What changed in this filing

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Item 1. Financial Statements

2023-10-27 compared with 2023-08-03 · 270 added, 287 removed, 1247 unchanged (31% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in Thousands) 2023 2022

10 unchanged sentences

Losses (Gains) on Sales of Securities, net 10 ( 48 )

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

Commercial Loan Swap Derivative Income ( 90 ) ( 738 )

Increase in the Value of Life Insurance Contracts ( 1,028 ) ( 1,009 )

Recognition of Restricted Stock Compensation Expense 1,171 1,010

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

(Increase) Decrease in Other Assets ( 826 ) 694

Increase (Decrease) in Other Liabilities 1,348 ( 702 )

7 unchanged sentences

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

(Purchase) Redemption of Federal Home Loan Bank Stock, net ( 9,663 ) 285

Purchase of Federal Home Loan Bank Stock, net ( 17,621 ) ( 840 )

Loan Originations, net ( 264,010 ) ( 224,839 )

5 unchanged sentences

Increase (Decrease) in Certificates of Deposits 250,028 ( 95,665 )

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

Proceeds on Federal Home Loan Bank Borrowings, net 333,585 23,000

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

9 unchanged sentences

Right-of-use Asset Recorded in Exchange for Lease Liabilities — 3,391

Stock Repurchase Settled in Subsequent Period ( 328 ) —

Stock Repurchase Excise Tax Settled in Subsequent Period ( 153 ) —

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

See accompanying notes to unaudited consolidated financial statements.

39 unchanged sentences

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

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

The ASU also provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 1 – BASIS OF PRESENTATION – (continued)

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

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

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

3 unchanged sentences

Deferral of the Sunset Date of Topic 848.

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

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

As it pertains to the U.S.

dollar LIBOR, e ffective January 1, 2022, the ICE Benchmark Administration Limited, the administrator of the LIBOR, ceased the publication of one-week and two-month USD LIBOR and ceased the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023.

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

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

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

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

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

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

This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions.

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

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

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

The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, and can be adopted at any time during this period.

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

The Company created an internal team in 2021 to identify and modify loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR.

The Company has selected one-month term Secured Overnight Financing Rate, (“SOFR”), (published by the CME Group) as the replacement benchmark for LIBOR based loans.

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

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

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

The transition team has fully committed to working within the guidelines established by the United Kingdom’s Financial Conduct Authority and the Federal Reserve System of New York’s Alternative Reference Rate Committee to complete a smooth transition away from LIBOR.

For existing LIBOR-based loans, remediation efforts were completed by September 30, 2023.

CARTER BANKSHARES, INC.

4 unchanged sentences

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

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

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

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

12 unchanged sentences

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

June 30, 2023

September 30, 2023

(Dollars in Thousands) Amortized

26 unchanged sentences

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

The Company did no t have securities classified as held-to-maturity at June 30, 2023 or December 31, 2022.

The Company did no t have securities classified as held-to-maturity at September 30, 2023 or December 31, 2022.

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

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

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

(Dollars in Thousands) 2023 2022 2023 2022

2 unchanged sentences

Gross Realized Losses ( 1 ) ( 4 ) ( 139 ) ( 160 )

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

Net Realized (Losses) Gains ( 1 ) ( 4 ) ( 10 ) 48

Tax Impact $ — $ ( 1 ) $ ( 2 ) $ 10

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

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

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

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

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

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

2 unchanged sentences

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

June 30, 2023

September 30, 2023

(Dollars in Thousands) Amortized

9 unchanged sentences

Total Debt Securities $ 912,989 $ 793,389

At June 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

At September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

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

The carrying value of securities pledged for various regulatory and legal requirements was $ 218.7 million at June 30, 2023 and $ 224.5 million at December 31, 2022.

The carrying value of securities pledged for various regulatory and legal requirements was $ 213.0 million at September 30, 2023 and $ 224.5 million at December 31, 2022.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

June 30, 2023

Available-for-sale securities with unrealized losses at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

September 30, 2023

Less Than 12 Months 12 Months or More Total

39 unchanged sentences

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

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended June 30, 2023 or the year ended December 31, 2022.

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

There were no securities classified as held-to-maturity at June 30, 2023 and December 31, 2022.

The Company did no t have any credit related impairment.

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

As of June 30, 2023, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis.

As of September 30, 2023, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis.

However, management may from time to time consider sales for strategic reasons that would be holistically beneficial to the bank.

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

4 unchanged sentences

NOTE 3 – INVESTMENT SECURITIES (continued)

As of June 30, 2023, management believes the unrealized losses detailed in the table above are not related to credit;

As of September 30, 2023, management believes the unrealized losses detailed in the table above are not related to credit;

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

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

During the three and six months ended June 30, 2023 and 2022, the Company had no credit related net investment impairment losses.

During the three and nine months ended September 30, 2023 and 2022, the Company had no credit related impairment.

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE

1 unchanged sentence

(Dollars in Thousands)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Commercial Real Estate

16 unchanged sentences

Loan Restructurings

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

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

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

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

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

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

A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater and/or based on management discretion;

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

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

A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater and/or based on management’s discretion;

otherwise, the restructured loan remains in the appropriate segment in the ACL model.

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

CARTER BANKSHARES, INC.

1 unchanged sentence

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

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

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

Restructured Loans

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

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

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

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

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

% of Total Class of Financing Receivable

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Total Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 %

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

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

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

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

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

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

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

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

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

During the third quarter of 2022 the Bank modified a construction loan and considered it a restructured loan as a result of financial difficulty.

The borrower is a single family home builder.

The purpose of the loan was to finance the construction of a speculative home.

The loan matured and was incomplete.

The Bank extended the maturity and completion date for five ( 5 ) months in order to provide time to complete and sell the home.

However, the Bank became aware of a mechanic’s lien filed by one of the borrower’s subcontractors.

This issue was resolved and the loan was restored to accrual status on September 30, 2022.

Subsequently, the home was sold and the Bank was paid in full on December 9, 2022.

This loan was not considered significant and remained in the general pool of the Bank’s ACL model for reserve purposes until it was paid in full.

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

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

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

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

At both June 30, 2023 and June 30, 2022 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

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

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

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

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

At both September 30, 2023 and September 30, 2022 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

As of September 30, 2023 and December 31, 2022, the Bank had $ 1.2 million of residential real estate loans in the process of foreclosure.

We also had $ 20 thousand at September 30, 2023 and $ 133 thousand at December 31, 2022 in residential real estate loans included in other real estate owned (“OREO”).

CARTER BANKSHARES, INC.

3 unchanged sentences

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

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

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

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

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

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

29 unchanged sentences

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

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

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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

acquisition loans without a defined source of amortization, iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of a financial obligations.

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

18 unchanged sentences

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

• A sampling review of Credit Risk Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures;

• A sampling review of non-organic commercial loans and those commercial loans approved outside of the Credit Risk Committee;

• Focus reviews of office and land development to evaluate segment risk rather than individual loan risk.

• A sampling review of Executive Loan Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures;

• A sampling review of non-organic commercial loans and those commercial loans approved outside of the Executive Loan Committee;

• Focus reviews of various segments to evaluate emerging risk rather than individual loan risk.

Focus reviews are performed annually on a rotational basis.

20 unchanged sentences

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

June 30, 2023

September 30, 2023

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

90 unchanged sentences

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

June 30, 2023

September 30, 2023

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

57 unchanged sentences

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

June 30, 2023

September 30, 2023

(Dollars in Thousands) Current

1 unchanged sentence

Past Due Total

Past Due Nonaccrual

Past Due Past Due

Still Accruing Total Loans Past Due Nonaccrual

Loans Total Portfolio

22 unchanged sentences

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

There were no loans past due 90 days or more and still accruing at June 30, 2023 and December 31, 2022.

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

Loans past due 30 to 89 days and still accruing decreased $ 3.3 million to $ 1.5 million at June 30, 2023 compared to $ 4.8 million at December 31, 2022 primarily in the construction category related to one $ 2.1 million residential construction relationship that moved to nonaccrual during the first quarter of 2023.

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

There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 2023 or December 31, 2022.

The Company had one loan totaling $ 0.7 million that was past due 90 days or more and still accruing at September 30, 2023 and no ne at December 31, 2022.

Since this CRE loan was well secured and in process of collection, it was maintained on accrual status and has since been paid in full as of the filing of this Form 10-Q.

Otherwise, loans past due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days and still accruing decreased $ 1.8 million to $ 3.1 million at September 30, 2023 compared to December 31, 2022 primarily in the construction category related to one $ 2.1 million residential construction relationship that moved to nonaccrual during the first quarter of 2023 and two credits totaling $ 1.1 million at December 31, 2022 which moved to current status.

Loans past due 30 to 89 days increased $ 1.8 million in the residential mortgage category primarily due to two credits totaling $ 1.6 million migrating from current to past due status.

Nonperforming loans increased significantly during the nine months ended September 30, 2023 compared to December 31, 2022 due to $ 301.9 million commercial loans in the Other segment, related to the Company’s largest lending relationship, transferred to nonaccrual status due to loan maturities and failure to pay in full.

There were no nonaccrual or past due loans related to loans held-for-sale at September 30, 2023 or December 31, 2022.

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

June 30, 2023

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

September 30, 2023

(Dollars in Thousands)

Nonaccrual without an Allowance for Credit Losses

Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Past Due

Still Accruing

7 unchanged sentences

December 31, 2022

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

(Dollars in Thousands) Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Past Due

Still Accruing

17 unchanged sentences

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

During the three and six months ended June 30, 2023 and June 30, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

During the three and nine months ended September 30, 2023 and September 30, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

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

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(Dollars in Thousands) Collateral Discounted Cash Flow Total Collateral

10 unchanged sentences

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

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

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

4 unchanged sentences

Recoveries — — 10 129 — — 139

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

Net (Charge-offs)/Recoveries — ( 50 ) ( 123 ) ( 602 ) — — ( 775 )

Balance at End of Period $ 19,490 $ 2,987 $ 10,619 $ 971 $ 6,747 $ 53,660 $ 94,474

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

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

4 unchanged sentences

Recoveries — 5 12 335 — — 352

Net Recoveries/(Charge-offs) — 4 ( 68 ) ( 1,102 ) ( 42 ) — ( 1,208 )

Net (Charge-offs)/Recoveries — ( 46 ) ( 191 ) ( 1,704 ) ( 42 ) — ( 1,983 )

Balance at End of Period $ 19,490 $ 2,987 $ 10,619 $ 971 $ 6,747 $ 53,660 $ 94,474

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

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

1 unchanged sentence

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

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

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

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

2 unchanged sentences

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

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

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

80 unchanged sentences

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

At June 30, 2023 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

At September 30, 2023 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

CARTER BANKSHARES, INC.

2 unchanged sentences

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

June 30, 2023

September 30, 2023

(Dollars in Thousands) Carrying

46 unchanged sentences

We have invested in subordinated debt of other financial institutions.

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

We have two securities totaling $ 7.4 million that are considered to be Level 3 securities at September 30, 2023 and total $ 7.5 million at December 31, 2022.

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

4 unchanged sentences

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

June 30, 2023

September 30, 2023

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

5 unchanged sentences

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

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

The Company had no individually evaluated loans measured at fair value on a nonrecurring basis as of September 30, 2023.

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

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

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

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 2.6 million as of June 30, 2023, compared with $ 8.4 million at December 31, 2022, primarily due to sales and payments.

There were no write-downs recorded on OREO for the six months ended June 30, 2023 and $ 0.4 million for the same periods in 2022.

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

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 3.8 million as of September 30, 2023, compared with $ 8.4 million at December 31, 2022, primarily due to sales and payments.

There were $ 0.9 million write-downs recorded on OREO for the nine months ended September 30, 2023 and $ 0.6 million for the same periods in 2022.

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

June 30, 2023

September 30, 2023

(Dollars in Thousands) Fair

3 unchanged sentences

Range Average

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

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

Total Individually Evaluated Loans $ 2,858

OREO $ 1,683 Appraisals Estimated Selling Costs 10.0 % 10.0 %

OREO 1,939 Discounted Internal Valuations Management's Subject Discount 0.0 % - 23.6 %

OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

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

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

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

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

CARTER BANKSHARES, INC.

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NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

population examined.

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

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

Fair values for June 30, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

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

Fair values for September 30, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

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

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

Fair Value Measurements at June 30, 2023

Fair Value Measurements at September 30, 2023

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

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Securities Available-for-Sale 793,389 13,104 772,874 7,411 793,389

Loans Held-for-Sale 173 — — 173 173

Portfolio Loans, net 3,316,466 — — 3,208,543 3,208,543

6 unchanged sentences

FHLB Borrowings 514,135 — — 512,282 512,282

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

Accrued Interest Payable 6,930 — — 6,930 6,930

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(Included in Other Assets)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

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(Included in Other Liabilities)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

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

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

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

(Dollars in Thousands) 2023 2022 2023 2022

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Interest Rate Swap Contracts – Commercial Loans 234 295 90 738

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

Total Derivative Income $ 234 $ 295 $ 90 $ 738

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

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(Included in Other Liabilities)

(Dollars in Thousands) June 30,

(Dollars in Thousands) September 30,

2023 December 31,

2022 June 30,

2022 September 30,

2023 December 31,

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

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

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

Noninterest-Bearing Demand $ 661,454 $ 703,334

4 unchanged sentences

Total $ 3,556,189 $ 3,630,333

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

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

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

All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law.

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

Certificates of deposits that exceed the FDIC Insurance limit at September 30, 2023 and December 31, 2022 were $ 248.9 million and $ 159.0 million, respectively.

At September 30, 2023 and December 31, 2022, total brokered deposits (excluding the CDARS and ICS two-way) were $ 20.0 million and zero , respectively.

Certificates of Deposit maturing as of the date presented:

(Dollars in Thousands) June 30, 2023

(Dollars in Thousands) September 30, 2023

3 Months or Less $ 217,569

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Total $ 1,511,554

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Overdrafts reclassified to loans were $ 0.2 million at September 30, 2023 and $ 0.3 million at December 31, 2022.

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

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

The Company had $ 407.1 million Federal Home Loan Bank (“FHLB”) borrowings at June 30, 2023 and $ 180.6 million at December 31, 2022.

The Company had $ 514.1 million Federal Home Loan Bank (“FHLB”) borrowings at September 30, 2023 and $ 180.6 million at December 31, 2022.

FHLB borrowings include both fixed rate and variable rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans.

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

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

There were no securities available-for-sale pledged as collateral at both June 30, 2023 and December 31, 2022.

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

The Company is eligible to borrow up to an additional $ 508.4 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.1 billion, or 25.0 % of the Company’s assets, as of June 30, 2023.

Variable rate FHLB borrowings were 21.2 % and 33.4 % of total borrowings at September 30, 2023 and December 31, 2022, respectively.

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

There were no securities available-for-sale pledged as collateral at both September 30, 2023 and December 31, 2022.

The Company is eligible to borrow up to an additional $ 357.6 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.1 billion, or 25.0 % of the Company’s assets, as of September 30, 2023.

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

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

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

The Company had no overnight federal funds purchased in September 30, 2023 and $ 17.9 million in December 31, 2022.

The available borrowing capacity under unsecured lines of credit with corresponding banks was $ 145.0 million and $ 127.1 million at September 30, 2023 and December 31, 2022, respectively.

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

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

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

FHLB Borrowings $ 514,135 $ 180,550

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

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

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

Federal Fund Purchased $ — $ 17,870

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

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

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

(Dollars in Thousands) Balance Weighted

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NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $ 749.4 million at June 30, 2023 and $ 630.6 million at December 31, 2022, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

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

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

Commitments to extend credit, which amounted to $ 751.1 million at September 30, 2023 and $ 630.6 million at December 31, 2022, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

CARTER BANKSHARES, INC.

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NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

million, or 59.2 %, of the commitments to extend credit at June 30, 2023 and December 31, 2022, respectively.

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

Lines of credit for construction projects represented $ 374.9 million, or 49.9 % and $ 373.2 million, or 59.2 %, of the commitments to extend credit at September 30, 2023 and December 31, 2022, respectively.

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

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

The Company had outstanding letters of credit totaling $ 26.3 million at June 30, 2023 and $ 25.7 million at December 31, 2022.

The Company had outstanding letters of credit totaling $ 21.6 million at September 30, 2023 and $ 25.7 million at December 31, 2022.

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

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

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

Commitments to Extend Credit $ 751,113 $ 630,619

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

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

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

(Dollars in Thousands) 2023 2022 2023 2022

1 unchanged sentence

Balance at Beginning of Period $ 2,736 $ 1,816 $ 2,292 $ 1,783

Provision for Unfunded Commitments 360 269 444 33

(Recovery) Provision for Unfunded Commitments ( 130 ) 157 314 190

Balance at End of Period $ 2,606 $ 1,973 $ 2,606 $ 1,973

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

An expense of $ 0.4 million was recorded during the three months ended June 30, 2023 for the provision for unfunded commitments, which resulted in increases of $ 0.1 million and $ 0.4 million for the three and six months ended June 30, 2023, respectively compared to the same periods in 2022.

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

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

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

The Company may enter into settlement discussions in some legal or administrative proceedings, if it believes it is in the Company’s best interests to do so.

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

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

2 unchanged sentences

On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Defendants with an aggregate principal balance of approximately $ 301.9 million.

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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

obligations and fiduciary duties to the Defendants and (iii) tortiously interfered with the Defendants’ business expectancies and relationships, among other allegations.

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

2 unchanged sentences

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

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

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

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

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

NOTE 11 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

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

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

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

Net Unrealized Losses Arising during the period $ ( 14,773 ) $ 3,197 $ ( 11,576 ) $ ( 33,326 ) $ 6,999 $ ( 26,327 )

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

Reclassification Adjustment for Losses included in Net Income 1 — 1 4 ( 1 ) 3

Other Comprehensive Loss $ ( 14,772 ) $ 3,197 $ ( 11,575 ) $ ( 33,322 ) $ 6,998 $ ( 26,324 )

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

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

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

(Dollars in Thousands) Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

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

Net Unrealized Losses Arising during the period $ ( 10,176 ) $ 2,224 $ ( 7,952 ) $ ( 111,360 ) $ 23,386 $ ( 87,974 )

Reclassification Adjustment for Losses (Gains) included in Net Income 10 ( 2 ) 8 ( 48 ) 10 ( 38 )

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

Other Comprehensive Loss $ ( 10,166 ) $ 4,615 $ 2,222 $ ( 7,944 ) $ ( 111,408 ) $ 23,396 $ ( 88,012 )

NOTE 12 – STOCK REPURCHASE PLAN

4 unchanged sentences

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

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

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

The 2023 Program does not obligate the Company to purchase any particular number of shares, and was exhausted as of August 31, 2023.

During the three months ended September 30, 2023, the remainder of 416,176 shares of common stock had been repurchased under this program at a total cost of $ 6.0 million, or an average price of $ 14.43 per share.

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

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

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

time at management’s discretion.

The 2022 Program authorized the purchase of the Company’s common stock in open market transactions or

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – STOCK REPURCHASE PLAN – (continued)

privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act.

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

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

3 unchanged sentences

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

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

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

2023 2022 2023 2022

12 unchanged sentences

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

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

As of September 30, 2023, the Company recognized $ 2.2 million in HTC equity investments recorded as a component of other assets on the Consolidated Balance Sheets.

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

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

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

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

CARTER BANKSHARES, INC.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2023 and June 30, 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help reader understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2023 and September 30, 2022.

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

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• 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.

Government, including policies of the Federal Reserve, FDIC and U.S.

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

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• 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;

• 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 war between Israel and Hamas and 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;

17 unchanged sentences

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

• changes in deposit flows and loan demand;

CARTER BANKSHARES, INC.

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

• 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;

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

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

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

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

Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 , Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, and any of our subsequent filings with the Securities and Exchange Commission (“SEC”).

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

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Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2023 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2023 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

CARTER BANKSHARES, INC.

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

Overview and Strategy

Carter Bankshares, Inc.

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

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.5 billion at September 30, 2023.

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

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

CARTER BANKSHARES, INC.

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

66 branches in Virginia and North Carolina.

The Bank is a FDIC insured, Virginia state-chartered bank, which operates 64 branches in Virginia and North Carolina.

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

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

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

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

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

The Company’s goal will be to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate.

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

We believe this initiative is viable given the Bank’s strong capital and liquidity positions.

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

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

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

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

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended June 30, 2023

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

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

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

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

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

Highlights for the Six Months Ended June 30, 2023

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

Highlights for the Three Months Ended September 30, 2023

• Net interest income decreased $10.3 million, or 27.4%, to $27.4 million for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to a $9.3 million negative impact on interest income caused by placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023 and by an increase of 194 basis points in funding costs, offset by an increase of 31 basis points in the yield on earning assets due to the rising interest rate environment;

• The provision for credit losses increased $1.2 million to $1.1 million for the three months ended September 30, 2023, compared to the same period in 2022;

• Total noninterest expense increased $3.8 million to $27.3 million for the three months ended September 30, 2023 compared to the same period in 2022;

• Provision for income taxes decreased $4.2 million to $0.8 million for the three months ended September 30, 2023 compared to $5.0 million for the same period in 2022 was primarily due to the decrease in pre-tax income due to the Company’s largest lending relationship moving into nonaccrual status during the three months ended June 30, 2023.

Highlights for the Nine Months Ended September 30, 2023

CARTER BANKSHARES, INC.

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

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

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

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

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

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

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

• Net interest income decreased $3.5 million, or 3.6%, to $94.9 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase of 142 basis points in funding costs, partially offset by an increase of 79 basis points in the yield on earning assets due to the rising interest rate environment and the negative impact of placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023;

• The provision for credit losses increased $0.2 million to $2.6 million for the nine months ended September 30, 2023, compared to the same period in 2022;

• Total noninterest income decreased $1.1 million to $15.0 million for the nine months ended September 30, 2023 compared to the same period in 2022;

• Total noninterest expense increased $7.0 million to $76.4 million for the nine months ended September 30, 2023 compared to the same period in 2022;

• Provision for income taxes decreased $2.8 million to $5.3 million for the nine months ended September 30, 2023 compared to the same period in 2022.

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

• The securities portfolio decreased $42.9 million and is currently 17.8% of total assets compared to 19.9% of total assets;

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

• Total portfolio loans increased $262.0 million, or 11.1%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”), residential mortgage and construction segments during the nine months ended September 30, 2023;

• The portfolio loans to deposit ratio was 95.9%, compared to 86.7%, due to loan growth;

1 unchanged sentence

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

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

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

These loans comprise 97.9% of nonperforming loans at September 30, 2023;

• Total deposits decreased $74.2 million or 2.0% to $3.6 billion at September 30, 2023 due to a decrease of $324.2 million in all deposit categories except CDs, which increased $250.0 million;

• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.77% compared to 2.98%.

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

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

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

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

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

The ACL on portfolio loans totaled $94.5 million at September 30, 2023, compared to $93.9 million at December 31, 2022.

The Company reported net income of $3.6 million or $0.16 diluted earnings per common share (“EPS”) for the three months ended September 30, 2023 and $25.3 million, or $1.07 diluted EPS for the nine months ended September 30, 2023 compared to net income of $14.4 million, or $0.59 diluted EPS and $34.5 million, or $1.38 diluted EPS, for the same periods in 2022.

The Company’s financial results for the three and nine months ended September 30, 2023, compared to the same periods in 2022, were significantly impacted by placing commercial loans with an aggregate principal value of $301.9 million in the Other segment of the Bank’s loan portfolio on nonaccrual status due to loan maturities and failure to pay in full.

This nonaccrual classification had a $9.3 million and $20.6 million negative impact on interest income recognized by the Company for the three and nine months ended September 30, 2023.

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

PERFORMANCE RATIOS 2023 2022 2023 2022

16 unchanged sentences

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

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

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

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

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

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

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

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

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

Total net interest income decreased $10.3 million to $27.4 million for the three months ended September 30, 2023 and decreased $3.5 million to $94.9 million for the nine months ended September 30, 2023 compared to the same periods in 2022.

The decreases for the comparable periods was a result of the higher interest rate environment that benefited earning asset yields given the asset sensitive positioning of the balance sheet.

The Company recognized higher yields on new loan originations and investment securities purchases, offset by the $9.3 million and $20.6 million negative impact on interest income related to the Company placing its largest lending relationship on nonaccrual status during the three and nine months ended September 30, 2023.

Net interest income, on an FTE basis (non-GAAP), decreased $10.4 million to $27.6 million for the three months ended September 30, 2023 and decreased $3.6 million to $95.7 million for the nine months ended September 30, 2023, compared to $38.0 million and $99.3 million for the same periods in 2022, respectively.

For the three months ended September 30, 2023 the decrease in net interest income, on an FTE basis (non-GAAP) was driven by higher interest income of $6.5 million, offset by higher interest expense of $16.9 million compared to the same period last year.

Net interest margin decreased 120 basis points and decreased 30 basis points to 2.52% and 2.98% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

Net interest margin, on an FTE basis (non-GAAP), decreased 121 basis points and decreased 31 basis points to 2.54% and 3.00% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively.

The Company’s net interest income and net interest margin will continue to be negatively impacted in future periods, by the Company’s largest lending relationship being placed on nonaccrual status.

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

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

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

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

During the nine months ended September 30, 2023, the Company’s yield on earning assets continued to benefit from the rising interest rate environment.

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

Positively impacting the nine months ended September 30, 2023 was the asset sensitivity of our balance sheet.

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

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

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

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

(Dollars in Thousands) 2023 2022 2023 2022

16 unchanged sentences

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

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

Three Months Ended September 30, 2023 Three Months Ended September 30, 2022

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

36 unchanged sentences

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

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

Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

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

34 unchanged sentences

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

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

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

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

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

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

Interest income increased $6.6 million and $32.6 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

Interest income, on an FTE basis (non-GAAP), increased $6.5 million and $32.5 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

The change was primarily due to increases in average interest-earning assets of $295.5 million and $249.8 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

Also impacting the change was higher interest rate yields on interest-earning assets of 31 basis points and 79 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due to the rising interest rate environment.

These changes were offset by the negative impact of $9.3 million and $20.6 million for the three and nine months ended September 30, 2023, respectively, to interest income related to placing the Company’s largest lending relationship on nonaccrual status.

For the three and nine months ended September 30, 2023 compared to the same periods in 2022, average interest-bearing deposits with banks decreased $12.5 million and $49.3 million, respectively, as funds were deployed into higher yielding loans, and the average rate earned increased 328 basis points and 452 basis points, respectively.

Average loan balances increased $339.5 million and $335.4 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

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

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

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

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

The average rate earned on loans decreased four basis points for the three months ended September 30, 2023 compared to the same period of 2022, primarily due to the negative impact of placing the Company’s largest lending relationship on nonaccrual status, and increased 44 basis points for the nine months ended September 30, 2023 compared to the same period in 2022.

Interest income was negatively impacted by placing the Company’s largest lending relationship on nonaccrual status during the second quarter of 2023, resulting in negative impacts to interest income of by $20.6 million since June 30, 2023, including $9.3

CARTER BANKSHARES, INC.

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

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

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

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

million in the third quarter of 2023 and $11.3 million in the second quarter of 2023.

These negative impacts represented an estimated negative effect on the yield on earning assets of 85 basis points for the three months ended September 30, 2023 and 64 basis points for the nine months ended September 30, 2023.

At September 30, 2023 the loan portfolio was comprised of 24.5% floating rate loans which reprice monthly, 41.3% variable rate loans that reprice at least once during the life of the loan and 34.2% fixed rate loans that do not reprice during the life of the loan.

Average investment securities decreased $51.7 million and $52.8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

The average rate earned on investment securities increased 112 basis points and 142 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

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

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

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

As of September 30, 2023, the securities portfolio was comprised of 47.3% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months.

We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses.

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

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

Interest expense increased $12.5 million and $19.2 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022 due to increases in the cost of all interest-bearing liability categories, except savings accounts, in the higher rate environment.

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

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

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

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

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

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

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

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

Interest expense increased $16.9 million and $36.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due to increases in the cost of all interest-bearing liability categories, except savings accounts, in the higher rate environment.

Also contributing to the increased interest expense is the shift to higher cost deposits and borrowings due to a decline and change in mix of deposits and the Company’s use of higher-cost borrowings to fund growth in the loan portfolio, including $145.1 million and $132.4 million declines in average interest-bearing deposits for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

The cost of interest-bearing liabilities increased by 194 basis points and 142 basis points to 2.54% and 2.02% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

Interest expense on deposits increased $10.9 million and $21.3 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022 primarily due to the rates on these deposits increasing 152 basis points and 101 basis points to 2.10% and 1.60%, respectively.

The increases in rates for the three and nine months ended September 30, 2023 compared to the same periods last year included interest-bearing demand deposits up by 23 basis points and 22 basis points, respectively, money market accounts up by 202 basis points and 145 basis points, respectively, and CDs up by 212 basis points and 146 basis points, respectively, in response to competitive pressures from higher market rates compared to the same periods in 2022.

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

The average balances on borrowings increased $447.3 million and $383.5 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022.

The cost of borrowings increased 145 basis points and 191 basis points for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022, largely due to increased balances and the higher interest rate environment.

CARTER BANKSHARES, INC.

1 unchanged sentence

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

Three Months Ended June 30, 2023

Compared to June 30, 2022

Six Months Ended June 30, 2023

Compared to June 30, 2022

Three Months Ended September 30, 2023

Compared to September 30, 2022

Nine Months Ended September 30, 2023

Compared to September 30, 2022

(Dollars in Thousands) Volume (3)

32 unchanged sentences

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

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

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

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

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

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

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

As a percentage of average portfolio loans, on an annualized

The ACL to total portfolio loans was 2.77% of total portfolio loans at September 30, 2023, compared to 2.98% of total portfolio loans, at December 31, 2022.

The provision for credit losses increased $1.2 million and $0.2 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022.

The increase for the three and nine months ended September 30, 2023 in the provision for credit losses was primarily driven by loan growth and net charge-offs.

The (recovery) provision for unfunded commitments decreased $0.3 million to a recovery of $0.1 million and increased $0.1 million to a provision of $0.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 related to changes in real estate construction and pressure on the reserve rate.

Net charge-offs were $0.8 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, compared to $3.7 million and $4.1 million for the same periods in 2022.

During the three months ended September 30, 2022, the Company charged-down $3.4 million on a $4.9 million purchased syndicated commercial and industrial loan and transferred $1.5 million to held-for-sale.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.09%

CARTER BANKSHARES, INC.

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

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

and 0.08% for the three and nine months ended 2023, respectively, and 0.49% and 0.19% for the same periods in 2022, respectively.

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

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

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

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

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

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

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

Nonperforming loans (“NPLs”) increased at September 30, 2023 by $301.7 million to $308.3 million compared to $6.6 million at December 31, 2022.

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

As of September 30, 2023 and December 31, 2022, those Other segment reserves were $53.6 million and $54.7 million, respectively.

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

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

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

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Noninterest Income

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

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

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

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

(Losses) Gains on Sales of Securities, net $ (1) $ (4) $ 3 75.0 % $ (10) $ 48 $ (58) (120.8) %

Service Charges, Commissions and Fees 1,783 1,750 33 1.9 % 5,380 5,452 (72) (1.3) %

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Total Noninterest Income $ 5,270 $ 5,235 $ 35 0.7 % $ 15,033 $ 16,174 $ (1,141) (7.1) %

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

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

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

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

Total noninterest income increased slightly to $5.3 million for the three months ended September 30, 2023 and decreased $1.1 million, or 7.1%, to $15.0 million for the nine months ended September 30, 2023 compared to the same periods in 2022.

The slight increase for the three months ended September 30, 2023 compared to the same periods in 2022 was primarily related to a $0.1 million increase in debit card interchange fees due to higher interchange fee volume, offset by a $0.1 million decrease within other noninterest income related to a higher fair value adjustment of our interest rate swap contracts with commercial customers in the same quarter of 2022.

For the nine months ended September 30, 2023, the decrease in total noninterest income primarily related to a decrease of $0.7 million in commercial loan swap fee income due to the rising interest rate environment, and a decrease of $0.3 million related to losses on sales and write-downs of bank premises, net due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.

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

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

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

These decreases were offset by an increase of $0.4 million in debit card interchange fees due to higher interchange fee volume in the first nine months of 2023.

CARTER BANKSHARES, INC.

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Noninterest Expense

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

Three Months Ended September 30, 2023 Nine Months Ended September 30,

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

11 unchanged sentences

Total Noninterest Expense $ 27,282 $ 23,463 $ 3,819 16.3 % $ 76,394 $ 69,384 $ 7,010 10.1 %

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

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

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

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

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

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

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

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

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

Provision for Income Taxes

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

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

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

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

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

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

During the three and nine months ended September 30, 2023 total noninterest expense increased $3.8 million and $7.0 million, respectively, compared to the same periods in 2022.

The most significant variances for the three months ended September 30, 2023 compared to the same period in 2022 related to increases of $1.2 million within other noninterest expense, an increase of $0.8 million in FDIC insurance expense, an increase of $0.8 million in tax credit amortization expense due to the early adoption of ASU 2023-02 Investments Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, an increase of $0.4 million in salaries and employee benefits, an increase of $0.2 million in data processing expenses, an increase of $0.2 million in professional and legal fees, and an increase of $0.1 million in occupancy expenses.

The increase in other noninterest expense related to a $0.6 million write-down on three legacy other real estate owned (“OREO”) properties pending sale, a $0.2 million nonrecurring expense in the third quarter of 2023, and $0.2 million in write-downs on two closed branches marked for sale.

FDIC insurance expense increased due to the deterioration in asset quality as a direct result of placing the Bank’s largest lending relationship in nonaccrual status during the quarter ended June 30, 2023, which is a component used to determine the assessment.

The decrease in tax credit amortization of $0.8 million is due to the reversal during the third quarter of 2022 as a result of updated information from the developer that extended the in-service date to 2023 for one of the Company’s partnerships.

The increase in salaries and employee benefits is primarily related to $1.3 million higher base salaries, and increased FICA expenses of $0.1 million, offset by lower profit sharing and incentives of $0.6 million and $0.3 million, respectively in the three months ended September 30, 2023.

The increases in data processing, professional and legal fees and occupancy expenses primarily related to additional seasonal services performed during the third quarter of 2023.

The largest increase for nine months ended September 30, 2023 compared to the same period in 2022 was higher salaries and employee benefits of $3.5 million related to higher salary expense due to retail open positions being filled, job grade assessment increases, normal merit increases, increased medical claims and higher incentive bonuses in 2023.

Also impacting the increase was $1.5 million increase in other noninterest expense, a $1.2 million increase in FDIC Insurance expense, an increase of $0.5 million in occupancy expense, a $0.3 million increase in data processing expenses, a $0.3 million increase in professional and legal fees and a $0.3 million increase in advertising expenses.

Offsetting these increases, similar to the quarterly variance, was a decline in tax credit amortization of $0.5 million due to the previously mentioned in-service date extension.

The increases in other noninterest expense, FDIC insurance expense, occupancy expense, data processing expenses and professional and legal expense for the nine months ended September 30, 2023 are all similar to the variances mentioned for the three months ended September 30, 2023 above;

however, advertising expenses increased due to marketing initiatives and the increase in FDIC expenses also related 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.

CARTER BANKSHARES, INC.

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

What changed 10-Q

Item 1. Financial Statements