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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 203 added, 492 removed, 300 unchanged (70% of the section changed)

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), 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 month periods ended March 31, 2023 and March 31, 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

CARTER BANKSHARES, INC.

◦ Contractual Obligations

◦ Off-Balance Sheet Arrangements

Important Note Regarding Forward-Looking Statements

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

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

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

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”);

• 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;

• 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;

CARTER BANKSHARES, INC.

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

• 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 ;

• 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;

• 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.

Many of these factors, as well as other factors, are described in this Quarterly Report, including in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 202 2 and any of our subsequent filings with the Securities and Exchange Commission (“SEC”).

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

CARTER BANKSHARES, INC.

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

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 March 31, 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 March 31, 2023.

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

The Bank is an Federal Deposit Insurance Corporation (“FDIC”) insured, Virginia state-chartered bank, which operates 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 be focusing on refining and enhancing the Bank’s guiding principles to better align with the future of the Company.

A new mission, vision, and set of core values are in development and the Company expects to rollout this plan in 2023.

The Company’s current mission is to strive to be the preferred lifetime financial partner for its customers and shareholders, and the employer of choice in the communities the Company is privileged to serve.

The vision and purpose of the Company is to enrich lives and enhance communities today, to build a better tomorrow, with values of loyalty, care, optimism, trustworthiness and innovation.

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 the 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.

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended March 31, 2023

• Net interest income increased $12.6 million, or 44.5%, to $40.8 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an increase of 170 basis points in the yield on earning assets due to the rising interest rate environment, offset by an increase of 82 basis points in funding costs;

CARTER BANKSHARES, INC.

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

• The provision for credit losses increased $0.8 million to $1.4 million for the three months ended March 31, 2023, compared to the same period in 2022;

• Total noninterest income decreased $0.6 million to $4.7 million for the three months ended March 31, 2023 compared to $5.3 million for the same period in 2022;

• Total noninterest expense increased $1.7 million to $24.2 million for the three months ended March 31, 2023 compared the same period in 2022;

• Provision for income taxes increased $2.6 million to $3.9 million for the three months ended March 31, 2023 compared to $1.3 million for the same period in 2022.

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

• The securities portfolio increased $26.6 million and is currently 19.8% of total assets compared to 19.9% of total assets;

• Total portfolio loans increased $100.0 million, or 12.9%, on an annualized basis, primarily due to loan growth in the first three months of 2023;

• The portfolio loans to deposit ratio was 91.9%, compared to 86.7%, due to a decrease in deposits;

• Total deposits decreased $96.9 million or 10.8%, on an annualized basis, to $3.5 billion at March 31, 2023;

• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.91% compared to 2.98%.

The ACL on portfolio loans totaled $94.7 million at March 31, 2023, compared to $93.9 million with the increase driven by loan growth, offset by declines in the other segment due to principal pay-downs;

• On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months.

The Company reported net income of $15.9 million, or $0.67 diluted earnings per common share, for the three months ended March 31, 2023 compared to net income of $9.3 million, or $0.36 diluted earnings per common share, for the same period in 2022.

Three Months Ended March 31,

PERFORMANCE RATIOS 2023 2022

Return on Average Assets 1.51 % 0.92 %

Return on Average Shareholders’ Equity 18.89 % 9.57 %

Portfolio Loans to Deposit Ratio 91.95 % 77.62 %

Allowance for Credit Losses to Total Portfolio Loans 2.91 % 3.33 %

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-

CARTER BANKSHARES, INC.

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

taxable sources of interest income.

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

Total net interest income increased $12.6 million, or 44.5%, to $40.8 million for the three months ended March 31, 2023 compared to the same period in 2022 as the higher interest rate environment benefited earning asset yields given the asset sensitive positioning of the balance sheet, and the Company recognized higher yields on new loan originations and investment securities purchases.

Net interest income, on an FTE basis (non-GAAP), increased $12.5 million, or 43.9% to $41.0 million for the three months ended March 31, 2023, compared to $28.5 million for the same period in 2022.

The increase in net interest income, on an FTE basis (non-GAAP), was driven by higher interest income of $19.2 million in the three months ended March 31, 2023 compared to the same period in 2022, partially offset by higher interest expense of $6.7 million for the same comparable periods.

Net interest margin increased 107 basis points to 3.95% for the three months ended March 31, 2023 compared to the same period in 2022.

Net interest margin, on an FTE basis (non-GAAP), increased 107 basis points to 3.98% for the three months ended March 31, 2023 compared to the same period in 2022.

During the first three months of 2023 the Company continued to benefit from the rising rate environment.

However, beginning in the first quarter of 2023, we started to see more pressure on our cost of funds due to the shift from deposits to higher-cost borrowings due to a decline in deposits, which may negatively impact our net interest margin in future periods.

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

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

Yields on our loan portfolio consist of 25.7% floating rate, 41.4% variable and 47.7% of the securities portfolio is floating rate and adjust as interest rates increase.

This positively impacts revenue and helps mitigate increased funding costs.

The first quarter of 2023 and the full year of 2022 was also positively impacted by enhanced pricing on loans related to one large credit relationship.

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

In addition, rising market interest rates have begun to increase the Company’s funding costs and will most likely continue in future periods.

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 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 March 31,

(Dollars in Thousands) 2023 2022

Interest Income (FTE)(Non-GAAP)

Interest and Dividend Income (GAAP) $ 51,955 $ 32,678

Tax Equivalent Adjustment 264 298

Interest and Dividend Income (FTE) (Non-GAAP) 52,219 32,976

Average Earning Assets $ 4,186,164 $ 3,974,341

Yield on Interest-earning Assets (GAAP) 5.03 % 3.33 %

Yield on Interest-earning Assets (FTE) (Non-GAAP) 5.06 % 3.36 %

Net Interest Income (GAAP) $ 40,785 $ 28,222

Tax Equivalent Adjustment 264 298

Net Interest Income (FTE) (Non-GAAP) 41,049 28,520

Average Earning Assets $ 4,186,164 $ 3,974,341

Net Interest Margin (GAAP) 3.95 % 2.88 %

Net Interest Margin (FTE) (Non-GAAP) 3.98 % 2.91 %

CARTER BANKSHARES, INC.

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

Average Balance Sheet and Net Interest Income Analysis (FTE)

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

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

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

Interest-Bearing Deposits with Banks $ 16,135 $ 200 5.03 % $ 140,080 $ 62 0.18 %

Tax-Free Investment Securities (2)

29,094 205 2.86 % 26,579 211 3.22 %

Taxable Investment Securities 920,633 7,393 3.26 % 960,645 3,732 1.58 %

Total Securities 949,727 7,598 3.24 % 987,224 3,943 1.62 %

Tax-Free Loans (1)(2)

132,742 1,053 3.22 % 154,117 1,206 3.17 %

Taxable Loans (1)

3,073,351 43,128 5.69 % 2,690,781 27,745 4.18 %

Total Loans 3,206,093 44,181 5.59 % 2,844,898 28,951 4.13 %

Federal Home Loan Bank Stock 14,209 240 6.85 % 2,139 20 3.79 %

Total Interest-Earning Assets 4,186,164 $ 52,219 5.06 % 3,974,341 $ 32,976 3.36 %

Noninterest Earning Assets 91,434 154,971

Total Assets $ 4,277,598 $ 4,129,312

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 490,615 $ 497 0.41 % $ 463,980 $ 277 0.24 %

Money Market 476,798 1,254 1.07 % 510,286 284 0.23 %

Savings 642,115 165 0.10 % 705,759 178 0.10 %

Certificates of Deposit 1,281,598 5,603 1.77 % 1,308,799 3,660 1.13 %

Total Interest-Bearing Deposits 2,891,126 7,519 1.05 % 2,988,824 4,399 0.60 %

Federal Funds Purchased 14,349 176 4.97 % — — — %

Federal Home Loan Bank Borrowings 285,563 3,395 4.82 % 1,400 6 1.74 %

Other Borrowings 6,448 80 5.03 % 4,358 51 4.75 %

Total Borrowings 306,360 3,651 4.83 % 5,758 57 4.01 %

Total Interest-Bearing Liabilities 3,197,486 11,170 1.42 % 2,994,582 4,456 0.60 %

Noninterest-Bearing Liabilities 737,857 739,556

Shareholders' Equity 342,255 395,174

Total Liabilities and Shareholders' Equity $ 4,277,598 $ 4,129,312

Net Interest Income (2)

$ 41,049 $ 28,520

Net Interest Margin (2)

3.98 % 2.91 %

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

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

Interest income increased $19.3 million, or 59.0%, for the three months ended March 31, 2023 compared to the same period in 2022.

Interest income, on an FTE basis (non-GAAP), increased $19.2 million, or 58.4% for the three months ended March 31, 2023 compared to the same period in 2022.

The change was primarily due to increases in average interest-earning assets of $211.8 million in the three months ended March 31, 2023 compared to the same period in 2022, and higher interest rate yields on interest-earning assets of 170 basis points for the three months ended March 31, 2023 compared to the same period in 2022 due to the rising interest rate environment.

For the three months ended March 31, 2023 compared to the same period in 2022, average interest-bearing deposits with banks decreased $123.9 million as funds were deployed into higher yielding loans, and the average rate earned increased 485 basis points.

Average loan balances increased $361.2 million for the three months ended March 31, 2023 compared to the same period 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 increased 146 basis points for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to increased short-term interest rates during 2022 and 2023.

At March 31, 2023, the loan portfolio was comprised of 25.7% floating rate loans which reprice monthly, 41.4% variable rate loans that reprice at least once during the life of the loan and 32.9% fixed rate loans that do not reprice during the life of the loan.

CARTER BANKSHARES, INC.

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

Average investment securities decreased $37.5 million for the three months ended March 31, 2023 compared to the same period in 2022.

The average rate earned on investment securities increased 162 basis points for the three months ended March 31, 2023 compared to the same period 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 March 31, 2023, the securities portfolio was comprised of 47.7% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months.

Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates 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 $6.7 million for the three months ended March 31, 2023 compared to the same period 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 borrowings due to a decline in deposits and the Company’s use of higher-cost borrowings to fund growth in the loan portfolio, including a $97.7 million decline in average interest-bearing deposits from the first quarter of 2022 to the same period in 2023.

The cost of interest-bearing liabilities increased by 82 basis points to 1.42% for the three months ended March 31, 2023 from the same period in 2022.

Interest expense on deposits increased $3.1 million for the three months ended March 31, 2023 compared to the same periods in 2022 primarily due to the rates on these deposits increasing 45 basis points to 1.05%;

however, the average balances on interest-bearing deposits decreased $97.7 million from the year ago quarter.

The increases in rates included interest-bearing demand deposits up by 17 basis points, money market accounts up by 84 basis points and CDs up by 64 basis points in response to competitive pressures from higher market rates.

The average rates paid on savings accounts for the three months ended March 31, 2023 remained relatively unchanged.

The average balances on borrowings increased $300.6 million for the three months ended March 31, 2023 when compared to the same period in 2022.

The cost of borrowing increased 82 basis points for the three months ended March 31, 2023 when compared to the same period in 2022, largely due to the higher interest rate environment.

Interest expense on other borrowings increased $3.6 million for the three months ended March 31, 2023 compared to the same periods in 2022 primarily due to the rates on these borrowings increasing 82 basis points to 4.83%.

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 March 31, 2023

Compared to March 31, 2022

(Dollars in Thousands) Volume (3)

Interest Earned on:

Interest-Bearing Deposits with Banks $ (102) $ 240 $ 138

Tax-free Investment Securities (2)

Taxable Investment Securities (162) 3,823 3,661

Total Securities (143) 3,798 3,655

Tax-free Loans (1)(2)

(169) 16 (153)

Taxable Loans (1)

4,347 11,036 15,383

Total Loans 4,178 11,052 15,230

Federal Home Loan Bank Stock 192 28 220

Total Interest-Earning Assets $ 4,125 $ 15,118 $ 19,243

Interest Paid on:

Interest-Bearing Demand $ 17 $ 203 $ 220

Money Market (20) 990 970

Savings (16) 3 (13)

Certificates of Deposit (78) 2,021 1,943

Total Interest-Bearing Deposits (97) 3,217 3,120

Federal Funds Purchased 176 — 176

Federal Home Loan Bank Borrowings 3,360 29 3,389

Other Borrowings 26 3 29

Total Borrowings 3,562 32 3,594

Total Interest-Bearing Liabilities 3,465 3,249 6,714

Change in Net Interest Margin $ 660 $ 11,869 $ 12,529

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

The ACL was 2.91% of total portfolio loans at March 31, 2023, compared to 2.98% of total portfolio loans, at December 31, 2022.

The provision for credit losses increased $0.8 million to $1.4 million for the three months ended March 31, 2023, when compared to the same period in 2022.

The increase for the three months ended March 31, 2023 was primarily driven by strong loan growth, net charge-offs of $0.6 million and a $0.5 million specific reserve for a mortgage loan that was placed in nonaccrual during the quarter, offset by the reduction of $1.3 million of reserves that were allocated to the other segment due to principal pay-downs.

The provision (recovery) for unfunded commitments increased $0.3 million for the three months ended March 31, 2023 compared to the same period in 2022 related to the provision for unfunded commitments primarily related to increases in real estate construction.

Net charge-offs were $0.6 million for the three months ended March 31, 2023 compared to $0.2 million for the same period in 2022.

During the first three months of 2023, net charge-offs were primarily included in the other consumer segment.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.07% and 0.03% for the three months

CARTER BANKSHARES, INC.

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

ended 2023 and 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 March 31, 2023 by $1.7 million, or 25.9% to $8.4 million compared to $6.7 million at December 31, 2022.

The increase was primarily due to one $2.1 million residential construction loan, offset by pay-downs on other existing NPLs.

NPLs as a percentage of total portfolio loans were 0.26% at March 31, 2023 compared to 0.21% at December 31, 2022.

See the “Credit Quality” section of this MD&A for more detail on our NPLs.

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

Noninterest Income

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022 $ Change % Change

Losses on Sales of Securities, net $ (12) $ (24) $ 12 (50.0) %

Service Charges, Commissions and Fees 1,838 1,953 (115) (5.9) %

Debit Card Interchange Fees 2,105 1,932 173 9.0 %

Insurance Commissions 174 269 (95) (35.3) %

Bank Owned Life Insurance Income 339 334 5 1.5 %

Gains on Sales and Write-downs of Bank Premises, net — 383 (383) (100.0) %

Commercial Loan Swap Fee Income 116 — 116 NM

Other 175 488 (313) (64.1) %

Total Noninterest Income $ 4,735 $ 5,335 $ (600) (11.2) %

Total noninterest income decreased $0.6 million, or 11.2%, to $4.7 million for the three months ended March 31, 2023 when compared to the same period in 2022.

The primary decreases during the quarter related to $0.4 million gains on sales and write-downs of bank premises, net, $0.3 million in other noninterest income and a $0.1 million decrease in service charges on deposit accounts.

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

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 and the decrease in service charges on deposit accounts was primarily volume driven.

Partially offsetting these decreases for the three months ended March 31, 2023 compared to the year ago quarter was higher debit card interchange fees of $0.2 million and increased commercial loan swap fee income of $0.1 million.

The increase in debit card interchange fees was due to higher interchange fee volume in the first quarter of 2023.

Noninterest Expense

Three Months Ended March 31,

(Dollars in Thousands) 2023 2022 $ Change % Change

Salaries and Employee Benefits $ 13,652 $ 11,757 $ 1,895 16.1 %

Occupancy Expense, net 3,400 3,352 48 1.4 %

FDIC Insurance Expense 641 368 273 74.2 %

Other Taxes 804 804 — — %

Advertising Expense 339 239 100 41.8 %

Telephone Expense 427 488 (61) (12.5) %

Professional and Legal Fees 834 1,219 (385) (31.6) %

Data Processing 720 841 (121) (14.4) %

Debit Card Expense 479 633 (154) (24.3) %

Tax Credit Amortization 612 615 (3) (0.5) %

Other 2,280 2,195 85 3.9 %

Total Noninterest Expense $ 24,188 $ 22,511 $ 1,677 7.4 %

CARTER BANKSHARES, INC.

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

During the three months ended March 31, 2023 total noninterest expense increased $1.7 million when compared to the same period in 2022.

The most significant increase for the period was higher salaries and employee benefits of $1.9 million related to higher salary expense due to retail open positions being filled, job grade assessment increases, normal merit increases and higher incentive bonuses in 2023.

Also impacting the increase from the comparable quarter was $0.3 million in Federal Deposit Insurance Corporation (“FDIC”) insurance expenses and an increase of $0.1 million in other noninterest expense.

The increase in FDIC insurance expenses was 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.

Offsetting these increases for the three months ended March 31, 2023 compared to the year ago quarter was a decrease of $0.4 million in professional and legal fees, and a decline of $0.2 million in debit card expenses.

The decrease in professional and legal expenses related to elevated legal expenses for the three months ended 2022 from loan and employment related matters.

The changes in losses on sales and write-downs of OREO, net, related to the sale of bank branches in the first three months of 2022 and no sales or write-downs in the three months ended 2023.

The decline in debit card expenses was primarily related to discounts received in March of 2023 and the timing of fraud settlements.

Provision for Income Taxes

The provision for income taxes increased $2.6 million to $3.9 million for the three months ended March 31, 2023 when compared to the same period in 2022.

Pre-tax income increased $9.2 million for the three months ended March 31, 2023 when compared to the same period in 2022.

The effective tax rate was 19.6% for the three months ended March 31, 2023 compared to 12.5% for the same period in 2022.

The increase in the effective tax rate is primarily due to a higher level of pre-tax income and lower level of tax-exempt interest income and updated information from the developer extending the in-service date on a new tax credit from 2022 to 2023.

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”).

Financial Condition

March 31, 2023

Total assets increased $161.0 million, to $4.4 billion at March 31, 2023 compared to $4.2 billion at December 31, 2022.

Total portfolio loans increased $100.0 million, or 12.9% on an annualized basis, to $3.2 billion at March 31, 2023 compared to December 31, 2022 primarily due to loan growth during the first three months of 2023.

June 30, 2023

Total assets increased $179.5 million, to $4.4 billion at June 30, 2023 compared to $4.2 billion at December 31, 2022.

Total portfolio loans increased $181.5 million, or 11.6% on an annualized basis, to $3.3 billion at June 30, 2023 compared to December 31, 2022 primarily due to loan growth in the CRE, residential mortgage and construction segments during the six months ended June 2023.

The variances in loan segments for portfolio loans related to increases of $172.0 million in commercial real estate loans, $49.9 million in residential mortgages, $3.2 million in construction loans, offset by decreases of $30.6 million in C&I loans, $7.2 million in the other category and $5.8 million in other consumer loans.

The securities portfolio increased $26.6 million and is currently 19.8% of total assets at March 31, 2023 compared to 19.9% of total assets at December 31, 2022.

The increase is primarily due to $24.9 million in purchases and a $15.6 million increase in fair value during the quarter due to fluctuations in market interest rates and conditions in the financial markets during the quarter, offset by $12.7 million in principal pay-downs.

At March 31, 2023, total gross unrealized gains in the available-for-sale portfolio were $1.4 million, offset by $95.1 million of gross unrealized losses.

The securities portfolio decreased $14.9 million and is currently 18.7% of total assets at June 30, 2023 compared to 19.9% of total assets at December 31, 2022.

The decrease is due to $42.0 million in security sales, curtailments and maturities deployed into higher yielding loan growth, offset by $24.9 million in purchases of small business administration bonds during the six months ended June 30, 2023.

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.

At June 30, 2023, total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $105.8 million of gross unrealized losses.

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

Federal Home Loan Bank stock (“FHLB”), at cost increased $10.9 million to $20.6 million at March 31, 2023 compared to $9.7 million at December 31, 2022.

Federal Home Loan Bank (“FHLB”) stock, at cost increased $9.7 million to $19.4 million at June 30, 2023 compared to $9.7 million at December 31, 2022.

The increase is due to the FHLB requirement to hold a specified level of stock based upon level of borrowings .

OREO decreased $0.1 million at March 31, 2023 compared to December 31, 2022 due to payments of OREO.

Closed retail bank offices had a book value of $1.1 million at March 31, 2023 and December 31, 2022, of which $0.1 million is under contract, at March 31, 2023.

Total deposits decreased $96.9 million to $3.5 billion at March 31, 2023 compared to December 31, 2022.

The primary driver of this decrease was related to deposit outflows of $67.0 million by three customers.

Management believes that these outflows were due to specific needs of each such customer;

one estate customer experienced a $32.0 million settlement and disbursement, and two other customers withdrew an aggregate of $35.0 million to pursue higher-yielding investment opportunities.

The variances in the deposit categories included decreases of $77.3 million in savings accounts, $53.3 million in money market accounts and $16.0 million in noninterest-bearing demand accounts partially offset by increases of $45.9 million in CDs and $3.8 million in interest-bearing demand accounts.

At March 31, 2023, noninterest-bearing deposits comprised 19.5% of total deposits compared to 19.4% at December 31, 2022 and 19.0% at March 31, 2022.

CDs comprised 37.0%, 34.7%

CARTER BANKSHARES, INC.

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

and 34.5% of total deposits at March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

As of March 31, 2023, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 87.6% of our total deposits of $3.5 billion were insured under standard FDIC insurance coverage limits, and approximately 12.4% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

Other real estate owned (“ OREO”) decre ase d $5.0 million at June 30, 2023 compared to December 31, 2022 due to the sale of one OREO property in June 2023.

Closed retail bank offices had a book value of $1.0 million at June 30, 2023 and $1.1 million at December 31, 2022.

Total deposits decreased $53.3 million to $3.6 billion at June 30, 2023 compared to December 31, 2022.

The decrease related to a decline of $243.3 million in savings, money market and demand deposits due to customers migrating to higher-yielding CD products driven by rising market interest rates.

At June 30, 2023, noninterest-bearing deposits comprised 19.2% of total deposits compared to 19.4% at December 31, 2022 and 18.8% at June 30, 2022.

CDs comprised 40.6%, 34.7% and 33.6% of total deposits at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.

As of June 30, 2023, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 88.3% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.7% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

The Company’s deposit base is diversified and granular and is comprised of approximately 77.5% of retail deposits.

Total capital increased by $26.3 million to $354.9 million at March 31, 2023 compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 was primarily due to a $12.3 million, net of tax, improvement in other comprehensive income (loss) due to the positive changes in fair value of available-for-sale investment securities, less $2.3 million related to the repurchase of common stock, through March 31, 2023, partially offset by net income of $15.9 million for the three months ended March 31, 2023 that was retained by the Company.

The remaining difference of $0.4 million is related to stock-based compensation activity for the quarter ended March 31, 2023.

The ACL was 2.91% of total portfolio loans at March 31, 2023 compared to 2.98% as of December 31, 2022.

General reserves as a percentage of total portfolio loans were 2.88% at March 31, 2023 compared to 2.96% at December 31, 2022.

The decrease in the general reserves as a percentage of total portfolio loans was primarily driven by the loan growth during the first quarter of 2023.

Total capital of $344.2 million at June 30, 2023, reflects an increase of $15.6 million as compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 is primarily due to a $3.6 million improvement in other comprehensive income due to changes in fair value of investment securities and net income of $21.6 million for the six months ended June 30, 2023, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02 less $10.4 million related to the repurchase of common stock.

The remaining difference of $0.7 million is related to restricted stock activity for the six months ended June 30, 2023.

The ACL was 2.83% of total portfolio loans at June 30, 2023 compared to 2.98% as of December 31, 2022.

General reserves as a percentage of total portfolio loans were 1.21% at June 30, 2023 compared to 2.96% at December 31, 2022.

The decrease in the general reserves as a percentage of total portfolio loans was primarily driven by the largest lending relationships movement from the general pool to the individually evaluated pool due to the transfer to nonaccrual during the second quarter of 2023 offset by loan growth.

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

See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses.

The Company remains well capitalized.

The Tier 1 capital ratio decreased to 12.28% at March 31, 2023 compared to 12.61% at December 31, 2022.

The leverage ratio was 10.09% at March 31, 2023, compared to 10.29% at December 31, 2022 and total risk-based capital ratio was 13.54% at March 31, 2023 compared to 13.86% at December 31, 2022.

The decrease is related to the aforementioned repurchase of common stock of $2.3 million through March 31, 2023 and loan growth during the first quarter of 2023.

The Bank also remained well capitalized as of March 31, 2023.

The Bank’s Tier 1 Capital ratio was 12.15% at March 31, 2023 compared to 12.42% at December 31, 2022.

The Bank’s leverage ratio was 9.98% at March 31, 2023 compared to 10.13% at December 31, 2022.

The Bank’s Total Risk-Based Capital ratio was 13.42% at March 31, 2023 compared to 13.68% at December 31, 2022.

The Tier 1 capital ratio decreased to 11.46% at June 30, 2023 compared to 12.61% at December 31, 2022.

The leverage ratio was 10.02% at June 30, 2023, compared to 10.29% at December 31, 2022 and the total risk-based capital ratio was 12.72% at June 30, 2023 compared to 13.86% at December 31, 2022.

The decrease is related to the aforementioned repurchase of common stock of $10.4 million through June 30, 2023 and loan growth during the six months ended June 30, 2023.

Another significant factor driving the ratios downward was the above mentioned large lending relationship movement to nonaccrual with the $11.3 million negative impact on interest income, combined with the movement of nonaccrual assets to higher risk rating categories.

CARTER BANKSHARES, INC.

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

The Bank also remained well capitalized as of June 30, 2023.

The Bank’s Tier 1 Capital ratio was 11.34% at June 30, 2023 compared to 12.42% at December 31, 2022.

The Bank’s leverage ratio was 9.76% at June 30, 2023 compared to 10.13% at December 31, 2022.

The Bank’s Total Risk-Based Capital ratio was 12.60% at June 30, 2023 compared to 13.68% at December 31, 2022.

Securities Activity

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

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

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

Treasury Securities $ 13,174 $ 17,866 $ (4,692)

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

The securities portfolio increased by $26.6 million to $862.9 million at March 31, 2023 compared to $836.3 million at December 31, 2022.

Securities comprise 19.8% of total assets at March 31, 2023 compared to 19.9% at December 31, 2022.

The increase is due to $24.9 million in purchases of small business administration bonds and a $15.6 million increase in fair

CARTER BANKSHARES, INC.

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

value during the quarter, offset by $12.7 million in principal paydowns.

As of March 31, 2023, the securities portfolio was comprised of 47.7% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months.

At March 31, 2023 total gross unrealized gains in the available-for-sale portfolio were $1.4 million, offset by $95.1 million of gross unrealized losses.

The securities portfolio decreased $14.9 million to $821.4 million at June 30, 2023 compared to $836.3 million at December 31, 2022.

Securities comprise 18.7% of total assets at June 30, 2023 compared to 19.9% at December 31, 2022.

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.

At June 30, 2023 total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $105.8 million of gross unrealized losses.

At December 31, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.3 million offset by $109.7 million of gross unrealized losses.

6 unchanged sentences

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

CARTER BANKSHARES, INC.

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

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

At December 31, 2022, the 5-year and 10-year U.S.

At June 30, 2023 the 5-year and 10-year U.S.

Treasury yields were 4.13% and 3.81, respectively.

Therefore, this decrease of 39 and 40 basis points, respectively in the intermediate part of the yield curve largely caused the reduction in unrealized losses for the first quarter of 2023.

At December 31, 2022, those same bond yields were 3.99% and 3.88%, respectively.

The decrease of seven basis points in the 10-year treasury was offset by the increase in the 5-year treasury in the intermediate part of the yield curve which drove the reduction in unrealized losses for the first six months of 2023.

The effects were generally greater for longer maturity bonds, such as municipal bonds.

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

At March 31, 2023, those same bond yields were 3.60% and 3.48%, respectively.

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 as an other comprehensive loss.

At March 31, 2023 and December 31, 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.

At June 30, 2023 and December 31, 2022, the Company had no credit related net investment impairment losses.

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

1 unchanged sentence

The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.

CARTER BANKSHARES, INC.

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

Loan Composition

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

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

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

Commercial Real Estate $ 1,642,597 $ 1,470,562

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

Total portfolio loans increased $100.0 million, or 12.9%, on an annualized basis, to $3.2 billion at March 31, 2023 compared to December 31, 2022 with strong production primarily in our commercial real estate portfolio.

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

For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2022, and Part II, Item 1A, “Risk Factors,” contained in our Quarterly Report on Form 10-Q for the period ended March 31, 2023 and this Quarterly Report on Form 10-Q.

Total portfolio loans increased $181.5 million, or 11.6%, on an annualized basis, to $3.3 billion at June 30, 2023 compared to December 31, 2022 with strong production primarily in our CRE and residential mortgage portfolios.

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

Given the continued rising rate environment our mortgage portfolio is experiencing more modest growth in 2023.

At March 31, 2023, the loan portfolio was comprised of 25.7% floating rates which reprice monthly, 41.4%, variable rates that reprice at least once during the life of the loan and the remaining 32.9% are fixed rate loans.

At June 30, 2023, the loan portfolio was comprised of 25.3% floating rates which reprice monthly, 41.6%, variable rates that reprice at least once during the life of the loan and the remaining 33.1% are fixed rate loans.

The Company is carefully monitoring the loan portfolio during 2023, including in light of market conditions that impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at March 31, 2023 equated to approximately $350.5 million, or 10.8%, of total portfolio loans.

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

Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic.

However, our clients continue to face challenges with respect to labor not unlike many other industries, which results in continued increases in labor costs and the potential to impede their ability to turnover rooms resulting in occupancy constraints.

This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness.

Contractual payments have been restored since the expiration of our deferral program on June 30, 2021 and our client’s financial performance has stabilized.

However, adverse changes in economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

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

Aggregate commitments to our top 10 credit relationships were $641.3 million at March 31, 2023.

The Other segment represents 47.1% of the top 10 credit relationships.

CARTER BANKSHARES, INC.

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

Aggregate commitments to our top 10 credit relationships were $638.3 million at June 30, 2023.

The Other segment represents 47.3% of the top 10 credit relationships and $301.9 million has since transferred to nonaccrual during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A.

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

Dollars in Thousands For the Periods Ending Change March 31, 2023 March 31, 2023

March 31, 2023 December 31, 2022 % of Gross Loans % of RBC

Dollars in Thousands For the Periods Ending Change June 30, 2023 June 30, 2023

June 30, 2023 December 31, 2022 % of Gross Loans % of RBC

Hospitality, agriculture & energy $ 301,913 $ 309,107 $ (7,194) 9.06 % 61.97 %

3 unchanged sentences

Retail real estate 37,955 37,679 276 1.14 % 7.78 %

Special / limited use 33,736 33,736 — 1.04 % 6.94 %

Multifamily & student housing 33,676 33,998 (322) 1.04 % 6.93 %

Non-Owner Occupied/Commercial Real Estate 33,538 17,308 16,230 1.01 % 6.88 %

Multifamily & student housing 33,349 33,998 (649) 1.00 % 6.85 %

Hospitality 32,987 33,587 (600) 0.99 % 6.77 %

Multifamily / Construction Real Estate 32,000 24,000 8,000 0.96 % 6.57 %

Multifamily Development 31,521 31,790 (269) 0.95 % 6.47 %

Top Ten (10) Relationships $ 638,290 $ 624,819 $ 13,471 19.16 % 131.00 %

2 unchanged sentences

Concentration (25% of RBC) $ 121,797 $ 120,863

Unfunded commitments on lines of credit were $565.4 million at March 31, 2023 as compared to $455.8 million at December 31, 2022.

Unfunded commitments on lines of credit were $592.8 million at June 30, 2023 as compared to $512.7 million at December 31, 2022.

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

Total utilization was 49.9% at March 31, 2023 and 52.7% at December 31, 2022.

Unfunded commitments on commercial operating lines of credit was 48.7% at March 31, 2023 and 53.9% at December 31, 2022.

Total utilization was 49.8% at June 30, 2023 and 52.2% at December 31, 2022.

Unfunded commitments on commercial operating lines of credit was 49.0% at June 30, 2023 and 51.7% at December 31, 2022.

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

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The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation (“FICO”) scores and restricting loan amounts at lower FICO scores.

Deferred costs and fees included in the portfolio balances above were $7.3 million and $8.2 million at March 31, 2023 and December 31, 2022, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $153.2 thousand and $161.2 thousand at March 31, 2023 and December 31, 2022, respectively.

Deferred costs and fees included in the portfolio balances above were $6.6 million and $8.2 million at June 30, 2023 and December 31, 2022, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $146.6 thousand and $161.2 thousand at June 30, 2023 and December 31, 2022, respectively.

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

1 unchanged sentence

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

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

There were $364 thousand and zero mortgage loans held-for-sale at March 31, 2023 and December 31, 2022, respectively.

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

We then hold these mortgage

CARTER BANKSHARES, INC.

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

loans from both sources until funded by the investor, typically a two-week period.

There were $173.2 thousand and zero mortgage loans held-for-sale at June 30, 2023 and December 31, 2022, respectively.

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

Credit Quality

3 unchanged sentences

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter.

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

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

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

Our Loan Review department serves as a mechanism to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities.

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

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

7 unchanged sentences

The following table summarizes nonperforming assets for the dates presented:

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

Nonperforming Loans

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

Nonaccrual Loans

Commercial Real Estate $ 2,512 $ 2,304 $ 208

3 unchanged sentences

Construction 2,908 864 2,044

Other 301,913 — 301,913

Total Nonperforming Loans 310,746 6,645 304,101

1 unchanged sentence

Total Nonperforming Assets $ 314,125 $ 15,038 $ 299,087

Nonperforming assets increased $1.6 million to $16.7 million at March 31, 2023 compared to December 31, 2022.

The increase was primarily due to one $2.1 million residential construction loan, offset by pay-downs on other existing NPLs.

Closed retail bank offices have a remaining book value of $1.1 million at March 31, 2023 and December 31, 2022, of which $0.1 million are under contract.

Past Company legacy underwriting standards relied heavily on loan to value and did not necessarily consider the income characteristics of the borrower.

An overreliance on value as a primary repayment source can become compromised during real estate cycles.

As a result, management has worked through these legacy credits and has installed a number of underwriting guardrails that consider the proportion of speculation, transaction limits and introduced sensitivity analysis in order to

Nonperforming assets increased $299.1 million to $314.1 million at June 30, 2023 compared to December 31, 2022.

During the second quarter of 2023, the Company placed commercial loans that resided 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

CARTER BANKSHARES, INC.

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

determine supportable loan amounts.

While these guardrails do not insulate the Company from credit cycles, it should reduce the experience of defaults.

Despite economic uncertainty, increased costs and interest rates, credit quality remains favorable.

At both March 31, 2023 and December 31, 2022, respectively, the Company’s loans held-for-sale were all accruing.

nonaccrual status due to loan maturities and failure to pay in full.

These nonperforming loans are 97.2% of the Company's total nonperforming loans and 96.1% of the Company's total nonperforming assets.

Based on analyses of the credit relationship and various cash flow assumptions in the alternative modeling the Company established specific reserves with respect to these loans of $53.6 million at June 30, 2023, representing 17.8%, of these loans aggregate principal amount.

At June 30, 2023, all of the Bank’s loans related to this lending relationship are on nonaccrual status.

The following is an analysis of nonperforming loans by loan portfolio segment for the dates presented, and each segment’s relative contribution to total nonperforming loans:

June 30, 2023

December 31, 2022

(Dollars in Thousands)

Commercial Real Estate

$ 2,512 0.8 % $ 2,304 34.7 %

Commercial & Industrial

113 — % 204 3.1 %

Residential Mortgages

3,288 1.1 % 3,265 49.1 %

Other Consumer

12 — % 8 0.1 %

2,908 0.9 % 864 13.0 %

301,913 97.2 % — — %

Balance End of Period

310,746 100.0 % 6,645 100.0 %

The Company believes it is well secured based on the net carrying value of the credit relationship and appropriately reserved for potential losses with respect to all such loans based on information currently available.

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

As the borrowers on these loans operate in the hospitality, agriculture, and energy sectors, this credit relationship is secured by, among other collateral, commercial real estate properties in these sectors including but not limited to top-tier hospitality properties.

When evaluating the net carrying value of this credit relationship at 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.

That evaluation resulted in the Company establishing a valuation allowance of $53.6 million at June 30, 2023.

The Company has initiated collection processes with respect to such loans and intends to explore all alternatives for repayment.

However, we cannot give any assurance as to the timing or amount of future payments or collections on such loans.

For a discussion of collection proceedings with respect to these loans, see Part II, Item 1, “Legal Proceedings” of this Quarterly Report on Form 10-Q.

Closed retail bank offices have a remaining book value of $1.0 million at June 30, 2023 and $1.1 million at December 31, 2022, and are recorded in OREO on the Company’s balance sheet.

Past Company legacy underwriting standards relied heavily on loan to value and did not necessarily consider the income characteristics of the borrower or the repayment capacity of collateral with respect to speculative land financing.

An overreliance on value as a primary repayment source can become compromised during real estate cycles.

As a result, management has worked through these legacy credits and has installed a number of underwriting guardrails that consider the global cash flows and repayment capability of borrowers and/or guarantors, the proportion of speculation, transaction limits and introduced sensitivity analysis in order to determine supportable loan amounts.

While these guardrails do not insulate the Company from credit cycles, we believe it should reduce the experience of defaults.

At both June 30, 2023 and December 31, 2022, respectively, the Company’s loans held-for-sale were all accruing.

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

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

CARTER BANKSHARES, INC.

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

Allowance for Credit Losses

The following is the allocation of the ACL balance by segment for the periods presented:

March 31, 2023 December 31, 2022

The following is the allocation of the ACL reserves by segment for the periods presented:

June 30, 2023 December 31, 2022

(Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans

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Balance End of Period $ 94,144 100.0 % $ 93,852 100.0 %

The decline in the other segment was primarily due to $1.3 million of principal pay-downs for the three months ended March 31, 2023.

The ACL was $94.7 million, or 2.91%, of total portfolio loans at March 31, 2023 compared to $93.9 million, or 2.98%, of total portfolio loans at December 31, 2022.

The following table summarizes the credit quality ratios and their components as of March 31, 2023 and December 31, 2022:

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

The decline in the ACL attributable to the other segment was primarily due to $1.3 million of principal pay-downs during the six months ended June 30, 2023 that occurred during the first quarter of 2023.

The ACL was $94.1 million, or 2.83%, of total portfolio loans at June 30, 2023 compared to $93.9 million, or 2.98%, of total portfolio loans at December 31, 2022.

The following table summarizes the credit quality ratios and their components as of June 30, 2023 and December 31, 2022:

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

Allowance for Credit Losses to Total Portfolio Loans

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See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the previous table.

The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date.

The provision for 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 specific reserves on three loans, offset by loan growth and increased reserves due to the above mentioned loan entering nonaccrual status.

For more information about the Company’s provision for credit losses, see the discussion above under “Provision for Credit Losses” in this MD&A.

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.

There are three basic factors that influence the reserve rates associated with unfunded commitments for real

CARTER BANKSHARES, INC.

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

The provision for credit losses, which includes a provision (recovery) for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date.

The provision for credit losses increased $0.8 million to $1.4 million for the three months ended March 31, 2023 compared to the same period in 2022.

The increase for the three months ended March 31, 2023 was primarily driven by loan growth, net charge-offs of $0.6 million and a $0.5 million specific reserve for a mortgage loan that was placed in nonaccrual during the quarter, offset by the release of $1.3 million of reserves that were allocated to the other segment due to principal pay-downs.

The provision (recovery) for unfunded commitments increased $0.3 million for the three months ended March 31, 2023 when compared to the same period in 2022 due to increased real estate construction.

There are three basic factors that influence the reserve rates associated with unfunded commitments for real estate construction loans.

estate construction loans.

First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model.

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Third, volume changes impact the total reserve calculation.

Net charge-offs were $0.6 million for the three months ended March 31, 2023 compared to $0.2 million for the same period in 2022.

During the three months ended March 31, 2023, net charge-offs were primarily included in the other consumer segment.

As a percentage of average total portfolio loans, on an annualized basis, net charge-offs were 0.07% for the three months ended March 31, 2023 compared to 0.03% for the same period in 2022.

At March 31, 2023, nonperforming loans increased $1.7 million, or 25.9%, to $8.4 million since December 31, 2022.

Nonperforming loans increased due to a $2.1 million residential construction relationship moved to nonaccrual status during the first quarter of 2023.

Nonperforming loans as a percentage of total portfolio loans were 0.26% and 0.21% as of March 31, 2023 and December 31, 2022, respectively.

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 period in 2022.

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

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.08% for both the three and six months ended June 30, 2023 and 0.03% for both the same periods of 2022, respectively.

At June 30, 2023, nonperforming loans increased $304.1 million to $310.7 million since December 31, 2022.

Nonperforming loans as a percentage of total portfolio loans were 9.33% and 0.21% as of June 30, 2023 and December 31, 2022, respectively.

Nonperforming loans increased during the second quarter of 2023 as the Company placed commercial loans that were 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.

For more information about the Company’s nonperforming loans and about this lending relationship, see the discussion above under “Credit Quality” in this MD&A.

The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:

March 31, 2023

June 30, 2023

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

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Total Portfolio Loans $ 1,642,597 $ 279,156 $ 707,893 $ 38,736 $ 356,805 $ 305,255 $ 3,330,442

CARTER BANKSHARES, INC.

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

December 31, 2022

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Total Portfolio Loans $ 1,470,562 $ 309,792 $ 657,948 $ 44,562 $ 353,553 $ 312,496 $ 3,148,913

Special mention, substandard and doubtful loans at March 31, 2023 decreased $5.1 million to $151.8 million compared to $156.9 million at December 31, 2022.

The decrease of $0.1 million in special mention is primarily related to payments.

The decrease of $5.0 million in substandard loans is primarily related to paydowns in the other loan category, offset by the movement of a $2.1 million residential construction loan to substandard and nonaccrual status in the first quarter of 2023.

Special mention, substandard and doubtful loans at June 30, 2023 increased $158.8 million to $315.7 million compared to $156.9 million at December 31, 2022.

The decrease of $11.0 million in special mention is primarily due to the upgrade of a $9.8 million credit to a pass rating.

The increase of $169.8 million in substandard loans is primarily related to the above mentioned large nonaccrual lending relationship in the other loan category.

The $301.9 million of loans related to the Bank’s

CARTER BANKSHARES, INC.

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

largest lending relationship were nonperforming and rated as substandard as of June 30, 2023.

At December 31, 2022 the largest lending relationship in the other segment loans were all accruing and totaled $309.1 million of which, $177.3 million of those loans were pass-rated and $131.8 million of those loans were substandard-rated.

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

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

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2023 December 31,

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Savings 526,588 684,287 (157,699) (23.0) %

Certificate of Deposits 1,307,411 1,261,526 45,885 3.6 %

Certificates of Deposit 1,451,540 1,261,526 190,014 15.1 %

Total Deposits $ 3,577,003 $ 3,630,333 $ (53,330) (1.5) %

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The Company believes that the deposit base is stable and that the Company has the ability to attract new depositors while diversifying the deposit composition.

Total deposits at March 31, 2023 decreased $96.9 million, or 2.7%, from December 31, 2022.

The primary driver of this decrease was related to deposit outflows of $67.0 million by three customers.

Management believes that these outflows were due to specific needs of these customers;

one estate customer experienced a $32.0 million settlement and disbursement, and two other customers withdrew an aggregate of $35.0 million to pursue higher-yielding investment opportunities.

The decreases for the quarter included $77.3 million in savings accounts, $53.3 million in money market accounts and $16.0 million in noninterest-bearing demand accounts offset by the increases of $45.9 million in CDs and $3.8 million in interest-bearing demand accounts.

Noninterest-bearing deposits comprised 19.5% and 19.4% of total deposits at March 31, 2023 and December 31, 2022, respectively.

Total deposits at June 30, 2023 decreased $53.3 million, or 1.5%, from December 31, 2022.

The decrease related to a decline of $243.3 million in demand, money market and savings deposits, offset by an increase of $190.0 million in CDs, which was primarily due to customers migrating between deposit products as interest rates have risen.

At June 30, 2023, noninterest-bearing deposits comprised 19.2% of total deposits compared to 19.4% at December 31, 2022 and 18.8% at June 30, 2022.

CDs comprised 40.6%, 34.7% and 33.6% of total deposits at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.

The Company’s deposit base is diversified and granular and is comprised of approximately 77.5% of retail deposits.

CARTER BANKSHARES, INC.

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

The following table presents additional information in relation to deposits:

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2023 December 31,

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This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.

Maturities of CDs over $250,000 or more not covered by deposit insurance at March 31, 2023 are summarized as follows:

Maturities of CDs over $250,000 or more not covered by deposit insurance at June 30, 2023 are summarized as follows:

(Dollars in Thousands) Amount Percent

4 unchanged sentences

Total $ 233,495 100.0 %

CARTER BANKSHARES, INC.

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

Borrowings and Federal Funds Purchased

Borrowings are an additional source of liquidity for the Company.

We had $435.1 million FHLB borrowings at March 31, 2023 and $180.6 million at December 31, 2022.

The Company had no outstanding overnight federal funds purchased at March 31, 2023 and $17.9 million in overnight federal funds purchased at December 31, 2022.

The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan growth, investment securities, deposit growth and capital considerations.

We had $407.1 million FHLB borrowings at June 30, 2023 and $180.6 million at December 31, 2022.

The Company had $7.9 million overnight federal funds purchased at June 30, 2023 and $17.9 million in overnight federal funds purchased at December 31, 2022.

The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan growth, investment securities, deposits and capital considerations.

We manage our borrowed funds to provide a reliable source of liquidity.

Information pertaining to FHLB borrowings and federal funds purchased is summarized in the following table:

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

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

Balance at Period End

13 unchanged sentences

Federal Funds Purchased 5.40 % 4.65 %

The Company held FHLB of Atlanta stock of $20.6 million and $9.7 million at March 31, 2023 and December 31, 2022, respectively.

The Company held FHLB of Atlanta stock of $19.4 million and $9.7 million at June 30, 2023 and December 31, 2022, respectively.

The increase in FHLB stock was due to increased borrowings.

Dividends recorded on this restricted stock were $240 thousand for the three months ended March 31, 2023 compared to $20 thousand for the same period in 2022.

Dividends recorded on restricted stock were $315.6 thousand and $555.4 thousand for the three and six months ended June 30, 2023, respectively, compared to $22.1 thousand and $41.7 thousand for the same periods in 2022.

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

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

Members do not purchase stock in the FHLB for

CARTER BANKSHARES, INC.

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

the same reasons that traditional equity investors acquire stock in an investor-owned enterprise.

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

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

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If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

CARTER BANKSHARES, INC.

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

The Company’s primary funding and liquidity source is a stable customer deposit base.

1 unchanged sentence

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

Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets approximating $1.1 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, access to the institutional CD market, and the brokered deposit market.

Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets approximating $1.1 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions with an available amount of $137.1 million, access to the institutional CD market, and the brokered deposit market.

In addition to the lines referenced above, the Company also has $602.7 million of unpledged available-for-sale investment securities that may be sold or pledged as collateral that can serve as an additional source of liquidity.

Please refer to the Liquidity Sources table below for available funding with the FHLB and our unsecured lines of credit with correspondent banks.

As of March 31, 2023, approximately 87.6% of our total deposits of $3.5 billion were insured under standard FDIC insurance coverage limits, and approximately 12.4% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

As of June 30, 2023, approximately 88.3% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.7% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

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

1 unchanged sentence

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

At March 31, 2023, the Bank had $679.7 million in highly liquid assets, which consisted of FRB Excess Reserves and interest-bearing deposits in other financial institutions of $41.3 million, $638.0 million in unpledged securities and $364 thousand in loans held-for-sale.

This resulted in highly liquid assets to total assets ratio of 15.6% at March 31, 2023.

Total available liquidity to uninsured deposits was 318.6% at March 31, 2023.

In response to the recent failures of three large banks, the Treasury Department, Federal Reserve, and FDIC jointly announced the Bank Term Funding Program (“BTFP”) on March 12, 2023.

This program aims to enhance liquidity by allowing institutions to pledge certain securities at the par value of the securities, and at a borrowing rate of ten basis points over the one-year overnight index swap rate.

The BTFP is available to eligible U.S.

federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties.

As of March 31, 2023, the Company has approximately $356.4 million in par value of securities that are eligible to be pledged under the BTFP, but has not borrowed under or otherwise accessed the BTFP.

CARTER BANKSHARES, INC.

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

At June 30, 2023, the Bank had $611.3 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $8.4 million, $602.7 million in unpledged securities and $173.2 thousand in loans held-for-sale.

This resulted in highly liquid assets to total assets ratio of 13.9% at June 30, 2023.

Total available liquidity to uninsured deposits was 324.5% at June 30, 2023.

As of June 30, 2023, the Company has approximately $322.3 million in par value of securities that are eligible to be pledged under the Bank Term Funding Program (“BTFP”), but the Bank has not borrowed under or otherwise accessed the BTFP.

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

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

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

Cash and Due From Banks, including Interest-bearing Deposits $ 53,275 $ 46,869

4 unchanged sentences

Total Liquidity Sources $ 1,358,554 $ 1,508,895

The following table provides total liquidity sources and ratios as of March 31, 2023:

(Dollars in Thousands) March 31, 2023

The following table provides total liquidity sources and ratios as of June 30, 2023:

(Dollars in Thousands) June 30, 2023

Total Liquidity Sources $ 1,358,554

3 unchanged sentences

Regulatory Capital Requirements

Total capital increased by $26.3 million to $354.9 million at March 31, 2023 compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 was primarily due to a $12.3 million, net of tax, improvement in other comprehensive income (loss) due to the positive changes in fair value of available-for-sale investment securities and net income of $15.9 million for the three months ended March 31, 2023 that was retained by the Company, less $2.3 million related to the repurchase of common stock.

The remaining difference of $0.4 million is related to stock-based compensation activity for the quarter ended March 31, 2023.

Total capital of $344.2 million at June 30, 2023, reflects an increase of $15.6 million as compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 is primarily due to a $3.6 million improvement in other comprehensive income due to changes in fair value of investment securities and net income of $21.6 million for the six months ended June 30, 2023, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02, less $10.4 million related to the Company’s repurchase of common stock.

The remaining difference of $0.7 million is related to restricted stock activity for the six months ended June 30, 2023.

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

Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

Under capital adequacy guidelines

CARTER BANKSHARES, INC.

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

and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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

At March 31, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

At June 30, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

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

At March 31, 2023, the Bank continues to maintain its capital position with a leverage ratio of 9.98% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.15% compared to the regulatory guideline of 6.50% to be well-capitalized.

At June 30, 2023, the Bank continues to maintain its capital position with a leverage ratio of 9.76% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 11.34% compared to the regulatory guideline of 6.50% to be well-capitalized.

The Bank’s risk-based Tier 1 and Total Capital ratios were 11.34% and 12.60%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively.

2 unchanged sentences

The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.

CARTER BANKSHARES, INC.

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

The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios.

6 unchanged sentences

Capitalized (1)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Amount Ratio Amount Ratio

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(1) To be “well capitalized” under the prompt corrective action framework applies to the Bank only.

In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the Federal Reserve System, (“FRB”), and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of current credit expected losses, (“CECL”).

In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve System, (“FRB”), and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.

The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule:

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

Revised Transition of the Current Expected Credit

CARTER BANKSHARES, INC.

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

Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19.

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

1 unchanged sentence

Contractual Obligations

As of March 31, 2023, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

As of June 30, 2023, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Off-Balance Sheet Arrangements

As of March 31, 2023, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.

As of June 30, 2023, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk by simulating various rate shock scenarios and analyzing the results of the rate shocks on the Company’s projected net interest income (“NII”) and economic value of equity (“EVE”).

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

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

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

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

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

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

The base case earnings scenario together with various rate shock earning scenarios are modeled utilizing both a static and growth balance sheet.

A static balance sheet is a no-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread over a prescribed index.

Parallel rate shock analyses assume an immediate parallel shift in market interest rates across all horizons of the yield curve and also include management’s assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market, and savings) and changes in the prepayment behavior of loans and securities with embedded optionality.

Our policy guidelines limit the change in pretax NII over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points.

We have temporarily

CARTER BANKSHARES, INC.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis