What changed in this filing

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Item 1. Financial Statements

2021-08-05 compared with 2021-05-07 · 276 added, 857 removed, 961 unchanged (54% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in Thousands) 2021 2020

Net Income $ 14,807 $ 8,878

Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Provision for Credit Losses 1,939 10,271

2 unchanged sentences

Depreciation/Amortization of Bank Premises and Equipment 3,113 3,016

Benefit for Deferred Taxes — ( 623 )

Provision (Benefit) for Deferred Taxes 1,999 ( 1,159 )

Net Amortization of Securities 1,879 1,724

3 unchanged sentences

Write-downs of Other Real Estate Owned 3,211 70

Losses on Sales of Other Real Estate Owned, Net 73 119

Gains on Sales of Other Real Estate Owned, Net ( 396 ) ( 18 )

Losses on Sales and Write-downs of Bank Premises 107 71

Premiums on Branch Sales ( 506 ) —

Increase in the Value of Life Insurance Contracts ( 682 ) ( 703 )

1 unchanged sentence

Increase in Other Assets ( 8,957 ) ( 20,138 )

(Decrease) Increase in Other Liabilities ( 2,279 ) 295

Net Cash Provided By (Used In) Operating Activities 359 ( 4,997 )

Decrease in Other Liabilities ( 5,447 ) ( 1,010 )

Net Cash Provided By Operating Activities 23,437 8,955

INVESTING ACTIVITIES

4 unchanged sentences

Purchase of Bank Premises and Equipment, Net ( 3,248 ) ( 6,873 )

Net Cash Paid in Branch Sales ( 73,923 ) —

Purchase of Federal Home Loan Bank Stock — ( 1,062 )

1 unchanged sentence

Loan Originations and Payments, net 28,891 ( 74,912 )

Payments Received on Other Real Estate Owned 230 245

Other Real Estate Owned Improvements — ( 19 )

6 unchanged sentences

Cash Dividends Paid — ( 3,689 )

Net Cash Provided By (Used In) Financing Activities 1,893 ( 9,939 )

Net Decrease in Cash and Cash Equivalents ( 22,788 ) ( 62,411 )

Net Cash (Used In) Provided by Financing Activities 48,696 123,773

Net (Decrease) Increase in Cash and Cash Equivalents ( 25,291 ) 63,446

Cash and Cash Equivalents at Beginning of Period 241,942 125,812

4 unchanged sentences

Transfer from Loans to Other Real Estate Owned — 707

Security (Purchases) Sales Settled in Subsequent Period ( 10,970 ) —

Transfer from Fixed Assets to Other Real Estate Owned 12,013 235

Security (Purchases) Settled in Subsequent Period ( 14,084 ) ( 3,225 )

Right-of-use Asset Recorded in Exchange for Lease Liabilities $ 2,027 $ —

36 unchanged sentences

Many of the requirements called for in the CARES Act and related regulations and supervisory guidance continue to be implemented and most are subject to implementing regulations, many of which continue to be refined by federal banking agencies.

The Company and the Bank continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

The Company and the Bank continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

CARTER BANKSHARES, INC.

6 unchanged sentences

The Bank became an approved SBA 7-A lender in the second quarter of 2020.

The Company participated in the initial round of funding through a referral relationship with a third-party, non-bank lender.

We participated in the initial round of funding through a referral relationship with a third-party, non-bank lender.

When an additional $310 billion in funds were approved and designated for the PPP in April 2020, the Bank opted to set up an internal, automated loan process utilizing its core system provider.

13 unchanged sentences

Newly Adopted Pronouncements in 2021:

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No.

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No.

2019-12, Income Taxes (Topic 740):

10 unchanged sentences

For periodic report filers that are not smaller reporting companies, such as the Company, this standard (Topic 326) was effective as of January 1, 2020.

The Company has elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology.

The Company was subject to the adoption of the CECL accounting method under FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326).

However, the Company elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19

The Company elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology.

The Company was subject to the adoption of the CECL accounting method under FASB ASU 2016-03

CARTER BANKSHARES, INC.

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NOTE 1 – BASIS OF PRESENTATION – (continued)

ends or December 31, 2020 which was later extended to January 1, 2022.

and related amendments, Financial Instruments – Credit Losses (Topic 326).

The CARES Act allowed companies to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020 which was later extended to January 1, 2022.

The Company adopted the CECL accounting method as of January 1, 2021 as allowed under the provisions of the CARES Act.

6 unchanged sentences

In addition, Topic 326 amends the accounting for credit losses on certain debt securities.

The Company did not record any allowance for credit losses on its debt securities as a result of adopting Topic 326.

The Company did not record any allowance for credit losses (“ACL”) on its debt securities as a result of adopting Topic 326.

The ultimate impact of adopting Topic 326, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgments.

26 unchanged sentences

Retained Earnings $ 203,885 $ 254,611 $ ( 50,726 )

The adoption of Topic 326 resulted in a Day 1 adjustment of $ 64.5 million, including an increase to our allowance for credit losses (“ACL”) of $ 61.6 million and a $ 2.9 million life-of-loss reserve on our unfunded loan commitments recorded in other liabilities on our Consolidated Balance Sheets on January 1, 2021.

As of January 1, 2021, the company recorded a cumulative-effect adjustment of $ 50.7 million to decrease retained earnings related to the adoption of Topic 326.

The adoption of Topic 326 resulted in a Day 1 adjustment of $ 64.5 million, including an increase to our ACL of $ 61.6 million and a $ 2.9 million life-of-loss reserve on our unfunded loan commitments recorded in other liabilities on our

CARTER BANKSHARES, INC.

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NOTE 1 – BASIS OF PRESENTATION – (continued)

Consolidated Balance Sheets on January 1, 2021.

As of January 1, 2021, the Company recorded a cumulative-effect adjustment of $ 50.7 million to decrease retained earnings related to the adoption of Topic 326.

Allowance for Credit Losses Policy

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At Day 1 adoption of CECL, current expected losses of $ 10.2 million were recorded due to economic uncertainties related to the Company's hospitality portfolio.

Between the Day 1 CECL model and the model ended March 31, 2021, additional current expected losses of $ 1.5 million were recognized, which resulted in a total current expected loss balance of $ 11.7 million as of March 31, 2021.

Certain hospitality loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

Between the Day 1 CECL model and the model ended June 30, 2021, additional current expected losses of $ 1.5 million were recognized, which

CARTER BANKSHARES, INC.

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NOTE 1 – BASIS OF PRESENTATION – (continued)

resulted in a total current expected loss balance of $ 11.7 million as of June 30, 2021.

Certain hospitality loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

“Other” Segmented Pool

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Management reviews the model output for appropriateness and subjectively makes adjustments as needed.

The analysis applied to this pool resulted in an increase in reserves of $ 51.3 million and is disclosed in the Other line item in the table above.

The analysis applied to this pool resulted in an increase in reserves of $ 51.3 million and is disclosed in the Other segment in the table above.

Accounting Statements Issued but Not Yet Adopted:

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The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in Thousands, except share and per share data) 2021 2020 2021 2020

9 unchanged sentences

All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation.

As such, these shares have been allocated a portion of net income and are excluded from the diluted earnings per share calculation.

As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation.

NOTE 3 - INVESTMENT SECURITIES

The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:

March 31, 2021

June 30, 2021

(Dollars in Thousands) Amortized

Losses Fair Value

Treasury Securities $ 4,438 $ 27 $ ( 25 ) $ 4,440

Government Agency Securities 3,445 32 — 3,477

10 unchanged sentences

NOTE 3 – INVESTMENT SECURITIES (continued)

(Dollars in Thousands) December 31, 2020

December 31, 2020

(Dollars in Thousands) Amortized

Losses Fair Value

7 unchanged sentences

Total Debt Securities $ 758,779 $ 22,570 $ ( 2,670 ) $ 778,679

The Company did no t have securities classified as held-to-maturity at March 31, 2021 or December 31, 2020.

The Company did no t have securities classified as held-to-maturity at June 30, 2021 or December 31, 2020.

The following table shows the composition of gross and net realized gains and losses for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in Thousands) 2021 2020 2021 2020

11 unchanged sentences

Securities not due at a single maturity date are shown separately.

March 31, 2021

June 30, 2021

(Dollars in Thousands) Amortized

Due in One Year or Less $ 1,157 $ 1,164

$ 1,088 $ 1,102

Due after One Year through Five Years 3,492 3,519

Due after Five Years through Ten Years 166,435 168,538

132,913 133,553

Due after Ten Years 201,759 208,162

208,396 210,178

Residential Mortgage-Backed Securities 62,074 61,894

33,348 33,454

Commercial Mortgage-Backed Securities 2,134 2,245

Collateralized Mortgage Obligations 255,808 259,810

252,219 254,850

Asset Backed Securities 137,926 138,206

Total Securities $ 774,236 $ 780,032

At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

Total Debt Securities $ 830,785 $ 843,538

At June 30, 2021 and December 31, 2020, 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 $ 153.7 million at March 31, 2021 and $ 146.0 million at December 31, 2020.

The carrying value of securities pledged for various regulatory and legal requirements was $ 145.9 million at June 30, 2021 and $ 146.0 million at December 31, 2020.

CARTER BANKSHARES, INC.

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NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

March 31, 2021

Available-for-sale securities with unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

June 30, 2021

Less Than 12 Months 12 Months or More Total

8 unchanged sentences

Value Unrealized

Government Agency Securities 1 $ 2,360 $ ( 94 ) — $ — $ — 1 $ 2,360 $ ( 94 )

Treasury Securities 1 $ 2,430 $ ( 25 ) — $ — $ — 1 $ 2,430 $ ( 25 )

Residential Mortgage-Backed Securities 13 39,144 ( 454 ) 3 27 ( 2 ) 16 39,171 ( 456 )

23 unchanged sentences

Total Debt Securities 51 $ 118,575 $ ( 949 ) 117 $ 147,625 $ ( 1,721 ) 168 $ 266,200 $ ( 2,670 )

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did no t record an allowance for credit losses on its investment securities during the quarter ended March 31, 2021 as the Company did no t have securities classified as held-to-maturity at March 31, 2021.

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did no t record an ACL on its investment securities during the quarter ended June 30, 2021 as the Company did no t have securities classified as held-to-maturity at June 30, 2021.

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.

2 unchanged sentences

The Company has reviewed all securities for OTTI.

As of March 31, 2021 and December 31, 2020, no OTTI has been identified for any investment securities in our portfolio.

We do not believe any individual unrealized loss as of March 31, 2021 represents an OTTI.

At March 31, 2021, there were 203 securities in an unrealized loss position and at December 31, 2020, there were 168 securities in an unrealized loss position.

As of June 30, 2021 and December 31, 2020, no OTTI has been identified for any investment securities in our portfolio.

We do not believe any individual unrealized loss as of June 30, 2021 represents an OTTI.

At June 30, 2021, there were 163 securities in an unrealized loss position and at December 31, 2020, there were 168 securities in an unrealized loss position.

The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities.

6 unchanged sentences

(Dollars in Thousands)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Commercial Real Estate

11 unchanged sentences

Construction 320,885 406,390

Other 373,386 —

Total Portfolio Loans $ 2,916,654 $ 2,947,170

$ 2,971,875 $ 2,947,170

Loans Held-for-Sale $ 9,311 $ 25,437

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value $ — $ 9,835

Total Loans $ 2,925,965 $ 2,982,442

(1) Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

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We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations.

When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments.

When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments.

The Company has specific loan segment limits in its loan policy.

2 unchanged sentences

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.

We also have policy limits on loan-to-cost for construction projects.

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment.

Unsecured loans are reserved for the best quality customers with well-established businesses, operate with low financial and operating leverage and demonstrate an ability to clear the outstanding balance on lines of credit for at least thirty consecutive days annually.

Commercial unsecured loans are reserved for the best quality customers with well-established businesses, operate with low financial and operating leverage.

The repayment capacity of the borrower should exceed the policy and guidelines for secured loans.

If the borrower is unable to comply with this requirement and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.

The Company provides deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications, which suspends the requirement to categorize these deferrals as TDRs.

The Company provided deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications, which suspends the requirement to categorize these deferrals as TDRs.

The Part I program was launched in March 2020 and expired at the end of August 2020.

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Prior to the extension of the CARES Act, the Company launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021.

For those borrowers who opted into the Part III program, they are required to provide monthly financial statements and remit payments on a quarterly basis based on excess cash flows, if any, up to their otherwise contractual payment.

The majority of deferrals in the Part III program are principal only deferrals.

At the end of the deferral period, for term loans, payments will be applied to accrued interest first and will resume principal payments once accrued interest is current.

Deferred principal will be due at maturity.

For interest only loans, such as lines of credit, deferred interest will be due at maturity.

As of March 31, 2021, we had 92 total customers opt for deferrals under Part III of the program, which continues through June 30, 2021, with an aggregate principal balance of $ 407.0 million, or 13.7 %, of total portfolio loans and a weighted average deferment period of 2.9 months.

Those borrowers who opted into the Part III program were required to provide monthly financial statements and remit payments on a quarterly basis based on excess cash flows, if any, up to their otherwise contractual payment.

The majority of deferrals in the Part III program were principal only deferrals.

At the end of the deferral period in Part III, which expired at June 30, 2021, for term loans, payments were applied to accrued interest first and resumed principal payments once accrued interest was current.

Deferred principal is due at maturity.

For interest only loans, such as lines of credit, deferred interest was due at maturity.

The expiration of the Part III program as of June 30, 2021 marked the end of any payment deferral programs for the Company.

CARTER BANKSHARES, INC.

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Our new segmentation breaks out Other loans from our original loan segments:

Commercial Real Estate, (“CRE”), Commercial and Industrial, (“C&I”), Construction and Residential Mortgages.

At March 31, 2021, other loans totaled $ 373.4 million consisting of loans that would otherwise have been included in the following loan segments:

CRE, C&I, Construction and Residential Mortgages.

At March 31, 2021 related to the adoption of Topic 326, the initial break-out of other loans totaled $ 373.4 million consisting of loans that would otherwise have been included in the following loan segments:

$ 136.3 million of CRE, $ 77.8 million of C&I, $ 49.6 million of Residential Mortgages and $ 109.7 million of Construction.

This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to the Other loans segment resulted in an increase in current expected credit losses of $ 51.3 million.

Net deferred costs included in the portfolio balances above were $ 3.2 million and $ 3.0 million at March 31, 2021 and December 31, 2020, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 212 thousand and $ 219 thousand at March 31, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $ 32.7 million and $ 25.4 million as of March 31, 2021 and December 31, 2020, respectively.

In addition to mortgage loans held-for-sale, the Company had $ 9.4 million and $ 9.8 million in loans held-for-sale in connection with sale of bank branches at March 31, 2021 and December 31, 2020, respectively, that are expected to close in the second quarter of 2021.

The analysis applied to the Other loans segment, at adoption, resulted in an increase in current expected credit losses of $ 51.3 million.

Deferred costs and fees included in the portfolio balances above were $ 2.9 million and $ 3.0 million at June 30, 2021 and December 31, 2020, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 205 thousand and $ 219 thousand at June 30, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $ 9.3 million and $ 25.4 million as of June 30, 2021 and December 31, 2020, respectively.

In addition to mortgage loans held-for-sale, the Company had $ 9.8 million in loans held-for-sale in connection with the sale of bank branches at December 31, 2020, that closed in the second quarter of 2021.

Troubled Debt Restructurings (“TDR”)

The following table summarizes the Company’s TDRs as of the dates presented:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(Dollars in Thousands) Performing

Loans Nonperforming

TDRs Nonperforming

TDRs Performing

Loans Nonperforming

TDRs Nonperforming

Commercial Real Estate $ 6,107 $ 146 $ 6,253 $ 6,151 $ 21,667 $ 27,818

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1) the debtor is experiencing financial difficulties, and 2) a creditor has granted a concession to the debtor that it would not normally grant.

Nonaccrual loans that are modified can be placed back on accrual status when both principal and interest are current and it is probable that the Bank will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

As of March 31, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs decreased $ 3.0 million, or 2.2 % to $ 131.3 million at March 31, 2021 compared to December 31, 2020.

The Bank received $ 2.9 million of pay-downs and had no new additions for the quarter ended March 31, 2021.

TDRs of $ 24.6 million and $ 25.0 million were nonaccrual as of March 31, 2021 and December 31, 2020, respectively.

During the three months ended March 31, 2021, the Bank modified no loans that constituted a TDR that had minimal commitments to lend additional funds.

The Bank had one consumer automobile loan modified as a TDR during the three months ended March 31, 2020.

Nonaccrual loans that are modified can be placed back on accrual status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

As of June 30, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs decreased $ 24.8 million, or 18.5 % to $ 109.4 million at June 30, 2021 compared to December 31, 2020.

The Company received $ 13.6 million and $ 16.6 million of pay-downs and had no new additions for the three and six months ended June 30, 2021, respectively.

The $ 24.8 million of pay-downs included $ 8.2 million in charge-offs for the resolution of our two largest nonperforming credits.

There were no new TDRs for the three and six months ended June 30, 2021.

TDRs of $ 3.2 million and $ 25.0 million were nonaccrual as of June 30, 2021 and December 31, 2020, respectively.

During the six months ended June 30, 2021, the Company modified no loans that constituted a TDR that had minimal commitments to lend additional funds.

The Company had one consumer automobile loan modified as a TDR during the three and six months ended June 30, 2020.

The customer was experiencing financial difficulties, but sold the vehicle and the proceeds from that sale were applied to the loan balance.

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NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

There were no TDR payment defaults during the three months ended March 31, 2021.

There were no TDR payment defaults during the three and six months ended June 30, 2021.

For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.

At March 31, 2021 and December 31, 2020, we had zero and $ 25.0 million, respectively, in loans modified as TDR’s that had experienced a payment default subsequent to the rework date and were classified as nonperforming.

At June 30, 2021 and December 31, 2020, we had $ 3.2 million and $ 25.0 million, respectively, in loans modified as TDRs that had experienced a payment default subsequent to the rework date and were classified as nonperforming.

The specific reserve portion of the ACL on TDRs, if required, is determined by discounting the restructured cash flow at the original effective rate of the loan before modification or is based on the fair value of the collateral less cost to sell, if repayment of the loan is collateral dependent.

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This method is used consistently for all segments of the portfolio.

The following table presents nonperforming assets as of March 31, 2021 and December 31, 2020.

The following table presents nonperforming assets as of June 30, 2021 and December 31, 2020.

Nonperforming Assets

(Dollars in Thousands) March 31, 2021 December 31, 2020

(Dollars in Thousands) June 30, 2021 December 31, 2020

Nonperforming Assets

2 unchanged sentences

Total Nonaccrual Loans 9,568 32,004

OREO 14,031 15,722

Other Real Estate Owned, or (“OREO”) 21,250 15,722

Total Nonperforming Assets $ 30,818 $ 47,726

As of March 31, 2021 and December 31, 2020, we had $ 677 thousand and $ 67 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 107 thousand at March 31, 2021 and $ 109 thousand at December 31, 2020 in residential real estate included in other real estate owned (“OREO”).

As of June 30, 2021 and December 31, 2020, we had $ 15 thousand and $ 67 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 57 thousand at June 30, 2021 and $ 109 thousand at December 31, 2020 in residential real estate included in OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL at a level determined to be adequate to absorb estimated expected probable incurred losses over the life of loans inherent in the loan portfolio as of the balance sheet date.

The Company maintains an ACL at a level determined to be adequate to absorb current expected credit losses over the life of loans inherent in the loan portfolio as of the balance sheet date.

Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

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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 purchase money mortgages.

The primary source of repayment for these loans is the income and assets of the borrower.

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.

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Our model is based on our best estimate of facts known with the most current information.

The model was developed with subjective assumptions that may cause volatility driven by the following key factors:

prepayment speeds, timing of contractual payments, discount rate, as well as other factors.

The discount rate is reflective of the inherit risk in the Other segment.

A significant 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.

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:

6 unchanged sentences

Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

• A review of the largest twenty pass-rated loan relationships, which represents approximately a quarter of total loans;

• A sampling of new loans originated to include an examination of the evidence of appropriate approval, adherence to loan policy and the completeness and accuracy of the analysis contained in the approval document;

• A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $ 2 million that are not part of the top twenty review;

CARTER BANKSHARES, INC.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

• A review of the largest twenty pass-rated loan relationships, which represents approximately a quarter of total loans;

• A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $ 2.0 million that are not part of the top twenty review;

• Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss history, document exceptions, policy exceptions and emerging trends in risk characteristics.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of March 31, 2021:

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of June 30, 2021:

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total

27 unchanged sentences

Total Other Loans $ — $ — $ — $ 88,345 $ 171,419 $ 115,174 $ 219 $ 375,157

Total Portfolio Loans

Pass $ 238,608 $ 436,673 $ 377,744 $ 474,705 $ 167,863 $ 680,136 $ 94,094 $ 2,469,823

1 unchanged sentence

Substandard 230 126 5,343 94,105 85,415 57,880 — 243,099

Total Loans $ 107,460 $ 446,091 $ 467,148 $ 576,843 $ 376,031 $ 872,627 $ 125,675 $ 2,971,875

Total Portfolio Loans $ 238,838 $ 436,809 $ 389,118 $ 576,966 $ 379,219 $ 801,610 $ 94,094 $ 2,916,654

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of March 31, 2021.

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of June 30, 2021.

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total

21 unchanged sentences

Total Other Loans $ — $ — $ — $ 88,345 $ 171,419 $ 115,174 $ 219 $ 375,157

Total Portfolio Loans

Performing $ 238,608 $ 436,690 $ 383,776 $ 576,323 $ 377,243 $ 800,352 $ 94,094 $ 2,907,086

Nonperforming 230 119 5,342 643 1,976 1,258 — 9,568

Total Loans $ 107,460 $ 446,091 $ 467,148 $ 576,843 $ 376,031 $ 872,627 $ 125,675 $ 2,971,875

Total Portfolio Loans $ 238,838 $ 436,809 $ 389,118 $ 576,966 $ 379,219 $ 801,610 $ 94,094 $ 2,916,654

CARTER BANKSHARES, INC.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the aging of the amortized cost basis in past due loans for our portfolio segments as of March 31, 2021 and December 31, 2020:

March 31, 2021

The following table presents the aging of the amortized cost basis in past due loans for our portfolio segments as of June 30, 2021 and December 31, 2020:

June 30, 2021

(Dollars in Thousands) Current

24 unchanged sentences

Total $ 2,908,769 $ 5,499 $ 905 $ 6,404 $ 31,997 $ 2,947,170

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan as of March 31, 2021.

For the three months ended March 31, 2021, the amount of interest income on nonaccrual loans was immaterial.

There were no loans at March 31, 2021 were that were past due more than more than 90 days and still accruing.

March 31, 2021

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan as of June 30, 2021.

For the three and six months ended June 30, 2021, the amount of interest income on nonaccrual loans was immaterial.

There were no loans at June 30, 2021 that were past due more than 90 days and still accruing.

June 30, 2021

(Dollars in Thousands) Beginning of

9 unchanged sentences

Other — — — —

Total $ 31,997 $ 31,953 $ 3,467 $ —

Total Portfolio Loans $ 31,997 $ 9,568 $ 3,219 $ —

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status but is considered a TDR.

Impaired loans with a commitment of $ 1.0 million or more are individually evaluated.

During the three and six months ended June 30, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

A loan is considered individually evaluated when it is transferred to nonaccrual status, or remains on accrual status but is considered a TDR.

Individually evaluated loans with a commitment of $ 1.0 million or more are evaluated as individually evaluated loans.

During the three months ended March 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

The following table presents the amortized cost basis of individually evaluated loans as of March 31 2021.

The following table presents the amortized cost basis of individually evaluated loans as of June 30, 2021.

Changes in the fair value of the collateral for individually evaluated loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.

March 31, 2021

June 30, 2021

Type of Collateral

6 unchanged sentences

Total $ 8,019

The following table presents activity in the ACL and ALL for the three months ended March 31, 2021 and March 31, 2020, respectively:

Three Months Ended March 31, 2021

The following table presents activity in the ACL and ALL for the three and six months ended June 30, 2021 and June 30, 2020, respectively:

Three Months Ended June 30, 2021

(Dollars in Thousands) Commercial

5 unchanged sentences

Balance at Beginning of Period $ 42,342 $ 4,905 $ 5,171 $ 1,347 $ 7,106 $ 56,001 $ 116,872

Provision for Credit Losses on Loans ( 6,103 ) ( 185 ) 217 269 1,039 5,730 967

Charge-offs ( 8,238 ) ( 7 ) ( 22 ) ( 539 ) — — ( 8,806 )

Recoveries 140 1 1 144 — — 286

Net (Charge-offs) / Recoveries ( 8,098 ) ( 6 ) ( 21 ) ( 395 ) — — ( 8,520 )

Balance at End of Period $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319

(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

Our new segmentation breaks out Other loans from our original loan segments:

CRE, C&I , residential mortgages and construction.

The allowance balance at the beginning of period was reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

Six Months Ended June 30, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential

Mortgage Other

Consumer Construction Other (1)

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 34,871 $ 3,643 $ 2,000 $ 2,479 $ 6,357 $ 4,724 $ 54,074

Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 61,642

7 unchanged sentences

CRE, C&I , residential mortgages and construction.

The allowance balance at the beginning of period were reclassified to Other from their original loan segments:

The allowance balance at the beginning of period was reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

Three Months Ended March 31, 2020

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended June 30, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Construction Residential

Mortgage Other

Consumer Total

Allowance for Loan Losses on Loans:

Balance at Beginning of Period $ 26,073 $ 3,990 $ 7,334 $ 1,811 $ 3,734 $ 42,942

Provision for Loan Losses on Loans 2,513 848 1,043 390 679 5,473

Charge-offs ( 40 ) ( 8 ) — ( 15 ) ( 1,094 ) ( 1,157 )

Recoveries — 1 — — 146 147

Net (Charge-offs) / Recoveries ( 40 ) ( 7 ) — ( 15 ) ( 948 ) ( 1,010 )

Balance at End of Period $ 28,546 $ 4,831 $ 8,377 $ 2,186 $ 3,465 $ 47,405

Six Months Ended June 30, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Construction Residential

8 unchanged sentences

Balance at End of Period $ 28,546 $ 4,831 $ 8,377 $ 2,186 $ 3,465 $ 47,405

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The adoption of Topic 326 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021.

The Day 1 model introduced a segmented pool of loans for discrete analysis.

This segmented pool had an aggregate principal balance of $ 373.4 million at March 31, 2021 and included unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this pool resulted in an increase in expected credit losses of $ 51.3 million and is disclosed in the Other line item in the table above.

At December 31, 2020, the aforementioned Other line item within the probable incurred loss model included $ 102.5 million of impaired loans and the remaining $ 270.9 million were not impaired and remained in their respective segments.

This segmented pool had an aggregate principal balance of $ 373.4 million at March 31, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this pool resulted in an increase in expected credit losses of $ 51.3 million, at adoption, and is disclosed in the Other segment in the 2021 tables below.

At December 31, 2020, the aforementioned Other segment within the probable incurred loss model included $ 102.5 million of impaired loans and the remaining $ 270.9 million were not impaired and remained in their respective segments.

Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $ 4.7 million at December 31, 2020.

For the quarter ended March 31, 2021, our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment.

Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment.

A significant 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 was developed with subjective assumptions that is driven by the following key factors:

prepayment speeds, timing of prepayments, loss given defaults as well as other factors including the discount rate and ultimately the timing of future cash flows.

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.

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.

An expected credit loss of $ 56.0 million upon adoption, which is an increase from the $ 4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased $ 62.8 million to $ 116.9 million for the three months ended March 31, 2021 compared to $ 54.1 million at December 31, 2020 due to the Day 1 adoption of CECL of $ 61.6 million.

In the first quarter of 2021, adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral.

The ACL increased $ 55.2 million to $ 109.3 million at June 30, 2021 compared to $ 54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $ 61.6 million.

In the first six months of 2021, adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain hospitality loans on deferral.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

Management observed continued deterioration on hospitality loans with aggregate principal balances of $ 50.9 million that are on deferral as of March 31, 2021.

This resulted in a current expected credit loss of $ 11.7 million.

The recovery has not been as sharp as management had anticipated as observed in other hospitality credits.

Hospitality loans on deferral at the end of Phase III of the deferral program, which expired on June 30, 2021, had an aggregate principal balances of $ 50.9 million, which resulted in a current expected credit loss of $ 11.7 million.

The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $ 42.8 million which resulted in current expected losses of $ 10.2 million as of January 1, 2021.

Between the Day 1 model and the model ended March 31, 2021 a loan with a principal balance of $ 8.1 million was recognized resulting in additional current expected losses of $ 1.5 million during the three months ended March 31, 2021.

Included in the provision for unfunded commitments in the first quarter of 2021 is a release of $ 0.3 million for the life-of-loss reserve for unfunded commitments compared to a release of $ 0.5 million in the fourth quarter of 2020, which was included in noninterest expense.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of March 31, 2021:

March 31, 2021

Between the Day 1 model and the model ended June 30, 2021 a loan with a principal balance of $ 8.1 million experienced additional deterioration resulting in additional current expected losses of $ 1.5 million in the first quarter of 2021.

Included in the provision for unfunded commitments for the three and six months ended June 30, 2021 was a release of $ 0.6 million and $ 0.9 million for the life-of-loss reserve for unfunded commitments.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of June 30, 2021:

June 30, 2021

(Dollars in Thousands) Commercial

12 unchanged sentences

The following tables are disclosures related to the allowance for loan losses in prior periods.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of December 31, 2020:

15 unchanged sentences

Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following tables present the balances in the ALL and the recorded investment in the loan balances based on impairment method as of December 31, 2020:

36 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents average recorded investment and interest income recognized on individually evaluated loans for the three months ended March 31, 2020:

Three Months Ended March 31, 2020

(Dollars in Thousands) Average

on Individually Evaluated

Loans Interest

The following table presents the year-to-date average recorded investment and interest income recognized on individually evaluated loans for the three and six months ended June 30, 2020:

June 30, 2020 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020

(Dollars in Thousands) Average Investment on Impaired Loans Interest Income Recognized Interest Income Recognized

Loans without a Specific Valuation Allowance

6 unchanged sentences

Construction 53,752 595 1,008

Residential Mortgages 52,099 428 1,048

Total by Category

3 unchanged sentences

Residential Mortgages 52,099 428 1,048

Total Individually Evaluated Loans $ 144,369 $ 1,065

Total Impaired Loans $ 143,948 $ 1,055 $ 2,120

NOTE 6 – FAIR VALUE MEASUREMENTS

16 unchanged sentences

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

The following are descriptions of the valuation methodologies used for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

Recurring Basis

44 unchanged sentences

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.

At March 31, 2021 our 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.

At June 30, 2021 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:

March 31, 2021

June 30, 2021

(Dollars in Thousands) Carrying

25 unchanged sentences

Total $ 4,756 $ — $ 4,756 $ —

There were no transfers between Level 1 and Level 2 during the quarter ended March 31, 2021 or the year ended December 31, 2020.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2021 or the year ended December 31, 2020.

We have invested in subordinated debt of other financial institutions.

We have two securities of $ 5.0 million each that are considered to be Level 3 securities at March 31, 2021 and December 31, 2020.

The change in the fair value of Level 3 securities available-for-sale from $ 10.4 million at December 31, 2020 to $ 10.3 million at March 31, 2021 is attributable to the calculated change in fair value as further detailed below.

We have three securities totaling $ 13.7 million that are considered to be Level 3 securities at June 30, 2021 and two totaling $ 10.4 million at December 31, 2020.

The change in the fair value of Level 3 securities available-for-sale from $ 10.4 million at December 31, 2020 to $ 13.7 million at June 30, 2021 is attributable to the calculated change in fair value as further detailed below as well as a new security in the second quarter of 2021 for $ 3.5 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, and the institution’s core earnings ability, liquidity management platform and current on and off balance sheet interest rate risk exposures.

The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

operations, and the institution’s core earnings ability, liquidity management platform and current on and off balance sheet interest rate risk exposures.

Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:

March 31, 2021

June 30, 2021

(Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value

5 unchanged sentences

Impaired Loans $ — $ — $ 10,919 $ 10,919

Individually evaluated loans had a net carrying amount of $ 10.8 million at March 31, 2021 with a valuation allowance of $ 15.0 million, resulting in a $ 0.3 million decrease in provision for credit losses for the three months ended March 31, 2021.

Impaired loans had a net carrying amount of $ 10.9 million at December 31, 2020 with a valuation allowance of $ 15.3 million, resulting in a $ 9.1 million increase in provision for credit losses for the year ended December 31, 2020.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 14.0 million as of March 31, 2021, compared with $ 15.7 million at December 31, 2020, respectively.

Write-downs of $ 0.1 million were recorded on OREO for the three months ended March 31, 2021 compared to $ 0.1 million for the same period in 2020.

Individually evaluated loans had a net carrying amount of $ 2.9 million at June 30, 2021 with a valuation allowance of $ 1.9 million.

Impaired loans had a net carrying amount of $ 10.9 million at December 31, 2020 with a valuation allowance of $ 15.3 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 21.3 million as of June 30, 2021, compared with $ 15.7 million at December 31, 2020.

Write-downs of $ 3.2 million were recorded on OREO for the six months ended June 30, 2021 compared to $ 0.1 million for the same period in 2020.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:

March 31, 2021

June 30, 2021

(Dollars in Thousands) Fair

3 unchanged sentences

Range Average

Individually Evaluated Loans $ 1,163 Discounted Appraisals Estimated Selling Costs 43.0 % 43.0 %

Individually Evaluated Loans $ 2,698 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 12.0 – 50.0 %

6 unchanged sentences

Total Other Real Estate Owned $ 21,250

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

December 31, 2020

13 unchanged sentences

Total Other Real Estate Owned $ 15,722

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

A baseline discount rate has been established for impairment measurement.

1 unchanged sentence

Management considers the unique attributes and characteristics of each specific impaired loan and may use judgement to adjust the baseline discount rate when appropriate.

The carrying values and estimated fair values of our financial instruments at March 31, 2021 and December 31, 2020 are presented in the following tables.

Fair values for March 31, 2021 and December 31, 2020 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

The carrying values and estimated fair values of our financial instruments at June 30, 2021 and December 31, 2020 are presented in the following tables.

Fair values for June 30, 2021 and December 31, 2020 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

GAAP requires disclosure of fair value information about financial instruments carried at book value on the consolidated balance sheet.

in cases where quoted market prices are not available, fair values are based on estimates using present vale or other valuation techniques.

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.

1 unchanged sentence

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair Value Measurements at March 31, 2021

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Fair Value Measurements at June 30, 2021

(Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total

4 unchanged sentences

Portfolio Loans, net 2,807,335 — — 2,768,885 2,768,885

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value 9,423 — — 9,423 9,423

Federal Home Loan Bank Stock, at Cost 3,215 — — NA NA

3 unchanged sentences

Deposits $ 3,659,341 $ 720,231 $ 1,481,942 $ 1,480,465 $ 3,682,638

Deposits Held for Assumption in Connection with Sale of Bank Branches 81,565 9,010 20,166 52,389 81,565

Other Liabilities- Interest Rate Derivatives 2,884 — 2,884 — 2,884

8 unchanged sentences

Portfolio Loans, net 2,893,096 — — 2,854,244 2,854,244

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value 9,835 — — 9,835 9,835

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value 9,835 — — 9,835 9,835

Federal Home Loan Bank Stock, at Cost 5,093 — — NA NA

7 unchanged sentences

Accrued Interest Payable 2,131 — — 2,131 2,131

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

10 unchanged sentences

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.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

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.

5 unchanged sentences

Asset Derivatives (Included in Other Assets)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

5 unchanged sentences

Liability Derivatives (Included in Other Liabilities)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

3 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 54 $ 331,053 $ 2,884 39 $ 255,723 $ 4,756

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the income (loss) recognized in income on derivatives for the periods presented:

For the Three Months Ended March 31,

For the Three Months Ended June 30, For the Six Months Ended June 30,

(Dollars in Thousands) 2021 2020 2021 2020

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans ( 276 ) ( 108 ) 153 ( 199 )

Total Derivative Income (Loss) $ 429 $ ( 91 )

Total Derivative (Loss) Income $ ( 276 ) $ ( 108 ) $ 153 $ ( 199 )

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.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented:

Asset Derivatives (Included in Other Assets) Liability Derivatives (Included in Other Liabilities)

(Dollars in Thousands) March 31,

(Dollars in Thousands) June 30,

2021 December 31,

2020 March 31,

2020 June 30,

2021 December 31,

4 unchanged sentences

Gross Amounts Not Offset (1) — — ( 1,310 ) ( 5,220 )

— — ( 3,390 ) ( 5,220 )

Net Amount $ 2,772 $ 4,493 $ 1,572 $ ( 464 )

3 unchanged sentences

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings are an additional source of liquidity for us.

Federal Home Loan Bank the (“FHLB”) borrowings were $ 30.0 million and $ 35.0 million at March 31, 2021 and December 31, 2020, respectively.

FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at March 31, 2021 and December 31, 2020.

Total loans pledged as collateral were $ 781.3 million and $ 804.2 million at March 31, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both March 31, 2021 and December 31, 2020.

The Company continues to methodically pledge additional eligible loans, with the ultimate expectation to have full pledging by year end 2021.

The Company is eligible to borrow up to an additional $ 506.1 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of March 31, 2021.

Borrowings are an additional source of liquidity the Company.

Federal Home Loan Bank, or (“FHLB”) borrowings were $ 30.0 million and $ 35.0 million at June 30, 2021 and December 31, 2020, respectively.

Total loans pledged as collateral were $ 846.4 million and $ 804.2 million at June 30, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both June 30, 2021 and December 31, 2020.

The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year.

The Company is eligible to borrow up to an additional $ 547.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of June 30, 2021.

The Company had the capacity to borrow up to an additional $ 510.5 million from the FHLB at December 31, 2020.

The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020

(Dollars in Thousands) June 30, 2021 December 31, 2020

Long-term Borrowings $ 30,000 $ 35,000

Weighted Average Interest Rate 1.15 % 1.13 %

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to March 31, 2021 and thereafter are as follows:

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to June 30, 2021 and thereafter are as follows:

(Dollars in Thousands) Balance Weighted

6 unchanged sentences

Total FHLB Borrowings $ 30,000 1.15 %

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $ 546.5 million at March 31, 2021 and $ 591.2 million at December 31, 2020, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

Commitments to extend credit, which amounted to $ 460.2 million at June 30, 2021 and $ 591.2 million at December 31, 2020, 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 represent $ 355.9 million, or 65.1 %, and $ 391.4 million, or 66.2 %, of the commitments to extend credit at March 31, 2021 and December 31, 2020, respectively.

Lines of credit for construction projects represent $ 284.6 million, or 61.8 %, and $ 391.4 million, or 66.2 %, of the commitments to extend credit at June 30, 2021 and December 31, 2020, 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 $ 27.8 million at March 31, 2021 and $ 29.3 million at December 31, 2020.

The Company had outstanding letters of credit totaling $ 31.4 million at June 30, 2021 and $ 29.3 million at December 31, 2020.

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.

3 unchanged sentences

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 allowance for credit losses for loans, modified to take into account the probability of a draw-down on the commitment.

Results for reporting periods beginning after January 1, 2021 are presented under Topic 326, while prior period amounts continue to be reported in other expense on our Consolidated Statements of Income.

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.

Results for reporting periods beginning after January 1, 2021 are presented under Topic 326, while prior period amounts continue to be reported in

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

other expense on our Consolidated Statements of Income.

The life-of-loss reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The activity in the life-of-loss reserve on unfunded loan commitments for the three months ended March 31, 2021 was as follows:

(Dollars in Thousands) Three Months Ended March 31, 2021

The activity in the life-of-loss reserve on unfunded loan commitments for the three and six months ended June 30, 2021 were as follows:

(Dollars in Thousands) Three Months Ended June 30, 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

March 31, 2021 $ 2,770

Provision for unfunded commitments ( 603 )

June 30, 2021 $ 2,167

(Dollars in Thousands) Six Months Ended June 30, 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

Balance at beginning of period $ 144

2 unchanged sentences

Provision for unfunded commitments ( 885 )

March 31, 2021 $ 2,770

June 30, 2021 $ 2,167

Our life-of-loss reserve for unfunded commitments is determined using a methodology similar to that used to determine the ACL.

Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments.

The provision for unfunded commitments was a release of $ 0.3 million for the three months ended March 31, 2021.

The provision for unfunded commitments was a release of $ 0.9 million for the six months ended June 30, 2021.

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims.

While any type of litigation contains a level of uncertainty, management believes that the outcome of such proceedings or claims pending will not have a material adverse effect on our consolidated financial position or results of operations.

Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.

Other than as set forth below, as of June 30, 2021, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.

On May 31, 2021, the Bank and its directors were named as defendants in a lawsuit filed in the United States District Court for the Southern District of West Virginia by James C.

Justice, II, Cathy L.

Justice, James C.

Justice, III and various related entities that he and/or they own and control (such entities, the “Justice Entities” and collectively, the “Plaintiffs”).

The allegations contained in the lawsuit relate to a series of loans (the “Loans”) made by the Bank to certain Justice Entities that are secured by collateral pledged by certain Justice Entities and are backed by personal guarantees from James C.

Justice, II and Cathy L.

Justice and, in certain cases, by personal guarantees from James C.

Justice, III.

In the lawsuit the Plaintiffs allege that the Bank (i) breached an implied covenant of good faith and fair dealing, (ii) breached fiduciary duties of care and loyalty, and (iii) violated anti-tying restrictions of the Bank Holding Company Act of 1956, as amended, and allege that the Bank’s directors aided and abetted breaches of fiduciary duties of care and loyalty by the Bank.

The Plaintiffs seek monetary damages of $ 421 million, additional punitive damages and interest on damages as allowed by law, payment of costs, expenses and attorneys’ fees, and a declaratory judgment from the court that certain confessions of judgment, release and affirmation agreements, and forbearance agreements executed by the Plaintiffs in favor of the Bank and relating to the Loans and/or their origination, extension, restructuring or forbearance, are unenforceable.

On July 14, 2021, the Bank filed a motion to dismiss the lawsuit for improper venue or, in the alternative, to transfer the lawsuit from the United States District Court for the Southern District of West Virginia, to the United States District Court for the Western District of Virginia (the “WDVA”), including on the grounds that Plaintiffs executed approximately 90 documents between 2017 and 2020 that contain forum selection clauses that mandate either the WDVA or the Circuit Court in the City of Martinsville, Virginia as the exclusive forum to adjudicate disputes arising from the lending relationship between the Bank and the Plaintiffs.

Also, on July 14, 2021, the Bank’s directors filed a motion to dismiss the lawsuit for lack of personal jurisdiction, including because the complaint contains no allegations that tie any of the Bank’s directors to West Virginia.

Both motions are pending.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

The Company and the Bank deny the allegations contained in the lawsuit and intend to vigorously defend the matter and the validity of the confessions of judgment, release and affirmation agreements and forbearance agreements.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in the lawsuit.

At this early stage of the lawsuit, the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter or to estimate the range of any possible loss.

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the change in components of other comprehensive income (loss) for the periods presented, net of tax effects:

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020

(Dollars in Thousands) Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized Gains Arising during the period $ 8,456 $ ( 1,776 ) $ 6,680 $ 14,422 $ ( 3,029 ) $ 11,393

Reclassification Adjustment for Gains included in Net Income ( 1,499 ) 315 ( 1,184 ) ( 2,321 ) 488 ( 1,833 )

Other Comprehensive Income $ 6,957 $ ( 1,461 ) $ 5,496 $ 12,101 $ ( 2,541 ) $ 9,560

Six Months Ended June 30, 2021 Six Months Ended June 30, 2020

(Dollars in Thousands) Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized (Losses) Gains Arising during the period $ ( 2,038 ) $ 428 $ ( 1,610 ) $ 16,426 $ ( 3,449 ) $ 12,977

1 unchanged sentence

Other Comprehensive (Loss) Income $ ( 7,147 ) $ 1,501 $ ( 5,646 ) $ 12,891 $ ( 2,707 ) $ 10,184

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), represents an overview of 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 month periods ended March 31, 2021 and 2020.

Our MD&A should be read in conjunction with our Consolidated Financial Statements and notes thereto.

The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements related to the COVID-19 pandemic and its potential impact on the Company, its markets and its customers, potential asset quality developments, and the Company’s efficiency initiatives and pending branch sales, and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting the Company and its future business and operations.

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,” “believe,” “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.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:

changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”);

credit losses;

technological risks and developments;

cyber-security;

threats, attacks or events;

rapid technological developments and changes;

the Company’s liquidity and capital positions;

the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of 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;

the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of economic recovery when the pandemic subsides and the heightened impact it has on exacerbation of many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2020;

legislative or regulatory changes and requirements, including the impact of the Coronavirus

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Aid, Relief, and Economic Security Act (the “CARES Act”), as amended by the Consolidated Appropriations Act, of 2021 (the “CAA”), and other legislative and regulatory reactions to the COVID-19 pandemic;

potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, under the CARES Act, as amended by the CAA;

sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;

a change in spreads on interest-earning assets and interest-bearing liabilities;

regulatory supervision and oversight;

legislation affecting the financial services industry as a whole, and the Company, in particular;

the outcome of pending and future litigation and governmental proceedings;

increasing price and product/service competition;

the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

the Company’s strategic branch network optimization plan;

managing our internal growth and acquisitions;

the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;

containing costs and expenses;

reliance on significant customer relationships;

general economic or business conditions;

deterioration of the housing market and reduced demand for mortgages;

deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the 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.

Many of these factors, as well as other factors, are described throughout this Quarterly Report, including and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and any of our subsequent filings with the 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 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.

Critical Accounting Policies and Estimates

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except we have updated our allowance for credit losses policy and included required disclosures in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

Please refer to the CECL disclosure contained in Notes 1 and 5 to the financial statements included in this Quarterly Report on Form 10-Q.

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at March 31, 2021.

The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”).

The Bank is an insured, Virginia state-chartered bank, which operates branches in Virginia and North Carolina.

The Company provides a full range of financial services with retail, and commercial banking products and insurance.

Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE.”

The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers.

The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

Our mission is that the Company strives to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve.

Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin.

Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses.

The Company is focused on executing our strategy to successfully build our brand and grow our business in our markets.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020.

The CARES Act is an emergency stimulus measure providing assistance and relief in a variety of ways to certain individuals, businesses, and industries.

The CARES Act established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”).

In addition to the general impact of the COVID-19 pandemic has had on the Company, certain provisions of the CARES Act, as well as other legislative and regulatory relief efforts, may have a material impact on our operations.

The full extent of these impacts at the date of this filing is unknown;

however, we have disclosed the material items of which we are aware.

Many of the CARES Act’s programs are dependent upon the direct involvement of U.S.

financial institutions and will be implemented through rules and guidance adopted by federal agencies, including the U.S.

Department of the Treasury, the Federal Deposit Insurance Corporation (“FDIC”), the Board of Governors of the Federal Reserve System (“FRB” or “Federal Reserve”) and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Set forth below is a brief overview of certain provisions of the CARES Act and certain other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company.

The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein.

Such statutes, regulations, and policies are subject to ongoing review by U.S.

Congress and federal regulatory authorities.

Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Bank could have a material effect on the Bank.

Many of the requirements called for in the CARES Act and related regulations and supervisory guidance will be implemented over time and most will be subject to implementing regulations over the course of the coming weeks.

The Bank will continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

FRB Reserve Programs and Initiatives

The CARES Act encourages the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities, including (i) a Midsize Business/Nonprofit Organization Program to provide financing to banks and other lenders to make direct loans to eligible businesses and nonprofit organizations with between 500 and 10,000 employees and (ii) the Municipal Liquidity Facility, provide liquidity to the financial system that supports states and municipalities.

On April 9, 2020, the FRB announced and solicited comments regarding the Main Street Lending Program, which would implement certain of these recommendations.

Separately and in response to the COVID-19 pandemic, the FRB’s Federal Open Market Committee (the “FOMC”) has set the federal funds target rate – i.e., the interest rate at which depository institutions such as the Company lend reserve balances to other depository institutions overnight on an uncollateralized basis – to a historic low.

On March 16, 2020, the FOMC set the federal funds target rate at 0-0.25%.

Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

In addition, the FRB has expanded the size and scope of three existing programs to mitigate the economic impact of the COVID-19 pandemic:

(i) the Primary Market Corporate Credit Facility;

(ii) the Secondary Market Corporate Credit Facility;

and (iii) the Term Asset-Backed Securities Loan Facility.

The FRB has also established two new program facilities – the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility – to broaden its support for the flow of credit to households and businesses during the COVID-19 pandemic.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Temporary Bank Secrecy Act (“BSA”) Reporting Relief

Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has provided targeted relief from certain BSA reporting requirements and have provided updated guidance to financial institutions on complying with such requirements during the COVID-19 pandemic.

Specifically, FinCEN has (i) granted targeted relief to financial institutions participating in the PPP, stating that PPP loans to existing customers will not require reverification under applicable BSA requirements, unless reverification is otherwise required under the financial institution’s risk-based BSA compliance program, (ii) acknowledged that there may be “reasonable delays in compliance” due to the COVID-19 pandemic, and (iii) temporarily suspended implementation of its February 2020 ruling, which would have entailed significant changes to currency transaction reporting filing requirements for transactions involving sole proprietorships and entities operating under a “doing business as” or other assumed name.

The Company’s Response to COVID-19

Lending Operations

The Company elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology.

The Company was subject to the adoption of the CECL accounting method under the FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020 and has since implemented CECL January 1, 2021.

Refer to Note 1, Basis of Presentation and Note 5 Allowance for Credit Losses, of the Notes to Unaudited Consolidated Financial statements for additional disclosures related to CECL.

The Company quickly responded to the pandemic and the CARES Act, offering the option of payment deferrals, participation in the PPP, fee waivers and other relief actions to customers.

Banks have been identified as essential services and have remained open during the COVID-19 pandemic.

As of April 28, 2021, all of the Company’s branch lobbies are open.

Every opportunity is being taken to protect both customers and employees through enhanced cleaning services, social distancing and personal protective equipment requirements for both.

Approximately 20% of the Company’s workforce is working remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the Small Business Administration’s (“SBA”) 7-A loan program.

The Company became an approved SBA 7A lender in November 2019.

The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic.

Initially, $349 billion was approved and designated for the PPP in order for the Small Business Administration (“SBA”) to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses.

The Company participated in the initial round of funding through a referral relationship with a third-party, non-bank lender.

When an additional $310 billion in funds were approved and designated for the PPP, we opted to set up an internal, automated loan process utilizing our core system provider.

As of March 31, 2021 we processed either through a third-party or internally 1,067 PPP loans totaling $66.0 million, represented by $17.9 million processed in round one, $39.9 million processed in round two and $8.2 million in round three.

The Company has continued making PPP loans pursuant to the additional PPP authorization that was contained in the December 2020 COVID-19 relief law.

The FRB implemented a liquidity facility available to financial institutions participating in the PPP.

However, the Company opted to fund all PPP loans through our internal liquidity sources.

These loans are fully guaranteed by the SBA and do not represent a credit risk.

We expect the vast majority of these PPP loans will be forgiven based upon a preliminary review of the loans.

As of March 31, 2021, the Company thus far has had 295 loans totaling $19.4 million fully forgiven by the SBA.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The Part I program was launched in March 2020 and expired at the end of August 2020.

The deferrals in Part I typically provided deferral of both principal and interest through the expiry.

The Part II program was launched in July 2020 and expired at the end of December 2020.

The deferrals in this program were needs based and required the collection of updated financial information and in certain situations, the validation of liquidity to support the business.

Prior to the extension of the CARES Act, the Company launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021.

The majority of deferrals in the Part III program are principal only deferrals.

At the end of the deferral period, for term loans, payments will be applied to accrued interest first and will resume principal payments once accrued interest is current.

Deferred principal will be due at maturity.

For interest only loans, such as lines of credit, deferred interest will be due at maturity.

As of March 31, 2021, we had 92 total customers opt for deferrals under Part III of the program, which continues through June 30, 2021, with an aggregate principal balance of $407.0 million, or 13.7%, of total portfolio loans and a weighted average deferment period of 2.9 months.

Approximately $320.4 million, comprised of 58 loan modifications, were related to the hospitality industry.

At the peak of the deferral programs, the company had 958 commercial and consumer customers opt for the program with an aggregate principal balance of $1.2 billion, or 41.0% of total loans.

The following table provides detail of the Company’s deferred loans as of March 31, 2021:

(Dollars in Thousands) Number

of Loans Loan

Principal Percent of

Outstanding Weighted

(months) Total Deferment

Principal Interest

Commercial Real Estate 85 $ 399,037 13.43 % 2.90 $ 280,451 $ 118,586

Commercial and Industrial 1 6,000 0.20 % 2.90 — 6,000

Residential Mortgages 5 1,828 0.06 % — 1,828 —

Other Consumer — — — % — — —

Construction 1 163 0.01 % 2.90 163 —

Other — — — % — — —

Total Aggregate Deferred Payments 92 $ 407,028 13.70 % 2.90 $ 282,442 $ 124,586

The following table provides detail of the Company’s deferred loans as of December 31, 2020:

(Dollars in Thousands) Number

of Loans Loan

Principal Percent of

Outstanding Weighted

(months) Total Deferment

Principal Interest

Commercial Real Estate 81 $ 382,437 12.98 % 6.0 $ 269,414 $ 113,023

Commercial and Industrial 1 6,000 0.20 % 6.0 — 6,000

Obligations of States and Political Subdivisions — — — % — — —

Commercial Construction 1 163 0.01 % 4.0 163 —

Total Commercial Loans 83 388,600 13.18 % 269,577 119,023

Residential Mortgages — — — % — — —

Other Consumer — — — % — — —

Consumer Construction — — — % — — —

Total Consumer Loans — — — % — — —

Total Aggregate Deferred Payments 83 $ 388,600 13.18 % $ 5.9 $ 269,577 $ 119,023

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our interest income could be reduced due to the COVID-19 pandemic.

In keeping with guidance from regulators, we are actively working borrowers affected by the COVID-10 pandemic to defer their payments, interest, and fees.

Interest and fees will still accrue to income through normal GAAP accounting.

Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.

In such a scenario, interest income in future periods could be negatively impacted.

At this time, we are unable to project the significance of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Our exposure to hospitality at March 31, 2021 equated to approximately $501.5 million, or 16.9% of total portfolio loans, of which approximately $320.4 million on 58 loans are on deferral.

These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows.

However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy levels at or below breakeven which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness.

These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

These risk considerations were factored into qualitative adjustments included in the ACL.

As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected.

Retail Operations

The Company continues to promote digital banking options through our website.

Customers are encouraged to utilize online and mobile banking tools and our customer contact center for personal and automated telephone banking services.

Retail branches are staffed and available to assist customers by offering lobby appointments, drive-up and virtual servicing.

In March 2020, we closed all branch lobbies to customer activity, offering drive-up and appointment only services.

On October 31, 2020, we opened 36 branch lobbies and as of April 28, 2021, we opened our remaining branch lobbies.

Retail leadership continues to monitor branch traffic and local conditions daily and makes adjustments as needed.

All branches are equipped with video conferencing and online tools that enable virtual servicing.

We continue to pay all employees according to their normal work schedule, even if their hours have been reduced.

No employees have been furloughed.

Employees whose job responsibilities can be effectively carried out remotely are working from home.

Employees whose critical duties require their continued presence on-site are utilizing personal protection equipment and observing social distancing and cleaning protocols.

Our fee income for 2020 was negatively impacted due to COVID-19 by approximately $1.5 million due to the COVID-19 pandemic.

Beginning on July 20, 2020, certain account fees were reinstated.

In keeping with guidance from regulators, we are actively working with customers effected by the COVID-10 pandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees.

We believe these reductions in fees are temporary in conjunction with the length of the economic crisis caused by the COVID-19 pandemic.

The breadth of the economic impact is likely to continue to impact our fee income in future periods.

Capital Resources and Liquidity

As of March 31, 2021, all of the Company’s capital ratios were in excess of all regulatory requirements.

The economic recession brought about by the COVID-19 pandemic has improved during the first quarter of 2021 and during the second quarter 2021 to date.

We maintain access to multiple sources of liquidity.

Funding sources accessible to the Company include borrowing availability at the Federal Home Loan Bank (“FHLB”), equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which $506.1 million remains available at March 31, 2021, federal funds unsecured lines with six other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered CDs.

In addition to the above resources, the Company also has $626.3 million of unpledged available-for-sale securities as an additional source of liquidity at March 31, 2021.

If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The Company is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources.

Due to the economic uncertainty, we are taking a prudent approach to capital management and have established access to the FRB’s PPP Lending Facility.

Earnings Summary

Net income increased $5.0 million, or 112.0%, for the three months ended March 31, 2021 compared to the same period in 2020.

Net income for the three months ended March 31, 2021 was $9.4 million, or $0.36 diluted earnings per share, compared to net income of $4.4 million, or $0.17 diluted earnings per share, for the same period in 2020.

The increase in net income was due to a lower provision for credit losses of $2.9 million, a $2.0 million increase in noninterest income and a decrease in noninterest expense of $1.1 million, offset by a decline in net interest income of $0.7 million and an increase in the provision for income taxes of $0.6 million.

Net interest income decreased $0.7 million, or 2.7%, to $26.5 million during the first three months of 2021 compared to the same period of 2020.

The net interest margin, on a fully taxable equivalent (“FTE”) basis, which is non-GAAP measure, decreased 23 basis points to 2.78% in the first quarter of 2021 compared to 3.01% in the first quarter of 2020.

The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but were partially offset by a lower cost of funds.

The yield on interest-earning assets decreased 71 basis points for the three months ended March 31, 2021, partially offset by a 57 basis point decline in funding costs compared to the same period of 2020.

Net interest margin is reconciled to net interest income adjusted to a FTE basis below in the “Net Interest Income” income section of the “Results of Operations - Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 discussion below.

Also refer to the “Explanation of Use of Non-GAAP Financial Measures” below for additional discussion of non-GAAP measures.

The provision for credit losses decreased $2.9 million to $1.9 million for the three months ended March 31, 2021 compared to $4.8 million for the same period of 2020 due to qualitative adjustments of $2.6 million for the decline in economic and market conditions as a result of COVID-19.

The first quarter of 2021 provision for credit losses was primarily driven by adjustments to the CECL model to account for additional expected deterioration in credit quality with respect to loans on deferral.

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

During the first quarter of 2021, management observed continued deterioration on a loan in deferral with an aggregate principal balance of $8.1 million that was not previously recognized in the Day 1 model.

This adjustment resulted in additional reserves of $1.5 million during the first quarter of 2021.

Provision expense for the first quarter of 2021was impacted by net charge-offs totaling $0.7 million.

Prior to the adoption of CECL at January 1, 2021, the life-of-loss reserves on unfunded commitments was a component of noninterest expense and has not been reclassified for comparable periods.

The life-of-loss reserves on unfunded commitments totaled $2.8 million at March 31, 2021.

Net charge-offs were $0.7 million in the first three months of 2021 compared to $0.6 million in the same period of 2020.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10% for the three months ended March 31, 2021 and 0.09% for the same period in 2020.

At March 31, 2021 and December 31, 2020, nonperforming loans were consistent at $32.0 million.

Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

Total noninterest income increased $2.0 million, or 28.8%, to $9.0 million for the three months ended March 31, 2021 compared to $7.0 million for the same period in 2020, primarily due to $3.6 million in net securities gains.

Security gains increased by $2.4 million for the three months ended March 31, 2021 to $3.6 million compared to $1.2 million for the same period of 2020 due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in the securities portfolio.

Other key factors that contributed to the increase in total noninterest income during the first quarter of 2021 were higher debit card interchange fees of $0.6 million, increased service charges on deposit accounts of $0.2 million and a $0.2 million increase in other noninterest income.

These increases were offset by lower insurance commissions of $1.0 million and lower commercial loan swap fee income of $0.2 million due to declines in our interest rate swap contracts by our commercial customers.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Total noninterest expense decreased $1.1 million, or 4.6%, for the first quarter of March 31, 2021 to $23.6 million compared to $24.7 million in the same period of 2020.

The decrease was primarily driven by a decline of $1.0 million in salaries and employee benefits primarily attributable to our branch network optimization project, lower unfunded loan commitment expense of $1.0 million primarily due to the reclassification to the provision for credit losses in 2021 due to the adoption of CECL, a decrease of $0.4 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020 and a $0.5 million decrease in other noninterest expense.

Offsetting these decreases were higher professional and legal fees of $0.8 million, higher data processing expenses of $0.4 million due to an increase in customer accounts and new modules added to our core processor, an increase of $0.3 million in occupancy expenses and a $0.2 million increase in the amortization of tax credits.

The provision for income taxes increased $0.7 million to $0.9 million for the three months ended March 31, 2021 compared to $0.2 million in the same period in 2020 as a result of an increase in pretax income of $5.6 million.

Our effective tax rate increased to 9.0% for the three months ended March 31, 2021 compared to 5.3% for the same period in 2020.

The increase in the effective tax rate is primarily due to a higher level of pretax income and a lower level of tax-exempt interest 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”), which are relatively consistent regardless of the level of pretax income.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses, and this quarterly report references net interest income and net interest margin on a FTE basis, each of which is a non-GAAP financial measure.

Management believes these non-GAAP financial 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.

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

The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Net interest income per the Consolidated Statements of Income is reconciled to net interest income adjusted to an FTE basis in the Net Interest Income section of the "Results of Operations – Three Months Ended March 31, 2021 Compared to Three Months Ended March 31,2020."

RESULTS OF OPERATIONS

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Net Interest Income

Our principal source of revenue is net interest income.

Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.

Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads.

The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet.

A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income.

Net interest income and the net interest margin are presented on an FTE basis, which are non-GAAP measures.

The FTE basis adjusts 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 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 of non-GAAP measures.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Total net interest income decreased $0.7 million, or 2.7%, to $26.5 million for the three months ended March 31, 2021, compared to $27.3 million for the same period in 2020 primarily due the decline in the interest rate environment, offset by an increase in the volume of interest-earning assets.

Net interest income, on an FTE basis (non-GAAP), decreased $0.9 million, or 3.1%, to $27.0 million in the first quarter of 2021 compared to $27.9 million in the same period in 2020.

The decrease in net interest income, on an FTE basis, was driven by an $5.0 million decrease in interest income, partially offset by a $4.1 million decrease in interest expense during the three months ended March 31, 2021 compared to the same period in 2020.

The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but are partially offset by a lower cost of funds.

Net interest margin decreased 21 basis points to 2.73% in the first quarter of 2021 compared to 2.94% for the same period in 2020 primarily due to the negative impact of lower yields on interest-earning assets, offset by a decline in the cost of interest-bearing liabilities.

The net interest margin, on an FTE basis (non-GAAP), decreased 23 basis points to 2.78% in the first three months ended 2021 compared to 3.01% for the same period in 2020, primarily due to the lower interest rate environment.

The lower interest rate environment and the intentional runoff of higher cost CDs has significantly contributed to lower the overall cost of funds.

The following table reconciles net interest income per the Consolidated Statements of Income to net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis, for the periods presented:

For the Three Months Ended March 31,

(Dollars in Thousands) 2021 2020

Total Interest Income $ 32,957 $ 37,836

Total Interest Expense 6,428 10,572

Net Interest Income per Consolidated Statements of Net Income 26,529 27,264

Adjustment to FTE Basis 462 601

Net Interest Income (FTE)(non-GAAP) $ 26,991 $ 27,865

Net Interest Margin 2.73 % 2.94 %

Adjustment to FTE Basis 0.05 % 0.07 %

Net Interest Income (FTE)(non-GAAP) 2.78 % 3.01 %

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Average Balance Sheet and Net Interest Income Analysis (FTE)

The following table provides information regarding the average balances, interest and rates earned on interest- earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

(Dollars in Thousands) Average Balance (3)

Income/ Expense Rate Average Balance Income/ Expense Rate

Interest-bearing Deposits with Banks $ 174,731 $ 50 0.12 % $ 62,960 $ 210 1.34 %

Tax-free Investment Securities (2)

51,589 413 3.25 % 21,452 204 3.82 %

Taxable Investment Securities 708,250 2,987 1.71 % 712,104 4,502 2.54 %

Tax-free Loans (1)(2)

223,012 1,787 3.25 % 337,857 2,660 3.17 %

Taxable Loans (1)

2,777,423 28,145 4.11 % 2,584,917 30,797 4.79 %

Federal Home Loan Bank Stock 4,805 37 3.12 % 4,418 64 5.83 %

Total Interest-earning Assets $ 3,939,810 $ 33,419 3.44 % $ 3,723,708 $ 38,437 4.15 %

Interest-bearing Demand $ 378,886 $ 215 0.23 % $ 297,395 $ 446 0.60 %

Money Market 309,624 266 0.35 % 154,564 271 0.71 %

Savings 644,806 162 0.10 % 562,712 145 0.10 %

Certificates of Deposit 1,620,543 5,652 1.41 % 1,918,841 9,633 2.02 %

Total Interest-bearing Deposits 2,953,859 6,295 0.86 % 2,933,512 10,495 1.44 %

Federal Funds Purchased — — — % 220 1 1.83 %

FHLB Borrowings 33,889 96 1.15 % 17,418 58 1.34 %

Other Borrowings 2,307 37 6.50 % 1,481 18 4.89 %

Total Borrowings 36,196 133 1.49 % 19,119 77 1.62 %

Total Interest-bearing Liabilities $ 2,990,055 6,428 0.87 % $ 2,952,631 10,572 1.44 %

Net Interest Income (2)

$ 26,991 $ 27,865

Net Interest Margin (2)

2.78 % 3.01 %

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.

(3) Loan and deposit balances include held-for-sale transactions in connection with sale of Bank branches.

Interest income, on an FTE basis (non-GAAP), decreased $5.0 million, or 13.1%, for the three months ended March 31, 2021, compared to the same period in 2020.

We are currently maintaining higher liquidity levels as a result of COVID-19.

The change was primarily due to an increase in average interest-earning assets of $216.1 million for the three months ended March 31, 2021 offset by lower short-term interest rates compared to the same period in 2020.

Average interest-bearing deposits with banks increased $111.8 million and the average rate earned decreased 122 basis points compared to the same period in 2020.

Average loan balances increased $77.7 million for the three months ended March 31, 2021 compared to the same period in 2020, which includes PPP loan production that began in second quarter of 2020.

Average PPP loans for the three months ended March 31, 2021 totaled $31.2 million.

The average rate earned on loans decreased 56 basis points for the first quarter of 2021 compared to the same period in 2020 primarily due to lower short-term interest rates.

Average investment securities increased $26.3 million and the average rate earned decreased 77 basis points for the three months ended 2021 compared to the same period in 2020.

The change in investment securities is the result of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures.

Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 71 basis points for the first quarter of 2021 compared to the same period in 2020.

Interest expense decreased $4.1 million for the three months ended March 31, 2021 compared to the same period in 2020.

The decrease was primarily due to lower short-term interest rates in 2021 as compared to 2020 as well as the intentional runoff of higher cost CDs.

Interest expense on interest-bearing deposits decreased $4.2 million for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to the decline in the average balance of CDs and interest-bearing demand accounts.

The decrease of $298.3 million in the average balance of CDs for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to the intentional runoff of these higher cost CDs.

Interest-bearing demand accounts increased $81.5 million for the three months ended March 31, 2021 compared to the same period in 2020.

The average rate paid on interest-bearing deposits decreased 58 basis points for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to lower short-term interest rates.

Average total borrowings increased $17.1 million and

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

the average rate paid decreased 13 basis points for the three months ended March 31, 2021 compared to the same period in 2020.

Overall, the cost of interest-bearing liabilities decreased 57 basis points for the three months ended March 31, 2021 compared to the same period in 2020.

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

Three Month Ended March 31, 2021

Compared to March 31, 2020

(Dollars in Thousands) Volume (3)

Interest-bearing Deposits with Banks $ 146 $ (306) $ (160)

Tax-free Investment Securities (2)

Taxable Investment Securities (25) (1,490) (1,515)

Tax-free Loans (1)(2)

(939) 66 (873)

Taxable Loans (1)

2,076 (4,728) (2,652)

Federal Home Loan Bank Stock 22 (49) (27)

Total Interest-earning Assets $ 1,524 $ (6,542) $ (5,018)

Interest-bearing Demand $ 97 $ (328) $ (231)

Money Market 177 (182) (5)

Savings 20 (3) 17

Certificates of Deposit (1,360) (2,621) (3,981)

Total Interest-bearing Deposits (1,066) (3,134) (4,200)

Federal Funds Purchased 1 (2) (1)

FHLB Borrowings 48 (10) 38

Other Borrowings 12 7 19

Total Borrowings 61 (5) 56

Total Interest-bearing Liabilities $ (1,005) $ (3,139) $ (4,144)

Change in Net Interest Margin $ 2,529 $ (3,403) $ (874)

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.

(3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The provision for credit losses is the amount to be added to the allowance for credit losses (“ACL”), after considering loan charge-offs and recoveries, to bring the ACL to a level determined to be appropriate in management's judgment to absorb expected losses inherent in the loan portfolio.

The Company elected to defer its adoption of CECL in accordance with relief provided under the CARES Act until March 31, 2021, effective January 1, 2021.

At January 1, 2021, we increased the ACL by $64.5 million for the Day 1 CECL adjustment which includes $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The provision for credit losses decreased $2.9 million to $1.9 million for the three months ended March 31, 2021 compared to $4.8 million for the same period in 2020.

The provision for credit losses decreased $2.9 million to $1.9 million for the three months ended March 31, 2021 compared to $4.8 million for the same period of 2020 due to qualitative adjustments of $2.6 million due to the decline in economic and market conditions as a result of COVID-19.

Adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral.

Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program.

During the first quarter of 2021, management observed continued deterioration on hospitality loans with aggregate principal balances of $50.9 million that are on deferral as of March 31, 2021.

This adjustment resulted in current expected credit losses of $11.7 million at March 31, 2021.

The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected credit losses of

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

$10.2 million as of January 1, 2021.

Between the Day 1 model and the model ended March 31, 2021 a loan with a principal balance of $8.1 million was recognized resulting in additional expected credit losses of $1.5 million during the three months ended March 31, 2021.

Net charge-offs increased by $0.1 million to $0.7 million for the three months ended March 31, 2021 compared to $0.6 million in the same period of 2020.

As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10% and 0.09% for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021, December 31, 2020 and March 31, 2020, nonperforming loans were $32.0 million, $32.0 million and $40.5 million, respectively.

Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

The ACL was 365.7% of nonperforming loans as of March 31, 2021, as compared to 169.1% of nonperforming loans as of December 31, 2020.

At March 31, 2021, the adoption of Topic 326 resulted in an increase to our ACL of $62.8 million, to $116.9 million, excluding the life-of-loss reserve compared to $54.1 million at December 31, 2020.

The ACL as a percentage of total portfolio loans was 3.93% at March 31, 2021 and 1.83% at December 31, 2020.

Noninterest Income

Three Months Ended March 31,

(Dollars in Thousands) 2021 2020 $ Change % Change

Gains on Sales of Securities, net $ 3,610 $ 1,214 $ 2,396 197.4 %

Service Charges, Commissions and Fees 1,809 1,650 159 9.6 %

Debit Card Interchange Fees 1,831 1,243 588 47.3 %

Insurance Commissions 294 1,309 (1,015) (77.5) %

Bank Owned Life Insurance Income 340 353 (13) (3.7) %

Other Real Estate Owned Income 71 139 (68) (48.9) %

Commercial Loan Swap Fee Income 219 422 (203) (48.1) %

Other 778 622 156 25.1 %

Total Noninterest Income $ 8,952 $ 6,952 $ 2,000 28.8 %

Total noninterest income increased $2.0 million, or 28.8%, to $9.0 million for the three months ended 2021 compared to the same period in 2020, primarily driven by the impact of $3.6 million in net securities gains.

Securities gains increased $2.4 million to $3.6 million during the first three months of 2021 compared to $1.2 million during the same period in 2020 to take advantage of market opportunities, reposition and diversify holdings in the securities portfolio.

Other key factors contributed to the increase in total noninterest income during the first quarter of 2021 were higher debit card interchange fees of $0.6 million due to higher activity in demand deposits, increased service charges on deposit accounts of $0.2 million and a $0.2 million increase in other noninterest income.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Noninterest Expense

Three Months Ended March 31,

(Dollars in Thousands) 2021 2020 $ Change % Change

Salaries and Employee Benefits $ 12,582 $ 13,581 $ (999) (7.4) %

Occupancy Expense, net 3,514 3,249 265 8.2 %

FDIC Insurance Expense 643 544 99 18.2 %

Other Taxes 762 746 16 2.1 %

Advertising Expense 170 612 (442) (72.2) %

Telephone Expense 600 574 26 4.5 %

Professional and Legal Fees 1,224 437 787 180.1 %

Data Processing 921 486 435 89.5 %

Losses on Sales and Write-downs of Other Real Estate Owned, net 212 189 23 12.2 %

Losses on Sales and Write-downs of Bank Premises, net 43 12 31 258.3 %

Debit Card Expense 632 554 78 14.1 %

Tax Credit Amortization 427 272 155 57.0 %

Unfunded Loan Commitment Expense — 982 (982) (100.0) %

Other Real Estate Owned Expense 54 140 (86) (61.4) %

Other 1,821 2,370 (549) (23.2) %

Total Noninterest Expense $ 23,605 $ 24,748 $ (1,143) (4.6) %

Total noninterest expense decreased $1.1 million, or 4.6%, for the first quarter of March 31, 2021 to $23.6 million compared to $24.7 million in the same period of 2020.

The decrease was primarily driven by a decline of $1.0 million in salaries and employee benefits primarily attributable to our branch network optimization project, which was partially offset by normal merit increases, lower unfunded loan commitment expense of $1.0 million primarily due to the reclassification to the provision for credit losses in 2021 due to the adoption of CECL.

Also impacting the decrease was $0.4 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020 and a $0.5 million decrease in other noninterest expense due to lower postage, travel and business development expenses which were somewhat impacted by COVID-19.

Partially offsetting these decreases were higher professional and legal fees of $0.8 million, increased data processing expenses of $0.4 million due to an increase in customer accounts and new modules added to our core processor, an increase of $0.3 million in occupancy expenses and a $0.2 million increase in the amortization of tax credits.

Provision for Income Taxes

The provision for income taxes increased $0.7 million to $0.9 million for the three months ended March 31, 2021 compared to $0.2 million for the same period in 2020.

The increase in pretax income of $5.6 million for the first three months of 2021 was primarily due to higher noninterest income, lower provision for credit losses and lower noninterest expenses.

Our effective tax rate increased to 9.0% for the three months ended March 31, 2021 as compared to 5.3% for the same period in 2020.

The increase in the effective tax rate is primarily due to a higher level of pretax income and a lower level of tax-exempt interest 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 BOLI, which are relatively consistent regardless of the level of pretax income.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Financial Condition

March 31, 2021

Total assets decreased $39.8 million to $4.1 billion at March 31, 2021 compared to $4.2 billion at December 31, 2020.

Federal Reserve Bank excess reserves decreased $52.8 million to $110.6 million at March 31, 2021 compared to December 31, 2020 due to active balance sheet management.

Total portfolio loans increased $24.7 million, or 0.8%, to $3.0 billion at March 31, 2021 compared to December 31, 2020.

The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326.

We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not applied to periods during 2020 and prior years, therefore showing fluctuations in all categories.

The break-out of Other loans totaled $373.4 million consisting of $136.3 million of CRE, $77.8 million of C&I, $49.6 million of Residential Mortgages and $109.7 million of Construction.

This segment of loans has unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

At March 31, 2021 we had $9.4 million loans held-for-sale in connection with the sale of Bank branches that are expected to close in the second quarter of 2021.

Nonperforming loans and TDRs remained at $32.0 million at both March 31, 2021 and December 31, 2020.

Other Real Estate Owned (“OREO”) decreased $1.7 million at March 31, 2021 compared to December 31, 2020.

Closed retail bank offices declined $0.6 million with a remaining book value of $1.9 million at March 31, 2021 compared to $2.5 million at December 31, 2020.

Through the second quarter of 2021, all branch closures and sale transactions will be completed as part of our branch network optimization project aligned with our strategic goals to enhance franchise value and improve operating efficiency.

The securities portfolio increased $1.4 million at March 31, 2021 from December 31, 2020 and comprised 18.8% of total assets at March 31, 2021 compared to 18.6% of total assets at December 31, 2020.

The increase was a result of active balance sheet management.

We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits increased $6.9 million to $3.7 billion at March 31, 2021 compared to $3.7 billion at December 31, 2020.

The increase in deposits primarily related to the growth in all our core deposit categories, which includes noninterest-bearing and interest-bearing demand deposits, money market and savings accounts.

Core deposits increased $102.3 million at March 31, 2021, or 5.2%, compared to December 31, 2020.

Offsetting the increase in core deposits was a decline of $92.3 million in our CDs.

This decrease relates to the intentional runoff of higher cost CDs.

Noninterest-bearing deposits comprised 19.9% and 19.0% of total deposits at March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021, $81.6 million of deposits were held for assumption in connection with the sale of Bank branches that are expected to close in the second quarter of 2021.

Total shareholders’ equity decreased by $52.3 million to $387.9 million at March 31, 2021 compared to $440.2 million at December 31, 2020.

The decrease was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a $11.1 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities partially offset by net income of $9.4 million.

The remaining difference is related to stock-based compensation during the three months ended March 31, 2021.

The ACL was 3.93% of total portfolio loans at March 31, 2021 compared to an allowance for loan losses of 1.83% as of December 31, 2020.

General reserves as a percentage of total portfolio loans were 3.43% at March 31, 2021 compared to 1.32% at December 31, 2020.

The ACL was 365.7% of nonperforming loans at March 31, 2021 compared to an allowance for loan losses of 169.1% of nonperforming loans at December 31, 2020.

Management believes, the allowance for credit losses is adequate to absorb expected losses inherent in the loan portfolio.

The Company remains well capitalized.

Our Tier 1 capital ratio decreased to 12.88% at March 31, 2021 compared to 13.08% at December 31, 2020.

Our leverage ratio was 10.16% at March 31, 2021, compared to 10.26% at December 31, 2020 and total risk-based capital ratio was 14.14% at March 31, 2021 compared to 14.33% at December 31, 2020.

We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Securities Activity

The following table presents the composition of available-for-sale securities:

(Dollars in Thousands) March 31, 2021 December 31, 2020 $ Change

Government Agency Securities $ 2,360 $ — $ 2,360

Residential Mortgage-backed Securities 33,454 44,724 (11,270)

Commercial Mortgage-backed Securities 5,285 5,447 (162)

Asset Backed Securities 137,499 133,557 3,942

Collateralized Mortgage Obligations 254,850 218,359 36,491

Small Business Administration 106,957 99,145 7,812

States and Political Subdivisions 210,315 252,622 (42,307)

Corporate Notes 29,312 24,825 4,487

Total Debt Securities $ 780,032 $ 778,679 $ 1,353

The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes.

Securities are subject to market risks that could negatively affect the level of liquidity available to us.

Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by $1.4 million at March 31, 2021 as compared to December 31, 2020.

Securities comprise 18.8% of total assets at March 31, 2021 as compared to 18.6% at December 31, 2020.

The increase is a result of active balance sheet management.

We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

At March 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $11.3 million, offset by $5.5 million of gross unrealized losses.

At December 31, 2020, total gross unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses.

Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis.

At March 31, 2021 and December 31, 2020, the Company did not record any OTTI.

The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.

Loan Composition

The following table summarizes our loan portfolio for the periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020

Commercial Real Estate $ 1,384,541 $ 1,453,799

Commercial and Industrial 460,264 557,164

Total Commercial Loans 1,844,805 2,010,963

Residential Mortgages 414,507 472,170

Other Consumer 49,516 57,647

Total Consumer Loans 464,023 529,817

Construction 289,661 406,390

Other 373,386 —

Total Portfolio Loans 2,971,875 2,947,170

Loans Held-for-Sale 32,737 25,437

Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value 9,423 9,835

Total Loans $ 3,014,035 $ 2,982,442

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our loan portfolio represents our most significant source of interest income.

The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio.

Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay.

For a discussion of the risks factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Total portfolio loans increased $24.7 million, or 0.8%, to $3.0 billion at March 31, 2021 compared to December 31, 2020.

The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326.

We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL.

The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not adjusted to the comparable period, therefore showing fluctuations in all categories.

The break-out of Other loans totaled $373.4 million consisting of $136.3 million of CRE, $77.8 million of C&I, $49.6 million of Residential Mortgages and $109.7 million of Construction.

This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

Nonperforming loans and TDRs remained at $32.0 million at both March 31, 2021 and December 31, 2020.

OREO decreased $1.7 million at March 31, 2021 compared to December 31, 2020.

Closed retail bank offices declined $0.6 million with a remaining book value of $1.9 million at March 31, 2021 compared to $2.5 million at December 31, 2020.

We expect that all branch closures and sale transactions part of our network optimization project will be completed during the second quarter of 2021.

Aligning with our strategic goals to enhance franchise value and improve operating efficiency.

The commercial portfolio is monitored for potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry, investment CRE dependent on common tenants and industries or property types that are similarly impacted by external factors.

Our exposure to hospitality at March 31, 2021 equated to approximately $501.5 million, or 16.9% of total portfolio loans.

These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows.

These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

As a result, our financial condition, capital levels and results of operations could be adversely affected.

Portfolio loan balances of our top 10 credit relationships were $739.8 million at March 31, 2021, with a total commitment exposure of $755.3 million.

These loans are in the hospitality, golf course, agricultural, land holdings, commercial real estate (multi-family and office/retail), energy, land development, and lumber industries.

The other segment is comprised of 49.3% of the top 10 credit relationships.

Line utilization, unused commitments, excluding consumer overdraft lines, were $387.3 million at March 31, 2021 as compared to $410.7 million at December 31, 2020.

The majority of unused commitments are for construction projects that will be drawn as the construction completes.

Total utilization, excluding consumer overdraft lines, was 55.6% at March 31, 2021, as compared to 52.2% at December 31, 2020.

Commercial line utilization was 55.7% at March 31, 2021, as compared to 51.7% at December 31, 2020.

From time to time, we have mortgage loans held-for-sale derived 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.

Secondly, 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.

Mortgage loans held-for-sale were $32.7 million and $25.4 million at March 31, 2021 and December 31, 2020, respectively.

In addition to mortgage loans held-for-sale, the Company had $9.4 million in loans held-for-sale in connection with sale of Bank branches at March 31, 2021 that are expected to close in the second quarter of 2021.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Credit Quality

On a monthly basis, a criticized asset committee meets to review all special mention and substandard loans within prescribed policy thresholds.

These loans typically represent the highest risk of loss to the Company.

Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations.

When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and interest risk rating trends and through stress testing of the loans in these segments.

The Company has 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.

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.

Unsecured loans pose a higher risk for the Company due to the lack of a well-defined secondary source of repayment.

The repayment capacity of the borrower should exceed all policy and guidelines for secured loans.

If the borrower is unable to comply with this requirement and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, segmentation guidelines, and loan review findings from the previous quarter.

Annually, this same committee reviews credit related policies and policy enhancements as they become available.

Additional credit risk management practices include periodic review and update of our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing.

Our loan review serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities.

The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms.

The Company has a loan review policy and annual scope report that details the level of loan review for commercial loans in a given year.

Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses.

In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function.

Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

• A review of the largest twenty pass-rated loan relationships, which represents approximately a quarter of total loans;

• A sampling of large loan relationships which are defined as loan relationships with aggregate exposure of at least $2 million that are not part of the top 20 review;

The Company does not typically structure these with a 30-day cleanout feature since that is difficult to measure and enforce.

Instead we usually set higher debt service standards and underwrite to the ability to amortize the loan on unsecured terms.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Allowance for Credit Losses

The allowance for credit losses, (“ACL”), represents an amount which, in management's judgment, is adequate to absorb expected losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.

The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.

However, the determination of the ACL requires significant judgment, and estimates of expected losses in the loan portfolio can vary significantly from the amounts actually observed.

While management uses available information to recognize expected losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The adoption of CECL guidance did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off 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.

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.

Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”).

which calculates a net present value of expected future cash flows, adjusted for the expected life of the portfolio.

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 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.

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.

Economic forecasts spanning four quarters are utilized and then reverted to the long term average to form the estimation of expected future cash flows.

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, analyzes the forecast inputs in relation to the model’s calibration 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.

At Day 1 adoption of CECL, current expected losses of $10.2 million were recorded due to economic uncertainties related to the Company's hospitality portfolio.

Between the Day 1 CECL model and the model ended March 31, 2021, additional current expected losses of $1.5 million were recognized, which resulted in a total current expected loss balance of

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

$11.7 million as of March 31, 2021.

Certain hospitality loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

Management elected to create reserves with the adoption of the CECL model.

These reserves were developed in addition to the model’s methodology.

The model introduced a segmented portfolio of loans for discrete analysis.

This segmented pool has unique risk attributes considered inconsistent with current underwriting standards.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the incurred loss model.

With the adoption of CECL management elected to separately evaluate certain loans from the Quantitative Analysis based on shared but unique risk attributes.

These loans included in the Other segment of the model.

These loans were underwritten and approved based on standards that are inconsistent with our current underwriting standards.

Which have since been enhanced by current management.

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, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

A general reserve of $56.0 million, which is an increase from the $4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The following tables summarize activity in the ACL during the period presented and present supplemental asset quality information as of the dates presented.

Three Months Ended March 31, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Construction Residential

Mortgage Other

Consumer Other Total

Allowance for Credit Losses on Loans:

Balance at Beginning of Period $ 34,871 $ 3,643 $ 6,357 $ 2,000 $ 2,479 $ 4,724 $ 54,074

Impact of CECL Adoption 6,587 1,379 (80) 3,356 (877) 51,277 61,642

Provision for Credit Losses on Loans 884 (117) 768 (156) 478 — 1,857

Charge-offs — (1) — (195) (870) — (1,066)

Recoveries — 1 61 166 137 — 365

Net (Charge-offs) / Recoveries — — 61 (29) (733) — (701)

Balance at End of Period $ 42,342 $ 4,905 $ 7,106 $ 5,171 $ 1,347 $ 56,001 $ 116,872

March 31, 2021 December 31, 2020

Net Charge-offs to Average Portfolio Loans 0.10 % * 0.09 %

Allowance for Credit Losses to Total Portfolio Loans 3.93 % 1.83 %

The adoption of Topic 326 resulted in an increase to our ACL of $61.6 million on January 1, 2021, excluding the life-of-loss reserve.

The Day 1 model introduced a segmented portfolio of loans for discrete analysis.

This segmented pool had an aggregate principal balance of $380.0 million at adoption and includes unique risk attributes considered inconsistent with current underwriting standards.

Management continuously assesses underwriting standards but significantly enhanced these standards in 2018.

The analysis applied to this pool resulted in expected credit losses of $51.3 million, at adoption and is disclosed in the Other line item in the table above.

At December 31, 2020, the aforementioned Other line item within the probable incurred loss model included $102.5 million of impaired loans and the remaining $277.5 million were not impaired and remained in their respective segments.

Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $4.7 million at December 31, 2020.

CARTER BANKSHARES, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements