Carter Bankshares, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Our mission is that the Company strives to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin. Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income. Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses. The Company is focused on executing this strategy to successfully build our brand and grow our business in our markets. The Company’s Response to COVID-19 Lending Operations The Company elected to take advantage of Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provision to temporarily delay adoption of the CECL methodology. The Company was subject to the adoption of the Current Expected Credit Loss (“CECL”) accounting method under the FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020 and has since implemented CECL on January 1, 2021. Refer to Note 1, Basis of Presentation and Note 6, Allowance for Credit Losses, of the Notes to Consolidated Financial Statements for additional disclosures relating to CECL in this Annual Report on Form 10-K. The Company quickly responded to the pandemic and the CARES Act, offering the option of payment deferrals, participation in the Paycheck Protection Program (“PPP”), fee waivers and other relief actions to customers. In 2021 and, to date in 2022, we continued to prioritize the safety of our associates and customers by taking precautions to protect both customers and associates through enhanced cleaning services, social distancing and personal protective equipment requirements for both. A portion of the Company’s workforce continues to work remotely. Under the CARES Act, the PPP is an amendment to a program administered as part of the Small Business Administration’s (“SBA”)’s 7-A loan program. The Bank became an approved SBA 7-A lender in November 2019. The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. Initially, $349 billion was approved and designated for the PPP in order for the SBA to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses. The Company participated in the initial round of funding through a referral relationship with a third-party, non-bank lender. When an additional $310 billion in funds were approved and designated for the PPP, we opted to set up an internal, automated loan process utilizing our core system provider. The Federal Reserve Bank (“FRB”) implemented a liquidity facility available to financial institutions participating in the PPP. However, we opted to fund all PPP loans through our internal liquidity sources. These loans are fully guaranteed by the SBA and do not represent a credit risk. The vast majority of these PPP loans have been forgiven. The Bank provided loan payment deferrals to customers under Section 4013 of the CARES Act and regulatory interagency guidance regarding loan modifications. The Bank launched successive deferral programs with short-term expirations. The Part I program was launched on March 23, 2020 and expired on August 31, 2020. The deferrals in Part I provided for deferral of principal and up to the deferral of principal and interest, if requested through the expiry. The Part II program extended deferrals through December 31, 2020 subject to the collection of updated financial information and validation of need. For these borrowers the Bank requested verification of business and/or guarantor liquidity to ascertain the viability of the business in a post-pandemic environment. Prior to the extension of the CARES Act, the Bank launched the Part III program, which offered borrowers in the Part II program an extension of deferrals through June 30, 2021. Borrowers who opted into the Part III program were required to provide monthly financial statements and remit payments on a quarterly basis equal to the lesser of: i) 90% of free cash flow (EBITDA) or, ii) the otherwise contractual payment (“recapture payment”). Following the expiration of the deferral programs on June 30, 2021, for term loans, payments were applied to accrued interest first and once accrued interest is current, payments will be applied to principal. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity. Cumulative deferred interest totaled $12.0 million as of June 30, 2021, but declined to $1.8 million as of December 31, 2021. 36 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The Bank also participated in the PPP established by the CARES Act. During the first round of PPP, we approved 451 loans that were referred to an online small business lender, totaling $17.9 million. Through the second round we had approved 515 loan applications totaling $39.9 million through our internal lending program, of which 498 loans totaling $38.5 million have been fully forgiven by the SBA. The $57.8 million in PPP loans originated during the first two rounds of PPP generated $1.5 million in fees, which have been, or will be, recognized in income as loans are forgiven, or over the remaining life of the loan for any portion that is not forgiven. On December 22, 2020 Congress passed legislation that was signed into law on December 27, 2020, making available a third round of PPP funding. We provided access to the program through our internal lending program for our current business customers. As of December 31, 2021, we had approved 136 loan applications totaling $11.0 million, of which 125 loans totaling $9.8 million have been fully forgiven by the SBA and generated an additional $0.6 million in fees. These loans, as they were forgiven, generated fee income of $0.1 million and $0.2 million, and $1.1 million and $0.3 million, for the three and twelve months ended December 31, 2021 and December 31, 2020, respectively. Our interest income could be reduced due to the COVID-19 pandemic. Interest and fees will still accrue to income through normal GAAP accounting. Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the significance of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods. Our exposure to the hospitality industry at December 31, 2021 equated to approximately $418.6 million, or 14.9% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy levels at or below breakeven which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness. These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. These risk considerations were factored into qualitative adjustments included in the ACL. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected. Retail Operations The Company continues to promote digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools and our customer contact center for personal and automated telephone banking services. Retail branches are staffed and available to assist customers by offering lobby appointments, drive-up and virtual servicing. In 2021 and, to date in 2022, we continued to prioritize the safety of our associates and customers by offering drive-up and appointment only services due to the COVID-19 pandemic. Retail leadership continues to monitor branch traffic and local conditions daily and makes adjustments as needed. All branches are equipped with video conferencing and online tools that enable virtual servicing. We continue to pay all associates according to their normal work schedule, even if their hours were reduced and no associates were furloughed. Associates whose job responsibilities can be effectively carried out remotely are working from home. Associates whose critical duties require their continued presence on-site are utilizing personal protection equipment and observing social distancing and cleaning protocols. Our fee income for 2020 was negatively impacted due to COVID-19 by approximately $1.5 million. Beginning on July 20, 2020, certain account fees that were waived for customers affected by the COVID-19 pandemic were reinstated. In keeping with guidance from regulators, we actively worked with customers affected by the COVID-19 pandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees. As of December 31, 2021, we had no fee waivers specific to the COVID-19 pandemic. We believe these reductions in fees were temporary. Capital Resources and Liquidity As of December 31, 2021, all of the Company’s capital ratios were in excess of all regulatory requirements. We believe the economic recession brought about by the COVID-19 pandemic improved during the year ended December 31, 2021. 37 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) We maintain access to multiple sources of liquidity. Funding sources accessible to the Company include borrowing availability at the Federal Home Loan Bank (“FHLB”), equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which $667.3 million remained available at December 31, 2021, federal funds unsecured lines with six other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered CDs. In addition to the above resources, the Company also has $743.8 million of unpledged available-for-sale securities as an additional source of liquidity at December 31, 2021. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding. The Company is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources. Results of Operations and Financial Condition Earnings Summary 2021 Highlights • Net interest income increased $6.1 million, or 5.8%, to $111.2 million for the full year 2021 compared to $105.1 million for the full year 2020 primarily due to the enhanced return on restructured loan assets and collection of significant late fees on those loan assets, as well as a decline in funding costs during 2021. • The provision for credit losses totaled $3.4 million for the year ended December 31, 2021, compared to $18.0 million for the full year ended December 31, 2020. • Total noninterest income increased $2.3 million to $28.9 million for the full year 2021 compared to $26.6 million for the full year 2020. • Total noninterest expense decreased $56.5 million to $102.3 million for the full year 2021 compared to $158.8 million for the full year 2020. • Provision for income taxes increased $3.3 million to $4.1 million for the full year 2021 compared to $0.8 million for the full year 2020. We reported net income of $31.6 million, or $1.19 diluted earnings per share, for the year ended December 31, 2021 compared to a net loss of $45.9 million, or $1.74 per share, for the year ended December 31, 2020 . Years Ended December 31, PERFORMANCE RATIOS 2021 2020 2019 Return on Average Assets 0.76 % (1.12) % 0.65 % Return on Average Shareholders' Equity 7.92 % (9.78) % 5.76 % Portfolio Loans to Deposit Ratio 76.03 % 79.99 % 82.32 % Allowance for Credit Losses to Total Portfolio Loans 3.41 % 1.83 % 1.34 % Net Interest Income Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income. The interest income on interest-earning assets and the net interest margin are presented on an FTE basis, which is a non-GAAP measure. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the applicable 38 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) federal statutory tax rate of 21% for each period and the dividend-received deduction for equity securities. The Company believes this FTE presentation provides a relevant comparison between taxable and non-taxable sources of interest income. The following table reconciles net interest income per the Consolidated Statements of Income (Loss) to net interest income on an FTE basis for the periods presented: (Dollars in Thousands) Years Ended December 31, 2021 2020 2019 Total Interest Income $ 133,897 $ 140,941 $ 159,120 Total Interest Expense 22,714 35,826 46,773 Net Interest Income per Consolidated Statements of Net Income (Loss) 111,183 105,115 112,347 Adjustment to FTE Basis 1,492 2,375 3,046 Net Interest Income (FTE) (non-GAAP) $ 112,675 $ 107,490 $ 115,393 Net Interest Margin 2.80 % 2.74 % 2.97 % Adjustment to FTE Basis 0.04 % 0.06 % 0.08 % Net Interest Income (FTE) (non-GAAP) 2.84 % 2.80 % 3.05 % Average Balance Sheet and Net Interest Income Analysis (FTE) Total net interest income increased $6.1 million, or 5.8%, to $111.2 million in 2021, as compared to $105.1 million in 2020. Net interest income, on an FTE basis (non-GAAP), increased $5.2 million, or 4.8%, to $112.7 million in 2021 as compared to $107.5 million in 2020. The increase in net interest income, on an FTE basis, is driven by $13.1 million decrease in interest expense, offset by a $7.9 million decrease in interest income during 2021 as compared to 2020. The low interest rate environment and large commercial paydowns during 2021 has a negative impact on both net interest income and the net interest margin, but continues to be offset by a lower cost of funds as well as the positive impact of enhanced pricing on restructured loans and related late fees. Net interest margin increased six basis points to 2.80% in 2021 compared to 2.74% in 2020. The net interest margin, on an FTE basis (non-GAAP), increased four basis points to 2.84% in 2021 compared to 2.80% in 2020, primarily due to the aforementioned enhanced return on restructured loan assets and the collection of related fees during 2021. The intentional runoff of higher cost CDs continues to drive the decline in the overall cost of funds. 39 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the years ended December 31: (Dollars in Thousands) 2021 2020 2019 Average Balance Income/ Expense Yield/Rate Average Balance (3) Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate ASSETS Interest-Bearing Deposits with Banks $ 194,492 $ 271 0.14 % $ 104,526 $ 302 0.29 % $ 123,946 $ 2,750 2.22 % Tax-Free Investment Securities (2) 34,171 1,116 3.27 % 47,364 1,567 3.31 % 63,641 2,352 3.70 % Taxable Investment Securities 798,672 12,442 1.56 % 697,408 14,264 2.05 % 730,500 17,826 2.44 % Total Securities 832,843 13,558 1.63 % 744,772 15,831 2.13 % 794,141 20,178 2.54 % Tax-Free Loans (1)(2) 189,716 5,991 3.16 % 307,023 9,739 3.17 % 379,090 12,154 3.21 % Taxable Loans (1) 2,751,169 115,448 4.20 % 2,672,435 117,226 4.39 % 2,489,105 126,940 5.10 % Total Loans 2,940,885 121,439 4.13 % 2,979,458 126,965 4.26 % 2,868,195 139,094 4.85 % Federal Home Loan Bank Stock 3,420 121 3.54 % 4,925 218 4.43 % 2,352 144 6.12 % Total Interest-Earning Assets 3,971,640 135,389 3.41 % 3,833,681 143,316 3.74 % 3,788,634 162,166 4.28 % Noninterest Earning Assets 170,856 276,473 289,027 Total Assets 4,142,496 4,110,154 4,077,661 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Demand 413,714 1,007 0.24 % $ 321,036 $ 1,140 0.36 % $ 249,086 $ 2,004 0.80 % Money Market 383,391 1,130 0.29 % 197,225 924 0.47 % 134,676 1,671 1.24 % Savings 663,382 682 0.10 % 599,637 632 0.11 % 582,195 1,388 0.24 % Certificates of Deposit 1,484,436 19,427 1.31 % 1,818,837 32,695 1.80 % 2,054,077 41,593 2.02 % Total Interest-Bearing Deposits 2,944,923 22,246 0.76 % 2,936,735 35,391 1.21 % 3,020,034 46,656 1.54 % Federal Funds Purchased — — — % 55 1 1.82 % — — — FHLB Borrowings 25,986 313 1.20 % 30,628 361 1.18 % 2,329 38 1.63 % Other Borrowings 3,167 155 4.89 % 1,408 73 5.18 % 1,042 79 7.58 % Total Borrowings 29,153 468 1.61 % 32,091 435 1.36 % 3,371 117 3.47 % Total Interest-Bearing Liabilities 2,974,076 22,714 0.76 % 2,968,826 35,826 1.21 % 3,023,405 46,773 1.55 % Noninterest-Bearing Liabilities 769,401 667,914 581,496 Shareholders' Equity 399,019 473,414 472,760 Total Liabilities and Shareholders' Equity 4,142,496 4,110,154 4,077,661 Net Interest Income (2) $ 112,675 $ 107,490 $ 115,393 Net Interest Margin (2) 2.84 % 2.80 % 3.05 % (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent. (3) Loan and deposit balances include held-for-sale transactions in connection with sale of Bank branches. Interest income decreased $7.0 million, or 5.0% for 2021 compared to 2020. Interest income, on an FTE basis (non-GAAP), decreased $7.9 million, or 5.5%, for 2021 compared to 2020. The change was primarily due to increases in average interest-earning assets of $138.0 million for 2021, offset by a lower interest rate yield of 33 basis points compared to 2020. Average interest-bearing deposits with banks increased $90.0 million in 2021, and the average rate paid decreased 15 basis points for 2021 compared to 2020. Average loan balances decreased $38.6 million, primarily due to large commercial payoffs and loan sales, during 2021 compared to 2020, which included PPP loan production that began in the second quarter of 2020. Average PPP loans totaled $19.3 million during 2021. The average rate earned on loans decreased 13 basis points for 2021 compared to 2020 primarily due to lower short-term interest rates. Average investment securities increased $88.1 million and the average rate earned decreased 50 basis points for 2021 compared to 2020. The change in investment securities is the result of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures. 40 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Interest expense decreased $13.1 million for 2021 compared to 2020. The decrease was primarily due to lower short-term interest rates in 2021 as compared to 2020 in addition to the intentional runoff of higher cost CDs. Interest expense on deposits decreased $13.1 million for 2021 compared to 2020 primarily due to the decline in the average balance of CDs. The decrease of $334.4 million or 18.4% in the average balance of CDs for 2021 compared to 2020 was primarily due to the aforementioned intentional runoff of these higher cost CDs. Money market and interest-bearing demand accounts increased $186.2 million and $92.7 million, respectively for 2021 compared to 2020 primarily due to our deposit acquisition strategy. The average rate paid on interest-bearing deposits decreased 45 basis points for 2021 compared to 2020 primarily due to the aforementioned intentional runoff of higher cost CDs and lower short-term interest rates. Overall, the cost of interest-bearing liabilities decreased 45 basis points for 2021 compared to 2020. The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: 2021 Compared to 2020 2020 Compared to 2019 (Dollars in Thousands) Volume (3) Rate (3) Increase/ (Decrease) Volume (3) Rate (3) Increase/ (Decrease) Interest Earned on: Interest-Bearing Deposits with Banks $ 177 $ (208) $ (31) $ (374) $ (2,074) $ (2,448) Tax-Free Investment Securities (2) (431) (20) (451) (557) (228) (785) Taxable Investment Securities 1,884 (3,706) (1,822) (779) (2,783) (3,562) Total Securities 1,453 (3,726) (2,273) (1,336) (3,011) (4,347) Tax-Free Loans (1)(2) (3,705) (43) (3,748) (2,287) (128) (2,415) Taxable Loans (1) 3,393 (5,171) (1,778) 8,898 (18,612) (9,714) Total Loans (312) (5,214) (5,526) 6,611 (18,740) (12,129) Federal Home Loan Bank Stock (58) (39) (97) 123 (49) 74 Total Interest-Earning Assets $ 1,260 $ (9,187) $ (7,927) $ 5,024 $ (23,874) $ (18,850) Interest Paid on: Interest-Bearing Demand $ 280 $ (413) $ (133) $ 469 $ (1,333) $ (864) Money Market 640 (434) 206 570 (1,317) (747) Savings 66 (16) 50 40 (796) (756) Certificates of Deposit (5,352) (7,916) (13,268) (4,493) (4,405) (8,898) Total Interest-Bearing Deposits (4,366) (8,779) (13,145) (3,414) (7,851) (11,265) Federal Funds Purchased — (1) (1) 1 — 1 FHLB Borrowings (56) 8 (48) 336 (13) 323 Other Borrowings 86 (4) 82 23 (29) (6) Total Borrowings 30 3 33 360 (42) 318 Total Interest-Bearing Liabilities $ (4,336) $ (8,776) $ (13,112) $ (3,054) $ (7,893) $ (10,947) Change in Net Interest Margin $ 5,596 $ (411) $ 5,185 $ 8,078 $ (15,981) $ (7,903) (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent. (3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. Provision for Credit Losses The Company recognizes provision expense for ACL based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments. Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. The Company elected to defer its adoption of CECL in accordance with relief provided under the CARES Act and the adoption became effective January 1, 2021. At January 1, 2021, we increased the ACL by $64.5 million, which includes $61.6 million for the Day 1 CECL adjustment and $2.9 million 41 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) related to the life-of-loan reserve on unfunded loan commitments. The ACL as a percentage of total portfolio loans was 3.41% at December 31, 2021 and 1.83% at December 31, 2020. Provision expense decreased $14.6 million to $3.4 million for the year ended 2021 compared to $18.0 million for the year ended 2020. The decline in provision expense was because of increased qualitative loss factors as a result of the estimated economic impact of COVID-19 during 2020 and the relatively stable economy and improving COVID-19 conditions from the date of adoption through December 31, 2021. During 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 sold all of these loans during the third and fourth quarters of 2021 after workout strategies had been exhausted. A release of $1.3 million was recorded in 2021 related to 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. Net charge-offs were $23.1 million for the full year 2021 compared to $2.7 million for the full year 2020. The increase in net charge-offs was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.79% and 0.09% for the years ended 2021 and 2020, respectively. See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs. Nonperforming loans (“NPLs”) decreased significantly at December 31, 2021 by $24.6 million, or 76.9% to $7.4 million compared to $32.0 million at December 31, 2020. The decrease was primarily due to the resolution of our largest NPL relationship during 2021 and a significant reduction of our second largest NPL relationship. NPLs as a percentage of total portfolio loans were 0.26% at December 31, 2021 compared to 1.09% at December 31, 2020. See the “Credit Quality” section of this MD&A for more detail on our NPLs. Discussion of net interest income for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Net Interest Income” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 , which was filed with the SEC on March 12, 2021, and is incorporated herein by reference. Noninterest Income Years Ended December 31, (Dollars in Thousands) 2021 2020 $ Change % Change Gains on Sales of Securities, net $ 6,869 $ 6,882 $ (13) (0.2) % Service Charges, Commissions and Fees 6,662 4,668 1,994 42.7 % Debit Card Interchange Fees 7,226 5,857 1,369 23.4 % Insurance Commissions 1,901 1,728 173 10.0 % Bank Owned Life Insurance Income 1,380 1,400 (20) (1.4) % Other Real Estate Owned Income 90 340 (250) (73.5) % Commercial Loan Swap Fee Income 2,416 4,051 (1,635) (40.4) % Other 2,337 1,654 683 41.3 % Total Noninterest Income $ 28,881 $ 26,580 $ 2,301 8.7 % For the year ended December 31, 2021 compared to December 31, 2020, the increase of $2.3 million in total noninterest income was driven by increases in service charges, commissions and fee accounts of $2.0 million, debit card interchange fees of $1.4 million, $0.7 million increase in other income primarily due to a year-to-date gain of $0.5 million on the sale of four bank branches and higher insurance commissions of $0.2 million. The above increases were offset by lower commercial loan swap fee income of $1.6 million and a decrease in OREO income of $0.3 million. Service charges, commission and fees increased due to reinstating fees that were previously waived during 2020 for customers affected by the COVID-19 pandemic and debit 42 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) card interchange fees increased due to increased usage. The fluctuations in commercial loan swap fee income are due primarily to the timing and demand for this product in the current low interest rate environment. Discussion of noninterest income for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Income” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 , which was filed with the SEC on March 12, 2021, and is incorporated herein by reference. Noninterest Expense (Dollars in Thousands) Years Ended December 31, 2021 2020 $ Change % Change Salaries and Employee Benefits $ 54,157 $ 52,390 $ 1,767 3.4 % Occupancy Expense, net 13,556 13,369 187 1.4 % FDIC Insurance Expense 2,157 2,313 (156) (6.7) % Other Taxes 3,129 3,151 (22) (0.7) % Advertising Expense 952 1,633 (681) (41.7) % Telephone Expense 2,208 2,303 (95) (4.1) % Professional and Legal Fees 5,255 5,006 249 5.0 % Data Processing Expense 3,758 2,648 1,110 41.9 % Losses on Sales and Write-downs of Other Real Estate Owned, net 3,622 1,435 2,187 152.4 % Losses on Sales and Write-downs of Bank Premises, net 231 99 132 133.3 % Debit Card Expense 2,777 2,565 212 8.3 % Tax Credit Amortization 1,708 1,088 620 57.0 % Unfunded Loan Commitment Expense — (252) 252 NM Other Real Estate Owned Expense 407 657 (250) (38.1) % Goodwill Impairment Expense — 62,192 (62,192) NM Other 8,368 8,178 190 2.3 % Total Noninterest Expense $ 102,285 $ 158,775 $ (56,490) (35.6) % NM - percentage not meaningful Total noninterest expense decreased $56.5 million to $102.3 million for the full year 2021 compared to $158.8 million compared to the full year 2020. The decline was driven by the one-time charge resulting from goodwill impairment of $62.2 million recorded in the third quarter of 2020. Offsetting the decrease were increases of $2.2 million in losses on sales and write-downs of OREO, net primarily due to nonrecurring write-downs related to closed bank branches. There were also increases of $1.8 million in salaries and employee benefits, a $1.1 million increase in data processing expense and a $0.6 million increase in tax credit amortization. The increase in salaries and employee benefits was due to increased profit sharing incentives of $1.1 million and higher medical expenses of $1.7 million, offset by lower salaries of $1.3 million due to our branch network optimization project. Higher data processing expenses resulted from increased customer accounts and new modules added to our core processor and the increase in tax credit amortization was due to new historic tax credits entered into throughout 2021. Discussion of noninterest expense for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Expense” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 , which was filed with the SEC on March 12, 2021, and is incorporated herein by reference. 43 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Provision for Income Taxes The provision for income taxes increased $3.3 million to $4.1 million for the year ended December 31, 2021 compared to $0.8 million for December 31, 2020. Pre-tax income increased $80.8 million for the year ended 2021 compared to 2020. A full goodwill impairment charge in the amount of $62.2 million was recorded in the third quarter of 2020. Our effective tax rate was 11.5% for the year ended December 31, 2021 compared to negative 1.7% for December 31, 2020. The increase in the effective tax rate is primarily due to a higher level of pre-tax income and a lower level of tax-exempt interest income for the year ended December 31, 2021 and the nondeductible goodwill impairment charge for the year ended December 31, 2020. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and Bank Owned Life Insurance (“BOLI”), which are relatively consistent regardless of the level of pre-tax income. Discussion of provision for income taxes for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Provision for Income Taxes” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 , which was filed with the SEC on March 12, 2021, and is incorporated herein by reference. Financial Condition December 31, 2021 Total assets of $4.1 billion decreased $45.4 million, or 1.1%, from December 31, 2020 . Total portfolio loans at December 31, 2021 were $2.8 billion, decreasing $135.0 million, or 4.6%, year over year. We experienced a decline in total loans during 2021 primarily due to large commercial loan payoffs of approximately $312.3 million , $62.2 million of loan sales and mortgage refinancing sold in the secondary markets. The variances between loan segments for portfolio loans are also related to the adoption of Topic 326. See the impact of Topic 326 in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not applied to periods during 2020 and prior years, therefore showing fluctuations in all categories. At January 1, 2021, the initial break-out of Other loans related to the adoption of Topic 326 totaled $379.9 million consisting of $140.8 million of Commercial Real Estate, (“CRE”), $78.1 million of Commercial and Industrial (“C&I”), $50.8 million of Residential Mortgages and $110.2 million of Construction. This segment of loans has unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this segment resulted in an expected credit loss of $51.3 million at adoption. Loans held-for-sale were $0.2 million at December 31, 2021 a decrease of $25.2 million over prior year. The Company’s investment portfolio increased $143.7 million, or 18.5%, from December 31, 2020. Deposits increased $13.8 million from December 31, 2020 primarily due to our core deposits offset by the runoff of higher cost CDs and $84.7 million of deposits held-for-assumption in connection with the sale of four bank branches, which were completed during the second quarter of 2021 . Shareholders’ equity at December 31, 2021 was $407.6 million, a $32.6 million or 7.4% decrease from $440.2 million at December 31, 2020 . 44 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Securities The following table presents the composition of available-for-sale securities for the periods presented: (Dollars in Thousands) 2021 2020 $ Change U.S. Treasury Securities $ 4,413 $ — $ 4,413 U.S. Government Agency Securities 3,478 — 3,478 Residential Mortgage-Backed Securities 110,013 44,724 65,289 Commercial Mortgage-Backed Securities 4,168 5,447 (1,279) Asset Backed Securities 81,863 133,557 (51,694) Collateralized Mortgage Obligations 287,614 218,359 69,255 Small Business Administration 108,914 99,145 9,769 States and Political Subdivisions 262,202 252,622 9,580 Corporate Notes 59,735 24,825 34,910 Total Debt Securities $ 922,400 $ 778,679 $ 143,721 The balances and average rates of our securities portfolio are presented below as of December 31: (Dollars in Thousands) 2021 2020 Balance Weighted- Average Yield Balance Weighted- Average Yield U.S. Treasury Securities $ 4,413 1.35 % $ — — % U.S. Government Agency Securities 3,478 1.73 % — — % Residential Mortgage-Backed Securities 110,013 0.44 % 44,724 1.86 % Commercial Mortgage-Backed Securities 4,168 2.02 % 5,447 2.77 % Asset Backed Securities 81,863 1.58 % 133,557 1.47 % Collateralized Mortgage Obligations 287,614 1.03 % 218,359 1.38 % Small Business Administration 108,914 1.47 % 99,145 1.69 % States and Political Subdivisions 262,202 2.41 % 252,622 2.69 % Corporate Notes 59,735 4.08 % 24,825 5.42 % Total Securities Available-for-Sale $ 922,400 1.65 % $ 778,679 2.02 % The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to our Investment Policy approved annually by our Board and administered through ALCO and our treasury function. The securities portfolio increased $143.7 million at December 31, 2021 compared to December 31, 2020. Securities comprise 22.3% of total assets at December 31, 2021 compared to 18.6% at December 31, 2020. The increase is a result of active balance sheet management and the Company’s excess cash position. We further diversified the securities portfolio as to bond types, maturities and interest rate structures. At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses. At December 31, 2020, total gross unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses. Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis. During the years ended December 31, 2021 and December 31, 2020 the Company did not record any OTTI. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported. 45 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table sets forth the maturities of securities at December 31, 2021 and the weighted average yields of such securities. Available-for-Sale Securities (Dollars in Thousands) Maturing Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury Securities $ — — % $ — — % $ 4,413 1.35 % $ — — % U.S. Government Agency Securities — — % — — % 3,478 1.73 % — — % Residential Mortgage-Backed Securities (2) 14 2.26 % — — % — — % 109,999 0.44 % Commercial Mortgage-Backed Securities (2) — — % — — % 4,168 2.02 % — — % Asset Backed Securities (2) — — % — — % 17,259 2.18 % 64,604 1.42 % Collateralized Mortgage Obligations (2) — — % — — % 62,132 1.81 % 225,482 0.82 % Small Business Administration — — % 1,922 1.47 % 63,530 1.47 % 43,462 1.47 % States and Political Subdivisions 731 4.11 % 963 2.75 % 70,814 2.23 % 189,694 2.47 % Corporate Notes — — % — — % 59,735 4.08 % — — % Total $ 745 $ 2,885 $ 285,529 $ 633,241 Weighted Average Yield (1) 4.08 % 1.90 % 2.33 % 1.35 % (1) Weighted -average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent. (2) Securities not due at a single maturity date At December 31, 2021 the Company had no held-to-maturity securities; however, if at a future date we classify securities as held-to-maturity, our disclosures will show the weighted average yield for each range of maturities. At December 31, 2021, the Company held 52% fixed rate and 48% floating rate securities. The floating rate securities may have a stated maturity greater than ten years, but the interest rate generally adjusts monthly. Therefore, the duration on these securities is short, generally less than one year, and will therefore not be as sensitive to interest rate changes. Refer to Note 4, Investment Securities, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our securities. 46 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Loan Composition The following table summarizes our loan portfolio as of the periods presented: December 31, (Dollars in Thousands) 2021 2020 2019 2018 2017 Commercial Commercial Real Estate $ 1,323,252 $ 1,453,799 $ 1,365,310 $ 1,359,036 $ 1,479,765 Commercial and Industrial 345,376 557,164 621,667 661,870 804,592 Total Commercial Loans 1,668,628 2,010,963 1,986,977 2,020,906 2,284,357 Consumer Residential Mortgages 457,988 472,170 514,538 397,280 193,328 Other Consumer 44,666 57,647 73,688 73,058 79,980 Total Consumer Loans 502,654 529,817 588,226 470,338 273,308 Construction 282,947 406,390 309,563 212,548 126,780 Other 357,900 — — — — Total Portfolio Loans 2,812,129 2,947,170 2,884,766 2,703,792 2,684,445 Loans Held-for-Sale 228 25,437 19,714 2,559 517 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 $ 2,904,480 $ 2,706,351 $ 2,684,962 Our loan portfolio represents our most significant source of interest income. The risk that borrowers are unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay. Total portfolio loans decreased $135.0 million, or 4.6% to $2.8 billion at December 31, 2021 compared to $2.9 billion at December 31, 2020. We experienced a decline in total loans during 2021 primarily due to large commercial loan payoffs, $62.2 million of loan sales and mortgage refinancing sold in the secondary markets. The variances between loan segments for portfolio loans also relates to the adoption of Topic 326 as we adjusted our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The commercial portfolio is monitored for potential concentrations of credit risk by market, loan type, property type and tenants. Our exposure to the hospitality industry at December 31, 2021 equated to approximately $418.6 million, or 14.9% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines throughout the pandemic. However, like many service industries our clients continue to face challenges with respect to labor, which impedes their ability to turnover rooms resulting in occupancy constraints. This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. Contractual payments have been restored since the expiration of our deferral program on June 30, 2021. These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. As a result, our financial condition, capital levels and results of operations could be adversely affected. Aggregate commitments to our top 10 credit relationships were $721.6 million at December 31, 2021. The Other segment represents 49.6% of the top 10 credit relationships. 47 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table summarizes our top 10 relationships and a description of industries represented for the periods presented: Dollars in Thousands For the Periods Ending Top Ten (10) Relationships 12/31/2021 12/31/2020 Change 2021 % of Gross Loans 2021 % of RBC 1. Hospitality, agriculture & energy $ 350,010 $ 375,990 $ (25,980) 12.45 % 72.45 % 2. Retail real estate & food services 56,073 55,373 700 1.99 % 11.61 % 3. Hospitality 55,634 61,691 (6,057) 1.98 % 11.51 % 4. Industrial & retail real estate 45,653 41,439 4,214 1.62 % 9.45 % 5. Retail real estate 38,250 35,388 2,862 1.36 % 7.92 % 6. Multifamily development 36,720 40,874 (4,154) 1.31 % 7.60 % 7. Hospitality 35,664 37,435 (1,771) 1.27 % 7.38 % 8. Multifamily & student housing 35,405 38,787 (3,382) 1.26 % 7.33 % 9. Hospitality 34,463 36,086 (1,623) 1.22 % 7.13 % 10. Special / limited use 33,736 33,273 463 1.20 % 6.98 % Top Ten (10) Relationships 721,608 756,336 (34,728) 25.66 % 149.36 % Total Gross Loans 2,812,357 2,982,442 (170,085) % of Total Gross Loans 25.66 % 25.36 % 0.30 % Concentration Threshold (25% of Risk-based Capital ("RBC")) $ 120,781 $ 116,300 Unfunded commitments on lines of credit were $433.1 million at December 31, 2021 as compared to $410.7 million at December 31, 2020. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 52.2% at December 31, 2021 and 47.8% at December 31, 2020. Unfunded commitments on commercial operating lines of credit was 51.7% at December 31, 2021 and 48.3% at December 31, 2020. From time to time, we have mortgage loans held-for-sale derived from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. 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. Mortgage loans held-for-sale were $0.2 million and $25.4 million at 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 sold in the second quarter of 2021. 48 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following tables present the maturity schedule of portfolio loan types at December 31, 2021: Maturity (Dollars in Thousands) Within One Year After One But Within Five Years After Five But Within 15 Years After 15 Years Total Fixed interest rates Commercial Real Estate $ 47,934 $ 127,445 $ 48,615 $ 9,463 $ 233,457 Commercial and Industrial 65,704 84,886 167,471 16,648 334,709 Residential Mortgages 4,463 7,680 72,577 29,696 114,416 Other Consumer 1,852 33,350 8,797 — 43,999 Construction 79,497 37,989 4,359 165 122,010 Other — — — — — Portfolio Loans with Fixed Interest Rates $ 199,450 $ 291,350 $ 301,819 $ 55,972 $ 848,591 Variable interest rates Commercial Real Estate $ 46,124 $ 74,822 $ 570,774 $ 398,075 $ 1,089,795 Commercial and Industrial 3,274 537 4,793 2,063 10,667 Residential Mortgages 1,380 2,538 19,679 319,975 343,572 Other Consumer 643 24 — — 667 Construction 47,074 104,067 8,016 1,780 160,937 Other 346,729 — 7,712 3,459 357,900 Portfolio Loans with Variable Interest Rates $ 445,224 $ 181,988 $ 610,974 $ 725,352 $ 1,963,538 Total Portfolio Loans $ 644,674 $ 473,338 $ 912,793 $ 781,324 $ 2,812,129 Refer to Note 5, Loans and Loans Held-For-Sale, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our loans. Credit Quality On a monthly basis, a Criticized Asset Committee meets to review certain special mention and substandard loans within prescribed policy thresholds. These loans typically represent the highest risk of loss to the Company. Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral. On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter. Annually, this same committee approves credit related policies and policy enhancements as they become available. Additional credit risk management practices include continuous reviews of our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing. Our Loan Review department serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities. The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process. Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms. 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. 49 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Nonperforming assets (“NPAs”) consist of nonaccrual loans, nonaccrual troubled debt restructurings (“TDRs”) and other real estate owned (“OREO”). The following table summarizes nonperforming assets for the dates presented: (Dollars in Thousands) December 31, 2021 2020 Nonperforming Loans Commercial Real Estate $ 595 $ 224 Commercial and Industrial 451 456 Residential Mortgages 2,551 4,135 Other Consumer 73 191 Construction 177 2,012 Other — — Total Nonperforming Loans 3,847 7,018 Nonperforming Troubled Debt Restructurings Commercial Real Estate 2,742 21,667 Commercial and Industrial — — Residential Mortgages — — Other Consumer — — Construction 808 3,319 Other — — Total Nonperforming Troubled Debt Restructurings 3,550 24,986 Total Nonperforming Loans 7,397 32,004 Other Real Estate Owned 10,916 15,722 Total Nonperforming Assets $ 18,313 $ 47,726 Nonperforming Loans to Total Portfolio Loans 0.26 % 1.09 % Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned 0.65 % 1.61 % NPLs decreased significantly by $24.6 million, or 76.9% compared to December 31, 2020, primarily due to the resolution of our largest NPL relationship and a significant decrease in the second largest NPL relationship, partly offset by new loans placed on nonaccrual status during 2021. The two largest NPL relationships had an aggregate principal balance of $21.4 million at December 31, 2020. We recognized charge-offs totaling $8.2 million related to these relationships during the second quarter of 2021 resulting in the release of $4.8 million of individually evaluated loan reserves. The $8.2 million in charge-offs consisted of a $6.3 million charge-off triggered by a settlement of the debt and proceeds received while the remaining $1.9 million charge-off was triggered by the sale of the underlying collateral through a purchase agreement approved by the bankruptcy court. Nonperforming construction loans decreased primarily due to paydowns from borrower asset sales on four loans related to one relationship during the fourth quarter of 2021. Paydowns on this relationship totaled $2.4 million and charge-offs totaled $1.9 million leaving a remaining book balance of $0.8 million that is adequately secured by collateral. Offsetting the declines were new NPLs totaling $2.8 million, of which $2.7 million is one loan. NPLs as a percentage of total portfolio loans were 0.26% at December 31, 2021 compared to 1.09% at December 31, 2020. OREO decreased $4.8 million, or 30.6%, at December 31, 2021 compared to December 31, 2020 due to the sale of 23 branches and six OREO properties during 2021. Closed retail bank office carrying values decreased $1.5 million and have a remaining book value of $1.0 million at December 31, 2021 compared to $2.5 million at December 31, 2020. During 2021, 20 branch closures were completed and 16 of these were sold as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. There were no nonaccrual loans related to loans held-for-sale at December 31, 2021. As of December 31, 2020 total nonaccrual loans include $7 thousand in loans held-for-sale in connection with sale of Bank branches. Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our nonperforming loans and OREO. 50 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following table summarizes past due loans for the dates presented: (Dollars in Thousands) December 31, 2021 2020 Loans 30 to 89 Days Past Due Commercial Commercial Real Estate $ 229 $ 3,816 Commercial and Industrial 297 384 Total Commercial Loans 526 4,200 Consumer Residential Mortgages 683 1,347 Other Consumer 461 580 Total Consumer Loans 1,144 1,927 Construction — 284 Other — — Total Loans 30 to 89 Days Past Due $ 1,670 $ 6,411 Portfolio loans past due 30 to 89 days or more and still accruing decreased $4.7 million, or 74.0% 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 loans during the year ended December 31, 2021 and December 31, 2020 that were past due more than 90 days and still accruing. 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 loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans. Troubled Debt Restructuring (“TDRs”) are loans that we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. The Company strives to identify borrowers in financial difficulty early and work with them to modify terms and conditions before their loan defaults and/or is transferred to nonaccrual status. Modified terms that might be considered a TDR generally include extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. Short-term modifications that are considered insignificant are generally not considered a TDR unless there are other concessions granted. An accruing loan that is characterized as a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period before the modification. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless a subsequent restructuring includes an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk, we fully expect that the remaining principal and interest will be collected according to the restructured agreement or the contractual terms of the original loan agreement are restored. Generally, the Company individually evaluates all impaired loans, which includes TDRs, with a commitment greater than or equal to $1.0 million for Individually Evaluated Loan reserves. In addition, the Company may evaluate credits that have complex loan structures for impairment, even if the balance is less than $1.0 million. Nonaccrual TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate given to the borrower is considered to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the significant extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk. The loan will be reported 51 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) as a nonaccrual TDR and an impaired loan. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. The loan will remain an impaired loan for the remaining life of the loan because the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk. Allowance for Credit Losses The following summarizes our allowance for credit loss experience at December 31 for each of the years presented: (Dollars in Thousands) 2021 2020 2019 Balance Beginning of Year $ 54,074 $ 38,762 $ 39,199 Impact of CECL Adoption 61,642 — — Provision for Credit Losses 3,350 18,006 3,404 Charge-offs: Commercial Real Estate 19,662 40 69 Commercial and Industrial 374 66 22 Residential Mortgages 273 258 197 Other Consumer 2,256 3,991 4,401 Construction 1,859 — 393 Other — — — Total Charge-offs 24,424 4,355 5,082 Recoveries: Commercial Real Estate 159 707 — Commercial and Industrial 291 2 — Residential Mortgages 168 27 9 Other Consumer 586 737 602 Construction 93 188 630 Other — — — Total Recoveries 1,297 1,661 1,241 Total Net Charge-offs 23,127 2,694 3,841 Balance End of Year $ 95,939 $ 54,074 $ 38,762 Net Charge-offs to Average Portfolio Loans 0.79% 0.09% 0.13% Allowance for Credit Losses to Total Portfolio Loans 3.41% 1.83% 1.34% Total net charge-offs increased to $23.1 million for the year ended December 31, 2021 compared to $2.7 million for the year ended December 31, 2020 primarily in the commercial real estate segment. In the quarter ended June 30, 2021, we released $4.8 million of specific reserves in connection with the resolution of our two largest CRE nonperforming relationships and recognized $8.2 million in charge-offs. In the quarter ended September 30, 2021, the Bank sold nine CRE loans within two performing relationships with an unpaid principal balance of $50.2 million, which resulted in charge-offs of $9.2 million and a net release of reserves of $3.1 million. Finally, in the quarter ended December 31, 2021, we sold an additional two notes, which resulted in $2.2 million net charge-offs and added $0.5 million to provision expense. We also recorded a $1.9 million net charge-off for a nonperforming lot development relationship. 52 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) The following is the Allocation of the ACL balance by segment as of December 31 for the years presented below: 2021 2020 (Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans Commercial Real Estate $ 17,297 47.0 % $ 36,428 49.3 % Commercial & Industrial 4,111 12.3 % 5,064 18.9 % Residential Mortgages 4,368 16.3 % 2,099 16.0 % Other Consumer 1,493 1.6 % 2,479 2.0 % Construction 6,939 10.1 % 8,004 13.8 % Other 61,731 12.7 % — — % Balance End of Year $ 95,939 100.0 % $ 54,074 100.0 % While the variances within the loan segments relate to the Day 1 impact of CECL, our ACL has a higher concentration of commercial loans including CRE, C&I and construction. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. The following table summarizes the credit quality ratios and their components as of December 31 for the years presented below: (Dollars in Thousands) 2021 2020 Allowance for Credit Losses to Total Portfolio Loans Allowance for Credit Losses $ 95,939 $ 54,074 Total Portfolio Loans 2,812,129 2,947,170 Allowance for Credit Losses to Total Portfolio Loans 3.41 % 1.83 % Nonperforming Loans to Total Portfolio Loans Nonperforming Loans $ 7,397 $ 32,004 Total Portfolio Loans 2,812,129 2,947,170 Nonperforming Loans to Total Portfolio Loans 0.26 % 1.09 % Allowance for Credit Losses to Nonperforming Loans Allowance for Credit Losses $ 95,939 $ 54,074 Nonperforming Loans 7,397 32,004 Allowance for Credit Losses to Nonperforming Loans 1,297.00 % 168.96 % Net Charge-offs to Average Portfolio Loans Net Charge-offs $ 23,127 $ 2,694 Average Total Portfolio Loans 2,927,083 2,959,376 Net Charge-offs to Average Portfolio Loans 0.79 % 0.09 % A discussion of the factors that drove the material changes in the ACL ratios presented in the table above, such as the significant reduction in nonperforming loans and the significant increase in net charge-offs have been communicated in the paragraphs preceding this table within the Credit Quality and Allowance for Credit Losses sections within this MD&A. 53 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Prior to the adoption of Topic 326 on January 1, 2021, we calculated our ACL using an incurred loan loss methodology. The following tables are disclosures related to the allowance for credit losses in prior periods. The following table summarizes the ACL balance as of December 31, 2020: (Dollars in Thousands) 2020 Collectively Evaluated for Impairment $ 38,824 Individually Evaluated for Impairment 15,250 Total Allowance for Credit Losses $ 54,074 The ACL was $95.9 million, or 3.41%, of total portfolio loans at December 31, 2021 compared to $54.1 million, or 1.83% December 31, 2020. Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our ACL. Deposits The daily average balance of deposits and rates paid on deposits are summarized in the following table for the years ended December 31: 2021 2020 (Dollars in Thousands) Average Balance Rate Average Balance Rate Noninterest-Bearing Demand Deposits $ 736,974 — $ 634,864 — Noninterest-Bearing Demand Deposits Held for Assumption in Connection with Sale of Bank Branches — — 6,776 — Interest-Bearing Demand 413,714 0.24 % 317,664 0.36 % Money Market 383,391 0.29 % 194,129 0.47 % Savings 663,382 0.10 % 591,967 0.11 % Certificates of Deposit 1,484,436 1.31 % 1,765,310 1.79 % Interest-Bearing Deposits Held for Assumption in Connection with Sale of Bank Branches — — % 67,665 1.52 % Total Interest-Bearing Deposits 2,944,923 0.76 % 2,936,735 1.21 % Total Deposits $ 3,681,897 0.60 % $ 3,578,375 0.99 % The following table presents additional information about our year-end deposits: (Dollars in Thousands) 2021 2020 Deposits from the Certificate of Deposit Account Registry Services (CDARS) $ 139 $ 139 Noninterest-Bearing Public Funds Deposits 58,393 34,457 Interest-Bearing Public Funds Deposits 123,968 139,386 Total Deposits not Covered by Deposit Insurance (1) 396,626 377,398 Certificates of Deposits not Covered by Deposit Insurance 147,134 181,057 Deposits from Certain Directors, Executive Officers and their Affiliates 3,032 6,697 (1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements. 54 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Maturities of CDs over $250,000 or more not covered by deposit insurance at December 31, 2021 are summarized as follows: (Dollars in Thousands) Amount Percent Three Months or Less $ 29,123 19.8 % Over Three Months Through Twelve Months 38,980 26.5 % Over Twelve Months Through Three Years 52,850 35.9 % Over Three Years 26,181 17.8 % Total $ 147,134 100.0 % Refer to Note 12, Deposits, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our deposits. Federal Home Loan Bank (“FHLB”) Borrowings Information pertaining to FHLB advances at December 31 is summarized in the table below: (Dollars in Thousands) 2021 2020 2019 Balance at Period End $ 7,000 $ 35,000 $ 10,000 Average Balance during Period 25,986 30,628 2,329 Average Interest Rate during the Period 1.20 % 1.18 % 1.63 % Maximum Month-end Balance during the Period 35,000 35,000 10,000 Average Interest Rate at Period End 1.61 % 1.13 % 1.63 % The Company held FHLB Atlanta stock of $2.4 million and $5.1 million at December 31, 2021 and December 31, 2020, respectively. Dividends recorded on this restricted stock were $121 thousand and $218 thousand for the years ended December 31, 2021 and December 31, 2020, respectively. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Refer to Note 13, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our borrowings. 55 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Capital Resources The following table summarizes ratios for the Company for December 31: 2021 2020 Common Equity Tier 1 Carter Bankshares, Inc. 14.21 % 13.08 % Carter Bank and Trust 14.04 % 13.06 % Tier 1 Ratio Carter Bankshares, Inc. 14.21 % 13.08 % Carter Bank and Trust 14.04 % 13.06 % Total Risk-Based Capital Ratio Carter Bankshares, Inc. 15.46 % 14.33 % Carter Bank and Trust 15.29 % 14.31 % Leverage Ratio Carter Bankshares, Inc. 10.62 % 10.26 % Carter Bank and Trust 10.49 % 10.24 % Total shareholders’ equity decreased by $32.6 million to $407.6 million at December 31, 2021 compared to $440.2 million at December 31, 2020. The decrease was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a $14.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for- sale securities and $0.5 million related to the repurchase of common stock, partially offset by net income of $31.6 million. The remaining difference of $1.0 million is related to stock-based compensation during the year ended December 31, 2021. The Company continues to maintain its capital position with a leverage ratio of 10.62% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 14.21% compared to the regulatory guideline of 6.50% to be well-capitalized. Our risk-based Tier 1 and Total Capital ratios were 14.21% and 15.46%, respectively, which places the Company above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary. In July 2013 the federal banking agencies issued a final rule to implement the Basel III Final Rules and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The final rule established a comprehensive capital framework and went into effect on January 1, 2015 for smaller banking organizations such as the Company. The rule also requires the Company and the Bank to maintain a capital conservation buffer composed of Common Equity Tier 1 capital in an amount greater than 2.50% of total risk-weighted assets beginning in 2019. The capital conservation buffer was phased-in, in equal increments from 2016 through 2019. As a result, starting in 2019, the Company and the Bank were required to maintain a Common Equity Tier 1 risk-based capital ratio greater than 7.0%, a Tier 1 risk-based capital ratio greater than 8.5%, and a Total risk-based capital ratio greater than 10.5%; otherwise, they will be subject to restrictions on capital distributions and discretionary bonus payments. Federal regulators periodically propose amendments to the regulatory capital rules and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted. The community bank leverage ratio final rule was effective on January 1, 2020 and allows qualifying community banking organizations to calculate a leverage ratio to measure capital adequacy. Qualifying banking organizations that have less than $10 billion total assets, a leverage ratio of greater than 9%, and meet other criteria such as off-balance sheet exposures and trading assets limits. Banks opting into this framework are not required to calculate or report risk-based capital. We did not adopt this framework; therefore, capital ratios are calculated and reported as detailed above. Refer to Note 21, Capital Adequacy, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our capital. 56 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Contractual Obligations Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payments. The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents as of December 31, 2021, significant fixed and determinable contractual obligations to third parties by payment date: Payments Due In (Dollars in Thousands) Less Than One Year One to Three Years Three to Five Years More Than five Years Total Deposits without a Stated Maturity (1) $ 2,354,158 $ — $ — $ — $ 2,354,158 Certificates of Deposits (1) 565,385 493,445 283,891 1,597 1,344,318 Federal Home Loan Bank Borrowings (2) 7,000 — — — 7,000 Operating and Capital Leases 447 1,000 877 7,549 9,873 Purchase Obligations 4,697 6,919 6,769 5,190 23,575 Total $ 2,931,687 $ 501,364 $ 291,537 $ 14,336 $ 3,738,924 (1) Excludes Interest (2) The FHLB borrowing of $ 7.0 million was prepaid in January 2022 outside of its scheduled maturity. Lease contracts are described in Note 8, Premises and Equipment, of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Purchase obligations primarily represent obligations under agreement with a third-party data processing vendor and communications charges. Off-Balance Sheet Arrangements In the normal course of business, the Company offers our customers lines of credit and letters of credit to meet their financing objectives. The undrawn or unfunded portion of these facilities do not represent outstanding balances and therefore are not reflected in our financial statements as loans receivable. The Company provides lines of credit to our clients to memorialize the commitment to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represent $283.9 million, or 55.3% and $391.4 million, or 66.2% of the commitments to extend credit identified in the table below at December 31, 2021 and December 31, 2020, respectively. The Company provides letters of credit, generally, for the benefit or our customers to provide assurance to various municipalities that construction projects will be completed according to approved plans and specifications. These instruments involve elements of credit and interest rate risk and our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, could be equal to the contractual amount of the obligation less the value of any collateral. The Company analyzes this risk and calculates a reserve for unfunded commitments. The same credit policies are applied in granting these facilities as those used for underwriting loans. Lines of credit to finance construction projects include a construction end date, at which time the loan is expected to convert to a mini-perm loan. A department independent of our lending group monitors construction commitments of $1.0 million or more. Lines of credit to operating companies to finance working capital include a maturity date and may include various financial covenants. Letters of credit include an expiration date unless it is a standby letter of credit which automatically renews but generally provide for a termination clause on an annual basis given sufficient notice to the beneficiary. The Company typically charges an annual fee for the issuance of letters of credit. Because letters of credit are expected to expire without being drawn upon, these commitments do not necessarily represent future cash requirements of the Company. The following table sets forth the commitments and letters of credit as of December 31: (Dollars in Thousands) 2021 2020 Commitments to Extend Credit $ 513,482 $ 591,175 Standby Letters of Credit 27,083 29,293 Total $ 540,565 $ 620,468 Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. 57 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Liquidity Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. Our primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, access to the institutional CD market, and the brokered deposit market. In addition to the lines referenced above, the Company also has $743.8 million of unpledged available-for-sale investment securities as an additional source of liquidity. An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At December 31, 2021, the Bank had $985.1 million in highly liquid assets, which consisted of $64.9 million in interest-bearing deposits in other financial institutions, $176.2 million in FRB Excess Reserves, $743.8 million in unpledged securities and $0.2 million in mortgage loans held-for-sale. This resulted in highly liquid assets to total assets ratio of 23.8% at December 31, 2021. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding. The following table provides detail of liquidity sources as of December 31: (Dollars in Thousands) 2021 2020 Cash and Due From Banks $ 36,698 $ 38,535 Interest Bearing Deposits in Other Financial Institutions 64,905 39,954 Federal Reserve Bank Excess Reserves 176,196 163,453 Unpledged Investment Securities 743,836 632,724 Excess Pledged Securities 28,417 7,857 FHLB Borrowing Availability 667,307 510,533 Unsecured Lines of Credit 145,000 145,000 Total Liquidity Sources $ 1,862,359 $ 1,538,056 58 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) Inflation Management is aware of the significant effect inflation has on interest rates and can have on financial performance. The Company’s ability to cope with this is best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income and expense. The mix of interest-rate sensitive assets and liabilities is monitored through ALCO in order to reduce the impact of inflation on net interest income. The effects of inflation are controlled by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Stock Repurchase Plan On December 13, 2021, the Company authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months. As of December 31, 2021, 30,407 shares of common stock had been repurchased under this program at an average price of $15.22 per share. The specific timing, price and quantity of repurchases will be at our discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. The Stock Repurchase Plan is also described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities, of this Annual Report on Form 10-K. 59 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES