings 5,287 127 4.84 % 2,914 77 5.33 %

Total Borrowings 10,823 147 2.74 % 34,848 264 1.53 %

Total Interest-Bearing Liabilities 3,016,218 8,958 0.60 % 2,975,017 12,319 0.84 %

Noninterest-Bearing Liabilities 748,744 765,852

Shareholders' Equity 370,291 391,966

Total Liabilities and Shareholders' Equity $ 4,135,253 $ 4,132,835

Net Interest Income (2)

$ 61,272 $ 54,580

Net Interest Margin (2)

3.09 % 2.78 %

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

Interest income increased $3.9 million, or 11.7% and $3.6 million, or 5.4%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Interest income, on an FTE basis (non-GAAP), increased $3.8 million, or 11.3% and $3.3 million, or 5.0% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

The change was primarily due to increases in average interest-earning assets of $48.0 million and $41.3 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 34 basis points and 13 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022.

For the three and six months ended June 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $160.2 million and $97.8 million, respectively, and the average rate earned increased 68 and 17 basis points, respectively, as funds were deployed into higher yielding loans and securities.

Average loan balances decreased $1.8 million and $78.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to large commercial paydowns in 2021.

Average Paycheck Protection Program (“PPP”) loans totaled $0.4 million as of June 30, 2022 compared to $29.8 million as of June 30, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.

The average rate earned on loans increased 33 and 21 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during the first half of 2022.

At June 30, 2022, the loan portfolio was comprised of 29.6% floating rate loans which reprice monthly, 39.5% variable rate loans that reprice at least once during the life of the loan and 30.9% fixed rate loans that do not reprice during the life of the loan.

Average investment securities increased $210.9 million and $219.1 million for the three and six months ended June 30, 2022,

CARTER BANKSHARES, INC.

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

respectively, compared to the same periods in 2021 and the average rate earned on investment securities increased 15 basis points for the three months ended June 30, 2022 and decreased two basis points for the six months ended June 30, 2022, when compared to the same periods in 2021.

The change in investment securities is the result of active balance sheet management to deploy excess cash.

Our portfolio has been diversified as to bond types, maturities, and interest rate structures.

As of March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

Interest expense decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily due to the intentional runoff of higher cost CDs in the first quarter of 2022 and in 2021.

Interest expense on deposits decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on the Company’s CDs.

The average balances on CDs decreased $311.7 million or 19.2% for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs.

The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $200.7 million, $85.1 million and $61.0 million, respectively, for the three months ended March 31, 2022 compared to the same periods in 2021.

The average rate paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts decreased 12 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

The average balances on borrowings decreased $30.4 million due to prepayments and scheduled maturities.

Overall, the cost of interest-bearing liabilities decreased 27 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.

Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates.

Bond prices generally fall when interest rates increase, which can result in unrealized losses.

However, variable rate securities do not carry as much interest rate risk so there is much less price volatility.

This variable rate structure is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities.

Interest expense decreased $1.4 million and $3.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first half of 2022.

Interest expense on deposits decreased $1.3 million and $3.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs.

The average balances on CDs decreased $242.4 million or 16.0% and $276.9 million, or 17.7% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs.

The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $176.4 million, $83.5 million and $77.6 million, respectively, for the three months ended June 30, 2022, and by $188.5 million, $84.3 million and $69.3 million, respectively, for the six months ended June 30, 2022, when compared to the same periods in 2021.

The average rates paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts, which decreased 11 and 12 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The average balances on borrowings decreased $17.7 million and $24.0 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities.

As a result, the cost of interest-bearing liabilities decreased 21 and 24 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

CARTER BANKSHARES, INC.

1 unchanged sentence

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

Three Months Ended March 31, 2022

Compared to March 31, 2021

Three Months Ended June 30, 2022

Compared to June 30, 2021 Six Months Ended June 30, 2022

Compared to June 30, 2021

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Rate Increase/

Interest Earned on:

17 unchanged sentences

Total Interest-Bearing Deposits (549) (799) (1,348) (1,327) (1,917) (3,244)

Federal Funds Purchased 4 — 4 4 — 4

Federal Home Loan Bank Borrowings (49) (32) (81) (125) (46) (171)

10 unchanged sentences

The Company adopted ASU 2016-03 on January 1, 2021, and increased the ACL by $64.5 million for the Day 1 adjustment which included $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The ACL was 3.33% of total portfolio loans at March 31, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses decreased $1.3 million to $0.6 million for the three months ended March 31, 2022 compared to $1.9 million for the same period in 2021.

The provision for unfunded commitments included a release of $0.2 million for the three months ended March 31, 2022 and a release of $0.3 million for the same period in 2021.

For the three months ended March 31, 2022, the decrease in the provision for credit losses was primarily driven by improved qualitative reserves, lower loan charge-offs, offset by loan growth.

Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses increased $0.8 million to $1.8 million for the three months ended June 30, 2022 and decreased $0.4 million to $2.4 million for the six months ended June 30, 2022, when compared to the same periods in 2021.

The increase for the three months ended June 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and partially offset by a decline in the other segment due to $15.4 million principal pay-downs.

These increases were partially offset by downward pressure on the challenger model’s long-term averages.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 compared to the same periods in 2021 due to increased commitment volume in construction, partially offset by a decrease in the reserve rates.

CARTER BANKSHARES, INC.

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

Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

Noninterest Income

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021 $ Change % Change

(Losses) Gains on Sales of Securities, net $ (24) $ 3,610 $ (3,634) (100.7) %

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

(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Gains on Sales of Securities, net $ 76 $ 1,499 $ (1,423) (94.9) % $ 52 $ 5,109 $ (5,057) (99.0) %

Service Charges, Commissions and Fees 1,749 1,489 260 17.5 % 3,702 3,298 404 12.2 %

2 unchanged sentences

Bank Owned Life Insurance Income 334 342 (8) (2.3) % 668 682 (14) (2.1) %

Gains on Sales and Write-downs of Bank Premises, net 383 — 383 NM

(Losses) Gains on Sales and Write-downs of Bank Premises, net (37) — (37) NM 346 — 346 NM

Other Real Estate Owned Income 12 4 8 200.0 % 22 75 (53) (70.7) %

2 unchanged sentences

Total Noninterest Income $ 5,604 $ 7,238 $ (1,634) (22.6) % $ 10,939 $ 16,190 $ (5,251) (32.4) %

Total noninterest income decreased $3.6 million, or 40.4%, to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily related to declines in net security gains of $3.6 million, a decrease in commercial loan swap fee income of $0.2 million and a $0.3 million decrease in other noninterest income.

These decreases were partially offset by gains of $0.4 million on sales and write-downs of bank premises, net, a $0.1 million increase in service charges, commissions and fees and a $0.1 million increase in debit card interchange fees.

The decline in security gains is due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.

The variances shown in commercial loan swap fee income is related to the timing and demand for this product in the current rising interest rate environment.

The increases in service charges on deposit accounts and debit card interchange fees were primarily due to new accounts, incentives and increased account activity.

The decrease in other noninterest income was related to the first quarter of 2021 as we had recorded a $0.2 million incentive true-up from a third-party and experienced fair value declines of $0.1 million related to our interest rate swap contracts with commercial customers.

Total noninterest income decreased $1.6 million, or 22.6%, to $5.6 million for the three months ended June 30, 2022 and decreased $5.3 million, or 32.4%, to $10.9 million for the six months ended June 30, 2022 when compared to the same periods in 2021.

These decreases were primarily related to declines in net security gains of $1.4 million and $5.1 million in the three and six months ended June 30, 2022, respectively.

The decline in security gains was due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.

Changes in total noninterest income for the three months ended June 30, 2022 also included a decrease of $0.6 million in other noninterest income offset by increases of $0.3 million in services charges, commissions and fees and $0.2 million in insurance commissions.

The decrease in other noninterest income for the three months ended June 30, 2022 when compared to the same period in 2021 was also related to a premium of $0.5 million on the sale of four bank branches in the second quarter of 2021.

The increase in service charges, commission and fees for the three months ended June 30, 2022 when compared to the same period in 2021 was primarily due to the seasonality of certain fees in the second quarter of 2022 and the higher insurance commissions was due to increased customer activity.

Changes in total noninterest income for the six months ended June 30, 2022 also included decreases of $0.9 million in other noninterest income and $0.2 million in commercial loan swap fee income offset by increases of $0.4 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.2 million in insurance commissions.

Similar to the decline during the three month period ended June 30, 2022, the decline in other noninterest income for the six months ended June 30, 2022 was similarly related to premiums on the sale of bank branches;

however, the decline in commercial loan swap fee income was related to the timing and demand for this product in the current rising interest rate environment.

The increases in service charges, commissions and fees and insurance commission for the six months ended June 30, 2022 compared to the same period in 2021 was driven by seasonality and increased customer activity.

The $0.3 million gains on sales and write-downs of bank premises, net for the six months ended June 30, 2022 was due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.

CARTER BANKSHARES, INC.

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

Noninterest Expense

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021 $ Change % Change

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

(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Salaries and Employee Benefits $ 12,444 $ 13,686 $ (1,242) (9.1) % $ 24,201 $ 26,268 $ (2,067) (7.9) %

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Data Processing 842 954 (112) (11.7) % 1,683 1,875 (192) (10.2) %

Losses on Sales and Write-downs of Other Real Estate Owned, net 159 212 (53) (25.0) %

(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net (60) 2,603 (2,663) (102.3) % 99 2,815 (2,716) (96.5) %

Losses on Sales and Write-downs on Bank Premises, net — 64 (64) (100.0) % — 107 (107) (100.0) %

4 unchanged sentences

Total Noninterest Expense $ 23,410 $ 27,759 $ (4,349) (15.7) % $ 45,921 $ 51,364 $ (5,443) (10.6) %

Total noninterest expense decreased $1.1 million, or 4.6%, for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease for the three months ended March 31, 2022 was driven by $0.8 million decrease in salaries and employee benefits and $0.3 million decrease in FDIC insurance expense.

The decrease in salaries and employee benefits was primarily related to a decline in salaries as a result of our retail branch optimization project and a decrease in medical costs.

The $0.3 million decrease in FDIC assessment resulted from improved financial metrics of the Bank that are used to perform the assessment.

CARTER BANKSHARES, INC.

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

Total noninterest expense decreased $4.3 million and $5.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The primary driver for both these decreases was $2.7 million for losses on sales and write-downs of OREO, net.

This nonrecurring write-down of $3.0 million was related to the closing of bank branches in the second quarter of 2021 that were transferred to OREO and marketed for sale.

Another driver of the decrease in noninterest expense for the three-month period ended June 30, 2022 when compared to the prior period in 2021 was the $1.2 million decrease in salaries and employee benefits, which was related to lower medical expenses of $0.8 million and a decrease of $0.4 million related to our retail branch optimization project.

Decreases of $0.2 million in professional and legal fees and $0.2 million in occupancy expense, net, in the three-month period ended June 30, 2022 when compared to the same period also impacted the decline in noninterest expense for the three months ended June 30, 2022 when compared to the same period in 2021.

The decrease in noninterest expense for the six-month period ended June 30, 2022 when compared to the same period in 2021 was primarily driven by a $2.1 million decline in salaries and employee benefits and lower medical expenses and our retail branch optimization project.

Other decreases during the six-months ended June 30, 2022 included a $0.3 million decrease in occupancy expense, net, a $0.3 million decrease in FDIC insurance expense and a $0.2 million decrease in professional and legal fees offset by an increase of $0.4 million in tax credit amortization.

The decrease in FDIC expense was due to improved financial metrics of the Bank that are used to perform the assessment.

The increase for the tax credit amortization related to a new historic tax credit that began in early 2022.

Provision for Income Taxes

The provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

Pre-tax income increased $0.4 million for the three months ended March 31, 2022 compared to the same period in 2021.

Our effective tax rate was 12.5% for the three months ended March 31, 2022 compared to 9.0% for the same period in 2021.

The provision for income taxes increased $0.9 million and $1.3 million to $1.8 million and $3.1 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Pre-tax income increased $6.3 million and $6.6 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The effective tax rate was 14.3% and 13.4% for the three and six months ended June 30, 2022, respectively, compared to 14.0% and 10.9% for the same periods in 2021.

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 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.

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 pre-tax income.

CARTER BANKSHARES, INC.

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

Financial Condition

March 31, 2022

Total assets decreased $10.5 million, to $4.1 billion at March 31, 2022 compared to December 31, 2021.

Federal Reserve Bank excess reserves decreased $133.2 million to $43.0 million at March 31, 2022 from $176.2 million at December 31, 2021 due to active balance sheet management.

Total portfolio loans increased $81.9 million, or 11.8% on an annualized basis, to $2.9 billion at March 31, 2022 compared to December 31, 2021 primarily due to higher loan growth in the first quarter of 2022.

June 30, 2022

Total assets decreased $10.5 million, to $4.1 billion at June 30, 2022 compared to December 31, 2021.

Federal Reserve Bank excess reserves decreased $149.9 million to $26.3 million at June 30, 2022 from $176.2 million at December 31, 2021 due to redeploying excess cash into higher yielding loans and securities.

Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to $2.8 billion at December 31, 2021 primarily due to higher loan growth in the first half of 2022.

During 2021, loan growth was muted by large commercial loan payoffs and loan sales.

The variances in loan segments for portfolio loans related to increases of $38.2 million in construction loans, $25.4 million in residential mortgages and $20.0 million in commercial real estate loans offset by decreases of $1.4 million in other consumer and $0.3 million in the other category.

Other real estate owned, (“OREO”), increased $0.3 million at March 31, 2022 compared to December 31, 2021 due to two branch closures completed in the first three months of 2022.

This is 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 $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021.

The securities portfolio increased $59.6 million and is currently 23.8% of total assets at March 31, 2022 compared to 22.3% of total assets at December 31, 2021.

The increase is due to the bank’s strategy of redeploying excess cash into higher yielding assets, including both loans and bonds.

The variances in loan segments for portfolio loans related to increases of $101.3 million in residential mortgages, $65.9 million in commercial real estate loans, $39.8 million in construction loans and $3.4 million in other consumer loans offset by decreases of $15.7 million in the other category and $8.9 million in C&I loans.

Other real estate owned, (“OREO”), decreased $2.5 million at June 30, 2022 compared to December 31, 2021 due to our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

Closed retail bank offices have a remaining book value of $1.0 million at June 30, 2022 and December 31, 2021.

The securities portfolio decreased $15.4 million and is currently 22.0% of total assets at June 30, 2022 compared to 22.3% of total assets at December 31, 2021.

The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth.

At June 30, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses.

Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

The Bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a mix of both fixed and floating rate instruments.

Total deposits increased $29.8 million to $3.7 billion at March 31, 2022 compared to December 31, 2021.

The increases included $63.8 million in money market accounts, $37.9 million in savings accounts and $27.5 million in interest-bearing demand accounts, offset by the intentional decline of $59.8 million in CDs and a decline of $39.6 million in noninterest-bearing demand accounts.

At March 31, 2022, noninterest-bearing deposits comprised 19.0% compared to 20.2% and 19.9% of total deposits at December 31, 2021 and March 31, 2021, respectively.

CDs comprised 34.5%, 36.3% and 41.2% of total deposits at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

Total capital decreased by $49.0 million to $358.6 million at March 31, 2022 compared to $407.6 million at December 31, 2021.

The decrease in equity was primarily due to a $34.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $24.6 million decrease related to the repurchase of common stock through March 31, 2022, partially offset by net income of $9.3 million for the three months ended March 31, 2022.

The remaining difference of $0.3 million is related to stock-based compensation during the three months ended March 31, 2022.

The ACL was 3.33% of total portfolio loans at March 31, 2022 compared to 3.41% as of December 31, 2021.

General reserves as a percentage of total portfolio loans were 3.30% at March 31, 2022 compared to 3.38% at December 31, 2021.

Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021.

The increases included $92.6 million in money market accounts, $46.6 million in interest-bearing demand accounts and $43.2 million in savings accounts offset by the intentional decline of $83.9 million in CDs and a decline of $43.6 million in noninterest-bearing demand accounts.

At June 30, 2022, noninterest-bearing deposits comprised 18.8% of total deposits compared to 20.2% at December 31, 2021 and 19.7% at June 30, 2021.

CDs comprised 33.6%, 36.3% and 39.8% of total deposits at June 30, 2022, December 31, 2021 and June 30, 2021, respectively.

Total capital decreased by $73.5 million to $334.1 million at June 30, 2022 compared to $407.6 million at December 31, 2021.

The decrease in equity was primarily due to a $61.7 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of $20.1 million for the six months ended June 30, 2022.

The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2022.

The ACL was 3.27% of total portfolio loans at June 30, 2022 compared to 3.41% as of December 31, 2021.

General reserves as a percentage of total portfolio loans were 3.15% at June 30, 2022 compared to 3.38% at December 31, 2021.

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

The Company remains well capitalized.

Our Tier 1 capital ratio decreased to 12.98% at March 31, 2022 compared to 14.21% at December 31, 2021.

Our leverage ratio was 10.00% at March 31, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 14.24% at March 31, 2022 compared to 15.46% at December 31, 2021.

Our Tier 1 capital ratio decreased to 12.70% at June 30, 2022 compared to 14.21% at December 31, 2021.

Our leverage ratio was 9.96% at June 30, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 13.96% at June 30, 2022 compared to 15.46% at December 31, 2021.The decrease is related to the aforementioned repurchase of common stock of $32.4 million through June 30, 2022.

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

3 unchanged sentences

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

(Dollars in Thousands) March 31, 2022 December 31, 2021 $ Change

(Dollars in Thousands) June 30, 2022 December 31, 2021 $ Change

Treasury Securities $ 18,275 $ 4,413 $ 13,862

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 $59.6 million to $982.0 million at March 31, 2022 compared to $922.4 million at December 31, 2021.

Securities comprise 23.8% of total assets at March 31, 2022 compared to 22.3% at December 31, 2021.

The increase is a result of active balance sheet management.

The securities portfolio decreased by $15.4 million to $907.0 million at June 30, 2022 compared to $922.4 million at December 31, 2021.

Securities comprise 22.0% of total assets at June 30, 2022 compared to 22.3% at December 31, 2021.

The decrease is a result of redeploying securities maturities into higher yielding loan growth during the second quarter of 2022.

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

As of March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

At March 31, 2022 total gross unrealized gains in the available-for-sale portfolio were $1.3 million, offset by $42.2 million of gross unrealized losses.

As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.

At June 30, 2022 total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses.

At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.

The unrealized losses on debt securities were primarily attributable to changes in interest rates, and not related to the credit quality of these securities.

The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities).

This portion of the Treasury yield curve has moved significantly upward over the past six months, driving unrealized losses on these securities higher.

Although the Federal Reserve is in the middle of an aggressive effort to raise short-term interest rates to combat inflation, the Company does not expect higher short-term rates to adversely impact the fair values of the Company’s investment securities to the same extent as increases in longer-term rates.

The Company expects that higher short-term rates may improve yields on certain of the Company’s variable rate securities within the next six to twelve months.

At December 31, 2021, the 5-year and 10-year U.S.

Treasury yields were 1.26% and 1.52%, respectively.

For the three months ended March 31, 2022, those same bond yields were 2.42% and 2.32%, respectively.

Therefore, this increase of 116 bps and 80 bps, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range.

At June 30, 2022, those same bond yields were 3.01% and 2.98%, respectively.

Therefore, this increase of 175 and 146 basis points, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range.

Note, the effects were greater for longer maturity bonds, such as municipal bonds.

On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Fed interest rate hikes.

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

At March 31, 2022 and December 31, 2021, 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.

On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Federal Reserve interest rate hikes.

At June 30, 2022 and December 31, 2021, the Company had no credit related net investment impairment losses.

Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our securities.

3 unchanged sentences

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

(Dollars in Thousands) March 31, 2022 December 31, 2021

(Dollars in Thousands) June 30, 2022 December 31, 2021

Commercial Real Estate $ 1,389,117 $ 1,323,252

13 unchanged sentences

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, 2021.

Total portfolio loans increased $81.9 million, or 2.9%, to $2.9 billion at March 31, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios.

Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios.

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

At June 30, 2022, the loan portfolio was comprised of 29.6% floating rates which reprice monthly, 39.5% variable rates that reprice at least once during the life of the loan and the remaining 30.9% are fixed rate loans.

The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at March 31, 2022 equated to approximately $406.2 million, or 14.0% of total portfolio loans.

Our exposure to the hospitality industry at June 30, 2022 equated to approximately $380.2 million, or 12.7% of total portfolio loans.

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

5 unchanged sentences

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

Aggregate commitments to our top 10 credit relationships were $717.7 million at March 31, 2022.

Aggregate commitments to our top 10 credit relationships were $686.8 million at June 30, 2022.

The Other segment represents 49.3% of the top 10 credit relationships.

2 unchanged sentences

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 March 31, 2022 % of Gross Loans March 31, 2022 % of RBC

March 31, 2022 December 31, 2021

Dollars in Thousands For the Periods Ending Change June 30, 2022 June 30, 2022

June 30, 2022 December 31, 2021 % of Gross Loans % of RBC

Hospitality, agriculture & energy $338,790 $350,010 ($11,220) 11.30 % 73.47 %

Retail real estate & food services 56,492 56,073 419 1.88 % 12.25 %

Hospitality 55,151 55,634 (483) 1.91 % 12.08 %

Industrial & retail real estate 44,503 45,653 (1,150) 1.48 % 9.65 %

Multifamily development 40,000 36,720 3,280 1.33 % 8.68 %

Retail real estate 37,355 38,250 (895) 1.25 % 8.10 %

2 unchanged sentences

Hospitality 34,046 34,463 (417) 1.14 % 7.38 %

Multifamily development 34,190 36,720 (2,530) 1.18 % 7.49 %

Special/limited use 33,736 33,736 — 1.13 % 7.32 %

Multifamily development 31,992 29,389 2,603 1.07 % 6.94 %

Top Ten (10) Relationships 686,823 695,363 (8,540) 22.91 % 148.95 %

2 unchanged sentences

Concentration (25% of RBC) $115,277 $120,781

Unfunded commitments on lines of credit were $435.1 million at March 31, 2022 as compared to $433.1 million at December 31, 2021.

Unfunded commitments on lines of credit were $430.8 million at June 30, 2022 as compared to $433.1 million at December 31, 2021.

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

Total utilization was 54.4% at March 31, 2022 and 52.2% at December 31, 2021.

Unfunded commitments on commercial operating lines of credit was 54.6% at March 31, 2022 and 51.7% at December 31, 2021.

Total utilization was 53.6% at June 30, 2022 and 52.2% at December 31, 2021.

Unfunded commitments on commercial operating lines of credit was 54.3% at June 30, 2022 and 51.7% at December 31, 2021.

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

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

Deferred costs and fees included in the portfolio balances above were $5.2 million and $4.5 million at March 31, 2022 and December 31, 2021, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $183.6 thousand and $190.6 thousand at March 31, 2022 and December 31, 2021, respectively.

Deferred costs and fees included in the portfolio balances above were $6.6 million and $4.5 million at June 30, 2022 and December 31, 2021, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $176.5 thousand and $190.6 thousand at June 30, 2022 and December 31, 2021, respectively.

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

2 unchanged sentences

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 $0.2 million and $0.2 million at March 31, 2022 and December 31, 2021, respectively.

There were no mortgage loans held-for-sale at June 30, 2022 and $0.2 million at December 31, 2021.

Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans.

7 unchanged sentences

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

Additional credit risk management practices include continuous reviews of our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing.

Additional credit risk management practices include continuous reviews of trends in our lending footprint and our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing.

Our Loan Review department 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.

3 unchanged sentences

Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Nonperforming assets consist of nonaccrual loans, nonaccrual troubled debt restructurings, (“TDRs”), and OREO.

Nonperforming assets consist of nonaccrual loans and OREO.

The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021 $ Change

(Dollars in Thousands) June 30, 2022 December 31, 2021 $ Change

Nonperforming Loans

5 unchanged sentences

Total Nonperforming Loans 12,029 7,397 4,632

Nonperforming Troubled Debt Restructurings

Other Real Estate Owned 8,432 10,916 (2,484)

Total Nonperforming Assets $ 20,461 $ 18,313 $ 2,148

Nonperforming assets increased $2.1 million to $20.5 million at June 30, 2022 compared to December 31, 2021.

The increase was primarily due to a $4.6 million increase in nonperforming loans due to the deterioration of a purchased syndicated C&I loan totaling $4.9 million, offset by a $2.5 million decrease in OREO.

Closed retail bank offices have a remaining book value of $1.0 million at both June 30, 2022 and December 31, 2021.

During the first quarter of 2022, two branch 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.

In addition, two former closed offices were also moved to OREO.

During the first six months of 2022, a total of four branch offices were sold.

Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more.

We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans.

CARTER BANKSHARES, INC.

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

Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No.

Prior to our adoption of ASU No.

2022-02, we accounted for a Troubled Debt Restructuring (“TDRs”) as a loan that we, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower that we would not otherwise grant.

The Company strives to identify borrowers in financial difficulty early and work with them to modify terms and conditions before their loan defaults and/or is transferred to nonaccrual status.

Modified terms that might have been considered a TDR generally included extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment.

While unusual, there may have been instances of principal forgiveness.

Short-term modifications that were considered insignificant were generally not considered a TDR unless there were other concessions granted.

On April 1, 2022, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2022.

Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to ASU No.

Generally, the Company individually evaluates all loans experiencing financial difficulty, with a commitment greater than or equal to $1.0 million for individually evaluated loan reserves.

In addition, the Company may evaluate credits that have complex loan structures for impairment, even if the commitment is less than $1.0 million.

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

CARTER BANKSHARES, INC.

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

Allowance for Credit Losses

The following is the allocation of the ACL balance by segment for the periods presented:

June 30, 2022 December 31, 2021

(Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans

Commercial Real Estate $ 17,808 46.3 % $ 17,297 47.0 %

Commercial and Industrial — — —

Commercial & Industrial 5,688 11.2 % 4,111 12.3 %

Residential Mortgages 5,155 18.7 % 4,368 16.3 %

1 unchanged sentence

Construction 6,832 10.8 % 6,939 10.1 %

Total Nonperforming Troubled Debt Restructurings 3,822 3,550 272

Total Nonperforming Loans and Troubled Debt Restructurings 7,297 7,397 (100)

Other Real Estate Owned 11,253 10,916 337

Total Nonperforming Assets $ 18,550 $ 18,313 $ 237

Nonperforming assets increased $0.2 million to $18.6 million at March 31, 2022 compared to December 31, 2021.

The increase was primarily due to a $0.3 million an increase in OREO, offset by a $0.1 million decline in nonperforming loans.

C losed retail bank offices increased $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021.

Other 60,779 11.4 % 61,731 12.7 %

Balance End of Year $ 97,981 100.0 % $ 95,939 100.0 %

The following table summarizes the credit quality ratios and their components as of June 30, 2022 and December 31, 2021:

(Dollars in Thousands) June 30, 2022 December 31, 2021

Allowance for Credit Losses to Total Portfolio Loans

Allowance for Credit Losses $ 97,981 $ 95,939

Total Portfolio Loans 2,997,896 2,812,129

Allowance for Credit Losses to Total Portfolio Loans 3.27 % 3.41 %

Nonperforming Loans to Total Portfolio Loans

Nonperforming Loans $ 12,029 $ 7,397

Total Portfolio Loans 2,997,896 2,812,129

Nonperforming Loans to Total Portfolio Loans 0.40 % 0.26 %

Allowance for Credit Losses to Nonperforming Loans

Allowance for Credit Losses $ 97,981 $ 95,939

Nonperforming Loans 12,029 7,397

Allowance for Credit Losses to Nonperforming Loans 814.54 % 1,297.00 %

Net Charge-offs to Average Portfolio Loans

Net Charge-offs (annualized) $ 811 $ 23,127

Average Total Portfolio Loans 2,911,872 2,927,083

Net Charge-offs to Average Portfolio Loans 0.03 % 0.79 %

See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the table above.

The net charge-offs of $23.1 million for the full year 2021 was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved.

The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 when compared to the same periods in 2021 due to increased commitment volume in construction offset by the reserve rates.

Net charge-offs were $0.2 million and $0.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 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.

As a percentage of average total portfolio loans, on an

CARTER BANKSHARES, INC.

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

annualized basis, net charge-offs were 0.03% for both the three and six months ended June 30, 2022 compared to 1.15% and 0.63% for the same periods in 2021.

At June 30, 2022, nonperforming loans increased $4.6 million, or 62.6%, to $12.0 million since December 31, 2021.

Nonperforming loans as a percentage of total portfolio loans were 0.40% and 0.26% as of June 30, 2022 and December 31, 2021, respectively.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:

June 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans

Pass $ 1,372,820 $ 328,459 $ 555,030 $ 47,964 $ 321,548 $ 180,792 $ 2,806,613

Special Mention 12,961 — 970 — 73 3,185 17,189

Substandard 3,336 8,018 3,313 69 1,110 158,248 174,094

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896

Performing $ 1,385,859 $ 331,267 $ 556,758 $ 48,027 $ 321,731 $ 342,225 $ 2,985,867

Nonperforming 3,258 5,210 2,555 6 1,000 — 12,029

Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans

Pass $ 1,314,576 $ 337,294 $ 453,894 $ 44,554 $ 281,241 $ 185,247 $ 2,616,806

Special Mention 5,260 8 553 — 604 3,281 9,706

Substandard 3,416 8,074 3,541 112 1,102 169,372 185,617

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Performing $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732

Nonperforming 3,337 451 2,551 73 985 — 7,397

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Special mention, substandard and doubtful loans at June 30, 2022 decreased $4.0 million to $191.3 million compared to $195.3 million at December 31, 2021.

The increase in special mention related to one large CRE loan that downgraded from pass and the decrease in substandard loans related to paydowns in the other loan category during the second quarter of 2022.

Additionally, refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL.

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,

2022 December 31,

2021 $ Change % Change

Noninterest-Bearing Demand $ 704,323 $ 747,909 $ (43,586) (5.8) %

Interest-Bearing Demand 499,282 452,644 46,638 10.3 %

Money Market 555,621 463,056 92,565 20.0 %

Savings 733,704 690,549 43,155 6.2 %

Certificate of Deposits 1,260,463 1,344,318 (83,855) (6.2) %

Total Deposits $ 3,753,393 $ 3,698,476 $ 54,917 1.5 %

Deposits are our primary source of funds.

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, 2022 increased $54.9 million, or 1.5%, from December 31, 2021.

The increase in deposits primarily related to an increase in our core deposits of $138.8 million, or 11.9% on an annualized basis.

Our core deposits include noninterest-bearing demand accounts, interest-bearing demand deposits, money market accounts and savings accounts.

The decrease of $83.9 million, or 6.2% in CDs at June 30, 2022 compared to December 31, 2021 is due to the intentional runoff of higher cost CDs.

Noninterest-bearing deposits comprised 18.8% and 20.2% of total deposits at June 30, 2022 and December 31, 2021, respectively.

The following table presents additional information in relation to deposits:

(Dollars in Thousands) June 30,

2022 December 31,

Deposits from the Certificate of Deposit Account Registry Services (CDARS) $ 922 $ 139

Noninterest-Bearing Public Funds Deposits 24,129 58,393

Interest-Bearing Public Funds Deposits 165,808 123,968

Total Deposits not Covered by Deposit Insurance (1)

426,331 396,626

Certificates of Deposits not Covered by Deposit Insurance 137,350 147,134

Deposits for Certain Directors, Executive Officers and their Affiliates 2,866 3,032

(1) These deposits are presented on an estimated basis.

This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.

Maturities of CDs over $250,000 or more not covered by deposit insurance at June 30, 2022 are summarized as follows:

(Dollars in Thousands) Amount Percent

Three Months or Less $ 11,961 8.7 %

Over Three Months Through Twelve Months 57,332 41.7 %

Over Twelve Months Through Three Years 44,452 32.4 %

Over Three Years 23,605 17.2 %

Total $ 137,350 100.0 %

CARTER BANKSHARES, INC.

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

What changed 10-Q

Item 1. Financial Statements