What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-08 compared with 2023-03-10 · 453 added, 480 removed, 1411 unchanged (40% of the section changed)

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Transfer from Loans to Other Real Estate Owned 110 74 59

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

Transfer from Fixed Assets to Other Real Estate Owned 1,854 2,675 12,013

Security (Purchases) Settled in Subsequent Period — — ( 2,259 )

Right-of-use Asset Recorded in Exchange for Lease Liabilities 1,464 3,391 2,027

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 Repurchase Excise Tax Settled in Subsequent Period ( 153 ) — —

Stock Repurchases Settled in Subsequent Period — — ( 306 )

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

See accompanying notes to audited Consolidated Financial Statements.

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations:

Nature of Operations and Principles of Consolidation:

Carter Bankshares, Inc.

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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.

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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.

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.

Operating Segments:

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Loan Commitments and Related Financial Instruments:

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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.

Comprehensive Income (Loss):

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

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

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, 2023 and December 31, 2022.

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.

Securities classified

CARTER BANKSHARES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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 gains (losses), net of tax included in other comprehensive income (loss).

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.

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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.

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

Loans Held-for-Sale:

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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.

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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:

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

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.

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

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.

An individually evaluated loan analysis is conducted for loans that are either or both nonperforming or a restructured loan with a commitment of $1.0 million or greater and/or based on management’s discretion.

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.

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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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

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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.

The allowance for credit losses represents management’s estimate of expected credit losses inherent in the loan portfolio, and consists of an allowance for credit losses for pooled loans.

Management estimates the allowance for credit losses for pooled loans utilizing a Discounted Cash Flow (“DCF”) method.

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 present value of future cash flows on the loan discounted at the loan's original effective interest rate.

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

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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.

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:

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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.

A charge-off is recognized when the loss is quantifiable and confirmed.

Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.

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Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

“Other” Segmented Pool

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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.

The analysis applied to this pool resulted in an allowance of $ 51.3 million at adoption on January 1, 2021 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.

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• The value of collateral and probability of successful liquidation;

CARTER BANKSHARES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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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).

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Bank Premises and Equipment:

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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.

Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income totaling $ 6.2 million in 2023, $ 6.1 million in 2022, and $ 6.2 million in 2021.

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

Buildings 25 years - 40 years

Furniture and Fixtures 5 years

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Operating and finance leases are recorded as a right of use (“ROU”) asset and operating lease liability, included in other assets and other liabilities, respectively.

Operating and finance lease ROU assets represent the right to use an underlying asset during the lease term and operating and finance lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date.

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded primarily in other expense in the Consolidated Statements of Income.

Finance lease expense is comprised of interest expense and amortization of the ROU asset, which are recorded in interest on other borrowings and other expense, respectively, in the Consolidated Statements of Income.

Federal Home Loan Bank (“FHLB”) Stock:

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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.

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

Earnings per Common Share:

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

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

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.

Other Real Estate Owned (“OREO”):

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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.

OREO assets are revalued every 12 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 24 months based on the size of the exposure.

Operating costs after acquisition are expensed.

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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 taxes are provided on a liability method whereby deferred tax assets are recognized for

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

deductible temporary differences, operating losses, and tax credit carryforwards.

Deferred tax liabilities are recognized for taxable temporary differences.

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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).

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements of Income.

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.

During 2023, the Company adopted the proportional amortization method of accounting for all qualifying equity investments within these limited partnerships.

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).

The investments are accounted for under the equity method, with the expense included within provision for income taxes on the Consolidated Statements of Income.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Transfer of Financial Assets:

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The Company does not provide any other post-retirement benefits.

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:

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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.

As disclosed in Note 18 to the Consolidated Financial Statements, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, and the disclosure set forth in Note 18 relating to certain legal matters is incorporated by reference.

Fair Value Measurements

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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

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,

CARTER BANKSHARES, INC.

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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.

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.

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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.

Individually evaluated loans with commitments of $1.0 million or greater and/or based on management’s discretion 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.

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Newly Adopted Pronouncements in 2023

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 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 expands the use of the proportional amortization method of accounting, previously only allowable for Low Income Tax Housing Credits, (“LITHC”) investments, to equity investments in other tax credit structures that meet certain criteria.

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 reviewed its existing tax equity investment portfolios and evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU as of June 30, 2023 on a modified retrospective basis, effective dated as of January 1, 2023.

As a result, the Company recorded a transitional adjustment of $ 0.1 million to retained earnings.

The Company makes equity investments as a limited partner in various partnerships that sponsor historic tax credits (“HTC”) as a strategic tax initiative designed to receive tax credits and other tax benefits, such as deductible flow-through losses.

The Company has evaluated all of the proportional amortization method qualifying criteria and has elected to apply the proportional amortization method at the HTC program level.

The Company records the investment in the HTC as a component of other assets and uses the proportional amortization method to account for the investments in the HTC partnerships.

Amortization related to these HTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income.

Prior to the ASU adoption, amortization was recorded as a component of noninterest expense on the Consolidated Statements of Income.

The amendments in this ASU did not materially impact our Consolidated Financial Statements.

In March 2020, the FASB issued ASU No.

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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.

The ASU also provides 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 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.

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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

The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, and can be adopted at any time during this period.

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

CARTER BANKSHARES, INC.

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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.

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

Company created an internal team in 2021 to identify and modify loans and other financial instruments with attributes that were either directly or indirectly influenced by LIBOR.

The Company has selected one-month term Secured Overnight Financing Rate, (“SOFR”), (published by the CME Group) as the replacement benchmark for LIBOR based loans.

The financial impact regarding pricing, valuation and operations of the transition have been evaluated and were not material in nature.

The transition team was fully committed to working within the guidelines established by the United Kingdom’s Financial Conduct Authority and the Federal Reserve System of New York’s Alternative Reference Rate Committee to complete a smooth transition away from LIBOR.

For LIBOR-based loans, remediation efforts were completed by September 30, 2023.

Accounting Statements Issued but Not Yet Adopted

On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which enhances the required disclosures primarily related to the income tax rate reconciliation and income taxes paid.

The ASU requires an entity’s income tax rate reconciliation to provide additional information for reconciling items meeting a quantitative threshold, and to disclose certain selected categories within the income tax rate reconciliation.

The ASU also requires entities to disclose the amount of income taxes paid, disaggregated by federal, state and foreign taxes.

The ASU is effective for annual periods beginning after December 15, 2024, though early adoption is permitted.

We are currently evaluating the impact of this guidance on our Consolidated Financial Statements.

On November 27, 2023, the FASB issued ASU 2023-07.

Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which changes disclosures relating to reportable segments.

The ASU expands the disclosure requirements relating to reportable segments, including requiring entities to disclose information about a reportable segment’s significant expenses, among other changes.

The ASU does not change how an entity identifies reportable segments or the accounting for segments.

The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024, with early adoption permitted.

The Company has one reporting segment therefore, will not impact our Consolidated Financial Statements;

however, this ASU requires disclosure of the title and position of the chief operating decision maker and an explanation of how resources are allocated.

NOTE 2 – EARNINGS PER COMMON 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.

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

Years ended December 31,

(Dollars in Thousands, except share and per share data) 2023 2022 2021

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

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

Numerator for Earnings per Common Share – Basic and Diluted

Net Income $ 23,384 $ 50,118 $ 31,590

Income allocated to participating shares 197 295 127

Net Income (Loss) Allocated to Common Shareholders - Basic & Diluted $ 49,823 $ 31,463 $ ( 45,858 )

Denominators:

Net Income Allocated to Common Shareholders - Basic & Diluted $ 23,187 $ 49,823 $ 31,463

Weighted Average Shares Outstanding, including Shares Considered Participating Securities 23,438,413 24,741,454 26,449,438

1 unchanged sentence

Weighted Average Common Shares Outstanding - Basic & Diluted $ 23,240,543 $ 24,595,789 $ 26,342,729

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.

Earnings per Common Share – Basic $ 1.00 $ 2.03 $ 1.19

Earnings per Common Share – Diluted $ 1.00 $ 2.03 $ 1.19

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.

CARTER BANKSHARES, INC.

4 unchanged sentences

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.

The Company had no required reserves for 2023, 2022 and 2021.

NOTE 4 - INVESTMENT SECURITIES

4 unchanged sentences

Losses Fair Value

Treasury Securities $ 19,318 $ — $ ( 1,452 ) $ 17,866

Government Agency Securities $ 44,185 $ 398 $ ( 756 ) $ 43,827

28 unchanged sentences

Gross Realized Losses ( 1,650 ) ( 162 ) ( 211 )

Net Realized Gains $ 46 $ 6,869 $ 6,882

Net Realized (Losses) Gains $ ( 1,521 ) $ 46 $ 6,869

Tax Impact $ ( 319 ) $ 10 $ 1,443

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

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

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

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

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

16 unchanged sentences

The carrying value of securities pledged for various regulatory and legal requirements was $ 215.5 million at December 31, 2023 and $ 224.5 million at December 31, 2022.

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:

Available-for-sale securities with unrealized losses at December 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:

December 31, 2023

6 unchanged sentences

Securities Fair Value Unrealized

Treasury Securities 3 $ 14,080 $ ( 789 ) 2 $ 3,786 $ ( 663 ) 5 $ 17,866 $ ( 1,452 )

Government Agency Securities 7 $ 6,567 $ ( 67 ) 15 $ 15,848 $ ( 689 ) 22 $ 22,415 $ ( 756 )

28 unchanged sentences

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 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 adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did no t record an allowance for credit losses, (“ACL”), on its investment securities during the year ended December 31, 2023 or December 31, 2022 as the Company did no t have any related impairment.

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, 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 unprecedented market volatility.

These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities.

2 unchanged sentences

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.

Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes.

During the year ended December 31, 2023 and December 31, 2022, the Company had no credit related net investment impairment losses.

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

CARTER BANKSHARES, INC.

11 unchanged sentences

Construction 436,349 353,553

312,496 357,900

Other 305,213 312,496

Total Portfolio Loans 3,505,910 3,148,913

1 unchanged sentence

Total Loans $ 3,505,910 $ 3,148,913

(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.

1 unchanged sentence

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.

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

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

In addition, there are specific targets for various categories of real estate loans with respect to debt service coverage ratios, 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.

Although leverage is important, the Company is also focused on cash flow generation and employs stress testing to calculate a supportable loan amount.

Supportable loan amounts have generally been more challenging given the increases in commodities pricing and the average loan to cost has decreased over time.

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

2 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Deferred costs and fees included in the portfolio balances above were $ 7.2 million and $ 8.2 million at December 31, 2023 and December 31, 2022, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $ 133.4 thousand and $ 161.2 thousand at December 31, 2023 and December 31, 2022, respectively.

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

The Company had no mortgage loans held-for-sale as of December 31, 2023 and December 31, 2022, respectively.

Loan Restructurings

4 unchanged sentences

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

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’s discretion;

otherwise, the restructured loan remains in the appropriate

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

segment in the ACL model.

For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Basis” 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, 2023 and December 31, 2022 for the loans restructured during the twelve months ended December 31, 2023 and December 31, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:

Restructured Loans Restructured Loans

Twelve Months Ended December 31, 2023 Twelve Months Ended December 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

17 unchanged sentences

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

The Company had no loans that were restructured during the three and twelve months ended December 31, 2023.

During the third quarter of 2022 the Bank modified a construction loan and considered it a restructured loan as a result of financial difficulty.

The borrower is a single family home builder.

The purpose of the loan was to finance the construction of a speculative home.

The loan matured and was incomplete.

The Bank extended the maturity and completion date for five ( 5 ) months in order to provide time to complete and sell the home.

However, the Bank became aware of a mechanic’s lien filed by one of the borrower’s subcontractors.

This issue was resolved and the loan was restored to accrual status on September 30, 2022.

Subsequently, the home was sold and the Bank was paid in full on December 9, 2022.

This loan was not considered significant and remained in the general pool of the Bank’s ACL model for reserve purposes until it was paid in full.

These loans are not considered significant and are included in the Bank’s ACL model in the general pool of the construction and commercial real estate (“CRE”) segments for reserve purposes.

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

19 unchanged sentences

(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.

As of December 31, 2023 and December 31, 2022, the Bank had no commitments to lend any additional funds on restructured loans.

As of December 31, 2023 and 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.

As of December 31, 2023 and December 31, 2022, the Company had $ 2.0 million and $ 0.9 million, respectively, of residential real estate in the process of foreclosure.

We also had $ 62 thousand at December 31, 2023 and $ 133 thousand at December 31, 2022 in residential real estate included in OREO.

11 unchanged sentences

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.

1) 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 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.

11 unchanged sentences

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.

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.

15 unchanged sentences

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

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

acquisition loans without a defined source of amortization, iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of financial obligations.

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

15 unchanged sentences

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:

Since 2020 and continuing through 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;

83 unchanged sentences

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

4 unchanged sentences

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

4 unchanged sentences

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

4 unchanged sentences

Substandard — 45 1 — 1 20 — 67

Doubtful — — — — — — — —

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

3 unchanged sentences

Substandard — — — — 92 876 — 968

Doubtful — — — — — — — —

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

3 unchanged sentences

Substandard — — — — 74,050 57,701 — 131,751

Doubtful — — — — — — — —

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

4 unchanged sentences

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

1 unchanged sentence

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

At December 31, 2023 and December 31, 2022, the Company had no loans that were risk rated as doubtful.

Special mention and substandard loans at December 31, 2023 increased $ 156.5 million to $ 313.3 million compared to December 31, 2022, with an increase of $ 167.5 million in substandard and a decrease of $ 11.0 million in special mention.

The increase of $ 167.5 million in substandard loans is primarily related to the above mentioned large nonaccrual lending relationship in the other loan category.

The $ 301.9 million of loans related to the Bank’s largest lending relationship were nonperforming and rated as substandard at December 31, 2023.

At December 31, 2022 the largest lending relationship in the other segment loans were all accruing and totaled $ 309.1 million of which, $ 177.3 million of those loans were pass-rated and $ 131.8 million of those loans were substandard-rated.

The decrease of $ 11.0 million in special mention is primarily due to the upgrade of a CRE credit totaling $ 9.9 million to a pass rating.

CARTER BANKSHARES, INC.

1 unchanged sentence

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:

62 unchanged sentences

Days Past Due Total 30-89 Days

Past Due Nonaccrual Loans Total Portfolio Loans

Past Due Past Due 90+ Days Still Accruing Nonaccrual Loans Total Portfolio Loans

Commercial Real Estate $ 1,668,988 $ 125 $ 194 $ 319 $ — $ 1,324 $ 1,670,631

22 unchanged sentences

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

Loans past due 30 to 89 days or more and still accruing 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.

Loans past due 30 to 89 days or more and still accruing increased $ 1.2 million to $ 6.0 million at December 31, 2023 compared to $ 4.8 million at December 31, 2022, primarily in the residential mortgage 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, 2023 and December 31, 2022, 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, 2023.

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, 2023 that were past due more than 90 days and still accruing.

As of and for the December 31, 2022

(Dollars in Thousands) Beginning of

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

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

Nonaccrual End of

Nonaccrual Nonaccrual

Allowance Past Due

As of and for the year ended December 31, 2023 As of and for the year ended December 31, 2022

(Dollars in Thousands)

Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual

Loans Past Due

Still Accruing Nonaccrual without an Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual

Loans Past Due

Still Accruing

6 unchanged sentences

Total Portfolio Loans $ 4,493 $ 305,042 $ 309,535 $ — $ — $ 6,645 $ 6,645 $ —

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.

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 greater and/or based on management’s discretion;

unless we elect to maintain the loan in the general pool.

During the years ended December 31, 2023 and December 31, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.

CARTER BANKSHARES, INC.

1 unchanged sentence

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.

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

Changes in the fair value of the types of collateral and discounted cash flow modeling for individually evaluated loans, as applicable, are reported as provision for credit loss on loans in the period of change.

December 31, 2023 December 31, 2022

(Dollars in Thousands) Real Estate Real Estate

(Dollars in Thousands) Fair Value - Real Estate Discounted Cash Flow Total Fair Value - Real Estate

Commercial Real Estate $ 453 $ — $ 453 2,106

3 unchanged sentences

Construction 2,898 — 2,898 —

Other — 301,913 301,913 —

Total $ 4,493 $ 301,913 $ 306,406 3,318

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

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

December 31, 2023

(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:

(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 $ 17,992 $ 3,980 $ 8,891 $ 1,329 $ 6,942 $ 54,718 $ 93,852

Provision (Recovery) for Credit Losses on Loans 1,881 ( 719 ) 2,081 1,729 892 ( 364 ) 5,500

Charge-offs — ( 63 ) ( 203 ) ( 2,665 ) ( 42 ) — ( 2,973 )

Recoveries — 88 110 475 — — 673

Net (Charge-offs) / Recoveries — 25 ( 93 ) ( 2,190 ) ( 42 ) — ( 2,300 )

Balance, End of Year $ 19,873 $ 3,286 $ 10,879 $ 868 $ 7,792 $ 54,354 $ 97,052

December 31, 2022

7 unchanged sentences

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

December 31, 2021

13 unchanged sentences

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.

CARTER BANKSHARES, INC.

6 unchanged sentences

Securities Available-for-Sale:

Treasury Securities $ 17,866 $ 17,866 $ — $ —

Government Agency Securities 43,827 — 43,827 —

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Individually Evaluated Loans $ — $ — $ 2,649 $ 2,649

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

The Company had no individually evaluated loans measured at fair value on a nonrecurring basis as of December 31, 2023.

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

The Company’s largest lending relationship is classified at December 31, 2023 as an individually evaluated loan with a net carrying amount totaling $ 247.6 million.

The Company utilized various cash flow and discounting assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $ 54.3 million at December 31, 2023.

When evaluating the net carrying value of this credit relationship at December 31, 2023, the Company utilized discounted cash flow valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 2.5 million as of December 31, 2023, compared with $ 8.4 million at December 31, 2022, primarily due to sales, write-downs on OREO and payments, offset by $ 1.4 million in fair value of closed retail offices transferred to OREO.

Write-downs of $ 1.1 million were recorded on OREO for the year ended December 31, 2023 compared to $ 0.7 million for the year ended December 31, 2022.

2 unchanged sentences

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

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 $ 130 Appraisals Estimated Selling Costs 6.0 % 6.0 %

OREO 142 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 %

OREO 2,191 Discounted Internal Valuations Management's Subject Discount 0.0 % — 24.0 % 15.6 %

Total OREO $ 2,463

4 unchanged sentences

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

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

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

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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.

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 December 31, 2023 and December 31, 2022 are presented in the following tables.

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

Loans Held-for-Sale 228 — — 228 228

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

6 unchanged sentences

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

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

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

NOTE 8 - RIGHT-OF-USE (“ROU”) ASSETS AND LEASE LIABILITIES

The Company has seven lease contracts, including five finance leases and two operating leases at December 31, 2023.

These leases are for our branch and loan production facilities.

There was one new lease agreement entered into in 2023.

The following table presents our lease expense for finance and operating leases for the periods presented:

(Dollars in Thousands) 2023 2022 2021

Operating Lease Expense $ 48 $ — $ —

Amortization of ROU Assets - finance leases 365 374 234

Interest on lease liabilities - finance leases 292 287 156

Total Lease Expense $ 705 $ 661 $ 390

ROU assets are included in other assets in the Consolidated Balance Sheets.

The following table presents our ROU assets, cash flows, weighted average lease terms, discount rates for finance and operating leases and ROU assets obtained in exchange for lease liabilities for the periods presented:

(Dollars in Thousands) 2023 2022

Operating Leases

ROU assets $ 419 $ —

Operating cash flows $ 87 $ —

Finance Leases

ROU assets $ 6,988 $ 6,306

Operating cash flows $ 292 $ 287

Financing cash flows $ 185 $ 201

Weighted Average Lease Term - Years

Operating leases 3.3 years —

Finance leases 17.9 years 18.5 years

Weighted Average Discount Rate

Operating leases 6.60 % — %

Finance leases 5.20 % 4.90 %

ROU Assets obtained in exchange for Lease Liabilities

Operating leases $ — $ —

Finance leases $ 1,464 $ 3,391

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Lease liabilities are included in other liabilities in the Consolidated Balance Sheets.

The following table presents the maturity analysis of lease liabilities for finance and operating leases as of December 31, 2023:

(Dollars in Thousands) Finance Operating Total

Maturity Analysis

2024 $ 529 $ 167 $ 696

2025 540 130 670

2026 563 107 670

2027 577 89 666

2028 589 — 589

Thereafter 8,728 — 8,728

Total 11,526 493 0 12,019

Present value discount ( 4,239 ) ( 52 ) ( 4,291 )

Lease Liabilities $ 7,287 $ 441 $ 7,728

NOTE 9 - PREMISES AND EQUIPMENT

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At both December 31, 2023 and December 31, 2022, 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).

Depreciation expense is included under occupancy expense, net in the Consolidated Statements of Income totaling $ 6.2 million in 2023, $ 6.1 million in 2022, and $ 6.2 million in 2021.

Real estate on closed branches were valued based on recent comparative market values received from a real estate broker.

The Company had $ 0.5 million in write-downs in 2023 and write-downs in the amount of $ 0.6 million and $ 3.2 million were recognized during 2022 and 2021, respectively.

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

The net remaining carrying value of $ 2.3 million and $ 1.1 million is classified as held-for-sale in OREO in the Consolidated Balance Sheets as of December 31, 2023 and 2022, 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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 10 - OTHER REAL ESTATE OWNED

10 unchanged sentences

End of Year Balance $ 2,463 $ 8,393 $ 10,916

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

At December 31, 2023, 2022, and 2021, the balance of OREO includes $ 0.2 million, $ 7.3 million, and $ 9.9 million, respectively, of foreclosed properties recorded as a result of obtaining physical possession of the asset.

At December 31, 2023 and 2022, the recorded investment of foreclosed residential real estate was $ 62 thousand and $ 133 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.

At December 31, 2023 and 2022, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $ 2.0 million and $ 0.9 million, respectively.

Income and expenses applicable to foreclosed assets include the following:

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All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience.

Interest rate swaps are considered derivatives but

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

are not accounted for using hedge accounting.

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

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 December 31:

9 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 61 $ 387,454 $ 17,440 63 $ 433,184 $ 22,974

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Fair Values of Derivative Instruments

8 unchanged sentences

Total Derivatives not Designated as Hedging Instruments 61 $ 387,454 $ 17,228 63 $ 433,184 $ 22,543

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

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

(Dollars in Thousands) 2023 2022 2021

3 unchanged sentences

Interest Rate Swap Contracts – Commercial Loans ( 219 ) 605 89

Total Derivative Income (Loss) $ 605 $ 89 $ ( 214 )

Total Derivative (Loss) Income $ ( 219 ) $ 605 $ 89

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:

The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values included in the Consolidated Balance Sheets at December 31:

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

5 unchanged sentences

Gross Amounts Not Offset (1)

— — — ( 4,080 )

Net Amount $ 17,437 $ 22,973 $ 17,225 $ 22,542

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 12 – DEPOSITS

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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.

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

depositor, per insured depository institution for each account ownership.

Certificates of deposits that exceed the FDIC Insurance limit of $250,000 at year-end 2023 and 2022 were $ 305.0 million and $ 159.0 million, respectively.

At December 31, 2023 and December 31, 2022, total brokered deposits (excluding the CDARS and ICS two-way) were $ 70.0 million and zero , respectively.

Certificates of Deposit maturing as of December 31:

3 unchanged sentences

Total $ 1,586,651

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

Overdrafts reclassified to loans were $ 0.3 million at both December 31, 2023 and December 31, 2022, respectively.

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2023 and 2022, respectively, were $ 1.8 million and $ 2.9 million.

2 unchanged sentences

The Company had $ 393.4 million FHLB borrowings at December 31, 2023 and $ 180.6 million at December 31, 2022.

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.

FHLB borrowings are fixed 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.

Total loans pledged as collateral were $ 1.5 billion at both December 31, 2023 and December 31, 2022, respectively.

There were no securities available-for-sale pledged as collateral at both December 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 $ 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.

At December 31, 2023, funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25 % of the Company’s assets or approximately $ 1.1 billion, subject to the amount of eligible collateral pledged, of which the Company is eligible to borrow up to an additional $ 480.3 million.

The Company has unsecured facilities with three other correspondent financial institutions totaling $ 50.0 million and access to the institutional CD and brokered deposit markets.

The Company did not have outstanding borrowings on these fed funds lines as of December 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 $ 17.9 million in overnight federal funds purchased at December 31, 2022.

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

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

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

The Company had no overnight federal funds purchased at December 31, 2023.

There were $ 17.9 million outstanding overnight federal funds purchased at December 31, 2022.

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

(Dollars in Thousands) 2023 2022 2021

2 unchanged sentences

Interest Expense $ 20,822 $ 1,163 $ 313

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

FHLB Availability $ 480,266 $ 676,746 $ 667,307

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

(Dollars in Thousands) 2023 2022 2021

2 unchanged sentences

Interest Expense $ 368 $ 188 $ —

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.

Federal Funds Purchased Availability $ 50,000 $ 127,130 $ 145,000

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to December 31, 2023 and thereafter are as follows:

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2024 $ 323,400 5.46 %

2025 25,000 4.13 %

2026 45,000 3.96 %

Thereafter — — %

11 unchanged sentences

5 Years of Service 100 % Vested

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

2 unchanged sentences

The contribution by the Company, which includes contributions to the nonqualified plan discussed below, was $ 0.4 million in 2023, $ 1.0 million in 2022 and $ 0.9 million in 2021.

These amounts are included in salaries and employee benefits in the Consolidated Statements of Income (Loss).

These amounts are included in salaries and employee benefits in the Consolidated Statements of Income.

Beginning in 2019, our integrated profit sharing plan includes a Company match based upon an associate’s elective deferral.

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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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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.

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For purposes of this Note 15, references to the “Company” mean the “Bank” with respect to actions prior to the Reorganization.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Restricted Stock

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

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

As of December 31, 2023, 478,969 shares of restricted stock had been granted under the Plan.

The Company granted 116,325 and 108,855 shares of restricted stock to key associates under the Plan during 2023 and 2022, 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 time-based shares of restricted stock granted in 2023 to executives vest in one-third annual installments over three years under the short-term incentive plan.

The time-based shares of restricted stock granted in 2022 to executives vest on the fifth anniversary of the grant date under the long-term incentive plan.

The time-based shares of restricted stock to non-executives vest in one-third annual installments over three years .

The closing price of our stock was used to determine the fair value on the date of the grant prior to September 1, 2023.

Beginning September 1, 2023 the Company utilizes a 90-day look back period to estimate the average stock price to resolve issues of rapid stock price fluctuations.

The Company granted 20,772 and 18,500 shares of restricted stock to non-employee directors under the Plan during 2023 and 2022, respectively.

1 unchanged sentence

The time-based shares of restricted stock granted in 2023 and 2022 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.

The fair value determination price for these grants is the same method as mentioned above.

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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

11 unchanged sentences

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 Company periodically grants performance units to executive officers pursuant to the Plan.

The Company did not grant performance units during 2023 but granted 27,848 target amounts of performance units in aggregate to executive officers under the Plan during 2022.

The closing price of $ 15.81 was used during 2022 to determine the fair value on the date of the grant.

These grants are 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.

1 unchanged sentence

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

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.

(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, 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.

2 unchanged sentences

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.

Management has evaluated the performance-based criteria and has determined that, as of December 31, 2023 the criteria was not probable of being met at target, and at December 31, 2022, the criteria were probable of being met at target.

The Company reversed compensation expense of $ 0.3 million for 2023 and recognized compensation expense $ 0.3 million for 2022 related to performance units.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 16 - FED E RAL AND ST AT E INCO M E T AX ES

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Deferred ( 516 ) 3,939 3,643

Change in Valuation Allowance 884 ( 309 ) ( 529 )

Income Tax Provision $ 5,337 $ 11,599 $ 4,108

8 unchanged sentences

Income from Bank Owned Life Insurance ( 290 ) ( 1.0 ) ( 285 ) ( 0.5 ) ( 290 ) ( 0.8 )

Goodwill Impairment — — — — 13,060 ( 29.1 )

Tax Credit Amortization 1,660 5.8 — — — —

Other ( 320 ) ( 1.1 ) 73 0.1 100 0.3

2 unchanged sentences

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.

The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the HTC program.

The Company makes equity investments as a limited partner in various partnerships that sponsor HTC as a strategic tax initiative designed to receive income tax credits and other income tax benefits, such as deductible flow-through losses.

As of December 31, 2023, the Company recognized $ 1.8 million in HTC equity investments recorded as a component of other assets on the Consolidated Balance Sheets.

The Company records income tax credits and other income tax benefits received from its HTC investments as a component of the provision for income taxes on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows.

Investments accounted for using the proportional amortization method are amortized and recorded as a component of the provision for income taxes on the Consolidated Statements of Income.

The Company records non-income-tax-related activity and other returns received from its HTC investments as a component of other noninterest income on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows.

As of December 31, 2023, the Company has not recognized any non-income-tax-related activity from its HTC investments.

CARTER BANKSHARES, INC.

8 unchanged sentences

Valuation Adjustments on Other Real Estate Owned — 649

Tax Credit Carryforwards — 1,781

Equity Investment in Partnerships — 304

Accrued Interest on Nonaccrual Loans 85 843

Capital Loss Carryforward 1,143 —

Operating Lease Liabilities 1,718 1,451

10 unchanged sentences

Equity Investment in Partnerships ( 480 ) ( 113 )

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

Other ( 437 ) ( 312 )

2 unchanged sentences

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.

Based on this evaluation, as of December 31, 2023, a valuation allowance of $ 0.9 million has been recorded on deferred tax assets related to capital loss carryforwards resulting from exits of equity investments in partnerships and sales of securities.

The Company has not identified prudent and feasible strategies to generate future capital gains to offset the entirety of the capital loss carryforward prior to their expiration in 2028.

At December 31, 2023 and 2022, 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 recognizes interest and penalties on unrecognized tax benefits in noninterest expense.

The Company is subject to U.S.

federal income tax, as well as, various taxation of other state and local jurisdictions.

federal income tax as well as various 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, 2020.

2 unchanged sentences

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:

NOTE 17 – TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the change in components of other comprehensive income (loss) for the years ended December 31, net of tax effects:

(Dollars in Thousands) Pre-Tax

Amount Tax Benefit (Expense) Net of Tax

Amount Tax (Expense) Benefit Net of Tax

Net Unrealized Gains Arising during the Period $ 16,370 $ ( 3,398 ) $ 12,972

Reclassification Adjustment for Losses included in Net Income 1,521 ( 316 ) 1,205

Other Comprehensive Income $ 17,891 $ ( 3,714 ) $ 14,177

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

4 unchanged sentences

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

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 18 – COMMITMENTS AND CONTINGENCIES

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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 life-of-loss reserve is computed using a methodology similar to that used to determine

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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 and for the years ended December 31:

2 unchanged sentences

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

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 )

Provision for Unfunded Commitments 901 509

Balance at end of period $ 3,193 $ 2,292

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.

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

An expense of $ 0.9 million was recorded for the year ended December 31, 2023 for the provision for unfunded commitments, which resulted in an increase of $ 0.4 million compared to the provision of $ 0.5 million for the year ended December 31, 2022.

We have a future commitment with a third party vendor for data processing charges, which is a ten year contract that will expire at the end of 2028.

Data processing expense was $ 3.9 million, $ 4.1 million and $ 3.8 million for 2023, 2022 and 2021, respectively.

Legal Proceedings

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.

Further, estimating an amount or range of possible losses that may result from legal or administrative proceedings and claims is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve awards that are discretionary in amount, present novel legal theories or policies, are in the early stages of the proceedings, or are subject to appeal.

In addition, because legal proceedings may be resolved over an extended period of time, potential losses are subject to change due to the outcome of intermediate procedural and substantive rulings, actions by other parties which may be influenced by their settlement posture or their evaluation of the strength or weakness of their case, and other factors.

For these reasons, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the matters described below, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

Other than as set forth below, as of December 31, 2023, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.

Justice Collection Actions

The Bank is engaged in a variety of collection proceedings (the “Collection Actions”) against various related entities that are owned and/or controlled by James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Collection Defendants”).

On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia (the “Martinsville Circuit Court”) confessions of judgment against the Collection Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Collection Defendants with an aggregate principal balance of approximately $ 301 million.

On May 12, 2023 and June 7, 2023, the Collection Defendants filed motions to set aside the confessions of judgment on the basis that the Bank allegedly (i) violated anti-tying provisions of the Bank Holding Company Act of 1956, as amended, (ii) breached contractual obligations and fiduciary duties to the Collection Defendants and (iii) tortiously interfered with the Collection Defendants’ business expectancies and relationships, among other allegations.

On December 11, 2023, the Martinsville Circuit Court heard oral arguments on the motions to set aside the confessions of judgment filed by the Collection Defendants.

On January 22, 2024, the Martinsville Circuit Court issued a letter opinion denying such motions.

On February 21, 2024, the Martinsville Circuit Court issued final orders denying such motions.

On February 26, 2024, the Collection Defendants filed a notice of appeal regarding the Martinsville Circuit Court’s order denying such motions.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Pursuant to the confessions of judgment that were upheld by the Martinsville Circuit Court, the Bank has initiated collection processes against the Collection Defendants (see “—Justice Foreclosure Litigation”).

The Company and the Bank intend to pursue vigorously the Collection Actions and enforce the confessions of judgment and related agreements, including but not limited to release and affirmation agreements and indemnification agreements.

The Company and the Bank vigorously deny the allegations contained in the Collection Defendants’ motions to set aside the confessions of judgment and, based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations that it understands may be asserted on appeal.

However, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Collection Actions or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

Justice Federal Court Litigation

On November 10, 2023, the Company, the Bank, and the individual directors of the Company and the Bank were named as defendants in a lawsuit (the “Justice Federal Court Litigation”) filed in the United States District Court for the Southern District of West Virginia by the Collection Defendants.

The allegations contained in the Justice Federal Court Litigation relate to the matured promissory notes made or guaranteed by the Collection Defendants that are the subject of the Collection Actions.

In the Justice Federal Court Litigation, as plaintiffs the Collection Defendants allege that the Company, the Bank and to a vicarious and limited extent, the individual directors (i) breached an implied covenant of good faith and fair dealing, (ii) breached fiduciary duties, (iii) tortiously interfered with business relations and (iv) violated anti-tying restrictions of the Bank Holding Company Act of 1956, as amended, and allege that the individual directors aided and abetted the same.

As plaintiffs in the Justice Federal Court Litigation, the Collection Defendants seek monetary damages of not less than $ 1.0 billion, additional punitive damages and interest on damages as allowed by law, payment of costs, expenses and attorneys’ fees, and a declaratory judgment from the court that certain confessions of judgment, and certain guarantees, be declared void and unenforceable.

The Company and the Bank deny the allegations contained in the Justice Federal Court Litigation and intend to vigorously defend the matter and the validity and enforceability of the confessions of judgment and of each of the Bank’s loan documents, including the guarantees.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the Company, the Bank and the individual defendants have meritorious defenses to all allegations contained in the Justice Federal Court Litigation.

Because the Justice Federal Court Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Justice Federal Court Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

Justice Foreclosure Litigation

On February 7, 2024, the Bank was named as a defendant in a lawsuit (the “Justice Foreclosure Litigation”) filed in the Circuit Court of Greenbrier County, West Virginia (the “Greenbrier Circuit Court”) by Greenbrier Sporting Club Development Co., Inc.

and The Greenbrier Sporting Club, Inc.

(collectively, “Sporting Club”).

The Justice Foreclosure Litigation relates to a deed of trust (the “Trust Deed”) granted by Sporting Club in favor of the Bank.

The trustee under this deed of trust was also named as a defendant.

In the Justice Foreclosure Litigation, Sporting Club requests the Greenbrier Circuit Court to issue declaratory judgments that the Trust Deed is invalid and unenforceable, the Notice of Sale (defined below) is invalid and of no effect, and that the trustee and the Bank may not sell the property described in the Notice of Sale.

Sporting Club also requests the Greenbrier Circuit Court to issue a declaratory judgment that the debts secured by the Trust Deed are not payable and therefore no trustee sale is permitted, or alternatively that Sporting Club is entitled to final adjudication of the Justice Federal Court Litigation before any sale of property by the trustee under the Trust Deed may proceed.

On or about February 6, 2024, a notice of sale (the “Notice of Sale”) was published in multiple newspapers regarding the proposed sale by the Trustee of certain real estate encumbered by the Trust Deed.

The debts secured by the Trust Deed matured on April 15, 2023 and the Bank filed confessions of judgment with respect to such debts in the Martinsville Circuit Court.

See the description of the Justice Collection Litigation above.

On February 16, 2024, the Bank cancelled the proposed sale by the Trustee of the real estate encumbered by the Trust Deed.

The Bank disputes all allegations contained in the Justice Foreclosure Litigation and intends to defend vigorously the matter and the validity and enforceability of the Trust Deed, the validity and collectability of the debts owed to the Bank by the Sporting Club.

The Bank intends to oppose vigorously the injunctive relief requested by Sporting Club in the Justice

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Foreclosure Litigation.

Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in the Justice Foreclosure Litigation.

Because the Justice Foreclosure Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the Justice Foreclosure Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

GLAS Federal Court Litigation

On February 12, 2024, the Bank was named as a defendant in a lawsuit (the “GLAS Federal Court Litigation”) filed in the United States District Court for the Western District of Virginia by GLAS Trust Company LLC (“GLAS”).

The allegations contained in the GLAS Federal Court Litigation relate to a series of financing transactions that occurred in 2018 between Bluestone Resources, Inc.

(“Bluestone Resources”), its subsidiary Bluestone Coal Sales Corporation (“Bluestone Sales”, and together with Bluestone Resources and their respective affiliates, the “Bluestone Entities”), and Greensill (UK) Limited, Ltd.

(“Greensill”).

The Bluestone Entities are owned and controlled by James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III.

In the GLAS Federal Court Litigation, GLAS alleges that it serves as trustee for investors that acquired notes via a series of securities transactions that repackaged the Bluestone Entities’ obligations to repay Greensill and sold them to those investors.

In the GLAS Federal Court Litigation, GLAS alleges that certain transfers to the Bank executed during 2018 by the Bluestone Entities or Greensill, which in the aggregate total approximately $ 226 million, each constitute either a fraudulent conveyance, or a voluntary conveyance, under Virginia law.

In the GLAS Federal Court Litigation, GLAS seeks an award equal to the full amount of such fraudulent conveyances and/or voluntary conveyances plus interest and payment of attorneys’ fees and costs.

The Company and the Bank deny the allegations contained in the GLAS Federal Court Litigation and intend to defend vigorously all claims asserted in the GLAS Federal Court Litigation.

During the course of the Bank’s lending transactions with James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III, and various Justice Entities, each of James C.

Justice, II, Cathy L.

Justice and James C.

Justice, III and certain Justice Entities agreed (the “Justice Indemnity Agreement”) to indemnify, defend and hold harmless the Bank from damages, claims, liabilities, losses, and expenses incurred in connection with certain claims that may be asserted against the Bank, including the claims that are asserted in the GLAS Federal Court Litigation.

These indemnity obligations are supported by substantial pledged collateral.

The Company and the Bank intend to pursue vigorously all remedies afforded to the Bank under the Justice Indemnity Agreement.

Because the GLAS Federal Court Litigation is in its early stages, the Company cannot reasonably estimate the ultimate outcome or timing of, or possible losses resulting from, the GLAS Federal Court Litigation or any related legal proceedings that may commence, and cannot conclude if the outcome of any of these matters would have a material impact to the Company.

NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for the product.

10 unchanged sentences

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.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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

13 unchanged sentences

Debit Card Interchange Fees At a point in time 7,828 7,427 7,226

Commercial Loan Swap Fee Income At a point in time 774 2,416 4,051

Customer Commissions At a point in time 131 104 91

6 unchanged sentences

Out of Scope Revenue Streams

Gain on Sales of Securities, net 46 6,869 6,882

(Losses) Gain on Sales of Securities, net ( 1,521 ) 46 6,869

Bank Owned Life Insurance Income 1,381 1,357 1,380

Commercial Loan Swap Fee Income 139 774 2,416

Other 1,012 1,209 730

14 unchanged sentences

Total Liabilities and Shareholders’ Equity $ 351,395 $ 328,630

Statements of Net Income (Loss)

Statements of Net Income

(Dollars in Thousands) 2023 2022 2021

Dividends from Subsidiaries $ 14,029 $ 45,377 $ 6,000

Total Income 418 — —

Total Expenses ( 3,011 ) ( 2,696 ) ( 2,238 )

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

Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary 11,436 42,681 3,762

Income Tax Benefit ( 534 ) ( 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 )

Income Before Undistributed Net Income of Bank Subsidiary 11,970 43,258 4,208

Equity in Undistributed Net Income of Bank Subsidiary 11,414 6,860 27,382

Net Income $ 23,384 $ 50,118 $ 31,590

Comprehensive Income (Loss) $ 37,561 $ ( 37,200 ) $ 17,571

Statements of Cash Flows

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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

Net Income $ 23,384 $ 50,118 $ 31,590

Equity in Undistributed Net Income of Bank Subsidiary ( 11,414 ) ( 6,860 ) ( 27,382 )

Adjustments to Reconcile Net Income to Net Cash Provided by

Operating Activities

Stock Compensation Expense 1,561 1,314 1,040

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

Decrease (Increase) in Other Assets 1,774 ( 3,778 ) ( 571 )

Decrease in Other Liabilities ( 47 ) ( 460 ) —

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

Decrease in Intercompany Liability — — ( 17 )

Net Cash Provided by Operating Activities 15,258 40,334 4,660

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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 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, which currently does not affect regulatory capital.

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

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The Basel III Capital Rules also provide for a 2.5% “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, 2023, the Company and the Bank met all capital adequacy requirements to which the Company is subject and satisfied the applicable capital conservation buffer requirements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table summarizes risk-based capital amounts and ratios for the Company and the Bank:

The following table summarizes risk-based capital amounts and ratios for the Company and the Bank, excluding the 2.5% capital conservation buffer:

Actual Minimum

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Carter Bank & Trust 476,496 13.68 % 278,617 8.00 % $ 348,271 10.00 %

The Company was incorporated on October 7, 2020 in connection with the Reorganization.

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.

4 unchanged sentences

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

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:

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

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

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

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

(Dollars in Thousands) First

Quarter Second

Quarter Third

Quarter Fourth

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

Independent Member Crowe Global

2 unchanged sentences

and Subsidiaries

Martinsville, VA

Martinsville, Virginia

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").

and Subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023, based on criteria established in Internal Control – Integrated Framework:

3 unchanged sentences

(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

6 unchanged sentences

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.

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.

13 unchanged sentences

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses – Other Pool

The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, and qualitative analysis.

Allowance for Credit Losses – Individually Evaluated Other Pool Loans

The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, qualitative analysis, and individually evaluated loans.

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

1 unchanged sentence

The loans included in the Other pool of the model were underwritten and approved based on standards that are inconsistent with the Company’s current underwriting standards.

The allowance for credit losses as of December 31, 2022 was $93.9 million with $54.7 million, or 58%, being attributed to the Other pool.

The model for the Other pool was developed with subjective assumptions that may cause volatility driven by the following key factors:

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

During 2023, $302 million of the $305 million, or 98.9%, of the Other pool loans were transferred to individually evaluated.

The allowance for credit losses as of December 31, 2023 was $97.1 million.

The reserves associated with these individually evaluated loans are $54.4 million and represent 56% of the overall allowance for credit losses.

The reserves for the individually evaluated loans within the Other pool are based upon discounted cash flow valuation techniques to estimate the timing and magnitude of potential recoveries resulting from various collection processes.

The techniques were developed with subjective assumptions, including the timing and magnitude of collections, 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.

Management reviews the model output for appropriateness and subjectively adjusts as needed.

We identified the allowance for credit losses – individually evaluated Other pool loans 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 Company’s affirmation of the key assumptions used in the model, including the discount rate, timing and magnitude of collections, and other 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

• Assessing the reasonableness of management’s selection of discount rate, timing and magnitude of collections, and other 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

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data