CARE filing — read by section

Item 1. Financial Statements

ITEM 1 – FINANCIAL STATEMENTS (continued) 

 CONSOLIDATED STATEMENTS OF CASH FLOWS 
 Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 
 Net Income $ 34,509 $ 25,980 
 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities 
 Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 2,557 1,466 
 
 Origination of Loans Held-for-Sale ( 7,017 ) ( 465,174 ) 
 Proceeds From Loans Held-for-Sale 7,399 485,984 
 Depreciation/Amortization of Bank Premises and Equipment 4,494 4,669 
 Provision for Deferred Taxes 1,697 2,965 
 Net Amortization of Securities 4,540 3,128 
 Tax Credit Amortization 466 1,281 
 Gains on Sales of Mortgage Loans Held-for-Sale ( 154 ) ( 262 ) 
 Gains on Sales of Securities, net ( 48 ) ( 6,450 ) 
 Write-downs of Other Real Estate Owned 578 3,324 
 (Gains) Losses on Sales of Other Real Estate Owned, Net ( 310 ) 99 
 (Gains) Losses on Sales and Write-downs of Bank Premises ( 342 ) 114 
 Change in Fair Market Value of Commercial Loan Swap Derivative ( 738 ) ( 188 ) 
 Premiums on Branch Sales — ( 506 ) 
 Increase in the Value of Life Insurance Contracts ( 1,009 ) ( 1,031 ) 
 Recognition of Restricted Stock Compensation Expense 1,010 772 
 Decrease in Other Assets 768 6,296 
 Decrease in Other Liabilities ( 702 ) ( 2,446 ) 
 Net Cash Provided By Operating Activities 47,698 60,021 
 INVESTING ACTIVITIES 
 Securities Available-for-Sale: 
 Proceeds from Sales 19,777 130,535 
 Proceeds from Maturities, Redemptions, and Pay-downs 71,146 76,328 
 Purchases ( 135,634 ) ( 323,355 ) 
 Purchase of Bank Premises and Equipment, Net ( 4,191 ) ( 6,281 ) 
 Net Cash Paid in Branch Sales — ( 73,923 ) 
 Proceeds from Sales of Bank Premises and Equipment, net 408 — 
 Proceeds from Sale of Portfolio Loans — 42,295 
 (Redemption) Purchases of Federal Home Loan Bank Stock, net ( 840 ) 1,878 
 Loan (Originations) and Payments, net ( 224,839 ) 9,458 
 
 Payments Received on Other Real Estate Owned 320 342 
 
 Proceeds from Sales and Payments of Other Real Estate Owned 3,742 10,728 
 Net Cash Used In Investing Activities ( 270,111 ) ( 131,995 ) 
 FINANCING ACTIVITIES 
 Net Change in Demand, Money Markets and Savings Accounts 123,118 279,063 
 Decrease in Certificates of Deposits ( 95,665 ) ( 218,235 ) 
 Borrowings (Payments) on Federal Home Loan Bank Borrowings, net 23,000 ( 5,000 ) 
 
 Repurchase of Common Stock ( 40,131 ) — 
 Net Cash Provided by Financing Activities 10,322 55,828 
 Net Decrease in Cash and Cash Equivalents ( 212,091 ) ( 16,146 ) 
 Cash and Cash Equivalents at Beginning of Period 277,799 241,942 
 Cash and Cash Equivalents at End of Period $ 65,708 $ 225,796 
 
 SUPPLEMENTARY DATA 
 Cash Interest Paid $ 13,698 $ 18,338 
 Cash Paid for Income Taxes 3,253 2,720 
 Transfer from Loans to Other Real Estate Owned — 23 
 
 Transfer from Fixed Assets to Other Real Estate Owned 1,584 12,013 
 Security (Purchases) Settled in Subsequent Period — ( 12,129 ) 
 Right-of-use Asset Recorded in Exchange for Lease Liabilities 3,391 2,027 
 
 Loans Transferred to Held-for-Sale $ 1,513 $ — 
 
 

 See accompanying notes to unaudited consolidated financial statements. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 
 
 
 NOTE 1 – BASIS OF PRESENTATION 
 Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). All significant intercompany transactions have been eliminated in consolidation. 
 Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”), on March 11, 2022. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. 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. 
 Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity. 
 Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Those estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided. Actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 related changes, and changes in the financial condition of borrowers. 
 Accounting Standards Adopted in 2022 
 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 were evaluated to determine if they resulted in a new loan or a continuation of the existing loan. The amendments in this ASU also required that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in this ASU are effective January 1, 2023, with early adoption permitted. The Company evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU on April 1, 2022 on a prospective basis, effective dated as of January 1, 2022. This change did not have a material effect on our consolidated financial statements. Refer to Note 4, Loans and Loans Held-For-Sale for disclosures for debtors experiencing financial difficulty and Note 5, Allowance for Credit Losses for vintage disclosures related to gross charge-offs by loan segment by year of origination, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information on the adoption of these amendments. 
 Allowance for Credit Losses Policy 
 The adoption of current expected credit losses (“CECL”) accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of restructured loans or charge-off policy. 
 The Company’s methodology for estimating the allowance for credit losses (“ACL”) includes: 
 Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly through 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 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 1 – BASIS OF PRESENTATION – (continued) 

 probable. Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below. 
 Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”) for quantitative analysis that are part of the Company’s ACL methodology. Economic forecasts, include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the long-term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values. 
 Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output following the quantitative analysis. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective. 
 “Other” Segmented Pool 
 CECL provides for the flexibility to model loans differently compared to the prior model. With the adoption of CECL, management elected to evaluate certain loans based on shared but unique risk attributes. The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards. The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors: prepayment speeds, timing of contractual payments, discount rate, as well as other factors. The discount rate is reflective of the inherent risk in the Other segment. A substantial change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively makes adjustments as needed. The analysis applied to this pool resulted in an allowance of $ 51.3 million upon adoption and is disclosed in the Other segment line item. 
 Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. The Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to: 
 • The status of a bankruptcy proceeding 
 • The value of collateral and probability of successful liquidation; and/or 
 • The status of adverse proceedings or litigation that may result in collection 
 Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell. 
 Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans. 
 Loan Restructurings: In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 1 – BASIS OF PRESENTATION – (continued) 

 loan to more affordable terms before their loan reaches nonaccrual status. These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included principal forgiveness, other-than-significant payment delays, interest only periods, extended term and amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type, or any combination. These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty. 
 Accounting Standards Issued but Not Yet Adopted 
 In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. 
 Furthermore, the United Kingdom’s Financial Conduct Authority (“FCA”), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to the U.S. dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023. In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The 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, 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 FRB to identify a replacement benchmark based on SOFR. 
 In response, we have created an internal team that is managing our transition away from LIBOR. This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions. To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition. The team is currently in the process of: i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices. We are considering SOFR and other credit-sensitive alternative indices that may gain market acceptance as potential replacements to LIBOR. The financial impact regarding pricing, valuation and operations of the transition is not expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR. 
 As of September 30, 2022, approximately 13.2 % 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. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 NOTE 2 – EARNINGS PER SHARE 
 Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. 
 The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands, except share and per share data) 2022 2021 2022 2021 
 Numerator for Earnings per Share – Basic and Diluted 
 Net Income $ 14,408 $ 11,173 $ 34,509 $ 25,980 
 Less: Income allocated to participating shares 92 48 199 104 
 Net Income Allocated to Common Shareholders - Basic & Diluted $ 14,316 $ 11,125 $ 34,310 $ 25,876 
 
 Denominator: 
 Weighted Average Shares Outstanding, including Shares Considered Participating Securities 24,421,264 26,461,617 24,970,993 26,445,654 
 Less: Average Participating Securities 156,189 113,129 143,850 105,724 
 Weighted Average Common Shares Outstanding - Basic & Diluted 24,265,075 26,348,488 24,827,143 26,339,930 
 
 Earnings per Common Share – Basic $ 0.59 $ 0.42 $ 1.38 $ 0.98 
 Earnings per Common Share – Diluted $ 0.59 $ 0.42 $ 1.38 $ 0.98 

 All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation. 
 
 NOTE 3 - INVESTMENT SECURITIES 
 The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented: 
 
 September 30, 2022 
 (Dollars in Thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value 
 U.S. Treasury Securities $ 19,300 $ — $ ( 1,552 ) $ 17,748 
 U.S. Government Agency Securities 3,520 — ( 606 ) 2,914 
 Residential Mortgage-Backed Securities 117,229 — ( 12,661 ) 104,568 
 Commercial Mortgage-Backed Securities 37,944 97 ( 959 ) 37,082 
 Asset Backed Securities 84,180 — ( 3,404 ) 80,776 
 Collateralized Mortgage Obligations 295,020 7 ( 28,416 ) 266,611 
 Small Business Administration 50,249 301 ( 107 ) 50,443 
 States and Political Subdivisions 282,272 1 ( 53,618 ) 228,655 
 Corporate Notes 70,750 — ( 8,336 ) 62,414 
 Total Debt Securities $ 960,464 $ 406 $ ( 109,659 ) $ 851,211 

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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 3 – INVESTMENT SECURITIES (continued) 

 
 December 31, 2021 
 (Dollars in Thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value 
 U.S. Treasury Securities $ 4,442 $ — $ ( 29 ) $ 4,413 
 U.S. Government Agency Securities 3,475 3 — 3,478 
 Residential Mortgage-Backed Securities 112,118 76 ( 2,181 ) 110,013 
 Commercial Mortgage-Backed Securities 4,155 53 ( 40 ) 4,168 
 Asset Backed Securities 82,119 49 ( 305 ) 81,863 
 Collateralized Mortgage Obligations 287,734 2,190 ( 2,310 ) 287,614 
 Small Business Administration 108,643 879 ( 608 ) 108,914 
 States and Political Subdivisions 257,810 6,344 ( 1,952 ) 262,202 
 Corporate Notes 59,750 375 ( 390 ) 59,735 
 Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400 

 
 The Company did no t have securities classified as held-to-maturity at September 30, 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, 
 (Dollars in Thousands) 2022 2021 2022 2021 
 Proceeds from Sales of Securities Available-for-Sale $ — $ 22,235 $ 19,777 $ 130,535 
 
 Gross Realized Gains $ — $ 1,351 $ 208 $ 6,545 
 Gross Realized Losses ( 4 ) ( 10 ) ( 160 ) ( 95 ) 
 Net Realized (Losses) Gains ( 4 ) 1,341 48 6,450 
 Tax Impact $ ( 1 ) $ 282 $ 10 $ 1,355 

 Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. 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. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. 
 
 September 30, 2022 
 (Dollars in Thousands) Amortized
Cost Fair
Value 
 Due in One Year or Less $ 195 $ 195 
 Due after One Year through Five Years 20,850 19,579 
 Due after Five Years through Ten Years 223,496 197,176 
 Due after Ten Years 181,550 145,224 
 Residential Mortgage-Backed Securities 117,229 104,568 
 Commercial Mortgage-Backed Securities 37,944 37,082 
 Collateralized Mortgage Obligations 295,020 266,611 
 Asset Backed Securities 84,180 80,776 
 Total Debt Securities $ 960,464 $ 851,211 

 At September 30, 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 $ 227.6 million at September 30, 2022 and $ 178.6 million at December 31, 2021. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 3 – INVESTMENT SECURITIES (continued) 

 Available-for-sale securities with unrealized losses at September 30, 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: 
 
 September 30, 2022 
 Less Than 12 Months 12 Months or More Total 
 (Dollars in Thousands) Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses 
 U.S. Treasury Securities 4 $ 15,724 $ ( 1,115 ) 1 $ 2,024 $ ( 437 ) 5 $ 17,748 $ ( 1,552 ) 
 U.S. Government Agency Securities 2 2,914 ( 606 ) — — — 2 2,914 ( 606 ) 
 Residential Mortgage-Backed Securities 22 51,432 ( 3,874 ) 21 53,136 ( 8,787 ) 43 104,568 ( 12,661 ) 
 Commercial Mortgage-Backed Securities 5 7,819 ( 307 ) 51 17,028 ( 652 ) 56 24,847 ( 959 ) 
 Asset Backed Securities 16 35,751 ( 1,592 ) 19 43,025 ( 1,812 ) 35 78,776 ( 3,404 ) 
 Collateralized Mortgage Obligations 61 143,015 ( 13,506 ) 51 121,056 ( 14,910 ) 112 264,071 ( 28,416 ) 
 Small Business Administration 6 9,622 ( 47 ) 5 8,746 ( 60 ) 11 18,368 ( 107 ) 
 States and Political Subdivisions 125 185,320 ( 40,751 ) 39 42,940 ( 12,867 ) 164 228,260 ( 53,618 ) 
 Corporate Notes 15 47,643 ( 6,608 ) 6 14,771 ( 1,728 ) 21 62,414 ( 8,336 ) 
 Total Debt Securities 256 $ 499,240 $ ( 68,406 ) 193 $ 302,726 $ ( 41,253 ) 449 $ 801,966 $ ( 109,659 ) 

 
 December 31, 2021 
 Less Than 12 Months 12 Months or More Total 
 (Dollars in Thousands) Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses 
 U.S. Treasury Securities 2 $ 4,413 $ ( 29 ) — $ — $ — 2 $ 4,413 $ ( 29 ) 
 U.S. Government Agency Securities 1 1,733 — — — — 1 1,733 — 
 Residential Mortgage-Backed Securities 30 95,749 ( 2,030 ) 7 8,706 ( 151 ) 37 104,455 ( 2,181 ) 
 Commercial Mortgage-Backed Securities 1 1,987 ( 40 ) — — — 1 1,987 ( 40 ) 
 Asset Backed Securities 17 44,095 ( 129 ) 10 21,895 ( 176 ) 27 65,990 ( 305 ) 
 Collateralized Mortgage Obligations 50 157,630 ( 1,945 ) 11 24,849 ( 365 ) 61 182,479 ( 2,310 ) 
 Small Business Administration 11 18,813 ( 235 ) 53 19,630 ( 373 ) 64 38,443 ( 608 ) 
 States and Political Subdivisions 56 88,746 ( 1,503 ) 8 7,874 ( 449 ) 64 96,620 ( 1,952 ) 
 Corporate Notes 10 29,683 ( 317 ) 1 2,427 ( 73 ) 11 32,110 ( 390 ) 
 Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 ) 

 The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the quarter or nine months ended September 30, 2022 as the Company did no t have securities classified as held-to-maturity at September 30, 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. 
 As of September 30, 2022, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. 
 As of September 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit; therefore, no ACL has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any non-credit loss will be recognized in other comprehensive loss. During the three and nine months ended September 30, 2022 and 2021, the Company had no credit related net investment impairment losses. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 NOTE 4 – LOANS AND LOANS HELD-FOR-SALE 
 The composition of the loan portfolio by dollar amount is shown in the table below: 
 
 (Dollars in Thousands) 
 September 30, 2022 December 31, 2021 
 Commercial 
 
 Commercial Real Estate 
 $ 1,365,348 $ 1,323,252 
 Commercial and Industrial 
 325,973 345,376 
 Total Commercial Loans 
 1,691,321 1,668,628 
 Consumer 
 
 Residential Mortgages 
 617,681 457,988 
 Other Consumer 
 47,006 44,666 
 Total Consumer Loans 
 664,687 502,654 
 Construction 350,037 282,947 
 Other 325,304 357,900 
 Total Portfolio Loans 3,031,349 2,812,129 
 Loans Held-for-Sale 1,513 228 
 
 Total Loans $ 3,032,862 $ 2,812,357 

 Loan Restructurings 
 On April 1, 2022, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of troubled debt restructurings (“TDRs”). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows. 
 A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. 
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 CARTER BANKSHARES, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued) 

 The following table shows the amortized cost basis as of September 30, 2022 for the three and nine months ended September 30, 2022 for the loans restructured during the three and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivables: 
 
 Restructured Loans 
 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 
 (Dollars in Thousands) Number of Contracts Amortized Cost Basis (1) 
 % of Total Class of Financing Receivable Number of Contracts Amortized Cost Basis (1) 
 % of Total Class of Financing Receivable 
 Accruing Restructured Loans 
 Commercial Real Estate — $ — — % 1 $ 326 0.02 % 
 Commercial and Industrial — — — % — — — % 
 Residential Mortgages — — — % — — — % 
 Other Consumer — — — % — — — % 
 Construction 1 137 0.04 % 1 137 0.04 % 
 Other — — — % — — — % 
 Total Accruing Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 % 
 
 Nonaccrual Restructured Loans 
 Commercial Real Estate — $ — — % — $ — — % 
 Commercial and Industrial — — — % — — — % 
 Residential Mortgages — — — % — — — % 
 Other Consumer — — — % — — — % 
 Construction — — — % — — — % 
 Other — — — % — — — % 
 Total Nonaccrual Restructured Loans — $ — — % — $ — — % 
 Total Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 % 

 (1) Excludes accrued interest receivable of $ 0.1 thousand and $ 0.9 thousand at September 30, 2022 for restructured loans during the the three and nine months ended September 30, 2022 . 
 During the third quarter of 2022 the Bank modified a construction loan as a restructured loan. This nonperforming loan was extended to allow the borrower to complete construction. In the first quarter of 2022 the Bank recognized a loan modification of a commercial real estate loan as a restructured loan. The borrower’s objective was to redevelop the property for a purpose that temporarily lacked feasibility due to the COVID-19 pandemic. In the interim the property was leased, albeit at a lower rate than originally forecasted. The Bank reduced the regularly scheduled principal and interest payments to accommodate the rental income until the property can be redeveloped. In the third quarter of 2022 this loan was returned to accruing status due to sustainable payments over the last six months. These loans are not considered significant and are included in the Bank’s ACL model in the general pool of the construction and commercial real estate (“CRE”) segments for reserve purposes. 
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 CARTER BANKSHARES, INC. 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued) 

 The Bank closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the nine months ended September 30, 2022: 
 
 Payment Status (Amortized Cost Basis) 
 (Dollars in Thousands) Current 30-89 Days Past Due 90+ Days Past Due 
 Accruing Restructured Loans 
 Commercial Real Estate $ 326 $ — $ — 
 Commercial and Industrial — — — 
 Residential Mortgages — — — 
 Other Consumer — — — 
 Construction 137 — — 
 Other — — — 
 Total Accruing Restructured Loans $ 463 $ — $ — 
 
 Nonaccrual Restructured Loans 
 Commercial Real Estate $ — $ — $ — 
 Commercial and Industrial — — — 
 Residential Mortgages — — — 
 Other Consumer — — — 
 Construction — — — 
 Other — — — 
 Total Nonaccrual Restructured Loans $ — $ — $ — 
 Total Restructured Loans (1) 
 $ 463 $ — $ — 

 (1) Excludes accrued interest receivable of $ 0.9 thousand at September 30, 2022. 
 As of September 30, 2022, the Bank had no commitments to lend any additional funds on restructured loans. As of September 30, 2022 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification. For purposes of this disclosure, a default occurs when, within 12 months of the original modification, either a full or partial charge-off occurs or the loan becomes 90 days or more past due. 
 As of September 30, 2022 and December 31, 2021, the Bank had $ 1.3 million and $ 0.3 million, respectively, of residential real estate loans in the process of foreclosure. We also had $ 23.0 thousand at September 30, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate loans included in other real estate owned (“OREO”). 
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 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES 
 The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. 
 CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business. 
 C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio. 
 Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. 
 Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. 
 Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed. 
 Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow 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 
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 without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018. 
 Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. 
 Credit Quality Indicators: 
 The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status. 
 The Company has a loan review policy and 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; 
 • 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; and 
 • 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: 
 Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality. 
 Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. 
 Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the 
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 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. 
 Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. 
 Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. 
 The 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. 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 The following table presents portfolio loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented: 
 
 
 
 September 30, 2022 
 Risk Rating 
 
 (Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans 
 Commercial Real Estate 
 Pass $ 304,481 $ 182,263 $ 140,468 $ 135,156 $ 223,885 $ 335,937 $ 29,428 $ 1,351,618 
 Special Mention — 220 — — 9,970 720 — 10,910 
 Substandard — — — 326 2,137 357 — 2,820 
 
 Total Commercial Real Estate $ 304,481 $ 182,483 $ 140,468 $ 135,482 $ 235,992 $ 337,014 $ 29,428 $ 1,365,348 
 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Commercial and Industrial 
 Pass $ 19,973 $ 48,704 $ 38,557 $ 9,652 $ 22,860 $ 159,476 $ 20,847 $ 320,069 
 Special Mention — — — — — — — — 
 Substandard 14 56 2,895 39 9 2,800 91 5,904 
 
 Total Commercial and Industrial $ 19,987 $ 48,760 $ 41,452 $ 9,691 $ 22,869 $ 162,276 $ 20,938 $ 325,973 
 YTD Gross Charge-offs $ 3,432 $ — $ — $ — $ — $ — $ — $ 3,432 
 
 Residential Mortgages 
 Pass $ 165,502 $ 178,132 $ 82,290 $ 51,552 $ 71,425 $ 41,750 $ 21,830 $ 612,481 
 Special Mention — — — — 431 528 33 992 
 Substandard — 1,212 — 904 598 1,494 — 4,208 
 
 Total Residential Mortgages $ 165,502 $ 179,344 $ 82,290 $ 52,456 $ 72,454 $ 43,772 $ 21,863 $ 617,681 
 YTD Gross Charge-offs $ — $ — $ — $ — $ 22 $ 23 $ — $ 45 
 
 Other Consumer 
 Pass $ 32,574 $ 5,757 $ 7,511 $ 337 $ 200 $ 219 $ 319 $ 46,917 
 Special Mention — — — — — — — — 
 Substandard 8 55 1 2 2 21 — 89 
 
 Total Other Consumer $ 32,582 $ 5,812 $ 7,512 $ 339 $ 202 $ 240 $ 319 $ 47,006 
 YTD Gross Charge-offs $ 89 $ 453 $ 227 $ 325 $ 38 $ 112 $ — $ 1,244 
 
 Construction 
 Pass $ 100,437 $ 126,652 $ 65,710 $ 6,214 $ 25,286 $ 17,743 $ 6,806 $ 348,848 
 Special Mention — — 137 — — 70 — 207 
 Substandard — — — — 107 875 — 982 
 
 Total Construction $ 100,437 $ 126,652 $ 65,847 $ 6,214 $ 25,393 $ 18,688 $ 6,806 $ 350,037 
 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Other 
 Pass $ — $ — $ — $ — $ — $ 180,768 $ — $ 180,768 
 Special Mention — — — — — 1,145 — 1,145 
 Substandard — — — — 82,210 61,181 — 143,391 
 
 Total Other Loans $ — $ — $ — $ — $ 82,210 $ 243,094 $ — $ 325,304 
 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Total Portfolio Loans 
 Pass $ 622,967 $ 541,508 $ 334,536 $ 202,911 $ 343,656 $ 735,893 $ 79,230 $ 2,860,701 
 Special Mention — 220 137 — 10,401 2,463 33 13,254 
 Substandard 22 1,323 2,896 1,271 85,063 66,728 91 157,394 
 
 Total Portfolio Loans $ 622,989 $ 543,051 $ 337,569 $ 204,182 $ 439,120 $ 805,084 $ 79,354 $ 3,031,349 
 Current YTD Period: 
 YTD Gross Charge-offs $ 3,521 $ 453 $ 227 $ 325 $ 60 $ 135 $ — $ 4,721 

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 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 
 December 31, 2021 
 Risk Rating 
 (Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total Portfolio Loans 
 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 
 YTD Gross Charge-offs $ — $ — $ 10,471 $ 1,424 $ 6,577 $ 1,190 $ — $ 19,662 
 
 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 
 YTD Gross Charge-offs $ — $ 109 $ 261 $ 3 $ — $ 1 $ — $ 374 
 
 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 
 YTD Gross Charge-offs $ — $ — $ — $ 172 $ — $ 101 $ — $ 273 
 
 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 
 YTD Gross Charge-offs $ 152 $ 661 $ 905 $ 247 $ 170 $ 121 $ — $ 2,256 
 
 Construction 
 Pass $ 140,639 $ 82,523 $ 24,336 $ 9,739 $ 5,328 $ 3,407 $ 15,269 $ 281,241 
 Special Mention — — 175 — — 429 — 604 
 Substandard — 107 809 95 — 91 — 1,102 
 
 Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947 
 YTD Gross Charge-offs $ — $ — $ 1,859 $ — $ — $ — $ — $ 1,859 
 
 Other 
 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 
 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 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 
 Current YTD Period: 
 YTD Gross Charge-offs $ 152 $ 770 $ 13,496 $ 1,846 $ 6,747 $ 1,413 $ — $ 24,424 

 
 
 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 The following table presents portfolio loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented: 
 
 September 30, 2022 
 (Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans 
 Commercial Real Estate 
 Performing $ 304,481 $ 182,483 $ 140,468 $ 135,482 $ 233,855 $ 336,735 $ 29,428 $ 1,362,932 
 Nonperforming — — — — 2,137 279 — 2,416 
 Total Commercial Real Estate $ 304,481 $ 182,483 $ 140,468 $ 135,482 $ 235,992 $ 337,014 $ 29,428 $ 1,365,348 
 Commercial and Industrial 
 Performing $ 19,973 $ 48,714 $ 41,452 $ 9,652 $ 22,860 $ 162,274 $ 20,847 $ 325,772 
 Nonperforming 14 46 — 39 9 2 91 201 
 Total Commercial and Industrial $ 19,987 $ 48,760 $ 41,452 $ 9,691 $ 22,869 $ 162,276 $ 20,938 $ 325,973 
 Residential Mortgages 
 Performing $ 165,502 $ 178,132 $ 82,290 $ 51,552 $ 72,083 $ 42,750 $ 21,863 $ 614,172 
 Nonperforming — 1,212 — 904 371 1,022 — 3,509 
 Total Residential Mortgages $ 165,502 $ 179,344 $ 82,290 $ 52,456 $ 72,454 $ 43,772 $ 21,863 $ 617,681 
 Other Consumer 
 Performing $ 32,582 $ 5,806 $ 7,511 $ 339 $ 200 $ 240 $ 319 $ 46,997 
 Nonperforming — 6 1 — 2 — — 9 
 Total Other Consumer $ 32,582 $ 5,812 $ 7,512 $ 339 $ 202 $ 240 $ 319 $ 47,006 
 Construction 
 Performing $ 100,437 $ 126,652 $ 65,847 $ 6,214 $ 25,379 $ 17,827 $ 6,806 $ 349,162 
 Nonperforming — — — — 14 861 — 875 
 Total Construction $ 100,437 $ 126,652 $ 65,847 $ 6,214 $ 25,393 $ 18,688 $ 6,806 $ 350,037 
 Other 
 Performing $ — $ — $ — $ — $ 82,210 $ 243,094 $ — $ 325,304 
 Nonperforming — — — — — — — — 
 Total Other Loans $ — $ — $ — $ — $ 82,210 $ 243,094 $ — $ 325,304 
 Total Portfolio Loans 
 Performing $ 622,975 $ 541,787 $ 337,568 $ 203,239 $ 436,587 $ 802,920 $ 79,263 $ 3,024,339 
 Nonperforming 14 1,264 1 943 2,533 2,164 91 7,010 
 Total Portfolio Loans $ 622,989 $ 543,051 $ 337,569 $ 204,182 $ 439,120 $ 805,084 $ 79,354 $ 3,031,349 

 
 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 
 December 31, 2021 
 (Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total Portfolio Loans 
 Commercial Real Estate 
 Performing $ 195,670 $ 165,100 $ 215,575 $ 292,857 $ 119,229 $ 293,102 $ 38,382 $ 1,319,915 
 Nonperforming — — 314 2,742 215 66 — 3,337 
 Total Commercial Real Estate $ 195,670 $ 165,100 $ 215,889 $ 295,599 $ 119,444 $ 293,168 $ 38,382 $ 1,323,252 
 Commercial and Industrial 
 Performing $ 55,187 $ 50,087 $ 15,648 $ 43,117 $ 26,373 $ 150,656 $ 3,857 $ 344,925 
 Nonperforming — — 308 4 — — 139 451 
 Total Commercial and Industrial $ 55,187 $ 50,087 $ 15,956 $ 43,121 $ 26,373 $ 150,656 $ 3,996 $ 345,376 
 Residential Mortgages 
 Performing $ 155,892 $ 91,023 $ 63,682 $ 73,564 $ 8,640 $ 49,399 $ 13,237 $ 455,437 
 Nonperforming — — 1,008 512 188 843 — 2,551 
 Total Residential Mortgages $ 155,892 $ 91,023 $ 64,690 $ 74,076 $ 8,828 $ 50,242 $ 13,237 $ 457,988 
 Other Consumer 
 Performing $ 9,364 $ 10,202 $ 979 $ 450 $ 211 $ 23,048 $ 339 $ 44,593 
 Nonperforming — — 11 57 5 — — 73 
 Total Other Consumer $ 9,364 $ 10,202 $ 990 $ 507 $ 216 $ 23,048 $ 339 $ 44,666 
 Construction 
 Performing $ 140,639 $ 82,523 $ 24,511 $ 9,834 $ 5,328 $ 3,858 $ 15,269 $ 281,962 
 Nonperforming — 107 809 — — 69 — 985 
 Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947 
 Other 
 Performing $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900 
 Nonperforming — — — — — — — 
 Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900 
 Total Portfolio Loans 
 Performing $ 556,752 $ 398,935 $ 320,395 $ 507,151 $ 323,511 $ 626,904 $ 71,084 $ 2,804,732 
 Nonperforming — 107 2,450 3,315 408 978 139 7,397 
 Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129 

 
 
 The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented: 
 
 September 30, 2022 
 (Dollars in Thousands) Current
Loans Loans
30-59 Days
Past Due Loans
60-89 Days
Past Due Total
30-89 Days
Past Due Nonaccrual
Loans Total Portfolio 
Loans 
 Commercial Real Estate $ 1,362,799 $ 133 $ — $ 133 $ 2,416 $ 1,365,348 
 Commercial and Industrial 325,604 69 99 168 201 325,973 
 Residential Mortgages 613,721 451 — 451 3,509 617,681 
 Other Consumer 46,645 176 176 352 9 47,006 
 Construction 349,162 — — — 875 350,037 
 Other 325,304 — — — — 325,304 
 Total $ 3,023,235 $ 829 $ 275 $ 1,104 $ 7,010 $ 3,031,349 

 
 
 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 
 December 31, 2021 
 (Dollars in Thousands) Current
Loans Loans
30-59 Days
Past Due Loans
60-89 Days
Past Due Total
30-89 Days
Past Due Nonaccrual
Loans Total Portfolio 
Loans 
 Commercial Real Estate $ 1,319,686 $ 229 $ — $ 229 $ 3,337 $ 1,323,252 
 Commercial and Industrial 344,628 80 217 297 451 345,376 
 Residential Mortgages 454,754 683 — 683 2,551 457,988 
 Other Consumer 44,132 367 94 461 73 44,666 
 Construction 281,962 — — — 985 282,947 
 Other 357,900 — — — — 357,900 
 Total $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129 

 
 There were no loans past due 90 days or more and still accruing at September 30, 2022 and December 31, 2021. Loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days and still accruing decreased $ 0.6 million to $ 1.1 million at September 30, 2022 compared to $ 1.7 million at December 31, 2021. 
 There were no nonaccrual or past due loans related to loans held-for-sale at September 30, 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 loan segment for the periods presented: 
 
 September 30, 2022 
 (Dollars in Thousands) Beginning of
Period
Nonaccrual End of
Period
Nonaccrual Nonaccrual
With No
Related
Allowance Past Due 
90+ Days
Still Accruing 
 Commercial Real Estate $ 3,337 $ 2,416 $ — $ — 
 Commercial and Industrial 451 201 — — 
 Residential Mortgages 2,551 3,509 1,212 — 
 Other Consumer 73 9 — — 
 Construction 985 875 — — 
 Other — — — — 
 Total Portfolio Loans $ 7,397 $ 7,010 $ 1,212 $ — 

 
 December 31, 2021 
 (Dollars in Thousands) Beginning of
Period
Nonaccrual End of
Period
Nonaccrual Nonaccrual
With No
Related
Allowance Past Due 
90+ Days
Still Accruing 
 Commercial Real Estate $ 21,891 $ 3,337 $ — $ — 
 Commercial and Industrial 456 451 — — 
 Residential Mortgages 4,135 2,551 — — 
 Other Consumer 184 73 — — 
 Construction 5,331 985 808 — 
 Other — — — — 
 Total Portfolio Loans $ 31,997 $ 7,397 $ 808 $ — 

 A loan is considered to be experiencing financial difficulty when it is transferred to nonaccrual status. Loans experiencing financial difficulty with a commitment of $ 1.0 million or more are individually evaluated. During the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans. 
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 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 provision (recovery) for credit loss on loans in the period of change. 
 
 Type of Collateral 
 September 30, 2022 December 31, 2021 
 (Dollars in Thousands) Real Estate Real Estate 
 Commercial Real Estate $ 2,137 $ 2,742 
 Commercial and Industrial — — 
 Residential Mortgages 1,212 — 
 Other Consumer — — 
 Construction — 808 
 Other — — 
 Total $ 3,349 $ 3,550 

 
 The following tables present activity in the ACL for the periods presented: 
 
 Three Months Ended September 30, 2022 
 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans 
 Allowance for Credit Losses on Loans: 
 Balance at Beginning of Period $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981 
 (Recovery) Provision for Credit Losses on Loans ( 433 ) 1,542 466 206 1,856 ( 3,714 ) ( 77 ) 
 Charge-offs — ( 3,432 ) — ( 418 ) — — ( 3,850 ) 
 Recoveries — — 1 109 — — 110 
 Net (Charge-offs) / Recoveries — ( 3,432 ) 1 ( 309 ) — — ( 3,740 ) 
 Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164 

 
 Nine Months Ended September 30, 2022 
 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans 
 Allowance for Credit Losses on Loans: 
 Balance at Beginning of Period $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939 
 Provision (Recovery) for Credit Losses on Loans 78 3,118 1,202 1,035 1,600 ( 4,666 ) 2,367 
 Charge-offs — ( 3,432 ) ( 45 ) ( 1,244 ) — — ( 4,721 ) 
 Recoveries — 1 97 332 149 — 579 
 Net (Charge-offs) / Recoveries — ( 3,431 ) 52 ( 912 ) 149 — ( 4,142 ) 
 Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164 

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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 

 
 Three Months Ended September 30, 2021 
 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans 
 Allowance for Credit Losses on Loans: 
 Balance at Beginning of Period $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319 
 (Recovery) Provision for Credit Losses on Loans ( 304 ) 4 266 410 ( 789 ) — ( 413 ) 
 Charge-offs ( 9,187 ) ( 188 ) ( 56 ) ( 424 ) — — ( 9,855 ) 
 Recoveries 9 3 1 198 32 — 243 
 Net (Charge-offs) / Recoveries ( 9,178 ) ( 185 ) ( 55 ) ( 226 ) 32 — ( 9,612 ) 
 Balance at End of Period $ 18,659 $ 4,533 $ 5,578 $ 1,405 $ 7,388 $ 61,731 $ 99,294 

 
 Nine Months Ended September 30, 2021 
 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans 
 Allowance for Credit Losses on Loans: 
 Balance at Beginning of Period $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ — $ 54,074 
 Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 $ 61,642 
 (Recovery) Provision for Credit Losses on Loans ( 7,080 ) ( 1,719 ) 228 1,157 ( 629 ) 10,454 2,411 
 Charge-offs ( 17,425 ) ( 196 ) ( 273 ) ( 1,833 ) — — ( 19,727 ) 
 Recoveries 149 5 168 479 93 — 894 
 Net (Charge-offs) / Recoveries ( 17,276 ) ( 191 ) ( 105 ) ( 1,354 ) 93 — ( 18,833 ) 
 Balance at End of Period $ 18,659 $ 4,533 $ 5,578 $ 1,405 $ 7,388 $ 61,731 $ 99,294 

 The adoption of ASU 2016-13 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021 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. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 NOTE 6 – FAIR VALUE MEASUREMENTS 
 The Company uses 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, individually evaluated loans, OREO, and certain other assets. 
 Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. 
 The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values: 
 Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs. 
 Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. 
 Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 
 A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. 
 The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis. 
 Recurring Basis 
 Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. 
 Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into 
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 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). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates. 
 Nonrecurring Basis 
 Individually Evaluated Loans: 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. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy. 
 Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. 
 Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal. 
 OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $ 0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At September 30, 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. 
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 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, 2022 
 (Dollars in Thousands) Carrying
Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) 
 Assets 
 Securities Available-for-Sale: 
 U.S. Treasury Securities $ 17,748 $ 17,748 $ — $ — 
 U.S. Government Agency Securities 2,914 — 2,914 — 
 Residential Mortgage-Backed Securities 104,568 — 104,568 — 
 Commercial Mortgage-Backed Securities 37,082 — 37,082 — 
 Asset Backed Securities 80,776 4,996 75,780 — 
 Collateralized Mortgage Obligations 266,611 2,541 264,070 — 
 Small Business Administration 50,443 — 50,443 — 
 States and Political Subdivisions 228,655 — 228,655 — 
 Corporate Notes 62,414 — 55,099 7,315 
 Total Securities Available-for-Sale 851,211 25,285 818,611 7,315 
 Derivatives 24,122 — 24,122 — 
 Total $ 875,333 $ 25,285 $ 842,733 $ 7,315 
 
 Liabilities 
 Derivatives $ 23,558 $ — $ 23,558 $ — 
 Total $ 23,558 $ — $ 23,558 $ — 

 
 December 31, 2021 
 (Dollars in Thousands) Carrying
Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) 
 Assets 
 Securities Available-for-Sale: 
 U.S. Treasury Securities $ 4,413 $ 4,413 $ — $ — 
 U.S. Government Agency Securities 3,478 — 3,478 — 
 Residential Mortgage-Backed Securities 110,013 — 110,013 — 
 Commercial Mortgage-Backed Securities 4,168 — 4,168 — 
 Asset Backed Securities 81,863 — 81,863 — 
 Collateralized Mortgage Obligations 287,614 — 287,614 — 
 Small Business Administration 108,914 — 108,914 — 
 States and Political Subdivisions 262,202 — 262,202 — 
 Corporate Notes 59,735 — 51,177 8,558 
 Total Securities Available-for-Sale 922,400 4,413 909,429 8,558 
 Derivatives 3,508 — 3,508 — 
 Total $ 925,908 $ 4,413 $ 912,937 $ 8,558 
 
 Liabilities 
 Derivatives $ 3,682 $ — $ 3,682 $ — 
 Total $ 3,682 $ — $ 3,682 $ — 

 We have invested in subordinated debt of other financial institutions. We have two securities totaling $ 7.3 million that are considered to be Level 3 securities at September 30, 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 $ 7.3 million at September 30, 2022 is attributable to a change in the fair value of $ 1.3 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, 
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 6 – FAIR VALUE MEASUREMENTS (continued) 
 
 
 
 
 
 

 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, 2022 
 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value 
 OREO $ — $ — $ 8,134 $ 8,134 
 Individually Evaluated Loans $ — $ — $ 1,791 $ 1,791 

 
 December 31, 2021 
 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value 
 OREO $ — $ — $ 10,916 $ 10,916 
 Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777 

 Individually evaluated loans had a net carrying amount of $ 1.8 million at September 30, 2022 with a valuation allowance of $ 0.3 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 $ 8.1 million as of September 30, 2022, compared with $ 10.9 million at December 31, 2021. We had $ 0.6 million of write-downs recorded on OREO for the nine months ended September 30, 2022 and $ 3.3 million 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, 2022 
 (Dollars in Thousands) Fair
Value Valuation
Technique Unobservable
Inputs Weighted
Range Average 
 Assets 
 Individually Evaluated Loans $ 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 % 
 
 Total Individually Evaluated Loans $ 1,791 
 
 OREO $ 7,315 Appraisals Estimated Selling Costs 10.0 % 10.0 % 
 OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % 
 OREO 676 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 20.1 % – 60.1 % 
 39.1 % 
 Total OREO $ 8,134 

 
 December 31, 2021 
 (Dollars in Thousands) Fair
Value Valuation
Technique Unobservable
Inputs Weighted
Range Average 
 Assets 
 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 % 
 20.3 % 
 Total OREO $ 10,916 

 A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales; therefore it represents an average recovery rate based on the transaction sizes and asset types in the population examined. Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgment to adjust the baseline discount rate when appropriate. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 6 – FAIR VALUE MEASUREMENTS (continued) 
 
 
 
 
 
 

 The carrying values and estimated fair values of our financial instruments at September 30, 2022 and December 31, 2021 are presented in the following tables. Fair values for September 30, 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. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 
 
 Fair Value Measurements at September 30, 2022 
 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total 
 Financial Assets: 
 Cash and Cash Equivalents $ 65,708 $ 38,749 $ 26,959 $ — $ 65,708 
 Securities Available-for-Sale 851,211 25,285 818,611 7,315 851,211 
 Loans Held-for-Sale 1,513 — — 1,513 1,513 
 Portfolio Loans, net 2,937,185 — — 2,908,527 2,908,527 
 
 Federal Home Loan Bank Stock, at Cost 3,192 — — NA NA 
 Other Assets- Interest Rate Derivatives 24,122 — 24,122 — 24,122 
 Accrued Interest Receivable 17,562 75 4,394 13,093 17,562 
 
 Financial Liabilities: 
 Deposits $ 3,725,929 $ 718,549 $ 1,758,727 $ 1,271,791 $ 3,749,067 
 
 Other Liabilities- Interest Rate Derivatives 23,558 — 23,558 — 23,558 
 FHLB Borrowings 30,000 — — 30,000 30,000 
 Accrued Interest Payable 1,240 — — 1,240 1,240 

 
 Fair Value Measurements at December 31, 2021 
 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total 
 Financial Assets: 
 Cash and Cash Equivalents $ 277,799 $ 36,698 $ 241,101 $ — $ 277,799 
 Securities Available-for-Sale 922,400 4,413 909,429 8,558 922,400 
 Loans Held-for-Sale 228 — — 228 228 
 Portfolio Loans, net 2,716,190 — — 2,689,578 2,689,578 
 
 Federal Home Loan Bank Stock, at Cost 2,352 — — NA NA 
 Other Assets- Interest Rate Derivatives 3,508 — 3,508 — 3,508 
 Accrued Interest Receivable 17,178 17 3,462 13,699 17,178 
 
 Financial Liabilities: 
 Deposits $ 3,698,476 $ 747,909 $ 1,606,249 $ 1,369,228 $ 3,723,386 
 
 Other Liabilities- Interest Rate Derivatives 3,682 — 3,682 — 3,682 
 FHLB Borrowings 7,000 — — 7,035 7,035 
 Accrued Interest Payable 1,378 — — 1,378 1,378 

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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 
 In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. 
 Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial. 
 Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income. 
 The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented: 
 
 Fair Value of Derivative Assets
(Included in Other Assets) 
 September 30, 2022 December 31, 2021 
 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value 
 Derivatives not Designated as Hedging Instruments 
 Interest Rate Lock Commitments – Mortgage Loans 4 $ 681 $ 20 — $ — $ — 
 Interest Rate Swap Contracts – Commercial Loans 64 440,626 24,102 66 446,490 3,508 
 Total Derivatives not Designated as Hedging Instruments 68 $ 441,307 $ 24,122 66 $ 446,490 $ 3,508 

 
 Fair Value of Derivative Liabilities
(Included in Other Liabilities) 
 September 30, 2022 December 31, 2021 
 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value 
 Derivatives not Designated as Hedging Instruments 
 Forward Sale Contracts – Mortgage Loans 4 $ 681 $ 20 — $ — $ — 
 Interest Rate Swap Contracts – Commercial Loans 64 440,626 23,538 66 446,490 3,682 
 Total Derivatives not Designated as Hedging Instruments 68 $ 441,307 $ 23,558 66 $ 446,490 $ 3,682 

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 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: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 2022 2021 
 Derivatives not Designated as Hedging Instruments 
 Interest Rate Lock Commitments – Mortgage Loans $ 2 $ 1 $ 20 $ 3 
 Forward Sale Contracts – Mortgage Loans ( 2 ) ( 1 ) ( 20 ) ( 3 ) 
 Interest Rate Swap Contracts – Commercial Loans 295 35 738 188 
 Total Derivative Income $ 295 $ 35 $ 738 $ 188 

 Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. 
 The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented: 
 
 Derivative Assets
(Included in Other Assets) Derivative Liabilities
(Included in Other Liabilities) 
 (Dollars in Thousands) September 30,
2022 December 31,
2021 September 30,
2022 December 31,
2021 
 Derivatives not Designated as Hedging Instruments 
 Gross Amounts Recognized $ 24,102 $ 3,508 $ 23,538 $ 3,682 
 Gross Amounts Offset — — — — 
 Net Amounts Presented in the Consolidated Balance Sheets 24,102 3,508 23,538 3,682 
 Gross Amounts Not Offset (1) 
 — — — ( 4,080 ) 
 Net Amount $ 24,102 $ 3,508 $ 23,538 $ ( 398 ) 

 (1) Amounts represent collateral posted for the periods presented. 
 
 NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS 
 Borrowings serve as an additional source of liquidity for the Company. The Company had $ 30.0 million Federal Home Loan Bank (“FHLB”) borrowings at September 30, 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 $ 1.4 billion at September 30, 2022 and $ 1.1 billion at December 31, 2021. There were no securities available-for-sale pledged as collateral at both September 30, 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 $ 807.8 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, 2022. The Company had the capacity to borrow up to an additional $ 667.3 million from the FHLB at December 31, 2021. 
 
 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS – (continued) 

 The following table represents the balance of FHLB borrowings and the weighted average interest rate as of the periods presented: 
 
 (Dollars in Thousands) September 30, 2022 December 31, 2021 
 FHLB Borrowings $ 30,000 $ 7,000 
 Weighted Average Interest Rate 3.13 % 1.61 % 
 

 S cheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2022 and thereafter are as follows : 
 
 (Dollars in Thousands) Balance Weighted
Average Rate 
 1 year $ 30,000 3.13 % 
 2 years — — % 
 3 years — — % 
 4 years — — % 
 5 years — — % 
 Thereafter — — % 
 Total FHLB Borrowings $ 30,000 3.13 % 

 During the year ended December 31, 2021 the Company repaid 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 and had unamortized prepayment fees related to the early repayment of the borrowing of $ 18 thousand. 
 
 NOTE 9 – COMMITMENTS AND CONTINGENCIES 
 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 represented 62.7 % and 55.3 %, of the commitments to extend credit at September 30, 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 following table sets forth our commitments and letters of credit as of the dates presented: 
 
 (Dollars in Thousands) September 30, 2022 December 31, 2021 
 Commitments to Extend Credit $ 525,086 $ 513,482 
 Standby Letters of Credit 26,725 27,083 
 Total $ 551,811 $ 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. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk. 
 Life-of-Loss Reserve on Unfunded Loan Commitments 
 We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets. 
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 CARTER BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 NOTE 9 – COMMITMENTS AND CONTINGENCIES – (continued) 

 The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 2022 2021 
 Life-of-Loss Reserve on Unfunded Loan Commitments 
 Balance at Beginning of Period $ 1,816 $ 2,167 $ 1,783 $ 144 
 Impact of Adopting ASU 2016-13 — — — 2,908 
 Balance after Adoption of ASU 2016-13 $ 1,816 $ 2,167 $ 1,783 $ 3,052 
 Provision (Recovery) for Unfunded Commitments 157 ( 60 ) 190 ( 945 ) 
 Total $ 1,973 $ 2,107 $ 1,973 $ 2,107 

 Amounts are added or subtracted to the provision (recovery) for unfunded commitments through a charge or credit to current earnings in the provision (recovery) for unfunded commitments. An expense of $ 0.2 million was recorded during the three and nine month periods for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 0.2 million and $ 1.1 million for the three and nine months ended September 30, 2022 compared to recoveries for the same periods in 2021. 
 Litigation 
 In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty. 
 
 NOTE 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: 
 
 (Dollars in Thousands) Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 
 Pre-Tax Amount Tax Benefit (Expense) Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount 
 Net Unrealized Losses Arising during the period $ ( 33,326 ) $ 6,999 $ ( 26,327 ) $ ( 4,588 ) $ 963 $ ( 3,625 ) 
 Reclassification Adjustment for Losses (Gains) included in Net Income 4 ( 1 ) 3 ( 1,341 ) 282 ( 1,059 ) 
 Other Comprehensive Loss $ ( 33,322 ) $ 6,998 $ ( 26,324 ) $ ( 5,929 ) $ 1,245 $ ( 4,684 ) 

 
 
 
 (Dollars in Thousands) Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 
 Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount 
 Net Unrealized Losses Arising during the period $ ( 111,360 ) $ 23,386 $ ( 87,974 ) $ ( 6,626 ) $ 1,391 $ ( 5,235 ) 
 Reclassification Adjustment for Gains included in Net Income ( 48 ) 10 ( 38 ) ( 6,450 ) 1,355 ( 5,095 ) 
 Other Comprehensive Loss $ ( 111,408 ) $ 23,396 $ ( 88,012 ) $ ( 13,076 ) $ 2,746 $ ( 10,330 ) 

 
 NOTE 11 – STOCK REPURCHASE PLAN 
 On June 28, 2022, the Company announced that the Board of Directors (“Board”) authorized a common stock repurchase program to purchase an additional 750,000 shares of its common stock in open market transactions, at prices that are accretive to continuing shareholders in the aggregate over a period of 12 months, subject to the non-objection letter from the Federal Reserve Bank of Richmond, which was received on July 26, 2022. During the three months ended September 30, 2022, 464,208 shares of common stock had been repurchased under this program at a total cost of $ 7.7 million, or an average price of $ 16.62 per share. 
 On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of 
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 twelve months . Through April 28, 2022, when this repurchase program was fully executed, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $ 32.4 million, or an average price of $ 16.46 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 price of $ 15.22 per share. 
 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. 
 
 
 
 ITEM 2. 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”), 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 and nine month periods ended September 30, 2022 and September 30, 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 Estimates 
 • Overview 
 • Results of Operations and Financial Condition 
 • Earnings Summary 
 • Liquidity and Capital Resources 
 • Regulatory Capital Requirements 
 • Contractual Obligations 
 • Off-Balance Sheet Arrangements 
 
 Important Note Regarding Forward-Looking Statements 
 This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality. 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. 
 Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could 
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 cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of: 
 • market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios; 
 • monetary and fiscal policies of the U.S. government, including policies of the Federal Reserve; 
 • changes in accounting policies, practices, or guidance, for example, our adoption of CECL, including potential volatility in the Company’s operating results due to application of the CECL methodology; 
 • cyber-security threats, attacks or events; rapid technological developments and changes; 
 • changes in the Company’s liquidity and capital positions; 
 • concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral; 
 • an insufficient ACL; 
 • the potential adverse effects of unusual and infrequently occurring 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 COVID-19 pandemic), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth; 
 • a change in spreads on interest-earning assets and interest-bearing liabilities; 
 • regulatory supervision and oversight; 
 • legislation affecting the financial services industry as a whole, and the Company and the Bank, in particular; 
 • the outcome of pending and future litigation and governmental proceedings; 
 • increasing price and product/service competition; 
 • the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; 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; 
 • material increases in costs and expenses; 
 • reliance on significant customer relationships; 
 • general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth; 
 • expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch network optimization project are not fully realized in a timely manner or at all; 
 • deterioration of the housing market and reduced demand for mortgages; and 
 • 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 
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 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 in the United States (“GAAP”), 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 comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of net interest income and net interest margin 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. Interest income (GAAP) per the Consolidated Statements of Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A. 
 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 September 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” 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. 
 
 Overview 
 Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at September 30, 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. 
 
 
 
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 Results of Operations and Financial Condition 
 Earnings Summary 
 Highlights for the Three Months Ended September 30, 2022 
 • Net interest income increased $8.3 million, or 28.3%, to $37.7 million for the three months ended September 30, 2022 compared to $29.4 million for the same period in 2021 primarily due an increase of 69 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 13 basis points in funding costs; 
 • The recovery for credit losses was $(0.1) million for the three months ended September 30, 2022, compared to $(0.4) million for the same period in 2021; 
 • Total noninterest income decreased $1.7 million to $5.2 million for the three months ended September 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities; 
 • Total noninterest expense decreased $1.2 million to $23.5 million for the three months ended September 30, 2022 compared to the same period in 2021; and 
 • Provision for income taxes increased $4.1 million to $5.0 million for the three months ended September 30, 2022 compared to $0.9 million for the same period in 2021. 
 Highlights for the Nine Months Ended September 30, 2022 
 • Net interest income increased $15.3 million, or 18.4%, to $98.4 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due an increase of 33 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 20 basis points in funding costs; 
 • The provision for credit losses remained relatively consistent at $2.4 million for the nine months ended September 30, 2022, compared to the same period in 2021; 
 • Total noninterest income decreased $6.9 million to $16.2 million for the nine months ended September 30, 2022 compared to $23.1 million for the same period in 2021 due primarily to a reduction in gains on sales of securities; 
 • Total noninterest expense decreased $6.7 million to $69.4 million for the nine months ended September 30, 2022 compared the same period in 2021 primarily resulting from our retail branch optimization project and the reversal of tax credit amortization due to an in-service date extension to 2023; and 
 • Provision for income taxes increased $5.4 million to $8.1 million for the nine months ended September 30, 2022 compared to $2.7 million for the same period in 2021. 
 Balance Sheet Highlights (period-end balances, September 30, 2022 compared to December 31, 2021) 
 • The securities portfolio decreased $71.2 million and is currently 20.7% of total assets compared to 22.3% of total assets. The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth and the continued decline in fair value due to rising market interest rates; 
 • Total portfolio loans increased $219.2 million, or 10.4%, on an annualized basis, primarily due to higher loan growth in the first nine months of 2022; 
 • The portfolio loans to deposit ratio was 81.4%, compared to 76.0%, as loan growth outpaced deposit growth; 
 • Total deposits increased $27.5 million to $3.7 billion at September 30, 2022 compared to December 31, 2021; 
 • The ACL to total portfolio loans ratio was 3.11% compared to 3.41%. The ACL on portfolio loans totaled $94.2 million at September 30, 2022, compared to $95.9 million with the decrease driven by a purchased syndicated C&I loan that was charged-down by $3.4 million, of which $2.6 million was previously reserved, loan growth and increased qualitative reserves, offset by declines in the other segment due to principal pay-downs; and 
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 • During the second quarter of 2022, the Company’s Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares of the Company’s common stock, subject to the Federal Reserve’s non-objection letter, which was received on July 26, 2022. Since this date the Company repurchased 464,208 shares at an average price of $16.62 per share. 
 The Company reported net income of $14.4 million or $0.59 diluted earnings per share for the three months ended September 30, 2022 and $34.5 million, or $1.38 diluted earnings per share, for the nine months ended September 30, 2022 compared to net income of $11.2 million, or $0.42 diluted earnings per share and $26.0 million, or $0.98 diluted earnings per share, for the same periods in 2021. 
 
 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 PERFORMANCE RATIOS 2022 2021 2022 2021 
 Return on Average Assets 1.38 % 1.07 % 1.12 % 0.84 % 
 Return on Average Shareholders’ Equity 16.75 % 10.95 % 12.80 % 8.76 % 
 Portfolio Loans to Deposit Ratio 81.36 % 78.66 % 81.36 % 78.66 % 
 Allowance for Credit Losses to Total Portfolio Loans 3.11 % 3.44 % 3.11 % 3.44 % 

 
 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 regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q. 
 Total net interest income increased $8.3 million, or 28.3% to $37.7 million and $15.3 million, or 18.4%, to $98.4 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs. Net interest income, on an FTE basis (non-GAAP), increased $8.3 million, or 27.8%, to $38.0 million and $15.0 million, or 17.7% to $99.3 million for the three and nine months ended September 30, 2022, respectively, compared to $29.7 million and $84.3 million for the same periods in 2021. The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of $7.4 million and $10.7 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $0.9 million and $4.3 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin increased 80 basis points to 3.72% and 48 basis points to 3.28% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin, on an FTE basis (non-GAAP), increased 79 basis points to 3.75% and 47 basis points to 3.31% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. 
 The Company continues to focus on the expansion of net interest income and net interest margin. The third quarter and first nine months of 2022 were positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs. The three and first nine months of 2022 were also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods. In addition, rising market interest rates may begin to increase the Company’s funding costs in future periods. 
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 The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, net interest income on an FTE basis, and net interest margin on an FTE basis (non-GAAP), for the periods presented: 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 2022 2021 
 Interest Income (FTE)(Non-GAAP) 
 Interest and Dividend Income (GAAP) $ 42,327 $ 34,913 $ 111,966 $ 100,964 
 Tax Equivalent Adjustment 279 330 870 1,178 
 Interest and Dividend Income (FTE) (Non-GAAP) 42,606 35,243 112,836 102,142 
 Average Earning Assets $ 4,024,880 $ 3,988,343 $ 4,006,788 $ 3,967,087 
 Yield on Interest-earning Assets (GAAP) 4.17 % 3.47 % 3.74 % 3.40 % 
 Yield on Interest-earning Assets (FTE) (Non-GAAP) 4.20 % 3.51 % 3.77 % 3.44 % 
 
 Net Interest Income (GAAP) $ 37,725 $ 29,401 $ 98,406 $ 83,133 
 Tax Equivalent Adjustment 279 330 870 1,178 
 Net Interest Income (FTE) (Non-GAAP) 38,004 29,731 99,276 84,311 
 Average Earning Assets $ 4,024,880 $ 3,988,343 $ 4,006,788 $ 3,967,087 
 Net Interest Margin (GAAP) 3.72 % 2.92 % 3.28 % 2.80 % 
 Net Interest Margin (FTE) (Non-GAAP) 3.75 % 2.96 % 3.31 % 2.84 % 

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 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 September 30, 2022 Three Months Ended September 30, 2021 
 (Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate 
 ASSETS 
 Interest-Bearing Deposits with Banks $ 25,151 $ 134 2.11 % $ 191,047 $ 76 0.16 % 
 Tax-Free Investment Securities (2) 
 30,073 215 2.84 % 26,849 221 3.27 % 
 Taxable Investment Securities 942,571 5,466 2.30 % 836,957 3,163 1.50 % 
 Total Securities 972,644 5,681 2.32 % 863,806 3,384 1.55 % 
 Tax-Free Loans (1)(2) 
 141,082 1,115 3.14 % 174,680 1,350 3.07 % 
 Taxable Loans (1) 
 2,883,790 35,652 4.90 % 2,755,595 30,403 4.38 % 
 Total Loans 3,024,872 36,767 4.82 % 2,930,275 31,753 4.30 % 
 Federal Home Loan Bank Stock 2,213 24 4.30 % 3,215 30 3.70 % 
 Total Interest-Earning Assets 4,024,880 $ 42,606 4.20 % 3,988,343 $ 35,243 3.51 % 
 Noninterest Earning Assets 109,307 169,554 
 Total Assets $ 4,134,187 $ 4,157,897 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY 
 Interest-Bearing Demand $ 500,281 $ 462 0.37 % $ 424,517 $ 278 0.26 % 
 Money Market 552,718 395 0.28 % 420,946 307 0.29 % 
 Savings 731,931 192 0.10 % 668,436 176 0.10 % 
 Certificates of Deposit 1,257,907 3,420 1.08 % 1,435,716 4,623 1.28 % 
 Total Interest-Bearing Deposits 3,042,837 4,469 0.58 % 2,949,615 5,384 0.72 % 
 Federal Funds Purchased 3,432 23 2.66 % — — — % 
 Federal Home Loan Bank Borrowings 3,913 31 3.14 % 30,000 89 1.18 % 
 Other Borrowings 6,326 79 4.95 % 3,437 39 4.50 % 
 Total Borrowings 13,671 133 3.86 % 33,437 128 1.52 % 
 Total Interest-Bearing Liabilities 3,056,508 4,602 0.60 % 2,983,052 5,512 0.73 % 
 Noninterest-Bearing Liabilities 736,441 769,871 
 Shareholders' Equity 341,238 404,974 
 Total Liabilities and Shareholders' Equity $ 4,134,187 $ 4,157,897 
 Net Interest Income (2) 
 $ 38,004 $ 29,731 
 Net Interest Margin (2) 
 3.75 % 2.96 % 

 (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. 
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 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 
 (Dollars in Thousands) Average 
Balance Income/
Expense Rate Average 
Balance Income/
Expense Rate 
 ASSETS 
 Interest-Bearing Deposits with Banks $ 64,858 $ 257 0.53 % $ 185,603 $ 182 0.13 % 
 Tax-Free Investment Securities (2) 
 30,188 663 2.94 % 37,064 906 3.27 % 
 Taxable Investment Securities 959,456 13,650 1.90 % 770,636 9,288 1.61 % 
 Total Securities 989,644 14,313 1.93 % 807,700 10,194 1.69 % 
 Tax-Free Loans (1)(2) 
 147,372 3,480 3.16 % 198,185 4,703 3.17 % 
 Taxable Loans (1) 
 2,802,692 94,720 4.52 % 2,771,860 86,965 4.19 % 
 Total Loans 2,950,064 98,200 4.45 % 2,970,045 91,668 4.13 % 
 Federal Home Loan Bank Stock 2,222 66 3.97 % 3,739 98 3.50 % 
 Total Interest-Earning Assets 4,006,788 $ 112,836 3.77 % 3,967,087 $ 102,142 3.44 % 
 Noninterest Earning Assets 128,105 174,194 
 Total Assets $ 4,134,893 $ 4,141,281 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY 
 Interest-Bearing Demand $ 484,076 $ 1,082 0.30 % $ 402,663 $ 727 0.24 % 
 Money Market 530,560 989 0.25 % 361,204 877 0.32 % 
 Savings 724,472 559 0.10 % 657,101 507 0.10 % 
 Certificates of Deposit 1,278,905 10,650 1.11 % 1,522,384 15,328 1.35 % 
 Total Interest-Bearing Deposits 3,018,013 13,280 0.59 % 2,943,352 17,439 0.79 % 
 Federal Funds Purchased 2,168 27 1.67 % — — — % 
 Federal Home Loan Bank Borrowings 3,978 47 1.58 % 31,282 276 1.18 % 
 Other Borrowings 5,637 206 4.89 % 3,090 116 5.02 % 
 Total Borrowings 11,783 280 3.18 % 34,372 392 1.52 % 
 Total Interest-Bearing Liabilities 3,029,796 13,560 0.60 % 2,977,724 17,831 0.80 % 
 Noninterest-Bearing Liabilities 744,597 767,207 
 Shareholders' Equity 360,500 396,350 
 Total Liabilities and Shareholders' Equity $ 4,134,893 $ 4,141,281 
 Net Interest Income (2) 
 $ 99,276 $ 84,311 
 Net Interest Margin (2) 
 3.31 % 2.84 % 

 (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 increased $7.4 million, or 21.2% and $11.0 million, or 10.9%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Interest income, on an FTE basis (non-GAAP), increased $7.4 million, or 20.9% and $10.7 million, or 10.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The change was primarily due to increases in average interest-earning assets of $36.5 million and $39.7 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 69 basis points and 33 basis points for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022. 
 For the three and nine months ended September 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $165.9 million and $120.7 million, respectively, and the average rate earned increased 195 and 40 basis points, respectively, as funds were deployed into higher yielding loans and securities. Average loan balances increased $94.6 million for the three months ended September 30, 2022 and decreased $20.0 million for the nine months ended September 30, 2022 when compared to the same periods in 2021. Loan growth during the three months ended September 30, 2022 was the primary influence for the quarterly increase, offset by large commercial paydowns in the first nine months of 2022 and 2021 and the decline in average Paycheck Protection Program (“PPP”) loans, due to the continued forgiveness by the Small Business Administration, which contributed to the decline for the nine months ended September 30, 2022. 
 The average rate earned on loans increased 52 and 32 basis points for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during 2022. At September 30, 2022, the loan portfolio was comprised of 28.9% floating rate loans which reprice monthly, 39.9% variable rate loans that reprice at least once during the life of the loan and 31.2% fixed rate loans that do not reprice during the life of the loan. 
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 CARTER BANKSHARES, INC. 
 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 

 Average investment securities increased $108.8 million and $181.9 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The average rate earned on investment securities increased 77 basis points and 24 basis points for the three and nine months ended September 30, 2022 compared to the same periods in 2021. The change in investment securities is the result of active balance sheet management to deploy excess cash combined with the continued decline in fair value. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of September 30, 2022, the securities portfolio was comprised of 48.0% variable rate securities with approximately 46.4% that will reprice at least once over the next 12 months. Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates. Bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate structure is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities. 
 Interest expense decreased $0.9 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first nine months of 2022. Interest expense on deposits decreased $0.9 million and $4.2 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs. 
 The average balances on CDs decreased $177.8 million or 12.4% and $243.5 million, or 16.0% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs. The average balances on our interest bearing core deposits, including money market accounts, interest-bearing demand accounts and savings accounts all increased by $131.8 million, $75.8 million and $63.5 million, respectively, for the three months ended September 30, 2022, and by $169.4 million, $81.4 million and $67.4 million, respectively, for the nine months ended September 30, 2022, when compared to the same periods in 2021. The average rates paid on interest-bearing demand accounts increased 11 and six basis points for the three and nine months ended September 30, 2022 and the average rate paid on money market accounts decreased one and seven basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. The average rates paid on savings accounts for both the three and nine months ended September 30, 2022 remained relatively unchanged. 
 The average balances on borrowings decreased $19.8 million and $22.6 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities. As a result, the cost of interest-bearing liabilities decreased 13 and 20 basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. 
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 CARTER BANKSHARES, INC. 
 ITEM 2. 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 September 30, 2022 
Compared to September 30, 2021 Nine Months Ended September 30, 2022 
Compared to September 30, 2021 
 (Dollars in Thousands) Volume (3) 
 Rate (3) 
 Increase/
(Decrease) Volume (3) 
 Rate Increase/
(Decrease) 
 Interest Earned on: 
 Interest-Bearing Deposits with Banks $ (120) $ 178 $ 58 $ (182) $ 257 $ 75 
 Tax-free Investment Securities (2) 
 25 (31) (6) (157) (86) (243) 
 Taxable Investment Securities 440 1,863 2,303 2,512 1,850 4,362 
 Total Securities 465 1,832 2,297 2,355 1,764 4,119 
 Tax-free Loans (1)(2) 
 (265) 30 (235) (1,200) (23) (1,223) 
 Taxable Loans (1) 
 1,462 3,787 5,249 977 6,778 7,755 
 Total Loans 1,197 3,817 5,014 (223) 6,755 6,532 
 Federal Home Loan Bank Stock (10) 4 (6) (44) 12 (32) 
 Total Interest-Earning Assets $ 1,532 $ 5,831 $ 7,363 $ 1,906 $ 8,788 $ 10,694 
 
 Interest Paid on: 
 Interest-Bearing Demand $ 56 $ 128 $ 184 $ 163 $ 192 $ 355 
 Money Market 94 (6) 88 347 (235) 112 
 Savings 17 (1) 16 52 — 52 
 Certificates of Deposit (533) (670) (1,203) (2,248) (2,430) (4,678) 
 Total Interest-Bearing Deposits (366) (549) (915) (1,686) (2,473) (4,159) 
 Federal Funds Purchased 23 — 23 27 — 27 
 Federal Home Loan Bank Borrowings (122) 64 (58) (300) 71 (229) 
 Other Borrowings 36 4 40 93 (3) 90 
 Total Borrowings (63) 68 5 (180) 68 (112) 
 Total Interest-Bearing Liabilities (429) (481) (910) (1,866) (2,405) (4,271) 
 Change in Net Interest Margin $ 1,961 $ 6,312 $ 8,273 $ 3,772 $ 11,193 $ 14,965 

 (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 (Recovery) for Credit Losses 
 The Company recognizes (recovery) provision 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 (recovery) 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 3.11% of total portfolio loans at September 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021. The provision for credit losses increased $0.3 million to $(0.1) million for the three months ended September 30, 2022 and remained relatively unchanged at $2.4 million for the nine months ended September 30, 2022, when compared to the same periods in 2021. The increase for the three months ended September 30, 2022 was primarily driven by loan growth, increased qualitative reserves of $3.0 million and a $4.9 million purchased syndicated C&I loan that was charged-down $3.4 million, of which $2.6 million was previously reserved, and then transferred to held-for-sale for $1.5 million, offset by the release of $3.7 million of reserves that were allocated to the other segment due to principal pay-downs. The increase in qualitative reserves were factors attributable to the residential mortgage and commercial construction portfolios. Project costs continue to escalate due to supply chain and labor disruptions as well as increased material costs. Absent material cost increases, supply chain and labor disruptions cause the overall construction duration to increase, increasing interest costs to the borrower. The bank has observed a handful of significant cost overruns on CRE projects. To date, these cost overruns have either been funded by the borrower and/or project sponsors or partially funded by the Bank within acceptable underwriting 
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 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 

 guidelines. The Company continues to monitor these trends by diligently collecting data on commercial construction projects and analyzing risk presented to the Company’s loan portfolio. 
 The provision (recovery) for unfunded commitments increased $0.2 million and $1.1 million for the three and nine months ended September 30, 2022, respectively compared to the same periods in 2021 due to a decline in the reserve rates. 
 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. 
 
 Noninterest Income 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 
 (Losses) Gains on Sales of Securities, net $ (4) $ 1,341 $ (1,345) (100.3) % $ 48 $ 6,450 $ (6,402) (99.3) % 
 Service Charges, Commissions and Fees 1,750 1,660 90 5.4 % 5,452 4,958 494 10.0 % 
 Debit Card Interchange Fees 1,788 1,751 37 2.1 % 5,570 5,456 114 2.1 % 
 Insurance Commissions 876 427 449 105.2 % 1,713 1,099 614 55.9 % 
 Bank Owned Life Insurance Income 341 349 (8) (2.3) % 1,009 1,031 (22) (2.1) % 
 (Losses) Gains on Sales and Write-downs of Bank Premises, net (4) — (4) NM 342 — 342 NM 
 Other Real Estate Owned Income 13 7 6 85.7 % 35 82 (47) (57.3) % 
 Commercial Loan Swap Fee Income 18 1,096 (1,078) (98.4) % 774 2,057 (1,283) (62.4) % 
 Other 457 284 173 60.9 % 1,231 1,972 (741) (37.6) % 
 Total Noninterest Income $ 5,235 $ 6,915 $ (1,680) (24.3) % $ 16,174 $ 23,105 $ (6,931) (30.0) % 

 Total noninterest income decreased $1.7 million, or 24.3%, to $5.2 million for the three months ended September 30, 2022 and decreased $6.9 million, or 30.0%, to $16.2 million for the nine months ended September 30, 2022 when compared to the same periods in 2021. These decreases were primarily related to declines in net security gains of $1.3 million and $6.4 million in the three and nine months ended September 30, 2022, respectively. The decline in security gains was due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales. 
 Changes in total noninterest income for the three months ended September 30, 2022 also included a decrease of $1.1 million in commercial loan swap fee income related to the timing and demand for this product in the current rising interest rate environment. Offsetting the decreases were increases of $0.4 million in insurance commissions due to increases in insurance provider income and an increase of $0.2 million in other noninterest income related to an increase in fair value due to our interest rate swap contracts with commercial customers in the third quarter of 2022. Also contributing to the offsetting decrease was was a $0.1 million increase in service charges on deposit accounts primarily driven by volume. 
 Along with the $6.4 million decline in net security gains previously mentioned for the nine months ended September 30, 2022, the Company also experienced declines of $1.3 million in commercial loan swap fee income and $0.7 million in other noninterest income. Partially offsetting these decreases were the following increases, $0.6 million in insurance commissions, $0.5 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.1 million in debit card interchange fees. Similar fluctuations as the three-month period ended September 30, 2022, the decline in other noninterest income for the nine month period ended September 30, 2022 related to premiums on the sale of bank branches. The increases related to debit card interchange fees were driven by higher customer activity and the $0.3 million gains on sales and write-downs of bank premises, net was due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022. 
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 CARTER BANKSHARES, INC. 
 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued) 

 Noninterest Expense 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 
 Salaries and Employee Benefits $ 13,520 $ 12,816 $ 704 5.5 % $ 37,721 $ 39,084 $ (1,363) (3.5) % 
 Occupancy Expense, net 3,412 3,333 79 2.4 % 10,060 10,298 (238) (2.3) % 
 FDIC Insurance Expense 543 582 (39) (6.7) % 1,540 1,882 (342) (18.2) % 
 Other Taxes 848 825 23 2.8 % 2,471 2,305 166 7.2 % 
 Advertising Expense 368 196 172 87.8 % 874 586 288 49.1 % 
 Telephone Expense 448 519 (71) (13.7) % 1,390 1,707 (317) (18.6) % 
 Professional and Legal Fees 1,310 1,244 66 5.3 % 3,731 3,908 (177) (4.5) % 
 Data Processing 833 1,018 (185) (18.2) % 2,516 2,893 (377) (13.0) % 
 Losses on Sales and Write-downs of Other Real Estate Owned, net 169 608 (439) (72.2) % 268 3,423 (3,155) (92.2) % 
 Losses on Sales and Write-downs on Bank Premises, net — 7 (7) (100.0) % — 114 (114) (100.0) % 
 Debit Card Expense 797 700 97 13.9 % 2,089 2,045 44 2.2 % 
 Tax Credit Amortization (764) 427 (1,191) (278.9) % 466 1,281 (815) (63.6) % 
 
 Other Real Estate Owned Expense 38 84 (46) (54.8) % 220 280 (60) (21.4) % 
 
 Other 1,941 2,326 (385) (16.6) % 6,038 6,243 (205) (3.3) % 
 Total Noninterest Expense $ 23,463 $ 24,685 $ (1,222) (5.0) % $ 69,384 $ 76,049 $ (6,665) (8.8) % 

 Total noninterest expense decreased $1.2 million and $6.7 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021. For the three months ended September 30, 2022 the most significant decrease for the period was a decline of $1.2 million in tax credit amortization. The decrease resulted from the reversal of $1.4 million amortization expense for one of the Bank’s partnerships due to updated information from the developer, extending the in-service date to 2023. Also impacting the fluctuations for the three-month period were decreases of $0.4 million for losses on sales and write-downs of OREO, net, $0.4 million in other noninterest expense and $0.2 million in data processing expenses. These decreases were offset by an increase of $0.7 million in salaries and employee benefits and an increase of $0.2 million in advertising expense. The losses on sales and write-downs of OREO, net, related to sales and properties under contract during the third quarter of 2022. The decrease in other noninterest expense of $0.4 million related to a finder’s fee for the sale of two credit relationships in the third quarter of 2021 and the decrease in data processing expense is due to new modules added to our core processor also in the third quarter of 2021. The increase in salaries and employee benefits primarily relates to a $0.5 million profit sharing adjustment in the third quarter of 2022. 
 The decrease in noninterest expense for the nine-month period ended September 30, 2022 when compared to the same period in 2021 was primarily driven by a $3.2 million decrease on sales and write-downs of OREO, net. This nonrecurring write-down of $3.0 million was related to the closing of bank branches in the second quarter of 2021 that were transferred to OREO and marketed for sale. Also impacting the nine-month decrease was a $1.4 million decline in salaries and employee benefits, a $0.8 million in tax credit amortization, a $0.4 million decline in data processing expenses, a $0.3 million decrease in FDIC insurance expense, a $0.3 million in telephone expenses, $0.2 million decrease in occupancy expense, net, and $0.2 million decrease in professional and legal fees. These various decreases were offset by an increase of $0.3 million in advertising expenses and a $0.2 million increase in other taxes. The decline in salaries and employee benefits was due to lower medical expenses and our retail branch optimization project offset by the $0.5 million profit sharing adjustment in the third quarter of 2022. The decrease in tax credit amortization related to the reversal of amortization expense for one of the Bank’s partnerships mentioned above offset by a new historic tax credit that began in early 2022. The decrease in FDIC expense was due to improved financial metrics of the Bank that are used to perform the assessment. 
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 CARTER BANKSHARES, INC.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Carter Bankshares, Inc. 10-Q

Item 1. Financial Statements
