Carter Bankshares, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 Net Income $ 16,243 $ 25,272 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities (Recovery) Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments ( 13 ) 2,919 Origination of Loans Held-for-Sale ( 6,233 ) ( 5,524 ) Proceeds From Loans Held-for-Sale 5,932 5,614 Depreciation/Amortization of Bank Premises and Equipment 5,216 4,689 Provision for Deferred Taxes 1,377 256 Net Amortization of Securities 2,735 3,696 Unrealized Gain on Equity Securities ( 207 ) — Tax Credit Amortization 354 1,438 Gains on Sales of Loans Held-for-Sale ( 89 ) ( 90 ) (Gains) Losses on Sales of Securities, net ( 36 ) 10 Commercial Loan Swap Derivative Loss (Income) 112 ( 90 ) Increase in the Value of Life Insurance Contracts ( 1,088 ) ( 1,028 ) Balance Sheet Hedge Fair Value Adjustment ( 103 ) — Recognition of Restricted Stock Compensation Expense 1,324 1,171 Decrease (Increase) in Other Assets 1,754 ( 826 ) (Decrease) Increase in Other Liabilities ( 1,791 ) 1,348 Net Cash Provided By Operating Activities 25,487 38,855 INVESTING ACTIVITIES Securities Available-for-Sale: Proceeds from Sales 10,617 15,054 Proceeds from Maturities, Redemptions, and Pay-downs 54,910 38,896 Purchases ( 8,615 ) ( 24,938 ) Purchase of Equity Securities ( 5,000 ) — Purchase of Bank Premises and Equipment, Net ( 4,996 ) ( 7,979 ) Redemption (Purchase) of Federal Home Loan Bank Stock, net 14,189 ( 17,621 ) Loan Originations, net ( 98,866 ) ( 264,010 ) Payments Received on Other Real Estate Owned — 299 Proceeds from Sales and Payments of Other Real Estate Owned 2,984 4,818 Net Cash Used In Investing Activities ( 34,777 ) ( 255,481 ) FINANCING ACTIVITIES Net Change in Demand, Money Markets and Savings Accounts 19,729 ( 324,172 ) Increase in Certificates of Deposits 343,424 250,028 (Repayments) Proceeds from Federal Home Loan Bank Borrowings, net ( 303,400 ) 333,585 Repayments from Federal Funds Purchased, net — ( 17,870 ) Repurchase of Common Stock — ( 16,416 ) Net Cash Provided By Financing Activities 59,753 225,155 Net Increase in Cash and Cash Equivalents 50,463 8,529 Cash and Cash Equivalents at Beginning of Period 54,529 46,869 Cash and Cash Equivalents at End of Period $ 104,992 $ 55,398 SUPPLEMENTARY DATA Cash Interest Paid $ 79,122 $ 45,031 Cash Paid for Income Taxes 457 5,658 Transfer from Loans to Other Real Estate Owned 1,181 — Transfer from Fixed Assets to Other Real Estate Owned — 1,388 Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,511 — Stock Repurchase Excise Tax Settled in Subsequent Period — ( 153 ) 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 and 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 COMMON 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, less average participating shares 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 September 30, Nine Months Ended September 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 $ 5,629 $ 3,627 $ 16,243 $ 25,272 Less: Income allocated to participating shares 58 33 165 208 Net Income Allocated to Common Shareholders - Basic & Diluted $ 5,571 $ 3,594 $ 16,078 $ 25,064 Denominator: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,072,376 23,157,563 23,043,705 23,600,946 Less: Average Participating Securities 239,757 211,384 233,591 193,875 Weighted Average Common Shares Outstanding - Basic & Diluted 22,832,619 22,946,179 22,810,114 23,407,071 Earnings per Common Share – Basic $ 0.24 $ 0.16 $ 0.70 $ 1.07 Earnings per Common Share – Diluted $ 0.24 $ 0.16 $ 0.70 $ 1.07 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: September 30, 2024 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government Agency Securities 27,986 51 ( 562 ) 27,475 Residential Mortgage-Backed Securities 107,515 7 ( 8,713 ) 98,809 Commercial Mortgage-Backed Securities 23,524 55 ( 538 ) 23,041 Other Commercial Mortgage-Backed Securities 24,097 — ( 1,830 ) 22,267 Asset Backed Securities 128,726 13 ( 7,593 ) 121,146 Collateralized Mortgage Obligations 165,377 16 ( 8,975 ) 156,418 States and Political Subdivisions 262,960 — ( 31,788 ) 231,172 Corporate Notes 70,750 — ( 8,443 ) 62,307 Total Debt Securities $ 810,935 $ 142 $ ( 68,442 ) $ 742,635 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 September 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 September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 2024 2023 Proceeds from Sales of Securities Available-for-Sale $ — $ — $ 10,617 $ 15,054 Gross Realized Gains $ — $ — $ 36 $ 129 Gross Realized Losses — ( 1 ) — ( 139 ) Net Realized (Losses) Gains — ( 1 ) 36 ( 10 ) Tax Impact $ — $ — $ 8 $ ( 2 ) Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized (losses) gains above reflect reclassification adjustments in the calculation of Other Comprehensive Income (Loss). The net realized (losses) gains are included in noninterest income as (losses) gains on sales of securities, net in the Consolidated Statements of Income. The 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) September 30, 2024 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 23 $ 23 Due after One Year through Five Years 23,711 22,476 Due after Five Years through Ten Years 272,978 242,763 Due after Ten Years 64,984 55,692 Residential Mortgage-Backed Securities 107,515 98,809 Commercial Mortgage-Backed Securities 23,524 23,041 Other Commercial Mortgage-Backed Securities 24,097 22,267 Collateralized Mortgage Obligations 165,377 156,418 Asset Backed Securities 128,726 121,146 Total Debt Securities $ 810,935 $ 742,635 At September 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 $ 309.3 million at September 30, 2024 and $ 215.5 million at December 31, 2023. Available-for-sale securities with unrealized losses at September 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: September 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 3,014 ( 19 ) 20 16,824 ( 543 ) 25 19,838 ( 562 ) Residential Mortgage-Backed Securities — — — 40 97,853 ( 8,713 ) 40 97,853 ( 8,713 ) Commercial Mortgage-Backed Securities 1 116 — 43 14,589 ( 538 ) 44 14,705 ( 538 ) Other Commercial Mortgage-Backed Securities — — — 8 22,267 ( 1,830 ) 8 22,267 ( 1,830 ) Asset Backed Securities 1 1,213 ( 10 ) 27 78,923 ( 7,583 ) 28 80,136 ( 7,593 ) Collateralized Mortgage Obligations 3 11,957 ( 10 ) 75 138,132 ( 8,965 ) 78 150,089 ( 8,975 ) States and Political Subdivisions — — — 153 231,172 ( 31,788 ) 153 231,172 ( 31,788 ) Corporate Notes — — — 21 62,307 ( 8,443 ) 21 62,307 ( 8,443 ) Total Debt Securities 10 $ 16,300 $ ( 39 ) 387 $ 662,067 $ ( 68,403 ) 397 $ 678,367 $ ( 68,442 ) 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 as of September 30, 2024 or 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 September 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 September 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 nine months ended September 30, 2024 and September 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 $ 5.2 million at September 30, 2024. These securities are separately reported as “equity securities” on the Company’s Consolidated Balance Sheets. 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 and nine months ended September 30, 2024, the Company recognized an unrealized fair value gain of $ 181.5 thousand and $ 207.1 thousand, respectively, 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) September 30, 2024 December 31, 2023 Commercial Commercial Real Estate $ 1,857,997 $ 1,670,631 Commercial and Industrial 241,474 271,511 Total Commercial Loans 2,099,471 1,942,142 Consumer Residential Mortgages 782,930 787,929 Other Consumer 29,813 34,277 Total Consumer Loans 812,743 822,206 Construction 399,502 436,349 Other 284,145 305,213 Total Portfolio Loans 3,595,861 3,505,910 Loans Held-for-Sale 390 — Total Loans $ 3,596,251 $ 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 September 30, 2024 for loans restructured during the three and nine months ended September 30, 2024 to borrowers experiencing financial difficulty, disaggregated by portfolio segment: Restructured Loans Three Months Ended September 30, 2024 Nine Months Ended September 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 2 13,604 5.63 % 2 13,604 5.63 % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % — — — % Total Accruing Restructured Loans 2 $ 13,604 5.63 % 2 $ 13,604 5.63 % Nonaccrual Restructured Loans Commercial Real Estate — $ — — % 1 $ 434 0.02 % Commercial and Industrial — — — % — — — % Residential Mortgages 1 2,106 0.27 % 1 2,106 0.27 % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % 11 280,905 98.86 % Total Nonaccrual Restructured Loans 1 $ 2,106 0.27 % 13 $ 283,445 97.98 % Total Restructured Loans 3 $ 15,710 4.91 % 15 $ 297,049 93.75 % There were no loans to borrowers experiencing financial difficulty restructured during the three and nine months ended September 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 September 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 13,604 — — 13,604 Residential Mortgages — — — — Other Consumer — — — — Construction — — — — Other — — — — Total Accruing Restructured Loans $ 13,604 $ — $ — $ 13,604 Nonaccrual Restructured Loans Commercial Real Estate $ 434 $ — $ — $ 434 Commercial and Industrial — — — — Residential Mortgages 2,106 — — 2,106 Other Consumer — — — — Construction — — — — Other 280,905 — — 280,905 Total Nonaccrual Restructured Loans $ 283,445 $ — $ — $ 283,445 Total Restructured Loans $ 297,049 $ — $ — $ 297,049 The following table presents the amortized cost of modified loans to borrowers experiencing financial difficulty by portfolio segment and type of modification during the periods presented. For the Three Months Ended September 30, 2024 (Dollars in Thousands) Principal Deferral Accelerated Maturity Date/Modified Rate Total % of Portfolio Segment Commercial Real Estate $ — $ — $ — — % Commercial and Industrial 13,604 — 13,604 5.63 % Residential Mortgages — 2,106 2,106 0.27 % Other Consumer — — — — % Construction — — — — % Other — — — % Total $ 13,604 $ 2,106 $ 15,710 4.91 % For the Nine Months Ended September 30, 2024 (Dollars in Thousands) Principal Deferral Accelerated Maturity Date/ Modified Rate Term Extension/Payment Delay Term Extension/Payment Delay/Interest Rate Reduction Total % of Portfolio Segment Commercial Real Estate $ — $ — $ 434 $ — $ 434 0.02 % Commercial and Industrial 13,604 — — — 13,604 5.63 % Residential Mortgages — 2,106 — — 2,106 0.27 % Other Consumer — — — — — — % Construction — — — — — — % Other — — — 280,905 280,905 98.86 % Total $ 13,604 $ 2,106 $ 434 $ 280,905 $ 297,049 93.75 % 15 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – LOANS (continued) The following table describes the effect of loan modifications made to borrowers experiencing financial difficulty during the periods presented: For the Three Months Ended September 30, 2024 Weighted Average Principal Deferral Weighted Average Accelerated Maturity Date Weighted Average Modified Rate Commercial Real Estate — — — Commercial & Industrial 0.58 years — — % Residential Mortgage — 19.26 years 4.63 % Other — — — % Total 0.58 years 19.26 years 4.63 % For the Nine Months Ended September 30, 2024 Weighted Average Principal Deferral Weighted Average Accelerated Maturity Date Weighted-Average Modified Rate Weighted-Average Term Extension/Payment Delay Weighted-Average Interest Rate Reduction Commercial Real Estate — — — % 4.91 years — % Commercial & Industrial 0.58 years — — % — — % Residential Mortgage — 19.26 years 4.63 % — — % Other — — — % 2.58 years 0.66 % Total 0.58 years 19.26 years 4.63 % 7.49 years 0.66 % At September 30, 2024 and December 31, 2023, the Bank had no commitments to lend any additional funds on restructured loans. A payment default is defined as a loan having a payment past due 90 days or more. There were no payment defaults for during the three and nine months ended September 30, 2024 and September 30, 2023 related to loans that were modified within the 12 months prior to default. 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 September 30, 2024 and December 31, 2023, the Bank had zero and $ 2.0 million, respectively, of loans in the process of foreclosure. 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 16 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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 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, 17 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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. 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: September 30, 2024 Risk Rating (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 151,923 $ 283,359 $ 439,591 $ 247,998 $ 132,974 $ 556,933 $ 38,288 $ 1,851,066 Special Mention — — — — — 62 — 62 Substandard — — 6,194 — — 636 39 6,869 Total Commercial Real Estate $ 151,923 $ 283,359 $ 445,785 $ 247,998 $ 132,974 $ 557,631 $ 38,327 $ 1,857,997 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 8,216 $ 24,041 $ 14,899 $ 24,171 $ 21,085 $ 120,375 $ 25,524 $ 238,311 Special Mention — — — — — — — — Substandard — — 739 1,037 38 — 1,349 3,163 Total Commercial and Industrial $ 8,216 $ 24,041 $ 15,638 $ 25,208 $ 21,123 $ 120,375 $ 26,873 $ 241,474 YTD Gross Charge-offs $ — $ — $ — $ 21 $ 18 $ 1 $ — $ 40 Residential Mortgages Pass $ 24,174 $ 68,991 $ 253,922 $ 185,238 $ 70,366 $ 125,542 $ 50,122 $ 778,355 Special Mention — — — — — 93 — 93 Substandard — — — — 2,106 1,612 764 4,482 Total Residential Mortgages $ 24,174 $ 68,991 $ 253,922 $ 185,238 $ 72,472 $ 127,247 $ 50,886 $ 782,930 YTD Gross Charge-offs $ — $ 1 $ — $ — $ — $ 31 $ — $ 32 Other Consumer Pass $ 16,722 $ 6,060 $ 2,918 $ 1,172 $ 2,753 $ 136 $ 32 $ 29,793 Special Mention — — — — — — — — Substandard — 6 — 14 — — — 20 Total Other Consumer $ 16,722 $ 6,066 $ 2,918 $ 1,186 $ 2,753 $ 136 $ 32 $ 29,813 YTD Gross Charge-offs $ 178 $ 89 $ 787 $ 294 $ 21 $ 20 $ — $ 1,389 Construction Pass $ 51,209 $ 172,647 $ 138,440 $ 11,740 $ 8,638 $ 10,374 $ 6,171 $ 399,219 Special Mention — — — — — 52 — 52 Substandard — — — 187 44 — — 231 Total Construction $ 51,209 $ 172,647 $ 138,440 $ 11,927 $ 8,682 $ 10,426 $ 6,171 $ 399,502 YTD Gross Charge-offs $ — $ — $ 1 $ — $ — $ 156 $ — $ 157 Other Pass $ — $ — $ — $ — $ — $ 3,240 $ — $ 3,240 Special Mention — — — — — — — — Substandard 280,905 — — — — — — 280,905 Total Other Loans $ 280,905 $ — $ — $ — $ — $ 3,240 $ — $ 284,145 YTD Gross Charge-offs $ 15,000 $ — $ — $ — $ — $ — $ — $ 15,000 Total Portfolio Loans Pass $ 252,244 $ 555,098 $ 849,770 $ 470,319 $ 235,816 $ 816,600 $ 120,137 $ 3,299,984 Special Mention — — — — — 207 — 207 Substandard 280,905 6 6,933 1,238 2,188 2,248 2,152 295,670 Total Portfolio Loans $ 533,149 $ 555,104 $ 856,703 $ 471,557 $ 238,004 $ 819,055 $ 122,289 $ 3,595,861 Current YTD Period: YTD Gross Charge-offs $ 15,178 $ 90 $ 788 $ 315 $ 39 $ 208 $ — $ 16,618 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: September 30, 2024 (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 151,923 $ 283,359 $ 445,482 $ 247,998 $ 132,974 $ 556,995 $ 38,288 $ 1,857,019 Nonperforming — — 303 — — 636 39 978 Total Commercial Real Estate $ 151,923 $ 283,359 $ 445,785 $ 247,998 $ 132,974 $ 557,631 $ 38,327 $ 1,857,997 Commercial and Industrial Performing $ 8,216 $ 24,041 $ 15,638 $ 24,171 $ 21,085 $ 120,375 $ 26,854 $ 240,380 Nonperforming — — — 1,037 38 — 19 1,094 Total Commercial and Industrial $ 8,216 $ 24,041 $ 15,638 $ 25,208 $ 21,123 $ 120,375 $ 26,873 $ 241,474 Residential Mortgages Performing $ 24,174 $ 68,991 $ 253,922 $ 185,238 $ 70,366 $ 125,635 $ 50,122 $ 778,448 Nonperforming — — — — 2,106 1,612 764 4,482 Total Residential Mortgages $ 24,174 $ 68,991 $ 253,922 $ 185,238 $ 72,472 $ 127,247 $ 50,886 $ 782,930 Other Consumer Performing $ 16,722 $ 6,060 $ 2,918 $ 1,172 $ 2,753 $ 136 $ 32 $ 29,793 Nonperforming — 6 — 14 — — — 20 Total Other Consumer $ 16,722 $ 6,066 $ 2,918 $ 1,186 $ 2,753 $ 136 $ 32 $ 29,813 Construction Performing $ 51,209 $ 172,647 $ 138,440 $ 11,740 $ 8,638 $ 10,426 $ 6,171 $ 399,271 Nonperforming — — — 187 44 — — 231 Total Construction $ 51,209 $ 172,647 $ 138,440 $ 11,927 $ 8,682 $ 10,426 $ 6,171 $ 399,502 Other Performing $ — $ — $ — $ — $ — $ 3,240 $ — $ 3,240 Nonperforming 280,905 — — — — — — 280,905 Total Other Loans $ 280,905 $ — $ — $ — $ — $ 3,240 $ — $ 284,145 Total Portfolio Loans Performing $ 252,244 $ 555,098 $ 856,400 $ 470,319 $ 235,816 $ 816,807 $ 121,467 $ 3,308,151 Nonperforming 280,905 6 303 1,238 2,188 2,248 822 287,710 Total Portfolio Loans $ 533,149 $ 555,104 $ 856,703 $ 471,557 $ 238,004 $ 819,055 $ 122,289 $ 3,595,861 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: September 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 $ 1,856,591 $ 428 $ — $ 428 $ 978 $ 1,857,997 Commercial and Industrial 240,380 — — — 1,094 241,474 Residential Mortgages 777,569 829 50 879 4,482 782,930 Other Consumer 29,524 98 171 269 20 29,813 Construction 398,069 1,202 — 1,202 231 399,502 Other 3,240 — — — 280,905 284,145 Total $ 3,305,373 $ 2,557 $ 221 $ 2,778 $ 287,710 $ 3,595,861 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 following tables present loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment for the periods presented: September 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 $ — $ 978 $ 978 $ — Commercial and Industrial — 1,094 1,094 — Residential Mortgages 2,106 2,376 4,482 — Other Consumer — 20 20 — Construction — 231 231 — Other — 280,905 280,905 — Total $ 2,106 $ 285,604 $ 287,710 $ — 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 $ — There were no nonaccrual or past due loans related to loans held-for-sale at September 30, 2024 or December 31, 2023. 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 nine months ended September 30, 2024 and September 30, 2023, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans. 23 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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 a (recovery) or provision for credit loss on loans in the period of change. September 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 1,037 — 1,037 — — — Residential Mortgages 2,106 — 2,106 1,142 — 1,142 Other Consumer — — — — — — Construction — — — 2,898 — 2,898 Other — 280,905 280,905 — 301,913 301,913 Total $ 3,143 $ 280,905 $ 284,048 $ 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 September 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 $ 19,817 $ 3,194 $ 10,744 $ 760 $ 9,217 $ 52,954 $ 96,686 Provision (Recovery) for Credit Losses on Loans 250 ( 238 ) ( 224 ) 288 526 ( 1,034 ) ( 432 ) Charge-offs — ( 21 ) ( 5 ) ( 421 ) ( 1 ) ( 15,000 ) ( 15,448 ) Recoveries — 1 5 97 — — 103 Net Charge-offs — ( 20 ) — ( 324 ) ( 1 ) ( 15,000 ) ( 15,345 ) Balance at End of Period $ 20,067 $ 2,936 $ 10,520 $ 724 $ 9,742 $ 36,920 $ 80,909 Nine Months Ended September 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 Provision (Recovery) for Credit Losses on Loans 194 ( 313 ) ( 356 ) 877 2,107 ( 2,434 ) 75 Charge-offs — ( 40 ) ( 32 ) ( 1,389 ) ( 157 ) ( 15,000 ) ( 16,618 ) Recoveries — 3 29 368 — — 400 Net Charge-offs — ( 37 ) ( 3 ) ( 1,021 ) ( 157 ) ( 15,000 ) ( 16,218 ) Balance at End of Period $ 20,067 $ 2,936 $ 10,520 $ 724 $ 9,742 $ 36,920 $ 80,909 Three Months Ended September 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 $ 19,144 $ 3,293 $ 10,386 $ 1,058 $ 6,603 $ 53,660 $ 94,144 Provision (Recovery) for Credit Losses on Loans 346 ( 256 ) 356 515 144 — 1,105 Charge-offs — ( 50 ) ( 133 ) ( 731 ) — — ( 914 ) Recoveries — — 10 129 — — 139 Net Charge-offs — ( 50 ) ( 123 ) ( 602 ) — — ( 775 ) Balance at End of Period $ 19,490 $ 2,987 $ 10,619 $ 971 $ 6,747 $ 53,660 $ 94,474 Nine Months Ended September 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 1,498 ( 947 ) 1,919 1,346 ( 153 ) ( 1,058 ) 2,605 Charge-offs — ( 51 ) ( 203 ) ( 2,039 ) ( 42 ) — ( 2,335 ) Recoveries — 5 12 335 — — 352 Net Charge-offs — ( 46 ) ( 191 ) ( 1,704 ) ( 42 ) — ( 1,983 ) Balance at End of Period $ 19,490 $ 2,987 $ 10,619 $ 971 $ 6,747 $ 53,660 $ 94,474 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, loans 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 September 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 September 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: September 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 27,475 — 27,475 — Residential Mortgage-Backed Securities 98,809 — 98,809 — Commercial Mortgage-Backed Securities 23,041 — 23,041 — Other Commercial Mortgage-Backed Securities 22,267 — 22,267 — Asset Backed Securities 121,146 — 121,146 — Collateralized Mortgage Obligations 156,418 — 156,418 — States and Political Subdivisions 231,172 — 231,172 — Corporate Notes 62,307 — 54,720 7,587 Total Securities Available-for-Sale 742,635 — 735,048 7,587 Equity Securities 5,207 5,207 — — Portfolio Loan Pool Subject to Fair Value Hedge 8,484 — 8,484 — Derivatives 13,756 — 13,756 — Total $ 770,082 $ 5,207 $ 757,288 $ 7,587 Liabilities Derivatives $ 21,765 $ — $ 21,765 $ — Total $ 21,765 $ — $ 21,765 $ — 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 $ 7.6 million that are considered to be Level 3 securities at September 30, 2024 and two totaling $ 7.3 million at December 31, 2023, attributable to 28 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) the calculated change in fair value of $ 0.3 million. The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures. Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented: September 30, 2024 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 1,512 $ 1,512 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 September 30, 2024 and zero at December 31, 2023. The Company’s largest lending relationship is classified at September 30, 2024 as an individually evaluated loan with a net carrying amount totaling $ 244.0 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 $ 36.9 million at September 30, 2024. When evaluating the net carrying value of this credit relationship at September 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 $ 1.5 million and $ 2.5 million as of September 30, 2024 and December 31, 2023, respectively, primarily due to sales offset by transfers to OREO from loans. The Company had no write-downs recorded on OREO for the three and nine months ended September 30, 2024 and had $ 0.9 million write-downs recorded on OREO for the nine months ended September 30, 2023. The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented: September 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 $ 1,041 Appraisals Estimated Selling Costs 6.0 % 6.0 % OREO 328 Discounted Internal Valuations Management's Subject Discount 24.0 % 24.0 % OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % Total OREO $ 1,512 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 September 30, 2024 and December 31, 2023 are presented in the following tables. Fair values for September 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 September 30, 2024 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 104,992 $ 43,389 $ 61,603 $ — $ 104,992 Securities Available-for-Sale 742,635 — 735,048 7,587 742,635 Equity Securities 5,207 5,207 — — 5,207 Portfolio Loans, net 3,514,952 — — 3,278,458 3,278,458 Federal Home Loan Bank Stock, at Cost 7,437 — — NA NA Other Assets- Interest Rate Derivatives 13,756 — 13,756 — 13,756 Accrued Interest Receivable 17,906 13 4,518 13,375 17,906 Financial Liabilities: Deposits $ 4,085,068 $ 628,901 $ 1,526,092 $ 1,944,080 $ 4,099,073 Other Liabilities- Interest Rate Derivatives 21,765 — 21,765 — 21,765 FHLB Borrowings 90,000 — — 89,865 89,865 Accrued Interest Payable 8,084 — 2 8,082 8,084 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. Effective July 11, 2024, the Company entered into two related pay-fixed/receive-floating interest rate swaps (the “Pay-Fixed Swap Agreements”) for a combined notional amount of $ 300.0 million with a combined fair value of $ 8.1 million at September 30, 2024. The Pay-Fixed Swap Agreements were designated as fair value hedges in order to hedge the risk of changes in the fair value of the fixed rate loans included in the amortizing single family mortgages and CRE loans. These fair value hedges convert the hedged loans from a fixed rate to a synthetic floating Secured Overnight Financing Rate (“SOFR”). The first Pay-Fixed Swap Agreement with a notional value of $ 125.0 million matures on July 11, 2027 and the Company will pay a fixed coupon rate of 4.188 % while receiving the overnight SOFR. The second Pay-Fixed Swap Agreement with a notional value of $ 175.0 million matures on July 11, 2029 (but includes partial amortization beginning July 11, 2027) and the Company will pay a fixed coupon rate of 4.004 % while receiving the overnight SOFR. As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for in net interest income. The fair value of these hedges is recorded in either other assets or in other liabilities depending on the position of the hedge, and the offset is recorded in loans. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. The hedges were determined to be effective during all periods presented and the Company expects them to remain effective during the remaining terms. 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. 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 amounts representing the fair value of derivative assets and derivative liabilities at the dates presented: Fair Value of Derivative Assets (Included in Other Assets) September 30, 2024 December 31, 2023 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives Designated as Hedging Instruments Interest Rate Swaps - Balance Sheet Hedge — $ — $ — — $ — $ — Total Derivatives Designated as Hedging Instruments — $ — $ — — $ — $ — Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans 5 $ 1,266 $ 2 3 $ 620 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 372,232 13,754 58 387,144 17,437 Total Derivatives not Designated as Hedging Instruments 61 $ 373,498 $ 13,756 61 $ 387,764 $ 17,440 Total Derivatives 61 $ 373,498 $ 13,756 61 $ 387,764 $ 17,440 Fair Value of Derivative Liabilities (Included in Other Liabilities) September 30, 2024 December 31, 2023 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives Designated as Hedging Instruments Interest Rate Swaps - Balance Sheet Hedge 2 $ 300,000 $ 8,109 — $ — $ — Total Derivatives Designated as Hedging Instruments 2 $ 300,000 $ 8,109 — $ — $ — Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 5 $ 1,266 $ 2 3 $ 620 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 372,232 13,654 58 387,144 17,225 Total Derivatives not Designated as Hedging Instruments 61 $ 373,498 $ 13,656 61 $ 387,764 $ 17,228 Total Derivatives 63 $ 673,498 $ 21,765 61 $ 387,764 $ 17,228 32 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued) The following table indicates the (loss) income recognized on derivatives for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 2024 2023 Derivatives Designated as Hedging Instruments Interest Rate Swaps - Balance Sheet Hedge $ 103 $ — $ 103 $ — Total Derivative Income Designated as Hedging Instruments $ 103 $ — $ 103 $ — Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans $ ( 3 ) $ ( 1 ) $ ( 1 ) $ 4 Forward Sale Contracts – Mortgage Loans 3 1 1 ( 4 ) Interest Rate Swap Contracts – Commercial Loans ( 128 ) 234 ( 112 ) 90 Total Derivative (Loss) Income not Designated as Hedging Instruments $ ( 128 ) $ 234 $ ( 112 ) $ 90 Total Derivative (Loss) Income $ ( 25 ) $ 234 $ ( 9 ) $ 90 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 derivative assets and derivative liabilities designated as hedging instruments and not designated as hedging instruments, 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) September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023 Derivatives Designated as Hedging Instruments Gross Amounts Recognized $ — $ — $ 8,381 $ — Gross Amounts Offset — — 272 — Net Amounts Presented in the Consolidated Balance Sheets — — 8,109 — Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 13,756 $ 17,440 $ 13,656 $ 17,228 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 13,756 17,440 13,656 17,228 Net Amount $ 13,756 $ 17,440 $ 21,765 $ 17,228 33 NOTE 8 – DEPOSITS The following table presents the composition of deposits at the dates presented: (Dollars in Thousands) September 30, 2024 December 31, 2023 Noninterest-Bearing Demand $ 628,901 $ 685,218 Interest-Bearing Demand 649,005 481,506 Money Market 504,206 513,664 Savings 372,881 454,876 Certificates of Deposits 1,930,075 1,586,651 Total $ 4,085,068 $ 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 September 30, 2024 and December 31, 2023 were $ 288.0 million and $ 235.0 million, respectively. At September 30, 2024 and December 31, 2023, total brokered deposits were $ 216.1 million and $ 70.0 million, respectively. Certificates of Deposit maturing as of the date presented: (Dollars in Thousands) September 30, 2024 3 Months or Less $ 588,873 Over 3 Months through 12 Months 1,001,349 Over 1 Year Through 3 Years 197,467 Over 3 Years 142,386 Total $ 1,930,075 Overdrafts reclassified to loans were $ 0.3 million at both September 30, 2024 and December 31, 2023. 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 $ 90.0 million Federal Home Loan Bank (“FHLB”) borrowings at September 30, 2024 and $ 393.4 million at December 31, 2023. FHLB borrowings are fixed 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 0.0 % and 5.6 % of total borrowings at September 30, 2024 and December 31, 2023, respectively. Total loans pledged as collateral were $ 1.6 billion at September 30, 2024 and $ 1.5 billion at December 31, 2023. There were no securities available-for-sale pledged as collateral at both September 30, 2024 and December 31, 2023. At September 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 $ 1.2 billion, subject to the amount of eligible collateral pledged, of which the Company is eligible to borrow up to an additional $ 791.4 million. The Company has unsecured facilities with three other correspondent financial institutions totaling $ 30.0 million at September 30, 2024 and $ 50.0 million at 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 September 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: 34 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands) September 30, 2024 December 31, 2023 FHLB Borrowings $ 90,000 $ 393,400 Weighted Average Interest Rate 4.30 % 5.20 % FHLB Availability $ 791,403 $ 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) September 30, 2024 December 31, 2023 Federal Fund Purchased $ — $ — Weighted Average Interest Rate — % — % Federal Funds Purchased Availability $ 75,000 $ 50,000 Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2024 and thereafter are as follows: (Dollars in Thousands) Balance Weighted Average Rate 1 year $ 45,000 4.64 % 2 years 45,000 3.96 % 3 years — — % 4 years — — % 5 years — — % Thereafter — — % Total FHLB Borrowings $ 90,000 4.30 % NOTE 10 – COMMITMENTS AND CONTINGENCIES Commitments to extend credit, which amounted to $ 799.8 million at September 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 $ 435.3 million, or 54.4 % and $ 452.2 million, or 64.4 %, of the commitments to extend credit at September 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. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $ 18.2 million at September 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) September 30, 2024 December 31, 2023 Commitments to Extend Credit $ 799,808 $ 702,301 Standby and Performance Letters of Credit 18,244 19,643 Total $ 818,052 $ 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 35 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) 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 September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 2024 2023 Life-of-Loss Reserve on Unfunded Loan Commitments Balance at Beginning of Period $ 2,914 $ 2,736 $ 3,193 $ 2,292 Provision (Recovery) for Unfunded Commitments 191 ( 130 ) ( 88 ) 314 Balance at End of Period $ 3,105 $ 2,606 $ 3,105 $ 2,606 Amounts are added or subtracted to the reserve for unfunded commitments through a charge or credit to current earnings in the provision (recovery) for unfunded commitments. A provision of $ 0.2 million was recorded for the three months ended September 30, 2024, which resulted in an increase of $ 0.3 million compared to a recovery of $( 0.1 ) million for the three months ended September 30, 2023. The increase in the provision (recovery) for unfunded commitments was primarily due to an increase 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. As of September 30, 2024, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business. 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 alleged 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 alleged that certain transfers to the Bank executed during 2018 by the Bluestone Entities or Greensill, which in the aggregate totaled approximately $ 226 million, each constitute either a fraudulent conveyance, or a voluntary conveyance, under Virginia law. In the GLAS Federal Court Litigation, GLAS sought 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 August 28, 2024, the Bank announced that it had agreed to a settlement with GLAS (the “GLAS Settlement”). In connection with the GLAS Settlement, the GLAS Federal Court Litigation was dismissed with prejudice, certain entities that are owned or controlled by James C. Justice, II, Cathy L. Justice and James C. Justice, III (each, a “Justice Entity” and collectively, the “Justice Entities”) executed documents reaffirming the legality, validity and binding nature of all loan documents they have executed and judgments granted in favor of the Bank, and GLAS and certain affiliates and parties on whose behalf GLAS was acting have executed a release that waives any and all causes of action of any kind that they might claim to have against the Bank. 36 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) Also in connection with the GLAS Settlement, the Company tendered a payment (the “Settlement Payment”) in consideration of the voluntary dismissal of the GLAS Federal Court Litigation. Because certain of the Justice Entities had previously agreed to indemnify the Bank against the claims asserted in the GLAS Federal Court Litigation, certain of the Justice Entities executed a promissory note in favor of the Bank further evidencing this indemnification obligation as related to the Settlement Payment. This promissory note was recognized as a principal charge-off during the three months ended September 30, 2024 due to the nonperforming status of the Bank’s loans with the Justice Entities, and because the settled claims asserted in the GLAS Federal Court Litigation related to allegedly preferential payments made on those nonperforming loans. For more information about the Company’s principal charge-offs, see Note 5 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. 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 September 30, 2024 Three Months Ended September 30, 2023 Pre-Tax Amount Tax (Expense) Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount Net Unrealized Gains (Losses) Arising during the period $ 20,910 $ ( 4,582 ) $ 16,328 $ ( 14,773 ) $ 3,197 $ ( 11,576 ) Reclassification Adjustment for Losses included in Net Income — — — 1 — 1 Other Comprehensive Income (Loss) $ 20,910 $ ( 4,582 ) $ 16,328 $ ( 14,772 ) $ 3,197 $ ( 11,575 ) (Dollars in Thousands) Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Pre-Tax Amount Tax (Expense) Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount Net Unrealized Gains (Losses) Arising during the period $ 23,279 $ ( 5,117 ) $ 18,162 $ ( 10,176 ) $ 2,224 $ ( 7,952 ) Reclassification Adjustment for (Gains) Losses included in Net Income ( 36 ) 8 ( 28 ) 10 ( 2 ) 8 Other Comprehensive Income (Loss) $ 23,243 $ ( 5,109 ) $ 18,134 $ ( 10,166 ) $ 2,222 $ ( 7,944 ) 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 September 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 nine month periods ended September 30, 2024 and September 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 ◦ Financial Condition ◦ 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 assumptions 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; 38 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued) • changes in trade, monetary and fiscal policies and laws of the U.S. government, including policies of the Federal Reserve, Federal Deposit Insurance Corporation, (“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; • 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; • 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 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; 39 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued) • 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 associates; • 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 • 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. 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. 40 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued) Critical Accounting Estimates Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2024 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference. Overview and Strategy Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.6 billion at September 30, 2024. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a 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. Part of the Company’s current three-year strategic plan is to focus on refining and enhancing its brand image and position in the markets it serves. With this new brand strategy, the Company has embarked on a multi-year implementation plan to c reate a brand tailored to the needs of our critical growth audiences, with a focus on innovating brand experiences to exceed expectations and to build a brand that stands apart. This means a commitment to aligning processes, operations and systems around the Company’s brand while introducing new products and services, so that in time the Company can increase its brand awareness in the communities it serves. To strengthen and further shape the brand and 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 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 support the 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 third quarter of 2024 , the Company obtained a voluntary stipulation of dismissal of the lawsuit filed against the Bank in the United States District Court for the Western District of Virginia (Danville Division) on February 10, 2024 (the “GLAS Trust Lawsuit”) by GLAS Trust Company, LLC, in its capacity as Note Trustee (“GLAS Trust”) “with prejudice.” Accordingly, GLAS Trust may not bring any future legal action in any court based on the facts alleged in the GLAS Trust Lawsuit. Moreover, in connection with the dismissal of the GLAS Trust Lawsuit, GLAS Trust and certain affiliates and parties on whose behalf it is acting have executed a release that waives any and all causes of action of any kind that they might claim to have against the Bank. The dismissal of the GLAS Trust Lawsuit ended all pending litigation brought against the Bank by GLAS Trust in connection with the Bank’s lending relationship with James C. Justice, II and the entities in which he has an interest. Also in connection with the dismissal of the GLAS Trust Lawsuit, certain Justice Entities executed documents reaffirming the legality, validity and binding nature of all loan documents they have executed in favor of the Bank. 41 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The Company tendered a payment (the “Settlement Payment”) in consideration of the voluntary dismissal of the GLAS Trust Lawsuit. Because certain of the Justice Entities had previously agreed to indemnify the Bank against the claims asserted in the GLAS Federal Court Litigation, certain of the Justice Entities executed a promissory note in favor of the Bank further evidencing this indemnification obligation as related to the Settlement Payment. This promissory note was recognized as a principal charge-off during the three months ended September 30, 2024 due to the nonperforming status of the Bank’s loans with the Justice Entities, and because the settled claims related to allegedly preferential payments made on those nonperforming loans. 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 was dismissed with prejudice. In connection with the dismissal of this litigation, the Justice Entities agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank. The Justice Entities have reduced the aggregate nonperforming loan balance associated with the Justice Entities has been reduced from $301.9 million as of March 31, 2024 to $280.9 million as of September 30, 2024. The Company’s financial results continue to be significantly impacted by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $280.9 million as of September 30, 2024. As a result, interest income was negatively impacted by $8.8 million and $9.3 million during the third quarter of 2024 and 2023, respectively, and $27.2 million and $20.7 million during the nine months ended September 30, 2024 and the same period in 2023, respectively. Interest income has been negatively impacted by $57.2 million in the aggregate since placement of these loans on nonaccrual status during the second quarter of 2023. Results of Operations and Financial Condition Earnings Summary Highlights for the Three Months Ended September 30, 2024 • Net interest income increased $1.4 million, or 5.1% compared to the three months ended September 30, 2023, primarily due to a 57 basis point increase in the yield on earning assets, offset by a 61 basis point increase in funding costs; • The (recovery) provision for credit losses decreased $1.5 million for the three months ended September 30, 2024, compared to the same period in 2023; • Total noninterest income increased $0.2 million to $5.4 million for the three months ended September 30, 2024, compared to the same period in 2023; • Total noninterest expense increased $0.2 million to $27.4 million for the three months ended September 30, 2024 compared to the same period in 2023; and • Provision for income taxes increased $0.6 million for the three months ended September 30, 2024 compared to the same period in 2023. 42 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Highlights for the Nine Months Ended September 30, 2024 • Net interest income decreased $9.6 million, or 10.1%, to $85.3 million for the nine months ended September 30, 2024 compared to the same period in 2023, reflecting the impact of rising rates on funding costs, which more than offset loan growth and higher loan and securities yields; • The (recovery) provision for credit losses decreased $2.5 million to $0.1 million for the nine months ended September 30, 2024 compared to the same period in 2023; • Total noninterest income increased $1.0 million to $16.0 million for the nine months ended September 30, 2024 compared to the same period in 2023; • Total noninterest expense increased $4.7 million to $81.1 million for the nine months ended September 30, 2024 compared to the same period in 2023; and • Provision for income taxes decreased $1.4 million to $3.9 million for the nine months ended September 30, 2024 compared to the same period in 2023. Balance Sheet Highlights (period-end balances, September 30, 2024 compared to December 31, 2023) • The securities portfolio decreased $36.4 million and is currently 16.1% of total assets compared to 17.3% of total assets; • Total portfolio loans increased $90.0 million, or 3.4%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”) segment during the nine months ended September 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 88.0%, compared to 94.2%; • At September 30, 2024, nonperforming loans declined by $21.8 million to $287.7 million since December 31, 2023. Nonperforming loans as a percentage of total portfolio loans were 8.00% compared to 8.83%. The decline is due to $21.0 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 $280.9 million as of September 30, 2024 and comprise 97.6% of nonperforming loans at September 30, 2024; • The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.25% compared to 2.77%. The ACL on portfolio loans totaled $80.9 million at September 30, 2024, compared to $97.1 million at December 31, 2023. • Total deposits increased $363.2 million, or 13.0% on an annualized basis, compared to December 31, 2023; and • Federal Home Loan Bank (“FHLB”) borrowings decreased $303.4 million to $90.0 million at September 30, 2024 compared to $393.4 million at December 31, 2023 primarily due to scheduled maturities, repayment of overnight funds and liquidity provided by deposit growth. The Company reported net income of $5.6 million or $0.24 diluted earnings per common share (“EPS”) for the three months ended September 30, 2024 compared to net income of $3.6 million, or $0.16 diluted EPS for the same period in 2023. Three Months Ended September 30, Nine Months Ended September 30, PERFORMANCE RATIOS 2024 2023 2024 2023 Return on Average Assets 0.49 % 0.33 % 0.48 % 0.78 % Return on Average Shareholders’ Equity 5.99 % 4.19 % 5.99 % 9.71 % Portfolio Loans to Deposit Ratio 88.02 % 95.82 % 88.02 % 95.82 % Allowance for Credit Losses to Total Portfolio Loans 2.25 % 2.77 % 2.25 % 2.77 % Nonperforming Loans to Portfolio Loans 8.00 % 9.04 % 8.00 % 9.04 % 43 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 September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 2024 2023 Interest Income (FTE)(Non-GAAP) Interest and Dividend Income (GAAP) $ 56,595 $ 48,886 $ 165,227 $ 144,557 Tax Equivalent Adjustment 190 247 593 768 Interest and Dividend Income (FTE) (Non-GAAP) 56,785 49,133 165,820 145,325 Average Earning Assets $ 4,447,455 $ 4,320,390 $ 4,437,886 $ 4,256,560 Yield on Interest-earning Assets (GAAP) 5.06 % 4.49 % 4.97 % 4.54 % Yield on Interest-earning Assets (FTE) (Non-GAAP) 5.08 % 4.51 % 4.99 % 4.56 % Net Interest Income (GAAP) $ 28,798 $ 27,394 $ 85,309 $ 94,890 Tax Equivalent Adjustment 190 247 593 768 Net Interest Income (FTE) (Non-GAAP) 28,988 27,641 85,902 95,658 Average Earning Assets $ 4,447,455 $ 4,320,390 $ 4,437,886 $ 4,256,560 Net Interest Margin (GAAP) 2.58 % 2.52 % 2.57 % 2.98 % Net Interest Margin (FTE) (Non-GAAP) 2.59 % 2.54 % 2.59 % 3.00 % 44 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 September 30, 2024 Three Months Ended September 30, 2023 (Dollars in Thousands) Average Balance Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate ASSETS Interest-Bearing Deposits with Banks $ 43,817 $ 597 5.42 % $ 12,652 $ 172 5.39 % Tax-Free Investment Securities (2) 11,740 84 2.85 % 27,594 203 2.92 % Taxable Investment Securities 815,885 7,266 3.54 % 893,386 7,793 3.46 % Total Securities 827,625 7,350 3.53 % 920,980 7,996 3.44 % Tax-Free Loans (1)(2) 99,810 815 3.25 % 120,670 972 3.20 % Taxable Loans (1)(3) 3,464,899 47,813 5.49 % 3,243,663 39,578 4.84 % Total Loans 3,564,709 48,628 5.43 % 3,364,333 40,550 4.78 % Federal Home Loan Bank Stock 11,304 210 7.39 % 22,425 415 7.34 % Total Interest-Earning Assets 4,447,455 $ 56,785 5.08 % 4,320,390 $ 49,133 4.51 % Noninterest Earning Assets 108,760 88,805 Total Assets $ 4,556,215 $ 4,409,195 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 604,630 $ 2,838 1.87 % $ 475,939 $ 720 0.60 % Money Market 502,008 4,012 3.18 % 430,954 2,495 2.30 % Savings 386,698 153 0.16 % 504,697 140 0.11 % Certificates of Deposit 1,835,329 18,515 4.01 % 1,486,165 11,973 3.20 % Total Interest-Bearing Deposits 3,328,665 25,518 3.05 % 2,897,755 15,328 2.10 % Federal Home Loan Bank Borrowings 171,424 2,143 4.97 % 447,287 5,986 5.31 % Federal Funds Purchased — — — % 7,550 107 5.62 % Other Borrowings 10,070 136 5.37 % 6,131 71 4.59 % Total Borrowings 181,494 2,279 5.00 % 460,968 6,164 5.31 % Total Interest-Bearing Liabilities 3,510,159 27,797 3.15 % 3,358,723 21,492 2.54 % Noninterest-Bearing Liabilities 672,208 707,445 Shareholders' Equity 373,848 343,027 Total Liabilities and Shareholders' Equity $ 4,556,215 $ 4,409,195 Net Interest Income (2) $ 28,988 $ 27,641 Net Interest Margin (2) 2.59 % 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. 45 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 (Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate ASSETS Interest-Bearing Deposits with Banks $ 33,049 $ 1,352 5.46 % $ 15,550 $ 587 5.05 % Tax-Free Investment Securities (2) 11,779 255 2.89 % 28,189 618 2.93 % Taxable Investment Securities 836,993 22,730 3.63 % 908,670 22,874 3.37 % Total Securities 848,772 22,985 3.62 % 936,859 23,492 3.35 % Tax-Free Loans (1)(2) 105,569 2,566 3.25 % 126,578 3,041 3.21 % Taxable Loans (1)(3) 3,434,407 138,025 5.37 % 3,158,888 117,235 4.96 % Total Loans 3,539,976 140,591 5.31 % 3,285,466 120,276 4.89 % Federal Home Loan Bank Stock 16,089 892 7.41 % 18,685 970 6.94 % Total Interest-Earning Assets 4,437,886 $ 165,820 4.99 % 4,256,560 $ 145,325 4.56 % Noninterest Earning Assets 97,235 92,613 Total Assets $ 4,535,121 $ 4,349,173 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand $ 544,680 $ 5,639 1.38 % $ 485,605 $ 1,876 0.52 % Money Market 512,539 11,934 3.11 % 440,700 5,607 1.70 % Savings 412,549 435 0.14 % 570,538 456 0.11 % Certificates of Deposit 1,734,538 50,950 3.92 % 1,388,773 26,690 2.57 % Total Interest-Bearing Deposits 3,204,306 68,958 2.87 % 2,885,616 34,629 1.60 % Federal Home Loan Bank Borrowings 273,413 10,637 5.20 % 380,023 14,461 5.09 % Federal Funds Purchased — — — % 9,062 354 5.22 % Other Borrowings 8,749 323 4.93 % 6,247 223 4.77 % Total Borrowings 282,162 10,960 5.19 % 395,332 15,038 5.09 % Total Interest-Bearing Liabilities 3,486,468 79,918 3.06 % 3,280,948 49,667 2.02 % Noninterest-Bearing Liabilities 686,560 720,181 Shareholders' Equity 362,093 348,044 Total Liabilities and Shareholders' Equity $ 4,535,121 $ 4,349,173 Net Interest Income (2) $ 85,902 $ 95,658 Net Interest Margin (2) 2.59 % 3.00 % (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 $28.8 million for the three months ended September 30, 2024 from $27.4 million for the same period in 2023. Net interest income, on an FTE basis (non-GAAP), increased $1.3 million, or 4.9%, to $29.0 million for the three months ended September 30, 2024 compared to the same period in 2023. The net interest margin increased 6 basis points to 2.58% for the three months ended September 30, 2024 compared to 2.52% for the same period in 2023. Net interest margin, on an FTE basis, increased 5 basis points to 2.59% for the three months ended September 30, 2024 compared to 2.54% for the same period in 2023. The increase was primarily a result of higher average interest-earning assets of $127.1 million with the yield on average interest-earning assets increasing 57 basis points. The most significant increase in interest-earning assets was a 65 basis point increase in the yield on average loans from 4.78% in the third quarter of 2023 to 5.43% in the third quarter of 2024, as well as a higher average loan balance. Net interest income decreased to $85.3 million for the nine months ended September 30, 2024 from $94.9 million for the same period in 2023. Net interest income, on an FTE basis (non-GAAP), decreased $9.8 million, or 10.2%, to $85.9 million for the nine months ended September 30, 2024 compared to $95.7 million for the same period in 2023. The net interest margin decreased 41 basis points to 2.57% for the nine months ended September 30, 2024 compared to 2.98% for the same period in 2023. Net interest margin, on an FTE basis, decreased 41 basis points to 2.59% for the nine months ended September 30, 2024 compared to 3.00% for the same period in 2023. The decline in net interest income and net interest margin were significantly driven by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023, which negatively impacted interest income by $27.2 million for the nine months ended September 30, 2024 and by $20.7 million for the same period in 2023. Funding costs increased 104 basis points, offset by an increase of 43 basis points on the yield on earning assets for the nine months ended September 30, 2024 compared to the same period in 2023. During the 46 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) nine months ended September 30, 2024, $1.2 billion of CDs matured and repriced from an average rate of 4.33% to an average rate of 4.40%. Interest income increased to $56.6 million for the three months ended September 30, 2024 from $48.9 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $7.7 million, or 15.6%, to $56.8 million for the three months ended September 30, 2024 compared to $49.1 million for the same period in 2023, primarily from growth in earning assets and higher earning asset yields. Average interest-earning assets increased primarily due to average loan growth of $200.4 million in loans and an increase of $31.2 million in interest-bearing deposits with banks during the third quarter of 2024, and was partially offset by a decrease of $93.4 million in average investment securities and a decrease of $11.1 million in FHLB stock. The Bank’s largest nonperforming lending relationship negatively impacted interest income by $8.8 million in the third quarter of 2024 and was negatively impacted by $9.3 million in the third quarter of 2023. Interest income increased to $165.2 million for the nine months ended September 30, 2024 from $144.6 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $20.5 million, or 14.1%, to $165.8 million for the nine months ended September 30, 2024 compared to $145.3 million for the same period in 2023, resulting from average loan growth of $275.5 million in taxable loans. The change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of September 30, 2024, the securities portfolio was comprised of 43.7% variable rate securities with approximately 96.9% that will reprice at least once over the next 12 months. We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate strategy has limited the impact of rising rates on the Company’s unrealized losses on debt securities. With the Federal Reserve on a likely path of reducing short-term interest rates, the Bank may alter this interest rate mix strategy going forward. Interest expense of $27.8 million for the three months ended September 30, 2024 increased $6.3 million, or 29.3% compared to the same period in 2023, primarily due to an increase in average interest-bearing deposits of $430.9 million. The increase in average-bearing deposits reflected solid growth in average CDs of $349.2 million, an increase of $128.7 million in interest-bearing demand accounts and an increase of $71.0 million in average money market accounts, offset by a decrease of $118.0 million in savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding interest-bearing demand, money market and CD products. Interest expense of $79.9 million for the nine months ended September 30, 2024 increased $30.3 million, or 60.9% compared to the same period in 2023, primarily due to an average increase in CDs of $345.8 million. Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 93.0% of our CD portfolio and 50.0% of our outstanding FHLB borrowings will mature and reprice over the next twelve months. This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) continue cutting short-term rates in the future. 47 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: Three Months Ended September 30, 2024 Compared to September 30, 2023 Nine Months Ended September 30, 2024 Compared to September 30, 2023 (Dollars in Thousands) Volume (3) Rate (3) Increase/ (Decrease) Volume (3) Rate (3) Increase/ (Decrease) Interest Earned on: Interest-Bearing Deposits with Banks $ 425 $ — $ 425 $ 712 $ 53 $ 765 Tax-free Investment Securities (2) (114) (5) (119) (356) (7) (363) Taxable Investment Securities (687) 160 (527) (1,875) 1,731 (144) Total Securities (801) 155 (646) (2,231) 1,724 (507) Tax-free Loans (1)(2) (170) 13 (157) (511) 36 (475) Taxable Loans (1) 2,820 5,415 8,235 10,660 10,130 20,790 Total Loans 2,650 5,428 8,078 10,149 10,166 20,315 Federal Home Loan Bank Stock (207) 2 (205) (141) 63 (78) Total Interest-Earning Assets $ 2,067 $ 5,585 $ 7,652 $ 8,489 $ 12,006 $ 20,495 Interest Paid on: Interest-Bearing Demand $ 242 $ 1,876 $ 2,118 $ 254 $ 3,509 $ 3,763 Money Market 458 1,059 1,517 1,039 5,288 6,327 Savings (38) 51 13 (145) 124 (21) Certificates of Deposit 3,155 3,387 6,542 7,770 16,490 24,260 Total Interest-Bearing Deposits 3,817 6,373 10,190 8,918 25,411 34,329 Federal Home Loan Bank Borrowings (3,472) (371) (3,843) (4,141) 317 (3,824) Federal Funds Purchased (54) (53) (107) (177) (177) (354) Other Borrowings 52 13 65 92 8 100 Total Borrowings (3,474) (411) (3,885) (4,226) 148 (4,078) Total Interest-Bearing Liabilities 343 5,962 6,305 4,692 25,559 30,251 Change in Net Interest Margin (2) $ 1,724 $ (377) $ 1,347 $ 3,797 $ (13,553) $ (9,756) (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent. (3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. (Recovery) Provision for Credit Losses (Recovery) provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb expected life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the (recovery) provision for credit losses and net charge-offs: (Dollars in Thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 $ Change 2024 2023 $ Change (Recovery) Provision for Credit Losses $ (432) $ 1,105 $ (1,537) $ 75 $ 2,605 $ (2,530) Provision (Recovery) for Unfunded Commitments 191 (130) 321 (88) 314 (402) Total (Recovery) Provision for Credit Losses on Loans (241) 975 (1,216) (13) 2,919 (2,932) Provision for Securities — — — — — — Total (Recovery) Provision for Credit Losses $ (241) $ 975 $ (1,216) $ (13) $ 2,919 $ (2,932) Net Loan Charge-offs $ 15,345 $ 775 $ 14,570 $ 16,218 $ 1,983 $ 14,235 Net Loan Charge-offs (annualized) / Average Portfolio Loans 1.71 % 0.09 % 0.61 % 0.08 % The (recovery) provision for credit losses decreased $1.5 million and $2.5 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. The decrease for the three and nine months ended September 30, 2024 in the (recovery) provision for credit losses as compared to the same periods in 2023 was primarily driven by updated analysis of the individually evaluated loans within the Other loan segment and $1.7 million of other segment 48 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) reserves released during the third quarter of 2024 related to $13.2 million of curtailment payments made during the third quarter by the Bank’s largest nonperforming lending relationship, offset by loan growth in the third quarter of 2024. The provision (recovery) for unfunded commitments for the three and nine months ended September 30, 2024 was a provision of $0.2 million and a recovery $(0.1) million, respectively, compared to a recovery of $(0.1) million and a provision of $0.3 million in the same periods in 2023, respectively. The decrease and the increase in the three and nine months ended September 30, 2024, respectively were due to changes in commitments in construction loans during the periods. Net charge-offs were $15.3 million and $16.2 million for the three and nine months ended September 30, 2024 compared to $0.8 million and $2.0 million for the same periods in 2023. During the three and nine months ended September 30, 2024 and September 30, 2023, net charge-offs were significantly impacted by a $15.0 million principal charge-off related to the Other segment of the loan portfolio. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 1.71% and 0.61% for the three and nine months ended 2024 and 0.09% and 0.08% for the three and nine months ended September 30, 2023, respectively. The $15.0 million principal charge-off related to the Other segment of the loan portfolio. Certain Justice Entities executed a promissory note related to the Settlement Payment (as defined in Note 10). This promissory note was recognized as a principal charge-off due to the nonperforming status of the Bank’s loans with the Justice Entities and because the settled claims related to allegedly preferential payments made on those nonperforming loans. See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs and for additional information related to our ACL. Noninterest Income Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Gains (Losses) on Sales of Securities, net $ — $ (1) $ 1 N/M $ 36 $ (10) $ 46 N/M Service Charges, Commissions and Fees 1,820 1,783 37 2.1 % 5,547 5,380 167 3.1 % Debit Card Interchange Fees 1,907 1,902 5 0.3 % 5,926 5,941 (15) (0.3) % Insurance Commissions 1,063 868 195 22.5 % 2,611 1,550 1,061 68.5 % Bank Owned Life Insurance Income 375 348 27 7.8 % 1,088 1,028 60 5.8 % Commercial Loan Swap Fee Income — — — — % — 114 (114) (100.0) % Other 257 370 (113) (30.5) % 792 1,030 (238) (23.1) % Total Noninterest Income $ 5,422 $ 5,270 $ 152 2.9 % $ 16,000 $ 15,033 $ 967 6.4 % N/M Not Meaningful Total noninterest income increased $0.2 million, or 2.9%, to $5.4 million for the three months ended September 30, 2024 and increased $1.0 million, or 6.4%, to $16.0 million for the nine months ended September 30, 2024 when compared to the same periods in 2023. The increase for the three months ended September 30, 2024 was primarily due to higher insurance commissions of $0.2 million, offset by a decrease of $0.1 million in other noninterest income related to lower fair value adjustment of our interest rate swap contracts with commercial customers. The most significant increase during the nine months ended September 30, 2024 was higher insurance commissions of $1.1 million. Also impacting the increase for the nine months ended September 30, 2024 was a $0.2 million increase in service charges, commissions and fees, offset by a decrease of $0.2 million in other noninterest income similar to the decrease mentioned above and a decline of $0.1 million in commercial loan swap fee income as activity has declined due to the interest rate environment. 49 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Noninterest Expense Three Months Ended September 30, Nine Months Ended September 30, (Dollars in Thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change Salaries and Employee Benefits $ 14,603 $ 13,956 $ 647 4.6 % $ 43,019 $ 41,257 $ 1,762 4.3 % Occupancy Expense, net 3,944 3,547 397 11.2 % 11,485 10,548 937 8.9 % FDIC Insurance Expense 1,529 1,368 161 11.8 % 4,782 2,711 2,071 76.4 % Other Taxes 878 856 22 2.6 % 2,680 2,446 234 9.6 % Advertising Expense 585 363 222 61.2 % 1,470 1,133 337 29.7 % Telephone Expense 324 500 (176) (35.2) % 1,083 1,339 (256) (19.1) % Professional and Legal Fees 1,193 1,512 (319) (21.1) % 4,248 4,005 243 6.1 % Data Processing 1,337 1,076 261 24.3 % 3,462 2,854 608 21.3 % Debit Card Expense 889 816 73 8.9 % 2,453 2,066 387 18.7 % Other 2,151 3,288 (1,137) (34.6) % 6,454 8,035 (1,581) (19.7) % Total Noninterest Expense $ 27,433 $ 27,282 $ 151 0.6 % $ 81,136 $ 76,394 $ 4,742 6.2 % Total noninterest expense increased $0.2 million to $27.4 million for the three months ended September 30, 2024 compared to the same period in 2023. The most significant variance for the comparable period related to a $0.6 million increase in salaries and employee benefits, an increase of $0.4 million in occupancy expenses, an increase of $0.3 million in data processing expenses and a $0.2 million increase in FDIC insurance expense, offset by a decrease of $1.1 million in other noninterest expense and a decrease of $0.3 million in professional and legal fees. The increases in salaries and employee benefits resulted from higher salary expenses due to fewer open positions in retail, job grade assessment increases and normal merit increases. The increase in occupancy expenses, net of $0.4 million was due to new software license and depreciation expense in the third quarter of 2024 and the increase in data processing expenses of $0.3 million relates primarily to general inflationary cost increases for existing and new service agreements. The increase in advertising expenses relates to costs incurred for the Company’s new brand roll-out. The higher FDIC insurance expense was due to the deterioration in asset quality as a direct result of the large nonperforming lending relationship that was placed into nonaccrual status in the second quarter of 2023, which is a component used to determine the assessment. The decrease in other noninterest expense related to a gain of $0.5 million on a closed office that was sold in the third quarter of 2024, write-downs of $0.6 million on three legacy other real estate owned (“OREO”) properties and write-downs of $0.3 million on two additional closed offices in the third quarter of 2023. Total noninterest expense increased $4.7 million or 6.2% to $81.1 million for the nine months ended September 30, 2024 compared to the same period in 2023. The most significant variances were similar to those mentioned for the three months ended September 30, 2024 compared to the same period in 2023. However, the year-to-date variance was also impacted by an increase of $0.4 million in debit card expense related to discounts received in March of 2023, as well as, a decrease of $0.3 million in telephone expenses due to the lower ongoing cost of a new phone system that was replaced in 2023. Provision for Income Taxes The provision for income taxes increased $0.6 million and decreased $1.4 million to $1.4 million and $3.9 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. Pre-tax income increased $2.6 million and decreased $10.4 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. The effective tax rate was 19.9% and 19.5% for the three and nine months ended September 30, 2024, respectively, compared to 17.7% and 17.4% for the same periods in 2023. The increase in the effective tax rate for the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”). 50 Table of Contents CARTER BANKSHARES, INC.