What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-10 compared with 2022-03-11 · 593 added, 585 removed, 1298 unchanged (48% of the section changed)

7 unchanged sentences

Transfer from Loans to Other Real Estate Owned 74 59 755

Loans Transferred to Held-for-Sale 1,513 — —

Transfer from Fixed Assets to Other Real Estate Owned 2,675 12,013 2,221

14 unchanged sentences

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

The holding company is regulated by the Federal Reserve Bank (“FRB”).

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

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

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

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

22 unchanged sentences

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

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

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

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

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

Operating Segments:

2 unchanged sentences

Cash and Cash Equivalents:

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

original maturities fewer than 90 days.

Federal funds are customarily sold for one-day periods.

2 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Loan Commitments and Related Financial Instruments:

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

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

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

Such financial instruments are recorded when they are funded.

Comprehensive Income (Loss):

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

Comprehensive (Loss) Income:

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

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

5 unchanged sentences

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

Other-Than-Temporary Impairments of Securities:

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

In determining OTTI, management considers many factors, including:

Management evaluates debt securities for impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining impairment, management considers many factors, including:

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

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

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

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

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

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

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

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

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

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

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

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

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

Loans Held-for-Sale:

5 unchanged sentences

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

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

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

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

The remaining unamortized fees and costs

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold.

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

3 unchanged sentences

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

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

A performing loan may be considered impaired.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

An individually evaluated loan analysis is conducted for loans that are either or both nonperforming or a restructured loan with a commitment greater than or equal to $1.0 million.

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

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

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

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

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

3 unchanged sentences

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

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

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

Allowance for Credit Losses

11 unchanged sentences

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

standards and averages, and general economic conditions.

Management made the determination by taking into consideration historical loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry standards and averages, and general economic conditions.

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

2 unchanged sentences

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

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

For more details, see Note 6 - Allowance for Credit Losses, in Item 8 of this Annual Report on Form 10-K.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Allowance for Credit Losses Policy

29 unchanged sentences

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

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

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.

1 unchanged sentence

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan.

5 unchanged sentences

• The value of collateral and probability of successful liquidation;

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

• The status of adverse proceedings or litigation that may result in collection

5 unchanged sentences

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

Troubled Debt Restructurings (“TDRs”):

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

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

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

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

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

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

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

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

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

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 a TDR.

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.

Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.

Concentration of Credit Risk:

8 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Bank Premises and Equipment:

14 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Federal Home Loan Bank (“FHLB”) Stock:

3 unchanged sentences

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

Earnings (Loss) per Share:

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

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

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

Earnings (Loss) per Common Share:

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

All outstanding unvested restricted stock awards are considered participating shares for the earnings (loss) per common share calculation.

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

Other Real Estate Owned (“OREO”):

16 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

9 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Transfer of Financial Assets:

14 unchanged sentences

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

The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price.

These triggering events indicated that goodwill related to our single reporting unit may be impaired and we expected to evaluate goodwill for impairment quarterly given the current environment.

During the first quarter of 2020, with the recent volatility in the financial services industry and in our economic environment we determined it prudent to have a full goodwill impairment analysis performed as of March 31, 2020 updated as of June 30, 2020.

We performed the goodwill impairment test by determining the fair value of the reporting unit.

We engaged a third-party financial advisor to prepare the market and income approaches in order to determine fair value.

Their analysis supported the conclusion that the fair value of our common stock at June 30, 2020 was greater than both stated and tangible common book value and therefore no impairment to the goodwill was recorded at June 30, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

As we monitored our performance due to the COVID-19 pandemic and continued to experience declines in our stock price in relation to other bank indices and the length of time that the market value of the reporting unit had been below its book value, we completed another interim quantitative goodwill impairment analysis as of September 30, 2020.

Various valuation methodologies were considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which is then compared to its carrying value, including goodwill.

Upon completing the quantitative impairment analysis as of September 30, 2020, the analysis estimated fair value of the reporting unit to be less than the carrying value.

Therefore, we recorded a goodwill impairment of $ 62.2 million, which represented the entire amount of goodwill allocated to the reporting unit.

This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

During 2020, with the volatility in the financial services industry and in the economic environment the Company determined it prudent to have a full goodwill impairment analysis performed on a quarterly basis.

The Company monitored its performance due to the COVID-19 pandemic and continued to experience declines in the stock price in relation to other bank indices and the length of time that the market value of the reporting unit had been below its book value.

As of September 30, 2020, the analysis estimated fair value of the reporting unit to be less than the carrying value, therefore, a goodwill impairment charge of $ 62.2 million was recorded.

This impairment charge represented the entire amount of goodwill allocated to the reporting unit.

This non-cash charge to earnings had no impact to the Company’s regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

Allowance for Unfunded Commitments:

2 unchanged sentences

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

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

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

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

2 unchanged sentences

Stock-Based Compensation:

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

The Company has issued both restricted stock to executive officers, associates and non-associate directors and performance based stock units to its executive officers.

Compensation expense for restricted stock awards is based on the fair value of these awards at the date of the grant.

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

2 unchanged sentences

The Company recognizes forfeitures as they occur.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

For the performance stock units (“PSUs”), management evaluates the criteria quarterly to determine the probability of the performance goals being met and recognizes compensation based upon the this evaluation.

The PSUs vest on the third anniversary of the grant date.

Loss Contingencies:

3 unchanged sentences

Fair Value Measurements

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

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, impaired loans, OREO, and certain other assets.

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.

5 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

5 unchanged sentences

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

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

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

3 unchanged sentences

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 relies on the securities’ relationship to similarly traded securities, benchmark curves, and the

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

17 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Nonrecurring Basis

Individually Evaluated Loans:

Individually evaluated loans with an outstanding balance greater than or equal to $1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell.

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.

14 unchanged sentences

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.

For smaller OREO assets with existing

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

11 unchanged sentences

Newly Adopted Pronouncements in 2022

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

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

In June 2016, the FASB issued ASU No.

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

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

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

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

Many of the loss estimation techniques applied today are still permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.

In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

For periodic report filers that are not smaller reporting companies, such as the Company, this standard (Topic 326) was effective as of January 1, 2020.

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

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

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

The Company adopted the CECL accounting method as of January 1, 2021 as allowed under the provisions of the CARES Act.

The Bank’s CECL Committee, which includes members from Credit Administration, Accounting/Finance, Risk Management and Internal Audit, has oversight by the Chief Executive Officer, Chief Financial Officer, and Chief Credit Officer.

We engaged a third-party to assist us in developing our CECL model and to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting the CECL accounting method, management implemented a third party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components.

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

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

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

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

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

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

The Company adopted Topic 326 using the modified retrospective method.

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

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

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

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

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

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

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

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

January 1, 2021

(Dollars in Thousands) As Reported Under

Topic 326 Pre

Topic 326 Impact of

Topic 326 Adoption

Allowance for Credit Losses on Loans:

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

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

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

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

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

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

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

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

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

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

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

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

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 as of January 1, 2022.

This change did not have a material effect on our consolidated financial statements.

Refer to Note 5, Loans and Loans Held-For-Sale for disclosures for debtors experiencing financial difficulty and Note 6, 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 8 of this Annual Report on Form 10-K for additional information on the adoption of these amendments.

Accounting Statements Issued but Not Yet Adopted

7 unchanged sentences

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

In December 2022, the FASB issued ASU No 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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.

2 unchanged sentences

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

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

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

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

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

The ARRC has recommended the use of the Secured Overnight

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

6 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

As of December 31, 2022, approximately 7.4 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

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

NOTE 2 – EARNINGS (LOSS) PER SHARE

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

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

NOTE 2 – EARNINGS (LOSS) PER COMMON SHARE

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

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

Years ended December 31,

(Dollars in Thousands, except share and per share data) 2022 2021 2020

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

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

Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )

7 unchanged sentences

Earnings (Loss) per Common Share-Diluted $ 2.03 $ 1.19 $ ( 1.74 )

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

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

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

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

As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation in the years ended 2022 and 2021.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

1 unchanged sentence

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

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

The Company had no required reserves for 2022 and 2021 and averaged $ 3.7 million for 2020.

The average of required reserves declined during 2022 and 2021 as a result of the implementation of a new deposit management tool.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 4 - INVESTMENT SECURITIES

8 unchanged sentences

Commercial Mortgage-Backed Securities 35,538 73 ( 936 ) 34,675

Other Commercial Mortgage-Backed Securities 24,987 9 ( 2,597 ) 22,399

Asset Backed Securities 156,552 — ( 15,169 ) 141,383

Collateralized Mortgage Obligations 190,781 — ( 14,159 ) 176,622

Small Business Administration 108,643 879 ( 608 ) 108,914

States and Political Subdivisions 281,753 — ( 53,607 ) 228,146

5 unchanged sentences

Losses Fair Value

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

Government Agency Securities 72,915 707 ( 88 ) 73,534

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

Commercial Mortgage-Backed Securities 43,358 228 ( 560 ) 43,026

Other Commercial Mortgage-Backed Securities 14,136 68 ( 58 ) 14,146

Asset Backed Securities 151,683 968 ( 1,201 ) 151,450

Collateralized Mortgage Obligations 204,034 1,203 ( 1,356 ) 203,881

Small Business Administration 99,604 346 ( 805 ) 99,145

States and Political Subdivisions 257,810 6,344 ( 1,952 ) 262,202

10 unchanged sentences

Tax Impact $ 10 $ 1,443 $ 1,445

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

5 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2022

6 unchanged sentences

Commercial Mortgage-Backed Securities 35,538 34,675

Other Commercial Mortgage-Backed Securities 24,987 22,399

Collateralized Mortgage Obligations 190,781 176,622

17 unchanged sentences

Commercial Mortgage-Backed Securities 7 7,843 ( 307 ) 49 15,675 ( 629 ) 56 23,518 ( 936 )

Other Commercial Mortgage-Backed Securities 2 5,302 ( 617 ) 6 14,560 ( 1,980 ) 8 19,862 ( 2,597 )

Asset Backed Securities 13 42,173 ( 2,984 ) 41 97,210 ( 12,185 ) 54 139,383 ( 15,169 )

Collateralized Mortgage Obligations 35 66,362 ( 4,500 ) 50 110,260 ( 9,659 ) 85 176,622 ( 14,159 )

Small Business Administration 11 18,813 ( 235 ) 53 19,630 ( 373 ) 64 38,443 ( 608 )

States and Political Subdivisions 73 112,564 ( 19,706 ) 91 115,382 ( 33,901 ) 164 227,946 ( 53,607 )

12 unchanged sentences

Securities Fair Value Unrealized

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

Government Agency Securities 7 13,847 ( 68 ) 2 2,537 ( 20 ) 9 16,384 ( 88 )

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

Commercial Mortgage-Backed Securities 6 8,686 ( 208 ) 51 17,093 ( 352 ) 57 25,779 ( 560 )

Other Commercial Mortgage-Backed Securities 3 8,962 ( 58 ) — — — 3 8,962 ( 58 )

Asset Backed Securities 30 89,756 ( 1,025 ) 10 21,895 ( 176 ) 40 111,651 ( 1,201 )

Collateralized Mortgage Obligations 34 103,007 ( 990 ) 11 24,849 ( 366 ) 45 127,856 ( 1,356 )

Small Business Administration 7 10,444 ( 53 ) 73 47,371 ( 752 ) 80 57,815 ( 805 )

States and Political Subdivisions 56 88,746 ( 1,503 ) 8 7,874 ( 449 ) 64 96,620 ( 1,952 )

1 unchanged sentence

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 year ended December 31, 2021 as the Company did not have securities classified as held-to-maturity at December 31, 2021.

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the year ended December 31, 2022 or December 31, 2021 as the Company did no t have securities classified as held-to-maturity at December 31, 2022 or December 31, 2021.

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

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

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

The Company has reviewed all securities for OTTI.

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

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

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

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

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

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

As of December 31, 2022, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such 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 December 31, 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 (loss) in the period the credit related impairment is identified, while any non-credit loss will be recognized in other comprehensive (loss) income.

During the year ended December 31, 2022 and December 31, 2021, the Company had no credit related net investment impairment losses.

As of December 31, 2020, the Company did not identify or record any other-than-temporary impairment for any investment securities in its portfolio.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 5 – LOANS AND LOANS HELD-FOR-SALE

8 unchanged sentences

Construction 353,553 282,947

312,496 357,900

Total Portfolio Loans 3,148,913 2,812,129

Loans Held-for-Sale — 228

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

Total Loans $ 3,148,913 $ 2,812,357

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

Measurement of Credit Losses on Financial Instruments.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

Measurement of Credit Losses on Financial Instruments on January 1, 2021.

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

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

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

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

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

The Company established transaction, relationship and specific loan segment limits in its loan policy.

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

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio and are based on management’s risk tolerance relative to capital.

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

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

Although leverage is important, the Company is also focused on cash flow generation and uses multiple metrics to calculate a supportable loan amount.

Supportable loan amounts have generally been more challenging given the increases in commodities pricing.

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

1 unchanged sentence

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

The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation (“FICO”) scores and restricting loan amounts at lower FICO scores.

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

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

CRE, C&I, Construction and Residential Mortgages.

CRE, commercial & industrial (“C&I”), Construction and Residential Mortgages.

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

1 unchanged sentence

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

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

The following tables provides the break-out of Other loans as of the dates presented:

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

Commercial Real Estate $ 123,286 $ 132,582

Commercial and Industrial 76,001 76,001

Residential Mortgages 18,053 40,881

Construction 95,156 108,436

Other $ 312,496 $ 357,900

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Deferred costs and fees included in the portfolio balances above were $ 8.2 million and $ 4.5 million at December 31, 2022 and December 31, 2021, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 161.2 thousand and $ 190.6 thousand at December 31, 2022 and December 31, 2021, respectively.

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

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

Troubled Debt Restructurings

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

December 31, 2021 December 31, 2020

(Dollars in Thousands) Performing

TDRs Nonperforming

TDRs Performing

TDRs Nonperforming

The Company had no mortgage loans held-for-sale as of December 31, 2022 and $ 0.2 million as of December 31, 2021.

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 a TDR.

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 7, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

The following table shows the amortized cost basis as of December 31, 2022 for the year ended December 31, 2022 for the loans restructured during the year ended December 31, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:

Restructured Loans

Twelve Months Ended December 31, 2022

(Dollars in Thousands) Number of Contracts Amortized Cost Basis (1)

% of Total Class of Financing Receivable

Accruing Restructured Loans

Commercial Real Estate 1 $ 324 0.02 %

Commercial and Industrial — — — %

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

Residential Mortgages — — — %

Other Consumer — — — %

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

Construction — — — %

Other — — — %

Total TDRs (1)

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

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

Measurement of Credit Losses on Financial Instruments.

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

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

A loan is a TDR if both of the following

Total Accruing Restructured Loans 1 324 0.02 %

Nonaccrual Restructured Loans

Commercial Real Estate — $ — — %

Commercial and Industrial — — — %

Residential Mortgages — — — %

Other Consumer — — — %

Construction — — — %

Other — — — %

Total Nonaccrual Restructured Loans — — — %

Total Restructured Loans 1 324 0.02 %

(1) Excludes accrued interest receivable of $ 1.5 thousand on restructured loans for the year ended 2022.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nonperforming Assets

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

Nonperforming Assets

Nonaccrual loans $ 3,847 $ 7,018

Nonaccrual TDRs 3,550 24,986

Total Nonaccrual Loans 7,397 32,004

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

Total Nonperforming Assets $ 18,313 $ 47,726

During the fourth quarter of 2022 the Bank had no new restructured loans.

During the third quarter of 2022 the Bank modified a construction loan as a restructured loan.

This performing loan was extended to allow the borrower to complete construction and has since paid off during the fourth quarter of 2022.

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.

This loan is not considered significant and is included in the Bank’s ACL model in the general pool of the CRE segment for reserve purposes.

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 during the year ended December 31, 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 $ 324 $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction — — —

Total Accruing Restructured Loans $ 324 $ — $ —

Nonaccrual Restructured Loans

Commercial Real Estate $ — $ — $ —

Commercial and Industrial — — —

Residential Mortgages — — —

Other Consumer — — —

Construction — — —

Total Nonaccrual Restructured Loans $ — $ — $ —

Total Restructured Loans (1)

$ 324 $ — $ —

(1) Excludes accrued interest receivable of $ 1.5 thousand at December 31, 2022.

As of December 31, 2022, the Bank had no commitments to lend any additional funds on restructured loans.

As of December 31, 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 December 31, 2022 and December 31, 2021, the Company had $ 902 thousand and $ 254 thousand, respectively, of residential real estate in the process of foreclosure.

3 unchanged sentences

Beginning Balance $ 2,625

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

New Loans 768

Principal Additions 310

Repayments ( 189 )

5 unchanged sentences

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

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

Measurement of Credit Losses on Financial Instrument.

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

32 unchanged sentences

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

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

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

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

changes in the future.

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

relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

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

12 unchanged sentences

Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status.

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

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

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

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

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

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

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

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

The Company 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 throughout 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;

• 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.

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.

1 unchanged sentence

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

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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.

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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of December 31:

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

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

Commercial Real Estate

4 unchanged sentences

Total Commercial Real Estate $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 227,522 $ 336,639 $ 31,349 $ 1,470,562

YTD Gross Charge-offs — — — — — — — —

Commercial and Industrial

4 unchanged sentences

Total Commercial and Industrial $ 23,104 $ 47,193 $ 38,706 $ 9,040 $ 10,736 $ 157,273 $ 23,740 $ 309,792

YTD Gross Charge-offs 3,432 — — — 4 — — 3,436

Residential Mortgages

4 unchanged sentences

Total Residential Mortgages $ 200,725 $ 185,930 $ 81,446 $ 51,635 $ 71,532 $ 41,331 $ 25,349 $ 657,948

YTD Gross Charge-offs — — — — 22 24 — 46

Other Consumer

4 unchanged sentences

Total Other Consumer $ 24,100 $ 10,051 $ 7,324 $ 1,999 $ 513 $ 276 $ 299 $ 44,562

YTD Gross Charge-offs 280 625 254 358 39 121 — 1,677

Pass $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,523 $ 7,190 $ 6,056 $ 352,516

3 unchanged sentences

Total Construction $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 8,135 $ 6,056 $ 353,553

YTD Gross Charge-offs — — — — — — — —

Pass $ — $ — $ — $ — $ — $ 180,745 $ — $ 180,745

3 unchanged sentences

Total Other Loans $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496

YTD Gross Charge-offs — — — — — — — —

Total Portfolio Loans

4 unchanged sentences

Total Portfolio Loans $ 816,403 $ 547,084 $ 308,432 $ 198,133 $ 409,968 $ 782,100 $ 86,793 $ 3,148,913

Current YTD Period:

YTD Gross Charge-offs $ 3,712 $ 625 $ 254 $ 358 $ 65 $ 145 $ — $ 5,159

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(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

Doubtful — — — — — — — —

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

Doubtful — — — — — — — —

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

Doubtful — — — — — — — —

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

Doubtful — — — — — — — —

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

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

Special Mention — — 175 — — 429 — 604

Substandard — 107 809 95 — 91 — 1,102

Doubtful — — — — — — — —

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

YTD Gross Charge-offs — — 1,859 — — — — 1,859

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

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

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

Doubtful — — — — — — — —

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

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

Doubtful — — — — — — — —

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

At December 31, 2022 and December 31, 2021, the Company had no loans that were risk rated as doubtful.

Special mention and substandard loans at December 31, 2022 decreased $ 38.4 million to $ 156.9 million compared to $ 195.3 million at December 31, 2021, with an increase of $ 5.0 million in special mention and a decrease of $ 43.4 million in substandard.

The largest variance in special mention was related to a CRE project totaling $ 9.9 million that was downgraded and yet to be stabilized offset by the payment in full on two CRE projects totaling $ 6.0 million and an upgraded credit to pass status in the amount of $ 1.5 million.

In addition to CRE, the Company downgraded a syndicated C&I loan totaling $ 2.9 million.

The decrease in substandard loans primarily related to the Other loan segment due to principal paydowns during 2022.

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of December 31:

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

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

Commercial Real Estate

24 unchanged sentences

Total Portfolio Loans $ 816,403 $ 547,084 $ 308,432 $ 198,133 $ 409,968 $ 782,100 $ 86,793 $ 3,148,913

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(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

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

Nonperforming — 107 809 — — 69 — 985

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

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

Nonperforming — — — — — — —

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

Total Portfolio Loans

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

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

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

Age Analysis of Past-Due Loans by Class

11 unchanged sentences

Other 312,496 — — — — 312,496

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

Measurement of Credit Losses on Financial Instruments.

Total $ 3,137,431 $ 2,481 $ 2,356 $ 4,837 $ 6,645 $ 3,148,913

CARTER BANKSHARES, INC.

15 unchanged sentences

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

Loans past due 30 to 89 days or more and still accruing decreased $ 4.7 million to $ 1.7 million at December 31, 2021 compared to $ 6.4 million at December 31, 2020, primarily in the commercial real estate segment.

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

As of December 31, 2020 loans held-for-sale in connection with sale of Bank branches included $ 7 thousand in nonaccrual status and $ 7 thousand that were past due.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan as of December 31, 2021.

Loans past due 30 to 89 days or more and still accruing increased $ 3.2 million to $ 4.8 million at December 31, 2022 compared to $ 1.7 million at December 31, 2021, primarily in the construction segment due to two relationships with an aggregate principal balance of $ 2.9 million.

There were no nonaccrual or past due loans related to loans held-for-sale as of December 31, 2022 and December 31, 2021, respectively.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment of loan as of December 31, 2022.

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

13 unchanged sentences

Total Portfolio Loans $ 7,397 $ 6,645 $ — $ —

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status, but is considered a TDR.

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

During the year ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

As of and for the December 31, 2021

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

Still Accruing

Commercial Real Estate $ 21,891 $ 3,337 $ — $ —

Commercial and Industrial 456 451 — —

Residential Mortgages 4,135 2,551 — —

Other Consumer 184 73 — —

Construction 5,331 985 808 —

Other — — — —

Total Portfolio Loans $ 31,997 $ 7,397 $ 808 $ —

A loan is considered nonperforming when we transfer the loan to nonaccrual status.

A loan is considered nonaccrual when the loan is 90 days or more delinquent.

It is also possible that management will transfer a loan to nonaccrual before it is 90 days past due under certain circumstances if there is a probability that we will not collect all principal and interest due under the contractual terms of the loan agreement.

Loans experiencing financial difficulty that are considered restructured loans and nonaccrual loans with a commitment of $ 1.0 million or more are individually evaluated for potential credit losses.

During the years ended December 31, 2022 and December 31, 2021, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

CARTER BANKSHARES, INC.

2 unchanged sentences

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of December 31.

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

December 31, 2021

(Dollars in Thousands) Real Estate

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss on loans in the period of change.

December 31, 2022 December 31, 2021

(Dollars in Thousands) Real Estate Real Estate

Commercial Real Estate $ 2,106 2,742

4 unchanged sentences

Total $ 3,318 3,550

The following tables presents the average investment in impaired loans and the interest income recognized at December 31, 2020.

December 31, 2020

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

Loans without a Specific Valuation Allowance:

Commercial Real Estate $ 4,201 $ 128

Construction 56,941 1,871

Residential Mortgages 51,716 1,906

Loans with a Specific Valuation Allowance:

Commercial Real Estate 27,780 163

Commercial and Industrial 184 —

Construction 1,739 —

Total by Category:

Commercial Real Estate 31,981 291

Commercial and Industrial 184 —

Construction 58,680 1,871

Residential Mortgages 51,716 1,906

Total Impaired Loans $ 142,561 $ 4,068

The following tables presents activity in the ACL and ALL for the periods presented:

December 31, 2022

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other (1)

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total

Allowance for Credit Losses on Loans:

Balance, Beginning of Year $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939

Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 61,642

Provision for Credit Losses on Loans ( 6,215 ) ( 2,249 ) ( 982 ) 1,561 781 10,454 3,350

Provision (Recovery) for Credit Losses on Loans 695 3,304 4,470 1,109 ( 146 ) ( 7,013 ) 2,419

Charge-offs — ( 3,436 ) ( 46 ) ( 1,677 ) — — ( 5,159 )

2 unchanged sentences

Balance, End of Year $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852

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

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

CRE, C&I, residential mortgages and construction.

The allowance balance at the beginning of period was reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other (1)

Allowance for Credit Losses on Loans:

Balance, Beginning of Year $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ — $ 54,074

Provision for Credit Losses on Loans 11,055 1,527 594 2,434 2,396 18,006

Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 61,642

(Recovery) Provision for Credit Losses on Loans ( 6,215 ) ( 2,249 ) ( 982 ) 1,561 781 10,454 3,350

Charge-offs ( 19,662 ) ( 374 ) ( 273 ) ( 2,256 ) ( 1,859 ) — ( 24,424 )

2 unchanged sentences

Balance, End of Year $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939

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

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

CRE, C&I, residential mortgages and construction.

The allowance balance at the beginning of period was reclassified to Other from their original loan segments:

CRE, C&I, residential mortgages and construction to conform to current presentation.

December 31, 2020

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Allowance for Credit Losses on Loans:

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

Provision for Credit Losses on Loans 878 2,565 ( 4,205 ) 4,370 ( 204 ) 3,404

Provision for Loan Losses 11,055 1,527 594 2,434 2,396 18,006

Charge-offs ( 40 ) ( 66 ) ( 258 ) ( 3,991 ) — ( 4,355 )

Recoveries 707 2 27 737 188 1,661

Net (Charge-offs) / Recoveries ( 69 ) ( 22 ) ( 188 ) ( 3,799 ) 237 ( 3,841 )

Net Recoveries / (Charge-offs) 667 ( 64 ) ( 231 ) ( 3,254 ) 188 ( 2,694 )

Balance, End of Year $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ 54,074

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The adoption of Topic 326 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021.

1 unchanged sentence

This segmented pool had an aggregate principal balance of $ 379.9 million at January 1, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards.

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

The analysis applied to this pool resulted in expected credit losses of $ 51.3 million, at adoption.

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

10 unchanged sentences

An expected credit loss of $ 51.3 million upon adoption was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased $ 41.8 million to $ 95.9 million at December 31, 2021 compared to $ 54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $ 61.6 million.

During the year ended December 31, 2021 adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral.

Following the conclusion of the deferral program on June 30, 2021, management observed that $ 62.2 million of loans that were previously in the deferral program were recovering at rates much lower than peers.

Accordingly, management attempted workout strategies with these clients.

After workout strategies were exhausted unsatisfactorily, these loans were sold during the third and fourth quarters of 2021.

During the third quarter of 2021, $ 50.2 million of loans were sold related to nine notes within two performing relationships that had been previously reserved and released.

During the fourth quarter of 2021, we sold $ 12.0 million of loans related to two notes, which resulted in $ 2.2 million net charge-offs and added $ 0.5 million to provision expense.

The ACL was $ 95.9 million, or 3.41 % of total portfolio loans at December 31, 2021, as compared to $ 54.1 million, or 1.83 % of total portfolio loans, at December 31, 2020.

Net charge-offs were $ 23.1 million in 2021 as compared to $ 2.7 million in 2020.

The increase in charge-offs of $ 20.4 million was primarily attributable to the resolution of five problem relationships during 2021, in which the majority were previously reserved.

As a percentage of average total portfolio loans, net charge-offs were 0.79 % and 0.09 % for the years ended December 31, 2021 and December 31, 2020, respectively.

Nonperforming loans as a percentage of total portfolio loans were 0.26 % and 1.09 % as of December 31, 2021 and December 31, 2020, respectively.

A release of $ 1.3 million was recorded in 2021 for the provision for unfunded commitments.

Per the guidance related to CECL, unfunded loan commitments are included as part of the provision for credit losses rather than noninterest expense, where it was previously recorded.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following tables represent credit exposures by internally assigned risk ratings as of December 31, 2021 and 2020:

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Other Total

Pass $ 1,314,576 $ 337,294 $ 453,894 $ 44,554 $ 281,241 $ 185,247 $ 2,616,806

Special Mention 5,260 8 553 — 604 3,281 9,706

Substandard 3,416 8,074 3,541 112 1,102 169,372 185,617

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Performing Loans $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732

Nonaccrual Loans 3,337 451 2,551 73 985 — 7,397

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

December 31, 2020

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

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

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

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

Doubtful — — — — — —

Loss — — — — — —

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

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

Nonaccrual Loans 21,891 456 4,135 184 5,331 31,997

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

Special mention, substandard and doubtful loans at December 31, 2021 decreased $ 229.2 million to $ 195.3 million compared to $ 424.5 million at December 31, 2020, with a decrease of $ 176.5 million in special mention and a decrease of $ 52.7 million in substandard.

The variances between loan segments for the years ended 2021 and 2020 primarily relates to the Other loan segment breakout due to the adoption of CECL.

The special mention decrease between 2021 and 2020 relates primarily to the restructuring of a loan relationship of $ 177.2 million in connection with the dismissal of a lawsuit disclosed in the second quarter 2021 Form 10-Q and on Form 8-K dated September 8, 2021.

The Bank believes that it is fully secured on all loans outstanding related to the lawsuit with an enhanced collateral position, including cross-collateralizations and executed documents reaffirming the legality, validity and binding nature of all loan documents that were executed in favor the the Bank.

The decrease in substandard from the year ended December 31, 2020 is primarily due to payoffs and charge-offs totaling $ 55.7 on five large commercial relationships.

At December 31, 2020 $ 7 thousand of loans with a risk rating of substandard were held-for-sale in connection with the sale of Bank branches.

Prior to the adoption of Topic 326 on January 1, 2021, we calculated our ALL using an incurred loan loss methodology.

The following tables are disclosures related to the allowance for credit losses in prior periods.

The following tables present the balances in the ACL and the recorded investment in the loan balances based on impairment method as of December 31, 2020 and 2019.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2020

(Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total

Allowance for Loan Losses on Loans:

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

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

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

Total Portfolio Loans:

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

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

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

The recorded investment in loans excludes accrued interest receivable.

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

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020 and 2019.

December 31, 2020

(Dollars in Thousands) Unpaid Principal Balance Recorded Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized

Loans without a Specific Valuation Allowance:

Commercial Real Estate $ 3,236 $ 3,236 $ — $ 4,201 $ 128

Construction 55,248 55,248 — 56,941 1,871

Residential Mortgages 50,618 50,618 — 51,716 1,906

Loans with a Specific Valuation Allowance:

Commercial Real Estate 24,430 24,430 13,773 27,780 163

Commercial and Industrial — — — 184 —

Construction 1,739 1,739 1,477 1,739 —

Total by Category:

Commercial Real Estate 27,666 27,666 13,773 31,981 291

Commercial and Industrial — — — 184 —

Construction 56,987 56,987 1,477 58,680 1,871

Residential Mortgages 50,618 50,618 — 51,716 1,906

Total Impaired Loans $ 135,271 $ 135,271 $ 15,250 $ 142,561 $ 4,068

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2019

(Dollars in Thousands) Unpaid Principal Balance Recorded Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized

Loans without a Specific Valuation Allowance:

Commercial Real Estate $ 4,487 $ 4,487 $ — $ 5,885 $ 131

Construction 59,053 59,053 — 59,558 3,056

Residential Mortgages 52,966 52,966 — 57,079 5,862

Loans with a Specific Valuation Allowance:

Commercial Real Estate 28,769 28,769 5,779 31,201 —

Commercial and Industrial 390 390 390 434 —

Construction — — — 1,716 —

Total by Category:

Commercial Real Estate 33,256 33,256 5,779 37,086 131

Commercial and Industrial 390 390 390 434 —

Construction 59,053 59,053 — 61,274 3,056

Residential Mortgages 52,966 52,966 — 57,079 5,862

Total Impaired Loans $ 145,665 $ 145,665 $ 6,169 $ 155,873 $ 9,049

NOTE 7 - FAIR VALUE MEASUREMENTS

Financial assets measured at fair value on a recurring basis at December 31, 2021 are summarized below:

The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at the dates presented:

December 31, 2022

5 unchanged sentences

Commercial Mortgage-Backed Securities 34,675 — 34,675 —

Other Commercial Mortgage-Backed Securities 22,399 2,538 19,861 —

Asset Backed Securities 141,383 4,996 136,387 —

Collateralized Mortgage Obligations 176,622 — 176,622 —

Small Business Administration 108,914 — 108,914 —

States and Political Subdivisions 228,146 — 228,146 —

5 unchanged sentences

Total $ 22,542 $ — $ 22,542 $ —

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Financial assets measured at fair value on a recurring basis at December 31, 2020 are summarized below:

December 31, 2021

1 unchanged sentence

Securities Available-for-Sale:

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

Government Agency Securities 73,534 — 73,534 —

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

Commercial Mortgage-Backed Securities 43,026 — 43,026 —

Other Commercial Mortgage-Backed Securities 14,146 — 14,146 —

Asset Backed Securities 151,450 — 151,450 —

Collateralized Mortgage Obligations 203,881 — 203,881 —

Small Business Administration 99,145 — 99,145 —

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

5 unchanged sentences

Total $ 3,682 $ — $ 3,682 $ —

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2021 or December 31, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

We have invested in subordinated debt of other financial institutions.

We have two securities totaling $ 7.5 million that are considered to be Level 3 securities at December 31, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 10.4 million at December 31, 2020 to $ 8.6 million at December 31, 2021 is attributable to a new security in the second quarter of 2021 for $ 3.5 million offset by the calculated change in fair value of $ 0.3 million and the call of a security totaling $ 5.0 million.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 7.5 million at December 31, 2022 is attributable to the calculated change in fair value of $ 1.1 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.

8 unchanged sentences

OREO $ — $ — $ 10,916 $ 10,916

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

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 10.9 million as of December 31, 2021, compared with $ 15.7 million at December 31, 2020.

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

Individually evaluated loans had a net carrying amount of $ 2.6 million at December 31, 2022, including a valuation allowance of $ 0.7 million.

Individually evaluated loans had a net carrying amount of $ 1.8 million at December 31, 2021, including 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 $ 8.4 million as of December 31, 2022, compared with $ 10.9 million at December 31, 2021, primarily due to sale and payments.

Write-downs of $ 0.7 million were recorded on OREO for the year ended December 31, 2022 compared to $ 3.5 million for the year ended December 31, 2021.

2 unchanged sentences

(Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average

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

Total Impaired Loans $ 1,777

Other Real Estate Owned $ 9,946 Appraisals Estimated Selling Costs 10.0 % 10.0 %

Other Real Estate Owned 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

Other Real Estate Owned 780 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 5.0 % — % 50.7 % 20.3 %

Total Other Real Estate Owned $ 10,916

Individually Evaluated Loans $ 858 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 14.2 % 14.2 %

Individually Evaluated Loans $ 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 %

Total Individually Evaluated Loans $ 2,649

OREO $ 7,323 Appraisals Estimated Selling Costs 10.0 % 10.0 %

OREO 143 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

OREO 927 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 0.0 % — 5.0 % 0.7 %

Total OREO $ 8,393

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2021

(Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average

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

Impaired Loans $ 9,494 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 12.0 % — % 50.0 % 33.2 %

Impaired Loans 262 Discounted Appraisals Estimated Selling Costs 20.9 % 20.9 %

Total Impaired Loans $ 10,919

Other Real Estate Owned $ 11,972 Appraisals Estimated Selling Costs 6.0 % — % 10.0 % 6.5 %

Other Real Estate Owned 1,260 Discounted Cash Flow Discount Rate 6.3 % 6.3 %

Other Real Estate Owned 1,583 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %

Other Real Estate Owned 907 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 33.7 % — % 73.5 % 55.5 %

Total Other Real Estate Owned $ 15,722

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.

8 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Fair Value Measurements at December 31, 2022

3 unchanged sentences

Securities Available-for-Sale 836,273 25,400 803,356 7,517 836,273

Loans Held-for-Sale 228 — — 228 228

Portfolio Loans, net 3,055,061 — — 2,955,489 2,955,489

6 unchanged sentences

FHLB Borrowings 180,550 — — 180,569 180,569

Federal Funds Purchased 17,870 — 17,870 — 17,870

Accrued Interest Payable 2,294 — — 2,294 2,294

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Fair Value Measurements at December 31, 2021

5 unchanged sentences

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

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

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

3 unchanged sentences

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

Deposits Held for Assumption in Connection with Sale of Bank Branches 84,717 9,506 18,699 56,512 84,717

Other Liabilities- Interest Rate Derivatives 3,682 — 3,682 — 3,682

11 unchanged sentences

Total $ 72,114 $ 75,297

At December 31, 2021, we had no bank premises and equipment held-for-sale and $ 2.3 million at December 31, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

At both December 31, 2022 and December 31, 2021, we had no bank premises and equipment held-for-sale.

Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) totaling $ 6.1 million in 2022, $ 6.2 million in 2021, and $ 6.1 million in 2020.

1 unchanged sentence

Write-downs in the amount of $ 0.6 million, $ 3.2 million and $ 1.1 million were recognized during 2022, 2021 and 2020, respectively.

These write-downs on closed branches are included in losses and write-downs on OREO, net in the Consolidated Statements of Income (Loss).

The net remaining carrying value of $ 1.1 million and $ 1.0 million is classified as held-for-sale in OREO in the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively.

1 unchanged sentence

Rental expense for these leases was $ 67 thousand in 2022, $ 72 thousand in 2021, and $ 99 thousand for 2020.

The Company currently has two depository locations, a loan production office, and a commercial banking office under lease contracts.

The Company currently has three depository locations, a loan production office, a commercial banking office and another office housing various Bank functions under lease contracts.

We have included $ 6.3 million and $ 3.3 million in right-of-use assets in other assets on its Consolidated Balance Sheets at December 31, 2022 and 2021, respectively.

The Company has included $ 6.6 million and $ 3.4 million in lease liabilities in other liabilities on its Consolidated Balance Sheets at December 31, 2022 and 2021, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 9 - OTHER REAL ESTATE OWNED

18 unchanged sentences

Operating Expenses, net of Rental Income 293 317 317

Net Loss (Gain) on Sales 150 ( 48 ) 275

Net (Gain) Loss on Sales ( 309 ) 150 ( 48 )

OREO Expense $ 725 $ 3,939 $ 1,752

NOTE 10 – GOODWILL

Accounting guidance requires companies to test goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be triggering events that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit.

Throughout 2020 as we monitored our performance, the Company experienced further declines in their stock price in relation to other bank indices primarily due to the COVID-19 pandemic.

Together with the declines in their stock price and the length of time that the market value of the reporting unit had been below its book value, the Company completed another interim quantitative goodwill impairment analysis as of September 30, 2020.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Upon completion of the quantitative impairment analysis the Company estimated fair value of the reporting unit to be less than the carrying value.

As such, at September 30, 2020, the Company recorded a goodwill impairment of $ 62.2 million, which represented the entire amount of goodwill allocated to the reporting unit.

This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

11 unchanged sentences

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.

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 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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

are not accounted for using hedge accounting.

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

20 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 63 $ 433,184 $ 22,543 66 $ 446,490 $ 3,682

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table indicates the income (loss) recognized in income on derivatives for the years ended December 31:

The following table indicates the income (loss) recognized in the Consolidated Statement of Income (Loss) for derivatives for the years ended December 31:

(Dollars in Thousands) 2022 2021 2020

17 unchanged sentences

(1) Amounts represent collateral posted for the periods presented.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 11 – DEPOSITS

The following table presents the composition of deposits at December 31:

(Dollars in Thousands) 2021 2020 $ Change % Change

(Dollars in Thousands) 2022 2021

Noninterest-Bearing Demand $ 703,334 $ 747,909

3 unchanged sentences

Certificates of Deposits 1,261,526 1,344,318

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

Total $ 3,630,333 $ 3,698,476

NM - percentage not meaningful

Deposits are our primary source of funds.

We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition.

Total deposits at December 31, 2021 increased $ 13.8 million, or 0.4 %, from December 31, 2020.

We had increases in all of our core deposits.

The increases included $ 168.8 million in money market accounts due to our deposit acquisition strategy, a $ 86.4 million increase in interest-bearing demand deposits, a $ 65.1 million increase in savings accounts due to promotions and an increase of $ 48.7 million in noninterest-bearing demand accounts.

Offsetting these increases was $ 270.5 million, or 16.7 % declines in CDs compared to December 31, 2020 due to the intentional runoff of higher cost CDs.

Also impacting the decrease was $ 84.7 million of deposits held-for-assumption, at December 31, 2020, in connection with the sale of four bank branches which were sold during the second quarter of 2021.

Noninterest-bearing deposits comprised 20.2 % and 19.0 % of total deposits at December 31, 2021 and December 31, 2020, respectively.

All depos i t accounts are i nsured by the FDIC u p to the maximum amount allowed by l aw.

The Dodd-Frank Act , signed into law on July 2 1 , 2010, makes permanent the $250,000 limit for federal deposit insurance and the coverage limit applies per depositor, per insured depository institution for each account ownership.

Time deposits that exceed the FDIC Insurance limit of

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

$250,000, excluding deposits held-for-assumption, at year-end 2021 and 2020 were $ 147.1 million and $ 181.1 million, respectively.

Time deposits that exceed the FDIC Insurance limit of $250,000 at year-end 2022 and 2021 were $ 159.0 million and $ 147.1 million, respectively.

Certificates of Deposit maturing as of December 31:

3 unchanged sentences

Total $ 1,261,526

Overdrafts reclassified to loans were $ 0.5 million at both December 31, 2021 and December 31, 2020.

Overdrafts reclassified to loans were $ 0.3 million at December 31, 2022 and $ 0.5 million at December 31, 2021.

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2022 and 2021, respectively, were $ 2.9 million and $ 3.0 million.

NOTE 13 – FEDERAL HOME LOAN BANK BORROWINGS

NOTE 12 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED

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

FHLB Borrowings were $ 7.0 million and $ 35.0 million at December 31, 2021 and December 31, 2020, respectively.

FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at December 31, 2021.

Total loans pledged as collateral were $ 1.1 billion and $ 0.8 billion at December 31, 2021 and December 31, 2020, respectively.

The Company had $ 180.6 million FHLB borrowings at December 31, 2022 and $ 7.0 million at December 31, 2021.

FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans.

Total loans pledged as collateral were $ 1.5 billion at December 31, 2022 and $ 1.1 billion at December 31, 2021.

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

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

The Company has a maximum borrowing capacity of approximately $ 1.0 billion, or 25 % of the Company’s assets, as of December 31, 2021.

The Company had the capacity to borrow up to an additional $ 667.3 million and $ 510.5 million from the FHLB at December 31, 2021 and December 31, 2020, respectively, based upon calculated collateral values.

The following table represents the balance of long-term borrowings, the weighted average interest rate, and interest expense for the years ended December 31:

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

The Company is eligible to borrow up to an additional $ 676.7 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25 % of the Company’s assets, as of December 31, 2022.

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

The Company had $ 17.9 million in overnight federal funds purchased at December 31, 2022.

There were no outstanding overnight federal funds purchased at December 31, 2021.

The available borrowing capacity under unsecured lines of credit with corresponding banks was $ 127.1 million and $ 145.0 million at December 31, 2022 and December 31, 2021, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table represents the balance of FHLB borrowings, the weighted average interest rate, and interest expense for the years ended December 31:

(Dollars in Thousands) 2022 2021 2020

Long-term Borrowings $ 7,000 $ 35,000 $ 10,000

FHLB Borrowings $ 180,550 $ 7,000 $ 35,000

Weighted Average Interest Rate 4.48 % 1.61 % 1.13 %

Interest Expense $ 1,163 $ 313 $ 361

During the year ending December 31, 2021 the Company retired four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

One FHLB advance totaling $ 3.0 million was repaid at maturity.

The following table represents the balance of federal funds purchased, the weighted average interest rate, and interest expense for the years ended December 31 :

(Dollars in Thousands) 2022 2021 2020

Federal Funds Purchased $ 17,870 $ — $ —

Weighted Average Interest Rate 4.65 % — % — %

Interest Expense $ 188 $ — $ 1

During the year ending 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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to December 31, 2022 and thereafter are as follows:

1 unchanged sentence

2023 $ 180,550 4.48 %

2024 3,000 1.63 %

Thereafter — — %

1 unchanged sentence

NOTE 13 - EMPLOYEE BENEFIT PLANS

The Company has adopted an integrated profit sharing plan, which allows for elective deferrals and non-elective contributions.

Associates participate in the profit sharing plan following completion of six ( 6 ) months of service and upon reaching the age of twenty years and six months as of January 1.

Vesting is based on years of service to the Company, with a year being any year an employee works a minimum of 1,000 hours.

The Company has adopted an integrated profit sharing plan, which allows for elective deferrals and non-elective profit sharing contributions.

Associates become eligible for the elective deferrals at the beginning of the quarter after they have been employed at least a month and have reached the age of twenty years and six months.

Associates are eligible for the non-elective profit sharing contributions at the beginning of the quarter after they have been employed six months and have reached the age of twenty years and six months.

Vesting for the non-elective profit sharing contribution is based on years of service to the Company, with a year being any year an employee works a minimum of 1,000 hours.

The following table details the vesting schedule based on years of service for participants:

4 unchanged sentences

5 Years of Service 100 % Vested

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Any participant who has reached the age of 62 is fully vested regardless of length of service.

15 unchanged sentences

On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide (i) certain key executives of the Bank (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these associates under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees.

The compensation

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants.

The compensation and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants.

The balance in the nonqualified deferred compensation plan at December 31, 2022 and December 31, 2021 was $ 269.6 thousand and $ 160.7 thousand, respectively.

1 unchanged sentence

The Bank Board adopted the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27, 2018.

In connection with the Reorganization, the Company adopted and assumed Carter Bank & Trust 2018 Omnibus Equity Incentive Plan as its own (now the Carter Bankshares, Inc.

In connection with the Reorganization, the Company adopted and assumed the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan as its own (now the Carter Bankshares, Inc.

Amended and Restated 2018 Omnibus Equity Incentive Plan, or, for purposes of this discussion, the “Plan”).

5 unchanged sentences

No awards may be granted under the Plan more than ten years from the effective date of the Plan.

As of December 31, 2022, 1,642,899 shares of common stock were available for issuance under the Plan.

For purposes of this Note 14, references to the “Company” mean the “Bank” with respect to actions prior to the Reorganization.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Restricted Stock

The Company periodically issues restricted stock to non-employee directors, executive officers and associates pursuant to the Plan.

As of December 31, 2021, 214,517 restricted shares had been granted under the Plan and 10,952 restricted shares had been forfeited.

The Company granted 50,120 and 39,019 restricted shares of common stock to key personnel under the Plan during 2021 and 2020, respectively.

These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance, including contribution during our recent core systems conversion.

These key personnel time-based restricted shares vest in one-third annual installments over three years after the grant date.

The Company periodically issues restricted stock to non-employee directors and key associates pursuant to the Plan.

As of December 31, 2022, 341,872 shares of restricted stock were outstanding under the Plan.

The Company granted 108,855 and 50,120 shares of restricted stock to key associates under the Plan during 2022 and 2021, respectively.

These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance.

The time-based shares of restricted stock fully vest on the fifth anniversary of the grant date for awards granted prior to 2023 and beginning with awards granted in 2023 vest in one-third annual installments over three years after the grant date.

The closing price of our stock was used to determine the fair value on the date of the grant.

There were 32,370 and 16,137 restricted shares of common stock issued to non-employee directors under the Plan during 2021 and 2020, respectively.

These grants were approved by the Committee as compensation for the Company’s performance.

The Committee approved accelerated vesting of these non-employee director restricted shares in January 2020 to fully vest one year after the grant date.

The restricted shares granted in 2021 fully vest one year after the grant date.

The Company granted 18,500 and 32,370 shares of restricted stock to non-employee directors under the Plan during 2022 and 2021, respectively.

These grants were approved by the Committee as compensation for Board service.

The time-based shares of restricted stock granted in 2022 and 2021 fully vest one year after the grant date.

The closing price of our stock was used to determine the fair value on the date of the grant.

If any award granted under the Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan.

Compensation expense for restricted shares of stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date.

The Company recognized compensation expense of $ 1.0 million, $ 1.0 million and $ 0.4 million for 2021, 2020, and 2019, respectively.

As of December 31, 2021 and 2020, there was $ 844 thousand and $ 907 thousand, respectively, of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 1.64 years and 1.68 years, respectively.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Compensation expense for restricted stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date.

The Company recognized compensation expense of $ 1.3 million, $ 1.0 million and $ 1.0 million for 2022, 2021, and 2020, respectively, related to restricted stock.

As of December 31, 2022 and 2021, there was $ 1.6 million and $ 0.8 million, respectively, of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 2.30 years and 1.64 years, respectively.

The following table provides information about restricted stock granted under the Plan for the years ended December 31:

2 unchanged sentences

Granted 82,490 12.81

Vested ( 37,908 ) 16.94

Forfeited ( 4,344 ) 19.06

Forfeited/Vested ( 54,232 ) 17.97

Non-vested at December 31, 2021 113,635 14.80

Granted 127,355 16.50

Vested ( 48,027 ) 18.63

Forfeited ( 6,205 ) 12.82

Forfeited/Vested ( 80,793 ) 15.01

Non-vested at December 31, 2022 160,197 $ 16.05

Performance Units

The Company periodically issues performance units to executive officers pursuant to the Plan.

As of December 31, 2022, 27,848 target amount of performance units were outstanding under the Plan.

The Company granted 27,848 target amount of performance units in aggregate to executive officers under the Plan during 2022.

The closing price of our stock, $ 15.81 , was used to determine the fair value on the date of the grant.

These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance.

The performance units can be earned up to a maximum of 110 % of the target amount.

They are subject to a three-year performance period and, if the performance criteria are met, will vest on the payment date which is within 70 days following the end of the performance period.

The payout for the performance units will be determined based on three weighted performance based goals:

(1) the Company's return on average assets (“ROAA”) performance during the performance period compared to its selected peer group, (2) the Company's core efficiency ratio during the performance period compared to its selected peer group,

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

and (3) the Company’s nonperforming assets ratio performance during the performance period compared to its selected peer group.

If the performance criteria are met, the Company will pay the performance units that have vested in shares of the Company’s common stock.

Compensation expense for performance units is based on fair value on the grant date.

The performance units are subject to the probability of attainment of meeting the above referenced performance criteria and service requirement.

Management has evaluated the performance-based criteria and has determined that, as of December 31, 2022, the criteria were probable of being met at target.

The Company recognized compensation expense of $ 0.3 million for 2022 related to performance units.

As of December 31, 2022, there was $ 0.2 million of total unrecognized compensation cost at target related to performance units that potentially could be recognized as compensation expense over a weighted average period of 2.2 years.

NOTE 15 - FED E RAL AND ST AT E INCO M E T AX ES

16 unchanged sentences

Income Tax Provision and Effective Income Tax Rate $ 11,599 18.8 $ 4,108 11.5 $ 772 ( 1.7 )

Realization of deferred tax assets is dependent upon the generation of future taxable income.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible.

Based on its assessment, management recorded a valuation allowance on deferred tax assets related to its equity investments in partnerships that will generate capital losses upon exiting the investments.

The Company has not identified prudent and feasible strategies to generate future capital gains to offset the capital losses.

Management has determined that it is more likely than not that all other deferred tax assets will be realized in future periods so no additional valuation allowance is necessary at December 31, 2021 and 2020.

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, tax-exempt income from bank owned life insurance, and tax benefits resulting from certain partnership investments.

CARTER BANKSHARES, INC.

6 unchanged sentences

Allowance for Credit Losses $ 20,671 $ 20,906

Net Unrealized Loss on Available-for-sale Securities 23,818 —

Valuation Adjustments on Other Real Estate Owned 649 1,392

13 unchanged sentences

Operating Lease Right-of-Use Assets ( 1,389 ) ( 712 )

Equity Investment in Partnerships ( 113 ) —

Net Unrealized Gain on Available-for-Sale Securities — ( 452 )

2 unchanged sentences

Net Deferred Tax Assets $ 37,965 $ 17,782

The Company had federal tax credit carryforwards of $ 1.8 million at both December 31, 2021 and December 31, 2020.

The federal tax credits consist primarily of new market credits and historic rehabilitation credits that, if not used, will expire in 2041.

Management assesses all available positive and negative evidence to estimate whether sufficient future taxable income of the appropriate character will be generated to utilize existing deferred tax assets.

On the basis of this evaluation, as of December 31, 2022, management has determined that no valuation allowance is necessary, as it is more likely than not that all deferred tax assets will be realized in future periods through future taxable income and future reversals of existing temporary differences.

As of December 31, 2021, a valuation allowance was recorded on deferred tax assets related to equity investments in partnerships that generate capital losses upon exiting the investments for which a prudent and feasible strategy to generate capital gains was not identified.

The partnerships on which the valuation allowance was based at December 31, 2021, were exited in 2022 and all capital losses generated upon exit were realized through carry back to prior tax years.

The Company had no federal tax credit carryforwards at December 31, 2022 and $ 1.8 million at December 31, 2021.

The federal tax credits at December 31, 2021 consisted mainly of new market credits and historic rehabilitation credits.

At December 31, 2022 and 2021, the Company had no ASC 740-10 unrecognized tax benefits or accrued interest and penalties recorded.

10 unchanged sentences

(Dollars in Thousands) Pre-Tax

Amount Tax (Expense)

Benefit Net of Tax

Amount Tax Benefit (Expense) Net of Tax

Net Unrealized Losses Arising during the Period $ ( 111,542 ) $ 24,261 $ ( 87,281 )

1 unchanged sentence

Other Comprehensive Loss $ ( 111,588 ) $ 24,270 $ ( 87,318 )

Net Unrealized Losses Arising during the Period $ ( 10,877 ) $ 2,284 $ ( 8,593 )

Reclassification Adjustment for Gains included in Net Income ( 6,869 ) 1,443 ( 5,426 )

Other Comprehensive Loss $ ( 17,746 ) $ 3,727 $ ( 14,019 )

Net Unrealized Gains Arising during the Period $ 26,621 $ ( 5,590 ) $ 21,031

1 unchanged sentence

Other Comprehensive Income $ 19,739 $ ( 4,145 ) $ 15,594

Net Unrealized Gains Arising during the Period $ 15,108 $ ( 3,173 ) $ 11,935

Reclassification Adjustment for Gains included in Net Income ( 2,205 ) 463 ( 1,742 )

Other Comprehensive Income $ 12,903 $ ( 2,710 ) $ 10,193

NOTE 17 – COMMITMENTS AND CONTINGENCIES

11 unchanged sentences

The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment.

Results for reporting periods beginning after January 1, 2021 are presented under Topic 326, while prior period amounts continue to be reported in other expense on our Consolidated Statements of Income (Loss).

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

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The activity in the life-of-loss reserve on unfunded loan commitments for the year ended December 31, 2021 is as follows:

(Dollars in Thousands) December 31, 2021

The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of and for the years ended December 31:

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

Life-of-Loss Reserve on Unfunded Loan Commitments

1 unchanged sentence

Impact of Adopting ASU 2016-13 — 2,908

January 1, 2021 3,052

Provision for unfunded commitments ( 1,269 )

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

Provision (Recovery) for Unfunded Commitments 509 ( 1,269 )

Balance at end of period $ 2,292 $ 1,783

Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments.

The provision for unfunded commitments was a release of $ 1.3 million for the year ended December 31, 2021.

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 $ 0.5 million was recorded for the year ended December 31, 2022 for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 1.8 million compared to a recovery of $ 1.3 million for the year ended December 31, 2021.

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

25 unchanged sentences

The Company also receives a return on its investment in Bankers Insurance, LLC on an annual basis based on the income of the insurance company and percentage of ownership.

The Company owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheet.

If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied.

The rents are generally received monthly.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The Company owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheet.

If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied.

The rents are generally received monthly.

Gains/Losses on Sales of OREO:

1 unchanged sentence

When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

Once these criteria are met, the OREO asset is disposed and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

11 unchanged sentences

Other Real Estate Owned Income At a point in time 50 90 340

Gains on Sales and Write-downs of Bank Premises, net At a point in time 73 — —

Gains (Losses) on Sale of Other Real Estate Owned At a point in time *** *** ***

19 unchanged sentences

Total Liabilities and Shareholders’ Equity $ 328,630 $ 407,903

Statements of Net Income

Statements of Net Income (Loss)

(Dollars in Thousands) 2022 2021 2020

1 unchanged sentence

Total Expenses ( 2,696 ) ( 2,238 ) ( 594 )

Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary 3,762 406 —

Income Before Income Tax Benefit and Undistributed Net Income (Loss) of Bank Subsidiary 42,681 3,762 406

Income Tax Benefit ( 577 ) ( 446 ) —

Income Before Undistributed Net Income of Bank Subsidiary 4,208 406 —

Income Before Undistributed Net Income (Loss) of Bank Subsidiary 43,258 4,208 406

Equity in Undistributed Net Income (Loss) of Bank Subsidiary 6,860 27,382 ( 46,264 )

Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 )

Comprehensive (Loss) Income $ ( 37,200 ) $ 17,571 $ ( 30,264 )

Statements of Cash Flows

7 unchanged sentences

Increase in Other Assets ( 3,778 ) ( 571 ) —

Decrease in Other Liabilities ( 460 ) — —

(Decrease) Increase in Intercompany Liability — ( 17 ) 18

1 unchanged sentence

INVESTING ACTIVITIES

Investments in Subsidiaries — — —

Equity Investment in Non-Subsidiary, net of distributions ( 350 ) — —

Net Cash Used in Investing Activities ( 350 ) — —

FINANCING ACTIVITIES

Stock Repurchase Plan Settlements ( 157 ) — —

Cash Dividends Paid to Common Shareholders — — —

Repurchase of Common Stock ( 42,927 ) ( 157 ) —

Net Cash Used In Financing Activities ( 42,927 ) ( 157 ) —

Net Increase in Cash 4,503 639 —

Net (Decrease) Increase in Cash ( 2,943 ) 4,503 639

Cash at Beginning of Year 5,142 639 —

5 unchanged sentences

The Company and the Bank are subject to various capital requirements administered by the federal banking regulators.

Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators in relation to components, risk weightings and other factors.

The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.

Banks (“Basel III rules”) became effective on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

Under the Basel III rules, we must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios.

Quantitative measures established by regulations to ensure capital adequacy require the Company to maintain minimum amounts and ratios.

The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive (loss) income, which currently does not affect regulatory capital.

The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.

The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below).

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.

The capital conservation buffer was phased in at the rate of 0.625% per year and was 2.5% on January 1, 2019.

Management believes as of December 31, 2021, the Company and the Bank met all capital adequacy requirements to which we are subject and satisfied the applicable capital conservation buffer requirements.

Management believes as of December 31, 2022, the Company and the Bank met all capital adequacy requirements to which the Company is subject and satisfied the applicable capital conservation buffer requirements.

Prompt corrective action regulations provide five classifications:

68 unchanged sentences

Net Interest Income 28,222 32,459 37,725 41,522

Provision for Credit Losses 1,857 967 ( 413 ) 939

Provision for Unfunded Commitments ( 282 ) ( 603 ) ( 60 ) ( 324 )

Net Interest Income after Provision for Credit Losses 24,954 26,839 29,874 27,435

Provision (Recovery) for Credit Losses 630 1,814 ( 77 ) 52

(Recovery) Provision for Unfunded Commitments ( 236 ) 269 157 319

Net Interest Income after Provision (Recovery) for Credit Losses 27,828 30,376 37,645 41,151

Total Noninterest Income 5,335 5,604 5,235 5,544

1 unchanged sentence

Income Before Income Taxes 10,652 12,570 19,417 19,078

Income Tax Expense 926 886 931 1,365

Income Tax Provision 1,329 1,792 5,009 3,469

Net Income $ 9,323 $ 10,778 $ 14,408 $ 15,609

Earnings Per Share $ 0.36 $ 0.21 $ 0.42 $ 0.21

Earnings Per Common Share $ 0.36 $ 0.44 $ 0.59 $ 0.65

(Dollars in Thousands) First

5 unchanged sentences

Net Interest Income 26,529 27,203 29,401 28,050

Provision for Credit Losses 4,798 5,473 2,914 4,821

Net Interest Income after Provision for Credit Losses 22,466 20,789 22,522 21,332

Provision (Recovery) for Credit Losses 1,857 967 ( 413 ) 939

Recovery for Unfunded Commitments ( 282 ) ( 603 ) ( 60 ) ( 324 )

Net Interest Income after Provision (Recovery) for Credit Losses 24,954 26,839 29,874 27,435

Total Noninterest Income 8,952 7,238 6,915 5,776

Total Noninterest Expense 23,605 27,759 24,685 26,236

Income (Loss) Before Income Taxes 4,670 3,967 ( 56,803 ) 3,080

Income Tax Expense (Benefit) 247 ( 488 ) 875 138

Net Income (Loss) $ 4,423 $ 4,455 $ ( 57,678 ) $ 2,942

Earnings (Loss) Per Share $ 0.17 $ 0.17 $ ( 2.19 ) $ 0.11

Income Before Income Taxes 10,301 6,318 12,104 6,975

Income Tax Provision 926 886 931 1,365

Net Income $ 9,375 $ 5,432 $ 11,173 $ 5,610

Earnings Per Common Share $ 0.36 $ 0.21 $ 0.42 $ 0.21

(Dollars in Thousands) First

9 unchanged sentences

Total Noninterest Expense 24,748 22,886 87,300 23,841

Income Before Income Taxes 7,963 8,331 8,059 3,431

Income Tax Expense (Benefit) 422 504 458 ( 175 )

Net Income $ 7,541 $ 7,827 $ 7,601 $ 3,606

Earnings Per Share $ 0.29 $ 0.30 $ 0.29 $ 0.14

Income (Loss) Before Income Taxes 4,670 3,967 ( 56,803 ) 3,080

Income Tax Provision (Benefit) 247 ( 488 ) 875 138

Net Income (Loss) $ 4,423 $ 4,455 $ ( 57,678 ) $ 2,942

Earnings (Loss) Per Common Share $ 0.17 $ 0.17 $ ( 2.19 ) $ 0.11

Independent Member Crowe Global

2 unchanged sentences

and Subsidiaries

Martinsville, Virginia

Martinsville, VA

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Carter Bankshares, Inc.

and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income (loss), comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

7 unchanged sentences

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

9 unchanged sentences

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included

performing such other procedures as we considered necessary in the circumstances.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

10 unchanged sentences

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2021 as described in Notes 1 and 6 of the consolidated financial statements using the modified retrospective method.

Also see explanatory paragraph above.

The ASU requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected.

The Company disclosed the impact of adoption of this standard on January 1, 2021 with a $61.6 million increase to the allowance for credit losses and a $50.7 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption.

Provision expense for the year ending December 31, 2021 was $3.4 million and the allowance for credit losses as of December 31, 2021 was $95.9 million.

Allowance for Credit Losses – Other Pool

The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, and qualitative analysis.

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

The quantitative analysis includes using a discounted cash flow (DCF) model for determining the allowance for credit losses.

Economic forecasts are used in the model to estimate the probability of default and loss given default through regression.

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

The qualitative analysis is determined based on management’s review and analysis of internal, external and model risks, including adjustment made to the model output and economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

We identified the allowance for credit losses as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management in the development of the estimate.

The principal considerations resulting in our determination included the following:

• Significant audit effort and auditor judgment to evaluate the segmentation, quantitative, and qualitative analysis used in the calculation

Further, management elected to evaluate certain loans based on shared but unique risk attributes by segmenting into the Other pool.

The loans included in the Other pool of the model were underwritten and approved based on standards that are inconsistent with the Company’s current underwriting standards.

The allowance for credit losses as of December 31, 2022 was $93.9 million with $54.7 million, or 58%, being attributed to the Other pool.

The model for the Other pool 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 pool.

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.

We identified the allowance for credit losses – Other pool as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management in the development of the estimate.

The primary procedures performed to address this critical audit matter include:

Testing the effectiveness of internal controls over:

• The Company’s selection of the DCF model, including evaluation of the segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

• The Company’s affirmation of the key assumptions used in the model, including the discount rate and qualitative adjustments

• The completeness and accuracy of data used in the model

• The Company’s review of the allowance for credit loss calculation, including the review of the Company’s judgments used in developing the segmentation, quantitative analysis, and qualitative analysis and the relevance and reliability of data used as the basis for adjustments for the model

Substantively testing management’s estimate, which included:

• Assessing the reasonableness of management’s selection of segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

• Evaluating management’s judgment for developing the segmentation, quantitative, and qualitative analysis, including assessing the relevance and reliability of data used to develop the model

• Evaluating the mathematical accuracy of the discounted cash flow model, including evaluating the completeness and accuracy of loan data used in the model

• Assessing the reasonableness of management’s selection of discount rate and qualitative adjustments

• Evaluating the mathematical accuracy of the discounted cash flow model used for the Other pool, including evaluating the completeness and accuracy of loan data used in the model

/s/ Crowe LLP

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data