Carter Bankshares, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Dollars in Thousands) 2023 2022 Net Income $ 15,941 $ 9,323 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Credit Losses, including Provision for Unfunded Commitments 1,499 394 Origination of Loans Held-for-Sale ( 1,795 ) ( 3,554 ) Proceeds From Loans Held-for-Sale 1,451 3,672 Depreciation/Amortization of Bank Premises and Equipment 1,511 1,478 Provision for Deferred Taxes 455 1,154 Net Amortization of Securities 1,271 1,634 Tax Credit Amortization 612 615 Gains on Sales of Mortgage Loans Held-for-Sale ( 20 ) ( 86 ) Losses on Sales of Securities, net 12 24 Change in Fair Market Value of Commercial Loan Swap Derivative 194 ( 304 ) Increase in the Value of Life Insurance Contracts ( 339 ) ( 334 ) Recognition of Restricted Stock Compensation Expense 345 395 Decrease (Increase) in Other Assets 2,386 ( 2,518 ) (Decrease) Increase in Other Liabilities ( 1,088 ) 577 Net Cash Provided By Operating Activities 22,435 12,470 INVESTING ACTIVITIES Securities Available-for-Sale: Proceeds from Sales — 4,921 Proceeds from Maturities, Redemptions, and Pay-downs 12,717 26,406 Purchases ( 24,938 ) ( 131,519 ) Purchase of Bank Premises and Equipment, Net ( 1,925 ) ( 809 ) Proceeds from Sales of Bank Premises and Equipment, net — 408 (Purchase) Redemption of Federal Home Loan Bank Stock, net ( 10,853 ) 285 Loan Originations, net ( 100,558 ) ( 82,032 ) Payments Received on Other Real Estate Owned 102 108 Proceeds from Sales and Payments of Other Real Estate Owned — 561 Net Cash Used In Investing Activities ( 125,455 ) ( 181,671 ) FINANCING ACTIVITIES Net Change in Demand, Money Markets and Savings Accounts ( 142,811 ) 89,650 Increase (Decrease) in Certificates of Deposits 45,885 ( 59,848 ) Proceeds (Repayments) on Federal Home Loan Bank Borrowings, net 254,585 ( 7,000 ) Repayments from Federal Funds Purchased, net ( 17,870 ) — Repurchase of Common Stock ( 2,260 ) ( 23,364 ) Net Cash Provided by (Used In ) Financing Activities 137,529 ( 562 ) Net Increase (Decrease) in Cash and Cash Equivalents 34,509 ( 169,763 ) Cash and Cash Equivalents at Beginning of Period 46,869 277,799 Cash and Cash Equivalents at End of Period $ 81,378 $ 108,036 SUPPLEMENTARY DATA Cash Interest Paid $ 9,096 $ 4,501 Cash Paid for Income Taxes 25 — Transfer from Fixed Assets to Other Real Estate Owned — 1,201 Security (Purchases) Settled in Subsequent Period — ( 4,115 ) Right-of-use Asset Recorded in Exchange for Lease Liabilities — 2,879 Stock Repurchase Settled in Subsequent Period — ( 1,262 ) See accompanying notes to unaudited consolidated financial statements. 7 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BASIS OF PRESENTATION Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation. Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), on March 10, 2023. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period. Reclassification: Amounts in prior periods financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no material effect on prior periods 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, and changes in the financial condition of borrowers. Accounting Standards Adopted in 2023 The Company did not adopt any Accounting Standards Updates (“ASU”) during the three months ended March 31, 2023. Accounting Standards Issued but Not Yet Adopted In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards (“ASU”) No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company is currently assessing ASU 2023-02 and its impact on its accounting and disclosures. 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 8 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BASIS OF PRESENTATION – (continued) pertains to the U.S. dollar LIBOR, e ffective January 1, 2022, the ICE Benchmark Administration Limited, the administrator of the LIBOR, ceased the publication of one-week and two-month USD LIBOR and will cease the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023. In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The Federal Reserve System, (“FRB”), of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S. Congress passed, and the U.S. President signed, legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the FRB to identify a replacement benchmark based on SOFR. In response, we have created an internal team that is managing our transition away from LIBOR. This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions. To date, the transition team has completed the following milestones required for a successful transition away from LIBOR: identified contracts that contain LIBOR language, documented the risks associated with the transition, reviewed existing contract language for the presence of appropriate fallback rate language, and developed appropriate loan fallback rate language for when LIBOR is retired. We have selected one month term SOFR (published by the CME Group) as our replacement benchmark for LIBOR based loans. The financial impact regarding pricing, valuation and operations of the transition has been evaluated and not is expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to complete a smooth transition away from LIBOR. As of March 31, 2023, approximately 6.5 % of our loan portfolio consists of loans whose variable rate index is one month LIBOR. We ceased originating new LIBOR based variable rate loans as of December 31, 2021 per the ARRC’s guidance. 9 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – EARNINGS PER SHARE Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per 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 per common share calculations for the periods presented: Three Months Ended March 31, (Dollars in Thousands, except share and per share data) 2023 2022 Numerator for Earnings per Common Share – Basic and Diluted Net Income $ 15,941 $ 9,323 Less: Income allocated to participating shares 112 43 Net Income Allocated to Common Shareholders - Basic & Diluted $ 15,829 $ 9,280 Denominator: Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,938,291 25,859,982 Less: Average Participating Securities 167,810 119,346 Weighted Average Common Shares Outstanding - Basic & Diluted 23,770,481 25,740,636 Earnings per Common Share – Basic $ 0.67 $ 0.36 Earnings per Common Share – Diluted $ 0.67 $ 0.36 All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation. NOTE 3 - INVESTMENT SECURITIES The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented: March 31, 2023 (Dollars in Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury Securities $ 19,336 $ — $ ( 1,204 ) $ 18,132 U.S. Government Agency Securities 56,208 597 ( 740 ) 56,065 Residential Mortgage-Backed Securities 114,509 — ( 10,625 ) 103,884 Commercial Mortgage-Backed Securities 47,946 729 ( 835 ) 47,840 Other Commercial Mortgage-Backed Securities 24,912 — ( 3,050 ) 21,862 Asset Backed Securities 154,630 — ( 12,952 ) 141,678 Collateralized Mortgage Obligations 187,455 — ( 13,032 ) 174,423 States and Political Subdivisions 280,899 32 ( 43,692 ) 237,239 Corporate Notes 70,750 — ( 9,017 ) 61,733 Total Debt Securities $ 956,645 $ 1,358 $ ( 95,147 ) $ 862,856 10 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) 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 The Company did no t have securities classified as held-to-maturity at March 31, 2023 or December 31, 2022. The following table shows the composition of gross and net realized gains and losses for the periods presented: Three Months Ended March 31, (Dollars in Thousands) 2023 2022 Proceeds from Sales of Securities Available-for-Sale $ — $ 4,921 Gross Realized Gains $ — $ — Gross Realized Losses ( 12 ) ( 24 ) Net Realized Losses ( 12 ) ( 24 ) Tax Impact $ ( 3 ) $ ( 5 ) Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized losses above reflect reclassification adjustments in the calculation of Other Comprehensive Income (Loss). The net realized losses are included in noninterest income as losses on sales of securities, net in the Consolidated Statements of Income. The tax impact is included in income tax provision in the Consolidated Statements of Income. The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. March 31, 2023 (Dollars in Thousands) Amortized Cost Fair Value Due in One Year or Less $ 10,159 $ 9,884 Due after One Year through Five Years 13,383 12,489 Due after Five Years through Ten Years 248,209 220,074 Due after Ten Years 155,442 130,722 Residential Mortgage-Backed Securities 114,509 103,884 Commercial Mortgage-Backed Securities 47,946 47,840 Other Commercial Mortgage-Backed Securities 24,912 21,862 Collateralized Mortgage Obligations 187,455 174,423 Asset Backed Securities 154,630 141,678 Total Debt Securities $ 956,645 $ 862,856 At March 31, 2023 and December 31, 2022, 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 $ 224.8 million at March 31, 2023 and $ 224.5 million at December 31, 2022. 11 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) Available-for-sale securities with unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows: March 31, 2023 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 — $ — $ — 5 $ 18,132 $ ( 1,204 ) 5 $ 18,132 $ ( 1,204 ) U.S. Government Agency Securities 7 4,581 ( 8 ) 12 18,139 ( 732 ) 19 22,720 ( 740 ) Residential Mortgage-Backed Securities 1 114 ( 1 ) 42 103,770 ( 10,624 ) 43 103,884 ( 10,625 ) Commercial Mortgage-Backed Securities 4 1,751 ( 7 ) 52 21,182 ( 828 ) 56 22,933 ( 835 ) Other Commercial Mortgage-Backed Securities 1 1,987 ( 538 ) 8 19,875 ( 2,512 ) 9 21,862 ( 3,050 ) Asset Backed Securities 2 3,845 ( 155 ) 53 137,833 ( 12,797 ) 55 141,678 ( 12,952 ) Collateralized Mortgage Obligations 1 155 ( 2 ) 84 174,268 ( 13,030 ) 85 174,423 ( 13,032 ) States and Political Subdivisions 4 3,835 ( 156 ) 157 231,922 ( 43,536 ) 161 235,757 ( 43,692 ) Corporate Notes 1 2,072 ( 178 ) 20 59,661 ( 8,839 ) 21 61,733 ( 9,017 ) Total Debt Securities 21 $ 18,340 $ ( 1,045 ) 433 $ 784,782 $ ( 94,102 ) 454 $ 803,122 $ ( 95,147 ) 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 Commerical 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 ) The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended March 31, 2023 or the year ended December 31, 2022 as the Company did no t have securities classified as held-to-maturity at March 31, 2023 and December 31, 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end. As of March 31, 2023, 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 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. 12 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – INVESTMENT SECURITIES (continued) As of March 31, 2023, management believes the unrealized losses detailed in the table above are not related to credit; therefore, no ACL has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any non-credit loss will be recognized in other comprehensive income (loss). During the three months ended March 31, 2023 and 2022, the Company had no credit related net investment impairment losses. NOTE 4 – LOANS AND LOANS HELD-FOR-SALE The composition of the loan portfolio by dollar amount is shown in the table below: (Dollars in Thousands) March 31, 2023 December 31, 2022 Commercial Commercial Real Estate $ 1,575,675 $ 1,470,562 Commercial and Industrial 290,293 309,792 Total Commercial Loans 1,865,968 1,780,354 Consumer Residential Mortgages 675,340 657,948 Other Consumer 41,308 44,562 Total Consumer Loans 716,648 702,510 Construction 361,003 353,553 Other 305,279 312,496 Total Portfolio Loans 3,248,898 3,148,913 Loans Held-for-Sale 364 — Total Loans $ 3,249,262 $ 3,148,913 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 troubled debt restructuring, (“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 and/or based on management discretion; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. 13 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued) The following table shows the amortized cost basis as of March 31, 2023 and March 31, 2022 for the loans restructured during the three months ended March 31, 2023 and March 31, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment: Restructured Loans Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (Dollars in Thousands) Number of Contracts Amortized Cost Basis (1) % of Total Class of Financing Receivable Number of Contracts Amortized Cost Basis (1) % of Total Class of Financing Receivable Accruing Restructured Loans Commercial Real Estate — $ — — % — $ — — % Commercial and Industrial — — — % — — — % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % — — — % Total Accruing Restructured Loans — $ — — % — $ — — % Nonaccrual Restructured Loans Commercial Real Estate — $ — — % 1 $ 308 0.02 % Commercial and Industrial — — — % — — — % Residential Mortgages — — — % — — — % Other Consumer — — — % — — — % Construction — — — % — — — % Other — — — % — — — % Total Nonaccrual Restructured Loans — $ — — % 1 $ 308 0.02 % Total Restructured Loans — $ — — % 1 $ 308 0.02 % (1) Excludes accrued interest receivable of $ 0.0 thousand and $ 6.4 thousand at March 31, 2023 and March 31, 2022 for restructured loans during the three months ended March 31, 2023 and March 31, 2022, respectively. . The Company had no loans that were restructured during the three months ended March 31, 2023. 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 lacks feasibility due to the COVID-19 pandemic. In the interim the property is 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 Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. During the three months ended March 31, 2023 and March 31, 2022, respectively, the Company had no modifications to borrowers experiencing financial difficulty to report. At both March 31, 2023 and March 31, 2022, the Bank had no commitments to lend any additional funds on restructured loans. At both March 31, 2023 and March 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. As of March 31, 2023 and December 31, 2022, the Bank had $ 72 thousand and $ 902 thousand, respectively, of residential real estate loans in the process of foreclosure. We also had $ 132 thousand at March 31, 2023 and $ 133 thousand at December 31, 2022 in residential real estate loans included in other real estate owned (“OREO”). 14 Table of Contents CARTER BANKSHARES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) Commercial Real Estate, (“CRE”), 2) Commercial and Industrial, (“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 current expected credit losses, (“CECL”), model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. 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 purchased 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 15 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (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 continuing into 2023, 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. 16 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. 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. 17 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following table presents portfolio loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented: March 31, 2023 Risk Rating (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Pass $ 95,614 $ 434,042 $ 198,482 $ 136,670 $ 129,372 $ 540,025 $ 28,568 $ 1,562,773 Special Mention — — 215 — — 10,515 — 10,730 Substandard — — — — — 2,172 — 2,172 Total Commercial Real Estate $ 95,614 $ 434,042 $ 198,697 $ 136,670 $ 129,372 $ 552,712 $ 28,568 $ 1,575,675 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 919 $ 21,855 $ 43,300 $ 30,628 $ 8,454 $ 156,986 $ 22,230 $ 284,372 Special Mention — — — 2,880 — — — 2,880 Substandard — — 45 21 38 2,896 41 3,041 Total Commercial and Industrial $ 919 $ 21,855 $ 43,345 $ 33,529 $ 8,492 $ 159,882 $ 22,271 $ 290,293 YTD Gross Charge-offs $ — $ — $ — $ — $ 1 $ — $ — $ 1 Residential Mortgages Pass $ 3,641 $ 200,122 $ 191,588 $ 80,803 $ 49,310 $ 117,555 $ 27,217 $ 670,236 Special Mention — — — — — 937 34 971 Substandard — — 1,212 — 863 1,808 250 4,133 Total Residential Mortgages $ 3,641 $ 200,122 $ 192,800 $ 80,803 $ 50,173 $ 120,300 $ 27,501 $ 675,340 YTD Gross Charge-offs $ — $ — $ 3 $ — $ — $ — $ — $ 3 Other Consumer Pass $ 22,010 $ 7,171 $ 4,238 $ 5,783 $ 150 $ 1,596 $ 297 $ 41,245 Special Mention — — — — — — — — Substandard — — 42 — — 21 — 63 Total Other Consumer $ 22,010 $ 7,171 $ 4,280 $ 5,783 $ 150 $ 1,617 $ 297 $ 41,308 YTD Gross Charge-offs $ 50 $ 337 $ 135 $ 32 $ 84 $ 19 $ — $ 657 Construction Pass $ 29,635 $ 157,302 $ 113,386 $ 38,318 $ 4,624 $ 7,867 $ 6,693 $ 357,825 Special Mention — — — — — 67 — 67 Substandard — 68 — 2,090 — 953 — 3,111 Total Construction $ 29,635 $ 157,370 $ 113,386 $ 40,408 $ 4,624 $ 8,887 $ 6,693 $ 361,003 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Other Pass $ — $ — $ — $ — $ — $ 180,679 $ — $ 180,679 Special Mention — — — — — — — — Substandard — — — — — 124,600 — 124,600 Total Other Loans $ — $ — $ — $ — $ — $ 305,279 $ — $ 305,279 YTD Gross Charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Total Portfolio Loans Pass $ 151,819 $ 820,492 $ 550,994 $ 292,202 $ 191,910 $ 1,004,708 $ 85,005 $ 3,097,130 Special Mention — — 215 2,880 — 11,519 34 14,648 Substandard — 68 1,299 2,111 901 132,450 291 137,120 Total Portfolio Loans $ 151,819 $ 820,560 $ 552,508 $ 297,193 $ 192,811 $ 1,148,677 $ 85,330 $ 3,248,898 Current YTD Period: YTD Gross Charge-offs $ 50 $ 337 $ 138 $ 32 $ 85 $ 19 $ — $ 661 18 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2022 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 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 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 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 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 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 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 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 19 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) The following table presents portfolio loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented: March 31, 2023 (Dollars in Thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans Commercial Real Estate Performing $ 95,614 $ 434,042 $ 198,697 $ 136,670 $ 129,372 $ 550,662 $ 28,568 $ 1,573,625 Nonperforming — — — — — 2,050 — 2,050 Total Commercial Real Estate $ 95,614 $ 434,042 $ 198,697 $ 136,670 $ 129,372 $ 552,712 $ 28,568 $ 1,575,675 Commercial and Industrial Performing $ 919 $ 21,855 $ 43,300 $ 33,508 $ 8,460 $ 159,880 $ 22,230 $ 290,152 Nonperforming — — 45 21 32 2 41 141 Total Commercial and Industrial $ 919 $ 21,855 $ 43,345 $ 33,529 $ 8,492 $ 159,882 $ 22,271 $ 290,293 Residential Mortgages Performing $ 3,641 $ 200,122 $ 191,588 $ 80,803 $ 49,310 $ 119,144 $ 27,501 $ 672,109 Nonperforming — — 1,212 — 863 1,156 — 3,231 Total Residential Mortgages $ 3,641 $ 200,122 $ 192,800 $ 80,803 $ 50,173 $ 120,300 $ 27,501 $ 675,340 Other Consumer Performing $ 22,010 $ 7,171 $ 4,275 $ 5,783 $ 150 $ 1,617 $ 297 $ 41,303 Nonperforming — — 5 — — — — 5 Total Other Consumer $ 22,010 $ 7,171 $ 4,280 $ 5,783 $ 150 $ 1,617 $ 297 $ 41,308 Construction Performing $ 29,635 $ 157,370 $ 113,386 $ 38,318 $ 4,624 $ 8,036 $ 6,693 $ 358,062 Nonperforming — — — 2,090 — 851 — 2,941 Total Construction $ 29,635 $ 157,370 $ 113,386 $ 40,408 $ 4,624 $ 8,887 $ 6,693 $ 361,003 Other Performing $ — $ — $ — $ — $ — $ 305,279 $ — $ 305,279 Nonperforming — — — — — — — — Total Other Loans $ — $ — $ — $ — $ — $ 305,279 $ — $ 305,279 Total Portfolio Loans Performing $ 151,819 $ 820,560 $ 551,246 $ 295,082 $ 191,916 $ 1,144,618 $ 85,289 $ 3,240,530 Nonperforming — — 1,262 2,111 895 4,059 41 8,368 Total Portfolio Loans $ 151,819 $ 820,560 $ 552,508 $ 297,193 $ 192,811 $ 1,148,677 $ 85,330 $ 3,248,898 20 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) December 31, 2022 (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 The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented: March 31, 2023 (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 $ 1,572,734 $ 891 $ — $ 891 $ 2,050 $ 1,575,675 Commercial and Industrial 290,128 13 11 24 141 290,293 Residential Mortgages 671,244 860 5 865 3,231 675,340 Other Consumer 40,830 284 189 473 5 41,308 Construction 357,984 67 11 78 2,941 361,003 Other 305,279 — — — — 305,279 Total $ 3,238,199 $ 2,115 $ 216 $ 2,331 $ 8,368 $ 3,248,898 21 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) 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 and 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 There were no loans past due 90 days or more and still accruing at March 31, 2023 and December 31, 2022. Loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days and still accruing decreased $ 2.5 million to $ 2.3 million at March 31, 2023 compared to $ 4.8 million at December 31, 2022 primarily in the construction category related to one $ 2.1 million residential construction relationship that moved to nonaccrual during the period. There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2023 or December 31, 2022. The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment for the periods presented: March 31, 2023 (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 $ 2,304 $ 2,050 $ — $ — Commercial and Industrial 204 141 — — Residential Mortgages 3,265 3,231 — — Other Consumer 8 5 — — Construction 864 2,941 — — Other — — — — Total Portfolio Loans $ 6,645 $ 8,368 $ — $ — 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 $ — $ — 22 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued) A loan is considered nonperforming when we transfer the interest methodology from accrual to nonaccrual. Nonaccrual status recognizes that the collection in full of both principal and interest is unlikely. Without applying additional scrutiny at a granular level, we believe delinquency to be a leading indicator with respect to the likelihood of collection in full of both principal and interest. Accordingly, we automatically transfer loans to nonaccrual status if they are 90 or more days delinquent. Management reserves the right to exercise discretion at the individual loan level. For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely. We may also elect to retain a loan that is 90 or more days delinquent in accrual status if we believe the loan is well secured and in the process of collection. Nonaccrual loans, and loans that have been characterized as Restructured Loans may be individually evaluated for credit losses in the Allowance for Credit Losses model if the loan commitment is $ 1.0 million or more unless we elect to maintain the loan in the general pool. During the three months ended March 31, 2023 and March 31, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans. The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented. Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision (recovery) for credit loss on loans in the period of change. Type of Collateral March 31, 2023 December 31, 2022 (Dollars in Thousands) Real Estate Real Estate Commercial Real Estate $ 1,986 $ 2,106 Commercial and Industrial — — Residential Mortgages 1,212 1,212 Other Consumer — — Construction 2,090 — Other — — Total $ 5,288 $ 3,318 The following tables present activity in the ACL for the periods presented: Three Months Ended March 31, 2023 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852 Provision (Recovery) for Credit Losses on Loans 603 ( 448 ) 1,530 430 564 ( 1,264 ) 1,415 Charge-offs — ( 1 ) ( 3 ) ( 657 ) — — ( 661 ) Recoveries — — 1 87 — — 88 Net Charge-offs — ( 1 ) ( 2 ) ( 570 ) — — ( 573 ) Balance at End of Period $ 18,595 $ 3,531 $ 10,419 $ 1,189 $ 7,506 $ 53,454 $ 94,694 Three Months Ended March 31, 2022 (Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans Allowance for Credit Losses on Loans: Balance at Beginning of Period $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939 Provision (Recovery) for Credit Losses on Loans 221 ( 529 ) 169 303 466 — 630 Charge-offs — — ( 17 ) ( 435 ) — — ( 452 ) Recoveries — 1 — 109 149 — 259 Net Recoveries / (Charge-offs) — 1 ( 17 ) ( 326 ) 149 — ( 193 ) Balance at End of Period $ 17,518 $ 3,583 $ 4,520 $ 1,470 $ 7,554 $ 61,731 $ 96,376 23 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis. Recurring Basis Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into 24 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2. The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates. Nonrecurring Basis Individually Evaluated Loans: Individually evaluated loans with commitments greater than or equal to $ 1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy. Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal. 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 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 March 31, 2023 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. 25 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) Financial assets measured at fair value on a recurring basis are summarized below for the periods presented: March 31, 2023 (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 $ 18,132 $ 18,132 $ — $ — U.S. Government Agency Securities 56,065 — 56,065 — Residential Mortgage-Backed Securities 103,884 — 103,884 — Commercial Mortgage-Backed Securities 47,840 — 47,840 — Asset Backed Securities 21,862 — 21,862 — Collateralized Mortgage Obligations 141,678 — 141,678 — Small Business Administration 174,423 — 174,423 — States and Political Subdivisions 237,239 — 237,239 — Corporate Notes 61,733 — 54,194 7,539 Total Securities Available-for-Sale 862,856 18,132 837,185 7,539 Derivatives 18,747 — 18,747 — Total $ 881,603 $ 18,132 $ 855,932 $ 7,539 Liabilities Derivatives $ 18,510 $ — $ 18,510 $ — Total $ 18,510 $ — $ 18,510 $ — 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 22,974 — 22,974 — Total $ 859,247 $ 25,400 $ 826,330 $ 7,517 Liabilities Derivatives $ 22,543 $ — $ 22,543 $ — Total $ 22,543 $ — $ 22,543 $ — 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 both March 31, 2023 and December 31, 2022, respectively. 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. 26 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented: March 31, 2023 (Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value OREO $ — $ — $ 8,291 $ 8,291 Individually Evaluated Loans $ — $ — $ 4,221 $ 4,221 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 Individually evaluated loans had a net carrying amount of $ 4.2 million at March 31, 2023 with a valuation allowance of $ 1.1 million. Individually evaluated loans had a net carrying amount of $ 2.6 million at December 31, 2022 with a valuation allowance of $ 0.7 million. The increase in individually evaluated loans and the valuation allowance is primarily due to one credit relationship moving to nonaccrual status during the first quarter of 2023. OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.3 million as of March 31, 2023, compared with $ 8.4 million at December 31, 2022, primarily due to sales and payments. There were no write-downs recorded on OREO for the three months ended March 31, 2023 and $ 0.1 million for the same period in 2022. The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented: March 31, 2023 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Range Average Assets Individually Evaluated Loans $ 2,430 Discounted Internal Valuations Management's Discount & Estimated Selling Costs 14.2 % - 43.9 % 29.1 % Individually Evaluated Loans 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 % Total Individually Evaluated Loans $ 4,221 OREO $ 7,221 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 $ 8,291 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 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 27 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – FAIR VALUE MEASUREMENTS (continued) population examined. Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgment to adjust the baseline discount rate when appropriate. The carrying values and estimated fair values of our financial instruments at March 31, 2023 and December 31, 2022 are presented in the following tables. Fair values for March 31, 2023 and December 31, 2022 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 March 31, 2023 (Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Cash Equivalents $ 81,378 $ 40,078 $ 41,300 $ — $ 81,378 Securities Available-for-Sale 862,856 18,132 837,185 7,539 862,856 Loans Held-for-Sale 364 — — 364 364 Portfolio Loans, net 3,154,204 — — 3,051,434 3,051,434 Federal Home Loan Bank Stock, at Cost 20,593 — — NA NA Other Assets- Interest Rate Derivatives 18,747 — 18,747 — 18,747 Accrued Interest Receivable 19,819 34 5,453 14,332 19,819 Financial Liabilities: Deposits $ 3,533,407 $ 687,333 $ 1,538,663 $ 1,310,660 $ 3,536,656 Other Liabilities- Interest Rate Derivatives 18,510 — 18,510 — 18,510 FHLB Borrowings 435,135 — — 434,889 434,889 Accrued Interest Payable 4,368 — — 4,368 4,368 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 22,974 — 22,974 — 22,974 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 22,543 — 22,543 — 22,543 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 28 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income. The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented: Fair Value of Derivative Assets (Included in Other Assets) March 31, 2023 December 31, 2022 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans 3 $ 339 $ 1 1 $ 200 $ 1 Interest Rate Swap Contracts – Commercial Loans 62 429,226 18,746 62 432,984 22,973 Total Derivatives not Designated as Hedging Instruments 65 $ 429,565 $ 18,747 63 $ 433,184 $ 22,974 Fair Value of Derivative Liabilities (Included in Other Liabilities) March 31, 2023 December 31, 2022 (Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value Derivatives not Designated as Hedging Instruments Forward Sale Contracts – Mortgage Loans 3 $ 339 $ 1 1 $ 200 $ 1 Interest Rate Swap Contracts – Commercial Loans 62 429,226 18,509 62 432,984 22,542 Total Derivatives not Designated as Hedging Instruments 65 $ 429,565 $ 18,510 63 $ 433,184 $ 22,543 29 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued) The following table indicates the income recognized on derivatives for the periods presented: Three Months Ended March 31, (Dollars in Thousands) 2023 2022 Derivatives not Designated as Hedging Instruments Interest Rate Lock Commitments – Mortgage Loans $ — $ 4 Forward Sale Contracts – Mortgage Loans — ( 4 ) Interest Rate Swap Contracts – Commercial Loans ( 194 ) 304 Total Derivative (Loss) Income $ ( 194 ) $ 304 Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented: Derivative Assets (Included in Other Assets) Derivative Liabilities (Included in Other Liabilities) (Dollars in Thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Derivatives not Designated as Hedging Instruments Gross Amounts Recognized $ 18,746 $ 22,973 $ 18,509 $ 22,542 Gross Amounts Offset — — — — Net Amounts Presented in the Consolidated Balance Sheets 18,746 22,973 18,509 22,542 Gross Amounts Not Offset — — — — Net Amount $ 18,746 $ 22,973 $ 18,509 $ 22,542 NOTE 8 – DEPOSITS The following table presents the composition of deposits at the dates presented: (Dollars in Thousands) March 31, 2023 December 31, 2022 Noninterest-Bearing Demand $ 687,333 $ 703,334 Interest-Bearing Demand 500,749 496,948 Money Market 430,938 484,238 Savings 606,976 684,287 Certificates of Deposits 1,307,411 1,261,526 Total $ 3,533,407 $ 3,630,333 All deposit accounts are insured by the FDIC up to the maximum amount allowed by law. The Dodd-Frank Act, signed into law on July 21, 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 March 31, 2023 and December 31, 2022 were $ 206.0 million and $ 159.0 million, respectively. Certificates of Deposit maturing as of March 31: (Dollars in Thousands) March 31, 2023 3 Months or Less $ 159,337 Over 3 Months through 12 Months 476,342 Over 1 Year Through 3 Years 571,334 Over 3 Years 100,398 Total $ 1,307,411 Overdrafts reclassified to loans were $ 0.2 million at March 31, 2023 and $ 0.3 million at December 31, 2022. NOTE 9 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED 30 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Borrowings serve as an additional source of liquidity for the Company. The Company had $ 435.1 million Federal Home Loan Bank (“FHLB”) borrowings at March 31, 2023 and $ 180.6 million at December 31, 2022. FHLB borrowings include both fixed rate and variable 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. Variable rate FHLB borrowings were 92.0 % and 33.4 % of total borrowings at March 31, 2023 and December 31, 2022, respectively. Total loans pledged as collateral were $ 1.5 billion at both March 31, 2023 and December 31, 2022, respectively. There were no securities available-for-sale pledged as collateral at both March 31, 2023 and December 31, 2022. 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 $ 461.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.1 billion, or 25.0 % of the Company’s assets, as of March 31, 2023. The Company had the capacity to borrow up to an additional $ 676.7 million from the FHLB at December 31, 2022. The Company had zero and $ 17.9 million in overnight federal funds purchased at March 31, 2023 and December 31, 2022, respectively. The available borrowing capacity under unsecured lines of credit with corresponding banks was $ 145.0 million and $ 127.1 million at March 31, 2023 and December 31, 2022, respectively. The following table represents the balance of FHLB borrowings and the weighted average interest rate as of the periods presented: (Dollars in Thousands) March 31, 2023 December 31, 2022 FHLB Borrowings $ 435,135 $ 180,550 Weighted Average Interest Rate 4.99 % 4.48 % FHLB Availability $ 461,913 $ 676,746 The following table represents the balance of federal funds purchased and the weighted average interest rate as of the periods presented: (Dollars in Thousands) March 31, 2023 December 31, 2022 Federal Fund Purchased $ — $ 17,870 Weighted Average Interest Rate — % 4.65 % Federal Funds Purchased Availability $ 145,000 $ 127,130 Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to March 31, 2023 and thereafter are as follows : (Dollars in Thousands) Balance Weighted Average Rate 1 year $ 400,135 5.07 % 2 years 15,000 4.13 % 3 years 20,000 4.00 % 4 years — — % 5 years — — % Thereafter — — % Total FHLB Borrowings $ 435,135 4.99 % NOTE 10 – COMMITMENTS AND CONTINGENCIES Commitments to extend credit, which amounted to $ 676.5 million at March 31, 2023 and $ 630.6 million at December 31, 2022, 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 $ 354.6 million, or 52.4 % and $ 373.2 million, or 59.2 %, of the commitments to extend credit at March 31, 2023 and December 31, 2022, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. 31 Table of Contents CARTER BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued) Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $ 26.6 million at March 31, 2023 and $ 25.7 million at December 31, 2022. The following table sets forth our commitments and letters of credit as of the dates presented: (Dollars in Thousands) March 31, 2023 December 31, 2022 Commitments to Extend Credit $ 676,549 $ 630,619 Standby and Performance Letters of Credit 26,576 25,739 Total $ 703,125 $ 656,358 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. The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented: Three Months Ended March 31, (Dollars in Thousands) 2023 2022 Life-of-Loss Reserve on Unfunded Loan Commitments Balance at beginning of period $ 2,292 $ 1,783 Provision (Recovery) for Unfunded Commitments 84 ( 236 ) Balance at end of period $ 2,376 $ 1,547 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 $ 0.1 million was recorded for the three months ended March 31, 2023 for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 0.3 million compared to recoveries for the same period in 2022. 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 11 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS) The following table presents the change in components of other comprehensive loss for the periods presented, net of tax effects: (Dollars in Thousands) Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Pre-Tax Amount Tax Expense Net of Tax Amount Pre-Tax Amount Tax Benefit (Expense) Net of Tax Amount Net Unrealized Gains (Losses) Arising during the period $ 15,633 $ ( 3,390 ) $ 12,243 $ ( 43,032 ) $ 9,037 $ ( 33,995 ) Reclassification Adjustment for Losses included in Net Income 12 ( 3 ) 9 24 ( 5 ) 19 Other Comprehensive Income (Loss) $ 15,645 $ ( 3,393 ) $ 12,252 $ ( 43,008 ) $ 9,032 $ ( 33,976 ) 32 NOTE 12 – STOCK REPURCHASE PLAN On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months, (the “2023 Program”) subject to receipt of non-objection from the Federal Reserve Bank of Richmond, which was received on April 24, 2023. The 2023 Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the 2023 Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position and applicable legal and regulatory requirements. The 2023 Program is authorized through May 1, 2024, although it may be modified or terminated by the Board at any time. The 2023 Program does not obligate the Company to purchase any particular number of shares. Previously on June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022 (the “2022 Program”). The 2022 Program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act. The authorization permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The 2022 Program was originally authorized through August 1, 2023, did not obligate the Company to purchase any particular number of shares, and was exhausted as of March 10, 2023. Previously on December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months (the “2021 Program”). The 2021 Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022.