What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-10-27 · 227 added, 182 removed, 310 unchanged (57% of the section changed)

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

sold in the first quarter of 2024 and a $0.3 million decrease in fair value due to our interest rate swap contracts with commercial customers.

Provision for Income Taxes

The provision for income taxes decreased $4.2 million and $2.8 million to $0.8 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022.

Pre-tax income decreased $15.0 million and $12.0 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022.

The effective tax rate was 17.7% and 17.4% for the three and nine months ended September 30, 2023 compared to 25.8% and 19.1% for the same periods in 2022.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the same periods in 2022 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023.

The provision for income taxes decreased $3.1 million to $1.4 million for the three months ended March 31, 2024, when compared to the same period in 2023.

Pre-tax income decreased $13.2 million for the three months ended March 31, 2024, when compared to the same period in 2023.

The effective tax rate was 19.7% for the three months ended March 31, 2024 compared to 22.0% for the same period in 2023.

The decrease in the effective tax rate for the three months ended March 31, 2024 compared to the same period in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023 as a result of updated information from the developer extending the in-service date on a new tax credit from 2022 to 2023.

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

Financial Condition

September 30, 2023

Total assets increased $247.6 million, to $4.5 billion at September 30, 2023 compared to $4.2 billion at December 31, 2022.

Total portfolio loans increased $262.0 million, or 11.1% on an annualized basis, to $3.4 billion at September 30, 2023 compared to December 31, 2022 primarily due to loan growth in the CRE, residential mortgage and construction segments during the nine months ended September 30, 2023.

The variances in loan segments for portfolio loans related to increases of $218.4 million in commercial real estate loans, $80.4 million in residential mortgages, $24.0 million in construction loans, offset by decreases of $45.5 million in C&I loans, $8.1 million in other consumer loans and $7.2 million in the other category.

The securities portfolio decreased $42.9 million and is currently 17.8% of total assets at September 30, 2023 compared to 19.9% of total assets at December 31, 2022.

The decrease is due to $54.0 million in maturities, curtailments and security sales deployed into higher yielding loan growth, offset by $24.9 million in purchases of small business administration bonds during the nine months ended September 30, 2023.

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.

At September 30, 2023, total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $120.5 million of gross unrealized losses.

March 31, 2024

Total assets increased $42.4 million, to $4.6 billion at March 31, 2024 compared to $4.5 billion at December 31, 2023.

Cash and due from banks increased $53.6 million to $108.1 million at March 31, 2024 compared to $54.5 million at December 31, 2023 due to a large loan payoff late on the last working day of the quarter.

Total portfolio loans increased $3.2 million to $3.5 billion at March 31, 2024 compared to December 31, 2023 primarily due to loan growth in the CRE loan and residential mortgage segments during the three months ended March 31, 2024.

The variances in loan segments for portfolio loans related to increases of $58.3 million in CRE loans and $0.2 million in residential mortgages, offset by decreases of $39.1 million in construction loans, $14.3 million in C&I loans, and $1.8 million in other consumer loans.

During the first quarter of 2024, loan growth was muted by $80.0 million in loan payoffs of two large commercial real estate loans.

The securities portfolio decreased $10.2 million and is currently 16.9% of total assets at March 31, 2024 compared to 17.3% of total assets at December 31, 2023.

The decrease is due to ongoing maturities, principal curtailments and changes in market values driven by fluctuations in intermediate treasury yields.

There were no additional purchases of new securities during the three months ended March 31, 2024.

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.

At March 31, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.4 million, offset by $89.8 million of gross unrealized losses.

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

Federal Home Loan Bank (“FHLB”) stock, at cost increased $17.6 million to $27.4 million at September 30, 2023 compared to December 31, 2022.

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

OREO decre ase d $4.6 million at September 30, 2023 compared to December 31, 2022 due to the sale of one OREO property in June 2023.

During the third quarter of 2023, the Bank closed two retail banking offices and moved $1.1 million at fair value to OREO.

Federal Home Loan Bank (“FHLB”) stock, at cost decreased $3.7 million to $17.9 million at March 31, 2024 compared to December 31, 2023.

The decrease is due to paydowns of FHLB borrowings .

OREO incre ase d $0.1 million at March 31, 2024 compared to December 31, 2023 due to the sale of two OREO properties totaling $1.1 million and moved $1.2 million of loans at fair value to OREO all during the first quarter of 2024.

These properties are currently being marketed for sale.

Closed retail bank offices had a book value of $2.1 million at September 30, 2023 and $1.1 million at December 31, 2022.

Total deposits decreased $74.2 million to $3.6 billion at September 30, 2023 compared to December 31, 2022.

The decrease related to a decline of $324.2 million in savings, money market and demand deposits due to customers migrating to higher-yielding CD products driven by rising market interest rates.

At September 30, 2023, noninterest-bearing deposits comprised 18.6% of total deposits compared to 19.4% at December 31, 2022 and 19.3% at September 30, 2022.

CDs comprised 42.5%, 34.7% and 33.5% of total deposits at September 30, 2023, December 31, 2022 and September 30, 2022, respectively.

As of September 30, 2023, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 88.9% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.1% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

Closed retail bank offices had a book value of $1.3 million at March 31, 2024 and $2.3 million at December 31, 2023.

Total deposits increased $108.6 million, or 11.7% on an annualized basis, to $3.8 billion at March 31, 2024 compared to December 31, 2023.

The increase in deposits was primarily due to a $108.0 million increase in CDs, which included $45.6 million in brokered CDs, an increase of $34.1 million in interest-bearing demand accounts and an increase of $7.1 million in money market accounts, offset by a decrease of $27.4 million in savings accounts and a decrease of $13.2 million in noninterest-bearing demand accounts.

The Company had $115.6 million brokered CDs at March 31, 2024, compared to $70.0 million at December 31, 2023.

At March 31, 2024, noninterest-bearing deposits comprised 17.5% of total deposits compared to 18.4% at December 31, 2023 and 19.5% at March 31, 2023.

CDs comprised 44.2%, 42.6% and 37.0% of total deposits at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

As of March 31, 2024, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 82.8% of our total deposits of $3.8 billion were insured under standard FDIC insurance coverage limits, and approximately 17.2% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

The Company’s deposit base is diversified and granular and is comprised of approximately 78.8% of retail deposits.

Total capital of $330.6 million at September 30, 2023, reflects an increase of $2.0 million compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 is primarily due to net income of $25.3 million for the nine months ended September 30, 2023, offset by $16.4 million related to the repurchase of common stock, a $7.9 million decrease in other comprehensive (loss) income due to changes in fair value of investment securities, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02.

The remaining difference of $1.1 million is related to restricted stock activity for the nine months ended September 30, 2023.

Total capital of $359.1 million at March 31, 2024, reflects an increase of $7.8 million compared to December 31, 2023.

The increase in total capital from December 31, 2023 is primarily due to net income of $5.8 million, a $1.6 million increase in other

CARTER BANKSHARES, INC.

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

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

General reserves as a percentage of total portfolio loans were 1.20% at September 30, 2023 compared to 2.96% at December 31, 2022.

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

comprehensive (loss) income due to changes in fair value of investment securities, as well as an increase of $0.4 million related to restricted stock activity all during the three months ended March 31, 2024.

The ACL was 2.75% of total portfolio loans at March 31, 2024 compared to 2.77% as of December 31, 2023.

General reserves as a percentage of total portfolio loans were 1.20% at March 31, 2024 compared to 1.22% at December 31, 2023.

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

1 unchanged sentence

The Company remains well capitalized.

The Tier 1 capital ratio decreased to 11.20% at September 30, 2023 compared to 12.61% at December 31, 2022.

The leverage ratio was 9.70% at September 30, 2023, compared to 10.29% at December 31, 2022 and the total risk-based capital ratio was 12.46% at September 30, 2023 compared to 13.86% at December 31, 2022.

The decrease is related to the aforementioned repurchase of common stock of $16.4 million through September 30, 2023 and loan growth during the nine months ended September 30, 2023.

Another significant factor driving the ratios downward was the above mentioned large lending relationship movement to nonaccrual status with the $20.6 million year-to-date negative impact on interest income, combined with the movement of nonaccrual assets to higher risk rating categories.

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

The Bank’s Tier 1 Capital ratio was 11.08% at September 30, 2023 compared to 12.42% at December 31, 2022.

The Bank’s leverage ratio was 9.59% at September 30, 2023 compared to 10.13% at December 31, 2022.

The Bank’s Total Risk-Based Capital ratio was 12.34% at September 30, 2023 compared to 13.68% at December 31, 2022.

Securities Activity

The Tier 1 capital ratio decreased to 10.89% at March 31, 2024 compared to 11.08% at December 31, 2023.

The leverage ratio was 9.34% at March 31, 2024, compared to 9.48% at December 31, 2023 and the total risk-based capital ratio was 12.15% at March 31, 2024 compared to 12.34% at December 31, 2023.

The most significant factor driving the ratios downward was the above mentioned large lending relationship movement to nonaccrual status with the $9.3 million negative impact on interest income recognized by the Company for the three months ended March 31, 2024, combined with the movement of nonaccrual assets to higher risk rating categories.

The Bank also remained well capitalized as of March 31, 2024.

The Bank’s Tier 1 Capital ratio was 10.80% at March 31, 2024 compared to 10.99% at December 31, 2023.

The Bank’s leverage ratio was 9.27% at March 31, 2024 compared to 9.41% at December 31, 2023.

The Bank’s Total Risk-Based Capital ratio was 12.07% at March 31, 2024 compared to 12.25% at December 31, 2023.

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

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

Treasury Securities $ 13,104 $ 17,866 $ (4,762)

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

Government Agency Securities 39,372 43,827 (4,455)

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

The securities portfolio decreased $42.9 million to $793.4 million at September 30, 2023 compared to $836.3 million at December 31, 2022.

Securities comprise 17.8% of total assets at September 30, 2023 compared to 19.9% at December 31, 2022.

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.

At September 30, 2023 total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $120.5 million of gross unrealized losses.

The securities portfolio decreased $10.2 million to $768.8 million at March 31, 2024 compared to $779.0 million at December 31, 2023.

Securities comprise 16.9% of total assets at March 31, 2024 compared to 17.3% at December 31, 2023.

The decrease is due to ongoing maturities, principal curtailments and changes in market values driven by fluctuations in intermediate treasury yields.

There were no additional purchases of new securities during the three months ended March 31, 2024, as liquidity generated by the securities portfolio during the first quarter of 2024 was deployed into higher yielding loans.

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.

At March 31, 2024 total gross unrealized gains in the available-for-sale portfolio were $0.4 million, offset by $89.8 million of gross unrealized losses.

At December 31, 2023, total gross unrealized gains in the available-for-sale portfolio were $0.7 million offset by $92.3 million of gross unrealized losses.

5 unchanged sentences

We have the ability to hold these securities to maturity and expect full recovery of the amortized cost.

From time to time we may sell securities to take advantage of market opportunities or as part of a strategic initiative.

We may occasionally sell securities to take advantage of market opportunities or as part of a strategic initiative.

The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities).

This portion of the Treasury yield curve has moved slightly higher over the past three months, driving unrealized losses on these securities higher.

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

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

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

This portion of the Treasury yield curve has moved higher over the past three months, driving unrealized losses on outstanding securities higher.

However, principal reductions outpaced the modest increase in unrealized losses, resulting in a lower net unrealized loss number.

Changes in short-term interest rates can affect the yield on floating rate securities.

Yields on floating rate securities may begin to fall should the FRB begin lowering short-term rates.

Changes in intermediate and long-term interest rates, which are market driven, affect the market value of fixed rate securities with similar maturities.

The Company expects that market values on the Bank’s intermediate and long-term maturity holdings will continue to fluctuate in large part driven by treasury yield changes.

At March 31, 2024 the 5-year and 10-year U.S.

Treasury yields were 4.21% and 4.20%, respectively.

At December 31, 2023, those same bond yields were 3.84% and 3.88%, respectively.

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

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

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

Therefore, this increase of 37 bps and 32 bps, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range.

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

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

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

At September 30, 2023 and December 31, 2022, the Company had no credit related impairment.

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

At March 31, 2024 and December 31, 2023, the Company had no credit related impairment.

The Basel rules also permit most banking organizations to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital.

3 unchanged sentences

Loan Composition

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

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

The following table summarizes our loan portfolio as of the dates presented:

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

Commercial Real Estate $ 1,728,929 $ 1,670,631

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

For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2022, and Part II, Item 1A, “Risk Factors,” contained in our Quarterly Report on Form 10-Q for the periods ended March 31, 2023, June 30, 2023 and this Quarterly Report on Form 10-Q.

Total portfolio loans increased $262.0 million, or 11.1%, on an annualized basis, to $3.4 billion at September 30, 2023 compared to December 31, 2022 with strong production primarily in our CRE, residential mortgage and construction portfolios.

Total portfolio loans were $3.5 billion at both March 31, 2024 and December 31, 2023 with production primarily in our CRE portfolio.

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

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

At September 30, 2023, the loan portfolio was comprised of 24.5% floating rates which reprice monthly, 41.3%, variable rates that reprice at least once during the life of the loan and the remaining 34.2% are fixed rate loans.

Given the current interest rate environment our mortgage portfolio experienced more modest growth in the three months ended March 31, 2024 and the full year ended December 31, 2023.

At March 31, 2024, the loan portfolio was comprised of 25.3% floating rates which reprice monthly, 40.0%, variable rates that reprice at least once during the life of the loan and the remaining 34.7% are fixed rate loans.

The Company continues to carefully monitor the loan portfolio during 2024, including in light of market conditions that impact our borrowers and the interest rate environment.

Aggregate commitments to our top 10 credit relationships were $644.8 million at September 30, 2023.

The Other segment represents 46.8% of the top 10 credit relationships and $301.9 million has since transferred to nonaccrual during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A.

Total CRE represented 49.3% of total portfolio loans at March 31, 2024 compared to 47.7% at December 31, 2023.

The collateral for the Company’s CRE loans is concentrated predominantly in North Carolina, Virginia, South Carolina, West Virginia and Georgia within the retail/restaurant, warehouse, hospitality, multifamily, and office metrics.

CARTER BANKSHARES, INC.

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

The following table presents the Company's loan portfolio breakout by CRE collateral type, loan amounts for each CRE collateral type included in special mention and substandard and the related percentages by segment to the CRE collateral types as of the periods presented:

March 31, 2024

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type

Retail/Restaurant $ 395,441 $ 127 $ — $ 49,040 $ 3,280 $ 447,888 $ 60 18.9 %

Warehouse 346,428 509 52 55,241 — 402,230 70 16.9 %

Hospitality 298,420 — — 4,277 51,552 354,249 51,552 14.9 %

Multifamily 266,098 — — 74,110 — 340,208 — 14.3 %

Office 207,806 — — 6,579 508 214,893 973 9.0 %

Land 1,097 — — 119,414 92,648 213,159 92,705 9.0 %

Single Family 5,496 13 46,813 16,630 13,367 82,319 13,437 3.5 %

Country Club — — — — 45,002 45,002 45,002 1.9 %

Long-term Care 20,171 — — 9,887 — 30,058 — 1.3 %

Other 191,605 437 126 30,208 22,836 245,212 22,938 10.3 %

Total $ 1,732,562 $ 1,086 $ 46,991 $ 365,386 $ 229,193 $ 2,375,218 $ 226,737 100.0 %

December 31, 2023

Retail/Restaurant $ 380,285 $ 129 $ — $ 46,241 $ 3,300 $ 429,955 $ 62 18.2 %

Warehouse 324,548 514 53 48,674 — 373,789 72 15.9 %

Hospitality 288,323 — — 1,229 51,552 341,104 51,552 14.5 %

Multifamily 258,676 — — 127,447 — 386,123 — 16.4 %

Office 217,228 — — 4,424 508 222,160 1,857 9.4 %

Land 1,153 — — 119,188 92,648 212,989 93,581 9.0 %

Single Family 5,770 14 47,205 13,194 13,367 79,550 13,439 3.4 %

Country Club — — — — 45,002 45,002 45,002 1.9 %

Long-term Care 20,172 — — 7,250 — 27,422 — 1.2 %

Other 201,353 444 127 34,932 — 236,856 22,941 10.1 %

Total $ 1,697,508 $ 1,101 $ 47,385 $ 402,579 $ 206,377 $ 2,354,950 $ 228,506 100.0 %

CRE loans represent a portfolio concentration risk.

The majority of our CRE loans are made in the above noted geographies and granted to experienced developers and sponsors with loan guaranty structures that provide recourse to individuals with access to financial resources.

We believe our knowledge of CRE and our operating knowledge at the local and regional level of these markets allows us to effectively manage concentration risk.

Our operating knowledge at the local and regional level is derived from our front-line connection to the customer and our understanding of their business model.

We also have access to research tools that inform us about market statistics such as occupancy, lease growth rates and new construction starts.

This data is reviewed frequently by our credit officers and disseminated to our lenders.

The Bank’s underwriting process includes multiple shock scenarios primarily focused on cash flow and leverage in order to determine a supportable loan amount.

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

When concentrations exist in certain segments, we seek to mitigate this risk by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments.

The Company established transaction, relationship and specific loan segment limits in its loan policy.

Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital.

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio and are based on

CARTER BANKSHARES, INC.

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

management’s risk tolerance relative to capital.

In addition, there are specific targets for various categories of real estate loans with respect to debt service coverage ratios, loan-to-value ratios, loan terms, and amortization periods.

We also have policy limits on loan-to-cost for construction projects.

Although leverage is important, the Company also focuses on cash flow generation and employs stress testing to calculate a supportable loan amount.

Aggregate commitments to our top 10 credit relationships were $632.6 million at March 31, 2024.

The Other segment represents 47.7% of the top 10 credit relationships including the Company’s largest lending relationship, the entire balance of which $301.9 million transferred to nonaccrual status during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A.

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

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

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

(Dollars in Thousands) For the Periods Ending Change March 31, 2024 March 31, 2024

March 31, 2024 December 31, 2023 % of Gross Loans % of RBC

Hospitality, Agriculture & Energy $ 301,913 $ 301,913 $ — 8.60 % 63.07 %

Retail Real Estate & Food Services 53,243 53,576 (333) 1.52 % 11.12 %

Industrial & retail real estate 40,351 41,725 (1,374) 1.18 % 8.30 %

Multifamily development 40,000 40,000 — 1.17 % 8.23 %

Retail Real Estate 37,622 38,972 (1,350) 1.07 % 7.86 %

Hospitality 37,369 37,502 (133) 1.06 % 7.81 %

Construction / Commercial Property 35,500 — 35,500 1.01 % 7.42 %

Non-Owner Occupied / Commercial Real Estate 35,364 27,834 7,530 1.01 % 7.39 %

Non-Owner Occupied / Commercial Real Estate 33,605 33,752 (147) 0.96 % 7.02 %

Industrial & Retail Real Estate 33,560 33,885 (325) 0.96 % 7.01 %

Multifamily & student housing 32,460 32,747 (287) 0.93 % 6.78 %

Hospitality 32,661 33,587 (926) 0.96 % 6.72 %

Multifamily / Construction Real Estate 32,000 24,000 8,000 0.94 % 6.58 %

Multifamily / Commercial Real Estate 32,000 32,000 — 0.91 % 6.67 %

Top Ten (10) Relationships $ 632,636 $ 592,181 $ 40,455 18.03 % 132.15 %

2 unchanged sentences

Concentration (25% of RBC) $ 119,681 $ 121,231

Unfunded commitments on lines of credit were $595.9 million at September 30, 2023 as compared to $512.7 million at December 31, 2022.

Unfunded commitments on lines of credit were $565.4 million at March 31, 2024 compared to $568.7 million at December 31, 2023.

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

Total utilization was 51.9% at September 30, 2023 and 52.2% at December 31, 2022.

Unfunded commitments on commercial operating lines of credit was 51.4% at September 30, 2023 and 51.7% at December 31, 2022.

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

When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments.

The Company established transaction, relationship and specific loan segment limits in its loan policy.

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio and are based on management’s risk tolerance relative to capital.

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.

We also have policy limits on loan-to-cost for construction projects.

Although leverage is important, the Company is also focused on cash flow generation and uses multiple metrics to calculate a supportable loan amount.

Supportable loan amounts have generally been more challenging given the increases in commodities pricing.

Total utilization was 49.9% at March 31, 2024 and 53.8% at December 31, 2023.

Unfunded commitments on commercial operating lines of credit was 48.7% at March 31, 2024 and 53.7% at December 31, 2023.

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment.

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

Deferred costs and fees included in the portfolio balances above were $6.7 million and $8.2 million at September 30, 2023 and December 31, 2022, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $140.0 thousand and $161.2 thousand at September 30, 2023 and December 31, 2022, respectively.

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

First, we purchase mortgage loans on a short-term basis from a partner financial institution that has fully executed sales contracts to end investors.

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

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

There were no mortgage loans held-for-sale at September 30, 2023 and December 31, 2022, respectively.

CARTER BANKSHARES, INC.

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

Deferred costs and fees included in the portfolio balances above were $7.5 million and $7.2 million at March 31, 2024 and December 31, 2023, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $125.9 thousand and $133.4 thousand at March 31, 2024 and December 31, 2023, respectively.

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

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Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

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

CARTER BANKSHARES, INC.

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

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

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

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Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due.

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

Management reserves the right to exercise discretion at the individual loan level.

For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely.

We may also elect to retain a loan that is 90 or more days’ delinquent in accrual status if we believe the loan is well secured and in the process of collection.

Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

5 unchanged sentences

The following table summarizes nonperforming assets for the dates presented:

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

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

Nonaccrual Loans

8 unchanged sentences

Total Nonperforming Assets $ 309,825 $ 311,998 $ (2,173)

Nonperforming assets increased $297.0 million to $312.1 million at September 30, 2023 compared to December 31, 2022.

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

These nonperforming loans are 97.9% of the Company's total nonperforming loans and 96.7% of the Company's total nonperforming assets.

Nonperforming assets decreased $2.2 million to $309.8 million at March 31, 2024 compared to December 31, 2023.

The decrease of $2.2 million in nonperforming loans was primarily related to two loans, one of which was a residential mortgage loan in the amount of $1.1 million and the other loan was a residential construction loan in the amount of $1.1 million.

Both loans were paid in full during the first quarter of 2024.

During the second quarter of 2023, the Company placed $301.9 million of commercial loans that reside in the Other segment of the Company’s loan portfolio, relating to the Bank’s largest lending relationship, on nonaccrual status due to loan maturities and failure to pay in full.

These loans remained on nonaccrual status at both March 31, 2024 and December 31, 2023.

These nonperforming loans are 98.2% of the Company's total nonperforming loans and 97.4% of the Company's total nonperforming assets at March 31, 2024.

Based on analyses of the credit relationship and various discounted cash flow valuation techniques utilized in the alternative modeling, which resulted in a valuation allowance with respect to these loans of $54.3 million at March 31, 2024, representing 18.0%, of these loans aggregate principal amount.

CARTER BANKSHARES, INC.

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

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

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

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

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

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

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

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

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

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.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(Dollars in Thousands)

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However, we cannot give any assurance as to the timing or amount of future payments or collections on such loans or that we will ultimately collect all amounts contractually due under the terms of such loans.

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

Closed retail bank offices have a remaining book value of $2.1 million at September 30, 2023 and $1.1 million at December 31, 2022, and are recorded in OREO on the Company’s balance sheet.

During the third quarter of 2023, the Bank closed two retail banking offices and moved $1.1 million at fair value to OREO.

For a discussion of collection proceedings with respect to these loans, see Part I, Item 1.

Notes to Consolidated Financial Statements - Note 10, “Commitments and Contingencies,” under the heading “Legal Proceedings” of this Quarterly Report on Form 10-Q.

Closed retail bank offices had a book value of $1.3 million at March 31, 2024 and $2.3 million at December 31, 2023, and are recorded in OREO on the Company’s balance sheet.

During the three months ended March 31, 2024, the Bank sold two retail banking offices and moved $1.2 million of loans at fair value to OREO.

These properties are currently being marketed for sale.

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

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

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

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

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

6 unchanged sentences

Balance End of Period $ 96,536 100.0 % $ 97,052 100.0 %

The decline in the ACL attributable to the other segment was primarily due to $1.1 million of principal pay-downs during the nine months ended September 30, 2023 that occurred during the first quarter of 2023.

The ACL was $94.5 million, or 2.77%, of total portfolio loans at September 30, 2023 compared to $93.9 million, or 2.98%, of total portfolio loans at December 31, 2022.

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

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

The ACL was $96.5 million, or 2.75%, of total portfolio loans at March 31, 2024 compared to $97.1 million, or 2.77%, of total portfolio loans at December 31, 2023.

The following table summarizes the credit quality ratios and their components as of March 31, 2024 and December 31, 2023:

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

Allowance for Credit Losses to Total Portfolio Loans

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

The provision for credit losses 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, offset by the release of specific reserves on two loans.

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

The decrease in the provision for credit losses was primarily driven by lower loan growth in the first quarter of 2024.

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

The (recovery) provision for unfunded commitments decreased $0.3 million and increased $0.1 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

The (recovery) provision for unfunded commitments decreased $0.1 million for the three months ended March 31, 2024 compared to the same period in 2023.

The decline was due to decreased commitments in construction loans during the first quarter of 2024.

The reserve for unfunded commitments is largely comprised of unfunded commitments related to real estate construction loans and pressure on the reserve rates.

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

First, the reserve rate is extrapolated from the reserve rates calculated

CARTER BANKSHARES, INC.

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

construction and pressure on the reserve rate.

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

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

for certain commercial real estate funded loans within the ACL model.

These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts, average portfolio life, etc.

3 unchanged sentences

Third, volume changes impact the total reserve calculation.

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 period in 2022.

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

During the three months ended September 30, 2022, the Company charged-down $3.4 million on a $4.9 million purchased syndicated C&I 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% and 0.08% for the three and nine months ended 2023 and 0.49% and 0.19% for the same periods in 2022, respectively.

At September 30, 2023, nonperforming loans increased $301.7 million to $308.3 million since December 31, 2022.

Nonperforming loans as a percentage of total portfolio loans were 9.04% and 0.21% as of September 30, 2023 and December 31, 2022, respectively.

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

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 primarily recognized in the other consumer segment.

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

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

At March 31, 2024, nonperforming loans decreased $2.2 million to $307.3 million since December 31, 2023.

Nonperforming loans as a percentage of total portfolio loans were 8.76% and 8.83% as of March 31, 2024 and December 31, 2023, respectively.

Nonperforming loans was primarily related to two loans, one of which was a residential mortgage loan in the amount of $1.1 million and the other loan was a residential construction loan in the amount of $1.1 million.

Both loans were paid in full during the first quarter of 2024.

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

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

September 30, 2023

March 31, 2024

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

13 unchanged sentences

Substandard 1,324 52 3,314 75 2,968 301,913 309,646

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,670,631 $ 271,511 $ 787,929 $ 34,277 $ 436,349 $ 305,213 $ 3,505,910

2 unchanged sentences

Total Portfolio Loans $ 1,670,631 $ 271,511 $ 787,929 $ 34,277 $ 436,349 $ 305,213 $ 3,505,910

At March 31, 2024 and December 31, 2023, the Company had no loans that were risk rated as doubtful.

Special mention and substandard loans at March 31, 2024 decreased $3.0 million compared to December 31, 2023, with a decrease of $2.3 million in substandard and a decrease of $0.7 million in special mention.

The decrease of $2.3 million in substandard was primarily related to two loans, one of which is a commercial real estate (“CRE”) loan and the other is a construction loan, totaling $1.3 million that were moved to OREO and a $1.1 million mortgage loan that was resolved during the first quarter of 2024.

At both March 31, 2024 and December 31, 2023 substandard loans were impacted by the above mentioned large nonaccrual

CARTER BANKSHARES, INC.

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

Special mention, substandard and doubtful loans at September 30, 2023 increased $157.1 million to $314.0 million compared to $156.9 million at December 31, 2022.

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

The increase of $168.1 million in substandard loans is primarily related to the above mentioned large nonaccrual lending relationship in the other loan category.

The $301.9 million of loans related to the Bank’s largest lending relationship were nonperforming and rated as substandard at September 30, 2023.

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

lending relationship in the Other loan category, which was placed on nonaccrual status during the second quarter of 2023 and contributed $301.9 million to the Company’s substandard loan balances as of those dates.

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

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

(Dollars in Thousands) September 30,

(Dollars in Thousands) March 31,

2024 December 31,

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

Total deposits at September 30, 2023 decreased $74.2 million, or 2.04%, from December 31, 2022.

The decrease related to a decline of $324.2 million in demand, money market and savings deposits, offset by an increase of $250.0 million in CDs, which was primarily due to customers migrating between deposit products as interest rates have risen.

At September 30, 2023, noninterest-bearing deposits comprised 18.6% of total deposits compared to 19.4% at December 31, 2022 and 19.3% at September 30, 2022.

CDs comprised 42.5%, 34.7% and 33.5% of total deposits at September 30, 2023, December 31, 2022 and September 30, 2022, respectively.

Total deposits at March 31, 2024 increased $108.6 million, or 2.9%, from December 31, 2023.

The increase related to an increase of $108.0 million in CDs, which includes an increase of $45.6 million in brokered CDs, an increase of $34.1 million in interest-bearing demand accounts and an increase of $7.1 million in money market accounts, offset by a decrease of $27.4 million in savings accounts and a decrease of $13.2 million in noninterest-bearing demand accounts.

The Company had $115.6 million brokered CDs at March 31, 2024, compared to $70.0 million at December 31, 2023.

At March 31, 2024, noninterest-bearing deposits comprised 17.5% of total deposits compared to 18.4% at December 31, 2023 and 19.5% at March 31, 2023.

CDs comprised 44.2%, 42.6% and 37.0% of total deposits at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

The Company’s deposit base is diversified and granular and is comprised of approximately 78.8% of retail deposits.

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.

CARTER BANKSHARES, INC.

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

The following table presents additional information in relation to deposits:

(Dollars in Thousands) September 30,

(Dollars in Thousands) March 31,

2024 December 31,

Deposits from the Certificate of Deposit Account Registry Services ("CDARS") $ — $ —

Brokered Deposits 115,551 70,000

Noninterest-Bearing Public Funds Deposits 42,607 51,506

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

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

Maturities of CDs over $250,000 or more not covered by deposit insurance at March 31, 2024 are summarized as follows:

(Dollars in Thousands) Amount Percent

4 unchanged sentences

Total $ 244,450 100.0 %

CARTER BANKSHARES, INC.

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

Borrowings and Federal Funds Purchased

Borrowings are an additional source of liquidity for the Company.

We had $514.1 million FHLB borrowings at September 30, 2023 and $180.6 million at December 31, 2022.

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

We had $310.5 million FHLB borrowings at March 31, 2024 and $393.4 million at December 31, 2023.

The Company had no overnight federal funds purchased at March 31, 2024 or at December 31, 2023.

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

1 unchanged sentence

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

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

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

Balance at Period End

13 unchanged sentences

Federal Funds Purchased — % — %

The Company held FHLB of Atlanta stock of $27.4 million and $9.7 million at September 30, 2023 and December 31, 2022, respectively.

The increase in FHLB stock was due to increased borrowings.

Dividends recorded on restricted stock were $415.3 thousand and $970.7 thousand for the three and nine months ended September 30, 2023, respectively, compared to $24.5 thousand and $66.2 thousand for the same periods in 2022.

The Company held FHLB of Atlanta stock of $17.9 million and $21.6 million at March 31, 2024 and December 31, 2023, respectively.

The decrease in FHLB stock was due to repayments.

Dividends recorded on restricted stock were $0.4 million for the three months ended March 31, 2024 compared to $0.2 million for the same period in 2023.

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

1 unchanged sentence

The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered.

Stock in the FHLB is non-marketable and is

CARTER BANKSHARES, INC.

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

redeemable at the discretion of the FHLB.

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

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

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This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing to access funds to meet their credit needs.

In order to manage liquidity risk, the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company.

In order to manage liquidity risk the Company’s Board has delegated authority to ALCO for formulation, implementation and oversight of liquidity risk management for the Company.

The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events.

The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan.

The ALCO policy guidelines define graduated risk tolerance levels.

The ALCO closely monitors and manages liquidity by reviewing cash flow projections, performing balance sheet stress tests and by maintaining a detailed contingency funding plan that includes specific liquidity measures that are reviewed by the ALCO monthly.

Our liquidity policy and contingency funding plan provide graduated risk tolerance levels for multiple liquidity measures and potential liquidity environments.

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

CARTER BANKSHARES, INC.

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

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

Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources.

Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any potential funding dependency on other more volatile sources.

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

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

In addition to the lines referenced above, the Company also has $580.4 million of unpledged available-for-sale investment securities that may be sold or pledged as collateral that can serve as an additional source of liquidity.

Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets or approximating $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, a fully secured facility with one other correspondent financial institution totaling $45.0 million, and access to the institutional CD market, and the brokered deposit market.

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

In addition to the above funding resources, the Company also has $465.4 million of unpledged available-for-sale investment securities, at fair value, as an additional source of liquidity.

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

As of September 30, 2023, approximately 88.9% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.1% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

As of March 31, 2024, approximately 82.8% of our total deposits of $3.8 billion were insured under standard FDIC insurance coverage limits, and approximately 17.2% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

The Company closely monitors changes in the industry and market conditions that may impact the Company’s liquidity and will use other borrowing means or other liquidity and funding strategies sources to fund its liquidity needs as needed.

The Company is also closely tracking the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio due to rising market interest rates and developments in the banking industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity.

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

1 unchanged sentence

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

At September 30, 2023, the Bank had $597.8 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $17.4 million, $580.4 million in unpledged securities.

This resulted in highly liquid assets to total assets ratio of 13.4% at September 30, 2023.

Total available liquidity to uninsured deposits was 306.8% at September 30, 2023.

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

CARTER BANKSHARES, INC.

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

At March 31, 2024, the Bank had $538.6 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $73.2 million and $465.4 million in unpledged securities.

This resulted in highly liquid assets to total assets ratio of 11.8% at March 31, 2024.

Total available liquidity to uninsured deposits was 199.0% at March 31, 2024.

If an extended recession, or significant industry or market volatility, caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

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

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

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

Cash and Due From Banks, including Interest-bearing Deposits $ 108,110 $ 54,529

2 unchanged sentences

FHLB Borrowing Availability 593,774 480,266

Collateralized Lines of Credit 45,000 —

Unsecured Lines of Credit 50,000 50,000

Total Liquidity Sources $ 1,307,608 $ 1,210,106

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

(Dollars in Thousands) September 30, 2023

The following table provides total liquidity sources and ratios as of the periods presented:

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

Total Liquidity Sources $ 1,307,608 $ 1,210,106

2 unchanged sentences

Total Available Liquidity to Uninsured Deposits 199.0 % 187.0 %

CARTER BANKSHARES, INC.

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

Regulatory Capital Requirements

Total capital of $330.6 million at September 30, 2023, reflects an increase of $2.0 million compared to $328.6 million at December 31, 2022.

The increase in total capital from December 31, 2022 is primarily due to net income of $25.3 million for the nine months ended September 30, 2023 offset by $16.4 million related to the repurchase of common stock, a $7.9 million decrease in other comprehensive income due to changes in fair value of investment securities, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02.

The remaining difference of $1.1 million is related to restricted stock activity for the nine months ended September 30, 2023.

Total capital of $359.1 million at March 31, 2024, reflects an increase of $7.8 million compared to December 31, 2023.

The increase in total capital from December 31, 2023 is primarily due to net income of $5.8 million, a $1.6 million increase in other comprehensive (loss) income due to changes in fair value of investment securities, as well as an increase of $0.4 million related to restricted stock activity all during the three months ended March 31, 2024.

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

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

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

At March 31, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

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

At September 30, 2023, the Bank continues to maintain its capital position with a leverage ratio of 9.59% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 11.08% compared to the regulatory guideline of 6.50% to be well-capitalized.

At March 31, 2024, the Bank continues to maintain its capital position with a leverage ratio of 9.27% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 10.80% compared to the regulatory guideline of 6.50% to be well-capitalized.

The Bank’s risk-based Tier 1 and Total Capital ratios were 10.80% and 12.07%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively.

We believe that we have the ability to raise additional capital, if necessary.

The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital.

The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.

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

CARTER BANKSHARES, INC.

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

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

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

Banking institutions with a ratio of Common

Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.

CARTER BANKSHARES, INC.

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

The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank for the dates presented:

2 unchanged sentences

Capitalized (1)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Amount Ratio Amount Ratio

10 unchanged sentences

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

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

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

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

4 unchanged sentences

Contractual Obligations

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

As of March 31, 2024, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 ( the “2023 Annual Report”).

Off-Balance Sheet Arrangements

As of September 30, 2023, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2022 Annual Report.

CARTER BANKSHARES, INC.

As of March 31, 2024, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2023 Annual Report.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis