What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-11 compared with 2021-03-12 · 1461 added, 2164 removed, 422 unchanged (90% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

- (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

Years Ended December 31,

4 unchanged sentences

Transfer from Loans to Other Real Estate Owned 59 755 302

Loans Provided for Sales of Other Real Estate Owned

Transfer from Fixed Assets to Other Real Estate Owned 12,013 2,221 1,694

Security (Purchases) Sales Settled in Subsequent Period

Security Purchases Settled in Subsequent Period — ( 2,259 ) ( 3,270 )

Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,027 621 1,659

2 unchanged sentences

Deposits Held for Assumption in Connection with Sale of Bank Branches — 84,717 —

See accompanying notes to audited consolidated

financial statements.

Stock Repurchases Settled in Subsequent Period ( 306 ) — —

See accompanying notes to audited Consolidated Financial Statements.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

of Operations:

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations:

Carter Bankshares, Inc.

(the “Company”) is a holding company headquartered in Martinsville,

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

(the “Company”) is a holding company headquartered in Martinsville, Virginia.

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

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

is regulated by the FDIC, Federal Reserve Bank (“FRB”) and State Bureau of Financial Institutions.

The Bank has one

wholly owned subsidiary, CB&T Investment Company (the “Investment Company”), which was chartered effective April 1,

Formerly, the Bank owned Mortgage Company of Virginia who owned 100% of Bank Services of Virginia and Bank Services Insurance, Inc.

Mortgage Company of Virginia was terminated and dissolved on December 11, 2018.

Bank Services of Virginia was terminated and

dissolved on July 10, 2018.

Bank Services Insurance, Inc.

was sold in January of 2018.

Company was incorporated on October 7, 2020, by and at the direction of the board of directors of the Bank, for the

sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate

reorganization transaction (the “Reorganization”) .

On November 9, 2020, the Bank entered into an Agreement

and Plan of Reorganization (the “Reorganization Agreement”) with the Company and CBT Merger Sub, Inc.

“Merger Sub”), a wholly-owned subsidiary of the Company, pursuant to which the Reorganization would be effected.

on November 20, 2020 (the “Effective Time”), under the terms of the Reorganization Agreement

and pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act (the “VSCA”), the

Bank merged with the Merger Sub and survived such merger as a wholly-owned subsidiary of the Company.

Effective Time, the Company had no material assets and had not conducted any business or operations except for activities related

to the Company’s organization and the Reorganization.

the Effective Time, under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1

of the VSCA, each of the outstanding shares of the Bank’s common stock,

par value $1.00 per share, formerly held by its shareholders was converted into and exchanged for one newly issued share of the

Company’s common stock, par value $1.00 per share, and the Bank became the Company’s wholly-owned subsidiary.

of the Company’s common stock issued to the Bank’s shareholders were issued without registration under the Securities

Act of 1933, as amended (the “Act”), pursuant to the exemption from registration provided by Section 3(a)(12)

Pursuant to Section 13.1-719.1 of the VSCA, the Reorganization did not

require approval of the Bank’s shareholders.

In the Reorganization, each shareholder

of the Bank received securities of the same class, having substantially the same designations, rights, powers, preferences, qualifications,

limitations and restrictions, as those that the shareholder held in the Bank, and the Company’s current shareholders own

the same percentages of its common stock as they previously owned of the Bank’s common stock.

to the Effective Time, the Bank’s common stock was registered under Section 12(b) of the Securities Exchange Act

of 1934, as amended (the “Exchange Act”).

The Bank was subject to the information requirements of the Exchange Act

and, in accordance with Section 12(i) thereof, it filed annual and quarterly reports, proxy statements and other information

with the Federal Deposit Insurance Corporation (“FDIC”).

Upon consummation of the Reorganization, the Company’s

common stock was deemed to be registered under Section 12(b) of the Exchange Act, pursuant to Rule 12g-3(a) promulgated

thereunder, and the Company now files annual reports, proxy statements and other information with the Securities and Exchange Commission

(the “SEC”).

The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Bank (“FRB”) and Bureau of Financial Institutions of the Virginia State Corporation Commission.

The Bank has one wholly owned subsidiary, CB&T Investment Company (the “Investment Company”).

The Company was incorporated on October 7, 2020, by and at the direction of the Bank Board, for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate reorganization transaction (the “Reorganization”).

The Reorganization was completed on November 20, 2020 pursuant to an Agreement and Plan of Reorganization among the Bank, the Company and CBT Merger Sub, Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company.

In the Reorganization, each of the outstanding shares of the Bank’s common stock were converted into and exchanged for one newly issued share of the Company’s common stock.

Our market coverage is primarily in Virginia and North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Christiansburg, Martinsville, Danville, Greensboro, Fayetteville, and Mooresville.

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

Accounting Policies:

Our financial statements have been prepared in accordance with U.S.

Generally Accepted Accounting Principles

(“GAAP”).

In preparing the financial statements, management is required to make estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance

sheets and revenues and expenses for the periods then ended.

Generally Accepted Accounting Principles (“GAAP”).

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended.

Actual results could differ from those estimates.

Our significant

accounting policies are described below.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of Consolidation :

Our significant accounting policies are described below.

Principles of Consolidation:

The Consolidated Financial Statements include the accounts of Carter Bankshares, Inc.

wholly owned subsidiary.

and its wholly owned subsidiary.

The Investment Company is a subsidiary of the Bank.

All significant intercompany transactions have been

eliminated in consolidation.

All significant intercompany transactions have been eliminated in consolidation.

Reclassification:

Amounts in prior years' period financial statements and footnotes are reclassified whenever necessary to conform to the current

year’s presentation.

Reclassifications had no material effect on prior year net income or shareholders’

of Estimates :

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based

on available information.

These estimates and assumptions affect the amounts reported in the consolidated financial statements

and the disclosures provided, and actual results could differ from those estimates.

Information available which could affect these

judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related

changes, and changes in the financial condition of borrowers.

The Company could experience a material

adverse effect on its business as a result of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail

It is at least reasonably possible that information which was available at the date of the financial statements will

change in the near term due to the COVID-19 pandemic and that the effect of the change could be material to the financial statements.

The extent to which the COVID-19 pandemic will impact our estimates and assumptions is highly uncertain and we are unable to make

an estimate, at this time.

While the chief decision-makers monitor the revenue streams of the various products and services, operations

are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one as operating

results for all segments are similar.

Accordingly, all of the financial service operations are considered by management to be aggregated

in one reportable operating segment.

and Cash Equivalents :

The Company considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess

reserves as cash equivalents for the purposes of the Consolidated Statements of Cash Flows with all items having original maturities

fewer than 90 days.

Federal funds are customarily sold for one-day periods.

The FRB pays the target fed funds rate on the FRB excess

Cash on hand or on deposit with the FRB is required to meet regulatory reserve and clearing requirements.

Commitments and Related Financial Instruments :

Financial instruments include off-balance sheet credit instruments, such

as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.

The face amount for these

items represents the exposure to loss, before considering customer collateral or ability to repay.

Such financial instruments are

recorded when they are funded.

Comprehensive

Income (Loss) :

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss).

comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, net of tax.

Amounts in prior years' financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation.

Reclassifications had no material effect on prior year net income or shareholders’ equity.

Use of Estimates:

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.

These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates.

Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers.

COVID-19 has adversely impacted various industries in which our customers operate and could still impair their ability to fulfill their financial obligations.

The Company’s business is dependent upon the willingness and ability of its associates and customers to conduct banking and other financial transactions.

While we believe conditions have improved as of December 31, 2021, if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows.

While it is not possible to know the full extent of the impact the COVID-19 pandemic will have on the Company's future operations, the Company continues to communicate with its associates and customers to understand their challenges, which allows us to respond to their needs and issues as they arise.

Operating Segments:

The chief decision-makers of our operating segments monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one as operating results for all segments are similar.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Cash and Cash Equivalents:

The Company considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess reserves as cash equivalents for the purposes of the Consolidated Statements of Cash Flows with all items having

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

original maturities fewer than 90 days.

Federal funds are customarily sold for one-day periods.

The FRB pays the target fed funds rate on the FRB excess reserves.

Restrictions on Cash:

Cash on hand or on deposit with the FRB is required to meet regulatory reserve and clearing requirements.

Loan Commitments and Related Financial Instruments:

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.

The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.

Such financial instruments are recorded when they are funded.

Comprehensive Income (Loss):

Comprehensive income (loss) consists of net income (loss) and other comprehensive (loss) income.

Other comprehensive (loss) income includes unrealized (losses) gains on securities available-for-sale, net of tax.

The Company classifies securities into either the held-to-maturity or available-for-sale categories at the time of purchase.

securities were classified as available-for-sale at December 31, 2020 and December 31, 2019.

Securities classified as

available-for-sale include securities, which can be sold for liquidity, investment management, or similar reasons even if there

is not a present intention of such a sale.

Available-for-sale securities are reported at fair value, with unrealized gains or losses

included in other comprehensive income (loss), net of tax.

Premium amortization is deducted from,

and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments,

except for mortgage-backed securities where prepayments are anticipated.

Gains and losses are recognized upon the sale of specific

identified securities on the completed trade date.

Other-Than-Temporary

Impairments of Securities :

Management evaluates debt securities for other-than-temporary impairment (“OTTI”)

on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining

OTTI, management considers many factors, including:

(1) the length of time and the extent to which the fair value has been

less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was

affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely

than not will be required to sell the debt security before its anticipated recovery.

The assessment of whether an OTTI decline

exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in

When an OTTI occurs, the amount of the

OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be

required to sell the security before recovery of its amortized cost basis, less any current-period credit loss.

If an entity intends

to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less

any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s

amortized cost basis and its fair value at the balance sheet date.

If an entity does not intend to sell the security and it is

not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less

any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all

other factors.

The amount of the total OTTI related to the credit loss is determined based upon the difference of the present value

of cash flows expected be collected and the amortized cost basis and is recognized in earnings.

The amount of the total OTTI related

to other factors is recognized in other comprehensive income, net of applicable taxes.

The previous amortized cost basis less the

OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Held-for-Sale:

All securities were classified as available-for-sale at December 31, 2021 and December 31, 2020.

Securities classified as available-for-sale include securities, which can be sold for liquidity, investment management, or similar reasons even if there is not a present intention of such a sale.

Available-for-sale securities are reported at fair value, with unrealized (losses) gains, net of tax included in other comprehensive (loss) income.

Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.

Gains and losses are recognized upon the sale of specific identified securities on the completed trade date.

Other-Than-Temporary Impairments of Securities:

Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including:

(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.

The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss.

If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.

If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.

Credit-related impairment is recognized as an ACL on the balance sheet with a corresponding adjustment to provision for credit losses in the Consolidated Statements of Net Income.

Both the allowance and the adjustment to net income can be reversed if conditions change.

Loans Held-for-Sale:

Loans held-for-sale arise primarily 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.

These loans are typically

held about two weeks.

Second, we originate certain mortgage loan types (30-year fixed rate and government) through our internal

mortgage department that are targeted for sale into the secondary market.

Gains and losses on sales of mortgage loans held-for-sale

are determined using the specific identification method and are included in other noninterest income in the Consolidated Statements

of Net (Loss) Income.

From time to time, certain loans are transferred

from the loan portfolio to loans held-for-sale, which are carried at the lower of cost or fair value.

If a loan is transferred

from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer

is recorded as a charge-off against the allowance for loan losses, or ALL.

Subsequent declines in fair value are recognized as

a charge to noninterest income.

The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at

the time it is sold.

Gains and losses on sales of loans held-for-sale are included in other noninterest income in the Consolidated

Statements of Net (Loss) Income.

First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors.

Second, 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.

Gains and losses on sales of mortgage loans held-for-sale are determined using the specific identification method and are included in other noninterest income in the Consolidated Statements of Net Income (Loss).

From time to time, certain loans are transferred from the loan portfolio to loans held-for-sale, which are carried at the lower of cost or fair value.

If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the allowance for credit losses (“ACL”).

Subsequent declines in fair value are recognized as a charge to noninterest income.

The remaining unamortized fees and costs

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and Allowance for Loan Losses :

Loans that management have the intent and ability to hold for the foreseeable future

or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, discounts,

and an allowance for loan losses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

are recognized as part of the cost basis of the loan at the time it is sold.

Gains and losses on sales of loans held-for-sale are included in other noninterest income in the Consolidated Statements of Net Income (Loss).

Loans and Allowance for Credit Losses:

Loans that management have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, discounts, and an allowance for credit losses.

Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain

direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

A loan is considered impaired when it is

probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms

of the loan agreement.

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement.

A performing loan may be considered impaired.

The allowance for loan losses related to loans identified

as impaired is primarily based on the excess of the loan's current outstanding principal balance compared to the estimated fair

value of the related collateral, less cost to sell.

For a loan that is not collateral-dependent, the allowance is recorded at the

amount by which the outstanding principal balance exceeds the current estimate of the future cash flows on the loan discounted

at the loan's original effective interest rate.

Loans, including impaired loans, are generally

classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days

based on contractual terms, unless such loans are well-secured and in the process of collection.

If a loan or a portion of a loan

is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual.

Loans that are on a current

payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest

All interest accrued but not received for loans placed on non-accrual status is reversed against interest income.

While a loan is classified as nonaccrual

and the probability of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied

as a reduction to principal outstanding.

Payments collected on a nonaccrual loan are first applied to principal, secondly to any

existing charge-offs, thirdly to interest, and lastly to any outstanding fees owed to the Company.

Any interest that is accrued but not collected

is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all,

or a portion, of a loan.

Loans may be returned to accrual status

when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an

acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual

terms of interest and principal.

The allowance for loan losses is a valuation

allowance for probable incurred losses inherent in the loan portfolio as determined by management taking into consideration historical

loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry standards

and averages, and general economic conditions.

Loan losses are charged against the allowance when management believes the un-collectability

of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

Ultimate losses may vary from current

These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the

periods in which they become reasonably estimable.

During the quarterly evaluation of the

allowance for loan losses, particular characteristics associated with a segment of the loan portfolio are also considered.

characteristics are detailed below:

Commercial loans not secured by real estate carry risks associated with the successful operation

of a business, and the repayments of these loans depend on the profitability and cash flows of the business.

Additional risk relates

to the value of collateral upon which depreciation occurs and the valuation is less precise.

The ACL related to loans identified as impaired is primarily based on the excess of the loan's current outstanding principal balance compared to the estimated fair value of the related collateral, less cost to sell.

For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance exceeds the current estimate of the future cash flows on the loan discounted at the loan's original effective interest rate.

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days based on contractual terms, unless such loans are well-secured and in the process of collection.

If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual.

Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest is unlikely.

Any interest that is accrued, but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan.

While a loan is classified as nonaccrual and the probability of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding.

Payments collected on a nonaccrual loan are first applied to principal, secondly to any existing charge-offs, thirdly to interest, and lastly to any outstanding fees owed to the Company.

Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

Allowance for Credit Losses

On January 1, 2021, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (“Topic 326”), which replaced the incurred loss impairment model with an expected loss model.

As part of adoption our model introduced a segmented pool of “other” loans for discrete analysis.

This segmented pool included unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this pool resulted in an increase in the Current Expected Credit Losses (“CECL”) and is disclosed in the Other line item in the portfolio loan segments.

As a result of the CECL adoption we recorded a transition adjustment of $ 50.7 million to retained earnings as of January 1, 2021 for the cumulative effect of the adoption of ASU 2016-13.

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

A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis.

For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero.

The CECL model was developed with subjective assumptions that is driven by the following key factors:

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

For periods prior to the adoption of the CECL standard, we recognized credit losses for loans that were collectively evaluated for impairment based on an incurred loss approach, which limited our measurement of credit losses to credit events that were estimated to have already occurred.

The allowance for credit losses under the incurred loss model was a valuation allowance for probable incurred losses inherent in the loan portfolio.

Management made the determination by taking into consideration historical loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans secured by commercial real estate also carry risks associated with the success of the business

and the ability to generate a positive cash flow sufficient to service debts.

Real estate security diminishes risks only to the

extent that a market exists for the subject collateral.

Residential real estate loans carry risks associated with the continued credit-worthiness of the

borrower and changes in the value of the collateral.

In instances where construction is in process, these loans carry risks that

a project will not be completed as scheduled and budgeted and that the value of the collateral may, at any point be less than the

principal amount of the loan.

Additional risks may occur if the general contractor, who may not be a loan customer, is unable to

finish the project as planned due to financial pressures unrelated to the project.

Consumer loans carry risks associated with the continued credit-worthiness of the borrower and

the value of the collateral, such as automobiles, which may depreciate more rapidly than other assets.

In addition, these loans

may be unsecured.

Consumer loans are more likely than real estate loans to be immediately affected in an adverse manner by job

loss, divorce, illness, or personal bankruptcy.

Consumer loans are further segmented into automobile and recreational vehicle loans

and other consumer loans.

Loans to tax-exempt state and political subdivisions carry risks associated with changes in budget

constraints or revenue bases of the particular municipality or entity.

These loans are dependent on the cash flow from the tax-exempt

entity and often times have collateral upon which depreciation occurs and valuation is less than precise.

The allowance consists of specific and

general components.

The specific component relates to loans that are individually classified as impaired.

Factors considered by

management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal

and interest payments when due.

Loans equal to or greater than $1.0 million are individually evaluated for impairment.

is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future

cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

The general component covers loans that

are collectively evaluated for impairment.

Large groups of homogeneous loans are collectively evaluated for impairment, and accordingly,

they are not included in the separately identified impairment disclosures.

The general allowance component also includes loans

that are not individually identified for impairment evaluation, such as those loans that fall below the individual evaluation threshold.

The general component is based on historical loss experience adjusted for current factors.

These factors may include consideration

for the following:

levels of delinquency and delinquency trends;

migration of loans to the classification of special mention, substandard

trends in volume and terms of loans;

effects of changes in underwriting standards;

changes in lending policies, procedures,

and practices;

national and local economic trends and conditions;

industry conditions, and effects of credit concentrations.

Our charge-off policy for 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.

The Company 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

standards and averages, and general economic conditions.

Credit losses were charged against the allowance when the loan balance was confirmed uncollectible.

Subsequent recoveries, if any, were credited to the allowance.

Ultimate losses varied from current estimates.

The estimates were reviewed periodically and as adjustments become necessary, they were reported in earnings in the periods in which they become reasonably estimable.

For more details on the impact and adoption of Topic 326 see later in this Note 1, Recent Accounting Pronouncements and Developments, and Note 6 - Allowance for Credit Losses, of this Annual Report on Form 10-K.

Allowance for Credit Losses Policy

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policy.

The Company’s methodology for estimating the ACL includes:

Segmentation.

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

Specific Analysis.

A specific reserve analysis is applied to certain individually evaluated loans.

These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows.

A specific reserve is established if the fair value is less than the loan balance.

A charge-off is recognized when the loss is quantifiable.

Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”).

Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product.

These forecasts are assumed to revert to the long-term average and are utilized in the model to estimate the probability of default and loss given default through regression.

Model assumptions include, but are not limited to the discount rate, prepayments and curtailments.

The product of the probability of default and the loss given default is the estimated loss rate, which varies over time.

The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value.

Net present value is also impacted by assumptions related to the duration between default and recovery.

The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis.

Based on management’s review and analysis of internal, external and model risks, management may adjust the model output.

Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary.

This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable.

Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the prior model.

With the adoption of CECL management elected to evaluate certain loans based on shared but unique risk attributes.

The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards.

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

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

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

A substantial change in these assumptions could cause a significant impact to the model causing volatility.

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

The analysis applied to this pool resulted in an allowance of $ 51.3 million upon adoption and is disclosed in the Other segment line item.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

Debt Restructurings :

In situations where, for economic or legal reasons related to a borrower's financial condition,

management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled

debt restructuring (“TDR”).

Management strives to identify borrowers in financial difficulty early and work with them

to modify their loan to more affordable terms before their loan reaches nonaccrual status.

These modified terms have historically

included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or

a below market interest rate when compared to management's underwriting standards for a similar loan type.

These concessions are

intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

In cases where borrowers are

granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above

for impaired loans.

March 22, 2020, a regulatory interagency statement was issued by our banking regulators that encouraged financial institutions

to work with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) further provided that a qualified loan

modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until

the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the

COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates.

The provisions

of the CARES act dealing with temporary relief from TDR was extended pursuant to the Consolidated Appropriations Act, of 2021 (the

“CAA”), which was signed into law on December 27, 2020.

The amendment extended the “applicable”

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

Concentration

of Credit Risk:

The majority of the Company's loans, commitments and lines of credit have been granted to customers

in the Company's market area.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Our charge-off policy for 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.

The Company 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:

• The status of a bankruptcy proceeding

• The value of collateral and probability of successful liquidation;

• The status 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.

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.

Refer to the “Credit Quality” and the “Allowance for Credit Losses” sections in the MD&A and Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for more details.

Troubled Debt Restructurings (“TDRs”):

In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR.

Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status.

These modified terms have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type.

These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for impaired loans.

On March 22, 2020, a regulatory interagency statement was issued by our banking regulators that encouraged financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) further provided that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates.

The provisions of the CARES Act dealing with temporary relief from TDR was extended pursuant to the Consolidated Appropriations Act, of 2021 (the “CAA”), which was signed into law on December 27, 2020.

The 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.

Concentration of Credit Risk:

The majority of the Company's loans, commitments and lines of credit have been granted to customers in the Company's market area.

The concentrations of credit by loan classification are set forth in Note 5.

Advertising Costs:

We expense all marketing-related costs, including advertising costs, as incurred.

Advertising expense was $1.6

million, $1.4 million, and $884 thousand for the years ended 2020, 2019, and 2018, respectively.

Owned Life Insurance:

The Company has purchased life insurance policies on certain executive officers and employees.

Advertising expense was $ 1.0 million, $ 1.6 million, and $ 1.4 million for the years ended 2021, 2020, and 2019, respectively.

Bank Owned Life Insurance:

The Company has purchased life insurance policies on certain executive officers and associates.

We receive the cash surrender value of each policy upon its termination or benefits are payable to us upon the death of the insured.

Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of (Loss) Income.

Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of Income (Loss).

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premises and Equipment :

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Bank Premises and Equipment:

Bank premises and equipment acquired are stated at cost, less accumulated depreciation.

is charged to operating expenses over the estimated useful life of the assets by the straight-line method.

Depreciation is charged to operating expenses over the estimated useful life of the assets by the straight-line method.

Land is carried at cost.

Costs of maintenance or repairs are charged to expense as incurred and improvements are capitalized.

Upon retirement or disposal

of an asset, the asset and related allowance account are eliminated.

Any gain or loss on such transactions is included in current

Depreciation has been included under occupancy expense in the Consolidated Statements of (Loss) Income totaling $6.1

million in 2020, $5.3 million in 2019, and $3.7 million in 2018.

The estimated useful life for bank premises ranges from 5 to 40

years and equipment depreciates over a 3 to 10-year period.

Land and Land Improvements

Non-depreciating assets

Furniture and Fixtures

Computer Equipment and Software

5 years or term of license

Other Equipment

Leasehold Improvements

Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise

Home Loan Bank Stock (“FHLB”) :

The Company is a member of the FHLB system.

Members are required to own a

certain amount of stock based on the level of borrowings and other factors such as asset base.

FHLB stock is carried at cost, classified

as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

Cash dividends are

reported as dividend income on the Consolidated Statements of (Loss) Income.

(Loss) per Share:

Basic earnings (loss) per share represent income (loss) available to common shareholders divided by

the weighted-average number of common shares outstanding during the period.

Diluted earnings per share reflect additional common

shares that would have been outstanding if dilutive common shares had been issued, as well as any adjustment to income resulting

from the assumed issuance.

Non-vested shares of restricted stock are included in the computation of basic and diluted earnings

(loss) per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period.

Real Estate Owned (“OREO”) :

Real estate properties acquired through or in lieu of loan foreclosure is initially

recorded at fair value less estimated selling cost at the date of foreclosure, which establishes a new cost basis.

Any write-downs

based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses.

After foreclosure, these

assets are carried at the lower of their new cost basis or fair value less cost to sell.

In addition, any retail branch locations

closed for branch operations and marketed for sale are also moved to OREO from bank premises and equipment.

This real estate is

initially valued based on recent comparative market values received from a real estate broker and any necessary write-downs are

charged to operations.

Costs of significant property improvements are capitalized, whereas costs relating to holding property are

Valuations are periodically performed by management, and any 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.

OREO assets are

revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral

For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the

assets, at minimum, once every twenty-four months based on the size of the exposure.

Upon retirement or disposal of an asset, the asset and related allowance account are eliminated.

Any gain or loss on such transactions is included in current operations.

Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) totaling $ 6.2 million in 2021, $ 6.1 million in 2020, and $ 5.3 million in 2019.

The estimated useful life for bank premises ranges from 5 to 40 years and equipment depreciates over a 3 to 10-year period.

Land and Land Improvements Non-depreciating assets

Buildings 25 years

Furniture and Fixtures 5 years

Computer Equipment and Software 5 years or term of license

Other Equipment 5 years

Vehicles 5 years

Leasehold Improvements Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise

Federal Home Loan Bank (“FHLB”) Stock:

The Company is a member of the FHLB.

Members are required to own a certain amount of stock based on the level of borrowings and other factors such as asset base.

FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

Cash dividends are reported as dividend income in the Consolidated Statements of Income (Loss).

Earnings (Loss) per Share:

Basic earnings (loss) per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.

All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participated securities for this calculation.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Other Real Estate Owned (“OREO”):

Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, which establishes a new cost basis.

Any write-downs based on the asset's fair value at the date of acquisition are charged to the ACL.

After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell.

In addition, any retail branch locations closed for branch operations and marketed for sale are also moved to OREO from bank premises and equipment.

This real estate is initially valued based on recent comparative market values received from a real estate broker and any necessary write-downs are charged to operations.

Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed.

Valuations are periodically performed by management, and any 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.

OREO assets are revalued every twelve months , or more frequently when deemed necessary by management based upon changes in market or collateral conditions.

For smaller OREO assets with existing carrying values less than $ 0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure.

Operating costs after acquisition are expensed.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax

assets and liabilities.

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible

temporary differences, operating losses, and tax credit carryforwards.

Deferred tax liabilities are recognized for taxable temporary

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some

portion or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are adjusted for the effects

of changes in tax laws and rates on the date of enactment.

Income Taxes:

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating losses, and tax credit carryforwards.

Deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

When tax returns are filed, it is highly

certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty

about the merits of the position taken or the amount of the position that would be ultimately sustained.

The benefit of a tax position

is recognized in the financial statements in the period during which, based on all available evidence, management believes it is

more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

Tax positions taken are not offset or aggregated with other positions.

Tax positions that meet the more-likely-than-not

recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon

settlement with the applicable taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the

amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance

sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements

of (Loss) Income.

The Company is a limited partner in several

tax-advantaged limited partnerships whose purpose is to invest in approved new market and historic rehabilitation projects.

investments are included in other assets on the Consolidated Balance Sheets.

These partnership investments generate a return through

the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses

of the investments over a period of time.

The investments are accounted for under the equity method, with the expense included

within noninterest expense on the Consolidated Statements of (Loss) Income.

All of the Company's tax credit investments are evaluated

for impairment at the end of each reporting period.

of Financial Assets :

Transfers of financial assets are accounted for as sales, when control over the assets has been

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company,

(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge

or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through

an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements of Income (Loss).

The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved new market and historic rehabilitation projects.

These investments are included in other assets on the Consolidated Balance Sheets.

These partnership investments generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time.

The investments are accounted for under the equity method, with the expense included within noninterest expense on the Consolidated Statements of Income (Loss).

All of the Company's tax credit investments are evaluated for impairment at the end of each reporting period.

Transfer of Financial Assets:

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Retirement Benefits:

The Company has established an employee benefit plan as described in Note 14.

The Company does not provide

any other post-retirement benefits.

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable

intangible assets acquired less the estimated fair value of the liabilities assumed.

Goodwill has an indefinite useful life and

is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

The Company does not provide any other post-retirement benefits .

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

Long-lived assets are those that provide the Bank with a future economic benefit beyond the current year or operating period.

assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset is greater than

the fair value of the asset.

Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset.

Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell.

Effective January 1, 2020, the Company

adopted Accounting Standards Update (“ASU”) No.

2017-04, “Intangibles –

Goodwill and Other (Topic

Simplifying the Test for Goodwill Impairment”, which simplifies the subsequent measurement of goodwill by eliminating

Step 2 from the goodwill impairment test.

The goodwill impairment test is performed by comparing the fair value of a reporting

unit with its carrying amount.

An impairment charge would be recognized for the amount by which the carrying amount exceeds the

reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that

reporting unit.

Effective January 1, 2020, the Company adopted ASU No.

2017-04, “Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment”, which simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.

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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 strength.

for Unfunded Commitments:

In the normal course of business, we offer off-balance sheet credit arrangements to enable

our customers to meet their financing objectives.

These instruments involve, to varying degrees, elements of credit and interest

rate risk in excess of the amount recognized in the financial statements.

Our exposure to credit loss, in the event the customer

does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral.

We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans

to customers.

Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment

Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not

necessarily represent future cash requirements.

The allowance for unfunded commitments is included in other liabilities in the

Consolidated Balance Sheets Our allowance for unfunded commitments is determined using a methodology similar to that used to determine

Amounts are added to the allowance for unfunded commitments through a charge to current earnings in noninterest expense.

Compensation :

Compensation cost is recognized for restricted stock awards issued to employees and non-employee directors,

based on the fair value of these awards at the date of the grant.

The market price of the Company’s common stock at the date

of the grant is the fair value of the award.

Compensation cost is recognized over the

required service period, generally defined as the vesting period.

For awards with graded vesting, compensation cost is recognized

on a straight-line basis over the requisite service period for the entire award.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

As 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 strength.

Allowance for Unfunded Commitments:

In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.

Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral.

We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers.

Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee.

Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s Consolidated Balance Sheets.

Stock-Based Compensation:

Compensation cost is recognized for restricted stock awards issued to associates and non-associate directors, based on the fair value of these awards at the date of the grant.

The market price of the Company’s common stock at the date of the grant is the fair value of the award.

Compensation cost is recognized over the required service period, generally defined as the vesting period.

For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

The Company recognizes forfeitures as they occur.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contingencies :

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are

recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

does not believe there are any such matters that will have a material effect on the financial statements.

Legal costs related to

loss contingencies are expensed as incurred.

Loss Contingencies:

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Management does not believe there are any such matters that will have a material effect on the financial statements.

Legal costs related to loss contingencies are expensed as incurred.

Fair Value Measurements

We use fair value measurements when recording

and disclosing certain financial assets and liabilities.

Securities available-for-sale, derivative financial instruments are recorded

at fair value on a recurring basis.

Additionally, from time to time, we may be required to record other assets at fair value on

a nonrecurring basis, such as loans held-for-sale, impaired loans, other real estate owned, (“OREO”), and certain other

Fair value is the price that would be received

to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between

market participants at the measurement date.

An orderly transaction is a transaction that assumes exposure to the market for a

period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving

such assets or liabilities;

We use fair value measurements when recording and disclosing certain financial assets and liabilities.

Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis.

Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, impaired loans, OREO, and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date.

An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities;

it is not a forced transaction.

In determining fair value, we use various valuation approaches, including

market, income and cost approaches.

The fair value standard establishes a hierarchy for inputs used in measuring fair value that

maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used

when available.

Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed

based on market data we have obtained from independent sources.

Unobservable inputs reflect our estimates of assumptions that market

participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest

priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the

lowest priority to unobservable inputs (Level 3 measurement).

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

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.

A financial instrument’s level within

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

transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

In determining fair value, we use various valuation approaches, including market, income and cost approaches.

The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources.

Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following are descriptions of the valuation

methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

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

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 data.

Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

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

Recurring Basis

Available-for-Sale:

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

nationally recognized securities exchanges, if available.

Securities Available-for-Sale:

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

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.

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 indicators.

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 indicators.

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

Financial Instruments and Hedging Activities:

The Company uses derivative instruments such as interest rate swaps

for commercial loans with our customers.

Upon entering into swaps with the borrower, the Company entered into offsetting positions

with counterparties to minimize risk to the Company.

The back-to-back swaps qualify as derivatives, but are not designated as hedging

Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet

contractual terms.

When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty

or customer owes the Company, and results in credit risk to the Company.

When the fair value of a derivative instrument contract

is negative, the Company owes the customer or counterparty, and, therefore, has no risk.

The Company also enters into commitments

to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments).

lock commitments on mortgage loans to be held-for-sale are considered to be derivatives.

The period of time between issuance of

a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days.

The Company protects itself from changes

in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the

time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments

dues to changes in interest rates.

Nonrecurring Basis

Impaired loans with an outstanding balance greater than or equal to $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.

Derivative Financial Instruments and Hedging Activities:

The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers.

Upon entering into swaps with the borrower, the Company entered into offsetting positions with counterparties to minimize risk to the Company.

The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms.

We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.

Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities.

When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company.

When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk.

Accordingly, interest rate swaps for commercial loans are classified as Level 2.

The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments).

Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives.

The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days.

The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Nonrecurring Basis

Individually Evaluated Loans:

Individually evaluated loans with an outstanding balance greater than or equal to $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 loans with a specific reserve are classified as Level 3 in the fair value hierarchy.

Fair value for individually evaluated loans is determined using several methods.

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

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 individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate.

For individually evaluated loans, the first stage of our impairment analysis involves 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.

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

In circumstances

where the Company feels 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 is located.

When the Company feels it cannot collect and analyze salient information on the subject collateral or the collateral’s real

estate market, a full appraisal will be utilized.

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.

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.

For smaller OREO assets with existing carrying values less

than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of

the exposure.

At December 31, 2020 our OREO assets were in compliance with the OREO policy as set forth above, and substantially

all of the assets were listed for sale with credible third-party real estate brokers.

After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated 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.

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.

Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers.

Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us.

OREO and other repossessed assets marked to fair value are classified as Level 3.

At December 31, 2021 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Financial Instruments

In addition to financial instruments recorded

at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s

assets and liabilities that are considered financial instruments.

The majority of our assets and liabilities are considered financial

Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller

engaged in an exchange transaction.

Also, it is our general practice and intent to hold our financial instruments to maturity and

to not engage in trading or sales activities with respect to such financial instruments.

For fair value disclosure purposes, we

substantially utilize the fair value measurement criteria as required and explained above.

In cases where quoted fair values are

not available, we use present value methods to determine the fair value of our financial instruments.

Cash and Cash Equivalents

The carrying amounts reported in the Consolidated

Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.

The fair value of variable rate performing

loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk.

The fair value

of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is

estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted

for credit risk.

The fair value of fixed rate performing loans is estimated using a discounted cash flow analysis that utilizes

interest rates currently being offered for similar loans and adjusted for credit risk.

The fair value of nonperforming loans is

the carrying value less any specific reserve on the loan if it is impaired.

The carrying amount of accrued interest approximates

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments.

The majority of our assets and liabilities are considered financial instruments.

Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction.

Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments.

For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above.

In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

Recent Accounting Pronouncements and Developments

Newly Adopted Pronouncements in 2021

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bank Owned Life Insurance

Fair value approximates net cash surrender

value of bank owned life insurance, or BOLI.

Federal Home Loan Bank Stock

It is not practical to determine the fair

value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks;

it is presented

at carrying value.

The fair values disclosed for deposits

without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition

equal to the amounts payable on demand.

The carrying amounts for variable rate, fixed-term time deposits approximate their fair

Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest

rates currently offered for time deposits with similar terms.

The carrying amount of accrued interest approximates fair value.

The fair values disclosed for fixed rate

long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings

of similar remaining maturities.

The carrying amounts of variable rate long-term borrowings approximate their fair values.

Loan Commitments and Standby Letters

Off-balance sheet financial instruments

consist of commitments to extend credit and letters of credit.

Except for interest rate lock commitments, estimates of the fair

value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing

of the counterparties.

Adopted Pronouncements in 2020:

In August 2016, the Financial Accounting Standards Board (the “FASB”)

issued ASU No.

2016-15, “Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payments”.

The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.

This accounting

guidance became effective on January 1, 2020.

The amendments in this ASU did not materially impact our Consolidated Balance

Sheets or Consolidated Statements of Comprehensive (Loss) Income.

In August 2018, the FASB issued ASU

2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework—

Changes to the Disclosure Requirements for Fair

Value Measurement”.

The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in

unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value

measurements and the narrative description of measurement uncertainty.

Certain disclosure requirements in Topic 820 are also removed

We adopted this ASU on January 1, 2020.

The amendments in this ASU did not materially impact our Consolidated

Balance Sheets or Consolidated Statements of Comprehensive (Loss) Income.

In January 2017, the FASB issued ASU

2017-04, “Intangibles –

Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment”.

The main objective of ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from

the goodwill impairment test.

The amendments are expected to reduce the complexity and costs associated with performing the goodwill

impairment test, which could result in recording impairment charges sooner.

We adopted the amendments of this ASU on January 1,

During the third quarter of 2020, we recorded an impairment charge of $62.2 million as the estimated fair value of the reporting

unit was less than the carrying value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The amendments in this ASU became effective on January 1, 2021 and did not have any material impact on our Consolidated Financial Statements.

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”, universally referred to as CECL.

The amendments in this ASU, among other things, requires 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 are still 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) was effective as of January 1, 2020.

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

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

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

The Company adopted the CECL accounting method as of January 1, 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 the CECL accounting method, 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.

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

The Company did not record any ACL on its debt securities as a result of adopting Topic 326.

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

The Company adopted Topic 326 using the modified retrospective method.

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

We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities.

Accrued interest deemed uncollectible will be written off through interest income.

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

Refer to Note 6, Allowance for Credit Losses, for further discussion of these portfolio segments.

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

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

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

The Company recorded a net decrease to retained earnings of $ 50.7 million as of January 1, 2021 for the cumulative effect of adopting Topic 326.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 –

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated

by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during

Diluted earnings (loss) per share is calculated using the two-class method.

Diluted earnings (loss) per share reflects

the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into

common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

For all periods presented,

the dilutive effect on average shares outstanding is the result of unvested restricted stock grants.

The following table reconciles the numerators

and denominators of basic and diluted earnings (loss) per share calculations for the periods presented:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table illustrates the impact of the ACL Topic 326:

January 1, 2021

(Dollars in Thousands) As Reported Under

Topic 326 Pre

Topic 326 Impact of

Topic 326 Adoption

Allowance for Credit Losses on Loans:

Commercial Real Estate $ ( 41,458 ) $ ( 34,871 ) $ ( 6,587 )

Commercial and Industrial ( 4,071 ) ( 2,692 ) ( 1,379 )

Obligations of States and Political Subdivisions ( 951 ) ( 951 ) —

Residential Mortgages ( 5,356 ) ( 2,000 ) ( 3,356 )

Other Consumer ( 1,602 ) ( 2,479 ) 877

Construction ( 6,277 ) ( 6,357 ) 80

Other Segment ( 56,001 ) ( 4,724 ) ( 51,277 )

Allowance for Credit Losses on Loans $ ( 115,716 ) $ ( 54,074 ) $ ( 61,642 )

Total Loans Held for Investments, net $ 2,831,454 $ 2,893,096 $ ( 61,642 )

Net deferred tax asset 21,413 7,589 13,824

Allowance for Credit Losses on Unfunded Loan Commitments 3,052 144 2,908

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

Accounting Statements Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No.

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 the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.

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

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

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

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

As it pertains to the U.S.

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

In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk.

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

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

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

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

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

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

The team is currently in the process of:

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

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

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

As of December 31, 2021, approximately 16.7 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

We ceased originating new LIBOR based variable rate loans as of December 31, 2021 per the ARRC’s guidance.

NOTE 2 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number shares of common stock outstanding during the period.

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

Years ended December 31,

(Dollars in Thousands, except share and per share data) 2021 2020 2019

Numerator for Earnings (Loss) per Share- Basic:

Net (Loss) Income Allocated to Common Shareholders

Numerator for Earnings (Loss) per Share- Diluted:

Net (Loss) Income Allocated to Common Shareholders

Numerator for Earnings (Loss) per Share - Basic and Diluted

Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575

Income allocated to participating shares 127 — 66

Net Income (Loss) Allocated to Common Shareholders - Basic & Diluted $ 31,463 $ ( 45,858 ) $ 26,509

Denominators:

Weighted Average Shares Outstanding- Basic

Average Participating Shares Outstanding

Denominator for Two-Class Method-Diluted

(Loss) Earnings per Common Share-Basic

(Loss) Earnings per Common Share-Diluted

a result of the net loss for the full year 2020, all average participating shares outstanding are considered anti-dilutive to loss

There were two shares not included in the average participating shares outstanding because they would be

considered to be anti-dilutive for the year ended December 31, 2019.

There were no weighted average shares considered anti-dilutive

in the calculations for the year ended December 31, 2018.

3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Board of Governors of the Federal Reserve

System (the “FRB”) imposes certain reserve requirements on all depository institutions.

These reserves are maintained

in the form of vault cash or as an interest-bearing balance with the FRB.

The required reserves averaged $3.7 million for 2020,

$44.3 million for 2019, and $42.4 million for 2018.

The average of required reserves declined during 2020 as a result of the implementation

of a new deposit management tool.

Weighted Average Shares Outstanding, including Shares Considered Participating Securities 26,449,438 26,379,774 26,323,899

Average Participating Securities 106,709 — 65,323

Weighted Average Common Shares Outstanding - Basic & Diluted $ 26,342,729 $ 26,379,774 $ 26,258,576

Earnings (Loss) per Common Share-Basic $ 1.19 $ ( 1.74 ) $ 1.01

Earnings (Loss) per Common Share-Diluted $ 1.19 $ ( 1.74 ) $ 1.01

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

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

As a result of the net loss for the full year December 31, 2020, all average participating shares outstanding are considered anti-dilutive to loss per share.

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Board of Governors of the FRB imposes certain reserve requirements on all depository institutions.

These reserves are maintained in the form of vault cash or as an interest-bearing balance with the FRB.

The Company had no required reserves for 2021 and averaged $ 3.7 million and $ 44.3 million for 2020 and 2019, respectively.

The average of required reserves declined during 2021 and 2020 as a result of the implementation of a new deposit management tool.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 4 - INVESTMENT SECURITIES

The following tables present the amortized

cost and fair value of available-for-sale securities as of the dates presented:

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

December 31, 2021

(Dollars in Thousands)

Unrealized Gains

(Dollars in Thousands) Amortized

Unrealized Gains Gross

Losses Fair Value

Treasury Securities $ 4,442 $ — $ ( 29 ) $ 4,413

Government Agency Securities 3,475 3 — 3,478

Residential Mortgage-Backed Securities 112,118 76 ( 2,181 ) 110,013

7 unchanged sentences

December 31, 2020

(Dollars in Thousands)

Unrealized Gains

(Dollars in Thousands) Amortized

Unrealized Gains Gross

Losses Fair Value

Residential Mortgage-Backed Securities $ 44,057 $ 1,008 $ ( 341 ) $ 44,724

6 unchanged sentences

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

The Company did not have securities classified

as held-to-maturity at December 31, 2020 or December 31, 2019.

The following table shows the composition

of gross and net realized gains and losses for the periods presented:

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

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

Years ended December 31,

4 unchanged sentences

Net Realized Gains $ 6,869 $ 6,882 $ 2,205

Gains or losses are recognized in earnings

on the trade date using the amortized cost of the specific security sold.

The net realized gains above reflect reclassification

adjustments in the calculation of other comprehensive income (loss).

The net realized gains are included in noninterest income

as gains on sales of securities, net in the Consolidated Statements of (Loss) Income.

The tax impact is included in income tax

provision in the Consolidated Statements of (Loss) Income.

Tax Impact $ 1,443 $ 1,445 $ 463

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

The net realized gains above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income.

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

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

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

Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of available-for-sale

debt securities are shown below by contractual maturity.

Expected maturities may differ from contractual maturities if borrowers

have the right to call or prepay obligations with or without call or prepayment penalties.

Securities not due at a single maturity

date are shown separately.

(Dollars in Thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2021

(Dollars in Thousands) Amortized

Due in One Year or Less $ 730 $ 731

7 unchanged sentences

Total Securities $ 920,246 $ 922,400

At December 31, 2020 and December 31,

2019, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

Government and its Agencies, in an amount greater than 10% of shareholders’

The carrying value of securities pledged

for various regulatory and legal requirements was $146.0 million at December 31, 2020 and $150.6 million at December 31,

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Available-for-sale securities with unrealized

losses at December 31, 2020 and 2019, aggregated by investment category and length of time that individual securities have

been in a continuous unrealized loss position, were as follows:

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

Government and its Agencies, in an amount greater than 10% of shareholders’ equity.

The carrying value of securities pledged for various regulatory and legal requirements was $ 178.6 million at December 31, 2021 and $ 146.0 million at December 31, 2020.

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

December 31, 2021

Less Than 12 Months

12 Months or More

(Dollars in Thousands)

Number of Securities

Unrealized Losses

Number of Securities

Unrealized Losses

Number of Securities

Unrealized Losses

Less Than 12 Months 12 Months or More Total

(Dollars in Thousands) Number of

Securities Fair Value Unrealized

Losses Number of

Securities Fair Value Unrealized

Losses Number of

Securities Fair Value Unrealized

Treasury Securities 2 $ 4,413 $ ( 29 ) — $ — $ — 2 $ 4,413 $ ( 29 )

Government Agency Securities 1 1,733 — — — — 1 1,733 —

Residential Mortgage-Backed Securities 30 95,749 ( 2,030 ) 7 8,706 ( 151 ) 37 104,455 ( 2,181 )

Commercial Mortgage-Backed Securities 1 1,987 ( 40 ) — — — 1 1,987 ( 40 )

Asset Backed Securities 17 44,095 ( 129 ) 10 21,895 ( 176 ) 27 65,990 ( 305 )

4 unchanged sentences

Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 )

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2020

Less Than 12 Months

12 Months or More

(Dollars in Thousands)

Number of Securities

Unrealized Losses

Number of Securities

Unrealized Losses

Number of Securities

Unrealized Losses

Less Than 12 Months 12 Months or More Total

(Dollars in Thousands) Number of

Securities Fair Value Unrealized

Losses Number of

Securities Fair Value Unrealized

Losses Number of

Securities Fair Value Unrealized

Residential Mortgage-Backed Securities 7 $ 21,109 $ ( 339 ) 3 $ 40 $ ( 2 ) 10 $ 21,149 $ ( 341 )

Commercial Mortgage-Backed Securities

Asset Backed Securities 11 23,653 ( 219 ) 27 61,599 ( 780 ) 38 85,252 ( 999 )

2 unchanged sentences

States and Political Subdivisions 12 12,558 ( 119 ) — — — 12 12,558 ( 119 )

Corporate Notes 1 2,493 ( 7 ) — — — 1 2,493 ( 7 )

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities are evaluated for OTTI quarterly

and more frequently if economic or market concerns warrant.

Consideration is given to the length of time and the extent to which

the fair value has been less than cost, the financial condition and near-term prospects of the issuer, the credit quality of the

issuer, and whether the Company intends to sell the security or may be required to sell the security prior to maturity.

has reviewed all securities for OTTI.

As of December 31, 2020, no OTTI has

been identified for any investment securities in the Company’s portfolio.

The Company does not believe any individual unrealized

loss as of December 31, 2020 represents an OTTI.

At December 31, 2020 there were 168 debt securities in an unrealized

loss position and at December 31, 2019 there were 209 debt securities in an unrealized loss position.

The unrealized losses

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

All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms

of the security.

The Company generally does not intend to sell and it is not more likely than not that the Company will be required

to sell any of the securities in an unrealized loss position before recovery of their amortized cost.

NOTE 5 –

LOANS AND LOANS HELD-FOR-SALE

The composition of the loan portfolio by

dollar amount is shown in the table below:

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the year ended December 31, 2021 as the Company did not have securities classified as held-to-maturity at December 31, 2021.

The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

Securities are evaluated for OTTI quarterly and more frequently if economic or market concerns warrant.

Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, the credit quality of the issuer, and whether the Company intends to sell the security or may be required to sell the security prior to maturity.

The Company has reviewed all securities for OTTI.

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

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

At December 31, 2021 there were 268 securities in an unrealized loss position and at December 31, 2020 there were 168 securities in an unrealized loss position.

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

All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security.

We generally do not intend to sell and it is not likely that we will be required to sell any of the securities in an unrealized loss position before recovery of amortized cost.

NOTE 5 – LOANS AND LOANS HELD-FOR-SALE

The composition of the loan portfolio by dollar amount is shown in the table below:

(Dollars in Thousands) 2021 2020

1 unchanged sentence

Commercial and Industrial 345,376 557,164

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial Loans 1,668,628 2,010,963

1 unchanged sentence

Other Consumer 44,666 57,647

Consumer Construction

Total Consumer Loans 502,654 529,817

Construction 282,947 406,390

Total Portfolio Loans 2,812,129 2,947,170

The Company attempts to limit its exposure

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

When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal

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

The Company has specific loan segment limits in its

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.

Loans Held-for-Sale 228 25,437

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

Total Loans $ 2,812,357 $ 2,982,442

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

Measurement of Credit Losses on Financial Instruments.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unsecured loans pose higher risk for the

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

Unsecured loans are reserved for the best quality customers

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

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

The repayment capacity of the borrower should exceed

the policy and guidelines for secured loans.

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

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

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.

loans held-for-sale were $25.4 million and $19.7 million as of December 31, 2020 and December 31, 2019, respectively.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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

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

Total commercial real estate balances should not exceed the combination of 300 % of total risk-based capital and growth in excess of 50 % over the previous thirty-six months and construction loan balances should not exceed 100 % of total risk-based capital.

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

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

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

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

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

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

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

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

CRE, C&I, Construction and Residential Mortgages.

At January 1, 2021 related to the adoption of Topic 326, the initial break-out of other loans totaled $ 379.9 million consisting of loans that would otherwise have been included in the following loan segments:

$ 140.8 million of CRE, $ 78.1 million of C&I, $ 50.8 million of Residential Mortgages and $ 110.2 million of Construction.

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

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

Deferred costs and fees included in the portfolio balances above were $ 4.5 million and $ 3.0 million at December 31, 2021 and December 31, 2020, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 190.6 thousand and $ 219.2 thousand at December 31, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $ 0.2 million and $ 25.4 million as of December 31, 2021 and December 31, 2020, respectively.

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

Troubled Debt Restructurings

The following table summarizes the TDRs as of the dates presented:

December 31, 2020

December 31, 2019

Nonperforming

(Dollars in Thousands)

December 31, 2021 December 31, 2020

(Dollars in Thousands) Performing

TDRs Nonperforming

TDRs Performing

TDRs Nonperforming

Commercial Real Estate $ 2,679 $ 2,742 $ 5,421 $ 6,151 $ 21,667 $ 27,818

Commercial and Industrial 14 — 14 — — —

Obligations of State and Political Subdivisions

Commercial Construction

Total Commercial TDRs 2,693 2,742 5,435 6,151 21,667 27,818

1 unchanged sentence

Other Consumer — — — — — —

Consumer Construction

Total Consumer TDRs — — — 50,618 — 50,618

In order to maximize the collection of

loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would

be appropriate.

Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow

our client to continue servicing the debt.

A loan is a TDR if both of the following exist:

1) the debtor is experiencing financial

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

Nonaccrual loans that

are modified can be placed back on accrual status when both principal and interest are current and it is probable that the Company

will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

minimal commitments to lend additional funds for loans identified as TDRs.

Construction 527 808 1,335 52,481 3,319 55,800

Other 169,372 — 169,372 — — —

Total TDRs (1)

$ 172,592 $ 3,550 $ 176,142 $ 109,250 $ 24,986 $ 134,236

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

Measurement of Credit Losses on Financial Instruments.

In order to maximize the collection of loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would be appropriate.

Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt.

A loan is a TDR if both of the following

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TDRs decreased from $143.9 million at

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

This represents a $9.7 million decrease, or 6.8%.

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.

During the twelve months ended December 31, 2020,

the Bank modified one loan totaling $3.1 million that constituted a TDR that had minimal commitments to lend additional funds.

The Company had one loan modified as a

TDR during the twelve months ending December 31, 2019 totaling $0.6 million in post-modified recorded balances.

was classified as a TDR because there are concessions present that would not be offered to a comparable borrower.

were no TDR payment defaults during the years ended December 31, 2020, 2019 and 2018.

For purposes of this disclosure, a

TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs

or a TDR becomes 90 days or more past due .

At December 31, 2020 and 2019 the Company had $25.0 million and $34.7 million,

respectively in loans modified as TDR’s in previous years which had experienced a payment default subsequent to the rework

date and were classified as nonperforming.

The specific reserve portion of the allowance

for loan losses on TDRs, if required, is determined by discounting the restructured cash flow at the original effective rate of

the loan before modification or is based on the fair value of the collateral less cost to sell, if repayment of the loan is collateral

If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance

as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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

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

TDRs increased $ 41.9 million, or 31.2 % to $ 176.1 million at December 31, 2021 compared to $ 134.2 million at December 31, 2020.

The Company had $ 78.0 million new additions, primarily due to the restructured loans related to one large relationship, offset by $ 26.1 million of principal pay-downs and $ 10.0 million in charge-offs for the resolution of our two largest nonperforming credits during the year ended December 31, 2021.

During the year ended December 31, 2021, the Company had six loans that were modified totaling $ 78.0 million.

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

TDRs of $ 3.6 million and $ 25.0 million as of December 31, 2021 and December 31, 2020, respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming.

During the year ended December 31, 2021, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

During the year ended December 31, 2020, the Bank modified one loan totaling $ 3.1 million that constituted a TDR that had minimal commitments to lend additional funds.

There were no TDR payment defaults during the years ended December 31, 2021 and 2020.

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

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

If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance as a component of the ACL or charges off the individually evaluated loan balance if it determines that such amount is a quantifiable loss.

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

Loans to principal officers, directors

and their affiliates during 2020 were as follows:

The following table presents nonperforming assets as of the dates presented:

Nonperforming Assets

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

Nonperforming Assets

Nonaccrual loans $ 3,847 $ 7,018

Nonaccrual TDRs 3,550 24,986

Total Nonaccrual Loans 7,397 32,004

Other Real Estate Owned, or (“OREO”) 10,916 15,722

Total Nonperforming Assets $ 18,313 $ 47,726

As of December 31, 2021 and December 31, 2020, the Company had $ 254 thousand and $ 67 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 62 thousand at December 31, 2021 and $ 109 thousand at December 31, 2020 in residential real estate included in OREO.

Loans to principal officers, directors and their affiliates during 2021 were as follows:

(Dollars in Thousands) 2021

Beginning Balance $ 39,205

Loans Associated with Retired Director and Affiliates ( 37,017 )

New Loans 768

Repayments ( 331 )

Balance at End of Year $ 2,625

at end of year includes $37.0 million in loans to a retired director and affiliates during 2020.

NOTE 6 - ALLOWANCE FOR LOAN LOSSES

The Company maintains an ALL at a level

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

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

1) CRE, 2) 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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 base of the municipality, specific revenue streams related to the infrastructure financed, and other business

operations of the municipal authority.

The health and stability of state and local economies directly impacts each municipality’s

tax basis and are important indicators of risk for this segment.

The ability of each municipality to increase taxes and fees to

offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

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 either secured by assets other than 1-4 family residences or unsecured.

This segment includes auto loans and unsecured

loans and lines.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 6 - ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date.

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

Measurement of Credit Losses on Financial Instrument.

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

1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other.

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

The segmentation in the CECL model is different from the segmentation in the Incurred Loss model.

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

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.

Cash 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.

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

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

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

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

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

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

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 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.

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

This segment includes auto loans and unsecured loans and lines.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present, by portfolio

segment, the changes in the allowance for loan losses and the allocation of the allowance for loan losses for the years ended

December 31, 2020, 2019, and 2018:

(Dollars in Thousands)

Of States and

Allowance for Loan Losses:

Provision Charged to Expense

Losses Charged Off

in Thousands)

for Loan Losses:

Beginning of Year

Charged to Expense

(Dollars in Thousands)

Allowance for Loan Losses:

Provision Charged to Expense

Losses Charged Off

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.

Construction loans include both commercial and consumer.

Commercial 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.

Consumer 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.

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

changes in the future.

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

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

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

Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to:

prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows.

Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model.

The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments.

In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations.

Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change.

Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate.

These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.

Credit Quality Indicators:

The Company’s portfolio grading

analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or

The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other

subjective factors.

The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.

The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors.

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

The Company’s internally assigned grades are as follows:

The loan is currently performing and is of high quality.

Mention –

Assets with potential weaknesses that warrant management’s close attention and if left uncorrected,

these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit

position at some future date.

Special mention assets are not adversely classified and do not expose an institution to sufficient

risk to warrant adverse classification.

Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by

the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies

are not corrected.

Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the

weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable

and improbable.

Assets considered of such little value that its continuance on the books is not warranted.

This classification

does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer

writing off this basically worthless asset even though partial recovery may be affected in the future.

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

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

In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function.

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

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

• A sampling of 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 $ 2.0 million that are not part of the top twenty review;

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

The Company’s internally assigned grades are as follows:

Pass – The Company uses six grades of pass.

Generally, a pass rating indicates that the loan is currently performing and is of high quality.

Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables represent credit exposures by internally

assigned grades as of December 31, 2020 and 2019:

(Dollars in Thousands)

Of States and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Loss – Assets considered of such little value that its continuance on the books is not warranted.

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

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

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

Commercial Real Estate

Pass $ 195,441 $ 165,100 $ 215,575 $ 292,857 $ 115,024 $ 292,197 $ 38,382 $ 1,314,576

Special Mention 229 — — — 4,205 826 — 5,260

Substandard — — 314 2,742 215 145 — 3,416

Doubtful — — — — — — — —

Total Commercial Real Estate $ 195,670 $ 165,100 $ 215,889 $ 295,599 $ 119,444 $ 293,168 $ 38,382 $ 1,323,252

Commercial and Industrial

Pass $ 55,173 $ 50,087 $ 15,648 $ 38,298 $ 23,575 $ 150,656 $ 3,857 $ 337,294

Special Mention — — 8 — — — 8

Substandard 14 — 308 4,815 2,798 — 139 8,074

Doubtful — — — — — — — —

Total Commercial and Industrial $ 55,187 $ 50,087 $ 15,956 $ 43,121 $ 26,373 $ 150,656 $ 3,996 $ 345,376

Residential Mortgages

Pass $ 155,892 $ 91,023 $ 63,682 $ 73,333 $ 8,640 $ 48,087 $ 13,237 $ 453,894

Special Mention — — — — — 553 — 553

Substandard — — 1,008 743 188 1,602 — 3,541

Doubtful — — — — — — — —

Total Residential Mortgages $ 155,892 $ 91,023 $ 64,690 $ 74,076 $ 8,828 $ 50,242 $ 13,237 $ 457,988

Other Consumer

Pass $ 9,353 $ 10,199 $ 979 $ 450 $ 186 $ 23,048 $ 339 $ 44,554

Special Mention — — — — — — — —

Substandard 11 3 11 57 30 — — 112

Doubtful — — — — — — — —

Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666

Pass $ 140,639 $ 82,523 $ 24,336 $ 9,739 $ 5,328 $ 3,407 $ 15,269 $ 281,241

Special Mention — — 175 — — 429 — 604

Substandard — 107 809 95 — 91 — 1,102

Doubtful — — — — — — — —

Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947

Pass $ — $ — $ — $ — $ 122,848 $ 62,399 $ — $ 185,247

Special Mention — — — — — 3,281 — 3,281

Substandard — — — 87,329 40,882 41,161 — 169,372

Doubtful — — — — — — — —

Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

Total Portfolio Loans

Pass $ 556,498 $ 398,932 $ 320,220 $ 414,677 $ 275,601 $ 579,794 $ 71,084 $ 2,616,806

Special Mention 229 — 175 8 4,205 5,089 — 9,706

Substandard 25 110 2,450 95,781 44,113 42,999 139 185,617

Doubtful — — — — — — — —

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of December 31:

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

Commercial Real Estate

Performing $ 195,670 $ 165,100 $ 215,575 $ 292,857 $ 119,229 $ 293,102 $ 38,382 $ 1,319,915

Nonperforming — — 314 2,742 215 66 — 3,337

Total Commercial Real Estate $ 195,670 $ 165,100 $ 215,889 $ 295,599 $ 119,444 $ 293,168 $ 38,382 $ 1,323,252

Commercial and Industrial

Performing $ 55,187 $ 50,087 $ 15,648 $ 43,117 $ 26,373 $ 150,656 $ 3,857 $ 344,925

Nonperforming — — 308 4 — — 139 451

Total Commercial and Industrial $ 55,187 $ 50,087 $ 15,956 $ 43,121 $ 26,373 $ 150,656 $ 3,996 $ 345,376

Residential Mortgages

Performing $ 155,892 $ 91,023 $ 63,682 $ 73,564 $ 8,640 $ 49,399 $ 13,237 $ 455,437

Nonperforming — — 1,008 512 188 843 — 2,551

Total Residential Mortgages $ 155,892 $ 91,023 $ 64,690 $ 74,076 $ 8,828 $ 50,242 $ 13,237 $ 457,988

Other Consumer

Performing $ 9,364 $ 10,202 $ 979 $ 450 $ 211 $ 23,048 $ 339 $ 44,593

Nonperforming — — 11 57 5 — — 73

Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666

Performing $ 140,639 $ 82,523 $ 24,511 $ 9,834 $ 5,328 $ 3,858 $ 15,269 $ 281,962

Nonperforming — 107 809 — — 69 — 985

Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947

Performing $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

Nonperforming — — — — — — —

Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

Total Portfolio Loans

Performing $ 556,752 $ 398,935 $ 320,395 $ 507,151 $ 323,511 $ 626,904 $ 71,084 $ 2,804,732

Nonperforming — 107 2,450 3,315 408 978 139 7,397

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

Age Analysis of Past-Due Loans by Class

The following tables include an aging analysis of the recorded investment of past-due portfolio loans as the periods presented:

December 31, 2021

Political Sub.

(Dollars in Thousands) Current Loans Loans 30-59

Days Past Due Loans 60-89

Days Past Due Total 30-89 Days

Past Due Nonaccrual Loans Total Portfolio Loans

Commercial Real Estate $ 1,319,686 $ 229 $ — $ 229 $ 3,337 $ 1,323,252

Commercial & Industrial 344,628 80 217 297 451 345,376

Residential Mortgages 454,754 683 — 683 2,551 457,988

Other Consumer 44,132 367 94 461 73 44,666

Construction 281,962 — — — 985 282,947

Other 357,900 — — — — 357,900

$ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129

Measurement of Credit Losses on Financial Instruments.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2020

(Dollars in Thousands) Current Loans Loans 30-59

Days Past Due Loans 60-89

Days Past Due Total 30-89 Days

Past Due Nonaccrual Loans Total Portfolio Loans

Commercial Real Estate $ 1,428,092 $ 3,487 $ 329 $ 3,816 $ 21,891 $ 1,453,799

Commercial & Industrial 556,324 194 190 384 456 557,164

Residential Mortgages 466,688 1,347 — 1,347 4,135 472,170

Other Consumer 56,890 278 295 573 184 57,647

Construction 400,775 193 91 284 5,331 406,390

Other — — — — — —

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

Loans past due 90 days or more and still accruing were zero at December 31, 2021 and 2020.

Loans past due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days or more and still accruing decreased $ 4.7 million to $ 1.7 million at December 31, 2021 compared to $ 6.4 million at December 31, 2020, primarily in the commercial real estate segment.

There were no nonaccrual or past due loans related to loans held-for-sale in December 31, 2021.

As of December 31, 2020 loans held-for-sale in connection with sale of Bank branches included $ 7 thousand in nonaccrual status and $ 7 thousand that were past due.

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

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

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

As of and for the December 31, 2021

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

Still Accruing

Commercial Real Estate $ 21,891 $ 3,337 $ — $ —

Commercial and Industrial 456 451 — —

Residential Mortgages 4,135 2,551 — —

Other Consumer 184 73 — —

Construction 5,331 985 808 —

Other — — — —

Total Portfolio Loans $ 31,997 $ 7,397 $ 808 $ —

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

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of December 31, 2021.

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

December 31, 2021

(Dollars in Thousands) Real Estate

Commercial Real Estate $ 2,742

Commercial and Industrial —

Residential Mortgages —

Other Consumer —

Construction 808

Total $ 3,550

The following tables presents activity in the ACL and ALL for the periods presented:

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other (1)

Allowance for Credit Losses on Loans:

Balance, Beginning of Year $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ — $ 54,074

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

Provision for Credit Losses on Loans ( 6,215 ) ( 2,249 ) ( 982 ) 1,561 781 10,454 3,350

Charge-offs ( 19,662 ) ( 374 ) ( 273 ) ( 2,256 ) ( 1,859 ) — ( 24,424 )

Recoveries 159 291 168 586 93 — 1,297

Net (Charge-offs) / Recoveries ( 19,503 ) ( 83 ) ( 105 ) ( 1,670 ) ( 1,766 ) — ( 23,127 )

Balance, End of Year $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939

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

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

CRE, C&I, residential mortgages and construction.

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

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

December 31, 2020

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Allowance for Credit Losses on Loans:

Balance, Beginning of Year $ 24,706 $ 3,601 $ 1,736 $ 3,299 $ 5,420 $ 38,762

Provision for Credit Losses on Loans 11,055 1,527 594 2,434 2,396 18,006

Charge-offs ( 40 ) ( 66 ) ( 258 ) ( 3,991 ) — ( 4,355 )

Recoveries 707 2 27 737 188 1,661

Net (Charge-offs) / Recoveries 667 ( 64 ) ( 231 ) ( 3,254 ) $ 188 ( 2,694 )

Balance, End of Year $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ 54,074

December 31, 2019

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Allowance for Credit Losses on Loans:

Balance, Beginning of Year $ 23,897 $ 1,058 $ 6,129 $ 2,728 $ 5,387 $ 39,199

Provision for Credit Losses on Loans 878 2,565 ( 4,205 ) 4,370 ( 204 ) 3,404

Charge-offs ( 69 ) ( 22 ) ( 197 ) ( 4,401 ) ( 393 ) ( 5,082 )

Recoveries — — 9 602 630 1,241

Net (Charge-offs) / Recoveries ( 69 ) ( 22 ) ( 188 ) ( 3,799 ) 237 ( 3,841 )

Balance, End of Year $ 24,706 $ 3,601 $ 1,736 $ 3,299 $ 5,420 $ 38,762

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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

This segmented pool had an aggregate principal balance of $ 379.9 million at January 1, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards.

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

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

A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis.

For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero.

Certain portions of the CECL model are inherently subjective and include, but are not limited to, estimates with respect to:

prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows.

Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model.

The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments.

Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate.

These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.

An expected credit loss of $ 51.3 million upon adoption was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased $ 41.8 million to $ 95.9 million at December 31, 2021 compared to $ 54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $ 61.6 million.

During the year ended December 31, 2021 adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral.

Following the conclusion of the deferral program on June 30, 2021, management observed that $ 62.2 million of loans that were previously in the deferral program were recovering at rates much lower than peers.

Accordingly, management attempted workout strategies with these clients.

After workout strategies were exhausted unsatisfactorily, these loans were sold during the third and fourth quarters of 2021.

During the third quarter of 2021, $ 50.2 million of loans were sold related to nine notes within two performing relationships that had been previously reserved and released.

During the fourth quarter of 2021, we sold $ 12.0 million of loans related to two notes, which resulted in $ 2.2 million net charge-offs and added $ 0.5 million to provision expense.

The ACL was $ 95.9 million, or 3.41 % of total portfolio loans at December 31, 2021, as compared to $ 54.1 million, or 1.83 % of total portfolio loans, at December 31, 2020.

Net charge-offs were $ 23.1 million in 2021 as compared to $ 2.7 million in 2020.

The increase in charge-offs of $ 20.4 million was primarily attributable to the resolution of five problem relationships during 2021, in which the majority were previously reserved.

As a percentage of average total portfolio loans, net charge-offs were 0.79 % and 0.09 % for the years ended December 31, 2021 and December 31, 2020, respectively.

Nonperforming loans as a percentage of total portfolio loans were 0.26 % and 1.09 % as of December 31, 2021 and December 31, 2020, respectively.

A release of $ 1.3 million was recorded in 2021 for the provision for unfunded commitments.

Per the guidance related to CECL, unfunded loan commitments are included as part of the provision for credit losses rather than noninterest expense, where it was previously recorded.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following tables represent credit exposures by internally assigned risk ratings as of December 31, 2021 and 2020:

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total

Pass $ 1,314,576 $ 337,294 $ 453,894 $ 44,554 $ 281,241 $ 185,247 $ 2,616,806

Special Mention 5,260 8 553 — 604 3,281 9,706

Substandard 3,416 8,074 3,541 112 1,102 169,372 185,617

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Performing Loans $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732

Non-Accrual Loans

Nonaccrual Loans 3,337 451 2,551 73 985 — 7,397

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

(Dollars in Thousands)

Of States and

December 31, 2020

Political Sub.

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Pass $ 1,281,106 $ 478,536 $ 415,773 $ 57,418 $ 289,781 $ 2,522,614

Special Mention 126,535 48 723 6 58,899 186,211

Substandard 46,158 78,580 55,674 223 57,710 238,345

Doubtful — — — — — —

Loss — — — — — —

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

Performing Loans $ 1,431,908 $ 556,708 $ 468,035 $ 57,463 $ 401,059 $ 2,915,173

Non-Accrual Loans

Nonaccrual Loans 21,891 456 4,135 184 5,331 31,997

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company individually evaluates all

substandard and nonaccrual loans greater than or equal to $1.0 million for impairment.

A loan is impaired when, based on current

information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual

terms of the loan agreement.

Our methodology for evaluating whether a loan is impaired includes risk-rating credits on an individual

basis and consideration of the borrower’s overall financial condition, payment history and available cash resources.

impairment, the Company primarily utilizes fair market value of the collateral;

however, the Company also uses the discounted cash

flow method for loans that are not deemed to be collateral dependent at the time of impairment.

TDRs whether on accrual or nonaccrual

status, are also classified as impaired loans.

TDRs are loans where the Company, for economic or legal reasons related to a borrower’s

financial difficulties, grant a concession to the borrower that the Company would not otherwise grant.

The Company strives to identify

borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status.

modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for

a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment.

While unusual, there

may be instances of principal forgiveness.

These modifications are generally for longer term periods that would not be considered

insignificant.

Special mention, substandard and doubtful loans at December 31, 2021 decreased $ 229.2 million to $ 195.3 million compared to $ 424.5 million at December 31, 2020, with a decrease of $ 176.5 million in special mention and a decrease of $ 52.7 million in substandard.

The variances between loan segments for the years ended 2021 and 2020 primarily relates to the Other loan segment breakout due to the adoption of CECL.

The special mention decrease between 2021 and 2020 relates primarily to the restructuring of a loan relationship of $ 177.2 million in connection with the dismissal of a lawsuit disclosed in the second quarter 2021 Form 10-Q and on Form 8-K dated September 8, 2021.

The Bank believes that it is fully secured on all loans outstanding related to the lawsuit with an enhanced collateral position, including cross-collateralizations and executed documents reaffirming the legality, validity and binding nature of all loan documents that were executed in favor the the Bank.

The decrease in substandard from the year ended December 31, 2020 is primarily due to payoffs and charge-offs totaling $ 55.7 on five large commercial relationships.

At December 31, 2020 $ 7 thousand of loans with a risk rating of substandard were held-for-sale in connection with the sale of Bank branches.

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

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

The following tables present the balances in the ACL and the recorded investment in the loan balances based on impairment method as of December 31, 2020 and 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the balances

in the ALL and the recorded investment in the loan balances based on impairment method as of December 31, 2020 and 2019.

(Dollars in Thousands)

Of States and

December 31, 2020

Political Sub.

Allowance for Loan Losses:

Individually Evaluated for Impairment

Evaluated for Impairment

Total Allowance for Loan Losses

Individually Evaluated for Impairment

Collectively Evaluated for Impairment

Total Portfolio Loans

(Dollars in Thousands)

Of States and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2020

Political Sub.

Allowance for Loan Losses:

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Allowance for Loan Losses on Loans:

Individually Evaluated for Impairment $ 13,773 $ — $ — $ — $ 1,477 $ 15,250

1 unchanged sentence

Total Allowance for Loan Losses $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ 54,074

Total Portfolio Loans:

Individually Evaluated for Impairment $ 27,666 $ — $ 50,618 $ — $ 56,987 $ 135,271

1 unchanged sentence

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

recorded investment in loans excludes accrued interest receivable.

Individually evaluated impaired loans do not include

certain troubled debt restructured loans which are less than $1.0 million.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table includes the recorded investment and unpaid

principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020, 2019 and 2018:

(Dollars in Thousands)

Impaired Loans

without a Specific Valuation Allowance:

with a Specific Valuation Allowance:

and Industrial

Impaired Loans

(Dollars in Thousands)

Unpaid Principal

Average Investment

Interest Income

in Impaired Loans

The recorded investment in loans excludes accrued interest receivable.

Individually evaluated impaired loans do not include certain TDR loans which are less than $ 1.0 million.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020 and 2019.

December 31, 2020

(Dollars in Thousands) Unpaid Principal Balance Recorded Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized

Loans without a Specific Valuation Allowance:

Commercial Real Estate $ 3,236 $ 3,236 $ — $ 4,201 $ 128

Commercial Construction

Construction 55,248 55,248 — 56,941 1,871

Residential Mortgages 50,618 50,618 — 51,716 1,906

2 unchanged sentences

Commercial and Industrial — — — 184 —

Commercial Construction

Construction 1,739 1,739 1,477 1,739 —

Total by Category:

1 unchanged sentence

Commercial and Industrial — — — 184 —

Commercial Construction

Construction 56,987 56,987 1,477 58,680 1,871

Residential Mortgages 50,618 50,618 — 51,716 1,906

2 unchanged sentences

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands)

Unpaid Principal

Average Investment

Estimated Interest

in Impaired Loans

Income Recognized

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2019

(Dollars in Thousands) Unpaid Principal Balance Recorded Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized

Loans without a Specific Valuation Allowance:

Commercial Real Estate $ 4,487 $ 4,487 $ — $ 5,885 $ 131

Commercial and Industrial

Commercial Construction

Construction 59,053 59,053 — 59,558 3,056

Residential Mortgages 52,966 52,966 — 57,079 5,862

Loans with a Specific Valuation Allowance:

Commercial Construction

Commercial Real Estate 28,769 28,769 5,779 31,201 —

Commercial and Industrial 390 390 390 434 —

Construction — — — 1,716 —

Total by Category:

1 unchanged sentence

Commercial and Industrial 390 390 390 434 —

Commercial Construction

Construction 59,053 59,053 — 61,274 3,056

Residential Mortgages 52,966 52,966 — 57,079 5,862

Total Impaired Loans $ 145,665 $ 145,665 $ 6,169 $ 155,873 $ 9,049

For the years ended December 31, 2020,

2019 and 2018, interest income recognized on impaired loans was $4.1 million, $9.0 million, and $4.0 million, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Age Analysis of Past-Due Loans by Class

The following table includes an aging analysis

of the recorded investment of past-due portfolio loans as of December 31, 2020 and 2019:

December 31, 2020

(Dollars in Thousands)

Current Loans

Days Past Due

Total 30-89 Days

Nonaccrual Loans

Total Portfolio Loans

Commercial Real Estate

Commercial & Industrial

Obligations of States and Political Sub.

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

December 31, 2019

(Dollars in Thousands)

Current Loans

Days Past Due

Total 30-89 Days

Nonaccrual Loans

Total Portfolio Loans

Commercial Real Estate

Commercial & Industrial

Obligations of States and Political Sub.

Commercial Construction

Residential Mortgages

Other Consumer

Consumer Construction

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 loans held-for-sale

in connection with sale of Bank branches included $7 thousand in nonaccrual status and $7 thousand that were past due.

no nonaccrual or past due loans related to loans held-for-sale in 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - FAIR VALUE MEASUREMENTS

Financial assets measured at fair value

on a recurring basis at December 31, 2020 are summarized below:

Quoted Prices In

Active Markets for

Significant Other

Identical Assets

Observable Inputs

(Dollars in Thousands)

Securities Available-for-Sale

Financial assets measured at fair value

on a recurring basis at December 31, 2019 are summarized below:

Quoted Prices In

Active Markets for

Significant Other

Identical Assets

Observable Inputs

(Dollars in Thousands)

Financial assets measured at fair value on a recurring basis at December 31, 2021 are summarized below:

December 31, 2021

(Dollars in Thousands) Carrying Value Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

Securities Available-for-Sale:

There were no transfers between Level 1

and Level 2 during 2020 or 2019.

We have invested in subordinated debt of

other financial institutions.

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

2020, an increase of $5.0 million in one security from December 31, 2019.

The Level 3 fair value is benchmarked to other securities

that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying

company operates.

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

to continue efficient and profitable operations, and the institution’s core earnings ability, liquidity management platform

and current on and off balance sheet interest rate risk exposures.

Treasury Securities $ 4,413 $ 4,413 $ — $ —

Government Agency Securities 3,478 — 3,478 —

Residential Mortgage-Backed Securities 110,013 — 110,013 —

Commercial Mortgage-Backed Securities 4,168 — 4,168 —

Asset Backed Securities 81,863 — 81,863 —

Collateralized Mortgage Obligations 287,614 — 287,614 —

Small Business Administration 108,914 — 108,914 —

States and Political Subdivisions 262,202 — 262,202 —

Corporate Notes 59,735 — 51,177 8,558

Total Securities Available-for-Sale 922,400 4,413 909,429 8,558

Derivatives 3,508 — 3,508 —

Total $ 925,908 $ 4,413 $ 912,937 $ 8,558

Derivatives $ 3,682 $ — $ 3,682 $ —

Total $ 3,682 $ — $ 3,682 $ —

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial assets measured at fair value

on a nonrecurring basis at December 31, 2020 and 2019 are summarized below:

(Dollars in Thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Financial assets measured at fair value on a recurring basis at December 31, 2020 are summarized below:

December 31, 2020

Impaired Loans

(Dollars in Thousands) Carrying Value Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

Securities Available-for-Sale:

Residential Mortgage-Backed Securities $ 44,724 $ — $ 44,724 $ —

Commercial Mortgage-Backed Securities 5,447 — 5,447 —

Asset Backed Securities 133,557 — 133,557 —

Collateralized Mortgage Obligations 218,359 — 218,359 —

Small Business Administration 99,145 — 99,145 —

States and Political Subdivisions 252,622 — 252,622 —

Corporate Notes 24,825 — 14,462 10,363

Total Securities Available-for-Sale 778,679 — 768,316 10,363

Derivatives 4,493 — 4,493 —

Total $ 783,172 $ — $ 772,809 $ 10,363

Derivatives $ 4,756 $ — $ 4,756 $ —

Total $ 4,756 $ — $ 4,756 $ —

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

We have invested in subordinated debt of other financial institutions.

We have two securities totaling $ 8.6 million that are considered to be Level 3 securities at December 31, 2021 and two totaling $ 10.4 million at December 31, 2020.

The change in the fair value of Level 3 securities available-for-sale from $ 10.4 million at December 31, 2020 to $ 8.6 million at December 31, 2021 is attributable to a new security in the second quarter of 2021 for $ 3.5 million offset by the calculated change in fair value of $ 0.3 million and the call of a security totaling $ 5.0 million.

The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates.

The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

Financial assets measured at fair value on a nonrecurring basis at December 31, 2021 and 2020 are summarized below:

December 31, 2021

Impaired Loans

Impaired loans had a net carrying amount

of $10.9 million at December 31, 2020 with a valuation allowance of $15.3 million, resulting in a $9.1 million increase in

provision for loan losses for the year ended December 31, 2020.

Impaired loans had a net carrying amount of $23.0 million

at December 31, 2019 with a valuation allowance of $6.2 million, resulting in a $1.0 million increase in provision for loan

losses for the year ended December 31, 2019.

OREO had a net carrying amount of $15.7

million as of December 31, 2020, compared with $18.3 million at December 31, 2019, respectively.

Write-downs of

$1.5 million were recorded on OREO for the year ended December 31, 2020 compared to $4.5 million for the year ended December 31,

2019, respectively.

The following tables summarize the Company’s

assets that were measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019:

(Dollars in Thousands)

Selling Costs

Impaired Loans

Discounted Appraisals

Estimated Selling Costs &

Qualitative Adjustments

Selling Costs

Impaired Loans

Other Real Estate Owned

Estimated Selling Costs

Other Real Estate Owned

Discounted Cash Flow

Discount Rate

Other Real Estate Owned

Internal Valuations

Estimated Selling Costs

Real Estate Owned

Internal Valuations

Management’s

Discount & Estimated Selling Costs

Other Real Estate Owned

(Dollars in Thousands)

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

OREO $ — $ — $ 10,916 $ 10,916

Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777

December 31, 2020

Impaired Loans

Purchase Contract

Pending Close of Contract,

Net of Closing Costs

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

OREO $ — $ — $ 15,722 $ 15,722

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

Discounted Appraisals

Management’s Disc.

& Selling Costs

Individually evaluated loans had a net carrying amount of $ 1.8 million at December 31, 2021 with a valuation allowance of $ 1.0 million.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 10.9 million as of December 31, 2021, compared with $ 15.7 million at December 31, 2020.

Write-downs of $ 3.5 million were recorded on OREO for the year ended December 31, 2021 compared to $ 1.5 million for the year ended December 31, 2020.

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020:

December 31, 2021

(Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average

Impaired Loans $ 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 %

Total Impaired Loans $ 1,777

Other Real Estate Owned

Selling Costs

Other Real Estate Owned

Discounted Cash Flow

Discount Rate

Other Real Estate Owned

Internal Valuations

Selling Costs

Other Real Estate Owned $ 9,946 Appraisals Estimated Selling Costs 10.0 % 10.0 %

Other Real Estate Owned 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

Other Real Estate Owned 780 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 5.0 % — % 50.7 % 20.3 %

Total Other Real Estate Owned $ 10,916

December 31, 2020

(Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average

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

Impaired Loans $ 9,494 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 12.0 % — % 50.0 % 33.2 %

Impaired Loans 262 Discounted Appraisals Estimated Selling Costs 20.9 % 20.9 %

Total Impaired Loans $ 10,919

Other Real Estate Owned $ 11,972 Appraisals Estimated Selling Costs 6.0 % — % 10.0 % 6.5 %

Other Real Estate Owned 1,260 Discounted Cash Flow Discount Rate 6.3 % 6.3 %

Other Real Estate Owned 1,583 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

Other Real Estate Owned 907 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 33.7 % — % 73.5 % 55.5 %

Total Other Real Estate Owned $ 15,722

A baseline discount rate has been established for impairment measurement.

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

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

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

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

GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet.

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

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A baseline discount rate has been established

for impairment measurement.

This baseline discount rate was back tested against historical OREO sales and therefore represents

an average recovery rate based on the transaction sizes and asset types in the population examined.

Management considers the unique

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

The carrying values and estimated fair values of the Company’s financial instruments at December 31, 2020 and December 31,

2019 are presented in the following tables.

Fair values for December 31, 2020 and December 31, 2019 are estimated under

the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

(Dollars in Thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Fair Value Measurements at December 31, 2021

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

Financial Assets:

Carrying Value

Cash and Cash Equivalents $ 277,799 $ 36,698 $ 241,101 $ — $ 277,799

2 unchanged sentences

Portfolio Loans, net 2,716,190 — — 2,689,578 2,689,578

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

Federal Home Loan Bank Stock, at Cost

Federal Home Loan Bank Stock, at Cost 2,352 — — NA NA

Other Assets- Interest Rate Derivatives 3,508 — 3,508 — 3,508

1 unchanged sentence

Financial Liabilities:

Deposits Held for Assumption in Connection with Sale of Banking Branches

Deposits $ 3,698,476 $ 747,909 $ 1,606,249 $ 1,369,228 $ 3,723,386

Other Liabilities- Interest Rate Derivatives 3,682 — 3,682 — 3,682

1 unchanged sentence

Accrued Interest Payable 1,378 — — 1,378 1,378

(Dollars in Thousands)

Fair Value Measurements at December 31, 2020

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

Financial Assets:

Carrying Value

Cash and Cash Equivalents $ 241,942 $ 38,535 $ 203,407 $ — $ 241,942

2 unchanged sentences

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

Federal Home Loan Bank Stock, at Cost

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

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

Other Assets- Interest Rate Derivatives 4,493 — 4,493 — 4,493

1 unchanged sentence

Financial Liabilities:

Deposits $ 3,599,911 $ 699,229 $ 1,285,912 $ 1,640,587 $ 3,625,728

Deposits Held for Assumption in Connection with Sale of Bank Branches 84,717 9,506 18,699 56,512 84,717

Other Liabilities- Interest Rate Derivatives 4,756 — 4,756 — 4,756

1 unchanged sentence

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8 - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost

less accumulated depreciation as follows:

NOTE 8 - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation as follows:

(Dollars in Thousands) 2021 2020

Land $ 20,763 $ 27,673

Bank Premises 55,463 60,571

1 unchanged sentence

Leasehold Improvements 854 613

Total Premises and Equipment 111,609 120,196

Accumulated Depreciation ( 36,312 ) ( 34,889 )

At December 31, 2020, we had $2.3

million bank premises and equipment held-for-sale.

Depreciation has been included under occupancy

expense in the Consolidated Statements of (Loss) Income totaling $6.1 million in 2020, $5.3 million in 2019, and $3.7 million in

Real estate on closed branches was valued

based on recent comparative market values received from a real estate broker.

Write-downs in the amount of $1.1 million, $0.8 million

and $3.5 million were recognized during 2020, 2019 and 2018, respectively.

The net remaining carrying value of $2.5 million and

$3.0 million is classified as held-for-sale in OREO in the Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively.

The Company leases offices from non-related

parties under various terms, some of which contain contingent rentals tied to a price index.

Rental expense for these leases was

$99 thousand in 2020, $37 thousand in 2019, and $211 thousand for 2018.

The Company currently has two depository

locations, a loan production office, and a commercial banking office under lease contracts.

We have included $1.5 million and $1.2

million in right-of-use assets in other assets on its Consolidated Balance Sheets at December 31, 2020 and 2019, respectively.

The Company has included $1.6 million and $1.5 million in lease liabilities in other liabilities on its Consolidated Balance Sheets

at December 31, 2020 and 2019, respectively.

Total $ 75,297 $ 85,307

At December 31, 2021, we had no bank premises and equipment held-for-sale and $ 2.3 million at December 31, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) totaling $ 6.2 million in 2021, $ 6.1 million in 2020, and $ 5.3 million in 2019.

Real estate on closed branches was valued based on recent comparative market values received from a real estate broker.

Write-downs in the amount of $ 3.2 million, $ 1.1 million and $ 0.8 million were recognized during 2021, 2020 and 2019, respectively.

The net remaining carrying value of $ 1.0 million and $ 2.5 million is classified as held-for-sale in OREO in the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.

The Company leases offices from non-related parties under various terms, some of which contain contingent rentals tied to a price index.

Rental expense for these leases was $ 72 thousand in 2021, $ 99 thousand in 2020, and $ 37 thousand for 2019.

The Company currently has two depository locations, a loan production office, and a commercial banking office under lease contracts.

We have included $ 3.3 million and $ 1.5 million in right-of-use assets in other assets on its Consolidated Balance Sheets at December 31, 2021 and 2020, respectively.

The Company has included $ 3.4 million and $ 1.6 million in lease liabilities in other liabilities on its Consolidated Balance Sheets at December 31, 2021 and 2020, respectively.

NOTE 9 - OTHER REAL ESTATE OWNED

The following table presents OREO owned

activity as of the dates presented:

The following table presents OREO activity as of the dates presented:

Year Ended December 31,

(Dollars in Thousands) 2021 2020 2019

Beginning Balance

Loans Transferred to Other Real Estate Owned

Loans to Finance the Sale of Other Real Estate Owned

Transfer of Closed Retail Offices to Other Real Estate Owned

Beginning of Year Balance $ 15,722 $ 18,324 $ 33,681

Loans Transferred to OREO 59 755 302

Transfer of Closed Retail Offices to OREO 12,013 2,221 1,694

Capitalized Expenditures — 19 —

1 unchanged sentence

Cash Proceeds from Pay-downs ( 452 ) ( 483 ) ( 580 )

Sales of Other Real Estate Owned

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2020, 2019, and 2018, the balance of OREO includes $13.2 million, $15.3 million, and $26.9 million, respectively,

of foreclosed properties recorded as a result of obtaining physical possession of the asset.

At December 31, 2020 and 2019,

the recorded investment of foreclosed residential real estate was $109 thousand and $69 thousand, respectively.

At December 31,

2020 and 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal

foreclosure proceeds are in process is $67 thousand and $290 thousand, respectively.

Income and expenses applicable to foreclosed

assets include the following:

Sales of OREO ( 12,954 ) ( 3,631 ) ( 12,316 )

End of Year Balance $ 10,916 $ 15,722 $ 18,324

At December 31, 2021, 2020, and 2019, the balance of OREO includes $ 9.9 million, $ 13.2 million, and $ 15.3 million, respectively, of foreclosed properties recorded as a result of obtaining physical possession of the asset.

At December 31, 2021 and 2020, the recorded investment of foreclosed residential real estate was $ 62 thousand and $ 109 thousand, respectively.

At December 31, 2021 and 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $ 254 thousand and $ 67 thousand, respectively.

Income and expenses applicable to foreclosed assets include the following:

Year Ended December 31,

2 unchanged sentences

Operating Expenses, net of Rental Income 317 317 ( 164 )

Net (Gain) Loss on Sales

Other Real Estate Owned Expense

NOTE 10 –

Accounting guidance requires the Company

to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered

to be triggering events that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting

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

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 continued to monitor 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

BANKSHARES, INC.

Net Loss (Gain) on Sales 150 ( 48 ) 275

OREO Expense $ 3,939 $ 1,752 $ 4,568

NOTE 10 – GOODWILL

Accounting guidance requires companies to test goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be triggering events that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit.

Throughout 2020 as we monitored our performance, the Company experienced further declines in their stock price in relation to other bank indices primarily due to the COVID-19 pandemic.

Together with the declines in their stock price and the length of time that the market value of the reporting unit had been below its book value, the Company completed another interim quantitative goodwill impairment analysis as of September 30, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table presents goodwill as

of December 31:

(Dollars in Thousands)

Balance as of January 1

Impairment Losses

Balance as of December 31

NOTE 11 –

DERIVATIVE INSTRUMENTS

AND HEDGING ACTIVITIES

In accordance with applicable accounting

guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance

Sheet at fair value.

Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged

over a prescribed period.

Upon completion of the quantitative impairment analysis the Company estimated fair value of the reporting unit to be less than the carrying value.

As such, at September 30, 2020, the Company 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 strength.

NOTE 11 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value.

Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period.

The notional amounts on which the interest payments are based are not exchanged.

These derivative positions

relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time

entering into an offsetting interest rate swap with another financial institution, or counterparty.

In connection with each transaction,

the Company originates a floating rate loan to the customer at a notional amount.

In turn, the customer contracts with the counterparty

to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest

rate cash flows based on the same notional amount as the Company’s loan.

The transaction allows the customer to effectively

convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate.

These agreements could have floors

or caps on the contracted interest rates.

Pursuant to agreements with various financial

institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions.

unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate

swap transactions.

Based upon current positions and related future collateral requirements relating to them, management believes

any effect on our cash flow or liquidity position to be immaterial.

Derivatives contain an element of credit

risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer,

fails to meet its contractual obligations.

All derivative contracts with financial institutions may be executed only with counterparties

approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of

qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have

past industry experience.

These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty.

In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount.

In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan.

The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate.

These agreements could have floors or caps on the contracted interest rates.

Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions.

Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions.

Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial.

Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations.

All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience.

Interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of (Loss)

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table indicates the amounts

representing the value of derivative assets and derivative liabilities at December 31:

Values of Derivative Instruments

Derivatives (Included in Other Assets)

in Thousands)

Derivatives not Designated as Hedging

Interest Rate

Lock Commitments –

Mortgage Loans

Rate Swap Contracts –

Commercial Loans

As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income (Loss).

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at December 31:

Fair Values of Derivative Instruments

Asset Derivatives (Included in Other Assets)

(Dollars in Thousands) 2021 2020

Transactions Notional

Value Number of

Transactions Notional

Derivatives not Designated as Hedging Instruments

Interest Rate Lock Commitments – Mortgage Loans — $ — $ — 1 $ 151 $ —

Interest Rate Swap Contracts – Commercial Loans 66 446,490 3,508 38 255,572 4,493

Total Derivatives not Designated as Hedging Instruments 66 $ 446,490 $ 3,508 39 $ 255,723 $ 4,493

Fair Values of Derivative Instruments

1 unchanged sentence

(Dollars in Thousands) 2021 2020

Transactions Notional

Value Number of

Transactions Notional

Derivatives not Designated as Hedging Instruments

Forward Sale Contracts –

Mortgage Loans

Interest Rate Swap Contracts –

Commercial Loans

Forward Sale Contracts – Mortgage Loans — $ — $ — 1 $ 151 $ —

Interest Rate Swap Contracts – Commercial Loans 66 446,490 3,682 38 255,572 4,756

Total Derivatives not Designated as Hedging Instruments 66 $ 446,490 $ 3,682 39 $ 255,723 $ 4,756

The following table indicates the loss

recognized in income on derivatives for the years ended December 31:

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table indicates the income (loss) recognized in income on derivatives for the years ended December 31:

(Dollars in Thousands) 2021 2020 2019

Derivatives not Designated as Hedging Instruments

Interest Rate Lock Commitments –

Mortgage Loans

Forward Sale Contracts –

Mortgage Loans

Interest Rate Swap Contracts –

Commercial Loans

Total Derivative Loss

Presenting offsetting derivatives that

are subject to legally enforceable netting arrangements with the same party is permitted.

For example, we may have a derivative

asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position

and the liability position resulting in a net presentation.

The following table indicates the gross

amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the

Consolidated Balance Sheets at December 31:

Asset Derivatives (Included in Other Assets)

Liability Derivatives (Included in Other Liabilities)

Interest Rate Lock Commitments – Mortgage Loans $ — $ ( 1 ) $ —

Forward Sale Contracts – Mortgage Loans — 1 —

Interest Rate Swap Contracts – Commercial Loans 89 ( 214 ) ( 22 )

Total Derivative Income (Loss) $ 89 $ ( 214 ) $ ( 22 )

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted.

For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.

The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values are included in the Consolidated Balance Sheets at December 31:

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

(Dollars in Thousands) 2021 2020 2021 2020

4 unchanged sentences

Gross Amounts Not Offset (1)

— — ( 4,080 ) ( 5,220 )

Net Amount $ 3,508 $ 4,493 $ ( 398 ) $ ( 464 )

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 –

The following table presents the composition

of deposits at December 31:

(Dollars in Thousands)

NOTE 12 – DEPOSITS

The following table presents the composition of deposits at December 31:

(Dollars in Thousands) 2021 2020 $ Change % Change

Noninterest-Bearing Demand $ 747,909 $ 699,229 $ 48,680 7.0 %

Interest-Bearing Demand 452,644 366,201 86,443 23.6 %

Money Market 463,056 294,229 168,827 57.4 %

Savings 690,549 625,482 65,067 10.4 %

Certificates of Deposits 1,344,318 1,614,770 ( 270,452 ) ( 16.7 ) %

Deposits Held for Assumption in Connection with Sale of Bank Branches

Deposits Held for Assumption in Connection with Sale of Bank Branches — 84,717 ( 84,717 ) NM

Total $ 3,698,476 $ 3,684,628 $ 13,848 0.4 %

NM - percentage not meaningful

depos i t accounts are i nsured

by the FDIC u p to the maximum amount allowed by

The Dodd-Frank Act , signed

into law on July 2 1 ,

2010, makes permanent the $250 , 000 limit for federal deposit insurance and the coverage

limit applies per depositor, per insured depository institution for each account ownership.

Time deposits that meet or exceed the

FDIC Insurance limit of $250,000, excluding deposits held-for-assumption, at year-end 2020 and 2019 were $184.2 million and $195.3

million, respectively.

Certificates of Deposit, excluding deposits

held for assumption for pending branch sale transactions, maturing as of December 31:

(Dollars in Thousands)

Overdrafts reclassified to loans at December 31,

2020 and 2019 were $0.5 million and $0.7 million, respectively.

deposit dollars from executive officers, directors, and their related interests at December 31, 2020 and 2019, respectively,

were $6.7 million and $7.5 million.

NOTE 13 –

FEDERAL HOME LOAN BANK

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.

Total 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.

Deposits 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, 2021 increased $ 13.8 million, or 0.4 %, from December 31, 2020.

We had increases in all of our core deposits.

The increases included $ 168.8 million in money market accounts due to our deposit acquisition strategy, a $ 86.4 million increase in interest-bearing demand deposits, a $ 65.1 million increase in savings accounts due to promotions and an increase of $ 48.7 million in noninterest-bearing demand accounts.

Offsetting these increases was $ 270.5 million, or 16.7 % declines in CDs compared to December 31, 2020 due to the intentional runoff of higher cost CDs.

Also impacting the decrease was $ 84.7 million of deposits held-for-assumption, at December 31, 2020, in connection with the sale of four bank branches which were sold during the second quarter of 2021.

Noninterest-bearing deposits comprised 20.2 % and 19.0 % of total deposits at December 31, 2021 and December 31, 2020, respectively.

All depos i t accounts are i nsured by the FDIC u p to the maximum amount allowed by l aw.

The Dodd-Frank Act , signed into law on July 2 1 , 2010, makes permanent the $250,000 limit for federal deposit insurance and the coverage limit applies per depositor, per insured depository institution for each account ownership.

Time deposits that exceed the FDIC Insurance limit of

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table represents the balance

of long-term borrowings, the weighted average interest rate, and interest expense for the years ended December 31:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

$250,000, excluding deposits held-for-assumption, at year-end 2021 and 2020 were $ 147.1 million and $ 181.1 million, respectively.

Certificates of Deposit maturing as of December 31:

(Dollars in Thousands) 2021

2022 $ 565,385

Thereafter 1,597

Total $ 1,344,318

Overdrafts reclassified to loans were $ 0.5 million at both December 31, 2021 and December 31, 2020.

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2021 and 2020, respectively, were $ 3.0 million and $ 6.7 million.

NOTE 13 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings serve as an additional source of liquidity for the Company.

FHLB Borrowings were $ 7.0 million and $ 35.0 million at December 31, 2021 and December 31, 2020, respectively.

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

Total loans pledged as collateral were $ 1.1 billion and $ 0.8 billion at December 31, 2021 and December 31, 2020, respectively.

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

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

The Company has a maximum borrowing capacity of approximately $ 1.0 billion, or 25 % of the Company’s assets, as of December 31, 2021.

The Company had the capacity to borrow up to an additional $ 667.3 million and $ 510.5 million from the FHLB at December 31, 2021 and December 31, 2020, respectively, based upon calculated collateral values.

The following table represents the balance of long-term borrowings, the weighted average interest rate, and interest expense for the years ended December 31:

(Dollars in Thousands) 2021 2020 2019

Long-term Borrowings $ 7,000 $ 35,000 $ 10,000

1 unchanged sentence

Interest Expense $ 313 $ 361 $ 38

Scheduled annual maturities and average

interest rates for FHLB advances for each of the five years subsequent to December 31, 2020 and thereafter are as follows:

(Dollars in Thousands)

Total FHLB Advances

14 - EMPLOYEE BENEFIT PLANS

The Company has adopted an integrated profit

sharing plan, which allows for elective deferrals and non-elective contributions.

Employees participate in the profit sharing plan

following completion of six (6) months of service and upon reaching the age of twenty years and six months as of January 1.

During the year ending December 31, 2021 the Company retired four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

One FHLB advance totaling $ 3.0 million was repaid at maturity.

The remaining FHLB advances totaling $ 25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the borrowings totaling $ 43 thousand at December 31, 2021.

The FHLB borrowing of $ 7.0 million was prepaid in January 2022 outside of its scheduled maturity.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

(Dollars in Thousands) Balance Weighted

2022 $ 4,000 1.60 %

2024 3,000 1.63 %

Thereafter — — %

Total FHLB Borrowings $ 7,000 1.61 %

NOTE 14 - EMPLOYEE BENEFIT PLANS

The Company has adopted an integrated profit sharing plan, which allows for elective deferrals and non-elective contributions.

Associates participate in the profit sharing plan following completion of six ( 6 ) months of service and upon reaching the age of twenty years and six months as of January 1.

Vesting is based on years of service to the Company, with a year being any year an employee works a minimum of 1,000 hours.

The following table details the vesting

schedule based on years of service for participants:

1 Year of Service 0

2 Years of Service 20

3 Years of Service 40

4 Years of Service 60

5 Years of Service 100

Any participant who has reached the age

of 62 is fully vested regardless of length of service.

Each participant in the plan (who has not reached age 62) becomes 100% vested

after five (5) years of service.

The non-elective contribution to the plan is determined each year by the Company’s

Board of Directors (the “Board”) and thus may fluctuate in amount from year to year.

The contribution by the Company,

which includes contributions to the non-qualified plan discussed below, was $1.0 million in 2020, $1.4 million in 2019 and $1.7

million in 2018.

These amounts are included in salaries and employee benefits in the Consolidated Statements of (Loss) Income.

Beginning in 2019, our integrated profit

sharing plan includes a Company match based upon an employee’s elective deferral.

This elective deferral is subject to dollar

limits announced annually by the Internal Revenue Service (“IRS”).

Elective deferrals are matched equal to 100% of

the first 3% deferred and 50% of the next 2%, producing a maximum 4% match.

Expense for this deferral match was $1.2 million and

$1.1 million for the years ended December 31, 2020 and 2019, respectively.

There was no expense for the calendar year ended

The following table details the vesting schedule based on years of service for participants:

1 Year of Service 0% Vested

2 Years of Service 20 % Vested

3 Years of Service 40 % Vested

4 Years of Service 60 % Vested

5 Years of Service 100 % Vested

Any participant who has reached the age of 62 is fully vested regardless of length of service.

Each participant in the plan (who has not reached age 62) becomes 100 % vested after five ( 5 ) years of service.

The non-elective contribution to the plan is determined each year by the Company’s Board of Directors (the “Board”) and thus may fluctuate in amount from year to year.

The contribution by the Company, which includes contributions to the nonqualified plan discussed below, was $ 1.8 million in 2021, $ 1.0 million in 2020 and $ 1.4 million in 2019.

These amounts are included in salaries and employee benefits in the Consolidated Statements of Income (Loss).

Beginning in 2020, our integrated profit sharing plan includes a Company match based upon an associate’s elective deferral.

This elective deferral is subject to dollar limits announced annually by the Internal Revenue Service (“IRS”).

Elective deferrals are matched equal to 100 % of the first 3 % deferred and 50 % of the next 2 %, producing a maximum 4 % match.

Expense for this deferral match was $ 1.3 million, $ 1.2 million and $ 1.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The Bank entered into a Nonqualified Profit Sharing Plan originally on December 30, 1996, which was subsequently amended and restated effective December 20, 2007.

The purpose of the Nonqualified Profit Sharing Plan was to provide additional benefits to be paid to the executive upon the occurrence of a “Distributable Event,” which is either termination or death.

The board of directors of the Bank (the “Bank Board”) approved the amended plan on December 20, 2007.

Since its inception, the Bank’s former Chairman and Chief Executive Officer was the only executive who participated in the Nonqualified Profit Sharing Plan.

In April 2017, a Distributable Event occurred, in which distributions will occur over 45 quarterly payments.

The value of the plan was $ 0.9 million as of December 31, 2021, and was solely comprised of cash.

The quarterly distributions began on January 1, 2018 and will continue to be paid out in equal quarterly installments approximating $ 30 thousand.

On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide (i) certain key executives of the Bank (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these associates under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees.

The compensation

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Bank entered into a Nonqualified Profit

Sharing Plan originally on December 30, 1996, which was subsequently amended and restated effective December 20, 2007.

The purpose of the Nonqualified Profit Sharing Plan was to provide additional benefits to be paid to the executive upon the occurrence

of a “Distributable Event,”

which is either termination or death.

The board of directors of the Bank (the “Bank

Board”) approved the amended plan on December 20, 2007.

Since its inception, the Bank’s former Chairman and Chief

Executive Officer was the only executive who participated in the Nonqualified Profit Sharing Plan.

In April 2017, a Distributable

Event occurred, in which distributions will occur over 45 quarterly payments.

The value of the plan was $1.0 million as of December 31,

2020, and was solely comprised of cash.

The quarterly distributions began on January 1, 2018 and will continue to be paid

out in equal quarterly installments approximating $30 thousand.

December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred

Compensation Plan, to provide to provide (i) certain key executives of the Bank (beginning after the date of adoption) the

opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply

to these employees under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee

directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees.

compensation and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants

and remain subject to the claims of the creditors of the Bank and Company until paid to the participants .

NOTE 15 –

INCENTIVE AND RESTRICTED

The Bank Board adopted the Carter Bank &

Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and

Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27,

In connection with the Reorganization, the Company adopted and assumed Carter Bank & Trust 2018 Omnibus Equity Incentive

Plan as its own (now the Carter Bankshares, Inc.

Amended and Restated 2018 Omnibus Equity Incentive Plan, or, for purposes

of this discussion, the “Plan”).

The Plan reserves a total 2,000,000 shares of common stock for issuance and provides

for the grant to key employees and non-employee directors of the Company and its subsidiaries of awards that may include one or

more of the following:

stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance

units and performance cash awards (collectively, the “awards”).

Subject to accelerated vesting under certain circumstances,

the Plan requires a minimum vesting period of one year for awards subject to time-based conditions and a minimum performance period

of one year for awards subject to achievement or satisfaction of performance goals.

These minimums are applicable to awards other

than those granted as part of a retainer for the service of non-employee directors.

The Committee will determine the vesting period

on the awards.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants.

The balance in the nonqualified deferred compensation plan at December 31, 2021 and December 31, 2020 was $ 161 thousand and $ 12 thousand, respectively.

NOTE 15 – INCENTIVE AND RESTRICTED STOCK PLAN

The Bank Board adopted the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27, 2018.

In connection with the Reorganization, the Company adopted and assumed Carter Bank & Trust 2018 Omnibus Equity Incentive Plan as its own (now the Carter Bankshares, Inc.

Amended and Restated 2018 Omnibus Equity Incentive Plan, or, for purposes of this discussion, the “Plan”).

The Plan reserves a total 2,000,000 shares of common stock for issuance and provides for the grant to key associates and non-employee directors of the Company and its subsidiaries of awards that may include one or more of the following:

stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards (collectively, the “awards”).

Subject to accelerated vesting under certain circumstances, the Plan requires a minimum vesting period of one year for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals.

These minimums are applicable to awards other than those granted as part of a retainer for the service of non-employee directors.

The Committee will determine the vesting period on the awards.

No awards may be granted under the Plan more than ten years from the effective date of the Plan.

For purposes of

this Note 15, references to the “Company”

mean the “Bank’

with respect to actions prior to the Reorganization.

For purposes of this Note 15, references to the “Company” mean the “Bank’ with respect to actions prior to the Reorganization.

Restricted Stock

The Company periodically issues restricted

stock to non-employee directors, executive officers and employees pursuant to the Plan.

As of December 31, 2020, 132,027 restricted

shares had been granted under the Plan and 4,747 restricted shares had been forfeited.

The Company granted 39,019 and 47,309 restricted

shares of common stock to key personnel under the Plan during 2020 and 2019, respectively.

These grants were approved by the Committee

as compensation for substantial contributions to the Company’s performance, including contribution during our recent core

systems conversion.

These key personnel time-based restricted shares vest in one-third annual installments over three years after

the grant date.

The Company periodically issues restricted stock to non-employee directors, executive officers and associates pursuant to the Plan.

As of December 31, 2021, 214,517 restricted shares had been granted under the Plan and 10,952 restricted shares had been forfeited.

The Company granted 50,120 and 39,019 restricted shares of common stock to key personnel under the Plan during 2021 and 2020, respectively.

These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance, including contribution during our recent core systems conversion.

These key personnel time-based restricted shares vest in one-third annual installments over three years after the grant date.

The closing price of our stock was used to determine the fair value on the date of the grant.

There were 32,370 and 16,137 restricted shares of common stock issued to non-employee directors under the Plan during 2021 and 2020, respectively.

These grants were approved by the Committee as compensation for the Company’s performance.

The Committee approved accelerated vesting of these non-employee director restricted shares in January 2020 to fully vest one year after the grant date.

The restricted shares granted in 2021 fully vest one year after the grant date.

The closing price of our stock was used to determine the fair value on the date of the grant.

If any award granted under the Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan.

Compensation expense for restricted shares of stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date.

The Company recognized compensation expense of $ 1.0 million, $ 1.0 million and $ 0.4 million for 2021, 2020, and 2019, respectively.

As of December 31, 2021 and 2020, there was $ 844 thousand and $ 907 thousand, respectively, of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 1.64 years and 1.68 years, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

There were 16,137 and 17,149 restricted

shares of common stock issued to non-employee directors under the Plan during 2020 and 2019, respectively.

These grants were approved

by the Committee as compensation for the Company’s performance.

These restricted shares granted in 2019 were originally approved

to fully vest three years after the grant date.

However, the Committee approved accelerated vesting of these non-employee director

restricted shares in January 2020 to fully vest one year after the grant date.

The restricted shares granted in 2020 fully

vest one year after the grant date.

The closing price of our stock was used to determine the fair value on the date of the grant.

If any award granted under the Plan terminates,

expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to

awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan.

Compensation expense for restricted shares

of stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant

The Company recognized compensation expense of $1.0 million and $381 thousand for 2020 and 2019, respectively.

As of December 31, 2020 and 2019,

there was $907 thousand and $946 thousand, respectively, of total unrecognized compensation cost related to restricted stock that

will be recognized as compensation expense over a weighted average period of 1.68 years and 2.13 years, respectively.

The following table provides information

about restricted stock granted under the Plan for the years ended December 31:

Weighted Average

Restricted Shares

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table provides information about restricted stock granted under the Plan for the years ended December 31:

Restricted Shares Weighted Average

Non-vested at December 31, 2019 72,473 $ 17.44

Granted 55,156 19.23

Vested ( 37,908 ) 16.94

Forfeited ( 4,344 ) 19.06

Non-vested at December 31, 2020 85,377 18.73

Granted 82,490 12.81

Vested ( 48,027 ) 18.63

Forfeited ( 6,205 ) 12.82

Non-vested at December 31, 2021 113,635 $ 14.80

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

16 - FED E RAL AND ST AT E INCO M E

The components of the provision (benefit)

for income tax expense were as follows:

NOTE 16 - FED E RAL AND ST AT E INCO M E T AX ES

The components of the provision for income tax expense were as follows:

(Dollars in Thousands) 2021 2020 2019

Current $ 994 $ 2,399 $ 1,285

Deferred 3,114 ( 1,627 ) ( 76 )

Income Tax Provision $ 4,108 $ 772 $ 1,209

The following is a reconciliation of the

differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax

rate (21% at December 31, 2020, 2019 and 2018) to income before taxes:

(Dollars in Thousands)

The following is a reconciliation of the differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes:

2021 2020 2019

(Dollars in Thousands) Amount Percent Amount Percent Amount Percent

Federal Income Tax at Statutory Rate $ 7,497 21.0 $ ( 9,468 ) 21.0 $ 5,835 21.0

2 unchanged sentences

Federal Tax Credits, net of Basis Reduction ( 1,559 ) ( 4.4 ) ( 948 ) 2.2 ( 2,032 ) ( 7.3 )

Change in Valuation Allowance (excluding the effect of the Act)

Change in Valuation Allowance ( 529 ) ( 1.5 ) ( 374 ) 0.8 ( 424 ) ( 1.5 )

Income from Bank Owned Life Insurance ( 290 ) ( 0.8 ) ( 294 ) 0.7 ( 302 ) ( 1.1 )

True-up of Book and Tax Basis Differences

Goodwill Impairment — — 13,060 ( 29.1 ) — —

Other 100 0.3 98 ( 0.2 ) 40 0.2

Income Tax Provision and Effective Income Tax Rate $ 4,108 11.5 $ 772 ( 1.7 ) $ 1,209 4.4

Realization of deferred tax assets is dependent

upon the generation of future taxable income.

A valuation allowance is provided when it is more likely than not that some portion

of the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, management considers the scheduled

reversal of the deferred tax liabilities and the projected future taxable income over the periods in which the temporary differences

comprising the deferred tax assets will be deductible.

Based on its assessment, management recorded a valuation allowance on deferred

tax assets related to its equity investments in partnerships that will generate capital losses upon exiting the investments.

Company has not identified prudent and feasible strategies to generate future capital gains to offset the capital losses.

has determined that it is more likely than not that all other deferred tax assets will be realized in future periods so no additional

valuation allowance is necessary at December 31, 2020 and 2019.

Realization of deferred tax assets is dependent upon the generation of future taxable income.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible.

Based on its assessment, management recorded a valuation allowance on deferred tax assets related to its equity investments in partnerships that will generate capital losses upon exiting the investments.

The Company has not identified prudent and feasible strategies to generate future capital gains to offset the capital losses.

Management has determined that it is more likely than not that all other deferred tax assets will be realized in future periods so no additional valuation allowance is necessary at December 31, 2021 and 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred income taxes reflect the net tax

effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the

amount used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

(Dollars in Thousands) 2021 2020

Deferred Tax Assets

Allowance for Loan Losses

Allowance for Credit Losses $ 20,906 $ 11,580

Valuation Adjustments on Other Real Estate Owned 1,392 1,537

3 unchanged sentences

Operating Lease Liabilities 736 349

Other 1,765 1,057

Gross Deferred Tax Assets 27,727 19,031

1 unchanged sentence

Total Deferred Tax Assets $ 27,418 $ 18,193

(Dollars in Thousands) 2021 2020

Deferred Tax Liabilities

4 unchanged sentences

Net Unrealized Gain on Available-for-Sale Securities ( 452 ) ( 4,179 )

Other ( 98 ) ( 59 )

Total Deferred Tax Liabilities ( 9,636 ) ( 14,783 )

Net Deferred Tax Assets $ 17,782 $ 3,410

The Company had federal tax credit carryforward

of $1.8 million at December 31, 2020 and $5.1 million at December 31, 2019.

The federal tax credits consist primarily

of new markets credits and historic rehabilitation credits that, if not used, will expire from 2038 to 2040.

At December 31, 2020 and 2019, the

Company had no ASC 740-10 unrecognized tax benefits or accrued interest and penalties recorded.

The Company does not expect the

total amount of unrecognized tax benefits to significantly increase within the next twelve months.

The Company recognizes interest

and penalties on unrecognized tax benefits in income tax expense.

The Company had federal tax credit carryforwards of $ 1.8 million at both December 31, 2021 and December 31, 2020.

The federal tax credits consist primarily of new market credits and historic rehabilitation credits that, if not used, will expire in 2041.

At December 31, 2021 and 2020, the Company had no ASC 740-10 unrecognized tax benefits or accrued interest and penalties recorded.

The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months.

The Company recognizes interest and penalties on unrecognized tax benefits in income tax expense.

The Company is subject to U.S.

income tax as well as various other state and local jurisdictions.

The Company is generally no longer subject to examination by

federal, state and local taxing authorities for years prior to December 31, 2017.

federal income tax, as well as, various taxation of other state and local jurisdictions.

The Company is generally no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2018.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 –

TAX EFFECTS ON OTHER COMPREHENSIVE INCOME

The following tables present the tax effects

of the components of other comprehensive income (loss) for the years ended December 31:

Tax (Expense)

(Dollars in Thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 17 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the change in components of other comprehensive (loss) income for the years ended December 31, net of tax effects:

(Dollars in Thousands) Pre-Tax

Amount Tax (Expense)

Benefit Net of Tax

Net Unrealized Losses Arising during the Period $ ( 10,877 ) $ 2,284 $ ( 8,593 )

Reclassification Adjustment for Gains included in Net Income ( 6,869 ) 1,443 ( 5,426 )

Other Comprehensive Loss $ ( 17,746 ) $ 3,727 $ ( 14,019 )

Net Unrealized Gains Arising during the Period $ 26,621 $ ( 5,590 ) $ 21,031

4 unchanged sentences

Other Comprehensive Income $ 12,903 $ ( 2,710 ) $ 10,193

Net Unrealized Losses Arising during the Period

Reclassification Adjustment for Gains included in Net Income

Other Comprehensive Loss

NOTE 18 –

COMMITMENTS AND CONTINGENCIES

to extend credit, which amounted to $591.2 million at December 31, 2020 and $488.9 million at December 31, 2019, represent

agreements to lend to customers with fixed expiration dates or other termination clauses.

The Company provides lines of

credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies

to finance their working capital needs.

Lines of credit for construction projects represent $391.4, or 66.2%, and $298.8, or 61.1%,

of the commitments to extend credit at December 31, 2020 and 2019, respectively.

Standby letters of credit are conditional

commitments issued by the Company guaranteeing the performance of a customer to a third-party.

Those guarantees are primarily

issued to support public and private borrowing arrangements.

The Company had outstanding letters of credit totaling $29.3 million

in 2020 and $39.5 million in 2019.

Our exposure to credit loss in the event

of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit

is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments

and unconditional obligations as it does for on balance sheet instruments.

Unless noted otherwise, collateral or other security

is required to support financial instruments with credit risk.

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 2019, respectively.

The allowance for unfunded commitments is included in other

liabilities in the Consolidated Balance Sheets.

The reserve is calculated by applying historical loss rates to our unfunded commitments.

NOTE 18 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $ 513.5 million at December 31, 2021 and $ 591.2 million at December 31, 2020, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs.

Lines of credit for construction projects represented $ 283.9 million, or 55.3 %, and $ 391.4 million, or 66.2 %, of the commitments to extend credit at December 31, 2021 and December 31, 2020, respectively.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party.

Those guarantees are primarily issued to support public and private borrowing arrangements.

The Company had outstanding letters of credit totaling $ 27.1 million at December 31, 2021 and $ 29.3 million at December 31, 2020.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments.

Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk.

Life-of-Loss Reserve on Unfunded Loan Commitments

We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment.

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the normal course of business, the

Company is subject to various legal and administrative proceedings and claims.

While any type of litigation contains a level of

uncertainty, management believes that the outcome of such proceedings or claims pending will not have a material adverse effect

on our consolidated financial position or results of operations.

NOTE 19 –

REVENUE FROM CONTRACTS

WITH CUSTOMERS

Topic 606 does not apply to revenue associated

with financial instruments, including revenue from loans and securities.

In addition, certain noninterest income streams such

as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not

in scope of the new guidance.

Topic 606 is applicable to noninterest revenue streams such as trust and asset management income,

deposit related fees, interchange fees, merchant income, and annuity and insurance commissions and return on investment.

the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

Substantially all of the Company’s

revenue is generated from contracts with customers.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The activity in the life-of-loss reserve on unfunded loan commitments for the year ended December 31, 2021 is as follows:

(Dollars in Thousands) December 31, 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

Balance at beginning of period $ 144

Impact of Adopting ASU 2016-13 2,908

January 1, 2021 3,052

Provision for unfunded commitments ( 1,269 )

Balance at end of period $ 1,783

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

The provision for unfunded commitments was a release of $ 1.3 million for the year ended December 31, 2021.

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

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

NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance.

Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions and return on investment.

However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

Substantially all of the Company’s revenue is generated from contracts with customers.

Noninterest revenue streams in-scope of Topic 606 are discussed below.

Charges on Deposit Accounts:

Service charges on deposit accounts consist of overdraft fees, service charges on returned

checks, stop payment fees, check chargeback fees, minimum balance fees, and other deposit account related fees.

Overdraft fees

are recognized at the point in time that the overdraft occurs.

Service charges on returned checks are recognized at the point

in time that a check is returned.

Transaction-based fees, which include services such as stop payment fees, check chargeback fees,

and other deposit account related fees are recognized at the point in time the Company fulfills the customer’s request.

Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for

Service charges on deposits are withdrawn from the customer’s account balance.

Fees and Other Income:

Other fees and other income consists of safe deposit rents, money order fees, check cashing

and cashiers’

check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees.

fees are largely transaction-based;

therefore, the Company’s performance obligation is satisfied and the resultant revenue

is recognized at the point in time the service is rendered.

Payments for transaction-based fees are generally received immediately

or in the following month by a direct charge to a customer’s account.

Card Interchange Fees:

The Company earns interchange fees from debit cardholder transactions conducted through a card

payment network.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and

are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Service Charges on Deposit Accounts:

Service charges on deposit accounts consist of overdraft fees, service charges on returned checks, stop payment fees, check chargeback fees, minimum balance fees, and other deposit account related fees.

Overdraft fees are recognized at the point in time that the overdraft occurs.

Service charges on returned checks are recognized at the point in time that a check is returned.

Transaction-based fees, which include services such as stop payment fees, check chargeback fees, and other deposit account related fees are recognized at the point in time the Company fulfills the customer’s request.

Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for the product.

Service charges on deposits are withdrawn from the customer’s account balance.

Other Fees and Other Income:

Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees.

These fees are largely transaction-based;

therefore, the Company’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered.

Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account.

Debit Card Interchange Fees:

The Company earns interchange fees from debit cardholder transactions conducted through a card payment network.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Commission income is earned based on customer transactions.

The commission income is recognized when the transaction

The Company also receives a return on its investment in Bankers Insurance, LLC on an annual basis based on the income

of the insurance company and percentage of ownership.

The Company owns properties acquired through foreclosure that are included in other real estate owned, net

on the Consolidated Balance Sheet.

If the Company rents any of those properties, the resultant income is recognized at the point

of receipt since the performance obligation has been satisfied.

The commission income is recognized when the transaction is complete.

The Company also receives a return on its investment in Bankers Insurance, LLC on an annual basis based on the income of the insurance company and percentage of ownership.

The Company owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheet.

If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied.

The rents are generally received monthly.

on Sales of OREO:

The Company records a gain or loss from the sale of OREO when control of the property transfers to

the buyer, which generally occurs at the time of an executed deed.

When the Company finances the sale of OREO to the buyer, the

Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of

the transaction price is probable.

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is

recorded upon the transfer of control of the property to the buyer.

In determining the gain or loss on the sale, the Company adjusts

the transaction price and related gain (loss) on sale if a significant financing component is present.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the point

of revenue recognition and the income recognized for each of the revenue streams for the years ended December 31:

Point of Revenue

(Dollars in Thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Gains/Losses on Sales of OREO:

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the years ended December 31:

(Dollars in Thousands) Point of Revenue

Recognition 2021 2020 2019

In-Scope Revenue Streams

Service Charges on Deposit Accounts

At a point in time

Other Fees and Other Income

At a point in time

Debit Card Interchange Fees

At a point in time

Commercial Loan Swap Fee Income

At a point in time

Customer Commissions

At a point in time

Annual Commission on Investment

Special Production Payout

Other Real Estate Owned Income

At a point in time

Gains (Losses) on Sale of Other Real Estate Owned

At a point in time

Service Charges on Deposit Accounts At a point in time $ 5,036 $ 3,518 $ 3,919

Other Fees and Other Income At a point in time 3,233 2,497 1,789

Debit Card Interchange Fees At a point in time 7,226 5,857 5,160

Commercial Loan Swap Fee Income At a point in time 2,416 4,051 —

Customer Commissions At a point in time 91 73 120

Annual Commission on Investment Over time 1,681 1,366 1,105

Special Production Payout Over time 129 289 —

Other Real Estate Owned Income At a point in time 90 340 689

Gains (Losses) on Sale of Other Real Estate Owned At a point in time *** *** ***

Total In-Scope Revenue Streams 19,902 17,991 12,782

2 unchanged sentences

Bank Owned Life Insurance Income 1,380 1,400 1,436

Other 730 307 447

Total Noninterest Income $ 28,881 $ 26,580 $ 16,870

***Reported net with Losses on Sales and Write-downs of Other Real Owned

in Noninterest Expense

NOTE 20 –

PARENT COMPANY CONDENSED

FINANCIAL INFORMATION

***Reported net with Losses on Sales and Write-downs of Other Real Owned in Noninterest Expense

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 20 – PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Balance Sheets

(Dollars in Thousands) 2021 2020

Cash $ 5,142 $ 639

Investment in Bank Subsidiary 402,190 439,553

Other Assets 571 —

Total Assets $ 407,903 $ 440,192

Other Liabilities $ 307 $ 18

Total Shareholders’

Total Liabilities and Shareholders’

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total Shareholders’ Equity 407,596 440,174

Total Liabilities and Shareholders’ Equity $ 407,903 $ 440,192

Statements of Net Income

2 unchanged sentences

Total Expenses ( 2,238 ) ( 594 ) —

Income before income tax and undistributed net loss of bank subsidiary

Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary 3,762 406 —

Income Tax Benefit ( 446 ) — —

Income before undistributed net loss of bank subsidiary

Equity in undistributed net loss of bank subsidiary

Income Before Undistributed Net Income of Bank Subsidiary 4,208 406 —

Equity in Undistributed Net Income (Loss) of Bank Subsidiary 27,382 ( 46,264 ) —

Net Income (Loss) $ 31,590 $ ( 45,858 ) $ —

Statements of Cash Flows

1 unchanged sentence

OPERATING ACTIVITIES

Equity in undistributed net loss of bank subsidiary

Adjustments to Reconcile Net Loss to Net Cash Provided by

Net Income (Loss) $ 31,590 $ ( 45,858 ) $ —

Equity in Undistributed Net (Income) Loss of Bank Subsidiary ( 27,382 ) 46,264 —

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by

Operating Activities

Stock Compensation Expense 1,040 215 —

Increase in Intercompany Liability

Increase in Other Assets ( 571 ) — —

(Decrease) Increase in Intercompany Liability ( 17 ) 18 —

Net Cash Provided by Operating Activities 4,660 639 —

3 unchanged sentences

FINANCING ACTIVITIES

Stock Repurchase Plan Settlements ( 157 ) — —

Cash Dividends Paid to Common Shareholders — — —

Net Cash Provided by Financing Activities

Net Cash Used In Financing Activities ( 157 ) — —

Net Increase in Cash 4,503 639 —

1 unchanged sentence

Cash at End of Year $ 5,142 $ 639 $ —

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 21 - CAPITAL ADEQUACY

Company and the Bank are subject to various capital requirements administered by the federal banking regulators.

to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators

that, if undertaken, could have a direct material effect on our financial statements.

Under capital adequacy guidelines and the

regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures

of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts

and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company and the Bank are subject to various capital requirements administered by the federal banking regulators.

Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators in relation to components, risk weightings and other factors.

Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulations

to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.

The final rules implementing Basel

Committee on Banking Supervision’s capital guidelines for U.S.

Banks (“Basel III rules”) became effective for

the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule,

and fully phased in by January 1, 2019.

Under the Basel III rules, we must hold a capital conservation buffer above the adequately

capitalized risk-based capital ratios.

The capital conservation buffer was phased in at the rate of 0.625% per year and was 2.5%

on January 1, 2019.

Management believes as of December 31, 2020, we met all capital adequacy requirements to which we

Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.

Banks (“Basel III rules”) became effective on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

Under the Basel III rules, we must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios.

The capital conservation buffer was phased in at the rate of 0.625% per year and was 2.5% on January 1, 2019.

Management believes as of December 31, 2021, the Company and the Bank met all capital adequacy requirements to which we are subject and satisfied the applicable capital conservation buffer requirements.

Prompt corrective action regulations provide five classifications:

well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.

If adequately capitalized, regulatory approval is required to accept brokered deposits.

If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At year-end 2021 and 2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the institution’s category.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Prompt corrective action regulations provide

five classifications:

well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically

undercapitalized, although these terms are not used to represent overall financial condition.

If adequately capitalized, regulatory

approval is required to accept brokered deposits.

If undercapitalized, capital distributions are limited, as is asset growth and

expansion, and capital restoration plans are required.

At year-end 2020 and 2019, the most recent regulatory notifications categorized

the Bank as well-capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since

that notification that management believes have changed the institutions category.

The following table summarizes risk-based

capital amounts and ratios for the Company and the Bank:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table summarizes risk-based capital amounts and ratios for the Company and the Bank:

Actual Minimum

Regulatory Capital

To be Well Capitalized

Requirements To be Well Capitalized

Corrective Action

(dollars in thousands)

(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2021

1 unchanged sentence

Carter Bankshares, Inc.

$ 443,940 10.62 % $ 167,184 4.00 % NA NA

Carter Bank & Trust 438,533 10.49 % 167,170 4.00 % $ 208,962 5.00 %

1 unchanged sentence

Carter Bankshares, Inc.

$ 443,940 14.21 % $ 140,606 4.50 % NA NA

Carter Bank & Trust 438,533 14.04 % 140,580 4.50 % $ 203,061 6.50 %

1 unchanged sentence

Carter Bankshares, Inc.

$ 443,940 14.21 % $ 187,475 6.00 % NA NA

Carter Bank & Trust 438,533 14.04 % 187,441 6.00 % $ 249,921 8.00 %

1 unchanged sentence

Carter Bankshares, Inc.

$ 483,124 15.46 % $ 249,967 8.00 % NA NA

Carter Bank & Trust 477,710 15.29 % 249,921 8.00 % $ 312,401 10.00 %

1 unchanged sentence

Leverage Ratio

Carter Bankshares, Inc.

$ 424,453 10.26 % $ 165,514 4.00 % NA NA

Carter Bank & Trust 423,832 10.24 % 165,514 4.00 % $ 206,892 5.00 %

Common Equity Tier 1 (to Risk-Weighted Assets)

Carter Bankshares, Inc.

$ 424,453 13.08 % $ 146,077 4.50 % NA NA

Carter Bank & Trust 423,832 13.06 % 146,078 4.50 % $ 211,001 6.50 %

Tier 1 Capital (to Risk-Weighted Assets)

Carter Bankshares, Inc.

$ 424,453 13.08 % $ 194,769 6.00 % NA NA

Carter Bank & Trust 423,832 13.06 % 194,770 6.00 % $ 259,694 8.00 %

Total Capital (to Risk-Weighted Assets)

Carter Bankshares, Inc.

$ 465,198 14.33 % $ 259,692 8.00 % NA NA

Carter Bank & Trust 464,578 14.31 % 259,694 8.00 % $ 324,617 10.00 %

On November 20, 2020, the Company

acquired the Bank in a merger and reorganization pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act, and

in accordance with the terms of a Plan of Merger and Reorganization dated November 9, 2020.

Pursuant to the Agreement,

on November 20, 2020 at 7:00 p.m.

all of the outstanding shares of the Bank’s $1.00 par value common stock formerly

held by its shareholders was converted into and exchanged for one newly issued share of the Company’s par value common stock,

and the Bank became a subsidiary of the Company.

In December 2018, the Office of the

Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC approved a final rule to address changes to credit

loss accounting under GAAP, including banking organizations’

implementation of CECL.

The final rule provides banking

organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result

from the adoption of the new accounting standard.

In March 2020, the OCC, the FRB, and the FDIC published an interim final

rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

The interim final rule maintains

the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of

CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed

by a three-year transition period (five-year transition option).

We plan to adopt the capital transition relief over the permissible

three-year period due to our intended adoption of CECL in the first quarter of 2021.

The Company was incorporated on October 7, 2020 in connection with the Reorganization.

In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for one newly issued share of the Company’s common stock.

In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.

The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule:

Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19.

The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 22 - QUARTERLY FINANCIAL DATA (Unaudited)

The following summarizes the quarterly

results of operations for the years ended December 31:

(Dollars in Thousands)

The following summarizes the quarterly results of operations for the years ended December 31:

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

Total Interest Income $ 32,957 $ 33,094 $ 34,913 $ 32,933

1 unchanged sentence

Net Interest Income 26,529 27,203 29,401 28,050

Provision for Loan Losses

Net Interest Income after Provision for Loan Losses

Provision for Credit Losses 1,857 967 ( 413 ) 939

Provision for Unfunded Commitments ( 282 ) ( 603 ) ( 60 ) ( 324 )

Net Interest Income after Provision for Credit Losses 24,954 26,839 29,874 27,435

Total Noninterest Income 8,952 7,238 6,915 5,776

Total Noninterest Expense 23,605 27,759 24,685 26,236

Income Before Income Taxes 10,301 6,318 12,104 6,975

Income Tax Expense 926 886 931 1,365

Net Income $ 9,375 $ 5,432 $ 11,173 $ 5,610

Earnings Per Share $ 0.36 $ 0.21 $ 0.42 $ 0.21

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

Total Interest Income $ 37,836 $ 35,617 $ 33,986 $ 33,502

Total Interest Expense 10,572 9,355 8,550 7,349

Net Interest Income 27,264 26,262 25,436 26,153

Provision for Credit Losses 4,798 5,473 2,914 4,821

Net Interest Income after Provision for Credit Losses 22,466 20,789 22,522 21,332

Total Noninterest Income 6,952 6,064 7,975 5,589

Total Noninterest Expense 24,748 22,886 87,300 23,841

Income (Loss) Before Income Taxes 4,670 3,967 ( 56,803 ) 3,080

2 unchanged sentences

Earnings (Loss) Per Share $ 0.17 $ 0.17 $ ( 2.19 ) $ 0.11

(Dollars in Thousands)

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

Total Interest Income $ 39,139 $ 40,068 $ 40,154 $ 39,759

1 unchanged sentence

Net Interest Income 27,896 27,955 28,070 28,426

Provision for Loan Losses

Net Interest Income after Provision for Loan Losses

Provision for Credit Losses 1,627 1,369 1,390 ( 982 )

Net Interest Income after Provision for Credit Losses 26,269 26,586 26,680 29,408

Total Noninterest Income 3,804 4,401 4,156 4,509

2 unchanged sentences

Income Tax Expense (Benefit) 422 504 458 ( 175 )

Net Income $ 7,541 $ 7,827 $ 7,601 $ 3,606

Earnings Per Share $ 0.29 $ 0.30 $ 0.29 $ 0.14

(Dollars in Thousands)

Total Interest Income

Total Interest Expense

Net Interest Income

Provision for Loan Losses

Net Interest Income after Provision for Loan Losses

Total Noninterest Income

Total Noninterest Expense

Income (Loss) Before Income Taxes

Income Tax (Benefit) Expense

Net Income (Loss)

Earnings (Loss) Per Share

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 23 –

SUBSEQUENT EVENT

On January 6, 2021, the Company announced

that it will be closing 24 Bank branches, throughout its footprint, through the closure or sale of those branches.

The branch closures

are expected to occur on or about April 16, 2021, as part of a strategic network optimization plan that is being implemented

to support the long-term, sustainable growth of the Company.

On January 14, 2021, the Company announced that the Bank had

agreed to sell three branches in Staunton, Harrisonburg, and Bridgewater, Virginia to Pendleton Community Bank, a subsidiary of

Allegheny Bancshares, Inc.

On January 27, 2021, the Company announced that the Bank had agreed to sell one branch in

Waynesboro, Virginia to F&M Bank, a subsidiary of F&M Bank Corp.

As part of the execution of these agreements, the purchasers

will acquire loans, assume deposits and acquire bank premises and equipment.

The balances as of December 31, 2020 were $9.8

million of combined loans, $84.7 million of combined deposits and book value of $2.3 million of bank premises and equipment.

transactions are subject to customary closing conditions, including regulatory approvals.

Independent Member Crowe Global

Report of Independent Registered Public

Accounting Firm

Shareholders and the Board of Directors

of Carter Bankshares, Inc.

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Carter Bankshares, Inc.

and Subsidiaries

Martinsville, Virginia

Opinions on the Financial Statements

and Internal Control over Financial Reporting

We have audited the accompanying consolidated

balance sheets of Carter Bankshares, Inc.

and Subsidiaries (formerly Carter Bank & Trust) (the "Company")

as of December 31, 2020 and 2019, the related consolidated statements of (loss) income, comprehensive (loss) income, changes

in shareholders’

equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the

related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal

control over financial reporting as of December 31, 2020, based on criteria established in Internal Control –

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Carter Bankshares, Inc.

and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements

referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020

and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31,

2020 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company

maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on

criteria established in Internal Control –

Integrated Framework:

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No.

326, Financial Instruments – Credit Losses (ASC 326).

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible

for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of

the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal

Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company’s financial statements and an

opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered

with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with

respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the

Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control

over financial reporting was maintained in all material respects.

Our audit of the financial statements included

performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,

and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding

the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and

significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,

assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal

control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the

circumstances.

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included

performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal

Control Over Financial Reporting

A company’s internal control over

financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and

the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s

internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records

that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with

generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with

authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely

detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the

financial statements.

Because of its inherent limitations, internal

control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated

below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated

to the audit committee and that:

(i) relate to accounts or disclosures that are material to the financial statements and (ii) involved

our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any

way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,

providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses –

more fully described in Note 1 and Note 6 to the financial statements, the Company’s allowance for loan losses is a valuation

allowance for probable incurred losses inherent in the loan portfolio.

The allowance for loan losses consists of a specific component

which relates to individually impaired loans and a general component.

The general component covers loans that are collectively

evaluated for impairment.

The general component is based on historical loss experience adjusted for current conditions and qualitative

These qualitative factors may include consideration for the following:

levels of delinquency and delinquency trends;

of loans to the classification of special mention, substandard or doubtful;

trends in volume and terms of loans;

effects of changes

in underwriting standards;

changes in lending policies, procedures, and practices;

national and local economic trends and conditions;

industry conditions, and effects of credit concentrations.

We determined that auditing the qualitative

factors applied to adjust the historical loss experience within the general component of the allowance for loan losses is a critical

audit matter.

The principal considerations for our determination are the high degree of subjectivity involved in management’s

assessment of the risk of loss associated with each risk factor and the weightings applied to them, and the significant degree

of auditor judgment and audit effort.

Our audit procedures to address the critical

audit matter included:

Testing the effectiveness of controls over management’s review of the reasonableness of the

qualitative factors, the amounts and weightings applied to each factor, the underlying documentation used in the calculation, and

the accuracy of the mathematical application of the qualitative factors used to adjust the historical loss experience and determine

the general component of the allowance for losses calculation.

Substantively testing management’s estimate, including evaluating their judgments and assumptions,

which included:

o Evaluating the reliability of the underlying objective data used to derive the qualitative factors.

Based on the underlying data, we evaluated the reasonableness of management’s designation of the resulting adjustment to

the historical loss experience.

We also evaluated the reasonableness of weightings applied to each risk factor and the impact of

changes in the factors from prior periods.

o Tested the accuracy of the mathematical application of the qualitative factors used to adjust the

historical loss experience within the allowance for loan loss calculation and respective loan segmentation balances the qualitative

factors are applied too.

o Performing analytical review procedures to determine if the general component of the allowance

for loan losses balance was consistent with trends in the loan portfolio and economic conditions and methodology was consistently

Allowance for Loan Losses - Fair Value

of Collateral Associated with Impaired Loans

As more fully described in Note 1 and Note

6 to the financial statements, the allowance for loan losses consists of specific and general components.

The specific component

relates to loans that are individually classified as impaired.

Factors considered by management in determining impairment include

payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

is impaired, and the loan is collateral dependent, the fair value of collateral is used to measure impairment.

Management obtained a third-party appraisal

to estimate the fair value of collateral associated with two collateral-dependent impaired loans.

The collateral’s fair value

is considered material to the impairment analyses and underlying assumptions used to estimate fair value have a high degree of

subjectivity.

We determined that auditing the fair value

of the collateral associated with the two collateral-dependent impaired loans is a critical audit matter.

The principal considerations

for our determination are the high degree of subjectivity associated with the underlying assumptions used by a third-party appraiser

in determining the fair value of the collateral and the significant degree of auditor judgment and audit effort.

Our audit procedures to address the critical

audit matter included:

Testing the effectiveness of management review controls including:

o Management’s evaluation of the valuation methodologies and critical assumptions used by the

Company engaged third-party appraiser and their sensitivity analysis.

o Management’s review of the accuracy of information utilized within the impairment analysis.

Substantively testing management’s estimate of fair value of the collateral which included:

o Utilization of auditor engaged valuation specialist to evaluate the appropriateness of valuation

methodologies and critical assumptions of the Company’s engaged third-party appraiser.

o Evaluate the relevance and reliability of data used by the auditor engaged specialist.

o Performed a sensitivity analysis of the significant assumptions.

o Evaluation of the impairment analysis of the two-collateral dependent impaired loans to determine

the application of the fair value was appropriately stated.

Goodwill Impairment Evaluation

described in Notes 1 and 10 to the financial statements, goodwill is tested for impairment at the reporting unit level at least

annually, or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that the fair

value of a reporting unit is less than its carrying amount.

During 2020, the Company performed impairment testing on a quarterly

basis due to the continued decline in the Company stock price primarily related to the economic fallout of COVID-19.

impairment charge of $62,192,000 was taken in the third quarter based on the Company’s impairment test.

The quantitative assessment of goodwill

for the Company’s single reporting unit was performed utilizing a discounted cash flow analysis (“income approach”)

and estimates of selected market information (“market approach”) performed by a third-party.

The calculation of the

goodwill impairment involves significant estimates and subjective assumptions which require a high degree of management judgment.

This judgment includes, but is not limited to, the selection of appropriate discount rates, the identification of relevant market

comparables and the development of cash flow projections.

The selection and weighting of the various fair value techniques may

result in a higher or lower fair value.

Judgment is applied in determining the weightings that are most representative of fair

We identified the goodwill impairment assessment

of the Company as a critical audit matter.

The principal considerations for this determination was the degree of auditor judgment

in performing procedures over the fair value methodologies and key assumptions used to determine fair value, which included, discount

rate, prospective financial information, and weighting allocation to valuation methodologies and the timing of the goodwill impairment

charge during 2020.

Our audit procedures to address the critical

audit matter included:

Testing the effectiveness of controls over management’s goodwill impairment test including:

o Management’s review of the reasonableness and accuracy of the Company’s prospective

financial information used in the discounted cash flow methodology associated with each quarterly impairment analysis.

o Management’s evaluation of key assumptions used by a third-party valuation specialist, including

discount rate, terminal growth rate, control premium and allocated weightings incorporated into the methodologies used to determine

fair value associated with each quarterly impairment analysis.

Substantively testing management’s process, including evaluating their judgements and assumptions,

for estimating fair value which included:

o Evaluation of key financial data for accuracy, including comparison of prospective financial information

to the Company’s strategic plan for the second and third quarter analysis.

o Evaluation of management’s ability to reasonably forecast cash flows by comparing actual

results to management’s historical forecasts for the second and third quarter analysis.

o Utilization of auditor employed valuation specialist to evaluate appropriateness of valuation methodologies,

discount rate, control premium, overall reasonableness of the fair value for the second and third quarter’s analysis.

o Evaluation of management’s weighting allocation to each valuation methodology tested.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2021 as described in Notes 1 and 6 of the consolidated financial statements using the modified retrospective method.

Also see explanatory paragraph above.

The ASU requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected.

The Company disclosed the impact of adoption of this standard on January 1, 2021 with a $61.6 million increase to the allowance for credit losses and a $50.7 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption.

Provision expense for the year ending December 31, 2021 was $3.4 million and the allowance for credit losses as of December 31, 2021 was $95.9 million.

The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, and qualitative analysis.

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

The quantitative analysis includes using a discounted cash flow (DCF) model for determining the allowance for credit losses.

Economic forecasts are used in the model to estimate the probability of default and loss given default through regression.

Model assumptions include, but are not limited to the discount rate, prepayments, and curtailments.

The qualitative analysis is determined based on management’s review and analysis of internal, external and model risks, including adjustment made to the model output and economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

We identified the allowance for credit losses as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management in the development of the estimate.

The principal considerations resulting in our determination included the following:

• Significant audit effort and auditor judgment to evaluate the segmentation, quantitative, and qualitative analysis used in the calculation

The primary procedures performed to address this critical audit matter include:

Testing the effectiveness of internal controls over:

• The Company’s selection of the DCF model, including evaluation of the segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

• The completeness and accuracy of data used in the model

• The Company’s review of the allowance for credit loss calculation, including the review of the Company’s judgments used in developing the segmentation, quantitative analysis, and qualitative analysis and the relevance and reliability of data used as the basis for adjustments for the model

Substantively testing management’s estimate, which included:

• Assessing the reasonableness of management’s selection of segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

• Evaluating management’s judgment for developing the segmentation, quantitative, and qualitative analysis, including assessing the relevance and reliability of data used to develop the model

• Evaluating the mathematical accuracy of the discounted cash flow model, including evaluating the completeness and accuracy of loan data used in the model

/s/ Crowe LLP

We have served as the Company's auditor

We have served as the Company's auditor since 2019.

Washington, D.C.

March 11, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and Shareholders

Carter Bankshares, Inc.

(as successor

to Carter Bank & Trust)

Martinsville, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated

statements of income, comprehensive income (loss), changes in shareholders' equity and cash flows for the year ended December 31,

2018, (collectively, the financial statements) of Carter Bankshares, Inc.

and subsidiaries (as successor to Carter Bank &

Trust and subsidiaries), the Company.

In our opinion, the financial statements present fairly, in all material respects the results

of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally

accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based

on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the

Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange

Commission and the PCAOB.

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable

basis for our opinion.

Hyde & Barbour , P.C.

We served as the Company’s auditor

from 2012 to 2018.

Roanoke, Virginia

March 14, 2019

BANKSHARES, INC.

AND SUBSIDIARIES

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURES

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation

of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (its principal

executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and

operation of the Company’s disclosure controls and procedures as of December 31, 2020.

In designing and evaluating the

disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,

can provide only reasonable assurance of achieving the desired control objectives.

We maintain disclosure controls and procedures

that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities

Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities

and Exchange Commission, or the SEC, and that such information is accumulated and communicated to the Company’s management,

including our CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.

Based on and as of the date of such evaluation,

our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material

respects, as of the end of the period covered by this Report.

Management’s Report on Internal Control over Financial

Our management is responsible for establishing

and maintaining adequate internal control over financial reporting, (as defined in Exchange Act Rule 13a-15(f)).

control over financial reporting is a process designed by or under the supervision of, our CEO and CFO to provide reasonable assurance

to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements

for external purposes in accordance with U.S.

generally accepted accounting principles.

A Company’s internal control over

financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable

detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally

accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations

of management and directors of the Company;

and (iii) provide reasonable assurance regarding prevention or timely detection

of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of the effectiveness of specific controls or internal control over financial reporting overall

to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree

of compliance with the policies or procedures may deteriorate.

Based on this assessment, management concludes

that, as of December 31, 2020, the Company’s system of internal control over financial reporting is effective and meets

the criteria of the “Internal Control Integrated Framework (2013).

”Crowe LLP, our independent registered public accounting

firm, has issued a report on the effectiveness of Company’s internal control over financial reporting as of December 31,

2020, which is included herein.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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 8. Financial Statements and Supplementary Data