Carter Bankshares, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued) Years Ended December 31, (Dollars in Thousands) 2024 2023 2022 SUPPLEMENTARY DATA Cash Interest Paid $ 106,342 $ 69,116 $ 19,338 Cash Paid for Income Taxes 478 5,718 5,793 Transfer from Loans to Other Real Estate Owned 1,181 110 74 Transfer from Fixed Assets to Other Real Estate Owned 348 1,854 2,675 Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,995 1,464 3,391 Stock Repurchase Excise Tax Settled in Subsequent Period — ( 153 ) — Loans Transferred to Held-for-Sale — — 1,513 See accompanying notes to audited Consolidated Financial Statements. 76 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation: Carter Bankshare s, Inc. (the “Company”) is a holding company headquartered in Martinsville, Virginia. The Company is the parent company of its wholly owned subsidiary of Carter Ban k & Trust (the “Bank”). The holding company is regulated by the Federal Reserve Bank (“FRB”). The Bank is an insured, Virginia state-chartered commercial bank which operates branches in Virginia and North Carolina. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and Bureau of Financial Institutions of the Virginia State Corporation Commission. The Bank has one wholly owned subsidiary, CB&T Investment Company (the “Investment Company”). Our market coverage is primarily in Virginia and North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Blacksburg, Martinsville, and Danville in Virginia, and Greensboro, Charlotte, Raleigh and Mooresville in North Carolina. The Company provides a full range of financial services with retail and commercial banking products and insurance. Accounting Policies: Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results could differ from those estimates. Our significant accounting policies are described below. Principles of Consolidation: The Consolidated Financial Statements include the accounts of Carter Banks hares, Inc. and its wholly owned subsidiary. The Investment Company is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Reclassification: Amounts in prior years' financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation. Reclassifications had no material effect on prior year 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. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Operating Segments: The chief decision-makers of our operating segments monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Cash and Cash Equivalents: The Company considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess reserves as cash equivalents for the purposes of the Consolidated Statements of Cash Flows with all items having original maturities fewer than 90 days. Federal funds are customarily sold for one-day periods. The FRB pays the target fed funds rate on the FRB excess reserves. Restrictions on Cash: Cash on hand or on deposit with the FRB is required to meet regulatory reserve and clearing requirements. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and financial standby and performance letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains (losses) on securities available-for-sale, net of tax. Securities: The Company classifies securities into either the held-to-maturity or available-for-sale categories at the time of purchase. All securities were classified as available-for-sale at December 31, 2024 and December 31, 2023. Securities classified 77 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) as available-for-sale include securities which can be sold for liquidity, investment management, or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized gains (losses), net of tax included in accumulated other comprehensive loss, net of applicable taxes. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date. Management evaluates debt securities for impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining impairment, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an impairment decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When an impairment occurs, the amount of impairment recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet with a corresponding adjustment to (recovery) provision for credit losses in the Consolidated Statements of Income. Both the allowance and the adjustment to net income can be reversed if conditions change. Equity Securities: 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. Equity securities are carried at fair value, with changes in fair value reported within other noninterest income in the Consolidated Statements of Income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment. Loans Held-for-Sale: Loans held-for-sale arise primarily from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. Gains and losses on sales of mortgage loans held-for-sale are determined using the specific identification method and are included in other noninterest income in the Consolidated Statements of Income. From time to time, certain loans are transferred from the loan portfolio to loans held-for-sale, which are carried at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the ACL. Subsequent declines in fair value are recognized as a charge to noninterest income. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of loans held-for-sale are included in other noninterest income in the Consolidated Statements of Income. Loans: Loans that management have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, discounts, and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. 78 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) An individually evaluated loan analysis is conducted for loans that are either or both nonperforming or a restructured loan with a commitment of $1.0 million or greater and/or based on management’s discretion. Loans, including individually evaluated loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days based on contractual terms, unless such loans are well-secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest is unlikely. Any interest that is accrued, but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan. While a loan is classified as nonaccrual and the probability of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. Payments collected on a nonaccrual loan are first applied to principal, secondly to any existing charge-offs, thirdly to interest, and lastly to any outstanding fees owed to the Company. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a period of a minimum of six months of satisfactory payment performance by the borrower in accordance with the contractual terms of interest and principal. Allowance for Credit Losses: The allowance for credit losses (“ACL”) represents management’s estimate of expected credit losses over the life of the loan portfolio. The ACL includes an estimate of credit losses for pooled loans utilizing a Discounted Cash Flow (“DCF”) method. Reserves for pooled loans are estimated by calculating the amount by which the outstanding principal balance exceeds the current estimate of the present value of future cash flows discounted at the loan’s original effective interest rate. The ACL also includes an estimate of credit losses related to loans that are individually evaluated, known as Individually Evaluated Loans, or IELs. Generally, an IEL reserve is calculated as the excess of the loan's current outstanding principal balance, or general ledger balance if the loan is non-accrual, compared to the estimated fair value of the related collateral, less cost to sell, if any. Management reserves the right to utilize alternative methods for IELs. Our CECL model introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. The CECL model estimates default probabilities driven by economic metrics identified below that form the basis of the prepayment speeds and prepayment timing estimated in the DCF method. The CECL model also estimates losses based on these default. The product of the probability of default and losses given default is the estimated expected loss. For more details, see Note 6 - Allowance for Credit Losses, in Item 8 of this Annual Report on Form 10-K. Allowance for Credit Losses Policy The Company’s methodology for estimating the ACL includes: Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans (IELs). These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable and confirmed. Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below. Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to Unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the long-term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. 79 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values. Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective. “Other” Segmented Pool CECL provides for the flexibility to model loans differently compared to the prior model. With the adoption of CECL management elected to evaluate certain loans based on shared but unique risk attributes. The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards. As these loans are not collateral dependent, management elected to use a modified DCF method. The modifications to DCF include assumptions with respect to the timing of cash flows and the utilization of a discount rate reflective of the inherent risk of the loans in the Other segment. A substantial change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively makes adjustments as needed. The analysis applied to this pool resulted in an allowance of $ 51.3 million at adoption on January 1, 2021 and is disclosed in the Other segment line item. Charge-off Policy Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. The Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to: • The status of a bankruptcy proceeding • The value of collateral and probability of successful liquidation; and/or • The status of adverse proceedings or litigation that may result in collection Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. 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. 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 early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans. Refer to the “Credit Quality” and the “Allowance for Credit Losses” sections in the MD&A and Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for more details. Loan Restructurings: On April 1, 2022, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of a TDR. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the 80 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company. Concentration of Credit Risk: The majority of the Company's loans, commitments and lines of credit have been granted to customers in the Company's market area. The concentrations of credit by loan classification are set forth in Note 5 - Loans, in the Notes to the Consolidated Financial Statements. Advertising Costs: We expense all marketing-related costs, including advertising costs, as incurred. Advertising expense was $ 2.5 million, $ 1.7 million, and $ 1.4 million for the years ended 2024, 2023, and 2022, respectively. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain executive officers and associates. We receive the cash surrender value of each policy upon its termination or benefits are payable to us upon the death of the insured. Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of Income. Bank Premises and Equipment: Bank premises and equipment acquired are stated at cost, less accumulated depreciation. Depreciation is charged to operating expenses over the estimated useful life of the assets by the straight-line method. Land is carried at cost. Costs of maintenance or repairs are charged to expense as incurred and improvements are capitalized. Upon retirement or disposal of an asset, the asset and related allowance account are eliminated. Any gain or loss on such transactions is included in current operations. Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income totaling $ 7.1 million in 2024, $ 6.2 million in 2023, and $ 6.1 million in 2022. The estimated useful life for bank premises ranges from 5 to 40 years and equipment depreciates over a 3 to 10-year period. Land and Land Improvements Non-depreciating assets Buildings 25 years - 40 years Furniture and Fixtures 5 years Computer Equipment and Software 5 years or term of license Other Equipment 5 years Vehicles 5 years Leasehold Improvements Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise Leases: Operating and finance leases are recorded as a right of use (“ROU”) asset and operating lease liability, included in other assets and other liabilities, respectively. Operating and finance lease ROU assets represent the right to use an underlying asset during the lease term and operating and finance lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded primarily in occupancy, net in the Consolidated Statements of Income. Finance lease expense is comprised of interest expense and amortization of the ROU asset, which are recorded in interest on other borrowings and other expense, respectively, in the Consolidated Statements of Income. Federal Home Loan Bank (“FHLB”) Stock: The Company is a member of the FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors such as asset base. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as dividend income in the Consolidated Statements of Income. Earnings per Common Share: Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding less average participating shares during the period. All outstanding unvested restricted stock awards are considered participating shares for the earnings per common share calculation. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to 81 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. Other Real Estate Owned (“OREO”): Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, which establishes a new cost basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the ACL. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. In addition, any retail branch locations closed for branch operations and marketed for sale are also moved to OREO from bank premises and equipment. This real estate is initially valued based on recent comparative market values received from a real estate broker and any necessary write-downs are charged to operations. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its carrying value or fair value less cost to sell. OREO assets are revalued every 12 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 24 months based on the size of the exposure. Operating costs after acquisition are expensed. Income Taxes: Income tax provision is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities including change in valuation allowance. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating losses, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income tax provision in the Consolidated Statements of Income. The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved new market and historic rehabilitation projects. During 2023, the Company adopted the proportional amortization method of accounting for all qualifying equity investments within these limited partnerships. These investments are included in other assets on the Consolidated Balance Sheets. These partnership investments generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. The investments are accounted for under the equity method, with the expense included within income tax provision on the Consolidated Statements of Income. All of the Company's tax credit investments are evaluated for impairment at the end of each reporting period. Transfer of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets. Retirement Benefits: The Company has established an employee benefit plan as described in Note 14 - Employee Benefit Plans to the Consolidated Financial Statements. The Company does not provide any other post-retirement benefits. Allowance for Unfunded Commitments: In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and 82 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby and performance letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included on the Company’s Consolidated Balance Sheets. Stock-Based Compensation: The Company has issued both restricted stock to executive officers, associates and non-associate directors and performance based stock units to its executive officers. Compensation expense for restricted stock awards is based on the fair value of these awards at the date of the grant prior to September 1, 2023. Beginning September 1, 2023 the Company utilizes a trading 90-day look back period to estimate the average stock price to resolve issues of rapid stock price fluctuations. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company recognizes forfeitures as they occur. For the performance stock units (“PSUs”), management evaluates the criteria quarterly to determine the probability of the performance goals being met and recognizes compensation based upon the evaluation. The PSUs vest on the third anniversary of the grant date and any vested performance units will be paid in shares of the Company's common stock. Loss Contingencies: As disclosed in Note 18 - Commitments and Contingencies to the Consolidated Financial Statements, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, and the disclosure set forth in Note 18 relating to certain legal matters is incorporated by reference. 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. 83 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. 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 December 31, 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 uses pay-fixed/receive-floating interest rate swaps (the “Pay-Fixed Swap Agreements”). 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 were utilized to convert the hedged loans from a fixed rate to a synthetic floating Secured Overnight Financing Rate (“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 the remaining hedge 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 remaining hedge was determined to be effective during all periods presented and the Company expects them to remain effective during the remaining terms. 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 84 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan. 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 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 December 31, 2024 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers. Financial Instruments In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments. 85 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Recent Accounting Pronouncements and Developments Newly Adopted Pronouncements in 2024 On November 27, 2023, the FASB issued ASU 2023-07. Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which changes disclosures relating to reportable segments. The ASU expands the disclosure requirements relating to reportable segments, including requiring entities to disclose information about a reportable segment’s significant expenses, among other changes. The ASU does not change how an entity identifies reportable segments or the accounting for segments. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted. The Company has one reporting segment therefore, will not impact our Consolidated Financial Statements; however, this ASU requires disclosure of the title and position of the chief operating decision maker and an explanation of how resources are allocated. The adoption of this ASU 2023-07 was effective for the Company on December 31, 2024 and did not have an impact to our Consolidated Financial Statements, See Note 22 - Segment Reporting to our Consolidated Financial Statements. 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 Statements Issued but Not Yet Adopted Accounting Standards Update 2024-04 “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” (“ASU 2024-04”) clarifies wither the settlement of convertible debt, including debt containing cash conversion features at terms that are different from the terms included in the existing debt instrument, should be accounted for as an induced conversion or a debt extinguishment. Updates permit an entity to apply the new guidance on either a prospective or a retrospective basis. ASU 2024-04 is effective for public business entities January 1, 2026 and is not expected to have a significant impact on the Company’s financial statements. In November 2024, the FASB issued Accounting Standards Update 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40)" ("ASU 2024-03"). ASU 2024-03 requires public entities to provide disaggregated disclosures, in the notes to the financial statements, of certain categories of expenses that are included in expense line items on the face of the income statement. ASU 2024-03 is effective for the Company for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company will update its expense disclosures upon adoption. 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. 86 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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. 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: Years ended December 31, (Dollars in Thousands, except share and per share data) 2024 2023 2022 Numerator for Earnings per Common Share – Basic and Diluted Net Income $ 24,523 $ 23,384 $ 50,118 Less: Income allocated to participating shares 248 197 295 Net Income Allocated to Common Shareholders - Basic & Diluted $ 24,275 $ 23,187 $ 49,823 Denominator: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,050,444 23,438,413 24,741,454 Less: Average Participating Securities 233,295 197,870 145,665 Weighted Average Common Shares Outstanding - Basic & Diluted 22,817,149 23,240,543 24,595,789 Earnings per Common Share – Basic $ 1.06 $ 1.00 $ 2.03 Earnings per Common Share – Diluted $ 1.06 $ 1.00 $ 2.03 NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Board of Governors of the FRB imposes certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as an interest-bearing balance with the FRB. The Company had no required reserves for 2024, 2023 and 2022. 87 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 4 - INVESTMENT SECURITIES The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented: December 31, 2024 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government Agency Securities $ 27,634 $ 36 $ ( 720 ) $ 26,950 Residential Mortgage-Backed Securities 106,593 3 ( 10,443 ) 96,153 Commercial Mortgage-Backed Securities 22,233 30 ( 676 ) 21,587 Other Commercial Mortgage-Backed Securities 24,064 — ( 2,094 ) 21,970 Asset Backed Securities 127,978 14 ( 9,471 ) 118,521 Collateralized Mortgage Obligations 158,610 8 ( 10,030 ) 148,588 States and Political Subdivisions 262,879 — ( 41,698 ) 221,181 Corporate Notes 70,750 — ( 7,300 ) 63,450 Total $ 800,741 $ 91 $ ( 82,432 ) $ 718,400 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 $ 870,546 $ 734 $ ( 92,277 ) $ 779,003 The Company did no t have securities classified as held-to-maturity at December 31, 2024 or December 31, 2023. The following table shows the composition of gross and net realized gains and losses for the periods presented: Years ended December 31, (Dollars in Thousands) 2024 2023 2022 Proceeds from Sales of Securities Available-for-Sale $ 17,953 $ 43,323 $ 19,777 Gross Realized Gains $ 68 $ 129 $ 208 Gross Realized Losses — ( 1,650 ) ( 162 ) Net Realized Gains (Losses) $ 68 $ ( 1,521 ) $ 46 Tax Impact $ 14 $ ( 319 ) $ 10 Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized gains (losses) above reflect reclassification adjustments in the calculation of Other Comprehensive Income (Loss). The net realized gains (losses) are included in noninterest income as gains (losses) on sales of securities, net in the Consolidated Statements of Income. The tax impact is included in income tax provision in the Consolidated Statements of Income. The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. 88 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2024 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 35 $ 35 Due after One Year through Five Years 31,967 29,749 Due after Five Years through Ten Years 287,942 248,003 Due after Ten Years 41,319 33,794 Residential Mortgage-Backed Securities 106,593 96,153 Commercial Mortgage-Backed Securities 22,233 21,587 Other Commercial Mortgage-Backed Securities 24,064 21,970 Collateralized Mortgage Obligations 158,610 148,588 Asset Backed Securities 127,978 118,521 Total $ 800,741 $ 718,400 At December 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized 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 $ 300.1 million at December 31, 2024 and $ 215.5 million at December 31, 2023. Available-for-sale securities with unrealized losses at December 31, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows: December 31, 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 12 $ 6,574 $ ( 60 ) 18 $ 14,558 $ ( 660 ) 30 $ 21,132 $ ( 720 ) Residential Mortgage-Backed Securities 1 7 — 40 95,326 ( 10,443 ) 41 95,333 ( 10,443 ) Commercial Mortgage-Backed Securities 10 2,743 ( 8 ) 42 13,780 ( 668 ) 52 16,523 ( 676 ) Other Commercial Mortgage-Backed Securities — — — 8 21,970 ( 2,094 ) 8 21,970 ( 2,094 ) Asset Backed Securities 1 1,176 ( 5 ) 27 76,333 ( 9,466 ) 28 77,509 ( 9,471 ) Collateralized Mortgage Obligations 2 2,339 ( 2 ) 74 132,902 ( 10,028 ) 76 135,241 ( 10,030 ) States and Political Subdivisions — — — 153 221,181 ( 41,698 ) 153 221,181 ( 41,698 ) Corporate Notes — — — 21 63,450 ( 7,300 ) 21 63,450 ( 7,300 ) Total Debt Securities 26 $ 12,839 $ ( 75 ) 383 $ 639,500 $ ( 82,357 ) 409 $ 652,339 $ ( 82,432 ) 89 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. Treasury Securities — $ — $ — — $ — $ — — $ — $ — 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 ) The Company did no t record an allowance for credit losses, (“ACL”), on its investment securities during the year ended December 31, 2024 or December 31, 2023 as the Company did no t have any 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 December 31, 2024, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis. 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. 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 (recovery) 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 year ended December 31, 2024 and December 31, 2023, the Company had no credit related net investment impairment losses. 90 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Equity Securities During 2024, the Company purchased $ 10.0 million of equity securities. 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, NASDAQ listed 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 mainly focuses on providing affordable housing to low-income and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. The fund invests nationally, but individual bonds are designated to our bank that align with our current footprint. The Company’s investment in the mutual fund is eligible for investment credit under the Community Reinvestment Act. During the year ended December 31, 2024, the Company recognized an unrealized fair value gain of $ 41.0 thousand on these equity securities. This unrealized fair value gain is recorded in Other Income on the Consolidated Statements of Income. NOTE 5 – LOANS The composition of the loan portfolio by dollar amount is shown in the table below: December 31, (Dollars in Thousands) 2024 2023 Commercial Commercial Real Estate $ 1,869,831 $ 1,670,631 Commercial and Industrial 230,483 271,511 Total Commercial Loans 2,100,314 1,942,142 Consumer Residential Mortgages 777,471 787,929 Other Consumer 28,908 34,277 Total Consumer Loans 806,379 822,206 Construction 462,930 436,349 Other 255,203 305,213 Total Loans $ 3,624,826 $ 3,505,910 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 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. 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 $ 8.8 million and $ 7.2 million at December 31, 2024 and December 31, 2023, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 104.1 thousand and $ 133.4 thousand at December 31, 2024 and December 31, 2023, respectively. The Company had no loans held-for-sale as of December 31, 2024 and December 31, 2023, respectively. 91 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Loan Restructurings On April 1, 2022, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of a TDR. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. 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 7, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The following table shows the amortized cost basis as of December 31, 2024 and December 31, 2023 for the loans restructured during the twelve months ended December 31, 2024 and December 31, 2023 to borrowers experiencing financial difficulty, disaggregated by portfolio segment: Restructured Loans Restructured Loans Twelve Months Ended December 31, 2024 Twelve Months Ended December 31, 2023 (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 1 $ 4,516 0.24 % — $ — — % Commercial and Industrial 1 1,053 0.46 % — — — % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % — — — % Total Accruing Restructured Loans 2 $ 5,569 0.15 % — $ — — % Nonaccrual Restructured Loans Commercial Real Estate 1 $ 419 0.02 % — $ — — % Commercial and Industrial 1 19 0.01 % — — — % Residential Mortgages 1 2,053 0.26 % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other 10 251,982 98.74 % — — — % Total Nonaccrual Restructured Loans 13 $ 254,473 7.02 % — $ — — % Total Restructured Loans 15 $ 260,042 7.17 % — $ — — % The Company had no loans that were restructured during the twelve months ended December 31, 2023. 92 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Bank closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified during the year ended December 31, 2024: Payment Status (Amortized Cost Basis) (Dollars in Thousands) Current 30-89 Days Past Due 90+ Days Past Due Accruing Restructured Loans Commercial Real Estate $ 4,516 $ — $ — Commercial and Industrial 1,053 — — Residential Mortgages — — — Other Consumer — — — Construction — — — Other — — — Total Accruing Restructured Loans $ 5,569 $ — $ — Nonaccrual Restructured Loans Commercial Real Estate $ 419 $ — $ — Commercial and Industrial 19 — — Residential Mortgages 2,053 — — Other Consumer — — — Construction — — — Other 251,982 — — Total Nonaccrual Restructured Loans $ 254,473 $ — $ — Total Restructured Loans $ 260,042 $ — $ — 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. Twelve Months Ended December 31, 2024 (Dollars in Thousands) Payment Delay Accelerated Maturity Date/Modified Rate Term Extension/Payment Delay Term Extension/Payment Delay/Interest Rate Reduction Total % of Total Class of Financing Receivable Commercial Real Estate $ 4,516 $ — $ 419 $ — $ 4,935 0.26 % Commercial and Industrial 1,053 — 19 — 1,072 0.47 % Residential Mortgages — 2,053 — — 2,053 0.26 % Other — — — 251,982 251,982 98.74 % Total $ 5,569 $ 2,053 $ 438 $ 251,982 $ 260,042 7.17 % The following table describes the effect of loan modifications made to borrowers experiencing financial difficulty during the periods presented: Twelve Months Ended December 31, 2024 (Dollars in Thousands) Weighted-Average Payment Delay Weighted-Average Accelerated Maturity Date Weighted-Average Modified Rate Weighted-Average Term Extension/Payment Delay Weighted-Average Interest Rate Reduction Commercial Real Estate 0.17 years — — % 4.91 years — % Commercial and Industrial 21.83 years — — % 8.03 years — % Residential Mortgages — 19.26 years 4.63 % — — % Other — — — % 2.60 years 0.67 % As of December 31, 2024 and December 31, 2023, the Bank had no commitments to lend any additional funds on restructured loans. As of December 31, 2024 and December 31, 2023 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification. 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. 93 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) As of December 31, 2024 and December 31, 2023, the Company had $ 0.4 million and $ 2.0 million, respectively, of residential real estate in the process of foreclosure. We also had zero and $ 62 thousand in residential real estate included in OREO at December 31, 2024 and December 31, 2023, respectively. Loans to principal officers, directors and their affiliates during 2024 were as follows: (Dollars in Thousands) 2024 Beginning Balance $ 2,433 Principal Additions 1,718 Repayments ( 1,649 ) Balance at End of Year $ 2,502 94 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 6 - ALLOWANCE FOR CREDIT LOSSES The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) Commercial Real Estate (“CRE”), 2) Commercial and Industrial, (“C&I”), 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business. C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio. Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchased money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed. Other loans, which includes the Company’s largest lending relationship, has unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, iv) loan structures on operating lines of 95 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) credit dependent on the value of real estate rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of financial obligations. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018. Current Expected Credit Losses (“CECL”) Model The CECL model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. Credit Quality Indicators: The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status. The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing through 2024, the Company used a five step approach for loan review in the following categories: • Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $ 2.0 million or more; • A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $ 2.0 million or more but not included in the top twenty LLRs; • A sampling review of Executive Loan Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures; • A sampling review of non-organic commercial loans and those commercial loans approved outside of the Executive Loan Committee; and • Focus reviews of various segments to evaluate emerging risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis. The Company’s internally assigned grades are as follows: Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality. Special Mention – 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. 96 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. 97 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of December 31: Risk Rating (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 184,228 $ 279,983 $ 424,195 $ 241,233 $ 131,479 $ 553,289 $ 45,906 $ 1,860,313 Special Mention 2,400 — — — — 60 — 2,460 Substandard — — 6,182 109 — 615 152 7,058 Total Commercial Real Estate $ 186,628 $ 279,983 $ 430,377 $ 241,342 $ 131,479 $ 553,964 $ 46,058 $ 1,869,831 YTD Gross Charge-offs — — — — — — — — Commercial and Industrial Pass $ 1,130 $ 23,676 $ 14,268 $ 22,779 $ 19,702 $ 116,868 $ 28,989 $ 227,412 Special Mention — — — — — — — — Substandard 19 — 666 1,026 33 — 1,327 3,071 Total Commercial and Industrial $ 1,149 $ 23,676 $ 14,934 $ 23,805 $ 19,735 $ 116,868 $ 30,316 $ 230,483 YTD Gross Charge-offs — — — 21 18 1 — 40 Residential Mortgages Pass $ 28,491 $ 67,171 $ 251,772 $ 182,510 $ 68,182 $ 121,121 $ 53,267 $ 772,514 Special Mention — — — — — 92 — 92 Substandard — — 527 — 2,053 1,597 688 4,865 Total Residential Mortgages $ 28,491 $ 67,171 $ 252,299 $ 182,510 $ 70,235 $ 122,810 $ 53,955 $ 777,471 YTD Gross Charge-offs — 1 — — — 31 — 32 Other Consumer Pass $ 17,896 $ 5,042 $ 2,456 $ 905 $ 2,433 $ 124 $ 32 $ 28,888 Special Mention — — — — — — — — Substandard — 1 8 11 — — — 20 Total Other Consumer $ 17,896 $ 5,043 $ 2,464 $ 916 $ 2,433 $ 124 $ 32 $ 28,908 YTD Gross Charge-offs 250 119 965 378 27 20 — 1,759 Construction Pass $ 97,922 $ 194,263 $ 138,982 $ 11,479 $ 2,408 $ 6,779 $ 6,390 $ 458,223 Special Mention — — — — 4,429 50 — 4,479 Substandard — — — 185 43 — — 228 Total Construction $ 97,922 $ 194,263 $ 138,982 $ 11,664 $ 6,880 $ 6,829 $ 6,390 $ 462,930 YTD Gross Charge-offs — — 1 — — 156 — 157 Other Pass $ — $ — $ — $ — $ — $ 3,221 $ — $ 3,221 Special Mention — — — — — — — — Substandard 251,982 — — — — — — 251,982 Total Other Loans $ 251,982 $ — $ — $ — $ — $ 3,221 $ — $ 255,203 YTD Gross Charge-offs 15,000 — — — — — — 15,000 Total Portfolio Loans Pass $ 329,667 $ 570,135 $ 831,673 $ 458,906 $ 224,204 $ 801,402 $ 134,584 $ 3,350,571 Special Mention 2,400 — — — 4,429 202 — 7,031 Substandard 252,001 1 7,383 1,331 2,129 2,212 2,167 267,224 Total Portfolio Loans $ 584,068 $ 570,136 $ 839,056 $ 460,237 $ 230,762 $ 803,816 $ 136,751 $ 3,624,826 Current YTD Period: YTD Gross Charge-offs $ 15,250 $ 120 $ 966 $ 399 $ 45 $ 208 $ — $ 16,988 98 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 99 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Bank’s largest credit relationship was nonperforming and rated as substandard at both December 31, 2024 and December 31, 2023 with an aggregate principal balance of $ 252.0 million and $ 301.9 million at December 31, 2024 and December 31, 2023, respectively. The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of December 31, 2024: (Dollars in Thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 186,628 $ 279,983 $ 430,076 $ 241,233 $ 131,479 $ 553,350 $ 45,906 $ 1,868,655 Nonperforming — — 301 109 — 614 152 1,176 Total Commercial Real Estate $ 186,628 $ 279,983 $ 430,377 $ 241,342 $ 131,479 $ 553,964 $ 46,058 $ 1,869,831 Commercial and Industrial Performing $ 1,130 $ 23,676 $ 14,934 $ 22,779 $ 19,702 $ 116,868 $ 30,316 $ 229,405 Nonperforming 19 — — 1,026 33 — — 1,078 Total Commercial and Industrial $ 1,149 $ 23,676 $ 14,934 $ 23,805 $ 19,735 $ 116,868 $ 30,316 $ 230,483 Residential Mortgages Performing $ 28,491 $ 67,171 $ 251,772 $ 182,510 $ 68,182 $ 121,213 $ 53,267 $ 772,606 Nonperforming — — 527 — 2,053 1,597 688 4,865 Total Residential Mortgages $ 28,491 $ 67,171 $ 252,299 $ 182,510 $ 70,235 $ 122,810 $ 53,955 $ 777,471 Other Consumer Performing $ 17,896 $ 5,043 $ 2,455 $ 905 $ 2,433 $ 124 $ 32 $ 28,888 Nonperforming — — 9 11 — — — 20 Total Other Consumer $ 17,896 $ 5,043 $ 2,464 $ 916 $ 2,433 $ 124 $ 32 $ 28,908 Construction Performing $ 97,922 $ 194,263 $ 138,982 $ 11,479 $ 6,837 $ 6,829 $ 6,390 $ 462,702 Nonperforming — — — 185 43 — — 228 Total Construction $ 97,922 $ 194,263 $ 138,982 $ 11,664 $ 6,880 $ 6,829 $ 6,390 $ 462,930 Other Performing $ — $ — $ — $ — $ — $ 3,221 $ — $ 3,221 Nonperforming 251,982 — — — — — — 251,982 Total Other Loans $ 251,982 $ — $ — $ — $ — $ 3,221 $ — $ 255,203 Total Portfolio Loans Performing $ 332,067 $ 570,136 $ 838,219 $ 458,906 $ 228,633 $ 801,605 $ 135,911 $ 3,365,477 Nonperforming 252,001 — 837 1,331 2,129 2,211 840 259,349 Total Portfolio Loans $ 584,068 $ 570,136 $ 839,056 $ 460,237 $ 230,762 $ 803,816 $ 136,751 $ 3,624,826 100 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of 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 Age Analysis of Past-Due Loans by Class The following tables include an aging analysis of the recorded investment of past-due portfolio loans as the periods presented: December 31, 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 $ 1,866,013 $ 2,642 $ — $ 2,642 $ 1,176 $ 1,869,831 Commercial & Industrial 229,225 180 — 180 1,078 230,483 Residential Mortgages 771,689 867 50 917 4,865 777,471 Other Consumer 28,582 208 98 306 20 28,908 Construction 461,919 783 — 783 228 462,930 Other 3,221 — — — 251,982 255,203 Total $ 3,360,649 $ 4,680 $ 148 $ 4,828 $ 259,349 $ 3,624,826 101 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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 & 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 Loans past due 90 days or more and still accruing were zero at December 31, 2024 and 2023. Loans past due 90 days are automatically transferred to nonaccrual status. There were no nonaccrual or past due loans related to loans held-for-sale as of December 31, 2024 and December 31, 2023, respectively. The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment of loan for the periods presented. There were no loans for the periods presented that were past due more than 90 days and still accruing. As of and for the year ended December 31, 2024 As of and for the year ended 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 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 $ — $ 1,176 $ 1,176 $ — $ 453 $ 871 $ 1,324 $ — Commercial and Industrial — 1,078 1,078 — — 52 52 — Residential Mortgages 2,053 2,812 4,865 — 1,142 2,141 3,283 — Other Consumer — 20 20 — — 59 59 — Construction — 228 228 — 2,898 6 2,904 — Other — 251,982 251,982 — — 301,913 301,913 — Total Portfolio Loans $ 2,053 $ 257,296 $ 259,349 $ — $ 4,493 $ 305,042 $ 309,535 $ — 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 years ended December 31, 2024 and December 31, 2023, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans. 102 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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 in the (recovery) provision for credit losses on loans in the period of change. December 31, 2024 Collateral Type Equipment Single Family Discounted Cash Flow Total (Dollars in Thousands) Fair Value - Collateral Commercial and Industrial $ 1,026 $ — $ — $ 1,026 Residential Mortgage — 2,053 — 2,053 Other — — 251,982 251,982 Total $ 1,026 $ 2,053 $ 251,982 $ 255,061 December 31, 2023 Collateral Type Office Single Family Land Discounted Cash Flow Total (Dollars in Thousands) Fair Value - Collateral Commercial Real Estate $ 453 $ — $ — $ — $ 453 Residential Mortgage — 1,142 — — 1,142 Construction — 2,090 808 — 2,898 Other — — — 301,913 301,913 Total $ 453 $ 3,232 $ 808 $ 301,913 $ 306,406 The following tables presents activity in the ACL for the periods presented: December 31, 2024 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total Allowance for Credit Losses on Loans: Balance, Beginning of Year $ 19,873 $ 3,286 $ 10,879 $ 868 $ 7,792 $ 54,354 $ 97,052 Provision (Recovery) for Credit Losses on Loans 273 ( 504 ) ( 489 ) 1,078 3,662 ( 9,059 ) ( 5,039 ) Charge-offs — ( 40 ) ( 32 ) ( 1,759 ) ( 157 ) ( 15,000 ) ( 16,988 ) Recoveries — 49 31 495 — — 575 Net Recoveries / (Charge-offs) — 9 ( 1 ) ( 1,264 ) ( 157 ) ( 15,000 ) ( 16,413 ) Balance, End of Year $ 20,146 $ 2,791 $ 10,389 $ 682 $ 11,297 $ 30,295 $ 75,600 December 31, 2023 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total Allowance for Credit Losses on Loans: Balance, Beginning of Year $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852 Provision (Recovery) for Credit Losses on Loans 1,881 ( 719 ) 2,081 1,729 892 ( 364 ) 5,500 Charge-offs — ( 63 ) ( 203 ) ( 2,665 ) ( 42 ) — ( 2,973 ) Recoveries — 88 110 475 — — 673 Net Recoveries / (Charge-offs) — 25 ( 93 ) ( 2,190 ) $ ( 42 ) — ( 2,300 ) Balance, End of Year $ 19,873 $ 3,286 $ 10,879 $ 868 $ 7,792 $ 54,354 $ 97,052 103 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2022 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total Allowance for Credit Losses on Loans: Balance, Beginning of Year $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939 Provision (Recovery) for Credit Losses on Loans 695 3,304 4,470 1,109 ( 146 ) ( 7,013 ) 2,419 Charge-offs — ( 3,436 ) ( 46 ) ( 1,677 ) — — ( 5,159 ) Recoveries — 1 99 404 149 — 653 Net (Charge-offs) / Recoveries — ( 3,435 ) 53 ( 1,273 ) 149 — ( 4,506 ) Balance, End of Year $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852 NOTE 7 - FAIR VALUE MEASUREMENTS The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at the dates presented: December 31, 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 $ 26,950 $ — $ 26,950 $ — Residential Mortgage-Backed Securities 96,153 — 96,153 — Commercial Mortgage-Backed Securities 21,587 — 21,587 — Other Commercial Mortgage-Backed Securities 21,970 — 21,970 — Asset Backed Securities 118,521 — 118,521 — Collateralized Mortgage Obligations 148,588 — 148,588 — States and Political Subdivisions 221,181 — 221,181 — Corporate Notes 63,450 — 55,692 7,758 Total Securities Available-for-Sale 718,400 — 710,642 7,758 Equity Securities 10,041 10,041 — — Portfolio Loan Pool Subject to Fair Value Hedge 622 — 622 — Derivatives 17,356 — 17,356 — Total $ 746,419 $ 10,041 $ 728,620 $ 7,758 Liabilities Derivatives $ 17,710 $ — $ 17,710 $ — Total $ 17,710 $ — $ 17,710 $ — 104 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 $ 7.8 million that are considered to be Level 3 securities at December 31, 2024 and two totaling $ 7.3 million at December 31, 2023, attributable to the calculated change in fair value of $ 0.5 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 at December 31, 2024 and 2023 are summarized below: December 31, 2024 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 659 $ 659 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 one C&I individually evaluated loan totaling $ 0.6 million measured at fair value on a nonrecurring basis as of December 31, 2024 and zero at December 31, 2023. The Company’s largest credit relationship is classified as an individually evaluated loan with a net carrying amount totaling $ 221.7 million at December 31, 2024 and $ 247.6 million at December 31, 2023. The Company utilized various cash flow and discounting assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $ 30.7 million at December 31, 2024 and $ 54.3 million at December 31, 2023. When evaluating the net carrying value of this credit relationship at December 31, 2024, the Company utilized discounted cash flow valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes. OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 0.7 million as of December 31, 2024, compared with $ 2.5 million at December 31, 2023, primarily due to sales offset by transfers to OREO for loans. The Company had $ 0.2 million write-downs recorded on OREO for the year ended December 31, 2024 and had $ 1.1 million write-downs recorded on OREO for the year ended December 31, 2023. 105 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2024 and 2023: December 31, 2024 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets Individually Evaluated Loans $ 579 Appraisals Estimated Selling Costs 3.5 % 3.5 % Total Individually Evaluated Loans $ 579 OREO $ — Appraisals Estimated Selling Costs — % — % OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % OREO 516 Discounted Internal Valuations Management's Subject Discount 24.0 % 24.0 % Total OREO $ 659 December 31, 2023 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets 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 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 December 31, 2024 and December 31, 2023 are presented in the following tables. Fair values for December 31, 2024 and December 31, 2023 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheets. 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. 106 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Fair Value Measurements at December 31, 2024 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 131,171 $ 39,608 $ 91,563 $ — $ 131,171 Securities Available-for-Sale 718,400 — 710,642 7,758 718,400 Equity Securities 10,041 10,041 — — 10,041 Portfolio Loans, net 3,549,226 — — 3,379,192 3,379,192 Federal Home Loan Bank Stock, at Cost 6,487 — — NA NA Other Assets- Interest Rate Derivatives 17,356 — 17,356 — 17,356 Accrued Interest Receivable 17,842 — 4,406 13,436 17,842 Financial Liabilities: Deposits $ 4,153,421 $ 634,436 $ 1,594,615 $ 1,937,914 $ 4,166,965 Other Liabilities- Interest Rate Derivatives 17,710 — 17,710 — 17,710 FHLB Borrowings 70,000 — — 69,604 69,604 Accrued Interest Payable 8,218 — 5 8,213 8,218 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 7,288 107 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 8 - RIGHT-OF-USE (“ROU”) ASSETS AND LEASE LIABILITIES The Company has nine lease contracts, including seven finance leases and two operating leases at December 31, 2024. These leases are for our branch and loan production facilities. There were two new lease agreements entered into in 2024. The following table presents our lease expense for finance and operating leases for the periods presented: December 31, (Dollars in Thousands) 2024 2023 2022 Operating Lease Expense $ 124 $ 48 $ — Amortization of ROU Assets - finance leases 490 365 374 Interest on lease liabilities - finance leases 462 292 287 Total Lease Expense $ 1,076 $ 705 $ 661 ROU assets are included in other assets in the Consolidated Balance Sheets. The following table presents our ROU assets, cash flows, weighted average lease terms, discount rates for finance and operating leases and ROU assets obtained in exchange for lease liabilities for the periods presented: December 31, (Dollars in Thousands) 2024 2023 Operating Leases ROU assets $ 294 $ 419 Operating cash flows $ 167 $ 87 Finance Leases ROU assets $ 9,560 $ 6,988 Operating cash flows $ 462 $ 292 Financing cash flows $ 179 $ 185 Weighted Average Lease Term - Years Operating leases 2.8 years 3.3 years Finance leases 16.2 years 17.9 years Weighted Average Discount Rate Operating leases 6.60 % 6.60 % Finance leases 5.70 % 5.20 % ROU Assets obtained in exchange for Lease Liabilities Operating leases $ — $ — Finance leases $ 2,995 $ 1,464 Lease liabilities are included in other liabilities in the Consolidated Balance Sheets. The following table presents the maturity analysis of lease liabilities for finance and operating leases as of December 31, 2024: (Dollars in Thousands) Finance Operating Total Maturity Analysis 2025 $ 801 $ 131 $ 932 2026 862 107 969 2027 885 89 974 2028 904 — 904 2029 923 — 923 Thereafter 11,454 — 11,454 Total 15,829 327 16,156 Less: Present value discount ( 5,726 ) ( 28 ) ( 5,754 ) Lease Liabilities $ 10,103 $ 299 $ 10,402 108 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 9 - PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation as follows: December 31, (Dollars in Thousands) 2024 2023 Land $ 18,610 $ 18,826 Bank Premises 59,857 58,983 Furniture and Equipment 40,361 35,772 Leasehold Improvements 3,023 1,579 Total Premises and Equipment 121,851 115,160 Accumulated Depreciation ( 47,522 ) ( 41,453 ) Total $ 74,329 $ 73,707 At both December 31, 2024 and December 31, 2023, we had no bank premises and equipment held-for-sale. Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income totaling $ 7.1 million in 2024, $ 6.2 million in 2023, and $ 6.1 million in 2022. Real estate on closed branches was valued based on recent comparative market values received from a real estate broker. The Company had $ 0.2 million in write-downs in 2024 and write-downs in the amount of $ 0.5 million and $ 0.6 million were recognized during 2023 and 2022, respectively. These write-downs on closed branches are included in other expense in the Consolidated Statements of Income. The net remaining carrying value of $ 0.7 million and $ 2.3 million is classified as OREO in the Consolidated Balance Sheets as of December 31, 2024 and 2023, respectively. NOTE 10 - OTHER REAL ESTATE OWNED The following table presents OREO activity as of the dates presented: Year Ended December 31, (Dollars in Thousands) 2024 2023 2022 Beginning of Year Balance $ 2,463 $ 8,393 $ 10,916 Loans Transferred to OREO 1,181 110 74 Transfer of Closed Retail Offices to OREO 348 1,854 2,675 Direct Write-Downs ( 160 ) ( 1,117 ) ( 741 ) Cash Proceeds from Pay-downs — ( 397 ) ( 422 ) Sales of OREO ( 3,173 ) ( 6,380 ) ( 4,109 ) End of Year Balance $ 659 $ 2,463 $ 8,393 At December 31, 2024, 2023, and 2022, the balance of OREO was zero , $ 0.2 million, and $ 7.3 million, respectively, of foreclosed properties recorded as a result of obtaining physical possession of the asset. At December 31, 2024 and 2023, the recorded investment of foreclosed residential real estate was zero and $ 62 thousand, respectively. At December 31, 2024 and 2023, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $ 0.4 million and $ 2.0 million, respectively. Income and expenses applicable to foreclosed assets include the following: Year Ended December 31, (Dollars in Thousands) 2024 2023 2022 Provision for Losses $ 160 $ 1,117 $ 741 Operating Expenses, net of Rental Income 37 178 293 Net Gain on Sales ( 1,026 ) ( 17 ) ( 309 ) OREO (Income) Expense $ ( 829 ) $ 1,278 $ 725 109 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 11 – 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 Sheets 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. 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 amortizing single family mortgages and CRE loans. These fair value hedges were utilized to convert the hedged loans from a fixed rate to a synthetic floating SOFR. On December 19, 2024, the Company terminated the first Pay-Fixed Swap Agreement with an original notional value of $ 175.0 million that would have matured on July 11, 2029. Negative interest income adjustments related to the termination of this hedge was $ 154 thousand. As of December 31, 2024, the Company had one remaining Pay-Fixed Swap Agreement in place with an original notional value of $ 125.0 million, contractual maturity date of July 11, 2027 and a fair value of $ 0.6 million. Under the remaining Pay-Fixed Swap Agreement the Company will pay a fixed coupon rate of 4.188 % 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 the remaining hedge 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 remaining hedge was 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. 110 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at December 31: Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets) 2024 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 3 $ 866 $ 2 3 $ 620 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 368,850 17,354 58 387,144 17,437 Total Derivatives not Designated as Hedging Instruments 59 $ 369,716 $ 17,356 61 $ 387,764 $ 17,440 Total Derivatives 59 $ 369,716 $ 17,356 61 $ 387,764 $ 17,440 Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities) 2024 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 1 $ 125,000 $ 554 — $ — $ — Total Derivatives Designated as Hedging Instruments 1 $ 125,000 $ 554 — $ — $ — Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 3 $ 866 $ 2 3 $ 620 $ 3 Interest Rate Swap Contracts – Commercial Loans 56 368,850 17,154 58 387,144 17,225 Total Derivatives not Designated as Hedging Instruments 59 $ 369,716 $ 17,156 61 $ 387,764 $ 17,228 Total Derivatives 60 $ 494,716 $ 17,710 61 $ 387,764 $ 17,228 The following table indicates the (loss) income recognized within “other noninterest income” in the Consolidated Statements of Income for derivatives for the years ended December 31: (Dollars in Thousands) 2024 2023 2022 Derivatives Designated as Hedging Instruments Interest Rate Swaps - Balance Sheet Hedge $ ( 125 ) $ — $ — Total Derivative Loss Designated as Hedging Instruments ( 125 ) — — Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans ( 1 ) 2 1 Forward Sale Contracts – Mortgage Loans 1 ( 2 ) ( 1 ) Interest Rate Swap Contracts – Commercial Loans ( 12 ) ( 219 ) 605 Total Derivative (Loss) Income not Designated as Hedging Instruments ( 12 ) ( 219 ) 605 Net Derivative (Loss) Income $ ( 137 ) $ ( 219 ) $ 605 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. 111 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 included in the Consolidated Balance Sheets at December 31: Asset Derivatives (Included in Other Assets) Liability Derivatives (Included in Other Liabilities) (Dollars in Thousands) 2024 2023 2024 2023 Derivatives Designated as Hedging Instruments Gross Amounts Recognized $ — $ — $ 592 $ — Gross Amounts Offset — — 38 — Net Amounts Presented in the Consolidated Balance Sheets — — 554 — Derivatives not Designated as Hedging Instruments Gross Amounts Recognized 17,356 17,440 17,156 17,228 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 17,356 17,440 17,156 17,228 Net Amount $ 17,356 $ 17,440 $ 17,710 $ 17,228 NOTE 12 – DEPOSITS The following table presents the composition of deposits at December 31: (Dollars in Thousands) 2024 2023 Noninterest-Bearing Demand $ 634,436 $ 685,218 Interest-Bearing Demand 726,947 481,506 Money Market 512,162 513,664 Savings 355,506 454,876 Certificates of Deposits 1,924,370 1,586,651 Total $ 4,153,421 $ 3,721,915 All depos i t accounts are i nsured by the FDIC u p to the maximum amount allowed by l aw. The Dodd-Frank Act , signed into law on July 2 1 , 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 year-end 2024 and 2023 were $ 297.9 million and $ 305.0 million, respectively. At December 31, 2024 and December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $ 196.1 million and $ 70.0 million, respectively, which are included within the “certificates of deposit” line item in the Consolidated Balance Sheet. Certificates of Deposit maturing as of December 31: (Dollars in Thousands) 2024 2025 $ 1,537,107 2026 198,330 2027 77,492 2028 68,081 2029 42,912 Thereafter 448 Total $ 1,924,370 Overdrafts reclassified to loans were $ 0.3 million at both December 31, 2024 and December 31, 2023, respectively. Total deposit dollars from executive officers, directors, and their related interests at December 31, 2024 and 2023, respectively, were $ 2.3 million and $ 1.8 million. 112 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 13 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED Borrowings serve as an additional source of liquidity for the Company. The Company had $ 70.0 million FHLB borrowings at December 31, 2024 and $ 393.4 million at December 31, 2023. FHLB borrowings are fixed and variable rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans. Variable rate FHLB borrowings were zero and 5.6 % of total borrowings at December 31, 2024 and December 31, 2023, respectively. The FHLB charges prepayment fees for advances that are repaid before maturity, which is the net present value between current market rates and the fixed rate on each borrowing. Total loans pledged as collateral were $ 1.6 billion at December 31, 2024 and $ 1.5 billion at December 31, 2023. There were no securities available-for-sale pledged as collateral at both December 31, 2024 and December 31, 2023, respectively. At December 31, 2024, funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25 % 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 $ 735.3 million. The Company has unsecured facilities with three other correspondent financial institutions totaling $ 30.0 million at December 31, 2024 and $ 50.0 million at December 31, 2023, respectively, a fully secured facility with one other correspondent financial institution totaling $ 45.0 million at December 31, 2024 and zero at December 31, 2023, 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 December 31, 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, the weighted average interest rate, the interest expense and the borrowing availability for the years ended December 31: (Dollars in Thousands) 2024 2023 2022 FHLB Borrowings $ 70,000 $ 393,400 $ 180,550 Weighted Average Interest Rate 4.02 % 5.20 % 4.48 % Interest Expense $ 11,379 $ 20,822 $ 1,163 FHLB Availability $ 735,294 $ 480,266 $ 676,746 The following table represents the balance of federal funds purchased, the weighted average interest rate, the interest expense and the borrowing availability for the years ended December 31: (Dollars in Thousands) 2024 2023 2022 Federal Funds Purchased $ — $ — $ 17,870 Weighted Average Interest Rate — % — % 4.65 % Interest Expense $ — $ 368 $ 188 Federal Funds Purchased Availability $ 75,000 $ 50,000 $ 127,130 Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to December 31, 2024 and thereafter are as follows: (Dollars in Thousands) Balance Weighted Average Rate 2025 $ 25,000 4.13 % 2026 45,000 3.96 % 2027 — — % 2028 — — % 2029 — — % Thereafter — — % Total FHLB Borrowings $ 70,000 4.02 % NOTE 14 - EMPLOYEE BENEFIT PLANS The Company has adopted an integrated profit sharing plan, which allows for elective deferrals and non-elective profit sharing contributions. Associates become eligible for the elective deferrals at the beginning of the quarter after they have been employed at least a month and have reached the age of twenty years and six months. Associates are eligible for the non-elective 113 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) profit sharing contributions at the beginning of the quarter after they have been employed six months , have reached the age of twenty years and six months, and are not participating in one of the Company’s annual incentive programs. Vesting for the non-elective profit sharing contribution is based on years of service to the Company, with a year being any year an associate works a minimum of 1,000 hours. The following table details the vesting schedule based on years of service for participants: 1 Year of Service 20 % Vested 2 Years of Service 40 % Vested 3 Years of Service 60 % Vested 4 Years of Service 80 % Vested 5 Years of Service 100 % Vested Any participant who has reached the age of 62 is fully vested regardless of length of service. Each participant in the plan (who has not reached age 62) becomes 100 % vested after five ( 5 ) years of service. The non-elective contribution to the plan is determined each year by the Company’s Board of Directors (the “Board”) and thus may fluctuate in amount from year to year. The contribution by the Company, which includes contributions to the nonqualified plan discussed below, was $ 0.5 million in 2024, $ 0.4 million in 2023 and $ 1.0 million in 2022. These amounts are included in salaries and employee benefits in the Consolidated Statements of Income. Beginning in 2019, our integrated profit sharing plan includes a Company match based upon an associate’s elective deferral. This elective deferral is subject to dollar limits announced annually by the Internal Revenue Service (“IRS”). Elective deferrals are matched equal to 100 % of the first 3 % deferred and 50 % of the next 2 %, producing a maximum 4 % match. Expense for this deferral match was $ 1.4 million, $ 1.4 million and $ 1.3 million for the years ended December 31, 2024, 2023 and 2022, respectively. The Bank entered into a Nonqualified Profit Sharing Plan originally on December 30, 1996, which was subsequently amended and restated effective December 20, 2007. The purpose of the Nonqualified Profit Sharing Plan was to provide additional benefits to be paid to the executive upon the occurrence of a “Distributable Event,” which is either termination or death. The Board of Directors of the Bank (the “Bank Board”) approved the amended plan on December 20, 2007. Since its inception, the Bank’s former Chairman and Chief Executive Officer was the only executive who participated in the Nonqualified Profit Sharing Plan. In April 2017, a Distributable Event occurred, in which distributions will occur over 45 quarterly payments. The value of the plan was $ 0.5 million as of December 31, 2024, and was solely comprised of cash. The quarterly distributions began on January 1, 2018 and will continue to be paid out in equal quarterly installments approximating $ 30 thousand. On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide (i) certain key executives of the Bank (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these associates under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees. The compensation and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants. The balance in the nonqualified deferred compensation plan at December 31, 2024 and December 31, 2023 was $ 596.3 thousand and $ 447.8 thousand, respectively. NOTE 15 – INCENTIVE AND RESTRICTED STOCK PLAN The Bank Board adopted the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27, 2018. In connection with the Reorganization, the Company adopted and assumed the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan as its own (now the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan, or, for purposes of this discussion, the “Plan”). The Plan reserves a total 2,000,000 shares of common stock for issuance and provides for the grant to key associates and non-employee directors of the Company and its subsidiaries of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards (collectively, the “awards”). Subject to accelerated vesting under certain circumstances, the Plan requires a minimum vesting period of one year 114 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals. These minimums are applicable to awards other than those granted as part of a retainer for the service of non-employee directors. The Committee will determine the vesting period on the awards. No awards may be granted under the Plan more than ten years from the effective date of the Plan. As of December 31, 2024, 1,416,491 shares of common stock were available for issuance under the Plan. For purposes of this Note 15, references to the “Company” mean the “Bank” with respect to actions prior to the Reorganization. Restricted Stock The Company periodically issues restricted stock to non-employee directors and key associates pursuant to the Plan. As of December 31, 2024, 607,084 shares of restricted stock had been granted under the Plan. The Company granted 104,815 and 116,325 shares of restricted stock to key associates under the Plan during 2024 and 2023, respectively. These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance. The time-based shares of restricted stock granted in 2024 to executives vest on the fifth anniversary of the grant date under the long-term incentive plan. The time-based shares of restricted stock granted in 2023 to executives vest in one-third annual installments over three years under the short-term incentive plan. The time-based shares of restricted stock to non-executives vest in one-third annual installments over three years . The closing price of our stock was used to determine the fair value on the date of the grant prior to September 1, 2023. Beginning September 1, 2023 the Company utilizes a trading 90-day look back period to estimate the average stock price to resolve issues of rapid stock price fluctuations. The Company granted 23,300 and 20,772 shares of restricted stock to non-employee directors under the Plan during 2024 and 2023, respectively. These grants were approved by the Committee as compensation for Board service. The time-based shares of restricted stock granted in 2024 and 2023 fully vest one year after the grant date. The fair value determination price for these grants is the same method as mentioned above. If any award granted under the Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan. Compensation expense for restricted stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date. The Company recognized compensation expense of $ 1.8 million, $ 1.6 million and $ 1.3 million for 2024, 2023, and 2022, respectively, related to restricted stock. As of December 31, 2024 and 2023, there was $ 1.9 million and $ 2.1 million, respectively, of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 2.00 years and 2.01 years, respectively. The following table provides information about restricted stock granted under the Plan for the years ended December 31: Restricted Shares Weighted Average Grant Date Fair Value Non-vested at December 31, 2022 160,197 $ 16.05 Granted 137,097 15.56 Forfeited/Vested ( 78,183 ) 16.24 Non-vested at December 31, 2023 219,111 15.67 Granted 128,115 13.07 Forfeited/Vested ( 103,826 ) 15.59 Non-vested at December 31, 2024 243,400 $ 14.34 Performance Units The Company periodically grants performance units to executive officers pursuant to the Plan. The Company granted 46,331 target amounts of performance units in aggregate to executive officers under the Plan during 2024, but did not grant performance units during 2023. These grants are approved by the Committee as compensation for substantial contributions to 115 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) the Company’s performance. Performance criteria for the performance units granted in 2022 were not met and those units expired effective December 31, 2024, with no issuance of the Company’s common stock. The performance units can be earned up to a maximum of 110 % of the target amount. They are subject to a three-year performance period and, if the performance criteria are met, will vest on the payment date which is within 70 days following the end of the performance period. The payout for the performance units will be determined based on four weighted performance based goals: (1) the Company's return on average assets (“ROAA”) performance during the performance period compared to its selected peer group, (2) the Company's core efficiency ratio during the performance period compared to its selected peer group, (3) the Company’s Total Shareholder Return (“TSR”) during the performance period compared to its selected peer group and (4) the Company’s nonperforming assets ratio performance during the performance period compared to its selected peer group. If the performance criteria are met, the Company will pay the performance units that have vested in shares of the Company’s common stock. If any award granted under the Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan. Compensation expense for performance units is based on fair value on the grant date. The performance units are subject to the probability of attainment of meeting the above-referenced performance criteria and service requirement. Management has evaluated the performance-based criteria and has determined that the criteria was probable to be met at target, as of December 31, 2024 for the 2024 grants and at December 31, 2023, the criteria was not probable of being met at target for the 2022 grants. The Company recognized compensation expense of $ 0.2 million for 2024 and reversed compensation expense of $ 0.3 million for 2023 related to performance units. NOTE 16 - FED E RAL AND ST AT E INCO M E T AX ES The components of income tax provision were as follows: (Dollars in Thousands) 2024 2023 2022 Current $ 3,657 $ 4,969 $ 7,969 Deferred 2,670 ( 516 ) 3,939 Change in Valuation Allowance 19 884 ( 309 ) Income Tax Provision $ 6,346 $ 5,337 $ 11,599 The following is a reconciliation of the differences between income tax provision and the amount computed by applying the statutory federal income tax rate to income before taxes: 2024 2023 2022 (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Federal Income Tax at Statutory Rate $ 6,482 21.0 $ 6,031 21.0 $ 12,961 21.0 State Income Tax, net of Federal Benefit 625 2.0 445 1.5 657 1.1 Tax-exempt Interest, net of Disallowance ( 513 ) ( 1.7 ) ( 708 ) ( 2.5 ) ( 873 ) ( 1.4 ) Federal Tax Credits, net of Basis Reduction ( 623 ) ( 2.0 ) ( 2,365 ) ( 8.2 ) ( 625 ) ( 1.0 ) Change in Valuation Allowance 19 0.1 884 3.1 ( 309 ) ( 0.5 ) Income from Bank Owned Life Insurance ( 309 ) ( 1.0 ) ( 290 ) ( 1.0 ) ( 285 ) ( 0.5 ) Tax Credit Amortization 408 1.3 1,660 5.8 — — Other 257 0.9 ( 320 ) ( 1.1 ) 73 0.1 Income Tax Provision and Effective Income Tax Rate $ 6,346 20.6 $ 5,337 18.6 $ 11,599 18.8 The income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before taxes. 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, tax-exempt income from bank-owned life insurance, and tax benefits resulting from certain partnership investments. 116 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the historic tax credits (“HTC”) program. The Company makes equity investments as a limited partner in various partnerships that sponsor HTC as a strategic tax initiative designed to receive income tax credits and other income tax benefits, such as deductible flow-through losses. As of December 31, 2024, the Company recognized $ 1.1 million in HTC equity investments recorded as a component of other assets on the Consolidated Balance Sheets. The Company records income tax credits and other income tax benefits received from its HTC investments as a component of the income tax provision on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows. Investments accounted for using the proportional amortization method are amortized and recorded as a component of the income tax provision on the Consolidated Statements of Income. The Company records non-income-tax-related activity and other returns received from its HTC investments as a component of other noninterest income on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows. As of December 31, 2024, the Company has not recognized any non-income-tax-related activity from its HTC investments. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows: (Dollars in Thousands) 2024 2023 Deferred Tax Assets Allowance for Credit Losses $ 16,667 $ 21,576 Net Unrealized Loss on Available-for-sale Securities 17,820 20,104 Capital Loss Carryforward 1,151 1,143 Accrued Interest on Nonaccrual Loans 1,717 132 Operating Lease Liabilities 2,293 1,718 Other 2,110 1,665 Gross Deferred Tax Assets 41,758 46,338 Less: Valuation Allowance ( 903 ) ( 884 ) Total Deferred Tax Assets $ 40,855 $ 45,454 (Dollars in Thousands) 2024 2023 Deferred Tax Liabilities Fixed Asset Depreciation $ ( 4,095 ) $ ( 4,409 ) Acquisition-Related Fair Value Adjustments ( 2,480 ) ( 2,686 ) Deferred Loan Income ( 1,943 ) ( 1,607 ) Operating Lease Right-of-Use Assets ( 2,172 ) ( 1,647 ) Equity Investment in Partnerships ( 607 ) ( 480 ) Other ( 343 ) ( 437 ) Total Deferred Tax Liabilities ( 11,640 ) ( 11,266 ) Net Deferred Tax Assets $ 29,215 $ 34,188 Management assesses all available positive and negative evidence to estimate whether sufficient future taxable income of the appropriate character will be generated to utilize existing deferred tax assets. Based on this evaluation, as of December 31, 2024, a valuation allowance of $ 0.9 million has been recorded on deferred tax assets related to capital loss carryforwards resulting from exits of equity investments in partnerships and sales of securities. The Company has not identified prudent and feasible strategies to generate future capital gains to offset the entirety of the capital loss carryforward prior to its expiration. At December 31, 2024 and 2023, the Company had no ASC 740-10 unrecognized tax benefits or accrued interest and penalties recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next 117 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) twelve months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax provision. The Company is subject to U.S. federal income tax as well as various other state and local jurisdictions. The Company is generally no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2021. NOTE 17 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS) The following table presents the change in components of other comprehensive income (loss) for the years ended December 31, net of tax effects: (Dollars in Thousands) Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount 2024 Net Unrealized Gains Arising during the Period $ 9,270 $ ( 2,299 ) $ 6,971 Reclassification Adjustment for Gains included in Net Income ( 68 ) 15 ( 53 ) Other Comprehensive Income $ 9,202 $ ( 2,284 ) $ 6,918 2023 Net Unrealized Gains Arising during the Period $ 16,370 $ ( 3,398 ) $ 12,972 Reclassification Adjustment for Losses included in Net Income 1,521 ( 316 ) 1,205 Other Comprehensive Income $ 17,891 $ ( 3,714 ) $ 14,177 2022 Net Unrealized Losses Arising during the Period $ ( 111,542 ) $ 24,261 $ ( 87,281 ) Reclassification Adjustment for Gains included in Net Income ( 46 ) 9 ( 37 ) Other Comprehensive Loss $ ( 111,588 ) $ 24,270 $ ( 87,318 ) NOTE 18 – COMMITMENTS AND CONTINGENCIES Commitments to extend credit, which amounted to $ 833.6 million at December 31, 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 $ 445.3 million, or 53.4 %, and $ 452.2 million, or 64.4 %, of the commitments to extend credit at December 31, 2024 and December 31, 2023, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $ 16.7 million at December 31, 2024 and $ 19.6 million at December 31, 2023. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk. Life-of-Loss Reserve on Unfunded Loan Commitments We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included on our Consolidated Balance Sheets. 118 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of and for the years ended December 31: (Dollars in Thousands) December 31, 2024 December 31, 2023 Life-of-Loss Reserve on Unfunded Loan Commitments Balance at beginning of period $ 3,193 $ 2,292 (Recovery) Provision for Unfunded Commitments ( 7 ) 901 Balance at end of period $ 3,186 $ 3,193 Amounts are added or subtracted to the (recovery) provision for unfunded commitments through a credit or charge to current earnings in the (recovery) provision for unfunded commitments. A recovery of $ 7 thousand was recorded for the year ended December 31, 2024 for the (recovery) provision for unfunded commitments, which resulted in a decrease of $ 0.9 million compared to the year ended December 31, 2023. We have a future commitment with a third party vendor for data processing charges, which is a ten year contract that will expire at the end of 2028. Data processing expense was $ 4.9 million, $ 3.9 million and $ 4.1 million for 2024, 2023 and 2022, respectively. 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 although the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty, the Company believes, based on current knowledge, that the resolution of any such matters will not have a material adverse effect on the Company. The material legal proceedings previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, were no longer pending as of December 31, 2024. NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions and return on investment. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below. Service Charges on Deposit Accounts: Service charges on deposit accounts consist of overdraft fees, service charges on returned checks, stop payment fees, check chargeback fees, minimum balance fees, and other deposit account related fees. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on returned checks are recognized at the point in time that a check is returned. Transaction-based fees, which include services such as stop payment fees, check chargeback fees, and other deposit account related fees are recognized at the point in time the Company fulfills the customer’s request. Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for the product. Service charges on deposits are withdrawn from the customer’s account balance. Other Fees and Other Income: Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees. These fees are largely transaction-based; therefore, the Company’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered. Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account. Debit Card Interchange Fees: The Company earns interchange fees from debit cardholder transactions conducted through a card payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. 119 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Insurance: Commission income is earned based on customer transactions. The commission income is recognized when the transaction is complete. The Company also receives a return on its investment in Bearing Insurance Group, LLC on an annual basis based on the equity insurance company and percentage of ownership. OREO Income: The Company occasionally owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheets. If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied. The rents are generally received monthly. Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is disposed and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the years ended December 31: (Dollars in Thousands) Point of Revenue Recognition 2024 2023 2022 In-Scope Revenue Streams Service Charges on Deposit Accounts At a point in time $ 5,856 $ 5,534 $ 5,537 Other Fees and Other Income At a point in time 1,983 1,885 3,284 Debit Card Interchange Fees At a point in time 7,843 7,828 7,427 Insurance Customer Commissions At a point in time 166 131 104 Annual Commission on Investment Over time 3,476 1,814 1,857 Special Production Payout Over time 43 — — Other Real Estate Owned Income At a point in time 46 75 50 Gains on Sales and Write-downs of Bank Premises, net At a point in time — — 73 Gains (Losses) on Sale of Other Real Estate Owned At a point in time *** *** *** Total In-Scope Revenue Streams 19,413 17,267 18,332 Out of Scope Revenue Streams Gains (Losses) on Sales of Securities, net 68 ( 1,521 ) 46 Bank Owned Life Insurance Income 1,473 1,381 1,357 Commercial Loan Swap Fee Income — 139 774 Other 414 1,012 1,209 Total Noninterest Income $ 21,368 $ 18,278 $ 21,718 *** Reported net with Losses on Sales and Write-downs of Other Real Owned in Noninterest Expense 120 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 20 – PARENT COMPANY CONDENSED FINANCIAL INFORMATION Balance Sheets December 31, (Dollars in Thousands) 2024 2023 ASSETS Cash $ 354 $ 629 Investment in Bank Subsidiary 377,395 347,429 Other Assets 6,564 3,337 Total Assets $ 384,313 $ 351,395 LIABILITIES Other Liabilities $ — $ 152 Total Shareholders’ Equity 384,313 351,243 Total Liabilities and Shareholders’ Equity $ 384,313 $ 351,395 Statements of Net Income December 31, (Dollars in Thousands) 2024 2023 2022 Dividends from Subsidiaries $ 3,950 $ 14,029 $ 45,377 Total Income ( 10 ) 418 — Total Expenses ( 3,121 ) ( 3,011 ) ( 2,696 ) Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary 819 11,436 42,681 Income Tax Benefit ( 656 ) ( 534 ) ( 577 ) Income Before Undistributed Net Income of Bank Subsidiary 1,475 11,970 43,258 Equity in Undistributed Net Income of Bank Subsidiary 23,048 11,414 6,860 Net Income $ 24,523 $ 23,384 $ 50,118 Comprehensive Income (Loss) $ 31,441 $ 37,561 $ ( 37,200 ) Statements of Cash Flows December 31, (Dollars in Thousands) 2024 2023 2022 OPERATING ACTIVITIES Net Income $ 24,523 $ 23,384 $ 50,118 Equity in Undistributed Net Income of Bank Subsidiary ( 23,048 ) ( 11,414 ) ( 6,860 ) Adjustments to Reconcile Net Income to Net Cash (Used in) Provided by Operating Activities Stock Compensation Expense 1,752 1,561 1,314 (Increase) Decrease in Other Assets ( 3,111 ) 1,774 ( 3,778 ) Decrease in Other Liabilities ( 275 ) ( 47 ) ( 460 ) Net Cash (Used in) Provided by Operating Activities ( 159 ) 15,258 40,334 INVESTING ACTIVITIES Equity Investment in Non-Subsidiary, net of distributions ( 116 ) ( 412 ) ( 350 ) Net Cash Used in Investing Activities ( 116 ) ( 412 ) ( 350 ) FINANCING ACTIVITIES Repurchase of Common Stock — ( 16,416 ) ( 42,927 ) Net Cash Used In Financing Activities — ( 16,416 ) ( 42,927 ) Net Decrease in Cash ( 275 ) ( 1,570 ) ( 2,943 ) Cash at Beginning of Year 629 2,199 5,142 Cash at End of Year $ 354 $ 629 $ 2,199 121 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 21 - CAPITAL ADEQUACY 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. 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 2.5% “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Management believes as of December 31, 2024, the Company and the Bank met all capital adequacy requirements to which the Company is subject and satisfied the applicable capital conservation buffer requirements. 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 year-end 2024 and 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. 122 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table summarizes risk-based capital amounts and ratios for the Company and the Bank, excluding the 2.5% capital conservation buffer: Actual Minimum Regulatory Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2024 Leverage Ratio Carter Bankshares, Inc. $ 448,834 9.56 % $ 187,837 4.00 % NA NA Carter Bank & Trust 441,916 9.42 % 187,649 4.00 % $ 234,561 5.00 % Common Equity Tier 1 (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 448,834 10.88 % $ 185,721 4.50 % NA NA Carter Bank & Trust 441,916 10.72 % 185,422 4.50 % $ 267,832 6.50 % Tier 1 Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 448,834 10.88 % $ 247,628 6.00 % NA NA Carter Bank & Trust 441,916 10.72 % 247,230 6.00 % $ 329,640 8.00 % Total Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 500,759 12.13 % $ 330,171 8.00 % NA NA Carter Bank & Trust 493,760 11.98 % 329,640 8.00 % $ 412,050 10.00 % As of December 31, 2023 Leverage Ratio Carter Bankshares, Inc. $ 435,364 9.48 % $ 183,636 4.00 % NA NA Carter Bank & Trust 431,550 9.41 % 183,427 4.00 % $ 229,283 5.00 % Common Equity Tier 1 (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 435,364 11.08 % $ 176,868 4.50 % NA NA Carter Bank & Trust 431,550 10.99 % 176,716 4.50 % $ 255,256 6.50 % Tier 1 Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 435,364 11.08 % $ 235,824 6.00 % NA NA Carter Bank & Trust 431,550 10.99 % 235,621 6.00 % $ 314,161 8.00 % Total Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 484,925 12.34 % $ 314,432 8.00 % NA NA Carter Bank & Trust 481,070 12.25 % 314,161 8.00 % $ 392,702 10.00 % In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC, approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period. 123 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 22 - SEGMENT REPORTING Carter Bankshares, Inc. (the “Company”) is a holding company and the parent company to its wholly-owned subsidiary Carter Bank and Trust (the “Bank”) that conducts its business solely through the Bank. As a state-chartered commercial bank, the Bank earns revenue primarily from interest on loans and securities and fees charged for financial services provided to customers. The Company operates through a single operating and reporting segment, Community Banking that offers services which include accepting a full range of deposit products and originating commercial and consumer loans. All financial information is reported on a consolidated basis and is evaluated regularly by the Chief Executive Officer, the Company’s Chief Operating Decision Maker (“CODM”) in allocating resources and assessing performance. The CODM uses the consolidated net income to benchmark the Company against it competitors. The benchmarking analysis in conjunction with monitoring of actual to budget results are used in assessment of performance and in establishing compensation. Loans, investments and deposits provide the revenues, net in the community bank’s operation. Interest expense, (recovery) provision for credit losses and salaries and benefits provide the significant expenses in the community bank’s operation. The results of operations for the Company’s single reporting segment are incorporated by reference to the Consolidated Statements of Income and Consolidated Balance Sheets. 124 Table of Contents Crowe LLP Independent Member Crowe Global REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Carter Bankshares, Inc. and Subsidiaries Martinsville, Virginia Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Carter Bankshares, Inc. and Subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal 125 Table of Contents control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses – Individually Evaluated Other Pool Loans The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, qualitative analysis, and individually evaluated loans. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. Further, management elected to evaluate certain loans based on shared but unique risk attributes by segmenting into the Other pool. The loans included in the Other pool of the model were underwritten and approved based on standards that are inconsistent with the Company’s current underwriting standards. As of December 31, 2024, $252 million of the Other pool loans were considered individually evaluated with an allowance for credit losses of $30.2 million. This represents 40% of the overall allowance for credit losses. The reserves for the individually evaluated loans within the Other pool are based upon a modified discounted cash flow method. The modifications to the discounted cash flow method include assumptions with respect to the expected amount and timing of cash flows and the utilization of a discount rate reflective of the inherent risk of the loans. A substantial change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively adjusts as needed. We identified the allowance for credit losses – individually evaluated Other pool loans as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management in the development of the estimate. The primary procedures performed to address this critical audit matter include: Testing the effectiveness of internal controls over: 126 Table of Contents • The Company’s affirmation of the key assumptions used in the model, including the discount rate, expected amount and timing of cash flows, and other adjustments • The completeness and accuracy of data used in the model Substantively testing management’s estimate, which included: • Assessing the reasonableness of management’s selection of discount rate, expected amount and timing of cash flows, and other adjustments • Evaluating the mathematical accuracy of the discounted cash flow model used for the Other pool, including evaluating the completeness and accuracy of loan data used in the model Allowance for Credit Losses – Adjustments to Economic Forecasts The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, qualitative analysis, and individually evaluated loans. The Company’s quantitative analysis uses a discounted cash flow with economic forecasts to estimate a loss rate. The qualitative analysis includes adjustments based on the composition of the loan portfolio, changes in current and forecasted economic conditions and changes in the interest rate environment. Management will periodically assess the appropriateness of qualitatively adjusting the allowance for credit losses based on their assessment of current expected credit losses and other economic factors. Principally, these adjustments are centered on potential variances to current economic indices. We identified the allowance for credit losses – adjustments to economic forecasts as a critical audit matter because of the auditor judgment applied and audit effort to evaluate the subjective judgments made by management in the development of the economic forecast adjustments. The primary procedures performed to address this critical audit matter include: Testing the effectiveness of internal controls over: • The Company’s selection of adjustments to economic forecasts • The relevance and reliability of data used in determining the economic forecast adjustments Substantively testing management’s estimate, which included: • Assessing the reasonableness of management’s judgments related to the need for and selection of adjustments to economic forecasts • Evaluating the relevance and reliability of data used in determining the economic forecast adjustments • Evaluating the mathematical accuracy of the application of the economic forecast adjustments within the discounted cash flow model calculation /s/ Crowe LLP We have served as the Company's auditor since 2019. Washington, D.C. March 7, 2025 127 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.