Carter Bankshares, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Financial Condition September 30, 2024 Total assets increased $100.9 million, to $4.6 billion at September 30, 2024 compared to December 31, 2023. Cash and due from banks increased $50.5 million to $105.0 million at September 30, 2024 compared to $54.5 million at December 31, 2023 primarily due to higher excess cash on hand in the third quarter of 2024. Total portfolio loans increased $90.0 million, or 3.4% on an annualized basis, to $3.6 billion at September 30, 2024 compared to December 31, 2023 primarily due to loan growth in the CRE loan segment during the nine months ended September 30, 2024. Loan growth was muted by $80.0 million in loan payoffs of two large commercial real estate loans in the first quarter of 2024. The variances in loan segments for portfolio loans related to increases of $187.4 million in CRE loans, offset by decreases in all the other loan segments, such as a $36.8 million decrease in construction loans, a $30.0 million decrease in C&I loans, a $21.1 million decrease in the other loan segment due to curtailment payments made by the Bank’s largest nonperforming lending relationship, a $5.0 million decrease in residential mortgages and a $4.5 million decrease in other consumer loans. The securities portfolio decreased $36.4 million and is currently 16.1% of total assets at September 30, 2024 compared to 17.3% of total assets at December 31, 2023. The decrease is due to ongoing maturities, principal curtailments, purchases and sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields. During the nine months ended September 30, 2024 there was one new security purchase of $8.6 million and one sale of two bonds with a book value of $10.6 million. As of 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. At September 30, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $68.4 million of gross unrealized losses. Refer to the “Securities” section below for further discussion of unrealized losses in the available-for-sale securities portfolio. During the second quarter of 2024, the Company purchased $5.0 million of equity securities with carrying value totaling $5.2 million at September 30, 2024. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. The Company’s investment in the mutual fund is eligible for investment credit under the Community Reinvestment Act. FHLB stock, at cost decreased $14.2 million to $7.4 million at September 30, 2024 compared to December 31, 2023. The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings . Closed retail bank offices had a book value of $0.5 million at September 30, 2024 and $2.3 million at December 31, 2023 included in OREO on the Consolidated Balance Sheets. The ACL was 2.25% of total portfolio loans at September 30, 2024 compared to 2.77% as of December 31, 2023. The decrease is primarily related to an updated analysis of the individually evaluated loans, a $15.0 million charge-off related to the Other segment of the loan portfolio and $3.1 million of Other segment specific reserves released in connection with $21.0 million of curtailment payments made by the Bank’s largest nonperforming lending relationship. General reserves as a percentage of total portfolio loans were 1.21% at September 30, 2024 and 1.22% at December 31, 2023. Management believes the ACL is adequate to absorb expected losses inherent in the loan portfolio. See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses. Total deposits increased $363.2 million, or 13.0% on an annualized basis, to $4.1 billion at September 30, 2024 compared to December 31, 2023. The increase in deposits was primarily due to a $343.4 million increase in CDs and an increase of $167.5 million in interest-bearing demand accounts, offset by a decrease of $82.0 million in savings accounts, a decrease of $56.3 million in noninterest-bearing demand accounts and a decrease of $9.4 million in money market accounts. The Company had $216.1 million brokered CDs at September 30, 2024, compared to $70.0 million at December 31, 2023. At September 30, 2024, noninterest-bearing deposits comprised 15.4% of total deposits compared to 18.4% at December 31, 2023 and 18.7% at September 30, 2023. CDs comprised 47.2%, 42.6% and 42.5% of total deposits at September 30, 2024, December 31, 2023 and September 30, 2023, respectively. As of September 30, 2024, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 82.7% of our total deposits of $4.1 billion were insured under standard FDIC insurance coverage limits, and approximately 17.3% of our total deposits were uninsured deposits over the standard FDIC 51 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 78.5% of retail deposits. 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 a decline in overnight borrowings, offset by $146.1 million of new brokered CDs during the third quarter of 2024, as well as deposit growth. The Company had no outstanding federal funds purchased at September 30, 2024 and December 31, 2023. Total capital of $386.8 million at September 30, 2024, reflects an increase of $35.6 million compared to December 31, 2023. The increase in total capital from December 31, 2023 is primarily due to net income of $16.2 million, an increase of $18.1 million in other comprehensive income (loss) due to changes in fair value of investment securities, as well as an increase of $1.3 million related to restricted stock activity all during the nine months ended September 30, 2024. The Company remains well capitalized. The Tier 1 capital ratio decreased to 10.83% at September 30, 2024 compared to 11.08% at December 31, 2023. The leverage ratio was 9.53% at September 30, 2024, compared to 9.48% at December 31, 2023 and the total risk-based capital ratio was 12.09% at September 30, 2024 compared to 12.34% at December 31, 2023. The Bank also remained well capitalized as of September 30, 2024. The Bank’s Tier 1 Capital ratio was 10.75% at September 30, 2024 compared to 10.99% at December 31, 2023. The Bank’s leverage ratio was 9.45% at September 30, 2024 compared to 9.41% at December 31, 2023. The Bank’s Total Risk-Based Capital ratio was 12.01% at September 30, 2024 compared to 12.25% at December 31, 2023. Securities The following table presents the composition of available-for-sale securities: (Dollars in Thousands) September 30, 2024 December 31, 2023 $ Change U.S. Government Agency Securities 27,475 43,827 (16,352) Residential Mortgage-Backed Securities 98,809 99,150 (341) Commercial Mortgage-Backed Securities 23,041 31,163 (8,122) Other Commercial Mortgage-Backed Securities 22,267 21,856 411 Asset Backed Securities 121,146 140,006 (18,860) Collateralized Mortgage Obligations 156,418 161,533 (5,115) States and Political Subdivisions 231,172 222,108 9,064 Corporate Notes 62,307 59,360 2,947 Total Debt Securities $ 742,635 $ 779,003 $ (36,368) The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function. The securities portfolio decreased $36.4 million to $742.6 million at September 30, 2024 compared to $779.0 million at December 31, 2023. Securities comprise 16.1% of total assets at September 30, 2024 compared to 17.3% at December 31, 2023. The decrease is due to ongoing maturities, principal curtailments, purchases and sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields. During the nine months ended September 30, 2024, there was one new security purchase of $8.6 million and one sale of two bonds with a book value of $10.6 million as liquidity generated by the securities portfolio during the nine months ended September 30, 2024 was primarily deployed into higher yielding loans. 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. At September 30, 2024 total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $68.4 million of gross unrealized losses. At December 31, 2023, total gross unrealized gains in the available-for-sale portfolio were $0.7 million offset by $92.3 million of gross unrealized losses. 52 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The unrealized losses on debt securities are believed to be temporary primarily because these unrealized losses are due to reductions in market value caused by upward movement in interest rates since the securities purchase (as applicable), and not related to the credit quality of these securities. Our portfolio consists of 46.9% of securities issued by United States government sponsored entities and carry an implicit government guarantee. States and political subdivisions comprise 31.1% of the portfolio and are largely general obligations or essential purpose revenue bonds, which have performed very well historically over all business cycles, and are rated AA and AAA. We have the ability to hold these securities to maturity and expect full recovery of the amortized cost. We may occasionally sell securities to take advantage of market opportunities or as part of a strategic initiative. The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities). This portion of the Treasury yield curve has moved lower over the past three months, driving unrealized losses on outstanding securities lower. Changes in short-term interest rates can affect the yield on floating rate securities. Yields on floating rate securities will fall as the Federal Reserve Board (“FRB”) lower short-term rates. Changes in intermediate and long-term interest rates, which are market driven, affect the market value of fixed rate securities with similar maturities. The Company expects that market values on the Bank’s intermediate and long-term maturity holdings will continue to fluctuate in large part driven by treasury yield changes. At September 30, 2024 the 5-year and 10-year U.S. Treasury yields were 3.58% and 3.81%, respectively. At December 31, 2023, those same bond yields were 3.84% and 3.88%, respectively. Therefore, this decrease of 26 bps and 7 bps, respectively in the intermediate part of the yield curve largely caused an increase in bond prices for fixed rate bonds in that maturity range. Note, the effects were generally greater for longer maturity bonds, such as municipal bonds. On the other hand, floating rate bonds largely held consistent values, as those interest rates generally adjust in line with FRB interest rate moves. Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes. At September 30, 2024 and December 31, 2023, the Company had no credit related impairment. The Basel rules permit most banking organizations to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels. 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. 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. 53 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Loan Composition The following table summarizes our loan portfolio as of the dates presented: (Dollars in Thousands) 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 Our loan portfolio represents our most significant source of interest income. The risk that borrowers are unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay. For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2023 . Total portfolio loans increased $90.0 million, or 3.4%, on an annualized basis, and was $3.6 billion at September 30, 2024 and $3.5 billion at December 31, 2023 with production primarily in our CRE portfolio. The CRE portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. Given the current interest rate environment, our mortgage portfolio paydowns outpaced growth in the nine months ended September 30, 2024. At September 30, 2024, the loan portfolio was comprised of 26.4% floating rates which reprice monthly, 39.1%, variable rates that reprice at least once during the life of the loan and the remaining 34.5% are fixed rate loans. The Company continues to carefully monitor the loan portfolio during 2024, including in light of market conditions that impact our borrowers and the interest rate environment. Total CRE represented 51.7% of total portfolio loans at September 30, 2024 compared to 47.7% at December 31, 2023. The collateral for the Company’s CRE loans is concentrated predominantly in North Carolina, Virginia, South Carolina, West Virginia and Georgia within the retail/restaurant, warehouse, hospitality, multifamily, and office metrics. 54 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table presents the Company's loan portfolio breakout by CRE collateral type, loan amounts for each CRE collateral type included in special mention and substandard and the related percentages by segment to the CRE collateral types as of the periods presented: September 30, 2024 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type Retail/Restaurant $ 418,549 $ 123 $ — $ 52,441 $ — $ 471,113 $ 346 18.7 % Warehouse 378,064 499 — 58,399 — 436,962 1,481 17.4 % Hospitality 291,878 — — 11,253 51,552 354,683 51,552 14.1 % Multifamily 300,855 — — 90,657 — 391,512 4,516 15.5 % Office 215,594 — — 5,510 508 221,612 982 8.8 % Land 823 — — 104,604 101,888 207,315 101,940 8.2 % Single Family 10,070 — 48,436 21,708 13,367 93,581 13,479 3.7 % Country Club 3,400 — — — 45,002 48,402 45,002 1.9 % Long-term Care 30,307 — — 10,506 — 40,813 — 1.6 % Other 206,718 417 — 24,277 22,835 254,247 22,937 10.1 % Total $ 1,856,258 $ 1,039 $ 48,436 $ 379,355 $ 235,152 $ 2,520,240 $ 242,235 100.0 % December 31, 2023 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgage Construction Other Total CRE Collateral Type in Special Mention and Substandard Risk Rating % of Each Segment to Total CRE Collateral Type Retail/Restaurant $ 380,285 $ 129 $ — $ 46,241 $ 3,300 $ 429,955 $ 62 18.2 % Warehouse 324,548 514 53 48,674 — 373,789 72 15.9 % Hospitality 288,323 — — 1,229 51,552 341,104 51,552 14.5 % Multifamily 258,676 — — 127,447 — 386,123 — 16.4 % Office 217,228 — — 4,424 508 222,160 1,857 9.4 % Land 1,153 — — 119,188 92,648 212,989 93,581 9.0 % Single Family 5,770 14 47,205 13,194 13,367 79,550 13,439 3.4 % Country Club — — 0 — 45,002 45,002 45,002 1.9 % Long-term Care 20,172 — — 7,250 — 27,422 — 1.2 % Other 201,353 444 127 34,932 — 236,856 22,941 10.1 % Total $ 1,697,508 $ 1,101 $ 47,385 $ 402,579 $ 206,377 $ 2,354,950 $ 228,506 100.0 % CRE loans represent a portfolio concentration risk. The majority of our CRE loans are made in the above noted geographies and granted to experienced developers and sponsors with loan guaranty structures that provide recourse to individuals with access to financial resources. We believe our knowledge of CRE and our operating knowledge at the local and regional level of these markets allows us to effectively manage concentration risk. Our operating knowledge at the local and regional level is derived from our front-line connection to the customer and our understanding of their business model. We also have access to research tools that inform us about market statistics such as occupancy, lease growth rates and new construction starts. This data is reviewed frequently by our credit officers and disseminated to our lenders. The Bank’s underwriting process includes multiple shock scenarios primarily focused on cash flow and leverage in order to determine a supportable loan amount. We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry while actively managing concentrations. When concentrations exist in certain segments, we seek to mitigate this risk by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments. The Company established transaction, relationship and specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio and are based on 55 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) management’s risk tolerance relative to capital. In addition, there are specific targets for various categories of real estate loans with respect to debt service coverage ratios, loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects. Although leverage is important, the Company also focuses on cash flow generation and employs stress testing to calculate a supportable loan amount. Aggregate commitments to our top 10 credit relationships was $717.2 million at September 30, 2024. The Other segment represents 39.2% of the top 10 credit relationships including the Bank’s largest nonperforming lending relationship, the entire balance which was transferred to nonaccrual status during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A. The following table summarizes our top 10 relationships and a description of industries represented for the periods presented: (Dollars in Thousands) For the Periods Ending Change September 30, 2024 September 30, 2024 September 30, 2024 December 31, 2023 % of Gross Loans % of RBC 1. Hospitality, Agriculture & Energy $ 280,905 $ 301,913 $ (21,008) 7.81 % 57.17 % 2. Multifamily 58,935 15,000 43,935 1.64 % 12.00 % 3. Health Care Facility / Long-Term Care 53,087 53,683 (596) 1.48 % 10.81 % 4. Retail & Office 52,666 53,576 (910) 1.46 % 10.72 % 5. Warehouse 50,069 51,185 (1,116) 1.39 % 10.19 % 6. Long-Term Care 46,199 21,803 24,396 1.29 % 9.40 % 7. Health Care Facility 44,779 — 44,779 1.25 % 9.11 % 8. Retail 44,683 45,187 (504) 1.24 % 9.09 % 9. Hospitality 43,268 44,297 (1,029) 1.20 % 8.81 % 10. Warehouse 42,582 20,082 22,500 1.18 % 8.67 % Top Ten (10) Relationships $ 717,173 $ 606,726 $ 110,447 19.94 % 145.97 % Total Gross Loans $ 3,596,251 $ 3,505,910 $ 90,341 % of Total Gross Loans 19.94 % 17.31 % 2.63% Concentration (25% of RBC) $ 122,832 $ 121,231 Unfunded commitments on lines of credit were $605.3 million at September 30, 2024 compared to $568.7 million at December 31, 2023. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 52.8% at September 30, 2024 and 53.8% at December 31, 2023. Unfunded commitments on commercial operating lines of credit was 52.6% at September 30, 2024 and 53.7% at December 31, 2023. Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation (“FICO”) scores and restricting loan amounts at lower FICO scores. Deferred costs and fees included in the portfolio balances above were $7.7 million and $7.2 million at September 30, 2024 and December 31, 2023, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $113.4 thousand and $133.4 thousand at September 30, 2024 and December 31, 2023, respectively. Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans. Credit Quality On a monthly basis, a Criticized Asset Committee meets to review certain watch, special mention and substandard risk rated loans within prescribed policy thresholds. These loans typically represent the highest risk of loss to the Company. Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral. 56 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and review the findings from Loan Review identified in the previous quarter. Annually, this same committee approves credit related policy changes and policy enhancements as they become available. Additional credit risk management practices include continuous reviews of trends in our lending footprint and our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing. Our Loan Review department serves as a mechanism to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities. The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as determining the appropriateness of risk ratings for those loans reviewed and providing input to the loan risk rating process. Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms. Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Loans past due 90 days are automatically transferred to nonaccrual status. Management reserves the right to exercise discretion at the individual loan level. For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely. We may also elect to retain a loan that is 90 or more days’ delinquent in accrual status if we believe the loan is well secured and in the process of collection. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented: (Dollars in Thousands) September 30, 2024 December 31, 2023 $ Change Nonaccrual Loans Commercial Real Estate $ 978 $ 1,324 $ (346) Commercial and Industrial 1,094 52 1,042 Residential Mortgages 4,482 3,283 1,199 Other Consumer 20 59 (39) Construction 231 2,904 (2,673) Other 280,905 301,913 (21,008) Total Nonperforming Loans 287,710 309,535 (21,825) Other Real Estate Owned 1,512 2,463 (951) Total Nonperforming Assets $ 289,222 $ 311,998 $ (22,776) Nonperforming assets decreased $22.8 million to $289.2 million at September 30, 2024 compared to December 31, 2023. The decrease of $21.8 million in nonperforming loans was primarily related to $21.0 million of curtailment payments made by the Bank’s largest nonperforming relationship. During the second quarter of 2023, the Company placed $301.9 million of commercial loans that reside in the Other segment of the Company’s loan portfolio, relating to the Bank’s largest lending relationship, on nonaccrual status due to loan maturities and failure to pay in full. These loans remained on nonaccrual status at both September 30, 2024 and December 31, 2023. These nonperforming loans are 97.6% of the Company's total nonperforming loans and 97.1% of the Company's total nonperforming assets at September 30, 2024. During the second quarter of 2024, the federal court lawsuit filed against the Company and the Bank by West Virginia Governor James C. Justice II, his wife Cathy L. Justice, his son James C. Justice, III, and related entities that he and/or they own (collectively, the “Justice Entities”) was dismissed and we have agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank. During the second and third quarters of 2024, $21.0 million of curtailment payments made by the Bank’s largest nonperforming lending relationship have decreased the aggregate nonperforming loan balance outstanding to 57 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) the Bank to $280.9 million as of September 30, 2024. The Company believes it is well secured based on the net carrying value of the credit relationship and it has appropriately reserved for expected credit losses with respect to all such loans based on information currently available. However, the Company cannot give any assurance as to the timing or amount of future payments or collections on such loans or that the Company will ultimately collect all amounts contractually due. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors. Based on analyses of the credit relationship and various discounted cash flow valuation techniques utilized in the alternative modeling, which resulted in a specific reserves with respect to these loans of $36.9 million at September 30, 2024, representing 13.1%, of these loans aggregate principal amount as compared to $54.3 million or 18.0% of these loans aggregate principal amount at December 31, 2023. This decline was driven by updated analysis of the credit relationship during the third quarter of 2024 using the discounted cash flow model with updated assumptions and inputs regarding the credit relationship, legal risk and related risks. As the borrowers on these loans operate in the hospitality, agriculture, and energy sectors, this credit relationship is secured by, among other collateral, commercial real estate properties in these sectors including but not limited to top-tier hospitality properties. When evaluating the net carrying value of this credit relationship at 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. 58 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following is an analysis of nonperforming loans by loan portfolio segment for the dates presented, and each segment’s relative contribution to total nonperforming loans: September 30, 2024 December 31, 2023 (Dollars in Thousands) Amount % of NPLs Amount % of NPLs Commercial Real Estate $ 978 0.3 % $ 1,324 0.4 % Commercial & Industrial 1,094 0.4 % 52 — % Residential Mortgages 4,482 1.6 % 3,283 1.1 % Other Consumer 20 — % 59 — % Construction 231 0.1 % 2,904 1.0 % Other 280,905 97.6 % 301,913 97.5 % Balance End of Period 287,710 100.0 % 309,535 100.0 % Closed retail bank offices had a book value of $0.5 million at September 30, 2024 and $2.3 million at December 31, 2023, and are recorded in OREO on the Company’s balance sheet. During the nine months ended September 30, 2024, the Bank sold three retail banking offices and moved $1.2 million of loans at fair value to OREO. These properties are currently being marketed for sale. Past Company legacy underwriting standards relied heavily on loan to value and did not necessarily consider the income characteristics of the borrower or the repayment capacity of collateral with respect to speculative land financing. An overreliance on value as a primary repayment source can become compromised during real estate cycles. As a result, management has worked through these legacy credits and has installed a number of underwriting guardrails that consider the global cash flows and repayment capability of borrowers and/or guarantors, the proportion of speculation, transaction limits and introduced sensitivity analysis in order to determine supportable loan amounts. While these guardrails do not insulate the Company from credit cycles, management believes it should reduce the experience of defaults. Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans. Allowance for Credit Losses The following is the allocation of the ACL reserves by segment for the periods presented: September 30, 2024 December 31, 2023 (Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans Commercial Real Estate $ 20,067 51.7 % $ 19,873 47.7 % Commercial & Industrial 2,936 6.7 % 3,286 7.7 % Residential Mortgages 10,520 21.8 % 10,879 22.5 % Other Consumer 724 0.8 % 868 1.0 % Construction 9,742 11.1 % 7,792 12.4 % Other 36,920 7.9 % 54,354 8.7 % Balance End of Period $ 80,909 100.0 % $ 97,052 100.0 % The ACL was $80.9 million, or 2.25%, of total portfolio loans at September 30, 2024 compared to $97.1 million, or 2.77%, of total portfolio loans at December 31, 2023. 59 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table summarizes the credit quality ratios and their components as of September 30, 2024 and December 31, 2023: (Dollars in Thousands) September 30, 2024 December 31, 2023 Allowance for Credit Losses to Total Portfolio Loans Allowance for Credit Losses $ 80,909 $ 97,052 Total Portfolio Loans 3,595,861 3,505,910 Allowance for Credit Losses to Total Portfolio Loans 2.25 % 2.77 % Nonperforming Loans to Total Portfolio Loans Nonperforming Loans $ 287,710 $ 309,535 Total Portfolio Loans 3,595,861 3,505,910 Nonperforming Loans to Total Portfolio Loans 8.00 % 8.83 % Allowance for Credit Losses to Nonperforming Loans Allowance for Credit Losses $ 80,909 $ 97,052 Nonperforming Loans 287,710 309,535 Allowance for Credit Losses to Nonperforming Loans 28.12 % 31.35 % Net Charge-offs to Average Portfolio Loans Net Charge-offs (annualized) $ 21,663 $ 2,300 Average Total Portfolio Loans 3,539,833 3,324,757 Net Charge-offs to Average Portfolio Loans 0.61 % 0.07 % See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the previous table. The (recovery) provision for credit losses, which includes a (recovery) provision for losses on loans and a provision (recovery) on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The (recovery) provision for credit losses decreased $1.5 million and $2.5 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. The decrease in the (recovery) provision for credit losses for the quarterly comparison was primarily driven by the updated analysis of the individually evaluated loans, within the Other loan segment and $1.7 million of other segment reserves released related to the aforementioned $13.2 million of curtailment payments made by the Bank’s largest nonperforming relationship, offset by loan growth in the third quarter of 2024. The decrease for the nine months ended September 30, 2024 in the (recovery) provision for credit losses, compared to the same period in 2023, was primarily driven by the aforementioned $3.1 million of other segment reserves released related to the aforementioned $21.0 million of curtailment payments, offset by loan growth in 2024. For more information about the Company’s provision for credit losses, see the discussion above under “Provision for Credit Losses” in this MD&A. The provision (recovery) for unfunded commitments increased $0.3 million and decreased $0.4 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. The increase was due to increased commitments in construction loans during the third quarter of 2024. The reserve for unfunded commitments is largely comprised of unfunded commitments related to real estate construction loans and pressure on the reserve rates. There are three basic factors that influence the reserve rates associated with unfunded commitments for real estate construction loans. First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model. These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts, average portfolio life, etc. Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain commercial real estate loans. The proportion of these segments affect the weighting. Third, volume changes impact the total reserve calculation. Net charge-offs were $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, net charge-offs were significantly impacted by 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. This promissory note was 60 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 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. 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 September 30, 2024 and 0.09% and 0.08% for the three and nine months ended September 30, 2023. Nonperforming loans remained significantly elevated at $287.7 million as of September 30, 2024 and $309.5 million as of December 31, 2023 due principally to the aggregate balance of the nonperforming loans associated with the Bank’s largest lending relationship that was placed on nonaccrual status during the second quarter of 2023. The balance of that relationship has declined from $301.9 million December 31, 2023 and March 31, 2024 to $280.9 million as of September 30, 2024. Nonperforming loans as a percentage of total portfolio loans were 8.00% and 8.83% as of September 30, 2024 and December 31, 2023, respectively. The decline in nonperforming loans is primarily due to $21.0 million in total payments received during the second and third quarters of 2024 on the Bank’s largest nonperforming lending relationship, which payments reduced the Bank’s amortized cost associated with those nonperforming loans and were made pursuant to the pathway of curtailment and payoff of the outstanding nonperforming loan agreed between the relevant borrowers and the Bank. For more information about the Company’s nonperforming loans and about this lending relationship, see the discussion above under “Credit Quality” in this MD&A. The following tables represent credit exposures by internally assigned risk ratings as of the periods presented: September 30, 2024 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans Pass $ 1,851,066 $ 238,311 $ 778,355 $ 29,793 $ 399,219 $ 3,240 $ 3,299,984 Special Mention 62 — 93 — 52 — 207 Substandard 6,869 3,163 4,482 20 231 280,905 295,670 Total Portfolio Loans $ 1,857,997 $ 241,474 $ 782,930 $ 29,813 $ 399,502 $ 284,145 $ 3,595,861 Performing $ 1,857,019 $ 240,380 $ 778,448 $ 29,793 $ 399,271 $ 3,240 $ 3,308,151 Nonperforming 978 1,094 4,482 20 231 280,905 287,710 Total Portfolio Loans $ 1,857,997 $ 241,474 $ 782,930 $ 29,813 $ 399,502 $ 284,145 $ 3,595,861 December 31, 2023 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans Pass $ 1,669,029 $ 268,622 $ 784,090 $ 34,202 $ 433,321 $ 3,300 $ 3,192,564 Special Mention 278 2,837 525 — 60 — 3,700 Substandard 1,324 52 3,314 75 2,968 301,913 309,646 Total Portfolio Loans $ 1,670,631 $ 271,511 $ 787,929 $ 34,277 $ 436,349 $ 305,213 $ 3,505,910 Performing $ 1,669,307 $ 271,459 $ 784,646 $ 34,218 $ 433,445 $ 3,300 $ 3,196,375 Nonperforming 1,324 52 3,283 59 2,904 301,913 309,535 Total Portfolio Loans $ 1,670,631 $ 271,511 $ 787,929 $ 34,277 $ 436,349 $ 305,213 $ 3,505,910 At September 30, 2024 and December 31, 2023, the Company had no loans that were risk rated as doubtful. Special mention and substandard loans at September 30, 2024 decreased $17.5 million compared to December 31, 2023, with a decrease of $14.0 million in substandard and a decrease of $3.5 million in special mention. The decrease of $14.0 million in substandard was primarily related to the aforementioned $21.0 million of curtailment payments received in the second and third quarters of 2024 in the Other segment category. Partially offsetting the curtailment payments were loan downgrades to substandard consisting of two CRE loans and two C&I loan relationships totaling $9.0 million, during the second and third quarters of 2024. The decrease in substandard loans for the nine months ended September 30, 2024 was driven by a $1.1 million mortgage loan that was resolved during the first quarter of 2024, as well as two loans, one of which was a CRE loan and the other was a construction loan, totaling $1.1 million that were moved to OREO during the first quarter of 2024. At September 30, 2024 and 61 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) December 31, 2023 substandard loans were impacted by the above mentioned large nonaccrual lending relationship in the Other loan category, which was placed on nonaccrual status during the second quarter of 2023. Additionally, refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL. Deposits The following table presents the composition of deposits for the periods presented: (Dollars in Thousands) September 30, 2024 December 31, 2023 $ Change % Change Noninterest-Bearing Demand $ 628,901 $ 685,218 $ (56,317) (8.2) % Interest-Bearing Demand 649,005 481,506 167,499 34.8 % Money Market 504,206 513,664 (9,458) (1.8) % Savings 372,881 454,876 (81,995) (18.0) % Certificates of Deposit 1,930,075 1,586,651 343,424 21.6 % Total Deposits $ 4,085,068 $ 3,721,915 $ 363,153 9.8 % Deposits are the Company’s primary source of funds. The Company believes that the deposit base is stable and that the Company has the ability to attract new depositors while diversifying the deposit composition. Total deposits at September 30, 2024 increased $363.2 million, or 13.0% on an annualized basis, from December 31, 2023. The variance related to an increase of $343.4 million in CDs, which includes an increase of $146.1 million in brokered CDs, and an increase of $167.5 million in interest-bearing demand accounts, offset by a decrease of $82.0 million in savings accounts, a decrease of $56.3 million in noninterest-bearing demand accounts and a decrease of $9.4 million in money market accounts. The Company had $216.1 million brokered CDs at September 30, 2024, compared to $70.0 million at December 31, 2023. At September 30, 2024, noninterest-bearing deposits comprised 15.4% of total deposits compared to 18.4% at December 31, 2023 and 18.7% at September 30, 2023. CDs comprised 47.2%, 42.6% and 42.5% of total deposits at September 30, 2024, December 31, 2023 and September 30, 2023, respectively. As of September 30, 2024, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 82.7% of our total deposits of $4.1 billion were insured under standard FDIC insurance coverage limits, and approximately 17.3% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 78.5% of retail deposits. The following table presents additional information in relation to deposits: (Dollars in Thousands) September 30, 2024 December 31, 2023 Deposits from the Certificate of Deposit Account Registry Services ("CDARS") $ — $ — Brokered Deposits 216,062 70,000 Noninterest-Bearing Public Funds Deposits 26,322 51,506 Interest-Bearing Public Funds Deposits 125,453 127,100 Total Deposits not Covered by Deposit Insurance (1) 707,544 647,154 Certificates of Deposits not Covered by Deposit Insurance 288,012 234,968 Deposits for Certain Directors, Executive Officers and their Affiliates 2,652 1,799 (1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements. Maturities of CDs over $250,000 or more not covered by deposit insurance at September 30, 2024 are summarized as follows: (Dollars in Thousands) Amount Percent Three Months or Less $ 106,408 36.9 % Over Three Months Through Twelve Months 173,401 60.2 % Over Twelve Months Through Three Years 7,633 2.7 % Over Three Years 570 0.2 % Total $ 288,012 100.0 % 62 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Borrowings and Federal Funds Purchased Borrowings are an additional source of liquidity for the Company. FHLB borrowings decreased $303.4 million to $90.0 million at September 30, 2024 and were $393.4 million at December 31, 2023 primarily due to a decline in overnight borrowings, coupled with $146.1 million of new brokered CDs during the nine months ended September 30, 2024. The Company used liquidity provided by deposit growth to reduce outstanding FHLB borrowings during the nine months ended September 30, 2024. The Company had no overnight federal funds purchased at September 30, 2024 or at December 31, 2023. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan growth, investment securities, deposits growth and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity. Information pertaining to FHLB borrowings and federal funds purchased is summarized in the following table: (Dollars in Thousands) September 30, 2024 December 31, 2023 Balance at Period End Federal Home Loan Bank Borrowings $ 90,000 $ 393,400 Federal Funds Purchased $ — $ — Average Balance during the Period Federal Home Loan Bank Borrowings $ 273,413 $ 402,675 Federal Funds Purchased $ — $ 7,023 Average Interest Rate during the Period Federal Home Loan Bank Borrowings 5.20 % 5.17 % Federal Funds Purchased — % 5.24 % Maximum Month-end Balance during the Period Federal Home Loan Bank Borrowings $ 403,000 $ 525,135 Federal Funds Purchased $ — $ 46,965 Average Interest Rate at Period End Federal Home Loan Bank Borrowings 4.30 % 5.20 % Federal Funds Purchased — % — % The Company held FHLB of Atlanta stock of $7.4 million and $21.6 million at September 30, 2024 and December 31, 2023, respectively. The decrease in FHLB stock was due to a lower required level of stock holdings due to a lower level of FHLB borrowings. Dividends recorded on restricted stock were $0.2 million and $0.9 million for the three and nine months ended September 30, 2024 compared to $0.4 million and $1.0 million for the same periods in 2023. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Refer to Note 9, Federal Home Loan Bank Borrowings and Federal Funds Purchased, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings. Liquidity and Capital Resources Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company’s Board has delegated authority to ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO closely monitors and manages liquidity by reviewing cash flow projections, performing balance sheet stress tests and by maintaining a detailed contingency funding plan that includes specific liquidity measures that 63 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) are reviewed by the ALCO monthly. Our liquidity policy and contingency funding plan provide graduated risk tolerance levels for multiple liquidity measures and potential liquidity environments. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. The Company’s primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any potential funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets or approximating $1.2 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, a fully secured facility with one other correspondent financial institution totaling $45.0 million, and access to the institutional CD market, and the brokered deposit market. The Company did not have outstanding borrowings on these fed funds lines as of September 30, 2024. In addition to the above funding resources, the Company also has $433.3 million of unpledged available-for-sale investment securities, at fair value, as an additional source of liquidity. Please refer to the Liquidity Sources table below for available funding with the FHLB and our secured and unsecured lines of credit with correspondent banks. As of September 30, 2024, approximately 82.7% of our total deposits of $4.1 billion were insured under standard FDIC insurance coverage limits, and approximately 17.3% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company closely monitors changes in the industry and market conditions that may impact the Company’s liquidity and will use other borrowing means or other liquidity and funding strategies sources to fund its liquidity needs as needed. The Company is also closely tracking the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio due to rising market interest rates and developments in the banking industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity. An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At September 30, 2024, the Bank had $495.3 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $61.6 million, $433.3 million in unpledged securities and $0.4 million in loans held-for-sale. This resulted in highly liquid assets to total assets ratio of 10.7% at September 30, 2024. Total available liquidity to uninsured deposits was 207.8% at September 30, 2024. If an extended recession, or significant industry or market volatility, caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding. The following table provides detail of liquidity sources as of the periods presented: (Dollars in Thousands) September 30, 2024 December 31, 2023 Cash and Due From Banks, including Interest-bearing Deposits $ 104,992 $ 54,529 Unpledged Investment Securities 433,273 563,537 Excess Pledged Securities 65,931 61,774 FHLB Borrowing Availability 791,403 480,266 Collateralized Lines of Credit 45,000 — Unsecured Lines of Credit 30,000 50,000 Total Liquidity Sources $ 1,470,599 $ 1,210,106 64 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table provides total liquidity sources and ratios as of the periods presented: (Dollars in Thousands) September 30, 2024 December 31, 2023 Total Liquidity Sources $ 1,470,599 $ 1,210,106 Highly Liquid Assets to Total Assets 10.7 % 12.8 % Highly Liquid Assets to Uninsured Deposits 70.0 % 89.4 % Total Available Liquidity to Uninsured Deposits 207.8 % 187.0 % Regulatory Capital Requirements Total capital of $386.8 million at September 30, 2024, reflects an increase of $35.6 million compared to December 31, 2023. The increase in total capital from December 31, 2023 is primarily due to net income of $16.2 million, an increase of $18.1 million in other comprehensive loss due to changes in fair value of investment securities, as well as an increase of $1.3 million related to restricted stock activity all during the nine months ended September 30, 2024. The Company and the Bank are subject to various capital requirements administered by the federal banking regulators. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. At September 30, 2024, the Bank continues to maintain its capital position with a leverage ratio of 9.45% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 10.75% compared to the regulatory guideline of 6.50% to be well-capitalized. The Bank’s risk-based Tier 1 and Total Capital ratios were 10.75% and 12.01%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary. The Basel rules permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels. The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum, but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. 65 Table of Contents CARTER BANKSHARES, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank for the dates presented: (Dollars in Thousands) Minimum Required Basel III Well Capitalized (1) September 30, 2024 December 31, 2023 Amount Ratio Amount Ratio Carter Bankshares, Inc. Leverage Ratio 4.00 % NA $ 440,130 9.53 % $ 435,364 9.48 % Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % NA 440,130 10.83 % 435,364 11.08 % Tier 1 Capital (to Risk-weighted Assets) 8.50 % NA 440,130 10.83 % 435,364 11.08 % Total Capital (to Risk-weighted Assets) 10.50 % NA 491,328 12.09 % 484,925 12.34 % Carter Bank & Trust Leverage Ratio 4.00 % 5.00 % $ 436,297 9.45 % $ 431,550 9.41 % Common Equity Tier 1 (to Risk-weighted Assets) 7.00 % 6.50 % 436,297 10.75 % 431,550 10.99 % Tier 1 Capital (to Risk-weighted Assets) 8.50 % 8.00 % 436,297 10.75 % 431,550 10.99 % Total Capital (to Risk-weighted Assets) 10.50 % 10.00 % 487,446 12.01 % 481,070 12.25 % (1) To be “well capitalized” under the prompt corrective action framework applies to the Bank only. Contractual Obligations As of September 30, 2024, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 ( the “2023 Annual Report”). Off-Balance Sheet Arrangements As of September 30, 2024, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2023 Annual Report.