What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-03 · 313 added, 180 removed, 357 unchanged (58% of the section changed)

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

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

of $86.6 million in average investment securities and a decrease of $2.7 million in FHLB stock.

The Bank’s largest NPL relationship negatively impacted interest income by $9.1 million in the second quarter of 2024 and was negatively impacted by $11.3 million in the second quarter of 2023.

Interest income increased to $108.6 million for the six months ended June 30, 2024 from $95.7 million compared to the same period in 2023.

Interest income, on an FTE basis (non-GAAP), increased $12.8 million, or 13.4%, to $109.0 million for the six months ended June 30, 2024 compared to $96.2 million for the same period in 2023, resulting from average loan growth of $303.2 million in taxable loans.

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 June 30, 2024, the securities portfolio was comprised of 46.1% 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 $26.5 million for the three months ended June 30, 2024 increased $9.5 million, or 55.8% compared to the same period in 2023, primarily due to an increase in average interest-bearing deposits of $318.4 million.

The increase in average-bearing deposits reflected solid growth in average CDs of $335.0 million, an increase of $96.0 million in average money market accounts and an increase of $42.3 million in interest-bearing demand accounts, offset by a decrease of $154.9 million in savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding money market and CD products.

Interest expense of $52.1 million for the six months ended June 30, 2024 increased $23.9 million, or 85.0% compared to the same period in 2023, primarily due to an average increase in CDs of $344.3 million.

During the second quarter of 2024, $286.8 million of CDs matured and repriced from an average rate of 4.32% to an average rate of 4.39%.

Additionally, FHLB borrowings decreased $122.3 million and the cost of these borrowings increased 19 basis points for the three months ended June 30, 2024 compared to the same period in 2023.

The net interest margin increased four basis points to 2.55% for the three months ended June 30, 2024 compared to 2.51% for the same period in 2023.

Net interest margin, on an FTE basis, increased two basis points to 2.56% for the three months ended June 30, 2024 compared to 2.54% for the same period in 2023.

The increase in net interest margin continues to be significantly impacted by the Bank’s largest lending relationship remaining on nonaccrual status since the second quarter of 2023.

The net interest margin decreased 66 basis points to 2.56% for the six months ended June 30, 2024 compared to 3.22% for the same period in 2023.

Net interest margin, on an FTE basis, decreased 67 basis points to 2.58% for the six months ended June 30, 2024 compared to 3.25% for the same period in 2023.

The decline in net interest income and net interest margin was significantly driven by the aforementioned 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, 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%.

Since the beginning of 2023, there has been continued pressure on our cost of funds due to the shift from non-maturing deposits to higher yielding CDs, money markets and higher-cost borrowings driven by the ongoing inversion of the yield curve, which has negatively impacted our net interest margin.

During the three months ended June 30, 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 position due to the short-term nature of our deposit portfolio and FHLB borrowings.

Specifically, 91.70% of our CD portfolio and 81.1% of our outstanding FHLB borrowings will mature and reprice over the next twelve months.

This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) begin cutting short-term rates later this year and during the remainder of 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 June 30, 2024

Compared to June 30, 2023

Six Months Ended June 30, 2024

Compared to June 30, 2023

(Dollars in Thousands) Volume (3)

(Decrease) Volume (3)

Interest Earned on:

Interest-Bearing Deposits with Banks $ 175 $ 30 $ 205 $ 284 $ 56 $ 340

Tax-free Investment Securities (2)

(118) (6) (124) (242) (2) (244)

Taxable Investment Securities (619) 652 33 (1,182) 1,565 383

Total Securities (737) 646 (91) (1,424) 1,563 139

Tax-free Loans (1)(2)

(170) 8 (162) (340) 22 (318)

Taxable Loans (1)

3,163 7,703 10,866 7,833 4,722 12,555

Total Loans 2,993 7,711 10,704 7,493 4,744 12,237

Federal Home Loan Bank Stock (47) 36 (11) 60 67 127

Total Interest-Earning Assets $ 2,384 $ 8,423 $ 10,807 $ 6,413 $ 6,430 $ 12,843

Interest Paid on:

Interest-Bearing Demand $ 61 $ 969 $ 1,030 $ 59 $ 1,586 $ 1,645

Money Market 505 1,563 2,068 576 4,234 4,810

Savings (47) 41 (6) (106) 72 (34)

Certificates of Deposit 2,542 5,307 7,849 4,509 13,209 17,718

Total Interest-Bearing Deposits 3,061 7,880 10,941 5,038 19,101 24,139

Federal Home Loan Bank Borrowings (1,581) 176 (1,405) (528) 547 19

Federal Funds Purchased (71) — (71) (247) — (247)

Other Borrowings 25 (4) 21 41 (6) 35

Total Borrowings (1,627) 172 (1,455) (734) 541 (193)

Total Interest-Bearing Liabilities 1,434 8,052 9,486 4,304 19,642 23,946

Change in Net Interest Margin (2)

$ 950 $ 371 $ 1,321 $ 2,109 $ (13,212) $ (11,103)

(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 provision for credit losses and net charge-offs:

(Dollars in Thousands) Three Months Ended June 30, Six Months Ended June 30,

2024 2023 $ Change 2024 2023 $ Change

Provision for Credit Losses $ 491 $ 85 $ 406 $ 507 $ 1,500 $ (993)

(Recovery) Provision for Unfunded Commitments (236) 360 (596) (279) 444 (723)

Total Provision for Credit Losses on Loans 255 445 (190) 228 1,944 (1,716)

Provision for Securities — — — — — —

Total Provision for Credit Losses $ 255 $ 445 $ (190) $ 228 $ 1,944 $ (1,716)

Net Loan Charge-offs $ 341 $ 635 $ (294) $ 873 $ 1,208 $ (335)

Net Loan Charge-offs (annualized) / Average Portfolio Loans 0.04 % 0.08 % 0.05 % 0.08 %

The provision for credit losses increased $0.4 million and decreased $1.0 million for the three and six months ended June 30, 2024, respectively compared to the same periods in 2023.

The increase in the provision for credit losses compared to the three months ended 2023 was primarily driven by loan growth, net charge-offs and a $0.5 million reserve on a new individually evaluated loan in the second quarter of 2024, offset by $1.4 million of other segment reserves released related to the $7.8

CARTER BANKSHARES, INC.

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

million of curtailment payments made by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023.

The decrease for the six months ended June 30, 2024 in the provision for credit losses was primarily driven by the aforementioned $1.4 million of other segment reserves released related to the aforementioned $7.8 million of curtailment payments made by the Bank’s largest NPL relationship during the second quarter of 2024 and lower loan growth in 2024, offset by the $0.5 million reserve on the new individually evaluated loan.

The (recovery) provision for unfunded commitments for the three and six months ended June 30, 2024 were recoveries of $0.2 million and $0.3 million, respectively compared to provisions of $0.4 million in both the three and six months ended June 30, 2023.

The declines in both the three and six months ended June 30, 2024 were due to decreased commitments in construction loans during the periods.

Net charge-offs were $0.3 million and $0.9 million for the three and six months ended June 30, 2024 compared to $0.6 million and $1.2 million for the same periods in 2023.

During the three and six months ended June 30, 2024 and June 30, 2023, 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 0.04% and 0.05% for the three and six months ended 2024 and 0.08% for both the three and six months ended June 30, 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 June 30, Six Months Ended June 30,

(Dollars in Thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change

Gains (Losses) on Sales of Securities, net $ 36 $ 3 $ 33 N/M $ 36 $ (9) $ 45 N/M

Service Charges, Commissions and Fees 1,852 1,759 93 5.3 % 3,727 3,597 130 3.6 %

Debit Card Interchange Fees 1,933 1,934 (1) (0.1) % 4,019 4,039 (20) (0.5) %

Insurance Commissions 934 508 426 83.9 % 1,548 682 866 127.0 %

Bank Owned Life Insurance Income 365 341 24 7.0 % 713 680 33 4.9 %

Commercial Loan Swap Fee Income — — — — % — 114 (114) (100.0) %

Other 413 483 (70) (14.5) % 535 660 (125) (18.9) %

Total Noninterest Income $ 5,533 $ 5,028 $ 505 10.0 % $ 10,578 $ 9,763 $ 815 8.3 %

N/M Not Meaningful

Total noninterest income increased $0.5 million, or 10.0%, to $5.5 million for the three months ended June 30, 2024 and increased $0.8 million, or 8.3%, to $10.6 million for the six months ended June 30, 2024 when compared to the same periods in 2023.

The increase for the three months ended June 30, 2024 was primarily due to an increase of $0.4 million in insurance commissions and $0.1 million increase on service charges, commissions and fees, offset by a decrease of $0.1 million in other noninterest income.

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

This unrealized fair value gain is recorded in other noninterest income.

The most significant increase during the six months ended June 30, 2024 was $0.9 million higher insurance commissions.

Also impacting the year-to-date increase was $0.1 million higher service charges, commissions and fees, offset by a decrease of $0.1 million in other noninterest income, as well as a decline of $0.1 million in commercial loan swap fee income as activity has declined due to the interest rate environment.

CARTER BANKSHARES, INC.

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

Noninterest Expense

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

(Dollars in Thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change

Salaries and Employee Benefits $ 14,216 $ 13,649 $ 567 4.2 % $ 28,416 $ 27,301 $ 1,115 4.1 %

Occupancy Expense, net 3,793 3,601 192 5.3 % 7,541 7,001 540 7.7 %

FDIC Insurance Expense 1,566 702 864 123.1 % 3,253 1,343 1,910 142.2 %

Other Taxes 894 786 108 13.7 % 1,797 1,590 207 13.0 %

Advertising Expense 528 431 97 22.5 % 885 770 115 14.9 %

Telephone Expense 342 412 (70) (17.0) % 759 839 (80) (9.5) %

Professional and Legal Fees 1,542 1,659 (117) (7.1) % 3,055 2,493 562 22.5 %

Data Processing 1,234 1,058 176 16.6 % 2,125 1,778 347 19.5 %

Debit Card Expense 808 771 37 4.8 % 1,564 1,250 314 25.1 %

Other 2,523 2,467 56 2.3 % 4,308 4,747 (439) (9.2) %

Total Noninterest Expense $ 27,446 $ 25,536 $ 1,910 7.5 % $ 53,703 $ 49,112 $ 4,591 9.3 %

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.

The most significant variance for the comparable period related to higher FDIC insurance expenses of $0.9 million due to the deterioration in asset quality as a direct result of the large NPL relationship, which is a component used to determine the assessment.

Other increases included, a $0.6 million increase in salaries and employee benefits, an increase of $0.2 million in occupancy expenses, $0.2 million in data processing expenses and a $0.1 million increase in other taxes.

Salaries and employee benefits increased related to higher salary expense due to fewer open positions in retail, job grade assessment increases and normal merit increases.

The variance in occupancy 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 second quarter of 2024.

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

As compared to the six months ended June 30, 2024, the most significant increases in total noninterest expense, and similar variances to the same period in 2023, was an increase of $1.9 million in FDIC insurance expense, which was a direct result of the aforementioned large NPL relationship, an increase of $1.1 million in salaries and employee benefits, and an increase of $0.5 million in occupancy expenses.

However, the year-to-date variance was also impacted by a $0.6 million increase in professional and legal fees as a result of the large NPL relationship and an increase of $0.3 million in debit card expense.

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

Provision for Income Taxes

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

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

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

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

The provision for income taxes increased $1.1 million and decreased $2.0 million to $1.1 million and $2.5 million for the three and six months ended June 30, 2024, respectively when compared to the same periods in 2023.

Pre-tax income increased $0.2 million and decreased $13.0 million for the three and six months ended June 30, 2024, respectively when compared to the same periods in 2023.

The effective tax rate was 18.9% and 19.3% for the three and six months ended June 30, 2024, respectively compared to 0.9% and 17.4% for the same periods in 2023.

The increase in the effective tax rate for the three and six months ended June 30, 2024 compared to the same periods in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023.

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

Financial Condition

March 31, 2024

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

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

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

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

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

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

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

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

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

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

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

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

The decrease is due to paydowns of FHLB borrowings .

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

These properties are currently being marketed for sale.

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

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

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

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

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

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

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

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

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

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

June 30, 2024

Total assets increased $20.0 million, to $4.5 billion at June 30, 2024 compared to December 31, 2023.

Cash and due from banks increased $7.2 million to $61.7 million at June 30, 2024 compared to $54.5 million at December 31, 2023.

Total portfolio loans increased $43.6 million, or 2.5% on an annualized basis, to $3.5 billion at June 30, 2024 compared to December 31, 2023 primarily due to loan growth in the CRE loan segment during the six months ended June 30, 2024.

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

The variances in loan segments for portfolio loans related to increases of $130.7 million in CRE loans, offset by decreases in all the other loan

CARTER BANKSHARES, INC.

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

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

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

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

segments, such as a $41.4 million decrease in construction loans, a $30.9 million decrease in C&I loans, a $7.8 million decrease in the other loan segment due to curtailment payments made by the Bank’s largest NPL relationship, a $4.0 million decrease in residential mortgages and a $3.0 million decrease in other consumer loans.

The securities portfolio decreased $32.7 million and is currently 16.5% of total assets at June 30, 2024 compared to 17.3% of total assets at December 31, 2023.

The decrease is due to ongoing maturities, principal curtailments, sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields.

During the six months ended June 30, 2024 there was one new security purchase of $8.6 million and one sale of two bonds with a book value of 10.6 million.

As of June 30, 2024, the securities portfolio was comprised of 46.1% variable rate securities with approximately 99.3% that will reprice at least once over the next 12 months.

At June 30, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $89.3 million of gross unrealized losses.

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

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.

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.

FHLB stock, at cost decreased $7.2 million to $14.5 million at June 30, 2024 compared to December 31, 2023.

The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings .

Closed retail bank offices had a book value of $1.3 million at June 30, 2024 and $2.3 million at December 31, 2023 included in OREO on the Consolidated Balance Sheets.

Total deposits increased $159.4 million, or 8.6% on an annualized basis, to $3.9 billion at June 30, 2024 compared to December 31, 2023.

The increase in deposits was primarily due to a $175.5 million increase in CDs and an increase of $84.0 million in interest-bearing demand accounts, offset by a decrease of $55.0 million in savings accounts, a decrease of $31.9 million in noninterest-bearing demand accounts and a decrease of $13.2 million in money market accounts.

The Company had $115.6 million brokered CDs at June 30, 2024, compared to $70.0 million at December 31, 2023.

At June 30, 2024, noninterest-bearing deposits comprised 16.8% of total deposits compared to 18.4% at December 31, 2023 and 19.3% at June 30, 2023.

CDs comprised 45.4%, 42.6% and 40.5% of total deposits at June 30, 2024, December 31, 2023 and June 30, 2023, respectively.

As of June 30, 2024, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 82.8% of our total deposits of $3.9 billion were insured under standard FDIC insurance coverage limits, and approximately 17.2% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

The Company’s deposit base is diversified and granular and is comprised of approximately 78.4% of retail deposits.

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 deposit growth that funded paydowns of FHLB borrowings.

The Company had no outstanding federal funds purchased at June 30, 2024 and December 31, 2023.

Total capital of $364.4 million at June 30, 2024, reflects an increase of $13.2 million compared to December 31, 2023.

The increase in total capital from December 31, 2023 is primarily due to net income of $10.6 million, a $1.8 million increase in other comprehensive income (loss) due to changes in fair value of investment securities, as well as an increase of $0.8 million related to restricted stock activity all during the six months ended June 30, 2024.

The ACL was 2.72% of total portfolio loans at June 30, 2024 compared to 2.77% as of December 31, 2023.

General reserves as a percentage of total portfolio loans were 1.22% at both June 30, 2024 and December 31, 2023.

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

1 unchanged sentence

The Company remains well capitalized.

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

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

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

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

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

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

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

The Tier 1 capital ratio decreased to 10.95% at June 30, 2024 compared to 11.08% at December 31, 2023.

The leverage ratio was 9.43% at June 30, 2024, compared to 9.48% at December 31, 2023 and the total risk-based capital ratio was 12.22% at June 30, 2024 compared to 12.34% at December 31, 2023.

CARTER BANKSHARES, INC.

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

The Bank also remained well capitalized as of June 30, 2024.

The Bank’s Tier 1 Capital ratio was 10.86% at June 30, 2024 compared to 10.99% at December 31, 2023.

The Bank’s leverage ratio was 9.35% at June 30, 2024 compared to 9.41% at December 31, 2023.

The Bank’s Total Risk-Based Capital ratio was 12.13% at June 30, 2024 compared to 12.25% at December 31, 2023.

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

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

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

Government Agency Securities 29,590 43,827 (14,237)

10 unchanged sentences

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

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

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

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

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

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

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

The securities portfolio decreased $32.7 million to $746.3 million at June 30, 2024 compared to $779.0 million at December 31, 2023.

Securities comprise 16.5% of total assets at June 30, 2024 compared to 17.3% at December 31, 2023.

The decrease is due to ongoing maturities, principal curtailments, sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields.

During the six months ended June 30, 2024, there was one new security purchase of $8.6 million and one sale of two bonds with a book value of 10.6 million as liquidity generated by the securities portfolio during the first half of 2024 was primarily deployed into higher yielding loans.

As of June 30, 2024, the securities portfolio was comprised of 46.1% variable rate securities with approximately 99.3% that will reprice at least once over the next 12 months.

At June 30, 2024 total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $89.3 million of gross unrealized losses.

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

CARTER BANKSHARES, INC.

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

The unrealized losses on debt securities are believed to be temporary primarily because these unrealized losses are due to reductions in market value caused by upward movement in interest rates since the securities purchase (as applicable), and not related to the credit quality of these securities.

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

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

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

Yields on floating rate securities may begin to fall should the Federal Reserve Board (“FRB”) begin lowering short-term rates.

Changes in intermediate and long-term interest rates, which are market driven, affect the

CARTER BANKSHARES, INC.

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

market value of fixed rate securities with similar maturities.

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

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

At June 30, 2024 the 5-year and 10-year U.S.

Treasury yields were 4.33% and 4.36%, respectively.

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

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

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

At June 30, 2024 and December 31, 2023, the Company had no credit related impairment.

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

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

CARTER BANKSHARES, INC.

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

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.

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.

Loan Composition

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

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

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

Commercial Real Estate $ 1,801,397 $ 1,670,631

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

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

Total portfolio loans increased $43.6 million, or 2.5%, on an annualized basis, and were $3.5 billion at both June 30, 2024 and December 31, 2023 with production primarily in our CRE portfolio.

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

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

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

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

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

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

Given the current interest rate environment, our mortgage portfolio paydowns outpaced growth in the six months ended June 30, 2024.

At June 30, 2024, the loan portfolio was comprised of 25.8% floating rates which reprice monthly, 40.3%, variable rates that reprice at least once during the life of

CARTER BANKSHARES, INC.

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

the loan and the remaining 33.9% are fixed rate loans.

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

Total CRE represented 50.8% of total portfolio loans at June 30, 2024 compared to 47.7% at December 31, 2023.

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

March 31, 2024

June 30, 2024

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

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

CARTER BANKSHARES, INC.

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

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

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

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

CARTER BANKSHARES, INC.

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

management’s risk tolerance relative to capital.

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

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

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

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

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

Aggregate commitments to our top 10 credit relationships were $700.2 million at June 30, 2024.

The Other segment represents 42.0% of the top 10 credit relationships including the Bank’s largest NPL relationship, the entire balance which was transferred to nonaccrual status during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A.

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

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

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

(Dollars in Thousands) For the Periods Ending Change June 30, 2024 June 30, 2024

June 30, 2024 December 31, 2023 % of Gross Loans % of RBC

Hospitality, Agriculture & Energy $ 294,140 $ 301,913 $ (7,773) 8.29 % 60.75 %

Health Care Facility / Long-Term Care 53,297 53,683 (386) 1.50 % 11.01 %

Retail Real Estate & Food Services 52,913 53,576 (663) 1.49 % 10.93 %

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

Warehouse 50,469 51,185 (716) 1.42 % 10.42 %

Retail 44,851 45,187 (336) 1.27 % 9.26 %

Hospitality 43,612 44,297 (685) 1.23 % 9.01 %

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

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

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

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

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

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

Multifamily 41,834 4,368 37,466 1.18 % 8.64 %

Office 40,529 40,603 (74) 1.14 % 8.37 %

Retail Real Estate 40,476 41,530 (1,054) 1.14 % 8.36 %

Multifamily 38,049 43,157 (5,108) 1.07 % 7.85 %

Top Ten (10) Relationships $ 700,170 $ 679,499 $ 20,671 19.73 % 144.60 %

2 unchanged sentences

Concentration (25% of RBC) $ 121,050 $ 121,231

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

Unfunded commitments on lines of credit were $558.7 million at June 30, 2024 compared to $568.7 million at December 31, 2023.

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

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

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

Total utilization was 53.9% at June 30, 2024 and 53.8% at December 31, 2023.

Unfunded commitments on commercial operating lines of credit was 53.8% at June 30, 2024 and 53.7% at December 31, 2023.

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

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

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

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

Deferred costs and fees included in the portfolio balances above were $7.6 million and $7.2 million at June 30, 2024 and December 31, 2023, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $119.7 thousand and $133.4 thousand at June 30, 2024 and December 31, 2023, respectively.

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

CARTER BANKSHARES, INC.

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

Credit Quality

2 unchanged sentences

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

CARTER BANKSHARES, INC.

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

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

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The following table summarizes nonperforming assets for the dates presented:

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

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

Nonaccrual Loans

8 unchanged sentences

Total Nonperforming Assets $ 302,743 $ 311,998 $ (9,255)

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

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

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

Nonperforming assets decreased $9.3 million to $302.7 million at June 30, 2024 compared to December 31, 2023.

The decrease of $9.3 million in nonperforming loans was primarily related to $7.8 million of curtailment payments made by the Bank’s largest NPL relationship.

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

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

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

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

These loans remained on nonaccrual status at both June 30, 2024 and December 31, 2023.

CARTER BANKSHARES, INC.

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

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

nonperforming loans are 98.0% of the Company's total nonperforming loans and 97.2% of the Company's total nonperforming assets at June 30, 2024.

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 and we have agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank.

During the second quarter of 2024, $7.8 million of curtailment payments made by the Bank’s largest NPL relationship have decreased the aggregate nonperforming loan balance outstanding to the Bank to $294.1 million as of June 30, 2024.

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

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

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.

Based on analyses of the credit relationship and various discounted cash flow valuation techniques utilized in the alternative modeling, which resulted in a valuation allowance with respect to these loans of $52.9 million at June 30, 2024, representing 18.0%, of these loans aggregate principal amount.

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

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

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.

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

(Dollars in Thousands)

11 unchanged sentences

300,242 100.0 % 309,535 100.0 %

The Company has initiated collection processes with respect to such loans and intends to explore all alternatives for repayment.

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

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

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

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

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

Closed retail bank offices had a book value of $1.3 million at June 30, 2024 and $2.3 million at December 31, 2023, and are recorded in OREO on the Company’s balance sheet.

During the six months ended June 30, 2024, the Bank sold two retail banking offices and moved $1.2 million of loans at fair value to OREO.

These properties are currently being marketed for sale.

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

6 unchanged sentences

Balance End of Period $ 96,686 100.0 % $ 97,052 100.0 %

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

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

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

The ACL was $96.7 million, or 2.72%, of total portfolio loans at June 30, 2024 compared to $97.1 million, or 2.77%, of total portfolio loans at December 31, 2023.

The following table summarizes the credit quality ratios and their components as of June 30, 2024 and December 31, 2023:

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

Allowance for Credit Losses to Total Portfolio Loans

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

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

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

The provision for credit losses increased $0.4 million and decreased $1.0 million for the three and six months ended June 30, 2024 when compared to the same periods in 2023.

The increase in the provision for credit losses for the quarterly comparison was primarily driven by loan growth, net charge-offs and a $0.5 million reserve on a new individually evaluated loan in the second quarter of 2024, offset by $1.4 million of other segment reserves released related to the aforementioned $7.8 million of curtailment payments made by the Bank’s largest NPL relationship.

The decrease for the six months ended June 30, 2024 in the provision for credit losses, compared to the same period in 2023, was primarily driven by the aforementioned $1.4 million of other segment reserves released related to the aforementioned $7.8 million of curtailment payments, a $0.5 million reserve on a new individually evaluated loan and lower loan growth in 2024.

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

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

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

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

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

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

CARTER BANKSHARES, INC.

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

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

The (recovery) provision for unfunded commitments decreased $0.6 million and $0.7 million for the three and six months ended June 30, 2024 compared to the same periods in 2023.

The declines were due to decreased commitments in construction loans during the second quarter of 2024.

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

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

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

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

3 unchanged sentences

Third, volume changes impact the total reserve calculation.

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

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

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

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

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

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

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

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

Net charge-offs were $0.3 million and $0.9 million for the three and six months ended June 30, 2024 compared to $0.6 million and $1.2 million for the same periods in 2023.

During the three and six months ended June 30, 2024, net charge-offs were primarily recognized in the other consumer segment.

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

Nonperforming loans as a percentage of total portfolio loans were 8.46% and 8.83% as of June 30, 2024 and December 31, 2023, respectively.

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

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

March 31, 2024

June 30, 2024

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

2 unchanged sentences

Substandard 1,991 3,188 1,952 30 2,426 294,140 303,727

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,801,397 $ 240,611 $ 783,903 $ 31,284 $ 394,926 $ 297,400 $ 3,549,521

11 unchanged sentences

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

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

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

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

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

At June 30, 2024 and December 31, 2023, the Company had no loans that were risk rated as doubtful.

Special mention and substandard loans at June 30, 2024 decreased $2.1 million compared to December 31, 2023, with a decrease of $5.9 million in substandard and an increase of $3.8 million in special mention.

The decrease of $5.9 million in substandard was primarily related to the aforementioned $7.8 million of curtailment payments received in the second quarter of 2024 in the Other segment category, partially offset by two Commercial & Industrial (“C&I”) loan relationships and one CRE loan that were downgraded

CARTER BANKSHARES, INC.

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

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

to substandard, during the second quarter of 2024, totaling $4.5 million.

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

At both June 30, 2024 and December 31, 2023 substandard loans were impacted by the above mentioned large nonaccrual lending relationship in the Other loan category, which was placed on nonaccrual status during the second quarter of 2023.

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

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

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2024 December 31,

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

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

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

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

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

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

Total deposits at June 30, 2024 increased $159.4 million, or 8.6% on an annualized basis, from December 31, 2023.

The variance related to an increase of $175.5 million in CDs, which includes an increase of $45.6 million in brokered CDs, and an increase of $84.0 million in interest-bearing demand accounts, offset by a decrease of $55.0 million in savings accounts, a decrease of $31.9 million in noninterest-bearing demand accounts and a decrease of $13.2 million in money market accounts.

The Company had $115.6 million brokered CDs at June 30, 2024, compared to $70.0 million at December 31, 2023.

At June 30, 2024, noninterest-bearing deposits comprised 16.8% of total deposits compared to 18.4% at December 31, 2023 and 19.3% at June 30, 2023.

CDs comprised 45.4%, 42.6% and 40.5% of total deposits at June 30, 2024, December 31, 2023 and June 30, 2023, respectively.

The Company’s deposit base is diversified and granular and is comprised of approximately 78.4% of retail deposits.

CARTER BANKSHARES, INC.

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

The following table presents additional information in relation to deposits:

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2024 December 31,

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

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

Maturities of CDs over $250,000 or more not covered by deposit insurance at June 30, 2024 are summarized as follows:

(Dollars in Thousands) Amount Percent

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Total $ 273,075 100.0 %

CARTER BANKSHARES, INC.

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

Borrowings and Federal Funds Purchased

Borrowings are an additional source of liquidity for the Company.

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

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

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

FHLB borrowings decreased $155.4 million to $238.0 million at June 30, 2024 and were $393.4 million at December 31, 2023.

The Company had no overnight federal funds purchased at June 30, 2024 or at December 31, 2023.

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

We manage our borrowed funds to provide a reliable source of liquidity.

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

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

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

Balance at Period End

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Federal Funds Purchased — % — %

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

The decrease in FHLB stock was due to repayments.

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

The Company held FHLB of Atlanta stock of $14.5 million and $21.6 million at June 30, 2024 and December 31, 2023, respectively.

The decrease in FHLB stock was due to a lower required level of stock holdings due to a lower level of FHLB borrowings.

Dividends recorded on restricted stock were $0.3 million and $0.7 million for the three and six months ended June 30, 2024 compared to $0.3 million and $0.6 million for the same periods in 2023.

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

We hold FHLB stock because we are a member of the FHLB of Atlanta.

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

The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the

CARTER BANKSHARES, INC.

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

members’ asset values, level of borrowings and participation in other programs offered.

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

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

CARTER BANKSHARES, INC.

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

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

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The Company has unsecured facilities with three other correspondent financial institutions totaling $50.0 million, a fully secured facility with one other correspondent financial institution totaling $45.0 million, and access to the institutional CD market, and the brokered deposit market.

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

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

In addition to the above funding resources, the Company also has $438.2 million of unpledged available-for-sale investment securities, at fair value, as an additional source of liquidity.

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

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

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

As of June 30, 2024, approximately 82.8% of our total deposits of $3.9 billion were insured under standard FDIC insurance coverage limits, and approximately 17.2% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.

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

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

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

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

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

At June 30, 2024, the Bank had $459.6 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $21.4 million and $438.2 million in unpledged securities.

This resulted in highly liquid assets to total assets ratio of 10.1% at June 30, 2024.

Total available liquidity to uninsured deposits was 195.7% at June 30, 2024.

CARTER BANKSHARES, INC.

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

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

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

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

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

Cash and Due From Banks, including Interest-bearing Deposits $ 61,746 $ 54,529

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

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

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

Total Liquidity Sources $ 1,303,889 $ 1,210,106

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Total Available Liquidity to Uninsured Deposits 195.7 % 187.0 %

CARTER BANKSHARES, INC.

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

Regulatory Capital Requirements

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

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

Total capital of $364.4 million at June 30, 2024, reflects an increase of $13.2 million compared to December 31, 2023.

The increase in total capital from December 31, 2023 is primarily due to net income of $10.6 million, a $1.8 million decrease in other comprehensive loss due to changes in fair value of investment securities, as well as an increase of $0.8 million related to restricted stock activity all during the six months ended June 30, 2024.

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

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

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

At June 30, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

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

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

At June 30, 2024, the Bank continues to maintain its capital position with a leverage ratio of 9.35% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 10.86% compared to the regulatory guideline of 6.50% to be well-capitalized.

The Bank’s risk-based Tier 1 and Total Capital ratios were 10.86% and 12.13%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively.

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

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

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

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

CARTER BANKSHARES, INC.

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

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

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

Banking institutions with a ratio of Common

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

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

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

CARTER BANKSHARES, INC.

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

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

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Capitalized (1)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Amount Ratio Amount Ratio

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

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

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

On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule:

Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19.

The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period.

Contractual Obligations

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

As of June 30, 2024, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 ( the “2023 Annual Report”).

Off-Balance Sheet Arrangements

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

As of June 30, 2024, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2023 Annual Report.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis