What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-08-03 compared with 2023-05-04 · 611 added, 130 removed, 923 unchanged (45% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in Thousands) 2023 2022

9 unchanged sentences

Gains on Sales of Mortgage Loans Held-for-Sale ( 57 ) ( 119 )

Losses on Sales of Securities, net 12 24

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

Losses (Gains) on Sales of Securities, net 9 ( 52 )

Commercial Loan Swap Derivative Loss (Income) 144 ( 443 )

Increase in the Value of Life Insurance Contracts ( 680 ) ( 668 )

Recognition of Restricted Stock Compensation Expense 776 704

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

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

Increase in Other Assets ( 2,574 ) ( 2,287 )

Increase (Decrease) in Other Liabilities 1,397 ( 1,882 )

Net Cash Provided By Operating Activities 29,592 26,798

9 unchanged sentences

Payments Received on Other Real Estate Owned 201 215

Proceeds from Sales and Payments of Other Real Estate Owned — 561

Proceeds from Sales of Other Real Estate Owned 4,818 3,718

Net Cash Used In Investing Activities ( 176,386 ) ( 249,859 )

3 unchanged sentences

Proceeds (Repayments) on Federal Home Loan Bank Borrowings, net 226,585 ( 7,000 )

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

Repayments on Federal Funds Purchased, net ( 9,970 ) —

Repurchase of Common Stock ( 10,085 ) ( 32,415 )

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

Net Cash Provided by Financing Activities 153,200 15,502

Net Increase (Decrease) in Cash and Cash Equivalents 6,406 ( 207,559 )

5 unchanged sentences

Transfer from Fixed Assets to Other Real Estate Owned — 1,584

Security (Purchases) Settled in Subsequent Period — ( 4,115 )

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

Stock Repurchase Settled in Subsequent Period ( 328 ) —

Stock Repurchase Excise Tax Settled in Subsequent Period ( 93 ) —

See accompanying notes to unaudited consolidated financial statements.

20 unchanged sentences

Accounting Standards Adopted in 2023

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.

1 unchanged sentence

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.

The amendments in this ASU expands the use of the proportional amortization method of accounting, previously only allowable for Low Income Tax Housing Credits, (“LITHC”) investments, to equity investments in other tax credit structures that meet certain criteria.

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.

The Company reviewed its existing tax equity investment portfolios and evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU as of June 30, 2023 on a modified retrospective basis, effective dated as of January 1, 2023.

As a result, the Company recorded a transitional adjustment of $ 0.1 million to retained earnings.

The Company makes equity investments as a limited partner in various partnerships that sponsor historic tax credits (“HTC”) as a strategic tax initiative designed to receive tax credits and other tax benefits, such as deductible flow-through losses.

The Company has evaluated all of the proportional amortization method qualifying criteria and has elected to apply the proportional amortization method at the HTC program level.

The Company records the investment in the HTC as a component of other assets and uses the proportional amortization method to account for the investments in the HTC partnerships.

Amortization related to these HTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income.

Prior to the ASU adoption, amortization was recorded as a component of noninterest expense on the Consolidated Statements of Income.

The amendments in this ASU did not materially impact our Consolidated Financial Statements.

Accounting Standards Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No.

2 unchanged sentences

The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting.

The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.

Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S.

The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts,

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.

Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in GAAP.

The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

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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.

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.

The Federal Reserve System, (“FRB”), of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S.

As it 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 ceased the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023.

The Federal Reserve System (“FRB”) of New York created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S.

institutions in transitioning away from LIBOR as a benchmark interest rate.

The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S.

Congress passed, and the U.S.

President signed, legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the FRB to identify a replacement benchmark based on SOFR.

In response, we have created an internal team that is managing our transition away from LIBOR.

The ARRC recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S.

passed legislation providing a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the FRB to identify a replacement benchmark based on SOFR.

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

We have created an internal team that is managing our transition away from LIBOR.

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.

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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.

The financial impact regarding pricing, valuation and operations of the transition has been evaluated and 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 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.

As of June 30, 2023, approximately 5.3 % of our loan portfolio consists of loans whose variable rate index is one month LIBOR.

CARTER BANKSHARES, INC.

4 unchanged sentences

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,

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

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

12 unchanged sentences

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

March 31, 2023

June 30, 2023

(Dollars in Thousands) Amortized

26 unchanged sentences

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

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

The Company did no t have securities classified as held-to-maturity at June 30, 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 March 31,

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

(Dollars in Thousands) 2023 2022 2023 2022

2 unchanged sentences

Gross Realized Losses ( 126 ) ( 132 ) ( 138 ) ( 156 )

Net Realized Losses ( 12 ) ( 24 )

Net Realized Gains (Losses) 3 76 ( 9 ) 52

Tax Impact $ 1 $ 16 $ ( 2 ) $ 11

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

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

The net realized gains (losses) are included in noninterest income as gains (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.

March 31, 2023

June 30, 2023

(Dollars in Thousands) Amortized

9 unchanged sentences

Total Debt Securities $ 926,198 $ 821,370

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.

At June 30, 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 $ 224.8 million at March 31, 2023 and $ 224.5 million at December 31, 2022.

The carrying value of securities pledged for various regulatory and legal requirements was $ 218.7 million at June 30, 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 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

Available-for-sale securities with unrealized losses at June 30, 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:

June 30, 2023

Less Than 12 Months 12 Months or More Total

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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 )

Other Commercial 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 )

3 unchanged sentences

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 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 did no t have any credit related net investment impairment losses.

There were no securities classified as held-to-maturity at June 30, 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 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.

As of June 30, 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.

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 market volatility.

4 unchanged sentences

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;

As of June 30, 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.

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 income (loss).

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

Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes.

During the three and six months ended June 30, 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)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Commercial Real Estate

22 unchanged sentences

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.

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

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

2 unchanged sentences

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

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:

The following table shows the amortized cost basis as of June 30, 2023 and June 30, 2022 for the loans restructured during the six months ended June 30, 2023 and June 30, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:

Restructured Loans

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

Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

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

18 unchanged sentences

Total Restructured Loans — $ — — % 1 $ 300 0.02 %

(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.

(1) Excludes accrued interest receivable of $ 0.0 thousand and $ 2.9 thousand at June 30, 2023 and June 30, 2022 for restructured loans during the six months ended June 30, 2023 and June 30, 2022, respectively.

The Company had no loans that were restructured during the three months ended June 30, 2023 and June 30, 2022.

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

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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”).

During the three and six months ended June 30, 2023 and June 30, 2022, respectively, the Company had no modifications to borrowers experiencing financial difficulty to report.

At both June 30, 2023 and June 30, 2022, the Bank had no commitments to lend any additional funds on restructured loans.

At both June 30, 2023 and June 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.

As of June 30, 2023 and December 31, 2022, the Bank had $ 2.1 million and $ 0.9 million, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 21 thousand at June 30, 2023 and $ 133 thousand at December 31, 2022 in residential real estate loans included in other real estate owned (“OREO”).

CARTER BANKSHARES, INC.

87 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:

March 31, 2023

June 30, 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:

March 31, 2023

June 30, 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:

March 31, 2023

June 30, 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 March 31, 2023 and December 31, 2022.

There were no loans past due 90 days or more and still accruing at June 30, 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 $ 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.

Loans past due 30 to 89 days and still accruing decreased $ 3.3 million to $ 1.5 million at June 30, 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 first quarter of 2023.

Nonperforming loans increased during the second quarter of 2023 as the Company placed commercial loans in the Other segment of the Company’s loan portfolio, relating to the Bank’s largest lending relationship which has an aggregate principal amount of $ 301.9 million, on nonaccrual status due to loan maturities and failure to pay in full.

There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 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

June 30, 2023

(Dollars in Thousands) Beginning of

9 unchanged sentences

Other — 301,913 — —

Total Portfolio Loans $ 6,645 $ 8,368 $ — $ —

Total $ 6,645 $ 310,746 $ 2,090 $ —

December 31, 2022

10 unchanged sentences

Other — — — —

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

Total $ 7,397 $ 6,645 $ — $ —

CARTER BANKSHARES, INC.

9 unchanged sentences

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.

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision (recovery) for credit loss on loans in the period of change.

Type of Collateral

March 31, 2023 December 31, 2022

(Dollars in Thousands) Real Estate Real Estate

During the three and six months ended June 30, 2023 and June 30, 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 individually evaluated loans as of the periods presented.

Changes in the fair value of the types of collateral and discounted cash flow modeling for individually evaluated loans are reported as provision for credit loss on loans in the period of change.

June 30, 2023 December 31, 2022

(Dollars in Thousands) Collateral Discounted Cash Flow Total Collateral

Commercial Real Estate $ 1,946 $ — $ 1,946 $ 2,106

3 unchanged sentences

Construction 2,090 — 2,090 —

Other — 301,913 301,913 —

Total $ 5,248 $ 301,913 $ 307,161 $ 3,318

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

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

4 unchanged sentences

Recoveries — 5 1 119 — — 125

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

Net Recoveries/(Charge-offs) — 5 ( 66 ) ( 532 ) ( 42 ) — ( 635 )

Balance at End of Period $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144

Three Months Ended March 31, 2022

Six Months Ended June 30, 2023

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

6 unchanged sentences

Balance at End of Period $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144

Three Months Ended June 30, 2022

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

Allowance for Credit Losses on Loans:

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

Provision (Recovery) for Credit Losses on Loans 290 2,127 545 526 ( 722 ) ( 952 ) 1,814

Charge-offs — ( 22 ) ( 6 ) ( 391 ) — — ( 419 )

Recoveries — — 96 114 — — 210

Net (Charge-offs)/Recoveries — ( 22 ) 90 ( 277 ) — — ( 209 )

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

Six Months Ended June 30, 2022

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

Allowance for Credit Losses on Loans:

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

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

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

Recoveries — 1 96 223 149 — 469

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

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

CARTER BANKSHARES, INC.

59 unchanged sentences

Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Alternative methodologies utilize various discounted cash flow assumptions in the alternative modeling through a variety of scenarios.

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate.

10 unchanged sentences

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

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.

At June 30, 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:

March 31, 2023

June 30, 2023

(Dollars in Thousands) Carrying

11 unchanged sentences

Commercial Mortgage-Backed Securities 35,402 — 35,402 —

Other Commercial Mortgage-Backed Securities 21,583 — 21,583 —

Asset Backed Securities 138,722 — 138,722 —

Collateralized Mortgage Obligations 169,077 — 169,077 —

Small Business Administration 174,423 — 174,423 —

States and Political Subdivisions 233,431 — 233,431 —

30 unchanged sentences

We have invested in subordinated debt of other financial institutions.

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.

We have two securities totaling $ 7.3 million that are considered to be Level 3 securities at June 30, 2023 and total $ 7.5 million at December 31, 2022.

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.

4 unchanged sentences

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

March 31, 2023

June 30, 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 $ 4.2 million at March 31, 2023 with a valuation allowance of $ 1.1 million.

Individually evaluated loans had a net carrying amount of $ 2.9 million at June 30, 2023 with a valuation allowance of $ 0.3 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.

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 Company’s largest lending relationship is classified as an individually evaluated loan with a net carrying amount totaling $ 248.3 million.

The Company utilized various cash flow assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $ 53.6 million at June 30, 2023.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 2.6 million as of June 30, 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 six months ended June 30, 2023 and $ 0.4 million for the same periods in 2022.

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

March 31, 2023

June 30, 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 %

Individually Evaluated Loans $ 1,067 Sales Contract Other Expenses & Liens 1.0 % 1.0 %

Individually Evaluated Loans 1,791 Discounted Appraisals Management's Discount & Estimated Selling Costs and Other Expenses & Liens 6.0 % 6.0 %

Total Individually Evaluated Loans $ 2,858

1 unchanged sentence

OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

OREO 927 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 0.0 % – 5.0 %

Total OREO $ 2,570

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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.”

The carrying values and estimated fair values of our financial instruments at June 30, 2023 and December 31, 2022 are presented in the following tables.

Fair values for June 30, 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 March 31, 2023

Fair Value Measurements at June 30, 2023

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

11 unchanged sentences

FHLB Borrowings 407,135 — — 405,543 405,543

Federal Funds Purchased 7,900 — 7,900 — 7,900

Accrued Interest Payable 6,772 — — 6,772 6,772

35 unchanged sentences

(Included in Other Assets)

March 31, 2023 December 31, 2022

June 30, 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)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

6 unchanged sentences

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

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

Three Months Ended March 31,

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

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

(Dollars in Thousands) 2023 2022 2023 2022

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans 50 139 ( 144 ) 443

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

Total Derivative Income (Loss) $ 50 $ 139 $ ( 144 ) $ 443

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) March 31,

(Dollars in Thousands) June 30,

2023 December 31,

2022 March 31,

2022 June 30,

2023 December 31,

7 unchanged sentences

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

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

(Dollars in Thousands) June 30, 2023 December 31, 2022

Noninterest-Bearing Demand $ 686,124 $ 703,334

6 unchanged sentences

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

Certificates of deposits that exceed the FDIC Insurance limit of $250,000 at June 30, 2023 and December 31, 2022 were $ 233.5 million and $ 159.0 million, respectively.

Certificates of Deposit maturing as of the date presented:

(Dollars in Thousands) June 30, 2023

3 Months or Less $ 99,282

3 unchanged sentences

Total $ 1,451,540

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

Overdrafts reclassified to loans were $ 0.3 million at both June 30, 2023 and December 31, 2022.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

The Company had $ 407.1 million Federal Home Loan Bank (“FHLB”) borrowings at June 30, 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.

Variable rate FHLB borrowings were 82.8 % and 33.4 % of total borrowings at June 30, 2023 and December 31, 2022, respectively.

Total loans pledged as collateral were $ 1.5 billion at both June 30, 2023 and December 31, 2022, respectively.

There were no securities available-for-sale pledged as collateral at both June 30, 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 is eligible to borrow up to an additional $ 508.4 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 June 30, 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 Company had $ 7.9 million and $ 17.9 million in overnight federal funds purchased at June 30, 2023 and December 31, 2022, respectively.

The available borrowing capacity under unsecured lines of credit with corresponding banks was $ 137.1 million and $ 127.1 million at June 30, 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) March 31, 2023 December 31, 2022

(Dollars in Thousands) June 30, 2023 December 31, 2022

FHLB Borrowings $ 407,135 $ 180,550

2 unchanged sentences

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

(Dollars in Thousands) June 30, 2023 December 31, 2022

Federal Fund Purchased $ 7,900 $ 17,870

1 unchanged sentence

Federal Funds Purchased Availability $ 137,100 $ 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 :

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to June 30, 2023 and thereafter are as follows :

(Dollars in Thousands) Balance Weighted

7 unchanged sentences

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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.

Commitments to extend credit, which amounted to $ 749.4 million at June 30, 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 $ 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.

Lines of credit for construction projects represented $ 395.6 million, or 52.8 % and $ 373.2

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

million, or 59.2 %, of the commitments to extend credit at June 30, 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.

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 Company had outstanding letters of credit totaling $ 26.3 million at June 30, 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) March 31, 2023 December 31, 2022

(Dollars in Thousands) June 30, 2023 December 31, 2022

Commitments to Extend Credit $ 749,377 $ 630,619

9 unchanged sentences

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

Three Months Ended March 31,

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

(Dollars in Thousands) 2023 2022 2023 2022

1 unchanged sentence

Balance at Beginning of Period $ 2,376 $ 1,547 $ 2,292 $ 1,783

Provision (Recovery) for Unfunded Commitments 84 ( 236 )

Provision for Unfunded Commitments 360 269 444 33

Balance at End of Period $ 2,736 $ 1,816 $ 2,736 $ 1,816

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 $ 0.1 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.

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

An expense of $ 0.4 million was recorded during the three months ended June 30, 2023 for the provision for unfunded commitments, which resulted in increases of $ 0.1 million and $ 0.4 million for the three and six months ended June 30, 2023, respectively compared to the same periods 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 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 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

Other than as set forth below, as of June 30, 2023, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.

The Bank is engaged in a variety of collection proceedings against various related entities that are owned and/or controlled by James C.

Justice, II, Cathy L Justice and James C.

Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Defendants”).

On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Defendants with an aggregate principal balance of approximately $ 301 million.

On May 12, 2023 and June 7, 2023, the Defendants filed motions to set aside the confessions of judgment on the basis that the Bank allegedly (i) violated anti-tying provisions of the Bank Holding Company Act of 1956, as amended, (ii) breached contractual obligations and fiduciary duties to the Defendants and (iii) tortiously interfered with the Defendants’ business expectancies and relationships, among other allegations.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

The Company and the Bank intend to pursue vigorously the confessions of judgment and enforce the promissory notes and related agreements, including release and affirmation agreements, guaranties and indemnification agreements.

The Company and the Bank vigorously deny the allegations contained in the Defendants’ motions to set aside the confessions of judgment.

Based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in such motions to set aside the confessions of judgment.

Because the collection litigation is in its early stages, the Company can make no prediction as to the ultimate outcome thereof or any related legal proceedings that may commence, and the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter or to estimate the range of any possible gain or loss with respect to this litigation.

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

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

(Dollars in Thousands) Three Months Ended June 30, 2023 Three Months Ended June 30, 2022

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 $ ( 11,036 ) $ 2,417 $ ( 8,619 ) $ ( 35,002 ) $ 7,350 $ ( 27,652 )

Reclassification Adjustment for Gains included in Net Income ( 3 ) 1 ( 2 ) ( 76 ) 16 ( 60 )

Other Comprehensive Loss $ ( 11,039 ) $ 2,418 $ ( 8,621 ) $ ( 35,078 ) $ 7,366 $ ( 27,712 )

(Dollars in Thousands) Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

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

Net Unrealized Gains (Losses) Arising during the period $ 4,597 $ ( 973 ) $ 3,624 $ ( 78,034 ) $ 16,387 $ ( 61,647 )

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

Reclassification Adjustment for Losses (Gains) included in Net Income 9 ( 2 ) 7 ( 52 ) 11 ( 41 )

Other Comprehensive Income (Loss) $ 4,606 $ 4,615 $ ( 975 ) $ 3,631 $ ( 78,086 ) $ 16,398 $ ( 61,688 )

6 unchanged sentences

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

During the six months ended June 30, 2023, 583,824 shares of common stock had been repurchased under this program at a total cost of $ 8.2 million, or an average price of $ 13.96 per share.

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 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.

1 unchanged sentence

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.

NOTE 13 – PROVISION FOR INCOME TAXES

The following is a reconciliation of the differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes:

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

2023 2022 2023 2022

(Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent

Federal Income Tax at Statutory Rate $ 1,209 21.0 $ 2,640 21.0 $ 5,503 21.0 $ 4,877 21.0

State Income Tax, net of Federal Benefit 55 0.9 48 0.4 420 1.6 262 1.1

Tax-exempt Interest, net of Disallowance ( 183 ) ( 2.9 ) ( 225 ) ( 1.8 ) ( 378 ) ( 1.4 ) ( 453 ) ( 2.0 )

Federal Tax Credits, net of Basis Reduction ( 559 ) ( 8.9 ) ( 553 ) ( 4.4 ) ( 1,109 ) ( 4.2 ) ( 1,107 ) ( 4.8 )

Tax Credit Investment Amortization, net of Federal Benefit 274 4.4 — — 757 2.9 — —

Change in Valuation Allowance — — ( 132 ) ( 1.1 ) — — ( 280 ) ( 1.2 )

Income from Bank Owned Life Insurance ( 72 ) ( 1.2 ) ( 70 ) ( 0.6 ) ( 143 ) ( 0.5 ) ( 140 ) ( 0.6 )

Interim Period Effective Tax Rate Adjustment ( 799 ) ( 12.8 ) 76 0.6 ( 597 ) ( 2.3 ) ( 55 ) ( 0.2 )

Other 129 0.4 8 0.2 105 0.3 17 0.1

Income Tax Provision and Effective Income Tax Rate $ 54 0.9 $ 1,792 14.3 $ 4,558 17.4 $ 3,121 13.4

The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the HTC program.

The Company makes equity investments as a limited partner in various partnerships that sponsor HTC as a strategic tax initiative designed to receive income tax credits and other income tax benefits, such as deductible flow-through losses.

As of June 30, 2023, the Company recognized $ 2.7 million in Historical Tax Credit equity investments recorded as a component of other assets on the Consolidated Balance Sheets.

The Company records income tax credits and other income tax benefits received from its HTC investments as a component of the provision for income taxes on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows.

Investments accounted for using the proportional amortization method are amortized and recorded as a component of the provision for income taxes on the Consolidated Statements of Income.

The Company records non-income-tax-related activity and other returns received from its HTC investments as a component of other noninterest income on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows.

As of June 30, 2023, the Company has not recognized any non-income-tax-related activity from its HTC investments.

CARTER BANKSHARES, INC.

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 Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2023 and June 30, 2022.

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

• Overview and Strategy

• 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, including but not limited to statements regarding the interest rate environment, the impact of future changes in interest rates, and the impacts of the Company placing its largest lending relationship on nonaccrual status.

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.

These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company’s control.

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

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements 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;

• inflation, market and monetary fluctuations;

• changes in trade, monetary and fiscal policies and laws of the U.S.

Government, including policies of the Federal Reserve, Federal Deposit Insurance Corporation, (“FDIC”) and U.S.

Department of the Treasury (the “Treasury Department”);

CARTER BANKSHARES, INC.

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

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

• our ability to resolve our nonperforming assets, and our ability to secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full;

• 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 allowance for credit losses;

• 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, including our relationship with regulators and any actions that may be initiated by our regulators;

• legislation affecting the financial services industry as a whole (such as the Inflation Reduction Act of 2022), and the Company and the Bank, in particular;

• the outcome of pending and future litigation and/or 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;

• the soundness of other financial institutions and any indirect exposure related to the closings of Silicon Valley Bank (“SVB”), Signature Bank, Silvergate Bank and First Republic Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank, Silvergate Bank and First Republic Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with ;

• our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs and marketing programs in the markets we serve, including, but not limited to, the Company’s guiding principles, including our new purpose statement:

To create opportunities for more people and businesses to prosper ;

supported by our new set of core values:

Build Relationships, Earn Trust and Take Ownership ;

• 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;

• significant weakening of the local economies in which we operate;

• changes in customer behaviors, including consumer spending, borrowing and saving habits;

• changes in deposit flows and loan demand;

CARTER BANKSHARES, INC.

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

• our failure to attract or retain key employees;

• 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.

Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 , Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023, and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, and any of our subsequent filings with the Securities and Exchange Commission (“SEC”).

All risk factors and uncertainties described herein and therein should be considered in evaluating the Company’s forward-looking statements.

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

We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events 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, interest and dividend income, yield on interest earning assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures.

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

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

Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to 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 June 30, 2023 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, 2022 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Overview and Strategy

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.4 billion at June 30, 2023.

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

The Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured, Virginia state-chartered bank, which operates

CARTER BANKSHARES, INC.

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

66 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 income tax provision.

For the 2023-2025 fiscal year periods, the Company will focus on refining and enhancing its brand image and position in the markets it serves.

To strengthen and further shape the culture of the Company, a new set of guiding principles were introduced to associates in June 2023.

The guiding principles include a new purpose statement:

To create opportunities for more people and businesses to prosper ;

supported by our new set of core values:

Build Relationships, Earn Trust and Take Ownership.

We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company.

The Company’s Board of Directors and management believe that the Bank is at a turning point in its evolution and transformation.

The Company’s focus will shift from restructuring the balance sheet to pursuing a prudent growth strategy.

This strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit this strategic vision.

This initiative is viable given the Bank’s strong capital and liquidity positions.

In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses.

The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter.

As part of executing this strategy, the Company will be dedicating significant resources to resolve the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship at June 30, 2023, in a manner that best protects the Company and its shareholders.

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended June 30, 2023

• Net interest income decreased $5.7 million, or 17.7%, to $26.7 million for the three months ended June 30, 2023 compared to the same period in 2022 primarily due to a $11.3 million negative impact on interest income caused by placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023 and by an increase of 149 basis points in funding costs, offset by an increase of 42 basis points in the yield on earning assets due to the rising interest rate environment;

• The provision for credit losses decreased $1.7 million to $0.1 million for the three months ended June 30, 2023, compared to the same period in 2022;

• Total noninterest income decreased $0.6 million to $5.0 million for the three months ended June 30, 2023 compared to $5.6 million for the same period in 2022;

• Total noninterest expense increased $2.1 million to $25.5 million for the three months ended June 30, 2023 compared to the same period in 2022;

• Provision for income taxes decreased $1.7 million to $0.1 million for the three months ended June 30, 2023 compared to $1.8 million for the same period in 2022 was primarily due to the decrease in pre-tax income due to the Company’s largest lending relationship moving into nonaccrual status during the quarter, partially offset by the adoption of ASU 2023-02.

Highlights for the Six Months Ended June 30, 2023

• Net interest income increased $6.8 million, or 11.2%, to $67.5 million for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase of 106 basis points in the yield on earning assets due

CARTER BANKSHARES, INC.

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

to the rising interest rate environment, partially offset by an increase of 115 basis points in funding costs and the negative impact of placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023;

• The provision for credit losses decreased $0.9 million to $1.5 million for the six months ended June 30, 2023, compared to the same period in 2022;

• Total noninterest income decreased $1.2 million to $9.8 million for the six months ended June 30, 2023 compared to the same period in 2022;

• Total noninterest expense increased $3.2 million to $49.1 million for the six months ended June 30, 2023 compared to the same period in 2022;

• Provision for income taxes increased $1.4 million to $4.6 million for the six months ended June 30, 2023 compared to the same period in 2022.

Balance Sheet Highlights (period-end balances, June 30, 2023 compared to December 31, 2022)

• The securities portfolio decreased $14.9 million and is currently 18.7% of total assets compared to 19.9% of total assets;

• Total portfolio loans increased $181.5 million, or 11.6%, on an annualized basis, primarily due to loan growth in commercial real estate (“CRE”) and residential mortgage segments during the first half of 2023;

• The portfolio loans to deposit ratio was 93.1%, compared to 86.7%, due to loan growth;

• Nonperforming loans as a percentage of total portfolio loans were 9.33% compared to 0.21%.

The significant increase is due to loans contained in the Other segment with an aggregate principal balance of $301.9 million that were placed into nonaccrual status due to loan maturities and failure to pay in full during the second quarter of 2023.

These loans comprise 97.2% of nonperforming loans at June 30, 2023;

• Total deposits decreased $53.3 million or 1.5% to $3.6 billion at June 30, 2023 due to a decrease of $243.3 million in core deposits;

• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.83% compared to 2.98%.

The ACL on portfolio loans totaled $94.1 million at June 30, 2023, compared to $93.9 million at December 31, 2022 with the decrease in the ACL coverage ratio driven by loan growth and by the release of specific reserves on three credits, offset by an increased valuation allowance on the large nonaccrual lending relationship.

The Company reported net income of $5.7 million or $0.24 diluted earnings per common share for the three months ended June 30, 2023 and $21.6 million, or $0.91 diluted earnings per common share for the six months ended June 30, 2023 compared to net income of $10.8 million, or $0.44 diluted earnings per common share and $20.1 million, or $0.80 diluted earnings per common share, for the same periods in 2022.

The Company’s financial results for the second quarter of 2023, compared to the prior quarter and the prior year quarter, were significantly impacted by placing commercial loans with an aggregate principal value of $301.9 million in the Other segment of the Bank’s loan portfolio on nonaccrual status due to loan maturities and failure to pay in full.

This nonaccrual classification had a $11.3 million negative impact on interest income recognized by the Company for the three and six months ended June 30, 2023

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

PERFORMANCE RATIOS 2023 2022 2023 2022

Return on Average Assets 0.52 % 1.04 % 1.01 % 0.98 %

Return on Average Shareholders’ Equity 6.38 % 12.51 % 12.45 % 10.95 %

Portfolio Loans to Deposit Ratio 93.11 % 79.87 % 93.11 % 79.87 %

Allowance for Credit Losses to Total Portfolio Loans 2.83 % 3.27 % 2.83 % 3.27 %

Nonperforming Loans to Total Portfolio Loans 9.33 % 0.40 % 9.33 % 0.40 %

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

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 decreased $5.7 million to $26.7 million for the three months ended June 30, 2023 and increased $6.8 million to $67.5 million for the six months ended June 30, 2023 compared to the same periods in 2022 as the higher interest rate environment benefited earning asset yields given the asset sensitive positioning of the balance sheet.

The Company recognized higher yields on new loan originations and investment securities purchases, offset by a $11.3 million negative impact on interest income related to the Company placing its largest lending relationship on nonaccrual status during the three months ended June 30, 2023.

Net interest income, on an FTE basis (non-GAAP), decreased $5.8 million to $27.0 million for the three months ended June 30, 2023 and increased $6.7 million to $68.0 million for the six months ended June 30, 2023, compared to $32.8 million and $61.3 million for the same periods in 2022, respectively.

The decrease in net interest income, on an FTE basis (non-GAAP) for the three months ended June 30, 2023 was driven by higher interest income of $6.7 million compared to the same period last year, offset by higher interest expense of $12.5 million for the three months ended June 30, 2023 compared to the same period last year.

Net interest margin decreased 73 basis points and increased 16 basis points to 2.51% and 3.22% for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

Net interest margin, on an FTE basis (non-GAAP), decreased 73 basis points and increased 16 basis points to 2.54% and 3.25% for the three and six months ended June 30, 2023 compared to the same periods in 2022, respectively.

The decline in net interest income and net interest margin was driven by the $11.3 million negative impact of the Company placing its largest lending relationship on nonaccrual status, which negatively impacted the yield on earning assets by 105 basis points during the three months ended June 30, 2023.

The Company’s net interest income and net interest margin will continue to be negatively impacted in future periods, if the Company’s largest lending relationship remains on nonaccrual status and the related loans are not repaid.

In addition, rising market interest rates have begun to increase the Company’s funding costs, which we believe will likely continue in future periods and which would negatively impact the Company’s net interest income and net interest margin in future periods.

During the first six months of 2023, the Company’s yield on earning assets continued to benefit from the rising interest rate environment.

However, during the third and fourth quarters of 2023, the impacts of rising yields on earning assets may not be sufficient to offset the negative impacts of increased funding costs in the rising rate environment and the negative impacts on interest income related to the Company’s largest lending relationship being placed in nonaccrual status.

Positively impacting the first six months of 2023 was the asset sensitivity of our balance sheet.

Yields on a large portion of our loan and securities portfolios adjust as rates rise at a quicker rate than the rates our deposits and other funding sources adjust.

Yields on our loan portfolio consist of 25.3% floating rates and 41.6% variable rates, while 46.9% of the securities portfolio is floating rate and adjust as interest rates increase.

This positively impacts revenue and helps mitigate increased funding costs.

The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE

CARTER BANKSHARES, INC.

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

basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented:

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

(Dollars in Thousands) 2023 2022 2023 2022

Interest Income (FTE)(Non-GAAP)

Interest and Dividend Income (GAAP) $ 43,716 $ 36,961 $ 95,671 $ 69,639

Tax Equivalent Adjustment 257 293 521 591

Interest and Dividend Income (FTE) (Non-GAAP) 43,973 37,254 96,192 70,230

Average Earning Assets $ 4,261,652 $ 4,020,589 $ 4,224,116 $ 3,997,592

Yield on Interest-earning Assets (GAAP) 4.11 % 3.69 % 4.57 % 3.51 %

Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.14 % 3.72 % 4.59 % 3.54 %

Net Interest Income (GAAP) $ 26,711 $ 32,459 $ 67,496 $ 60,681

Tax Equivalent Adjustment 257 293 521 591

Net Interest Income (FTE) (Non-GAAP) 26,968 32,752 68,017 61,272

Average Earning Assets $ 4,261,652 $ 4,020,589 $ 4,224,116 $ 3,997,592

Net Interest Margin (GAAP) 2.51 % 3.24 % 3.22 % 3.06 %

Net Interest Margin (FTE) (Non-GAAP) 2.54 % 3.27 % 3.25 % 3.09 %

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

Average Balance Sheet and Net Interest Income Analysis (FTE)

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

Three Months Ended June 30, 2023 Three Months Ended June 30, 2022

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

Interest-Bearing Deposits with Banks $ 17,902 $ 215 4.82 % $ 30,606 $ 61 0.80 %

Tax-Free Investment Securities (2)

27,894 210 3.02 % 33,873 237 2.81 %

Taxable Investment Securities 912,292 7,688 3.38 % 975,352 4,452 1.83 %

Total Securities 940,186 7,898 3.37 % 1,009,225 4,689 1.86 %

Tax-Free Loans (1)(2)

126,453 1,016 3.22 % 147,060 1,159 3.16 %

Taxable Loans (3)

3,157,780 34,529 4.39 % 2,831,384 31,323 4.44 %

Total Loans 3,284,233 35,545 4.34 % 2,978,444 32,482 4.37 %

Federal Home Loan Bank Stock 19,331 315 6.54 % 2,314 22 3.81 %

Total Interest-Earning Assets 4,261,652 $ 43,973 4.14 % 4,020,589 $ 37,254 3.72 %

Noninterest Earning Assets 97,525 120,540

Total Assets $ 4,359,177 $ 4,141,129

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 490,423 $ 659 0.54 % $ 487,567 $ 343 0.28 %

Money Market 414,852 1,858 1.80 % 528,211 310 0.24 %

Savings 566,312 151 0.11 % 735,438 189 0.10 %

Certificates of Deposit 1,396,307 9,114 2.62 % 1,270,569 3,570 1.13 %

Total Interest-Bearing Deposits 2,867,894 11,782 1.65 % 3,021,785 4,412 0.59 %

Federal Home Loan Bank Borrowings 405,443 5,080 5.03 % 6,594 10 0.61 %

Federal Funds Purchased 5,363 71 5.31 % 3,033 4 0.53 %

Other Borrowings 6,163 72 4.69 % 6,205 76 4.91 %

Total Borrowings 416,969 5,223 5.02 % 15,832 90 2.28 %

Total Interest-Bearing Liabilities 3,284,863 17,005 2.08 % 3,037,617 4,502 0.59 %

Noninterest-Bearing Liabilities 715,576 757,831

Shareholders' Equity 358,738 345,681

Total Liabilities and Shareholders' Equity $ 4,359,177 $ 4,141,129

Net Interest Income (2)

$ 26,968 $ 32,752

Net Interest Margin (2)

2.54 % 3.27 %

(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) Average loan balances include loans held-for-sale.

CARTER BANKSHARES, INC.

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

Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

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

Interest-Bearing Deposits with Banks $ 17,023 $ 415 4.92 % $ 85,040 $ 123 0.29 %

Tax-Free Investment Securities (2)

28,491 415 2.94 % 30,246 448 2.99 %

Taxable Investment Securities 916,439 15,081 3.32 % 968,039 8,184 1.70 %

Total Securities 944,930 15,496 3.31 % 998,285 8,632 1.74 %

Tax-Free Loans (1)(2)

129,580 2,069 3.22 % 150,569 2,365 3.17 %

Taxable Loans (3)

3,115,799 77,657 5.03 % 2,761,471 59,068 4.31 %

Total Loans 3,245,379 79,726 4.95 % 2,912,040 61,433 4.25 %

Federal Home Loan Bank Stock 16,784 555 6.67 % 2,227 42 3.80 %

Total Interest-Earning Assets 4,224,116 $ 96,192 4.59 % 3,997,592 $ 70,230 3.54 %

Noninterest Earning Assets 94,549 137,661

Total Assets $ 4,318,665 $ 4,135,253

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 490,518 $ 1,156 0.48 % $ 475,838 $ 620 0.26 %

Money Market 445,654 3,112 1.41 % 519,298 594 0.23 %

Savings 604,004 316 0.11 % 720,681 367 0.10 %

Certificates of Deposit 1,339,269 14,717 2.22 % 1,289,578 7,230 1.13 %

Total Interest-Bearing Deposits 2,879,445 19,301 1.35 % 3,005,395 8,811 0.59 %

Federal Home Loan Bank Borrowings 345,834 8,475 4.94 % 4,011 16 0.80 %

Federal Funds Purchased 9,831 247 5.07 % 1,525 4 0.53 %

Other Borrowings 6,305 152 4.86 % 5,287 127 4.84 %

Total Borrowings 361,970 8,874 4.94 % 10,823 147 2.74 %

Total Interest-Bearing Liabilities 3,241,415 28,175 1.75 % 3,016,218 8,958 0.60 %

Noninterest-Bearing Liabilities 726,656 748,744

Shareholders' Equity 350,594 370,291

Total Liabilities and Shareholders' Equity $ 4,318,665 $ 4,135,253

Net Interest Income (2)

$ 68,017 $ 61,272

Net Interest Margin (2)

3.25 % 3.09 %

(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) Average loan balances include loans held-for-sale.

Interest income increased $6.8 million and $26.0 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

Interest income, on an FTE basis (non-GAAP), increased $6.7 million and $26.0 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The change was primarily due to increases in average interest-earning assets of $241.1 million and $226.5 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, and higher interest rate yields on interest-earning assets of 42 basis points and 105 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022 due to the rising interest rate environment, offset by a $11.3 million negative impact related to placing the Company’s largest lending relationship on nonaccrual status.

For the three and six months ended June 30, 2023 compared to the same periods in 2022, average interest-bearing deposits with banks decreased $12.7 million and $68.0 million, respectively, as funds were deployed into higher yielding loans, and the average rate earned increased 402 basis points and 463 basis points, respectively.

Average loan balances increased $305.8 million and $333.3 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

Loans provide the greatest impact on interest income and the yield on earning assets as they have the largest balance and the highest yield within major earning asset categories.

The average rate earned on loans decreased three basis points and increased 70 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

Interest income was negatively affected by placing the Bank’s largest lending relationship on nonaccrual status during the second quarter of 2023, which had a negative impact on interest income of $11.3 million during the second quarter and first six months of 2023.

This negative impact represented an estimated negative effect on the yield on earning assets for the six months ended June 30, 2023 of 53 basis points.

CARTER BANKSHARES, INC.

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

At June 30, 2023 the loan portfolio was comprised of 25.3% floating rate loans which reprice monthly, 41.6% variable rate loans that reprice at least once during the life of the loan and 33.1% fixed rate loans that do not reprice during the life of the loan.

Average investment securities decreased $69.0 million and $53.4 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The average rate earned on investment securities increased 151 basis points and 157 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The change in investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal payments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio.

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

As of June 30, 2023, the securities portfolio was comprised of 46.9% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months.

We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate 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 increased $12.5 million and $19.2 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022 due to increases in the cost of all interest-bearing liability categories, except savings accounts, in the higher rate environment.

Also contributing to the increased interest expense is the shift to higher cost deposits and borrowings due to a decline and change in mix of deposits and the Company’s use of higher-cost borrowings to fund growth in the loan portfolio, including $153.9 million and $126.0 million declines in average interest-bearing deposits for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The cost of interest-bearing liabilities increased by 149 basis points and 115 basis points to 2.08% and 1.75% for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

Interest expense on deposits increased $7.4 million and $10.5 million for the three and six months ended June 30, 2023 compared to the same periods in 2022 primarily due to the rates on these deposits increasing 106 basis points and 76 basis points to 1.65% and 1.35%, respectively.

The increases in rates for the three and six months ended June 30, 2023 compared to the same periods last year included interest-bearing demand deposits up by 26 basis points and 22 basis points, respectively, money market accounts up by 156 basis points and 118 basis points, respectively, and CDs up by 149 basis points and 109 basis points, respectively, in response to competitive pressures from higher market rates compared to the same periods in 2022.

The average rates paid on savings accounts increased by one basis point for both the three and six months ended June 30, 2023 compared to the same periods in 2022.

The average balances on borrowings increased $401.1 million and $351.1 million for the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022.

The cost of borrowings increased 274 basis points and 220 basis points for the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, largely due to the higher interest rate environment.

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 June 30, 2023

Compared to June 30, 2022

Six Months Ended June 30, 2023

Compared to June 30, 2022

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Rate Increase/

Interest Earned on:

Interest-Bearing Deposits with Banks $ (35) $ 189 $ 154 $ (173) $ 465 $ 292

Tax-free Investment Securities (2)

(44) 17 (27) (26) (7) (33)

Taxable Investment Securities (305) 3,541 3,236 (458) 7,355 6,897

Total Securities (349) 3,558 3,209 (484) 7,348 6,864

Tax-free Loans (1)(2)

(165) 22 (143) (334) 38 (296)

Taxable Loans (1)

3,573 (367) 3,206 8,127 10,462 18,589

Total Loans 3,408 (345) 3,063 7,793 10,500 18,293

Federal Home Loan Bank Stock 267 26 293 460 53 513

Total Interest-Earning Assets $ 3,291 $ 3,428 $ 6,719 $ 7,596 $ 18,366 $ 25,962

Interest Paid on:

Interest-Bearing Demand $ 2 $ 314 $ 316 $ 20 $ 516 $ 536

Money Market (80) 1,628 1,548 (96) 2,614 2,518

Savings (45) 7 (38) (60) 9 (51)

Certificates of Deposit 386 5,158 5,544 289 7,198 7,487

Total Interest-Bearing Deposits 263 7,107 7,370 153 10,337 10,490

Federal Home Loan Bank Borrowings 4,527 543 5,070 7,977 482 8,459

Federal Funds Purchased 5 62 67 95 148 243

Other Borrowings (1) (3) (4) 24 1 25

Total Borrowings 4,531 602 5,133 8,096 631 8,727

Total Interest-Bearing Liabilities 4,794 7,709 12,503 8,249 10,968 19,217

Change in Net Interest Margin $ (1,503) $ (4,281) $ (5,784) $ (653) $ 7,398 $ 6,745

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

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

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

Provision for Credit Losses

The Company recognizes provision expense for the 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 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 ACL to total portfolio loans was 2.83% of total portfolio loans at June 30, 2023, compared to 2.98% of total portfolio loans, at December 31, 2022.

The provision for credit losses decreased $1.7 million and $0.9 million for the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022.

The decrease for the three and six months ended June 30, 2023 in the provision for credit losses was primarily driven by the release of individually evaluated loan reserves on three loans, offset by organic loan growth.

The provision for unfunded commitments increased $0.1 million and $0.4 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022 related to increases in real estate construction and increased pressure on the reserve rate.

Net charge-offs were $0.6 million and $1.2 million for the three and six months ended June 30, 2023, respectively, compared to $0.2 million and $0.4 million for the same periods in 2022.

During the three and six months ended June 30, 2023, net charge-offs were primarily recognized in the other consumer segment.

As a percentage of average portfolio loans, on an annualized

CARTER BANKSHARES, INC.

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

basis, net charge-offs were 0.08% for both the three and six months ended 2023 and 0.03% for both the same periods of 2022, respectively.

See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.

Nonperforming loans (“NPLs”) increased at June 30, 2023 by $304.1 million to $310.7 million compared to $6.6 million at December 31, 2022.

During the second quarter of 2023, the Company placed commercial loans that reside in the Other segment of the Company’s loan portfolio, relating to a single lending relationship which has an aggregate principal amount of $301.9 million, on nonaccrual status due to loan maturities and failure to pay in full during the second quarter of 2023.

The Other loan segment resulted in current expected credit losses (“CECL”) of $51.3 million in connection with our adoption of Topic 326 “Financial Instruments - Credit Losses.” on January 1, 2021.

As of December 31, 2022 and March 31, 2023, those Other segment reserves were $54.7 million and $53.5 million, respectively.

As of June 30, 2023, the Company utilized discounted cash flow valuation techniques to evaluate the current condition of certain of the borrowers’ operating businesses and those borrowers’ capacity to repay, which resulted in specific reserves related to that single lending relationship of $53.6 million.

As a result, the classification of these commercial loans in nonaccrual status did not have a significant impact on the Company’s provision for credit losses during the three or six months ended June 30, 2023.

See the “Credit Quality” section of this MD&A for additional information regarding our NPLs and this lending relationship.

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 June 30, Six Months Ended June 30,

(Dollars in Thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Gains (Losses) on Sales of Securities, net $ 3 $ 76 $ (73) (96.1) % $ (9) $ 52 $ (61) (117.3) %

Service Charges, Commissions and Fees 1,759 1,749 10 0.6 % 3,597 3,702 (105) (2.8) %

Debit Card Interchange Fees 1,934 1,850 84 4.5 % 4,039 3,782 257 6.8 %

Insurance Commissions 508 568 (60) (10.6) % 682 837 (155) (18.5) %

Bank Owned Life Insurance Income 341 334 7 2.1 % 680 668 12 1.8 %

(Losses) Gains on Sales and Write-downs of Bank Premises, net — (37) 37 100.0 % — 346 (346) (100.0) %

Commercial Loan Swap Fee Income — 756 (756) (100.0) % 114 756 (642) (84.9) %

Other 483 308 175 56.8 % 660 796 (136) (17.1) %

Total Noninterest Income $ 5,028 $ 5,604 $ (576) (10.3) % $ 9,763 $ 10,939 $ (1,176) (10.8) %

Total noninterest income decreased $0.6 million, or 10.3%, to $5.0 million for the three months ended June 30, 2023 and decreased $1.2 million, or 10.8%, to $9.8 million for the six months ended June 30, 2023 when compared to the same periods in 2022.

The decrease for the three months ended June 30, 2023 compared to the same periods in 2022 was primarily related to a $0.8 million decrease in commercial loan swap fee income due to the rising interest rate environment, offset by a $0.2 million increase within other noninterest income due to a $0.2 million net gain on an equity investment.

For the six months ended June 30, 2023, the decrease in total noninterest income primarily related to a decrease of $0.6 million in commercial loan swap fee income due to the rising interest rate environment, a decrease of $0.3 million related to losses on sales and write-downs of bank premises, net due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.

Also impacting the decrease from the year ago period included a $0.2 million decline in insurance commissions, a decrease of $0.1 million in other noninterest income, as well as a decline of $0.1 million in service charges, commissions and fees.

The decreases in insurance commissions and service charges on deposit accounts were primarily volume driven and the decrease in other noninterest income related to a higher fair value adjustment of our interest rate swap contracts with commercial customers in the first quarter of 2022.

These decreases were offset by an increase of $0.3 million in debit card interchange fees due to higher interchange fee volume in the first six months of 2023.

CARTER BANKSHARES, INC.

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

Noninterest Expense

Three Months Ended June 30, 2023 Six Months Ended June 30,

(Dollars in Thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Salaries and Employee Benefits $ 13,649 $ 12,444 $ 1,205 9.7 % $ 27,301 $ 24,201 $ 3,100 12.8 %

Occupancy Expense, net 3,601 3,296 305 9.3 % 7,001 6,648 353 5.3 %

FDIC Insurance Expense 702 629 73 11.6 % 1,343 997 346 34.7 %

Other Taxes 786 819 (33) (4.0) % 1,590 1,623 (33) (2.0) %

Advertising Expense 431 267 164 61.4 % 770 506 264 52.2 %

Telephone Expense 412 454 (42) (9.3) % 839 942 (103) (10.9) %

Professional and Legal Fees 1,659 1,202 457 38.0 % 2,493 2,421 72 3.0 %

Data Processing 1,058 842 216 25.7 % 1,778 1,683 95 5.6 %

Debit Card Expense 771 659 112 17.0 % 1,250 1,292 (42) (3.3) %

Tax Credit Amortization — 615 (615) (100.0) % — 1,230 (1,230) (100.0) %

Other 2,467 2,183 284 13.0 % 4,747 4,378 369 8.4 %

Total Noninterest Expense $ 25,536 $ 23,410 $ 2,126 9.1 % $ 49,112 $ 45,921 $ 3,191 6.9 %

During the three and six months ended June 30, 2023 total noninterest expense increased $2.1 million and $3.2 million, respectively, when compared to the same periods in 2022.

The most significant increase for both the three and six months ended June 30, 2023 was higher salaries and employee benefits of $1.2 million and $3.1 million, respectively, compared to the same periods in 2022 related to higher salary expense due to retail open positions being filled, job grade assessment increases, normal merit increases, increased medical claims and higher incentive bonuses in 2023.

Also impacting the variance for both the three and six months ended June 30, 2023 were increases in occupancy expense, net of $0.3 million and $0.4 million, respectively compared to the same periods in 2022 as well as $0.3 million and $0.4 million in other noninterest expense, respectively in comparison to the prior periods.

Advertising expenses increased for both the three and six month periods by $0.2 million and $0.3 million, respectively, due to marketing initiatives.

Impacting both the three and six months ended June 30, 2023 was a decline of $0.6 million in tax credit amortization due to the early adoption of ASU 2023-02 Investments Equity Method and Joint Ventures (Topic 323):

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

Under the proportional amortization method, the amortization of tax credit investments is recorded as a component of income tax expense instead of through noninterest expense as previously recorded.

Other variances impacting the three months ended June 30, 2023, along with the above mentioned fluctuations, was an increase of $0.5 million in professional and legal expense and a $0.2 million increase in data processing expenses due to an additional service in the second quarter of 2023.

Other variances impacting the six months ended June 30, 2023, along with the above mentioned fluctuations, was a $0.3 million increase in Federal Deposit Insurance Corporation (“FDIC”) insurance expenses due to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rate schedules uniformly by two basis points on all insured depository institutions, beginning in the first quarterly assessment period of 2023.

Provision for Income Taxes

The provision for income taxes decreased $1.7 million and increased $1.4 million to $0.1 million and $4.6 million for the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022.

Pre-tax income decreased $6.8 million for the three months ended June 30, 2023 and increased $3.0 million when compared to the same periods in 2022.

The effective tax rate was 0.9% and 17.4% for the three and six months ended June 30, 2023 compared to 14.3% and 13.4% for the same periods in 2022.

The decrease in the effective tax rate for the three months ended June 30, 2023 compared to the same period in 2022 was primarily related to the decrease in pre-tax income due to the Company’s largest lending relationship moving to nonaccrual status during the quarter, partially offset by $0.1 million due to the adoption of ASU 2023-02.

Under ASU 2023-02 the amortization of tax credit investments is recorded as a component of income tax expense instead of through noninterest expense, which affects the effective tax rate.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).

CARTER BANKSHARES, INC.

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

What changed 10-Q

Item 1. Financial Statements