Carter Bankshares, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (Dollars in Thousands) 2024 2023 Net Income $ 10,614 $ 21,645 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Credit Losses, including (Recovery) Provision for Unfunded Commitments 228 1,944 Origination of Loans Held-for-Sale ( 3,902 ) ( 3,527 ) Proceeds From Loans Held-for-Sale 3,963 3,411 Depreciation/Amortization of Bank Premises and Equipment 3,422 3,079 (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 ) (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 (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 INVESTING ACTIVITIES 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 ) Redemption (Purchase) of Federal Home Loan Bank Stock, net 7,159 ( 9,663 ) Loan Originations, net ( 45,665 ) ( 182,737 ) Payments Received on Other Real Estate Owned — 201 Proceeds from Sales and Payments of Other Real Estate Owned 1,502 4,818 Net Cash Used In Investing Activities ( 11,944 ) ( 176,386 ) FINANCING ACTIVITIES Net Change in Demand, Money Markets and Savings Accounts ( 16,195 ) ( 243,344 ) Increase in Certificates of Deposits 175,581 190,014 (Repayments) Proceeds from Federal Home Loan Bank Borrowings, net ( 155,400 ) 226,585 Repayments from Federal Funds Purchased, net — ( 9,970 ) Repurchase of Common Stock — ( 10,085 ) Net Cash Provided By Financing Activities 3,986 153,200 Net Increase in Cash and Cash Equivalents 7,217 6,406 Cash and Cash Equivalents at Beginning of Period 54,529 46,869 Cash and Cash Equivalents at End of Period $ 61,746 $ 53,275 SUPPLEMENTARY DATA Cash Interest Paid $ 51,252 $ 23,697 Cash Paid for Income Taxes 265 5,550 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. 8 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BASIS OF PRESENTATION Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”), on March 8, 2024. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period. Reclassification: Amounts in prior periods financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no material effect on prior periods net income or shareholders’ equity. Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Accounting Standards Adopted in 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 On March 29, 2024 the FASB issued ASU 2024-02, Codification Improvements— Amendments to Remove References to the Concepts Statements, which amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. The ASU is effective January 1, 2025 and is not expected to have a significant impact on the Company’s financial statements. 9 Table of Contents 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): Improvements to Income Tax Disclosures, which enhances the required disclosures primarily related to the income tax rate reconciliation and income taxes paid. The ASU requires an entity’s income tax rate reconciliation to provide additional information for reconciling items meeting a quantitative threshold, and to disclose certain selected categories within the income tax rate reconciliation. The ASU also requires entities to disclose the amount of income taxes paid, disaggregated by federal, state and foreign taxes. The ASU is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements. On November 27, 2023, the FASB issued ASU 2023-07. Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which changes disclosures relating to reportable segments. The ASU expands the disclosure requirements relating to reportable segments, including requiring entities to disclose information about a reportable segment’s significant expenses, among other changes. The ASU does not change how an entity identifies reportable segments or the accounting for segments. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted. The Company has one reporting segment therefore, will not impact our Consolidated Financial Statements; however, this ASU requires disclosure of the title and position of the chief operating decision maker and an explanation of how resources are allocated. Recently Issued Disclosure Rules In March 2024, the U.S. Securities and Exchange Commission ("SEC") adopted final rules under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. 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 Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following table reconciles the numerators and denominators of basic and diluted earnings per common share calculations for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (Dollars in Thousands, except share and per share data) 2024 2023 2024 2023 Numerator for Earnings per Common Share – Basic and Diluted Net Income $ 4,803 $ 5,704 $ 10,614 $ 21,645 Less: Income allocated to participating shares 47 49 106 168 Net Income Allocated to Common Shareholders - Basic & Diluted $ 4,756 $ 5,655 $ 10,508 $ 21,477 Denominator: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,050,864 23,715,564 23,029,213 23,826,312 Less: Average Participating Securities 224,354 201,727 230,737 185,203 Weighted Average Common Shares Outstanding - Basic & Diluted 22,826,510 23,513,837 22,798,476 23,641,109 Earnings per Common Share – Basic $ 0.21 $ 0.24 $ 0.46 $ 0.91 Earnings per Common Share – Diluted $ 0.21 $ 0.24 $ 0.46 $ 0.91 All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation . 10 Table of Contents 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: June 30, 2024 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government Agency Securities 30,288 57 ( 755 ) 29,590 Residential Mortgage-Backed Securities 108,898 3 ( 10,433 ) 98,468 Commercial Mortgage-Backed Securities 24,679 52 ( 693 ) 24,038 Other Commercial Mortgage-Backed Securities 24,287 — ( 2,521 ) 21,766 Asset Backed Securities 143,208 13 ( 10,415 ) 132,806 Collateralized Mortgage Obligations 170,291 3 ( 11,112 ) 159,182 States and Political Subdivisions 263,134 — ( 42,872 ) 220,262 Corporate Notes 70,750 — ( 10,537 ) 60,213 Total Debt Securities $ 835,535 $ 128 $ ( 89,338 ) $ 746,325 December 31, 2023 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government Agency Securities 44,185 398 ( 756 ) 43,827 Residential Mortgage-Backed Securities 110,726 — ( 11,576 ) 99,150 Commercial Mortgage-Backed Securities 31,578 336 ( 751 ) 31,163 Other Commercial Mortgage-Backed Securities 24,522 — ( 2,666 ) 21,856 Asset Backed Securities 150,832 — ( 10,826 ) 140,006 Collateralized Mortgage Obligations 174,396 — ( 12,863 ) 161,533 States and Political Subdivisions 263,557 — ( 41,449 ) 222,108 Corporate Notes 70,750 — ( 11,390 ) 59,360 Total Debt Securities $ 870,546 $ 734 $ ( 92,277 ) $ 779,003 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 June 30, Six Months Ended June 30, (Dollars in Thousands) 2024 2023 2024 2023 Proceeds from Sales of Securities Available-for-Sale $ 10,617 $ 15,054 $ 10,617 $ 15,054 Gross Realized Gains $ 36 $ 129 $ 36 $ 129 Gross Realized Losses — ( 126 ) — ( 138 ) 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 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. The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. 11 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) June 30, 2024 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 49 $ 49 Due after One Year through Five Years 20,516 18,935 Due after Five Years through Ten Years 258,413 221,610 Due after Ten Years 85,194 69,471 Residential Mortgage-Backed Securities 108,898 98,468 Commercial Mortgage-Backed Securities 24,679 24,038 Other Commercial Mortgage-Backed Securities 24,287 21,766 Collateralized Mortgage Obligations 170,291 159,182 Asset Backed Securities 143,208 132,806 Total Debt Securities $ 835,535 $ 746,325 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 $ 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 (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Government Agency Securities 5 3,170 ( 38 ) 20 17,741 ( 717 ) 25 20,911 ( 755 ) Residential Mortgage-Backed Securities — — — 42 97,931 ( 10,433 ) 42 97,931 ( 10,433 ) Commercial Mortgage-Backed Securities 1 126 — 44 15,701 ( 693 ) 45 15,827 ( 693 ) Other Commercial Mortgage-Backed Securities — — — 8 21,766 ( 2,521 ) 8 21,766 ( 2,521 ) Asset Backed Securities 1 1,291 ( 13 ) 30 83,538 ( 10,402 ) 31 84,829 ( 10,415 ) Collateralized Mortgage Obligations 1 8,254 ( 12 ) 80 145,395 ( 11,100 ) 81 153,649 ( 11,112 ) States and Political Subdivisions — — — 153 220,262 ( 42,872 ) 153 220,262 ( 42,872 ) Corporate Notes — — — 21 60,213 ( 10,537 ) 21 60,213 ( 10,537 ) Total Debt Securities 8 $ 12,841 $ ( 63 ) 398 $ 662,547 $ ( 89,275 ) 406 $ 675,388 $ ( 89,338 ) December 31, 2023 Less Than 12 Months 12 Months or More Total (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Government Agency Securities 7 $ 6,567 $ ( 67 ) 15 $ 15,848 $ ( 689 ) 22 $ 22,415 $ ( 756 ) Residential Mortgage-Backed Securities — — — 43 99,150 ( 11,576 ) 43 99,150 ( 11,576 ) Commercial Mortgage-Backed Securities 3 1,073 ( 3 ) 50 18,692 ( 748 ) 53 19,765 ( 751 ) Other Commercial Mortgage-Backed Securities — — — 9 21,856 ( 2,666 ) 9 21,856 ( 2,666 ) Asset Backed Securities 2 2,530 ( 84 ) 52 137,476 ( 10,742 ) 54 140,006 ( 10,826 ) Collateralized Mortgage Obligations — — — 85 161,533 ( 12,863 ) 85 161,533 ( 12,863 ) States and Political Subdivisions — — — 153 222,108 ( 41,449 ) 153 222,108 ( 41,449 ) Corporate Notes — — — 21 59,360 ( 11,390 ) 21 59,360 ( 11,390 ) Total Debt Securities 12 $ 10,170 $ ( 154 ) 428 $ 736,023 $ ( 92,123 ) 440 $ 746,193 $ ( 92,277 ) 12 Table of Contents 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 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. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. It should be noted that we may occasionally sell securities to take advantage of market opportunities or as part of a strategic initiative. 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 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 The composition of the loan portfolio by dollar amount is shown in the table below: (Dollars in Thousands) June 30, 2024 December 31, 2023 Commercial Commercial Real Estate $ 1,801,397 $ 1,670,631 Commercial and Industrial 240,611 271,511 Total Commercial Loans 2,042,008 1,942,142 Consumer Residential Mortgages 783,903 787,929 Other Consumer 31,284 34,277 Total Consumer Loans 815,187 822,206 Construction 394,926 436,349 Other 297,400 305,213 Total Loans $ 3,549,521 $ 3,505,910 13 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – LOANS (continued) Loan Restructurings 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. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows. A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater and/or based on management’s discretion; otherwise, the restructured loan remains in the appropriate segment in the ACL model. 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. 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. 14 Table of Contents 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 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. 15 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 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. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business. C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio. Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchased money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. 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, 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 16 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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. Current Expected Credit Losses (“CECL”) Model The CECL model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. Credit Quality Indicators: The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status. The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing through 2024, the Company used a five step approach for loan review in the following categories: • Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $ 2.0 million or more; • A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $ 2.0 million or more but not included in the top twenty LLRs; • A sampling review of Executive Loan Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures; • A sampling review of non-organic commercial loans and those commercial loans approved outside of the Executive Loan Committee; and • Focus reviews of various segments to evaluate emerging risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis. The Company’s internally assigned grades are as follows: Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality. Special Mentio n – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. 17 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. 18 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented: June 30, 2024 Risk Rating (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 80,206 $ 280,400 $ 431,656 $ 239,903 $ 134,333 $ 584,989 $ 43,337 $ 1,794,824 Special Mention — — 4,516 — — 66 — 4,582 Substandard — — 1,380 — — 611 — 1,991 Total Commercial Real Estate $ 80,206 $ 280,400 $ 437,552 $ 239,903 $ 134,333 $ 585,666 $ 43,337 $ 1,801,397 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 60 $ 24,334 $ 15,546 $ 28,789 $ 22,057 $ 126,864 $ 16,946 $ 234,596 Special Mention — — — — 2,827 — — 2,827 Substandard — — 772 1,065 — — 1,351 3,188 Total Commercial and Industrial $ 60 $ 24,334 $ 16,318 $ 29,854 $ 24,884 $ 126,864 $ 18,297 $ 240,611 YTD Gross Charge-offs $ — $ — $ — $ — $ 18 $ 1 $ — $ 19 Residential Mortgages Pass $ 17,841 $ 69,217 $ 256,092 $ 188,444 $ 72,046 $ 130,898 $ 47,320 $ 781,858 Special Mention — — — — — 93 — 93 Substandard — — — — — 1,619 333 1,952 Total Residential Mortgages $ 17,841 $ 69,217 $ 256,092 $ 188,444 $ 72,046 $ 132,610 $ 47,653 $ 783,903 YTD Gross Charge-offs $ — $ 1 $ — $ — $ — $ 26 $ — $ 27 Other Consumer Pass $ 15,443 $ 7,149 $ 3,376 $ 1,525 $ 3,163 $ 164 $ 434 $ 31,254 Special Mention — — — — — — — — Substandard — 9 — 21 — — — 30 Total Other Consumer $ 15,443 $ 7,158 $ 3,376 $ 1,546 $ 3,163 $ 164 $ 434 $ 31,284 YTD Gross Charge-offs $ 97 $ 29 $ 590 $ 220 $ 16 $ 16 $ — $ 968 Construction Pass $ 22,813 $ 166,405 $ 146,414 $ 29,310 $ 9,074 $ 11,036 $ 7,394 $ 392,446 Special Mention — — — — — 54 — 54 Substandard — — 292 — 2,134 — — 2,426 Total Construction $ 22,813 $ 166,405 $ 146,706 $ 29,310 $ 11,208 $ 11,090 $ 7,394 $ 394,926 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ 156 $ — $ 156 Other Pass $ — $ — $ — $ — $ — $ 3,260 $ — $ 3,260 Special Mention — — — — — — — — Substandard 294,140 — — — — — — 294,140 Total Other Loans $ 294,140 $ — $ — $ — $ — $ 3,260 $ — $ 297,400 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Total Portfolio Loans Pass $ 136,363 $ 547,505 $ 853,084 $ 487,971 $ 240,673 $ 857,211 $ 115,431 $ 3,238,238 Special Mention — — 4,516 — 2,827 213 — 7,556 Substandard 294,140 9 2,444 1,086 2,134 2,230 1,684 303,727 Total Portfolio Loans $ 430,503 $ 547,514 $ 860,044 $ 489,057 $ 245,634 $ 859,654 $ 117,115 $ 3,549,521 Current YTD Period: YTD Gross Charge-offs $ 97 $ 30 $ 590 $ 220 $ 34 $ 199 $ — $ 1,170 19 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2023 Risk Rating (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 259,171 $ 434,639 $ 173,667 $ 142,494 $ 124,176 $ 503,965 $ 30,917 $ 1,669,029 Special Mention — — 206 — — 72 — 278 Substandard — — — 101 1,223 — 1,324 Total Commercial Real Estate $ 259,171 $ 434,639 $ 173,873 $ 142,494 $ 124,277 $ 505,260 $ 30,917 $ 1,670,631 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 24,863 $ 18,061 $ 37,566 $ 24,566 $ 2,636 $ 137,395 $ 23,535 $ 268,622 Special Mention — — — 2,837 — — — 2,837 Substandard — — — 18 14 1 19 52 Total Commercial and Industrial $ 24,863 $ 18,061 $ 37,566 $ 27,421 $ 2,650 $ 137,396 $ 23,554 $ 271,511 YTD Gross Charge-offs $ — $ — $ 45 $ — $ 16 $ 2 $ — $ 63 Residential Mortgages Pass $ 79,247 $ 250,603 $ 194,014 $ 77,805 $ 43,633 $ 96,238 $ 42,550 $ 784,090 Special Mention — — — — — 525 — 525 Substandard — — 1,142 — 860 1,070 242 3,314 Total Residential Mortgages $ 79,247 $ 250,603 $ 195,156 $ 77,805 $ 44,493 $ 97,833 $ 42,792 $ 787,929 YTD Gross Charge-offs $ — $ — $ 136 $ — $ — $ 67 $ — $ 203 Other Consumer Pass $ 22,809 $ 4,494 $ 2,396 $ 3,936 $ 26 $ 187 $ 354 $ 34,202 Special Mention — — — — — — — — Substandard 14 6 55 — — — — 75 Total Other Consumer $ 22,823 $ 4,500 $ 2,451 $ 3,936 $ 26 $ 187 $ 354 $ 34,277 YTD Gross Charge-offs $ 232 $ 1,451 $ 744 $ 83 $ 126 $ 29 $ — $ 2,665 Construction Pass $ 118,120 $ 162,794 $ 122,087 $ 10,837 $ 5,155 $ 6,280 $ 8,048 $ 433,321 Special Mention — — — — — 60 — 60 Substandard — 64 — 2,090 — 814 — 2,968 Total Construction $ 118,120 $ 162,858 $ 122,087 $ 12,927 $ 5,155 $ 7,154 $ 8,048 $ 436,349 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ 42 $ — $ 42 Other Pass $ — $ — $ — $ — $ — $ 3,300 $ — $ 3,300 Special Mention — — — — — — — — Substandard — — — — — 301,913 — 301,913 Total Other Loans $ — $ — $ — $ — $ — $ 305,213 $ — $ 305,213 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Total Portfolio Loans Pass $ 504,210 $ 870,591 $ 529,730 $ 259,638 $ 175,626 $ 747,365 $ 105,404 $ 3,192,564 Special Mention — — 206 2,837 — 657 — 3,700 Substandard 14 70 1,197 2,108 975 305,021 261 309,646 Total Portfolio Loans $ 504,224 $ 870,661 $ 531,133 $ 264,583 $ 176,601 $ 1,053,043 $ 105,665 $ 3,505,910 Current YTD Period: YTD Gross Charge-offs $ 232 $ 1,451 $ 925 $ 83 $ 142 $ 140 $ — $ 2,973 20 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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: June 30, 2024 (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 80,206 $ 280,400 $ 437,552 $ 239,903 $ 134,333 $ 585,055 $ 43,337 $ 1,800,786 Nonperforming — — — — — 611 — 611 Total Commercial Real Estate $ 80,206 $ 280,400 $ 437,552 $ 239,903 $ 134,333 $ 585,666 $ 43,337 $ 1,801,397 Commercial and Industrial Performing $ 60 $ 24,334 $ 16,318 $ 28,789 $ 24,884 $ 126,864 $ 18,278 $ 239,527 Nonperforming — — — 1,065 — — 19 1,084 Total Commercial and Industrial $ 60 $ 24,334 $ 16,318 $ 29,854 $ 24,884 $ 126,864 $ 18,297 $ 240,611 Residential Mortgages Performing $ 17,841 $ 69,217 $ 256,092 $ 188,444 $ 72,046 $ 130,991 $ 47,321 $ 781,952 Nonperforming — — — — — 1,619 332 1,951 Total Residential Mortgages $ 17,841 $ 69,217 $ 256,092 $ 188,444 $ 72,046 $ 132,610 $ 47,653 $ 783,903 Other Consumer Performing $ 15,443 $ 7,149 $ 3,376 $ 1,525 $ 3,163 $ 164 $ 434 $ 31,254 Nonperforming — 9 — 21 — — — 30 Total Other Consumer $ 15,443 $ 7,158 $ 3,376 $ 1,546 $ 3,163 $ 164 $ 434 $ 31,284 Construction Performing $ 22,813 $ 166,405 $ 146,414 $ 29,310 $ 9,074 $ 11,090 $ 7,394 $ 392,500 Nonperforming — — 292 — 2,134 — — 2,426 Total Construction $ 22,813 $ 166,405 $ 146,706 $ 29,310 $ 11,208 $ 11,090 $ 7,394 $ 394,926 Other Performing $ — $ — $ — $ — $ — $ 3,260 $ — $ 3,260 Nonperforming 294,140 — — — — — — 294,140 Total Other Loans $ 294,140 $ — $ — $ — $ — $ 3,260 $ — $ 297,400 Total Portfolio Loans Performing $ 136,363 $ 547,505 $ 859,752 $ 487,971 $ 243,500 $ 857,424 $ 116,764 $ 3,249,279 Nonperforming 294,140 9 292 1,086 2,134 2,230 351 300,242 Total Portfolio Loans $ 430,503 $ 547,514 $ 860,044 $ 489,057 $ 245,634 $ 859,654 $ 117,115 $ 3,549,521 21 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2023 (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 259,171 $ 434,639 $ 173,873 $ 142,494 $ 124,176 $ 504,037 $ 30,917 $ 1,669,307 Nonperforming — — — — 101 1,223 — 1,324 Total Commercial Real Estate $ 259,171 $ 434,639 $ 173,873 $ 142,494 $ 124,277 $ 505,260 $ 30,917 $ 1,670,631 Commercial and Industrial Performing $ 24,863 $ 18,061 $ 37,566 $ 27,403 $ 2,636 $ 137,395 $ 23,535 $ 271,459 Nonperforming — — — 18 14 1 19 52 Total Commercial and Industrial $ 24,863 $ 18,061 $ 37,566 $ 27,421 $ 2,650 $ 137,396 $ 23,554 $ 271,511 Residential Mortgages Performing $ 79,247 $ 250,603 $ 194,014 $ 77,805 $ 43,633 $ 96,794 $ 42,550 $ 784,646 Nonperforming — — 1,142 — 860 1,039 242 3,283 Total Residential Mortgages $ 79,247 $ 250,603 $ 195,156 $ 77,805 $ 44,493 $ 97,833 $ 42,792 $ 787,929 Other Consumer Performing $ 22,809 $ 4,494 $ 2,412 $ 3,936 $ 26 $ 187 $ 354 $ 34,218 Nonperforming 14 6 39 — — — — 59 Total Other Consumer $ 22,823 $ 4,500 $ 2,451 $ 3,936 $ 26 $ 187 $ 354 $ 34,277 Construction Performing $ 118,120 $ 162,858 $ 122,087 $ 10,837 $ 5,155 $ 6,340 $ 8,048 $ 433,445 Nonperforming — — — 2,090 — 814 — 2,904 Total Construction $ 118,120 $ 162,858 $ 122,087 $ 12,927 $ 5,155 $ 7,154 $ 8,048 $ 436,349 Other Performing $ — $ — $ — $ — $ — $ 3,300 $ — $ 3,300 Nonperforming — — — — 301,913 — 301,913 Total Other Loans $ — $ — $ — $ — $ — $ 305,213 $ — $ 305,213 Total Portfolio Loans Performing $ 504,210 $ 870,655 $ 529,952 $ 262,475 $ 175,626 $ 748,053 $ 105,404 $ 3,196,375 Nonperforming 14 6 1,181 2,108 975 304,990 261 309,535 Total Portfolio Loans $ 504,224 $ 870,661 $ 531,133 $ 264,583 $ 176,601 $ 1,053,043 $ 105,665 $ 3,505,910 The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented: June 30, 2024 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,800,335 $ 411 $ 40 $ 451 $ 611 $ 1,801,397 Commercial and Industrial 239,464 63 — 63 1,084 240,611 Residential Mortgages 781,065 679 208 887 1,951 783,903 Other Consumer 30,912 188 154 342 30 31,284 Construction 392,500 — — — 2,426 394,926 Other 3,260 — — — 294,140 297,400 Total $ 3,247,536 $ 1,341 $ 402 $ 1,743 $ 300,242 $ 3,549,521 22 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2023 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,668,988 $ 125 $ 194 $ 319 $ 1,324 $ 1,670,631 Commercial and Industrial 271,420 5 34 39 52 271,511 Residential Mortgages 782,765 1,846 35 1,881 3,283 787,929 Other Consumer 33,813 247 158 405 59 34,277 Construction 430,057 3,388 — 3,388 2,904 436,349 Other 3,300 — — — 301,913 305,213 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 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 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: June 30, 2024 (Dollars in Thousands) Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Past Due 90+ Days Still Accruing Commercial Real Estate $ — $ 611 $ 611 $ — Commercial and Industrial — 1,084 1,084 — Residential Mortgages — 1,951 1,951 — Other Consumer — 30 30 — Construction 2,089 337 2,426 — Other — 294,140 294,140 — Total $ 2,089 $ 298,153 $ 300,242 $ — December 31, 2023 (Dollars in Thousands) Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Past Due 90+ Days Still Accruing Commercial Real Estate $ 453 $ 871 $ 1,324 $ — Commercial and Industrial — 52 52 — Residential Mortgages 1,142 2,141 3,283 — Other Consumer — 59 59 — Construction 2,898 6 2,904 — Other — 301,913 301,913 — Total $ 4,493 $ 305,042 $ 309,535 $ — 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. 23 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) A loan is considered nonperforming when we transfer the interest methodology from accrual to nonaccrual. Nonaccrual status recognizes that the collection in full of both principal and interest is unlikely. 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 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. For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely. We may also elect to retain a loan that is 90 or more days’ delinquent in accrual status if we believe the loan is well secured and in the process of collection. Nonaccrual loans, and loans that have been characterized as Restructured Loans may be individually evaluated for credit losses in the Allowance for Credit Losses model if the loan commitment is $ 1.0 million or greater and/or based on management’s discretion; unless we elect to maintain the loan in the general pool. 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. 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 Commercial Real Estate $ — $ — $ — $ 453 $ — $ 453 Commercial and Industrial 1,065 — 1,065 — — — Residential Mortgages — — — 1,142 — 1,142 Other Consumer — — — — — — Construction 2,089 — 2,089 2,898 — 2,898 Other — 294,140 294,140 — 301,913 301,913 Total $ 3,154 $ 294,140 $ 297,294 $ 4,493 $ 301,913 $ 306,406 24 Table of Contents 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 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 $ 19,162 $ 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 Charge-offs — ( 19 ) ( 27 ) ( 968 ) ( 156 ) — ( 1,170 ) Recoveries — 2 24 271 — — 297 Net Charge-offs — ( 17 ) ( 3 ) ( 697 ) ( 156 ) — ( 873 ) Balance at End of Period $ 19,817 $ 3,194 $ 10,744 $ 760 $ 9,217 $ 52,954 $ 96,686 Three 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 $ 18,595 $ 3,531 $ 10,419 $ 1,189 $ 7,506 $ 53,454 $ 94,694 Provision (Recovery) for Credit Losses on Loans 549 ( 243 ) 33 401 ( 861 ) 206 85 Charge-offs — — ( 67 ) ( 651 ) ( 42 ) — ( 760 ) Recoveries — 5 1 119 — — 125 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 25 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities. 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. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis. Recurring Basis Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. 26 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) 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. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2. The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates. Nonrecurring Basis Individually Evaluated Loans: Individually evaluated loans with commitments of $ 1.0 million or greater and/or based on management’s discretion are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy. Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal. 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. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. 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 27 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) 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 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: June 30, 2024 (Dollars in Thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Government Agency Securities 29,590 — 29,590 — Residential Mortgage-Backed Securities 98,468 — 98,468 — Commercial Mortgage-Backed Securities 24,038 — 24,038 — Other Commercial Mortgage-Backed Securities 21,766 — 21,766 — Asset Backed Securities 132,806 — 132,806 — Collateralized Mortgage Obligations 159,182 — 159,182 — States and Political Subdivisions 220,262 — 220,262 — Corporate Notes 60,213 — 52,726 7,487 Total Securities Available-for-Sale 746,325 — 738,838 7,487 Equity Securities 5,063 5,063 — — Derivatives 19,592 — 19,592 — Total $ 770,980 $ 5,063 $ 758,430 $ 7,487 Liabilities Derivatives $ 19,364 $ — $ 19,364 $ — Total $ 19,364 $ — $ 19,364 $ — December 31, 2023 (Dollars in Thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Government Agency Securities 43,827 — 43,827 — Residential Mortgage-Backed Securities 99,150 — 99,150 — Commercial Mortgage-Backed Securities 31,163 — 31,163 — Other Commercial Mortgage-Backed Securities 21,856 — 21,856 — Asset Backed Securities 140,006 — 140,006 — Collateralized Mortgage Obligations 161,533 — 161,533 — States and Political Subdivisions 222,108 — 222,108 — Corporate Notes 59,360 — 52,041 7,319 Total Securities Available-for-Sale 779,003 — 771,684 7,319 Derivatives 17,440 — 17,440 — Total $ 796,443 $ — $ 789,124 $ 7,319 Liabilities Derivatives $ 17,228 $ — $ 17,228 $ — Total $ 17,228 $ — $ 17,228 $ — 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 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 28 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented: June 30, 2024 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 2,501 $ 2,501 Individually Evaluated Loans $ — $ — $ 579 $ 579 December 31, 2023 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 2,463 $ 2,463 Individually Evaluated Loans $ — $ — $ — $ — 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: June 30, 2024 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets 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 % OREO 1,146 Discounted Internal Valuations Management's Subject Discount 0.0 % - 21.8 % 7.6 % OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % Total OREO $ 2,501 December 31, 2023 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average OREO $ 130 Appraisals Estimated Selling Costs 6.0 % 6.0 % OREO 142 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % OREO 2,191 Discounted Internal Valuations Management’s Subject Discount 0.0 % - 24.0 % 15.6 % Total OREO $ 2,463 29 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales, and; therefore, represents an average recovery rate based on the transaction sizes and asset types in the population examined. 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 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 other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Fair Value Measurements at June 30, 2024 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 61,746 $ 40,382 $ 21,364 $ — $ 61,746 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 Federal Home Loan Bank Stock, at Cost 14,467 — — NA NA Other Assets- Interest Rate Derivatives 19,592 — 19,592 — 19,592 Accrued Interest Receivable 18,588 13 4,945 13,630 18,588 Financial Liabilities: Deposits $ 3,881,301 $ 653,296 $ 1,465,773 $ 1,775,687 $ 3,894,756 Other Liabilities- Interest Rate Derivatives 19,364 — 19,364 — 19,364 FHLB Borrowings 238,000 — — 236,859 236,859 Accrued Interest Payable 8,157 — — 8,157 8,157 Fair Value Measurements at December 31, 2023 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 54,529 $ 39,676 $ 14,853 $ — $ 54,529 Securities Available-for-Sale 779,003 — 771,684 7,319 779,003 Portfolio Loans, net 3,408,858 — — 3,177,715 3,177,715 Federal Home Loan Bank Stock, at Cost 21,626 — — NA NA Other Assets- Interest Rate Derivatives 17,440 — 17,440 — 17,440 Accrued Interest Receivable 18,877 — 5,368 13,509 18,877 Financial Liabilities: Deposits $ 3,721,915 $ 685,218 $ 1,450,046 $ 1,599,043 $ 3,734,307 Other Liabilities- Interest Rate Derivatives 17,228 — 17,228 — 17,228 FHLB Borrowings 393,400 — — 392,696 392,696 Accrued Interest Payable 7,288 — — 7,288 7,288 30 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income. The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented: Fair Value of Derivative Assets (Included in Other Assets) June 30, 2024 December 31, 2023 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans 4 $ 1,112 $ 5 3 $ 310 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 375,554 19,587 58 387,144 17,437 Total Derivatives not Designated as Hedging Instruments 60 $ 376,666 $ 19,592 61 $ 387,454 $ 17,440 Fair Value of Derivative Liabilities (Included in Other Liabilities) June 30, 2024 December 31, 2023 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 4 $ 1,112 $ 5 3 $ 310 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 375,554 19,359 58 387,144 17,225 Total Derivatives not Designated as Hedging Instruments 60 $ 376,666 $ 19,364 61 $ 387,454 $ 17,228 31 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued) The following table indicates the income (loss) recognized on derivatives for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (Dollars in Thousands) 2024 2023 2024 2023 Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans $ 5 $ 5 $ 2 $ 5 Forward Sale Contracts – Mortgage Loans ( 5 ) ( 5 ) ( 2 ) ( 5 ) Interest Rate Swap Contracts – Commercial Loans 2 50 16 ( 144 ) Total Derivative Income (Loss) $ 2 $ 50 $ 16 $ ( 144 ) Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented: Derivative Assets (Included in Other Assets) Derivative Liabilities (Included in Other Liabilities) (Dollars in Thousands) June 30, 2024 December 31, 2023 June 30, 2024 December 31, 2023 Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 19,587 $ 17,437 $ 19,359 $ 17,225 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 19,587 17,437 19,359 17,225 Gross Amounts Not Offset — — — — Net Amount $ 19,587 $ 17,437 $ 19,359 $ 17,225 NOTE 8 – DEPOSITS The following table presents the composition of deposits at the dates presented: (Dollars in Thousands) June 30, 2024 December 31, 2023 Noninterest-Bearing Demand $ 653,296 $ 685,218 Interest-Bearing Demand 565,465 481,506 Money Market 500,475 513,664 Savings 399,833 454,876 Certificates of Deposits 1,762,232 1,586,651 Total $ 3,881,301 $ 3,721,915 All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, 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 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) June 30, 2024 3 Months or Less $ 417,979 Over 3 Months through 12 Months 1,092,011 Over 1 Year Through 3 Years 163,754 Over 3 Years 88,488 Total $ 1,762,232 Overdrafts reclassified to loans were $ 0.3 million at both June 30, 2024 and December 31, 2023. 32 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED Borrowings serve as an additional source of liquidity for the Company. The Company had $ 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 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 following table represents the balance of FHLB borrowings and the weighted average interest rate as of the periods presented: (Dollars in Thousands) June 30, 2024 December 31, 2023 FHLB Borrowings $ 238,000 $ 393,400 Weighted Average Interest Rate 5.05 % 5.20 % FHLB Availability $ 669,474 $ 480,266 The following table represents the balance of federal funds purchased and the weighted average interest rate as of the periods presented: (Dollars in Thousands) June 30, 2024 December 31, 2023 Federal Fund Purchased $ — $ — Weighted Average Interest Rate — % — % 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 June 30, 2024 and thereafter are as follows: (Dollars in Thousands) Balance Weighted Average Rate 1 year $ 193,000 5.31 % 2 years 45,000 3.96 % 3 years — — % 4 years — — % 5 years — — % Thereafter — — % Total FHLB Borrowings $ 238,000 5.05 % NOTE 10 – COMMITMENTS AND CONTINGENCIES 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 $ 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. 33 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) Those guarantees are primarily issued to support public and private borrowing arrangements. 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) June 30, 2024 December 31, 2023 Commitments to Extend Credit $ 697,985 $ 702,301 Standby and Performance Letters of Credit 17,943 19,643 Total $ 715,928 $ 721,944 Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk. Life-of-Loss Reserve on Unfunded Loan Commitments We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. 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 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 June 30, Six Months Ended June 30, (Dollars in Thousands) 2024 2023 2024 2023 Life-of-Loss Reserve on Unfunded Loan Commitments Balance at Beginning of Period $ 3,150 $ 2,376 $ 3,193 $ 2,292 (Recovery) Provision for Unfunded Commitments ( 236 ) 360 ( 279 ) 444 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 (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 In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty. Further, estimating an amount or range of possible losses that may result from legal or administrative proceedings and claims is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve awards that are discretionary in amount, present novel legal theories or policies, are in the early stages of the proceedings, or are subject to appeal. In addition, because legal proceedings may be resolved over an extended period of time, potential losses are subject to change due to the outcome of intermediate procedural and substantive rulings, actions by other parties which may be influenced by their settlement posture or their evaluation of the strength or weakness of their case, and other factors. For these reasons, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the matters described below, and cannot conclude if the outcome of any of these matters would have a material impact to the Company. 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. 34 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) 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, 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 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. 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 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. In connection with the settlement described above, on June 26, 2024 the Justice Federal Court Litigation was dismissed with prejudice. Justice Foreclosure Litigation On February 7, 2024, the Bank was named as a defendant in a lawsuit (the “Justice Foreclosure Litigation”) filed in the Circuit Court of Greenbrier County, West Virginia (the “Greenbrier Circuit Court”) by The Greenbrier Sporting Club Development Company, Inc. and The Greenbrier Sporting Club, Inc. (collectively, “Sporting Club”). The Justice Foreclosure Litigation 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 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 35 Table of Contents 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. On February 16, 2024, the Bank voluntarily cancelled the proposed sale by the Trustee of the real estate encumbered by the Trust Deed. In connection with the settlement described above, on June 28, 2024 the Justice Foreclosure Litigation was dismissed with prejudice. GLAS Federal Court Litigation On February 12, 2024, the Bank was named as a defendant in a lawsuit (the “GLAS Federal Court Litigation”) filed in the United States District Court for the Western District of Virginia by GLAS Trust Company LLC (“GLAS”). The allegations contained in the GLAS Federal Court Litigation relate to a series of financing transactions that occurred in 2018 between Bluestone Resources, Inc. (“Bluestone Resources”), its subsidiary Bluestone Coal Sales Corporation (“Bluestone Sales”, and together with Bluestone Resources and their respective affiliates, the “Bluestone Entities”), and Greensill (UK) Limited, Ltd. (“Greensill”). The Bluestone Entities are owned and controlled by James C. Justice, II and James C. Justice, III. In the GLAS Federal Court Litigation, GLAS alleges that it serves as trustee for investors that acquired notes via a series of securities transactions that repackaged the Bluestone Entities’ obligations to repay Greensill and sold them to those investors. In the GLAS Federal Court Litigation, GLAS alleges that certain transfers to the Bank executed during 2018 by the Bluestone Entities or Greensill, which in the aggregate total approximately $ 226 million, each constitute either a fraudulent conveyance, or a voluntary conveyance, under Virginia law. In the GLAS Federal Court Litigation, GLAS seeks an award equal to the full amount of such fraudulent conveyances and/or voluntary conveyances plus interest and payment of attorneys’ fees and costs. On March 29, 2024, the Bank filed a motion to dismiss the original complaint filed by GLAS due to lack of subject matter jurisdiction and failure to assert facts sufficient to support the claims alleged by GLAS. Subsequently, GLAS filed an amended complaint on April 19, 2024, which contains substantively similar allegations regarding fraudulent and/or voluntary conveyances, and seeks the same relief, in each case as the original complaint. 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. 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 GLAS Federal Court Litigation. During the course of the Bank’s lending transactions with James C. Justice, II, Cathy L. Justice and James C. Justice, III, and various Justice Entities, each of James C. Justice, II, Cathy L. Justice and James C. Justice, III and all 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 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. 36 Table of Contents 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 (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 NOTE 12 – STOCK REPURCHASE PLAN The Company was active in share repurchase activity and repurchased 1,000,000 shares of its common stock at a total cost of $ 14.2 million, or an average price of $ 14.16 per share during the year ended December 31, 2023. On March 29, 2023, the Company's Board of Directors authorized a new share repurchase program (the “2023 Program”) which took effect starting May 1, 2023, after the expiration of the previous repurchase program (the “2022 Program”), which was originally authorized through August 1, 2023, but was fully exhausted as of March 10, 2023. The Board of Directors authorized the repurchase of 1,000,000 shares of common stock under the 2023 Program and on August 31, 2023 reached the maximum number of shares that could be purchased under the 2023 Program. The Company’s Board of Directors has not authorized a new repurchase program as of June 30, 2024. 37 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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 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. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections: • Important Note Regarding Forward-Looking Statements • Explanation of Use of Non-GAAP Financial Measures • Critical Accounting Estimates • Overview and Strategy • Results of Operations and Financial Condition ◦ Earnings Summary ◦ Liquidity and Capital Resources ◦ Regulatory Capital Requirements ◦ Contractual Obligations ◦ Off-Balance Sheet Arrangements Important Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, strategic initiatives and related earn-back periods, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality, including but not limited to statements regarding the interest rate environment, the impact of future changes in interest rates, and the impacts of the Company placing its largest lending relationship on nonaccrual status. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company’s control. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of: • market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios; • inflation, market and monetary fluctuations; • changes in trade, monetary and fiscal policies and laws of the U.S. government, including policies of the Federal Reserve, FDIC and Treasury Department; • 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; 38 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued) • cyber-security threats, attacks or events; • rapid technological developments and changes; • our ability to resolve our nonperforming assets and our ability to secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full; • changes in the Company’s liquidity and capital positions; • concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral; • increased delinquency and foreclosure rates on commercial real estate loans; • an insufficient allowance for credit losses; • the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the war between Israel and Hamas and the ongoing war between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth; • a change in spreads on interest-earning assets and interest-bearing liabilities; • regulatory supervision and oversight, including our relationship with regulators and any actions that may be initiated by our regulators; • legislation affecting the financial services industry as a whole, and the Company and the Bank, in particular; • 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; • the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; • 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 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, supply chain disruptions and slowdowns in economic growth; • significant weakening of the local economies in which we operate; • changes in customer behaviors, including consumer spending, borrowing and saving habits; • changes in deposit flows and loan demand; • our failure to attract or retain key employees; • expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch network optimization project are not fully realized in a timely manner or at all; • deterioration of the housing market and reduced demand for mortgages; and • 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. 39 Table of Contents CARTER BANKSHARES, INC. ITEM 2. 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”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made. Explanation of Use of Non-GAAP Financial Measures In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A. Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies. Critical Accounting Estimates 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 $4.5 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 commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”. The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and income tax provision. Beginning in 2023, and continuing into 2024 and 2025, the Company is focusing on refining and enhancing its brand image and position in the markets it serves. To strengthen and further shape the culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take 40 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company. The Company’s goal is to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate. We believe this strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit this strategic vision. We believe that the Bank’s strong capital and liquidity positions support this strategy. In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses. The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter. As part of executing this strategy, the Company continues to dedicate significant resources to 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 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; and • 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 41 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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; and • 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 $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 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 $96.7 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; and • 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 Return on Average Assets 0.43 % 0.52 % 0.47 % 1.01 % Return on Average Shareholders’ Equity 5.40 % 6.38 % 5.99 % 12.45 % Portfolio Loans to Deposit Ratio 91.45 % 93.03 % 91.45 % 93.03 % Allowance for Credit Losses to Total Portfolio Loans 2.72 % 2.83 % 2.72 % 2.83 % Nonperforming Loans to Portfolio Loans 8.46 % 9.33 % 8.46 % 9.33 % 42 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Net Interest Income Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income. 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). 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. 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 Interest Income (FTE)(Non-GAAP) Interest and Dividend Income (GAAP) $ 54,583 $ 43,716 $ 108,632 $ 95,671 Tax Equivalent Adjustment 197 257 403 521 Interest and Dividend Income (FTE) (Non-GAAP) 54,780 43,973 109,035 96,192 Average Earning Assets $ 4,437,077 $ 4,261,652 $ 4,433,049 $ 4,224,116 Yield on Interest-earning Assets (GAAP) 4.95 % 4.11 % 4.93 % 4.57 % Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.97 % 4.14 % 4.95 % 4.59 % Net Interest Income (GAAP) $ 28,092 $ 26,711 $ 56,511 $ 67,496 Tax Equivalent Adjustment 197 257 403 521 Net Interest Income (FTE) (Non-GAAP) 28,289 26,968 56,914 68,017 Average Earning Assets $ 4,437,077 $ 4,261,652 $ 4,433,049 $ 4,224,116 Net Interest Margin (GAAP) 2.55 % 2.51 % 2.56 % 3.22 % Net Interest Margin (FTE) (Non-GAAP) 2.56 % 2.54 % 2.58 % 3.25 % 43 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Average Balance Sheet and Net Interest Income Analysis (FTE) 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 June 30, 2024 Three Months Ended June 30, 2023 (Dollars in Thousands) Average Balance Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate ASSETS Interest-Bearing Deposits with Banks $ 31,083 $ 420 5.43 % $ 17,902 $ 215 4.82 % Tax-Free Investment Securities (2) 11,779 86 2.94 % 27,894 210 3.02 % Taxable Investment Securities 841,787 7,721 3.69 % 912,292 7,688 3.38 % Total Securities 853,566 7,807 3.68 % 940,186 7,898 3.37 % Tax-Free Loans (1)(2) 105,487 854 3.26 % 126,453 1,016 3.22 % Taxable Loans (1)(3) 3,430,330 45,395 5.32 % 3,157,780 34,529 4.39 % Total Loans 3,535,817 46,249 5.26 % 3,284,233 35,545 4.34 % Federal Home Loan Bank Stock 16,611 304 7.36 % 19,331 315 6.54 % Total Interest-Earning Assets 4,437,077 $ 54,780 4.97 % 4,261,652 $ 43,973 4.14 % Noninterest Earning Assets 91,648 97,525 Total Assets $ 4,528,725 $ 4,359,177 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 532,700 $ 1,689 1.28 % $ 490,423 $ 659 0.54 % Money Market 510,828 3,926 3.09 % 414,852 1,858 1.80 % Savings 411,457 145 0.14 % 566,312 151 0.11 % Certificates of Deposit 1,731,358 16,963 3.94 % 1,396,307 9,114 2.62 % Total Interest-Bearing Deposits 3,186,343 22,723 2.87 % 2,867,894 11,782 1.65 % Federal Home Loan Bank Borrowings 283,154 3,675 5.22 % 405,443 5,080 5.03 % Federal Funds Purchased — — — % 5,363 71 5.31 % Other Borrowings 8,460 93 4.42 % 6,163 72 4.69 % Total Borrowings 291,614 3,768 5.20 % 416,969 5,223 5.02 % Total Interest-Bearing Liabilities 3,477,957 26,491 3.06 % 3,284,863 17,005 2.08 % Noninterest-Bearing Liabilities 693,336 715,576 Shareholders' Equity 357,432 358,738 Total Liabilities and Shareholders' Equity $ 4,528,725 $ 4,359,177 Net Interest Income (2) $ 28,289 $ 26,968 Net Interest Margin (2) 2.56 % 2.54 % (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3) Average loan balances include loans held-for-sale. 44 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Six Months Ended June 30, 2024 Six Months Ended June 30, 2023 (Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate ASSETS Interest-Bearing Deposits with Banks $ 27,606 $ 755 5.50 % $ 17,023 $ 415 4.92 % Tax-Free Investment Securities (2) 11,799 171 2.91 % 28,491 415 2.94 % Taxable Investment Securities 847,664 15,464 3.67 % 916,439 15,081 3.32 % Total Securities 859,463 15,635 3.66 % 944,930 15,496 3.31 % Tax-Free Loans (1)(2) 108,479 1,751 3.25 % 129,580 2,069 3.22 % Taxable Loans (1)(3) 3,418,994 90,212 5.31 % 3,115,799 77,657 5.03 % Total Loans 3,527,473 91,963 5.24 % 3,245,379 79,726 4.95 % Federal Home Loan Bank Stock 18,507 682 7.41 % 16,784 555 6.67 % Total Interest-Earning Assets 4,433,049 $ 109,035 4.95 % 4,224,116 $ 96,192 4.59 % 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 % Money Market 517,862 7,922 3.08 % 445,654 3,112 1.41 % Savings 425,616 282 0.13 % 604,004 316 0.11 % Certificates of Deposit 1,683,589 32,435 3.87 % 1,339,269 14,717 2.22 % Total Interest-Bearing Deposits 3,141,443 43,440 2.78 % 2,879,445 19,301 1.35 % Federal Home Loan Bank Borrowings 324,968 8,494 5.26 % 345,834 8,475 4.94 % Federal Funds Purchased — — — % 9,831 247 5.07 % Other Borrowings 8,081 187 4.65 % 6,305 152 4.86 % Total Borrowings 333,049 8,681 5.24 % 361,970 8,874 4.94 % Total Interest-Bearing Liabilities 3,474,492 52,121 3.02 % 3,241,415 28,175 1.75 % 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) 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 45 Table of Contents CARTER BANKSHARES, INC.