What changed in this filing

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Item 1. Financial Statements

2024-05-03 compared with 2023-10-27 · 344 added, 456 removed, 1061 unchanged (43% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023

1 unchanged sentence

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

Provision for Credit Losses, including (Recovery) Provision for Unfunded Commitments ( 27 ) 1,499

Origination of Loans Held-for-Sale ( 2,195 ) ( 1,795 )

4 unchanged sentences

Tax Credit Amortization 163 612

Gains on Sales of Mortgage Loans Held-for-Sale ( 90 ) ( 154 )

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

Gains on Sales of Loans Held-for-Sale ( 37 ) ( 20 )

Losses on Sales of Securities, net — 12

Commercial Loan Swap Derivative Income ( 14 ) 194

1 unchanged sentence

Recognition of Restricted Stock Compensation Expense 441 345

(Increase) Decrease in Other Assets ( 826 ) 694

Decrease in Other Assets 2,125 2,386

Increase (Decrease) in Other Liabilities 6,578 ( 1,088 )

2 unchanged sentences

Securities Available-for-Sale:

Proceeds from Sales 15,054 19,777

Proceeds from Maturities, Redemptions, and Pay-downs 11,246 12,717

1 unchanged sentence

Purchase of Bank Premises and Equipment, Net ( 1,305 ) ( 1,925 )

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

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

Redemption (Purchase) of Federal Home Loan Bank Stock, net 3,716 ( 10,853 )

Loan Originations, net ( 4,874 ) ( 100,558 )

Payments Received on Other Real Estate Owned — 102

Proceeds from Sales of Other Real Estate Owned 4,818 3,742

Net Cash Used In Investing Activities ( 255,481 ) ( 270,111 )

Proceeds from Sales and Payments of Other Real Estate Owned 1,458 —

Net Cash Provided By (Used In) Investing Activities 10,241 ( 125,455 )

FINANCING ACTIVITIES

Net Change in Demand, Money Markets and Savings Accounts 577 ( 142,811 )

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 ) —

Increase in Certificates of Deposits 108,029 45,885

(Repayments) Proceeds from Federal Home Loan Bank Borrowings, net ( 82,900 ) 254,585

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

Repurchase of Common Stock — ( 2,260 )

Net Cash Provided By Financing Activities 25,706 137,529

Net Increase (Decrease) in Cash and Cash Equivalents 8,529 ( 212,091 )

Net Increase in Cash and Cash Equivalents 53,581 34,509

Cash and Cash Equivalents at Beginning of Period 54,529 46,869

3 unchanged sentences

Cash Paid for Income Taxes 25 25

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

Transfer from Loans to Other Real Estate Owned 1,181 —

See accompanying notes to unaudited consolidated financial statements.

18 unchanged sentences

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 2024

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.

The Company did not adopt any Accounting Standards Updates (“ASU”) during the three months ended March 31, 2024.

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

On March 29, 2024 the FASB issued ASU 2024-02, Codification Improvements— Amendments to Remove References to the Concepts Statements, which amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification.

The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance.

Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities.

The ASU is effective January 1, 2025 and is not expected to have a significant impact on the Company’s financial statements.

On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which enhances the required disclosures primarily related to the income tax rate reconciliation and income taxes paid.

The ASU requires an entity’s income tax rate reconciliation to provide additional information for reconciling items meeting a quantitative threshold, and to disclose certain selected categories within the income tax rate reconciliation.

The ASU also requires entities to disclose the amount of income taxes paid, disaggregated by federal, state and foreign taxes.

The ASU is effective for annual periods beginning after December 15, 2024, though early adoption is permitted.

The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements.

On November 27, 2023, the FASB issued ASU 2023-07.

Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which changes disclosures relating to reportable segments.

The ASU expands the disclosure requirements relating to reportable segments, including requiring entities to disclose information about a reportable segment’s significant expenses, among other changes.

The ASU does not change how an entity identifies reportable segments or the accounting for segments.

The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted.

The Company has one reporting segment therefore, will not impact our Consolidated Financial Statements;

however, this ASU requires disclosure of the title and position of the chief operating decision maker and an explanation of how resources are allocated.

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Disclosure Rules

In March 2024, the U.S.

Securities and Exchange Commission ("SEC") adopted final rules under SEC Release No.

33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”.

This rule will require registrants to disclose certain climate-related information in registration statements and annual reports.

The disclosure requirements will start to phase-in commencing with the Company's fiscal year beginning January 1, 2026.

NOTE 2 – EARNINGS PER SHARE

2 unchanged sentences

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

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

Three Months Ended March 31,

(Dollars in Thousands, except share and per share data) 2024 2023

12 unchanged sentences

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

September 30, 2023

March 31, 2024

(Dollars in Thousands) Amortized

Losses Fair Value

Treasury Securities $ 14,383 $ — $ ( 1,279 ) $ 13,104

Government Agency Securities 40,094 97 ( 819 ) 39,372

13 unchanged sentences

Losses Fair Value

Treasury Securities $ 19,318 $ — $ ( 1,452 ) $ 17,866

Government Agency Securities 44,185 398 ( 756 ) 43,827

7 unchanged sentences

Total Debt Securities $ 870,546 $ 734 $ ( 92,277 ) $ 779,003

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

The Company did not have securities classified as held-to-maturity at March 31, 2024 or December 31, 2023.

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023

5 unchanged sentences

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

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

3 unchanged sentences

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

September 30, 2023

March 31, 2024

(Dollars in Thousands) Amortized

9 unchanged sentences

Total Debt Securities $ 858,256 $ 768,832

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.

At March 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than those securities issued 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.

The carrying value of securities pledged for various regulatory and legal requirements was $ 303.4 million at March 31, 2024 and $ 215.5 million at December 31, 2023.

CARTER BANKSHARES, INC.

1 unchanged sentence

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

Available-for-sale securities with unrealized losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

March 31, 2024

Less Than 12 Months 12 Months or More Total

8 unchanged sentences

Value Unrealized

Treasury Securities — $ — $ — 4 $ 13,104 $ ( 1,279 ) 4 $ 13,104 $ ( 1,279 )

Government Agency Securities 8 5,479 ( 47 ) 20 19,070 ( 772 ) 28 24,549 ( 819 )

18 unchanged sentences

Value Unrealized

Treasury Securities 3 $ 14,080 $ ( 789 ) 2 $ 3,786 $ ( 663 ) 5 $ 17,866 $ ( 1,452 )

Government Agency Securities 7 $ 6,567 $ ( 67 ) 15 $ 15,848 $ ( 689 ) 22 $ 22,415 $ ( 756 )

7 unchanged sentences

Total Debt Securities 12 $ 10,170 $ ( 154 ) 428 $ 736,023 $ ( 92,123 ) 440 $ 746,193 $ ( 92,277 )

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 adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended March 31, 2024 or the year ended December 31, 2023 as the Company did not have any 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.

As of March 31, 2024, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis.

The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations, 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.

It should be noted that we may occasionally sell securities to take advantage of market opportunities or as part of a strategic initiative.

CARTER BANKSHARES, INC.

1 unchanged sentence

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;

As of March 31, 2024, the Company determined 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

During the three months ended March 31, 2024 and March 31, 2023, the Company had no credit related net investment impairment losses.

NOTE 4 – LOANS

The composition of the loan portfolio by dollar amount is shown in the table below:

(Dollars in Thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Commercial Real Estate

12 unchanged sentences

Other 305,194 305,213

Total Portfolio Loans 3,410,940 3,148,913

Loans Held-for-Sale — —

Total Loans $ 3,509,071 $ 3,505,910

6 unchanged sentences

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

CARTER BANKSHARES, INC.

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.

There were no loans to borrowers experiencing financial difficulty restructured during the three months ended March 31, 2024 or March 31, 2023.

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”).

During the three months ended March 31, 2024 and March 31, 2023, respectively, the Company had no modifications to borrowers experiencing financial difficulty to report.

At March 31, 2024 and December 31, 2023, the Bank had no commitments to lend any additional funds on restructured loans.

At March 31, 2024 and March 31, 2023, the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

For purposes of this disclosure, a default occurs when, within 12 months of the original modification, either a full or partial charge-off occurs or the loan becomes 90 days or more past due.

As of March 31, 2024 and December 31, 2023, the Bank had $ 0.9 million and $ 2.0 million, respectively, of residential real estate loans in the process of foreclosure.

The Company also had $ 37 thousand at March 31, 2024 and $ 62 thousand at December 31, 2023 in residential real estate loans included in other real estate owned (“OREO”).

CARTER BANKSHARES, INC.

36 unchanged sentences

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

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, iv) loan structures on operating lines of credit dependent on the value of real estate

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of 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.

Current Expected Credit Losses (“CECL”) Model

The CECL 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:

13 unchanged sentences

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:

Since 2020 and continuing through 2024, 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;

7 unchanged sentences

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.

Special Mentio n – 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.

CARTER BANKSHARES, INC.

14 unchanged sentences

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

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

March 31, 2024

(Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans

90 unchanged sentences

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

September 30, 2023

March 31, 2024

(Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans

57 unchanged sentences

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

September 30, 2023

March 31, 2024

(Dollars in Thousands) Current

1 unchanged sentence

Past Due Total

Past Due Past Due

Still Accruing Total Loans Past Due Nonaccrual

Past Due Nonaccrual

Loans Total Portfolio

22 unchanged sentences

Total $ 3,190,343 $ 5,611 $ 421 $ 6,032 $ 309,535 $ 3,505,910

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 Company had no loans past due 90 days or more and still accruing at March 31, 2024 and December 31, 2023.

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

Loans past due 30 to 89 days and still accruing increased $ 2.6 million to $ 8.7 million at March 31, 2024 compared to December 31, 2023 primarily due to one CRE relationship totaling $ 3.2 million and one C&I relationship that went delinquent totaling $ 0.9 million during the first quarter of 2024, offset by two construction loans, one paid off and one that paid current totaling $ 2.6 million.

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

March 31, 2024

(Dollars in Thousands)

19 unchanged sentences

Total $ 4,493 $ 305,042 $ 309,535 $ —

Nonperforming loans remained significantly elevated during the three months ended March 31, 2024 and December 31, 2023 due to loans of $ 301.9 million representing the Bank’s largest lending relationship, that were placed on nonaccrual during the second quarter of 2023.

There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2024 or December 31, 2023.

CARTER BANKSHARES, INC.

3 unchanged sentences

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.

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

Accordingly, management 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.

1 unchanged sentence

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.

unless we elect to maintain the loan in the general pool.

During the three months ended March 31, 2024 and March 31, 2023, 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

March 31, 2024 December 31, 2023

(Dollars in Thousands) Fair Value - Real Estate Discounted Cash Flow Total Fair Value - Real Estate Discounted Cash Flow Total

Commercial Real Estate $ — $ — $ — $ 453 $ — $ 453

5 unchanged sentences

Total $ 2,090 $ 301,913 $ 304,003 $ 4,493 $ 301,913 $ 306,406

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

Three Months Ended March 31, 2024

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

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Recoveries — 1 2 142 — — 145

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

Net Charge-offs — ( 17 ) ( 21 ) ( 338 ) ( 156 ) — ( 532 )

Balance at End of Period $ 19,162 $ 3,061 $ 11,038 $ 783 $ 8,139 $ 54,353 $ 96,536

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

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

4 unchanged sentences

Recoveries — — 1 87 — — 88

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

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

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

51 unchanged sentences

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.

Individually evaluated loans with commitments of $ 1.0 million or greater and/or based on management’s discretion 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.

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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.

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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.

At March 31, 2024 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

CARTER BANKSHARES, INC.

2 unchanged sentences

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

September 30, 2023

March 31, 2024

(Dollars in Thousands) Carrying

7 unchanged sentences

Securities Available-for-Sale:

Treasury Securities $ 13,104 $ 13,104 $ — $ —

Government Agency Securities 39,372 — 39,372 —

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Securities Available-for-Sale:

Treasury Securities $ 17,866 $ 17,866 $ — $ —

Government Agency Securities 43,827 — 43,827 —

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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.

We have two securities totaling $ 7.5 million that are considered to be Level 3 securities at March 31, 2024 and two totaling $ 7.3 million at December 31, 2023, attributable to the calculated change in fair value of $ 0.2 million.

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

4 unchanged sentences

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

September 30, 2023

March 31, 2024

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

5 unchanged sentences

Individually Evaluated Loans $ — $ — $ — $ —

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 Company had no individually evaluated loans measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023.

The Company’s largest lending relationship is classified at March 31, 2024 as an individually evaluated loan with a net carrying amount totaling $ 247.6 million.

The Company utilized various cash flow and discounting assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $ 54.3 million at March 31, 2024.

When evaluating the net carrying value of this credit relationship at March 31, 2024, the Company utilized discounted cash flow valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 2.5 million as of March 31, 2024 and at December 31, 2023, primarily due to sales, write-downs on OREO and payments.

The Company had no write-downs recorded on OREO for the three months ended March 31, 2024 or for the same period in 2023.

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

March 31, 2024

(Dollars in Thousands) Fair

13 unchanged sentences

Range Average

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 $ 130 Appraisals Estimated Selling Costs 6.0 % 6.0 %

OREO 142 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

OREO 927 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 0.0 % - 5.0 %

OREO 2,191 Discounted Internal Valuations Management’s Subject Discount 0.0 % - 24.0 %

Total OREO $ 2,463

3 unchanged sentences

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

The carrying values and estimated fair values of our financial instruments at March 31, 2024 and December 31, 2023 are presented in the following tables.

Fair values for March 31, 2024 and December 31, 2023 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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

The carrying values and estimated fair values of our financial instruments at September 30, 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.

other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

1 unchanged sentence

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

Fair Value Measurements at September 30, 2023

Fair Value Measurements at March 31, 2024

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

24 unchanged sentences

FHLB Borrowings 393,400 — — 392,696 392,696

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

Accrued Interest Payable 7,288 — — 7,288 7,288

20 unchanged sentences

(Included in Other Assets)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

5 unchanged sentences

(Included in Other Liabilities)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

7 unchanged sentences

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans 14 ( 194 )

Total Derivative Income $ 234 $ 295 $ 90 $ 738

Total Derivative Income (Loss) $ 14 $ ( 194 )

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

4 unchanged sentences

(Included in Other Liabilities)

(Dollars in Thousands) September 30,

(Dollars in Thousands) March 31,

2024 December 31,

2022 September 30,

2023 March 31,

2024 December 31,

7 unchanged sentences

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

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

(Dollars in Thousands) March 31, 2024 December 31, 2023

Noninterest-Bearing Demand $ 671,981 $ 685,218

5 unchanged sentences

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.

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

Certificates of deposits that exceed the FDIC Insurance limit of $250,000 at March 31, 2024 and December 31, 2023 were $ 244.5 million and $ 235.0 million, respectively.

At March 31, 2024 and December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $ 115.6 million and $ 70.0 million, respectively.

Certificates of Deposit maturing as of the date presented:

(Dollars in Thousands) September 30, 2023

(Dollars in Thousands) March 31, 2024

3 Months or Less $ 279,137

3 unchanged sentences

Total $ 1,694,680

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

Overdrafts reclassified to loans were $ 0.2 million at March 31, 2024 and $ 0.3 million at December 31, 2023.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The Company had $ 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 $ 310.5 million Federal Home Loan Bank (“FHLB”) borrowings at March 31, 2024 and $ 393.4 million at December 31, 2023.

FHLB borrowings are fixed 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 19.5 % and 5.6 % of total borrowings at March 31, 2024 and December 31, 2023, respectively.

Total loans pledged as collateral were $ 1.5 billion at March 31, 2024 and at December 31, 2023, respectively.

There were no securities available-for-sale pledged as collateral at both March 31, 2024 and December 31, 2023.

At March 31, 2024, funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0 % of the Company’s assets or approximately $ 1.1 billion, subject to the amount of eligible collateral pledged, of which the Company is eligible to borrow up to an additional $ 593.8 million.

The Company has unsecured facilities with three other correspondent financial institutions totaling $ 50.0 million at both March 31, 2024 and December 31, 2023, respectively, a fully secured facility with one other correspondent financial institution totaling $ 45.0 million, and access to the institutional CD and brokered deposit markets.

The Company did not have outstanding borrowings on these fed funds lines as of March 31, 2024.

The Company had the capacity to borrow up to an additional $ 480.3 million from the FHLB at December 31, 2023.

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 Company had no overnight federal funds purchased in March 31, 2024 and nothing in December 31, 2023.

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

(Dollars in Thousands) March 31, 2024 December 31, 2023

FHLB Borrowings $ 310,500 $ 393,400

2 unchanged sentences

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

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

(Dollars in Thousands) March 31, 2024 December 31, 2023

Federal Fund Purchased $ — $ —

1 unchanged sentence

Federal Funds Purchased Availability $ 95,000 $ 50,000

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 :

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to March 31, 2024 and thereafter are as follows:

(Dollars in Thousands) Balance Weighted

7 unchanged sentences

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $ 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.

Commitments to extend credit, which amounted to $ 742.7 million at March 31, 2024 and $ 702.3 million at December 31, 2023, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

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

Lines of credit for construction projects represented $ 451.6 million, or 60.8 % and $ 452.2

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

million, or 64.4 %, of the commitments to extend credit at March 31, 2024 and December 31, 2023, 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 Company had outstanding letters of credit totaling $ 18.3 million at March 31, 2024 and $ 19.6 million at December 31, 2023.

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

(Dollars in Thousands) March 31, 2024 December 31, 2023

Commitments to Extend Credit $ 742,714 $ 702,301

8 unchanged sentences

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,

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023

4 unchanged sentences

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.

A recovery of $ 43.0 thousand was recorded for the three months ended March 31, 2024 for the provision for unfunded commitments, which resulted in a decrease of $ 0.1 million compared to the provision of $ 0.1 million for the three months ended March 31, 2023.

Legal Proceedings

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

Further, estimating an amount or range of possible losses that may result from legal or administrative proceedings and claims is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve awards that are discretionary in amount, present novel legal theories or policies, are in the early stages of the proceedings, or are subject to appeal.

In addition, because legal proceedings may be resolved over an extended period of time, potential losses are subject to change due to the outcome of intermediate procedural and substantive rulings, actions by other parties which may be influenced by their settlement posture or their evaluation of the strength or weakness of their case, and other factors.

For these reasons, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the matters described below, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

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

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

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

Other than as set forth below, as of March 31, 2024, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.

Justice Collection Actions

The Bank is engaged in a variety of collection proceedings (the “Collection Actions”) 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 “Collection Defendants”).

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

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

On December 11, 2023, the Martinsville Circuit Court heard oral arguments on the motions to set aside the confessions of judgment filed by the Collection Defendants.

On January 22, 2024, the Martinsville Circuit Court issued a letter opinion denying such motions.

On February 21, 2024, the Martinsville Circuit Court issued final orders denying such motions.

On February 26, 2024, the Collection Defendants filed a notice of appeal regarding the Martinsville Circuit Court’s order denying such motions.

Under Virginia law, a party seeking to suspend the execution of a confessed judgment during an appeal is required to provide security by filing a suspending bond or irrevocable letter of credit conditioned upon the performance or satisfaction of the judgment and payment of all damages incurred in consequence of such suspension.

On March 14, 2024, the Collection Defendants filed a motion with the Court of Appeals of the Commonwealth of Virginia (the “Virginia Court of Appeals”), seeking to modify the security requirement applicable to the Collection Defendants’ appeals of the Martinsville Circuit Court’s orders described in the paragraph above, and to expedite such appeals.

On March 29, 2024, the Virginia Court of Appeals denied the Collection Defendants’ request to expedite such appeals, denied the Collection Defendants’ request to eliminate any security requirements applicable to such appeals, and directed the Martinsville Circuit Court to first address the Collection Defendants’ request to modify the security requirements.

Pursuant to the confessions of judgment that were upheld by the Martinsville Circuit Court, the Bank has initiated collection processes against the Collection Defendants (see “—Justice Foreclosure Litigation”).

The Company and the Bank intend to pursue vigorously the Collection Actions and enforce the confessions of judgment and related agreements, including but not limited to release and reaffirmation agreements and indemnification agreements.

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

Based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations that it understands may be asserted on appeal.

Further, the Company and the Bank also vigorously oppose any attempts by the Collection Defendants to reduce or eliminate the security requirements applicable to appeals of the confessions of judgment.

However, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Collection Actions or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

Justice Federal Court Litigation

On November 10, 2023, the Company, the Bank, and the individual directors of the Company and the Bank were named as defendants in a lawsuit (the “Justice Federal Court Litigation”) filed in the United States District Court for the Southern District of West Virginia by the Collection Defendants.

The allegations contained in the Justice Federal Court Litigation relate to the matured promissory notes made or guaranteed by the Collection Defendants that have been reduced to judgment in the Martinsville Circuit Court and are the subject of the Collection Actions.

In the Justice Federal Court Litigation, as plaintiffs the Collection Defendants allege that the Company, the Bank and to a vicarious and limited extent, the individual directors (i) breached an implied covenant of good faith and fair dealing, (ii) breached fiduciary duties, (iii) tortiously interfered with business relations and (iv) violated anti-tying restrictions of the Bank Holding Company Act of 1956, as amended, and allege that the individual directors aided and abetted the same.

As plaintiffs in the Justice Federal Court Litigation, the Collection Defendants seek monetary damages of not less than $ 1.0 billion, additional punitive damages and interest on damages as allowed by law, payment of costs, expenses and attorneys’ fees, and a declaratory judgment from the court that certain

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

confessions of judgment, and certain guarantees, be declared void and unenforceable.

On December 6, 2023, the Company and the Bank filed a motion to transfer venue to the United States District Court for the Western District of Virginia.

That motion was granted on April 24, 2024.

The Company and the Bank deny the allegations contained in the Justice Federal Court Litigation and intend to defend vigorously the matter and the validity and enforceability of the confessions of judgment and each of the Bank’s loan documents, including the guarantees.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the Company, the Bank and the individual defendants have meritorious defenses to all allegations contained in the Justice Federal Court Litigation.

Because the Justice Federal Court Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Justice Federal Court Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

Justice Foreclosure Litigation

On February 7, 2024, the Bank was named as a defendant in a lawsuit (the “Justice Foreclosure Litigation”) filed in the Circuit Court of Greenbrier County, West Virginia (the “Greenbrier Circuit Court”) by The Greenbrier Sporting Club Development Company, Inc.

and The Greenbrier Sporting Club, Inc.

(collectively, “Sporting Club”).

The Justice Foreclosure Litigation relates to a deed of trust (the “Trust Deed”) granted by Sporting Club in favor of the Bank.

The trustee under this deed of trust was also named as a defendant.

In the Justice Foreclosure Litigation, Sporting Club requests the Greenbrier Circuit Court to issue declaratory judgments that the Trust Deed is invalid and unenforceable, the Notice of Sale (defined below) is invalid and of no effect, and that the trustee and the Bank may not sell the property described in the Notice of Sale.

Sporting Club also requests the Greenbrier Circuit Court to issue a declaratory judgment that the debts secured by the Trust Deed are not payable and therefore no trustee sale is permitted, or alternatively that Sporting Club is entitled to final adjudication of the Justice Federal Court Litigation before any sale of property by the trustee under the Trust Deed may proceed.

On or about February 6, 2024, a notice of sale (the “Notice of Sale”) was published in multiple newspapers regarding the proposed sale by the Trustee of certain real estate encumbered by the Trust Deed.

The debts secured by the Trust Deed matured on April 15, 2023 and the Bank filed confessions of judgment with respect to such debts in the Martinsville Circuit Court.

See the description of the Justice Collection Litigation above.

On February 16, 2024, the Bank voluntarily cancelled the proposed sale by the Trustee of the real estate encumbered by the Trust Deed.

The Bank disputes all allegations contained in the Justice Foreclosure Litigation and intends to defend vigorously the matter and the validity and enforceability of the Trust Deed, the validity and collectability of the debts owed to the Bank by the Sporting Club.

The Bank intends to oppose vigorously the injunctive relief requested by Sporting Club in the Justice Foreclosure Litigation.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in the Justice Foreclosure Litigation.

Because the Justice Foreclosure Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Justice Foreclosure Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

GLAS Federal Court Litigation

On February 12, 2024, the Bank was named as a defendant in a lawsuit (the “GLAS Federal Court Litigation”) filed in the United States District Court for the Western District of Virginia by GLAS Trust Company LLC (“GLAS”).

The allegations contained in the GLAS Federal Court Litigation relate to a series of financing transactions that occurred in 2018 between Bluestone Resources, Inc.

(“Bluestone Resources”), its subsidiary Bluestone Coal Sales Corporation (“Bluestone Sales”, and together with Bluestone Resources and their respective affiliates, the “Bluestone Entities”), and Greensill (UK) Limited, Ltd.

(“Greensill”).

The Bluestone Entities are owned and controlled by James C.

Justice, II and James C.

Justice, III.

In the GLAS Federal Court Litigation, GLAS alleges that it serves as trustee for investors that acquired notes via a series of securities transactions that repackaged the Bluestone Entities’ obligations to repay Greensill and sold them to those investors.

In the GLAS Federal Court Litigation, GLAS alleges that certain transfers to the Bank executed during 2018 by the Bluestone Entities or Greensill, which in the aggregate total approximately $ 226 million, each constitute either a fraudulent conveyance, or a

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

voluntary conveyance, under Virginia law.

In the GLAS Federal Court Litigation, GLAS seeks an award equal to the full amount of such fraudulent conveyances and/or voluntary conveyances plus interest and payment of attorneys’ fees and costs.

On March 29, 2024, the Bank filed a motion to dismiss the original complaint filed by GLAS due to lack of subject matter jurisdiction and failure to assert facts sufficient to support the claims alleged by GLAS.

Subsequently, GLAS filed an amended complaint on April 19, 2024, which contains substantively similar allegations regarding fraudulent and/or voluntary conveyances, and seeks the same relief, in each case as the original complaint.

The Company and the Bank deny the allegations contained in the GLAS Federal Court Litigation and intend to defend vigorously all claims asserted in the GLAS Federal Court Litigation.

During the course of the Bank’s lending transactions with James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III, and various Justice Entities, each of James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III and all Justice Entities agreed (the “Justice Indemnity Agreement”) to indemnify, defend and hold harmless the Bank from damages, claims, liabilities, losses, and expenses incurred in connection with certain claims that may be asserted against the Bank, including the claims that are asserted in the GLAS Federal Court Litigation.

These indemnity obligations are supported by substantial pledged collateral.

The Company and the Bank intend to pursue vigorously all remedies afforded to the Bank under the Justice Indemnity Agreement.

Because the GLAS Federal Court Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the GLAS Federal Court Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

NOTE 11 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME

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

(Dollars in Thousands) Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

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 )

Net Unrealized Gains Arising during the period $ 2,119 $ ( 476 ) $ 1,643 $ 15,633 $ ( 3,390 ) $ 12,243

Reclassification Adjustment for Losses included in Net Income — — — 12 ( 3 ) 9

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 )

Other Comprehensive Income $ 2,119 $ ( 476 ) $ 1,643 $ 15,645 $ ( 3,393 ) $ 12,252

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

The Company was active in share repurchase activity and repurchased 1,000,000 shares of its common stock at a total cost of $ 14.2 million, or an average price of $ 14.16 per share during the year ended December 31, 2023.

On March 29, 2023, the Company's Board of Directors authorized a new share repurchase program (the “2023 Program”) which took effect starting May 1, 2023, after the expiration of the previous repurchase program (the “2022 Program”), which was originally authorized through August 1, 2023 but was fully exhausted as of March 10, 2023.

The Board of Directors authorized the repurchase of 1,000,000 shares of common stock under the 2023 Program and on August 31, 2023 reached the maximum number of shares that could be purchased under the 2023 Program.

The Company’s Board of Directors have not authorized a new repurchase program as of March 31, 2024.

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

Three Months Ended March 31,

(Dollars in Thousands) Amount Percent Amount Percent

Federal Income Tax at Statutory Rate $ 1,519 21.0 $ 4,294 21.0

10 unchanged sentences

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

As of 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.

As of March 31, 2024, the Company recognized $ 1.6 million in HTC equity investments recorded as a component of other assets on the Consolidated Balance Sheets.

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

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

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

As of March 31, 2024, the Company has not recognized any non-income-tax-related activity from its HTC investments.

CARTER BANKSHARES, INC.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three month periods ended March 31, 2024 and March 31, 2023.

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

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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 include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, strategic initiatives and related earn-back periods, 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.

5 unchanged sentences

• 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”);

government, including policies of the Federal Reserve, FDIC and Treasury Department;

• cyber-security threats, attacks or events;

CARTER BANKSHARES, INC.

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

• changes in accounting policies, practices, or guidance, for example, our adoption of Current Expected Credit Losses (“CECL”) methodology, including potential volatility in the Company’s operating results due to application of the CECL methodology;

• cyber-security threats, attacks or events;

• rapid technological developments and changes;

2 unchanged sentences

• 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;

• increased delinquency and foreclosure rates on commercial real estate loans;

• an insufficient allowance for credit losses;

3 unchanged sentences

• 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;

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

• the outcome of pending and future litigation and/or governmental proceedings, including the outcome of the lawsuits between the Bank and West Virginia Governor James C.

Justice, II, his wife Cathy Justice, his son James C.

Justice, III and various related entities that he and/or they own and control, concerning, among other items, their lending relationship with the Bank and repayment of amounts owed to the Bank;

• increasing price and product/service competition;

2 unchanged sentences

• 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 ;

• the soundness of other financial institutions and any indirect exposure related to recent significant bank failures or broader stability or liquidity concerns regarding other financial institutions including but not limited to other regional banks, which may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;

• material increases in costs and expenses;

3 unchanged sentences

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

• changes in deposit flows and loan demand;

CARTER BANKSHARES, INC.

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

• changes in deposit flows and loan demand;

• our failure to attract or retain key employees;

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

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

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

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

Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 , Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the 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.

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, 202 3 , and any of our subsequent filings with the Securities and Exchange Commission (“SEC”).

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

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.

1 unchanged sentence

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.

In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures.

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

The Company believes the presentation of interest and dividend income, yield on interest 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.

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

Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is 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.

1 unchanged sentence

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.

CARTER BANKSHARES, INC.

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

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2024 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, 2023 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Overview and Strategy

Carter Bankshares, Inc.

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

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.6 billion at March 31, 2024.

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.

The Bank is a Federal Deposit Insurance Corporation, (“FDIC”) insured, Virginia state-chartered bank, which operates 65 branches in Virginia and North Carolina.

The Company provides a full range of financial services with retail, and

CARTER BANKSHARES, INC.

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

commercial banking products and insurance.

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

1 unchanged sentence

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.

Beginning in 2023, and continuing into 2024 and 2025, the Company is focusing 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.

4 unchanged sentences

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.

The Company’s goal is 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.

We believe that the Bank’s strong capital and liquidity positions support this strategy.

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.

As part of executing this strategy, the Company continues to dedicate, and expects to continue to dedicate, significant resources to resolving the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship that the Company placed on nonaccrual status in the second quarter of 2023 due to loan maturities and failure to pay in full, in a manner that best protects the Company, the Bank and shareholders.

The Company is dedicating, and expects to continue to dedicate, significant resources to resolving pending litigation related to this single large lending relationship in a manner that best protects the Company, the Bank and 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;

• 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

Highlights for the Three Months Ended March 31, 2024

• Net interest income decreased $12.4 million, or 30.3% compared to the three months ended March 31, 2023, primarily due to a 155 basis point increase in funding costs and a 12 basis point decrease in yield on earning assets.

Net interest income for the first quarter of 2024 was negatively impacted by $9.3 million compared to the prior year quarter as a result of the Bank placing its largest lending relationship on nonaccrual status during the second quarter of 2023;

• The provision for credit losses decreased $1.4 million for the three months ended March 31, 2024, compared to the same period in 2023;

• Total noninterest income increased $0.3 million to $5.0 million for the three months ended March 31, 2024, compared to the same period in 2023;

• Total noninterest expense increased $2.7 million to $26.3 million for the three months ended March 31, 2024 compared to the same period in 2023;

• Provision for income taxes decreased $3.1 million to $1.4 million for the three months ended March 31, 2024 compared to $4.5 million for the same period in 2023, which was primarily due to the decrease in pre-tax income due to the Company’s largest lending relationship moving into nonaccrual status during the second quarter of 2023.

CARTER BANKSHARES, INC.

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;

• 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)

Balance Sheet Highlights (period-end balances, March 31, 2024 compared to December 31, 2023)

• The securities portfolio decreased $10.2 million and is currently 16.9% of total assets compared to 17.3% 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;

• Total portfolio loans increased $3.2 million, or 0.4%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”) and residential mortgage segments during the three months ended March 31, 2024 and was muted by $80.0 million in loan payoffs of two large commercial real estate loans;

• The portfolio loans to deposit ratio was 91.6%, compared to 94.2%;

• Nonperforming loans as a percentage of total portfolio loans were 8.76% compared to 8.83%.

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;

These loans comprise 98.2% of nonperforming loans at March 31, 2024;

• Total deposits increased $108.6 million, or 11.6% on an annualized basis, compared to December 31, 2023;

• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.75% compared to 2.77%.

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,

The ACL on portfolio loans totaled $96.5 million at March 31, 2024, compared to $97.1 million at December 31, 2023.

The Company reported net income of $5.8 million or $0.25 diluted earnings per common share (“EPS”) for the three months ended March 31, 2024 compared to net income of $15.9 million, or $0.67 diluted EPS for the same period in 2023.

The Company’s financial results for the three months ended March 31, 2024, compared to the same period in 2023 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 negative impact on interest income recognized by the Company for the three months ended March 31, 2024.

Three Months Ended March 31,

PERFORMANCE RATIOS 2024 2023

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Nonperforming Loans to Total Portfolio Loans 8.76 % 0.26 %

CARTER BANKSHARES, INC.

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

Net Interest Income

8 unchanged sentences

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

Total net interest income decreased $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

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023

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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

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.

CARTER BANKSHARES, INC.

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

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

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

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(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

Net interest income decreased to $28.4 million for the three months ended March 31, 2024 from $40.8 million for the same period in 2023.

Net interest income, on an FTE basis (non-GAAP), decreased $12.4 million, or 30.3%, to $28.6 million for the three months ended March 31, 2024 compared to $41.0 million for the same period in 2023.

The most significant decrease relates to the $9.3 million negative impact on interest income due to the $301.9 million of loans comprising the Bank’s largest lending relationship, that were placed on nonaccrual status, during the second quarter of 2023.

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

Interest income increased to $54.0 million for the three months ended March 31, 2024 from $52.0 million compared to the same period in 2023.

Interest income, on an FTE basis (non-GAAP), increased $2.1 million, or 3.9%, to $54.3 million for the three months ended March 31, 2024 compared to $52.2 million for the same period in 2023, resulting from an increase in average interest-earning assets of $242.9 million, while the yield on average interest-earning assets decreased 13 basis points due to the negative impact on interest income related to the Bank’s largest lending relationship previously mentioned.

Average interest-earning assets increased primarily due to an increase of $313.0 million in average loans, an increase of $8.0 million in interest-bearing deposits with banks and an increase of $6.2 million in FHLB stock, offset by a decrease of $84.4 million in average investment securities.

CARTER BANKSHARES, INC.

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 change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments 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.

As of March 31, 2024, the securities portfolio was comprised of 46.9% variable rate securities with approximately 99.3% 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.

This variable rate strategy has limited the impact of rising rates on the Company’s unrealized losses on debt securities.

With interest rates likely peaking, the bank may alter this interest rate mix strategy going forward.

Interest expense of $25.6 million for the three months ended March 31, 2024 increased $14.5 million, or 129.5% compared to the same period in 2023, primarily due to the higher interest rate environment and an increase in average-bearing deposits of $205.4 million.

The increase in average-bearing deposits reflected solid growth in average certificates of deposit of $354.2 million, an increase of $48.1 million in average money market accounts and an increase of $5.4 million in interest-bearing demand accounts, offset by a decrease of $202.3 million in savings accounts as customer preferences shifted towards certificates of deposits as interest rates increased.

Additionally, FHLB borrowings increased $81.2 million and the cost of borrowings increased 46 basis points for the three months ended March 31, 2024 compared to the same period in 2023, largely due to increased balances and the higher interest rate environment.

The net interest margin decreased 137 basis points to 2.58% for the three months ended March 31, 2024 compared to 3.95% for the same period in 2023.

Net interest margin, on an FTE basis, decreased 138 basis points to 2.60% for the three months ended March 31, 2024 compared to 3.98% for the same period in 2023.

The decline in net interest income and net interest margin was significantly driven by the aforementioned nonperforming loan (“NPL”) relationship, which negatively impacted interest income by $9.3 million for the first three months of 2024.

Funding costs increased 155 basis points and the yield on earning assets declined 12 basis points for the three months ended March 31, 2024 compared to the same period in 2023.

Since the three months ended March 31, 2023, there has been more pressure on our cost of funds due to the shift from non-maturing deposits to higher yielding certificates of deposits, money markets and higher-cost borrowings, which has negatively impacted our net interest margin.

During the three months ended March 31, 2024, this trend began to stabilize and we believe it will continue to stabilize in the coming quarters.

Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive balance sheet due to the short-term nature of our deposit portfolio.

Specifically, 83.0% of our time deposit portfolio will mature and reprice over the next twelve months which gives us flexibility to manage the structure and pricing of our deposit portfolio to reduce funding costs, should the Federal Open Market Committee (“FOMC”) begin cutting short-term rates during 2024.

CARTER BANKSHARES, INC.

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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

Three Months Ended March 31, 2024

Compared to March 31, 2023

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Rate Increase/

Interest Earned on:

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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%

Provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb expected life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period.

The following table presents information regarding the (recovery) provision for credit losses and net charge-offs:

(Dollars in Thousands) Three Months Ended March 31, $ Change % Change

Provision for Credit Losses $ 16 $ 1,415 $ (1,399) (98.9) %

(Recovery) Provision for Unfunded Commitments (43) 84 (127) (151.2) %

Total (Recovery) Provision for Credit Losses on Loans (27) 1,499 (1,526) (101.8) %

Provision for Securities — — — — %

Total (Recovery) Provision for Credit Losses $ (27) $ 1,499 $ (1,526) (101.8) %

Net Loan Charge-offs $ 532 $ 573 $ (41) (7.2) %

Net Loan Charge-offs (annualized) / Average Portfolio Loans 0.06 % 0.07 %

The (recovery) provision for credit losses decreased $1.5 million for the three months ended March 31, 2024 compared to the same period in 2023.

The decrease for the three months ended March 31, 2024 in the (recovery) provision for credit losses was primarily driven by lower loan growth partially, by a lower average life of the portfolio and the decline in the (recovery) provision for unfunded commitments was the result of decreased commitments in construction loans during the first quarter of 2024.

CARTER BANKSHARES, INC.

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.

Net charge-offs were $0.5 million for the three months ended March 31, 2024 compared to $0.6 million for the same period in 2023.

During the three months ended March 31, 2024, net charge-offs were concentrated in the other consumer loan segment.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.06% for the three months ended 2024 and 0.07% for the same period in 2023.

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023 $ Change % Change

Losses on Sales of Securities, net $ — $ (12) $ 12 100.0 %

Service Charges, Commissions and Fees 1,875 1,838 37 2.0 %

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Bank Owned Life Insurance Income 348 339 9 2.7 %

(Losses) Gains on Sales and Write-downs of Bank Premises, net — (4) 4 100.0 % — 342 (342) (100.0) %

Commercial Loan Swap Fee Income — 116 (116) (100.0) %

1 unchanged sentence

Total Noninterest Income $ 5,045 $ 4,735 $ 310 6.5 %

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.

CARTER BANKSHARES, INC.

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

Total noninterest income increased $0.3 million to $5.0 million for the three months ended March 31, 2024 compared to the same period in 2023.

The increase for the comparable periods primarily related to a $0.4 million increase in insurance commissions, offset by a $0.1 million decrease in commercial loan swap fee income as activity has declined due to the interest rate environment.

Noninterest Expense

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

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

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023 $ Change % Change

Salaries and Employee Benefits $ 14,200 $ 13,652 $ 548 4.0 %

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Debit Card Expense 756 479 277 57.8 %

Tax Credit Amortization — (764) 764 100.0 % — 466 (466) (100.0) %

Other 1,785 2,280 (495) (21.7) %

Total Noninterest Expense $ 26,257 $ 23,576 $ 2,681 11.4 %

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.

Total noninterest expense increased $2.7 million to $26.3 million for the three months ended March 31, 2024 compared to the same period in 2023.

The most significant variance for the comparable periods related to higher FDIC insurance expenses of $1.0 million due to the deterioration in asset quality as a direct result of the large nonperforming relationship, which is a component used to determine the assessment, and a $0.7 million increase in professional and legal fees also as a result of the large NPL relationship.

Other increases to the comparable period was $0.5 million in salaries and employee benefits, an increase of $0.3 million in occupancy expenses, an increase of $0.3 million in debit card expenses and an increase of $0.2 million in data processing expenses, offset by a decrease of $0.5 million in other noninterest expenses.

Salaries and employee benefits increased related to higher salary expense due to fewer open positions in retail, job grade assessment increases, normal merit increases and higher restricted stock expense due to new grants awarded in the first quarter of 2024.

The occupancy expense variance relates primarily to general inflationary cost increases for existing and new service agreements, as well as lease expense on a newly opened office in the first quarter of 2024.

The increase in debit card expenses was primarily related to discounts received in March of 2023.

The increase in data processing related to higher third party costs.

The decline in other noninterest expenses relates to a net gain of $0.3 million on two other real estate owned (“OREO”) properties of which were

CARTER BANKSHARES, INC.

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What changed 10-Q

Item 1. Financial Statements