Carter Bankshares, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued) Years Ended December 31, (Dollars in Thousands) 2021 2020 2019 SUPPLEMENTARY DATA Cash Interest Paid $ 23,467 $ 36,696 $ 46,170 Cash Paid for Income Taxes 2,720 416 220 Transfer from Loans to Other Real Estate Owned 59 755 302 Transfer from Fixed Assets to Other Real Estate Owned 12,013 2,221 1,694 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 Loans Held-for-Sale in Connection with Sale of Bank Branches — 9,835 — Bank Premises and Equipment Held-for-Sale — 2,293 — Deposits Held for Assumption in Connection with Sale of Bank Branches — 84,717 — Stock Repurchases Settled in Subsequent Period ( 306 ) — — See accompanying notes to audited Consolidated Financial Statements. 69 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Carter Bankshares, Inc. (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. 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. Actual results could differ from those estimates. Our significant accounting policies are described below. Principles of Consolidation: The Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. and its wholly owned subsidiary. The Investment Company is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Reclassification: 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 70 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. Securities: The Company classifies securities into either the held-to-maturity or available-for-sale categories at the time of purchase. 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. 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 71 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. A performing loan may be considered impaired. 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 72 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. 73 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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; and/or • 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 $ 1.0 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 Income (Loss). 74 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Bank Premises and Equipment: Bank premises and equipment acquired are stated at cost, less accumulated depreciation. 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 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 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. 75 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. 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: 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. 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 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. 76 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. 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 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. 77 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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: Level 1: 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. Level 2: 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. Level 3: 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 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 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. This valuation method is classified as Level 3 in the fair value hierarchy. 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. 78 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. 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: 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. 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 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 79 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) guidance. 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. 80 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 ) Assets: Total Loans Held for Investments, net $ 2,831,454 $ 2,893,096 $ ( 61,642 ) Net deferred tax asset 21,413 7,589 13,824 Liabilities: Allowance for Credit Losses on Unfunded Loan Commitments 3,052 144 2,908 Equity: 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. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective 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. 81 Table of Contents 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. 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. 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 and Diluted Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575 Less: 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, including Shares Considered Participating Securities 26,449,438 26,379,774 26,323,899 Less: 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. 82 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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: December 31, 2021 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 4,442 $ — $ ( 29 ) $ 4,413 U.S. Government Agency Securities 3,475 3 — 3,478 Residential Mortgage-Backed Securities 112,118 76 ( 2,181 ) 110,013 Commercial Mortgage-Backed Securities 4,155 53 ( 40 ) 4,168 Asset Backed Securities 82,119 49 ( 305 ) 81,863 Collateralized Mortgage Obligations 287,734 2,190 ( 2,310 ) 287,614 Small Business Administration 108,643 879 ( 608 ) 108,914 States and Political Subdivisions 257,810 6,344 ( 1,952 ) 262,202 Corporate Notes 59,750 375 ( 390 ) 59,735 Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400 December 31, 2020 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Residential Mortgage-Backed Securities $ 44,057 $ 1,008 $ ( 341 ) $ 44,724 Commercial Mortgage-Backed Securities 5,194 253 — 5,447 Asset Backed Securities 133,672 884 ( 999 ) 133,557 Collateralized Mortgage Obligations 212,751 6,007 ( 399 ) 218,359 Small Business Administration 99,604 346 ( 805 ) 99,145 States and Political Subdivisions 239,251 13,490 ( 119 ) 252,622 Corporate Notes 24,250 582 ( 7 ) 24,825 Total Debt Securities $ 758,779 $ 22,570 $ ( 2,670 ) $ 778,679 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, (Dollars in Thousands) 2021 2020 2019 Proceeds from Sales of Securities Available-for-Sale $ 197,056 $ 188,169 $ 390,548 Gross Realized Gains $ 7,080 $ 6,957 $ 4,172 Gross Realized Losses ( 211 ) ( 75 ) ( 1,967 ) Net Realized Gains $ 6,869 $ 6,882 $ 2,205 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. 83 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2021 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 730 $ 731 Due after One Year through Five Years 2,856 2,885 Due after Five Years through Ten Years 200,895 201,970 Due after Ten Years 229,639 233,156 Residential Mortgage-Backed Securities 112,118 110,013 Commercial Mortgage-Backed Securities 4,155 4,168 Collateralized Mortgage Obligations 287,734 287,614 Asset Backed Securities 82,119 81,863 Total Securities $ 920,246 $ 922,400 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 Total (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Treasury Securities 2 $ 4,413 $ ( 29 ) — $ — $ — 2 $ 4,413 $ ( 29 ) U.S. 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 ) Collateralized Mortgage Obligations 50 157,630 ( 1,945 ) 11 24,849 ( 365 ) 61 182,479 ( 2,310 ) Small Business Administration 11 18,813 ( 235 ) 53 19,630 ( 373 ) 64 38,443 ( 608 ) States and Political Subdivisions 56 88,746 ( 1,503 ) 8 7,874 ( 449 ) 64 96,620 ( 1,952 ) Corporate Notes 10 29,683 ( 317 ) 1 2,427 ( 73 ) 11 32,110 ( 390 ) Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 ) 84 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2020 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 Losses Residential Mortgage-Backed Securities 7 $ 21,109 $ ( 339 ) 3 $ 40 $ ( 2 ) 10 $ 21,149 $ ( 341 ) Asset Backed Securities 11 23,653 ( 219 ) 27 61,599 ( 780 ) 38 85,252 ( 999 ) Collateralized Mortgage Obligations 13 48,318 ( 212 ) 14 38,615 ( 187 ) 27 86,933 ( 399 ) Small Business Administration 7 10,444 ( 53 ) 73 47,371 ( 752 ) 80 57,815 ( 805 ) 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 ) 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: December 31, (Dollars in Thousands) 2021 2020 Commercial Commercial Real Estate $ 1,323,252 $ 1,453,799 Commercial and Industrial 345,376 557,164 Total Commercial Loans 1,668,628 2,010,963 Consumer Residential Mortgages 457,988 472,170 Other Consumer 44,666 57,647 Total Consumer Loans 502,654 529,817 Construction 282,947 406,390 Other (1) 357,900 — Total Portfolio Loans 2,812,129 2,947,170 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. 85 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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, 2021 December 31, 2020 (Dollars in Thousands) Performing TDRs Nonperforming TDRs Total TDRs Performing TDRs Nonperforming TDRs Total TDRs Commercial Commercial Real Estate $ 2,679 $ 2,742 $ 5,421 $ 6,151 $ 21,667 $ 27,818 Commercial and Industrial 14 — 14 — — — Total Commercial TDRs 2,693 2,742 5,435 6,151 21,667 27,818 Consumer Residential Mortgages — — — 50,618 — 50,618 Other Consumer — — — — — — Total Consumer TDRs — — — 50,618 — 50,618 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 86 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. 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. 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 87 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. 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 88 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 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 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; and • 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. 89 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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: Risk Rating (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 Construction 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 Other 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 90 Table of Contents 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 Construction 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 Other 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 (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 Total (1) $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129 (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. 91 Table of Contents 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 Period Nonaccrual End of Period Nonaccrual Nonaccrual With No Related Allowance Past Due 90+ Days 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. 92 Table of Contents 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 Other — 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) Total 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 93 Table of Contents 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. 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. 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. 94 Table of Contents 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 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 December 31, 2020 (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 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 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. 95 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2020 (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 Collectively Evaluated for Impairment 22,655 5,064 2,099 2,479 6,527 38,824 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 Collectively Evaluated for Impairment 1,426,133 557,164 421,552 57,647 349,403 2,811,899 Total Portfolio Loans $ 1,453,799 $ 557,164 $ 472,170 $ 57,647 $ 406,390 $ 2,947,170 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 Construction 55,248 55,248 — 56,941 1,871 Residential Mortgages 50,618 50,618 — 51,716 1,906 Loans with a Specific Valuation Allowance: Commercial Real Estate 24,430 24,430 13,773 27,780 163 Commercial and Industrial — — — 184 — Construction 1,739 1,739 1,477 1,739 — Total by Category: Commercial Real Estate 27,666 27,666 13,773 31,981 291 Commercial and Industrial — — — 184 — Construction 56,987 56,987 1,477 58,680 1,871 Residential Mortgages 50,618 50,618 — 51,716 1,906 Total Impaired Loans $ 135,271 $ 135,271 $ 15,250 $ 142,561 $ 4,068 96 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 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 Real Estate 28,769 28,769 5,779 31,201 — Commercial and Industrial 390 390 390 434 — Construction — — — 1,716 — Total by Category: Commercial Real Estate 33,256 33,256 5,779 37,086 131 Commercial and Industrial 390 390 390 434 — 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 NOTE 7 - FAIR VALUE MEASUREMENTS 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) Assets Securities Available-for-Sale: U.S. Treasury Securities $ 4,413 $ 4,413 $ — $ — U.S. 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 Liabilities Derivatives $ 3,682 $ — $ 3,682 $ — Total $ 3,682 $ — $ 3,682 $ — 97 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 (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) Assets 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 Liabilities 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 (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 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 15,722 $ 15,722 Impaired Loans $ — $ — $ 10,919 $ 10,919 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. 98 Table of Contents 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 Assets 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 $ 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 Assets 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. 99 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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: Cash and Cash Equivalents $ 277,799 $ 36,698 $ 241,101 $ — $ 277,799 Securities Available-for-Sale 922,400 4,413 909,429 8,558 922,400 Loans Held-for-Sale 228 — — 228 228 Portfolio Loans, net 2,716,190 — — 2,689,578 2,689,578 Federal Home Loan Bank Stock, at Cost 2,352 — — NA NA Other Assets- Interest Rate Derivatives 3,508 — 3,508 — 3,508 Accrued Interest Receivable 17,178 17 3,462 13,699 17,178 Financial Liabilities: 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 FHLB Borrowings 7,000 — — 7,035 7,035 Accrued Interest Payable 1,378 — — 1,378 1,378 Fair Value Measurements at December 31, 2020 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 241,942 $ 38,535 $ 203,407 $ — $ 241,942 Securities Available-for-Sale 778,679 — 768,316 10,363 778,679 Loans Held-for-Sale 25,437 — — 25,437 25,437 Portfolio Loans, net 2,893,096 — — 2,854,244 2,854,244 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 Accrued Interest Receivable 32,157 — 2,887 29,270 32,157 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 FHLB Borrowings 35,000 — — 35,461 35,461 Accrued Interest Payable 2,131 — — 2,131 2,131 NOTE 8 - PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation as follows: December 31, (Dollars in Thousands) 2021 2020 Land $ 20,763 $ 27,673 Bank Premises 55,463 60,571 Furniture and Equipment 34,529 31,339 Leasehold Improvements 854 613 Total Premises and Equipment 111,609 120,196 Accumulated Depreciation ( 36,312 ) ( 34,889 ) 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. 100 Table of Contents 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 activity as of the dates presented: Year Ended December 31, (Dollars in Thousands) 2021 2020 2019 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 — Direct Write-Downs ( 3,472 ) ( 1,483 ) ( 4,457 ) Cash Proceeds from Pay-downs ( 452 ) ( 483 ) ( 580 ) 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, (Dollars in Thousands) 2021 2020 2019 Provision for Losses $ 3,472 $ 1,483 $ 4,457 Operating Expenses, net of Rental Income 317 317 ( 164 ) 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. 101 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 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. 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. 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 Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value 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 Liability Derivatives (Included in Other Liabilities) (Dollars in Thousands) 2021 2020 Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments 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 $ 4,756 102 Table of Contents 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 $ — $ ( 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 Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 3,508 $ 4,493 $ 3,682 $ 4,756 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 3,508 4,493 3,682 4,756 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. 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 — 84,717 ( 84,717 ) NM Total $ 3,698,476 $ 3,684,628 $ 13,848 0.4 % NM - percentage not meaningful 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 103 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 2023 344,037 2024 149,408 2025 175,974 2026 107,917 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 Weighted Average Interest Rate 1.61 % 1.13 % 1.63 % Interest Expense $ 313 $ 361 $ 38 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. 104 Table of Contents 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 Average Rate 2022 $ 4,000 1.60 % 2023 — — % 2024 3,000 1.63 % 2025 — — % 2026 — — % 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% 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 105 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. Restricted Stock 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. 106 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 Grant Date Fair Value 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 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 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 State Income Tax, net of Federal Benefit 20 0.1 455 ( 1.0 ) 220 0.8 Tax-exempt Interest, net of Disallowance ( 1,131 ) ( 3.2 ) ( 1,757 ) 3.9 ( 2,128 ) ( 7.7 ) Federal Tax Credits, net of Basis Reduction ( 1,559 ) ( 4.4 ) ( 948 ) 2.2 ( 2,032 ) ( 7.3 ) 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 ) 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. 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. 107 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 Credit Losses $ 20,906 $ 11,580 Valuation Adjustments on Other Real Estate Owned 1,392 1,537 Tax Credit Carryforwards 1,781 1,771 Equity Investment in Partnerships 304 837 Accrued Interest on Nonaccrual Loans 843 1,900 Operating Lease Liabilities 736 349 Other 1,765 1,057 Gross Deferred Tax Assets 27,727 19,031 Less: Valuation Allowance ( 309 ) ( 838 ) Total Deferred Tax Assets $ 27,418 $ 18,193 (Dollars in Thousands) 2021 2020 Deferred Tax Liabilities Fixed Asset Depreciation $ ( 4,300 ) $ ( 5,512 ) Acquisition-Related Fair Value Adjustments ( 3,069 ) ( 4,063 ) Deferred Loan Income ( 1,005 ) ( 649 ) Operating Lease Right-of-Use Assets ( 712 ) ( 321 ) 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 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. 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. 108 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 Amount 2021 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 ) 2020 Net Unrealized Gains Arising during the Period $ 26,621 $ ( 5,590 ) $ 21,031 Reclassification Adjustment for Gains included in Net Loss ( 6,882 ) 1,445 ( 5,437 ) Other Comprehensive Income $ 19,739 $ ( 4,145 ) $ 15,594 2019 Net Unrealized Gains Arising during the Period $ 15,108 $ ( 3,173 ) $ 11,935 Reclassification Adjustment for Gains included in Net Income ( 2,205 ) 463 ( 1,742 ) Other Comprehensive Income $ 12,903 $ ( 2,710 ) $ 10,193 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. 109 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. Litigation 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. 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. Insurance: Commission income is earned based on customer transactions. 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. OREO Income: 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. 110 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 $ 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 — Insurance 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 Out of Scope Revenue Streams Gain on Sales of Securities, net 6,869 6,882 2,205 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 111 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 20 – PARENT COMPANY CONDENSED FINANCIAL INFORMATION Balance Sheets December 31, (Dollars in Thousands) 2021 2020 ASSETS Cash $ 5,142 $ 639 Investment in Bank Subsidiary 402,190 439,553 Other Assets 571 — Total Assets $ 407,903 $ 440,192 LIABILITIES Other Liabilities $ 307 $ 18 Total Shareholders’ Equity 407,596 440,174 Total Liabilities and Shareholders’ Equity $ 407,903 $ 440,192 Statements of Net Income December 31, (Dollars in Thousands) 2021 2020 2019 Dividends from Subsidiaries $ 6,000 $ 1,000 $ — Total Expenses ( 2,238 ) ( 594 ) — Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary 3,762 406 — Income Tax Benefit ( 446 ) — — 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 December 31, (Dollars in Thousands) 2021 2020 2019 OPERATING ACTIVITIES 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 Other Assets ( 571 ) — — (Decrease) Increase in Intercompany Liability ( 17 ) 18 — Net Cash Provided by Operating Activities 4,660 639 — INVESTING ACTIVITIES Investments in Subsidiaries — — — Net Cash Used in Investing Activities — — — FINANCING ACTIVITIES Stock Repurchase Plan Settlements ( 157 ) — — Cash Dividends Paid to Common Shareholders — — — Net Cash Used In Financing Activities ( 157 ) — — Net Increase in Cash 4,503 639 — Cash at Beginning of Year 639 — — Cash at End of Year $ 5,142 $ 639 $ — 112 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 21 - CAPITAL ADEQUACY 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 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. 113 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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 Requirements To be Well Capitalized Under Prompt Corrective Action Provisions (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2021 Leverage Ratio 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 % Common Equity Tier 1 (to Risk-Weighted Assets) 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 % Tier 1 Capital (to Risk-Weighted Assets) 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 % Total Capital (to Risk-Weighted Assets) 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 % As of December 31, 2020 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 % The Company was incorporated on October 7, 2020 in connection with 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 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. 114 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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: 2021 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Total Interest Income $ 32,957 $ 33,094 $ 34,913 $ 32,933 Total Interest Expense 6,428 5,891 5,512 4,883 Net Interest Income 26,529 27,203 29,401 28,050 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 2020 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter 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 Income Tax Expense (Benefit) 247 ( 488 ) 875 138 Net Income (Loss) $ 4,423 $ 4,455 $ ( 57,678 ) $ 2,942 Earnings (Loss) Per Share $ 0.17 $ 0.17 $ ( 2.19 ) $ 0.11 2019 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Total Interest Income $ 39,139 $ 40,068 $ 40,154 $ 39,759 Total Interest Expense 11,243 12,113 12,084 11,333 Net Interest Income 27,896 27,955 28,070 28,426 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 Total Noninterest Expense 22,110 22,656 22,777 30,486 Income Before Income Taxes 7,963 8,331 8,059 3,431 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 $ 0.14 115 Table of Contents Crowe LLP Independent Member Crowe Global 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 (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, 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 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 116 Table of Contents 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; (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 117 Table of Contents • 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 since 2019. Washington, D.C. March 11, 2022 118 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.