What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2022-03-11 compared with 2021-03-12 · 83 added, 2254 removed, 15 unchanged (99% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock and Dividends

The Company’s common stock trades on NASDAQ, under the ticker symbol “CARE.” As of the close of business on March 8, 2022, we had 2,379 shareholders of record.

On October 14, 2016, prior to the Reorganization, the board of directors of the Bank (the "Bank Board") determined that it was prudent not to declare a quarterly cash dividend on the Bank's common stock beginning in the fourth quarter of 2016.

Notwithstanding the Bank’s history of paying a quarterly cash dividend on its common stock, the Bank Board believed this decision was necessary and appropriate as the Bank committed, and now the Company commits, additional resources to assist with regulatory compliance, preserve capital during the COVID-19 pandemic, and makes significant investments in new technology and human resources.

While recognizing the importance of dividends to its shareholders, the Board of Directors of the Company (the “Board”) has determined that preservation of capital is of paramount importance at this time.

The Bank Board paid a special one-time cash dividend of $0.14 per share on March 3, 2020.

This was a one-time dividend and there are no immediate plans to reinstate a quarterly dividend.

The amount and timing of future dividends, if any, remains subject to the discretion of the Board and will depend upon a number of factors, including future earnings, financial condition, liquidity and capital requirements of the Company, applicable governmental regulations and other factors deemed relevant by the Board.

Repurchases of Shares of Common Stock

The following table is a summary of our purchases of common stock during the fourth quarter of 2021:

Period Total number of shares purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs

10/10/2021 - 10/31/2021 — $— — 2,000,000

11/1/2021 - 11/30/2021 — — — 2,000,000

12/1/2021 - 12/31/2021 30,407 15.22 30,407 1,969,593

Total 30,407 $15.22 30,407 1,969,593

(1) On December 13, 2021, the Company authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock over a period of twelve months.

As of December 31, 2021, 30,407 shares of common stock have been repurchased under this program at an average price of $15.22 per share.

The program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.

The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion.

The actual means and timing of any shares purchased under the program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements.

The repurchase program is authorized through December 9, 2022, although it may be modified or terminated by the Board at any time.

The repurchase program does not obligate the Company to purchase any particular number of shares.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES - (continued)

Five-Year Cumulative Total Return

The following chart compares the cumulative

total shareholder return on our common stock with the cumulative total return of the NASDAQ Composite Index and SNL Bank and Thrift

Index, which includes the stocks of banks, thrifts and bank and financial holding companies listed on all major exchanges (NYSE,

AMEX, NASDAQ) S&P Global Market Intelligence’s coverage universe.

The following chart compares the cumulative total shareholder return on our common stock with the cumulative total return of the NASDAQ Composite Index and S&P U.S.

BMI Banks Index, which includes the stocks of banks, thrifts and bank and financial holding companies listed on all major exchanges (NYSE, AMEX, NASDAQ) in the S&P Global Market Intelligence’s coverage universe.

All SNL indices were retired in 2021, therefore we have replaced that index with the S&P U.S.

BMI Banks Index.

Period Ending

Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21

Carter Bankshares, Inc.

100.00 132.05 112.87 178.48 81.24 116.63

NASDAQ Composite Index 100.00 129.64 125.96 172.18 249.51 304.85

SNL Bank and Thrift Index

investment in Carter Bankshares, Inc.

BMI Banks Index 100.00 118.21 98.75 135.64 118.33 160.89

(1) An investment in Carter Bankshares, Inc.

prior to November 2020 represents an investment in Carter Bank & Trust.

Repurchases of Shares of Common Stock

Neither the Company nor the Bank repurchased

any shares of its common stock during 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

FINANCIAL DATA

The tables below summarize selected consolidated

financial data as of the dates or for the periods presented and should be read in conjunction with Management’s Discussion

and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and the Consolidated Financial

Statements and Supplementary Data in Part II, Item 8 of this Report:

(Dollars in Thousands except per Share Data)

For the Year Ended December 31,

Five-Year Selected Financial Data

Balance Sheet Summary

(At End of Period)

Securities Available-for-Sale, at Fair Value

Securities Held-to-Maturity, at Cost

Loans Held-for-Sale

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

Portfolio Loans

Allowance for Loan Losses

Goodwill and Other Intangibles

Noninterest-Bearing Deposits

Interest-Bearing Deposits

Deposits Held for Assumption in connection with Sale of Bank Branches

Total Deposits

FHLB Borrowings

Other Liabilities

Total Liabilities

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total Shareholders' Equity

Summary of Earnings

Interest Income

Interest Expense

Provision for Loan Losses

Net Interest Income after Provision for Loan Losses

Noninterest Income

Noninterest Expense

Net (Loss) Income before Taxes

Income Tax Provision (Benefit)

Net (Loss) Income

(Loss) Earnings per Share Basic and Diluted

Cash Dividends Declared per Share

Selected Ratios

Return on average assets

Return on average equity

Equity to Assets

Total Risk-based capital

Leverage Ratio

Dividend Payout

percentage not meaningful

BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section reviews our financial condition

for each of the past two years and results of operations for each of the past three years.

Certain reclassifications have been

made to prior periods to place them on a basis comparable with the current period presentation.

Some tables may include additional

time periods to illustrate trends within our Consolidated Financial Statements and notes thereto.

The results of operations reported

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

Important Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains

or incorporates statements that we believe are “forward-looking statements”

within the meaning of the Private Securities

Litigation Reform Act of 1995.

Forward-looking statements generally relate to our financial condition, results of operations, plans,

objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial

position, and other matters regarding or affecting the Company and its future business and operations.

Forward looking statements

are typically identified by words or phrases such as “will likely result,”

“expect,”

“anticipate,”

“estimate,”

“forecast,”

“project,”

“intend,”

believe,”

“assume,”

“strategy,”

“trend,”

“plan,”

“outlook,”

“outcome,”

“continue,”

“remain,”

“potential,”

“opportunity,”

“believe,”

“comfortable,”

“current,”

“position,”

“maintain,”

“sustain,”

“seek,”

“achieve”

and variations

of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Although we believe

the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be

inaccurate and the forward-looking statements based on these assumptions could be incorrect.

The matters discussed in these forward-looking

statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially

from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other

factors including, but not limited to:

credit losses;

technological risks and developments;

cyber-security;

threats, attacks or

rapid technological developments and changes;

the Company’s liquidity and capital positions;

the potential adverse

effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events

(such as the current COVID-19 pandemic), and of governmental and societal responses thereto;

these potential adverse effects may

include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company,

on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents

of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service

providers, on other aspects of the Company's business operations and on financial markets and economic growth;

the effect of steps

the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new

variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or

tightening of government restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many

of the risks described herein;

legislative or regulatory changes and requirements, including the impact of the CARES Act, as amended

by the CAA, and other legislative and regulatory reactions to the COVID-19 pandemic;

potential claims, damages, and fines related

to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration

of programs related to the COVID-19 pandemic, including, among other things, under the CARES Act, as amended by the CAA;

to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change

in the shape of the yield curve;

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

regulatory supervision

and oversight;

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

the outcome of

pending and future litigation and governmental proceedings;

increasing price and product/service competition;

the ability to continue

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

the Company’s strategic

branch network optimization plan ;

managing our internal growth and acquisitions;

the possibility that the anticipated benefits

from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more

difficult, disruptive or more costly than anticipated;

containing costs and expenses;

reliance on significant customer relationships;

general economic or business conditions;

deterioration of the housing market and reduced demand for mortgages;

deterioration in

the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant

portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues

and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts,

at the times and on the terms required to support our future businesses.

Many of these factors, as well as other factors, are described

throughout this Report, including Part I, Item 1A, Risk Factors and any of our subsequent filings with the SEC.

Forward-looking

statements are based on beliefs and assumptions using information available at the time the statements are made.

We caution you

not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events

may, and often do, differ materially from actual results.

Any forward-looking statement speaks only as to the date on which it

is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring

after the statement is made.

BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Carter Bankshares, Inc., our operations, and our present business environment.

The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this Annual Report on Form 10-K.

The MD&A includes the following sections:

• Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations

presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses,

and this annual report references, adjusted net income and net interest income on a fully taxable equivalent, or (“FTE”),

basis, each of which is a non-GAAP financial measure.

Management believes these measures provide information useful to investors

in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the

performance of other companies in the financial services industry.

Although management believes that this non-GAAP financial measure

enhances an investor’s understanding of our business and performance, this non-GAAP financial measure should not be considered

an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it

necessarily comparable with similar non-GAAP measures which may be presented by other companies.

The Company believes the presentation of

net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources

and is consistent with industry practice.

Net interest income per the Consolidated Statements of (Loss) Income is reconciled to

net interest income adjusted to an FTE basis in the Net Interest Income section of the "Results of Operations –

ended December 31, 2020."

The Company believes the presentation of

adjusted net income to exclude the impact of a one-time goodwill impairment charge during 2020 will help an investor compare the

results of our core business operations with our operations for other fiscal years and with the results of operations of other

companies in the financial services industry.

The following table reconciles adjusted net income to GAAP net income for the periods

Years Ended December 31,

(Dollars in Thousands)

Goodwill Impairment Expense

Adjusted Net Income (non-GAAP)

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Critical Accounting Policies and Significant

Accounting Estimates

The Company’s accounting and reporting

policies conform to GAAP and predominant practice in the banking industry.

The preparation of financial statements in accordance

with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements

and accompanying notes.

Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results

and may significantly affect our reported results and financial position for the periods presented or in future periods.

view the determination of the allowance for loan losses, goodwill and income taxes to be critical, because they are highly dependent

on subjective or complex judgments, assumptions and estimates made by management.

Allowance for Loan Losses

We account for the credit risk associated

with our lending activities through the allowance and provision for loan losses.

The allowance represents management’s best

estimate of probable incurred losses that have been incurred in our existing loan portfolio as of the balance sheet date.

The provision

is a periodic charge to earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s

assessment of probable estimated losses.

Management determines and reviews with

the Board the adequacy of the allowance on a quarterly basis in accordance with the methodology described below:

Individual loans are selected for review in accordance with Financial Accounting Standards Board

(the “FASB”) Accounting Standards Codification (“ASC”) Topic 310, “Receivables.”

generally large balance commercial loans and commercial mortgages that are rated less than “satisfactory”

our internal credit-rating process.

We assess whether the loans identified for review in step one are “impaired,”

means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement, which

generally represents loans that management has placed on nonaccrual status.

For impaired loans we calculate the estimated fair value of the loans that are selected for

review based on observable market prices, discounted cash flows or the value of the underlying collateral less costs to sell

and record an allowance if needed.

We individually evaluate all impaired loans greater than or equal to $1.0 million for

additional impairment.

In addition, we evaluate credits, which have complex loan structures, with balances less than $1.0

million for impairment.

Impaired loans are reevaluated quarterly for additional impairment and adjustments to fair value less

costs to sell are made, where appropriate.

For collateral dependent loans, the first stage of our impairment analysis

involves management’s inspection of the property in question to affirm the condition has not deteriorated since the

previous impairment analysis date.

The second stage involves an assessment of current trends in the regional market.

thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

circumstances where we feel confident in its ability to collect and analyze salient information on the subject collateral and

its surrounding real estate market, an in-house valuation will be utilized.

We then select pools of homogeneous smaller balance loans, having similar risk characteristics,

as well as unimpaired larger commercial loans, that have similar risk characteristics, for evaluation collectively under the provisions

of the FASB ASC Topic 450, “Contingencies.”

These smaller balance loans generally include residential mortgages, consumer

loans, installment loans and some commercial loans.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The FASB ASC Topic 450 loans are segmented into groups with similar characteristics and an

allowance for loan losses is allocated to each segment based on recent loss history and other relevant information.

then review the results to determine the appropriate balance of the allowance for loan

This review includes consideration of additional factors, such as the mix of

loans in the portfolio, the balance of the allowance relative to total loans and nonperforming

assets, trends in the overall risk profile in the portfolio, trends in delinquencies

and nonaccrual loans, and local and national economic information and industry data,

including trends in the industries we believe are higher risk.

There are many factors affecting the allowance

for loan losses;

some are quantitative, while others require qualitative judgment.

These factors require the use of estimates

related to the amount and timing of expected future cash flows, appraised values on impaired loans, estimated losses for each

loan category based on historical loss experience by category, and consideration of current economic trends and conditions, all

of which may be susceptible to significant judgment and change.

To the extent that actual outcomes differ from estimates, additional

provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods.

The loan portfolio represents the largest asset category on our Consolidated Balance Sheets.

The Company intends to adopt ASU 2016-13,

Measurement of Credit Losses, or CECL, in the first quarter of 2021, which will impact the measurement of the Company’s

allowance for credit losses (including the allowance for losses on lending-related commitments).

CECL replaces the previous incurred

loss methodology, discussed above, which delays recognition until such loss is probable, with a methodology that reflects an estimate

of lifetime expected credit losses considering current economic condition and forecasts.

Though other assets, including investment

securities and other receivables, are considered in-scope of the standard and will require a measurement of the allowance for

credit loss, the most significant impact of CECL remains within the Company’s loan portfolios and related lending commitments.

Fair Value Measurements

Fair value is the exchange price that

would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the

asset or liability in an orderly transaction between market participants on the measurement date.

We use various valuation techniques

to determine fair value, including market, income and cost approaches.

There are three levels of inputs that may be used to measure

Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability

to access as of the measurement date, or observable inputs.

Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,

quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market

Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market

participants would use in pricing an asset or liability.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

In certain cases, the inputs used to measure

fair value may fall into different levels of the fair value hierarchy.

When that occurs, we classify the fair value hierarchy

on the lowest level of input that is significant to the fair value measurement.

We used the following methods and significant

assumptions to estimate fair value:

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized

securities exchanges, if available.

This valuation method is classified as Level 1 in the fair value hierarchy.

For securities

where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which

is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices

for the specific securities but rather by relying on the securities’

relationship to other benchmark quoted securities.

Matrix pricing relies on the securities’

relationship to similarly traded securities, benchmark curves, and the benchmarking

of like securities.

Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer

quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events.

In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market

participants.

This valuation method is classified as Level 2 in the fair value hierarchy.

For securities where quoted prices or

market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market

This valuation method is classified as Level 3 in the fair value hierarchy.

Impaired loans with an outstanding balance equal to or greater than $1.0 million are evaluated for potential

specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell.

Fair value is measured based on the value

of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or

present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined

to be collateral dependent.

All impaired loans with a specific reserve are classified as Level 3 in the fair value hierarchy.

Fair value for collateral dependent loans

is determined using several methods.

Generally, the fair value of real estate is determined based on appraisals by qualified licensed

These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales

and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between

the comparable sales and income data available.

These routine adjustments are made to adjust the value of a specific property

relative to comparable properties for variations in qualities such as location, size, and income production capacity relative

to the subject property of the appraisal.

Such adjustments are typically significant and result in a Level 3 classification of

the inputs for determining fair value.

Subsequent to the initial impairment date,

existing impaired loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are

made, where appropriate.

For collateral dependent loans, the first stage of our impairment analysis involves management’s

inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date.

Management also engages in conversations with local real estate professionals and market participants to determine the likely

marketing time and value range for the property.

The second stage involves an assessment of current trends in the regional market.

After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

In circumstances where we feel confident in its ability to collect and analyze salient information on the subject collateral and

its surrounding real estate market, an in house valuation shall be utilized.

Factors which should be considered in an in house

valuation are timing of sale, location and neighborhood, size of the structure and land component, age of any improvements, and

other attributes as warranted by the Company.

This determination is made on a property-by-property basis in light of circumstances

in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property

When we feel we cannot collect and analyze salient information on the subject collateral or the collateral’s

real estate market, a full appraisal will be utilized.

CARTER BANKSHARES, INC.

AND SUBSIDIARIE

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

For non-collateral dependent loans, the

fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to

reflect the payment schedule for the remaining life of the loan.

Real Estate Owned (“OREO”) :

OREO is evaluated at the time of acquisition and is recorded at fair value

as determined by an appraisal or evaluation, less costs to sell.

After acquisition, most OREO assets are revalued every twelve

months, or more frequently when deemed necessary by management based upon changes in market, or collateral conditions.

OREO assets with existing carrying values less than $0.5 million, management may elect to revalue the assets, at minimum, once

every twenty-four months based on the size of the exposure.

Write-downs are recorded as a charge to operations, if necessary,

to reduce the carrying value of a property to the lower of its carrying value or fair value less cost to sell.

Such adjustments

can be significant and result in a Level 3 classification of the inputs for determining fair value.

At December 31, 2020

our OREO assets were in compliance with our OREO policy as set forth above, and substantially all of the assets were listed for

sale with credible third-party real estate brokers.

Goodwill assets with indefinite useful

lives are tested for impairment at least annually and written down and charged to results of operations only in periods in which

the recorded value is more than the estimated fair value.

Intangible assets that have finite useful lives will continue to be

amortized over their useful lives and are periodically evaluated for impairment.

The unprecedented decline in economic

conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including

our stock price.

These triggering events indicated that goodwill related to our single reporting unit may be impaired and we expected

to evaluate goodwill for impairment quarterly given the current environment.

During the first quarter of 2020, with

the recent volatility in the financial services industry and in our economic environment we determined it prudent to have a full

goodwill impairment analysis performed as of March 31, 2020 updated as of June 30, 2020.

We performed the goodwill impairment

test by determining the fair value of the reporting unit.

We engaged a third-party financial advisor to prepare the market and

income approaches in order to determine fair value.

Their analysis supported the conclusion that the fair value of our common

stock at June 30, 2020 was greater than both stated and tangible common book value and therefore no impairment to the goodwill

was recorded at June 30, 2020.

we monitored our performance due to the COVID-19 pandemic and continued to experience declines in our stock price in relation

to other bank indices and the length of time that the market value of the reporting unit had been below its book value, we completed

another interim quantitative goodwill impairment analysis as of September 30, 2020.

Various valuation methodologies were

considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which

is then compared to its carrying value, including goodwill.

Upon completing the quantitative impairment analysis as of September 30,

2020, the analysis estimated fair value of the reporting unit to be less than the carrying value.

Therefore, we recorded a goodwill

impairment of $62.2 million, which represented the entire amount of goodwill allocated to the reporting unit.

This was a non-cash

charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

We estimate income tax expense based on

amounts expected to be owed to the tax jurisdictions where we conduct business.

On a quarterly basis, management assesses the

reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits

and the applicable statutory tax rates expected for the full year.

Deferred income tax assets and liabilities

are determined using the asset and liability method and are reported in the Consolidated Balance Sheets.

Under this method, deferred

tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases.

If current available information raises doubt

as to the realization of the deferred tax assets, a valuation allowance is established.

Deferred tax assets and liabilities are

measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are

expected to be recovered or settled.

Management assesses all available positive and negative evidence on a quarterly basis to

estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

The amount of future

taxable income used in management’s valuation is based upon management approved forecasts, evaluation of historical earnings

levels, proven ability to raise capital to support growth or during times of economic stress and consideration of prudent and

feasible potential tax strategies.

If future events differ from our current forecasts, a valuation allowance may be required,

which could have a material impact on our financial condition and results of operations.

Accrued taxes payable or receivable represent

the net estimated amount due to or due from taxing jurisdictions and are reported in other liabilities and other assets, respectively,

in the Consolidated Balance Sheets.

Management evaluates and assesses the relative risks and appropriate tax treatment of transactions

and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals

consistent with its evaluation of these relative risks and merits.

Changes to the estimate of accrued taxes occur periodically

due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and

changes to statutory, judicial and regulatory guidance.

These changes, when they occur, can affect deferred taxes and accrued

taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Recent Accounting Pronouncements

and Developments

Note 1 Summary

of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part II, Item 8

of this Report, discusses new accounting pronouncements that we have adopted during 2020.

In December 2019, the FASB issued

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.”

The amendments in this

ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP

by clarifying and amending other existing guidance.

The amendments in this ASU will be effective on January 1, 2021 and are

not expected to have any impact on our consolidated financial statements.

In March 2020, the FASB issued ASU

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial

Reporting.”

The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden

in accounting for or recognizing the effects of reference rate reform on financial reporting.

The amendments provide optional

expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected

by the anticipated transition away from LIBOR toward new interest rate benchmarks.

Modified contracts that meet certain scope

guidance are eligible for relief from the modification accounting requirements in US GAAP.

The optional guidance generally allows

for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement

at the modification date or reassessment of a previous accounting determination.

The amendments in this ASU are effective as of

March 12, 2020 through December 31, 2022.

We are evaluating the impacts of this ASU and have not yet determined whether

LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

In June 2016, the FASB issued ASU

2016-13, “Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”,

universally referred to as Current Expected Credit Loss (“CECL”).

The amendments in this ASU, among other things,

require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience,

current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking

information to better inform their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted,

although the inputs to those techniques will change to reflect the full amount of expected credit losses.

In addition, the ASU

amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

For periodic report filers that are not smaller reporting companies, such as the Company, this standard (Topic 326) is effective

as of January 1, 2020.

Company has elected to take advantage of Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (the

“CARES Act”) provision to temporarily delay adoption of the CECL methodology.

The Bank was subject to the adoption

of the CECL accounting method under ASU 2016-03 and related amendments, Financial Instruments –

Credit Losses (Topic 326).

However, the Bank 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.

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

The Bank’s CECL Committee,

which includes members from Credit Administration, Accounting/Finance, Risk Management and Internal Audit, has oversight by the

Chief Executive Officer, Chief Financial Officer, and Chief Credit Officer.

We engaged a third-party to assist us in developing

our CECL model and to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting CECL,

management implemented a third-party software solution and determined appropriate loan segments, methodologies, model assumptions

and qualitative components.

Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both

a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables.

Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls.

Management had a third-party independent consultant review and validate our CECL model.

Parallel runs utilizing data from the

current and previous quarters in 2020 and 2019, incorporate elements of our operational procedures and internal controls.

current parallel run includes the composition, characteristics and quality of our loan portfolio as well as current market economic

conditions and forecasts as of the adoption date.

In addition, ASU 2016-13 amends the accounting

for credit losses on certain debt securities.

Based upon the nature and characteristics of our securities portfolio at the adoption

date, management does not expect to record any allowance for credit losses on its debt securities as a result of adopting ASU

The ultimate impact of adopting ASU 2016-13,

and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition

of our loans and available-for-sale securities portfolio, along with other management judgments.

The transition adjustment to

record the allowance for loan losses (“ALL”) will be applied using a cumulative effect adjustment to retained earnings.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Executive Overview

Bankshares, Inc.

(the “Company”) is bank holding company headquartered in Martinsville, Virginia with assets

of $4.2 billion at December 31, 2020.

The Company is the parent company of its wholly owned subsidiary, Carter Bank &

Trust (the “Bank”).

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

North Carolina.

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

Per the 2019 Annual Report of the Virginia Bureau of Financial Institutions, our Company continues to be the fourth largest state-chartered

bank by assets size at year end 2019 .

Our common stock trades on the Nasdaq Global Select Market under the ticker symbol

“CARE.”

The Company earns revenue primarily from

interest on loans and securities and fees charged for financial services provided to our customers.

The Company incurs expenses

for the cost of deposits, provision for loan losses and other operating costs such as salaries and employee benefits, data processing,

occupancy and tax expense.

Our mission is that the Company strives

to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities

the Company is privileged to serve.

Our strategic plan focuses on restructuring the balance sheet to provide more diversification

and higher yielding assets to increase the net interest margin.

Another area of focus is the transformation of the infrastructure

of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that

will ultimately increase noninterest income.

Our focus continues to be on loan and

deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost

certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring

our operating expenses.

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

in our markets.

FRB Reserve Programs and Initiatives

The CARES Act encourages the FRB, in coordination

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

including (i) a Midsize Business/Nonprofit Organization Program to provide financing to banks and other lenders to make direct

loans to eligible businesses and nonprofit organizations with between 500 and 10,000 employees and (ii) the Municipal Liquidity

Facility, provide liquidity to the financial system that supports states and municipalities.

On April 9, 2020, the FRB announced

and solicited comments regarding the Main Street Lending Program, which would implement certain of these recommendations.

Separately and in response to COVID-19,

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

interest rate at which depository institutions such as the Company 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

Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary

policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

In addition, the FRB has expanded the

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

(i) the Primary Market

Corporate Credit Facility;

(ii) the Secondary Market Corporate Credit Facility;

and (iii) the Term Asset-Backed Securities

Loan Facility.

The FRB has also established two new program facilities –

the Money Market Mutual Fund Liquidity Facility

and the Commercial Paper Funding Facility –

to broaden its support for the flow of credit to households and businesses during

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Temporary Regulatory Capital Relief

related to Impact of CECL

Concurrent with enactment of the CARES

Act, the federal bank regulatory authorities issued an interim final rule to provide banking organizations that are required

to implement CECL 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.

Temporary Bank Secrecy Act (“BSA”)

Reporting Relief

Department of the Treasury’s

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

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

Specifically,

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

customers will not require reverification under applicable BSA requirements, unless reverification is otherwise required under

the financial institution’s risk-based BSA compliance program, (ii) acknowledged that there may be “reasonable

delays in compliance”

due to COVID-19, and (iii) temporarily suspended implementation of its February 2020 ruling,

which would have entailed significant changes to currency transaction reporting filing requirements for transactions involving

sole proprietorships and entities operating under a “doing business as”

or other assumed name.

The Company’s Response to COVID-19

Lending Operations

The Company elected to take advantage

of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology.

The Company is subject

to the adoption of the CECL accounting method under the FASBASU 2016-03 and related amendments, Financial Instruments –

Credit Losses (Topic 326).

However, we elected under the CARES Act to defer the implementation of CECL until January 1, 2021.

The Company quickly responded to the pandemic

and the CARES Act, offering the option of payment deferrals, participation in the PPP, fee waivers and other relief actions to

Banks have been identified as essential services and have remained open during the order.

On October 31, 2020,

we opened 3 additional branch lobbies and as of December 31, 2020, the Company had opened the lobbies of 36 branches.

the Company continues to serve its customers in the remaining branches through modified hours in both the drive-ins and branch

services via appointment.

Every opportunity is being taken to protect both customers and employees through enhanced cleaning services,

social distancing and personal protective equipment requirements for both.

Approximately 20% of the Company’s workforce

is working remotely.

Under the CARES Act, PPP is an amendment

to the SBA 7-A loan program.

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

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.

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

an additional $310 billion in funds were approved and designated for PPP, we opted to stand up an internal, automated loan process

utilizing our core system provider.

As of December 31, 2020 we processed either through a third-party or internally 966 PPP

loans totaling $57.8 million, represented by $17.9 million and $39.9 million processed in round one and round two, respectively.

During 2021 the Company has continued making PPP loans pursuant to the additional PPP authorization that was contained in the

December 2020 COVID-19 relief law.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The FRB implemented a liquidity facility

available to financial institutions participating in the PPP.

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

liquidity sources.

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

We expect the vast majority

of these PPP loans will be forgiven based upon a preliminary review of the loans.

The Company provides deferrals to customers

under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications, which suspends the requirement

to categorize these deferrals as TDRs.

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

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

The Part II program

was launched in July 2020 and expired at the end of December 2020.

The deferrals in this program were needs based and

required the collection of updated financial information and in certain situations, the validation of liquidity to support the

Prior to the extension of the CARES Act, the Company launched the Part III program that offered borrowers in the

Part II program an extension of deferrals through June 2021.

For those borrowers who opted into the Part III program,

they are required to provide monthly financial statements and remit payments on a quarterly basis based on excess cash flows,

if any, up to their otherwise contractual payment.

Management expects the majority of deferrals in the Part III program to

be principal only deferrals.

At the end of the deferral period, for term loans, payments will be applied to accrued interest first

and will resume principal payments once accrued interest is current.

Deferred principal will be due at maturity.

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

As of December 31, 2020, we had 83

total customers opt for deferrals under Part III of the program which continues through June 30, 2021, with an aggregate

principal balance of $388.6 million with $11.1 million in deferred principal and interest payments.

The weighted average deferment

period for these loans is 5.9 months.

Approximately $313.9 million, comprised of 56 loan modifications, were in the hospitality

The following table provides detail of

the Bank’s deferred loans as of December 31, 2020:

Total Deferment

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial Loans Consumer

Residential Mortgages

Other Consumer

Consumer Construction

Total Consumer Loans

Total Aggregate Deferred Payments

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Our interest income could be reduced due

In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their

payments, interest, and fees.

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

Should eventual credit

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

In such a scenario, interest

income in future periods could be negatively impacted.

At this time, we are unable to project the significance of such an impact,

if any but recognize the breadth of the economic impact may affect our borrowers’

ability to repay in future periods.

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, or will cause, them to draw on their existing lines of credit with other financial

institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness.

These developments,

together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality

and other commercial real estate exposure.

As a result, we anticipate that our financial condition, capital levels and results

of operations could be adversely affected.

The total balance of allowance for loan

losses increased $15.3 million during 2020 which was comprised of an increase in specific reserves of $9.1 million and an increase

in general reserves of $6.2 million.

The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative

reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in the Company’s loss history.

The $16.1 million increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns

regarding disruptions to the Company’s hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million

based on general economic, geo-political and other risk factors determined by management.

These qualitative reserves are intended

to reflect not only the risks of continued weak economic conditions on our loan portfolio, but also loss estimates identified

in loan portfolios deemed to be at risk from the COVID-19 pandemic.

The Company adjusted qualitative risk factors under its incurred

loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced

cash flows and external factors such as government actions.

Management believes the uncertainty regarding customers' ability to

repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals,

temporary business shutdowns and reduced consumer and business spending.

Retail Operations

The Company will continue to promote digital

banking options through our website.

Customers are encouraged to utilize online and mobile banking tools and our customer contact

center for personal and automated telephone banking services.

Retail branches are staffed and available to assist customers

by offering lobby appointments, drive-up and virtual servicing.

In March 2020, we closed all branch

lobbies to customer activity, offering drive-up and appointment only services.

On October 31, 2020, we opened 31 branch lobbies

and as of December 31, 2020, we had 36 branch lobbies open.

Retail leadership continues to monitor branch traffic and

local conditions daily making adjustments as needed.

All branches are equipped with video conferencing and online tools

that enable virtual servicing.

When we make the decision to open the remainder of our branch lobbies, plans are in

place to resume full-service lobby operations augmented with the virtual and online servicing enhancements deployed over the past

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

No employees have been furloughed.

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

Employees whose critical duties require their continued presence on-site are utilizing personal protection equipment and

observing social distancing and cleaning protocols.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Our fee income for 2020 was negatively

impacted due to COVID-19 by approximately $1.5 million.

In keeping with guidance from regulators, we are actively working with

COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft

fees and account maintenance fees, etc.

These reductions in fees are thought, at this time, to be temporary in conjunction

with the length of the expected COVID-19 related economic crisis.

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

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

Capital Resources and Liquidity

As of December 31, 2020, all of the

Company’s capital ratios were in excess of all regulatory requirements.

An extended economic recession brought about by

the COVID-19 pandemic could adversely impact our reported regulatory capital ratios.

We maintain access to multiple sources

of liquidity.

Funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25% of the Company’s

assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds unsecured lines with six

other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered

In addition to the above resources, the Company also has $632.7 million of unpledged available-for-sale securities as an

additional source of liquidity at December 31, 2020.

If an extended recession caused large numbers of our deposit customers

to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The Company is monitoring and will continue

to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and

impact on our liquidity and capital resources.

Due to the economic uncertainty, we are taking a prudent approach to capital management

and have established access to the FRB’s PPP Lending Facility.

Earnings Summary

We recognized a net loss of $45.9 million,

or ($1.74) per share in 2020, resulting in a decrease of $72.4 million, or 272.6% compared to net income of $26.6 million, or

$1.01 per share for the same period in 2019.

The decrease was primarily due to a one-time goodwill impairment charge of $62.2

million that was recorded in the third quarter of 2020.

Excluding this one-time charge, adjusted net income was $16.3 million

Also contributing to the net loss and the decrease in net income and adjusted net income for the year was an increase

in the provision for loan losses of $14.6 million.

Net income is reconciled to adjusted net income, which is a non-GAAP financial

measure, below in the “Explanation of Use of Non-GAAP Financial Measures”

section of this MD&A.

income decreased $7.2 million, or 6.4%, to $105.1 million in 2020 compared to $112.3 million for the same period in 2019.

interest margin decreased 23 basis points to 2.74% in 2020 compared to 2.97% in 2019.

The net interest margin, on a fully taxable

equivalent basis, (or “FTE”), decreased 25 basis points to 2.80% in 2020 compared to 3.05% in 2019.

The decreases

in short-term interest rates had a negative impact on both net interest income and the net interest margin, but are offset by

a lower cost of funds.

The yield on interest-earning assets decreased 54 basis points in 2020, offset by a 34 basis point decline

in funding costs as compared to 2019.

Net interest margin is reconciled to net interest income adjusted to an FTE basis, which

is a non-GAAP financial measure, below in the “Net Interest Income”

section of this MD&A.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The provision for loan losses increased

$14.6 million, or 429.0% to $18.0 million during 2020 compared to $3.4 million in 2019.

The total balance of reserves increased

$15.3 million during 2020 which was comprised of an increase in specific reserves of $9.1 million and an increase in general reserves

of $6.2 million.

The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative reserves offset

by a decrease of $9.9 million in quantitative reserves due to improvements in the Company’s loss history.

The $16.1 million

increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions

to the Company’s hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic,

geo-political and other risk factors determined by management.

At December 31, 2020, nonperforming

loans and TDRs were $32.0 million compared to $42.1 million at December 31, 2019, a decrease of $10.1 million, or 24.0%.

Net charge-offs were $2.7 million in 2020 compared to $3.8 million in 2019.

As a percentage of total portfolio loans, net charge-offs

were 0.09% at December 31, 2020 compared to 0.13% at December 31, 2019.

Nonperforming loans as a percentage of total

portfolio loans was 1.09% and 1.46% as of December 31, 2020 and December 31, 2019, respectively.

Total noninterest income increased $9.7

million, or 57.6%, to $26.6 million for the full year 2020 compared to $16.9 million for the same period in 2019, primarily driven

by the impact of a $6.9 million in net securities gains.

Securities gains increased $4.7 million to $6.9 million during 2020 compared

to $2.2 million during 2019 to take advantage of market opportunities and reposition and diversify holdings in the securities

Other key factors impacting total noninterest income during 2020 were $4.1 million of commercial loan swap fee income

throughout 2020, due to the high demand for this product in the current low interest rate environment and $0.7 million of higher

debit card interchange fees, $0.5 million of higher insurance commissions and $0.5 million in other noninterest income.

increases were offset by lower service charges, commissions and fees of $0.3 million due to COVID-19 waivers and OREO income of

$0.3 million.

OREO income declined due to the sale of several large commercial properties that generated income.

Total noninterest expense increased $60.8

million, or 62.0%, to $158.8 million for the full year 2020 compared to $98.0 million for the same period in 2019, primarily driven

by the impact of a $62.2 million one-time goodwill impairment charge during the third quarter of 2020.

Other key factors impacting

total noninterest expense during 2020 were a $1.6 million increase in occupancy expenses, a $1.0 million increase in FDIC expense

due to the $1.1 million one-time credit for eligible institutions available in the third quarter of 2019, a $0.4 million increase

in data processing licensing fee and a $0.5 million increase in professional and legal fees.

Offsetting these increases were decreases

of $3.3 million related to losses on sales and write-downs of OREO due to the write-down of $1.1 million on five closed retail

branch offices moved to OREO in the third quarter of 2020, a $1.2 million decrease in tax credit amortization and a decrease of

$0.5 million in salaries and employee benefits attributable to our branch network optimization project.

The provision for income taxes decreased

$0.4 million to $0.8 million in 2020 compared to $1.2 million in 2019.

The decrease in pretax income of $72.9 million for the

full year 2020 was primarily due to the full goodwill impairment charge of $62.2 million that was recorded in the third quarter

Our effective tax rate was (1.7%) for 2020 as compared to 4.4% in 2019.

The $62.2 million goodwill impairment charge

was the reason for the decreased effective tax rate in 2020.

The goodwill impairment charge was not tax deductible.

We ordinarily

generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest

and tax credit projects, which are relatively consistent regardless of the level of pretax income.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS

Year Ended December 31, 2020

Net Interest Income

Our principal source of revenue is net

interest income.

Net interest income represents the difference between the interest and fees earned on interest-earning assets

and the interest paid on interest-bearing liabilities.

Net interest income is affected by changes in the average balance of interest-earning

assets and interest-bearing liabilities and changes in interest rates and spreads.

The level and mix of interest-earning assets

and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest

rate and liquidity risks of the balance sheet.

A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters,

to produce what the Company believes is an acceptable level of net interest income.

The interest income on interest-earning

assets and the net interest margin are presented on an FTE basis, which is a non-GAAP measure.

The FTE basis adjusts for the tax

benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which

was 21% for the years ended December 31, 2020, 2019 and 2018) and the dividend-received deduction for equity securities.

The Company believes this FTE presentation provides a relevant comparison between taxable and non-taxable sources of interest

The following table reconciles net interest

income per the Consolidated Statements of (Loss) Income to net interest income on an FTE basis for the periods presented:

Years Ended December 31,

(Dollars in Thousands)

Total Interest Income

Total Interest Expense

Net Interest Income per Consolidated Statements of Net (Loss) Income

Adjustment to FTE Basis

Net Interest Income (FTE) (non-GAAP)

Net Interest Margin

Adjustment to FTE Basis

Net Interest Income (FTE) (non-GAAP)

Average Balance Sheet and Net Interest

Income Analysis (FTE)

net interest income decreased $7.2 million, or 6.4%, to $105.1 million in 2020, as compared to $112.3 million in 2019.

income, on an FTE basis (non-GAAP), decreased $7.9 million, or 6.8%, to $107.5 million in 2020 as compared to $115.4 million in

The decrease in net interest income, on an FTE basis, is driven by an $18.8 million decrease in interest income, offset

by a $10.9 million decrease in interest expense during 2020 as compared to 2019.

The decreases in short-term interest rates

had a negative impact on both net interest income and the net interest margin, but are offset by a lower cost of funds.

margin decreased 23 basis points to 2.74% in 2020 compared to 2.97% in 2019.

The net interest margin, on an FTE basis (non-GAAP),

decreased 25 basis points to 2.80% in 2020 compared to 3.05% in 2019, primarily due to the lower interest rate environment.

lower interest rate environment and the intentional runoff of higher cost CDs helped to lower the overall cost of funds.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The following table provides information

regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates

paid on interest-bearing liabilities for the years ended December 31:

in Thousands)

Interest-Bearing Deposits

Investment Securities (2)

Taxable Investment Securities

Federal Home Loan Bank

Total Interest-Earning

Interest-Bearing Demand

Certificates of Deposit

Total Interest-Bearing

Federal Funds Purchased

FHLB Borrowings

Other Borrowings

Total Borrowings

Total Interest-Bearing

Interest Income (2)

Interest Margin (2)

(1) Nonaccruing

loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt

income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.

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

income, on an FTE basis (non-GAAP) decreased $18.8 million, or 11.6%, in 2020 compared to 2019.

The decrease is primarily

due to balance sheet repricing driven by the impact of the lower interest rate environment.

We are currently maintaining higher

liquidity levels as a result of COVID-19.

The change was primarily due to an increase in average interest-earning assets of $45.0

million in 2020 offset by lower short-term interest rates compared to 2019.

Average loan balances increased $111.3 million in

2020 compared to 2019 includes PPP loan production, which began in second quarter of 2020.

Average PPP loans for the year ended

December 31, 2020 totaled $24.7 million.

The average rate earned on loans decreased 59 basis points in 2020 compared

to 2019 primarily due to lower short-term interest rates.

Average interest-bearing deposits with banks decreased $19.4 million

and the average rate earned decreased 193 basis points compared to 2019.

Average investment securities decreased $49.4 million

and the average rate earned decreased 41 basis points in 2020 compared 2019.

The change in investment securities is the result

of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures.

Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 54 basis points in 2020 compared to 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

expense decreased $10.9 million in 2020 compared to the same periods in 2019.

The decrease was primarily due to lower short-term

interest rates compared to 2019.

Average interest-bearing deposits decreased $83.3 million in 2020 compared to 2019 primarily

due to the decline in the average balance of CDs offset by increases in all other deposit categories.

The decrease in the

average balance of CDs compared to 2019 was primarily due to the intentional runoff of these higher cost deposits.

we experienced in all of the other deposit categories was primarily due to our ongoing strategy to attract commercial deposits

and customer PPP funds on deposit.

The average rate paid on interest-bearing deposits decreased 33 basis points compared to 2019

primarily due to lower short-term interest rates.

Average total borrowings increased $28.7 million and the average rate paid decreased

211 basis points in 2020 compared to 2019.

Overall, the cost of interest-bearing liabilities decreased 34 basis points in 2020

compared to 2019.

The following table sets forth for the

periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in

2020 Compared to 2019

2019 Compared to 2018

(Dollars in Thousands)

Interest-Bearing Deposits with Banks

Tax-Free Investment Securities (2)

Taxable Investment Securities

Tax-Free Loans (1)(2)

Taxable Loans (1)

Federal Home Loan Bank Stock

Total Interest-Earning Assets

Interest-Bearing Demand

Certificates of Deposit

Total Interest-Bearing Deposits

Federal Funds Purchased

FHLB Borrowings

Other Borrowings

Total Borrowings

Total Interest-Bearing Liabilities

Net Interest Income (FTE)

(1) Nonaccruing

loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt

income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.

to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Provision for Loan Losses

The following table summarizes the activity

in the ALL for the periods presented:

(Dollars in Thousands)

Balance Beginning of Year

Provision for Loan Losses

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Charge-offs

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Recoveries

Total Net Charge-offs

Balance End of Year

Net Charge-offs to Average Loans

Allowance for Loan Losses to Total Portfolio Loans

The provision for loan losses is the amount

to be added to the ALL, after considering loan charge-offs and recoveries, to bring the ALL to a level determined to be appropriate

in management's judgment to absorb probable incurred losses inherent in the loan portfolio.

We are subject to the adoption of the

CECL accounting method under ASU 2016-03 and related amendments, Financial Instruments –

Credit Losses (Topic 326).

we 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.

We intend to adopt

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

provision for loan losses increased $14.6 million to $18.0 million in 2020 compared to $3.4 million in 2019.

the provision expense during 2020 was an increase in qualitative loss factors as a result of the estimated economic impact of

COVID-19 of $9.6 million.

This represents a 429.0% increase in the provision expense as compared to the same period of 2019.

Bank adjusted qualitative risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures,

expected changes in collateral values due to reduced cash flows and external factors such as government actions.

Management believes

the uncertainty regarding customers’

ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher

unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

contributing to the increase in provision for loan loss expense was higher specific reserves in 2020 of $15.3 million compared

to $6.2 million in 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The increase was comprised of both higher

specific reserves of $9.1 million and general reserves of $6.2 million.

The $6.2 million increase in general reserves included

an increase of $16.1 million in qualitative reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements

in the Company’s loss history.

The $16.1 million increase in qualitative reserves included $9.6 million due to general economic

uncertainties and specific concerns regarding disruptions to the Company’s hospitality clients caused by the COVID-19 pandemic

and an additional $6.5 million based on general economic, geo-political and other risk factors determined by management.

qualitative reserves are intended to reflect not only the risks of continued weak economic conditions on our loan portfolio, but

also loss estimates identified in loan portfolios deemed to be at risk from the COVID-19 pandemic.

The Company adjusted qualitative

risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in

collateral values due to reduced cash flows and external factors such as government actions.

Management believes the uncertainty

regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates,

requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

Net charge-offs decreased $1.1 million

to $2.7 million in 2020 compared to $3.8 million for 2019.

Net loan charge-offs to average loans were 0.09% and 0.13% in 2020

and 2019, respectively.

Specific reserves were $15.3 million at December 31, 2020 and $6.2 million at December 31, 2019.

Nonperforming loans and TDRs decreased

at December 31, 2020 by $10.1 million, to $32.0 million as compared to $42.1 million at December 31, 2019, due to sale

proceeds from two credit relationships.

The allowance for loan losses was 169.1% of nonperforming loans as of December 31,

2020 as compared to 92.0% of nonperforming loans as of December 31, 2019.

Management is aggressively taking steps to address

problem loan relationships.

The ALL at December 31, 2020 was

$54.1 million compared to $38.8 million at December 31, 2019.

The ALL as a percentage of total portfolio loans was 1.83%

at December 31, 2020 and 1.34% at December 31, 2019.

Discussion of net interest income for

the year ended December 31, 2018 has been omitted as such discussion was provided in Part II, Item 7.

“Management’s

Discussion and Analysis,”

under the heading “Net Interest Income”

in the Bank’s Annual Report on Form 10-K

for the year ended December 31, 2019, which was filed as Exhibit 99.1 with the SEC on November 23, 2020 (and originally

filed with the FDIC).

Noninterest Income

Years Ended December 31,

(Dollars in Thousands)

Gains on Sales of Securities, net

Service Charges, Commissions and Fees

Debit Card Interchange Fees

Insurance Commissions

Bank Owned Life Insurance Income

Other Real Estate Owned Income

Commercial Loan Swap Fee Income

Total Noninterest Income

NM - percentage not meaningful

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Total noninterest income increased $9.7

million, or 57.6%, to $26.9 million for the full year 2020 compared to the same period of 2019, primarily driven by the impact

of $6.9 million in net securities gains.

Securities gains increased $4.7 million to $6.9 million during 2020 compared to $2.2

million during 2019 to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio.

Other key factors impacting total noninterest income during 2020 were $4.1 million commercial loan swap fee income for 2020 compared

to 2019, due to the high demand for this product in the current low interest rate environment and $0.7 million increase in debit

card interchange fees due to higher volumes in demand deposits, $0.5 million in insurance income and $0.5 million in other noninterest

The increase of $0.5 million in other income primarily relates to higher gains on sales of mortgage loans and tax credit

These increases were partially offset by lower service charges, commissions and fees of $0.3 million due to COVID-19 waivers

and OREO income of $0.3 million.

OREO income declined due to the sale of several large commercial properties that generated income

Discussion of noninterest income for the

year ended December 31, 2018 has been omitted as such discussion was provided in Part II, Item 7.

“Management’s

Discussion and Analysis,”

under the heading “Noninterest Income”

in the Bank’s Annual Report on Form 10-K

for the year ended December 31, 2019, which was filed as Exhibit 99.1 with the SEC on November 23, 2020 (and originally

filed with the FDIC).

Noninterest Expense

Years Ended December 31,

(Dollars in Thousands)

Salaries and Employee Benefits

Occupancy Expense, net

FDIC Insurance Expense

Advertising Expense

Telephone Expense

Professional and Legal Fees

Data Processing

Losses on Sales and Write-downs of Other Real Estate Owned, net

Losses on Sales and Write-downs of Bank Premises, net

Debit Card Expense

Tax Credit Amortization

Unfunded Loan Commitment Expense

Other Real Estate Owned Expense

Goodwill Impairment Expense

Total Noninterest Expense

NM - percentage not meaningful

Total noninterest expense increased $60.8

million, or 62.0% to $158.8 million for the full year 2020 compared to $98.0 million in the same period of 2019, primarily driven

by the impact of a $62.2 million one-time goodwill impairment charge during the third quarter of 2020.

Other key factors impacting

total noninterest expense during 2020 were a $1.6 million increase in occupancy expense resulting from higher depreciation expense

on software and equipment for ancillary products and services, an increase of $1.0 million for FDIC expense which related to a

one-time credit of $1.1 million received in the third quarter of 2019 for eligible institutions, a $0.4 million increase in data

processing licensing fee and a $0.5 million increase in professional and legal fees.

The decreases offsetting these increases

included losses and write-downs of OREO of $3.3 million, $1.2 million decline in the amortization of tax credits and a $0.5 million

decrease in salaries and employee benefits.

The losses and write-downs of OREO relate to eight retail offices that were closed

as part of our branch optimization project.

Five of these branches were moved to OREO and marketed for sale resulting in a $1.1

million write-down.

The decline of $1.2 million for the amortization of tax credits relates to tax credits being fully amortized.

The net decrease of $0.5 million in salaries and employee benefits was comprised of a $0.9 million increase in salaries offset

by a $1.4 million decrease in benefits.

Salaries increased primarily due to $0.2 million in merit increases, a $0.6 million decrease

in salary deferral on new loan origination in 2020, and $0.2 million in hazard bonus payments offset by a reduction of overtime

expense of $0.1 million.

Benefits decreased primarily due to a $0.5 million reduction in profit sharing and a $0.9 million reduction

in medical expense.

There have not been any permanent or temporary reductions in employees as a result of COVID-19.

of noninterest expense for the year ended December 31, 2018 has been omitted as such discussion was provided in Part II, Item

“Management’s Discussion and Analysis,”

under the heading “Noninterest Expense”

in the Bank’s

Annual Report on Form 10-K for the year ended December 31, 2019, which was filed as Exhibit 99.1 with the SEC on

November 23, 2020 (originally filed with the FDIC).

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND

RESULTS OF OPERATIONS (continued)

Provision for Income Taxes

provision for income taxes decreased $0.4 million to $0.8 million in 2020 compared to $1.2 million in 2019.

decrease in pretax income of $72.9 million for the full year 2020 was primarily due to the full goodwill impairment charge

of $62.2 million that was recorded in the third quarter of 2020 .

Our effective tax

rate was (1.7%) for 2020 as compared to 4.4% in 2019.

The $62.2 million goodwill impairment charge is the reason for the

decreased effective tax rate in 2020.

The goodwill impairment charge was not tax deductible.

The Company ordinarily generates an

annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest and tax

credit projects, which are relatively consistent regardless of the level of pretax income.

Discussion of provision for income taxes

for the year ended December 31, 2018 has been omitted as such discussion was provided in Part II, Item 7.

“Management’s

Discussion and Analysis,”

under the heading “Provision for Income Taxes”

in the Bank’s Annual Report on

Form 10-K for the year ended December 31, 2019, which was filed as Exhibit 99.1 with the SEC on November 23,

2020 (and originally filed with the FDIC).

Financial Condition

December 31, 2020

Total assets increased $173.1 million to

$4.2 billion at December 31, 2020 compared to $4.0 billion at December 31, 2019.

Federal Reserve Bank excess reserves

increased $124.2 million to $163.5 million at December 31, 2020 compared to $39.3 million at December 31, 2019 due to

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

portfolio loans increased $62.4 million, or 2.2%, to $2.9 billion at December 31, 2020 compared to December 31, 2019.

The increase in portfolio loans primarily related to growth in the commercial loan portfolio

of $118.6 million with increases of $94.6 million in commercial construction, $88.5 million in Commercial Real Estate (“CRE”)

and $50.0 million in Commercial and Industrial (“C&I”), which includes $35.0 million of PPP loans ,

offset by a decrease of $114.5 million in the obligations of state and political subdivisions portfolio compared to December 31,

The decline in state and political subdivisions are due to municipalities finding cheaper refinancing alternatives.

loans decreased $56.2 million compared to December 31, 2019 with decreases in all portfolios except consumer construction.

The decrease in consumer loans is primarily a result of de-risking the portfolio during the economic downturn.

At December 31,

2020 we had $9.8 million l oans held-for-sale in connection with the sale of Bank branches that is expected to close in the

second quarter of 2021.

Nonperforming loans and TDRs decreased $10.1 million to $32.0 million, or 24.0%, at December 31, 2020

compared to $42.1 million at December 31, 2019.

OREO decreased $2.6 million at December 31, 2020 compared to December 31,

Closed retail bank offices declined $0.5 million with a remaining book value of $2.5 million at December 31, 2020 compared

to $3.0 million at December 31, 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

The securities portfolio increased $36.1

million at December 31, 2020 from December 31, 2019 and comprised 18.6% of total assets at December 31, 2020 compared

to 18.5% of total assets at December 31, 2019.

The increase was a result of active balance sheet management.

We have further

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

Total deposits increased $180.4 million

to $3.7 billion at December 31, 2020 compared to $3.5 billion at December 31, 2019.

The increase in deposits primarily

related to the growth in all our core deposit categories, which includes noninterest-bearing and interest-bearing demand deposits,

money market and savings accounts.

Core deposits increased $441.3 million, or 28.6%, compared to December 31, 2019.

the increase in core deposits was a decline of $345.6 million in our CDs.

This decrease relates to the intentional runoff of $289.1

million of higher cost CDs.

Noninterest-bearing deposits comprised 19.0% and 15.8% of total deposits at December 31, 2020

and December 31, 2019, respectively.

At December 31, 2020, $84.7 million of deposits were held for assumption in connection

with the sale of Bank branches that is expected to close in the second quarter of 2021.

shareholders’

equity decreased by $32.9 million to $440.2 million at December 31, 2020 compared to $473.1 million at

December 31, 2019.

The decrease was primarily due to a net loss of $45.9 million and a special dividend of $3.7 million paid

in March of 2020, both offset by a $15.6 million, net of tax, increase in other comprehensive income due to changes in the

fair value of available-for-sale securities.

The remaining difference is related to stock-based compensation during the year ended

December 31, 2020.

The ALL was 1.83% of total portfolio loans

at December 31, 2020 compared to 1.34% as of December 31, 2019.

General reserves as a percentage of total portfolio loans

were 1.32% at December 31, 2020 compared to 1.13% at December 31, 2019.

The ALL was 169.1% of nonperforming loans at

December 31, 2020 compared to 92.0% of nonperforming loans at December 31, 2019.

Management believes, the allowance for

loan losses is adequate to absorb probable losses inherent in the loan portfolio.

The Company remains well capitalized.

Tier 1 capital ratio decreased to 13.08% at December 31, 2020 compared to 13.58% at December 31, 2019.

Our leverage ratio

was 10.26% at December 31, 2020, compared to 10.33% at December 31, 2019 and total risk-based capital ratio was 14.33%

at December 31, 2020 compared to 14.83% at December 31, 2019.

The following table presents the composition

of available-for-sale securities for the periods presented:

(Dollars in Thousands)

December 31, 2020

December 31, 2019

Residential Mortgage-Backed Securities

Commercial Mortgage-Backed Securities

Asset Backed Securities

Collateralized Mortgage Obligations

Small Business Administration

States and Political Subdivisions

Corporate Notes

Total Debt Securities

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The balances and average rates of our securities

portfolio are presented below as of December 31:

in Thousands)

Agency Securities

Residential Mortgage-Backed

Commercial Mortgage-Backed

Asset Backed Securities

Collateralized Mortgage

Small Business Administration

States and Political

Securities Available-for-Sale

The Company invests in various securities

in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a

tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes.

Securities are subject to market

risks that could negatively affect the level of liquidity available to us.

Security purchases are subject to our Investment Policy

approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by $36.1

million at December 31, 2020 as compared to December 31, 2019.

Securities comprise 18.6% of total assets at December 31,

2020 as compared to 18.5% at December 31, 2019.

The increase is a result of active balance sheet management.

We have further

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

At December 31, 2020, total gross

unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses.

At December 31,

2019, total gross unrealized gains in the available-for-sale portfolio were $6.2 million offset by $6.0 million of gross unrealized

Management evaluates the securities portfolio

for OTTI on a quarterly basis.

During the years ended December 31, 2020 and 2019 the Company did not record any OTTI.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table sets forth the maturities

of securities at December 31, 2020 and the weighted average yields of such securities.

Taxable-equivalent adjustments (using

a 21% federal income tax rate) for 2020 have been made in calculating yields on obligations of state and political subdivisions.

Available-for-Sale Securities

After One But Within

After Five But Within

Within One Year

After Ten Years

(Dollars in Thousands)

Residential Mortgage-Backed Securities

Commercial Mortgage-Backed Securities

Asset Backed Securities

Collateralized Mortgage Obligations

Small Business Administration

States and Political Subdivisions

Corporate Notes

Weighted Average Yield

Weighted -average

yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent.

Loan Composition

following table summarizes our loan portfolio as of the periods presented:

(Dollars in Thousands)

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial Loans

Residential Mortgages

Other Consumer

Consumer Construction

Total Consumer Loans

Total Portfolio Loans

Loans Held-for-Sale

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Our loan portfolio represents our most

significant source of interest income.

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

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

ability to pay.

portfolio loans increased $62.4 million, or 2.2%, at December 31, 2020 compared to December 31, 2019.

Commercial loans

increased $118.6 million, or 5.2%, including $35.0 million of PPP loans, offset by

a decrease of $114.5 million in the obligations of state and political subdivisions portfolio compared to December 31, 2019.

The decline in state and political subdivisions are due to municipalities finding cheaper refinancing alternatives.

loans decreased $56.2 million, or 9.3% in all categories, except consumer construction.

decrease in consumer loans if primarily a result of de-risking the portfolio during the economic downturn.

Total commercial loans represented 81.4%

of total portfolio loans at December 31, 2020 and 79.0% of total portfolio loans at December 31, 2019.

Within our commercial

portfolio, the CRE and Commercial Construction portfolios combined comprised $1.8 billion or 76.8% of total commercial loans and

62.5% of total portfolio loans at December 31, 2020 and comprised $1.7 billion or 72.7% of total commercial loans and 57.5%

of total portfolio loans at December 31, 2019.

Net deferred costs included in the portfolio balances above were $3.0 million

and $5.1 million at December 31, 2020 and 2019, respectively.

Discounts on purchased 1-4 family loans included in the portfolio

balances above were $219 thousand and $250 thousand at December 31, 2020 and 2019, respectively.

The commercial portfolio is monitored for

potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry,

investment CRE dependent on common tenants and industries or property types that are similarly impacted by external factors.

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, or will cause, them to draw on their existing lines of credit

with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness.

These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral

in hospitality and other commercial real estate exposure.

As a result, we anticipate that our financial condition, capital levels

and results of operations could be adversely affected.

Portfolio loan balances of our top 10 credit

relationships were $675.9 million at December 31, 2020, with a total commitment exposure of $727.7 million.

These loans are

in the hospitality, golf course, agricultural, land holdings, commercial real estate (multi-family and office/retail), energy,

land development, and lumber industries.

Line utilization, unused commitments, excluding

consumer overdraft lines, were $410.7 million at December 31, 2020 as compared to $355.5 million at December 31, 2019.

The majority of unused commitments are for construction projects that will be drawn as the construction completes.

Total utilization,

excluding consumer overdraft lines, was 47.8% at December 31, 2020, as compared to 51.1% at December 31, 2019.

line utilization was 48.3% at December 31, 2020, as compared to 50.8% at December 31, 2019.

time to time, we have mortgage loans held-for-sale derived from two sources.

First, we purchase mortgage loans on a short-term

basis from a partner financial institution that have fully executed sales contracts to end investors.

Secondly, we originate and

close mortgages with fully executed contracts with investors to purchase shortly after closing.

We then hold these mortgage loans

from both sources until funded by the investor, typically a two-week period.

Mortgage loans held-for-sale were $25.4 million

and $19.7 million at December 31, 2020 and December 31, 2019, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

In addition to mortgage loans held-for-sale,

the Company had $9.8 million in loans held-for-sale in connection with sale of Bank branches at December 31, 2020 that are

expected to close in the second quarter of 2021.

The following tables present the maturity

schedule of selected loan types at December 31, 2020:

(Dollars in Thousands)

Fixed interest rates

Variable interest rates

Total Construction Loans

to Commercial Construction and Consumer Construction in the loan composition table above.

(Dollars in Thousands)

Fixed interest rates

Variable interest rates

Total Commercial, Industrial & Agricultural

to Commercial & Industrial in the loan composition table above.

Credit Quality

On a monthly basis, a criticized asset

committee meets to review all special mention and substandard loans within prescribed policy thresholds.

These loans typically

represent the highest risk of loss to the Company.

Action plans are established and these loans are monitored through regular contact

with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential

loan restructures or modifications and the regular re-evaluation of assets held as collateral.

We attempt to limit our exposure to credit

risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations.

concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and interest risk

rating trends and through stress testing of the loans in these segments.

The Company has specific loan segment limits in its loan

Total commercial real estate balances should not exceed the combination of 300% of total risk based capital and growth

in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk based

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded

in the portfolio.

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value

ratios, loan terms, and amortization periods.

Unsecured loans pose a higher risk for

the Company due to the lack of a well-defined secondary source of repayment.

Unsecured loans are reserved for the best quality

customers with well-established businesses, operate with low financial and operating leverage and demonstrate an ability to clear

the outstanding balance on lines of credit for at least thirty consecutive days annually.

The repayment capacity of the borrower

should exceed all policy and guidelines for secured loans.

If the borrower is unable to comply with this requirement and the Company

is willing to renew the credit facility, the line should be secured and/or begin amortization.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

On a quarterly basis, the Credit Risk Committee

of the Board meets to review our loan portfolio metrics, segmentation guidelines, and loan review findings from the previous quarter.

Annually, this same committee reviews credit related policies and policy enhancements as they become available.

Additional credit risk management practices

include periodic review and update of our lending policies and procedures to support sound underwriting practices and portfolio

management through portfolio stress testing.

Our loan review serves as a mechanism to independently monitor credit quality and

assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities.

review function has the primary responsibility for assessing commercial credit administration and credit decision functions of

consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Our policy is to place loans in

all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal

payments are 90 days or more past due based on contractual terms.

The Company has a loan review policy and

annual scope report that details the level of loan review for commercial loans in a given year.

Primary objectives of loan reviews

include the identification of unknown risks and patterns that might influence potential future losses.

In concert with significant

enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with

respect to the accuracy of the underwriting function.

During 2020, we used a four-step approach for loan review in the following

A review of the largest twenty pass-rated loan relationships, which represents approximately a

quarter of total loans;

A sampling of new loans originated to include an examination of the evidence of appropriate approval,

adherence to loan policy and the completeness and accuracy of the analysis contained in the approval document;

A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships

with aggregate exposure of at least $2 million that are not part of the top 20 review;

Concentration focus reviews of identified segments that represent concentration risk, represented

by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss

history, document exceptions, policy exceptions and emerging trends in risk characteristics.

The Company does not typically structure

these with a 30-day cleanout feature since that is difficult to measure and enforce.

Instead we usually set higher debt service

standards and underwrite to the ability to amortize the loan on unsecured terms.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Nonperforming assets (“NPAs”)

consist of nonaccrual loans, nonaccrual TDRs and OREO.

The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands)

Nonaccrual Loans

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Nonaccrual Loans

Nonaccrual Troubled Debt Restructurings

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Nonaccrual Troubled Debt Restructurings

Total Nonaccrual Loans and Troubled Debt Restructurings

Other Real Estate Owned

Total Nonperforming Assets

Nonaccrual Loans and Troubled Debt Restructurings to Total Portfolio Loans

Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned

Nonperforming

assets decreased to $12.7 million to $47.7 million at December 31, 2020 compared to $60.4 million at December 31, 2019.

The decrease was due to a $10.1 million decline in nonaccrual loans and a $2.6 million net decrease in OREO.

in nonaccrual loans was primarily due to pay-downs during the 2020, offset by draws on minimal commitments.

The gross amount of

interest that would have been recorded under original terms, had these loans not been placed on nonaccrual status was $4.7 million

The decrease in OREO was primarily due to sales of properties during 2020, offset by transfers into OREO.

branch banking offices were closed during 2020 as part of our branch optimization project.

Five of these branches were moved to

OREO in 2020 and marketed for sale resulting in a $1.1 million write-down.

Closed retail bank offices have a remaining book value

of $2.5 million at December 31, 2020 and $3.0 million at December 31, 2019.

As of December 31, 2020 total nonaccrual

loans include $7 thousand in loans held-for-sale in connection with sale of Bank branches.

There were no nonaccrual loans related

to loans held-for-sale in 2019.

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.

This amendment 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.

We are currently applying

this guidance to qualifying loan modifications.

At this time, it is uncertain what future impact loan and lease modifications related

to COVID-19 will have on our financial condition, results of operations and allowance for loan losses.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The following table summarizes past due

loans for the dates presented:

(Dollars in Thousands)

Loans 90 Days or More Past Due and Still Accruing

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial Loans

Residential Mortgages

Other Consumer

Consumer Construction

Total Consumer Loans

Total Loans 90 Days or More Past Due

(Dollars in Thousands)

Loans 30 to 89 Days Past Due

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial Loans

Residential Mortgages

Other Consumer

Consumer Construction

Total Consumer Loans

Total Loans 30 to 89 Days Past Due

Loans past due 90 days or more and still

accruing were zero at December 31, 2020 and 2019.

With the implementation of the Company’s new core system, loans past

due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days or more and still accruing increased

$2.3 million to $6.4 million at December 31, 2020 compared to $4.1 million at December 31, 2019.

As of December 31, 2020 total loans

past due 30 to 89 days include $7 thousand in loans held-for-sale in connection with sale of Bank branches.

There were no past

due loans related to loans held-for-sale in 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Closed-end installment loans, amortizing

loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in

arrears two or more monthly payments.

Other multi-payment obligations with payments scheduled other than monthly are reported past

due when one scheduled payment is due and unpaid for 30 days or more.

We monitor delinquency on a monthly basis, including early

stage delinquencies of 30 to 89 days past due for early identification of potential problem loans.

TDRs are loans that we, for economic or

legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise

The Company strives to identify borrowers in financial difficulty early and work with them to modify the terms before their

loan reaches nonaccrual status.

These modified terms generally include extension of maturity dates at a stated interest rate lower

than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal

While unusual, there may be instances of principal forgiveness.

These modifications are generally for longer term periods

that would not be considered insignificant.

An accruing loan that is modified into

a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with

the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period

before the modification.

All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining

lives, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at

the time of the restructuring for a new loan with comparable risk and we fully expect that the remaining principal and interest

will be collected according to the restructured agreement.

The Company individually evaluates all impaired loans, which includes

TDRs, greater than or equal to $1.0 million for additional impairment.

In addition, the Company evaluates credits that have complex

loan structures for impairment, even if the balance is less than $1.0 million.

Nonaccrual TDRs can be returned to accruing status

if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there

is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the

restructuring.

As an example, consider a substandard commercial

construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer

than would be considered an insignificant period of time.

The post-modification interest rate given to the borrower is considered

to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original

loan agreement.

This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been

granted due to the long extension, resulting in payment delay as well as the rate being lower than current market rate for new

debt with similar risk.

The loan will be reported as a nonaccrual TDR and an impaired loan.

In addition, the loan could be charged

down to the fair value of the collateral if a confirmed loss exists.

If the loan subsequently performs, by means of making on-time

principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all

remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned

to accrual status and reported as an accruing TDR.

The loan will remain an impaired loan for the remaining life of the loan because

the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring

for a new loan with comparable risk.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table summarizes the restructured loans as of

the dates presented:

December 31, 2020

December 31, 2019

Nonperforming

(Dollars in Thousands)

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial TDRs

Residential Mortgages

Other Consumer

Consumer Construction

Total Consumer TDRs

TDRs decreased $9.7 million, or 6.8%, to

$134.2 million at December 31, 2020 compared to December 31, 2019.

The Bank received $12.8 million of pay-downs, offset

by an addition of $3.1 million.

TDRs of $25.0 million and $34.7 million were nonaccrual as of December 31, 2020 and December 31,

2019, respectively.

At December 31, 2020 we had one relationship identified as a TDR that had minimal commitments to lend

additional funds.

During the twelve months ended December 31,

2020, the Bank modified one loan totaling $3.1 million that constituted a TDR.

The loan is part of a $15.7 million relationship.

The relationship is collateralized by income producing property and unimproved land that was acquired for future development.

cash flows of the income producing property are insufficient to amortize the $3.1 million loan which matured during the year.

underlying conditions in the immediate submarket make development in the near term unlikely.

The Bank renewed the $3.1 million

loan and extended interest only terms which management considered a concession.

The balance of the relationship continues to amortize

as agreed and the cash flows of the income producing property are sufficient to amortize the larger loan and fund interest payments

on the $3.1 million loan.

Bank had o ne loan modified as a TDR during the twelve months ending December 31, 2019 totaling $0.6 million in post-modified

recorded balances.

The TDR modification was a result of several key factors.

The borrower is experiencing financial difficulties

due to negative cash flows and being dependent upon collateral to repay the loan.

The most recent appraisal suggests that the borrower

would have to sell the lots in this lot development project at a price higher than the appraisal for this project to be profitable.

In addition, when comparing the complete value versus the cost to complete, the loan would not currently fit our standards for

underwriting a lot development loan.

The current rate on the loan is below market rate and there are other terms and conditions

that would not be offered to a comparable borrower.

There were no TDR payment defaults during the year ended December 31,

2019 for TDRs with outstanding principal balances at year end 2019.

For purposes of this disclosure, a TDR payment default occurs

when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or

more past due.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following tables represent credit exposures by internally

assigned grades as of December 31, 2020 and 2019:

(Dollars in Thousands)

Special Mention

Portfolio Loans

Performing Loans

Portfolio Loans

(Dollars in Thousands)

Of States and

December 31, 2019

Political Sub.

Special Mention

Total Portfolio Loans

Performing Loans

Non-Accrual Loans

Total Portfolio Loans

Loans held-for-sale in connection with sale of Bank branches

at December 31, 2020 include $7 thousand in the substandard category.

There were no substandard loans in loans held-for-sale

at December 31, 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Special mention, substandard and doubtful

loans at December 31, 2020 decreased by $9.6 million to $424.6 million compared to $434.2 million at December 31, 2019,

with an increase of $182.0 million in special mention and a decrease of $191.6 million in substandard.

During 2020 there was a

significant risk rating upgrade due to improvements in underlying operating cash flows of certain credits.

At this time, it is uncertain what impact

COVID-19 will have on our current impaired loans or the susceptibility of the loan portfolio to future loan impairment.

Allowance for Loan Losses

The Company maintains an ALL at a level

determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet

date and it is presented as a reserve against loans in the Consolidated Balance Sheets.

Determination of an adequate ALL is inherently

subjective and may be subject to significant changes from period to period.

The methodology for determining the ALL has two main

evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous

loans with similar risk characteristics.

Our charge-off policy for commercial loans

requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless

of the delinquency status of the loan.

We may elect to recognize a partial charge-off when management has determined that the value

of collateral is less than the remaining investment in the loan.

A loan or obligation does not need to be charged-off, regardless

of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance

and (ii) there exists a strategy to liquidate the collateral.

Management may also consider a number of other factors to determine

when a charge-off is appropriate.

These factors may include, but are not limited to:

of a bankruptcy proceeding

collateral and probability of successful liquidation;

of adverse proceedings or litigation that may result in collection

Consumer unsecured loans and secured loans

are evaluated for charge-off after the loan becomes 90 days past due.

Unsecured loans are fully charged-off and secured loans are

charged-off to the estimated fair value of the collateral less the cost to sell.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following summarizes our allowance

for loan loss experience at December 31 for each of the years presented:

(Dollars in Thousands)

Balance Beginning of Year

Provision for Loan Losses

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Charge-offs

Commercial Real Estate

Commercial and Industrial

Obligations of State and Political Subdivisions

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

Total Recoveries

Total Net Charge-offs

Balance End of Year

Net Charge-offs to Average Loans

Allowance for Loan Losses to Total Portfolio Loans

increase in the ALL of $15.3 million was primarily due an increase in specific reserves of $9.1 million and an increase

in general reserves of $6.2 million.

The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative

reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in our loss history.

The $16.1 million

increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions

to our hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic, geo-political

and other risk factors determined by management.

These qualitative reserves are intended to reflect not only the risks of continued

weak economic conditions on our loan portfolio, but also loss estimates identified in loan portfolios deemed to be at risk from

the COVID-19 pandemic.

We adjusted qualitative risk factors under our incurred loss model for economic conditions, changes in payment

deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions.

Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic

given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business

charge-offs were $2.7 million in 2020 as compared to $3.8 million in 2019.

As a percentage of total portfolio loans net

charge-offs were 0.09% and 0.13% for the periods ending December 31, 2020 and 2019, respectively.

Nonperforming loans as a

percentage of total portfolio loans were 1.09% and 1.46% as of December 31, 2020 and December 31, 2019, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

An inherent risk to the loan portfolio

as a whole is the condition of the economy in our markets.

In addition, each loan segment carries with it risks specific to the

The Company develops and documents a systematic ALL methodology based on the following portfolio segments:

C&I, 3) Obligations of States and Political Subdivisions, 4) Commercial Construction, 5) Residential Mortgages, 6) Other Consumer,

and 7) Consumer Construction.

The following is a discussion of the key risks by portfolio segment that management assesses in

preparing the ALL.

CRE loans are secured by commercial purpose

real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls

and apartments.

Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment

for these loans.

The condition of the local economy is an important indicator of risk, but there are also more specific risks

depending on the collateral type as well as the business.

C&I loans are made to operating companies

or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing.

flow from the operations of the borrower is the primary source of repayment for these loans.

The condition of the local economy

is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower.

for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding

Obligations of States and Political Subdivision

loans are made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure

up-fit and expansion, or to purchase new equipment.

This segment of loans may be secured by general obligations from the municipal

authority or revenues generated by infrastructure and equipment financed by the Company.

The primary repayment source for these

loans include the tax basis of the municipality, specific revenue streams related to the infrastructure financed, and other business

operations of the municipal authority.

The health and stability of state and local economies directly impacts each municipality’s

tax basis and are important indicators of risk for this segment.

The ability of each municipality to increase taxes and fees to

offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

Commercial Construction loans are made

to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for

various purposes.

While the risk of these loans is generally confined to the construction period, if there are problems, the project

may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value

in a liquidation to cover the outstanding principal.

The condition of the local economy is an important indicator of risk, but

there are also more specific risks depending on the type of project and the experience and resources of the developer.

Residential Mortgages are loans secured

by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including

purchase money mortgages.

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

The condition

of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.

The state of the

local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit

the ability of borrowers to sell a property and satisfy the debt.

Consumer loans are made to individuals

and may be secured by assets other than 1-4 family residences, as well as unsecured loans.

This segment includes auto loans and

unsecured loans and lines.

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

The condition

of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.

The value of the

collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

Consumer Construction loans are made for

the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient

to complete construction.

Residential construction loans to individuals generally provide for the payment of interest only during

the construction phase.

Credit risk for residential real estate construction loans can arise from construction delays, cost overruns,

failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply

of the property being constructed.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The following is the ALL balance by segment

as of December 31 for the years presented below:

in Thousands)

Commercial Real Estate

Obligations of States

and Political Sub.

Commercial Construction

Residential Mortgages

Other Consumer

Significant to our ALL is a higher concentration

of commercial loans.

The ability of borrowers to repay commercial loans is dependent upon the success of their business and general

economic conditions.

Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio

through an internal risk rating system.

Loan risk ratings are assigned based upon the creditworthiness of the borrower and are

reviewed on an ongoing basis according to our internal policies.

Loans rated special mention or substandard have potential or

well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit

The following table summarizes the ALL balance as of December 31

for the years presented below:

(Dollars in Thousands)

Collectively Evaluated for Impairment

Individually Evaluated for Impairment

Total Allowance for Loan Losses

The ALL was $54.1 million, or 1.83% of

total portfolio loans at December 31, 2020 compared to $38.8 million, or 1.34% of total portfolio loans at December 31,

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

The following tables present the composition

of deposits at December 31:

(Dollars in Thousands)

Noninterest-Bearing Demand

Interest-Bearing Demand

Certificates of Deposits

Deposits Held for Assumption in Connection with Sale of Bank Branches

NM - percentage not meaningful

The daily average balance of deposits

and rates paid on deposits are summarized in the following table for the years ended December 31:

in Thousands)

Noninterest-Bearing

Demand Deposits

Noninterest-Bearing Demand

Deposits Held for Assumption in Connection with Sale of Bank Branches

Interest-Bearing Transaction

Certificates of Deposit

Interest-Bearing

Deposits Held for Assumption in Connection with Sale of Bank Branches

Interest-Bearing Deposits

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

are our primary source of funds.

We believe that our deposit base is stable and that we have the ability to attract new depositors

while diversifying the deposit composition.

Total deposits at December 31, 2020 increased $180.4 million, or 5.1%, from December 31,

Noninterest-bearing deposits increased by $144.3 million, or 26.0%, to $699.2 million as of December 31, 2020 as compared

to $554.9 million at December 31, 2019.

Money market accounts increased $153.6 million, or 109.3%, during 2020 compared to

2019, due to recent special rate promotions.

Interest-bearing demand deposits increased $79.6 million, or 27.8% to $366.2 million

at December 31, 2020 compared to December 31, 2019.

Savings accounts increased $63.7 million, or 11.3%, at December 31,

2020 compared to December 31, 2019.

Offsetting these increases was a decrease of $345.6 million, or 17.6%, in CDs at December 31,

2020 compared to December 31, 2019 due to intentional runoff of these higher cost deposits.

Noninterest-bearing deposits

comprised 19.0% and 15.8% of total deposits at December 31, 2020 and December 31, 2019, respectively.

At December 31,

2020, $84.7 million of deposits were held for assumption in connection with the sale of Bank branches that is expected to close

in the second quarter of 2021.

The following table summarizes the maturities

of CDs, excluding CDs held-for-assumption:

(Dollars in Thousands)

Maturities of CDs of $250,000 or more

outstanding, excluding CDs held-for-assumption at December 31, 2020 are summarized as follows:

(Dollars in Thousands)

Three Months or Less

Over Three Months Through Twelve Months

Over Twelve Months Through Three Years

Over Three Years

Federal Home Loan Bank (“FHLB”)

are an additional source of liquidity for the Company.

FHLB borrowings were $35.0 million and $10.0 million at December 31,

2020 and December 31, 2019, respectively.

FHLB borrowings are fixed rate advances for various terms and are secured by a

blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at December 31,

Total loans pledged as collateral were $804.2 million and $284.6 million at December 31, 2020 and December 31,

2019, respectively.

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

The bank continues

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

securities available-for-sale pledged as collateral were $28.6 million at December 31, 2019.

The Company is eligible to borrow

up to an additional $510.5 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately

$1.0 billion, or 25% of the Company’s assets, as of December 31, 2020.

The Company had the capacity to borrow up to

an additional $242.2 million from the FHLB at December 31, 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Information pertaining to FHLB advances

at December 31 is summarized in the table below:

(Dollars in Thousands)

Balance at Period End

Average Balance during Period

Average Interest Rate during the Period

Maximum Month-end Balance during the Period

Average Interest Rate at Period End

The Company held FHLB Atlanta stock of

$5.1 million and $4.1 million at December 31, 2020 and December 31, 2019, respectively.

Dividends recorded on this restricted

stock were $218 thousand, $144 thousand, and zero for the years ended December 31, 2020, 2019, and 2018, respectively.

investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

stock because we are a member of the FHLB of Atlanta.

The FHLB requires members to purchase and hold a specified level of FHLB

stock based upon the members’

asset values, level of borrowings and participation in other programs offered.

FHLB is non-marketable and is redeemable at the discretion of the FHLB.

Members do not purchase stock in the FHLB for the same

reasons that traditional equity investors acquire stock in an investor-owned enterprise.

Rather, members purchase stock to obtain

access to the products and services offered by the FHLB.

Unlike equity securities of traditional for-profit enterprises, the stock

of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only

be purchased, redeemed and transferred at par value.

• Critical Accounting Policies and Estimates

• Our Business

• Results of Operations and Financial Condition

• Capital Resources

The following table summarizes ratios for

the Company for December 31:

Common Equity Tier 1

Total Risk-Based Capital Ratio

Leverage Ratio

Shareholders’

equity decreased $32.9

million, or 7.0%, to $440.2 million at December 31, 2020 as compared to $473.1 million at December 31, 2019.

in shareholders’

equity is primarily due to a net loss of $45.9 million in 2020, a special dividend of $3.7 million paid

in March of 2020, both offset by an increase in other comprehensive income in the amount of $15.6 million.

The change in other

comprehensive income of $15.6 million was primarily due to the increase in net unrealized gains on securities available-for-sale

driven by a change in interest rates during the period.

The remaining difference is related to stock-based compensation during

the year ended December 31, 2020.

The Company continues to maintain its capital

position with a leverage ratio of 10.26% as compared to the regulatory guideline of 5.0% to be well-capitalized and a risk-based

Common Equity Tier 1 ratio of 13.08% compared to the regulatory guideline of 6.5% to be well-capitalized.

Our risk-based Tier 1

and Total Capital ratios were 13.08% and 14.33%, respectively, which places the Company about the federal bank regulatory agencies’

well-capitalized guidelines of 8.0% and 10.0%, respectively.

We believe that we have the ability to raise additional capital, if

In July 2013 the federal banking agencies

issued a final rule to implement the Basel III Final Rules and the minimum leverage and risk-based capital requirements

of the Dodd-Frank Act.

The final rule established a comprehensive capital framework and went into effect on January 1,

2015 for smaller banking organizations such as the Company.

The rule also requires the Company and the Bank to maintain a

capital conservation buffer composed of Common Equity Tier 1 capital in an amount greater than 2.50% of total risk-weighted assets

beginning in 2019.

The capital conservation buffer was phased-in, in equal increments from 2016 through 2019.

As a result, starting

in 2019, the Company and the Bank were required to maintain a Common Equity Tier I risk-based capital ratio greater than 7.0%,

a Tier 1 risk-based capital ratio greater than 8.5%, and a Total risk-based capital ratio greater than 10.5%;

otherwise, they will

be subject to restrictions on capital distributions and discretionary bonus payments.

BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Federal regulators periodically propose

amendments to the regulatory capital rules and the related regulatory framework and consider changes to the capital standards

that could significantly increase the amount of capital needed to meet applicable standards.

The timing of adoption, ultimate form

and effect of any such proposed amendments cannot be predicted.

The community bank leverage ratio final

rule was effective on January 1, 2020 and allows qualifying community banking organizations to calculate a leverage ratio

to measure capital adequacy.

Qualifying banking organizations that have less than $10 billion total assets, a leverage ratio of

greater than 9%, and meet other criteria such as off-balance sheet exposures and trading assets limits.

Banks opting into this

framework are not required to calculate or report risk-based capital.

We did not adopt this framework;

therefore, capital ratios

are calculated and reported as detailed above.

• Contractual Obligations

Contractual obligations represent future

cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we

cannot reasonably predict future payments.

The Company has various financial obligations, including contractual obligations and

commitments that may require future cash payments.

The following table presents as of December 31, 2020, significant fixed

and determinable contractual obligations to third parties by payment date:

Payments Due In

(Dollars in Thousands)

Deposits without a Stated Maturity (1)

Certificates of Deposits (1)

Deposits Held for Assumption in Connection with sale of Bank Branches (1)

FHLB Advances

Operating and Capital Leases

Purchase Obligations

(1) Excludes Interest

Lease contracts are described in Note 8,

Premises and Equipment, to the Consolidated Financial Statements included in Part II, Item 8 of this Report.

obligations primarily represent obligations under agreement with a third-party data processing vendor and communications charges.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

• Off-Balance Sheet Arrangements

In the normal course of business, the Company

offers our customers lines of credit and letters of credit to meet their financing objectives.

The undrawn or unfunded portion

of these facilities do not represent outstanding balances and therefore are not reflected in our financial statements as loans

The Company provides lines of credit to our clients to memorialize the commitment to finance the completion of construction

projects and revolving lines of credit to operating companies to finance their working capital needs.

Lines of credit for construction

projects represent $391.4 or 66.2% and $298.8 or 61.1% of the Commitments to Extend Credit identified in the table below at December 31,

2020 and 2019, respectively.

The Company provides letters of credit, generally for the benefit or our customers to provide assurance

to various municipalities that construction projects will be completed according to approved plans and specifications.

These instruments

involve elements of credit and interest rate risk and our exposure to credit loss, in the event the customer does not satisfy the

terms of the agreement, could be equal to the contractual amount of the obligation less the value of any collateral.

analyzes this risk and calculates a reserve for unfunded commitments.

The same credit policies are applied in granting these facilities

as those used for underwriting loans.

Lines of credit to finance construction projects include a construction end date, at which

time the loan is expected to convert to a mini-perm loan.

A department independent of our lending group monitors construction commitments

of $1 million or more.

Lines of credit to operating companies to finance working capital include a maturity date and may include

various financial covenants.

Letters of credit include an expiration date unless it is a standby letter of credit which automatically

renews but generally provide for a termination clause on an annual basis given sufficient notice to the beneficiary.

typically charges an annual fee for the issuance of letters of credit.

Because letters of credit are expected to expire without

being drawn upon, these commitments do not necessary represent future cash requirements of the Company.

The following table sets

forth the commitments and letters of credit as of December 31:

(Dollars in Thousands)

Commitments to Extend Credit

Standby Letters of Credit

Estimates of the fair value of these off-balance

sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

Our allowance for unfunded commitments

is determined using a methodology similar to that used to determine the ALL.

Amounts are added to the allowance for unfunded commitments

through a charge to current earnings in noninterest expense.

The balance in the allowance for unfunded commitments was $0.1 million

and $0.4 million at December 31, 2020 and December 31, 2019, respectively.

Liquidity is defined as a financial institution’s

ability to meet its cash and collateral obligations at a reasonable cost.

This includes the ability to satisfy the financial needs

of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs.

In order to manage

liquidity risk the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity

risk management for the Company.

The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet

funding needs in both a normal operating environment and for potential liquidity stress events.

The ALCO monitors and manages liquidity

through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan.

The ALCO policy guidelines define graduated risk tolerance levels.

If our liquidity position moves to a level that has been defined

as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk

• Stock Repurchase Program

This section reviews our financial condition for each of the past two years and results of operations for each of the past three years.

Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation.

Some tables may include additional time periods to illustrate trends within our Consolidated Financial Statements and notes thereto.

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

Explanation of Use of Non-GAAP Financial Measures

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

Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry.

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

Net interest income per the Consolidated Statements of Income (Loss) is reconciled to net interest income adjusted to an FTE basis in the Net Interest Income section of the "Results of Operations – Year ended December 31, 2021."

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

MANAGEMENT’S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our primary funding and liquidity source

is a stable customer deposit base.

Management believes that we have the ability to retain existing deposits and attract new deposits,

mitigating any funding dependency on other more volatile sources.

Although deposits are the primary source of funds, the Company

has identified various other funding sources that can be used as part of our normal funding program when either a structure or

cost efficiency has been identified.

Additional funding sources accessible to the Company include borrowing availability at the

FHLB, equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged,

federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, and the brokered deposit

In addition to the lines referenced above, the Company also has its available-for-sale investment securities portfolio

as an additional source of liquidity.

An important component of our ability to

effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets.

Highly liquid assets

are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations.

ALCO policy guidelines

define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high.

At December 31,

2020, the Bank had $871.4 million in highly liquid assets, which consisted of $40.0 million in interest-bearing deposits in other

financial institutions, $163.5 million in FRB Excess Reserves, $632.7 million in unpledged securities, $25.4 million in mortgage

loans held-for-sale and $9.8 million in loans held-for-sale in connection with sale of Bank branches.

This resulted in highly liquid

assets to total assets ratio of 20.9% at December 31, 2020.

If an extended recession caused large numbers

of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The following table provides detail of

liquidity sources as of the periods presented:

(Dollars in Thousands)

December 31, 2020

December 31, 2019

Cash and Due From Banks

Interest Bearing Deposits in Other Financial Institutions

Federal Reserve Bank Excess Reserves

Unpledged Investment Securities

Excess Pledged Securities

FHLB Borrowing Availability

Unsecured Lines of Credit

Total Liquidity Sources

Management is aware of the significant

effect inflation has on interest rates and can have on financial performance.

The Company’s ability to cope with this is

best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income

The mix of interest-rate sensitive assets and liabilities is monitored through ALCO in order to reduce the impact

of inflation on net interest income.

The effects of inflation are controlled by reviewing the prices of our products and services,

by introducing new products and services and by controlling overhead expenses.

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

Critical Accounting Estimates

The Company’s preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes.

Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the periods presented or in future periods.

We currently view the determination of the allowance for credit losses to be critical, because it is made in accordance with GAAP, is highly dependent on subjective or complex judgments, assumptions and estimates made by management and have had or is reasonably likely to have a material impact on the Company’s financial condition and results of operations .

We have identified the following critical accounting estimates:

Allowance for Credit Losses (“ACL”)

The ACL represents an amount which, in management's judgment, is adequate to absorb expected credit losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.

The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.

However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed.

While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources.

Management evaluates the variability of market conditions by examining the peak and trough of economic cycles.

These peaks and troughs are used to stress the base case model to develop a range of potential outcomes.

Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.

For the year ended December 31, 2021 the range of outcomes would produce a 17% reduction or a 27% increase in reserves based on the best and worst case scenarios, respectively.

Refer to Note 1, Summary of Significant Accounting Policies, for further detailed descriptions of our estimation process and methodology related to the ACL and Note 6, Allowance for Credit Losses, of this Annual Report on Form 10-K.

Carter Bankshares, Inc.

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

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

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

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

Per the 2020 Annual Report of the Virginia Bureau of Financial Institutions, our Company continues to be the fourth largest state-chartered bank by asset size at year end 2020.

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

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity