Carter Bankshares, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued) Years Ended December 31, (Dollars in Thousands) 2022 2021 2020 SUPPLEMENTARY DATA Cash Interest Paid $ 19,338 $ 23,467 $ 36,696 Cash Paid for Income Taxes 5,793 2,720 416 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 Security (Purchases) Settled in Subsequent Period — — ( 2,259 ) Right-of-use Asset Recorded in Exchange for Lease Liabilities 3,391 2,027 621 Loans Held-for-Sale in Connection with Sale of Bank Branches — — 9,835 Bank Premises and Equipment Held-for-Sale — — 2,293 Deposits Held for Assumption in Connection with Sale of Bank Branches — — 84,717 Stock Repurchases Settled in Subsequent Period — ( 306 ) — See accompanying notes to audited Consolidated Financial Statements. 71 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Carter Bankshares, Inc. (the “Company”) is a holding company headquartered in Martinsville, Virginia. The Company is the parent company of its wholly owned subsidiary of Carter Bank & Trust (the “Bank”). The 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”) and Bureau of Financial Institutions of the Virginia State Corporation Commission. The Bank has one wholly owned subsidiary, CB&T Investment Company (the “Investment Company”). The Company was incorporated on October 7, 2020, by and at the direction of the Bank Board, for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate reorganization transaction (the “Reorganization”). The Reorganization was completed on November 20, 2020 pursuant to an Agreement and Plan of Reorganization among the Bank, the Company and CBT Merger Sub, Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s common stock were converted into and exchanged for one newly issued share of the Company’s common stock. Our market coverage is primarily in Virginia and North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Christiansburg, Martinsville, Danville, Greensboro, Fayetteville, and Mooresville. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Accounting Policies: Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results could differ from those estimates. Our significant accounting policies are described below. Principles of Consolidation: The Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. and its wholly owned subsidiary. The Investment Company is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Reclassification: Amounts in prior years' financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity. Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers. Operating Segments: The chief decision-makers of our operating segments monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Cash and Cash Equivalents: The Company considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess reserves as cash equivalents for the purposes of the Consolidated Statements of Cash Flows with all items having original maturities fewer than 90 days. Federal funds are customarily sold for one-day periods. The FRB pays the target fed funds rate on the FRB excess reserves. Restrictions on Cash: Cash on hand or on deposit with the FRB is required to meet regulatory reserve and clearing requirements. 72 Table of Contents 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 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 (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. Securities: The Company classifies securities into either the held-to-maturity or available-for-sale categories at the time of purchase. All securities were classified as available-for-sale at December 31, 2022 and December 31, 2021. Securities classified as available-for-sale include securities which can be sold for liquidity, investment management, or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized (losses) gains, net of tax included in other comprehensive (loss) income. Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date. 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 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: Loans held-for-sale arise primarily from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. Gains and losses on sales of mortgage loans held-for-sale are determined using the specific identification method and are included in other noninterest income in the Consolidated Statements of Net Income (Loss). From time to time, certain loans are transferred from the loan portfolio to loans held-for-sale, which are carried at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the ACL. Subsequent declines in fair value are recognized as a charge to noninterest income. 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). Loans and Allowance for Credit Losses: Loans that management have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, discounts, and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. 73 Table of Contents 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 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. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest is unlikely. Any interest that is accrued, but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan. While a loan is classified as nonaccrual and the probability of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. Payments collected on a nonaccrual loan are first applied to principal, secondly to any existing charge-offs, thirdly to interest, and lastly to any outstanding fees owed to the Company. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a 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 On January 1, 2021, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (“Topic 326”), which replaced the incurred loss impairment model with an expected loss model. As part of adoption our model introduced a segmented pool of “other” loans for discrete analysis. This segmented pool included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this pool resulted in an increase in the Current Expected Credit Losses (“CECL”) and is disclosed in the Other line item in the portfolio loan segments. As a result of the CECL adoption we recorded a transition adjustment of $ 50.7 million to retained earnings as of January 1, 2021 for the cumulative effect of the adoption of ASU 2016-13. Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. The CECL model was developed with subjective assumptions that is driven by the following key factors: prepayment speeds, timing of prepayments, loss given defaults as well as other factors including the discount rate based upon the cost of capital and ultimately the timing of future cash flows. For periods prior to the adoption of the CECL standard, we recognized credit losses for loans that were collectively evaluated for impairment based on an incurred loss approach, which limited our measurement of credit losses to credit events that were estimated to have already occurred. The allowance for credit losses under the incurred loss model was a valuation allowance for probable incurred losses inherent in the loan portfolio. Management made the determination by taking into consideration historical loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry standards and averages, and general economic conditions. Credit losses were charged against the allowance when the loan balance was confirmed uncollectible. Subsequent recoveries, if any, were credited to the allowance. Ultimate losses varied from current estimates. The estimates were reviewed periodically and as adjustments become necessary, they were reported in earnings in the periods in which they become reasonably estimable. For more details, see Note 6 - Allowance for Credit Losses, in Item 8 of this Annual Report on Form 10-K. 74 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Allowance for Credit Losses Policy The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policy. The Company’s methodology for estimating the ACL includes: Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below. Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the long-term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values. Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective. “Other” Segmented Pool CECL provides for the flexibility to model loans differently compared to the prior model. With the adoption of CECL management elected to evaluate certain loans based on shared but unique risk attributes. The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards. The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors: prepayment speeds, timing of contractual payments, discount rate, as well as other factors. The discount rate is reflective of the inherent risk in the Other segment. A substantial change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively makes adjustments as needed. The analysis applied to this pool resulted in an allowance of $ 51.3 million upon adoption and is disclosed in the Other segment line item. Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. The Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to: • The status of a bankruptcy proceeding • The value of collateral and probability of successful liquidation; and/or 75 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) • The status of adverse proceedings or litigation that may result in collection Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell. Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans. Refer to the “Credit Quality” and the “Allowance for Credit Losses” sections in the MD&A and Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for more details. 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: The majority of the Company's loans, commitments and lines of credit have been granted to customers in the Company's market area. The concentrations of credit by loan classification are set forth in Note 5. Advertising Costs: We expense all marketing-related costs, including advertising costs, as incurred. Advertising expense was $ 1.4 million, $ 1.0 million, and $ 1.6 million for the years ended 2022, 2021, and 2020, respectively. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain executive officers and associates. We receive the cash surrender value of each policy upon its termination or benefits are payable to us upon the death of the insured. Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of Income (Loss). Bank Premises and Equipment: Bank premises and equipment acquired are stated at cost, less accumulated depreciation. Depreciation is charged to operating expenses over the estimated useful life of the assets by the straight-line method. Land is carried at cost. Costs of maintenance or repairs are charged to expense as incurred and improvements are capitalized. Upon retirement or disposal of an asset, the asset and related allowance account are eliminated. Any gain or loss on such transactions is included in current operations. Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) totaling $ 6.1 million in 2022, $ 6.2 million in 2021, and $ 6.1 million in 2020. The estimated useful life for bank premises ranges from 5 to 40 years and equipment depreciates over a 3 to 10-year period. Land and Land Improvements Non-depreciating assets Buildings 25 years Furniture and Fixtures 5 years Computer Equipment and Software 5 years or term of license Other Equipment 5 years Vehicles 5 years Leasehold Improvements Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise 76 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Federal Home Loan Bank (“FHLB”) Stock: The Company is a member of the FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors such as asset base. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as dividend income in the Consolidated Statements of Income (Loss). Earnings (Loss) per 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”): Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, which establishes a new cost basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the ACL. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. In addition, any retail branch locations closed for branch operations and marketed for sale are also moved to OREO from bank premises and equipment. This real estate is initially valued based on recent comparative market values received from a real estate broker and any necessary write-downs are charged to operations. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its carrying value or fair value less cost to sell. OREO assets are revalued every twelve months , or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $ 0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Operating costs after acquisition are expensed. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating losses, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements of Income (Loss). The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved new market and historic rehabilitation projects. These investments are included in other assets on the Consolidated Balance Sheets. These partnership investments generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. The investments are accounted for under the equity method, with the expense included within noninterest expense on the Consolidated Statements of Income (Loss). All of the Company's tax credit investments are evaluated for impairment at the end of each reporting period. 77 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Transfer of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets. Retirement Benefits: The Company has established an employee benefit plan as described in Note 13. The Company does not provide any other post-retirement benefits . Goodwill: Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Long-lived assets are those that provide the Bank with a future economic benefit beyond the current year or operating period. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell. Effective January 1, 2020, the Company adopted ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. 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: In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby 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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s Consolidated Balance Sheets. Stock-Based Compensation: 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. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company recognizes forfeitures as they occur. 78 Table of Contents 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: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements. Legal costs related to loss contingencies are expensed as incurred. Fair Value Measurements The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis. Recurring Basis Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the 79 Table of Contents 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. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2. The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates. Nonrecurring Basis Individually Evaluated Loans: Individually evaluated loans with commitments greater than or equal to $1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy. Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal. For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan. OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. 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 80 Table of Contents 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. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At December 31, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers. Financial Instruments In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments. Recent Accounting Pronouncements and Developments Newly Adopted Pronouncements in 2022 In March 2022, the FASB issued ASU No. 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan. The amendments in this ASU also required that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in this ASU are effective January 1, 2023, with early adoption permitted. The Company evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU on April 1, 2022 on a prospective basis, effective 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 In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. 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. As it pertains to the U.S. dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023. In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The Federal Reserve System, (“FRB”), of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight 81 Table of Contents 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. This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions. To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition. The team is currently in the process of: i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices. We are considering SOFR and other credit-sensitive alternative indices that may gain market acceptance as potential replacements to LIBOR. The financial impact regarding pricing, valuation and operations of the transition is not expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR. As of 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 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. 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. 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 Common Share - Basic and Diluted Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 ) Less: Income allocated to participating shares 295 127 — Net Income (Loss) Allocated to Common Shareholders - Basic & Diluted $ 49,823 $ 31,463 $ ( 45,858 ) Denominators: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 24,741,454 26,449,438 26,379,774 Less: Average Participating Securities 145,665 106,709 — Weighted Average Common Shares Outstanding - Basic & Diluted $ 24,595,789 $ 26,342,729 $ 26,379,774 Earnings (Loss) per Common Share-Basic $ 2.03 $ 1.19 $ ( 1.74 ) 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 (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. 82 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Board of Governors of the FRB imposes certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as an interest-bearing balance with the FRB. The Company had no required reserves for 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. NOTE 4 - INVESTMENT SECURITIES The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented: December 31, 2022 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 19,318 $ — $ ( 1,452 ) $ 17,866 U.S. Government Agency Securities 50,334 218 ( 788 ) 49,764 Residential Mortgage-Backed Securities 115,694 — ( 12,009 ) 103,685 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 States and Political Subdivisions 281,753 — ( 53,607 ) 228,146 Corporate Notes 70,750 — ( 9,017 ) 61,733 Total Debt Securities $ 945,707 $ 300 $ ( 109,734 ) $ 836,273 December 31, 2021 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 4,442 $ — $ ( 29 ) $ 4,413 U.S. Government Agency Securities 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 States and Political Subdivisions 257,810 6,344 ( 1,952 ) 262,202 Corporate Notes 59,750 375 ( 390 ) 59,735 Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400 The Company did no t have securities classified as held-to-maturity at December 31, 2022 or December 31, 2021. The following table shows the composition of gross and net realized gains and losses for the periods presented: Years ended December 31, (Dollars in Thousands) 2022 2021 2020 Proceeds from Sales of Securities Available-for-Sale $ 19,777 $ 197,056 $ 188,169 Gross Realized Gains $ 208 $ 7,080 $ 6,957 Gross Realized Losses ( 162 ) ( 211 ) ( 75 ) Net Realized Gains $ 46 $ 6,869 $ 6,882 Tax Impact $ 10 $ 1,443 $ 1,445 83 Table of Contents 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. The net realized gains above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income. The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income (Loss). The tax impact is included in income tax provision in the Consolidated Statements of Income (Loss). The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. December 31, 2022 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 200 $ 200 Due after One Year through Five Years 20,470 19,278 Due after Five Years through Ten Years 224,424 196,367 Due after Ten Years 177,061 141,664 Residential Mortgage-Backed Securities 115,694 103,685 Commercial Mortgage-Backed Securities 35,538 34,675 Other Commercial Mortgage-Backed Securities 24,987 22,399 Collateralized Mortgage Obligations 190,781 176,622 Asset Backed Securities 156,552 141,383 Total Securities $ 945,707 $ 836,273 At December 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $ 224.5 million at December 31, 2022 and $ 178.6 million at December 31, 2021. Available-for-sale securities with unrealized losses at December 31, 2022 and 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows: December 31, 2022 Less Than 12 Months 12 Months or More Total (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Treasury Securities 3 $ 14,080 $ ( 789 ) 2 $ 3,786 $ ( 663 ) 5 $ 17,866 $ ( 1,452 ) U.S. Government Agency Securities 6 5,337 ( 26 ) 9 15,576 ( 762 ) 15 20,913 ( 788 ) Residential Mortgage-Backed Securities 6 7,601 ( 372 ) 37 96,084 ( 11,637 ) 43 103,685 ( 12,009 ) 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 ) States and Political Subdivisions 73 112,564 ( 19,706 ) 91 115,382 ( 33,901 ) 164 227,946 ( 53,607 ) Corporate Notes 8 23,285 ( 2,965 ) 13 38,448 ( 6,052 ) 21 61,733 ( 9,017 ) Total Debt Securities 153 $ 284,547 $ ( 32,266 ) 298 $ 506,981 $ ( 77,468 ) 451 $ 791,528 $ ( 109,734 ) 84 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2021 Less Than 12 Months 12 Months or More Total (Dollars in Thousands) Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses U.S. Treasury Securities 2 $ 4,413 $ ( 29 ) — $ — $ — 2 $ 4,413 $ ( 29 ) U.S. Government Agency Securities 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 ) States and Political Subdivisions 56 88,746 ( 1,503 ) 8 7,874 ( 449 ) 64 96,620 ( 1,952 ) Corporate Notes 10 29,683 ( 317 ) 1 2,427 ( 73 ) 11 32,110 ( 390 ) Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 ) The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the 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. 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. 85 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 5 – LOANS AND LOANS HELD-FOR-SALE The composition of the loan portfolio by dollar amount is shown in the table below: December 31, (Dollars in Thousands) 2022 2021 Commercial Commercial Real Estate $ 1,470,562 $ 1,323,252 Commercial and Industrial 309,792 345,376 Total Commercial Loans 1,780,354 1,668,628 Consumer Residential Mortgages 657,948 457,988 Other Consumer 44,562 44,666 Total Consumer Loans 702,510 502,654 Construction 353,553 282,947 Other (1) 312,496 357,900 Total Portfolio Loans 3,148,913 2,812,129 Loans Held-for-Sale — 228 Total Loans $ 3,148,913 $ 2,812,357 (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 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. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. The 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, 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: $ 140.8 million of CRE, $ 78.1 million of C&I, $ 50.8 million of Residential Mortgages and $ 110.2 million of Construction. This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards. The 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 86 Table of Contents 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. 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. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows. A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in Note 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 — — — % Residential Mortgages — — — % Other Consumer — — — % Construction — — — % Other — — — % 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. 87 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 — — — Other — — — Total Accruing Restructured Loans $ 324 $ — $ — Nonaccrual Restructured Loans Commercial Real Estate $ — $ — $ — Commercial and Industrial — — — Residential Mortgages — — — Other Consumer — — — Construction — — — Other — — — 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. We also had $ 133 thousand at December 31, 2022 and $ 62 thousand at December 31, 2021 in residential real estate included in OREO. Loans to principal officers, directors and their affiliates during 2022 were as follows: (Dollars in Thousands) 2022 Beginning Balance $ 2,625 Principal Additions 310 Repayments ( 189 ) Balance at End of Year $ 2,746 88 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 6 - ALLOWANCE FOR CREDIT LOSSES The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business. C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio. Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed. Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or 89 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018. Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. Credit Quality Indicators: The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status. The Company has a loan review policy and 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; and • Focus reviews of office and land development to evaluate segment risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis. The Company’s internally assigned grades are as follows: Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality. Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the 90 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES 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. Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. 91 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of December 31: Risk Rating (Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 418,939 $ 186,226 $ 139,148 $ 130,521 $ 215,498 $ 335,659 $ 31,349 $ 1,457,340 Special Mention — 218 — — 9,919 659 — 10,796 Substandard — — — — 2,105 321 — 2,426 Doubtful — — — — — — — — 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 Pass $ 23,104 $ 47,137 $ 35,819 $ 9,022 $ 10,639 $ 154,473 $ 23,699 $ 303,893 Special Mention — — 2,887 — — — — 2,887 Substandard — 56 — 18 97 2,800 41 3,012 Doubtful — — — — — — — — 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 Pass $ 200,725 $ 184,718 $ 81,446 $ 50,770 $ 70,659 $ 39,411 $ 25,315 $ 653,044 Special Mention — — — — 429 520 34 983 Substandard — 1,212 — 865 444 1,400 — 3,921 Doubtful — — — — — — — — 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 Pass $ 24,100 $ 10,006 $ 7,323 $ 1,999 $ 512 $ 256 $ 299 $ 44,495 Special Mention — — — — — — — — Substandard — 45 1 — 1 20 — 67 Doubtful — — — — — — — — 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 Construction Pass $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,523 $ 7,190 $ 6,056 $ 352,516 Special Mention — — — — — 69 — 69 Substandard — — — — 92 876 — 968 Doubtful — — — — — — — — Total Construction $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 8,135 $ 6,056 $ 353,553 YTD Gross Charge-offs — — — — — — — — Other Pass $ — $ — $ — $ — $ — $ 180,745 $ — $ 180,745 Special Mention — — — — — — — — Substandard — — — — 74,050 57,701 — 131,751 Doubtful — — — — — — — — Total Other Loans $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 YTD Gross Charge-offs — — — — — — — — Total Portfolio Loans Pass $ 816,403 $ 545,553 $ 305,544 $ 197,250 $ 322,831 $ 717,734 $ 86,718 $ 2,992,033 Special Mention — 218 2,887 — 10,348 1,248 34 14,735 Substandard — 1,313 1 883 76,789 63,118 41 142,145 Doubtful — — — — — — — — 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 92 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Risk Rating (Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 195,441 $ 165,100 $ 215,575 $ 292,857 $ 115,024 $ 292,197 $ 38,382 $ 1,314,576 Special Mention 229 — — — 4,205 826 — 5,260 Substandard — — 314 2,742 215 145 — 3,416 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 Construction Pass $ 140,639 $ 82,523 $ 24,336 $ 9,739 $ 5,328 $ 3,407 $ 15,269 $ 281,241 Special Mention — — 175 — — 429 — 604 Substandard — 107 809 95 — 91 — 1,102 Doubtful — — — — — — — — Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947 YTD Gross Charge-offs — — 1,859 — — — — 1,859 Other Pass $ — $ — $ — $ — $ 122,848 $ 62,399 $ — $ 185,247 Special Mention — — — — — 3,281 — 3,281 Substandard — — — 87,329 40,882 41,161 — 169,372 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 93 Table of Contents 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) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 225,416 $ 336,441 $ 31,349 $ 1,468,258 Nonperforming — — — — 2,106 198 — 2,304 Total Commercial Real Estate $ 418,939 $ 186,444 $ 139,148 $ 130,521 $ 227,522 $ 336,639 $ 31,349 $ 1,470,562 Commercial and Industrial Performing $ 23,104 $ 47,147 $ 38,706 $ 9,022 $ 10,639 $ 157,271 $ 23,699 $ 309,588 Nonperforming — 46 — 18 97 2 41 204 Total Commercial and Industrial $ 23,104 $ 47,193 $ 38,706 $ 9,040 $ 10,736 $ 157,273 $ 23,740 $ 309,792 Residential Mortgages Performing $ 200,725 $ 184,718 $ 81,446 $ 50,770 $ 71,313 $ 40,362 $ 25,349 $ 654,683 Nonperforming — 1,212 — 865 219 969 — 3,265 Total Residential Mortgages $ 200,725 $ 185,930 $ 81,446 $ 51,635 $ 71,532 $ 41,331 $ 25,349 $ 657,948 Other Consumer Performing $ 24,100 $ 10,045 $ 7,323 $ 1,999 $ 512 $ 276 $ 299 $ 44,554 Nonperforming — 6 1 — 1 — — 8 Total Other Consumer $ 24,100 $ 10,051 $ 7,324 $ 1,999 $ 513 $ 276 $ 299 $ 44,562 Construction Performing $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 7,271 $ 6,056 $ 352,689 Nonperforming — — — — — 864 — 864 Total Construction $ 149,535 $ 117,466 $ 41,808 $ 4,938 $ 25,615 $ 8,135 $ 6,056 $ 353,553 Other Performing $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 Nonperforming — — — — — — — Total Other Loans $ — $ — $ — $ — $ 74,050 $ 238,446 $ — $ 312,496 Total Portfolio Loans Performing $ 816,403 $ 545,820 $ 308,431 $ 197,250 $ 407,545 $ 780,067 $ 86,752 $ 3,142,268 Nonperforming — 1,264 1 883 2,423 2,033 41 6,645 Total Portfolio Loans $ 816,403 $ 547,084 $ 308,432 $ 198,133 $ 409,968 $ 782,100 $ 86,793 $ 3,148,913 94 Table of Contents 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 Construction Performing $ 140,639 $ 82,523 $ 24,511 $ 9,834 $ 5,328 $ 3,858 $ 15,269 $ 281,962 Nonperforming — 107 809 — — 69 — 985 Total Construction $ 140,639 $ 82,630 $ 25,320 $ 9,834 $ 5,328 $ 3,927 $ 15,269 $ 282,947 Other Performing $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900 Nonperforming — — — — — — — Total Other Loans $ — $ — $ — $ 87,329 $ 163,730 $ 106,841 $ — $ 357,900 Total Portfolio Loans Performing $ 556,752 $ 398,935 $ 320,395 $ 507,151 $ 323,511 $ 626,904 $ 71,084 $ 2,804,732 Nonperforming — 107 2,450 3,315 408 978 139 7,397 Total Portfolio Loans $ 556,752 $ 399,042 $ 322,845 $ 510,466 $ 323,919 $ 627,882 $ 71,223 $ 2,812,129 Age Analysis of Past-Due Loans by Class The following tables include an aging analysis of the recorded investment of past-due portfolio loans as the periods presented: December 31, 2022 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,468,154 $ 104 $ — $ 104 $ 2,304 $ 1,470,562 Commercial & Industrial 309,305 274 9 283 204 309,792 Residential Mortgages 654,238 445 — 445 3,265 657,948 Other Consumer 44,013 337 204 541 8 44,562 Construction 349,225 1,321 2,143 3,464 864 353,553 Other 312,496 — — — — 312,496 Total $ 3,137,431 $ 2,481 $ 2,356 $ 4,837 $ 6,645 $ 3,148,913 95 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) December 31, 2021 (Dollars in Thousands) Current Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due Total 30-89 Days Past Due Nonaccrual Loans Total Portfolio Loans Commercial Real Estate $ 1,319,686 $ 229 $ — $ 229 $ 3,337 $ 1,323,252 Commercial & Industrial 344,628 80 217 297 451 345,376 Residential Mortgages 454,754 683 — 683 2,551 457,988 Other Consumer 44,132 367 94 461 73 44,666 Construction 281,962 — — — 985 282,947 Other 357,900 — — — — 357,900 Total $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129 Loans past due 90 days or more and still accruing were zero at December 31, 2022 and 2021. Loans past due 90 days are automatically transferred to nonaccrual status. 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. There were no loans at December 31, 2022 that were past due more than 90 days and still accruing. As of and for the December 31, 2022 (Dollars in Thousands) Beginning of Period Nonaccrual End of Period Nonaccrual Nonaccrual With No Related Allowance Past Due 90+ Days Still Accruing Commercial Real Estate $ 3,337 $ 2,304 $ — $ — Commercial and Industrial 451 204 — — Residential Mortgages 2,551 3,265 — — Other Consumer 73 8 — — Construction 985 864 — — Other — — — — Total Portfolio Loans $ 7,397 $ 6,645 $ — $ — As of and for the December 31, 2021 (Dollars in Thousands) Beginning of Period Nonaccrual End of Period Nonaccrual Nonaccrual With No Related Allowance Past Due 90+ Days Still Accruing Commercial Real Estate $ 21,891 $ 3,337 $ — $ — Commercial and Industrial 456 451 — — Residential Mortgages 4,135 2,551 — — Other Consumer 184 73 — — Construction 5,331 985 808 — Other — — — — Total Portfolio Loans $ 31,997 $ 7,397 $ 808 $ — A loan is considered 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. 96 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of December 31. 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 Commercial and Industrial — — Residential Mortgages 1,212 — Other Consumer — — Construction — 808 Other — — 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 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 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 ) Recoveries — 1 99 404 149 — 653 Net (Charge-offs) / Recoveries — ( 3,435 ) 53 ( 1,273 ) 149 — ( 4,506 ) Balance, End of Year $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852 97 Table of Contents 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 Other (1) Total Allowance for Credit Losses on Loans: Balance, Beginning of Year $ 36,428 $ 5,064 $ 2,099 $ 2,479 $ 8,004 $ — $ 54,074 Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 61,642 (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 ) Recoveries 159 291 168 586 93 — 1,297 Net (Charge-offs) / Recoveries ( 19,503 ) ( 83 ) ( 105 ) ( 1,670 ) $ ( 1766 ) — ( 23,127 ) Balance, End of Year $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939 (1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I, residential mortgages and construction. The allowance balance at the beginning of period was reclassified to Other from their original loan segments: CRE, C&I, residential mortgages and construction to conform to current presentation. December 31, 2020 (Dollars in Thousands) Commercial Real Estate Commercial & Industrial Residential Mortgages Other Consumer Construction Total Balance, Beginning of Year $ 24,706 $ 3,601 $ 1,736 $ 3,299 $ 5,420 $ 38,762 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 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 The adoption of Topic 326 resulted in an increase to our ACL of $ 61.6 million on January 1, 2021. The Day 1 model introduced a segmented pool of loans for discrete analysis. This segmented pool had an aggregate principal balance of $ 379.9 million at January 1, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this pool resulted in expected credit losses of $ 51.3 million, at adoption. Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero . Certain portions of the CECL model are inherently subjective and include, but are not limited to, estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. An expected credit loss of $ 51.3 million upon adoption was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted. 98 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 7 - FAIR VALUE MEASUREMENTS 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 (Dollars in Thousands) Carrying Value Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Treasury Securities $ 17,866 $ 17,866 $ — $ — U.S. Government Agency Securities 49,764 — 49,764 — Residential Mortgage-Backed Securities 103,685 — 103,685 — 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 — States and Political Subdivisions 228,146 — 228,146 — Corporate Notes 61,733 — 54,216 7,517 Total Securities Available-for-Sale 836,273 25,400 803,356 7,517 Derivatives 22,973 — 22,973 — Total $ 859,246 $ 25,400 $ 826,329 $ 7,517 Liabilities Derivatives $ 22,542 $ — $ 22,542 $ — Total $ 22,542 $ — $ 22,542 $ — December 31, 2021 (Dollars in Thousands) Carrying Value Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Securities Available-for-Sale: U.S. Treasury Securities $ 4,413 $ 4,413 $ — $ — U.S. Government Agency Securities 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 — States and Political Subdivisions 262,202 — 262,202 — Corporate Notes 59,735 — 51,177 8,558 Total Securities Available-for-Sale 922,400 4,413 909,429 8,558 Derivatives 3,508 — 3,508 — Total $ 925,908 $ 4,413 $ 912,937 $ 8,558 Liabilities Derivatives $ 3,682 $ — $ 3,682 $ — Total $ 3,682 $ — $ 3,682 $ — 99 Table of Contents 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 $ 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. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures. Financial assets measured at fair value on a nonrecurring basis at December 31, 2022 and 2021 are summarized below: December 31, 2022 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 8,393 $ 8,393 Individually Evaluated Loans $ — $ — $ 2,649 $ 2,649 December 31, 2021 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 10,916 $ 10,916 Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777 Individually evaluated loans had a net carrying amount of $ 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. The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021: December 31, 2022 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets 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 $ 8,393 100 Table of Contents 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 Assets Individually Evaluated Loans $ 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 % Total Individually Evaluated Loans $ 1,777 OREO $ 9,946 Appraisals Estimated Selling Costs 10.0 % 10.0 % OREO 190 Internal Valuations Estimated Selling Costs 5.0 % 5.0 % OREO 780 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 5.0 % — 50.7 % 20.3 % Total OREO $ 10,916 A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales and therefore represents an average recovery rate based on the transaction sizes and asset types in the population examined. Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgement to adjust the baseline discount rate when appropriate. The carrying values and estimated fair values of our financial instruments at December 31, 2022 and December 31, 2021 are presented in the following tables. Fair values for December 31, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Fair Value Measurements at December 31, 2022 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 46,869 $ 42,364 $ 4,505 $ — $ 46,869 Securities Available-for-Sale 836,273 25,400 803,356 7,517 836,273 Portfolio Loans, net 3,055,061 — — 2,955,489 2,955,489 Federal Home Loan Bank Stock, at Cost 9,740 — — NA NA Other Assets- Interest Rate Derivatives 22,973 — 22,973 — 22,973 Accrued Interest Receivable 19,346 138 4,903 14,305 19,346 Financial Liabilities: Deposits $ 3,630,333 $ 703,334 $ 1,665,473 $ 1,264,659 $ 3,633,466 Other Liabilities- Interest Rate Derivatives 22,542 — 22,542 — 22,542 FHLB Borrowings 180,550 — — 180,569 180,569 Federal Funds Purchased 17,870 — 17,870 — 17,870 Accrued Interest Payable 2,294 — — 2,294 2,294 101 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Fair Value Measurements at December 31, 2021 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 277,799 $ 36,698 $ 241,101 $ — $ 277,799 Securities Available-for-Sale 922,400 4,413 909,429 8,558 922,400 Loans Held-for-Sale 228 — — 228 228 Portfolio Loans, net 2,716,190 — — 2,689,578 2,689,578 Federal Home Loan Bank Stock, at Cost 2,352 — — NA NA Other Assets- Interest Rate Derivatives 3,508 — 3,508 — 3,508 Accrued Interest Receivable 17,178 17 3,462 13,699 17,178 Financial Liabilities: Deposits $ 3,698,476 $ 747,909 $ 1,606,249 $ 1,369,228 $ 3,723,386 Other Liabilities- Interest Rate Derivatives 3,682 — 3,682 — 3,682 FHLB Borrowings 7,000 — — 7,035 7,035 Accrued Interest Payable 1,378 — — 1,378 1,378 NOTE 8 - PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation as follows: December 31, (Dollars in Thousands) 2022 2021 Land $ 19,703 $ 20,763 Bank Premises 54,872 55,463 Furniture and Equipment 34,945 34,529 Leasehold Improvements 1,618 854 Total Premises and Equipment 111,138 111,609 Accumulated Depreciation ( 39,024 ) ( 36,312 ) Total $ 72,114 $ 75,297 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. Real estate on closed branches was valued based on recent comparative market values received from a real estate broker. Write-downs in the amount of $ 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. The Company leases offices from non-related parties under various terms, some of which contain contingent rentals tied to a price index. Rental expense for these leases was $ 67 thousand in 2022, $ 72 thousand in 2021, and $ 99 thousand for 2020. 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. 102 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 9 - OTHER REAL ESTATE OWNED The following table presents OREO activity as of the dates presented: Year Ended December 31, (Dollars in Thousands) 2022 2021 2020 Beginning of Year Balance $ 10,916 $ 15,722 $ 18,324 Loans Transferred to OREO 74 59 755 Transfer of Closed Retail Offices to OREO 2,675 12,013 2,221 Capitalized Expenditures — — 19 Direct Write-Downs ( 741 ) ( 3,472 ) ( 1,483 ) Cash Proceeds from Pay-downs ( 422 ) ( 452 ) ( 483 ) Sales of OREO ( 4,109 ) ( 12,954 ) ( 3,631 ) End of Year Balance $ 8,393 $ 10,916 $ 15,722 At December 31, 2022, 2021, and 2020, the balance of OREO includes $ 7.3 million, $ 9.9 million, and $ 13.2 million, respectively, of foreclosed properties recorded as a result of obtaining physical possession of the asset. At December 31, 2022 and 2021, the recorded investment of foreclosed residential real estate was $ 133 thousand and $ 62 thousand, respectively. At December 31, 2022 and 2021, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $ 902 thousand and $ 254 thousand, respectively. Income and expenses applicable to foreclosed assets include the following: Year Ended December 31, (Dollars in Thousands) 2022 2021 2020 Provision for Losses $ 741 $ 3,472 $ 1,483 Operating Expenses, net of Rental Income 293 317 317 Net (Gain) Loss on Sales ( 309 ) 150 ( 48 ) OREO Expense $ 725 $ 3,939 $ 1,752 NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of 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 103 Table of Contents 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). The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at December 31: Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets) (Dollars in Thousands) 2022 2021 Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans 1 $ 200 $ 1 $ — $ — $ — Interest Rate Swap Contracts – Commercial Loans 62 432,984 22,973 66 446,490 3,508 Total Derivatives not Designated as Hedging Instruments 63 $ 433,184 $ 22,974 66 $ 446,490 $ 3,508 Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities) (Dollars in Thousands) 2022 2021 Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 1 $ 200 $ 1 — $ — $ — Interest Rate Swap Contracts – Commercial Loans 62 432,984 22,542 66 446,490 3,682 Total Derivatives not Designated as Hedging Instruments 63 $ 433,184 $ 22,543 66 $ 446,490 $ 3,682 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 Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans $ 1 $ — $ ( 1 ) Forward Sale Contracts – Mortgage Loans ( 1 ) — 1 Interest Rate Swap Contracts – Commercial Loans 605 89 ( 214 ) Total Derivative Income (Loss) $ 605 $ 89 $ ( 214 ) Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values are included in the Consolidated Balance Sheets at December 31: Asset Derivatives (Included in Other Assets) Liability Derivatives (Included in Other Liabilities) (Dollars in Thousands) 2022 2021 2022 2021 Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 22,973 $ 3,508 $ 22,542 $ 3,682 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 22,973 3,508 22,542 3,682 Gross Amounts Not Offset (1) — — — ( 4,080 ) Net Amount $ 22,973 $ 3,508 $ 22,542 $ ( 398 ) (1) Amounts represent collateral posted for the periods presented. 104 Table of Contents 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) 2022 2021 Noninterest-Bearing Demand $ 703,334 $ 747,909 Interest-Bearing Demand 496,948 452,644 Money Market 484,238 463,056 Savings 684,287 690,549 Certificates of Deposits 1,261,526 1,344,318 Total $ 3,630,333 $ 3,698,476 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 $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: (Dollars in Thousands) 2022 2023 $ 637,771 2024 349,001 2025 138,826 2026 82,863 2027 51,482 Thereafter 1,583 Total $ 1,261,526 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 12 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED Borrowings serve as an additional source of liquidity for the Company. 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 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. 105 Table of Contents 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 FHLB Borrowings $ 180,550 $ 7,000 $ 35,000 Weighted Average Interest Rate 4.48 % 1.61 % 1.13 % Interest Expense $ 1,163 $ 313 $ 361 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 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: (Dollars in Thousands) Balance Weighted Average Rate 2023 $ 180,550 4.48 % 2024 — — % 2025 — — % 2026 — — % 2027 — — % Thereafter — — % Total FHLB Borrowings $ 180,550 4.48 % NOTE 13 - EMPLOYEE BENEFIT PLANS 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: 1 Year of Service 0% Vested 2 Years of Service 20 % Vested 3 Years of Service 40 % Vested 4 Years of Service 60 % Vested 5 Years of Service 100 % Vested 106 Table of Contents 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. Each participant in the plan (who has not reached age 62) becomes 100 % vested after five ( 5 ) years of service. The non-elective contribution to the plan is determined each year by the Company’s Board of Directors (the “Board”) and thus may fluctuate in amount from year to year. The contribution by the Company, which includes contributions to the nonqualified plan discussed below, was $ 2.0 million in 2022, $ 1.8 million in 2021 and $ 1.0 million in 2020. These amounts are included in salaries and employee benefits in the Consolidated Statements of Income (Loss). Beginning in 2020, our integrated profit sharing plan includes a Company match based upon an associate’s elective deferral. This elective deferral is subject to dollar limits announced annually by the Internal Revenue Service (“IRS”). Elective deferrals are matched equal to 100 % of the first 3 % deferred and 50 % of the next 2 %, producing a maximum 4 % match. Expense for this deferral match was $ 1.3 million, $ 1.3 million and $ 1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Bank entered into a Nonqualified Profit Sharing Plan originally on December 30, 1996, which was subsequently amended and restated effective December 20, 2007. The purpose of the Nonqualified Profit Sharing Plan was to provide additional benefits to be paid to the executive upon the occurrence of a “Distributable Event,” which is either termination or death. The board of directors of the Bank (the “Bank Board”) approved the amended plan on December 20, 2007. Since its inception, the Bank’s former Chairman and Chief Executive Officer was the only executive who participated in the Nonqualified Profit Sharing Plan. In April 2017, a Distributable Event occurred, in which distributions will occur over 45 quarterly payments. The value of the plan was $ 0.8 million as of December 31, 2022, and was solely comprised of cash. The quarterly distributions began on January 1, 2018 and will continue to be paid out in equal quarterly installments approximating $ 30 thousand. On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide (i) certain key executives of the Bank (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these associates under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees. The compensation 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. NOTE 14 – INCENTIVE AND RESTRICTED STOCK PLAN The Bank Board adopted the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27, 2018. In connection with the Reorganization, the Company adopted and assumed 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”). The Plan reserves a total 2,000,000 shares of common stock for issuance and provides for the grant to key associates and non-employee directors of the Company and its subsidiaries of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards (collectively, the “awards”). Subject to accelerated vesting under certain circumstances, the Plan requires a minimum vesting period of one year for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals. These minimums are applicable to awards other than those granted as part of a retainer for the service of non-employee directors. The Committee will determine the vesting period on the awards. No awards may be granted under the Plan more than ten years from the effective date of the Plan. 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. 107 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Restricted Stock 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. 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 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: Restricted Shares Weighted Average Grant Date Fair Value Non-vested at December 31, 2020 85,377 $ 18.73 Granted 82,490 12.81 Forfeited/Vested ( 54,232 ) 17.97 Non-vested at December 31, 2021 113,635 14.80 Granted 127,355 16.50 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, 108 Table of Contents 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. 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 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 The components of the provision for income tax expense were as follows: (Dollars in Thousands) 2022 2021 2020 Current $ 7,969 $ 994 $ 2,399 Deferred 3,630 3,114 ( 1,627 ) Income Tax Provision $ 11,599 $ 4,108 $ 772 The following is a reconciliation of the differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes: 2022 2021 2020 (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Federal Income Tax at Statutory Rate $ 12,961 21.0 $ 7,497 21.0 $ ( 9,468 ) 21.0 State Income Tax, net of Federal Benefit 657 1.1 20 0.1 455 ( 1.0 ) Tax-exempt Interest, net of Disallowance ( 873 ) ( 1.4 ) ( 1,131 ) ( 3.2 ) ( 1,757 ) 3.9 Federal Tax Credits, net of Basis Reduction ( 625 ) ( 1.0 ) ( 1,559 ) ( 4.4 ) ( 948 ) 2.2 Change in Valuation Allowance ( 309 ) ( 0.5 ) ( 529 ) ( 1.5 ) ( 374 ) 0.8 Income from Bank Owned Life Insurance ( 285 ) ( 0.5 ) ( 290 ) ( 0.8 ) ( 294 ) 0.7 Goodwill Impairment — — — — 13,060 ( 29.1 ) Other 73 0.1 100 0.3 98 ( 0.2 ) Income Tax Provision and Effective Income Tax Rate $ 11,599 18.8 $ 4,108 11.5 $ 772 ( 1.7 ) 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. 109 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows: (Dollars in Thousands) 2022 2021 Deferred Tax Assets 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 Tax Credit Carryforwards — 1,781 Equity Investment in Partnerships — 304 Accrued Interest on Nonaccrual Loans 85 843 Operating Lease Liabilities 1,451 736 Other 2,165 1,765 Gross Deferred Tax Assets 48,839 27,727 Less: Valuation Allowance — ( 309 ) Total Deferred Tax Assets $ 48,839 $ 27,418 (Dollars in Thousands) 2022 2021 Deferred Tax Liabilities Fixed Asset Depreciation $ ( 4,523 ) $ ( 4,300 ) Acquisition-Related Fair Value Adjustments ( 2,737 ) ( 3,069 ) Deferred Loan Income ( 1,800 ) ( 1,005 ) Operating Lease Right-of-Use Assets ( 1,389 ) ( 712 ) Equity Investment in Partnerships ( 113 ) — Net Unrealized Gain on Available-for-Sale Securities — ( 452 ) Other ( 312 ) ( 98 ) Total Deferred Tax Liabilities ( 10,874 ) ( 9,636 ) Net Deferred Tax Assets $ 37,965 $ 17,782 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. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company recognizes interest and penalties on unrecognized tax benefits in income tax expense. The Company is subject to U.S. federal income tax, as well as, various taxation of other state and local jurisdictions. The Company is generally no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2019. 110 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 16 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) INCOME The following table presents the change in components of other comprehensive (loss) income for the years ended December 31, net of tax effects: (Dollars in Thousands) Pre-Tax Amount Tax Benefit (Expense) Net of Tax Amount 2022 Net Unrealized Losses Arising during the Period $ ( 111,542 ) $ 24,261 $ ( 87,281 ) Reclassification Adjustment for Gains included in Net Income ( 46 ) 9 ( 37 ) Other Comprehensive Loss $ ( 111,588 ) $ 24,270 $ ( 87,318 ) 2021 Net Unrealized Losses Arising during the Period $ ( 10,877 ) $ 2,284 $ ( 8,593 ) Reclassification Adjustment for Gains included in Net Income ( 6,869 ) 1,443 ( 5,426 ) Other Comprehensive Loss $ ( 17,746 ) $ 3,727 $ ( 14,019 ) 2020 Net Unrealized Gains Arising during the Period $ 26,621 $ ( 5,590 ) $ 21,031 Reclassification Adjustment for Gains included in Net Loss ( 6,882 ) 1,445 ( 5,437 ) Other Comprehensive Income $ 19,739 $ ( 4,145 ) $ 15,594 NOTE 17 – COMMITMENTS AND CONTINGENCIES Commitments to extend credit, which amounted to $ 630.6 million at December 31, 2022 and $ 513.5 million at December 31, 2021, represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represented $ 373.2 million, or 59.2 %, and $ 283.9 million, or 55.3 %, of the commitments to extend credit at December 31, 2022 and December 31, 2021, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $ 25.7 million at December 31, 2022 and $ 27.1 million at December 31, 2021. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk. Life-of-Loss Reserve on Unfunded Loan Commitments We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets. 111 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 Balance at beginning of period $ 1,783 $ 144 Impact of Adopting ASU 2016-13 — 2,908 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 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. Litigation In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty. NOTE 18 – REVENUE FROM CONTRACTS WITH CUSTOMERS Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions and return on investment. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below. Service Charges on Deposit Accounts: Service charges on deposit accounts consist of overdraft fees, service charges on returned checks, stop payment fees, check chargeback fees, minimum balance fees, and other deposit account related fees. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on returned checks are recognized at the point in time that a check is returned. Transaction-based fees, which include services such as stop payment fees, check chargeback fees, and other deposit account related fees are recognized at the point in time the Company fulfills the customer’s request. Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for the product. Service charges on deposits are withdrawn from the customer’s account balance. Other Fees and Other Income: Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees. These fees are largely transaction-based; therefore, the Company’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered. Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account. Debit Card Interchange Fees: The Company earns interchange fees from debit cardholder transactions conducted through a card payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Insurance: Commission income is earned based on customer transactions. The commission income is recognized when the transaction is complete. The Company also receives a return on its investment in Bankers Insurance, LLC on an annual basis based on the income of the insurance company and percentage of ownership. 112 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) OREO Income: The Company owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheet. If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied. The rents are generally received monthly. Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is 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. The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the years ended December 31: (Dollars in Thousands) Point of Revenue Recognition 2022 2021 2020 In-Scope Revenue Streams Service Charges on Deposit Accounts At a point in time $ 5,537 $ 5,036 $ 3,518 Other Fees and Other Income At a point in time 3,284 3,233 2,497 Debit Card Interchange Fees At a point in time 7,427 7,226 5,857 Commercial Loan Swap Fee Income At a point in time 774 2,416 4,051 Insurance Customer Commissions At a point in time 104 91 73 Annual Commission on Investment Over time 1,857 1,681 1,366 Special Production Payout Over time — 129 289 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 *** *** *** Total In-Scope Revenue Streams 19,106 19,902 17,991 Out of Scope Revenue Streams Gain on Sales of Securities, net 46 6,869 6,882 Bank Owned Life Insurance Income 1,357 1,380 1,400 Other 1,209 730 307 Total Noninterest Income $ 21,718 $ 28,881 $ 26,580 ***Reported net with Losses on Sales and Write-downs of Other Real Owned in Noninterest Expense 113 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 19 – PARENT COMPANY CONDENSED FINANCIAL INFORMATION Balance Sheets December 31, (Dollars in Thousands) 2022 2021 ASSETS Cash $ 2,199 $ 5,142 Investment in Bank Subsidiary 321,732 402,190 Other Assets 4,699 571 Total Assets $ 328,630 $ 407,903 LIABILITIES Other Liabilities $ 3 $ 307 Total Shareholders’ Equity 328,627 407,596 Total Liabilities and Shareholders’ Equity $ 328,630 $ 407,903 Statements of Net Income (Loss) December 31, (Dollars in Thousands) 2022 2021 2020 Dividends from Subsidiaries $ 45,377 $ 6,000 $ 1,000 Total Expenses ( 2,696 ) ( 2,238 ) ( 594 ) 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 (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 December 31, (Dollars in Thousands) 2022 2021 2020 OPERATING ACTIVITIES Net Income (Loss) $ 50,118 $ 31,590 $ ( 45,858 ) Equity in Undistributed Net (Income) Loss of Bank Subsidiary ( 6,860 ) ( 27,382 ) 46,264 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities Stock Compensation Expense 1,314 1,040 215 Increase in Other Assets ( 3,778 ) ( 571 ) — Decrease in Other Liabilities ( 460 ) — — (Decrease) Increase in Intercompany Liability — ( 17 ) 18 Net Cash Provided by Operating Activities 40,334 4,660 639 INVESTING ACTIVITIES Equity Investment in Non-Subsidiary, net of distributions ( 350 ) — — Net Cash Used in Investing Activities ( 350 ) — — FINANCING ACTIVITIES Repurchase of Common Stock ( 42,927 ) ( 157 ) — Net Cash Used In Financing Activities ( 42,927 ) ( 157 ) — Net (Decrease) Increase in Cash ( 2,943 ) 4,503 639 Cash at Beginning of Year 5,142 639 — Cash at End of Year $ 2,199 $ 5,142 $ 639 114 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 20 - CAPITAL ADEQUACY The Company and the Bank are subject to various capital requirements administered by the federal banking regulators. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s 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 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 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, 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: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2022 and 2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. 115 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The following table summarizes risk-based capital amounts and ratios for the Company and the Bank: Actual Minimum Regulatory Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2022 Leverage Ratio Carter Bankshares, Inc. $ 439,606 10.29 % $ 170,906 4.00 % NA NA Carter Bank & Trust 432,711 10.13 % 170,857 4.00 % $ 213,571 5.00 % Common Equity Tier 1 (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 439,606 12.61 % $ 156,936 4.50 % NA NA Carter Bank & Trust 432,711 12.42 % 156,722 4.50 % $ 226,376 6.50 % Tier 1 Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 439,606 12.61 % $ 209,248 6.00 % NA NA Carter Bank & Trust 432,711 12.42 % 208,962 6.00 % $ 278,617 8.00 % Total Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 483,450 13.86 % $ 278,997 8.00 % NA NA Carter Bank & Trust 476,496 13.68 % 278,617 8.00 % $ 348,271 10.00 % As of December 31, 2021 Leverage Ratio Carter Bankshares, Inc. $ 443,940 10.62 % $ 167,184 4.00 % NA NA Carter Bank & Trust 438,533 10.49 % 167,170 4.00 % $ 208,962 5.00 % Common Equity Tier 1 (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 443,940 14.21 % $ 140,606 4.50 % NA NA Carter Bank & Trust 438,533 14.04 % 140,580 4.50 % $ 203,061 6.50 % Tier 1 Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 443,940 14.21 % $ 187,475 6.00 % NA NA Carter Bank & Trust 438,533 14.04 % 187,441 6.00 % $ 249,921 8.00 % Total Capital (to Risk-Weighted Assets) Carter Bankshares, Inc. $ 483,124 15.46 % $ 249,967 8.00 % NA NA Carter Bank & Trust 477,710 15.29 % 249,921 8.00 % $ 312,401 10.00 % The Company was incorporated on October 7, 2020 in connection with the Reorganization. The Reorganization was completed on November 20, 2020 pursuant to an Agreement and Plan of Reorganization among the Bank, the Company and CBT Merger Sub, Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for one newly issued share of the Company’s common stock. In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC, approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period. 116 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) NOTE 21 - QUARTERLY FINANCIAL DATA (Unaudited) The following summarizes the quarterly results of operations for the years ended December 31: 2022 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Total Interest Income $ 32,678 $ 36,961 $ 42,327 $ 48,216 Total Interest Expense 4,456 4,502 4,602 6,694 Net Interest Income 28,222 32,459 37,725 41,522 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 Total Noninterest Expense 22,511 23,410 23,463 27,617 Income Before Income Taxes 10,652 12,570 19,417 19,078 Income Tax Provision 1,329 1,792 5,009 3,469 Net Income $ 9,323 $ 10,778 $ 14,408 $ 15,609 Earnings Per Common Share $ 0.36 $ 0.44 $ 0.59 $ 0.65 2021 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Total Interest Income $ 32,957 $ 33,094 $ 34,913 $ 32,933 Total Interest Expense 6,428 5,891 5,512 4,883 Net Interest Income 26,529 27,203 29,401 28,050 Provision (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 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 2020 (Dollars in Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Total Interest Income $ 37,836 $ 35,617 $ 33,986 $ 33,502 Total Interest Expense 10,572 9,355 8,550 7,349 Net Interest Income 27,264 26,262 25,436 26,153 Provision for Credit Losses 4,798 5,473 2,914 4,821 Net Interest Income after Provision for Credit Losses 22,466 20,789 22,522 21,332 Total Noninterest Income 6,952 6,064 7,975 5,589 Total Noninterest Expense 24,748 22,886 87,300 23,841 Income (Loss) Before Income Taxes 4,670 3,967 ( 56,803 ) 3,080 Income Tax 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 ) $ 0.11 117 Table of Contents Crowe LLP Independent Member Crowe Global REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Carter Bankshares, Inc. and Subsidiaries Martinsville, 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, 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: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 118 Table of Contents We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – 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. 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. 119 Table of Contents 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 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 Substantively testing management’s estimate, which included: • 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 We have served as the Company's auditor since 2019. Washington, D.C. March 10, 2023 120 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.