Carter Bankshares, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 Net Income $ 25,272 $ 34,509 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Credit Losses, including Provision for Unfunded Commitments 2,919 2,557 Origination of Loans Held-for-Sale ( 5,524 ) ( 7,017 ) Proceeds From Loans Held-for-Sale 5,614 7,399 Depreciation/Amortization of Bank Premises and Equipment 4,689 4,494 Provision for Deferred Taxes 256 1,697 Net Amortization of Securities 3,696 4,540 Tax Credit Amortization 1,438 466 Gains on Sales of Mortgage Loans Held-for-Sale ( 90 ) ( 154 ) Losses (Gains) on Sales of Securities, net 10 ( 48 ) 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) Decrease in Other Assets ( 826 ) 694 Increase (Decrease) in Other Liabilities 1,348 ( 702 ) Net Cash Provided By Operating Activities 38,855 47,698 INVESTING ACTIVITIES Securities Available-for-Sale: Proceeds from Sales 15,054 19,777 Proceeds from Maturities, Redemptions, and Pay-downs 38,896 71,146 Purchases ( 24,938 ) ( 135,634 ) Purchase of Bank Premises and Equipment, Net ( 7,979 ) ( 4,191 ) Proceeds from Sales of Bank Premises and Equipment, net — 408 Purchase of Federal Home Loan Bank Stock, net ( 17,621 ) ( 840 ) Loan Originations, net ( 264,010 ) ( 224,839 ) Payments Received on Other Real Estate Owned 299 320 Proceeds from Sales of Other Real Estate Owned 4,818 3,742 Net Cash Used In Investing Activities ( 255,481 ) ( 270,111 ) FINANCING ACTIVITIES Net Change in Demand, Money Markets and Savings Accounts ( 324,172 ) 123,118 Increase (Decrease) in Certificates of Deposits 250,028 ( 95,665 ) Proceeds on Federal Home Loan Bank Borrowings, net 333,585 23,000 Repayments on Federal Funds Purchased, net ( 17,870 ) — Repurchase of Common Stock ( 16,416 ) ( 40,131 ) Net Cash Provided by Financing Activities 225,155 10,322 Net Increase (Decrease) in Cash and Cash Equivalents 8,529 ( 212,091 ) Cash and Cash Equivalents at Beginning of Period 46,869 277,799 Cash and Cash Equivalents at End of Period $ 55,398 $ 65,708 SUPPLEMENTARY DATA Cash Interest Paid $ 45,031 $ 13,698 Cash Paid for Income Taxes 5,658 3,253 Transfer from Fixed Assets to Other Real Estate Owned 1,388 1,584 Right-of-use Asset Recorded in Exchange for Lease Liabilities — 3,391 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. 7 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BASIS OF PRESENTATION Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), on March 10, 2023. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period. Reclassification: Amounts in prior periods financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no material effect on prior periods net income or shareholders’ equity. Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Accounting Standards Adopted in 2023 In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards (“ASU”) No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU expands the use of the proportional amortization method of accounting, previously only allowable for Low Income Tax Housing Credits, (“LITHC”) investments, to equity investments in other tax credit structures that meet certain criteria. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company reviewed its existing tax equity investment portfolios and evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU as of June 30, 2023 on a modified retrospective basis, effective dated as of January 1, 2023. As a result, the Company recorded a transitional adjustment of $ 0.1 million to retained earnings. The Company makes equity investments as a limited partner in various partnerships that sponsor historic tax credits (“HTC”) as a strategic tax initiative designed to receive tax credits and other tax benefits, such as deductible flow-through losses. The Company has evaluated all of the proportional amortization method qualifying criteria and has elected to apply the proportional amortization method at the HTC program level. The Company records the investment in the HTC as a component of other assets and uses the proportional amortization method to account for the investments in the HTC partnerships. Amortization related to these HTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income. Prior to the ASU adoption, amortization was recorded as a component of noninterest expense on the Consolidated Statements of Income. The amendments in this ASU did not materially impact our Consolidated Financial Statements. Accounting Standards Issued but Not Yet Adopted In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. 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 ASU also provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative 8 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BASIS OF PRESENTATION – (continued) 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. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, 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. 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. 9 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – EARNINGS PER SHARE Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following table reconciles the numerators and denominators of basic and diluted earnings per common share calculations for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands, except share and per share data) 2023 2022 2023 2022 Numerator for Earnings per Common Share – Basic and Diluted Net Income $ 3,627 $ 14,408 $ 25,272 $ 34,509 Less: Income allocated to participating shares 33 92 208 199 Net Income Allocated to Common Shareholders - Basic & Diluted $ 3,594 $ 14,316 $ 25,064 $ 34,310 Denominator: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,157,563 24,421,264 23,600,946 24,970,993 Less: Average Participating Securities 211,384 156,189 193,875 143,850 Weighted Average Common Shares Outstanding - Basic & Diluted 22,946,179 24,265,075 23,407,071 24,827,143 Earnings per Common Share – Basic $ 0.16 $ 0.59 $ 1.07 $ 1.38 Earnings per Common Share – Diluted $ 0.16 $ 0.59 $ 1.07 $ 1.38 All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation. NOTE 3 - INVESTMENT SECURITIES The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented: September 30, 2023 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 14,383 $ — $ ( 1,279 ) $ 13,104 U.S. Government Agency Securities 48,197 454 ( 909 ) 47,742 Residential Mortgage-Backed Securities 111,550 — ( 13,988 ) 97,562 Commercial Mortgage-Backed Securities 33,872 411 ( 955 ) 33,328 Other Commercial Mortgage-Backed Securities 24,588 — ( 3,484 ) 21,104 Asset Backed Securities 151,788 — ( 14,713 ) 137,075 Collateralized Mortgage Obligations 178,559 — ( 15,253 ) 163,306 States and Political Subdivisions 279,302 — ( 56,658 ) 222,644 Corporate Notes 70,750 — ( 13,226 ) 57,524 Total Debt Securities $ 912,989 $ 865 $ ( 120,465 ) $ 793,389 10 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) December 31, 2022 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 19,318 $ — $ ( 1,452 ) $ 17,866 U.S. Government Agency Securities 50,334 218 ( 788 ) 49,764 Residential Mortgage-Backed Securities 115,694 — ( 12,009 ) 103,685 Commercial Mortgage-Backed Securities 35,538 73 ( 936 ) 34,675 Other Commercial Mortgage-Backed Securities 24,987 9 ( 2,597 ) 22,399 Asset Backed Securities 156,552 — ( 15,169 ) 141,383 Collateralized Mortgage Obligations 190,781 — ( 14,159 ) 176,622 States and Political Subdivisions 281,753 — ( 53,607 ) 228,146 Corporate Notes 70,750 — ( 9,017 ) 61,733 Total Debt Securities $ 945,707 $ 300 $ ( 109,734 ) $ 836,273 The Company did no t have securities classified as held-to-maturity at September 30, 2023 or December 31, 2022. The following table shows the composition of gross and net realized gains and losses for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 2023 2022 Proceeds from Sales of Securities Available-for-Sale $ — $ — $ 15,054 $ 19,777 Gross Realized Gains $ — $ — $ 129 $ 208 Gross Realized Losses ( 1 ) ( 4 ) ( 139 ) ( 160 ) 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 (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. The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. September 30, 2023 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 5,193 $ 5,126 Due after One Year through Five Years 19,682 17,770 Due after Five Years through Ten Years 256,370 215,337 Due after Ten Years 131,387 102,781 Residential Mortgage-Backed Securities 111,550 97,562 Commercial Mortgage-Backed Securities 33,872 33,328 Other Commercial Mortgage-Backed Securities 24,588 21,104 Collateralized Mortgage Obligations 178,559 163,306 Asset Backed Securities 151,788 137,075 Total Debt Securities $ 912,989 $ 793,389 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 $ 213.0 million at September 30, 2023 and $ 224.5 million at December 31, 2022. 11 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) 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 (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Treasury Securities — $ — $ — 4 $ 13,104 $ ( 1,279 ) 4 $ 13,104 $ ( 1,279 ) U.S. Government Agency Securities 6 5,562 ( 71 ) 14 16,450 ( 838 ) 20 22,012 ( 909 ) Residential Mortgage-Backed Securities — — — 43 97,562 ( 13,988 ) 43 97,562 ( 13,988 ) Commercial Mortgage-Backed Securities 3 846 ( 4 ) 50 19,192 ( 951 ) 53 20,038 ( 955 ) Other Commercial Mortgage-Backed Securities 1 1,844 ( 673 ) 8 19,260 ( 2,811 ) 9 21,104 ( 3,484 ) Asset Backed Securities 2 2,535 ( 118 ) 52 134,540 ( 14,595 ) 54 137,075 ( 14,713 ) Collateralized Mortgage Obligations — — — 85 163,306 ( 15,253 ) 85 163,306 ( 15,253 ) States and Political Subdivisions 1 1,190 ( 121 ) 160 221,254 ( 56,537 ) 161 222,444 ( 56,658 ) Corporate Notes — — — 21 57,524 ( 13,226 ) 21 57,524 ( 13,226 ) Total Debt Securities 13 $ 11,977 $ ( 987 ) 437 $ 742,192 $ ( 119,478 ) 450 $ 754,169 $ ( 120,465 ) December 31, 2022 Less Than 12 Months 12 Months or More Total (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Treasury Securities 3 $ 14,080 $ ( 789 ) 2 $ 3,786 $ ( 663 ) 5 $ 17,866 $ ( 1,452 ) U.S. Government Agency Securities 6 5,337 ( 26 ) 9 15,576 ( 762 ) 15 20,913 ( 788 ) Residential Mortgage-Backed Securities 6 7,601 ( 372 ) 37 96,084 ( 11,637 ) 43 103,685 ( 12,009 ) Commercial Mortgage-Backed Securities 7 7,843 ( 307 ) 49 15,675 ( 629 ) 56 23,518 ( 936 ) Other Commercial Mortgage-Backed Securities 2 5,302 ( 617 ) 6 14,560 ( 1,980 ) 8 19,862 ( 2,597 ) Asset Backed Securities 13 42,173 ( 2,984 ) 41 97,210 ( 12,185 ) 54 139,383 ( 15,169 ) Collateralized Mortgage Obligations 35 66,362 ( 4,500 ) 50 110,260 ( 9,659 ) 85 176,622 ( 14,159 ) States and Political Subdivisions 73 112,564 ( 19,706 ) 91 115,382 ( 33,901 ) 164 227,946 ( 53,607 ) Corporate Notes 8 23,285 ( 2,965 ) 13 38,448 ( 6,052 ) 21 61,733 ( 9,017 ) 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 September 30, 2023 or the year ended 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 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. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. 12 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) 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 nine months ended September 30, 2023 and 2022, the Company had no credit related impairment. NOTE 4 – LOANS AND LOANS HELD-FOR-SALE The composition of the loan portfolio by dollar amount is shown in the table below: (Dollars in Thousands) September 30, 2023 December 31, 2022 Commercial Commercial Real Estate $ 1,688,947 $ 1,470,562 Commercial and Industrial 264,329 309,792 Total Commercial Loans 1,953,276 1,780,354 Consumer Residential Mortgages 738,368 657,948 Other Consumer 36,487 44,562 Total Consumer Loans 774,855 702,510 Construction 377,576 353,553 Other 305,233 312,496 Total Portfolio Loans 3,410,940 3,148,913 Loans Held-for-Sale — — Total Loans $ 3,410,940 $ 3,148,913 Loan Restructurings 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’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. 13 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued) The following table shows the amortized cost basis as of 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 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 Accruing Restructured Loans Commercial Real Estate — $ — — % 1 $ 326 0.02 % Commercial and Industrial — — — % — — — % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction 1 137 0.04 % 1 137 0.04 % Other — — — % — — — % Total Accruing Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 % Nonaccrual Restructured Loans Commercial Real Estate — $ — — % — $ — — % Commercial and Industrial — — — % — — — % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % — — — % Total Nonaccrual Restructured Loans — $ — — % — $ — — % Total Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 % (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 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”). 14 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 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 following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business. C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio. Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchased money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed. Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land 15 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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. Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. Credit Quality Indicators: The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status. The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing into 2023, the Company used a five step approach for loan review in the following categories: • Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $ 2.0 million or more; • 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 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; and • Focus reviews of various segments to evaluate emerging risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis. The Company’s internally assigned grades are as follows: Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality. Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. 16 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. 17 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following table presents portfolio loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented: September 30, 2023 Risk Rating (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 224,524 $ 441,066 $ 196,432 $ 148,493 $ 125,716 $ 520,018 $ 30,467 $ 1,686,716 Special Mention — — 209 — — 77 — 286 Substandard — — — — — 1,945 — 1,945 Total Commercial Real Estate $ 224,524 $ 441,066 $ 196,641 $ 148,493 $ 125,716 $ 522,040 $ 30,467 $ 1,688,947 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 825 $ 18,601 $ 39,365 $ 26,094 $ 7,089 $ 143,652 $ 25,790 $ 261,416 Special Mention — — — 2,838 — — — 2,838 Substandard — — — 25 28 3 19 75 Total Commercial and Industrial $ 825 $ 18,601 $ 39,365 $ 28,957 $ 7,117 $ 143,655 $ 25,809 $ 264,329 YTD Gross Charge-offs $ — $ — $ 45 $ — $ 6 $ — $ — $ 51 Residential Mortgages Pass $ 47,097 $ 232,769 $ 193,959 $ 79,454 $ 44,984 $ 99,337 $ 36,989 $ 734,589 Special Mention — — — — — 527 — 527 Substandard — — 1,142 — 861 999 250 3,252 Total Residential Mortgages $ 47,097 $ 232,769 $ 195,101 $ 79,454 $ 45,845 $ 100,863 $ 37,239 $ 738,368 YTD Gross Charge-offs $ — $ — $ 136 $ — $ — $ 67 $ — $ 203 Other Consumer Pass $ 23,004 $ 5,419 $ 2,989 $ 4,430 $ 43 $ 201 $ 359 $ 36,445 Special Mention — — — — — — — — Substandard — 15 24 — — 3 — 42 Total Other Consumer $ 23,004 $ 5,434 $ 3,013 $ 4,430 $ 43 $ 204 $ 359 $ 36,487 YTD Gross Charge-offs $ 163 $ 1,092 $ 574 $ 63 $ 118 $ 29 $ — $ 2,039 Construction Pass $ 63,243 $ 156,134 $ 123,455 $ 13,668 $ 3,936 $ 7,232 $ 6,827 $ 374,495 Special Mention — — — — — 62 — 62 Substandard — 65 — 2,090 — 864 — 3,019 Total Construction $ 63,243 $ 156,199 $ 123,455 $ 15,758 $ 3,936 $ 8,158 $ 6,827 $ 377,576 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ 42 $ — $ 42 Other Pass $ — $ — $ — $ — $ — $ 3,320 $ — $ 3,320 Special Mention — — — — — — — — Substandard — — — — — 301,913 — 301,913 Total Other Loans $ — $ — $ — $ — $ — $ 305,233 $ — $ 305,233 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Total Portfolio Loans Pass $ 358,693 $ 853,989 $ 556,200 $ 272,139 $ 181,768 $ 773,760 $ 100,432 $ 3,096,981 Special Mention — — 209 2,838 — 666 — 3,713 Substandard — 80 1,166 2,115 889 305,727 269 310,246 Total Portfolio Loans $ 358,693 $ 854,069 $ 557,575 $ 277,092 $ 182,657 $ 1,080,153 $ 100,701 $ 3,410,940 Current YTD Period: YTD Gross Charge-offs $ 163 $ 1,092 $ 755 $ 63 $ 124 $ 138 $ — $ 2,335 18 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2022 Risk Rating (Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 418,939 $ 186,226 $ 139,148 $ 130,521 $ 215,498 $ 335,659 $ 31,349 $ 1,457,340 Special Mention — 218 — — 9,919 659 — 10,796 Substandard — — — — 2,105 321 — 2,426 Total Commercial Real Estate $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 227,522 $ 336,639 $ 31,349 $ 1,470,562 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 23,104 $ 47,137 $ 35,819 $ 9,022 $ 10,639 $ 154,473 $ 23,699 $ 303,893 Special Mention — — 2,887 — — — — 2,887 Substandard — 56 — 18 97 2,800 41 3,012 Total Commercial and Industrial $ 23,104 $ 47,193 $ 38,706 $ 9,040 $ 10,736 $ 157,273 $ 23,740 $ 309,792 YTD Gross Charge-offs $ 3,432 $ — $ — $ — $ 4 $ — $ — $ 3,436 Residential Mortgages Pass $ 200,725 $ 184,718 $ 81,446 $ 50,770 $ 70,659 $ 39,411 $ 25,315 $ 653,044 Special Mention — — — — 429 520 34 983 Substandard — 1,212 — 865 444 1,400 — 3,921 Total Residential Mortgages $ 200,725 $ 185,930 $ 81,446 $ 51,635 $ 71,532 $ 41,331 $ 25,349 $ 657,948 YTD Gross Charge-offs $ — $ — $ — $ — $ 22 $ 24 $ — $ 46 Other Consumer Pass $ 24,100 $ 10,006 $ 7,323 $ 1,999 $ 512 $ 256 $ 299 $ 44,495 Special Mention — — — — — — — — Substandard — 45 1 — 1 20 — 67 Total Other Consumer $ 24,100 $ 10,051 $ 7,324 $ 1,999 $ 513 $ 276 $ 299 $ 44,562 YTD Gross Charge-offs $ 280 $ 625 $ 254 $ 358 $ 39 $ 121 $ — $ 1,677 Construction Pass $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,523 $ 7,190 $ 6,056 $ 352,516 Special Mention — — — — — 69 — 69 Substandard — — — — 92 876 — 968 Total Construction $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 8,135 $ 6,056 $ 353,553 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Other Pass $ — $ — $ — $ — $ — $ 180,745 $ — $ 180,745 Special Mention — — — — — — — — Substandard — — — — 74,050 57,701 — 131,751 Total Other Loans $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Total Portfolio Loans Pass $ 816,403 $ 545,553 $ 305,544 $ 197,250 $ 322,831 $ 717,734 $ 86,718 $ 2,992,033 Special Mention — 218 2,887 — 10,348 1,248 34 14,735 Substandard — 1,313 1 883 76,789 63,118 41 142,145 Total Portfolio Loans $ 816,403 $ 547,084 $ 308,432 $ 198,133 $ 409,968 $ 782,100 $ 86,793 $ 3,148,913 Current YTD Period: YTD Gross Charge-offs $ 3,712 $ 625 $ 254 $ 358 $ 65 $ 145 $ — $ 5,159 19 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following table presents portfolio loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented: September 30, 2023 (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 224,524 $ 441,066 $ 196,641 $ 148,493 $ 125,716 $ 520,775 $ 30,467 $ 1,687,682 Nonperforming — — — — — 1,265 — 1,265 Total Commercial Real Estate $ 224,524 $ 441,066 $ 196,641 $ 148,493 $ 125,716 $ 522,040 $ 30,467 $ 1,688,947 Commercial and Industrial Performing $ 825 $ 18,601 $ 39,365 $ 28,932 $ 7,094 $ 143,652 $ 25,790 $ 264,259 Nonperforming — — — 25 23 3 19 70 Total Commercial and Industrial $ 825 $ 18,601 $ 39,365 $ 28,957 $ 7,117 $ 143,655 $ 25,809 $ 264,329 Residential Mortgages Performing $ 47,097 $ 232,769 $ 195,101 $ 79,454 $ 44,984 $ 99,897 $ 36,989 $ 736,291 Nonperforming — — — — 861 966 250 2,077 Total Residential Mortgages $ 47,097 $ 232,769 $ 195,101 $ 79,454 $ 45,845 $ 100,863 $ 37,239 $ 738,368 Other Consumer Performing $ 23,004 $ 5,419 $ 3,009 $ 4,430 $ 43 $ 201 $ 359 $ 36,465 Nonperforming — 15 4 — — 3 — 22 Total Other Consumer $ 23,004 $ 5,434 $ 3,013 $ 4,430 $ 43 $ 204 $ 359 $ 36,487 Construction Performing $ 63,243 $ 156,199 $ 123,455 $ 13,668 $ 3,936 $ 7,294 $ 6,827 $ 374,622 Nonperforming — — — 2,090 — 864 — 2,954 Total Construction $ 63,243 $ 156,199 $ 123,455 $ 15,758 $ 3,936 $ 8,158 $ 6,827 $ 377,576 Other Performing $ — $ — $ — $ — $ — $ 3,320 $ — $ 3,320 Nonperforming — — — — — 301,913 — 301,913 Total Other Loans $ — $ — $ — $ — $ — $ 305,233 $ — $ 305,233 Total Portfolio Loans Performing $ 358,693 $ 854,054 $ 557,571 $ 274,977 $ 181,773 $ 775,139 $ 100,432 $ 3,102,639 Nonperforming — 15 4 2,115 884 305,014 269 308,301 Total Portfolio Loans $ 358,693 $ 854,069 $ 557,575 $ 277,092 $ 182,657 $ 1,080,153 $ 100,701 $ 3,410,940 20 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2022 (Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 225,416 $ 336,441 $ 31,349 $ 1,468,258 Nonperforming — — — — 2,106 198 — 2,304 Total Commercial Real Estate $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 227,522 $ 336,639 $ 31,349 $ 1,470,562 Commercial and Industrial Performing $ 23,104 $ 47,147 $ 38,706 $ 9,022 $ 10,639 $ 157,271 $ 23,699 $ 309,588 Nonperforming — 46 — 18 97 2 41 204 Total Commercial and Industrial $ 23,104 $ 47,193 $ 38,706 $ 9,040 $ 10,736 $ 157,273 $ 23,740 $ 309,792 Residential Mortgages Performing $ 200,725 $ 184,718 $ 81,446 $ 50,770 $ 71,313 $ 40,362 $ 25,349 $ 654,683 Nonperforming — 1,212 — 865 219 969 — 3,265 Total Residential Mortgages $ 200,725 $ 185,930 $ 81,446 $ 51,635 $ 71,532 $ 41,331 $ 25,349 $ 657,948 Other Consumer Performing $ 24,100 $ 10,045 $ 7,323 $ 1,999 $ 512 $ 276 $ 299 $ 44,554 Nonperforming — 6 1 — 1 — — 8 Total Other Consumer $ 24,100 $ 10,051 $ 7,324 $ 1,999 $ 513 $ 276 $ 299 $ 44,562 Construction Performing $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 7,271 $ 6,056 $ 352,689 Nonperforming — — — — — 864 — 864 Total Construction $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 8,135 $ 6,056 $ 353,553 Other Performing $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 Nonperforming — — — — — — — Total Other Loans $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 Total Portfolio Loans Performing $ 816,403 $ 545,820 $ 308,431 $ 197,250 $ 407,545 $ 780,067 $ 86,752 $ 3,142,268 Nonperforming — 1,264 1 883 2,423 2,033 41 6,645 Total Portfolio Loans $ 816,403 $ 547,084 $ 308,432 $ 198,133 $ 409,968 $ 782,100 $ 86,793 $ 3,148,913 The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented: September 30, 2023 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Past Due 90+ Days Still Accruing Total Loans Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,686,768 $ 234 $ — $ 234 $ 680 $ 914 $ 1,265 $ 1,688,947 Commercial and Industrial 264,197 57 5 62 — 62 70 264,329 Residential Mortgages 734,012 2,079 200 2,279 — 2,279 2,077 738,368 Other Consumer 36,033 249 183 432 — 432 22 36,487 Construction 374,574 — 48 48 — 48 2,954 377,576 Other 3,320 — — — — — 301,913 305,233 Total $ 3,098,904 $ 2,619 $ 436 $ 3,055 $ 680 $ 3,735 $ 308,301 $ 3,410,940 21 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2022 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,468,154 $ 104 $ — $ 104 $ 2,304 $ 1,470,562 Commercial and Industrial 309,305 274 9 283 204 309,792 Residential Mortgages 654,238 445 — 445 3,265 657,948 Other Consumer 44,013 337 204 541 8 44,562 Construction 349,225 1,321 2,143 3,464 864 353,553 Other 312,496 — — — — 312,496 Total $ 3,137,431 $ 2,481 $ 2,356 $ 4,837 $ 6,645 $ 3,148,913 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: 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 90+ Days Still Accruing Commercial Real Estate $ — $ 1,265 $ 1,265 $ 680 Commercial and Industrial — 70 70 — Residential Mortgages — 2,077 2,077 — Other Consumer — 22 22 — Construction 2,090 864 2,954 — Other — 301,913 301,913 — Total $ 2,090 $ 306,211 $ 308,301 $ 680 December 31, 2022 (Dollars in Thousands) Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Past Due 90+ Days Still Accruing Commercial Real Estate $ — $ 2,304 $ 2,304 $ — Commercial and Industrial — 204 204 — Residential Mortgages — 3,265 3,265 — Other Consumer — 8 8 — Construction — 864 864 — Other — — — — Total $ — $ 6,645 $ 6,645 $ — 22 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) A loan is considered nonperforming when we transfer the interest methodology from accrual to nonaccrual. Nonaccrual status recognizes that the collection in full of both principal and interest is unlikely. Without applying additional scrutiny at a granular level, we believe delinquency to be a leading indicator with respect to the likelihood of collection in full of both principal and interest. Accordingly, we automatically transfer loans to nonaccrual status if they are 90 or more days’ delinquent. Management reserves the right to exercise discretion at the individual loan level. For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely. We may also elect to retain a loan that is 90 or more days’ delinquent in accrual status if we believe the loan is well secured and in the process of collection. Nonaccrual loans, and loans that have been characterized as Restructured Loans may be individually evaluated for credit losses in the Allowance for Credit Losses model if the loan commitment is $ 1.0 million or more unless we elect to maintain the loan in the general pool. During the three 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. September 30, 2023 December 31, 2022 (Dollars in Thousands) Collateral Discounted Cash Flow Total Collateral Commercial Real Estate $ — $ — $ — $ 2,106 Commercial and Industrial — — — — Residential Mortgages — — — 1,212 Other Consumer — — — — Construction 2,090 — 2,090 — Other — 301,913 301,913 — Total $ 2,090 $ 301,913 $ 304,003 $ 3,318 23 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following tables present activity in the ACL for the periods presented: Three Months Ended September 30, 2023 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144 Provision (Recovery) for Credit Losses on Loans 346 ( 256 ) 356 515 144 — 1,105 Charge-offs — ( 50 ) ( 133 ) ( 731 ) — — ( 914 ) Recoveries — — 10 129 — — 139 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 Nine Months Ended September 30, 2023 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852 Provision (Recovery) for Credit Losses on Loans 1,498 ( 947 ) 1,919 1,346 ( 153 ) ( 1,058 ) 2,605 Charge-offs — ( 51 ) ( 203 ) ( 2,039 ) ( 42 ) — ( 2,335 ) Recoveries — 5 12 335 — — 352 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 September 30, 2022 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981 (Recovery) Provision for Credit Losses on Loans ( 433 ) 1,542 466 206 1,856 ( 3,714 ) ( 77 ) Charge-offs — ( 3,432 ) — ( 418 ) — — ( 3,850 ) Recoveries — — 1 109 — — 110 Net (Charge-offs)/Recoveries — ( 3,432 ) 1 ( 309 ) — — ( 3,740 ) Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164 Nine Months Ended September 30, 2022 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939 Provision (Recovery) for Credit Losses on Loans 78 3,118 1,202 1,035 1,600 ( 4,666 ) 2,367 Charge-offs — ( 3,432 ) ( 45 ) ( 1,244 ) — — ( 4,721 ) Recoveries — 1 97 332 149 — 579 Net (Charge-offs)/Recoveries — ( 3,431 ) 52 ( 912 ) 149 — ( 4,142 ) Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164 24 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis. Recurring Basis Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into 25 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2. The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates. Nonrecurring Basis Individually Evaluated Loans: Individually evaluated loans with commitments greater than or equal to $ 1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy. Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Alternative methodologies utilize various discounted cash flow assumptions in the alternative modeling through a variety of scenarios. Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal. For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan. OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $ 0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. 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. 26 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) Financial assets measured at fair value on a recurring basis are summarized below for the periods presented: September 30, 2023 (Dollars in Thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Treasury Securities $ 13,104 $ 13,104 $ — $ — U.S. Government Agency Securities 47,742 — 47,742 — Residential Mortgage-Backed Securities 97,562 — 97,562 — Commercial Mortgage-Backed Securities 33,328 — 33,328 — Other Commercial Mortgage-Backed Securities 21,104 — 21,104 — Asset Backed Securities 137,075 — 137,075 — Collateralized Mortgage Obligations 163,306 — 163,306 — States and Political Subdivisions 222,644 — 222,644 — Corporate Notes 57,524 — 50,113 7,411 Total Securities Available-for-Sale 793,389 13,104 772,874 7,411 Derivatives 25,296 — 25,296 — Total $ 818,685 $ 13,104 $ 798,170 $ 7,411 Liabilities Derivatives $ 24,775 $ — $ 24,775 $ — Total $ 24,775 $ — $ 24,775 $ — December 31, 2022 (Dollars in Thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Treasury Securities $ 17,866 $ 17,866 $ — $ — U.S. Government Agency Securities 49,764 — 49,764 — Residential Mortgage-Backed Securities 103,685 — 103,685 — Commercial Mortgage-Backed Securities 34,675 — 34,675 — Other Commercial Mortgage-Backed Securities 22,399 2,538 19,861 — Asset Backed Securities 141,383 4,996 136,387 — Collateralized Mortgage Obligations 176,622 — 176,622 — States and Political Subdivisions 228,146 — 228,146 — Corporate Notes 61,733 — 54,216 7,517 Total Securities Available-for-Sale 836,273 25,400 803,356 7,517 Derivatives 22,974 — 22,974 — Total $ 859,247 $ 25,400 $ 826,330 $ 7,517 Liabilities Derivatives $ 22,543 $ — $ 22,543 $ — Total $ 22,543 $ — $ 22,543 $ — We have invested in subordinated debt of other financial institutions. 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. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures. 27 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented: September 30, 2023 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 3,765 $ 3,765 Individually Evaluated Loans $ — $ — $ — $ — December 31, 2022 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 8,393 $ 8,393 Individually Evaluated Loans $ — $ — $ 2,649 $ 2,649 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 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: September 30, 2023 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets 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 % 11.9 % OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % Total OREO $ 3,765 December 31, 2022 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets Individually Evaluated Loans $ 858 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 14.2 % 14.2 % Individually Evaluated Loans $ 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 % Total Individually Evaluated Loans $ 2,649 OREO $ 7,323 Appraisals Estimated Selling Costs 10.0 % 10.0 % OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % OREO 927 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 0.0 % - 5.0 % 0.7 % Total OREO $ 8,393 A baseline discount rate has been established for impairment measurement. 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 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. 28 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) 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. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Fair Value Measurements at September 30, 2023 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 55,398 $ 37,960 $ 17,438 $ — $ 55,398 Securities Available-for-Sale 793,389 13,104 772,874 7,411 793,389 Portfolio Loans, net 3,316,466 — — 3,208,543 3,208,543 Federal Home Loan Bank Stock, at Cost 27,361 — — NA NA Other Assets- Interest Rate Derivatives 25,296 — 25,296 — 25,296 Accrued Interest Receivable 17,713 39 5,401 12,273 17,713 Financial Liabilities: Deposits $ 3,556,189 $ 661,454 $ 1,383,181 $ 1,515,311 $ 3,559,946 Other Liabilities- Interest Rate Derivatives 24,775 — 24,775 — 24,775 FHLB Borrowings 514,135 — — 512,282 512,282 Accrued Interest Payable 6,930 — — 6,930 6,930 Fair Value Measurements at December 31, 2022 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 46,869 $ 42,364 $ 4,505 $ — $ 46,869 Securities Available-for-Sale 836,273 25,400 803,356 7,517 836,273 Portfolio Loans, net 3,055,061 — — 2,955,489 2,955,489 Federal Home Loan Bank Stock, at Cost 9,740 — — NA NA Other Assets- Interest Rate Derivatives 22,974 — 22,974 — 22,974 Accrued Interest Receivable 19,346 138 4,903 14,305 19,346 Financial Liabilities: Deposits $ 3,630,333 $ 703,334 $ 1,665,473 $ 1,264,659 $ 3,633,466 Other Liabilities- Interest Rate Derivatives 22,543 — 22,543 — 22,543 FHLB Borrowings 180,550 — — 180,569 180,569 Federal Funds Purchased 17,870 — 17,870 — 17,870 Accrued Interest Payable 2,294 — — 2,294 2,294 29 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income. The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented: Fair Value of Derivative Assets (Included in Other Assets) September 30, 2023 December 31, 2022 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans 6 $ 899 $ 5 1 $ 200 $ 1 Interest Rate Swap Contracts – Commercial Loans 58 390,408 25,291 62 432,984 22,973 Total Derivatives not Designated as Hedging Instruments 64 $ 391,307 $ 25,296 63 $ 433,184 $ 22,974 Fair Value of Derivative Liabilities (Included in Other Liabilities) September 30, 2023 December 31, 2022 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 6 $ 899 $ 5 1 $ 200 $ 1 Interest Rate Swap Contracts – Commercial Loans 58 390,408 24,770 62 432,984 22,542 Total Derivatives not Designated as Hedging Instruments 64 $ 391,307 $ 24,775 63 $ 433,184 $ 22,543 30 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued) The following table indicates the income (loss) recognized on derivatives for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 2023 2022 Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans $ ( 1 ) $ 2 $ 4 $ 20 Forward Sale Contracts – Mortgage Loans 1 ( 2 ) ( 4 ) ( 20 ) Interest Rate Swap Contracts – Commercial Loans 234 295 90 738 Total Derivative Income $ 234 $ 295 $ 90 $ 738 Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented: Derivative Assets (Included in Other Assets) Derivative Liabilities (Included in Other Liabilities) (Dollars in Thousands) September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 25,291 $ 22,973 $ 24,770 $ 22,542 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 25,291 22,973 24,770 22,542 Gross Amounts Not Offset — — — — Net Amount $ 25,291 $ 22,973 $ 24,770 $ 22,542 NOTE 8 – DEPOSITS The following table presents the composition of deposits at the dates presented: (Dollars in Thousands) September 30, 2023 December 31, 2022 Noninterest-Bearing Demand $ 661,454 $ 703,334 Interest-Bearing Demand 469,904 496,948 Money Market 426,172 484,238 Savings 487,105 684,287 Certificates of Deposits 1,511,554 1,261,526 Total $ 3,556,189 $ 3,630,333 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) September 30, 2023 3 Months or Less $ 217,569 Over 3 Months through 12 Months 765,980 Over 1 Year Through 3 Years 456,579 Over 3 Years 71,426 Total $ 1,511,554 31 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 $ 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 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 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) September 30, 2023 December 31, 2022 FHLB Borrowings $ 514,135 $ 180,550 Weighted Average Interest Rate 5.29 % 4.48 % FHLB Availability $ 357,583 $ 676,746 The following table represents the balance of federal funds purchased and the weighted average interest rate as of the periods presented: (Dollars in Thousands) September 30, 2023 December 31, 2022 Federal Fund Purchased $ — $ 17,870 Weighted Average Interest Rate — % 4.65 % Federal Funds Purchased Availability $ 145,000 $ 127,130 Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2023 and thereafter are as follows : (Dollars in Thousands) Balance Weighted Average Rate 1 year $ 444,135 5.49 % 2 years 25,000 4.13 % 3 years 45,000 3.96 % 4 years — — % 5 years — — % Thereafter — — % Total FHLB Borrowings $ 514,135 5.29 % NOTE 10 – COMMITMENTS AND CONTINGENCIES 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. The Company 32 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) 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 $ 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) September 30, 2023 December 31, 2022 Commitments to Extend Credit $ 751,113 $ 630,619 Standby and Performance Letters of Credit 21,611 25,739 Total $ 772,724 $ 656,358 Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk. Life-of-Loss Reserve on Unfunded Loan Commitments We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets. The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 2023 2022 Life-of-Loss Reserve on Unfunded Loan Commitments Balance at Beginning of Period $ 2,736 $ 1,816 $ 2,292 $ 1,783 (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. Litigation 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. 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. Justice, II, Cathy L Justice and James C. Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Defendants”). On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Defendants with an aggregate principal balance of approximately $ 301.9 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 33 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company and the Bank vigorously deny the allegations contained in the Defendants’ motions to set aside the confessions of judgment. Based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in such motions to set aside the confessions of judgment. Because the collection litigation is in its early stages, the Company can make no prediction as to the ultimate outcome thereof or any related legal proceedings that may commence, and the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter or to estimate the range of any possible gain or loss with respect to this litigation. NOTE 11 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS 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 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) 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 Loss $ ( 10,166 ) $ 4,615 $ 2,222 $ ( 7,944 ) $ ( 111,408 ) $ 23,396 $ ( 88,012 ) NOTE 12 – STOCK REPURCHASE PLAN On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months, (the “2023 Program”) subject to receipt of non-objection from the Federal Reserve Bank of Richmond, which was received on April 24, 2023. The 2023 Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the 2023 Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position and applicable legal and regulatory requirements. The 2023 Program is authorized through May 1, 2024, although it may be modified or terminated by the Board at any time. The 2023 Program does not obligate the Company to purchase any particular number of shares, 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 34 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. Previously on December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months (the “2021 Program”). The 2021 Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022. NOTE 13 – PROVISION FOR INCOME TAXES The following is a reconciliation of the differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Federal Income Tax at Statutory Rate $ 925 21.0 $ 4,077 21.0 $ 6,428 21.0 $ 8,954 21.0 State Income Tax, net of Federal Benefit 48 1.1 208 1.1 468 1.5 470 1.1 Tax-exempt Interest, net of Disallowance ( 170 ) ( 3.9 ) ( 214 ) ( 1.1 ) ( 548 ) ( 1.8 ) ( 667 ) ( 1.6 ) Federal Tax Credits, net of Basis Reduction ( 556 ) ( 12.6 ) 790 4.1 ( 1,665 ) ( 5.4 ) ( 317 ) ( 0.7 ) Tax Credit Investment Amortization, net of Federal Benefit 379 8.6 — — 1,136 3.7 — — Change in Valuation Allowance — — 219 1.1 — — ( 61 ) ( 0.1 ) Income from Bank Owned Life Insurance ( 73 ) ( 1.7 ) ( 72 ) ( 0.4 ) ( 216 ) ( 0.7 ) ( 212 ) ( 0.5 ) Interim Period Effective Tax Rate Adjustment 321 7.3 6 — ( 276 ) ( 0.9 ) ( 49 ) ( 0.1 ) Other ( 94 ) ( 2.1 ) ( 5 ) — 11 — 12 — Income Tax Provision and Effective Income Tax Rate $ 780 17.7 $ 5,009 25.8 $ 5,338 17.4 $ 8,130 19.1 The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the HTC program. The Company makes equity investments as a limited partner in various partnerships that sponsor HTC as a strategic tax initiative designed to receive income tax credits and other income tax benefits, such as deductible flow-through losses. As of 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. Investments accounted for using the proportional amortization method are amortized and recorded as a component of the provision for income taxes on the Consolidated Statements of Income. The Company records non-income-tax-related activity and other returns received from its HTC investments as a component of other noninterest income on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows. As of September 30, 2023, the Company has not recognized any non-income-tax-related activity from its HTC investments. 35 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 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. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections: • Important Note Regarding Forward-Looking Statements • Explanation of Use of Non-GAAP Financial Measures • Critical Accounting Estimates • Overview and Strategy • Results of Operations and Financial Condition ◦ Earnings Summary ◦ Liquidity and Capital Resources ◦ Regulatory Capital Requirements ◦ Contractual Obligations ◦ Off-Balance Sheet Arrangements Important Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality, including but not limited to statements regarding the interest rate environment, the impact of future changes in interest rates, and the impacts of the Company placing its largest lending relationship on nonaccrual status. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company’s control. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of: • market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios; • inflation, market and monetary fluctuations; • changes in trade, monetary and fiscal policies and laws of the U.S. Government, including policies of the Federal Reserve, FDIC and U.S. Department of the Treasury (the “Treasury Department”); 36 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued) • changes in accounting policies, practices, or guidance, for example, our adoption of Current Expected Credit Losses (“CECL”) methodology, including potential volatility in the Company’s operating results due to application of the CECL methodology; • cyber-security threats, attacks or events; • rapid technological developments and changes; • our ability to resolve our nonperforming assets, and our ability to secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full; • changes in the Company’s liquidity and capital positions; • concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral; • an insufficient allowance for credit losses; • the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the 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; • a change in spreads on interest-earning assets and interest-bearing liabilities; • regulatory supervision and oversight, including our relationship with regulators and any actions that may be initiated by our regulators; • legislation affecting the financial services industry as a whole (such as the Inflation Reduction Act of 2022), and the Company and the Bank, in particular; • the outcome of pending and future litigation and/or governmental proceedings; • increasing price and product/service competition; • the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; • managing our internal growth and acquisitions; • the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated; • the soundness of other financial institutions and any indirect exposure related to the closings of Silicon Valley Bank (“SVB”), Signature Bank, Silvergate Bank and First Republic Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank, Silvergate Bank and First Republic Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with ; • our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs and marketing programs in the markets we serve, including, but not limited to, the Company’s guiding principles, including our new purpose statement: To create opportunities for more people and businesses to prosper ; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership ; • material increases in costs and expenses; • reliance on significant customer relationships; • general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth; • significant weakening of the local economies in which we operate; • changes in customer behaviors, including consumer spending, borrowing and saving habits; 37 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 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; and • 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 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. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are prepared. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made. Explanation of Use of Non-GAAP Financial Measures In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earning assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earning assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A. Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies. Critical Accounting Estimates Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of 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. 38 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 $4.5 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 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. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”. The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and income tax provision. For the 2023-2025 fiscal year periods, the Company will focus on refining and enhancing its brand image and position in the markets it serves. To strengthen and further shape the culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper ; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company. The Company’s Board of Directors and management believe that the Bank is at a turning point in its evolution and transformation. The Company’s 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 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 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; and • 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 39 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) • 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; and • 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 $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; • Nonperforming loans as a percentage of total portfolio loans were 9.04% compared to 0.21%. The significant increase is due to loans contained in the Other segment with an aggregate principal balance of $301.9 million that were placed into nonaccrual status due to loan maturities and failure to pay in full during the second quarter of 2023. These loans comprise 97.9% 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; and • The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.77% compared to 2.98%. The ACL on portfolio loans totaled $94.5 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 Return on Average Assets 0.33 % 1.38 % 0.78 % 1.12 % Return on Average Shareholders’ Equity 4.19 % 16.75 % 9.71 % 12.80 % Portfolio Loans to Deposit Ratio 95.92 % 81.36 % 95.92 % 81.36 % Allowance for Credit Losses to Total Portfolio Loans 2.77 % 3.11 % 2.77 % 3.11 % Nonperforming Loans to Total Portfolio Loans 9.04 % 0.23 % 9.04 % 0.23 % 40 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Net Interest Income Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income. Net interest income and the net interest margin are presented on an FTE basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities. The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q. Total net interest income decreased $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 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. Yields on our loan portfolio consist of 24.5% floating rates and 41.3% variable rates, while 47.3% of the securities portfolio is floating rate and adjust as interest rates increase. This positively impacts revenue and helps mitigate increased funding costs. The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE 41 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 2023 2022 Interest Income (FTE)(Non-GAAP) Interest and Dividend Income (GAAP) $ 48,886 $ 42,327 $ 144,557 $ 111,966 Tax Equivalent Adjustment 247 279 768 870 Interest and Dividend Income (FTE) (Non-GAAP) 49,133 42,606 145,325 112,836 Average Earning Assets $ 4,320,390 $ 4,024,880 $ 4,256,560 $ 4,006,788 Yield on Interest-earning Assets (GAAP) 4.49 % 4.17 % 4.54 % 3.74 % Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.51 % 4.20 % 4.56 % 3.77 % Net Interest Income (GAAP) $ 27,394 $ 37,725 $ 94,890 $ 98,406 Tax Equivalent Adjustment 247 279 768 870 Net Interest Income (FTE) (Non-GAAP) 27,641 38,004 95,658 99,276 Average Earning Assets $ 4,320,390 $ 4,024,880 $ 4,256,560 $ 4,006,788 Net Interest Margin (GAAP) 2.52 % 3.72 % 2.98 % 3.28 % Net Interest Margin (FTE) (Non-GAAP) 2.54 % 3.75 % 3.00 % 3.31 % 42 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Average Balance Sheet and Net Interest Income Analysis (FTE) The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented: Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 (Dollars in Thousands) Average Balance Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate ASSETS Interest-Bearing Deposits with Banks $ 12,652 $ 172 5.39 % $ 25,151 $ 134 2.11 % Tax-Free Investment Securities (2) 27,594 203 2.92 % 30,073 215 2.84 % Taxable Investment Securities 893,386 7,793 3.46 % 942,571 5,466 2.30 % Total Securities 920,980 7,996 3.44 % 972,644 5,681 2.32 % Tax-Free Loans (1)(2) 120,670 972 3.20 % 141,082 1,115 3.14 % Taxable Loans (3) 3,243,663 39,578 4.84 % 2,883,790 35,652 4.90 % Total Loans 3,364,333 40,550 4.78 % 3,024,872 36,767 4.82 % Federal Home Loan Bank Stock 22,425 415 7.34 % 2,213 24 4.30 % Total Interest-Earning Assets 4,320,390 $ 49,133 4.51 % 4,024,880 $ 42,606 4.20 % Noninterest Earning Assets 88,805 109,307 Total Assets $ 4,409,195 $ 4,134,187 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 475,939 $ 720 0.60 % $ 500,281 $ 462 0.37 % Money Market 430,954 2,495 2.30 % 552,718 395 0.28 % Savings 504,697 140 0.11 % 731,931 192 0.10 % Certificates of Deposit 1,486,165 11,973 3.20 % 1,257,907 3,420 1.08 % Total Interest-Bearing Deposits 2,897,755 15,328 2.10 % 3,042,837 4,469 0.58 % Federal Home Loan Bank Borrowings 447,287 5,986 5.31 % 3,913 31 3.14 % Federal Funds Purchased 7,550 107 5.62 % 3,432 23 2.66 % Other Borrowings 6,131 71 4.59 % 6,326 79 4.95 % Total Borrowings 460,968 6,164 5.31 % 13,671 133 3.86 % Total Interest-Bearing Liabilities 3,358,723 21,492 2.54 % 3,056,508 4,602 0.60 % Noninterest-Bearing Liabilities 707,445 736,441 Shareholders' Equity 343,027 341,238 Total Liabilities and Shareholders' Equity $ 4,409,195 $ 4,134,187 Net Interest Income (2) $ 27,641 $ 38,004 Net Interest Margin (2) 2.54 % 3.75 % (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3) Average loan balances include loans held-for-sale. 43 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 ASSETS Interest-Bearing Deposits with Banks $ 15,550 $ 587 5.05 % $ 64,858 $ 257 0.53 % Tax-Free Investment Securities (2) 28,189 618 2.93 % 30,188 663 2.94 % Taxable Investment Securities 908,670 22,874 3.37 % 959,456 13,650 1.90 % Total Securities 936,859 23,492 3.35 % 989,644 14,313 1.93 % Tax-Free Loans (1)(2) 126,578 3,041 3.21 % 147,372 3,484 3.16 % Taxable Loans (3) 3,158,888 117,235 4.96 % 2,802,692 94,716 4.52 % Total Loans 3,285,466 120,276 4.89 % 2,950,064 98,201 4.45 % Federal Home Loan Bank Stock 18,685 970 6.94 % 2,222 66 3.97 % Total Interest-Earning Assets 4,256,560 $ 145,325 4.56 % 4,006,788 $ 112,836 3.77 % Noninterest Earning Assets 92,613 128,105 Total Assets $ 4,349,173 $ 4,134,893 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 485,605 $ 1,876 0.52 % $ 484,076 $ 1,082 0.30 % Money Market 440,700 5,607 1.70 % 530,560 989 0.25 % Savings 570,538 456 0.11 % 724,472 559 0.10 % Certificates of Deposit 1,388,773 26,690 2.57 % 1,278,905 10,650 1.11 % Total Interest-Bearing Deposits 2,885,616 34,629 1.60 % 3,018,013 13,280 0.59 % Federal Home Loan Bank Borrowings 380,023 14,461 5.09 % 3,978 47 1.58 % Federal Funds Purchased 9,062 354 5.22 % 2,168 27 1.67 % Other Borrowings 6,247 223 4.77 % 5,637 206 4.89 % Total Borrowings 395,332 15,038 5.09 % 11,783 280 3.18 % Total Interest-Bearing Liabilities 3,280,948 49,667 2.02 % 3,029,796 13,560 0.60 % Noninterest-Bearing Liabilities 720,181 744,597 Shareholders' Equity 348,044 360,500 Total Liabilities and Shareholders' Equity $ 4,349,173 $ 4,134,893 Net Interest Income (2) $ 95,658 $ 99,276 Net Interest Margin (2) 3.00 % 3.31 % (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3) Average loan balances include loans held-for-sale. Interest income increased $6.6 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 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 44 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 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 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. 45 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: Three Months Ended September 30, 2023 Compared to September 30, 2022 Nine Months Ended September 30, 2023 Compared to September 30, 2022 (Dollars in Thousands) Volume (3) Rate (3) Increase/ (Decrease) Volume (3) Rate Increase/ (Decrease) Interest Earned on: Interest-Bearing Deposits with Banks $ (92) $ 130 $ 38 $ (332) $ 662 $ 330 Tax-free Investment Securities (2) (18) 6 (12) (44) (1) (45) Taxable Investment Securities (299) 2,626 2,327 (758) 9,982 9,224 Total Securities (317) 2,632 2,315 (802) 9,981 9,179 Tax-free Loans (1)(2) (165) 22 (143) (499) 56 (443) Taxable Loans (1) 4,397 (471) 3,926 12,704 9,815 22,519 Total Loans 4,232 (449) 3,783 12,205 9,870 22,075 Federal Home Loan Bank Stock 363 28 391 821 83 904 Total Interest-Earning Assets $ 4,186 $ 2,341 $ 6,527 $ 11,892 $ 20,597 $ 32,489 Interest Paid on: Interest-Bearing Demand $ (23) $ 281 $ 258 $ 3 $ 791 $ 794 Money Market (106) 2,206 2,100 (195) 4,813 4,618 Savings (62) 10 (52) (122) 19 (103) Certificates of Deposit 724 7,829 8,553 989 15,051 16,040 Total Interest-Bearing Deposits 533 10,326 10,859 675 20,674 21,349 Federal Home Loan Bank Borrowings 5,919 36 5,955 14,083 331 14,414 Federal Funds Purchased 44 40 84 196 131 327 Other Borrowings (2) (6) (8) 22 (5) 17 Total Borrowings 5,961 70 6,031 14,301 457 14,758 Total Interest-Bearing Liabilities 6,494 10,396 16,890 14,976 21,131 36,107 Change in Net Interest Margin $ (2,308) $ (8,055) $ (10,363) $ (3,084) $ (534) $ (3,618) (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. Provision for Credit Losses The Company recognizes provision expense for the ACL based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments. Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. The ACL to total portfolio loans was 2.77% 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% 46 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 September 30, 2023 by $301.7 million to $308.3 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. 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. Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL. Noninterest Income Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change (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) % Debit Card Interchange Fees 1,902 1,788 114 6.4 % 5,941 5,570 371 6.7 % Insurance Commissions 868 876 (8) (0.9) % 1,550 1,713 (163) (9.5) % Bank Owned Life Insurance Income 348 341 7 2.1 % 1,028 1,009 19 1.9 % (Losses) Gains on Sales and Write-downs of Bank Premises, net — (4) 4 100.0 % — 342 (342) (100.0) % Commercial Loan Swap Fee Income — 18 (18) (100.0) % 114 774 (660) (85.3) % Other 370 470 (100) (21.3) % 1,030 1,266 (236) (18.6) % Total Noninterest Income $ 5,270 $ 5,235 $ 35 0.7 % $ 15,033 $ 16,174 $ (1,141) (7.1) % 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 $0.4 million in debit card interchange fees due to higher interchange fee volume in the first nine months of 2023. 47 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Noninterest Expense Three Months Ended September 30, 2023 Nine Months Ended September 30, (Dollars in Thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change Salaries and Employee Benefits $ 13,956 $ 13,520 $ 436 3.2 % $ 41,257 $ 37,721 $ 3,536 9.4 % Occupancy Expense, net 3,547 3,412 135 4.0 % 10,548 10,060 488 4.9 % FDIC Insurance Expense 1,368 543 825 151.9 % 2,711 1,540 1,171 76.0 % Other Taxes 846 848 (2) (0.2) % 2,436 2,471 (35) (1.4) % Advertising Expense 363 368 (5) (1.4) % 1,133 874 259 29.6 % Telephone Expense 500 448 52 11.6 % 1,339 1,390 (51) (3.7) % Professional and Legal Fees 1,512 1,310 202 15.4 % 4,005 3,731 274 7.3 % Data Processing 1,076 833 243 29.2 % 2,854 2,516 338 13.4 % Debit Card Expense 816 797 19 2.4 % 2,066 2,089 (23) (1.1) % Tax Credit Amortization — (764) 764 100.0 % — 466 (466) (100.0) % Other 3,298 2,148 1,150 53.5 % 8,045 6,526 1,519 23.3 % Total Noninterest Expense $ 27,282 $ 23,463 $ 3,819 16.3 % $ 76,394 $ 69,384 $ 7,010 10.1 % 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. 48 Table of Contents CARTER BANKSHARES, INC.