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Item 1. Financial Statements

2024-08-01 compared with 2024-05-03 · 367 added, 330 removed, 1075 unchanged (39% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in Thousands) 2024 2023

5 unchanged sentences

Depreciation/Amortization of Bank Premises and Equipment 3,422 3,079

Provision for Deferred Taxes 189 455

(Benefit) Provision for Deferred Taxes ( 1,418 ) 539

Net Amortization of Securities 1,871 2,528

Unrealized Gain on Equity Securities ( 63 ) —

Tax Credit Amortization 326 958

Gains on Sales of Loans Held-for-Sale ( 61 ) ( 57 )

Losses on Sales of Securities, net — 12

Commercial Loan Swap Derivative Income ( 14 ) 194

(Gains) Losses on Sales of Securities, net ( 36 ) 9

Commercial Loan Swap Derivative (Income) Loss ( 16 ) 144

Increase in the Value of Life Insurance Contracts ( 713 ) ( 680 )

Recognition of Restricted Stock Compensation Expense 866 776

Decrease in Other Assets 2,125 2,386

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

Decrease (Increase) in Other Assets 1,762 ( 2,574 )

(Decrease) Increase in Other Liabilities ( 1,668 ) 1,397

Net Cash Provided By Operating Activities 15,175 29,592

1 unchanged sentence

Securities Available-for-Sale:

Proceeds from Sales 10,617 15,054

Proceeds from Maturities, Redemptions, and Pay-downs 31,174 26,856

Purchases ( 8,615 ) ( 24,938 )

Purchase of Equity Securities ( 5,000 ) —

Purchase of Bank Premises and Equipment, Net ( 3,116 ) ( 5,977 )

3 unchanged sentences

Proceeds from Sales and Payments of Other Real Estate Owned 1,502 4,818

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

Net Cash Used In Investing Activities ( 11,944 ) ( 176,386 )

FINANCING ACTIVITIES

12 unchanged sentences

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

Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,511 —

Stock Repurchase Excise Tax Settled in Subsequent Period — ( 93 )

Stock Repurchases Settled in Subsequent Period — ( 328 )

See accompanying notes to unaudited consolidated financial statements.

19 unchanged sentences

Accounting Standards Adopted in 2024

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

On June 30, 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .

The FASB issued this ASU to (1) clarify the guidance in Topic 820, Fair Value Measurement , when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.

The amendments in this ASU also require the following disclosures for equity securities subject to contractual sale restrictions:

(1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet;

(2) the nature and remaining duration of the restriction(s);

and (3) the circumstances that could cause a lapse in the restriction(s).

For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

The adoption of this ASU was effective for the Company on March 31, 2024 but was first applied on June 30, 2024, concurrent with the purchase of equity securities, and did not have a significant impact to our Consolidated Financial Statements.

Accounting Standards Issued but Not Yet Adopted

3 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

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

12 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

Recently Issued Disclosure Rules

3 unchanged sentences

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

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

In April 2024, the SEC issued an order staying this rule pending the outcome of the federal court litigation challenging the rule.

Subject to the outcome of this litigation, the disclosure requirements of the final rule will start to phase-in commencing with the Company's fiscal year beginning January 1, 2026.

NOTE 2 – EARNINGS PER SHARE

2 unchanged sentences

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

Three Months Ended March 31,

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

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

10 unchanged sentences

As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation .

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - INVESTMENT SECURITIES

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

March 31, 2024

June 30, 2024

(Dollars in Thousands) Amortized

9 unchanged sentences

Total Debt Securities $ 835,535 $ 128 $ ( 89,338 ) $ 746,325

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

December 31, 2023

10 unchanged sentences

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

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

The Company did not have securities classified as held-to-maturity at June 30, 2024 or December 31, 2023.

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

Three Months Ended March 31,

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

(Dollars in Thousands) 2024 2023 2024 2023

2 unchanged sentences

Gross Realized Losses — ( 126 ) — ( 138 )

Net Realized (Losses) Gains — ( 12 )

Net Realized Gains (Losses) 36 3 36 ( 9 )

Tax Impact $ 8 $ 1 $ 8 $ ( 2 )

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

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

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

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

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

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

2 unchanged sentences

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

March 31, 2024

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

June 30, 2024

(Dollars in Thousands) Amortized

9 unchanged sentences

Total Debt Securities $ 835,535 $ 746,325

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

At June 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than those securities issued by the U.S.

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

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

March 31, 2024

The carrying value of securities pledged for various regulatory and legal requirements was $ 308.1 million at June 30, 2024 and $ 215.5 million at December 31, 2023.

Available-for-sale securities with unrealized losses at June 30, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

June 30, 2024

Less Than 12 Months 12 Months or More Total

37 unchanged sentences

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

The Company did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended June 30, 2024 or the year ended December 31, 2023 as there was no related impairment.

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

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

As of June 30, 2024, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis.

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

2 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

As of March 31, 2024, the Company determined the unrealized losses detailed in the table above are not related to credit;

As of June 30, 2024, the Company determined the unrealized losses detailed in the table above are not related to credit;

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

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

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

During the three and six months ended June 30, 2024 and June 30, 2023, the Company had no credit related net investment impairment losses.

Equity Securities

During the second quarter of 2024, the Company purchased $ 5.0 million of equity securities with carrying value totaling $ 5.1 million at June 30, 2024.

These securities are separately reported as “equity securities” on the Company’s consolidated balance sheet.The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States.

The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts.

The Company’s investment in the mutual fund is eligible for investment credit under the Community Reinvestment Act.

During the three months ended June 30, 2024, we recognized an unrealized fair value gain of $ 63.3 thousand on these equity securities.

This unrealized fair value gain is recorded in Other Income on the Consolidated Statements of Income.

NOTE 4 – LOANS

1 unchanged sentence

(Dollars in Thousands)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Commercial Real Estate

13 unchanged sentences

Total Loans $ 3,549,521 $ 3,505,910

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS (continued)

Loan Restructurings

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

The Company evaluates all loan restructurings in accordance with ASU 2022-02 for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan.

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

3 unchanged sentences

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

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

The following table shows the amortized cost basis as of June 30, 2024 for loans restructured during the three and six months ended June 30, 2024 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:

Restructured Loans

Three Months Ended June 30, 2024 Six Months Ended June 30, 2024

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

Accruing Restructured Loans

Commercial Real Estate — $ — — % — $ — — %

Commercial and Industrial — — — % — — — %

Residential Mortgages — — — % — — — %

Other Consumer — — — % — — — %

Construction — — — % — — — %

Other — — — % — — — %

Total Accruing Restructured Loans — $ — — % — $ — — %

Nonaccrual Restructured Loans

Commercial Real Estate 1 $ 449 0.02 % 1 $ 449 0.02 %

Commercial and Industrial — — — % — — — %

Residential Mortgages — — — % — — — %

Other Consumer — — — % — — — %

Construction — — — % — — — %

Other 11 294,140 98.90 % 11 294,140 98.90 %

Total Nonaccrual Restructured Loans 12 $ 294,589 98.75 % 12 $ 294,589 98.75 %

Total Restructured Loans 12 $ 294,589 98.75 % 12 $ 294,589 98.75 %

There were no loans to borrowers experiencing financial difficulty restructured during the three and six months ended June 30, 2023.

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

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

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

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

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS (continued)

The following table presents the aging analysis of modifications to borrowers experiencing financial difficulty in the last 12 months as of June 30, 2024:

Payment Status (Amortized Cost Basis)

(Dollars in Thousands) Current 30-89 Days Past Due 90+ Days Past Due Total

Accruing Restructured Loans

Commercial Real Estate $ — $ — $ — $ —

Commercial and Industrial — — — —

Residential Mortgages — — — —

Other Consumer — — — —

Construction — — — —

Other — — — —

Total Accruing Restructured Loans $ — $ — $ — $ —

Nonaccrual Restructured Loans

Commercial Real Estate $ — $ — $ 449 $ 449

Commercial and Industrial — — — —

Residential Mortgages — — — —

Other Consumer — — — —

Construction — — — —

Other — — 294,140 294,140

Total Nonaccrual Restructured Loans $ — $ — $ 294,589 $ 294,589

Total Restructured Loans $ — $ — $ 294,589 $ 294,589

The following table presents the amortized cost of loans to borrowers experiencing financial difficulty by portfolio segment and type of modification during the periods presented.

For the Three and Six Months Ended June 30, 2024

(Dollars in Thousands) Term Extension/Payment Delay Term Extension/Payment Delay/Interest Rate Reduction Total % of Portfolio Segment

Commercial Real Estate $ 449 $ — $ 449 0.02 %

Commercial and Industrial — — — — %

Residential Mortgages — — — — %

Other Consumer — — — — %

Construction — — — — %

Other — 294,140 294,140 98.90 %

Total $ 449 $ 294,140 $ 294,589 98.75 %

The following table describes the effect of loan modifications made to borrowers experiencing financial difficulty during the periods presented:

For the Three and Six Months Ended June 30, 2024

Weighted-Average Term Extension/Payment Delay Weighted Average Interest Rate Reduction

Commercial Real Estate 4.9 years — %

Other 2.6 years 0.63 %

Total 7.5 years 0.63 %

At June 30, 2024 and December 31, 2023, the Bank had no commitments to lend any additional funds on restructured loans.

At June 30, 2024 and June 30, 2023, the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

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

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

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

As of June 30, 2024 and December 31, 2023, the Bank had $ 0.1 million and $ 2.0 million, respectively, of residential real estate loans in the process of foreclosure.

The Company also had no residential real estate loans included in other real estate owned (“OREO”) at June 30, 2024 and $ 62 thousand at December 31, 2023.

CARTER BANKSHARES, INC.

3 unchanged sentences

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

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

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

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

28 unchanged sentences

Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.

Other loans include unique risk attributes considered inconsistent with our current underwriting standards.

Other loans, which includes the Company’s largest lending relationship, has unique risk attributes considered inconsistent with our current underwriting standards.

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

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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

credit dependent on the value of real estate rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of financial obligations.

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

44 unchanged sentences

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

March 31, 2024

June 30, 2024

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

90 unchanged sentences

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

March 31, 2024

June 30, 2024

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

57 unchanged sentences

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

March 31, 2024

June 30, 2024

(Dollars in Thousands) Current

26 unchanged sentences

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

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

The Company had no loans past due 90 days or more and still accruing at June 30, 2024 and December 31, 2023.

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

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

Loans past due 30 to 89 days and still accruing decreased $ 4.3 million to $ 1.7 million at June 30, 2024 compared to December 31, 2023.

Construction past due loans decreased $ 3.4 million partly due to a delinquent construction loan totaling $ 1.5 million that went permanent to a residential mortgage and is now current in the second quarter of 2024.

In addition, a second construction loan in the amount of $ 1.1 million paid off in the first quarter of 2024.

Residential mortgages decreased $ 1.0 million during the second quarter of 2024.

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

March 31, 2024

June 30, 2024

(Dollars in Thousands)

19 unchanged sentences

Total $ 4,493 $ 305,042 $ 309,535 $ —

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

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

Nonperforming loans remained significantly elevated at June 30, 2024 and December 31, 2023 due to the aggregate nonperforming loan balance that was reduced from $ 301.9 million as of March 31, 2024 to $ 294.1 million as of June 30, 2024 associated with the Bank’s largest lending relationship, that was placed on nonaccrual status during the second quarter of 2023.

During the second quarter of 2024, the Bank received payment of $ 7.8 million, which reduced the Bank’s amortized cost associated with these loans, pursuant to the pathway of curtailment and payoff of the outstanding nonperforming loan agreed between the relevant borrowers and the Bank.

There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 2024 or December 31, 2023.

CARTER BANKSHARES, INC.

4 unchanged sentences

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

Accordingly, management automatically transfer loans to nonaccrual status if they are 90 or more days’ delinquent.

Accordingly, management automatically transfers loans to nonaccrual status if they are 90 or more days’ delinquent.

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

3 unchanged sentences

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

During the three months ended March 31, 2024 and March 31, 2023, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

During the three and six months ended June 30, 2024 and June 30, 2023, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

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

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

6 unchanged sentences

Total $ 3,154 $ 294,140 $ 297,294 $ 4,493 $ 301,913 $ 306,406

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

Three Months Ended March 31, 2024

Three Months Ended June 30, 2024

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

1 unchanged sentence

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

Provision (Recovery) for Credit Losses on Loans 655 133 ( 312 ) 336 1,078 ( 1,399 ) 491

Charge-offs — ( 1 ) ( 4 ) ( 488 ) — — ( 493 )

Recoveries — 1 22 129 — — 152

Net Recoveries/(Charge-offs) — — 18 ( 359 ) — — ( 341 )

Balance at End of Period $ 19,817 $ 3,194 $ 10,744 $ 760 $ 9,217 $ 52,954 $ 96,686

Six Months Ended June 30, 2024

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

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 19,873 $ 3,286 $ 10,879 $ 868 $ 7,792 $ 54,354 $ 97,052

(Recovery) Provision for Credit Losses on Loans ( 56 ) ( 75 ) ( 132 ) 589 1,581 ( 1,400 ) 507

3 unchanged sentences

Balance at End of Period $ 19,817 $ 3,194 $ 10,744 $ 760 $ 9,217 $ 52,954 $ 96,686

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

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

4 unchanged sentences

Recoveries — 5 1 119 — — 125

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

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

Balance at End of Period $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144

Six Months Ended June 30, 2023

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

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852

Provision (Recovery) for Credit Losses on Loans 1,152 ( 691 ) 1,563 831 ( 297 ) ( 1,058 ) 1,500

Charge-offs — ( 1 ) ( 70 ) ( 1,308 ) ( 42 ) — ( 1,421 )

Recoveries — 5 2 206 — — 213

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

Balance at End of Period $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144

CARTER BANKSHARES, INC.

2 unchanged sentences

The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities.

Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis.

Securities available-for-sale, equity securities and derivative financial instruments are recorded at fair value on a recurring basis.

Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets.

25 unchanged sentences

This valuation method is classified as Level 3 in the fair value hierarchy.

Derivative Financial Instruments and Hedging Activities:

The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers.

Upon entering into swaps with the borrower, the Company entered into

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

offsetting positions with counterparties to minimize risk to the Company.

Equity Securities :

The fair values of equity securities are determined by obtaining quoted prices on nationally recognized or foreign securities exchanges, if available.

This valuation method is classified as Level 1 in the fair value hierarchy.

As of June 30, 2024, Level 1 fair values are available for each of the Company’s equity securities.

Derivative Financial Instruments and Hedging Activities:

The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers.

Upon entering into swaps with the borrower, the Company entered into offsetting positions with counterparties to minimize risk to the Company.

The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments.

25 unchanged sentences

After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

For non-collateral dependent loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell.

1 unchanged sentence

For smaller OREO assets with existing carrying values less than $ 0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure.

Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers.

Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us.

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

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

Fair value, when recorded, is generally based upon appraisals by approved, independent state certified

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us.

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

At June 30, 2024 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

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

March 31, 2024

June 30, 2024

(Dollars in Thousands) Carrying

16 unchanged sentences

Total Securities Available-for-Sale 746,325 — 738,838 7,487

Equity Securities 5,063 5,063 — —

Derivatives 19,592 — 19,592 —

26 unchanged sentences

We have invested in subordinated debt of other financial institutions.

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

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

The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

We have two securities totaling $ 7.5 million that are considered to be Level 3 securities at June 30, 2024 and two totaling $ 7.3 million at December 31, 2023, attributable to the calculated change in fair value of $ 0.2 million.

The Level 3 fair value is benchmarked to other securities that have observable

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates.

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

March 31, 2024

June 30, 2024

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

5 unchanged sentences

Individually Evaluated Loans $ — $ — $ — $ —

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

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

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

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

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

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

The Company had $ 0.6 million in individually evaluated loans measured at fair value on a nonrecurring basis as of June 30, 2024 and zero at December 31, 2023.

The Company’s largest lending relationship is classified at June 30, 2024 as an individually evaluated loan with a net carrying amount totaling $ 241.2 million.

The Company utilized various cash flow and discounting assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $ 52.9 million at June 30, 2024.

When evaluating the net carrying value of this credit relationship at June 30, 2024, the Company utilized discounted cash flow valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 2.5 million as of June 30, 2024 and at December 31, 2023, primarily due to sales offset by transfers to OREO from loans.

The Company had no write-downs recorded on OREO for the six months ended June 30, 2024 or for the same period in 2023.

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

March 31, 2024

June 30, 2024

(Dollars in Thousands) Fair

3 unchanged sentences

Range Average

Individually Evaluated Loans $ 579 Appraisal Estimated Selling Costs 3.5 % 3.5 %

Total Individually Evaluated Loans $ 579

OREO $ 1,212 Appraisals Estimated Selling Costs 6.0 % 6.0 %

12 unchanged sentences

Total OREO $ 2,463

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

A baseline discount rate has been established for impairment measurement.

2 unchanged sentences

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

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

Fair values for March 31, 2024 and December 31, 2023 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

The carrying values and estimated fair values of our financial instruments at June 30, 2024 and December 31, 2023 are presented in the following tables.

Fair values for June 30, 2024 and December 31, 2023 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

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

In cases where quoted market prices are not available, fair values are based on estimates using present value or

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

other valuation techniques.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

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

1 unchanged sentence

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

Fair Value Measurements at March 31, 2024

Fair Value Measurements at June 30, 2024

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

2 unchanged sentences

Securities Available-for-Sale 746,325 — 738,838 7,487 746,325

Equity Securities 5,063 5,063 — — 5,063

Portfolio Loans, net 3,452,835 — — 3,218,835 3,218,835

42 unchanged sentences

(Included in Other Assets)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

5 unchanged sentences

(Included in Other Liabilities)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

7 unchanged sentences

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

Three Months Ended March 31,

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

(Dollars in Thousands) 2024 2023 2024 2023

10 unchanged sentences

(Included in Other Liabilities)

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2024 December 31,

2023 March 31,

2023 June 30,

2024 December 31,

7 unchanged sentences

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

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

(Dollars in Thousands) June 30, 2024 December 31, 2023

Noninterest-Bearing Demand $ 653,296 $ 685,218

6 unchanged sentences

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

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

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

Certificates of deposits that exceed the FDIC Insurance limit of $250,000 at June 30, 2024 and December 31, 2023 were $ 273.1 million and $ 235.0 million, respectively.

At June 30, 2024 and December 31, 2023, total brokered deposits were $ 115.6 million and $ 70.0 million, respectively.

Certificates of Deposit maturing as of the date presented:

(Dollars in Thousands) March 31, 2024

(Dollars in Thousands) June 30, 2024

3 Months or Less $ 417,979

3 unchanged sentences

Total $ 1,762,232

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

Overdrafts reclassified to loans were $ 0.3 million at both June 30, 2024 and December 31, 2023.

CARTER BANKSHARES, INC.

2 unchanged sentences

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

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

The Company had $ 238.0 million Federal Home Loan Bank (“FHLB”) borrowings at June 30, 2024 and $ 393.4 million at December 31, 2023.

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

Variable rate FHLB borrowings were 19.5 % and 5.6 % of total borrowings at March 31, 2024 and December 31, 2023, respectively.

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

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

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

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

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

Variable rate FHLB borrowings were 7.6 % and 5.6 % of total borrowings at June 30, 2024 and December 31, 2023, respectively.

Total loans pledged as collateral were $ 1.6 billion at June 30, 2024 and $ 1.5 billion at December 31, 2023.

There were no securities available-for-sale pledged as collateral at both June 30, 2024 and December 31, 2023.

At June 30, 2024, funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0 % of the Company’s assets or approximately $ 1.1 billion, subject to the amount of eligible collateral pledged, of which the Company is eligible to borrow up to an additional $ 669.5 million.

The Company has unsecured facilities with three other correspondent financial institutions totaling $ 50.0 million at both June 30, 2024 and December 31, 2023, respectively, a fully secured facility with one other correspondent financial institution totaling $ 45.0 million, and access to the institutional certificate of deposit (“CD”) and brokered deposit markets.

The Company did not have outstanding borrowings on these fed funds lines as of June 30, 2024 or December 31, 2023.

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

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

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

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

(Dollars in Thousands) June 30, 2024 December 31, 2023

FHLB Borrowings $ 238,000 $ 393,400

2 unchanged sentences

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

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

(Dollars in Thousands) June 30, 2024 December 31, 2023

Federal Fund Purchased $ — $ —

1 unchanged sentence

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

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

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to June 30, 2024 and thereafter are as follows:

(Dollars in Thousands) Balance Weighted

7 unchanged sentences

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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

Commitments to extend credit, which amounted to $ 698.0 million at June 30, 2024 and $ 702.3 million at December 31, 2023, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

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

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

Lines of credit for construction projects represented $ 409.7 million, or 58.7 % and $ 452.2 million, or 64.4 %, of the commitments to extend credit at June 30, 2024 and December 31, 2023, respectively.

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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

million, or 64.4 %, of the commitments to extend credit at March 31, 2024 and December 31, 2023, respectively.

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

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

The Company had outstanding letters of credit totaling $ 18.3 million at March 31, 2024 and $ 19.6 million at December 31, 2023.

The Company had outstanding letters of credit totaling $ 17.9 million at June 30, 2024 and $ 19.6 million at December 31, 2023.

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

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

(Dollars in Thousands) June 30, 2024 December 31, 2023

Commitments to Extend Credit $ 697,985 $ 702,301

7 unchanged sentences

The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment.

The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The life-of-loan reserve for unfunded commitments is included on our Consolidated Balance Sheets.

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

Three Months Ended March 31,

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

(Dollars in Thousands) 2024 2023 2024 2023

3 unchanged sentences

Balance at End of Period $ 2,914 $ 2,736 $ 2,914 $ 2,736

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

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

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

A recovery of $ 0.2 million was recorded for the three months ended June 30, 2024, which resulted in a decrease of $ 0.6 million compared to the provision of $ 0.4 million for the three months ended June 30, 2023.

The decrease in the (recovery) provision for unfunded commitments was primarily due to a decline in construction commitments.

Legal Proceedings

4 unchanged sentences

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

Other than as set forth below, as of June 30, 2024, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

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

Justice Collection Actions

The Bank is engaged in a variety of collection proceedings (the “Collection Actions”) against various related entities that are owned and/or controlled by James C.

Settlement of Certain Justice Disput es

On June 26, 2024, the Bank announced that it had agreed to a pathway of curtailment and payoff of loans outstanding to the Bank owed or guaranteed by James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Collection Defendants”).

Justice, III, and various entities that are owned or controlled by them (such entities, the “Justice Entities” and collectively, the “Justice Obligors”).

In connection with this agreement, several legal proceedings involving the Bank and the Justice Obligors were dismissed, as described below, and the Justice Obligors executed a release that waives all causes of action of any kind that they might claim to have against the Company or the Bank.

Justice Collection Actions

The Bank has been engaged in a variety of collection proceedings (the “Collection Actions”) against James C.

Justice, II, Cathy L.

Justice, James C.

Justice, III and various Justice Entities (collectively, the “Collection Defendants”).

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

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

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

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

On May 12, 2023 and June 7, 2023, the Collection Defendants filed motions to set aside the confessions of judgment that the Bank had filed.

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

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

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

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

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

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

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

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

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

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

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

In connection with the settlement described above, on July 3, 2024, the Collection Defendants withdrew their notices of appeal, and the Collection Defendants have agreed not to challenge further the confessions of judgment or the final orders related thereto issued by the Martinsville Circuit Court.

Justice Federal Court Litigation

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

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

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

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

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

The allegations contained in the Justice Federal Court Litigation related to the matured promissory notes made or guaranteed by the Collection Defendants that have been reduced to judgment in the Martinsville Circuit Court.

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

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

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

That motion was granted on April 24, 2024.

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

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

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

In connection with the settlement described above, on June 26, 2024 the Justice Federal Court Litigation was dismissed with prejudice.

Justice Foreclosure Litigation

2 unchanged sentences

(collectively, “Sporting Club”).

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

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

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

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

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

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

Sporting Club also requested that the Greenbrier Circuit Court issue a declaratory judgment that the debts secured by the Trust Deed were not payable and therefore no trustee sale was permitted, or alternatively that Sporting Club was entitled to final

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

adjudication of the Justice Federal Court Litigation before any sale of property by the trustee under the Trust Deed might proceed.

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

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

See the description of the Justice Collection Litigation above.

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

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

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

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

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

In connection with the settlement described above, on June 28, 2024 the Justice Foreclosure Litigation was dismissed with prejudice.

GLAS Federal Court Litigation

7 unchanged sentences

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)

voluntary conveyance, under Virginia law.

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

1 unchanged sentence

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

On May 13, 2024, the Bank filed a motion to dismiss the amended complaint filed by GLAS on similar grounds.

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

6 unchanged sentences

Justice and James C.

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

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

These indemnity obligations are supported by substantial pledged collateral.

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

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

NOTE 11 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME

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

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

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

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

(Dollars in Thousands) Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

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

Net Unrealized Gains (Losses) Arising during the period $ 250 $ ( 59 ) $ 191 $ ( 11,036 ) $ 2,417 $ ( 8,619 )

Reclassification Adjustment for Gains included in Net Income ( 36 ) 8 ( 28 ) ( 3 ) 1 ( 2 )

Other Comprehensive Income (Loss) $ 214 $ ( 51 ) $ 163 $ ( 11,039 ) $ 2,418 $ ( 8,621 )

(Dollars in Thousands) Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

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

Net Unrealized Gains Arising during the period $ 2,369 $ ( 535 ) $ 1,834 $ 4,597 $ ( 973 ) $ 3,624

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

Reclassification Adjustment for (Gains) Losses included in Net Income ( 36 ) 8 ( 28 ) 9 ( 2 ) 7

Other Comprehensive Income $ 2,333 $ — $ ( 527 ) $ 1,806 $ 4,606 $ ( 975 ) $ 3,631

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

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – PROVISION FOR INCOME TAXES

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

Three Months Ended March 31,

(Dollars in Thousands) Amount Percent Amount Percent

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

State Income Tax, net of Federal Benefit 210 2.9 365 1.8

Tax-exempt Interest, net of Disallowance ( 137 ) ( 1.9 ) ( 195 ) ( 1.0 )

Federal Tax Credits, net of Basis Reduction ( 155 ) ( 2.1 ) ( 550 ) ( 2.8 )

Tax Credit Investment Amortization, net of Federal Benefit 129 1.8 483 2.4

Change in Valuation Allowance 21 0.3 — —

Income from Bank Owned Life Insurance ( 73 ) ( 1.0 ) ( 71 ) ( 0.3 )

Interim Period Effective Tax Rate Adjustment ( 133 ) ( 1.8 ) 202 1.0

Other 42 0.5 ( 24 ) ( 0.1 )

Income Tax Provision and Effective Income Tax Rate $ 1,423 19.7 $ 4,504 22.0

The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the HTC program.

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

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

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

Investments accounted for using the proportional amortization method are amortized and recorded as a component of the provision for income taxes on the Consolidated Statements of Income.

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

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

The Company’s Board of Directors has not authorized a new repurchase program as of June 30, 2024.

CARTER BANKSHARES, INC.

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2024 and June 30, 2023.

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

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

• cyber-security threats, attacks or events;

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

CARTER BANKSHARES, INC.

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

• cyber-security threats, attacks or events;

• rapid technological developments and changes;

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

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

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

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

• the outcome of pending and future litigation and/or governmental proceedings, including the outcome of lawsuits related to the largest nonperforming loan (“NPL”) relationship;

• increasing price and product/service competition;

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• managing our internal growth and acquisitions;

• the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;

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

• the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating acquired operations will be more difficult, disruptive or more costly than anticipated;

• the soundness of other financial institutions and any indirect exposure related to recent large bank failures and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with those failed banks may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;

• material increases in costs and expenses;

• reliance on significant customer relationships;

• general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth;

• general economic or business conditions, including unemployment levels, supply chain disruptions and slowdowns in economic growth;

• significant weakening of the local economies in which we operate;

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• changes in deposit flows and loan demand;

CARTER BANKSHARES, INC.

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

• our failure to attract or retain key employees;

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

CARTER BANKSHARES, INC.

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

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

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Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2024 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2024 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Overview and Strategy

Carter Bankshares, Inc.

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

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.5 billion at June 30, 2024.

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

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

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

CARTER BANKSHARES, INC.

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

commercial banking products and insurance.

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

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

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supported by our new set of core values:

Build Relationships, Earn Trust and Take Ownership.

Build Relationships, Earn Trust and Take

CARTER BANKSHARES, INC.

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

We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company.

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

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

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

As part of executing this strategy, the Company continues to dedicate significant resources to the ultimate resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank and shareholders.

The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors.

During the second quarter of 2024 the federal court lawsuit filed against the Company and the Bank by West Virginia Governor James C.

Justice II, his wife Cathy L.

Justice, his son James C.

Justice, III, and related entities that he and/or they own (collectively, the “Justice Entities”) was dismissed with prejudice.

In connection with the dismissal of this litigation, the Justice Entities have agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank.

The Justice Entities have already started that process of curtailment, and the aggregate nonperforming loan balance associated with the Justice Entities has been reduced from $301.9 million as of March 31, 2024 to $294.1 million as of June 30, 2024.

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended March 31, 2024

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

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

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

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

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

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

Highlights for the Three Months Ended June 30, 2024

• Net interest income increased $1.4 million, or 5.2% compared to the three months ended June 30, 2023, primarily due to an 84 basis point increase in the yield on earning assets offset by a 98 basis point increase in funding costs;

• The provision for credit losses increased $0.4 million for the three months ended June 30, 2024, compared to the same period in 2023;

• Total noninterest income increased $0.5 million to $5.5 million for the three months ended June 30, 2024, compared to the same period in 2023;

• Total noninterest expense increased $1.9 million to $27.4 million for the three months ended June 30, 2024 compared to the same period in 2023;

• Provision for income taxes increased $1.1 million for the three months ended June 30, 2024 compared to the same period in 2023.

Highlights for the Six Months Ended June 30, 2024

• Net interest income decreased $11.0 million, or 16.3%, to $56.5 million for the six months ended June 30, 2024 compared to the same period in 2023.

The decline in net interest income was significantly driven by the Bank’s largest NPL relationship that was placed on nonaccrual status during the second quarter of 2023, which negatively impacted interest income by $18.4 million for the six months ended June 30, 2024 and by $11.3 million for the same period in

CARTER BANKSHARES, INC.

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

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

Funding costs increased 127 basis points, offset by an increase of 36 basis points on the yield on earning assets for the six months ended June 30, 2024 compared to the same period in 2023;

• The provision for credit losses decreased $1.0 million to $0.5 million for the six months ended June 30, 2024 compared to the same period in 2023;

• Total noninterest income increased $0.8 million to $10.6 million for the six months ended June 30, 2024 compared to the same period in 2023;

• Total noninterest expense increased $4.6 million to $53.7 million for the six months ended June 30, 2024 compared to the same period in 2023;

• Provision for income taxes decreased $2.0 million to $2.5 million for the six months ended June 30, 2024 compared to the same period in 2023.

Balance Sheet Highlights (period-end balances, June 30, 2024 compared to December 31, 2023)

• The securities portfolio decreased $32.7 million and is currently 16.5% of total assets compared to 17.3% of total assets;

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

• Total portfolio loans increased $43.6 million, or 2.5%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”) segment during the six months ended June 30, 2024 and was muted by $80.0 million in loan payoffs of two large commercial real estate loans;

• The portfolio loans to deposit ratio was 91.5%, compared to 94.2%;

• At June 30, 2024, nonperforming loans declined by $9.3 million to $300.2 million since December 31, 2023.

Nonperforming loans as a percentage of total portfolio loans were 8.46% compared to 8.83%.

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

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

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

The decline is due to $7.8 million of curtailment payments made by the Banks’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023.

These loans are contained in the Other segment with an aggregate principal balance of $294.1 million as of June 30, 2024 and comprise 98.0% of nonperforming loans at June 30, 2024;

• The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.72% compared to 2.77%.

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

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

The Company’s financial results for the three months ended March 31, 2024, compared to the same period in 2023 were significantly impacted by placing commercial loans with an aggregate principal value of $301.9 million in the Other segment of the Bank’s loan portfolio on nonaccrual status due to loan maturities and failure to pay in full.

This nonaccrual classification had a $9.3 million negative impact on interest income recognized by the Company for the three months ended March 31, 2024.

Three Months Ended March 31,

The ACL on portfolio loans totaled $96.7 million at June 30, 2024, compared to $97.1 million at December 31, 2023.

• Total deposits increased $159.4 million, or 8.61% on an annualized basis, compared to December 31, 2023;

• Federal Home Loan Bank (“FHLB”) borrowings decreased $155.4 million to $238.0 million at June 30, 2024 compared to $393.4 million at December 31, 2023 primarily due to liquidity provided by deposit growth.

The Company reported net income of $4.8 million or $0.21 diluted earnings per common share (“EPS”) for the three months ended June 30, 2024 compared to net income of $5.7 million, or $0.24 diluted EPS for the same period in 2023.

The Company’s financial results continue to be significantly impacted by the Bank’s largest NPL relationship that was placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $294.1 million as of June 30, 2024.

As a result, interest income was negatively impacted by $9.1 million and $11.3 million during the second quarter of 2024 and 2023, respectively.

Interest income has been negatively impacted by $48.4 million in the aggregate since placement of these loans on nonaccrual status during the second quarter of 2023.

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

PERFORMANCE RATIOS 2024 2023 2024 2023

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Allowance for Credit Losses to Total Portfolio Loans 2.72 % 2.83 % 2.72 % 2.83 %

Nonperforming Loans to Total Portfolio Loans 8.76 % 0.26 %

Nonperforming Loans to Portfolio Loans 8.46 % 9.33 % 8.46 % 9.33 %

CARTER BANKSHARES, INC.

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

Net Interest Income

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Net interest income and the net interest margin are presented on an FTE basis.

The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities.

The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income.

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

CARTER BANKSHARES, INC.

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

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

Three Months Ended March 31,

The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented:

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

(Dollars in Thousands) 2024 2023 2024 2023

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

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

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

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

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

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

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

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

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

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

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

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

CARTER BANKSHARES, INC.

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

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

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

As of March 31, 2024, the securities portfolio was comprised of 46.9% variable rate securities with approximately 99.3% that will reprice at least once over the next 12 months.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CARTER BANKSHARES, INC.

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

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

Three Months Ended March 31, 2024

Compared to March 31, 2023

(Dollars in Thousands) Volume (3)

Interest Earned on:

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

(Dollars in Thousands) Average

Balance Income/

Expense Rate Average

Balance Income/

Interest-Bearing Deposits with Banks $ 27,606 $ 755 5.50 % $ 17,023 $ 415 4.92 %

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Total Interest-Earning Assets 4,433,049 $ 109,035 4.95 % 4,224,116 $ 96,192 4.59 %

Interest Paid on:

Noninterest Earning Assets 91,409 94,549

Total Assets $ 4,524,458 $ 4,318,665

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 514,376 $ 2,801 1.10 % $ 490,518 $ 1,156 0.48 %

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Total Interest-Bearing Liabilities 3,474,492 52,121 3.02 % 3,241,415 28,175 1.75 %

Change in Net Interest Margin $ 1,009 $ (13,433) $ (12,424)

Noninterest-Bearing Liabilities 693,814 726,656

Shareholders' Equity 356,152 350,594

Total Liabilities and Shareholders' Equity $ 4,524,458 $ 4,318,665

Net Interest Income (2)

$ 56,914 $ 68,017

Net Interest Margin (2)

2.58 % 3.25 %

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

(3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

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

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

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

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

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

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

Provision for Securities — — — — %

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

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

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

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

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

CARTER BANKSHARES, INC.

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

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

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

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

See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs and refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

Noninterest Income

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023 $ Change % Change

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

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

Debit Card Interchange Fees 2,086 2,105 (19) (0.9) %

Insurance Commissions 614 174 440 252.9 %

Bank Owned Life Insurance Income 348 339 9 2.7 %

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

Other 122 175 (53) (30.3) %

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

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

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

Noninterest Expense

Three Months Ended March 31,

(Dollars in Thousands) 2024 2023 $ Change % Change

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

Occupancy Expense, net 3,748 3,400 348 10.2 %

FDIC Insurance Expense 1,687 641 1,046 163.2 %

Other Taxes 903 804 99 12.3 %

Advertising Expense 357 339 18 5.3 %

Telephone Expense 417 427 (10) (2.3) %

Professional and Legal Fees 1,513 834 679 81.4 %

Data Processing 891 720 171 23.8 %

Debit Card Expense 756 479 277 57.8 %

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

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

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

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

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

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

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

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

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

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

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

Net interest income increased to $28.1 million for the three months ended June 30, 2024 from $26.7 million for the same period in 2023.

Net interest income, on an FTE basis (non-GAAP), increased $1.3 million, or 4.9%, to $28.3 million for the three months ended June 30, 2024 compared to $27.0 million for the same period in 2023.

The increase is primarily a result of an increase in average interest-earning assets of $175.4 million with the yield on average interest-earning assets increasing 83 basis points as well as a decline in the negative impact of the Bank’s largest NPL of $2.2 million in the second quarter of 2024, offset by an increase of 98 basis points in funding costs.

Net interest income decreased to $56.5 million for the six months ended June 30, 2024 from $67.5 million for the same period in 2023.

Net interest income, on an FTE basis (non-GAAP), decreased $11.1 million, or 16.3%, to $56.9 million for the six months ended June 30, 2024 compared to $68.0 million for the same period in 2023.

The decline in net interest income and net interest margin were significantly driven by the aforementioned large NPL relationship, which negatively impacted interest income by $18.4 million for the six months ended June 30, 2024 as compared to $11.3 million for the same period in 2023.

Funding costs increased 127 basis points, partially offset by an increase of 36 basis points on the yield on earning assets for the six months ended June 30, 2024 compared to the same period in 2023.

During the six months ended June 30, 2024, $760.6 million of CDs matured and repriced from an average rate of 4.30% to an average rate of 4.41%.

Interest income increased to $54.6 million for the three months ended June 30, 2024 from $43.7 million compared to the same period in 2023.

Interest income, on an FTE basis (non-GAAP), increased $10.8 million, or 24.6%, to $54.8 million for the three months ended June 30, 2024 compared to $44.0 million for the same period in 2023, resulting from an increase in average interest-earning assets of $175.4 million, while the yield on average interest-earning assets increased 83 basis points.

Average interest-earning assets increased primarily due to average loan growth of $272.6 million in taxable loans and an increase of $13.2 million in interest-bearing deposits with banks during the second quarter of 2024, and was partially offset by a decrease

CARTER BANKSHARES, INC.

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

What changed 10-Q

Item 1. Financial Statements