Carter Bankshares, Inc. 10-Q

ITEM 2. 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 $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 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 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 $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 $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 45 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses. The Company remains well capitalized. The Tier 1 capital ratio decreased to 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. Securities The following table presents the composition of available-for-sale securities: (Dollars in Thousands) March 31, 2024 December 31, 2023 $ Change U.S. Government Agency Securities 39,372 43,827 (4,455) Residential Mortgage-Backed Securities 99,784 99,150 634 Commercial Mortgage-Backed Securities 29,120 31,163 (2,043) Other Commercial Mortgage-Backed Securities 21,897 21,856 41 Asset Backed Securities 139,274 140,006 (732) Collateralized Mortgage Obligations 158,341 161,533 (3,192) States and Political Subdivisions 221,049 222,108 (1,059) Corporate Notes 59,995 59,360 635 Total Debt Securities $ 768,832 $ 779,003 $ (10,171) The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. 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 $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. 46 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The unrealized losses on debt securities are believed to be temporary primarily because these unrealized losses are due to reductions in market value caused by upward movement in interest rates since the securities purchase (as applicable), and not related to the credit quality of these securities. Our portfolio consists of 48.2% of securities issued by United States government sponsored entities and carry an implicit government guarantee. States and political subdivisions comprise 28.8% of the portfolio and are largely general obligations or essential purpose revenue bonds, which have performed very well historically over all business cycles, and are rated AA and AAA. We have the ability to hold these securities to maturity and expect full recovery of the amortized cost. 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 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. 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 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. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels. 47 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Loan Composition The following table summarizes our loan portfolio as of the dates presented: (Dollars in Thousands) March 31, 2024 December 31, 2023 Commercial Commercial Real Estate $ 1,728,929 $ 1,670,631 Commercial and Industrial 257,176 271,511 Total Commercial Loans 1,986,105 1,942,142 Consumer Residential Mortgages 788,125 787,929 Other Consumer 32,428 34,277 Total Consumer Loans 820,553 822,206 Construction 397,219 436,349 Other 305,194 305,213 Total Portfolio Loans 3,509,071 3,505,910 Loans Held-for-Sale — — Total Loans $ 3,509,071 $ 3,505,910 Our loan portfolio represents our most significant source of interest income. The risk that borrowers are unable to pay such obligations is inherent in the loan portfolio. 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, 2023 . 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 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. 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. 48 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 (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 $ 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 49 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 March 31, 2024 March 31, 2024 March 31, 2024 December 31, 2023 % of Gross Loans % of RBC 1. Hospitality, Agriculture & Energy $ 301,913 $ 301,913 $ — 8.60 % 63.07 % 2. Retail Real Estate & Food Services 53,243 53,576 (333) 1.52 % 11.12 % 3. Retail Real Estate 37,622 38,972 (1,350) 1.07 % 7.86 % 4. Hospitality 37,369 37,502 (133) 1.06 % 7.81 % 5. Construction / Commercial Property 35,500 — 35,500 1.01 % 7.42 % 6. Non-Owner Occupied / Commercial Real Estate 35,364 27,834 7,530 1.01 % 7.39 % 7. Non-Owner Occupied / Commercial Real Estate 33,605 33,752 (147) 0.96 % 7.02 % 8. Industrial & Retail Real Estate 33,560 33,885 (325) 0.96 % 7.01 % 9. Multifamily & student housing 32,460 32,747 (287) 0.93 % 6.78 % 10. 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 % Total Gross Loans $ 3,509,071 $ 3,505,910 $ 3,161 % of Total Gross Loans 18.03 % 16.89 % 1.14 % Concentration (25% of RBC) $ 119,681 $ 121,231 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 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. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation (“FICO”) scores and restricting loan amounts at lower FICO scores. Deferred costs and fees included in the portfolio balances above were $7.5 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. Credit Quality On a monthly basis, a Criticized Asset Committee meets to review certain watch, special mention and substandard risk rated loans within prescribed policy thresholds. These loans typically represent the highest risk of loss to the Company. 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. 50 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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. Additional credit risk management practices include continuous reviews of trends in our lending footprint and our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing. Our Loan Review department serves as a mechanism to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities. The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as determining the appropriateness of risk ratings for those loans reviewed and providing input to the loan risk rating process. Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms. 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. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented: (Dollars in Thousands) March 31, 2024 December 31, 2023 $ Change Nonaccrual Loans Commercial Real Estate $ 641 $ 1,324 $ (683) Commercial and Industrial 109 52 57 Residential Mortgages 2,491 3,283 (792) Other Consumer 50 59 (9) Construction 2,093 2,904 (811) Other 301,913 301,913 — Total Nonperforming Loans 307,297 309,535 (2,238) Other Real Estate Owned 2,528 2,463 65 Total Nonperforming Assets $ 309,825 $ 311,998 $ (2,173) 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. 51 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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 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: March 31, 2024 December 31, 2023 (Dollars in Thousands) Amount % of NPLs Amount % of NPLs Commercial Real Estate $ 641 0.2 % $ 1,324 0.4 % Commercial & Industrial 109 — % 52 — % Residential Mortgages 2,491 0.8 % 3,283 1.1 % Other Consumer 50 — % 59 — % Construction 2,093 0.7 % 2,904 1.0 % Other 301,913 98.3 % 301,913 97.5 % Balance End of Period 307,297 100.0 % 309,535 100.0 % The Company has initiated collection processes with respect to such loans and intends to explore all alternatives for repayment. However, we cannot give any assurance as to the timing or amount of future payments or collections on such loans 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 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. Past Company legacy underwriting standards relied heavily on loan to value and did not necessarily consider the income characteristics of the borrower or the repayment capacity of collateral with respect to speculative land financing. An overreliance on value as a primary repayment source can become compromised during real estate cycles. As a result, management has worked through these legacy credits and has installed a number of underwriting guardrails that consider the global cash flows and repayment capability of borrowers and/or guarantors, the proportion of speculation, transaction limits and introduced sensitivity analysis in order to determine supportable loan amounts. While these guardrails do not insulate the Company from credit cycles, 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. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans. 52 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Allowance for Credit Losses The following is the allocation of the ACL reserves by segment for the periods presented: 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 Commercial Real Estate $ 19,162 49.3 % $ 19,873 47.7 % Commercial & Industrial 3,061 7.3 % 3,286 7.7 % Residential Mortgages 11,038 22.5 % 10,879 22.5 % Other Consumer 783 0.9 % 868 1.0 % Construction 8,139 11.3 % 7,792 12.4 % Other 54,353 8.7 % 54,354 8.7 % Balance End of Period $ 96,536 100.0 % $ 97,052 100.0 % 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 Allowance for Credit Losses $ 96,536 $ 97,052 Total Portfolio Loans 3,509,071 3,505,910 Allowance for Credit Losses to Total Portfolio Loans 2.75 % 2.77 % Nonperforming Loans to Total Portfolio Loans Nonperforming Loans $ 307,297 $ 309,535 Total Portfolio Loans 3,509,071 3,505,910 Nonperforming Loans to Total Portfolio Loans 8.76 % 8.83 % Allowance for Credit Losses to Nonperforming Loans Allowance for Credit Losses $ 96,536 $ 97,052 Nonperforming Loans 307,297 309,535 Allowance for Credit Losses to Nonperforming Loans 31.41 % 31.35 % Net Charge-offs to Average Portfolio Loans Net Charge-offs (annualized) $ 2,140 $ 2,300 Average Total Portfolio Loans 3,518,987 3,324,757 Net Charge-offs to Average Portfolio Loans 0.06 % 0.07 % See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the previous table. The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses decreased $1.4 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 $0.1 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 53 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. Refer to Note 1, Basis of Presentation, 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 Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain commercial real estate loans. The proportion of these segments affect the weighting. Third, volume changes impact the total reserve calculation. 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: March 31, 2024 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans Pass $ 1,728,218 $ 254,230 $ 785,504 $ 32,378 $ 395,069 $ 3,281 $ 3,198,680 Special Mention 70 2,837 101 — 57 — 3,065 Substandard 641 109 2,520 50 2,093 301,913 307,326 Doubtful — — — — — — — Loss — — — — — — — Total Portfolio Loans $ 1,728,929 $ 257,176 $ 788,125 $ 32,428 $ 397,219 $ 305,194 $ 3,509,071 Performing $ 1,728,288 $ 257,067 $ 785,634 $ 32,378 $ 395,126 $ 3,281 $ 3,201,774 Nonperforming 641 109 2,491 50 2,093 301,913 307,297 Total Portfolio Loans $ 1,728,929 $ 257,176 $ 788,125 $ 32,428 $ 397,219 $ 305,194 $ 3,509,071 December 31, 2023 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans Pass $ 1,669,029 $ 268,622 $ 784,090 $ 34,202 $ 433,321 $ 3,300 $ 3,192,564 Special Mention 278 2,837 525 — 60 — 3,700 Substandard 1,324 52 3,314 75 2,968 301,913 309,646 Total Portfolio Loans $ 1,670,631 $ 271,511 $ 787,929 $ 34,277 $ 436,349 $ 305,213 $ 3,505,910 Performing $ 1,669,307 $ 271,459 $ 784,646 $ 34,218 $ 433,445 $ 3,300 $ 3,196,375 Nonperforming 1,324 52 3,283 59 2,904 301,913 309,535 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 54 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. Deposits The following table presents the composition of deposits for the periods presented: (Dollars in Thousands) March 31, 2024 December 31, 2023 $ Change % Change Noninterest-Bearing Demand $ 671,981 $ 685,218 $ (13,237) (1.9) % Interest-Bearing Demand 515,614 481,506 34,108 7.1 % Money Market 520,785 513,664 7,121 1.4 % Savings 427,461 454,876 (27,415) (6.0) % Certificates of Deposit 1,694,680 1,586,651 108,029 6.8 % Total Deposits $ 3,830,521 $ 3,721,915 $ 108,606 2.9 % Deposits are the Company’s primary source of funds. The Company believes that the deposit base is stable and that the Company has the ability to attract new depositors while diversifying the deposit composition. Total deposits at March 31, 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. 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. The following table presents additional information in relation to deposits: (Dollars in Thousands) March 31, 2024 December 31, 2023 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 Interest-Bearing Public Funds Deposits 124,402 127,100 Total Deposits not Covered by Deposit Insurance (1) 657,124 647,154 Certificates of Deposits not Covered by Deposit Insurance 244,450 234,968 Deposits for Certain Directors, Executive Officers and their Affiliates 2,086 1,799 (1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements. Maturities of CDs over $250,000 or more not covered by deposit insurance at March 31, 2024 are summarized as follows: (Dollars in Thousands) Amount Percent Three Months or Less $ 49,814 20.4 % Over Three Months Through Twelve Months 180,758 73.9 % Over Twelve Months Through Three Years 12,390 5.1 % Over Three Years 1,488 0.6 % Total $ 244,450 100.0 % 55 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 $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. We manage our borrowed funds to provide a reliable source of liquidity. Information pertaining to FHLB borrowings and federal funds purchased is summarized in the following table: (Dollars in Thousands) March 31, 2024 December 31, 2023 Balance at Period End Federal Home Loan Bank Borrowings $ 310,500 $ 393,400 Federal Funds Purchased $ — $ — Average Balance during the Period Federal Home Loan Bank Borrowings $ 366,782 $ 402,675 Federal Funds Purchased $ — $ 7,023 Average Interest Rate during the Period Federal Home Loan Bank Borrowings 5.28 % 5.17 % Federal Funds Purchased — % 5.24 % Maximum Month-end Balance during the Period Federal Home Loan Bank Borrowings $ 403,000 $ 525,135 Federal Funds Purchased $ — $ 46,965 Average Interest Rate at Period End Federal Home Loan Bank Borrowings 5.16 % 5.20 % Federal Funds Purchased — % — % 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. We hold FHLB stock because we are a member of the FHLB of Atlanta. 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 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. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Refer to Note 9, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings. Liquidity and Capital Resources Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. 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 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 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. 56 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 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 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 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. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At March 31, 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) March 31, 2024 December 31, 2023 Cash and Due From Banks, including Interest-bearing Deposits $ 108,110 $ 54,529 Unpledged Investment Securities 465,391 563,537 Excess Pledged Securities 45,333 61,774 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 the periods presented: (Dollars in Thousands) March 31, 2024 December 31, 2023 Total Liquidity Sources $ 1,307,608 $ 1,210,106 Highly Liquid Assets to Total Assets 11.8 % 12.8 % Highly Liquid Assets to Uninsured Deposits 82.0 % 89.4 % Total Available Liquidity to Uninsured Deposits 199.0 % 187.0 % 57 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Regulatory Capital Requirements 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. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. 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 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 income, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels. 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. 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. 58 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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: (Dollars in Thousands) Minimum Required Basel III Well Capitalized (1) March 31, 2024 December 31, 2023 Amount Ratio Amount Ratio Carter Bankshares, Inc. Leverage Ratio 4.00 % NA $ 428,862 9.34 % $ 435,364 9.48 % Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % NA 428,862 10.89 % 435,364 11.08 % Tier 1 Capital (to Risk-weighted Assets) 8.50 % NA 428,862 10.89 % 435,364 11.08 % Total Capital (to Risk-weighted Assets) 10.50 % NA 478,725 12.15 % 484,925 12.34 % Carter Bank & Trust Leverage Ratio 4.00 % 5.00 % $ 425,250 9.27 % $ 431,550 9.41 % Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % 6.50 % 425,250 10.80 % 431,550 10.99 % Tier 1 Capital (to Risk-weighted Assets) 8.50 % 8.00 % 425,250 10.80 % 431,550 10.99 % Total Capital (to Risk-weighted Assets) 10.50 % 10.00 % 475,071 12.07 % 481,070 12.25 % (1) To be “well capitalized” under the prompt corrective action framework applies to the Bank only. In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC, approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period. Contractual Obligations 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 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.