What changed in this filing

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Item 1. Financial Statements

2021-11-04 compared with 2021-08-05 · 230 added, 186 removed, 1051 unchanged (28% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in Thousands) 2021 2020

Net Income $ 14,807 $ 8,878

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

Net Income (Loss) $ 25,980 $ ( 48,800 )

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

Provision for Credit Losses 1,466 13,185

Goodwill Impairment — 62,192

Origination of Loans Held-for-Sale ( 465,174 ) ( 511,344 )

7 unchanged sentences

Write-downs of Other Real Estate Owned 3,324 1,420

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

Loss (Gains) on Sales of Other Real Estate Owned, Net 99 ( 63 )

Losses on Sales and Write-downs of Bank Premises 114 88

2 unchanged sentences

Recognition of Restricted Stock Compensation Expense 772 805

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

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

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

Decrease (Increase) in Other Assets 7,438 ( 28,624 )

(Decrease) Increase in Other Liabilities ( 3,776 ) 1,313

Net Cash Provided By (Used In) Operating Activities 60,021 ( 11,185 )

INVESTING ACTIVITIES

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

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

Redemption of Federal Home Loan Bank Stock 1,878 82

Proceeds from Sale of Portfolio Loans 42,295 —

Redemption (Purchase) of Federal Home Loan Bank Stock, net 1,878 ( 980 )

Loan Originations and Payments, net 9,458 ( 103,844 )

8 unchanged sentences

Cash Dividends Paid — ( 3,689 )

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

Net Cash Provided by Financing Activities 55,828 130,861

Net (Decrease) Increase in Cash and Cash Equivalents ( 16,146 ) 25,362

44 unchanged sentences

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

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.

We believe most of the requirements called for in the CARES Act and related regulations and supervisory guidance have been implemented, but there are some that continue to be refined by federal banking agencies.

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.

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

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

The Bank 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.

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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 June 30, 2021, additional current expected losses of $ 1.5 million were recognized, which

As part of our initial identification of loan pools, a subset of loans with a similar risk profile and an aggregate principal balance of $ 42.8 million which resulted in current expected losses of $ 10.2 million.

In the quarter ended March 31, 2021 the model

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.

recognized the deterioration of an additional loan with a principal balance of $ 8.1 million which resulted in current expected losses of $ 1.5 million and an additional $ 0.6 million standard qualitative general reserve.

In the quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $ 50.2 million which resulted in charge-offs totaling $ 9.2 million and a net release of reserves of $ 3.1 million.

Additionally, in the quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $ 12.0 million which resulted in current expected losses of $ 1.6 million.

Certain 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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The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.

Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in US GAAP.

Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S.

The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

The amendments in this ASU are effective through December 31, 2022.

We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations or consolidated financial statements.

The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022.

Furthermore, the United Kingdom’s Financial Conduct Authority (“FCA”), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021.

As it pertains to U.S.

dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023.

Bank regulators, in a joint statement, have urged banks to stop using LIBOR altogether on new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk.

The FRB of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S.

institutions in transitioning away from LIBOR as a benchmark interest rate.

The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR.

In response, we have created an internal team that is managing our transition away from LIBOR.

This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions.

To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition.

The team is currently in the process of:

i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices.

We are considering SOFR and other credit-sensitive alternative indices, that may gain market acceptance, as a replacement to LIBOR.

The financial impact regarding pricing, valuation and operations of the transition is not expected to be material in nature.

Our transition team is fully committed to work within the guidelines established by the FCA and ARRC to provide for a smooth transition away from LIBOR.

As of September 30, 2021, approximately 16.0 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

We intend to cease originating new LIBOR based variable rate loans by December 31, 2021 per the ARRC’s guidance.

CARTER BANKSHARES, INC.

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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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

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

Numerator for Earnings per Share – Basic and Diluted

Net Income $ 5,432 $ 4,455 $ 14,807 $ 8,878

Net Income (Loss) $ 11,173 $ ( 57,678 ) $ 25,980 $ ( 48,800 )

Income allocated to participating shares 48 — 104 —

Net Income Allocated to Common Shareholders $ 5,407 $ 4,440 $ 14,738 $ 8,848

Net Income (Loss) Allocated to Common Shareholders $ 11,125 $ ( 57,678 ) $ 25,876 $ ( 48,800 )

Weighted Average Shares Outstanding, including Shares Considered Participating Securities 26,461,617 26,385,189 26,445,654 26,377,626

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Weighted Average Common Shares Outstanding 26,348,488 26,385,189 26,339,930 26,377,626

Earnings per Common Share – Basic $ 0.21 $ 0.17 $ 0.56 $ 0.34

Earnings per Common Share – Diluted $ 0.21 $ 0.17 $ 0.56 $ 0.34

Earnings (Loss) per Common Share – Basic $ 0.42 $ ( 2.19 ) $ 0.98 $ ( 1.85 )

Earnings (Loss) per Common Share – Diluted $ 0.42 $ ( 2.19 ) $ 0.98 $ ( 1.85 )

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

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

June 30, 2021

September 30, 2021

(Dollars in Thousands) Amortized

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

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

The Company did no t have securities classified as held-to-maturity at September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2021 2020 2021 2020

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Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold.

The net realized gains above reflect reclassification adjustments in the calculation of other comprehensive income.

The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income.

The tax impact is included in income tax provision in the Consolidated Statements of Income.

The net realized gains above reflect reclassification adjustments in the calculation of other comprehensive (loss) income.

The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income (Loss).

The tax impact is included in income tax provision in the Consolidated Statements of Income (Loss).

The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented.

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

June 30, 2021

September 30, 2021

(Dollars in Thousands) Amortized

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Total Debt Securities $ 890,722 $ 897,546

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.

At September 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 $ 145.9 million at June 30, 2021 and $ 146.0 million at December 31, 2020.

The carrying value of securities pledged for various regulatory and legal requirements was $ 172.8 million at September 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 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

Available-for-sale securities with unrealized losses at September 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:

September 30, 2021

Less Than 12 Months 12 Months or More Total

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Residential Mortgage-Backed Securities 14 51,057 ( 1,382 ) 7 9,301 ( 153 ) 21 60,358 ( 1,535 )

Commercial Mortgage-Backed Securities 1 2,002 ( 28 ) — — — 1 2,002 ( 28 )

Asset Backed Securities 19 47,674 ( 138 ) 15 31,066 ( 211 ) 34 78,740 ( 349 )

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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 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 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 September 30, 2021 as the Company did no t have securities classified as held-to-maturity at September 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.

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The Company has reviewed all securities for OTTI.

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.

As of September 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 September 30, 2021 represents an OTTI.

At September 30, 2021, there were 214 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.

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(Dollars in Thousands)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Commercial Real Estate

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

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

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

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

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 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 Bank 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 Bank launched successive deferral programs with short-term expirations.

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.

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.

The deferrals in Part I provided for deferral of principal and up to the deferral of principal and interest, if requested through the expiry.

The Part II program extended deferrals through December 31, 2020 subject to the collection of updated financial information and validation of need.

The Bank requested verification of business and/or guarantor liquidity to ascertain the viability of the business in a post-pandemic environment.

Prior to the extension of the CARES Act, the Bank launched the Part III program which offered borrowers in the Part II program an extension of deferrals through June 30, 2021.

Borrowers who opted into the Part III program were required to provide monthly financial statements and remit payments on a quarterly basis equal to the lesser of:

i) 90% of free cash flow (EBITDA) or, ii) the otherwise contractual payment (“recapture payment”).

In the quarter ended March 31, 2021, recapture payments due from deferral clients totaled $ 2.8 million and of this the Bank received $ 2.0 million.

A number of customers opted out of the deferral program after the first quarter.

As a result, the second quarter 2021 recapture payments due from deferral clients totaled $ 1.2 million and of this the Bank received $ 0.8 million.

Following the expiration of the deferral programs on June 30, 2021, for term loans payments will be applied to accrued interest first and after accrued interest is current, payments will be applied to principal.

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 September 30, 2021, all but $ 6.5 million of loans resumed regularly scheduled payments and are continually evaluated through our credit monitoring

CARTER BANKSHARES, INC.

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

Cumulative deferred interest totaled $ 11.0 million as of June 30, 2021 but has been reduced to $ 2.8 million as of September 30, 2021.

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.

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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.

Deferred costs and fees included in the portfolio balances above were $ 4.2 million and $ 3.0 million at September 30, 2021 and December 31, 2020, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 198 thousand and $ 219 thousand at September 30, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $ 4.9 million and $ 25.4 million as of September 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.

1 unchanged sentence

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(Dollars in Thousands) Performing

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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.

The remaining balance was charged-off, but the loan has been re-amortized for the customer to repay the balance by the end of 2021.

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

TDRs increased $ 45.0 million, or 33.5 % to $ 179.2 million at September 30, 2021 compared to $ 134.2 million at December 31, 2020.

The Company had $ 78.0 million new additions, related to the restructured loans to one large relationship, offset by $ 24.8 million of principal pay-downs and $ 8.2 million in charge-offs for the resolution of our two largest nonperforming credits during the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, the Company had five loans that were modified totaling $ 78.0 million.

These loans were included in the Other category and restructured with enhanced pricing and collateral position of the relationships, during the third quarter of 2021.

TDRs of $ 3.2 million and $ 25.0 million as of September 30, 2021 and December 31, 2020, respectively, were loans modified as TDRs that experienced a

CARTER BANKSHARES, INC.

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

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

payment default subsequent to the rework date and were classified as nonperforming.

During the nine months ended September 30, 2021, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

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

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

The remaining balance was charged-off, but the loan has been re-amortized for the customer to repay the balance by the end of 2021.

There were no TDR payment defaults during the three and nine months ended September 30, 2021 or September 30, 2020.

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 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 June 30, 2021 and December 31, 2020.

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

Nonperforming Assets

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

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

Nonperforming Assets

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Total Nonperforming Assets $ 22,132 $ 47,726

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.

As of September 30, 2021 and December 31, 2020, we had $ 261 thousand and $ 67 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 49 thousand at September 30, 2021 and $ 109 thousand at December 31, 2020 in residential real estate included in OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

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These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company.

The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority.

The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment.

The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and

CARTER BANKSHARES, INC.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

equipment financed by the Company.

The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment.

The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages.

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The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured.

Other Consumer are loans made to individuals and may be either secured by assets other than 1-4 family residences or unsecured.

This segment includes auto loans and unsecured loans and lines.

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Other loans include unique risk attributes considered inconsistent with our current underwriting standards.

The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future.

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves may fluctuate based on expected cash flow changes in the future.

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, and iii) land acquisition loans without a defined source of amortization.

Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.

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Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status.

The Company has a loan review policy and annual scope report that details the level of loan review for 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:

CARTER BANKSHARES, INC.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year.

Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses.

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;

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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 June 30, 2021:

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

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

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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 June 30, 2021.

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

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

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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 June 30, 2021 and December 31, 2020:

June 30, 2021

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

September 30, 2021

(Dollars in Thousands) Current

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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 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

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 September 30, 2021.

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

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

September 30, 2021

(Dollars in Thousands) Beginning of

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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.

During the three and nine months ended September 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.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

The following table presents the amortized cost basis of individually evaluated loans as of September 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.

June 30, 2021

September 30, 2021

Type of Collateral

6 unchanged sentences

Total $ 8,019

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

The following table presents activity in the ACL and allowance for loan losses (“ALL”), for the three and nine months ended September 30, 2021 and September 30, 2020, respectively:

Three Months Ended September 30, 2021

(Dollars in Thousands) Commercial

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

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

(Dollars in Thousands) Commercial

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

(Dollars in Thousands) Commercial

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Recoveries — 119 — 1 206 326

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

Net Recoveries / (Charge-offs) — 119 — 1 ( 474 ) ( 354 )

Balance at End of Period $ 30,208 $ 5,226 $ 9,103 $ 2,406 $ 3,022 $ 49,965

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(Dollars in Thousands) Commercial

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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 $ 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.

The ACL increased $ 45.2 million to $ 99.3 million at September 30, 2021 compared to $ 54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL that increased reserves by $ 61.6 million.

In the first nine months of 2021, adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to

CARTER BANKSHARES, INC.

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

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 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

certain loans on deferral.

Management reviewed and analyzed the monthly operating statements of commercial clients in the Part III deferral program.

The deferral program expired June 30, 2021.

The majority of our clients in the deferral program experienced recoveries starting in the spring of 2021.

Based on the ongoing review of operating statements, management identified a lag in recovery with respect to loans with an aggregate principal balance of $ 62.0 million.

These loans were addressed throughout the nine months ended September 30, 2021 as additional information was received and analyzed as follows.

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.

In the quarter ended March 31, 2021 the model recognized the deterioration of a loan with a principal balance of $ 8.1 million which resulted in current expected losses of $ 1.5 million and an additional $ 0.6 million standard qualitative general reserve.

In the third quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $ 50.2 million which resulted in charge-offs totaling $ 9.2 million and a net release of reserves of $ 3.1 million.

Additionally, in the third quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $ 12.0 million which resulted in current expected losses of $ 1.6 million.

In summary, out of the $ 398.5 million in the deferral program as of June 30, 2021, only $ 12.0 million remain a concern and have been reserved for as of September 30, 2021.

Included in the provision for unfunded commitments for the three and nine months ended September 30, 2021 was a release of $ 0.1 million and $ 0.9 million, respectively, 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 September 30, 2021:

September 30, 2021

(Dollars in Thousands) Commercial

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Total Portfolio Loans $ 1,346,953 $ 387,402 $ 449,118 $ 44,953 $ 297,337 $ 358,394 $ 2,884,157

Prior to the adoption of Topic 326 on January 1, 2021, we calculated our allowance for loan losses using an incurred loan loss methodology.

Prior to the adoption of Topic 326 on January 1, 2021, we calculated our ALL using an incurred loan loss methodology.

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

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NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

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

September 30, 2020 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

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

79 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 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.

At September 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:

June 30, 2021

September 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 six months ended June 30, 2021 or the year ended December 31, 2020.

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

We have invested in subordinated debt of other financial institutions.

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.

We have three securities totaling $ 13.6 million that are considered to be Level 3 securities at September 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 $ 13.6 million at September 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

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

CARTER BANKSHARES, INC.

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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.

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.

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

June 30, 2021

September 30, 2021

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

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

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

Individually evaluated loans had a net carrying amount of $ 2.1 million at September 30, 2021 with a valuation allowance of $ 2.7 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.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 13.3 million as of September 30, 2021, compared with $ 15.7 million at December 31, 2020.

Write-downs of $ 3.3 million were recorded on OREO for the nine months ended September 30, 2021 compared to $ 1.4 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:

June 30, 2021

September 30, 2021

(Dollars in Thousands) Fair

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This baseline discount rate was back tested against historical OREO sales and therefore represents an average recovery rate based on the transaction sizes and asset types in the population examined.

Management considers the unique attributes and characteristics of each specific 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 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.”

Management considers the unique attributes and characteristics of each specific individually evaluated 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 September 30, 2021 and December 31, 2020 are presented in the following tables.

Fair values for September 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.

3 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Fair Value Measurements at June 30, 2021

Fair Value Measurements at September 30, 2021

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

12 unchanged sentences

Accrued Interest Payable 1,624 — — 1,624 1,624

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Fair Value Measurements at December 31, 2020

27 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.

3 unchanged sentences

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities for the periods presented:

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Fair Values of Derivative Instruments

Asset Derivatives (Included in Other Assets)

June 30, 2021 December 31, 2020

September 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)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

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

4 unchanged sentences

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

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(Dollars in Thousands) 2021 2020 2021 2020

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans 35 ( 86 ) 188 ( 285 )

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

Total Derivative Income (Loss) $ 35 $ ( 86 ) $ 188 $ ( 285 )

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) June 30,

(Dollars in Thousands) September 30,

2021 December 31,

2020 June 30,

2020 September 30,

2021 December 31,

4 unchanged sentences

Gross Amounts Not Offset (1)

— — ( 4,080 ) ( 5,220 )

Net Amount $ 3,351 $ 4,493 $ ( 654 ) $ ( 464 )

(1) Amounts represent collateral posted for the periods presented.

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings are an additional source of liquidity for the Company.

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

Total loans pledged as collateral were $ 908.7

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

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.

million and $ 804.2 million at September 30, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both September 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 is eligible to borrow up to an additional $ 555.9 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 September 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) June 30, 2021 December 31, 2020

(Dollars in Thousands) September 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 June 30, 2021 and thereafter are as follows:

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

(Dollars in Thousands) Balance Weighted

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NOTE 9 – COMMITMENTS AND CONTINGENCIES

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.

Commitments to extend credit, which amounted to $ 444.0 million at September 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 $ 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.

Lines of credit for construction projects represent $ 259.7 million, or 58.5 %, and $ 391.4 million, or 66.2 %, of the commitments to extend credit at September 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 $ 31.4 million at June 30, 2021 and $ 29.3 million at December 31, 2020.

The Company had outstanding letters of credit totaling $ 32.6 million at September 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.

4 unchanged sentences

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

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 (Loss).

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 and nine months ended September 30, 2021 were as follows:

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 and six months ended June 30, 2021 were as follows:

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

(Dollars in Thousands) Three Months Ended September 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

Provision for unfunded commitments ( 60 )

September 30, 2021 $ 2,107

(Dollars in Thousands) Nine Months Ended September 30, 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

3 unchanged sentences

Provision for unfunded commitments ( 945 )

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.

September 30, 2021 $ 2,107

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 $ 0.9 million for the six months ended June 30, 2021.

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

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

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

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.

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

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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 (the “District Court”) 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, III and various related entities that he and/or they own and control (such entities, the “Justice Entities” and collectively, the “Justice Parties”).

The allegations contained in the lawsuit related 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.

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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.

In July 2021, the Bank filed confessions of judgment against certain of the Justice Parties in Virginia state courts to collect amounts owed on certain of the Loans that were past due and in default.

In August 2021, the Bank and the Justice Parties reached an agreement to restructure the Loans.

In connection with this agreement, the Bank obtained a voluntary dismissal with prejudice of the lawsuit filed by the Justice Parties in the District Court.

The Bank withdrew the creditor collection actions it had filed against certain of the Justice Parties in Virginia state court.

The Bank believes that it is fully secured on all loans outstanding to the Justice Parties.

In connection with the dismissal of the lawsuits and the restructuring of the Loans, the Justice Parties executed documents that waive any and all causes of action of any kind they might claim to have against the Bank, reaffirmed the Loans owed to the Bank, and enhance the Bank’s collateral position, including cross-collateralizations, with respect to all loans outstanding to the Justice Parties.

The Company and the Bank denied and continue to deny all allegations contained in the lawsuit filed against the Bank by the Justice Parties.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the legal proceedings described above are concluded and will not have a material adverse effect on the Company’s consolidated financial statements.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 September 30, 2021 Three Months Ended September 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

Net Unrealized (Losses) Gains Arising during the period $ ( 4,588 ) $ 963 $ ( 3,625 ) $ 6,434 $ ( 1,351 ) $ 5,083

Reclassification Adjustment for Gains included in Net Income ( 1,341 ) 282 ( 1,059 ) ( 2,388 ) 501 ( 1,887 )

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

Other Comprehensive (Loss) Income $ ( 5,929 ) $ 1,245 $ ( 4,684 ) $ 4,046 $ ( 850 ) $ 3,196

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

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

2 unchanged sentences

Other Comprehensive (Loss) Income $ ( 13,076 ) $ 2,746 $ ( 10,330 ) $ 16,937 $ ( 3,557 ) $ 13,380

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 and nine month periods ended September 30, 2021 and September 30, 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 additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and deferral programs 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, litigation to which the Company is or has been a party and the potential impacts thereof, 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,” “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”);

technological risks and developments;

cyber-security threats, attacks or events;

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

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