What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-04 compared with 2022-11-04 · 217 added, 670 removed, 836 unchanged (51% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022

1 unchanged sentence

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 2,557 1,466

Provision for Credit Losses, including Provision for Unfunded Commitments 1,499 394

Origination of Loans Held-for-Sale ( 1,795 ) ( 3,554 )

5 unchanged sentences

Gains on Sales of Mortgage Loans Held-for-Sale ( 20 ) ( 86 )

Gains on Sales of Securities, net ( 48 ) ( 6,450 )

Write-downs of Other Real Estate Owned 578 3,324

(Gains) Losses on Sales of Other Real Estate Owned, Net ( 310 ) 99

(Gains) Losses on Sales and Write-downs of Bank Premises ( 342 ) 114

Losses on Sales of Securities, net 12 24

Change in Fair Market Value of Commercial Loan Swap Derivative 194 ( 304 )

Premiums on Branch Sales — ( 506 )

Increase in the Value of Life Insurance Contracts ( 339 ) ( 334 )

Recognition of Restricted Stock Compensation Expense 345 395

Decrease in Other Assets 768 6,296

Decrease in Other Liabilities ( 702 ) ( 2,446 )

Decrease (Increase) in Other Assets 2,386 ( 2,518 )

(Decrease) Increase in Other Liabilities ( 1,088 ) 577

Net Cash Provided By Operating Activities 22,435 12,470

5 unchanged sentences

Purchase of Bank Premises and Equipment, Net ( 1,925 ) ( 809 )

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

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

Proceeds from Sale of Portfolio Loans — 42,295

(Redemption) Purchases of Federal Home Loan Bank Stock, net ( 840 ) 1,878

Loan (Originations) and Payments, net ( 224,839 ) 9,458

(Purchase) Redemption of Federal Home Loan Bank Stock, net ( 10,853 ) 285

Loan Originations, net ( 100,558 ) ( 82,032 )

Payments Received on Other Real Estate Owned 102 108

3 unchanged sentences

Net Change in Demand, Money Markets and Savings Accounts ( 142,811 ) 89,650

Decrease in Certificates of Deposits ( 95,665 ) ( 218,235 )

Borrowings (Payments) on Federal Home Loan Bank Borrowings, net 23,000 ( 5,000 )

Increase (Decrease) in Certificates of Deposits 45,885 ( 59,848 )

Proceeds (Repayments) on Federal Home Loan Bank Borrowings, net 254,585 ( 7,000 )

Repayments from Federal Funds Purchased, net ( 17,870 ) —

Repurchase of Common Stock ( 2,260 ) ( 23,364 )

Net Cash Provided by Financing Activities 10,322 55,828

Net Decrease in Cash and Cash Equivalents ( 212,091 ) ( 16,146 )

Net Cash Provided by (Used In ) Financing Activities 137,529 ( 562 )

Net Increase (Decrease) in Cash and Cash Equivalents 34,509 ( 169,763 )

Cash and Cash Equivalents at Beginning of Period 46,869 277,799

3 unchanged sentences

Cash Paid for Income Taxes 25 —

Transfer from Loans to Other Real Estate Owned — 23

Transfer from Fixed Assets to Other Real Estate Owned — 1,201

1 unchanged sentence

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

Loans Transferred to Held-for-Sale $ 1,513 $ —

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

See accompanying notes to unaudited consolidated financial statements.

5 unchanged sentences

(the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”).

CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank.

All significant intercompany transactions have been eliminated in consolidation.

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Reclassification:

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.

Reclassifications had no material effect on prior year net income or shareholders’ equity.

Amounts in prior periods financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation.

Reclassifications had no material effect on prior periods net income or shareholders’ equity.

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period.

Those estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided.

Actual results could differ from those estimates.

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.

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.

These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates.

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

Accounting Standards Adopted in 2023

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 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 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 current expected credit losses (“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 allowance for credit losses (“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)

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 principal forgiveness, other-than-significant payment delays, interest only periods, extended term and 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, or any combination.

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.

The Company did not adopt any Accounting Standards Updates (“ASU”) during the three months ended March 31, 2023.

Accounting Standards Issued but Not Yet Adopted

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards (“ASU”) No.

2023-02, Investments Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.

The amendments in this ASU allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted in any interim period.

The Company is currently assessing ASU 2023-02 and its impact on its accounting and disclosures.

In March 2020, the FASB issued ASU No.

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The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022.

In December 2022, the FASB issued ASU No 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Furthermore, the United Kingdom’s Financial Conduct Authority (“FCA”), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021.

As it pertains to the U.S.

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

pertains to the U.S.

dollar LIBOR, e ffective January 1, 2022, the ICE Benchmark Administration Limited, the administrator of the LIBOR, ceased the publication of one-week and two-month USD LIBOR and will cease the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after 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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This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions.

To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition.

The team is currently in the process of:

i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices.

We are considering SOFR and other credit-sensitive alternative indices that may gain market acceptance as potential replacements to LIBOR.

The financial impact regarding pricing, valuation and operations of the transition is not expected to be material in nature.

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 September 30, 2022, approximately 13.2 % 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.

To date, the transition team has completed the following milestones required for a successful transition away from LIBOR:

identified contracts that contain LIBOR language, documented the risks associated with the transition, reviewed existing contract language for the presence of appropriate fallback rate language, and developed appropriate loan fallback rate language for when LIBOR is retired.

We have selected one month term SOFR (published by the CME Group) as our replacement benchmark for LIBOR based loans.

The financial impact regarding pricing, valuation and operations of the transition has been evaluated and not is expected to be material in nature.

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

As of March 31, 2023, approximately 6.5 % of our loan portfolio consists of loans whose variable rate index is one month LIBOR.

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

CARTER BANKSHARES, INC.

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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 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 September 30, Nine Months Ended September 30,

Basic earnings per common 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 common 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 common share calculations for the periods presented:

Three Months Ended March 31,

(Dollars in Thousands, except share and per share data) 2023 2022

Numerator for Earnings per Share – Basic and Diluted

Numerator for Earnings per Common Share – Basic and Diluted

Net Income $ 15,941 $ 9,323

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All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation.

As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation.

As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation.

NOTE 3 - INVESTMENT SECURITIES

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) Amortized

4 unchanged sentences

Commercial Mortgage-Backed Securities 47,946 729 ( 835 ) 47,840

Other Commercial Mortgage-Backed Securities 24,912 — ( 3,050 ) 21,862

Asset Backed Securities 154,630 — ( 12,952 ) 141,678

Collateralized Mortgage Obligations 187,455 — ( 13,032 ) 174,423

Small Business Administration 50,249 301 ( 107 ) 50,443

States and Political Subdivisions 280,899 32 ( 43,692 ) 237,239

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Commercial Mortgage-Backed Securities 35,538 73 ( 936 ) 34,675

Other Commercial Mortgage-Backed Securities 24,987 9 ( 2,597 ) 22,399

Asset Backed Securities 156,552 — ( 15,169 ) 141,383

Collateralized Mortgage Obligations 190,781 — ( 14,159 ) 176,622

Small Business Administration 108,643 879 ( 608 ) 108,914

States and Political Subdivisions 281,753 — ( 53,607 ) 228,146

1 unchanged sentence

Total Debt Securities $ 945,707 $ 300 $ ( 109,734 ) $ 836,273

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

The Company did no t have securities classified as held-to-maturity at March 31, 2023 or December 31, 2022.

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022

2 unchanged sentences

Gross Realized Losses ( 12 ) ( 24 )

Net Realized (Losses) Gains ( 4 ) 1,341 48 6,450

Net Realized Losses ( 12 ) ( 24 )

Tax Impact $ ( 3 ) $ ( 5 )

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 losses above reflect reclassification adjustments in the calculation of Other Comprehensive Income (Loss).

The net realized losses are included in noninterest income as losses 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.

2 unchanged sentences

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) Amortized

5 unchanged sentences

Commercial Mortgage-Backed Securities 47,946 47,840

Other Commercial Mortgage-Backed Securities 24,912 21,862

Collateralized Mortgage Obligations 187,455 174,423

1 unchanged sentence

Total Debt Securities $ 956,645 $ 862,856

At September 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.

At March 31, 2023 and December 31, 2022, 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 $ 227.6 million at September 30, 2022 and $ 178.6 million at December 31, 2021.

The carrying value of securities pledged for various regulatory and legal requirements was $ 224.8 million at March 31, 2023 and $ 224.5 million at December 31, 2022.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at September 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:

September 30, 2022

Available-for-sale securities with unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

March 31, 2023

Less Than 12 Months 12 Months or More Total

12 unchanged sentences

Commercial Mortgage-Backed Securities 4 1,751 ( 7 ) 52 21,182 ( 828 ) 56 22,933 ( 835 )

Other Commercial Mortgage-Backed Securities 1 1,987 ( 538 ) 8 19,875 ( 2,512 ) 9 21,862 ( 3,050 )

Asset Backed Securities 2 3,845 ( 155 ) 53 137,833 ( 12,797 ) 55 141,678 ( 12,952 )

Collateralized Mortgage Obligations 1 155 ( 2 ) 84 174,268 ( 13,030 ) 85 174,423 ( 13,032 )

Small Business Administration 6 9,622 ( 47 ) 5 8,746 ( 60 ) 11 18,368 ( 107 )

States and Political Subdivisions 4 3,835 ( 156 ) 157 231,922 ( 43,536 ) 161 235,757 ( 43,692 )

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Commercial Mortgage-Backed Securities 7 7,843 ( 307 ) 49 15,675 ( 629 ) 56 23,518 ( 936 )

Other Commerical Mortgage-Backed Securities 2 5,302 ( 617 ) 6 14,560 ( 1,980 ) 8 19,862 ( 2,597 )

Asset Backed Securities 13 42,173 ( 2,984 ) 41 97,210 ( 12,185 ) 54 139,383 ( 15,169 )

Collateralized Mortgage Obligations 35 66,362 ( 4,500 ) 50 110,260 ( 9,659 ) 85 176,622 ( 14,159 )

Small Business Administration 11 18,813 ( 235 ) 53 19,630 ( 373 ) 64 38,443 ( 608 )

States and Political Subdivisions 73 112,564 ( 19,706 ) 91 115,382 ( 33,901 ) 164 227,946 ( 53,607 )

1 unchanged sentence

Total Debt Securities 153 $ 284,547 $ ( 32,266 ) 298 $ 506,981 $ ( 77,468 ) 451 $ 791,528 $ ( 109,734 )

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the quarter or nine months ended September 30, 2022 as the Company did no t have securities classified as held-to-maturity at September 30, 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 March 31, 2023 or the year ended December 31, 2022 as the Company did no t have securities classified as held-to-maturity at March 31, 2023 and December 31, 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.

As of September 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.

As of March 31, 2023, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis.

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 September 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit;

therefore, no ACL 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 non-credit loss will be recognized in other comprehensive loss.

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

As of March 31, 2023, management believes the unrealized losses detailed in the table above are not related to credit;

therefore, no ACL has been recognized on the Company’s securities.

During the three months ended March 31, 2023 and 2022, the Company had no credit related net investment impairment losses.

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE

1 unchanged sentence

(Dollars in Thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Commercial Real Estate

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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”).

2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of a troubled debt restructuring, (“TDR”).

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.

1 unchanged sentence

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;

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 and/or based on management discretion;

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.

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

The following table shows the amortized cost basis as of September 30, 2022 for the three and nine months ended September 30, 2022 for the loans restructured during the three and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:

The following table shows the amortized cost basis as of March 31, 2023 and March 31, 2022 for the loans restructured during the three months ended March 31, 2023 and March 31, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:

Restructured Loans

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

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

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Total Restructured Loans — $ — — % 1 $ 308 0.02 %

(1) Excludes accrued interest receivable of $ 0.1 thousand and $ 0.9 thousand at September 30, 2022 for restructured loans during the the three and nine months ended September 30, 2022 .

During the third quarter of 2022 the Bank modified a construction loan as a restructured loan.

This nonperforming loan was extended to allow the borrower to complete construction.

(1) Excludes accrued interest receivable of $ 0.0 thousand and $ 6.4 thousand at March 31, 2023 and March 31, 2022 for restructured loans during the three months ended March 31, 2023 and March 31, 2022, respectively.

The Company had no loans that were restructured during the three months ended March 31, 2023.

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 lacked feasibility due to the COVID-19 pandemic.

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

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.

In the third quarter of 2022 this loan was returned to accruing status due to sustainable payments over the last six months.

These loans are not considered significant and are included in the Bank’s ACL model in the general pool of the construction and commercial real estate (“CRE”) segments for reserve purposes.

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The Bank 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 nine months ended September 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 $ 326 $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction 137 — —

Total Accruing Restructured Loans $ 463 $ — $ —

Nonaccrual Restructured Loans

Commercial Real Estate $ — $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction — — —

Total Nonaccrual Restructured Loans $ — $ — $ —

Total Restructured Loans (1)

$ 463 $ — $ —

(1) Excludes accrued interest receivable of $ 0.9 thousand at September 30, 2022.

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

As of September 30, 2022 the Bank 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 September 30, 2022 and December 31, 2021, the Bank had $ 1.3 million and $ 0.3 million, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 23.0 thousand at September 30, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate loans included in other real estate owned (“OREO”).

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.

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.

During the three months ended March 31, 2023 and March 31, 2022, respectively, the Company had no modifications to borrowers experiencing financial difficulty to report.

At both March 31, 2023 and March 31, 2022, the Bank had no commitments to lend any additional funds on restructured loans.

At both March 31, 2023 and March 31, 2022 the Bank 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.

As of March 31, 2023 and December 31, 2022, the Bank had $ 72 thousand and $ 902 thousand, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 132 thousand at March 31, 2023 and $ 133 thousand at December 31, 2022 in residential real estate loans included in other real estate owned (“OREO”).

CARTER BANKSHARES, INC.

3 unchanged sentences

The Company develops and documents a systematic ACL methodology based on the following portfolio segments:

1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other.

1) Commercial Real Estate, (“CRE”), 2) Commercial and Industrial, (“C&I”), 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other.

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

The segmentation in the CECL model is different from the segmentation in the Incurred Loss model.

The segmentation in the current expected credit losses, (“CECL”), model is different from the segmentation in the Incurred Loss model.

The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

11 unchanged sentences

The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages.

Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchased money mortgages.

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

15 unchanged sentences

The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future.

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans

These inconsistencies may include, but are not limited to i) transaction and/or

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

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

26 unchanged sentences

Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

liquidation of the debt.

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

10 unchanged sentences

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans

90 unchanged sentences

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans

57 unchanged sentences

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) Current

26 unchanged sentences

Total $ 3,137,431 $ 2,481 $ 2,356 $ 4,837 $ 6,645 $ 3,148,913

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

There were no loans past due 90 days or more and still accruing at March 31, 2023 and December 31, 2022.

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

Loans past due 30 to 89 days and still accruing decreased $ 0.6 million to $ 1.1 million at September 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 September 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 loan segment for the periods presented:

September 30, 2022

Loans past due 30 to 89 days and still accruing decreased $ 2.5 million to $ 2.3 million at March 31, 2023 compared to $ 4.8 million at December 31, 2022 primarily in the construction category related to one $ 2.1 million residential construction relationship that moved to nonaccrual during the period.

There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2023 or December 31, 2022.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment for the periods presented:

March 31, 2023

(Dollars in Thousands) Beginning of

23 unchanged sentences

Total Portfolio Loans $ 7,397 $ 6,645 $ — $ —

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 nine months ended September 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.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

A loan is considered nonperforming when we transfer the interest methodology from accrual to nonaccrual.

Nonaccrual status recognizes that the collection in full of both principal and interest is unlikely.

Without applying additional scrutiny at a granular level, we believe delinquency to be a leading indicator with respect to the likelihood of collection in full of both principal and interest.

Accordingly, we automatically transfer loans to nonaccrual status if they are 90 or more days delinquent.

Management reserves the right to exercise discretion at the individual loan level.

For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely.

We may also elect to retain a loan that is 90 or more days delinquent in accrual status if we believe the loan is well secured and in the process of collection.

Nonaccrual loans, and loans that have been characterized as Restructured Loans may be individually evaluated for credit losses in the Allowance for Credit Losses model if the loan commitment is $ 1.0 million or more unless we elect to maintain the loan in the general pool.

During the three months ended March 31, 2023 and March 31, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

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

1 unchanged sentence

Type of Collateral

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(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 September 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 $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981

(Recovery) Provision for Credit Losses on Loans ( 433 ) 1,542 466 206 1,856 ( 3,714 ) ( 77 )

Charge-offs — ( 3,432 ) — ( 418 ) — — ( 3,850 )

Recoveries — — 1 109 — — 110

Net (Charge-offs) / Recoveries — ( 3,432 ) 1 ( 309 ) — — ( 3,740 )

Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

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

4 unchanged sentences

Recoveries — — 1 87 — — 88

Net (Charge-offs) / Recoveries — ( 3,431 ) 52 ( 912 ) 149 — ( 4,142 )

Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended September 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 $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319

(Recovery) Provision for Credit Losses on Loans ( 304 ) 4 266 410 ( 789 ) — ( 413 )

Charge-offs ( 9,187 ) ( 188 ) ( 56 ) ( 424 ) — — ( 9,855 )

Recoveries 9 3 1 198 32 — 243

Net (Charge-offs) / Recoveries ( 9,178 ) ( 185 ) ( 55 ) ( 226 ) 32 — ( 9,612 )

Net Charge-offs — ( 1 ) ( 2 ) ( 570 ) — — ( 573 )

Balance at End of Period $ 18,595 $ 3,531 $ 10,419 $ 1,189 $ 7,506 $ 53,454 $ 94,694

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

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

1 unchanged sentence

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

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

(Recovery) Provision for Credit Losses on Loans ( 7,080 ) ( 1,719 ) 228 1,157 ( 629 ) 10,454 2,411

Provision (Recovery) for Credit Losses on Loans 221 ( 529 ) 169 303 466 — 630

Charge-offs — — ( 17 ) ( 435 ) — — ( 452 )

Recoveries — 1 — 109 149 — 259

Net (Charge-offs) / Recoveries ( 17,276 ) ( 191 ) ( 105 ) ( 1,354 ) 93 — ( 18,833 )

Net Recoveries / (Charge-offs) — 1 ( 17 ) ( 326 ) 149 — ( 193 )

Balance at End of Period $ 17,518 $ 3,583 $ 4,520 $ 1,470 $ 7,554 $ 61,731 $ 96,376

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.

CARTER BANKSHARES, INC.

64 unchanged sentences

After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell.

4 unchanged sentences

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

At September 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.

At March 31, 2023 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:

September 30, 2022

March 31, 2023

(Dollars in Thousands) Carrying

35 unchanged sentences

Commercial Mortgage-Backed Securities 34,675 — 34,675 —

Other Commercial Mortgage-Backed Securities 22,399 2,538 19,861 —

Asset Backed Securities 141,383 4,996 136,387 —

Collateralized Mortgage Obligations 176,622 — 176,622 —

Small Business Administration 108,914 — 108,914 —

States and Political Subdivisions 228,146 — 228,146 —

6 unchanged sentences

We have invested in subordinated debt of other financial institutions.

We have two securities totaling $ 7.3 million that are considered to be Level 3 securities at September 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 $ 7.3 million at September 30, 2022 is attributable to a change in the fair value of $ 1.3 million.

We have two securities totaling $ 7.5 million that are considered to be Level 3 securities at both March 31, 2023 and December 31, 2022, respectively.

The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates.

The underwriting includes considerations of capital adequacy, asset quality trends,

The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

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

September 30, 2022

March 31, 2023

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

5 unchanged sentences

Individually Evaluated Loans $ — $ — $ 2,649 $ 2,649

Individually evaluated loans had a net carrying amount of $ 1.8 million at September 30, 2022 with a valuation allowance of $ 0.3 million.

Individually evaluated loans had a net carrying amount of $ 4.2 million at March 31, 2023 with a valuation allowance of $ 1.1 million.

Individually evaluated loans had a net carrying amount of $ 2.6 million at December 31, 2022 with a valuation allowance of $ 0.7 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.1 million as of September 30, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.6 million of write-downs recorded on OREO for the nine months ended September 30, 2022 and $ 3.3 million for the same period in 2021.

The increase in individually evaluated loans and the valuation allowance is primarily due to one credit relationship moving to nonaccrual status during the first quarter of 2023.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.3 million as of March 31, 2023, compared with $ 8.4 million at December 31, 2022, primarily due to sales and payments.

There were no write-downs recorded on OREO for the three months ended March 31, 2023 and $ 0.1 million for the same period in 2022.

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

September 30, 2022

March 31, 2023

(Dollars in Thousands) Fair

3 unchanged sentences

Range Average

Individually Evaluated Loans $ 2,430 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 14.2 % - 43.9 %

Individually Evaluated Loans 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 %

10 unchanged sentences

Range Average

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

Individually Evaluated Loans $ 858 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 14.2 % 14.2 %

Individually Evaluated Loans $ 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 %

Total Individually Evaluated Loans $ 2,649

4 unchanged sentences

A baseline discount rate has been established for impairment measurement.

This baseline discount rate was back tested against historical OREO sales;

therefore it represents an average recovery rate based on the transaction sizes and asset types in the population examined.

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

This baseline discount rate was back tested against historical OREO sales, and;

therefore, represents an average recovery rate based on the transaction sizes and asset types in the

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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

Fair values for September 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.”

population examined.

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

The carrying values and estimated fair values of our financial instruments at March 31, 2023 and December 31, 2022 are presented in the following tables.

Fair values for March 31, 2023 and December 31, 2022 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 September 30, 2022

Fair Value Measurements at March 31, 2023

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

17 unchanged sentences

Securities Available-for-Sale 836,273 25,400 803,356 7,517 836,273

Loans Held-for-Sale 228 — — 228 228

Portfolio Loans, net 3,055,061 — — 2,955,489 2,955,489

6 unchanged sentences

FHLB Borrowings 180,550 — — 180,569 180,569

Federal Funds Purchased 17,870 — 17,870 — 17,870

Accrued Interest Payable 2,294 — — 2,294 2,294

14 unchanged sentences

Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations.

All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience.

All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience.

Interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

3 unchanged sentences

(Included in Other Assets)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

5 unchanged sentences

(Included in Other Liabilities)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

7 unchanged sentences

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans ( 194 ) 304

Total Derivative Income $ 295 $ 35 $ 738 $ 188

Total Derivative (Loss) Income $ ( 194 ) $ 304

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

4 unchanged sentences

(Included in Other Liabilities)

(Dollars in Thousands) September 30,

(Dollars in Thousands) March 31,

2023 December 31,

2021 September 30,

2022 March 31,

2023 December 31,

4 unchanged sentences

Gross Amounts Not Offset — — — —

— — — ( 4,080 )

Net Amount $ 18,746 $ 22,973 $ 18,509 $ 22,542

(1) Amounts represent collateral posted for the periods presented.

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

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

The Company had $ 30.0 million Federal Home Loan Bank (“FHLB”) borrowings at September 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 $ 1.4 billion at September 30, 2022 and $ 1.1 billion at December 31, 2021.

There were no securities available-for-sale pledged as collateral at both September 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 $ 807.8 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of September 30, 2022.

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

NOTE 8 – DEPOSITS

The following table presents the composition of deposits at the dates presented:

(Dollars in Thousands) March 31, 2023 December 31, 2022

Noninterest-Bearing Demand $ 687,333 $ 703,334

Interest-Bearing Demand 500,749 496,948

Money Market 430,938 484,238

Savings 606,976 684,287

Certificates of Deposits 1,307,411 1,261,526

Total $ 3,533,407 $ 3,630,333

All deposit accounts are insured by the FDIC up to the maximum amount allowed by law.

The Dodd-Frank Act, signed into law on July 21, 2010, makes permanent the $250,000 limit for federal deposit insurance and the coverage limit applies per depositor, per insured depository institution for each account ownership.

Time deposits that exceed the FDIC Insurance limit of $250,000 at March 31, 2023 and December 31, 2022 were $ 206.0 million and $ 159.0 million, respectively.

Certificates of Deposit maturing as of March 31:

(Dollars in Thousands) March 31, 2023

3 Months or Less $ 159,337

Over 3 Months through 12 Months 476,342

Over 1 Year Through 3 Years 571,334

Over 3 Years 100,398

Total $ 1,307,411

Overdrafts reclassified to loans were $ 0.2 million at March 31, 2023 and $ 0.3 million at December 31, 2022.

NOTE 9 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS – (continued)

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

The Company had $ 435.1 million Federal Home Loan Bank (“FHLB”) borrowings at March 31, 2023 and $ 180.6 million at December 31, 2022.

FHLB borrowings include both fixed rate and variable 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.

Variable rate FHLB borrowings were 92.0 % and 33.4 % of total borrowings at March 31, 2023 and December 31, 2022, respectively.

Total loans pledged as collateral were $ 1.5 billion at both March 31, 2023 and December 31, 2022, respectively.

There were no securities available-for-sale pledged as collateral at both March 31, 2023 and December 31, 2022.

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

The Company is eligible to borrow up to an additional $ 461.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.1 billion, or 25.0 % of the Company’s assets, as of March 31, 2023.

The Company had the capacity to borrow up to an additional $ 676.7 million from the FHLB at December 31, 2022.

The Company had zero and $ 17.9 million in overnight federal funds purchased at March 31, 2023 and December 31, 2022, respectively.

The available borrowing capacity under unsecured lines of credit with corresponding banks was $ 145.0 million and $ 127.1 million at March 31, 2023 and December 31, 2022, respectively.

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

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

(Dollars in Thousands) March 31, 2023 December 31, 2022

FHLB Borrowings $ 435,135 $ 180,550

Weighted Average Interest Rate 4.99 % 4.48 %

S cheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2022 and thereafter are as follows :

FHLB Availability $ 461,913 $ 676,746

The following table represents the balance of federal funds purchased and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) March 31, 2023 December 31, 2022

Federal Fund Purchased $ — $ 17,870

Weighted Average Interest Rate — % 4.65 %

Federal Funds Purchased Availability $ 145,000 $ 127,130

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to March 31, 2023 and thereafter are as follows :

(Dollars in Thousands) Balance Weighted

6 unchanged sentences

Total FHLB Borrowings $ 435,135 4.99 %

During the year ended December 31, 2021 the Company repaid 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 and had unamortized prepayment fees related to the early repayment of the borrowing of $ 18 thousand.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit represent agreements to lend to customers with fixed expiration dates or other termination clauses.

Commitments to extend credit, which amounted to $ 676.5 million at March 31, 2023 and $ 630.6 million at December 31, 2022, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

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 62.7 % and 55.3 %, of the commitments to extend credit at September 30, 2022 and December 31, 2021, respectively.

Lines of credit for construction projects represented $ 354.6 million, or 52.4 % and $ 373.2 million, or 59.2 %, of the commitments to extend credit at March 31, 2023 and December 31, 2022, respectively.

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

Those guarantees are primarily issued to support public and private borrowing arrangements.

The Company had outstanding letters of credit totaling $ 26.6 million at March 31, 2023 and $ 25.7 million at December 31, 2022.

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

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

(Dollars in Thousands) March 31, 2023 December 31, 2022

Commitments to Extend Credit $ 676,549 $ 630,619

Standby Letters of Credit 26,725 27,083

Standby and Performance Letters of Credit 26,576 25,739

Total $ 703,125 $ 656,358

6 unchanged sentences

The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES – (continued)

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022

1 unchanged sentence

Balance at beginning of period $ 2,292 $ 1,783

Impact of Adopting ASU 2016-13 — — — 2,908

Balance after Adoption of ASU 2016-13 $ 1,816 $ 2,167 $ 1,783 $ 3,052

Provision (Recovery) for Unfunded Commitments 84 ( 236 )

Total $ 1,973 $ 2,107 $ 1,973 $ 2,107

Balance at end of period $ 2,376 $ 1,547

Amounts are added or subtracted to the provision (recovery) for unfunded commitments through a charge or credit to current earnings in the provision (recovery) for unfunded commitments.

An expense of $ 0.2 million was recorded during the three and nine month periods for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 0.2 million and $ 1.1 million for the three and nine months ended September 30, 2022 compared to recoveries for the same periods in 2021.

An expense of $ 0.1 million was recorded for the three months ended March 31, 2023 for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 0.3 million compared to recoveries for the same period in 2022.

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

Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

NOTE 11 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS)

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

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

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

Net Unrealized Losses Arising during the period $ ( 33,326 ) $ 6,999 $ ( 26,327 ) $ ( 4,588 ) $ 963 $ ( 3,625 )

Reclassification Adjustment for Losses (Gains) included in Net Income 4 ( 1 ) 3 ( 1,341 ) 282 ( 1,059 )

Other Comprehensive Loss $ ( 33,322 ) $ 6,998 $ ( 26,324 ) $ ( 5,929 ) $ 1,245 $ ( 4,684 )

(Dollars in Thousands) Nine Months Ended September 30, 2022 Nine Months Ended September 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 $ ( 111,360 ) $ 23,386 $ ( 87,974 ) $ ( 6,626 ) $ 1,391 $ ( 5,235 )

Reclassification Adjustment for Gains included in Net Income ( 48 ) 10 ( 38 ) ( 6,450 ) 1,355 ( 5,095 )

Other Comprehensive Loss $ ( 111,408 ) $ 23,396 $ ( 88,012 ) $ ( 13,076 ) $ 2,746 $ ( 10,330 )

(Dollars in Thousands) Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

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

Net Unrealized Gains (Losses) Arising during the period $ 15,633 $ ( 3,390 ) $ 12,243 $ ( 43,032 ) $ 9,037 $ ( 33,995 )

Reclassification Adjustment for Losses included in Net Income 12 ( 3 ) 9 24 ( 5 ) 19

Other Comprehensive Income (Loss) $ 15,645 $ ( 3,393 ) $ 12,252 $ ( 43,008 ) $ 9,032 $ ( 33,976 )

NOTE 12 – STOCK REPURCHASE PLAN

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.

During the three months ended September 30, 2022, 464,208 shares of common stock had been repurchased under this program at a total cost of $ 7.7 million, or an average price of $ 16.62 per share.

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 .

Through April 28, 2022, when this repurchase program was fully executed, 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.

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.

The repurchase plan does not obligate the Company to repurchase any particular number of shares.

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 and nine month periods ended September 30, 2022 and September 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.

Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation.

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

The MD&A includes the following sections:

• Important Note Regarding Forward-Looking Statements

• Explanation of Use of Non-GAAP Financial Measures

• Critical Accounting Estimates

• Results of Operations and Financial Condition

• Earnings Summary

• Liquidity and Capital Resources

• Regulatory Capital Requirements

• Contractual Obligations

• Off-Balance Sheet Arrangements

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality.

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.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could

CARTER BANKSHARES, INC.

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

cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of:

• market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios;

• monetary and fiscal policies of the U.S.

government, including policies of the Federal Reserve;

• changes in accounting policies, practices, or guidance, for example, our adoption of CECL, including potential volatility in the Company’s operating results due to application of the CECL methodology;

• cyber-security threats, attacks or events;

rapid technological developments and changes;

• changes in the Company’s liquidity and capital positions;

• concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral;

• an insufficient ACL;

• the potential adverse effects of unusual and infrequently occurring 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 COVID-19 pandemic), and of any governmental and societal responses thereto;

these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

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

• regulatory supervision and oversight;

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

• the outcome of pending and future litigation and governmental proceedings;

• increasing price and product/service competition;

• the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

managing our internal growth and acquisitions;

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

• material increases in costs and expenses;

• reliance on significant customer relationships;

• general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth;

• expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch network optimization project are not fully realized in a timely manner or at all;

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

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

Many of these factors, as well as other factors, are described 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”).

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

We caution you not to unduly rely on forward-looking statements

CARTER BANKSHARES, INC.

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

because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results.

Any forward-looking statement speaks only as to the date on which it is made, and 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 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 and net interest margin 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.

Interest income (GAAP) per the Consolidated Statements of Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.

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 September 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 September 30, 2022.

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

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

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

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

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

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

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

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

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

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

The Company is focused on executing 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 September 30, 2022

• Net interest income increased $8.3 million, or 28.3%, to $37.7 million for the three months ended September 30, 2022 compared to $29.4 million for the same period in 2021 primarily due an increase of 69 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 13 basis points in funding costs;

• The recovery for credit losses was $(0.1) million for the three months ended September 30, 2022, compared to $(0.4) million for the same period in 2021;

• Total noninterest income decreased $1.7 million to $5.2 million for the three months ended September 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $1.2 million to $23.5 million for the three months ended September 30, 2022 compared to the same period in 2021;

• Provision for income taxes increased $4.1 million to $5.0 million for the three months ended September 30, 2022 compared to $0.9 million for the same period in 2021.

Highlights for the Nine Months Ended September 30, 2022

• Net interest income increased $15.3 million, or 18.4%, to $98.4 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due an increase of 33 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 20 basis points in funding costs;

• The provision for credit losses remained relatively consistent at $2.4 million for the nine months ended September 30, 2022, compared to the same period in 2021;

• Total noninterest income decreased $6.9 million to $16.2 million for the nine months ended September 30, 2022 compared to $23.1 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $6.7 million to $69.4 million for the nine months ended September 30, 2022 compared the same period in 2021 primarily resulting from our retail branch optimization project and the reversal of tax credit amortization due to an in-service date extension to 2023;

• Provision for income taxes increased $5.4 million to $8.1 million for the nine months ended September 30, 2022 compared to $2.7 million for the same period in 2021.

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

• The securities portfolio decreased $71.2 million and is currently 20.7% 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 and the continued decline in fair value due to rising market interest rates;

• Total portfolio loans increased $219.2 million, or 10.4%, on an annualized basis, primarily due to higher loan growth in the first nine months of 2022;

• The portfolio loans to deposit ratio was 81.4%, compared to 76.0%, as loan growth outpaced deposit growth;

• Total deposits increased $27.5 million to $3.7 billion at September 30, 2022 compared to December 31, 2021;

• The ACL to total portfolio loans ratio was 3.11% compared to 3.41%.

The ACL on portfolio loans totaled $94.2 million at September 30, 2022, compared to $95.9 million with the decrease driven by a purchased syndicated C&I loan that was charged-down by $3.4 million, of which $2.6 million was previously reserved, loan growth and increased qualitative reserves, offset by declines 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)

• 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.

Since this date the Company repurchased 464,208 shares at an average price of $16.62 per share.

The Company reported net income of $14.4 million or $0.59 diluted earnings per share for the three months ended September 30, 2022 and $34.5 million, or $1.38 diluted earnings per share, for the nine months ended September 30, 2022 compared to net income of $11.2 million, or $0.42 diluted earnings per share and $26.0 million, or $0.98 diluted earnings per share, for the same periods in 2021.

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

PERFORMANCE RATIOS 2022 2021 2022 2021

Return on Average Assets 1.38 % 1.07 % 1.12 % 0.84 %

Return on Average Shareholders’ Equity 16.75 % 10.95 % 12.80 % 8.76 %

Portfolio Loans to Deposit Ratio 81.36 % 78.66 % 81.36 % 78.66 %

Allowance for Credit Losses to Total Portfolio Loans 3.11 % 3.44 % 3.11 % 3.44 %

Net Interest Income

Our principal source of revenue is net interest income.

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

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

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

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

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

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

The Company believes this FTE basis 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 regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Total net interest income increased $8.3 million, or 28.3% to $37.7 million and $15.3 million, or 18.4%, to $98.4 million for the three and nine months ended September 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 $8.3 million, or 27.8%, to $38.0 million and $15.0 million, or 17.7% to $99.3 million for the three and nine months ended September 30, 2022, respectively, compared to $29.7 million and $84.3 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 $7.4 million and $10.7 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $0.9 million and $4.3 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin increased 80 basis points to 3.72% and 48 basis points to 3.28% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin, on an FTE basis (non-GAAP), increased 79 basis points to 3.75% and 47 basis points to 3.31% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

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

The third quarter and first nine months of 2022 were 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 three and first nine months of 2022 were 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.

In addition, rising market interest rates may begin to increase the Company’s funding costs in future periods.

CARTER BANKSHARES, INC.

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

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 on an FTE basis (non-GAAP), for the periods presented:

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

(Dollars in Thousands) 2022 2021 2022 2021

Interest Income (FTE)(Non-GAAP)

Interest and Dividend Income (GAAP) $ 42,327 $ 34,913 $ 111,966 $ 100,964

Tax Equivalent Adjustment 279 330 870 1,178

Interest and Dividend Income (FTE) (Non-GAAP) 42,606 35,243 112,836 102,142

Average Earning Assets $ 4,024,880 $ 3,988,343 $ 4,006,788 $ 3,967,087

Yield on Interest-earning Assets (GAAP) 4.17 % 3.47 % 3.74 % 3.40 %

Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.20 % 3.51 % 3.77 % 3.44 %

Net Interest Income (GAAP) $ 37,725 $ 29,401 $ 98,406 $ 83,133

Tax Equivalent Adjustment 279 330 870 1,178

Net Interest Income (FTE) (Non-GAAP) 38,004 29,731 99,276 84,311

Average Earning Assets $ 4,024,880 $ 3,988,343 $ 4,006,788 $ 3,967,087

Net Interest Margin (GAAP) 3.72 % 2.92 % 3.28 % 2.80 %

Net Interest Margin (FTE) (Non-GAAP) 3.75 % 2.96 % 3.31 % 2.84 %

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 September 30, 2022 Three Months Ended September 30, 2021

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

Interest-Bearing Deposits with Banks $ 25,151 $ 134 2.11 % $ 191,047 $ 76 0.16 %

Tax-Free Investment Securities (2)

30,073 215 2.84 % 26,849 221 3.27 %

Taxable Investment Securities 942,571 5,466 2.30 % 836,957 3,163 1.50 %

Total Securities 972,644 5,681 2.32 % 863,806 3,384 1.55 %

Tax-Free Loans (1)(2)

141,082 1,115 3.14 % 174,680 1,350 3.07 %

Taxable Loans (1)

2,883,790 35,652 4.90 % 2,755,595 30,403 4.38 %

Total Loans 3,024,872 36,767 4.82 % 2,930,275 31,753 4.30 %

Federal Home Loan Bank Stock 2,213 24 4.30 % 3,215 30 3.70 %

Total Interest-Earning Assets 4,024,880 $ 42,606 4.20 % 3,988,343 $ 35,243 3.51 %

Noninterest Earning Assets 109,307 169,554

Total Assets $ 4,134,187 $ 4,157,897

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 500,281 $ 462 0.37 % $ 424,517 $ 278 0.26 %

Money Market 552,718 395 0.28 % 420,946 307 0.29 %

Savings 731,931 192 0.10 % 668,436 176 0.10 %

Certificates of Deposit 1,257,907 3,420 1.08 % 1,435,716 4,623 1.28 %

Total Interest-Bearing Deposits 3,042,837 4,469 0.58 % 2,949,615 5,384 0.72 %

Federal Funds Purchased 3,432 23 2.66 % — — — %

Federal Home Loan Bank Borrowings 3,913 31 3.14 % 30,000 89 1.18 %

Other Borrowings 6,326 79 4.95 % 3,437 39 4.50 %

Total Borrowings 13,671 133 3.86 % 33,437 128 1.52 %

Total Interest-Bearing Liabilities 3,056,508 4,602 0.60 % 2,983,052 5,512 0.73 %

Noninterest-Bearing Liabilities 736,441 769,871

Shareholders' Equity 341,238 404,974

Total Liabilities and Shareholders' Equity $ 4,134,187 $ 4,157,897

Net Interest Income (2)

$ 38,004 $ 29,731

Net Interest Margin (2)

3.75 % 2.96 %

(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.

CARTER BANKSHARES, INC.

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

Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021

(Dollars in Thousands) Average

Balance Income/

Expense Rate Average

Balance Income/

Interest-Bearing Deposits with Banks $ 64,858 $ 257 0.53 % $ 185,603 $ 182 0.13 %

Tax-Free Investment Securities (2)

30,188 663 2.94 % 37,064 906 3.27 %

Taxable Investment Securities 959,456 13,650 1.90 % 770,636 9,288 1.61 %

Total Securities 989,644 14,313 1.93 % 807,700 10,194 1.69 %

Tax-Free Loans (1)(2)

147,372 3,480 3.16 % 198,185 4,703 3.17 %

Taxable Loans (1)

2,802,692 94,720 4.52 % 2,771,860 86,965 4.19 %

Total Loans 2,950,064 98,200 4.45 % 2,970,045 91,668 4.13 %

Federal Home Loan Bank Stock 2,222 66 3.97 % 3,739 98 3.50 %

Total Interest-Earning Assets 4,006,788 $ 112,836 3.77 % 3,967,087 $ 102,142 3.44 %

Noninterest Earning Assets 128,105 174,194

Total Assets $ 4,134,893 $ 4,141,281

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 484,076 $ 1,082 0.30 % $ 402,663 $ 727 0.24 %

Money Market 530,560 989 0.25 % 361,204 877 0.32 %

Savings 724,472 559 0.10 % 657,101 507 0.10 %

Certificates of Deposit 1,278,905 10,650 1.11 % 1,522,384 15,328 1.35 %

Total Interest-Bearing Deposits 3,018,013 13,280 0.59 % 2,943,352 17,439 0.79 %

Federal Funds Purchased 2,168 27 1.67 % — — — %

Federal Home Loan Bank Borrowings 3,978 47 1.58 % 31,282 276 1.18 %

Other Borrowings 5,637 206 4.89 % 3,090 116 5.02 %

Total Borrowings 11,783 280 3.18 % 34,372 392 1.52 %

Total Interest-Bearing Liabilities 3,029,796 13,560 0.60 % 2,977,724 17,831 0.80 %

Noninterest-Bearing Liabilities 744,597 767,207

Shareholders' Equity 360,500 396,350

Total Liabilities and Shareholders' Equity $ 4,134,893 $ 4,141,281

Net Interest Income (2)

$ 99,276 $ 84,311

Net Interest Margin (2)

3.31 % 2.84 %

(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 $7.4 million, or 21.2% and $11.0 million, or 10.9%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

Interest income, on an FTE basis (non-GAAP), increased $7.4 million, or 20.9% and $10.7 million, or 10.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The change was primarily due to increases in average interest-earning assets of $36.5 million and $39.7 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 69 basis points and 33 basis points for the three and nine months ended September 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 nine months ended September 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $165.9 million and $120.7 million, respectively, and the average rate earned increased 195 and 40 basis points, respectively, as funds were deployed into higher yielding loans and securities.

Average loan balances increased $94.6 million for the three months ended September 30, 2022 and decreased $20.0 million for the nine months ended September 30, 2022 when compared to the same periods in 2021.

Loan growth during the three months ended September 30, 2022 was the primary influence for the quarterly increase, offset by large commercial paydowns in the first nine months of 2022 and 2021 and the decline in average Paycheck Protection Program (“PPP”) loans, due to the continued forgiveness by the Small Business Administration, which contributed to the decline for the nine months ended September 30, 2022.

The average rate earned on loans increased 52 and 32 basis points for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during 2022.

At September 30, 2022, the loan portfolio was comprised of 28.9% floating rate loans which reprice monthly, 39.9% variable rate loans that reprice at least once during the life of the loan and 31.2% fixed rate loans that do not reprice during the life of the loan.

CARTER BANKSHARES, INC.

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

Average investment securities increased $108.8 million and $181.9 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The average rate earned on investment securities increased 77 basis points and 24 basis points for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

The change in investment securities is the result of active balance sheet management to deploy excess cash combined with the continued decline in fair value.

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

As of September 30, 2022, the securities portfolio was comprised of 48.0% variable rate securities with approximately 46.4% 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 $0.9 million and $4.3 million for the three and nine months ended September 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 nine months of 2022.

Interest expense on deposits decreased $0.9 million and $4.2 million for the three and nine months ended September 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 $177.8 million or 12.4% and $243.5 million, or 16.0% for the three and nine months ended September 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 interest bearing core deposits, including money market accounts, interest-bearing demand accounts and savings accounts all increased by $131.8 million, $75.8 million and $63.5 million, respectively, for the three months ended September 30, 2022, and by $169.4 million, $81.4 million and $67.4 million, respectively, for the nine months ended September 30, 2022, when compared to the same periods in 2021.

The average rates paid on interest-bearing demand accounts increased 11 and six basis points for the three and nine months ended September 30, 2022 and the average rate paid on money market accounts decreased one and seven basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

The average rates paid on savings accounts for both the three and nine months ended September 30, 2022 remained relatively unchanged.

The average balances on borrowings decreased $19.8 million and $22.6 million for the three and nine months ended September 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 13 and 20 basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

CARTER BANKSHARES, INC.

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

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 September 30, 2022

Compared to September 30, 2021 Nine Months Ended September 30, 2022

Compared to September 30, 2021

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Rate Increase/

Interest Earned on:

Interest-Bearing Deposits with Banks $ (120) $ 178 $ 58 $ (182) $ 257 $ 75

Tax-free Investment Securities (2)

25 (31) (6) (157) (86) (243)

Taxable Investment Securities 440 1,863 2,303 2,512 1,850 4,362

Total Securities 465 1,832 2,297 2,355 1,764 4,119

Tax-free Loans (1)(2)

(265) 30 (235) (1,200) (23) (1,223)

Taxable Loans (1)

1,462 3,787 5,249 977 6,778 7,755

Total Loans 1,197 3,817 5,014 (223) 6,755 6,532

Federal Home Loan Bank Stock (10) 4 (6) (44) 12 (32)

Total Interest-Earning Assets $ 1,532 $ 5,831 $ 7,363 $ 1,906 $ 8,788 $ 10,694

Interest Paid on:

Interest-Bearing Demand $ 56 $ 128 $ 184 $ 163 $ 192 $ 355

Money Market 94 (6) 88 347 (235) 112

Savings 17 (1) 16 52 — 52

Certificates of Deposit (533) (670) (1,203) (2,248) (2,430) (4,678)

Total Interest-Bearing Deposits (366) (549) (915) (1,686) (2,473) (4,159)

Federal Funds Purchased 23 — 23 27 — 27

Federal Home Loan Bank Borrowings (122) 64 (58) (300) 71 (229)

Other Borrowings 36 4 40 93 (3) 90

Total Borrowings (63) 68 5 (180) 68 (112)

Total Interest-Bearing Liabilities (429) (481) (910) (1,866) (2,405) (4,271)

Change in Net Interest Margin $ 1,961 $ 6,312 $ 8,273 $ 3,772 $ 11,193 $ 14,965

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

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

(3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision (Recovery) for Credit Losses

The Company recognizes (recovery) provision for the allowance for credit losses (“ACL”) based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments.

Similarly, the Company recognizes provision (recovery) expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments.

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 3.11% of total portfolio loans at September 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses increased $0.3 million to $(0.1) million for the three months ended September 30, 2022 and remained relatively unchanged at $2.4 million for the nine months ended September 30, 2022, when compared to the same periods in 2021.

The increase for the three months ended September 30, 2022 was primarily driven by loan growth, increased qualitative reserves of $3.0 million and a $4.9 million purchased syndicated C&I loan that was charged-down $3.4 million, of which $2.6 million was previously reserved, and then transferred to held-for-sale for $1.5 million, offset by the release of $3.7 million of reserves that were allocated to the other segment due to principal pay-downs.

The increase in qualitative reserves were factors attributable to the residential mortgage and commercial construction portfolios.

Project costs continue to escalate due to supply chain and labor disruptions as well as increased material costs.

Absent material cost increases, supply chain and labor disruptions cause the overall construction duration to increase, increasing interest costs to the borrower.

The bank has observed a handful of significant cost overruns on CRE projects.

To date, these cost overruns have either been funded by the borrower and/or project sponsors or partially funded by the Bank within acceptable underwriting

CARTER BANKSHARES, INC.

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

The Company continues to monitor these trends by diligently collecting data on commercial construction projects and analyzing risk presented to the Company’s loan portfolio.

The provision (recovery) for unfunded commitments increased $0.2 million and $1.1 million for the three and nine months ended September 30, 2022, respectively compared to the same periods in 2021 due to a decline in the reserve rates.

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 September 30, Nine Months Ended September 30,

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

(Losses) Gains on Sales of Securities, net $ (4) $ 1,341 $ (1,345) (100.3) % $ 48 $ 6,450 $ (6,402) (99.3) %

Service Charges, Commissions and Fees 1,750 1,660 90 5.4 % 5,452 4,958 494 10.0 %

Debit Card Interchange Fees 1,788 1,751 37 2.1 % 5,570 5,456 114 2.1 %

Insurance Commissions 876 427 449 105.2 % 1,713 1,099 614 55.9 %

Bank Owned Life Insurance Income 341 349 (8) (2.3) % 1,009 1,031 (22) (2.1) %

(Losses) Gains on Sales and Write-downs of Bank Premises, net (4) — (4) NM 342 — 342 NM

Other Real Estate Owned Income 13 7 6 85.7 % 35 82 (47) (57.3) %

Commercial Loan Swap Fee Income 18 1,096 (1,078) (98.4) % 774 2,057 (1,283) (62.4) %

Other 457 284 173 60.9 % 1,231 1,972 (741) (37.6) %

Total Noninterest Income $ 5,235 $ 6,915 $ (1,680) (24.3) % $ 16,174 $ 23,105 $ (6,931) (30.0) %

Total noninterest income decreased $1.7 million, or 24.3%, to $5.2 million for the three months ended September 30, 2022 and decreased $6.9 million, or 30.0%, to $16.2 million for the nine months ended September 30, 2022 when compared to the same periods in 2021.

These decreases were primarily related to declines in net security gains of $1.3 million and $6.4 million in the three and nine months ended September 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 September 30, 2022 also included a decrease of $1.1 million in commercial loan swap fee income related to the timing and demand for this product in the current rising interest rate environment.

Offsetting the decreases were increases of $0.4 million in insurance commissions due to increases in insurance provider income and an increase of $0.2 million in other noninterest income related to an increase in fair value due to our interest rate swap contracts with commercial customers in the third quarter of 2022.

Also contributing to the offsetting decrease was was a $0.1 million increase in service charges on deposit accounts primarily driven by volume.

Along with the $6.4 million decline in net security gains previously mentioned for the nine months ended September 30, 2022, the Company also experienced declines of $1.3 million in commercial loan swap fee income and $0.7 million in other noninterest income.

Partially offsetting these decreases were the following increases, $0.6 million in insurance commissions, $0.5 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.1 million in debit card interchange fees.

Similar fluctuations as the three-month period ended September 30, 2022, the decline in other noninterest income for the nine month period ended September 30, 2022 related to premiums on the sale of bank branches.

The increases related to debit card interchange fees were driven by higher customer activity and the $0.3 million gains on sales and write-downs of bank premises, net 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 September 30, Nine Months Ended September 30,

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

Salaries and Employee Benefits $ 13,520 $ 12,816 $ 704 5.5 % $ 37,721 $ 39,084 $ (1,363) (3.5) %

Occupancy Expense, net 3,412 3,333 79 2.4 % 10,060 10,298 (238) (2.3) %

FDIC Insurance Expense 543 582 (39) (6.7) % 1,540 1,882 (342) (18.2) %

Other Taxes 848 825 23 2.8 % 2,471 2,305 166 7.2 %

Advertising Expense 368 196 172 87.8 % 874 586 288 49.1 %

Telephone Expense 448 519 (71) (13.7) % 1,390 1,707 (317) (18.6) %

Professional and Legal Fees 1,310 1,244 66 5.3 % 3,731 3,908 (177) (4.5) %

Data Processing 833 1,018 (185) (18.2) % 2,516 2,893 (377) (13.0) %

Losses on Sales and Write-downs of Other Real Estate Owned, net 169 608 (439) (72.2) % 268 3,423 (3,155) (92.2) %

Losses on Sales and Write-downs on Bank Premises, net — 7 (7) (100.0) % — 114 (114) (100.0) %

Debit Card Expense 797 700 97 13.9 % 2,089 2,045 44 2.2 %

Tax Credit Amortization (764) 427 (1,191) (278.9) % 466 1,281 (815) (63.6) %

Other Real Estate Owned Expense 38 84 (46) (54.8) % 220 280 (60) (21.4) %

Other 1,941 2,326 (385) (16.6) % 6,038 6,243 (205) (3.3) %

Total Noninterest Expense $ 23,463 $ 24,685 $ (1,222) (5.0) % $ 69,384 $ 76,049 $ (6,665) (8.8) %

Total noninterest expense decreased $1.2 million and $6.7 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

For the three months ended September 30, 2022 the most significant decrease for the period was a decline of $1.2 million in tax credit amortization.

The decrease resulted from the reversal of $1.4 million amortization expense for one of the Bank’s partnerships due to updated information from the developer, extending the in-service date to 2023.

Also impacting the fluctuations for the three-month period were decreases of $0.4 million for losses on sales and write-downs of OREO, net, $0.4 million in other noninterest expense and $0.2 million in data processing expenses.

These decreases were offset by an increase of $0.7 million in salaries and employee benefits and an increase of $0.2 million in advertising expense.

The losses on sales and write-downs of OREO, net, related to sales and properties under contract during the third quarter of 2022.

The decrease in other noninterest expense of $0.4 million related to a finder’s fee for the sale of two credit relationships in the third quarter of 2021 and the decrease in data processing expense is due to new modules added to our core processor also in the third quarter of 2021.

The increase in salaries and employee benefits primarily relates to a $0.5 million profit sharing adjustment in the third quarter of 2022.

The decrease in noninterest expense for the nine-month period ended September 30, 2022 when compared to the same period in 2021 was primarily driven by a $3.2 million decrease 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.

Also impacting the nine-month decrease was a $1.4 million decline in salaries and employee benefits, a $0.8 million in tax credit amortization, a $0.4 million decline in data processing expenses, a $0.3 million decrease in FDIC insurance expense, a $0.3 million in telephone expenses, $0.2 million decrease in occupancy expense, net, and $0.2 million decrease in professional and legal fees.

These various decreases were offset by an increase of $0.3 million in advertising expenses and a $0.2 million increase in other taxes.

The decline in salaries and employee benefits was due to lower medical expenses and our retail branch optimization project offset by the $0.5 million profit sharing adjustment in the third quarter of 2022.

The decrease in tax credit amortization related to the reversal of amortization expense for one of the Bank’s partnerships mentioned above offset by a new historic tax credit that began in early 2022.

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

CARTER BANKSHARES, INC.

On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months, (the “2023 Program”) subject to receipt of non-objection from the Federal Reserve Bank of Richmond, which was received on April 24, 2023.

The 2023 Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.

The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion.

The actual means and timing of any shares purchased under the 2023 Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position and applicable legal and regulatory requirements.

The 2023 Program is authorized through May 1, 2024, although it may be modified or terminated by the Board at any time.

The 2023 Program does not obligate the Company to purchase any particular number of shares.

Previously on June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022 (the “2022 Program”).

The 2022 Program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act.

The authorization permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion.

The 2022 Program was originally authorized through August 1, 2023, did not obligate the Company to purchase any particular number of shares, and was exhausted as of March 10, 2023.

Previously on December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share 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 (the “2021 Program”).

The 2021 Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022.

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