Carter Bankshares, Inc.

Previous wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2024 and September 30, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:

Current wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Carter Bankshares, Inc., its operations, and its present business environment, and its consolidated results of operations and financial condition and highlights material changes in its financial condition and results of operations as of and for the three month periods ended March 31, 2025 and March 31, 2024. The MD&A is provided as a supplement to, and should be read in conjunction with, The Company’s Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:

Previous wording

This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, strategic initiatives and related earn-back periods, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality, including but not limited to statements regarding the interest rate environment, the impact of future changes in interest rates, and the impacts of the Company placing its largest lending relationship on nonaccrual status. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Current wording

This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality and nonaccrual and nonperforming loans. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Previous wording

•market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios;

Current wording

•market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s net interest margin, net interest income and its deposit, loan and securities portfolios;

Previous wording

•changes in trade, monetary and fiscal policies and laws of the U.S. government, including policies of the Federal Reserve, Federal Deposit Insurance Corporation, (“FDIC”) and Treasury Department;

Current wording

•changes in trade, tariffs, monetary and fiscal policies and laws of the U.S. government and the related impacts on economic conditions and financial markets, and changes in policies of the Federal Reserve, FDIC and U.S. Department of the Treasury;

Previous wording

•concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral;

Current wording

•concentrations of loans secured by real estate, particularly CRE, and the potential impacts of changes in market conditions on the value of real estate collateral;

Previous wording

•increased delinquency and foreclosure rates on commercial real estate loans;

Current wording

•increased delinquency and foreclosure rates on CRE loans;

Previous wording

•the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the war between Israel and Hamas and the ongoing war between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

Current wording

•the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and Ukraine) or public health events and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

Previous wording

•expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch network optimization project are not fully realized in a timely manner or at all;

Current wording

•expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch acquisitions or the Company’s branch network optimization project are not fully realized in a timely manner or at all;

Previous wording

•turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Current wording

•re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Previous wording

Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and any of our subsequent filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

Current wording

Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, and any of the Company’s subsequent filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

Previous wording

In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earnings assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.

Current wording

In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earning assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earning assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.

Previous wording

Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Current wording

Although management believes that this non-GAAP financial measure enhances investors’ understanding of its business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Previous wording

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2024 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Current wording

The Company’s critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2025 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in its Annual Report on Form 10-K for the year ended December 31, 2024 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Previous wording

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.6 billion at September 30, 2024. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a FDIC insured, Virginia state-chartered bank, which operates 65 branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.

Current wording

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.7 billion at March 31, 2025. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured, Virginia state-chartered bank, which operates 65 branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. The Company’s common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.

Previous wording

The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and income tax provision.

Current wording

The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, borrowings, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, FDIC expense, occupancy and income tax provision.

Previous wording

Part of the Company’s current three-year strategic plan is to focus on refining and enhancing its brand image and position in the markets it serves. With this new brand strategy, the Company has embarked on a multi-year implementation plan to create a brand tailored to the needs of our critical growth audiences, with a focus on innovating brand experiences to exceed expectations and to build a brand that stands apart. This means a commitment to aligning processes, operations and systems around the Company’s brand while introducing new products and services, so that in time the Company can increase its brand awareness in the communities it serves. To strengthen and further shape the brand and culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company.

Current wording

Part of the Company’s current three-year strategic plan is to focus on refining and enhancing its brand image and position in the markets it serves. With this new brand strategy, the Company has embarked on a multi-year implementation plan to create a brand tailored to the needs of its critical growth audiences, with a focus on innovating brand experiences to exceed expectations and to build a brand that stands apart. This means a commitment to aligning processes, operations and systems around the Company’s brand while introducing new products and services, so that in time the Company can increase its brand awareness in the communities it serves. To strengthen and further shape the brand and culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company. On October 30, 2024 the Company unveiled the new brand identity centered entirely around the people who matter most: customers and associates of Carter Bank and Trust and the communities it serves to help deliver on its promise of helping people experience a life lived full.

Previous wording

The Company is focused on executing this strategy to successfully support the new brand and grow our business in our current markets as well as any new markets we may enter. As part of executing this strategy, the Company continues to dedicate significant resources to the ultimate resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank and shareholders. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors.

Current wording

The Company is focused on executing this strategy to successfully support the new brand and grow its business in our current markets as well as any new markets it may enter. As part of executing this strategy, the Company continues to dedicate significant resources to the resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large credit relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank and shareholders. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors.

Previous wording

The Company’s financial results continue to be significantly impacted by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $280.9 million as of September 30, 2024. As a result, interest income was negatively impacted by $8.8 million and $9.3 million during the third quarter of 2024 and 2023, respectively, and $27.2 million and $20.7 million during the nine months ended September 30, 2024 and the same period in 2023, respectively. Interest income has been negatively impacted by $57.2 million in the aggregate since placement of these loans on nonaccrual status during the second quarter of 2023.

Current wording

The Company’s financial results continue to be significantly impacted by the single large credit relationship that the Company placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $245.1 million as of March 31, 2025. Since placement of these loans, now reduced to judgements, on nonaccrual status during the second quarter of

Previous wording

The (recovery) provision for credit losses decreased $1.5 million and $2.5 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. The decrease for the three and nine months ended September 30, 2024 in the (recovery) provision for credit losses as compared to the same periods in 2023 was primarily driven by updated analysis of the individually evaluated loans within the Other loan segment and $1.7 million of other segment reserves released during the third quarter of 2024 related to $13.2 million of curtailment payments made during the third quarter by the Bank’s largest nonperforming lending relationship, offset by loan growth in the third quarter of 2024.

Current wording

•The (recovery) provision for credit losses decreased $2.0 million to a recovery of $2.0 million for the three months ended March 31, 2025, compared to the same period in 2024 primarily driven by a decline in the Other segment reserve rate related to the Company’s largest credit relationship from 12.01% to 11.05% and Other segment reserves released of $0.8 million due to $6.9 million of curtailment payments during the three months ended March 31, 2025, partially offset by loan growth;

Previous wording

•The securities portfolio decreased $36.4 million and is currently 16.1% of total assets compared to 17.3% of total assets;

Current wording

•The available-for-sale securities portfolio increased $27.0 million and is currently 15.9% of total assets compared to 15.4% of total assets;

Previous wording

•The portfolio loans to deposit ratio was 88.0%, compared to 94.2%;

Current wording

•The portfolio loans to deposit ratio was 87.8%, compared to 87.3%;

Previous wording

•The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.25% compared to 2.77%. The ACL on portfolio loans totaled $80.9 million at September 30, 2024, compared to $97.1 million at December 31, 2023.

Current wording

•The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 1.99% compared to 2.09%. The ACL on portfolio loans totaled $73.5 million at March 31, 2025, compared to $75.6 million at December 31, 2024;

Previous wording

•Total deposits increased $363.2 million, or 13.0% on an annualized basis, compared to December 31, 2023; and

Current wording

•Total deposits increased $47.5 million, or 4.6%, on an annualized basis, to $4.2 billion at March 31, 2025, compared to December 31, 2024; and

Previous wording

The Company reported net income of $5.6 million or $0.24 diluted earnings per common share (“EPS”) for the three months ended September 30, 2024 compared to net income of $3.6 million, or $0.16 diluted EPS for the same period in 2023.

Current wording

The Company reported net income of$9.0 million, or $0.39 diluted earnings per share for thethree months ended March 31, 2025 compared to net income of$5.8 million, or $0.25 diluted earnings per share, for thethree months ended March 31, 2024.

Previous wording

Net interest income and the net interest margin are presented on an FTE basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented). The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Current wording

Net interest income and the net interest margin are presented on an FTE basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities. The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Previous wording

The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented:

Current wording

The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income (GAAP) per the Consolidated Statements of Income to interest and dividend income on an FTE basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented:

Previous wording

Interest income increased to $56.6 million for the three months ended September 30, 2024 from $48.9 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $7.7 million, or 15.6%, to $56.8 million for the three months ended September 30, 2024 compared to $49.1 million for the same period in 2023, primarily from growth in earning assets and higher earning asset yields. Average interest-earning assets increased primarily due to average loan growth of $200.4 million in loans and an increase of $31.2 million in interest-bearing deposits with banks during the third quarter of 2024, and was partially offset by a decrease of $93.4 million in average investment securities and a decrease of $11.1 million in FHLB stock. The Bank’s largest nonperforming lending relationship negatively impacted interest income by $8.8 million in the third quarter of 2024 and was negatively impacted by $9.3 million in the third quarter of 2023. Interest income increased to $165.2 million for the nine months ended September 30, 2024 from $144.6 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $20.5 million, or 14.1%, to $165.8 million for the nine months ended September 30, 2024 compared to $145.3 million for the same period in 2023, resulting from average loan growth of $275.5 million in taxable loans.

Current wording

Interest income increased to $56.0 million for the three months ended March 31, 2025 from $54.0 million compared to the same period in 2024. Interest income, on an FTE basis (non-GAAP), increased $1.9 million, or 3.6%, to $56.2 million for the three months ended March 31, 2025 compared to $54.3 million for the same period in 2024, resulting from average loan growth of $159.5 million, primarily due to growth in taxable loans. Average interest-earning assets increased primarily due to growth in average loans of $141.5 million and an increase of $43.3 million in average interest-bearing deposits with banks during the three months ended March 31, 2025, and was partially offset by a decrease of $45.8 million in average investment securities and a decrease of $13.9 million in average FHLB stock.

Previous wording

The change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of September 30, 2024, the securities portfolio was comprised of 43.7% variable rate securities with approximately 96.9% that will reprice at least once over the next 12 months. We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate strategy has limited the impact of rising rates on the Company’s unrealized losses on debt securities. With the Federal Reserve on a likely path of reducing short-term interest rates, the Bank may alter this interest rate mix strategy going forward.

Current wording

The change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of March 31, 2025, the securities portfolio was comprised of 42.5% variable rate securities with approximately 85.5% that will reprice at least once over the next 12 months. We believe having a balanced mix of variable and fixed rate securities is an important strategy, especially during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk as fixed rate securities, so there is much less price volatility. This variable rate strategy has limited the impact of past upward shifts in the yield curve on the Company’s unrealized losses on debt securities. If the Federal Reserve continues reducing short-term interest rates, the Bank may consider changes to this interest rate mix strategy going forward.

Previous wording

Interest expense of $27.8 million for the three months ended September 30, 2024 increased $6.3 million, or 29.3% compared to the same period in 2023, primarily due to an increase in average interest-bearing deposits of $430.9 million. The increase in average-bearing deposits reflected solid growth in average CDs of $349.2 million, an increase of $128.7 million in interest-bearing demand accounts and an increase of $71.0 million in average money market accounts, offset by a decrease of $118.0 million in savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding interest-bearing demand, money market and CD products. Interest expense of $79.9 million for the nine months ended September 30, 2024 increased $30.3 million, or 60.9% compared to the same period in 2023, primarily due to an average increase in CDs of $345.8 million.

Current wording

Interest expense for the three months ended March 31, 2025 increased $0.2 million, or 0.9%, to $25.9 million compared to the same period in 2024. The increase of $447.1 million in average interest-bearing deposits reflected solid growth in average CDs of $282.4 million, an increase of $248.8 million in average interest-bearing demand accounts and an increase of $0.6 million in average money market accounts, offset by a decrease of $84.7 million in average savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding interest-bearing demand, money market and short-term CD products.

Previous wording

Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 93.0% of our CD portfolio and 50.0% of our outstanding FHLB borrowings will mature and reprice over the next twelve months. This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) continue cutting short-term rates in the future.

Current wording

Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 73.5% of our CD portfolio and 54.5% of our outstanding FHLB borrowings will mature and reprice over the next twelve months. This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) continue cutting short-term rates in the future.

Previous wording

(Recovery) provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb expected life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the (recovery) provision for credit losses and net charge-offs:

Current wording

The following table presents information regarding the (recovery) provision for credit losses and net charge-offs for the periods presented:

Previous wording

The $15.0 million principal charge-off related to the Other segment of the loan portfolio. Certain Justice Entities executed a promissory note related to the Settlement Payment (as defined in Note 10). This promissory note was recognized as a principal charge-off due to the nonperforming status of the Bank’s loans with the Justice Entities and because the settled claims related to allegedly preferential payments made on those nonperforming loans. See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs and for additional information related to our ACL.

Current wording

See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.

Previous wording

Total noninterest expense increased $0.2 million to $27.4 million for the three months ended September 30, 2024 compared to the same period in 2023. The most significant variance for the comparable period related to a $0.6 million increase in salaries and employee benefits, an increase of $0.4 million in occupancy expenses, an increase of $0.3 million in data processing expenses and a $0.2 million increase in FDIC insurance expense, offset by a decrease of $1.1 million in other noninterest expense and a decrease of $0.3 million in professional and legal fees.

Current wording

For the three months ended March 31, 2025, total noninterest expense was $28.0 million, an increase of $1.8 million, or 6.8%, from the same period in 2024. The most significant variances for the comparable period related to increases of $0.9 million in other noninterest expense, $0.7 million in occupancy expenses, $0.6 million in advertising expenses and $0.6 million in data processing expenses, offset by decreases of $0.5 million in salaries and employee benefits, $0.3 million in professional and legal fees and $0.3 million in FDIC insurance expense.

Previous wording

The increases in salaries and employee benefits resulted from higher salary expenses due to fewer open positions in retail, job grade assessment increases and normal merit increases. The increase in occupancy expenses, net of $0.4 million was due to new software license and depreciation expense in the third quarter of 2024 and the increase in data processing expenses of $0.3 million relates primarily to general inflationary cost increases for existing and new service agreements. The increase in advertising expenses relates to costs incurred for the Company’s new brand roll-out. The higher FDIC insurance expense was due to the deterioration in asset quality as a direct result of the large nonperforming lending relationship that was placed into nonaccrual status in the second quarter of 2023, which is a component used to determine the assessment. The decrease in other noninterest expense related to a gain of $0.5 million on a closed office that was sold in the third quarter of 2024, write-downs of $0.6 million on three legacy other real estate owned (“OREO”) properties and write-downs of $0.3 million on two additional closed offices in the third quarter of 2023.

Current wording

The significant increases in other noninterest expense are related to a $0.3 million 1035 exchange fee recorded in the first quarter of 2025 as a direct result of the early surrender and transfer to a new carrier of one of the Company’s BOLI policies and a gain of $0.3 million on two closed offices sold in the first quarter of 2024. The increase in occupancy expense was due to new software licenses and additional maintenance contracts during the three months ended March 31, 2025. The increase in advertising expenses primarily related to contributions made during the first quarter of 2025, as well as, additional expenses in the current quarter related to the launching of the new brand refresh that occurred in the fourth quarter of 2024. The increase in data processing expenses relates primarily to general inflationary cost increases for existing and new service agreements in the beginning of the year.

Previous wording

The provision for income taxes increased $0.6 million and decreased $1.4 million to $1.4 million and $3.9 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. Pre-tax income increased $2.6 million and decreased $10.4 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. The effective tax rate was 19.9% and 19.5% for the three and nine months ended September 30, 2024, respectively, compared to 17.7% and 17.4% for the same periods in 2023. The increase in the effective tax rate for the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).

Current wording

The provision for income taxes increased $0.8 million to $2.2 million for the three months ended March 31, 2025 compared to $1.4 million for three months ended March 31, 2024. Pre-tax income increased $3.9 million for the three months ended March 31, 2025 compared to the same period in 2024, primarily due to recording a $2.0 million recovery to the (recovery) provision for credit losses in the first quarter of 2025, as well as, a gain of $1.9 million for a BOLI death benefit in first quarter of 2025. The effective tax rate was 19.6% for the three months ended March 31, 2025 compared to 19.7% for the same period in 2024. The slight decrease in the effective tax rate for the three months ended March 31, 2025 compared to the same period in 2024 was primarily related to BOLI tax-free income related to the $1.9 million death benefit received in the first quarter of 2025, offset by the increase in pre-tax income. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).

Previous wording

The securities portfolio decreased $36.4 million and is currently 16.1% of total assets at September 30, 2024 compared to 17.3% of total assets at December 31, 2023. The decrease is due to ongoing maturities, principal curtailments, purchases and sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields. During the nine months ended September 30, 2024 there was one new security purchase of $8.6 million and one sale of two bonds with a book value of $10.6 million. As of September 30, 2024, the securities portfolio was comprised of 43.7% variable rate securities with approximately 96.9% that will reprice at least once over the next 12 months. At September 30, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $68.4 million of gross unrealized losses. Refer to the “Securities” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

Current wording

During the three months ended March 31, 2025 there were new security purchases totaling $33.7 million, partially offset by normal paydowns and maturities. As of March 31, 2025, the securities portfolio was comprised of 42.5% variable rate securities with approximately 85.5% that will reprice at least once over the next 12 months. At March 31, 2025, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $72.1 million of gross unrealized losses. Refer to the “Securities” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

Previous wording

The ACL was 2.25% of total portfolio loans at September 30, 2024 compared to 2.77% as of December 31, 2023. The decrease is primarily related to an updated analysis of the individually evaluated loans, a $15.0 million charge-off related to the Other segment of the loan portfolio and $3.1 million of Other segment specific reserves released in connection with $21.0 million of curtailment payments made by the Bank’s largest nonperforming lending relationship. General reserves as a percentage of total portfolio loans were 1.21% at September 30, 2024 and 1.22% at December 31, 2023. Management believes the ACL is adequate to absorb expected losses inherent in the loan portfolio. See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses.

Current wording

The ACL was 1.99% of total portfolio loans at March 31, 2025 compared to 2.09% as of December 31, 2024. Management believes the ACL is adequate to absorb expected losses inherent in the loan portfolio. See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses.

Previous wording

FHLB stock, at cost decreased $14.2 million to $7.4 million at September 30, 2024 compared to December 31, 2023. The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings. Closed retail bank offices had a book value of $0.5 million at September 30, 2024 and $2.3 million at December 31, 2023 included in OREO on the Consolidated Balance Sheets.

Current wording

FHLB stock, at cost decreased $0.6 million to $5.9 million at March 31, 2025 compared to December 31, 2024. The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings. Closed retail bank offices had a book value of $0.6 million at March 31, 2025 and $0.7 million at December 31, 2024, and are included in OREO on the Consolidated Balance Sheets.

Previous wording

At September 30, 2024, noninterest-bearing deposits comprised 15.4% of total deposits compared to 18.4% at December 31, 2023 and 18.7% at September 30, 2023. CDs comprised 47.2%, 42.6% and 42.5% of total deposits at September 30, 2024, December 31, 2023 and September 30, 2023, respectively. As of September 30, 2024, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 82.7% of our total deposits of $4.1 billion were insured under standard FDIC insurance coverage limits, and approximately 17.3% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 78.5% of retail deposits.

Current wording

Total deposits increased $47.5 million to $4.2 billion at March 31, 2025 compared to December 31, 2024. Deposits increased primarily due to growth in interest-bearing demand accounts of $67.1 million, and an increase of $16.2 million in money market accounts, partially offset by decreases of $31.0 million in CDs, $2.7 million in noninterest-bearing demand accounts and $2.1 million in savings accounts. As of March 31, 2025, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 81.6% of our total deposits of $4.2 billion were insured under standard FDIC insurance coverage limits, and approximately 18.4% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 78.8% of retail deposits.

Previous wording

FHLB borrowings decreased $303.4 million to $90.0 million at September 30, 2024 compared to $393.4 million at December 31, 2023 primarily due to a decline in overnight borrowings, offset by $146.1 million of new brokered CDs during the third quarter of 2024, as well as deposit growth. The Company had no outstanding federal funds purchased at September 30, 2024 and December 31, 2023.

Current wording

FHLB borrowings decreased $15.0 million to $55.0 million at March 31, 2025 compared to $70.0 million at December 31, 2024. The Company had no outstanding federal funds purchased at March 31, 2025 and December 31, 2024.