What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 782 added, 624 removed, 657 unchanged (68% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021

Net Income (Loss) $ 25,980 $ ( 48,800 )

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities

Provision for Credit Losses 1,466 13,185

Goodwill Impairment — 62,192

Net Income $ 9,323 $ 9,375

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Provision for Credit Losses, including Provision for Unfunded Commitments 394 1,575

Origination of Loans Held-for-Sale ( 3,554 ) ( 314,092 )

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Depreciation/Amortization of Bank Premises and Equipment 1,478 1,559

Provision (Benefit) for Deferred Taxes 2,965 ( 1,268 )

Provision for Deferred Taxes 1,154 —

Net Amortization of Securities 1,634 902

1 unchanged sentence

Gains on Sales of Mortgage Loans Held-for-Sale ( 86 ) ( 74 )

Gains on Sales of Securities, net ( 6,450 ) ( 5,923 )

Losses (Gains) on Sales of Securities, net 24 ( 3,610 )

Write-downs of Other Real Estate Owned 131 139

Loss (Gains) on Sales of Other Real Estate Owned, Net 99 ( 63 )

Losses on Sales and Write-downs of Bank Premises 114 88

Premiums on Branch Sales ( 506 ) —

Losses on Sales of Other Real Estate Owned, Net 28 73

(Gains) Losses on Sales and Write-downs of Bank Premises ( 383 ) 43

Increase in the Value of Life Insurance Contracts ( 334 ) ( 340 )

Recognition of Restricted Stock Compensation Expense 395 208

Decrease (Increase) in Other Assets 7,438 ( 28,624 )

(Decrease) Increase in Other Liabilities ( 3,776 ) 1,313

Net Cash Provided By (Used In) Operating Activities 60,021 ( 11,185 )

Increase in Other Assets ( 9,563 ) ( 413 )

Increase (Decrease) in Other Liabilities 7,542 ( 2,279 )

Net Cash Provided By Operating Activities 12,470 359

INVESTING ACTIVITIES

4 unchanged sentences

Purchase of Bank Premises and Equipment, Net ( 809 ) ( 1,624 )

Net Cash Paid in Branch Sales ( 73,923 ) —

Proceeds from Sale of Portfolio Loans 42,295 —

Redemption (Purchase) of Federal Home Loan Bank Stock, net 1,878 ( 980 )

Proceeds from Sales of Bank Premises and Equipment, net 408 —

Redemption of Federal Home Loan Bank Stock, net 285 1,878

Loan Originations and Payments, net ( 82,032 ) ( 24,994 )

Payments Received on Other Real Estate Owned 108 —

Other Real Estate Owned Improvements — ( 19 )

Proceeds from Sales and Payments of Other Real Estate Owned 561 1,479

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Decrease in Certificates of Deposits ( 59,848 ) ( 96,383 )

(Payments) Proceeds from Federal Home Loan Bank Borrowings ( 5,000 ) 25,000

Cash Dividends Paid — ( 3,689 )

Net Cash Provided by Financing Activities 55,828 130,861

Net (Decrease) Increase in Cash and Cash Equivalents ( 16,146 ) 25,362

Payments on Federal Home Loan Bank Borrowings ( 7,000 ) ( 5,000 )

Repurchase of Common Stock ( 23,364 ) —

Net Cash (Used In) Provided by Financing Activities ( 562 ) 1,893

Net Decrease in Cash and Cash Equivalents ( 169,763 ) ( 22,788 )

Cash and Cash Equivalents at Beginning of Period 277,799 241,942

3 unchanged sentences

Cash Paid for Income Taxes — 88

Transfer from Loans to Other Real Estate Owned 23 707

Transfer from Fixed Assets to Other Real Estate Owned 1,201 —

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Right-of-use Asset Recorded in Exchange for Lease Liabilities 2,879 2,027

Stock Repurchase Settled in Subsequent Period ( 1,262 ) —

See accompanying notes to unaudited consolidated financial statements.

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

(the “Company”) and its wholly owned subsidiaries, including Carter Bank & Trust (the “Bank”).

(the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”).

All significant intercompany transactions have been eliminated in consolidation.

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Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period.

Reorganization:

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

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.

Reclassification:

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

The CARES Act:

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020.

The CARES Act provided approximately $2.2 trillion in emergency economic relief measures including, among other things, loan programs for small and mid-sized businesses and other economic relief for impacted businesses and industries, including financial institutions.

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

financial institutions and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.

Department of the Treasury, the Federal Deposit Insurance Corporation (the “FDIC”), the Board of Governors of the Federal Reserve System (“FRB”) and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

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

The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein.

Such statutes, regulations, and policies are subject to ongoing review by U.S.

Congress and federal regulatory authorities.

Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company or the Bank could have a material effect on the Company and the Bank.

We believe most of the requirements called for in the CARES Act and related regulations and supervisory guidance have been implemented, but there are some that continue to be refined by federal banking agencies.

The Company and the Bank continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

Paycheck Protection Program (“PPP”)

PPP is a program administered as part of the Small Business Administration’s (“SBA”) 7-A loan program.

The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic.

Initially, $349 billion was approved and designated for the PPP in order for the SBA to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses.

The Bank became an approved SBA 7-A lender in the second quarter of 2020.

The Bank participated in the initial round of funding through a referral relationship with a third-party, non-bank lender.

When an additional $310 billion in funds were approved and designated for the PPP in April 2020, the Bank opted to set up an internal, automated loan process utilizing its core system provider.

Congress enacted the Consolidated Appropriations Act, 2021 (the “CAA”) on December 27, 2020, which amended the CARES Act and included (i) the Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, (ii) the COVID-Related Tax Relief Act of 2020, and (iii) the Taxpayer Certainty and Disability Relief Act of 2020.

These laws include significant clarifications and modifications to the PPP, which had terminated on August 8, 2020.

In particular, Congress revived PPP and allocated an additional $284 billion in the PPP funds for 2021.

As a participating PPP lender, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.

Troubled Debt Restructurings (“TDRs”) and Loan Modifications for Affected Borrowers

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

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

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

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

The Bank is currently applying this guidance to qualifying loan modifications.

FRB Programs and Initiatives Related to the COVID-19 Pandemic

In response to COVID-19, the FRB’s Federal Open Market Committee (the “FOMC”) on March 16, 2020, set the federal funds target rate at 0-0.25%.

Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

Newly Adopted Pronouncements in 2021:

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 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 Current Expected Credit Loss (“CECL”).

The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

Many of the loss estimation techniques applied today 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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

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.

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 CECL, management implemented a third party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components.

Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables.

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

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

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

The Company did not record any allowance for credit losses (“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.

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 5 – 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.

The following table illustrates the impact of 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 56,001 4,724 51,277

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

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

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

Life-of-loss Reserve on Unfunded Loan Commitments 3,052 144 2,908

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

The adoption of Topic 326 resulted in a Day 1 adjustment of $ 64.5 million, including an increase to our ACL of $ 61.6 million and a $ 2.9 million life-of-loss reserve on our unfunded loan commitments recorded in other liabilities on our

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

Consolidated Balance Sheets on January 1, 2021.

As of January 1, 2021, the Company recorded a cumulative-effect adjustment of $ 50.7 million to decrease retained earnings related to the adoption of Topic 326.

Allowance for Credit Losses Policy

The ACL represents an amount which, in management's judgment, is adequate to absorb expected losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.

The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.

However, the determination of the ACL requires significant judgment, and estimates of expected losses in the loan portfolio can vary significantly from the amounts actually observed.

While management uses available information to recognize expected losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring processes, 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, reside in the Quantitative Analysis.

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 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.

As part of our initial identification of loan pools, a subset of loans with a similar risk profile and an aggregate principal balance of $ 42.8 million which resulted in current expected losses of $ 10.2 million.

In the quarter ended March 31, 2021 the model

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

recognized the deterioration of an additional loan with a principal balance of $ 8.1 million which resulted in current expected losses of $ 1.5 million and an additional $ 0.6 million standard qualitative general reserve.

In the quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $ 50.2 million which resulted in charge-offs totaling $ 9.2 million and a net release of reserves of $ 3.1 million.

Additionally, in the quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $ 12.0 million which resulted in current expected losses of $ 1.6 million.

Certain loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the Incurred Loss 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 significant 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 increase in reserves of $ 51.3 million and is disclosed in the Other segment in the table above.

The Company did not adopt any new accounting standards in the first quarter of 2022 that had a material impact to our financial statements.

Accounting Statements Issued but Not Yet Adopted

In March 2022, the FASB issued ASU No.

2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications now will be evaluated to determine if they result in a new loan or a continuation of the existing loan.

The amendments in this ASU also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases.

We are currently evaluating the impact of the updated guidance on our Consolidated Financial Statements and write-offs.

The amendments in this ASU are effective January 1, 2023, with early adoption permitted.

The Company plans to early adopt this ASU in 2022.

In March 2020, the FASB issued ASU No.

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

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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 U.S.

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

Bank regulators, in a joint statement, have urged banks to stop using LIBOR altogether on 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.

As it pertains to the U.S.

dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

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 Federal Reserve System, (“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.

The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S.

Congress passed and the U.S.

President signed legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the Federal Reserve to identify a replacement benchmark based on SOFR.

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

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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 a replacement to LIBOR.

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 work within the guidelines established by the FCA and ARRC to provide for a smooth transition away from LIBOR.

As of September 30, 2021, approximately 16.0 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

We intend to cease originating new LIBOR based variable rate loans by December 31, 2021 per the ARRC’s guidance.

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.

As of March 31, 2022, approximately 16.0 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

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

CARTER BANKSHARES, INC.

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NOTE 2 – EARNINGS PER SHARE

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

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

Basic earnings per share is calculated by dividing net income allocated 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.

For all periods presented, the dilutive effect on average shares outstanding is the result of unvested restricted stock grants.

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in Thousands, except share and per share data) 2022 2021

Numerator for Earnings per Share – Basic and Diluted

Net Income (Loss) $ 11,173 $ ( 57,678 ) $ 25,980 $ ( 48,800 )

Net Income $ 9,323 $ 9,375

Income allocated to participating shares 43 46

Net Income (Loss) Allocated to Common Shareholders $ 11,125 $ ( 57,678 ) $ 25,876 $ ( 48,800 )

Net Income Allocated to Common Shareholders - Basic & Diluted $ 9,280 $ 9,329

Weighted Average Shares Outstanding, including Shares Considered Participating Securities 25,859,982 26,408,319

Average Participating Securities 119,346 131,429

Weighted Average Common Shares Outstanding 26,348,488 26,385,189 26,339,930 26,377,626

Earnings (Loss) per Common Share – Basic $ 0.42 $ ( 2.19 ) $ 0.98 $ ( 1.85 )

Earnings (Loss) per Common Share – Diluted $ 0.42 $ ( 2.19 ) $ 0.98 $ ( 1.85 )

Weighted Average Common Shares Outstanding - Basic & Diluted 25,740,636 26,276,890

Earnings per Common Share – Basic $ 0.36 $ 0.36

Earnings per Common Share – Diluted $ 0.36 $ 0.36

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

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

September 30, 2021

March 31, 2022

(Dollars in Thousands) Amortized

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Losses Fair Value

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

Government Agency Securities 3,475 3 — 3,478

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

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Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400

The Company did no t have securities classified as held-to-maturity at September 30, 2021 or December 31, 2020.

The Company did no t have securities classified as held-to-maturity at March 31, 2022 or December 31, 2021.

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021

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Gross Realized Losses ( 24 ) ( 19 )

Net Realized Gains 1,341 2,388 6,450 5,923

Net Realized (Losses) Gains ( 24 ) 3,610

Tax Impact $ ( 5 ) $ 758

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

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

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

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

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

September 30, 2021

March 31, 2022

(Dollars in Thousands) Amortized

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Total Debt Securities $ 1,022,894 $ 982,041

At September 30, 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.

At March 31, 2022 and December 31, 2021, 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 $ 172.8 million at September 30, 2021 and $ 146.0 million at December 31, 2020.

The carrying value of securities pledged for various regulatory and legal requirements was $ 164.6 million at March 31, 2022 and $ 178.6 million at December 31, 2021.

CARTER BANKSHARES, INC.

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NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

September 30, 2021

Available-for-sale securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

March 31, 2022

Less Than 12 Months 12 Months or More Total

9 unchanged sentences

Treasury Securities 5 $ 18,609 $ ( 654 ) — $ — $ — 5 $ 18,609 $ ( 654 )

Government Agency Securities 2 3,237 ( 253 ) — — — 2 3,237 ( 253 )

Residential Mortgage-Backed Securities 37 105,273 ( 5,886 ) 7 10,137 ( 663 ) 44 115,410 ( 6,549 )

17 unchanged sentences

Value Unrealized

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

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

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

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

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

4 unchanged sentences

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

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did no t record an ACL on its investment securities during the quarter ended September 30, 2021 as the Company did no t have securities classified as held-to-maturity at September 30, 2021.

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended March 31, 2022 as the Company did no t have securities classified as held-to-maturity at March 31, 2022.

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.

2 unchanged sentences

The Company has reviewed all securities for OTTI.

As of September 30, 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 September 30, 2021 represents an OTTI.

At September 30, 2021, there were 214 securities in an unrealized loss position and at December 31, 2020, there were 168 securities in an unrealized loss position.

As of March 31, 2022 and December 31, 2021, no OTTI has been identified for any investment securities in our portfolio.

We do not believe any individual unrealized loss as of March 31, 2022 represents an OTTI.

At March 31, 2022, there were 436 securities in an unrealized loss position and at December 31, 2021, there were 268 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 more likely than not that we will be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost.

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.

CARTER BANKSHARES, INC.

3 unchanged sentences

(Dollars in Thousands)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Commercial Real Estate

11 unchanged sentences

Construction 321,190 282,947

Other 357,593 357,900

Total Portfolio Loans $ 2,894,004 $ 2,812,129

Loans Held-for-Sale 196 228

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

Total Loans $ 2,894,200 $ 2,812,357

(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.

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

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

The Bank provided deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications, which suspends the requirement to categorize these deferrals as TDRs.

The Bank launched successive deferral programs with short-term expirations.

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

The deferrals in Part I provided for deferral of principal and up to the deferral of principal and interest, if requested through the expiry.

The Part II program extended deferrals through December 31, 2020 subject to the collection of updated financial information and validation of need.

The Bank requested verification of business and/or guarantor liquidity to ascertain the viability of the business in a post-pandemic environment.

Prior to the extension of the CARES Act, the Bank launched the Part III program which offered borrowers in the Part II program an extension of deferrals through June 30, 2021.

Borrowers who opted into the Part III program were required to provide monthly financial statements and remit payments on a quarterly basis equal to the lesser of:

i) 90% of free cash flow (EBITDA) or, ii) the otherwise contractual payment (“recapture payment”).

In the quarter ended March 31, 2021, recapture payments due from deferral clients totaled $ 2.8 million and of this the Bank received $ 2.0 million.

A number of customers opted out of the deferral program after the first quarter.

As a result, the second quarter 2021 recapture payments due from deferral clients totaled $ 1.2 million and of this the Bank received $ 0.8 million.

Following the expiration of the deferral programs on June 30, 2021, for term loans payments will be applied to accrued interest first and after accrued interest is current, payments will be applied to principal.

Deferred principal will be due at maturity.

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

As of September 30, 2021, all but $ 6.5 million of loans resumed regularly scheduled payments and are continually evaluated through our credit monitoring

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

Cumulative deferred interest totaled $ 11.0 million as of June 30, 2021 but has been reduced to $ 2.8 million as of September 30, 2021.

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 March 31, 2021 related to the adoption of Topic 326, the initial break-out of other loans totaled $ 373.4 million consisting of loans that would otherwise have been included in the following loan segments:

$ 136.3 million of CRE, $ 77.8 million of C&I, $ 49.6 million of Residential Mortgages and $ 109.7 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 an increase in current expected credit losses of $ 51.3 million.

Deferred costs and fees included in the portfolio balances above were $ 4.2 million and $ 3.0 million at September 30, 2021 and December 31, 2020, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 198 thousand and $ 219 thousand at September 30, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $ 4.9 million and $ 25.4 million as of September 30, 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 the sale of bank branches at December 31, 2020, that closed in the second quarter of 2021.

Troubled Debt Restructurings (“TDR”)

The following table summarizes the Company’s TDRs as of the dates presented:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(Dollars in Thousands) Performing

11 unchanged sentences

Total TDRs $ 171,478 $ 3,822 $ 175,300 $ 172,592 $ 3,550 $ 176,142

$ 175,991 $ 3,217 $ 179,208 $ 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.

3 unchanged sentences

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 September 30, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs increased $ 45.0 million, or 33.5 % to $ 179.2 million at September 30, 2021 compared to $ 134.2 million at December 31, 2020.

The Company had $ 78.0 million new additions, related to the restructured loans to one large relationship, offset by $ 24.8 million of principal pay-downs and $ 8.2 million in charge-offs for the resolution of our two largest nonperforming credits during the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, the Company had five 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 quarter of 2021.

TDRs of $ 3.2 million and $ 25.0 million as of September 30, 2021 and December 31, 2020, respectively, were loans modified as TDRs that experienced a

As of March 31, 2022, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs decreased $ 0.9 million, or 0.5 % to $ 175.3 million at March 31, 2022 compared to December 31, 2021.

D uring the three months ended March 31, 2022, t he Company had one new TDR totaling $ 0.3 million in the commercial real estate segment, offset by $ 1.2 million of principal pay-downs.

This new TDR loan was restructured with enhanced payment terms as a result of a forbearance agreement.

TDRs of $ 3.8 million and $ 3.6 million as of March 31, 2022 and December 31, 2021 , respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming.

During the three months ended March 31, 2022, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

payment default subsequent to the rework date and were classified as nonperforming.

During the nine months ended September 30, 2021, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

The Company had one consumer automobile loan modified as a TDR during the three and nine months ended September 30, 2020.

The customer was experiencing financial difficulties, but sold the vehicle and the proceeds from that sale were applied to the loan balance.

The remaining balance was charged-off, but the loan has been re-amortized for the customer to repay the balance by the end of 2021.

There were no TDR payment defaults during the three and nine months ended September 30, 2021 or September 30, 2020.

There were no TDR payment defaults during the three months ended March 31, 2022 or March 31, 2021.

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 confirmed loss.

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

The following table presents nonperforming assets as of September 30, 2021 and December 31, 2020.

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

Nonperforming Assets

(Dollars in Thousands) September 30, 2021 December 31, 2020

(Dollars in Thousands) March 31, 2022 December 31, 2021

Nonperforming Assets

4 unchanged sentences

Total Nonperforming Assets $ 18,550 $ 18,313

As of September 30, 2021 and December 31, 2020, we had $ 261 thousand and $ 67 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 49 thousand at September 30, 2021 and $ 109 thousand at December 31, 2020 in residential real estate included in OREO.

As of March 31, 2022 and December 31, 2021, the Company had $ 854.9 thousand and $ 254.0 thousand, respectively, of residential real estate in the process of foreclosure.

We also had $ 24.7 thousand at March 31, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate included in OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL at a level determined to be adequate to absorb current expected credit losses over the life of loans inherent in the loan portfolio 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 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.

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

1 unchanged sentence

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 segmentation in the current expected credit losses, (“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.

7 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

equipment financed by the Company.

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.

3 unchanged sentences

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 condition of the local economy, in particular the unemployment rate, is an important indicator of

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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

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.

10 unchanged sentences

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 may fluctuate based on expected cash flow 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, and iii) land acquisition loans without a defined source of amortization.

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

12 unchanged sentences

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

The annual loan review provides the Credit Risk Committee with an independent analysis of the following:

1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings.

Since 2020 and continuing into 2022, the Company used a five step approach for loan review in the following categories:

• Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $ 2.0 million or more;

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year.

Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses.

In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function.

Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

• A review of the largest twenty pass-rated loan relationships, which represents approximately a quarter of total loans;

• A sampling of new loans originated to include an examination of the evidence of appropriate approval, adherence to loan policy and the completeness and accuracy of the analysis contained in the approval document;

• A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $ 2.0 million that are not part of the top twenty review;

• Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss history, document exceptions, policy exceptions and emerging trends in risk characteristics.

• A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $ 2.0 million or more but not included in the top twenty LLRs;

• A sampling review of Credit Risk Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures;

• A sampling review of non-organic commercial loans and those commercial loans approved outside of the Credit Risk Committee;

• Focus reviews of office and land development to evaluate segment risk rather than individual loan risk.

Focus reviews are performed annually on a rotational basis.

The Company’s internally assigned grades are as follows:

1 unchanged sentence

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 institutions credit position at some future date.

Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant classified classification.

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

4 unchanged sentences

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 ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions.

Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system.

Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies.

Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of September 30, 2021:

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:

March 31, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

35 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of September 30, 2021.

December 31, 2021

(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

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

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

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

Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666

Pass $ 140,639 $ 82,523 $ 24,336 $ 9,739 $ 5,328 $ 3,407 $ 15,269 $ 281,241

Special Mention — — 175 — — 429 — 604

Substandard — 107 809 95 — 91 — 1,102

Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947

Pass $ — $ — $ — $ — $ 122,848 $ 62,399 $ — $ 185,247

Special Mention — — — — — 3,281 — 3,281

Substandard — — — 87,329 40,882 41,161 — 169,372

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

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented.

March 31, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

Commercial Real Estate

Performing $ 57,112 $ 202,105 $ 161,037 $ 206,487 $ 262,967 $ 413,547 $ 36,672 $ 1,339,927

26 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the aging of the amortized cost basis in past due loans for our portfolio segments as of September 30, 2021 and December 31, 2020:

September 30, 2021

December 31, 2021

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total

Commercial Real Estate

Performing $ 195,670 $ 165,100 $ 215,575 $ 292,857 $ 119,229 $ 293,102 $ 38,382 $ 1,319,915

Nonperforming — — 314 2,742 215 66 — 3,337

Total Commercial Real Estate $ 195,670 $ 165,100 $ 215,889 $ 295,599 $ 119,444 $ 293,168 $ 38,382 $ 1,323,252

Commercial and Industrial

Performing $ 55,187 $ 50,087 $ 15,648 $ 43,117 $ 26,373 $ 150,656 $ 3,857 $ 344,925

Nonperforming — — 308 4 — — 139 451

Total Commercial and Industrial $ 55,187 $ 50,087 $ 15,956 $ 43,121 $ 26,373 $ 150,656 $ 3,996 $ 345,376

Residential Mortgages

Performing $ 155,892 $ 91,023 $ 63,682 $ 73,564 $ 8,640 $ 49,399 $ 13,237 $ 455,437

Nonperforming — — 1,008 512 188 843 — 2,551

Total Residential Mortgages $ 155,892 $ 91,023 $ 64,690 $ 74,076 $ 8,828 $ 50,242 $ 13,237 $ 457,988

Other Consumer

Performing $ 9,364 $ 10,202 $ 979 $ 450 $ 211 $ 23,048 $ 339 $ 44,593

Nonperforming — — 11 57 5 — — 73

Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666

Performing $ 140,639 $ 82,523 $ 24,511 $ 9,834 $ 5,328 $ 3,858 $ 15,269 $ 281,962

Nonperforming — 107 809 — — 69 — 985

Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947

Performing $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

Nonperforming — — — — — — —

Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900

Total Portfolio Loans

Performing $ 556,752 $ 398,935 $ 320,395 $ 507,151 $ 323,511 $ 626,904 $ 71,084 $ 2,804,732

Nonperforming — 107 2,450 3,315 408 978 139 7,397

Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:

March 31, 2022

(Dollars in Thousands) Current

9 unchanged sentences

Other 357,593 — — — — 357,593

$ 2,866,454 $ 1,896 $ 6,940 $ 8,836 $ 8,867 $ 2,884,157

(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.

Total $ 2,885,852 $ 659 $ 196 $ 855 $ 7,297 $ 2,894,004

December 31, 2021

6 unchanged sentences

Commercial and Industrial 344,628 80 217 297 451 345,376

Construction 400,775 193 91 284 5,331 406,390

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 $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129

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 September 30, 2021.

For the three and nine months ended September 30, 2021, the amount of interest income on nonaccrual loans was immaterial.

There were no loans at September 30, 2021 that were past due more than 90 days and still accruing.

September 30, 2021

Loans past due 90 days or more and still accruing were zero at March 31, 2022 and December 31, 2021.

Loans past due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days or more and still accruing decreased $ 0.8 million to $ 0.9 million at March 31, 2022 compared to $ 1.7 million at December 31, 2021 in all loan categories except construction, which increased $ 0.2 million.

There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2022 or December 31, 2021.

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 March 31, 2022.

For the three months ended March 31, 2022, the amount of interest income on nonaccrual loans was immaterial.

March 31, 2022

(Dollars in Thousands) Beginning of

12 unchanged sentences

Impaired loans with a commitment of $ 1.0 million or more are individually evaluated.

During the three and nine months ended September 30, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

During the three months ended March 31, 2022, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the amortized cost basis of individually evaluated loans as of September 30, 2021.

Changes in the fair value of the collateral for individually evaluated loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.

September 30, 2021

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented.

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.

Type of Collateral

(Dollars in Thousands) Real Estate

March 31, 2022 December 31, 2021

(Dollars in Thousands) Real Estate Real Estate

Commercial Real Estate $ 2,705 $ 2,742

4 unchanged sentences

Total $ 3,513 $ 3,550

The following table presents activity in the ACL and allowance for loan losses (“ALL”), for the three and nine months ended September 30, 2021 and September 30, 2020, respectively:

Three Months Ended September 30, 2021

The following tables present activity in the ACL for the periods presented:

Three Months Ended March 31, 2022

(Dollars in Thousands) Commercial

2 unchanged sentences

Mortgage Other

Consumer Construction Other (1)

Consumer Construction Other Total

Allowance for Credit Losses on Loans:

5 unchanged sentences

Balance at End of Period $ 17,518 $ 3,583 $ 4,520 $ 1,470 $ 7,554 $ 61,731 $ 96,376

(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.

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2021

(Dollars in Thousands) Commercial

2 unchanged sentences

Mortgage Other

Consumer Construction Other (1)

Consumer Construction Other Total

Allowance for Credit Losses on Loans:

6 unchanged sentences

Balance at End of Period $ 42,342 $ 4,905 $ 5,171 $ 1,347 $ 7,106 $ 56,001 $ 116,872

(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.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended September 30, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Construction Residential

Mortgage Other

Consumer Total

Allowance for Loan Losses on Loans:

Balance at Beginning of Period $ 28,546 $ 4,831 $ 8,377 $ 2,186 $ 3,465 $ 47,405

Provision for Loan Losses on Loans 1,662 276 726 219 31 2,914

Charge-offs — — — — ( 680 ) ( 680 )

Recoveries — 119 — 1 206 326

Net Recoveries / (Charge-offs) — 119 — 1 ( 474 ) ( 354 )

Balance at End of Period $ 30,208 $ 5,226 $ 9,103 $ 2,406 $ 3,022 $ 49,965

Nine Months Ended September 30, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Construction Residential

Mortgage Other

Consumer Total

Allowance for Loan Losses on Loans:

Balance at Beginning of Period $ 24,706 $ 3,601 $ 5,420 $ 1,736 $ 3,299 $ 38,762

Provision for Loan Losses on Loans 4,835 1,550 3,683 689 2,428 13,185

Charge-offs ( 40 ) ( 46 ) — ( 20 ) ( 3,301 ) ( 3,407 )

Recoveries 707 121 — 1 596 1,425

Net Recoveries / (Charge-offs) 667 75 — ( 19 ) ( 2,705 ) ( 1,982 )

Balance at End of Period $ 30,208 $ 5,226 $ 9,103 $ 2,406 $ 3,022 $ 49,965

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 $ 373.4 million at March 31, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards.

The analysis applied to this pool resulted in an increase in expected credit losses of $ 51.3 million, at adoption, and is disclosed in the Other segment in the 2021 tables below.

At December 31, 2020, the aforementioned Other segment within the probable incurred loss model included $ 102.5 million of impaired loans and the remaining $ 270.9 million were not impaired and remained in their respective segments.

Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $ 4.7 million at December 31, 2020.

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 $ 56.0 million upon adoption, which is an increase from the $ 4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased $ 45.2 million to $ 99.3 million at September 30, 2021 compared to $ 54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL that increased reserves by $ 61.6 million.

In the first nine months of 2021, adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

certain loans on deferral.

Management reviewed and analyzed the monthly operating statements of commercial clients in the Part III deferral program.

The deferral program expired June 30, 2021.

The majority of our clients in the deferral program experienced recoveries starting in the spring of 2021.

Based on the ongoing review of operating statements, management identified a lag in recovery with respect to loans with an aggregate principal balance of $ 62.0 million.

These loans were addressed throughout the nine months ended September 30, 2021 as additional information was received and analyzed as follows.

The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $ 42.8 million which resulted in current expected losses of $ 10.2 million.

In the quarter ended March 31, 2021 the model recognized the deterioration of a loan with a principal balance of $ 8.1 million which resulted in current expected losses of $ 1.5 million and an additional $ 0.6 million standard qualitative general reserve.

In the third quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $ 50.2 million which resulted in charge-offs totaling $ 9.2 million and a net release of reserves of $ 3.1 million.

Additionally, in the third quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $ 12.0 million which resulted in current expected losses of $ 1.6 million.

In summary, out of the $ 398.5 million in the deferral program as of June 30, 2021, only $ 12.0 million remain a concern and have been reserved for as of September 30, 2021.

Included in the provision for unfunded commitments for the three and nine months ended September 30, 2021 was a release of $ 0.1 million and $ 0.9 million, respectively, for the life-of-loss reserve for unfunded commitments.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of September 30, 2021:

September 30, 2021

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio

Pass $ 1,326,048 $ 385,520 $ 445,149 $ 44,835 $ 291,614 $ 185,693 $ 2,678,859

Special Mention 16,101 21 565 — 612 3,329 20,628

Substandard 4,804 1,861 3,404 118 5,111 169,372 184,670

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,346,953 $ 387,402 $ 449,118 $ 44,953 $ 297,337 $ 358,394 $ 2,884,157

Performing $ 1,346,201 $ 386,855 $ 446,618 $ 44,876 $ 292,346 $ 358,394 $ 2,875,290

Nonperforming 752 547 2,500 77 4,991 — 8,867

Total Portfolio Loans $ 1,346,953 $ 387,402 $ 449,118 $ 44,953 $ 297,337 $ 358,394 $ 2,884,157

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 loan losses in prior periods.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of December 31, 2020:

December 31, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Construction Residential

Mortgage Other

Consumer Total

Portfolio Loans

Pass $ 1,281,106 $ 478,536 $ 289,781 $ 415,773 $ 57,418 $ 2,522,614

Special Mention 126,535 48 58,899 723 6 186,211

Substandard 46,158 78,580 57,710 55,674 223 238,345

Doubtful — — — — — —

Loss — — — — — —

Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170

Performing $ 1,431,908 $ 556,708 $ 401,059 $ 468,035 $ 57,463 $ 2,915,173

Nonperforming 21,891 456 5,331 4,135 184 31,997

Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following tables present the balances in the ALL and the recorded investment in the loan balances based on impairment method as of December 31, 2020:

December 31, 2020

(Dollars in Thousands) Commercial

Real Estate Commercial

Industrial Construction Residential

Mortgage Other

Consumer Total

Allowance for Loan Losses:

Individually Evaluated for Impairment $ 13,773 $ — $ 1,477 $ — $ — $ 15,250

Collectively Evaluated for Impairment 22,655 5,064 6,527 2,099 2,479 38,824

Total Allowance for Loan Losses $ 36,428 $ 5,064 $ 8,004 $ 2,099 $ 2,479 $ 54,074

Total Portfolio Loans:

Individually Evaluated for Impairment $ 27,666 $ — $ 56,987 $ 50,618 $ — $ 135,271

Collectively Evaluated for Impairment 1,426,133 557,164 349,403 421,552 57,647 2,811,899

Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170

The recorded investment in loans excludes accrued interest receivable.

Individually evaluated loans do not include certain TDR loans which are less than $ 1.0 million.

The following table includes the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020.

(Dollars in Thousands) Unpaid

Balance Recorded

Balance Specific

Loans without a Specific Valuation Allowance

Commercial Real Estate $ 3,236 $ 3,236 $ —

Construction 55,248 55,248 —

Residential Mortgages 50,618 50,618 —

Loans with a Specific Valuation Allowance

Commercial Real Estate 24,430 24,430 13,773

Commercial & Industrial — — —

Construction 1,739 1,739 1,477

Total by Category

Commercial Real Estate 27,666 27,666 13,773

Commercial & Industrial — — —

Construction 56,987 56,987 1,477

Residential Mortgages 50,618 50,618 —

Total Impaired Loans $ 135,271 $ 135,271 $ 15,250

The adoption of ASU 2016-13 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021 to the ACL and $ 2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The increase primarily included an expected credit loss of $ 51.3 million established based on a modified discounted cash flow method on expected cash flow changes in the future for the Other segment.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the year-to-date average recorded investment and interest income recognized on individually evaluated loans for the three and nine months ended September 30, 2020:

September 30, 2020 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

(Dollars in Thousands) Average Investment on Impaired Loans Interest Income Recognized Interest Income Recognized

Loans without a Specific Valuation Allowance

Commercial Real Estate $ 4,442 $ 154 $ 218

Construction 57,365 432 1,440

Residential Mortgages 51,990 429 1,477

Loans with a Specific Valuation Allowance

Commercial Real Estate 28,617 — —

Commercial & Industrial 230 — —

Construction 1,739 — —

Residential Mortgages — — —

Total by Category

Commercial Real Estate 33,059 154 218

Commercial & Industrial 230 — —

Construction 59,104 432 1,440

Residential Mortgages 51,990 429 1,477

Total Impaired Loans $ 144,383 $ 1,015 $ 3,135

NOTE 6 – 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.

12 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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

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

11 unchanged sentences

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.

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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).

1 unchanged sentence

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

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

Nonrecurring Basis

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.

Individually evaluated loans with commitments 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.

9 unchanged sentences

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

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

assessment of current trends in the regional market.

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 is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell.

1 unchanged sentence

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

At September 30, 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.

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 March 31, 2022 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.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:

September 30, 2021

March 31, 2022

(Dollars in Thousands) Carrying

7 unchanged sentences

Securities Available-for-Sale:

Treasury Securities $ 18,609 $ 18,609 $ — $ —

Government Agency Securities 3,237 — 3,237 —

Residential Mortgage-Backed Securities 115,722 — 115,722 —

Commercial Mortgage-Backed Securities 43,645 — 43,645 —

Asset Backed Securities 85,440 4,996 80,444 —

Collateralized Mortgage Obligations 305,009 7,818 297,191 —

Small Business Administration 68,706 3,296 65,410 —

States and Political Subdivisions 270,743 4,115 266,628 —

Corporate Notes 70,930 — 59,865 11,065

Total Securities Available-for-Sale 982,041 38,834 932,142 11,065

Derivatives 10,781 — 10,781 —

12 unchanged sentences

Securities Available-for-Sale:

Treasury Securities $ 4,413 $ 4,413 $ — $ —

Government Agency Securities 3,478 — 3,478 —

Residential Mortgage-Backed Securities 110,013 — 110,013 —

Commercial Mortgage-Backed Securities 4,168 — 4,168 —

Asset Backed Securities 81,863 — 81,863 —

Collateralized Mortgage Obligations 287,614 — 287,614 —

Small Business Administration 108,914 — 108,914 —

States and Political Subdivisions 262,202 — 262,202 —

Corporate Notes 59,735 — 51,177 8,558

Total Securities Available-for-Sale 922,400 4,413 909,429 8,558

Derivatives 3,508 — 3,508 —

2 unchanged sentences

Total $ 3,682 $ — $ 3,682 $ —

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2021 or the year ended December 31, 2020.

We have invested in subordinated debt of other financial institutions.

We have three securities totaling $ 13.6 million that are considered to be Level 3 securities at September 30, 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 $ 13.6 million at September 30, 2021 is attributable to the calculated change in fair value as further detailed below as well as a new security in the second quarter of 2021 for $ 3.5 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

We have three securities totaling $ 11.1 million that are considered to be Level 3 securities at March 31, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 11.1 million at March 31, 2022 is attributable to a change in the fair value level of an existing security in the amount of $ 2.9 million, offset by the change in calculated fair value of $ 0.4 million.

The existing security was previously valued by an independent third party based upon a trade desktop evaluation, but is now performed internally using the same approach applied to the other Level 3 securities.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

efficient and profitable operations, and the institution’s core earnings ability, liquidity management platform and current on and off balance sheet interest rate risk exposures.

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 are summarized below for the periods presented:

September 30, 2021

March 31, 2022

(Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value

4 unchanged sentences

OREO $ — $ — $ 10,916 $ 10,916

Impaired Loans $ — $ — $ 10,919 $ 10,919

Individually evaluated loans had a net carrying amount of $ 2.1 million at September 30, 2021 with a valuation allowance of $ 2.7 million.

Impaired loans had a net carrying amount of $ 10.9 million at December 31, 2020 with a valuation allowance of $ 15.3 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 13.3 million as of September 30, 2021, compared with $ 15.7 million at December 31, 2020.

Write-downs of $ 3.3 million were recorded on OREO for the nine months ended September 30, 2021 compared to $ 1.4 million for the same period in 2020.

Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777

Individually evaluated loans had a net carrying amount of $ 1.8 million at March 31, 2022 with a valuation allowance of $ 0.9 million.

Individually evaluated loans had a net carrying amount of $ 1.8 million at December 31, 2021 with a valuation allowance of $ 1.0 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 11.3 million as of March 31, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.1 million write-downs recorded on OREO for the three months ended March 31, 2022 and for the same period in 2021.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:

September 30, 2021

March 31, 2022

(Dollars in Thousands) Fair

3 unchanged sentences

Range Average

Individually Evaluated Loans $ 1,890 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 50.0 – 50.0 %

Individually Evaluated Loans 235 Discounted Appraisals Estimated Selling Costs 20.8 % 20.8 %

Individually Evaluated Loans $ 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 %

Total Individually Evaluated Loans $ 1,777

Other Real Estate Owned $ 9,503 Appraisals Estimated Selling Costs 6.0 – 10.0 %

Other Real Estate Owned 922 Discounted Cash Flow Discount Rate 6.3 % 6.3 %

Other Real Estate Owned 424 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

Other Real Estate Owned 2,416 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 5.0 % – 50.7 %

Total Other Real Estate Owned $ 13,265

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

OREO $ 9,801 Appraisals Estimated Selling Costs 10.0 % 10.0 %

OREO 627 Executed Sales Agreement Estimated Selling Costs 5.0 % 5.0 %

OREO 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

OREO 635 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 7.3 % – 50.7 %

Total OREO $ 11,253

December 31, 2021

4 unchanged sentences

Range Average

Impaired Loans $ 1,163 Discounted Appraisals Estimated Selling Costs 43.0 % 43.0 %

Impaired Loans 9,494 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 12.0 – 50.0 %

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 %

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 %

Total Other Real Estate Owned $ 15,722

Individually Evaluated Loans 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 %

Total Individually Evaluated Loans $ 1,777

OREO $ 9,946 Appraisals Estimated Selling Costs 10.0 % 10.0 %

OREO 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

OREO 780 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 5.0 % - 50.7 %

Total OREO $ 10,916

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

A baseline discount rate has been established for impairment measurement.

1 unchanged sentence

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 September 30, 2021 and December 31, 2020 are presented in the following tables.

Fair values for September 30, 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.”

The carrying values and estimated fair values of our financial instruments at March 31, 2022 and December 31, 2021 are presented in the following tables.

Fair values for March 31, 2022 and December 31, 2021 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.

3 unchanged sentences

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair Value Measurements at September 30, 2021

Fair Value Measurements at March 31, 2022

(Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total

12 unchanged sentences

Accrued Interest Payable 1,333 — — 1,333 1,333

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Fair Value Measurements at December 31, 2021

5 unchanged sentences

Portfolio Loans, net 2,716,190 — — 2,689,578 2,689,578

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

Federal Home Loan Bank Stock, at Cost 2,352 — — NA NA

3 unchanged sentences

Deposits $ 3,698,476 $ 747,909 $ 1,606,249 $ 1,369,228 $ 3,723,386

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 3,682 — 3,682 — 3,682

1 unchanged sentence

Accrued Interest Payable 1,378 — — 1,378 1,378

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

14 unchanged sentences

As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income.

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities for the periods presented:

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented:

Fair Values of Derivative Instruments

Asset Derivatives (Included in Other Assets)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

5 unchanged sentences

Liability Derivatives (Included in Other Liabilities)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

3 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 63 $ 390,032 $ 10,651 66 $ 446,490 $ 3,682

The following table indicates the income (loss) recognized in income on derivatives for the periods presented:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the income recognized on derivatives for the periods presented:

For the Three Months Ended March 31,

(Dollars in Thousands) 2022 2021

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans 304 429

Total Derivative Income (Loss) $ 35 $ ( 86 ) $ 188 $ ( 285 )

Total Derivative Income $ 304 $ 429

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted.

2 unchanged sentences

Asset Derivatives (Included in Other Assets) Liability Derivatives (Included in Other Liabilities)

(Dollars in Thousands) September 30,

(Dollars in Thousands) March 31,

2022 December 31,

2020 September 30,

2021 March 31,

2022 December 31,

8 unchanged sentences

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings are an additional source of liquidity for the Company.

Federal Home Loan Bank, or (“FHLB”) borrowings were $ 30.0 million and $ 35.0 million at September 30, 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 September 30, 2021 and December 31, 2020.

Total loans pledged as collateral were $ 908.7

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million and $ 804.2 million at September 30, 2021 and December 31, 2020, respectively.

There were no securities available-for-sale pledged as collateral at both September 30, 2021 and December 31, 2020.

Borrowings serve as an additional source of liquidity for the Company.

Federal Home Loan Bank, or (“FHLB”) borrowings were zero at March 31, 2022 and $ 7.0 million at December 31, 2021.

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.

Total loans pledged as collateral were $ 1.1 billion at both March 31, 2022 and December 31, 2021.

There were no securities available-for-sale pledged as collateral at both March 31, 2022 and December 31, 2021.

The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year.

The Company is eligible to borrow up to an additional $ 555.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of September 30, 2021.

The Company is eligible to borrow up to an additional $ 693.0 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of March 31, 2022.

The Company had the capacity to borrow up to an additional $ 667.3 million from the FHLB at December 31, 2021.

The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) September 30, 2021 December 31, 2020

(Dollars in Thousands) March 31, 2022 December 31, 2021

Long-term Borrowings $ — $ 7,000

Weighted Average Interest Rate — % 1.61 %

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the four years subsequent to September 30, 2021 and thereafter are as follows:

(Dollars in Thousands) Balance Weighted

1 year $ 3,000 1.68 %

2 years 14,000 1.09 %

3 years 10,000 0.94 %

4 years 3,000 1.63 %

5 years — — %

Thereafter — — %

Total FHLB Borrowings $ 30,000 1.15 %

During the year ending December 31, 2021 the Company prepaid 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 in the fourth quarter of 2021.

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.

There were no new FHLB borrowings during the three months ended March 31, 2022.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $ 444.0 million at September 30, 2021 and $ 591.2 million at December 31, 2020, represent agreements to lend to customers with fixed expiration dates or other termination clauses.

Commitments to extend credit represent agreements to lend to customers with fixed expiration dates or other termination clauses.

The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs.

Lines of credit for construction projects represent $ 259.7 million, or 58.5 %, and $ 391.4 million, or 66.2 %, of the commitments to extend credit at September 30, 2021 and December 31, 2020, respectively.

Lines of credit for construction projects represented 54.1 % and 55.3 %, of the commitments to extend credit at March 31, 2022 and December 31, 2021, 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 $ 32.6 million at September 30, 2021 and $ 29.3 million at December 31, 2020.

The following table sets forth our commitments and letters of credit as of the dates presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021

Commitments to Extent Credit $ 493,765 $ 513,482

Standby Letters of Credit 26,154 27,083

Total $ 519,919 $ 540,565

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.

4 unchanged sentences

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-loss reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The activity in the life-of-loss reserve on unfunded loan commitments for the three and nine months ended September 30, 2021 were as follows:

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands) Three Months Ended September 30, 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

June 30, 2021 $ 2,167

Provision for unfunded commitments ( 60 )

September 30, 2021 $ 2,107

(Dollars in Thousands) Nine Months Ended September 30, 2021

The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021

Life-of-Loss Reserve on Unfunded Loan Commitments

1 unchanged sentence

Impact of Adopting ASU 2016-13 — 2,908

January 1, 2021 $ 3,052

Balance after Adoption of ASU 2016-13 $ 1,783 $ 3,052

Provision for Unfunded Commitments ( 236 ) ( 282 )

September 30, 2021 $ 2,107

Total $ 1,547 $ 2,770

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 $ 0.9 million for the nine months ended September 30, 2021.

The provision for unfunded commitments was a release of $ 0.2 million for the three months ended March 31, 2022 and $ 0.3 million for the three months ended March 31, 2021.

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims.

Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.

Other than as set forth below, as of September 30, 2021, the Company is not involved in any material pending or threatened legal proceedings other than proceedings occurring in the ordinary course of business.

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, the Bank and its directors were named as defendants in a lawsuit filed in the United States District Court for the Southern District of West Virginia (the “District Court”) by James C.

Justice, II, Cathy L.

Justice, James C.

Justice, III and various related entities that he and/or they own and control (such entities, the “Justice Entities” and collectively, the “Justice Parties”).

The allegations contained in the lawsuit related to a series of loans (the “Loans”) made by the Bank to certain Justice Entities that are secured by collateral pledged by certain Justice Entities and are backed by personal guarantees from James C.

Justice, II and Cathy L.

Justice and, in certain cases, by personal guarantees from James C.

Justice, III.

In July 2021, the Bank filed confessions of judgment against certain of the Justice Parties in Virginia state courts to collect amounts owed on certain of the Loans that were past due and in default.

In August 2021, the Bank and the Justice Parties reached an agreement to restructure the Loans.

In connection with this agreement, the Bank obtained a voluntary dismissal with prejudice of the lawsuit filed by the Justice Parties in the District Court.

The Bank withdrew the creditor collection actions it had filed against certain of the Justice Parties in Virginia state court.

The Bank believes that it is fully secured on all loans outstanding to the Justice Parties.

In connection with the dismissal of the lawsuits and the restructuring of the Loans, the Justice Parties executed documents that waive any and all causes of action of any kind they might claim to have against the Bank, reaffirmed the Loans owed to the Bank, and enhance the Bank’s collateral position, including cross-collateralizations, with respect to all loans outstanding to the Justice Parties.

The Company and the Bank denied and continue to deny all allegations contained in the lawsuit filed against the Bank by the Justice Parties.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the legal proceedings described above are concluded and will not have a material adverse effect on the Company’s consolidated financial statements.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(Dollars in Thousands) Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized (Losses) Gains Arising during the period $ ( 4,588 ) $ 963 $ ( 3,625 ) $ 6,434 $ ( 1,351 ) $ 5,083

Reclassification Adjustment for Gains included in Net Income ( 1,341 ) 282 ( 1,059 ) ( 2,388 ) 501 ( 1,887 )

Other Comprehensive (Loss) Income $ ( 5,929 ) $ 1,245 $ ( 4,684 ) $ 4,046 $ ( 850 ) $ 3,196

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

The following table presents the change in components of other comprehensive loss for the periods presented, net of tax effects:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

(Dollars in Thousands) Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized (Losses) Gains Arising during the period $ ( 6,626 ) $ 1,391 $ ( 5,235 ) $ 22,860 $ ( 4,801 ) $ 18,059

Reclassification Adjustment for Gains included in Net Income ( 6,450 ) 1,355 ( 5,095 ) ( 5,923 ) 1,244 ( 4,679 )

Other Comprehensive (Loss) Income $ ( 13,076 ) $ 2,746 $ ( 10,330 ) $ 16,937 $ ( 3,557 ) $ 13,380

Net Unrealized Losses Arising during the period $ ( 43,032 ) $ 9,037 $ ( 33,995 ) $ ( 10,494 ) $ 2,204 $ ( 8,290 )

Reclassification Adjustment for Losses (Gains) included in Net Income 24 ( 5 ) 19 ( 3,610 ) 758 ( 2,852 )

Other Comprehensive Loss $ ( 43,008 ) $ 9,032 $ ( 33,976 ) $ ( 14,104 ) $ 2,962 $ ( 11,142 )

NOTE 11 – STOCK REPURCHASE PLAN

On December 13, 2021, announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months .

During the quarter ended March 31, 2022, 1,523,157 shares of common stock had been repurchased under this program at an average price of $ 16.17 per share.

During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $ 0.5 million, or an average of $ 15.22 per share.

As of April 28, 2022, the repurchase program to purchase up to two million shares of the Company’s common stock was fully executed.

The specific timing, price and quantity of repurchases will be at the Company’s discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance.

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

CARTER BANKSHARES, INC.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2021 and September 30, 2020.

Our MD&A should be read in conjunction with our Consolidated Financial Statements and notes thereto.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three month periods ended March 31, 2022 and March 31, 2021.

The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q.

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

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

The MD&A includes the following sections:

• Important Note Regarding Forward-Looking Statements

• Explanation of Use of Non-GAAP Financial Measures

• Critical Accounting Policies and Estimates

• Results of Operations and Financial Condition

• Earnings Summary

• Liquidity and Capital Resources

• Regulatory Capital Resources

• Contractual Obligations

• Off-Balance Sheet Arrangements

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements related to the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and deferral programs and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, litigation to which the Company is or has been a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations.

Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements related to the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, litigation to which the Company is or has been a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.

1 unchanged sentence

• changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”);

• general economic or business conditions, or changes in interest rates;

• technological risks and developments;

1 unchanged sentence

• the Company’s liquidity and capital positions;

the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto;

these potential adverse effects may include, without

• the potential adverse effects of unusual and infrequently occurring events, or the prospect of these events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and Ukraine) or public health events (such as the current COVID-19 pandemic), and the governmental and societal responses thereto;

• these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

Company's loans or its other products and services, on incidents of cyberattacks and fraud, on the Company’s results of operations, liquidity or capital resources, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

• the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 ;

• potential claims, damages, and fines related to litigation or government actions;

• sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;

• the replacement of LIBOR;

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

• regulatory supervision and oversight, including the failure to comply with state and federal banking agency laws and regulations;

• legislative and regulatory changes and requirements affecting the financial services industry as a whole, and the Company, in particular;

the outcome of pending and future litigation and governmental proceedings;

• increased competition;

• the ability to continue to introduce competitive new products and services at competitive prices and on a timely, cost-effective basis;

• the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team;

• the Company’s strategic branch network optimization plan;

• managing our internal growth and acquisitions;

• the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;

• containing costs and expenses;

• reliance on significant customer relationships;

• credit losses;

• the potential impact of climate change and related government regulation on the Company and its customers;

• deterioration of the housing market and reduced demand for mortgages;

• deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Many of these factors, as well as other factors, are described in this Quarterly Report, as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent filings with the Securities and Exchange Commission (“SEC”).

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

We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results.

Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses, and this quarterly report references, net interest income on a fully taxable equivalent, or (“FTE”), basis, which is a non-GAAP financial measure.

Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

comparisons with the performance of other companies in the financial services industry.

The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Net interest income is reconciled to net interest income to an FTE basis (non-GAAP) in the Net Interest Income section of the "Results of Operations and Financial Condition."

Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at March 31, 2022.

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

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

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

Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE.”

The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers.

The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

Our mission is to strive to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve.

Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin.

Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.

Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses.

The Company is focused on executing this strategy to successfully build our brand and grow our business in our markets.

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended March 31, 2022

• Net interest income increased $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021 due primarily to the ongoing reduction in funding costs;

• The provision for credit losses decreased to $0.6 million for the three months ended March 31, 2022, compared to $1.9 million for the same period in 2021 due to improved qualitative reserves and lower net charge-offs, partialy offset by loan growth;

• Total noninterest income decreased $3.6 million to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021due to a reduction in gains on sales of securities;

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

• Total noninterest expense decreased $1.1 million to $22.5 million for the three months ended March 31, 2022 compared to $23.6 million for the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and vacation carryover in the fourth quarter of 2021 as well as lower medical costs in the first three months of 2022;

• Provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

We reported net income of $9.3 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2022 compared to net income of $9.4 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2021.

Three Months Ended March 31,

PERFORMANCE RATIOS 2022 2021

Return on Average Assets 0.92 % 0.92 %

Return on Average Shareholders’ Equity 9.57 % 9.72 %

Portfolio Loans to Deposit Ratio 77.62 % 80.51 %

Allowance for Credit Losses to Total Portfolio Loans 3.33 % 3.93 %

Net Interest Income

Our principal source of revenue is net interest income.

Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.

Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads.

The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet.

A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income.

Net interest income and the net interest margin are presented on an FTE basis.

The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities.

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

Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion of non-GAAP measures.

Total net interest income increased $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021.

This increase was primarily due to the ongoing reduction in funding costs.

Net interest income, on an FTE basis (non-GAAP), increased $1.5 million, or 5.7%, to $28.5 million for the three months ended March 31, 2022 compared to $27.0 million for the same period in 2021.

For the three months ended March 31, 2022, the increase in net interest income, on an FTE basis (non-GAAP), was driven by lower interest income of $0.4 million and lower interest expense of $1.9 million compared to the same period in 2021.

Net interest margin increased 15 basis points to 2.88% for the three months ended March 31, 2022 compared to 2.73% for the same period in 2021.

The net interest margin, on an FTE basis (non-GAAP), increased 13 basis points to 2.91% for the three months ended March 31, 2022 compared to 2.78% for the same period in 2021.

The Company continues to focus on the expansion of net interest income and the net interest margin.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table reconciles net interest income per the Consolidated Statements of Income to net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented:

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021

Total Interest Income $ 32,678 $ 32,957

Total Interest Expense 4,456 6,428

Net Interest Income per Consolidated Statements of Net Income 28,222 26,529

Adjustment to FTE Basis 298 462

Net Interest Income (FTE)(non-GAAP) $ 28,520 $ 26,991

Net Interest Margin 2.88 % 2.73 %

Adjustment to FTE Basis 0.03 % 0.05 %

Net Interest Margin (FTE)(non-GAAP) 2.91 % 2.78 %

Average Balance Sheet and Net Interest Income Analysis (FTE)

The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

(Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate

Interest-Bearing Deposits with Banks $ 140,080 $ 62 0.18 % $ 174,731 $ 50 0.12 %

Tax-Free Investment Securities (2)

26,579 211 3.22 % 51,589 413 3.25 %

Taxable Investment Securities 960,645 3,732 1.58 % 708,250 2,987 1.71 %

Total Securities 987,224 3,943 1.62 % 759,839 3,400 1.81 %

Tax-Free Loans (1)(2)

154,117 1,206 3.17 % 223,012 1,787 3.25 %

Taxable Loans (1)

2,690,781 27,745 4.18 % 2,777,423 28,145 4.11 %

Total Loans 2,844,898 28,951 4.13 % 3,000,435 29,932 4.05 %

Federal Home Loan Bank Stock 2,139 20 3.79 % 4,805 37 3.12 %

Total Interest-Earning Assets 3,974,341 $ 32,976 3.36 % 3,939,810 $ 33,419 3.44 %

Noninterest Earning Assets 154,971 182,283

Total Assets $ 4,129,312 $ 4,122,093

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-Bearing Demand $ 463,980 $ 277 0.24 % $ 378,886 $ 215 0.23 %

Money Market 510,286 284 0.23 % 309,624 266 0.35 %

Savings 705,759 178 0.10 % 644,806 162 0.10 %

Certificates of Deposit 1,308,799 3,660 1.13 % 1,620,543 5,652 1.41 %

Total Interest-Bearing Deposits 2,988,824 4,399 0.60 % 2,953,859 6,295 0.86 %

Federal Home Loan Bank Borrowings 1,400 6 1.74 % 33,889 96 1.15 %

Other Borrowings 4,358 51 4.75 % 2,307 37 6.50 %

Total Borrowings 5,758 57 4.01 % 36,196 133 1.49 %

Total Interest-Bearing Liabilities 2,994,582 4,456 0.60 % 2,990,055 6,428 0.87 %

Noninterest-Bearing Liabilities 739,556 740,892

Shareholders' Equity 395,174 391,146

Total Liabilities and Shareholders' Equity $ 4,129,312 $ 4,122,093

Net Interest Income (2)

$ 28,520 $ 26,991

Net Interest Margin (2)

2.91 % 2.78 %

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

Interest income decreased $0.3 million, or 0.8%, for the three months ended March 31, 2022 compared to the same period in 2021.

Interest income, on an FTE basis (non-GAAP), decreased $0.4 million, or 1.3% for the three months ended March 31, 2022 compared to the same period in 2021.

The change was primarily due to increases in average interest-earning assets of $34.5 million for the three months ended March 31, 2022, offset by a lower interest rate yield of eight basis points compared to

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

the same period in 2021.

Average interest-bearing deposits with banks decreased $34.7 million and the average rate earned increased six basis points for the three months ended March 31, 2022 compared to the same period in 2021.

Average loan balances decreased $155.5 million for the three months ended March 31, 2022 compared to the same periods in 2021 due to large commercial paydowns in 2021.

Average Paycheck Protection Program (“PPP”) loans totaled $0.6 million as of March 31, 2022 compared to $31.2 million as of March 31, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.

The average rate earned on loans increased eight basis points for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the increase in short-term interest rates mid-March 2022.

At March 31, 2022, the loan portfolio was comprised of 31.0% floating rates which reprice monthly, 39.0% variable rates that reprice at least once during the life of the loan and the remaining 30.0% are fixed rate loans.

Average investment securities increased $227.4 million and the average rate earned decreased 19 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

The change in investment securities is the result of active balance sheet management to deploy excess cash.

Our portfolio has been diversified as to bond types, maturities, and interest rate structures.

As of March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

Interest expense decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily due to the intentional runoff of higher cost CDs in the first quarter of 2022 and in 2021.

Interest expense on deposits decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on the Company’s CDs.

The average balances on CDs decreased $311.7 million or 19.2% for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs.

The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $200.7 million, $85.1 million and $61.0 million, respectively, for the three months ended March 31, 2022 compared to the same periods in 2021.

The average rate paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts decreased 12 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

The average balances on borrowings decreased $30.4 million due to prepayments and scheduled maturities.

Overall, the cost of interest-bearing liabilities decreased 27 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

Three Months Ended March 31, 2022

Compared to March 31, 2021

(Dollars in Thousands) Volume (3)

Interest Earned on:

Interest-Bearing Deposits with Banks $ (11) $ 23 $ 12

Tax-free Investment Securities (2)

(199) (3) (202)

Taxable Investment Securities 996 (251) 745

Total Securities 797 (254) 543

Tax-free Loans (1)(2)

(540) (41) (581)

Taxable Loans (1)

(888) 488 (400)

Total Loans (1,428) 447 (981)

Federal Home Loan Bank Stock (24) 7 (17)

Total Interest-Earning Assets $ (666) $ 223 $ (443)

Interest Paid on:

Interest-Bearing Demand $ 50 $ 12 $ 62

Money Market 133 (115) 18

Savings 15 1 16

Certificates of Deposit (981) (1,011) (1,992)

Total Interest-Bearing Deposits (783) (1,113) (1,896)

Federal Home Loan Bank Borrowings (123) 33 (90)

Other Borrowings 26 (12) 14

Total Borrowings (97) 21 (76)

Total Interest-Bearing Liabilities $ (880) $ (1,092) $ (1,972)

Change in Net Interest Margin $ 214 $ 1,315 $ 1,529

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

(3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The Company recognizes provision expense for the allowance for credit losses, (“ACL”), based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments.

Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments.

The Company adopted ASU 2016-03 on January 1, 2021, and increased the ACL by $64.5 million for the Day 1 adjustment which included $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The ACL was 3.33% of total portfolio loans at March 31, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses decreased $1.3 million to $0.6 million for the three months ended March 31, 2022 compared to $1.9 million for the same period in 2021.

The provision for unfunded commitments included a release of $0.2 million for the three months ended March 31, 2022 and a release of $0.3 million for the same period in 2021.

For the three months ended March 31, 2022, the decrease in the provision for credit losses was primarily driven by improved qualitative reserves, lower loan charge-offs, offset by loan growth.

Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Noninterest Income

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021 $ Change % Change

(Losses) Gains on Sales of Securities, net $ (24) $ 3,610 $ (3,634) (100.7) %

Service Charges, Commissions and Fees 1,953 1,809 144 8.0 %

Debit Card Interchange Fees 1,932 1,831 101 5.5 %

Insurance Commissions 269 294 (25) (8.5) %

Bank Owned Life Insurance Income 334 340 (6) (1.8) %

Gains on Sales and Write-downs of Bank Premises, net 383 — 383 NM

Other Real Estate Owned Income 10 71 (61) (85.9) %

Commercial Loan Swap Fee Income — 219 (219) (100.0) %

Other 478 778 (300) (38.6) %

Total Noninterest Income $ 5,335 $ 8,952 $ (3,617) (40.4) %

Total noninterest income decreased $3.6 million, or 40.4%, to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease was primarily related to declines in net security gains of $3.6 million, a decrease in commercial loan swap fee income of $0.2 million and a $0.3 million decrease in other noninterest income.

These decreases were partially offset by gains of $0.4 million on sales and write-downs of bank premises, net, a $0.1 million increase in service charges, commissions and fees and a $0.1 million increase in debit card interchange fees.

The decline in security gains is due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.

The variances shown in commercial loan swap fee income is related to the timing and demand for this product in the current rising interest rate environment.

The increases in service charges on deposit accounts and debit card interchange fees were primarily due to new accounts, incentives and increased account activity.

The decrease in other noninterest income was related to the first quarter of 2021 as we had recorded a $0.2 million incentive true-up from a third-party and experienced fair value declines of $0.1 million related to our interest rate swap contracts with commercial customers.

Noninterest Expense

Three Months Ended March 31,

(Dollars in Thousands) 2022 2021 $ Change % Change

Salaries and Employee Benefits $ 11,757 $ 12,582 $ (825) (6.6) %

Occupancy Expense, net 3,352 3,514 (162) (4.6) %

FDIC Insurance Expense 368 643 (275) (42.8) %

Other Taxes 804 762 42 5.5 %

Advertising Expense 239 170 69 40.6 %

Telephone Expense 488 600 (112) (18.7) %

Professional and Legal Fees 1,219 1,224 (5) (0.4) %

Data Processing 841 921 (80) (8.7) %

Losses on Sales and Write-downs of Other Real Estate Owned, net 159 212 (53) (25.0) %

Losses on Sales and Write-downs on Bank Premises, net — 43 (43) (100.0) %

Debit Card Expense 633 632 1 0.2 %

Tax Credit Amortization 615 427 188 44.0 %

Other Real Estate Owned Expense 41 54 (13) (24.1) %

Other 1,995 1,821 174 9.6 %

Total Noninterest Expense $ 22,511 $ 23,605 $ (1,094) (4.6) %

Total noninterest expense decreased $1.1 million, or 4.6%, for the three months ended March 31, 2022 compared to the same period in 2021.

The decrease for the three months ended March 31, 2022 was driven by $0.8 million decrease in salaries and employee benefits and $0.3 million decrease in FDIC insurance expense.

The decrease in salaries and employee benefits was primarily related to a decline in salaries as a result of our retail branch optimization project and a decrease in medical costs.

The $0.3 million decrease in FDIC assessment resulted from improved financial metrics of the Bank that are used to perform the assessment.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Provision for Income Taxes

The provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

Pre-tax income increased $0.4 million for the three months ended March 31, 2022 compared to the same period in 2021.

Our effective tax rate was 12.5% for the three months ended March 31, 2022 compared to 9.0% for the same period in 2021.

The increase in the effective tax rate is primarily due to a higher level of pre-tax income and a lower level of tax-exempt interest income.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and BOLI, which are relatively consistent regardless of the level of pre-tax income.

Financial Condition

March 31, 2022

Total assets decreased $10.5 million, to $4.1 billion at March 31, 2022 compared to December 31, 2021.

Federal Reserve Bank excess reserves decreased $133.2 million to $43.0 million at March 31, 2022 from $176.2 million at December 31, 2021 due to active balance sheet management.

Total portfolio loans increased $81.9 million, or 11.8% on an annualized basis, to $2.9 billion at March 31, 2022 compared to December 31, 2021 primarily due to higher loan growth in the first quarter of 2022.

During 2021, loan growth was muted by large commercial loan payoffs and loan sales.

The variances in loan segments for portfolio loans related to increases of $38.2 million in construction loans, $25.4 million in residential mortgages and $20.0 million in commercial real estate loans offset by decreases of $1.4 million in other consumer and $0.3 million in the other category.

Other real estate owned, (“OREO”), increased $0.3 million at March 31, 2022 compared to December 31, 2021 due to two branch closures completed in the first three months of 2022.

This is part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

Closed retail bank offices increased $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021.

The securities portfolio increased $59.6 million and is currently 23.8% of total assets at March 31, 2022 compared to 22.3% of total assets at December 31, 2021.

The increase is due to the bank’s strategy of redeploying excess cash into higher yielding assets, including both loans and bonds.

The bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a mix of both fixed and floating rate instruments.

Total deposits increased $29.8 million to $3.7 billion at March 31, 2022 compared to December 31, 2021.

The increases included $63.8 million in money market accounts, $37.9 million in savings accounts and $27.5 million in interest-bearing demand accounts, offset by the intentional decline of $59.8 million in CDs and a decline of $39.6 million in noninterest-bearing demand accounts.

At March 31, 2022, noninterest-bearing deposits comprised 19.0% compared to 20.2% and 19.9% of total deposits at December 31, 2021 and March 31, 2021, respectively.

CDs comprised 34.5%, 36.3% and 41.2% of total deposits at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

Total capital decreased by $49.0 million to $358.6 million at March 31, 2022 compared to $407.6 million at December 31, 2021.

The decrease in equity was primarily due to a $34.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $24.6 million decrease related to the repurchase of common stock through March 31, 2022, partially offset by net income of $9.3 million for the three months ended March 31, 2022.

The remaining difference of $0.3 million is related to stock-based compensation during the three months ended March 31, 2022.

The ACL was 3.33% of total portfolio loans at March 31, 2022 compared to 3.41% as of December 31, 2021.

General reserves as a percentage of total portfolio loans were 3.30% at March 31, 2022 compared to 3.38% at December 31, 2021.

Management believes, the ACL is adequate to absorb expected losses inherent in the loan portfolio.

The Company remains well capitalized.

Our Tier 1 capital ratio decreased to 12.98% at March 31, 2022 compared to 14.21% at December 31, 2021.

Our leverage ratio was 10.00% at March 31, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 14.24% at March 31, 2022 compared to 15.46% at December 31, 2021.

We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Securities Activity

The following table presents the composition of available-for-sale securities:

(Dollars in Thousands) March 31, 2022 December 31, 2021 $ Change

Treasury Securities $ 18,609 $ 4,413 $ 14,196

Government Agency Securities 3,237 3,478 (241)

Residential Mortgage-Backed Securities 115,722 110,013 5,709

Commercial Mortgage-Backed Securities 43,645 4,168 39,477

Asset Backed Securities 85,440 81,863 3,577

Collateralized Mortgage Obligations 305,009 287,614 17,395

Small Business Administration 68,706 108,914 (40,208)

States and Political Subdivisions 270,743 262,202 8,541

Corporate Notes 70,930 59,735 11,195

Total Debt Securities $ 982,041 $ 922,400 $ 59,641

The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes.

Securities are subject to market risks that could negatively affect the level of liquidity available to us.

Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by $59.6 million to $982.0 million at March 31, 2022 compared to $922.4 million at December 31, 2021.

Securities comprise 23.8% of total assets at March 31, 2022 compared to 22.3% at December 31, 2021.

The increase is a result of active balance sheet management.

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

As of March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

At March 31, 2022 total gross unrealized gains in the available-for-sale portfolio were $1.3 million, offset by $42.2 million of gross unrealized losses.

At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.

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

At December 31, 2021, the 5-year and 10-year U.S.

Treasury yields were 1.26% and 1.52%, respectively.

For the three months ended March 31, 2022, those same bond yields were 2.42% and 2.32%, respectively.

Therefore, this increase of 116 bps and 80 bps, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range.

Note, the effects were greater for longer maturity bonds, such as municipal bonds.

On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Fed interest rate hikes.

Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis.

At March 31, 2022 and December 31, 2021, the Company did not record any OTTI.

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

Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our securities.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Loan Composition

The following table summarizes our loan portfolio for the periods presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021

Commercial Real Estate $ 1,343,206 $ 1,323,252

Commercial and Industrial 345,345 345,376

Total Commercial Loans 1,688,551 1,668,628

Residential Mortgages 483,382 457,988

Other Consumer 43,288 44,666

Total Consumer Loans 526,670 502,654

Construction 321,190 282,947

Other 357,593 357,900

Total Portfolio Loans 2,894,004 2,812,129

Loans Held-for-Sale 196 228

Total Loans $ 2,894,200 $ 2,812,357

Our loan portfolio represents our most significant source of interest income.

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

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

For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

Total portfolio loans increased $81.9 million, or 2.9%, to $2.9 billion at March 31, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios.

The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations.

The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at March 31, 2022 equated to approximately $406.2 million, or 14.0% of total portfolio loans.

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

Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic.

However, our clients continue to face challenges with respect to labor, which we believe impedes their ability to turnover rooms resulting in occupancy constraints.

This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness.

Contractual payments have been restored since the expiration of our deferral program on June 30, 2021.

These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

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

Aggregate commitments to our top 10 credit relationships were $717.7 million at March 31, 2022.

The Other segment represents 48.7% of the top 10 credit relationships.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:

Dollars in Thousands For the Periods Ending Change March 31, 2022 % of Gross Loans March 31, 2022 % of RBC

March 31, 2022 December 31, 2021

Hospitality, agriculture & energy $349,818 $350,010 ($192) 12.09 % 76.62 %

Retail real estate & food services 57,025 56,073 952 1.97 % 12.49 %

Hospitality 55,151 55,634 (483) 1.91 % 12.08 %

Industrial & retail real estate 45,176 45,653 (477) 1.56 % 9.89 %

Retail real estate 37,799 38,250 (451) 1.31 % 8.28 %

Hospitality 35,456 35,664 (208) 1.23 % 7.77 %

Multifamily & student housing 35,042 35,405 (363) 1.21 % 7.67 %

Hospitality 34,269 34,463 (194) 1.18 % 7.51 %

Multifamily development 34,190 36,720 (2,530) 1.18 % 7.49 %

Special/limited use 33,736 33,736 — 1.17 % 7.39 %

Top Ten (10) Relationships 717,662 721,608 (3,946) 24.80 % 157.18 %

Total Gross Loans 2,894,200 2,812,357 81,843

% of Total Gross Loans 24.80 % 25.66 % (0.86) %

Concentration (25% of RBC) $114,146 $120,781

Unfunded commitments on lines of credit were $435.1 million at March 31, 2022 as compared to $433.1 million at December 31, 2021.

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

Total utilization was 54.4% at March 31, 2022 and 52.2% at December 31, 2021.

Unfunded commitments on commercial operating lines of credit was 54.6% at March 31, 2022 and 51.7% at December 31, 2021.

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.

Deferred costs and fees included in the portfolio balances above were $5.2 million and $4.5 million at March 31, 2022 and December 31, 2021, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $183.6 thousand and $190.6 thousand at March 31, 2022 and December 31, 2021, respectively.

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

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

Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing.

We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period.

Mortgage loans held-for-sale were $0.2 million and $0.2 million at March 31, 2022 and December 31, 2021, respectively.

Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Credit Quality

On a monthly basis, a Criticized Asset Committee meets to review certain special mention and substandard loans within prescribed policy thresholds.

These loans typically represent the highest risk of loss to the Company.

Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter.

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

Additional credit risk management practices include continuous reviews of our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing.

Our Loan Review department serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities.

The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms.

Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due.

Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Nonperforming assets consist of nonaccrual loans, nonaccrual troubled debt restructurings, (“TDRs”), and OREO.

The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands) March 31, 2022 December 31, 2021 $ Change

Nonperforming Loans

Commercial Real Estate $ 265 $ 595 $ (330)

Commercial and Industrial 208 451 (243)

Residential Mortgages 2,816 2,551 265

Other Consumer 20 73 (53)

Construction 166 177 (11)

Total Nonperforming Loans 3,475 3,847 (372)

Nonperforming Troubled Debt Restructurings

Commercial Real Estate 3,014 2,742 272

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction 808 808 —

Total Nonperforming Troubled Debt Restructurings 3,822 3,550 272

Total Nonperforming Loans and Troubled Debt Restructurings 7,297 7,397 (100)

Other Real Estate Owned 11,253 10,916 337

Total Nonperforming Assets $ 18,550 $ 18,313 $ 237

Nonperforming assets increased $0.2 million to $18.6 million at March 31, 2022 compared to December 31, 2021.

The increase was primarily due to a $0.3 million an increase in OREO, offset by a $0.1 million decline in nonperforming loans.

C losed retail bank offices increased $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021.

During the first quarter of 2022, two branch closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

CARTER BANKSHARES, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements