What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2022-03-11 compared with 2021-03-12 · 307 added, 583 removed, 29 unchanged (97% of the section changed)

BUSINESS - (continued)

Brokered Deposits

Section 29 of the FDIA and FDIC regulations

generally limit the ability of any bank to accept, renew or roll over any brokered deposit unless it is “well capitalized”

or, with the FDIC’s approval, “adequately capitalized.”

However, as a result of the EGRRCPA, the FDIC undertook

a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits, and interest rate caps

applicable to banks that are less than “well capitalized.”

On December 15, 2020, the FDIC issued final rules that

amend the FDIC’s methodology for calculating interest rate caps, provide a new process for banks that seek FDIC approval

to offer a competitive rate on deposits when the prevailing rate in the Bank’s local market exceeds the national rate cap,

and provides specific exemptions and streamlined application and notice procedures for certain deposit-placement arrangements

that are not subject to brokered deposit restrictions.

These final rules are effective on April 1, 2021.

Prompt Corrective Action

The federal banking agencies have broad

powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions.

extent of these powers depends upon whether the institution in question is “well capitalized,”

“adequately capitalized,”

“undercapitalized,”

“significantly undercapitalized”

or “critically undercapitalized.”

terms are defined under uniform regulations issued by each of the federal banking agencies regulating these institutions.

depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject

to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities.

As of December 31, 2020,

the Bank was considered “well capitalized.”

Incentive Compensation

The federal banking agencies have issued

regulatory guidance (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies

of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

The FDIC will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking

organizations, such as the Bank, that are not “large, complex banking organizations.”

The findings will be included

in reports of examination, and deficiencies will be incorporated into the organization’s supervisory ratings.

actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control

or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt

and effective measures to correct the deficiencies.

In 2016, the SEC and the federal banking

agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing

or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons

(consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees

or benefits that could lead to material financial loss to the financial institution.

The proposed rules outline factors to

be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages

inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements

that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately

balance risk and reward.

The proposed rules also impose additional corporate governance requirements on the boards of directors

of covered financial institutions and impose additional record-keeping requirements.

The comment period for these proposed rules has

closed and a final rule has not yet been published.

Confidentiality and Required Disclosures

of Customer Information

The Company is subject to various laws

and regulations that address the privacy of nonpublic personal financial information of consumers.

The Gramm-Leach-Bliley Act

and certain regulations issued thereunder protect against the transfer and use by financial institutions of consumer nonpublic

personal information.

A financial institution must provide to its customers, at the beginning of the customer relationship and

annually thereafter, the institution’s policies and procedures regarding the handling of customers’

nonpublic personal

financial information.

These privacy provisions generally prohibit a financial institution from providing a customer’s personal

financial information to unaffiliated third parties unless the institution discloses to the customer that the information may

be so provided and the customer is given the opportunity to opt out of such disclosure.

Certain exceptions may apply to the requirement

to deliver an annual privacy notice based on how a financial institution limits sharing of nonpublic personal information, and

whether the institution’s disclosure practices or policies have changed in certain ways since the last privacy notice that

was delivered.

Banking Acquisitions;

Changes in Control

The BHCA and related regulations require, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company.

In determining whether to approve a proposed bank acquisition, the FRB will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, any outstanding regulatory compliance issues of any institution that is a party to the transaction, the projected capital ratios and levels on a post-acquisition basis, the financial condition of each institution that is a party to the transaction and of the combined institution after the transaction, the parties’ managerial resources and risk management and governance processes and systems, the parties’ compliance with the Bank Secrecy Act and anti-money laundering requirements, and the acquiring institution’s performance under the Community Reinvestment Act and its compliance with fair housing and other consumer protection laws.

Subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with the applicable regulations, require FRB approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company’s acquiring “control” of a bank or bank holding company.

A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution.

A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the SEC under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the acquisition.

The Company’s common stock is registered under Section 12 of the Exchange Act.

On April 1, 2020, the FRB’s new rule for determining whether a company has control over a bank or other company for purposes of the BHCA, and the control presumptions promulgated under Regulation Y, became effective.

The new rule provides specific guidance for the FRB’s approach to certain control evaluations, including a tiered framework incorporating a series of presumptions based on ownership of a class of voting securities.

A company may be presumed to be in control of a target second company based on five levels of ownership of voting securities:

(i) less than five percent;

(ii) five percent;

(iii) ten percent;

(iv) 15 percent;

(v) 25 percent;

and (vi) with a presumption triggered at levels below 25 percent, depending on whether any of nine types of relationships exist (i.e., directors and director service positions, business relationships and business terms, officer/employee interlocks, contractual powers, proxy contests involving directors, and total equity ownership) and, at the same time, ownership of a class of voting securities exceeds certain thresholds.

As was the case prior to the new rule, a presumption of control (once triggered) does not automatically result in a control determination under the BHCA as such presumptions may be rebutted.

The new rule applies only to questions of control under the BHCA, but does not extend to the Change in Bank Control Act.

In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition by a Virginia bank holding company of more than 5% of the voting shares of a Virginia bank or a Virginia bank holding company, or (ii) the acquisition by any other person of control of a Virginia bank holding company or a Virginia bank.

Certain Transactions by Insured Banks with their Affiliates

There are statutory restrictions related to the extent bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with their insured depository institution (i.e., banking) subsidiaries.

In general, an “affiliate” of a bank includes the bank’s parent holding company and any subsidiary thereof.

However, an “affiliate” does not generally include the bank’s operating subsidiaries.

A bank (and its subsidiaries) may not lend money to, or engage in other covered transactions with, its non-bank affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction, exceeds the following limits:

(a) in the case of any one such affiliate, the aggregate amount of covered transactions of the bank and its subsidiaries cannot exceed 10 percent of the bank’s capital stock and surplus;

and (b) in the case of all affiliates, the aggregate amount of covered transactions of the bank and its subsidiaries cannot exceed 20 percent of the bank’s capital stock and surplus.

“Covered transactions” are defined to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending

CARTER BANKSHARES, INC.

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BUSINESS - (continued)

The Company is also subject to various

laws and regulations that attempt to combat money laundering and terrorist financing.

The Bank Secrecy Act (the “BSA”)

requires all financial institutions to, among other things, create a system of controls designed to prevent money laundering and

the financing of terrorism, and imposes recordkeeping and reporting requirements.

The USA PATRIOT Act added regulations to facilitate

information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering,

and requires financial institutions to establish anti-money laundering programs.

Regulations adopted under the BSA impose on financial

institutions customer due diligence requirements, and the federal banking regulators expect that customer due diligence programs

will be integrated within a financial institution’s broader BSA and anti-money laundering compliance program.

of Foreign Assets Control (“OFAC”), which is a division of the U.S.

Department of Treasury, is responsible for helping

to ensure that United States entities do not engage in transactions with “enemies”

of the United States, as defined

by various Executive Orders and Acts of Congress.

If the Company finds the name of an “enemy”

of the United States

on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into

a blocked account, and report it to OFAC.

Although these laws and programs impose

compliance costs and create privacy obligations and, in some cases, reporting obligations, and compliance with all of the laws,

programs, and privacy and reporting obligations may require significant resources of the Company and the Bank, these laws and

programs do not materially affect the Bank’s products, services or other business activities.

Temporary BSA Reporting Relief

Department of the Treasury’s

Financial Crimes Enforcement Network (“FinCEN”) provided targeted relief from certain BSA reporting requirements and

provided updated guidance to financial institutions on complying with such requirements during COVID-19.

Specifically, FinCEN

(i) granted targeted relief to financial institutions participating in the PPP, stating that PPP loans to existing customers

will not require re-verification under applicable BSA requirements, unless re-verification 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 COVID-19, and (iii) temporarily suspended implementation if 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 and the Bank continue to monitor

developments related to FinCEN’s targeted and temporary relief measures.

Corporate Transparency Act

On January 1, 2021, as part of the

2021 National Defense Authorization Act, Congress enacted the Corporate Transparency Act (“CTA”), which requires the

Financial Crimes Enforcement Network (“FinCEN”) to issue regulations implementing reporting requirements for “reporting

companies”

(as defined in the CTA) to disclose beneficial ownership interests of certain U.S.

and foreign entities by January 1,

The CTA imposes additional reporting requirements on entities not previously subject to such beneficial ownership disclosure

regulations and also contains exemptions for several different types of entities, including among others:

(i) certain banks,

bank holding companies, and credit unions;

(ii) money transmitting businesses registered with FinCEN;

and (iii) certain

insurance companies.

Reporting companies subject to the CTA will be required to provide specific information with respect to beneficial

owner(s) (as defined in the CTA) as well as satisfy initial filing obligations (for newly-formed reporting companies) and

submit on-going periodic reports.

Non-compliance with FinCEN regulations promulgated under the CTA may result in civil fines as

well as criminal penalties.

At this time, FinCEN has yet to issue any proposed rules.

Accordingly, the Company is unable to determine

what impact (if any) the CTA and related regulations will have on the Company and the Bank.

The Company will continue to monitor

regulatory developments related to the CTA.

transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate.

Certain covered transactions are also subject to collateral security requirements.

Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms, which means that the transaction must be conducted on terms and under circumstances that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving nonaffiliates or, in the absence of comparable transactions, that in good faith would be offered to or would apply to nonaffiliates.

Moreover, certain amendments to the BHCA provide that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.

Regulatory Capital Requirements

All financial institutions are required to maintain minimum levels of regulatory capital.

The FDIC establishes risk-based and leveraged capital standards for the financial institutions they regulate.

The FDIC also may impose capital requirements in excess of these standards on a case-by-case basis for various reasons, including financial condition or actual or anticipated growth.

As of December 31, 2021 and 2020, the Bank qualified as a “well capitalized” institution.

Refer to Note 21, Capital Adequacy, of the Notes to Consolidated Financial Statements in Part II, Item 8, of this Annual Report on Form 10-K.

In response to the COVID-19 pandemic, the federal bank regulatory authorities issued an interim final rule in March 2020 to provide banking organizations that were required to implement Accounting Standard Update 2016-13:

Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments before the end of 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.

On August 26, 2020, federal banking agencies adopted a final rule that was substantially similar to the interim final rule issued in March 2020, which allowed the Company to phase in the impact of adopting the Current Expected Credit Losses (“CECL”) methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.

The Company adopted the CECL methodology effective January 1, 2021.

Refer to “Capital Resources” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), of this Annual Report on Form 10-K for information regarding the impact of this final rule on the Company’s regulatory capital.

Basel III Capital Framework

The FRB and the FDIC have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the “Basel III Final Rules”) that apply to banking institutions they supervise and to bank holding companies.

For the purposes of the Basel III Final Rules, (i) common equity tier 1 capital (CET1) consists principally of common stock (including surplus) and retained earnings;

(ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities;

and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for credit losses.

Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules.

The Basel III Final Rules also establish risk weightings that are applied to many classes of assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans.

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BUSINESS - (continued)

Cybersecurity

The federal banking agencies have also

adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under

the supervision of a financial institution’s board of directors.

These guidelines, along with related regulatory materials,

increasingly focus on risk management and processes related to information technology and the use of third parties in the provision

of financial products and services.

The federal banking agencies expect financial institutions to establish lines of defense and

ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial

institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance

of the institution’s operations after a cyber-attack.

If the Company or the Bank fails to meet the expectations set forth

in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions and any remediation efforts

may require significant resources of the Company or the Bank.

In addition, all federal and state banking agencies continue to

increase focus on cybersecurity programs and risks as part of regular supervisory exams.

In October 2016, the federal banking

agencies issued proposed rules on enhanced cybersecurity risk-management and resilience standards that would apply to very

large financial institutions and to services provided by third parties to these institutions.

The comment period for these proposed

rules has closed and a final rule has not been published.

Although the proposed rules would apply only to bank

holding companies and banks with $50 billion or more in total consolidated assets, these rules could influence the federal

banking agencies’

expectations and supervisory requirements for information security standards and cybersecurity programs

of smaller financial institutions, such as the Bank.

Stress Testing

The federal banking agencies have implemented

stress testing requirements for certain large or risky financial institutions, including bank holding companies and state-chartered

Although these requirements do not apply to the Company and the Bank, the federal banking agencies emphasize that all banking

organizations, regardless of size, should have the capacity to analyze the potential effect of adverse market conditions or outcomes

on the organization’s financial condition.

Based on existing regulatory guidance, the Company and the Bank will be expected

to consider its interest rate risk management, commercial real estate loan concentrations and other credit-related information,

and funding and liquidity management during this analysis of adverse market conditions or outcomes.

The Dodd-Frank Act prohibits bank holding

companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on

ownership of equity investments in private equity and hedge funds (the “Volcker Rule”).

The EGRRCPA and final rules adopted

to implement the EGRRCPA exempt all banks with less than $10 billion in assets (including their holding companies and affiliates)

from the Volcker Rule, provided that the institution has total trading assets and liabilities of 5% or less of total assets, subject

to certain limited exceptions.

The Company believes that its financial condition and its operations are not significantly affected

by the Volcker Rule, amendments thereto, or its implementing regulations.

The Basel III Final Rules and minimum capital ratios were effective January 1, 2015.

The Basel III Final Rules also include a requirement that banks and bank holding companies maintain additional capital (the “capital conservation buffer”), which was phased in beginning January 1, 2016 and was fully phased-in effective January 1, 2019.

The Basel III Final Rules and fully phased-in capital conservation buffer require:

• a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the minimum CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7%);

• a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5%);

• a minimum ratio of total capital (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (effectively resulting in a required total capital ratio of 10.5%);

• a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average total assets, subject to certain adjustments and limitations.

The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital rules.

For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

As of December 31, 2021, the Company and the Bank met all capital adequacy requirements under the Basel III Final Rules.

Community Bank Leverage Ratio

As a result of the EGRRCPA, the federal banking agencies have developed and implemented the Community Bank Leverage Ratio Framework (the “CBLRF”).

To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%.

A bank that elects the CBLRF and has a leverage ratio greater than 9% will be considered to be in compliance with Basel III capital requirements and exempt from the complex Basel III calculations.

A bank that falls out of compliance with the CBLRF will have a two-quarter grace period to come back into full compliance, provided that its leverage ratio remains above 8% (a bank will be deemed well-capitalized during the grace period).

The CBLRF became available for banking organizations to use as of March 31, 2020 (with the flexibility for banking organizations to subsequently opt into or out of the CBLRF, as applicable).

As of December 31, 2021, the Bank has not elected to apply the CBLRF.

Dividend Limitations

The Company is a legal entity that is separate and distinct from the Bank.

A significant portion of the revenues of the Company result from dividends paid to it by the Bank.

Both the Company and the Bank are subject to laws and regulations that limit the payment of dividends, including limits on the sources of dividends and requirements to maintain capital at or above regulatory minimums.

Banking regulators have indicated that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.

In addition, FRB supervisory guidance indicates that the FRB may have safety and soundness concerns if a bank holding company pays dividends that exceed earnings for the period in which the dividend is being paid.

Further, the Federal Deposit Insurance Act (“FDIA”) prohibits insured depository institutions such as the Bank from making capital distributions, including paying dividends, if, after making such distribution, the institution would become undercapitalized as defined in the statute.

We do not expect that any of these laws, regulations or policies will materially affect the ability of the Company or the Bank to pay dividends.

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BUSINESS - (continued)

Call Reports and Examination Cycle

All institutions, regardless of size,

submit a quarterly call report that includes data used by federal banking agencies to monitor the condition, performance, and

risk profile of individual institutions and the industry as a whole.

The EGRRCPA contained provisions expanding the number of

regulated institutions eligible to use streamlined call report forms.

In June 2019, the federal banking agencies issued a

final rule to permit insured depository institutions with total assets of less than $5 billion that do not engage in certain

complex or international activities to file the most streamlined version of the quarterly call report, and to reduce data reportable

on certain streamlined call report submissions.

Effect of Governmental Monetary

As with other financial institutions,

the earnings of the Company and the Bank are affected by general economic conditions as well as by the monetary policies of the

Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon

the source and cost of funds and the rates of return earned on loans and investments.

The FRB exerts a substantial influence on

interest rates and credit conditions, primarily through establishing target rates for federal funds, open market operations in

Government securities, varying the discount rate on member bank borrowings and setting cash reserve requirements against

Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase

of investments, the generation of deposits, and rates received on loans and investment securities and paid on deposits.

in the FRB’s monetary policies have had a significant impact on the operating results of the Company and the Bank and all

financial institutions in the past and are expected to continue to do so in the future.

Legislative and Regulatory Responses

to the COVID-19 Pandemic

In response to the COVID-19 pandemic,

the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020.

Act provided approximately $2.2 trillion in emergency economic relief measures including, among other things, loan programs for

small and mid-sized businesses and other economic relief for impacted businesses and industries, including financial institutions.

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

financial institutions and have been implemented

through rules and guidance adopted by federal departments and agencies, including the U.S.

Department of the Treasury, the

FDIC, the FRB 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 and the Bank.

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 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 developed over the course

of several months during 2020, 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.

Insurance of Accounts, Assessments and Regulation by the FDIC

Deposits with the Bank are insured through the Deposit Insurance Fund (“DIF”) of the FDIC.

As a DIF-insured institution, the Bank is subject to FDIC rules and regulations as administrator of the DIF.

The Dodd-Frank Act made permanent the current standard maximum deposit insurance amount of $250,000.

The FDIC coverage applies per depositor, per insured depository institution, for each account ownership category.

The FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions.

The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the insurance fund.

Also, the FDIC may initiate enforcement actions against banks after first giving the institution’s primary regulatory authority an opportunity to take such action.

The FDIC may terminate the deposit insurance of any depository institution, including the Bank, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC.

It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital.

If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC.

Management is aware of no existing circumstances that could result in termination of the Bank’s deposit insurance.

The actual assessment to be paid by each DIF member is based on the institution’s assessment risk classification and whether the institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.

The DIF is funded by assessments on banks and other depository institutions calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital).

As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more detail below) of 2% for the DIF and, in lieu of dividends, provides for a lower assessment rate schedule when the reserve ratio reaches 2% and 2.5%.

An institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS component rating, and is subject to further adjustments including those related to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets).

At December 31, 2021, total base assessment rates for institutions that have been insured for at least five years range from 1.5 to 30 basis points applying to banks with less than $10 billion in assets.

The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” The FDIA requires the FDIC to consider the appropriate level for the DIF on at least an annual basis.

Banks with less than $10 billion in total consolidated assets (such as the Bank) receive credits to offset the portion of their assessments that help to raise the reserve ratio to 1.35%.

The FDIC will automatically apply such a bank’s credits to reduce its regular DIF assessment up to the entire amount of the assessment.

The FDIC will remit any such remaining credits in a lump sum to the appropriate bank following application to the bank’s regular DIF assessment for four quarterly assessment periods.

Although the DIF declined below the minimum level of 1.35% during 2020 due to the impact of significant deposit increases which led the FDIC to adopt a DIF restoration plan, and the DIF was 1.27 percent as of September 30, 2021, the FDIC has not increased base assessment rates.

In June 2020, the FDIC adopted a final rule that generally removes the effect of lending by financial institutions under the Small Business (“SBA”) Administration’s Paycheck Protection Program (“PPP”) when calculating a bank’s deposit insurance assessment by providing an offset to the bank’s total assessment amount for the increase in the assessment base attributable to the bank’s participation in the PPP.

This final rule began applying to FDIC deposit insurance assessments during the second quarter of 2020.

Community Reinvestment

The Community Reinvestment Act (the “CRA”) imposes on financial institutions, including the Bank an affirmative obligation to help meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions.

Each financial institution’s efforts in helping meet community credit needs

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Paycheck Protection Program (“PPP”)

PPP is an amendment to the Small Business

Administration’s (“SBA”) 7-A loan program.

PPP is a guaranteed, unsecured loan program created to fund certain

payroll and operating costs of eligible businesses, organizations and self-employed persons during COVID-19.

Initially, $349 billion

were approved and designated for PPP in order for the SBA to guarantee 100% of collective loans made under the program to eligible

small businesses, nonprofits, veteran’s organizations, and tribal businesses.

The Bank became an approved SBA 7-A lender

in the second quarter of 2020.

The Bank participated in the initial round of funding though a referral relationship with a third-party,

non-bank lender.

When an additional $310 billion in funds were approved and designated for PPP in April 2020, the Bank opted

to stand up an internal, automated loan process utilizing its core system provider.

Congress enacted the Consolidated Appropriations

Act of 2021 (the “CAA”) on December 27, 2020, which amended the CARES Act and included (i) the Economic

Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, (ii) the COVID-Related Tax Relief Act of 2020, and (iii) the

Taxpayer Certainty and Disability Relief Act of 2020.

These laws include significant clarifications and modifications to PPP,

which had terminated on August 8, 2020.

In particular, Congress revived PPP and allocated an additional $284 billion in PPP

funds for 2021.

As a result, the SBA will modify prior guidance and promulgate new regulations and guidance to conform with and

implement the new provisions during the first quarter of 2021.

As a participating PPP lender, the Bank continues to monitor legislative,

regulatory, and supervisory developments related thereto.

The Bank expects to continue to provide access to the PPP through our

internal lending program for our current business customers.

Troubled Debt Restructurings (“TDRs”)

and Loan Modifications for Affected Borrowers.

The CARES Act permits banks to suspend

requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs

and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier

of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was

not more than 30 days past due as of December 31, 2019.

The provisions of the CARES Act dealing with temporary relief related

to TDRs was extended pursuant to the CAA which was signed into law on December 27, 2020.

The CAA extended the “applicable”

period to the earlier of January 1, 2022 or 60 days after the date on which the national emergency concerning the COVID-19

pandemic terminates.

The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers

affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.

The Bank is currently applying

this guidance to qualifying loan modifications.

Debt Guarantees and Account Insurance

The CARES Act also authorized several

key initiatives directly applicable to federal bank regulatory authorities, including (i) the establishment of a program

by the FDIC to guarantee the debt obligations of solvent insured depository institutions and their affiliates (including their

holding companies) through December 31, 2020 and (ii) an increase by the FDIC and the National Credit Union Association

to the insurance coverage on any noninterest-bearing transaction accounts through December 31, 2020.

currently are evaluated as part of the examination process pursuant to regulations adopted by the federal banking agencies.

Under the regulation, a financial institution’s efforts in helping meet its community’s credit needs are evaluated, based on the particular institution’s total assets, according to three-pronged test of lending, investment and service in the community.

The grade received by a bank is considered in evaluating mergers, acquisitions and applications to open a branch or facility.

To the best knowledge of the Bank, it is meeting its obligations under the CRA.

The Bank received a rating of “satisfactory” on its most recent CRA examination dated February 1, 2021.

Federal Home Loan Bank of Atlanta

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of 12 regional FHLBs that provide funding to their members for making housing loans as well as for affordable housing and community development loans.

Each FHLB serves as a reserve, or central bank, for the members within its assigned region.

Each FHLB makes loans to members in accordance with policies and procedures established by the Board of Directors of the FHLB.

As a member, the Bank must purchase and maintain stock in the FHLB.

At December 31, 2021, the Bank owned $2.4 million of FHLB stock.

Consumer Protection

The Consumer Financial Protection Bureau (the “CFPB”) is the federal regulatory agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions.

The CFPB supervises and regulates providers of consumer financial products and services, and has rulemaking authority in connection with numerous federal consumer financial protection laws (for example, but not limited to, the Truth-in-Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”)).

Because the Company and the Bank are smaller institutions (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the FRB and the Bank by the FDIC.

However, the CFPB may include its own examiners in regulatory examinations by a smaller institution’s principal regulators and may require smaller institutions to comply with certain CFPB reporting requirements.

In addition, regulatory positions taken by the CFPB and administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision of larger banks, could influence how the FRB and the FDIC apply consumer protection laws and regulations to financial institutions that are not directly supervised by the CFPB.

The precise effect of the CFPB’s consumer protection activities on the Company and the Bank cannot be determined with certainty.

Mortgage Banking Regulation

In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.

The Bank’s mortgage origination activities are subject to the Equal Credit Opportunity Act, TILA, the Home Mortgage Disclosure Act, RESPA, the Home Ownership Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws, regulations and rules.

The Bank’s mortgage origination activities are also subject to Regulation Z, which implements TILA.

Certain provisions of Regulation Z require mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.

Alternatively, a mortgage lender can originate “qualified mortgages,” which are generally defined as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30 years, and points and fees paid by a consumer equal to or less than 3% of the total loan amount.

Under the EGRRCPA, most residential mortgage loans originated and held in portfolio by a bank with less than $10 billion in assets will be designated as “qualified mortgages.” Higher-priced qualified mortgages (e.g., sub-prime loans) receive a rebuttable presumption of compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules.

The Bank predominantly originates mortgage loans that comply with Regulation Z’s “qualified mortgage” rules.

CARTER BANKSHARES, INC.

1 unchanged sentence

BUSINESS - (continued)

FRB Programs and Initiatives related

to the CARES Act and COVID-19

The CARES Act encouraged the Federal Reserve,

in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits,

and municipalities.

On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program, (“MSLP”)

to implement certain of these recommendations.

On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender

registration.

The MSLP operated through five facilities:

The Main Street New Loan Facility, the Main Street Priority Loan Facility,

the Main Street Expanded Loan Facility, the Nonprofit Organization New Loan Facility, and the Nonprofit Organization Expanded Loan

With the consent of the U.S.

Department of the Treasury, the FRB terminated the MSLP facilities on January 8, 2021.

Separately and in response to COVID-19,

the FRB’s Federal Open Market Committee (the “FOMC”) set the federal funds target rate –

i.e., the interest

rate at which depository institutions such as the Bank lend reserve balances to other depository institutions overnight on an uncollateralized

basis –

to an 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 expanded the size

and scope of three existing programs to mitigate the economic impact of the COVID-19 outbreak:

(i) the Primary Market Corporate

Credit Facility;

(ii) the Secondary Market Corporate Credit Facility;

and (iii) the Term Asset-Backed Securities Loan

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 COVID-19.

On November 30, 2020, the FRB extended these lending facilities (scheduled to expire on or around December 31, 2020)

through March 31, 2021.

Future Regulation

From time to time, various legislative

and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.

Such initiatives

may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially

change the financial institution regulatory system.

Such legislation could change banking statutes and the operating environment

of the Company and the Bank in substantial and unpredictable ways.

If enacted, such legislation could increase or decrease the

cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations,

credit unions, and other financial institutions.

The Company cannot predict whether any such legislation will be enacted, and,

if enacted, the effect that it, or any implementing regulations, would have on its financial condition or results of operations.

A change in statutes, regulations or regulatory policies applicable to the Company and the Bank could have a material effect on

our business.

Where You Can Find More Information

The Company files quarterly, annual and

periodic reports, proxy statements and insider filings with the SEC.

The Company’s SEC filings are available to the public

over the Internet at the SEC’s web site at http://www.sec.gov.

The Company’s SEC filings also are available through

our web site (www.CBTCares.com at the “Filings”

link under the “Investor”

tab) as of the day they are filed

with the SEC.

Copies of documents also can be obtained free of charge by directing a request by telephone or mail to Investor Relations,

Carter Bankshares, Inc., 1300 Kings Mountain Road, Martinsville, Virginia 24112;

telephone number:

(276) 656-1776.

Brokered Deposits

Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept, renew or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” However, as a result of the EGRRCPA, the FDIC undertook a comprehensive review of its regulatory approach to brokered deposits, including reciprocal deposits, and interest rate caps applicable to banks that are less than “well capitalized.” On December 15, 2020, the FDIC issued final rules that amended the FDIC’s methodology for calculating interest rate caps, provided a new process for banks that seek FDIC approval to offer a competitive rate on deposits when the prevailing rate in the Bank’s local market exceeds the national rate cap, and provided specific exemptions and streamlined application and notice procedures for certain deposit-placement arrangements that are not subject to brokered deposit restrictions.

These final rules were effective as of April 1, 2021.

Prompt Corrective Action

Federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions.

The extent of these powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” These terms are defined under uniform regulations issued by each of the federal banking agencies regulating these institutions.

An insured depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities.

As of December 31, 2021, the Bank was considered “well capitalized.”

Incentive Compensation

The federal banking agencies have issued regulatory guidance (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

The FDIC will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Bank, that are not “large, complex banking organizations.” The findings will be included in reports of examination, and deficiencies will be incorporated into the organization’s supervisory ratings.

Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution.

The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward.

The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements.

The comment period for these proposed rules has closed and a final rule has not yet been published.

Confidentiality and Required Disclosures of Customer Information

The Company is subject to various laws and regulations that address the privacy of nonpublic personal financial information of consumers.

The Gramm-Leach-Bliley Act and certain regulations issued thereunder protect against the transfer and use by financial institutions of consumer nonpublic personal information.

A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information.

These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt-out of such disclosure.

Certain exceptions may apply to the requirement to deliver an annual privacy notice based on how a financial institution limits sharing

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

Investments in the Company’s common

stock involve risk.

In addition to the other information set forth in this Report, including the information addressed under “Forward-Looking

Statements,”

investors in the Company’s common stock should carefully consider the factors discussed below.

The following

discussion highlights the risks that we believe are material to the Company, but does not necessarily include all risks that we

These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results

of operations, and capital position, and could cause the Company’s actual results to differ materially from its historical

results or the results contemplated by the forward-looking statements contained in this Report, in which case the trading price

of the Company’s common stock could decline.

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic and resulting

adverse economic conditions have already adversely impacted the Company’s business and results, and could have a more material

adverse impact on our business, financial condition and results of operations.

The ongoing COVID-19 global and national

health emergency has caused significant disruption in the United States and international economies and financial markets.

spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school

shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and

overall economic and financial market instability.

In March 2020, almost all states, including Virginia, where the Company

is headquartered, and North Carolina, in which the Company has significant operations, issued “stay-at-home orders”

and declared states of emergency.

Many state and local governments began implementing phased regulations and guidelines for reopening

communities and economies, often with reduced capacity and social distancing restrictions.

However, recently, many state and local

governments have implemented additional restrictions in light of the significant COVID-19 resurgence.

Although banks have generally been permitted

to continue operating, the COVID-19 pandemic has caused disruptions to the Company’s business and could cause material disruptions

to our business and operations in the future.

Impacts to our business have included decreased operating effectiveness due to additional

health and safety precautions we implemented at our branches and the transition of 20% of our workforce to home locations, decreases

in customer traffic in our branches and increases in requests for forbearance and loan modifications.

Further, loan payment deferment

programs that we have implemented and government stimulus programs, like the PPP, may mask credit deterioration in our loan portfolio

by making less applicable standard measures of developing financial weakness in a client or portfolio, such as past due monitoring

and non-accrual assessments.

To the extent that commercial and social restrictions remain in place or increase, the Company’s

expenses, delinquencies, charge-offs, foreclosures and credit losses could materially increase, and we could experience

reductions in interest and fee income.

In addition, we anticipate that potential declines in credit quality could significantly

affect the adequacy of our allowance for loan losses, which we expect could lead to increases in the provision for loan losses

and related declines in our net income.

Unfavorable economic conditions and increasing

unemployment figures may also make it more difficult for the Company to maintain deposit levels and loan origination volume

and to obtain additional financing.

Furthermore, such conditions have and may continue to cause the value of our

Company’s investment portfolio and of collateral associated with our existing loans to decline.

In addition, in March 2020,

the FRB lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in part as a result of the pandemic.

A prolonged period of very low interest rates could reduce the Company’s net interest income and have a material adverse

impact on our cash flows and the market value of our investments or the manner in which we redeploy proceeds from maturing investments.

BUSINESS - (continued)

of nonpublic personal information, and whether the institution’s disclosure practices or policies have changed in certain ways since the last privacy notice that was delivered.

The Company is also subject to various laws and regulations that attempt to combat money laundering and terrorist financing.

The Bank Secrecy Act (the “BSA”) requires all financial institutions to, among other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping and reporting requirements.

The USA PATRIOT Act added regulations to facilitate information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering and requires financial institutions to establish anti-money laundering programs.

Regulations adopted under the BSA impose on financial institutions customer due diligence requirements, and the federal banking regulators expect that customer due diligence programs will be integrated within a financial institution’s broader BSA and anti-money laundering compliance program.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.

Department of Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress.

If the Company finds the name of an “enemy” of the United States on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into a blocked account, and report it to OFAC.

Although these laws and programs impose compliance costs and create privacy obligations and, in some cases, reporting obligations, and compliance with all of the laws, programs, and privacy and reporting obligations may require significant resources of the Company and the Bank, these laws and programs do not materially affect the Bank’s products, services or other business activities.

Corporate Transparency Act

On January 1, 2021, as part of the 2021 National Defense Authorization Act, Congress enacted the Corporate Transparency Act (“CTA”), which requires the Financial Crimes Enforcement Network (“FinCEN”) to issue regulations implementing reporting requirements for “reporting companies” (as defined in the CTA) to disclose beneficial ownership interests of certain U.S.

and foreign entities by January 1, 2022.

The CTA imposes additional reporting requirements on entities not previously subject to such beneficial ownership disclosure regulations and also contains exemptions for several different types of entities, including among others:

(i) certain banks, bank holding companies, and credit unions;

(ii) money transmitting businesses registered with FinCEN;

and (iii) certain insurance companies.

Reporting companies subject to the CTA are required to provide specific information with respect to beneficial owner(s) (as defined in the CTA) as well as satisfy initial filing obligations (for newly-formed reporting companies) and submit on-going periodic reports.

Non-compliance with FinCEN regulations promulgated under the CTA may result in civil fines and criminal penalties.

The Company and the Bank will continue to monitor regulatory developments related to the CTA and will continue to assess the ultimate impact of the CTA on the Company and the Bank.

Cybersecurity

The federal banking agencies have also adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors.

These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services.

The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack.

If the Company or the Bank fails to meet the expectations set forth in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions and any remediation efforts may require significant resources of the Company or the Bank.

In addition, all federal and state banking agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.

In October 2016, the federal banking agencies issued proposed rules on enhanced cybersecurity risk-management and resilience standards that would apply to very large financial institutions and to services provided by third parties to these institutions.

The comment period for these proposed rules has closed and a final rule has not been published.

Although the proposed rules would apply only to bank holding companies and banks with $50 billion or more in total consolidated assets, these rules could influence the federal banking agencies’ expectations and supervisory requirements for information security standards and cybersecurity programs of smaller financial institutions, such as the Bank.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

RISK FACTORS –

While we have taken and continue to take

precautions to protect the safety and well-being of our employees and customers, no assurance can be given that the steps we’ve

taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption to our employees’

to provide customer support and service.

The continued or renewed spread of COVID-19 could negatively impact the availability

of key personnel necessary to conduct the Company’s business, the business and operations of our third-party service providers

who perform critical services for the Company’s business, or the businesses of many of our customers and borrowers.

is not successfully contained, we could experience a material adverse effect on its business, financial condition, results of

operations and cash flow.

Among the factors outside the Company’s

control that are likely to affect the impact the COVID-19 pandemic will ultimately have on the Company’s business are, without

pandemic’s course and severity;

uncertainty regarding new variants of COVID-19 that have emerged;

speed and efficacy of vaccine and treatment developments;

direct and indirect results of the pandemic, such as recessionary economic trends, including

with respect to employment, wages and benefits, commercial activity, the residential

housing market, consumer spending and real estate and investment securities market values;

legal and regulatory actions and policies in response to the pandemic, including the

effects of restrictions on commerce and banking, such as current temporary or required

continuing moratoria and other suspensions of collections, foreclosures, and related

timing, magnitude and effect of public spending, directly or through subsidies, its direct

and indirect effects on commercial activity and incentives of employers and individuals

to resume or increase employment, wages and benefits and commercial activity;

on the Company’s liquidity position due to changes in customers’

and loan activity in response to the pandemic and its economic effects;

timing and availability of direct and indirect governmental support for various financial

assets, including mortgage loans;

long-term effect of the economic downturn on the Company’s intangible assets such

as our deferred tax asset and goodwill;

longer-term effects of increased government spending on the interest rate environment

and borrowing costs for non-governmental parties;

ability of the Company’s employees to work effectively during the course of the

ability of the Company’s third-party vendors to maintain a high-quality and effective

level of service;

possibility of increased fraud, cybercrime and similar incidents, due to vulnerabilities

posed by the significant increase in our employees and customers handling their banking

interactions remotely from home, the quick roll-out of various government-sponsored lending

programs, like the PPP, or otherwise;

changes to the Company’s internal controls over financial reporting to reflect

a rapidly changing work environment;

longer-term shifts toward mobile banking, telecommuting and telecommerce;

variation in the severity and duration of the COVID-19 pandemic, particularly in Virginia

and North Carolina, where the Company operates physically.

The ongoing COVID-19 pandemic has resulted

in severe volatility in the financial markets and meaningfully lower stock prices for many companies, including the Company’s

common stock.

Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock may continue to experience

volatility and declines.

BUSINESS - (continued)

On November 18, 2021, the federal bank regulatory agencies issued final rule to improve the sharing of information about cyber incidents that may affect the U.S.

banking system.

Such rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber-incident has occurred.

Notification is required for incidents that have materially affected—or are reasonably likely to materially affect—the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector.

In addition, the rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours.

Compliance with the final rule is required by May 1, 2022.

The Company and the Bank are currently assessing the impact of this rule, but do not anticipate any material impact to their respective operations at this time.

Stress Testing

The federal banking agencies have implemented stress-testing requirements for certain large or risky financial institutions, including bank holding companies and state-chartered banks.

Although these requirements do not apply to the Company and the Bank, the federal banking agencies emphasize that all banking organizations, regardless of size, should have the capacity to analyze the potential effect of adverse market conditions or outcomes on the organization’s financial condition.

Based on existing regulatory guidance, the Company and the Bank will be expected to consider its interest rate risk management, commercial real estate loan concentrations and other credit-related information, and funding and liquidity management during this analysis of adverse market conditions or outcomes.

The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the “Volcker Rule”).

The EGRRCPA and final rules adopted to implement the EGRRCPA exempt all banks with less than $10 billion in assets (including their holding companies and affiliates) from the Volcker Rule, provided that the institution has total trading assets and liabilities of 5% or less of total assets, subject to certain limited exceptions.

The Company believes that its financial condition and its operations are not significantly affected by the Volcker Rule, amendments thereto, or its implementing regulations.

Call Reports and Examination Cycle

All institutions, regardless of size, submit a quarterly call report that includes data used by federal banking agencies to monitor the condition, performance, and risk profile of individual institutions and the industry as a whole.

The EGRRCPA contained provisions expanding the number of regulated institutions eligible to use streamlined call report forms.

In June 2019, the federal banking agencies issued a final rule to permit insured depository institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the most streamlined version of the quarterly call report, and to reduce data reportable on certain streamlined call report submissions.

Effect of Governmental Monetary Policies

As with other financial institutions, the earnings of the Company and the Bank are affected by general economic conditions as well as by the monetary policies of the FRB.

Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments, and on levels of inflation in the United States.

The FRB exerts a substantial influence on interest rates and credit conditions, primarily through establishing target rates for federal funds, open market operations in U.S.

Government securities, varying the discount rate on member bank borrowings and setting cash reserve requirements against deposits.

Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits, and rates received on loans and investment securities and paid on deposits.

Fluctuations in the FRB’s monetary policies have had a significant impact on the operating results of the Company and the Bank and all financial institutions in the past and are expected to continue to do so in the future.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

RISK FACTORS –

The Company continues to monitor the COVID-19

pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as

to its ultimate impact on the Company.

However, if the COVID-19 pandemic continues to spread or otherwise result in a continuation

or worsening of the current economic and commercial environments, our business, financial condition, results of operations and

cash flows could be materially adversely affected.

The full effects of the COVID-19 pandemic

may have a material adverse effect on the Company in numerous ways.

While the scope, duration, and full effects

of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic

activity, adversely affected the functioning of financial markets, impacted interest rates and increased economic and market uncertainty.

If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors

identified in Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse impact on us

in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk and human capital.

results of operations may continue to be negatively impacted by general economic or business

conditions and uncertainty, including the strength of economic conditions in our principal

area of operations impacting the demand for our products and services.

low interest rate environment will continue to negatively impact our net interest income

and net interest margin.

losses may be higher and our provision for loan losses may continue to increase, due

to deterioration in the financial condition of our commercial and consumer loan customers.

asset and collateral values may necessitate increases in our provision for loan losses

and net charge-offs.

negative impact on the hospitality industry and our hotel portfolio, which could result

in additional loan losses and net charge-offs.

may have an interruption or cessation of an important service provided by a third-party

liquidity and regulatory capital could be adversely impacted.

new or revised regulations regarding capital and liquidity adopted in response to the

COVID-19 pandemic may require us to maintain materially more capital or liquidity.

may have less confidence in the equity markets in general and in financial services industry

in particular, which could have a negative impact on our stock price and resulting market

economic downturn caused by the pandemic may last longer in the areas where we do business,

which could negatively affect our financial performance.

face heightened cyber security risk in connection with our operation in a remote working

after the COVID-19 pandemic subsides, the U.S.

economy will likely require time to recover.

is uncertain how long this recovery will take.

As a result, we anticipate our business may be adversely affected during this recovery.

BUSINESS - (continued)

Application of Supervisory Guidance to the Company and the Bank

On March 31, 2021, the Federal Reserve issued a final rule outlining and confirming the use of supervisory guidance for regulated institutions, including bank holding companies like the Company.

The rule generally codifies a statement issued by the federal banking agencies in September 2018 clarifying the differences between regulations and guidance, and provides that, unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.

Rather, guidance outlines expectations and priorities, or articulates views regarding appropriate practices for a specific subject.

The rule became effective on April 30, 2021.

The Company was not materially impacted by the effectiveness of this rule.

Legislative and Regulatory Responses to the COVID-19 Pandemic

In response to the COVID-19 pandemic, the federal banking agencies have adopted regulations and policies that are applicable to the operations and activities of the Company and the Bank.

In addition, the U.S.

Congress adopted several laws containing significant economic relief packages, including the CARES Act, which was enacted on March 27, 2020.

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

The PPP was authorized by the CARES Act and is a loan program that was administered under the SBA’s 7-A loan program.

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, and was later expanded to cover additional borrowers.

In total, we authorized $953 million in loans under the PPP in multiple tranches, the last of which was utilized in full during 2021.

As a participating PPP lender, the Bank continues to monitor legislative, regulatory and administrative developments related to the PPP, and continues to evaluate PPP compliance in connection with the forgiveness of principal for qualifying PPP loans.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019.

The provisions of the CARES Act dealing with temporary relief related to TDRs were extended pursuant to the CAA, which was signed into law on December 27, 2020.

The CAA extended the “applicable” period to the earlier of January 1, 2022 or 60 days after the date on which the national emergency concerning the COVID-19 pandemic terminates.

The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.

In response to COVID-19, the Bank applied this guidance to qualifying loan modifications, and assessed the impact of the expiration of the “applicable” period for the temporary relief related to TDRs.

In response to the COVID-19 pandemic, on March 16, 2020, the FRB’s Federal Open Market Committee (the “FOMC”) set the federal funds target rate (the interest rate at which depository institutions such as the Bank lend reserve balances to other depository institutions overnight on an uncollateralized basis) at 0-0.25%, an historic low.

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.

The FOMC has indicated its intention to raise the federal funds target rate in 2022.

Future Regulation

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.

Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or to substantially change the financial institution regulatory system.

Such legislation could change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways.

If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions with which we compete.

The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any

CARTER BANKSHARES, INC.

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BUSINESS - (continued)

implementing regulations, would have on its financial condition or results of operations.

A change in statutes, regulations or regulatory policies applicable to the Company and the Bank could have a material effect on our business.

Where You Can Find More Information

The Company files quarterly, annual and periodic reports, proxy statements and insider filings with the SEC.

The Company’s SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

The Company’s SEC filings also are available through our website, www.CBTCares.com.

Copies of documents may also be obtained free of charge by directing a request by telephone to (276) 656-1776 or mail to Investor Relations, Carter Bankshares, Inc., 1300 Kings Mountain Road, Martinsville, Virginia 24112.

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AND SUBSIDIARIES

Investments in the Company’s common stock involve risk.

In addition to the other information set forth in this Annual Report on Form 10-K, including the information addressed above under “Important Note Regarding Forward-Looking Statements,” investors in the Company’s common stock should carefully consider the factors discussed below.

The following discussion highlights the risks that we believe are material to the Company, but the following discussion does not necessarily include all risks that we may face, and an investor in the Company’s common stock should not interpret the disclosure of a risk in the following discussion to state or imply that the risk has not already materialized.

These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position, and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, in which case, the trading price of the Company’s common stock could decline.

Risks Related to Credit

A large percentage of the Company’s

loans are secured by real estate, and an adverse change in the real estate market may result in losses and adversely affect our

profitability.

Approximately 79% of the Company’s

loan portfolio as of December 31, 2020, was comprised of loans secured by real estate.

An adverse change in the economy affecting

values of real estate generally or in the market areas we serve specifically could impair the value of the Company’s collateral

and its ability to sell the collateral upon foreclosure.

In the event of a default with respect to any of these loans, the amounts

the Company receives upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan.

As a result, the Company’s profitability and financial condition could be negatively impacted by an adverse change in the

real estate market.

The Company relies on independent appraisals

to determine the value of the real estate which secures a significant portion of our loans, and the values indicated by such appraisals

may not be realizable if foreclose on such loans is forced.

A significant portion of the Company’s

loan portfolio consists of loans secured by real estate.

We rely on independent appraisers to estimate the value of such real

Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment that adversely

affect the reliability of their appraisals.

In addition, events occurring after the initial appraisal may cause the value of the

real estate to increase or decrease.

As a result of any of these factors, the real estate securing some of the loans may be more

or less valuable than anticipated at the time the loans were made.

If a default occurs on a loan secured by real estate that is

less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan.

The Company’s level of credit

risk is increased due to the level of commercial real estate loans in its portfolio.

Approximately 49% of the Company’s

loan portfolio as of December 31, 2020, was comprised of loans secured by commercial purpose real estate, including loans

related to hotels, strip malls and apartments.

These loans generally carry larger loan balances and involve a greater degree of

financial and credit risk than loans secured by residential real estate.

Repayment of these loans is often dependent on the success

of the borrower’s underlying business and the borrower’s ability to generate a positive cash flow sufficient to service

The increased financial and credit risk associated with these loans is a result of several factors, including the concentration

of principal in a limited number of loans and to borrowers in similar lines of business, the size of the loan balances, general

economic conditions affecting values of real estate, and the existence of a market for the subject collateral.

The ongoing adverse

economic effects of the COVID-19 pandemic will likely exacerbate the financial and credit risk associated with these loans.

The Company’s exposure to hospitality

at December 31, 2020 equated to approximately $497.2 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.

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, and may continue to 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,

and is expected to adversely impact the value of collateral.

These developments, together with the current economic conditions

generally, may impact the value of real estate collateral in hospitality and other commercial real estate exposures.

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

A large percentage of the Company’s loans are secured by real estate, and an adverse change in the real estate market may result in losses and adversely affect our profitability.

Approximately 83% of the Company’s commercial loan portfolio as of December 31, 2021, was comprised of loans secured by real estate.

An adverse change in the economy affecting occupancy and/or rental rates in the investment real estate market areas we serve could increase the likelihood of defaults.

Real estate collateral securing the Company's loans are a secondary source of repayment in the event of unremedied defaults.

The value of the Company's collateral could be impaired by changes in demand, rental rates and capitalization rates and could be insufficient to recover outstanding principal and interest.

As a result, the Company’s profitability and financial condition could be negatively impacted by an adverse change in the real estate market.

The Company relies on independent appraisals to determine the value of the real estate which secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if foreclose on such loans is forced.

A significant portion of the Company’s loan portfolio consists of loans secured by real estate.

We rely on independent appraisers to estimate the value of such real estate.

Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment that adversely affect the reliability of their appraisals.

In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease.

As a result of any of these factors, the real estate securing some of the loans may be more or less valuable than anticipated at the time the loans were made.

If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan.

The Company’s level of credit risk is elevated due to the concentration of commercial real estate loans in its portfolio.

As of December 31, 2021, the Company’s exposure to loans secured by commercial purpose real estate, including investment real estate loans related to hospitality, retail and multifamily apartments (but excluding construction) equated to $1.5 billion, or 51.7% of its total loan portfolio.

The average balance of these loans are generally larger and these loans generally involve a more complex degree of financial and credit risk than loans secured by residential real estate.

Repayment of these loans is dependent on the success of the borrower’s underlying business and/or the borrower’s ability to generate leases in order to receive sufficient cash flow to service its debts.

The financial and credit risk associated with these loans is a result of several factors, including macroeconomic conditions affecting supply, demand and property valuations, as well as larger balances in a smaller population of loans.

The ongoing adverse economic effects of the COVID-19 pandemic could potentially exacerbate the financial and credit risk associated with these loans.

The Company’s exposure to hospitality at December 31, 2021 equated to approximately $418.6 million, or 14.9% of its total loan portfolio.

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

The COVID-19 pandemic significantly impacted demand for both leisure and business travel resulting in overall declines in occupancy and room rates.

The Company offered an assistance program that deferred payments in order to alleviate the financial pressures related to depressed revenues caused by the COVID-19 pandemic.

The Company closely monitored these borrowers, identified underperforming operators and de-risked the portfolio through note sales.

The recovery for the hospitality industry, especially leisure travel, has improved.

Conditions in the

CARTER BANKSHARES, INC.

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Allowance for loan losses may be insufficient.

All borrowers carry the potential to default

and our remedies to recover may not fully satisfy money previously loaned.

We maintain an allowance for loan losses, which is

a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate

of probable credit losses that have been incurred within the existing portfolio of loans.

Management believes the allowance is

adequate to reserve for estimated loan losses and risks inherent in the loan portfolio.

The level of the allowance for loan losses

reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current

loan portfolio quality, present economic conditions and unidentified losses in the current loan portfolio.

The determination of

the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make

significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo

material changes.

Changes in economic conditions affecting borrowers, new information regarding existing loans, identification

of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance

for loan losses.

In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase

in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different than those

of management.

An increase in the allowance for loan losses results in a decrease in net income or losses, and possibly risk-based

capital, and may have a material adverse effect on our financial condition and results of operations.

The adoption of ASU 2016-13, Measurement

of Credit Losses on Financial Instruments, referred to as CECL, will result in a significant change in how the Company recognizes

credit losses.

If the assumptions or estimates used in adopting the new standard are incorrect or needs to change, there may be

a material adverse impact on the results of operations and financial condition.

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 Financial Accounting Standards Board (the “FASB”) Accounting Standards

Update (“ASU”) 2016-13 and related amendments, Financial Instruments –

Credit Losses (Topic 326).

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

The Company intends to adopt

in the first quarter of 2021 as allowed under the provisions of the CARES Act.

CECL replaces the incurred loss impairment

methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range

of reasonable and supportable information to form credit loss estimates.

The measurement of expected credit losses is to be based

on historical loss experience, current conditions and reasonable and supportable forecasts that affect the collectability of the

reported amount.

This measurement will take place at the time the financial asset is first added to the balance sheet and periodically

This differs significantly from the incurred loss mode required under current GAAP, which delays recognition until

it is probable a loss has been incurred.

Upon origination of a loan, the estimate of expected credit losses, and any subsequent

changes to such estimate, will be recorded through provision for loan losses in our Consolidated Statements of (Loss) Income.

The CECL model may create more volatility in the level of our allowance for loan losses.

RISK FACTORS - (continued)

hospitality industry, and especially leisure travel, have improved despite the fact that the COVID-19 pandemic is ongoing.

We believe this is driven in part by the desire to vacation within a drivable distance, which enables social distancing and the avoidance of airline travel, and also in part by increasing COVID-19 vaccination and immunity rates in the United States.

While we believe business travel is still depressed when compared to conditions prior to COVID-19, we believe borrowers focused on business travel were able to survive, in part due to the Company’s deferral programs.

These programs ended on June 30, 2021 and these borrowers have returned to contractual payments and continue to perform.

Property values have generally not deteriorated and, in certain circumstances, have increased.

However, it is possible that additional COVID variants could impact demand and affect borrowers’ abilities to service debt.

These developments, together with widespread labor shortages and additional shocks to economic conditions could generally impact operations and property valuations in hospitality and other commercial real estate exposures.

As a result, our capital levels and results of operations could be adversely affected.

The Company’s exposure to commercial real estate construction loans at December 31, 2021 equated to approximately $355.4 million, or 12.6% of total portfolio loans.

Construction loans are inherently risky.

These risks include, but are not limited to, potential adverse changes in material costs resulting in cost overruns, the potential that the general contractors develop financial stress and are unable to complete projects and the speculative nature of lease up risk.

A severe downturn in real estate could affect demand for leases, capitalization rates and property valuations, which could adversely affect our financial condition and results of operations.

Our allowance for credit losses may be insufficient.

The measure of our allowance for credit losses is dependent on the interpretation and application of the CECL methodology, which the Company adopted effective January 1, 2021, and which replaced the incurred loss methodology that was used by the Company and the Bank under GAAP prior to that date.

The CECL methodology reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

Accordingly, the implementation of the CECL model changed the Company’s current method of providing allowance for credit losses (“ACL”) and resulted in material changes in the Company’s accounting for credit losses on financial instruments.

The CECL model may create more volatility in the Company’s level of ACL, which, if materially increased, could adversely affect our business, financial condition, and results of operations.

We will implement further enhancements or changes to our methodology, models and the underlying assumptions, estimates and assessments, as needed.

If the assumptions or estimates we use in adopting the new standard are incorrect or we need to change our underlying assumptions and estimates, there may be a material adverse impact on our results of operation and financial condition.

Our real estate lending business can result in increased costs associated with Other Real Estate Owned (“OREO”).

Because we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.

We use methods for valuing collateral for impaired loans and OREO that are in compliance with Accounting Standards Codification (“ASC”) Topic 310 Receivables.

The methods require the use of assumptions that are subject to change based on events impacting real estate values.

The amount that we may realize after a default is dependent upon factors outside of our control, including, but not limited to, general or local economic conditions, environmental cleanup liability, neighborhood values, interest rates, real estate tax rates, operating expenses of the mortgaged properties, and supply of and demand for properties.

Certain expenditures associated with the ownership of income producing real estate, principally real estate taxes and maintenance costs, may adversely affect the net cash flows generated by the real estate.

Therefore, the cost of operating income-producing real property may exceed the rental income earned from such property, and we may have to advance funds to protect our investment or we may be required to dispose of the real property at a loss.

Risks Related to Our Operations

A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt the Company’s businesses, and adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.

The Company’s operational and security systems, infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties, are integral to our business.

We rely on our associates and third parties in

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Item 1. Business