UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39731

CARTER BANKSHARES, INC.

(~~Name~~Exact name of registrant as specified in its charter)


Virginia			85-3365661
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
1300 Kings Mountain Road	Martinsville	Virginia	24112
(Address of principal executive offices)			(Zip Code)

(Registrant’s telephone number, including area ~~code~~code) (276) 656-1776

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value	CARE	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)~~.Yes~~. Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 3,~~November 1, 2021 there were ~~26,467,231~~26,461,426 shares of the registrant’s common stock issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION			34
ITEM 1 – FINANCIAL STATEMENTS			34
Consolidated Balance Sheets - ~~March 31,~~September 30, 2021 (unaudited) and December 31, 2020 (audited)			34
Consolidated Statements of Income (Loss) - Three and Nine Months Ended ~~March 31,~~September 30, 2021 and 2020 (unaudited)			4
Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ - Three and Nine Months Ended ~~March 31, 2021 and 2020 (unaudited)~~			5
~~Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31,~~September 30, 2021 and 2020 (unaudited)			6
Consolidated Statements of ~~Cash Flows –~~Changes in Shareholders' Equity - Three and Nine Months Ended ~~March 31,~~September 30, 2021 and 2020 (unaudited)			7
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020 (unaudited)			8
Notes to Unaudited Consolidated Financial Statements			89
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			3638
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			6266
ITEM 4 - CONTROLS AND PROCEDURES			6367
PART II – OTHER INFORMATION			6469
ITEM 1 - LEGAL PROCEEDINGS			6469
ITEM 1A –- RISK FACTORS			6469
ITEM 2 –- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			6469
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES			6469
ITEM 4 ~~–MINE~~-MINE SAFETY DISCLOSURES			6469
ITEM 5 - OTHER INFORMATION			6469
ITEM 6 - EXHIBITS			6570
SIGNATURES			6671

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS


(Dollars in Thousands Except per Share Data)	(Dollars in Thousands Except per Share Data)	March 31, 2021 (unaudited)		December 31, 2020 (audited)		(Dollars in Thousands Except per Share Data)	September 30, 2021 (unaudited)		December 31, 2020 (audited)
ASSETS	ASSETS					ASSETS
Cash and Due From Banks	Cash and Due From Banks	$	42,899	$	38,535	Cash and Due From Banks	$	43,061	$	38,535
Interest-Bearing Deposits in Other Financial Institutions	Interest-Bearing Deposits in Other Financial Institutions	65,624		39,954		Interest-Bearing Deposits in Other Financial Institutions	61,435		39,954
Federal Reserve Bank Excess Reserves	Federal Reserve Bank Excess Reserves	110,631		163,453		Federal Reserve Bank Excess Reserves	121,300		163,453
Total Cash and Cash Equivalents	Total Cash and Cash Equivalents	219,154		241,942		Total Cash and Cash Equivalents	225,796		241,942
Securities Available-for-Sale, at Fair Value	Securities Available-for-Sale, at Fair Value	780,032		778,679		Securities Available-for-Sale, at Fair Value	897,546		778,679
Loans Held-for-Sale	Loans Held-for-Sale	32,737		25,437		Loans Held-for-Sale	4,889		25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	9,423		9,835		Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	—		9,835
Portfolio Loans	Portfolio Loans	2,971,875		2,947,170		Portfolio Loans	2,884,157		2,947,170
Allowance for Credit Losses	Allowance for Credit Losses	(116,872)		(54,074)		Allowance for Credit Losses	(99,294)		(54,074)
Portfolio Loans, net	Portfolio Loans, net	2,855,003		2,893,096		Portfolio Loans, net	2,784,863		2,893,096
Bank Premises and Equipment, net	Bank Premises and Equipment, net	85,349		85,307		Bank Premises and Equipment, net	74,771		85,307
Bank Premises and Equipment, Held-for-Sale, net	Bank Premises and Equipment, Held-for-Sale, net	2,273		2,293		Bank Premises and Equipment, Held-for-Sale, net	—		2,293
Other Real Estate Owned, net	Other Real Estate Owned, net	14,031		15,722		Other Real Estate Owned, net	13,265		15,722
Federal Home Loan Bank Stock, at Cost	Federal Home Loan Bank Stock, at Cost	3,215		5,093		Federal Home Loan Bank Stock, at Cost	3,215		5,093
Bank Owned Life Insurance	Bank Owned Life Insurance	54,337		53,997		Bank Owned Life Insurance	55,028		53,997
Other Assets	Other Assets	86,576		67,778		Other Assets	74,690		67,778
Total Assets	Total Assets	$	4,142,130	$	4,179,179	Total Assets	$	4,134,063	$	4,179,179

LIABILITIES	LIABILITIES					LIABILITIES
Deposits:	Deposits:					Deposits:
Noninterest-Bearing Demand	Noninterest-Bearing Demand	$	733,291	$	699,229	Noninterest-Bearing Demand	$	722,145	$	699,229
Interest-Bearing Demand	Interest-Bearing Demand	384,425		366,201		Interest-Bearing Demand	433,144		366,201
Money Market	Money Market	323,008		294,229		Money Market	432,167		294,229
Savings	Savings	646,722		625,482		Savings	676,035		625,482
Certificates of Deposit	Certificates of Deposit	1,522,510		1,614,770		Certificates of Deposit	1,402,982		1,614,770
Deposits Held-for-Assumption in Connection with Sale of Bank Branches	Deposits Held-for-Assumption in Connection with Sale of Bank Branches	81,565		84,717		Deposits Held-for-Assumption in Connection with Sale of Bank Branches	—		84,717
Total Deposits	Total Deposits	3,691,521		3,684,628		Total Deposits	3,666,473		3,684,628
Federal Home Loan Bank Borrowings	Federal Home Loan Bank Borrowings	30,000		35,000		Federal Home Loan Bank Borrowings	30,000		35,000
Other Liabilities	Other Liabilities	32,720		19,377		Other Liabilities	31,720		19,377
Total Liabilities	Total Liabilities	3,754,241		3,739,005		Total Liabilities	3,728,193		3,739,005

SHAREHOLDERS’ EQUITY	SHAREHOLDERS’ EQUITY					SHAREHOLDERS’ EQUITY
Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares Outstanding 26,467,531 at March 31, 2021 and 26,385,041 at December 31, 2020		26,468		26,385
Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares; Outstanding 26,461,426 at September 30, 2021 and 26,385,041 at December 31, 2020						Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares; Outstanding 26,461,426 at September 30, 2021 and 26,385,041 at December 31, 2020	26,461		26,385
Additional Paid-in Capital	Additional Paid-in Capital	143,582		143,457		Additional Paid-in Capital	144,153		143,457
Retained Earnings	Retained Earnings	213,260		254,611		Retained Earnings	229,865		254,611
Accumulated Other Comprehensive Income	Accumulated Other Comprehensive Income	4,579		15,721		Accumulated Other Comprehensive Income	5,391		15,721
Total Shareholders’ Equity	Total Shareholders’ Equity	387,889		440,174		Total Shareholders’ Equity	405,870		440,174
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	4,142,130	$	4,179,179	Total Liabilities and Shareholders’ Equity	$	4,134,063	$	4,179,179

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF INCOME (LOSS)


(Dollars in Thousands Except per Share Data)	(Dollars in Thousands Except per Share Data)	Three Months Ended March 31,				(Dollars in Thousands Except per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020			2021		2020		2021		2020
INTEREST INCOME	INTEREST INCOME					INTEREST INCOME
Loans, including fees	Loans, including fees					Loans, including fees
Taxable	Taxable	$	28,145	$	30,797	Taxable	$	30,402	$	28,511	$	86,964	$	88,885
Non-Taxable	Non-Taxable	1,412		2,102		Non-Taxable	1,067		1,894		3,716		6,020
Investment Securities	Investment Securities					Investment Securities
Taxable	Taxable	2,987		4,502		Taxable	3,163		3,150		9,288		11,246
Non-Taxable	Non-Taxable	326		161		Non-Taxable	175		360		716		850
FRB Excess Reserves		26		136
Federal Reserve Bank Excess Reserves						Federal Reserve Bank Excess Reserves	49		31		108		193
Interest on Bank Deposits	Interest on Bank Deposits	24		74		Interest on Bank Deposits	27		1		74		75
Dividend Income	Dividend Income	37		64		Dividend Income	30		39		98		170
Total Interest Income	Total Interest Income	32,957		37,836		Total Interest Income	34,913		33,986		100,964		107,439
Interest Expense	Interest Expense					Interest Expense
Interest Expense on Deposits	Interest Expense on Deposits	6,295		10,495		Interest Expense on Deposits	5,384		8,432		17,439		28,164
Interest Expense on Federal Funds Purchased	Interest Expense on Federal Funds Purchased	0		1		Interest Expense on Federal Funds Purchased	—		—		—		1
Interest on Other Borrowings	Interest on Other Borrowings	133		76		Interest on Other Borrowings	128		118		392		312
Total Interest Expense	Total Interest Expense	6,428		10,572		Total Interest Expense	5,512		8,550		17,831		28,477
NET INTEREST INCOME	NET INTEREST INCOME	26,529		27,264		NET INTEREST INCOME	29,401		25,436		83,133		78,962
Provision for Credit Losses	Provision for Credit Losses	1,857		4,798		Provision for Credit Losses	(413)		2,914		2,411		13,185
Provision for Unfunded Commitments	Provision for Unfunded Commitments	(282)		0		Provision for Unfunded Commitments	(60)		—		(945)		—
Net Interest Income After Provision for Credit Losses	Net Interest Income After Provision for Credit Losses	24,954		22,466		Net Interest Income After Provision for Credit Losses	29,874		22,522		81,667		65,777
NONINTEREST INCOME	NONINTEREST INCOME					NONINTEREST INCOME
Gain on Sales of Securities, net	Gain on Sales of Securities, net	3,610		1,214		Gain on Sales of Securities, net	1,341		2,388		6,450		5,923
Service Charges, Commissions and Fees	Service Charges, Commissions and Fees	1,809		1,650		Service Charges, Commissions and Fees	1,660		1,205		4,958		3,045
Debit Card Interchange Fees	Debit Card Interchange Fees	1,831		1,243		Debit Card Interchange Fees	1,751		1,559		5,456		4,270
Insurance Commissions	Insurance Commissions	294		1,309		Insurance Commissions	427		482		1,099		2,123
Bank Owned Life Insurance Income	Bank Owned Life Insurance Income	340		353		Bank Owned Life Insurance Income	349		351		1,031		1,054

Other Real Estate Owned Income	Other Real Estate Owned Income	71		139		Other Real Estate Owned Income	7		58		82		279
Commercial Loan Swap Fee Income	Commercial Loan Swap Fee Income	219		422		Commercial Loan Swap Fee Income	1,096		1,572		2,057		3,120
Other	Other	778		622		Other	284		360		1,972		1,177
Total Noninterest Income	Total Noninterest Income	8,952		6,952		Total Noninterest Income	6,915		7,975		23,105		20,991
NONINTEREST EXPENSE	NONINTEREST EXPENSE					NONINTEREST EXPENSE
Salaries and Employee Benefits	Salaries and Employee Benefits	12,582		13,581		Salaries and Employee Benefits	12,816		13,036		39,084		39,106
Occupancy Expense, net	Occupancy Expense, net	3,514		3,249		Occupancy Expense, net	3,333		3,413		10,298		10,077
FDIC Insurance Expense	FDIC Insurance Expense	643		544		FDIC Insurance Expense	582		547		1,882		1,628
Other Taxes	Other Taxes	762		746		Other Taxes	825		809		2,305		2,343
Advertising Expense	Advertising Expense	170		612		Advertising Expense	196		404		586		1,410
Telephone Expense	Telephone Expense	600		574		Telephone Expense	519		578		1,707		1,725
Professional and Legal Fees	Professional and Legal Fees	1,224		437		Professional and Legal Fees	1,244		1,474		3,908		3,310
Data Processing	Data Processing	921		486		Data Processing	1,018		836		2,893		1,917
Losses on sales and Write-downs of Other Real Estate Owned, net		212		189
Losses on sale and Write-downs on Bank Premises, net		43		12
Losses on Sales and Write-downs of Other Real Estate Owned, net						Losses on Sales and Write-downs of Other Real Estate Owned, net	608		1,305		3,423		1,357
Losses on Sales and Write-downs on Bank Premises, net						Losses on Sales and Write-downs on Bank Premises, net	7		17		114		88
Debit Card Expense	Debit Card Expense	632		554		Debit Card Expense	700		764		2,045		1,989
Tax Credit Amortization	Tax Credit Amortization	427		272		Tax Credit Amortization	427		272		1,281		816
Unfunded Loan Commitment Expense	Unfunded Loan Commitment Expense	0		982		Unfunded Loan Commitment Expense	—		(348)		—		251
Other Real Estate Owned Expense	Other Real Estate Owned Expense	54		140		Other Real Estate Owned Expense	84		94		280		411

Goodwill Impairment Expense						Goodwill Impairment Expense	—		62,192		—		62,192
Other	Other	1,821		2,370		Other	2,326		1,907		6,243		6,314
Total Noninterest Expense	Total Noninterest Expense	23,605		24,748		Total Noninterest Expense	24,685		87,300		76,049		134,934
Income Before Income Taxes		10,301		4,670
Income (Loss) Before Income Taxes						Income (Loss) Before Income Taxes	12,104		(56,803)		28,723		(48,166)
Income Tax Provision	Income Tax Provision	926		247		Income Tax Provision	931		875		2,743		634
Net Income		$	9,375	$	4,423
Net Income (Loss)						Net Income (Loss)	$	11,173	$	(57,678)	$	25,980	$	(48,800)

Earnings per Common Share
Basic Earnings per Common Share		$	0.36	$	0.17
Diluted Earnings per Common Share		$	0.36	$	0.17
Average Shares Outstanding – Basic		26,276,890		26,362,649
Average Shares Outstanding – Diluted		26,408,319		26,460,523
Earnings (Loss) per Common Share						Earnings (Loss) per Common Share
Basic Earnings (Loss) per Common Share						Basic Earnings (Loss) per Common Share	$	0.42	$	(2.19)	$	0.98	$	(1.85)
Diluted Earnings (Loss) per Common Share						Diluted Earnings (Loss) per Common Share	$	0.42	$	(2.19)	$	0.98	$	(1.85)
Average Shares Outstanding – Basic & Diluted						Average Shares Outstanding – Basic & Diluted	26,348,488		26,385,189		26,339,930		26,377,626

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2021		2020		2021		2020
Net Income		$	9,375	$	4,423
Net Income (Loss)						Net Income (Loss)	$	11,173	$	(57,678)	$	25,980	$	(48,800)
Other Comprehensive (Loss) Income:	Other Comprehensive (Loss) Income:					Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:	Net Unrealized (Losses) Gains on Securities Available-for-Sale:					Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period	Net Unrealized (Losses) Gains Arising during the Period	(10,494)		2,004		Net Unrealized (Losses) Gains Arising during the Period	(4,588)		6,434		(6,626)		22,860
Reclassification Adjustment for (Losses) Gains included in Net Income		(3,610)		(1,214)
Reclassification Adjustment for Gains included in Net Income						Reclassification Adjustment for Gains included in Net Income	(1,341)		(2,388)		(6,450)		(5,923)
Tax Effect	Tax Effect	2,962		(166)		Tax Effect	1,245		(850)		2,746		(3,557)
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income	Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income	(11,142)		624		Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income	(4,684)		3,196		(10,330)		13,380
Other Comprehensive (Loss) Income	Other Comprehensive (Loss) Income	(11,142)		624		Other Comprehensive (Loss) Income	(4,684)		3,196		(10,330)		13,380
Comprehensive (Loss) Income		$	(1,767)	$	5,047
Comprehensive Income (Loss)						Comprehensive Income (Loss)	$	6,489	$	(54,482)	$	15,650	$	(35,420)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


		Three Months Ended March 31,											Three Months Ended September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity		(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at December 31, 2020		$	26,385	$	143,457	$	254,611	$	15,721	$	440,174
Balance at June 30, 2021												Balance at June 30, 2021	$	26,467	$	143,874	$	218,692	$	10,075	$	399,108
Net Income	Net Income	—		—		9,375		—		9,375		Net Income	—		—		11,173		—		11,173
Cumulative Effect for Adoption of Credit Losses		—		—		(50,726)		—		(50,726)
Other Comprehensive Loss, Net of Tax	Other Comprehensive Loss, Net of Tax	—		—		—		(11,142)		(11,142)		Other Comprehensive Loss, Net of Tax	—		—		—		(4,684)		(4,684)
Recognition of Restricted Stock Compensation Expense	Recognition of Restricted Stock Compensation Expense	—		208		—		—		208		Recognition of Restricted Stock Compensation Expense	—		273		—		—		273
Issuance of Restricted Stock (82,490 shares)		83		(83)		—		—		—
Balance at March 31, 2021		$	26,468	$	143,582	$	213,260	$	4,579	$	387,889
Forfeitures of Restricted Stock (5,322 shares)												Forfeitures of Restricted Stock (5,322 shares)	(6)		6		—		—		—
Balance at September 30, 2021												Balance at September 30, 2021	$	26,461	$	144,153	$	229,865	$	5,391	$	405,870

Three Months Ended March 31,
(Dollars in Thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Shareholders’ Equity
Balance December 31, 2019 $ 26,334 $ 142,492 $ 304,158 $ 127 $ 473,111
Net Income — — 4,423 — 4,423
Other Comprehensive Income, Net of Tax — — — 624 624
Dividends Declared ($0.14 per share) — — (3,689) — (3,689)
Forfeitures of Restricted Stock (1,531 shares) (2) 2 — — —
Recognition of Restricted Stock Compensation Expense — 352 — — 352
Issuance of Restricted Stock (53,056 shares) 54 (54) — — —
Balance at March 31, 2020 $ 26,386 $ 142,792 $ 304,892 $ 751 $ 474,821


	Three Months Ended September 30, 2020
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance June 30, 2020	$	26,385	$	143,016	$	309,347	$	10,311	$	489,059
Net Loss	—		—		(57,678)		—		(57,678)
Other Comprehensive Income, Net of Tax	—		—		—		3,196		3,196
Recognition of Restricted Stock Compensation Expense	—		230		—		—		230
Issuance of Restricted Stock (2,100 shares)	2		(2)		—		—		—
Balance at September 30, 2020	$	26,387	$	143,244	$	251,669	$	13,507	$	434,807


	Nine Months Ended September 30, 2021
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at December 31, 2020	$	26,385	$	143,457	$	254,611	$	15,721	$	440,174
Net Income	—		—		25,980		—		25,980
Cumulative Effect for Adoption of Credit Losses	—		—		(50,726)		—		(50,726)
Other Comprehensive Loss, Net of Tax	—		—		—		(10,330)		(10,330)
Recognition of Restricted Stock Compensation Expense	—		772		—		—		772
Forfeitures of Restricted Stock (6,105 shares)	(7)		7		—		—		—
Issuance of Restricted Stock (82,490 shares)	83		(83)		—		—		—
Balance at September 30, 2021	$	26,461	$	144,153	$	229,865	$	5,391	$	405,870


	Nine Months Ended September 30, 2020
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance December 31, 2019	$	26,334	$	142,492	$	304,158	$	127	$	473,111
Net Loss	—		—		(48,800)		—		(48,800)
Other Comprehensive Income, Net of Tax	—		—		—		13,380		13,380
Dividends Declared ($0.14 per share)	—		—		(3,689)		—		(3,689)
Recognition of Restricted Stock Compensation Expense	—		805		—		—		805
Forfeitures of Restricted Stock (2,484 shares)	(2)		2		—		—		—
Issuance of Restricted Stock (55,156 shares)	55		(55)		—		—		—
Balance at September 30, 2020	$	26,387	$	143,244	$	251,669	$	13,507	$	434,807

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Three Months Ended March 31,					Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2021		2020
Net Income		$	9,375	$	4,423
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities
Net Income (Loss)						Net Income (Loss)	$	25,980	$	(48,800)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities						Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities
Provision for Credit Losses	Provision for Credit Losses	1,575		4,798		Provision for Credit Losses	1,466		13,185

Goodwill Impairment						Goodwill Impairment	—		62,192
Origination of Loans Held-for-Sale	Origination of Loans Held-for-Sale	(314,092)		(137,764)		Origination of Loans Held-for-Sale	(465,174)		(511,344)
Proceeds From Loans Held-for-Sale	Proceeds From Loans Held-for-Sale	306,866		127,811		Proceeds From Loans Held-for-Sale	485,984		499,081
Depreciation/Amortization of Bank Premises and Equipment	Depreciation/Amortization of Bank Premises and Equipment	1,559		1,480		Depreciation/Amortization of Bank Premises and Equipment	4,669		4,589
Benefit for Deferred Taxes		0		(623)
Provision (Benefit) for Deferred Taxes						Provision (Benefit) for Deferred Taxes	2,965		(1,268)
Net Amortization of Securities	Net Amortization of Securities	902		874		Net Amortization of Securities	3,128		2,529
Tax Credit Amortization	Tax Credit Amortization	427		272		Tax Credit Amortization	1,281		816
Gains on Sales of Mortgage Loans Held-for-Sale	Gains on Sales of Mortgage Loans Held-for-Sale	(74)		(22)		Gains on Sales of Mortgage Loans Held-for-Sale	(262)		(127)
Gains on Sales of Securities, net	Gains on Sales of Securities, net	(3,610)		(1,214)		Gains on Sales of Securities, net	(6,450)		(5,923)
Write-downs of Other Real Estate Owned	Write-downs of Other Real Estate Owned	139		70		Write-downs of Other Real Estate Owned	3,324		1,420
Losses on Sales of Other Real Estate Owned, Net		73		119
Loss (Gains) on Sales of Other Real Estate Owned, Net						Loss (Gains) on Sales of Other Real Estate Owned, Net	99		(63)
Losses on Sales and Write-downs of Bank Premises	Losses on Sales and Write-downs of Bank Premises	43		12		Losses on Sales and Write-downs of Bank Premises	114		88
Premiums on Branch Sales						Premiums on Branch Sales	(506)		—
Increase in the Value of Life Insurance Contracts	Increase in the Value of Life Insurance Contracts	(340)		(353)		Increase in the Value of Life Insurance Contracts	(1,031)		(1,054)
Recognition of Restricted Stock Compensation Expense	Recognition of Restricted Stock Compensation Expense	208		352		Recognition of Restricted Stock Compensation Expense	772		805
Increase in Other Assets		(413)		(5,527)
Decrease (Increase) in Other Assets						Decrease (Increase) in Other Assets	7,438		(28,624)
(Decrease) Increase in Other Liabilities	(Decrease) Increase in Other Liabilities	(2,279)		295		(Decrease) Increase in Other Liabilities	(3,776)		1,313
Net Cash Provided By (Used In) Operating Activities	Net Cash Provided By (Used In) Operating Activities	359		(4,997)		Net Cash Provided By (Used In) Operating Activities	60,021		(11,185)
INVESTING ACTIVITIES	INVESTING ACTIVITIES					INVESTING ACTIVITIES
Securities Available-for-Sale:	Securities Available-for-Sale:					Securities Available-for-Sale:
Proceeds from Sales	Proceeds from Sales	64,870		54,502		Proceeds from Sales	130,535		149,301
Proceeds from Maturities, Redemptions, and Pay-downs	Proceeds from Maturities, Redemptions, and Pay-downs	25,365		23,705		Proceeds from Maturities, Redemptions, and Pay-downs	76,328		61,127
Purchases	Purchases	(92,014)		(64,433)		Purchases	(323,355)		(195,008)
Purchase of Bank Premises and Equipment, Net	Purchase of Bank Premises and Equipment, Net	(1,624)		(4,536)		Purchase of Bank Premises and Equipment, Net	(6,281)		(8,395)
Net Cash Paid in Branch Sales						Net Cash Paid in Branch Sales	(73,923)		—

Purchase of Federal Home Loan Bank Stock		0		(1,062)
Redemption of Federal Home Loan Bank Stock		1,878		82
Proceeds from Sale of Portfolio Loans						Proceeds from Sale of Portfolio Loans	42,295		—
Redemption (Purchase) of Federal Home Loan Bank Stock, net						Redemption (Purchase) of Federal Home Loan Bank Stock, net	1,878		(980)
Loan Originations and Payments, net	Loan Originations and Payments, net	(24,994)		(56,458)		Loan Originations and Payments, net	9,458		(103,844)

Payments Received on Other Real Estate Owned						Payments Received on Other Real Estate Owned	342		—
Other Real Estate Owned Improvements	Other Real Estate Owned Improvements	0		(19)		Other Real Estate Owned Improvements	—		(19)
Proceeds from Sales and Payments of Other Real Estate Owned	Proceeds from Sales and Payments of Other Real Estate Owned	1,479		744		Proceeds from Sales and Payments of Other Real Estate Owned	10,728		3,504
Net Cash Used In Investing Activities	Net Cash Used In Investing Activities	(25,040)		(47,475)		Net Cash Used In Investing Activities	(131,995)		(94,314)
FINANCING ACTIVITIES	FINANCING ACTIVITIES					FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts	Net Change in Demand, Money Markets and Savings Accounts	103,276		41,440		Net Change in Demand, Money Markets and Savings Accounts	279,063		307,311
Decrease in Certificates of Deposits	Decrease in Certificates of Deposits	(96,383)		(72,690)		Decrease in Certificates of Deposits	(218,235)		(197,761)
(Payments) Proceeds from Federal Home Loan Bank Borrowings	(Payments) Proceeds from Federal Home Loan Bank Borrowings	(5,000)		25,000		(Payments) Proceeds from Federal Home Loan Bank Borrowings	(5,000)		25,000
Cash Dividends Paid	Cash Dividends Paid	0		(3,689)		Cash Dividends Paid	—		(3,689)
Net Cash Provided By (Used In) Financing Activities		1,893		(9,939)
Net Decrease in Cash and Cash Equivalents		(22,788)		(62,411)
Net Cash Provided by Financing Activities						Net Cash Provided by Financing Activities	55,828		130,861
Net (Decrease) Increase in Cash and Cash Equivalents						Net (Decrease) Increase in Cash and Cash Equivalents	(16,146)		25,362
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period	241,942		125,812		Cash and Cash Equivalents at Beginning of Period	241,942		125,812
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$	219,154	$	63,401	Cash and Cash Equivalents at End of Period	$	225,796	$	151,174

SUPPLEMENTARY DATA	SUPPLEMENTARY DATA					SUPPLEMENTARY DATA
Cash Interest Paid	Cash Interest Paid	$	6,666	$	10,645	Cash Interest Paid	$	18,338	$	29,041
Cash Paid for Income Taxes	Cash Paid for Income Taxes	88		0		Cash Paid for Income Taxes	2,720		416
Transfer from Loans to Other Real Estate Owned	Transfer from Loans to Other Real Estate Owned	0		707		Transfer from Loans to Other Real Estate Owned	23		707

Security (Purchases) Sales Settled in Subsequent Period		(10,970)		0
Transfer from Fixed Assets to Other Real Estate Owned						Transfer from Fixed Assets to Other Real Estate Owned	12,013		2,221
Security (Purchases) Settled in Subsequent Period						Security (Purchases) Settled in Subsequent Period	(12,129)		(30,458)
Right-of-use Asset Recorded in Exchange for Lease Liabilities	Right-of-use Asset Recorded in Exchange for Lease Liabilities	$	2,027	$	0	Right-of-use Asset Recorded in Exchange for Lease Liabilities	$	2,027	$	621

See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiaries, including Carter Bank & Trust (the “Bank”). All significant intercompany transactions have been eliminated in consolidation.

Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”), on March 12, 2021. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period.

Reorganization: The Company was incorporated on October 7, 2020, by and at the direction of the board of directors of the Bank, 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,~~Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for 1 newly issued share of the Company’s common stock.

Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided. Actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 related changes, and changes in the financial condition of borrowers.

The CARES Act: In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act provided approximately $2.2 trillion in emergency economic relief measures including, among other things, loan programs for small and mid-sized businesses and other economic relief for impacted businesses and industries, including financial institutions. Many of the CARES Act’s programs depend upon the direct involvement of U.S. financial institutions and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of the Treasury, the Federal Deposit Insurance Corporation (the “FDIC”), the Board of Governors of the Federal Reserve System (“FRB”) and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Set forth below is a brief overview of certain provisions of the CARES Act and certain other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and the Bank. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Such statutes, regulations, and policies are subject to ongoing review by U.S. Congress and federal regulatory authorities. Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company or the Bank could have a material effect on the Company and the Bank. ~~Many~~We believe most of the requirements called for in the CARES Act and related regulations and supervisory guidance ~~continue to be~~have been implemented, ~~and most~~but there are ~~subject to implementing regulations, many of which~~some that continue to be refined by federal banking agencies. The Company and the Bank ~~continues~~continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

Paycheck Protection Program (“PPP”)

PPP is a program administered as part of the Small Business Administration’s (“SBA”) 7-A loan program. The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. Initially, $349 billion was approved and designated for the PPP in order for the SBA to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses. The Bank became an approved SBA 7-A lender in the second quarter of 2020. The ~~Company~~Bank participated in the initial round of funding through a referral relationship with a third-party, non-bank lender. When an additional $310 billion in funds were approved and designated for the PPP in April 2020, the Bank opted to set up an internal, automated loan process utilizing its core system provider.

Congress enacted the Consolidated Appropriations Act, 2021 (the “CAA”) on December 27, 2020, which amended the CARES Act and included (i) the Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, (ii) the COVID-Related Tax Relief Act of 2020, and (iii) the Taxpayer Certainty and Disability Relief Act of 2020. These laws include significant clarifications and modifications to the PPP, which had terminated on August 8, 2020. In particular, Congress revived PPP and allocated an additional $284 billion in the PPP funds for 2021. As a participating PPP lender, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.

Troubled Debt Restructurings (“TDRs”) and Loan Modifications for Affected ~~Borrowers.~~Borrowers

The CARES Act permits banks to suspend requirements under GAAP for certain loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The provisions of the CARES Act dealing with temporary relief related to TDRs were extended pursuant to the CAA which was signed into law on December 27, 2020. The CAA extended the “applicable” period to the earlier of January 1, 2022 or 60 days after the date on which the national emergency concerning the COVID-19 pandemic terminates. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by the COVID-19 pandemic and to assure banks that they will not be criticized by examiners for making such modifications. The Bank is currently applying this guidance to qualifying loan modifications.

FRB Programs and Initiatives Related to the COVID-19 Pandemic

In response to COVID-19, the FRB’s Federal Open Market Committee (the “FOMC”) on March 16, 2020, set the federal funds target rate at 0-0.25%. Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

Newly Adopted Pronouncements in 2021: In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. The amendments in this ASU became effective on January 1, 2021 and did not have any material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, universally referred to as Current Expected Credit Loss (“CECL”). The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today are still permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For periodic report filers that are not smaller reporting companies, such as the Company, this standard (Topic 326) was effective as of January 1, 2020.

The Company ~~has~~ elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology. The Company was subject to the adoption of the CECL accounting method under FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

and related amendments, Financial Instruments – Credit Losses (Topic 326). The CARES Act allowed companies to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020 which was later extended to January 1, 2022. The Company adopted the CECL accounting method as of January 1, 2021 as allowed under the provisions of the CARES Act. The Bank’s CECL Committee, which includes members from Credit Administration, Accounting/Finance, Risk Management and Internal Audit, has oversight by the Chief Executive Officer, Chief Financial Officer, and Chief Credit Officer. We engaged a third-party to assist us in developing our CECL model and to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting CECL, management implemented a third party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components. Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables. Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls. Management had a third party independent consultant review and validate our CECL model.

In addition, Topic 326 amends the accounting for credit losses on certain debt securities. The Company did not record any allowance for credit losses (“ACL”) on its debt securities as a result of adopting Topic 326.

The ultimate impact of adopting Topic 326, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgments. The Company adopted Topic 326 using the modified retrospective method. Results for reporting periods beginning after January 1, 2021 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 5– Allowance for Credit Losses for further discussion of these portfolio segments. Our new segmentation breaks out Other loans from our original loan segments: Commercial Real Estate (“CRE”), Commercial and Industrial (“C&I”), Residential Mortgages and Construction. Other loans include unique risk attributes considered inconsistent with current underwriting standards. The Company recorded a net decrease to retained earnings of $50.7 million as of January 1, 2021 for the cumulative effect of adopting Topic 326.

The following table illustrates the impact of Topic 326:


		January 1, 2021							January 1, 2021
(Dollars in Thousands)	(Dollars in Thousands)	As Reported Under Topic 326		Pre Topic 326		Impact of Topic 326 Adoption		(Dollars in Thousands)	As Reported Under Topic 326		Pre Topic 326		Impact of Topic 326 Adoption
Assets	Assets							Assets
Allowance for Credit Losses on Loans	Allowance for Credit Losses on Loans							Allowance for Credit Losses on Loans
Commercial Real Estate	Commercial Real Estate	$	41,458	$	34,871	$	6,587	Commercial Real Estate	$	41,458	$	34,871	$	6,587
Commercial and Industrial	Commercial and Industrial	4,071		2,692		1,379		Commercial and Industrial	4,071		2,692		1,379
Obligations of States and Political Subdivisions	Obligations of States and Political Subdivisions	951		951		0		Obligations of States and Political Subdivisions	951		951		—
Residential Mortgages	Residential Mortgages	5,356		2,000		3,356		Residential Mortgages	5,356		2,000		3,356
Other Consumer	Other Consumer	1,602		2,479		(877)		Other Consumer	1,602		2,479		(877)
Construction	Construction	6,277		6,357		(80)		Construction	6,277		6,357		(80)
Other	Other	56,001		4,724		51,277		Other	56,001		4,724		51,277
Allowance for Credit Losses on Loans	Allowance for Credit Losses on Loans	115,716		54,074		61,642		Allowance for Credit Losses on Loans	$	115,716	$	54,074	$	61,642
Assets:	Assets:							Assets:
Total Loans Held for Investments, net	Total Loans Held for Investments, net	2,831,454		2,893,096		61,642		Total Loans Held for Investments, net	$	2,831,454	$	2,893,096	$	61,642
Net deferred tax asset	Net deferred tax asset	21,413		7,589		13,824		Net deferred tax asset	21,413		7,589		13,824
Liabilities:	Liabilities:							Liabilities:
Life-of-loss Reserve on Unfunded Loan Commitments	Life-of-loss Reserve on Unfunded Loan Commitments	3,052		144		2,908		Life-of-loss Reserve on Unfunded Loan Commitments	3,052		144		2,908
Equity:	Equity:							Equity:
Retained Earnings	Retained Earnings	$	203,885	$	254,611	$	(50,726)	Retained Earnings	$	203,885	$	254,611	$	(50,726)

The adoption of Topic 326 resulted in a Day 1 adjustment of $64.5 million, including an increase to our ~~allowance for credit losses (“ACL”)~~ACL of $61.6 million and a $2.9 million life-of-loss reserve on our unfunded loan commitments recorded in other liabilities on our Consolidated Balance Sheets on January 1, 2021. As of January 1, 2021, the company recorded a cumulative-effect adjustment of $50.7 million to decrease retained earnings related to the adoption of Topic 326.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

Consolidated Balance Sheets on January 1, 2021. As of January 1, 2021, the Company recorded a cumulative-effect adjustment of $50.7 million to decrease retained earnings related to the adoption of Topic 326.

Allowance for Credit Losses Policy

The ACL represents an amount which, in management's judgment, is adequate to absorb expected losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP. However, the determination of the ACL requires significant judgment, and estimates of expected losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policy.

The Company’s methodology for estimating the ACL includes:

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

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans, not specifically analyzed, reside in the Quantitative Analysis.

Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the ~~long term~~long-term average and utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to, the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

As part of ~~CECL,~~our initial identification of loan pools, a subset of loans with a similar risk profile and an aggregate principal balance of $42.8 million which resulted in current expected losses of $10.2 ~~million were recorded due to economic uncertainties related to~~million. In the ~~Company's hospitality portfolio. Between the Day 1 CECL model and the model~~quarter ended March 31, 2021 additional current expected losses of $1.5 million were recognized, which resulted in a total current expected loss balance of $11.7 million as of March 31, 2021. Certain hospitality loans exhibit more than expected deterioration and the ~~risk rating has been downgraded to non-pass to reflect the increased risk.~~model

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

recognized the deterioration of an additional loan with a principal balance of $8.1 million which resulted in current expected losses of $1.5 million and an additional $0.6 million standard qualitative general reserve. In the quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $50.2 million which resulted in charge-offs totaling $9.2 million and a net release of reserves of $3.1 million. Additionally, in the quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $12.0 million which resulted in current expected losses of $1.6 million. Certain loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the Incurred Loss model. With the adoption of CECL, management elected to evaluate certain loans based on shared but unique risk attributes. The loans included in the Other segment of the model were underwritten and approved based on standards that are inconsistent with our current underwriting standards. The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors: prepayment speeds, timing of contractual payments, discount rate, as well as other factors. The discount rate is reflective of the inherit risk in the Other segment. A significant change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively makes adjustments as needed. The analysis applied to this pool resulted in an increase in reserves of $51.3 million and is disclosed in the Other ~~line item~~segment in the table above.

Accounting Statements Issued but Not Yet Adopted: In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in USU.S. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective ~~through~~for all entities between March 12, 2020 and December 31, 2022.

Furthermore, the United Kingdom’s Financial Conduct Authority (“FCA”), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to U.S. dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023. Bank regulators, in a joint statement, have urged banks to stop using LIBOR altogether on new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The FRB of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR.

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 ~~evaluating~~considering SOFR and other credit-sensitive alternative indices, that may gain market acceptance, as a replacement to LIBOR. The financial impact regarding pricing, valuation and operations of the ~~impacts~~transition is not expected to be material in nature. Our transition team is fully committed to work within the guidelines established by the FCA and ARRC to provide for a smooth transition away from LIBOR.

As of ~~this ASU and have not yet determined whether~~September 30, 2021, approximately 16.0% of our loan portfolio consists of loans whose variable rate index is LIBOR. We intend to cease originating new LIBOR ~~transition and this ASU will have material effects on our business operations or consolidated financial statements.~~based variable rate loans by December 31, 2021 per the ARRC’s guidance.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the two-class method. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented, the dilutive effect on average shares outstanding is the result of unvested restricted stock grants.

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


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands, except share and per share data)	(Dollars in Thousands, except share and per share data)	2021		2020		(Dollars in Thousands, except share and per share data)	2021		2020		2021		2020
Numerator for Earnings per Share – Basic and Diluted	Numerator for Earnings per Share – Basic and Diluted					Numerator for Earnings per Share – Basic and Diluted
Net Income		$	9,375	$	4,423
Net Income (Loss)						Net Income (Loss)	$	11,173	$	(57,678)	$	25,980	$	(48,800)
Less: Income allocated to participating shares	Less: Income allocated to participating shares	46		16		Less: Income allocated to participating shares	48		—		104		—
Net Income Allocated to Common Shareholders		$	9,329	$	4,407
Net Income (Loss) Allocated to Common Shareholders						Net Income (Loss) Allocated to Common Shareholders	$	11,125	$	(57,678)	$	25,876	$	(48,800)

Denominator:	Denominator:					Denominator:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities	Weighted Average Shares Outstanding, including Shares Considered Participating Securities	26,408,319		26,460,523		Weighted Average Shares Outstanding, including Shares Considered Participating Securities	26,461,617		26,385,189		26,445,654		26,377,626
Less: Average Participating Securities	Less: Average Participating Securities	131,429		97,874		Less: Average Participating Securities	113,129		—		105,724		—
Weighted Average Common Shares Outstanding	Weighted Average Common Shares Outstanding	26,276,890		26,362,649		Weighted Average Common Shares Outstanding	26,348,488		26,385,189		26,339,930		26,377,626

Earnings per Common Share – Basic		$	0.36	$	0.17
Earnings per Common Share – Diluted		$	0.36	$	0.17
Earnings (Loss) per Common Share – Basic						Earnings (Loss) per Common Share – Basic	$	0.42	$	(2.19)	$	0.98	$	(1.85)
Earnings (Loss) per Common Share – Diluted						Earnings (Loss) per Common Share – Diluted	$	0.42	$	(2.19)	$	0.98	$	(1.85)

All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation.

NOTE 3 - INVESTMENT SECURITIES

The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:


		March 31, 2021									September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U. S. Government Agency Securities		$	2,454	$	0	$	(94)	$	2,360
U.S. Treasury Securities										U.S. Treasury Securities	$	4,440	$	16	$	(37)	$	4,419
U.S. Government Agency Securities										U.S. Government Agency Securities	3,460		18		—		3,478
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	33,348		304		(198)		33,454		Residential Mortgage-Backed Securities	85,131		302		(1,535)		83,898
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,181		104		0		5,285		Commercial Mortgage-Backed Securities	4,160		90		(28)		4,222
Asset Backed Securities	Asset Backed Securities	136,976		1,093		(570)		137,499		Asset Backed Securities	139,835		716		(349)		140,202
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	252,219		3,971		(1,340)		254,850		Collateralized Mortgage Obligations	271,231		2,992		(1,247)		272,976
Small Business Administration	Small Business Administration	107,320		487		(850)		106,957		Small Business Administration	108,126		900		(648)		108,378
States and Political Subdivisions	States and Political Subdivisions	207,738		4,883		(2,306)		210,315		States and Political Subdivisions	226,589		6,460		(1,142)		231,907
Corporate Notes	Corporate Notes	29,000		473		(161)		29,312		Corporate Notes	47,750		499		(183)		48,066
Total Debt Securities	Total Debt Securities	$	774,236	$	11,315	$	(5,519)	$	780,032	Total Debt Securities	$	890,722	$	11,993	$	(5,169)	$	897,546

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)


											December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	December 31, 2020								(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	$	44,057	$	1,008	$	(341)	$	44,724	Residential Mortgage-Backed Securities	$	44,057	$	1,008	$	(341)	$	44,724
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,194		253		0		5,447		Commercial Mortgage-Backed Securities	5,194		253		—		5,447
Asset Backed Securities	Asset Backed Securities	133,672		884		(999)		133,557		Asset Backed Securities	133,672		884		(999)		133,557
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	212,751		6,007		(399)		218,359		Collateralized Mortgage Obligations	212,751		6,007		(399)		218,359
Small Business Administration	Small Business Administration	99,604		346		(805)		99,145		Small Business Administration	99,604		346		(805)		99,145
States and Political Subdivisions	States and Political Subdivisions	239,251		13,490		(119)		252,622		States and Political Subdivisions	239,251		13,490		(119)		252,622
Corporate Notes	Corporate Notes	24,250		582		(7)		24,825		Corporate Notes	24,250		582		(7)		24,825
Total Debt Securities	Total Debt Securities	$	758,779	$	22,570	$	(2,670)	$	778,679	Total Debt Securities	$	758,779	$	22,570	$	(2,670)	$	778,679

The Company did 0tnot have securities classified as held-to-maturity at ~~March 31,~~September 30, 2021 or December 31, 2020.

The following table shows the composition of gross and net realized gains and losses for the periods presented:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2021		2020		2021		2020
Proceeds from Sales of Securities Available-for-Sale	Proceeds from Sales of Securities Available-for-Sale	$	64,870	$	54,502	Proceeds from Sales of Securities Available-for-Sale	$	22,235	$	52,632	$	130,535	$	149,301

Gross Realized Gains	Gross Realized Gains	$	3,629	$	1,217	Gross Realized Gains	$	1,351	$	2,405	$	6,545	$	5,976
Gross Realized Losses	Gross Realized Losses	(19)		(3)		Gross Realized Losses	(10)		(17)		(95)		(53)
Net Realized Gains	Net Realized Gains	3,610		1,214		Net Realized Gains	1,341		2,388		6,450		5,923
Tax Impact	Tax Impact	$	758	$	255	Tax Impact	$	282	$	501	$	1,355	$	1,244

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.~~Income (Loss). The tax impact is included in income tax provision in the Consolidated Statements of ~~Income.~~Income (Loss).

The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


		March 31, 2021					September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Amortized Cost		Fair Value		(Dollars in Thousands)	Amortized Cost		Fair Value
Due in One Year or Less	Due in One Year or Less	$	1,088	$	1,102	Due in One Year or Less	$	696	$	699
Due after One Year through Five Years	Due after One Year through Five Years	4,115		4,111		Due after One Year through Five Years	3,731		3,750
Due after Five Years through Ten Years	Due after Five Years through Ten Years	132,913		133,553		Due after Five Years through Ten Years	173,134		174,762
Due after Ten Years	Due after Ten Years	208,396		210,178		Due after Ten Years	212,804		217,037
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	33,348		33,454		Residential Mortgage-Backed Securities	85,131		83,898
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,181		5,285		Commercial Mortgage-Backed Securities	4,160		4,222
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	252,219		254,850		Collateralized Mortgage Obligations	271,231		272,976
Asset Backed Securities	Asset Backed Securities	136,976		137,499		Asset Backed Securities	139,835		140,202
Total Securities		$	774,236	$	780,032
Total Debt Securities						Total Debt Securities	$	890,722	$	897,546

At ~~March 31,~~September 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was ~~$153.7~~$172.8 million at ~~March 31,~~September 30, 2021 and $146.0 million at December 31, 2020.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at ~~March 31,~~September 30, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:


		March 31, 2021																September 30, 2021
		Less Than 12 Months					12 Months or More					Total						Less Than 12 Months					12 Months or More					Total
(Dollars in Thousands)	(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
U.S. Government Agency Securities		1	$	2,360	$	(94)	0	$	0	$	0	1	$	2,360	$	(94)
U.S. Treasury Securities																	U.S. Treasury Securities	1	$	2,420	$	(37)	—	$	—	$	—	1	$	2,420	$	(37)
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	7	20,574		(197)		3	34		(1)		10	20,608		(198)		Residential Mortgage-Backed Securities	14	51,057		(1,382)		7	9,301		(153)		21	60,358		(1,535)
Commercial Mortgage-Backed Securities																	Commercial Mortgage-Backed Securities	1	2,002		(28)		—	—		—		1	2,002		(28)
Asset Backed Securities	Asset Backed Securities	6	13,332		(117)		19	41,825		(453)		25	55,157		(570)		Asset Backed Securities	19	47,674		(138)		15	31,066		(211)		34	78,740		(349)
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	18	65,912		(1,168)		9	21,246		(172)		27	87,158		(1,340)		Collateralized Mortgage Obligations	31	106,470		(1,065)		8	17,279		(182)		39	123,749		(1,247)
Small Business Administration	Small Business Administration	6	10,484		(153)		78	51,817		(697)		84	62,301		(850)		Small Business Administration	8	14,211		(253)		54	20,561		(395)		62	34,772		(648)
States and Political Subdivisions	States and Political Subdivisions	49	70,861		(2,206)		3	1,951		(100)		52	72,812		(2,306)		States and Political Subdivisions	43	62,082		(961)		6	5,187		(181)		49	67,269		(1,142)
Corporate Notes	Corporate Notes	4	9,590		(161)		0	0		0		4	9,590		(161)		Corporate Notes	7	18,317		(183)		—	—		—		7	18,317		(183)
Total Debt Securities	Total Debt Securities	91	$	193,113	$	(4,096)	112	$	116,873	$	(1,423)	203	$	309,986	$	(5,519)	Total Debt Securities	124	$	304,233	$	(4,047)	90	$	83,394	$	(1,122)	214	$	387,627	$	(5,169)


		December 31, 2020																December 31, 2020
		Less Than 12 Months					12 Months or More					Total						Less Than 12 Months					12 Months or More					Total
(Dollars in Thousands)	(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	7	$	21,109	$	(339)	3	$	40	$	(2)	10	$	21,149	$	(341)	Residential Mortgage-Backed Securities	7	$	21,109	$	(339)	3	$	40	$	(2)	10	$	21,149	$	(341)
Asset Backed Securities	Asset Backed Securities	11	23,653		(219)		27	61,599		(780)		38	85,252		(999)		Asset Backed Securities	11	23,653		(219)		27	61,599		(780)		38	85,252		(999)
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	13	48,318		(212)		14	38,615		(187)		27	86,933		(399)		Collateralized Mortgage Obligations	13	48,318		(212)		14	38,615		(187)		27	86,933		(399)
Small Business Administration	Small Business Administration	7	10,444		(53)		73	47,371		(752)		80	57,815		(805)		Small Business Administration	7	10,444		(53)		73	47,371		(752)		80	57,815		(805)
States and Political Subdivisions	States and Political Subdivisions	12	12,558		(119)		0	0		0		12	12,558		(119)		States and Political Subdivisions	12	12,558		(119)		—	—		—		12	12,558		(119)
Corporate Notes	Corporate Notes	1	2,493		(7)		0	0		0		1	2,493		(7)		Corporate Notes	1	2,493		(7)		—	—		—		1	2,493		(7)
Total Debt Securities	Total Debt Securities	51	$	118,575	$	(949)	117	$	147,625	$	(1,721)	168	$	266,200	$	(2,670)	Total Debt Securities	51	$	118,575	$	(949)	117	$	147,625	$	(1,721)	168	$	266,200	$	(2,670)

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did 0tnot record an ~~allowance for credit losses~~ACL on its investment securities during the quarter ended ~~March 31,~~September 30, 2021 as the Company did 0tnot have securities classified as held-to-maturity at ~~March 31,~~September 30, 2021. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

Securities are evaluated for other-than-temporary impairment (“OTTI”) quarterly and more frequently if economic or market concerns warrant. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, the credit quality of the issuer, and whether the Company intends to sell the security or may be required to sell the security prior to maturity. The Company has reviewed all securities for OTTI.

As of ~~March 31,~~September 30, 2021 and December 31, 2020, no OTTI has been identified for any investment securities in our portfolio. We do not believe any individual unrealized loss as of ~~March 31,~~September 30, 2021 represents an OTTI. At ~~March 31,~~September 30, 2021, there were ~~203~~214 securities in an unrealized loss position and at December 31, 2020, there were 168 securities in an unrealized loss position. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. We generally do not intend to sell and it is not more likely than not that we will be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE

The composition of the loan portfolio by dollar amount is shown in the table below:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Commercial	Commercial					Commercial
Commercial Real Estate	Commercial Real Estate	$	1,384,541	$	1,453,799	Commercial Real Estate	$	1,346,953	$	1,453,799
Commercial and Industrial	Commercial and Industrial	460,264		557,164		Commercial and Industrial	387,402		557,164
Total Commercial Loans	Total Commercial Loans	1,844,805		2,010,963		Total Commercial Loans	1,734,355		2,010,963
Consumer	Consumer					Consumer
Residential Mortgages	Residential Mortgages	414,507		472,170		Residential Mortgages	449,118		472,170
Other Consumer	Other Consumer	49,516		57,647		Other Consumer	44,953		57,647
Total Consumer Loans	Total Consumer Loans	464,023		529,817		Total Consumer Loans	494,071		529,817
Construction	Construction	289,661		406,390		Construction	297,337		406,390
Other(1)	Other(1)	373,386		0		Other(1)	358,394		—
Total Portfolio Loans ~~(1)~~	Total Portfolio Loans ~~(1)~~	$	2,971,875	$	2,947,170	Total Portfolio Loans ~~(1)~~	$	2,884,157	$	2,947,170
Loans Held-for-Sale						Loans Held-for-Sale	4,889		25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value						Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	—		9,835
Total Loans						Total Loans	$	2,889,046	$	2,982,442

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

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends ~~and through stress testing~~ of the loans in these segments. The Company has specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total ~~risk based~~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~~risk-based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio. In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects.

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. ~~Unsecured~~Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating ~~leverage and demonstrate an ability to clear the outstanding balance on lines of credit for at least thirty consecutive days annually.~~leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. ~~If the borrower is unable to comply with this requirement and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.~~

The ~~Company provides~~Bank provided deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications, which suspends the requirement to categorize these deferrals as TDRs. The Bank launched successive deferral programs with short-term expirations. The Part I program was launched in March 2020 and expired at the end of August 2020. The deferrals in Part I ~~typically~~ provided for deferral of ~~both~~principal and up to the deferral of principal and interest, if requested through the expiry. The Part II program ~~was launched in July~~extended deferrals through December 31, 2020 ~~and expired at the end of December 2020. The deferrals in this program were needs based and required~~subject to the collection of updated financial information and ~~in certain situations, the~~ validation of need. The Bank requested verification of business and/or guarantor liquidity to ~~support~~ascertain the ~~business.~~viability of the business in a post-pandemic environment. Prior to the extension of the CARES Act, the ~~Company~~Bank launched the Part III program ~~that~~which offered borrowers in the Part II program an extension of deferrals through June 30, 2021. ~~For those borrowers~~Borrowers who opted into the Part III program ~~they are~~were required to provide monthly financial statements and remit payments on a quarterly basis ~~based on excess~~equal to the lesser of: i) 90% of free cash ~~flows, if any, up to their~~flow (EBITDA) or, ii) the otherwise contractual ~~payment. The majority~~payment (“recapture payment”). In the quarter ended March 31, 2021, recapture payments due from deferral clients totaled $2.8 million and of ~~deferrals in~~this the ~~Part III program are principal only deferrals. At the end~~Bank received $2.0 million. A number of customers opted out of the deferral ~~period,~~program after the first quarter. As a result, the second quarter 2021 recapture payments due from deferral clients totaled $1.2 million and of this the Bank received $0.8 million. Following the expiration of the deferral programs on June 30, 2021, for term loans payments will be applied to accrued interest first and ~~will resume principal payments once~~after accrued interest is ~~current.~~current, payments will be applied to principal. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity.

As of ~~March 31, 2021, we had 92 total customers opt for deferrals under Part III of the program, which continues through June~~September 30, 2021, ~~with an aggregate principal balance~~all but $6.5 million of ~~$407.0 million, or 13.7%, of total portfolio~~ loans resumed regularly scheduled payments and ~~a weighted average deferment period of 2.9 months.~~are continually evaluated through our credit monitoring

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CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

procedures. Cumulative deferred interest totaled $11.0 million as of June 30, 2021 but has been reduced to $2.8 million as of September 30, 2021.

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: ~~Commercial Real Estate, (“CRE”), Commercial and Industrial, (“~~CRE, C~~&I”),~~&I, Construction and Residential Mortgages. At March 31, 2021 related to the adoption of Topic 326, the initial break-out of other loans totaled $373.4 million consisting of loans that would otherwise have been included in the following loan segments: $136.3 million of CRE, $77.8 million of C&I, $49.6 million of Residential Mortgages and $109.7 million of Construction. This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to the Other loans segment, at adoption, resulted in an increase in current expected credit losses of $51.3 million.

~~Net deferred~~Deferred costs and fees included in the portfolio balances above were ~~$3.2~~$4.2 million and $3.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were ~~$212~~$198 thousand and $219 thousand at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were ~~$32.7~~$4.9 million and $25.4 million as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. In addition to mortgage loans held-for-sale, the Company had ~~$9.4 million and~~ $9.8 million in loans held-for-sale in connection with the sale of bank branches at ~~March 31, 2021 and~~ December 31, 2020, ~~respectively,~~ that ~~are expected to close~~closed in the second quarter of 2021.

Troubled Debt Restructurings (“TDR”)

The following table summarizes the Company’s TDRs as of the dates presented:


		March 31, 2021						December 31, 2020							September 30, 2021						December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Performing Loans		Nonperforming Loans		Total TDRs		Performing Loans		Nonperforming Loans		Total TDRs		(Dollars in Thousands)	Performing TDRs		Nonperforming TDRs		Total TDRs		Performing TDRs		Nonperforming TDRs		Total TDRs
Commercial	Commercial													Commercial
Commercial Real Estate	Commercial Real Estate	$	6,131	$	21,306	$	27,437	$	6,151	$	21,667	$	27,818	Commercial Real Estate	$	6,085	$	146	$	6,231	$	6,151	$	21,667	$	27,818
Commercial and Industrial	Commercial and Industrial	0		0		0		0		0		0		Commercial and Industrial	—		—		—		—		—		—
Total Commercial TDRs	Total Commercial TDRs	6,131		21,306		27,437		6,151		21,667		27,818		Total Commercial TDRs	6,085		146		6,231		6,151		21,667		27,818
Consumer	Consumer													Consumer
Residential Mortgages	Residential Mortgages	0		0		0		50,618		0		50,618		Residential Mortgages	—		—		—		50,618		—		50,618
Other Consumer	Other Consumer	0		0		0		0		0		0		Other Consumer	—		—		—		—		—		—
Total Consumer TDRs	Total Consumer TDRs	0		0		0		50,618		0		50,618		Total Consumer TDRs	—		—		—		50,618		—		50,618
Construction	Construction	549		3,319		3,868		52,481		3,319		55,800		Construction	534		3,071		3,605		52,481		3,319		55,800
Other	Other	99,970		0		99,970		0		0		0		Other	169,372		—		169,372		—		—		—
Total TDRs(1)	Total TDRs(1)	$	106,650	$	24,625	$	131,275	$	109,250	$	24,986	$	134,236	Total TDRs(1)	$	175,991	$	3,217	$	179,208	$	109,250	$	24,986	$	134,236

In order to maximize the collection of loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. A loan is a TDR if both of the following exist: 1) the debtor is experiencing financial difficulties, and 2) a creditor has granted a concession to the debtor that it would not normally grant. Nonaccrual loans that are modified can be placed back on accrual status when both principal and interest are current and it is probable that the ~~Bank~~Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. As of ~~March 31,~~September 30, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs ~~decreased $3.0~~increased $45.0 million, or ~~2.2%~~33.5% to ~~$131.3~~$179.2 million at ~~March 31,~~September 30, 2021 compared to $134.2 million at December 31, 2020. The ~~Bank received $2.9~~Company had $78.0 million new additions, related to the restructured loans to one large relationship, offset by $24.8 million of principal pay-downs and ~~had 0 new additions~~$8.2 million in charge-offs for the resolution of our two largest nonperforming credits during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company had 5 loans that were modified totaling $78.0 million. These loans were included in the Other category and restructured with enhanced pricing and collateral position of the relationships, during the third quarter ~~ended March 31,~~of 2021. TDRs of ~~$24.6~~$3.2 million and $25.0 million ~~were nonaccrual~~ as of ~~March 31,~~September 30, 2021 and December 31, 2020, ~~respectively.~~respectively, were loans modified as TDRs that experienced a

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CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

payment default subsequent to the rework date and were classified as nonperforming. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, the ~~Bank~~Company modified no loans that constituted a TDR that had ~~minimal~~significant commitments to lend additional funds. The ~~Bank~~Company had ~~one~~1 consumer automobile loan modified as a TDR during the three and nine months ended ~~March 31,~~September 30, 2020. The customer was experiencing financial difficulties, but sold the vehicle and the proceeds from that sale were applied to the loan balance. The remaining balance was charged-off, but the loan has been re-amortized for the customer to repay the balance by the end of 2021.

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~~CARTER BANKSHARES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)~~

There were 0no TDR payment defaults during the three and nine months ended ~~March 31, 2021.~~September 30, 2021 or September 30, 2020. For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. At March 31, 2021 and December 31, 2020, we had 0 and $25.0 million, respectively, in loans modified as TDR’s that had experienced a payment default subsequent to the rework date and were classified as nonperforming.

The specific reserve portion of the ACL on TDRs, if required, is determined by discounting the restructured cash flow at the original effective rate of the loan before modification or is based on the fair value of the collateral less cost to sell, if repayment of the loan is collateral dependent. If the resulting amount is less than the recorded book value, the Company either establishes a valuation allowance as a component of the ACL or charges off the individually evaluated loan balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio.

The following table presents nonperforming assets as of ~~March 31,~~September 30, 2021 and December 31, 2020.


		Nonperforming Assets					Nonperforming Assets
(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Nonperforming Assets	Nonperforming Assets					Nonperforming Assets
Nonaccrual loans	Nonaccrual loans	$	7,331	$	7,018	Nonaccrual loans	$	5,650	$	7,018
Nonaccrual TDRs	Nonaccrual TDRs	24,625		24,986		Nonaccrual TDRs	3,217		24,986
Total Nonaccrual Loans	Total Nonaccrual Loans	31,956		32,004		Total Nonaccrual Loans	8,867		32,004
OREO		14,031		15,722
Other Real Estate Owned, or (“OREO”)						Other Real Estate Owned, or (“OREO”)	13,265		15,722
Total Nonperforming Assets	Total Nonperforming Assets	$	45,987	$	47,726	Total Nonperforming Assets	$	22,132	$	47,726

As of ~~March 31,~~September 30, 2021 and December 31, 2020, we had ~~$677~~$261 thousand and $67 thousand, respectively, of residential real estate in the process of foreclosure. We also had ~~$107~~$49 thousand at ~~March 31,~~September 30, 2021 and $109 thousand at December 31, 2020 in residential real estate included in ~~other real estate owned (“OREO”).~~OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL at a level determined to be adequate to absorb ~~estimated~~current expected ~~probable incurred~~credit losses over the life of loans inherent in the loan portfolio as of the balance sheet date. Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business.

C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

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~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)~~

Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income ~~and assets~~ of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other Consumer ~~loans~~ are loans made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.

Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves ~~will~~may fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, and 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.~~amortization. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018. Our model is based on our best estimate of facts known with the most current information. ~~The~~Certain portions of the CECL model ~~was developed~~are inherently subjective and include, but are not limited to estimates with ~~subjective assumptions that may cause volatility driven by the following key factors:~~respect to: prepayment speeds, the timing of ~~contractual payments,~~prepayments, potential losses given default, discount ~~rate,~~rates and the timing of future cash flows. Management utilizes widely published economic forecasts as ~~well~~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 ~~factors. The discount rate is reflective~~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 ~~inherit risk in~~velocity of change. Therefore, management developed a framework to assess the ~~Other segment. A significant change in these assumptions could cause a significant impact~~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 ~~model causing volatility. Management reviews the~~CECL model output ~~for appropriateness~~ and ~~subjectively makes adjustments as needed.~~are designed to be counter cyclical, thereby reducing variability.

Credit Quality Indicators:

The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The Company has a loan review policy and annual scope report that details the level of loan review for ~~commercial~~ loans in a given year. Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses. In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function. Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

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

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

•A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $2$2.0 million that are not part of the top twenty review; and

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~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)~~

The Company’s internally assigned grades are as follows:

Pass – The Company uses six grades of pass. Generally, a pass rating indicates that the loan is currently performing and is of high quality.

Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant classified classification.

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of ~~March 31,~~September 30, 2021:


		Risk Rating																Risk Rating
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total			(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial Real Estate	Commercial Real Estate																		Commercial Real Estate
Pass	Pass	$	37,319	$	171,101	$	210,835	$	319,788	$	118,743	$	369,614	$	76,261	$	1,303,661		Pass	$	139,389	$	170,295	$	218,850	$	318,767	$	117,939	$	313,053	$	47,755	$	1,326,048
Special Mention	Special Mention	0		0		0		8,143		3,070		968		0		12,181			Special Mention	232		—		11,964		—		3,023		882		—		16,101
Substandard	Substandard	236		0		21,633		4,560		34,941		7,329		0		68,699			Substandard	—		—		468		3,061		215		1,060		—		4,804

Total Commercial Real Estate	Total Commercial Real Estate	$	37,555	$	171,101	$	232,468	$	332,491	$	156,754	$	377,911	$	76,261	$	1,384,541		Total Commercial Real Estate	$	139,621	$	170,295	$	231,282	$	321,828	$	121,177	$	314,995	$	47,755	$	1,346,953
Commercial and Industrial	Commercial and Industrial																		Commercial and Industrial
Pass	Pass	$	17,609	$	71,032	$	16,918	$	29,984	$	24,947	$	287,350	$	11,101	$	458,941		Pass	$	26,115	$	45,782	$	12,798	$	35,366	$	24,097	$	229,361	$	12,001	$	385,520
Special Mention	Special Mention	0		17		0		15		0		0		0		32			Special Mention	—		11		—		10		—		—		—		21
Substandard	Substandard	0		253		881		0		0		0		157		1,291			Substandard	14		1,300		400		5		—		—		142		1,861

Total Commercial and Industrial	Total Commercial and Industrial	$	17,609	$	71,302	$	17,799	$	29,999	$	24,947	$	287,350	$	11,258	$	460,264		Total Commercial and Industrial	$	26,129	$	47,093	$	13,198	$	35,381	$	24,097	$	229,361	$	12,143	$	387,402
Residential Mortgages	Residential Mortgages																		Residential Mortgages
Pass	Pass	$	23,306	$	104,594	$	93,203	$	107,169	$	11,615	$	58,158	$	11,000	$	409,045		Pass	$	133,755	$	93,334	$	71,582	$	80,527	$	8,826	$	45,558	$	11,567	$	445,149
Special Mention	Special Mention	0		0		0		0		0		764		0		764			Special Mention	—		—		—		—		—		565		—		565
Substandard	Substandard	0		0		1,085		1,394		228		1,991		0		4,698			Substandard	—		—		1,035		716		202		1,451		—		3,404

Total Residential Mortgages	Total Residential Mortgages	$	23,306	$	104,594	$	94,288	$	108,563	$	11,843	$	60,913	$	11,000	$	414,507		Total Residential Mortgages	$	133,755	$	93,334	$	72,617	$	81,243	$	9,028	$	47,574	$	11,567	$	449,118
Other Consumer	Other Consumer																		Other Consumer
Pass	Pass	$	1,684	$	15,626	$	2,450	$	1,032	$	325	$	27,922	$	332	$	49,371		Pass	$	8,344	$	11,777	$	1,366	$	600	$	224	$	22,185	$	339	$	44,835
Special Mention	Special Mention	0		0		5		0		0		0		0		5			Special Mention	—		—		—		—		—		—		—		—
Substandard	Substandard	0		4		23		73		40		0		0		140			Substandard	11		11		2		60		34		—		—		118

Total Other Consumer	Total Other Consumer	$	1,684	$	15,630	$	2,478	$	1,105	$	365	$	27,922	$	332	$	49,516		Total Other Consumer	$	8,355	$	11,788	$	1,368	$	660	$	258	$	22,185	$	339	$	44,953
Construction	Construction																		Construction
Pass	Pass	$	27,306	$	83,356	$	116,456	$	15,532	$	8,924	$	6,151	$	25,734	$	283,459		Pass	$	111,369	$	83,794	$	45,834	$	13,075	$	18,421	$	3,619	$	15,502	$	291,614
Special Mention	Special Mention	0		0		185		0		0		446		0		631			Special Mention	—		—		177		—		—		435		—		612
Substandard	Substandard	0		108		3,474		98		1,741		150		0		5,571			Substandard	—		108		3,070		96		1,741		96		—		5,111

Total Construction	Total Construction	$	27,306	$	83,464	$	120,115	$	15,630	$	10,665	$	6,747	$	25,734	$	289,661		Total Construction	$	111,369	$	83,902	$	49,081	$	13,171	$	20,162	$	4,150	$	15,502	$	297,337
Other	Other																		Other
Pass	Pass	$	0	$	0	$	0	$	0	$	3,544	$	0	$	1,090	$	4,634		Pass	$	—	$	—	$	—	$	—	$	122,872	$	62,821	$	—	$	185,693
Special Mention	Special Mention	0		0		0		0		119,389		61,683		0		181,072			Special Mention	—		—		—		—		—		3,329		—		3,329
Substandard	Substandard	0		0		0		89,055		48,524		50,101		0		187,680			Substandard	—		—		—		87,329		40,882		41,161		—		169,372

Total Other Loans	Total Other Loans	$	0	$	0	$	0	$	89,055	$	171,457	$	111,784	$	1,090	$	373,386		Total Other Loans	$	—	$	—	$	—	$	87,329	$	163,754	$	107,311	$	—	$	358,394
Total Loans
Total Portfolio Loans																			Total Portfolio Loans
Pass	Pass	$	107,224	$	445,709	$	439,862	$	473,505	$	168,098	$	749,195	$	125,518	$	2,509,111		Pass	$	418,972	$	404,982	$	350,430	$	448,335	$	292,379	$	676,597	$	87,164	$	2,678,859
Special Mention	Special Mention	0		17		190		8,158		122,459		63,861		0		194,685			Special Mention	232		11		12,141		10		3,023		5,211		—		20,628
Substandard	Substandard	236		365		27,096		95,180		85,474		59,571		157		268,079			Substandard	25		1,419		4,975		91,267		43,074		43,768		142		184,670

Total Loans		$	107,460	$	446,091	$	467,148	$	576,843	$	376,031	$	872,627	$	125,675	$	2,971,875
Total Portfolio Loans																			Total Portfolio Loans	$	419,229	$	406,412	$	367,546	$	539,612	$	338,476	$	725,576	$	87,306	$	2,884,157

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of ~~March 31,~~September 30, 2021.


(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total		(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial Real Estate	Commercial Real Estate																	Commercial Real Estate
Performing	Performing	$	37,319	$	171,101	$	210,835	$	332,491	$	156,754	$	377,822	$	76,261	$	1,362,583	Performing	$	139,621	$	170,295	$	230,815	$	321,828	$	120,962	$	314,925	$	47,755	$	1,346,201
Nonperforming	Nonperforming	236		0		21,633		0		0		89		0		21,958		Nonperforming	—		—		467		—		215		70		—		752
Total Commercial Real Estate	Total Commercial Real Estate	$	37,555	$	171,101	$	232,468	$	332,491	$	156,754	$	377,911	$	76,261	$	1,384,541	Total Commercial Real Estate	$	139,621	$	170,295	$	231,282	$	321,828	$	121,177	$	314,995	$	47,755	$	1,346,953
Commercial and Industrial	Commercial and Industrial																	Commercial and Industrial
Performing	Performing	$	17,609	$	71,049	$	17,391	$	29,999	$	24,947	$	287,350	$	11,101	$	459,446	Performing	$	26,129	$	47,093	$	12,798	$	35,376	$	24,097	$	229,361	$	12,001	$	386,855
Nonperforming	Nonperforming	0		253		408		0		0		0		157		818		Nonperforming	—		—		400		5		—		—		142		547
Total Commercial and Industrial	Total Commercial and Industrial	$	17,609	$	71,302	$	17,799	$	29,999	$	24,947	$	287,350	$	11,258	$	460,264	Total Commercial and Industrial	$	26,129	$	47,093	$	13,198	$	35,381	$	24,097	$	229,361	$	12,143	$	387,402
Residential Mortgages	Residential Mortgages																	Residential Mortgages
Performing	Performing	$	23,306	$	104,594	$	93,204	$	107,638	$	11,615	$	59,521	$	11,000	$	410,878	Performing	$	133,755	$	93,334	$	71,582	$	80,859	$	8,826	$	46,695	$	11,567	$	446,618
Nonperforming	Nonperforming	0		0		1,084		925		228		1,392		0		3,629		Nonperforming	—		—		1,035		384		202		879		—		2,500
Total Residential Mortgages	Total Residential Mortgages	$	23,306	$	104,594	$	94,288	$	108,563	$	11,843	$	60,913	$	11,000	$	414,507	Total Residential Mortgages	$	133,755	$	93,334	$	72,617	$	81,243	$	9,028	$	47,574	$	11,567	$	449,118
Other Consumer	Other Consumer																	Other Consumer
Performing	Performing	$	1,684	$	15,629	$	2,457	$	1,034	$	353	$	27,922	$	332	$	49,411	Performing	$	8,355	$	11,780	$	1,366	$	600	$	251	$	22,185	$	339	$	44,876
Nonperforming	Nonperforming	0		1		21		71		12		0		0		105		Nonperforming	—		8		2		60		7		—		—		77
Total Other Consumer	Total Other Consumer	$	1,684	$	15,630	$	2,478	$	1,105	$	365	$	27,922	$	332	$	49,516	Total Other Consumer	$	8,355	$	11,788	$	1,368	$	660	$	258	$	22,185	$	339	$	44,953
Construction	Construction																	Construction
Performing	Performing	$	27,306	$	83,356	$	116,641	$	15,630	$	8,924	$	6,627	$	25,734	$	284,218	Performing	$	111,369	$	83,795	$	46,010	$	13,171	$	18,421	$	4,078	$	15,502	$	292,346
Nonperforming	Nonperforming	0		108		3,474		0		1,741		120		0		5,443		Nonperforming	—		107		3,071		—		1,741		72		—		4,991
Total Construction	Total Construction	$	27,306	$	83,464	$	120,115	$	15,630	$	10,665	$	6,747	$	25,734	$	289,661	Total Construction	$	111,369	$	83,902	$	49,081	$	13,171	$	20,162	$	4,150	$	15,502	$	297,337
Other	Other																	Other
Performing	Performing	$	0	$	0	$	0	$	89,055	$	171,457	$	111,784	$	1,090	$	373,386	Performing	$	—	$	—	$	—	$	87,329	$	163,754	$	107,311	$	—	$	358,394
Nonperforming	Nonperforming	0		0		0		0		0		0		0		0		Nonperforming	—		—		—		—		—		—		—		—
Total Other Loans	Total Other Loans	$	0	$	0	$	0	$	89,055	$	171,457	$	111,784	$	1,090	$	373,386	Total Other Loans	$	—	$	—	$	—	$	87,329	$	163,754	$	107,311	$	—	$	358,394
Total Loans
Total Portfolio Loans																		Total Portfolio Loans
Performing	Performing	$	107,224	$	445,729	$	440,528	$	575,847	$	374,050	$	871,026	$	125,518	$	2,939,922	Performing	$	419,229	$	406,297	$	362,571	$	539,163	$	336,311	$	724,555	$	87,164	$	2,875,290
Nonperforming	Nonperforming	236		362		26,620		996		1,981		1,601		157		31,953		Nonperforming	—		115		4,975		449		2,165		1,021		142		8,867
Total Loans		$	107,460	$	446,091	$	467,148	$	576,843	$	376,031	$	872,627	$	125,675	$	2,971,875
Total Portfolio Loans																		Total Portfolio Loans	$	419,229	$	406,412	$	367,546	$	539,612	$	338,476	$	725,576	$	87,306	$	2,884,157

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the aging of the amortized cost basis in past due loans for our portfolio segments as of ~~March 31,~~September 30, 2021 and December 31, 2020:


		March 31, 2021													September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans		(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans
Commercial Real Estate	Commercial Real Estate	$	1,361,963	$	620	$	0	$	620	$	21,958	$	1,384,541	Commercial Real Estate	$	1,339,340	$	79	$	6,782	$	6,861	$	752	$	1,346,953
Commercial and Industrial	Commercial and Industrial	457,569		1,622		255		1,877		818		460,264		Commercial and Industrial	385,547		1,308		—		1,308		547		387,402
Residential Mortgages	Residential Mortgages	410,771		46		61		107		3,629		414,507		Residential Mortgages	446,242		376		—		376		2,500		449,118
Other Consumer	Other Consumer	49,074		127		210		337		105		49,516		Other Consumer	44,585		133		158		291		77		44,953
Construction	Construction	284,218		0		0		0		5,443		289,661		Construction	292,346		—		—		—		4,991		297,337
Other	Other	369,842		3,544		0		3,544		0		373,386		Other	358,394		—		—		—		—		358,394
Total (1)	Total (1)	$	2,933,437	$	5,959	$	526	$	6,485	$	31,953	$	2,971,875	Total (1)	$	2,866,454	$	1,896	$	6,940	$	8,836	$	8,867	$	2,884,157


		December 31, 2020													December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans		(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans
Commercial Real Estate	Commercial Real Estate	$	1,428,092	$	3,487	$	329	$	3,816	$	21,891	$	1,453,799	Commercial Real Estate	$	1,428,092	$	3,487	$	329	$	3,816	$	21,891	$	1,453,799
Commercial and Industrial	Commercial and Industrial	556,324		194		190		384		456		557,164		Commercial and Industrial	556,324		194		190		384		456		557,164
Construction	Construction	400,775		193		91		284		5,331		406,390		Construction	400,775		193		91		284		5,331		406,390
Residential Mortgages	Residential Mortgages	466,688		1,347		0		1,347		4,135		472,170		Residential Mortgages	466,688		1,347		—		1,347		4,135		472,170
Other Consumer	Other Consumer	56,890		278		295		573		184		57,647		Other Consumer	56,890		278		295		573		184		57,647
Total	Total	$	2,908,769	$	5,499	$	905	$	6,404	$	31,997	$	2,947,170	Total	$	2,908,769	$	5,499	$	905	$	6,404	$	31,997	$	2,947,170

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan as of ~~March 31,~~September 30, 2021. For the three and nine months ended ~~March 31,~~September 30, 2021, the amount of interest income on nonaccrual loans was immaterial. There were no loans at ~~March 31,~~September 30, 2021 ~~were~~ that were past due ~~more than~~ more than 90 days and still accruing.


		March 31, 2021									September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual With No Related Allowance		Past Due 90+ Days Still Accruing		(Dollars in Thousands)	Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual With No Related Allowance		Past Due 90+ Days Still Accruing
Commercial Real Estate	Commercial Real Estate	$	21,891	$	21,958	$	146	$	0	Commercial Real Estate	$	21,891	$	752	$	146	$	—
Commercial and Industrial	Commercial and Industrial	456		818		0		0		Commercial and Industrial	456		547		—		—
Residential Mortgages	Residential Mortgages	4,135		3,629		0		0		Residential Mortgages	4,135		2,500		—		—
Other Consumer	Other Consumer	184		105		0		0		Other Consumer	184		77		—		—
Construction	Construction	5,331		5,443		3,321		0		Construction	5,331		4,991		3,073		—
Other	Other	0		0		0		0		Other	—		—		—		—
Total		$	31,997	$	31,953	$	3,467	$	0
Total Portfolio Loans										Total Portfolio Loans	$	31,997	$	8,867	$	3,219	$	—

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status, but is considered a TDR. Impaired loans with a commitment of $1.0 million or more are individually evaluated. During the three and nine months ended September 30, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

A loan is considered individually evaluated when it is transferred to nonaccrual status, or remains on accrual status but is considered a TDR. Individually evaluated loans with a commitment of $1.0 million or more are evaluated as individually evaluated loans. During the three months ended March 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

The following table presents the amortized cost basis of individually evaluated loans as of ~~March 31~~September 30, 2021. Changes in the fair value of the collateral for individually evaluated loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.


	~~March 31,~~September 30, 2021
	Type of Collateral
(Dollars in Thousands)	Real Estate
Commercial Real Estate	$	~~24,220~~3,208
Commercial and Industrial	0—
Residential Mortgages	0—
Other Consumer	0—
Construction	~~5,060~~4,811
Other	0—
Total	$	~~29,280~~8,019

The following table presents activity in the ACL and ~~ALL~~allowance for loan losses (“ALL”), for the three and nine months ended ~~March 31,~~September 30, 2021 and ~~March 31,~~September 30, 2020, respectively:


		Three Months Ended March 31, 2021															Three Months Ended September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other (1)		Total		(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other (1)		Total
Allowance for Credit Losses on Loans:	Allowance for Credit Losses on Loans:															Allowance for Credit Losses on Loans:
Balance at Beginning of Period	Balance at Beginning of Period	$	34,871	$	3,643	$	2,000	$	2,479	$	6,357	$	4,724	$	54,074	Balance at Beginning of Period	$	28,141	$	4,714	$	5,367	$	1,221	$	8,145	$	61,731	$	109,319
Impact of CECL Adoption		6,587		1,379		3,356		(877)		(80)		51,277		61,642
Provision for Credit Losses on Loans	Provision for Credit Losses on Loans	884		(117)		(156)		478		768		0		1,857		Provision for Credit Losses on Loans	(304)		4		266		410		(789)		—		(413)
Charge-offs	Charge-offs	0		(1)		(195)		(870)		0		0		(1,066)		Charge-offs	(9,187)		(188)		(56)		(424)		—		—		(9,855)
Recoveries	Recoveries	0		1		166		137		61		0		365		Recoveries	9		3		1		198		32		—		243
Net (Charge-offs) / Recoveries	Net (Charge-offs) / Recoveries	0		0		(29)		(733)		61		0		(701)		Net (Charge-offs) / Recoveries	(9,178)		(185)		(55)		(226)		32		—		(9,612)
Balance at End of Period	Balance at End of Period	$	42,342	$	4,905	$	5,171	$	1,347	$	7,106	$	56,001	$	116,872	Balance at End of Period	$	18,659	$	4,533	$	5,578	$	1,405	$	7,388	$	61,731	$	99,294

(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I , residential mortgages and construction. The allowance balance at the beginning of period ~~were~~was reclassified to Other from their original loan segments: CRE, C&I, residential mortgages and construction to conform to current presentation.


	Nine Months Ended September 30, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other (1)		Total
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	34,871	$	3,643	$	2,000	$	2,479	$	6,357	$	4,724	$	54,074
Impact of CECL Adoption	6,587		1,379		3,356		(877)		(80)		51,277		61,642
Provision for Credit Losses on Loans	(5,523)		(298)		327		1,157		1,018		5,730		2,411
Charge-offs	(17,425)		(196)		(273)		(1,833)		—		—		(19,727)
Recoveries	149		5		168		479		93		—		894
Net (Charge-offs) / Recoveries	(17,276)		(191)		(105)		(1,354)		93		—		(18,833)
Balance at End of Period	$	18,659	$	4,533	$	5,578	$	1,405	$	7,388	$	61,731	$	99,294

Three Months Ended March 31, 2020
(Dollars in Thousands) Commercial
Real Estate Commercial
and
Industrial Construction Residential
Mortgage Other
Consumer Total
Allowance for Loan Losses on Loans:
Balance at Beginning of Period $ 24,706 $ 3,601 $ 5,420 $ 1,736 $ 3,299 $ 38,762
Provision for Loan Losses on Loans 660 426 1,914 80 1,718 4,798
Charge-offs 0 (38) 0 (5) (1,527) (1,570)
Recoveries 707 1 0 0 244 952
Net Recoveries / (Charge-offs) 707 (37) 0 (5) (1,283) (618)
Balance at End of Period $ 26,073 $ 3,990 $ 7,334 $ 1,811 $ 3,734 $ 42,942
(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I , residential mortgages and construction. The allowance balance at the beginning of period was reclassified to Other from their original loan segments: CRE, C&I, residential mortgages and construction to conform to current presentation.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)


	Three Months Ended September 30, 2020
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total
Allowance for Loan Losses on Loans:
Balance at Beginning of Period	$	28,546	$	4,831	$	8,377	$	2,186	$	3,465	$	47,405
Provision for Loan Losses on Loans	1,662		276		726		219		31		2,914
Charge-offs	—		—		—		—		(680)		(680)
Recoveries	—		119		—		1		206		326
Net Recoveries / (Charge-offs)	—		119		—		1		(474)		(354)
Balance at End of Period	$	30,208	$	5,226	$	9,103	$	2,406	$	3,022	$	49,965


	Nine Months Ended September 30, 2020
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total
Allowance for Loan Losses on Loans:
Balance at Beginning of Period	$	24,706	$	3,601	$	5,420	$	1,736	$	3,299	$	38,762
Provision for Loan Losses on Loans	4,835		1,550		3,683		689		2,428		13,185
Charge-offs	(40)		(46)		—		(20)		(3,301)		(3,407)
Recoveries	707		121		—		1		596		1,425
Net Recoveries / (Charge-offs)	667		75		—		(19)		(2,705)		(1,982)
Balance at End of Period	$	30,208	$	5,226	$	9,103	$	2,406	$	3,022	$	49,965

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 $373.4 million at March 31, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this pool resulted in an increase in expected credit losses of $51.3 million, at adoption, and is disclosed in the Other ~~line item~~segment in the ~~table above.~~

2021 tables below.

At December 31, 2020, the aforementioned Other ~~line item~~segment within the probable incurred loss model included $102.5 million of impaired loans and the remaining $270.9 million were not impaired and remained in their respective segments. Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $4.7 million at December 31, 2020.

~~For the quarter ended March 31, 2021, our~~Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. ~~The~~Certain portions of the CECL model ~~was developed~~are inherently subjective and include, but are not limited to, estimates with ~~subjective assumptions that is driven by the following key factors:~~respect to: prepayment speeds, the timing of prepayments, ~~loss~~potential losses given ~~defaults as well as other factors including the~~default, discount ~~rate~~rates and ~~ultimately~~ 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 $56.0 million upon adoption, which is an increase from the $4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased ~~$62.8~~$45.2 million to ~~$116.9~~$99.3 million ~~for the three months ended March 31,~~at September 30, 2021 compared to $54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL ofthat increased reserves by $61.6 million. In the first ~~quarter~~nine months of 2021, adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral. Management reviews and analyzes the monthly operating statements of commercial clients in the deferral program. Management observed continued deterioration on hospitality loans with aggregate principal balances of $50.9 million that are on deferral as of March 31, 2021. This resulted in a current expected credit loss of $11.7 million. The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected losses of $10.2 million as of January 1, 2021. Between the Day 1 model and the model ended March 31, 2021 a loan with a principal balance of $8.1 million was recognized resulting in additional current expected losses of $1.5 million during the three months ended March 31, 2021.

Included in the provision for unfunded commitments in the first quarter of 2021 is a release of $0.3 million for the life-of-loss reserve for unfunded commitments compared to a release of $0.5 million in the fourth quarter of 2020, which was included in noninterest expense.

~~The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of March 31, 2021:~~

March 31, 2021
(Dollars in Thousands) Commercial
Real Estate Commercial
and
Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio
Loans
Pass $ 1,303,661 $ 458,941 $ 409,045 $ 49,371 $ 283,459 $ 4,634 $ 2,509,111
Special Mention 12,181 32 764 5 631 181,072 194,685
Substandard 68,699 1,291 4,698 140 5,571 187,680 268,079
Doubtful 0 0 0 0 0 0 0
Loss 0 0 0 0 0 0 0
Total Portfolio Loans $ 1,384,541 $ 460,264 $ 414,507 $ 49,516 $ 289,661 $ 373,386 $ 2,971,875
Performing $ 1,362,583 $ 459,446 $ 410,878 $ 49,411 $ 284,218 $ 373,386 $ 2,939,922
Nonperforming 21,958 818 3,629 105 5,443 0 31,953
Total Portfolio Loans $ 1,384,541 $ 460,264 $ 414,507 $ 49,516 $ 289,661 $ 373,386 $ 2,971,875

Prior to the adoption of Topic 326 on January 1, 2021, we calculated our allowance for loan losses using an incurred loan loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

certain loans on deferral. Management reviewed and analyzed the monthly operating statements of commercial clients in the Part III deferral program. The deferral program expired June 30, 2021. The majority of our clients in the deferral program experienced recoveries starting in the spring of 2021. Based on the ongoing review of operating statements, management identified a lag in recovery with respect to loans with an aggregate principal balance of $62.0 million. These loans were addressed throughout the nine months ended September 30, 2021 as additional information was received and analyzed as follows. The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected losses of $10.2 million. In the quarter ended March 31, 2021 the model recognized the deterioration of a loan with a principal balance of $8.1 million which resulted in current expected losses of $1.5 million and an additional $0.6 million standard qualitative general reserve. In the third quarter ended September 30, 2021 the Bank sold these loans with an unpaid principal balance of $50.2 million which resulted in charge-offs totaling $9.2 million and a net release of reserves of $3.1 million. Additionally, in the third quarter ended September 30, 2021 the model recognized the deterioration of loans with an aggregate principal balance of $12.0 million which resulted in current expected losses of $1.6 million. In summary, out of the $398.5 million in the deferral program as of June 30, 2021, only $12.0 million remain a concern and have been reserved for as of September 30, 2021.

Included in the provision for unfunded commitments for the three and nine months ended September 30, 2021 was a release of $0.1 million and $0.9 million, respectively, for the life-of-loss reserve for unfunded commitments.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of September 30, 2021:


	September 30, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Portfolio Loans
Pass	$	1,326,048	$	385,520	$	445,149	$	44,835	$	291,614	$	185,693	$	2,678,859
Special Mention	16,101		21		565		—		612		3,329		20,628
Substandard	4,804		1,861		3,404		118		5,111		169,372		184,670
Doubtful	—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—
Total Portfolio Loans	$	1,346,953	$	387,402	$	449,118	$	44,953	$	297,337	$	358,394	$	2,884,157

Performing	$	1,346,201	$	386,855	$	446,618	$	44,876	$	292,346	$	358,394	$	2,875,290
Nonperforming	752		547		2,500		77		4,991		—		8,867
Total Portfolio Loans	$	1,346,953	$	387,402	$	449,118	$	44,953	$	297,337	$	358,394	$	2,884,157

Prior to the adoption of Topic 326 on January 1, 2021, we calculated our ALL using an incurred loan loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status as of December 31, 2020:


		December 31, 2020													December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total Portfolio Loans		(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total Portfolio Loans
Pass	Pass	$	1,281,106	$	478,536	$	289,781	$	415,773	$	57,418	$	2,522,614	Pass	$	1,281,106	$	478,536	$	289,781	$	415,773	$	57,418	$	2,522,614
Special Mention	Special Mention	126,535		48		58,899		723		6		186,211		Special Mention	126,535		48		58,899		723		6		186,211
Substandard	Substandard	46,158		78,580		57,710		55,674		223		238,345		Substandard	46,158		78,580		57,710		55,674		223		238,345
Doubtful	Doubtful	0		0		0		0		0		0		Doubtful	—		—		—		—		—		—
Loss	Loss	0		0		0		0		0		0		Loss	—		—		—		—		—		—
Total Portfolio Loans	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170

Performing	Performing	$	1,431,908	$	556,708	$	401,059	$	468,035	$	57,463	$	2,915,173	Performing	$	1,431,908	$	556,708	$	401,059	$	468,035	$	57,463	$	2,915,173
Nonperforming	Nonperforming	21,891		456		5,331		4,135		184		31,997		Nonperforming	21,891		456		5,331		4,135		184		31,997
Total Portfolio Loans	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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


		December 31, 2020													December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total		(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Construction		Residential Mortgage		Other Consumer		Total
Allowance for Loan Losses:	Allowance for Loan Losses:													Allowance for Loan Losses:
Individually Evaluated for Impairment	Individually Evaluated for Impairment	$	13,773	$	0	$	1,477	$	0	$	0	$	15,250	Individually Evaluated for Impairment	$	13,773	$	—	$	1,477	$	—	$	—	$	15,250
Collectively Evaluated for Impairment	Collectively Evaluated for Impairment	22,655		5,064		6,527		2,099		2,479		38,824		Collectively Evaluated for Impairment	22,655		5,064		6,527		2,099		2,479		38,824
Total Allowance for Loan Losses	Total Allowance for Loan Losses	$	36,428	$	5,064	$	8,004	$	2,099	$	2,479	$	54,074	Total Allowance for Loan Losses	$	36,428	$	5,064	$	8,004	$	2,099	$	2,479	$	54,074

Total Portfolio Loans:	Total Portfolio Loans:													Total Portfolio Loans:
Individually Evaluated for Impairment	Individually Evaluated for Impairment	$	27,666	$	0	$	56,987	$	50,618	$	0	$	135,271	Individually Evaluated for Impairment	$	27,666	$	—	$	56,987	$	50,618	$	—	$	135,271
Collectively Evaluated for Impairment	Collectively Evaluated for Impairment	1,426,133		557,164		349,403		421,552		57,647		2,811,899		Collectively Evaluated for Impairment	1,426,133		557,164		349,403		421,552		57,647		2,811,899
Total Portfolio Loans	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170	Total Portfolio Loans	$	1,453,799	$	557,164	$	406,390	$	472,170	$	57,647	$	2,947,170

The recorded investment in loans excludes accrued interest receivable. Individually evaluated loans do not include certain TDR loans which are less than $1.0 million. The following table includes the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020.


(Dollars in Thousands)	(Dollars in Thousands)	Unpaid Principal Balance		Recorded Balance		Specific Reserve		(Dollars in Thousands)	Unpaid Principal Balance		Recorded Balance		Specific Reserve
Loans without a Specific Valuation Allowance	Loans without a Specific Valuation Allowance							Loans without a Specific Valuation Allowance
Commercial Real Estate	Commercial Real Estate	$	3,236	$	3,236	$	—	Commercial Real Estate	$	3,236	$	3,236	$	—
Construction	Construction	55,248		55,248		—		Construction	55,248		55,248		—
Residential Mortgages	Residential Mortgages	50,618		50,618		—		Residential Mortgages	50,618		50,618		—
Loans with a Specific Valuation Allowance	Loans with a Specific Valuation Allowance							Loans with a Specific Valuation Allowance
Commercial Real Estate	Commercial Real Estate	24,430		24,430		13,773		Commercial Real Estate	24,430		24,430		13,773
Commercial & Industrial	Commercial & Industrial	0		0		0		Commercial & Industrial	—		—		—
Construction	Construction	1,739		1,739		1,477		Construction	1,739		1,739		1,477
Total by Category	Total by Category							Total by Category
Commercial Real Estate	Commercial Real Estate	27,666		27,666		13,773		Commercial Real Estate	27,666		27,666		13,773
Commercial & Industrial	Commercial & Industrial	0		0		0		Commercial & Industrial	—		—		—
Construction	Construction	56,987		56,987		1,477		Construction	56,987		56,987		1,477
Residential Mortgages	Residential Mortgages	50,618		50,618		0		Residential Mortgages	50,618		50,618		—
Total Impaired Loans	Total Impaired Loans	$	135,271	$	135,271	$	15,250	Total Impaired Loans	$	135,271	$	135,271	$	15,250

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the year-to-date average recorded investment and interest income recognized on individually evaluated loans for the three and nine months ended ~~March 31,~~September 30, 2020:


		Three Months Ended March 31, 2020					September 30, 2020		Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Average Investment on Individually Evaluated Loans		Interest Income Recognized		(Dollars in Thousands)	Average Investment on Impaired Loans		Interest Income Recognized		Interest Income Recognized
Loans without a Specific Valuation Allowance	Loans without a Specific Valuation Allowance					Loans without a Specific Valuation Allowance
Commercial Real Estate	Commercial Real Estate	$	3,992	$	32	Commercial Real Estate	$	4,442	$	154	$	218
Construction	Construction	58,104		413		Construction	57,365		432		1,440
Residential Mortgages	Residential Mortgages	52,315		620		Residential Mortgages	51,990		429		1,477
Loans with a Specific Valuation Allowance	Loans with a Specific Valuation Allowance					Loans with a Specific Valuation Allowance
Commercial Real Estate	Commercial Real Estate	28,748		0		Commercial Real Estate	28,617		—		—
Commercial & Industrial	Commercial & Industrial	340		0		Commercial & Industrial	230		—		—
Construction	Construction	870		0		Construction	1,739		—		—
Residential Mortgages						Residential Mortgages	—		—		—
Total by Category	Total by Category					Total by Category
Commercial Real Estate	Commercial Real Estate	32,740		32		Commercial Real Estate	33,059		154		218
Commercial & Industrial	Commercial & Industrial	340		0		Commercial & Industrial	230		—		—
Construction	Construction	58,974		413		Construction	59,104		432		1,440
Residential Mortgages	Residential Mortgages	52,315		620		Residential Mortgages	51,990		429		1,477
Total Individually Evaluated Loans		$	144,369	$	1,065
Total Impaired Loans						Total Impaired Loans	$	144,383	$	1,015	$	3,135

NOTE 6 – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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

Recurring Basis

Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy.

Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk.

The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments dues to changes in interest rates.

Nonrecurring Basis

Individually Evaluated ~~Loans~~

Loans: Individually evaluated loans with an outstanding balance greater than or equal to $1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy.

Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

OREO

OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. At ~~March 31,~~September 30, 2021 ~~our~~ OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:


		March 31, 2021									September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Dollars in Thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	Assets									Assets
Securities Available-for-Sale	Securities Available-for-Sale	$	780,032	$	0	$	769,762	$	10,270	Securities Available-for-Sale	$	897,546	$	4,419	$	879,505	$	13,622
Derivatives	Derivatives	3,295		0		3,295		0		Derivatives	3,354		—		3,354		—
Total	Total	$	783,327	$	0	$	773,057	$	10,270	Total	$	900,900	$	4,419	$	882,859	$	13,622

Liabilities	Liabilities									Liabilities
Derivatives	Derivatives	$	3,129	$	0	$	3,129	$	0	Derivatives	$	3,429	$	—	$	3,429	$	—
Total	Total	$	3,129	$	0	$	3,129	$	0	Total	$	3,429	$	—	$	3,429	$	—


		December 31, 2020									December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Dollars in Thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	Assets									Assets
Securities Available-for-Sale	Securities Available-for-Sale	$	778,679	$	0	$	768,316	$	10,363	Securities Available-for-Sale	$	778,679	$	—	$	768,316	$	10,363
Derivatives	Derivatives	4,493		0		4,493		0		Derivatives	4,493		—		4,493		—
Total	Total	$	783,172	$	0	$	772,809	$	10,363	Total	$	783,172	$	—	$	772,809	$	10,363

Liabilities	Liabilities									Liabilities
Derivatives	Derivatives	$	4,756	$	0	$	4,756	$	0	Derivatives	$	4,756	$	—	$	4,756	$	—
Total	Total	$	4,756	$	0	$	4,756	$	0	Total	$	4,756	$	—	$	4,756	$	—

There were no transfers between Level 1 and Level 2 during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2021 or the year ended December 31, 2020.

We have invested in subordinated debt of other financial institutions. We have 23 securities ~~of $5.0~~totaling $13.6 million ~~each~~ that are considered to be Level 3 securities at ~~March 31,~~September 30, 2021 and 2 totaling $10.4 million at December 31, 2020. The change in the fair value of Level 3 securities available-for-sale from $10.4 million at December 31, 2020 to ~~$10.3~~$13.6 million at ~~March 31,~~September 30, 2021 is attributable to the calculated change in fair value as further detailed ~~below.~~below as well as a new security in the second quarter of 2021 for $3.5 million. The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue ~~efficient and profitable operations, and the institution’s core earnings ability, liquidity management platform and current on and off balance sheet interest rate risk exposures.~~

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NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

efficient and profitable operations, and the institution’s core earnings ability, liquidity management platform and current on and off balance sheet interest rate risk exposures.

Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:


		March 31, 2021									September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value		(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value
OREO	OREO	$	0	$	0	$	14,031	$	14,031	OREO	$	—	$	—	$	13,265	$	13,265
Individually Evaluated Loans	Individually Evaluated Loans	$	0	$	0	$	10,810	$	10,810	Individually Evaluated Loans	$	—	$	—	$	2,125	$	2,125


		December 31, 2020									December 31, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value		(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value
OREO	OREO	$	0	$	0	$	15,722	$	15,722	OREO	$	—	$	—	$	15,722	$	15,722
Impaired Loans	Impaired Loans	$	0	$	0	$	10,919	$	10,919	Impaired Loans	$	—	$	—	$	10,919	$	10,919

Individually evaluated loans had a net carrying amount of ~~$10.8~~$2.1 million at ~~March 31,~~September 30, 2021 with a valuation allowance of ~~$15.0 million, resulting in a $0.3 million decrease in provision for credit losses for the three months ended March 31, 2021.~~$2.7 million. Impaired loans had a net carrying amount of $10.9 million at December 31, 2020 with a valuation allowance of $15.3 ~~million, resulting in a $9.1 million increase in provision for credit losses for the year ended December 31, 2020.~~million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of ~~$14.0~~$13.3 million as of ~~March 31,~~September 30, 2021, compared with $15.7 million at December 31, ~~2020, respectively.~~2020. Write-downs of ~~$0.1~~$3.3 million were recorded on OREO for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to ~~$0.1~~$1.4 million for the same period in 2020.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:
March 31, 2021
(Dollars in Thousands) Fair
Value Valuation
Technique Unobservable
Inputs Weighted
Range Average
Assets
Individually Evaluated Loans $ 1,163 Discounted Appraisals Estimated Selling Costs 43.0 % 43.0 %
Individually Evaluated Loans 9,401 Discounted Appraisals Estimated Selling Costs & Qualitative Adjustments 12.0 – 50.0% 33.1 %
Individually Evaluated Loans 246 Discounted Appraisals Estimated Selling Costs 23.3 % 23.3 %
Total Individually Evaluated Loans $ 10,810
Other Real Estate Owned $ 10,984 Appraisals Estimated Selling Costs 6.0 – 10.0% 6.5 %
Other Real Estate Owned 1,145 Discounted Cash Flow Discount Rate 6.3 % 6.3 %
Other Real Estate Owned 1,470 Internal Valuations Estimated Selling Costs 5.0 % 5.0 %
Other Real Estate Owned 432 Discounted Internal Valuations Management’s Discount & Estimated Selling Costs 50.7 – 73.5% 65.5 %
Total Other Real Estate Owned $ 14,031


		December 31, 2020									September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Range		Average		(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Range		Average
Assets	Assets									Assets
Impaired Loans		$	1,163	Discounted Appraisals	Estimated Selling Costs	43.0	%	43.0	%
Impaired Loans		9,494		Discounted Appraisals	Estimated Selling Costs & Qualitative Adjustments	12.0 – 50.0%		33.2	%
Impaired Loans		262		Discounted Appraisals	Estimated Selling Costs	20.9	%	20.9	%
Total Impaired Loans		$	10,919
Individually Evaluated Loans										Individually Evaluated Loans	$	1,890	Discounted Appraisals	Estimated Selling Costs & Qualitative Adjustments	50.0 – 50.0%		50.0	%
Individually Evaluated Loans										Individually Evaluated Loans	235		Discounted Appraisals	Estimated Selling Costs	20.8	%	20.8	%
Total Individually Evaluated Loans										Total Individually Evaluated Loans	$	2,125

Other Real Estate Owned	Other Real Estate Owned	$	11,972	Appraisals	Estimated Selling Costs	6.0 – 10.0%		6.5	%	Other Real Estate Owned	$	9,503	Appraisals	Estimated Selling Costs	6.0 – 10.0%		6.5	%
Other Real Estate Owned	Other Real Estate Owned	1,260		Discounted Cash Flow	Discount Rate	6.3	%	6.3	%	Other Real Estate Owned	922		Discounted Cash Flow	Discount Rate	6.3	%	6.3	%
Other Real Estate Owned	Other Real Estate Owned	1,583		Internal Valuations	Estimated Selling Costs	5.0	%	5.0	%	Other Real Estate Owned	424		Internal Valuations	Estimated Selling Costs	5.0	%	5.0	%
Other Real Estate Owned	Other Real Estate Owned	907		Discounted Internal Valuations	Management’s Discount & Estimated Selling Costs	33.7 – 73.5%		55.5	%	Other Real Estate Owned	2,416		Discounted Internal Valuations	Management’s Discount & Estimated Selling Costs	5.0 % – 50.7%		11.5	%
Total Other Real Estate Owned	Total Other Real Estate Owned	$	15,722							Total Other Real Estate Owned	$	13,265

3031

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)


	December 31, 2020
(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Range		Average
Assets
Impaired Loans	$	1,163	Discounted Appraisals	Estimated Selling Costs	43.0	%	43.0	%
Impaired Loans	9,494		Discounted Appraisals	Estimated Selling Costs & Qualitative Adjustments	12.0 – 50.0%		33.2	%
Impaired Loans	262		Discounted Appraisals	Estimated Selling Costs	20.9	%	20.9	%
Total Impaired Loans	$	10,919

Other Real Estate Owned	$	11,972	Appraisals	Estimated Selling Costs	6.0 – 10.0%		6.5	%
Other Real Estate Owned	1,260		Discounted Cash Flow	Discount Rate	6.3	%	6.3	%
Other Real Estate Owned	1,583		Internal Valuations	Estimated Selling Costs	5.0	%	5.0	%
Other Real Estate Owned	907		Discounted Internal Valuations	Management’s Discount & Estimated Selling Costs	33.7 – 73.5%		55.5	%
Total Other Real Estate Owned	$	15,722

A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales and therefore represents an average recovery rate based on the transaction sizes and asset types in the population examined. Management considers the unique attributes and characteristics of each specific ~~impaired~~individually evaluated loan and may use judgement to adjust the baseline discount rate when appropriate.

The carrying values and estimated fair values of our financial instruments at ~~March 31,~~September 30, 2021 and December 31, 2020 are presented in the following tables. Fair values for ~~March 31,~~September 30, 2021 and December 31, 2020 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

GAAP requires disclosure of fair value information about financial instruments carried at book value on the consolidated balance sheet. inIn cases where quoted market prices are not available, fair values are based on estimates using present ~~vale~~value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair Value Measurements at March 31, 2021
(Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total
Financial Assets:
Cash and Cash Equivalents $ 219,154 $ 42,899 $ 176,255 $ 0 $ 219,154
Securities Available-for-Sale 780,032 0 769,762 10,270 780,032
Loans Held-for-Sale 32,737 0 0 32,737 32,737
Portfolio Loans, net 2,855,003 0 0 2,813,058 2,813,058
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value 9,423 0 0 9,423 9,423
Federal Home Loan Bank Stock, at Cost 3,215 0 0 NA NA
Other Assets- Interest Rate Derivatives 3,295 0 3,295 0 3,295
Accrued Interest Receivable 31,737 0 2,833 28,904 31,737
Financial Liabilities:
Deposits $ 3,609,956 $ 733,291 $ 1,354,155 $ 1,546,852 $ 3,634,298
Deposits Held for Assumption in Connection with Sale of Bank Branches 81,565 9,010 20,166 52,389 81,565
Other Liabilities- Interest Rate Derivatives 3,129 0 3,129 0 3,129
FHLB Borrowings 30,000 0 0 30,249 30,249
Accrued Interest Payable 1,893 0 0 1,893 1,893


				Fair Value Measurements at December 31, 2020											Fair Value Measurements at September 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Carrying Value		Level 1		Level 2		Level 3		Total		(Dollars in Thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:	Financial Assets:											Financial Assets:
Cash and Cash Equivalents	Cash and Cash Equivalents	$	241,942	$	38,535	$	203,407	$	0	$	241,942	Cash and Cash Equivalents	$	225,796	$	43,061	$	182,735	$	—	$	225,796
Securities Available-for-Sale	Securities Available-for-Sale	778,679		0		768,316		10,363		778,679		Securities Available-for-Sale	897,546		4,419		879,505		13,622		897,546
Loans Held-for-Sale	Loans Held-for-Sale	25,437		0		0		25,437		25,437		Loans Held-for-Sale	4,889		—		—		4,889		4,889
Portfolio Loans, net	Portfolio Loans, net	2,893,096		0		0		2,854,244		2,854,244		Portfolio Loans, net	2,784,863		—		—		2,846,054		2,846,054
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value		9,835		0		0		9,835		9,835

Federal Home Loan Bank Stock, at Cost	Federal Home Loan Bank Stock, at Cost	5,093		0		0		NA		NA		Federal Home Loan Bank Stock, at Cost	3,215		—		—		NA		NA
Other Assets- Interest Rate Derivatives	Other Assets- Interest Rate Derivatives	4,493		0		4,493		0		4,493		Other Assets- Interest Rate Derivatives	3,354		—		3,354		—		3,354
Accrued Interest Receivable	Accrued Interest Receivable	32,157		0		2,887		29,270		32,157		Accrued Interest Receivable	19,390		4		3,128		16,258		19,390

Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Deposits	Deposits	$	3,599,911	$	699,229	$	1,285,912	$	1,640,587	$	3,625,728	Deposits	$	3,666,473	$	722,145	$	1,541,346	$	1,425,413	$	3,688,904
Deposits Held for Assumption in Connection with Sale of Bank Branches		84,717		9,506		18,699		56,512		84,717

Other Liabilities- Interest Rate Derivatives	Other Liabilities- Interest Rate Derivatives	4,756		0		4,756		0		4,756		Other Liabilities- Interest Rate Derivatives	3,429		—		3,429		—		3,429
FHLB Borrowings	FHLB Borrowings	35,000		0		0		35,461		35,461		FHLB Borrowings	30,000		—		—		30,160		30,160
Accrued Interest Payable	Accrued Interest Payable	2,131		0		0		2,131		2,131		Accrued Interest Payable	1,624		—		—		1,624		1,624

3132

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)


			Fair Value Measurements at December 31, 2020
(Dollars in Thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Cash Equivalents	$	241,942	$	38,535	$	203,407	$	—	$	241,942
Securities Available-for-Sale	778,679		—		768,316		10,363		778,679
Loans Held-for-Sale	25,437		—		—		25,437		25,437
Portfolio Loans, net	2,893,096		—		—		2,854,244		2,854,244
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	9,835		—		—		9,835		9,835
Federal Home Loan Bank Stock, at Cost	5,093		—		—		NA		NA
Other Assets- Interest Rate Derivatives	4,493		—		4,493		—		4,493
Accrued Interest Receivable	32,157		—		2,887		29,270		32,157

Financial Liabilities:
Deposits	$	3,599,911	$	699,229	$	1,285,912	$	1,640,587	$	3,625,728
Deposits Held for Assumption in Connection with Sale of Bank Branches	84,717		9,506		18,699		56,512		84,717
Other Liabilities- Interest Rate Derivatives	4,756		—		4,756		—		4,756
FHLB Borrowings	35,000		—		—		35,461		35,461
Accrued Interest Payable	2,131		—		—		2,131		2,131

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.

Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial.

Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income.

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities for the periods presented:

Fair Values of Derivative Instruments
Asset Derivatives (Included in Other Assets)
March 31, 2021 December 31, 2020
(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans 0 $ 0 $ 0 1 $ 151 $ 0
Interest Rate Swap Contracts – Commercial Loans 44 268,708 3,295 38 255,572 4,493
Total Derivatives not Designated as Hedging Instruments 44 $ 268,708 $ 3,295 39 $ 255,723 $ 4,493

Fair Values of Derivative Instruments
Liability Derivatives (Included in Other Liabilities)
March 31, 2021 December 31, 2020
(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans 0 $ 0 $ 0 1 $ 151 $ 0
Interest Rate Swap Contracts – Commercial Loans 44 268,708 3,129 38 255,572 4,756
Total Derivatives not Designated as Hedging Instruments 44 $ 268,708 $ 3,129 39 $ 255,723 $ 4,756

3233

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)


	Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets)
	September 30, 2021					December 31, 2020
(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans	2	$	519	$	3	1	$	151	$	—
Interest Rate Swap Contracts – Commercial Loans	62	420,615		3,351		38	255,572		4,493
Total Derivatives not Designated as Hedging Instruments	64	$	421,134	$	3,354	39	$	255,723	$	4,493


	Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities)
	September 30, 2021					December 31, 2020
(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans	2	$	519	$	3	1	$	151	$	—
Interest Rate Swap Contracts – Commercial Loans	62	420,615		3,426		38	255,572		4,756
Total Derivatives not Designated as Hedging Instruments	64	$	421,134	$	3,429	39	$	255,723	$	4,756

The following table indicates the income (loss) recognized in income on derivatives for the periods presented:


		For the Three Months Ended March 31,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2021		2020		2021		2020
Derivatives not Designated as Hedging Instruments	Derivatives not Designated as Hedging Instruments					Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans	Interest Rate Lock Commitments – Mortgage Loans	$	0	$	11	Interest Rate Lock Commitments – Mortgage Loans	$	1	$	(6)	$	3	$	—
Forward Sale Contracts – Mortgage Loans	Forward Sale Contracts – Mortgage Loans	0		(11)		Forward Sale Contracts – Mortgage Loans	(1)		6		(3)		—
Interest Rate Swap Contracts – Commercial Loans	Interest Rate Swap Contracts – Commercial Loans	429		(91)		Interest Rate Swap Contracts – Commercial Loans	35		(86)		188		(285)
Total Derivative Income (Loss)	Total Derivative Income (Loss)	$	429	$	(91)	Total Derivative Income (Loss)	$	35	$	(86)	$	188	$	(285)

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.

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


		Asset Derivatives (Included in Other Assets)				Liability Derivatives (Included in Other Liabilities)					Asset Derivatives (Included in Other Assets)				Liability Derivatives (Included in Other Liabilities)
(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Derivatives not Designated as Hedging Instruments	Derivatives not Designated as Hedging Instruments									Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized	Gross Amounts Recognized	$	3,295	$	4,493	$	3,129	$	4,756	Gross Amounts Recognized	$	3,351	$	4,493	$	3,426	$	4,756
Gross Amounts Offset	Gross Amounts Offset	0		0		0		0		Gross Amounts Offset	—		—		—		—
Net Amounts Presented in the Consolidated Balance Sheets	Net Amounts Presented in the Consolidated Balance Sheets	3,295		4,493		3,129		4,756		Net Amounts Presented in the Consolidated Balance Sheets	3,351		4,493		3,426		4,756
Gross Amounts Not Offset (1)	Gross Amounts Not Offset (1)	0		0		(3,390)		(5,220)		Gross Amounts Not Offset (1)	—		—		(4,080)		(5,220)
Net Amount	Net Amount	$	3,295	$	4,493	$	(261)	$	(464)	Net Amount	$	3,351	$	4,493	$	(654)	$	(464)

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

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings are an additional source of liquidity for ~~us.~~the Company. Federal Home Loan Bank, ~~the~~or (“FHLB”) borrowings were $30.0 million and $35.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at ~~March 31,~~September 30, 2021 and December 31, 2020. Total loans pledged as collateral were ~~$781.3~~ $908.7

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million and $804.2 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. There were 0no securities available-for-sale pledged as collateral at both ~~March 31,~~September 30, 2021 and December 31, 2020. The Company continues to methodically pledge additional eligible loans ~~with~~and expect continued progress in additional pledging throughout the ~~ultimate expectation to have full pledging by year end 2021.~~year. The Company is eligible to borrow up to an additional ~~$506.1~~$555.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25.0% of the Company’s assets, as of ~~March 31,~~September 30, 2021. The Company had the capacity to borrow up to an additional $510.5 million from the FHLB at December 31, 2020.

The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021			December 31, 2020			(Dollars in Thousands)	September 30, 2021			December 31, 2020
Long-term Borrowings	Long-term Borrowings	$	30,000		$	35,000		Long-term Borrowings	$	30,000		$	35,000
Weighted Average Interest Rate	Weighted Average Interest Rate	1.15		%	1.13		%	Weighted Average Interest Rate	1.15		%	1.13		%

Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the ~~five~~four years subsequent to ~~March 31,~~September 30, 2021 and thereafter are as follows:


(Dollars in Thousands)	(Dollars in Thousands)	Balance		Weighted Average Rate		(Dollars in Thousands)	Balance		Weighted Average Rate
1 year	1 year	$	3,000	1.68	%	1 year	$	3,000	1.68	%
2 years	2 years	14,000		1.09	%	2 years	14,000		1.09	%
3 years	3 years	10,000		0.94	%	3 years	10,000		0.94	%
4 years	4 years	3,000		1.63	%	4 years	3,000		1.63	%
5 years	5 years	0		0	%	5 years	—		—	%
Thereafter	Thereafter	0		0	%	Thereafter	—		—	%
Total FHLB Borrowings	Total FHLB Borrowings	$	30,000	1.15	%	Total FHLB Borrowings	$	30,000	1.15	%

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to ~~$546.5~~$444.0 million at ~~March 31,~~September 30, 2021 and $591.2 million at December 31, 2020, represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represent ~~$355.9~~$259.7 million, or ~~65.1%~~58.5%, and $391.4 million, or 66.2%, of the commitments to extend credit at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling ~~$27.8~~$32.6 million at ~~March 31,~~September 30, 2021 and $29.3 million at December 31, 2020.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk.

Life-of-Loss Reserve on Unfunded Loan Commitments

We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ~~allowance for credit losses~~ACL for loans, modified to take into account the probability of a draw-down on the commitment. Results for reporting periods beginning after January 1, 2021 are presented under Topic 326, while prior period amounts continue to be reported in other expense on our Consolidated Statements of ~~Income.~~Income (Loss). The life-of-loss reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The activity in the life-of-loss reserve on unfunded loan commitments for the three and nine months ended ~~March 31,~~September 30, 2021 ~~was~~were as follows:

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in Thousands)	Three Months Ended ~~March 31,~~September 30, 2021
Life-of-Loss Reserve on Unfunded Loan Commitments
June 30, 2021		$	2,167
Provision for unfunded commitments		(60)
September 30, 2021		$	2,107


(Dollars in Thousands)	Nine Months Ended September 30, 2021
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at beginning of period		$	144
Impact of Adopting ASU 2016-13		2,908
January 1, 2021		$	3,052
Provision for unfunded commitments		~~(282)~~(945)
~~March 31,~~September 30, 2021		$	~~2,770~~2,107

~~Our life-of-loss reserve for unfunded commitments is determined using a methodology similar to that used to determine the ACL.~~ Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments. The provision for unfunded commitments was a release of ~~$0.3~~$0.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

Litigation

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. ~~While~~Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any ~~type~~legal or administrative proceeding cannot be predicted with certainty. Other than as set forth below, as of ~~litigation contains~~September 30, 2021, the Company is not involved in any material pending or threatened legal proceedings other than proceedings occurring in the ordinary course of business.

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, the Bank and its directors were named as defendants in a ~~level~~lawsuit filed in the United States District Court for the Southern District of ~~uncertainty, management~~West Virginia (the “District Court”) by James C. Justice, II, Cathy L. Justice, James C. Justice, III and various related entities that he and/or they own and control (such entities, the “Justice Entities” and collectively, the “Justice Parties”). The allegations contained in the lawsuit related to a series of loans (the “Loans”) made by the Bank to certain Justice Entities that are secured by collateral pledged by certain Justice Entities and are backed by personal guarantees from James C. Justice, II and Cathy L. Justice and, in certain cases, by personal guarantees from James C. Justice, III. In July 2021, the Bank filed confessions of judgment against certain of the Justice Parties in Virginia state courts to collect amounts owed on certain of the Loans that were past due and in default.

In August 2021, the Bank and the Justice Parties reached an agreement to restructure the Loans. In connection with this agreement, the Bank obtained a voluntary dismissal with prejudice of the lawsuit filed by the Justice Parties in the District Court. The Bank withdrew the creditor collection actions it had filed against certain of the Justice Parties in Virginia state court.

The Bank believes that it is fully secured on all loans outstanding to the Justice Parties. In connection with the dismissal of the lawsuits and the restructuring of the Loans, the Justice Parties executed documents that waive any and all causes of action of any kind they might claim to have against the Bank, reaffirmed the Loans owed to the Bank, and enhance the Bank’s collateral position, including cross-collateralizations, with respect to all loans outstanding to the Justice Parties.

The Company and the Bank denied and continue to deny all allegations contained in the lawsuit filed against the Bank by the Justice Parties. Based on information presently available to the Company and the Bank and based on consultation with legal counsel, the Company believes that the ~~outcome of such~~legal proceedings ~~or claims pending~~described above are concluded and will not have a material adverse effect on ~~our~~the Company’s consolidated financial ~~position or results of operations.~~statements.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:


		Three Months Ended March 31, 2021						Three Months Ended March 31, 2020							Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		(Dollars in Thousands)	Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
Net Unrealized (Losses) Gains Arising during the period	Net Unrealized (Losses) Gains Arising during the period	$	(10,494)	$	2,204	$	(8,290)	$	2,004	$	(421)	$	1,583	Net Unrealized (Losses) Gains Arising during the period	$	(4,588)	$	963	$	(3,625)	$	6,434	$	(1,351)	$	5,083
Reclassification Adjustment for Gains included in Net Income	Reclassification Adjustment for Gains included in Net Income	(3,610)		758		(2,852)		(1,214)		255		(959)		Reclassification Adjustment for Gains included in Net Income	(1,341)		282		(1,059)		(2,388)		501		(1,887)
Other Comprehensive (Loss) Income	Other Comprehensive (Loss) Income	$	(14,104)	$	2,962	$	(11,142)	$	790	$	(166)	$	624	Other Comprehensive (Loss) Income	$	(5,929)	$	1,245	$	(4,684)	$	4,046	$	(850)	$	3,196


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
(Dollars in Thousands)	Pre-Tax Amount		Tax Benefit		Net of Tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
Net Unrealized (Losses) Gains Arising during the period	$	(6,626)	$	1,391	$	(5,235)	$	22,860	$	(4,801)	$	18,059
Reclassification Adjustment for Gains included in Net Income	(6,450)		1,355		(5,095)		(5,923)		1,244		(4,679)
Other Comprehensive (Loss) Income	$	(13,076)	$	2,746	$	(10,330)	$	16,937	$	(3,557)	$	13,380

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended ~~March 31,~~September 30, 2021 and September 30, 2020. Our MD&A should be read in conjunction with our Consolidated Financial Statements and notes thereto. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements related to the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and ~~pending branch sales,~~deferral programs and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, ~~financial position,~~litigation to which the Company is or has been a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,~~” “believe,~~” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”); ~~credit losses;~~ technological risks and developments; ~~cyber-security;~~cyber-security threats, attacks or events; ~~rapid technological developments and changes;~~ the Company’s liquidity and capital positions; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of ~~cyberattack~~cyberattacks and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth; the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of economic recovery when the pandemic subsides and the ~~heightened~~ impact it has on exacerbation of many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, ~~2020;~~2020, as supplemented by the risk factor disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021; legislative or regulatory changes and requirements, including the impact of the Coronavirus

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Aid, Relief, and Economic Security Act (the “CARES Act”), as amended by the Consolidated Appropriations Act, of 2021 (the “CAA”), and other legislative and regulatory reactions to the COVID-19 pandemic; potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, under the CARES Act, as amended by the CAA; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight; legislation affecting the financial services industry as a whole, and the Company, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the Company’s strategic branch network optimization plan; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated; containing costs and expenses; reliance on significant customer relationships; credit losses; general economic or business conditions; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described throughout this Quarterly Report, including and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and ~~any of~~ our subsequent filings with the ~~SEC.~~Securities and Exchange Commission (“SEC”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

Critical Accounting Policies and Estimates

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of ~~March 31,~~September 30, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020 under the section “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations,” except we have updated our allowance for credit losses (“ACL”) policy and included required disclosures in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Please refer to the CECL disclosure contained in Notes 1 and 5 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Overview

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at ~~March 31,~~September 30, 2021. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is an insured, Virginia state-chartered bank, which operates branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE.”

The Company earns revenue primarily from interest on loans, ~~and~~ securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Our mission is that the Company strives to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin. Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses. ~~The Company is~~We continuously work to maintain and improve credit quality and the reduction of problem assets. We are focused on executing our strategy to successfully build our brand and grow our business in our markets.

COVID-19

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act is an emergency stimulus measure providing assistance and relief in a variety of ways to certain individuals, businesses, and industries. The CARES Act established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). In addition to the general impact ofthat the COVID-19 pandemic has had on the Company, certain provisions of the CARES Act, as well as other legislative and regulatory relief efforts, may have a material impact on our operations. The full extent of these impacts at the date of this filing is unknown; however, we have disclosed the material items of which we are aware.

Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, ~~and will be~~ implemented through rules and guidance adopted by federal agencies, including the U.S. Department of the Treasury, the Federal Deposit Insurance Corporation (“FDIC”), the Board of Governors of the Federal Reserve System (“FRB” or “Federal Reserve”) and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Set forth below is a brief overview of certain provisions of the CARES Act and certain other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Such statutes, regulations, and policies are subject to ongoing review by U.S. Congress and federal regulatory authorities. Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Bank could have a material effect on the Bank. Many of the requirements called for in the CARES Act and related regulations and supervisory guidance will be implemented over time and most will be subject to implementing regulations over the course of the coming weeks. The Bank will continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

FRB Reserve Programs and Initiatives

The CARES Act encourages the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities, including (i) a Midsize Business/Nonprofit Organization Program to provide financing to banks and other lenders to make direct loans to eligible businesses and nonprofit organizations with between 500 and 10,000 employees and (ii) the Municipal Liquidity Facility, provide liquidity to the financial system that supports states and municipalities. On April 9, 2020, the FRB announced and solicited comments regarding the Main Street Lending Program, which would implement certain of these recommendations.

Separately, and in response to the COVID-19 pandemic, the FRB’s Federal Open Market Committee (the “FOMC”) has set the federal funds target rate – i.e., the interest rate at which depository institutions such as the Company lend reserve balances to other depository institutions overnight on an uncollateralized basis – to a historic low. On March 16, 2020, the FOMC set the federal funds target rate at 0-0.25%. Consistent with FRB policy, the FRB has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

In addition, the FRB ~~has~~ expanded the size and scope of three existing programs to mitigate the economic impact of the COVID-19 pandemic: (i) the Primary Market Corporate Credit Facility; (ii) the Secondary Market Corporate Credit Facility; and (iii) the Term Asset-Backed Securities Loan Facility. The FRB ~~has~~ also established two new program facilities – the Money Market Mutual

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Fund Liquidity Facility and the Commercial Paper Funding Facility – to broaden its support for the flow of credit to households and businesses during the COVID-19 pandemic.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Temporary Bank Secrecy Act (“BSA”) Reporting Relief

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has provided targeted relief from certain BSA reporting requirements and have provided updated guidance to financial institutions on complying with such requirements during the COVID-19 pandemic. Specifically, FinCEN has (i) granted targeted relief to financial institutions participating in the PPP, stating that PPP loans to existing customers will not require reverification under applicable BSA requirements, unless reverification is otherwise required under the financial institution’s risk-based BSA compliance program, (ii) acknowledged that there may be “reasonable delays in compliance” due to the COVID-19 pandemic, and (iii) temporarily suspended implementation of its February 2020 ruling, which would have entailed significant changes to currency transaction reporting filing requirements for transactions involving sole proprietorships and entities operating under a “doing business as” or other assumed name.

The Company’s Response to COVID-19

Lending Operations

The Company elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology. The Company was subject to the adoption of the CECL accounting method under the FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020 and has since implemented CECL January 1, 2021. Refer to Note 1, Basis of Presentation and Note 5 Allowance for Credit Losses, of the Notes to Unaudited Consolidated Financial statements for additional disclosures related to CECL.

The Company quickly responded to the pandemic and the CARES Act, offering the option of payment deferrals, participation in the PPP, fee waivers and other relief actions to customers. ~~Banks have been identified as essential services and have remained open during the COVID-19 pandemic. As of~~Since April 28, 2021, all of the Company’s branch lobbies are open. ~~Every opportunity is being taken~~We continue to take precautions to protect both customers and employees through enhanced cleaning services, social distancing and personal protective equipment requirements for both. ~~Approximately 20%~~A portion of the Company’s workforce ~~is working~~continues to work remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the ~~Small Business Administration’s (“SBA”)~~SBA 7-A loan program. The ~~Company~~Bank became an approved SBA 7A7-A lender in November 2019. The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. Initially, $349 billion was approved and designated for the PPP in order for the ~~Small Business Administration (“SBA”)~~SBA to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses. The Company participated in the initial round of funding through a referral relationship with a third-party, non-bank lender. When an additional $310 billion in funds were approved and designated for the PPP, we opted to set up an internal, automated loan process utilizing our core system provider. As of March 31, 2021 we processed either through a third-party or internally 1,067 PPP loans totaling $66.0 million, represented by $17.9 million processed in round one, $39.9 million processed in round two and $8.2 million in round three. The Company has continued making PPP loans pursuant to the additional PPP authorization that was contained in the December 2020 COVID-19 relief law.

The FRB implemented a liquidity facility available to financial institutions participating in the PPP. However, ~~the Company~~we opted to fund all PPP loans through our internal liquidity sources. These loans are fully guaranteed by the SBA and do not represent a credit risk. We expect the vast majority of these PPP loans will be forgiven based upon a preliminary review of the loans. ~~As of March 31, 2021, the Company thus far has had 295 loans totaling $19.4 million fully forgiven by the SBA.~~

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

The ~~Company provides~~Bank provided deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan ~~modifications, which suspends the requirement to categorize these deferrals as Troubled Debt Restructuring (“TDRs”).~~modifications. The Bank launched successive deferral programs with short-term expirations. The Part I program was launched in March 2020 and expired at the end of August 2020. The deferrals in Part I typically provided deferral of both principal and interest through the expiry. The Part II program was launched in July 2020 and expired at the end of December 2020. The deferrals in this program were needs based and required the collection of updated financial information and in certain situations, the validation of liquidity to support the business. Prior to the extension of the CARES Act, the ~~Company~~Bank launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021. ~~For those borrowers~~Borrowers who opted into the Part III program ~~they are~~were required to provide monthly financial statements and remit payments on a quarterly basis based on excess cash flows ~~if any, up to their otherwise contractual payment. The majority~~(“recapture payment”). In the quarter ended March 31, 2021, recapture payments due from deferral clients totaled $2.8 million and of ~~deferrals in~~this the ~~Part III program are principal only deferrals. At the end~~Bank received $2.0 million. A number of customers opted out of the deferral ~~period, for term loans,~~program after the first quarter. As a result, the second quarter 2021 recapture payments ~~will be applied to accrued interest first~~due from deferral clients totaled $1.2 million and ~~will resume principal payments once accrued interest is current. Deferred principal will be due at maturity. For interest only loans, such as lines~~ of ~~credit, deferred interest will be due at maturity.~~

~~As of March 31, 2021, we had 92 total customers opt for deferrals under Part III of~~this the program, which continues through June 30, 2021, with an aggregate principal balance of $407.0 million, or 13.7%, of total portfolio loans and a weighted average deferment period of 2.9 months. Approximately $320.4 million, comprised of 58 loan modifications, were related toBank received $0.8 million. Following the ~~hospitality industry. At the peak~~expiration of the deferral programs ~~the company had 958 commercial and consumer customers opt~~on June 30, 2021, for ~~the program with an aggregate principal balance of $1.2 billion, or 41.0% of total loans.~~

~~The following table provides detail of the Company’s deferred~~term loans ~~as of March 31, 2021:~~

(Dollars in Thousands) Number
of Loans Loan
Principal Percent of
Outstanding Weighted
Average
Deferment
Period
(months) Total Deferment
Principal Interest
Commercial Real Estate 85 $ 399,037 13.43 % 2.90 $ 280,451 $ 118,586
Commercial and Industrial 1 6,000 0.20 % 2.90 — 6,000
Residential Mortgages 5 1,828 0.06 % — 1,828 —
Other Consumer — — — % — — —
Construction 1 163 0.01 % 2.90 163 —
Other — — — % — — —
Total Aggregate Deferred Payments 92 $ 407,028 13.70 % 2.90 $ 282,442 $ 124,586

~~The following table provides detail of the Company’s deferred loans as of December 31, 2020:~~

(Dollars in Thousands) Number
of Loans Loan
Principal Percent of
Outstanding Weighted
Average
Deferment
Period
(months) Total Deferment
Principal Interest
Commercial
Commercial Real Estate 81 $ 382,437 12.98 % 6.0 $ 269,414 $ 113,023
Commercial and Industrial 1 6,000 0.20 % 6.0 — 6,000
Obligations of States and Political Subdivisions — — — % — — —
Commercial Construction 1 163 0.01 % 4.0 163 —
Total Commercial Loans 83 388,600 13.18 % 269,577 119,023
Consumer
Residential Mortgages — — — % — — —
Other Consumer — — — % — — —
Consumer Construction — — — % — — —
Total Consumer Loans — — — % — — —
Total Aggregate Deferred Payments 83 $ 388,600 13.18 % $ 5.9 $ 269,577 $ 119,023

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

payments will be applied to accrued interest first and after accrued interest is current, payments will be applied to principal. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity. As of September 30, 2021 all but $6.5 million of loans resumed regularly scheduled payments. Cumulative deferred interest totaled $11.0 million as of June 30, 2021 but has been reduced to $2.8 million as of September 30, 2021.

Through the first two rounds of PPP, we had approved 515 loan applications totaling $39.9 million through our internal lending program, of which 498 loans totaling $38.5 million have been fully forgiven by the SBA as of September 30, 2021. The $39.9 million in PPP loans originated during the first two rounds of PPP generated $1.5 million in fees, which will be recognized in income as loans are forgiven, or over the remaining life of the loan for any portion that is not forgiven. We had an additional 451 loans approved that were referred to an online small business lender, totaling $17.9 million during the first two rounds of PPP. On December 22, 2020 Congress passed legislation that was signed into law on December 27, 2020, making available a third round of PPP funding. We provided access to the program through our internal lending program for our current business customers. As of September 30, 2021, we had approved 136 loan applications totaling $11.1 million, of which 87 loans totaling $6.4 million have been fully forgiven by the SBA.

Our interest income could be reduced due to the COVID-19 pandemic. In keeping with guidance from regulators, we are actively working with borrowers affected by the ~~COVID-10~~COVID-19 pandemic to defer their payments, interest, and fees. Interest and fees will still accrue to income through normal GAAP accounting. Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the significance of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Our exposure to the hospitality industry at ~~March 31,~~September 30, 2021 equated to approximately ~~$501.5~~$451.4 million, or ~~16.9%~~15.6% of total portfolio ~~loans, of which approximately $320.4 million on 58 loans are on deferral.~~loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy levels at or below breakeven which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness. These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. These risk considerations were factored into qualitative adjustments included in the ACL. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected.

Retail Operations

The Company continues to promote digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools and our customer contact center for personal and automated telephone banking services. Retail branches are staffed and available to assist customers by offering lobby appointments, drive-up and virtual servicing.

In March 2020, we closed all branch lobbies to customer activity, offering drive-up and appointment only ~~services. On October 31, 2020, we opened 36 branch lobbies and as of~~services due to the COVID-19 pandemic. Since April 28, 2021, ~~we opened~~all of our ~~remaining~~ branch ~~lobbies.~~lobbies have been open. Retail leadership continues to monitor branch traffic and local conditions daily and makes adjustments as needed. All branches are equipped with video conferencing and online tools that enable virtual servicing. We continue to pay all employees according to their normal work schedule, even if their hours ~~have been reduced. No~~were reduced and no employees ~~have been~~were furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are utilizing personal protection equipment and observing social distancing and cleaning protocols.

Our fee income for 2020 was negatively impacted due to COVID-19 by approximately $1.5 ~~million due to the COVID-19 pandemic.~~million. Beginning on July 20, 2020, certain account fees were reinstated. In keeping with guidance from regulators, we ~~are~~ actively ~~working~~worked with customers ~~effected~~affected by the ~~COVID-10~~COVID-19 pandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees. As of September 30, 2021 we had no fee waivers specific to the COVID-19 pandemic. We believe these reductions in fees are temporary in conjunction with the length of the economic crisis caused by the COVID-19 pandemic. The breadth of the economic impact is likely to continue to impact our fee income in future periods.were temporary.

Capital Resources and Liquidity

As of ~~March 31,~~September 30, 2021, all of the Company’s capital ratios were in excess of all regulatory requirements. The economic recession brought about by the COVID-19 pandemic has improved during the ~~first quarter~~nine months ended September 30, 2021.

Table of ~~2021 and during the second quarter 2021 to date.~~Contents

CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

We maintain access to multiple sources of liquidity. Funding sources accessible to the Company include borrowing availability at the Federal Home Loan Bank (“FHLB”), equal to ~~25%~~25.0% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which ~~$506.1~~$555.9 million remains available at ~~March 31,~~September 30, 2021, federal funds unsecured lines with six other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered CDs. In addition to the above resources, the Company also has ~~$626.3~~$724.7 million of unpledged available-for-sale securities as an additional source of liquidity at ~~March 31,~~September 30, 2021. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

The Company is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources. Due to the economic uncertainty, we are taking a prudent approach to capital management and have established access to the FRB’s PPP Lending Facility.

Earnings Summary

Net income increased ~~$5.0~~$68.9 million ~~or 112.0%,~~and $74.8 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same ~~period~~periods in 2020. Net income for the three and nine months ended ~~March 31,~~September 30, 2021 was ~~$9.4~~$11.2 million and $26.0 million, or ~~$0.36~~$0.42 and $0.98 per diluted ~~earnings per~~ share, respectively, compared to net ~~income~~losses of ~~$4.4~~$57.7 million and $48.8 million, or ~~$0.17 diluted earnings~~$2.19 and $1.85 per share, respectively, for the same ~~period~~periods in 2020. The net loss was recognized during the third quarter of 2020 related to a one-time charge resulting from goodwill impairment. This impairment charge reduced net income by $62.2 million resulting in the net loss for the period. The increase in net income for the three and nine months ended September 30, 2021 of $68.9 million and $74.8 million was mainly due to athe above mentioned goodwill impairment, as well as, lower provision for credit losses ~~of $2.9 million, a $2.0 million increase in noninterest income and a decrease in noninterest expense of $1.1 million, offset by a decline in net interest income of $0.7~~for both periods. The total provision for credit losses decreased $3.4 million and ~~an increase~~$11.7 million for the three and nine months ended September 30, 2021, respectively compared to the same periods in 2020. Included in the total provision for credit losses for the three and nine months ended September 30, 2021 was the release of $0.1 million and $0.9 million for the provision for ~~income taxes~~unfunded commitments, which was included in other expense prior to the January 1, 2021 adoption of ~~$0.6 million.~~CECL.

Net interest income ~~decreased $0.7~~increased $4.0 million, or ~~2.7%~~15.6%, to ~~$26.5~~$29.4 million ~~during~~and increased $4.2 million, or 5.3%, to $83.1 million for the ~~first~~ three and nine months ofended September 30, 2021, respectively, compared to the same periods in 2020. Net interest margin increased 31 basis points and three basis points to 2.92% and 2.80% for the three and nine months ended September 30, 2021, respectively, compared to 2.61% and 2.77% for the same periods in 2020. These impacts were primarily due to higher yields on interest-earning assets due to the positive impact of significant late fees and enhanced pricing on restructured loans related to one large credit relationship during the period and a decline in the cost of ~~2020. The net~~interest-bearing liabilities. Net interest margin, on a fully taxable equivalent (“FTE”) basis ~~which is non-GAAP measure, decreased 23~~(non-GAAP), increased 29 and one basis points to ~~2.78% in~~2.96% and 2.84% for the ~~first quarter of~~three and nine months ended September 30, 2021 compared to ~~3.01%~~2.67% and 2.83% for the same periods in ~~the first quarter of~~ 2020. The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but ~~were partially~~continues to be offset by a lower cost of funds. The yield on interest-earning assets decreased 71four and 39 basis points for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, partially offset by a 5741 and 48 basis ~~point decline~~points reduction in funding costs compared to the same ~~period of~~periods in 2020. Net interest margin is reconciled to net interest income adjusted to aan FTE basis ~~below~~ in the “Net Interest Income” ~~income~~ section of the “Results of Operations - Three and Nine Months Ended ~~March 31,~~September 30, 2021 Compared to Three and Nine Months Ended ~~March 31, 2020 discussion below.~~September 30, 2020” in this MD&A. Also refer to the “Explanation of Use of Non-GAAP Financial Measures” ~~below~~ for additional discussion of the non-GAAP measures.

The provision for credit losses, excluding unfunded, decreased ~~$2.9~~$3.3 million and $10.8 million to ~~$1.9~~$(0.4) million and $2.4 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~$4.8~~$2.9 million and $13.2 million for the same ~~period of 2020 due to qualitative adjustments of $2.6 million for the decline~~periods in ~~economic and market conditions as a result of COVID-19. The first quarter of 2021 provision~~2020. Provision for credit losses during the three months ended September 30, 2021 was primarily driven by ~~adjustments~~the release of $3.1 million to the ~~CECL model~~ACL due to ~~account for additional expected deterioration~~the sale of two relationships that included nine loans during the third quarter of 2021 with an aggregate unpaid principal balance of $50.2 million that were previously reserved. This decrease was offset by the increase of $1.6 million of special qualitative reserves in connection with increased uncertainty in credit quality with respect to two loans ~~on deferral. Management reviews~~with an aggregate unpaid balance of $12.0 million in the commercial real estate loan segment. During the three and ~~analyzes the monthly operating statements~~nine months ended September 30, 2021, management observed that $62.0 million of ~~commercial clients~~loans that were previously in the deferral ~~program. During~~program were recovering at rates much lower than peers. Accordingly, management sold $50.2 million of these loans during the ~~first quarter of~~three months ended September 30, 2021 ~~management observed continued deterioration on~~and has developed a ~~loan in deferral~~workout strategy with the remaining two loans with an aggregate ~~principal~~

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

unpaid balance of ~~$8.1 million that was not previously recognized in~~$12.0 million. The qualitative reserves were established given the ~~Day 1 model. This adjustment resulted in additional reserves~~uncertainty of ~~$1.5 million during~~ the ~~first quarter~~future performance of ~~2021. Provision expense for the first quarter of 2021was impacted by net charge-offs totaling $0.7 million.~~these borrowers.

Prior to the adoption of CECL at January 1, 2021, the life-of-loss reserves on unfunded commitments was a component of noninterest expense and has not been reclassified for comparable periods. The life-of-loss reserves on unfunded commitments totaled ~~$2.8~~$2.1 million at ~~March 31,~~September 30, 2021.

Net charge-offs were ~~$0.7~~$9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020. The increase in net charge-offs in the ~~first three months~~third quarter of 2021 ~~compared~~was primarily due to ~~$0.6~~$9.2 million incharge-offs related to the ~~same period~~aforementioned sale of ~~2020.~~two relationships that included nine loans that had been previously reserved. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were ~~0.10%~~1.30% and 0.85% for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to 0.05% and 0.09% for the same ~~period~~periods in 2020. At ~~March 31,~~September 30, 2021, ~~and~~we had low nonperforming loans, with such nonperforming loans decreasing $23.1 million to $8.9 million, compared to $32.0 million at December 31, ~~2020,~~2020. The decline is due to the aforementioned resolution of our two largest nonperforming ~~loans were consistent at $32.0 million.~~relationships during the second quarter of 2021 which resulted in net charge-offs of $6.3 million and $1.9 million, respectively, of which $13.1 million was previously reserved. Nonperforming loans as a percentage of total portfolio loans were ~~1.08%~~0.31%, 1.09% and ~~1.38%~~1.35% as of ~~March 31,~~September 30, 2021, December 31, 2020 and ~~March 31,~~September 30, 2020, respectively.

Total noninterest income decreased $1.1 million and increased ~~$2.0~~$2.1 million ~~or 28.8%,~~ to ~~$9.0~~$6.9 million and $23.1 million for the three and nine months ended September 30, 2021, respectively, compared to $8.0 million and $21.0 million for the same periods in 2020. The decrease of $1.1 million for the three months ended ~~March 31,~~September 30, 2021 compared to ~~$7.0 million for~~ the same period in 2020 was primarily the result of declines in net security gains of $1.0 million and lower commercial loan swap fee income of $0.5 million. The fluctuations of commercial loan swap fee income were due to ~~$3.6~~the timing and demand for this product in the current low interest rate environment.

The increase of $2.1 million in ~~net securities gains. Security gains increased by $2.4 million~~total noninterest income for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to ~~$3.6~~the same period in 2020 was driven by service charges on deposit accounts increasing $1.9 million, debit card interchange fees increased $1.2 million, higher net security gains of $0.5 million and a year-to-date gain of $0.5 million on the sale of four bank branches included in other income. Offsetting these increases were lower commercial loan swap fee income of $1.1 million and lower insurance commissions of $1.0 million compared to ~~$1.2 million for~~ the ~~same period of 2020~~prior year period. The fluctuations in security gains is due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in ~~the~~its securities portfolio. ~~Other key factors that contributed~~

Total noninterest expense decreased $62.6 million and $58.9 million to $24.7 million and $76.0 million for the three and nine months ended September 30, 2021, respectively, compared to $87.3 million and $134.9 million for the same periods in 2020. The most significant decrease for both the three and nine month periods was driven by the one-time charge resulting from goodwill impairment of $62.2 million recorded in the third quarter of 2020. Also impacting the variances for both the three and nine months ended September 30, 2021 compared to the ~~increase~~same periods in ~~total noninterest income~~2020 were the nonrecurring write-downs for closed bank branches and unfunded loan commitment expense. Losses on sales and write-downs of Other Real Estate Owned (“OREO”), net decreased $0.7 million and increased $2.1 million for the three and nine months ended September 30, 2021. The $0.7 million decrease for the three-month period included a $0.6 million loss on the sale of OREO on 13 properties during the ~~first~~third quarter of 2021. For the nine-months ended September 30, 2021, the increase of $2.1 million in losses on sales and write-downs of OREO was related to the nonrecurring write-down of $3.0 million for closed bank branches that were closed in the second quarter of 2021, transferred to OREO and marketed for sale resulting in the nonrecurring write-down. These write-downs were offset by $0.4 million in gains associated with the sale of four of the OREO properties. The $0.3 million increase for the three-month period of 2021 and the $0.3 million decline in the nine-month period of 2021, in unfunded loan commitment expense compared to the same periods in 2020, is a result of the adoption of CECL as unfunded loan commitment expense is now recorded as part of provision for credit losses instead of noninterest expense.

Along with the above mentioned variances, total noninterest expense increases during the nine months ended September 30, 2021 included $1.0 million higher ~~debit card interchange fees of~~data processing expenses due to an increase in customer accounts and new modules added to our core processor, $0.6 million ~~increased service charges on deposit accounts of $0.2 million~~higher professional and ~~a $0.2~~legal fees, $0.5 million increase in ~~other noninterest income.~~the amortization of tax credits, $0.3 million in FDIC insurance expense and $0.2 million in occupancy expenses. These increases were offset by ~~lower insurance commissions~~a decrease of ~~$1.0~~$0.8 million ~~and lower commercial loan swap fee income of $0.2 million~~in advertising expenses due to ~~declines~~the sunset of our deposit acquisition strategy in ~~our interest rate swap contracts by our commercial customers.~~the fourth quarter of 2020.

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Total noninterest expense decreased $1.1 million, or 4.6%, for the first quarter of March 31, 2021 to $23.6 million compared to $24.7 million in the same period of 2020. The decrease was primarily driven by a decline of $1.0 million in salaries and employee benefits primarily attributable to our branch network optimization project, lower unfunded loan commitment expense of $1.0 million primarily due to the reclassification to the provision for credit losses in 2021 due to the adoption of CECL, a decrease of $0.4 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020 and a $0.5 million decrease in other noninterest expense. Offsetting these decreases were higher professional and legal fees of $0.8 million, higher data processing expenses of $0.4 million due to an increase in customer accounts and new modules added to our core processor, an increase of $0.3 million in occupancy expenses and a $0.2 million increase in the amortization of tax credits.

The provision for income taxes increased ~~$0.7~~$0.1 million and $2.1 million to $0.9 million and $2.7 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~$0.2~~$0.9 million and $0.6 million for the same periods in 2020. Pre-tax income increased $68.9 million and $76.9 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. A full goodwill impairment charge in the ~~same period~~amount of $62.2 million was recorded in ~~2020 as a result~~the third quarter of ~~an increase in pretax income of $5.6 million.~~2020. Our effective tax rate ~~increased to 9.0%~~was 7.7% and 9.5% for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~5.3%~~negative 1.5% and negative 1.3% for the same ~~period~~periods in 2020. The ~~increase in~~nondeductible goodwill impairment charge was the reason for the decreased effective tax rate ~~is primarily due to a higher level of pretax income~~for the three and ~~a lower level of tax-exempt interest income.~~nine period ended September 30, 2020. 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 income, tax credit projects and Bank Owned Life Insurance (“BOLI”), which are relatively consistent regardless of the level of ~~pretax~~pre-tax income.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses, and this quarterly report references, net interest income and net interest margin, each on a fully taxable equivalent, or FTE, basis, ~~each of~~ which ~~is a~~are non-GAAP financial ~~measure.~~measures. Management believes ~~these non-GAAP financial measures~~net interest income and net interest margin on an FTE basis provide information useful to investors in understanding our underlying business, operational performance and performance trends as ~~it facilitates~~they facilitate comparisons with the performance of other companies in the financial services industry. Although management believes that these non-GAAP financial measures enhance ~~an investor’s~~investors’ understanding of our business and performance, these non-GAAP financial ~~measure~~measures should not be considered ~~an alternative~~alternatives to ~~financial measures determined in accordance with~~ GAAP or considered to be more important than financial ~~measures~~results determined in accordance with GAAP, nor ~~is it~~are they necessarily comparable ~~to similar~~with non-GAAP ~~financial~~ measures which may be presented by ~~us or~~ other companies.

~~The Company~~Management believes the presentation of net interest income on an FTE basis (non-GAAP) ensures the comparability of net interest income arising from both taxable and tax-exempt sources and we believe is consistent with industry practice. Net interest income ~~per the Consolidated Statements of Income~~ is reconciled to net interest income adjusted to an FTE basis (non-GAAP) in the Net Interest Income section of the "Results of Operations – Three and Nine Months Ended ~~March 31,~~September 30, 2021 Compared to Three and Nine Months Ended ~~March 31,2020.~~September 30, 2020."

RESULTS OF OPERATIONS

Three and Nine Months Ended ~~March 31,~~September 30, 2021 Compared to Three and Nine Months Ended ~~March 31,~~September 30, 2020

Net Interest Income

Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income.

Net interest income and the net interest margin are presented on an FTE ~~basis, which are non-GAAP measures.~~basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities. The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion of non-GAAP measures.

Total net interest income increased $4.0 million, or 15.6%, to $29.4 million, and $4.2 million, or 5.3%, to $83.1 million, for the three and nine months ended September 30, 2021, respectively, compared to $25.4 million and $79.0 million for the same periods in 2020. These increases were primarily due to the increase in the volume of interest-earning assets, enhanced pricing on restructured loans related to one large credit relationship, offset by the decline in the interest rate environment. Net interest income, on an FTE basis (non-GAAP), increased $3.7 million, or 14.2%, to $29.7 million and $3.5 million, or 4.4%, to $84.3

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

~~Total net interest income decreased $0.7 million, or 2.7%, to $26.5~~ million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~$27.3~~$26.0 million and $80.8 million for the same ~~period~~periods in ~~2020 primarily due~~2020. For the ~~decline in~~three months ended September 30, 2021, the ~~interest rate environment, offset by an~~ increase in ~~the volume of interest-earning assets. Net~~net interest income, on an FTE basis (non-GAAP), ~~decreased $0.9 million, or 3.1%, to $27.0 million in the first quarter of 2021 compared to $27.9 million in the same period in 2020. The decrease in net interest income, on an FTE basis,~~ was driven by ~~an $5.0 million decrease in~~higher interest income ~~partially offset by a $4.1~~of $0.7 million ~~decrease in~~and lower interest expense ~~during the three months ended March 31, 2021~~of $3.0 million compared to the same period in 2020. ~~The decreases~~For the nine months ended September 30, 2021 the increase in ~~short-term interest rates had a negative impact on both~~ net interest income, ~~and the net~~on a FTE basis (non-GAAP), was due to lower interest ~~margin, but are partially~~income of $7.1 million, offset by a ~~lower cost~~decrease of ~~funds.~~$10.6 million in interest expense compared to the same periods in 2020. Net interest margin ~~decreased 21~~increased 31 basis point and three basis points to ~~2.73% in~~2.92% and 2.80% for the ~~first quarter of~~three and nine months ended September 30, 2021, respectively, compared to ~~2.94%~~2.61% and 2.77% for the same ~~period~~periods in ~~2020~~2020. These impacts were primarily due to the ~~negative impact of~~ lower yields on interest-earning assets, offset by the aforementioned enhanced pricing on restructured loans and a decline in the cost of interest-bearing liabilities. The net interest margin, on an FTE basis (non-GAAP), ~~decreased 23~~increased 29 basis points and one basis point to ~~2.78% in~~2.96% and 2.84% for the ~~first~~ three and nine months ended September 30, 2021, respectively, compared to ~~3.01%~~2.67% and 2.83% for the same ~~period~~periods in 2020, primarily due to the lower interest rate environment. The lower interest rate environment and the intentional runoff of higher cost CDs has significantly contributed to lower the overall cost of funds.

The following table reconciles net interest income per the Consolidated Statements of Income to net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented:


		For the Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021			2020			(Dollars in Thousands)	2021			2020			2021			2020
Total Interest Income	Total Interest Income	$	32,957		$	37,836		Total Interest Income	$	34,913		$	33,986		$	100,964		$	107,439
Total Interest Expense	Total Interest Expense	6,428			10,572			Total Interest Expense	5,512			8,550			17,831			28,477
Net Interest Income per Consolidated Statements of Net Income		26,529			27,264
Net Interest Income per Consolidated Statements of Net Income (Loss)								Net Interest Income per Consolidated Statements of Net Income (Loss)	29,401			25,436			83,133			78,962
Adjustment to FTE Basis	Adjustment to FTE Basis	462			601			Adjustment to FTE Basis	330			599			1,178			1,826
Net Interest Income (FTE)(non-GAAP)	Net Interest Income (FTE)(non-GAAP)	$	26,991		$	27,865		Net Interest Income (FTE)(non-GAAP)	$	29,731		$	26,035		$	84,311		$	80,788
Net Interest Margin	Net Interest Margin	2.73		%	2.94		%	Net Interest Margin	2.92		%	2.61		%	2.80		%	2.77		%
Adjustment to FTE Basis	Adjustment to FTE Basis	0.05		%	0.07		%	Adjustment to FTE Basis	0.04		%	0.06		%	0.04		%	0.06		%
Net Interest Income (FTE)(non-GAAP)		2.78		%	3.01		%
Net Interest Margin (FTE)(non-GAAP)								Net Interest Margin (FTE)(non-GAAP)	2.96		%	2.67		%	2.84		%	2.83		%

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Average Balance Sheet and Net Interest Income Analysis (FTE)

The following table provides information regarding the average balances, interest and rates earned on ~~interest- earning~~interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:


		Three Months Ended March 31, 2021						Three Months Ended March 31, 2020							Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Average Balance(3)		Income/ Expense		Rate		Average Balance		Income/ Expense		Rate		(Dollars in Thousands)	Average Balance		Income/ Expense		Rate		Average Balance		Income/ Expense		Rate
ASSETS	ASSETS													ASSETS
Interest-bearing Deposits with Banks		$	174,731	$	50	0.12	%	$	62,960	$	210	1.34	%
Tax-free Investment Securities(2)		51,589		413		3.25	%	21,452		204		3.82	%
Interest-Bearing Deposits with Banks														Interest-Bearing Deposits with Banks	$	191,047	$	76	0.16	%	$	124,886	$	32	0.10	%
Tax-Free Investment Securities(2)														Tax-Free Investment Securities(2)	26,849		221		3.27	%	54,541		456		3.33	%
Taxable Investment Securities	Taxable Investment Securities	708,250		2,987		1.71	%	712,104		4,502		2.54	%	Taxable Investment Securities	836,957		3,163		1.50	%	693,330		3,150		1.81	%
Tax-free Loans(1)(2)		223,012		1,787		3.25	%	337,857		2,660		3.17	%
Total Securities														Total Securities	863,806		3,384		1.55	%	747,871		3,606		1.92	%
Tax-Free Loans(1)(2)														Tax-Free Loans(1)(2)	174,680		1,350		3.07	%	302,351		2,397		3.15	%
Taxable Loans(1)	Taxable Loans(1)	2,777,423		28,145		4.11	%	2,584,917		30,797		4.79	%	Taxable Loans(1)	2,755,595		30,403		4.38	%	2,694,747		28,511		4.21	%
Total Loans														Total Loans	2,930,275		31,753		4.30	%	2,997,098		30,908		4.10	%
Federal Home Loan Bank Stock	Federal Home Loan Bank Stock	4,805		37		3.12	%	4,418		64		5.83	%	Federal Home Loan Bank Stock	3,215		30		3.70	%	5,093		39		3.05	%
Total Interest-earning Assets		$	3,939,810	$	33,419	3.44	%	$	3,723,708	$	38,437	4.15	%
Total Interest-Earning Assets														Total Interest-Earning Assets	3,988,343		$	35,243	3.51	%	3,874,948		$	34,585	3.55	%
Noninterest Earning Assets														Noninterest Earning Assets	169,554						299,992
Total Assets														Total Assets	$	4,157,897					$	4,174,940

LIABILITIES
Deposits:
Interest-bearing Demand		$	378,886	$	215	0.23	%	$	297,395	$	446	0.60	%
LIABILITIES AND SHAREHOLDERS' EQUITY														LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand														Interest-Bearing Demand	$	424,517	$	278	0.26	%	$	330,402	$	238	0.29	%
Money Market	Money Market	309,624		266		0.35	%	154,564		271		0.71	%	Money Market	420,946		307		0.29	%	200,303		211		0.42	%
Savings	Savings	644,806		162		0.10	%	562,712		145		0.10	%	Savings	668,436		176		0.10	%	616,414		168		0.11	%
Certificates of Deposit	Certificates of Deposit	1,620,543		5,652		1.41	%	1,918,841		9,633		2.02	%	Certificates of Deposit	1,435,716		4,623		1.28	%	1,801,535		7,815		1.73	%
Total Interest-bearing Deposits		2,953,859		6,295		0.86	%	2,933,512		10,495		1.44	%
Borrowings:
Federal Funds Purchased		—		—		—	%	220		1		1.83	%
FHLB Borrowings		33,889		96		1.15	%	17,418		58		1.34	%
Total Interest-Bearing Deposits														Total Interest-Bearing Deposits	$	2,949,615	$	5,384	0.72	%	$	2,948,654	$	8,432	1.14	%

Federal Home Loan Bank Borrowings														Federal Home Loan Bank Borrowings	30,000		89		1.18	%	35,000		101		1.15	%
Other Borrowings	Other Borrowings	2,307		37		6.50	%	1,481		18		4.89	%	Other Borrowings	3,437		39		4.50	%	1,183		17		5.72	%
Total Borrowings	Total Borrowings	36,196		133		1.49	%	19,119		77		1.62	%	Total Borrowings	33,437		128		1.52	%	36,183		118		1.30	%
Total Interest-bearing Liabilities		$	2,990,055	6,428		0.87	%	$	2,952,631	10,572		1.44	%
Total Interest-Bearing Liabilities														Total Interest-Bearing Liabilities	2,983,052		5,512		0.73	%	2,984,837		8,550		1.14	%
Noninterest-Bearing Liabilities														Noninterest-Bearing Liabilities	769,871						696,273
Shareholders' Equity														Shareholders' Equity	404,974						493,830
Total Liabilities and Shareholders' Equity														Total Liabilities and Shareholders' Equity	$	4,157,897					$	4,174,940
Net Interest Income(2)	Net Interest Income(2)			$	26,991					$	27,865			Net Interest Income(2)			$	29,731					$	26,035
Net Interest Margin(2)	Net Interest Margin(2)					2.78	%					3.01	%	Net Interest Margin(2)					2.96	%					2.67	%

(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
(Dollars in Thousands)	Average Balance(3)		Income/ Expense		Rate		Average Balance		Income/ Expense		Rate
ASSETS
Interest-Bearing Deposits with Banks	$	185,603	$	182	0.13	%	$	98,283	$	268	0.36	%
Tax-Free Investment Securities(2)	37,064		906		3.27	%	41,922		1,076		3.43	%
Taxable Investment Securities	770,636		9,288		1.61	%	696,954		11,246		2.16	%
Total Securities	807,700		10,194		1.69	%	738,876		12,322		2.23	%
Tax-Free Loans(1)(2)	198,185		4,703		3.17	%	320,914		7,620		3.17	%
Taxable Loans(1)	2,771,860		86,965		4.19	%	2,644,031		88,885		4.49	%
Total Loans	2,970,045		91,668		4.13	%	2,964,945		96,505		4.35	%
Federal Home Loan Bank Stock	3,739		98		3.50	%	4,869		170		4.66	%
Total Interest-Earning Assets	3,967,087		$	102,142	3.44	%	3,806,973		$	109,265	3.83	%
Noninterest Earning Assets	174,194						289,672
Total Assets	$	4,141,281					$	4,096,645

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand	$	402,663	$	727	0.24	%	$	308,617	$	926	0.40	%
Money Market	361,204		877		0.32	%	179,546		692		0.51	%
Savings	657,101		507		0.10	%	590,534		470		0.11	%
Certificates of Deposit	1,522,384		15,328		1.35	%	1,855,027		26,076		1.88	%
Total Interest-Bearing Deposits	$	2,943,352	$	17,439	0.79	%	$	2,933,724	$	28,164	1.28	%
Federal Funds Purchased	—		—		—	%	73		1		1.83	%
Federal Home Loan Bank Borrowings	31,282		276		1.18	%	29,161		260		1.19	%
Other Borrowings	3,090		116		5.02	%	1,303		52		5.33	%
Total Borrowings	34,372		392		1.52	%	30,537		313		1.37	%
Total Interest-Bearing Liabilities	2,977,724		17,831		0.80	%	2,964,261		28,477		1.28	%
Noninterest-Bearing Liabilities	767,207						646,924
Shareholders' Equity	396,350						485,460
Total Liabilities and Shareholders' Equity	$	4,141,281					$	4,096,645
Net Interest Income(2)			$	84,311					$	80,788
Net Interest Margin(2)					2.84	%					2.83	%

(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

(3)Loan and deposit balances include ~~held-for-sale~~held-for-assumption transactions in connection with sale of Bank branches.

Interest income increased $0.9 million, or 2.7% and decreased $6.5 million, or 6.0%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. Interest income, on an FTE basis (non-GAAP), ~~decreased $5.0~~increased $0.7 million, or ~~13.1%~~1.9% and decreased $7.1 million, or 6.5%, for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same ~~period~~periods in 2020. We are currently maintaining higher liquidity levels as a result of ~~COVID-19.~~COVID-19 and resulting government stimulus programs. The change was primarily due to ~~an increase~~increases in average interest-earning assets of ~~$216.1~~$113.4 million and $160.1 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, offset by lower short-term interest rates compared to the same ~~period~~periods in 2020. Average interest-bearing deposits with banks increased ~~$111.8~~$87.3 million for the nine months ended September 30, 2021, and the average rate earned decreased ~~122~~23 basis points for the nine months ended September 30, 2021 compared to the same period in 2020. Average loan balances decreased $66.8 million, due to the loan sale, and increased ~~$77.7~~$5.1 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same ~~period~~periods in 2020, which ~~includes~~included PPP loan production that began in the second quarter of 2020. Average PPP loans ~~for the three months ended March 31, 2021~~ totaled ~~$31.2 million.~~$24.5 million through September 30, 2021. The average rate earned on loans decreased 5620 and 22 basis points for the ~~first quarter of~~three and nine months ended September 30, 2021, respectively, compared to the same ~~period~~periods in 2020 primarily due to lower short-term interest rates. Average investment securities increased ~~$26.3~~$115.9 million and $68.8 million and the average rate earned decreased 7737 and 54 basis points for the three and nine months ended September 30, 2021, respectively, compared to the same ~~period~~periods in 2020. The change in investment securities is the result of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures. ~~Overall, the FTE rate on interest-earning assets (non-GAAP)~~

Interest expense decreased ~~71 basis points~~$3.0 million and $10.6 million for the ~~first quarter of~~three and nine months ended September 30, 2021, respectively, compared to the same ~~period in 2020.~~

~~Interest expense decreased $4.1 million for the three months ended March 31, 2021 compared to the same period~~periods in 2020. The decrease was primarily due to lower short-term interest rates in 2021 as compared to 2020 as well as the intentional runoff of higher cost ~~CDs.~~certificates of deposit (“CDs”). Interest expense on ~~interest-bearing~~ deposits decreased ~~$4.2~~$3.0 million and $10.7 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same period in 2020 primarily due to the decline in the average balance of CDs and interest-bearing demand accounts. The decrease of $298.3 million in the average balance of CDs for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to the intentional runoff of these higher cost CDs. Interest-bearing demand accounts increased $81.5 million for the three months ended March 31, 2021 compared to the same period in 2020. The average rate paid on interest-bearing deposits decreased 58 basis points for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to lower short-term interest rates. Average total borrowings increased $17.1 million and

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the same periods in 2020 primarily due to the decline in the average balance of CDs. The decrease of $365.8 million or 20.3% and $332.6 million or 17.9% in the average balance of CDs for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 was primarily due to the intentional runoff of these higher cost CDs. Interest-bearing demand accounts increased $94.1 million and $94.0 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. The average rate paid on interest-bearing deposits decreased 1342 and 49 basis points for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same ~~period~~periods in ~~2020.~~2020 primarily due to lower short-term interest rates. Overall, the cost of interest-bearing liabilities decreased 5741 and 48 basis points for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to the same ~~period~~periods in 2020.

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:


		Three Month Ended March 31, 2021 Compared to March 31, 2020							Three Month Ended September 30, 2021 Compared to September 30, 2020						Nine Months Ended September 30, 2021 Compared to September 30, 2020
(Dollars in Thousands)	(Dollars in Thousands)	Volume(3)		Rate(3)		Increase/ (Decrease)		(Dollars in Thousands)	Volume(3)		Rate(3)		Increase/ (Decrease)		Volume(3)		Rate(3)		Increase/ (Decrease)
ASSETS
Interest-bearing Deposits with Banks		$	146	$	(306)	$	(160)
Interest Earned on:								Interest Earned on:
Interest-Bearing Deposits with Banks								Interest-Bearing Deposits with Banks	$	20	$	24	$	44	$	149	$	(235)	$	(86)
Tax-free Investment Securities(2)	Tax-free Investment Securities(2)	244		(35)		209		Tax-free Investment Securities(2)	(227)		(8)		(235)		(121)		(49)		(170)
Taxable Investment Securities	Taxable Investment Securities	(25)		(1,490)		(1,515)		Taxable Investment Securities	596		(583)		13		1,098		(3,056)		(1,958)
Total Securities								Total Securities	369		(591)		(222)		977		(3,105)		(2,128)
Tax-free Loans(1)(2)	Tax-free Loans(1)(2)	(939)		66		(873)		Tax-free Loans(1)(2)	(982)		(65)		(1,047)		(2,919)		2		(2,917)
Taxable Loans(1)	Taxable Loans(1)	2,076		(4,728)		(2,652)		Taxable Loans(1)	683		1,209		1,892		4,143		(6,063)		(1,920)
Total Loans								Total Loans	(299)		1,144		845		1,224		(6,061)		(4,837)
Federal Home Loan Bank Stock	Federal Home Loan Bank Stock	22		(49)		(27)		Federal Home Loan Bank Stock	(16)		7		(9)		(35)		(37)		(72)
Total Interest-earning Assets		$	1,524	$	(6,542)	$	(5,018)
Total Interest-Earning Assets								Total Interest-Earning Assets	$	74	$	584	$	658	$	2,315	$	(9,438)	$	(7,123)

LIABILITIES
Deposits:
Interest-bearing Demand		$	97	$	(328)	$	(231)
Interest Paid on:								Interest Paid on:
Interest-Bearing Demand								Interest-Bearing Demand	$	64	$	(24)	$	40	$	233	$	(432)	$	(199)
Money Market	Money Market	177		(182)		(5)		Money Market	172		(76)		96		510		(325)		185
Savings	Savings	20		(3)		17		Savings	18		(10)		8		68		(31)		37
Certificates of Deposit	Certificates of Deposit	(1,360)		(2,621)		(3,981)		Certificates of Deposit	(1,418)		(1,774)		(3,192)		(4,168)		(6,580)		(10,748)
Total Interest-bearing Deposits		(1,066)		(3,134)		(4,200)
Borrowings:
Total Interest-Bearing Deposits								Total Interest-Bearing Deposits	(1,164)		(1,884)		(3,048)		(3,357)		(7,368)		(10,725)
Federal Funds Purchased	Federal Funds Purchased	1		(2)		(1)		Federal Funds Purchased	—		—		—		(1)		—		(1)
FHLB Borrowings		48		(10)		38
Federal Home Loan Bank Borrowings								Federal Home Loan Bank Borrowings	(15)		3		(12)		19		(3)		16
Other Borrowings	Other Borrowings	12		7		19		Other Borrowings	26		(4)		22		67		(3)		64
Total Borrowings	Total Borrowings	61		(5)		56		Total Borrowings	11		(1)		10		85		(6)		79
Total Interest-bearing Liabilities		$	(1,005)	$	(3,139)	$	(4,144)
Total Interest-Bearing Liabilities								Total Interest-Bearing Liabilities	$	(1,153)	$	(1,885)	$	(3,038)	$	(3,272)	$	(7,374)	$	(10,646)
Change in Net Interest Margin	Change in Net Interest Margin	$	2,529	$	(3,403)	$	(874)	Change in Net Interest Margin	$	1,227	$	2,469	$	3,696	$	5,587	$	(2,064)	$	3,523

(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

(3)Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on unfunded commitments, is the amount to be added to the ~~allowance for credit losses (“ACL”),~~ACL, after considering loan charge-offs and recoveries, to bring the ACL to a level determined to be appropriate in management's judgment to absorb expected losses inherent in the loan portfolio. The Company elected to defer its adoption of CECL in accordance with relief provided under the CARES Act ~~until March 31, 2021,~~ effective January 1, 2021. At January 1, 2021, we increased the ACL by $64.5 million for the Day 1 CECL adjustment which includes $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments. ~~The provision for credit losses decreased $2.9 million to $1.9 million for the three months ended March 31, 2021 compared to $4.8 million for the same period in 2020.~~

The provision for credit losses decreased ~~$2.9~~$3.3 million to ~~$1.9~~$(0.4) million and $10.8 million to $2.4 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~$4.8~~$2.9 million and $13.2 million for the same ~~period~~periods in 2020. The provision for unfunded commitments included a release of ~~2020 due to qualitative adjustments~~$0.1 million and a release of ~~$2.6~~$0.9 million ~~due to~~for the ~~decline in economic~~three and ~~market conditions as a result of COVID-19. Adjustments to~~nine months ended September 30, 2021. For the ~~CECL model were made to account for additional potential deterioration in credit quality with respect to loans on deferral. Management reviews and analyzes~~three months ended September 30, 2021, the ~~monthly operating statements of commercial clients~~decrease in the deferral program. During the first quarter of 2021, management observed continued deterioration on hospitality loans with aggregate principal balances of $50.9 million that are on deferral as of March 31, 2021. This adjustment resulted in current expectedprovision for credit losses of $11.7 million at March 31, 2021. The Day 1 model recognized the deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected credit losses of

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~~$10.2~~losses was primarily driven by the release of $3.1 million to the ACL due to nine loans within two performing relationships. These loans were included in the commercial real estate loan segment, during the third quarter of 2021 with an aggregate

unpaid principal balance of $50.2 million that were previously reserved. This decrease was offset by the increase of $1.6 million of special qualitative reserves in connection with increased uncertainty in credit quality with respect to two loans with an aggregate unpaid balance of $12.0 million in the commercial real estate loan segment.

During the three and nine months ended September 30, 2021, management observed that $62.0 million of loans that were previously in the deferral program were recovering at rates much lower than peers. Accordingly, management sold $50.2 million of these loans during the three months ended September 30, 2021 and has developed a workout strategy with the remaining two loans with an aggregate unpaid balance of $12.0 million. The qualitative reserves were established given the uncertainty of the future performance of these borrowers.

Adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral. Management reviewed and analyzed the monthly operating statements of commercial clients in the Part III deferral program. The deferral program expired June 30, 2021. The majority of our clients in the deferral program experienced recoveries starting in the spring of 2021. Based on the ongoing review of operating statements, management identified a lag in recovery with respect to loans with an aggregate principal balance of $62.0 million. These loans were addressed throughout the nine months ended September 30, 2021 as ~~of January 1, 2021. Between the~~additional information was received and analyzed as follows. The Day 1 model ~~and~~recognized the ~~model~~deterioration of loans with an aggregate principal balance of $42.8 million which resulted in current expected losses of $10.2 million. In the quarter ended March 31, 2021 the model recognized the deterioration of a loan with a principal balance of $8.1 million ~~was recognized resulting~~which resulted in ~~additional~~current expected ~~credit~~ losses of $1.5 million ~~during~~and an additional $0.6 million standard qualitative general reserve. In the third quarter ended September 30, 2021, the Bank sold these loans with an unpaid principal balance of $50.2 million which resulted in charge-offs totaling $9.2 million and a net release of reserves of $3.1 million. Additionally, in the third quarter ended September 30, 2021, the model recognized the deterioration of loans with an aggregate principal balance of $12.0 million, which resulted in current expected losses of $1.6 million. In summary, out of the $398.5 million in the deferral program as of June 30, 2021, only $12.0 million of these loans remain a concern for the quarter ended September 30, 2021 and have been adequately reserved.

Net charge-offs were $9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020. During the three months ended ~~March 31, 2021.~~

~~Net~~September 30, 2021, the increase in net charge-offs ~~increased by $0.1 million~~was primarily due to ~~$0.7 million for the three months ended March 31, 2021 compared to $0.6~~$9.2 million in charge-offs related to the ~~same period~~aforementioned sale of ~~2020.~~two relationships that included nine loans that had been previously reserved. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were ~~0.10%~~1.30% and 0.85% for the three and nine months ended September 30, 2021, respectively, compared to 0.05% and 0.09% for the ~~three months ended March 31, 2021 and 2020, respectively.~~same periods in 2020.

At ~~March 31,~~September 30, 2021, we had low nonperforming loans, with such nonperforming loans decreasing $23.1 million to $8.9 million, compared to $32.0 million at December 31, ~~2020 and March 31, 2020,~~2020. The decline is due to the aforementioned resolution of our two largest nonperforming ~~loans were $32.0 million, $32.0~~relationships during the second quarter of 2021 which resulted in net charge-offs of $6.3 million and ~~$40.5~~$1.9 million, ~~respectively.~~respectively, of which $13.1 million was previously reserved. Nonperforming loans as a percentage of total portfolio loans were ~~1.08%~~0.31%, 1.09% and ~~1.38%~~1.35% as of ~~March 31,~~September 30, 2021, December 31, 2020 and ~~March 31,~~September 30, 2020, respectively. ~~The ACL was 365.7% of nonperforming loans as of March 31, 2021, as compared to 169.1% of nonperforming loans as of December 31, 2020.~~

At ~~March 31,~~September 30, 2021, the adoption of Topic 326 and subsequent measurement under this standard, resulted in an increase to our ACL of ~~$62.8~~$45.2 million, to ~~$116.9~~$99.3 million ~~excluding the life-of-loss reserve~~ compared to $54.1 million at December 31, 2020. The ACL as a percentage of total portfolio loans was ~~3.93%~~3.44% at ~~March 31,~~September 30, 2021 and 1.83% at December 31, 2020.

~~Noninterest Income~~

Three Months Ended March 31,
(Dollars in Thousands) 2021 2020 $ Change % Change
Gains on Sales of Securities, net $ 3,610 $ 1,214 $ 2,396 197.4 %
Service Charges, Commissions and Fees 1,809 1,650 159 9.6 %
Debit Card Interchange Fees 1,831 1,243 588 47.3 %
Insurance Commissions 294 1,309 (1,015) (77.5) %
Bank Owned Life Insurance Income 340 353 (13) (3.7) %
Other Real Estate Owned Income 71 139 (68) (48.9) %
Commercial Loan Swap Fee Income 219 422 (203) (48.1) %
Other 778 622 156 25.1 %
Total Noninterest Income $ 8,952 $ 6,952 $ 2,000 28.8 %

Total noninterest income increased $2.0 million, or 28.8%, to $9.0 million for the three months ended 2021 compared to the same period in 2020, primarily driven by the impact of $3.6 million in net securities gains. Securities gains increased $2.4 million to $3.6 million during the first three months of 2021 compared to $1.2 million during the same period in 2020 to take advantage of market opportunities, reposition and diversify holdings in the securities portfolio. Other key factors contributed to the increase in total noninterest income during the first quarter of 2021 were higher debit card interchange fees of $0.6 million due to higher activity in demand deposits, increased service charges on deposit accounts of $0.2 million and a $0.2 million increase in other noninterest income. These increases were offset by lower insurance commissions of $1.0 million and lower commercial loan swap fee income of $0.2 million due to declines in our interest rate swap contracts by our commercial customers.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Noninterest Income


	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in Thousands)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change
Gain on Sales of Securities, net	$	1,341	$	2,388	$	(1,047)	(43.8)	%	$	6,450	$	5,923	$	527	8.9	%
Service Charges, Commissions and Fees	1,660		1,205		455		37.8	%	4,958		3,045		1,913		62.8	%
Debit Card Interchange Fees	1,751		1,559		192		12.3	%	5,456		4,270		1,186		27.8	%
Insurance Commissions	427		482		(55)		(11.4)	%	1,099		2,123		(1,024)		(48.2)	%
Bank Owned Life Insurance Income	349		351		(2)		(0.6)	%	1,031		1,054		(23)		(2.2)	%

Other Real Estate Owned Income	7		58		(51)		(87.9)	%	82		279		(197)		(70.6)	%
Commercial Loan Swap Fee Income	1,096		1,572		(476)		(30.3)	%	2,057		3,120		(1,063)		(34.1)	%
Other	284		360		(76)		(21.1)	%	1,972		1,177		795		67.5	%
Total Noninterest Income	$	6,915	$	7,975	$	(1,060)	(13.3)	%	$	23,105	$	20,991	$	2,114	10.1	%

Total noninterest income decreased $1.1 million, or 13.3%, to $6.9 million for the three months ended September 30, 2021 and increased $2.1 million, or 10.1%, to $23.1 million for the nine months ended September 30, 2021 compared to the same periods in 2020. The decrease of $1.1 million for the three months ended September 30, 2021 compared to the same period in 2020 was related to declines in net security gains of $1.0 million and lower commercial loan swap fee income of $0.5 million due to the timing and demand for this product in the current low interest rate environment. These decreases were offset by increases of $0.5 million in service charges on deposit accounts due to reinstating fees that we previously waived during 2020 for customers affected by the COVID-19 pandemic and higher debit card interchange fees of $0.2 million due to usage.

For the nine months ended September 30, 2021 compared to the same period in 2020, the increase of $2.1 million in total noninterest income was driven by increases in service charges on deposit accounts of $1.9 million, debit card interchange fees of $1.2 million, a year-to-date gain of $0.5 million on the sale of four bank branches included in other income and higher net security gains of $0.5 million. The increase in security gains of $0.5 million for the nine months ended September 30, 2021, to $6.5 million compared to $5.9 million for the same period in 2020 was due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in its securities portfolio. The above increases were offset by lower commercial loan swap fee income of $1.1 million, a decline in insurance commissions of $1.0 million and lower OREO income of $0.2 million.

Noninterest Expense


		Three Months Ended March 31,									Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		$ Change		% Change		(Dollars in Thousands)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change
Salaries and Employee Benefits	Salaries and Employee Benefits	$	12,582	$	13,581	$	(999)	(7.4)	%	Salaries and Employee Benefits	$	12,816	$	13,036	$	(220)	(1.7)	%	$	39,084	$	39,106	$	(22)	(0.1)	%
Occupancy Expense, net	Occupancy Expense, net	3,514		3,249		265		8.2	%	Occupancy Expense, net	3,333		3,413		(80)		(2.3)	%	10,298		10,077		221		2.2	%
FDIC Insurance Expense	FDIC Insurance Expense	643		544		99		18.2	%	FDIC Insurance Expense	582		547		35		6.4	%	1,882		1,628		254		15.6	%
Other Taxes	Other Taxes	762		746		16		2.1	%	Other Taxes	825		809		16		2.0	%	2,305		2,343		(38)		(1.6)	%
Advertising Expense	Advertising Expense	170		612		(442)		(72.2)	%	Advertising Expense	196		404		(208)		(51.5)	%	586		1,410		(824)		(58.4)	%
Telephone Expense	Telephone Expense	600		574		26		4.5	%	Telephone Expense	519		578		(59)		(10.2)	%	1,707		1,725		(18)		(1.0)	%
Professional and Legal Fees	Professional and Legal Fees	1,224		437		787		180.1	%	Professional and Legal Fees	1,244		1,474		(230)		(15.6)	%	3,908		3,310		598		18.1	%
Data Processing	Data Processing	921		486		435		89.5	%	Data Processing	1,018		836		182		21.8	%	2,893		1,917		976		50.9	%
Losses on Sales and Write-downs of Other Real Estate Owned, net	Losses on Sales and Write-downs of Other Real Estate Owned, net	212		189		23		12.2	%	Losses on Sales and Write-downs of Other Real Estate Owned, net	608		1,305		(697)		(53.4)	%	3,423		1,357		2,066		152.2	%
Losses on Sales and Write-downs of Bank Premises, net		43		12		31		258.3	%
Losses on Sales and Write-downs on Bank Premises, net										Losses on Sales and Write-downs on Bank Premises, net	7		17		(10)		(58.8)	%	114		88		26		29.5	%
Debit Card Expense	Debit Card Expense	632		554		78		14.1	%	Debit Card Expense	700		764		(64)		(8.4)	%	2,045		1,989		56		2.8	%
Tax Credit Amortization	Tax Credit Amortization	427		272		155		57.0	%	Tax Credit Amortization	427		272		155		57.0	%	1,281		816		465		57.0	%
Unfunded Loan Commitment Expense	Unfunded Loan Commitment Expense	—		982		(982)		(100.0)	%	Unfunded Loan Commitment Expense	—		(348)		348		(100.0)	%	—		251		(251)		(100.0)	%
Other Real Estate Owned Expense	Other Real Estate Owned Expense	54		140		(86)		(61.4)	%	Other Real Estate Owned Expense	84		94		(10)		(10.6)	%	280		411		(131)		(31.9)	%

Goodwill Impairment Expense										Goodwill Impairment Expense	—		62,192		(62,192)		(100.0)	%	—		62,192		(62,192)		(100.0)	%
Other	Other	1,821		2,370		(549)		(23.2)	%	Other	2,326		1,907		419		22.0	%	6,243		6,314		(71)		(1.1)	%
Total Noninterest Expense	Total Noninterest Expense	$	23,605	$	24,748	$	(1,143)	(4.6)	%	Total Noninterest Expense	$	24,685	$	87,300	$	(62,615)	(71.7)	%	$	76,049	$	134,934	$	(58,885)	(43.6)	%

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Total noninterest expense decreased ~~$1.1~~$62.6 million, or ~~4.6%~~71.7%, for the ~~first quarter of March 31,~~three months ended September 30, 2021 ~~to $23.6~~and decreased $58.9 million, or 43.6%, for the nine months ended September 30, 2021 compared to ~~$24.7 million in~~ the same ~~period of~~periods in 2020. The most significant decrease for both the three and nine month periods was ~~primarily~~ driven by a ~~decline~~one-time charge resulting from goodwill impairment of ~~$1.0~~$62.2 million recorded in the third quarter of 2020. Also impacting the decrease for the three months ended September 30, 2021 was $0.7 million lower losses on sales and write-downs of OREO, net, a decrease in professional and legal fees of $0.2 million, lower salaries and employee benefits ~~primarily attributable to our branch network optimization project,~~of $0.2 million and lower advertising expenses of $0.2 million. Offsetting these decreases were increases of $0.4 million in other noninterest expense, which ~~was partially offset by normal merit increases, lower~~included a finder’s fee for the sale of the two credit relationships, $0.3 million increase in unfunded loan commitment expense ~~of $1.0 million primarily due~~related to the ~~reclassification~~reclass to the provision for credit losses ~~in 2021 due to~~as a result of the adoption of ~~CECL. Also impacting~~Topic 326, a $0.2 million increase in data processing expense and $0.2 million in tax credit amortization.

Along with the above mentioned one-time goodwill impairment charge of $62.2 million, the decrease in total noninterest expense for the nine months ended September 30, 2021 included an increase for a nonrecurring write-down of $3.0 million for closed bank branches included in losses on sales and write-downs of OREO, net. These branches were closed in the second quarter of 2021, transferred to OREO and marketed for sale resulting in the $3.0 million nonrecurring write-down. Also decreasing for the period was ~~$0.4~~$0.8 million in in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020, $0.3 million lower unfunded loan commitment expense and ~~a $0.5~~$0.1 million ~~decrease in other noninterest expense due to~~ lower ~~postage, travel and business development expenses which were somewhat impacted by COVID-19. Partially offsetting~~OREO expenses. Offsetting these decreases for the nine months ended September 30, 2021 were ~~higher professional and legal fees~~increases of ~~$0.8~~$1.0 million ~~increased~~in data processing expenses ~~of $0.4 million~~ due to an increase in customer accounts and new modules added to our core processor, an$0.6 million higher professional and legal fees, $0.5 million increase in the amortization of tax credits, $0.3 million in ~~occupancy~~higher FDIC insurance expenses and a $0.2 million increase in ~~the amortization of tax credits.~~occupancy expenses.

Provision for Income Taxes

The provision for income taxes increased ~~$0.7~~$0.1 million and $2.1 million to $0.9 million and $2.7 million for the three and nine months ended ~~March 31,~~September 30, 2021, respectively, compared to ~~$0.2~~$0.9 million and $0.6 million for the same ~~period~~periods in 2020. ~~The increase in pretax~~Pre-tax income ~~of $5.6~~increased $68.9 million and $76.9 million for the ~~first~~ three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. A full goodwill impairment charge in the amount of ~~2021~~$62.2 million was ~~primarily due to higher noninterest income, lower provision for credit losses and lower noninterest expenses.~~recorded in the third quarter of 2020. Our effective tax rate ~~increased to 9.0%~~was 7.7% and 9.5% for the three and nine months ended ~~March 31,~~September 30, 2021, asrespectively, compared to ~~5.3%~~negative 1.5% and negative 1.3% for the same ~~period~~periods in 2020. The increase in the effective tax rate is primarily due to a higher level of ~~pretax~~pre-tax income and a lower level of tax-exempt interest income. The nondeductible goodwill impairment charge was the reason for the decreased effective tax rate for the three and nine period ended September 30, 2020. 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 income, tax credit projects and BOLI, which are relatively consistent regardless of the level of ~~pretax~~pre-tax income.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Financial Condition

~~March 31,~~September 30, 2021

Total assets decreased ~~$39.8~~$45.1 million, to $4.1 billion at ~~March 31,~~September 30, 2021 compared to $4.2 billion at December 31, 2020. Federal Reserve Bank excess reserves decreased ~~$52.8~~$42.2 million to ~~$110.6~~$121.3 million at ~~March 31,~~September 30, 2021 ~~compared to~~from $163.5 million at December 31, 2020 due to active balance sheet management.

Total portfolio loans ~~increased $24.7~~decreased $63.0 million, or ~~0.8%,~~2.9% on an annualized basis, to ~~$3.0~~$2.9 billion at ~~March 31,~~September 30, 2021 compared to December 31, ~~2020.~~2020 primarily due to several large commercial loan payoffs. The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326. We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not applied to periods during 2020 and prior years, therefore showing fluctuations in all categories. ~~The~~At March 31, 2021, the initial break-out of Other loans related to the adoption of Topic 326 totaled $373.4 million consisting of $136.3 million of ~~CRE,~~Commercial Real Estate, (“CRE”), $77.8 million of Commercial and Industrial (“C~~&I,~~&I”), $49.6 million of Residential Mortgages and $109.7 million of Construction. This segment of loans has unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

At March 31, 2021 we had $9.4 million loans held-for-sale in connection with the sale of Bank branches that are expected to close in the second quarter of 2021. Nonperforming loans and TDRs remained at $32.0OREO decreased $2.5 million at ~~both March 31, 2021 and December 31, 2020. Other Real Estate Owned (“OREO”) decreased $1.7 million at March 31,~~September 30, 2021 compared to December 31, ~~2020.~~2020 due to 20 branch closures that were completed and 13 of those that were sold as part of our branch network optimization project that aligns with our strategic goals

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

to enhance franchise value and improve operating efficiency. Closed retail bank offices ~~declined $0.6~~increased $0.3 million ~~with~~and have a remaining book value of ~~$1.9~~$2.8 million at ~~March 31,~~September 30, 2021 compared to $2.5 million at December 31, 2020. Through the second quarter of 2021, all branch closures and sale transactions will be completed as part of our branch network optimization project aligned with our strategic goals to enhance franchise value and improve operating efficiency.

The securities portfolio increased ~~$1.4~~$118.8 million ~~at March 31, 2021 from December 31, 2020~~ and ~~comprised 18.8%~~is currently 21.7% of total assets at ~~March 31,~~September 30, 2021 compared to 18.6% of total assets at December 31, 2020. The increase ~~was~~is a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits ~~increased $6.9~~decreased $18.2 million to $3.7 billion at ~~March 31,~~September 30, 2021 as compared to ~~$3.7 billion at~~ December 31, 2020. The ~~increase in deposits primarily related~~decline from December 31, 2020 was due to the ~~growth~~intentional runoff of $211.8 million of higher cost CDs and $84.7 million of deposits held-for-assumption in ~~all our~~connection with the sale of four bank branches, which were completed during the second quarter of 2021. Offsetting these decreases was an increase of $278.3 million, or 14.0% in core ~~deposit categories,~~deposits, which includes noninterest-bearing and interest-bearing demand deposits, money market accounts and savings accounts. ~~Core deposits increased $102.3 million at March 31,~~At September 30, 2021, or 5.2%, compared to December 31, 2020. Offsetting the increase in core deposits was a decline of $92.3 million in our CDs. This decrease relates to the intentional runoff of higher cost CDs. Noninterest-bearingnoninterest-bearing deposits comprised ~~19.9% and~~19.7% compared to 19.0% of total deposits at ~~March~~December 31, 2020, respectively. CDs comprised 38.3% and 43.8% of total deposits at September 30, 2021 and December 31, 2020, respectively. ~~At March 31, 2021, $81.6 million of deposits were held for assumption in connection with the sale of Bank branches that are expected to close in the second quarter of 2021.~~

Total ~~shareholders’ equity~~capital decreased by ~~$52.3~~$34.3 million to ~~$387.9~~$405.9 million at ~~March 31,~~September 30, 2021 compared to $440.2 million at December 31, 2020. The decrease in equity was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a ~~$11.1~~$10.3 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities partially offset by net income of ~~$9.4 million.~~$26.0 million for the nine months ended September 30, 2021. The remaining difference of $0.7 million is related to stock-based compensation during the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

The ACL was ~~3.93%~~3.44% of total portfolio loans at ~~March 31,~~September 30, 2021 compared to an allowance for loan losses of 1.83% as of December 31, 2020. General reserves as a percentage of total portfolio loans were ~~3.43%~~3.35% at ~~March 31,~~September 30, 2021 compared to 1.32% at December 31, 2020. ~~The ACL was 365.7% of nonperforming loans at March 31, 2021 compared to an allowance for loan losses of 169.1% of nonperforming loans at December 31, 2020.~~ Management believes, the ~~allowance for credit losses~~ACL is adequate to absorb expected losses inherent in the loan portfolio.

The Company remains well capitalized. Our Tier 1 capital ratio ~~decreased~~increased to ~~12.88%~~13.85% at ~~March 31,~~September 30, 2021 compared to 13.08% at December 31, 2020. Our leverage ratio was ~~10.16%~~10.48% at ~~March 31,~~September 30, 2021, compared to 10.26% at December 31, 2020 and total risk-based capital ratio was ~~14.14%~~15.11% at ~~March 31,~~September 30, 2021 compared to 14.33% at December 31, 2020. We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Securities Activity

The following table presents the composition of available-for-sale securities:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		$ Change		(Dollars in Thousands)	September 30, 2021		December 31, 2020		$ Change
U.S. Treasury Securities								U.S. Treasury Securities	$	4,419	$	—	$	4,419
U.S. Government Agency Securities	U.S. Government Agency Securities	$	2,360	$	—	$	2,360	U.S. Government Agency Securities	3,478		—		3,478
Residential Mortgage-backed Securities		33,454		44,724		(11,270)
Commercial Mortgage-backed Securities		5,285		5,447		(162)
Residential Mortgage-Backed Securities								Residential Mortgage-Backed Securities	83,898		44,724		39,174
Commercial Mortgage-Backed Securities								Commercial Mortgage-Backed Securities	4,222		5,447		(1,225)
Asset Backed Securities	Asset Backed Securities	137,499		133,557		3,942		Asset Backed Securities	140,202		133,557		6,645
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	254,850		218,359		36,491		Collateralized Mortgage Obligations	272,976		218,359		54,617
Small Business Administration	Small Business Administration	106,957		99,145		7,812		Small Business Administration	108,378		99,145		9,233
States and Political Subdivisions	States and Political Subdivisions	210,315		252,622		(42,307)		States and Political Subdivisions	231,907		252,622		(20,715)
Corporate Notes	Corporate Notes	29,312		24,825		4,487		Corporate Notes	48,066		24,825		23,241
Total Debt Securities	Total Debt Securities	$	780,032	$	778,679	$	1,353	Total Debt Securities	$	897,546	$	778,679	$	118,867

The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by ~~$1.4~~$118.8 million to $897.5 million at ~~March 31,~~September 30, 2021 as compared to $778.7 million at December 31, 2020. Securities comprise ~~18.8%~~21.7% of total assets at ~~March 31,~~September 30, 2021 as compared to 18.6% at December 31,

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

2020. The increase is a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

At ~~March 31,~~September 30, 2021 total gross unrealized gains in the available-for-sale portfolio were ~~$11.3~~$12.0 million, offset by ~~$5.5~~$5.2 million of gross unrealized losses. At December 31, 2020, total gross unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses.

Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis. At ~~March 31,~~September 30, 2021 and December 31, 2020, the Company did not record any OTTI. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.

Loan Composition

The following table summarizes our loan portfolio for the periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020
Commercial
Commercial Real Estate $ 1,384,541 $ 1,453,799
Commercial and Industrial 460,264 557,164
Total Commercial Loans 1,844,805 2,010,963
Consumer
Residential Mortgages 414,507 472,170
Other Consumer 49,516 57,647
Total Consumer Loans 464,023 529,817
Construction 289,661 406,390
Other 373,386 —
Total Portfolio Loans 2,971,875 2,947,170
Loans Held-for-Sale 32,737 25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value 9,423 9,835
Total Loans $ 3,014,035 $ 2,982,442

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~


(Dollars in Thousands)	September 30, 2021		December 31, 2020
Commercial
Commercial Real Estate	$	1,346,953	$	1,453,799
Commercial and Industrial	387,402		557,164
Total Commercial Loans	1,734,355		2,010,963
Consumer
Residential Mortgages	449,118		472,170
Other Consumer	44,953		57,647
Total Consumer Loans	494,071		529,817
Construction	297,337		406,390
Other	358,394		—
Total Portfolio Loans	2,884,157		2,947,170
Loans Held-for-Sale	4,889		25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value	—		9,835
Total Loans	$	2,889,046	$	2,982,442

Our loan portfolio represents our most significant source of interest income. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay. For a discussion of the ~~risks~~risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2020, as supplemented by the risk factor disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

Total portfolio loans ~~increased $24.7~~decreased $63.0 million, or ~~0.8%~~2.1%, to ~~$3.0~~$2.9 billion at ~~March 31,~~September 30, 2021 compared to December 31, 2020. The variances in loan segments for portfolio loans is primarily related to the adoption of Topic 326. We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not adjusted to the comparable period, therefore showing fluctuations in all categories. ~~The~~At March 31, 2021 the initial break-out of Other loans related to the adoption of Topic 326 totaled $373.4 million consisting of $136.3 million of CRE, $77.8 million of C&I, $49.6 million of Residential Mortgages and $109.7 million of Construction. This segment of loans includes unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this segment resulted in an increase in reserves of $51.3 million.

Nonperforming loans ~~and TDRs remained at $32.0~~decreased $23.1 million, or 72.3%, to $8.9 million at ~~both March 31, 2021 and December 31, 2020. OREO decreased $1.7 million at March 31,~~September 30, 2021 compared to ~~December 31, 2020. Closed retail bank offices declined $0.6 million with a remaining book value of $1.9 million at March 31, 2021 compared to $2.5~~$32.0 million at December 31, 2020. ~~We expect that all branch closures and sale transactions part~~The decline from December 31, 2020 is due to the resolution of our ~~network optimization project will be completed~~two largest nonperforming credits during the second quarter of 2021. ~~Aligning~~OREO decreased $2.5 million at September 30, 2021 compared to December 31, 2020 due to 20 branches that were closed during the second quarter of 2021, and moved to OREO and marketed for sale resulting in a $3.0 million one-time write-down. During the first nine months of 2021, 20 branch closures were completed and 13 were sold as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. Closed retail bank offices increased $0.3 million and have a remaining book value of $2.8 million at September 30, 2021 compared to $2.5 million at December 31, 2020.

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The commercial portfolio is monitored for potential concentrations of credit risk by market, ~~type of lending, CRE~~ property type ~~C&I~~ and ~~owner-occupied CRE by industry, investment CRE dependent on common tenants and industries or property types that are similarly impacted by external factors.~~tenant concentrations.

Our exposure to the hospitality industry at ~~March 31,~~September 30, 2021 equated to approximately ~~$501.5~~$451.4 million, or ~~16.9%~~15.6% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. ~~However, we anticipate that a significant portion of our borrowers~~Starting in the second quarter of 2021, we have observed improvements in occupancy and the average daily rates for our hotel ~~industry will continue~~clients following sharp declines through the pandemic. However our clients are now facing enormous challenges when it comes to ~~operate at~~attracting labor, which impedes their ability to turnover rooms resulting in occupancy ~~levels at or below breakeven which~~constraints. This has caused, or ~~will~~may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements forcing them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. As a result, our financial condition, capital levels and results of operations could be adversely affected.

~~Portfolio loan balances of~~Aggregate commitments to our top 10 credit relationships were ~~$739.8~~$747.0 million at March 31, 2021, with a total commitment exposure of $755.3 million. These loans are in the hospitality, golf course, agricultural, land holdings, commercial real estate (multi-family and office/retail), energy, land development, and lumber industries.September 30, 2021. The ~~other~~Other segment ~~is comprised of 49.3%~~represents 47.4% of the top 10 credit relationships.

The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:


Dollars in Thousands	For the Periods Ending				Change		9/30/2021 % of Gross Loans		9/30/2021 % of RBC
	September 30, 2021		December 31, 2020
1. Hospitality, agriculture & energy	$354,240		$375,990		($21,750)		12.26	%	74.07	%
2. Hospitality	63,855		61,691		2,164		2.21	%	13.35	%
3. Retail real estate & food services	56,258		55,373		885		1.95	%	11.76	%
4. Industrial & retail real estate	47,425		41,439		5,986		1.64	%	9.92	%
5. Multifamily, lumber & retail	44,008		35,322		8,686		1.52	%	9.20	%
6. Hospitality	37,584		37,435		149		1.30	%	7.86	%
7. Multifamily development	36,720		40,874		(4,154)		1.27	%	7.68	%
8. Retail real estate	36,619		35,388		1,231		1.27	%	7.66	%
9. Multifamily & student housing	35,749		38,787		(3,038)		1.24	%	7.47	%
10. Hospitality	34,591		36,086		(1,495)		1.20	%	7.23	%
Top Ten (10) Relationships	747,049		758,385		(11,336)		25.86	%	156.20	%
Total Gross Loans	2,889,046		2,982,442		(93,396)
% of Total Gross Loans	25.86	%	25.43	%	12.14	%
Concentration (25% of RBC)	$119,565		$116,300

Line utilization, unused commitments, excluding consumer overdraft lines, were ~~$387.3~~$394.4 million at ~~March 31,~~September 30, 2021 as compared to $410.7 million at December 31, 2020. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization, excluding consumer overdraft lines, was ~~55.6%~~55.4% at ~~March 31,~~September 30, 2021, as compared to 52.2% at December 31, 2020. Commercial line utilization was ~~55.7%~~55.6% at ~~March 31,~~September 30, 2021, as compared to 51.7% at December 31, 2020.

From time to time, we have mortgage loans held-for-sale derived from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Secondly, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. Mortgage loans held-for-sale were ~~$32.7~~$4.9 million and $25.4 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

In addition to mortgage loans held-for-sale, the Company had ~~$9.4~~$9.8 million in loans held-for-sale in connection with sale of Bank branches at ~~March~~December 31, ~~2021~~2020 that ~~are expected to close in~~all closed during the second quarter of 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Credit Quality

On a monthly basis, a criticized asset committee meets to review all special mention and substandard loans within prescribed policy thresholds. These loans typically represent the highest risk of loss to the Company. Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and interest risk rating trends and through stress testing of the loans in these segments. The Company has specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total risk based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio. In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects.

Unsecured loans pose a higher risk for the Company due to the lack of a well-defined secondary source of repayment. ~~Unsecured~~Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage and demonstrate an ability to clear the outstanding balance on lines of credit for at least thirty consecutive days annually. The repayment capacity of the borrower should exceed all policy and guidelines for secured loans. ~~If the borrower is unable to comply with this requirement and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.~~

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, segmentation guidelines, and loan review findings from the previous quarter. Annually, this same committee reviews credit related policies and policy enhancements as they become available.

Additional credit risk management practices include periodic review and update of our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing. Our loan review serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all ~~corporate~~ lending activities. The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process. Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms.

The Company has a loan review policy and annual scope report that details the level of loan review for commercial loans in a given year. Primary objectives of loan reviews include the identification of emerging risks and patterns that might influence potential future losses. In concert with significant enhancements to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracy of the underwriting function. Since 2020 and continuing into 2021, the Company used a four step approach for loan review in the following categories:

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

•A sampling of large loan relationships which are defined as loan relationships with aggregate exposure of at least $2$2.0 million that are not part of the top 20 review; and

•Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss history, document exceptions, policy exceptions and emerging trends in risk characteristics. The Company does not typically structure these with a 30-day cleanout feature since that is difficult to measure and enforce. Instead we usually set higher debt service standards and underwrite to the ability to amortize the loan on unsecured terms.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Allowance for Credit Losses

The ~~allowance for credit losses, (“ACL”),~~ACL represents an amount which, in management's judgment, is adequate to absorb current expected credit losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs previously reserved for, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.

The adoption of CECL guidance did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of troubled debt restructurings or charge-off policy.

The Company’s methodology for estimating the ACL includes:

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

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”)., which calculates a net present value of expected future cash flows, adjusted for the expected life of the portfolio. Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the ~~long term~~long-term average and utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. Economic forecasts spanning four quarters are utilized and then reverted to the ~~long term~~long-term average to form the estimation of expected future cash flows. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output, analyzes the forecast inputs in relation to the model’s calibration and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective. ~~At Day 1 adoption of CECL, current expected losses of $10.2 million were recorded due to economic uncertainties related to the Company's hospitality portfolio. Between the~~The Day 1 CECL model and the model ended September 30, 2021, recognized the deterioration of loans with an aggregate principal balance of $42.8 million, which resulted in current expected losses of $10.2 million. In the quarter ended March 31, 2021 ~~additional~~the model recognized the deterioration of a loan with a principal balance of $8.1 million which resulted in current expected losses of $1.5 million ~~were recognized, which resulted in a total current expected loss balance of~~and an additional $0.6 million standard qualitative general reserve. In the third quarter

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~~$11.7~~ended September 30, 2021, the bank sold these loans with an unpaid principal balance of $50.2 million, aswhich resulted in charge-offs totaling $9.2 million and a net release of ~~March 31, 2021.~~reserves of $3.1 million. Additionally, in the third quarter ended September 30, 2021, the model recognized the deterioration of loans with an aggregate principal balance of $12.0 million, which resulted in current expected losses of $1.6 million. Certain ~~hospitality~~ loans exhibit more than expected deterioration and the risk rating has been downgraded to non-pass to reflect the increased risk.

Management elected to create reserves with the adoption of the CECL model. These reserves were developed in addition to the model’s methodology. The model introduced a segmented portfolio of loans for discrete analysis. This segmented pool has unique risk attributes considered inconsistent with current underwriting standards.

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the incurred loss model. With the adoption of CECL, management elected to separately evaluate certain loans from the Quantitative Analysis based on shared but unique risk attributes. These loans are included in the Other segment of the model. These loans were underwritten and approved based on standards that are inconsistent with our current underwriting ~~standards. Which~~standards, which have ~~since~~ been enhanced by current management. 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, and 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.~~amortization. A general reserve of $56.0 million, which is an increase from the $4.7 million under the probable incurred loss model, was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The following tables summarize activity in the ACL during the period presented and present supplemental asset quality information as of the dates presented.

Three Months Ended March 31, 2021
(Dollars in Thousands) Commercial
Real Estate Commercial
and
Industrial Construction Residential
Mortgage Other
Consumer Other Total
Allowance for Credit Losses on Loans:
Balance at Beginning of Period $ 34,871 $ 3,643 $ 6,357 $ 2,000 $ 2,479 $ 4,724 $ 54,074
Impact of CECL Adoption 6,587 1,379 (80) 3,356 (877) 51,277 61,642
Provision for Credit Losses on Loans 884 (117) 768 (156) 478 — 1,857
Charge-offs — (1) — (195) (870) — (1,066)
Recoveries — 1 61 166 137 — 365
Net (Charge-offs) / Recoveries — — 61 (29) (733) — (701)
Balance at End of Period $ 42,342 $ 4,905 $ 7,106 $ 5,171 $ 1,347 $ 56,001 $ 116,872

March 31, 2021 December 31, 2020
Net Charge-offs to Average Portfolio Loans 0.10 % * 0.09 %
Allowance for Credit Losses to Total Portfolio Loans 3.93 % 1.83 %


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

*(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I, residential mortgages and construction. The allowance balance at the beginning of period were reclassified to Other from their original loan segments: CRE, C&I, residential mortgages and construction to conform to current presentation.


	Nine Months Ended September 30, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other (1)		Total
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	34,871	$	3,643	$	2,000	$	2,479	$	6,357	$	4,724	$	54,074
Impact of CECL Adoption	6,587		1,379		3,356		(877)		(80)		51,277		61,642
Provision for Credit Losses on Loans	(5,523)		(298)		327		1,157		1,018		5,730		2,411
Charge-offs	(17,425)		(196)		(273)		(1,833)		—		—		(19,727)
Recoveries	149		5		168		479		93		—		894
Net (Charge-offs) / Recoveries	(17,276)		(191)		(105)		(1,354)		93		—		(18,833)
Balance at End of Period	$	18,659	$	4,533	$	5,578	$	1,405	$	7,388	$	61,731	$	99,294

(1) In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I, residential mortgages and construction. The allowance balance at the beginning of period were reclassified to Other from their original loan segments: CRE, C&I, residential mortgages and construction to conform to current presentation.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)


	September 30, 2021			December 31, 2020
Net Charge-offs to Average Portfolio Loans	0.85	%	*	0.09	%
Allowance for Credit Losses to Total Portfolio Loans	3.44	%		1.83	%

Annualized

The adoption of Topic 326 resulted in an increase to our ACL of $61.6 million on January 1, ~~2021, excluding the life-of-loss reserve.~~2021. The Day 1 model introduced a segmented portfolio of loans for discrete analysis. This segmented pool had an aggregate principal balance of $380.0 million at adoption and includes unique risk attributes considered inconsistent with current underwriting standards. 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, and 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.~~amortization. Management continuously assesses underwriting standards but significantly enhanced these standards in 2018. The analysis applied to this pool resulted in expected credit losses of $51.3 million, at adoption and is disclosed in the Other ~~line~~segment item in the table above.

At December 31, 2020, the aforementioned Other ~~line item~~segment within the probable incurred loss model included $102.5 million of impaired loans and the remaining ~~$277.5~~$270.9 million were not impaired and remained in their respective segments. Based on the fair value of collateral, the specific reserves on the impaired loans totaled zero and the general reserves for the remainder of these loans totaled $4.7 million at December 31, 2020.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

As of January 1, 2021, our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the ~~other~~Other segment. This methodology produced a significantly higher level of reserves from the incurred loss model. ~~The~~Certain portions of the CECL model ~~was developed~~are inherently subjective and include, but are not limited to estimates with ~~subjective assumptions that is driven by the following key factors:~~respect to: prepayment speeds, the timing of ~~prepayment, loss~~prepayments, potential losses given ~~defaults~~default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as ~~well~~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 ~~factors.~~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 countercyclical, thereby reducing variability. This methodology resulted in an increase in other reserves totaling $51.3 million.

The ACL increased ~~$62.8~~$45.2 million to ~~$116.9~~$99.3 million ~~for the three months ended March 31,~~at September 30, 2021 as compared to an allowance for loan losses of $54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $61.6 million. ~~The first quarter~~During the nine months of 2021 ~~was primarily driven by~~ adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral. ~~Management reviews and analyzes the monthly operating statements of commercial clients~~The decrease in the ~~deferral program. Management observed continued deterioration on hospitality~~provision for credit losses was primarily driven by a decrease of $3.1 million to the ACL due to the sale of two performing relationships that included nine loans during the third quarter of 2021 with an aggregate unpaid principal ~~balances~~balance of ~~$50.9~~$50.2 million that ~~are on deferral as~~were previously reserved. The nine loans were comprised of ~~March 31, 2021.~~six loans, a resort loan and other commercial assets. This ~~adjustment resulted~~decrease was offset by the increase of $1.6 million of special qualitative reserves in ~~expected~~connection with increased uncertainty in credit ~~losses of $11.7 million at March 31, 2021. The Day 1 model recognized the deterioration of~~quality with respect to two loans with an aggregate ~~principal~~unpaid balance of ~~$42.8~~$12.0 million ~~which resulted~~ in ~~current expected credit losses of $10.2 million~~the commercial real estate loan segment. Management monitored loans in the deferral program monthly. The deferral program expired as of ~~January 1,~~June 30, 2021. ~~Between the Day 1 model and the model ended March 31, 2021 a loan with a principal balance of $8.1 million was recognized resulting in additional expected credit losses of $1.5 million during~~During the three months ended ~~March 31, 2021.~~September 30, 2021, management observed that $62.0 million of loans in the deferral program were recovering at rates much lower than peers. Accordingly, management sold $50.2 million of these loans in the third quarter of 2021 and has developed a workout strategy with the remaining two loans with an aggregate unpaid balance of $12.0 million. The qualitative reserves were established given the uncertainty of the future performance of these borrowers.

The ACL was ~~$116.9~~$99.3 million, or ~~3.93%~~3.44%, of total portfolio loans at ~~March 31,~~September 30, 2021, as compared to an allowance for ~~loans~~loan losses of $54.1 million, or 1.83% of total portfolio loans at December 31, 2020.

Net charge-offs were ~~$0.7~~$9.6 million and $18.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.4 million and $2.0 million for the same periods in 2020. During the ~~first three months~~third quarter of 2021, ~~compared to $0.6~~nine loans within two performing relationships were sold with an aggregate unpaid principal balance of $50.0 million that were previously reserved. This sale resulted in charge-offs of $9.2 million during the ~~same period~~third quarter of ~~2020.~~2021 and was previously reserved. As a percentage

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

of average portfolio loans, on an annualized basis, net charge-offs were ~~0.10%~~0.85% and 0.09% for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and year ended December 31, 2020, respectively. ~~At March 31,~~Nonperforming loans decreased $23.1 million, or 72.3%, to $8.9 million at September 30, 2021 ~~and~~compared to $32.0 million at December 31, ~~2020, nonperforming loans were consistent at $32.0 million.~~2020. Nonperforming loans as a percentage of total portfolio loans were ~~1.08%~~0.31%, 1.09% and ~~1.38%~~1.35% as of ~~March 31,~~September 30, 2021, December 31, 2020 and ~~March 31,~~September 30, 2020, respectively.

Loans that amortize monthly, such as closed-end installment loans and amortizing loans secured by real estate are reported past due when the borrower is in arrears two or more monthly payments. Loans that amortize on a schedule other than monthly and interest only loans are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis for early identification of potential problem loans.

~~TDRs~~Troubled debt restructurings (“TDRs”) are loans that we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. The Company strives to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. Modifications structured with deferments for significant periods are generally considered TDRs. However, related to the COVID-19 pandemic, ~~the Bank has~~we have modified certain loans since March 2020 without considering them TDRs if consistent with the CARES Act and guidance issued by the federal bank regulatory agencies. Generally, modifications that have not been considered a TDR are relatively short-term in nature.

An accruing loan that is modified and determined to be a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period before the modification. ~~All~~ TDRs are considered ~~to be individually evaluated~~impaired loans and ~~will be~~ reported as ~~individually evaluated loans for~~a TDR in the calendar year in which they are ~~determined to be a TDR.~~determined. The Company individually evaluates all ~~individually evaluated~~impaired loans, which includes TDRs, greater than or equal to $1.0 million ~~for a specific reserve~~as individually evaluated loans unless otherwise accounted for in the CECL model. Nonaccrual TDRs can be returned to ~~accruing~~accrual status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower subsequent to the restructuring.

As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate given to the borrower is considered to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the long extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk. The loan will be reported as a nonaccrual TDR and an individually evaluated ~~loan.~~loan if the principal balance is equal to or greater than $1.0 million. In addition, the loan could be charged down to the fair value of the

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~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. For the loan’s remaining life, it will continue to be individually evaluated because the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk.

TDRs ~~decreased $2.9~~increased $45.0 million, or 33.5% to ~~$131.3~~$179.2 million at ~~March 31,~~September 30, 2021 compared to $134.2 million at December 31, 2020. The ~~decrease is due to~~Company had $78.0 million new additions offset by $24.8 million of principal pay-downs and $8.2 million in charge-offs for the resolution of our two largest nonperforming credits during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company had five loans that were modified totaling $78.0 million. These loans were included in the ~~amount~~Other category and restructured with enhanced pricing and collateral position of ~~$2.9 million. Total~~the relationships, during the third quarter of 2021. TDRs of ~~$24.6~~$3.2 million and $25.0 million ~~were on nonaccrual at March 31,~~as of September 30, 2021 and December 31, 2020, ~~respectively. There~~respectively, were ~~minimal commitments to lend additional funds on relationships identified~~loans modified as TDRs inthat experienced a payment default subsequent to the ~~amount of $2.9 million~~rework date and were classified as ~~of March 31, 2021.~~nonperforming.

Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes quantifiable, regardless of the delinquency status of the loan. The ~~Bank~~Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:

•The status of a bankruptcy ~~proceeding~~proceeding;

•The value of collateral and probability of successful liquidation; and/oror;

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

Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following table summarizes nonperforming assets for the dates presented:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		$ Change		(Dollars in Thousands)	September 30, 2021		December 31, 2020		$ Change
Nonperforming Loans	Nonperforming Loans							Nonperforming Loans
Commercial Real Estate	Commercial Real Estate	$	651	$	224	$	427	Commercial Real Estate	$	606	$	224	$	382
Commercial and Industrial	Commercial and Industrial	818		456		362		Commercial and Industrial	547		456		91
Construction	Construction	2,124		2,012		112		Construction	1,920		2,012		(92)
Residential Mortgages	Residential Mortgages	3,629		4,135		(506)		Residential Mortgages	2,500		4,135		(1,635)
Other Consumer	Other Consumer	109		191		(82)		Other Consumer	77		191		(114)
Other	Other	—		—		—		Other	—		—		—
Total Nonperforming Loans	Total Nonperforming Loans	7,331		7,018		313		Total Nonperforming Loans	5,650		7,018		(1,368)

Nonperforming Troubled Debt Restructurings	Nonperforming Troubled Debt Restructurings							Nonperforming Troubled Debt Restructurings
Commercial Real Estate	Commercial Real Estate	21,306		21,667		(361)		Commercial Real Estate	146		21,667		(21,521)
Commercial and Industrial	Commercial and Industrial	—		—		—		Commercial and Industrial	—		—		—
Construction	Construction	3,319		3,319		—		Construction	3,071		3,319		(248)
Residential Mortgages	Residential Mortgages	—		—		—		Residential Mortgages	—		—		—
Other Consumer	Other Consumer	—		—		—		Other Consumer	—		—		—
Other	Other	—		—		—		Other	—		—		—
Total Nonperforming Troubled Debt Restructurings	Total Nonperforming Troubled Debt Restructurings	24,625		24,986		(361)		Total Nonperforming Troubled Debt Restructurings	3,217		24,986		(21,769)
Total Nonperforming Loans and Troubled Debt Restructurings	Total Nonperforming Loans and Troubled Debt Restructurings	31,956		32,004		(48)		Total Nonperforming Loans and Troubled Debt Restructurings	8,867		32,004		(23,137)
Other Real Estate Owned	Other Real Estate Owned	14,031		15,722		(1,691)		Other Real Estate Owned	13,265		15,722		(2,457)
Total Nonperforming Assets	Total Nonperforming Assets	$	45,987	$	47,726	$	(1,739)	Total Nonperforming Assets	$	22,132	$	47,726	$	(25,594)


		March 31, 2021			December 31, 2020			September 30, 2021		December 31, 2020
Nonaccrual Loans and Troubled Debt Restructurings to Total Portfolio Loans		1.08	%	*	1.09	%
Nonperforming Loans and Troubled Debt Restructurings to Total Portfolio Loans							Nonperforming Loans and Troubled Debt Restructurings to Total Portfolio Loans	0.31	%	1.09	%
Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned	Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned	1.54	%		1.61	%	Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned	0.76	%	1.61	%

Nonperforming assets decreased ~~$1.7~~$25.6 million to ~~$46.0~~$22.1 million at ~~March 31,~~September 30, 2021 compared to $47.7 million at December 31, 2020. The decrease was primarily related to the resolution of our two largest nonperforming relationships, offset by a ~~$1.7~~$2.5 million ~~net~~ decrease in OREO. The decrease in OREO, from December 31, 2021, was primarily due to ~~sales~~the sale of ~~properties~~the closed retail offices during the second quarter of 2021. Closed retail bank offices have a remaining book value of ~~$1.9~~$2.8 million at ~~March 31,~~September 30, 2021 and $2.5 million at December 31, 2020. The gross amount of interest that would have been recorded under original terms had these loans not been placed on nonaccrual status was ~~$1.1~~$0.8 million and $1.9 million during the ~~first~~ three

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

and nine months ~~of 2021.~~

~~As of March 31,~~ended September 30, 2021, ~~total nonaccrual loans include $3.0 thousand in loans held-for-sale in connection with sale of Bank branches.~~respectively. There were $7 thousand nonaccrual loans related to loans held-for-sale at December 31, 2020.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by the COVID-19 pandemic that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The provisions of the CARES Act dealing with temporary relief related to TDRs was extended pursuant to the CAA, which was signed into law on December 27, 2020. This amendment extended the “applicable” period to the earlier of January 1, 2022 or 60 days after the date on which the national emergency concerning the COVID-19 pandemic terminates. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so. We are currently applying this guidance to qualifying loan modifications. At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 will have on our financial condition, results of operations and ~~allowance for credit losses.~~

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

ACL.

The following table summarizes portfolio loans past due 30-89 days for the periods presented:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Loans 30 to 89 Days Past Due	Loans 30 to 89 Days Past Due					Loans 30 to 89 Days Past Due
Commercial	Commercial					Commercial
Commercial Real Estate	Commercial Real Estate	$	620	$	3,816	Commercial Real Estate	$	6,861	$	3,816
Commercial and Industrial	Commercial and Industrial	1,878		384		Commercial and Industrial	1,308		384
Total Commercial Loans	Total Commercial Loans	2,498		4,200		Total Commercial Loans	8,169		4,200
Consumer	Consumer					Consumer
Residential Mortgages	Residential Mortgages	260		1,347		Residential Mortgages	376		1,347
Other Consumer	Other Consumer	337		580		Other Consumer	291		573
Total Consumer Loans	Total Consumer Loans	597		1,927		Total Consumer Loans	667		1,920
Construction	Construction	—		284		Construction	—		284
Other	Other	3,544		—		Other	—		—
Total Loans 30 to 89 Days Past Due	Total Loans 30 to 89 Days Past Due	$	6,639	$	6,411	Total Loans 30 to 89 Days Past Due	$	8,836	$	6,404

~~Loans~~Portfolio loans past due 30 to 89 days or more and still accruing ~~including held-for-sale loans,~~ increased ~~$0.2~~$2.4 million to ~~$6.6~~$8.8 million at ~~March 31,~~September 30, 2021 compared to $6.4 million at December 31, 2020. The variances in loan segments for past due 30 to 89 days is primarily related to the adoption of Topic 326. We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not adjusted to the comparable period, therefore showing fluctuations in all categories. ~~The $3.5 million included in the other segment is to one relationship and was previously included in commercial and industrial loans at December 31, 2020.~~

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Deposits

The following table presents the composition of deposits for the periods presented:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		$ Change		% Change		(Dollars in Thousands)	September 30, 2021		December 31, 2020		$ Change		% Change
Noninterest-bearing Demand		$	733,291	$	699,229	$	34,062	4.9	%
Interest-bearing Demand		384,425		366,201		18,224		5.0	%
Noninterest-Bearing Demand										Noninterest-Bearing Demand	$	722,145	$	699,229	$	22,916	3.3	%
Interest-Bearing Demand										Interest-Bearing Demand	433,144		366,201		66,943		18.3	%
Money Market	Money Market	323,008		294,229		28,779		9.8	%	Money Market	432,167		294,229		137,938		46.9	%
Savings	Savings	646,722		625,482		21,240		3.4	%	Savings	676,035		625,482		50,553		8.1	%
Certificate of Deposits	Certificate of Deposits	1,522,510		1,614,770		(92,260)		(5.7)	%	Certificate of Deposits	1,402,982		1,614,770		(211,788)		(13.1)	%
Deposits Held-for-Assumption in Connection with Sale of Bank Branches		81,565		84,717		(3,152)		(3.7)	%
Deposits Held for Assumption in Connection with Sale of Bank Branches										Deposits Held for Assumption in Connection with Sale of Bank Branches	—		84,717		(84,717)		(100.0)	%
Total Deposits	Total Deposits	$	3,691,521	$	3,684,628	$	6,893	0.2	%	Total Deposits	$	3,666,473	$	3,684,628	$	(18,155)	(0.5)	%

Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition. Total deposits at ~~March 31,~~September 30, 2021 ~~increased $6.9~~decreased $18.2 million, or ~~0.2%~~0.5%, from December 31, 2020. ~~Noninterest-bearing~~The decrease in deposits ~~increased by $34.1~~primarily related to the $211.8 million, or ~~4.9%~~13.1%, ~~to $733.3 million as of March 31, 2021 as compared to $699.2 million~~decline in CDs at ~~December 31, 2020. Money market accounts increased $28.8 million, or 9.8%, during the first three months of~~September 30, 2021 compared to December 31, 2020 due to the intentional runoff of higher cost CDs, and $84.7 million of deposits held-for-assumption, at December 31, 2020, in connection with the sale of four bank branches which were sold during the second quarter of 2021. These decreases were offset by increases in our core deposits, including $137.9 million in money market accounts due to our deposit acquisition ~~strategy. Savings~~strategy, a $66.9 million increase in interest-bearing demand deposits, a $50.6 million increase in savings accounts ~~increased $21.2 million, or 3.4%, at March 31, 2021 compared to December 31, 2020~~ due to ~~promotions. Interest-bearing~~promotions and an increase of $22.9 million in noninterest-bearing demand deposits increased $18.2 million, or 5.0% to $384.4 million at March 31, 2021 compared to December 31, 2020. Offsetting these increases was a decrease of $92.3 million, or 5.7%, in CDs at March 31, 2021 compared to December 31, 2020 due to intentional runoff of these higher cost CDs.accounts. Noninterest-bearing deposits comprised ~~19.9%~~19.7% and 19.0% of total deposits at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. ~~At March 31, 2021, $81.6 million of deposits were held-for-assumption in connection with the sale of Bank branches that are expected to close in the second quarter of 2021.~~

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Federal Home Loan Bank Borrowings (“FHLB”)

Borrowings are an additional source of liquidity for the Company. FHLB borrowings were $30.0 million and $35.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at ~~March 31,~~September 30, 2021 and December 31, 2020. Total loans pledged as collateral were ~~$781.3~~$908.7 million and $804.2 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. There were no securities available-for-sale pledged as collateral at both ~~March 31,~~September 30, 2021 and December 31, 2020. The ~~Bank~~Company continues to methodically pledge additional eligible loans ~~with~~and expect continued progress in additional pledging throughout the ~~ultimate expectation to have full pledging by year end 2021.~~year. The ~~Company~~Bank is eligible to borrow up to an additional ~~$506.1~~$555.9 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or ~~25%~~25.0% of the Company’s assets, as of ~~March 31,~~September 30, 2021. The Company had the capacity to borrow up to an additional $510.5 million from the FHLB at December 31, 2020.

Information pertaining to long-term FHLB borrowings is summarized in the following table:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021			December 31, 2020			(Dollars in Thousands)	September 30, 2021			December 31, 2020
Balance at Period End	Balance at Period End	$	30,000		$	35,000		Balance at Period End	$	30,000		$	35,000
Average Balance during the Period	Average Balance during the Period	$	33,889		$	30,628		Average Balance during the Period	$	31,282		$	30,628
Average Interest Rate during the Period	Average Interest Rate during the Period	1.15		%	1.18		%	Average Interest Rate during the Period	1.18		%	1.18		%
Maximum Month-end Balance during the Period	Maximum Month-end Balance during the Period	$	35,000		$	35,000		Maximum Month-end Balance during the Period	$	35,000		$	35,000
Average Interest Rate at Period End	Average Interest Rate at Period End	1.15		%	1.13		%	Average Interest Rate at Period End	1.15		%	1.13		%

The Company held FHLB Atlanta stock of $3.2 million and $5.1 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. Dividends recorded on this restricted stock were ~~$37~~$30 thousand and ~~$64~~$98 thousand for the three and nine months ended ~~March 31,~~September 30, 2021, respectively. Dividends recorded on this restricted stock were $39 thousand and ~~March 31,~~$170 thousand for the three and nine months ended September 30, 2020, respectively. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.

Liquidity and Capital Resources

Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to ~~25%~~25.0% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, access to the institutional CD market, and the brokered deposit market. In addition to the lines referenced above, the Company also has ~~its~~$724.7 million of unpledged available-for-sale investment securities ~~portfolio~~ as an additional source of liquidity.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At ~~March 31,~~September 30, 2021, the Bank had ~~$844.7~~$912.3 million in highly liquid assets, which consisted of ~~$65.6~~$61.4 million in interest-bearing deposits in other financial institutions, ~~$110.6~~$121.3 million in FRB Excess Reserves, ~~$626.3~~$724.7 million in unpledged securities ~~$32.7~~and $4.9 million in mortgage loans ~~held-for-sale and $9.4 million in loans held-for-sale in connection with sale of Bank branches.~~held-for-sale. This resulted in a highly liquid assets to total assets ratio of ~~20.4%~~22.1% at ~~March 31,~~September 30, 2021.

If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The following table provides detail of liquidity sources as of the periods presented:


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021		December 31, 2020		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Cash and Due From Banks	Cash and Due From Banks	$	48,108	$	38,535	Cash and Due From Banks	$	43,061	$	38,535
Interest-bearing Deposits in Other Financial Institutions	Interest-bearing Deposits in Other Financial Institutions	60,415		39,954		Interest-bearing Deposits in Other Financial Institutions	61,435		39,954
Federal Reserve Bank Excess Reserves	Federal Reserve Bank Excess Reserves	110,631		163,453		Federal Reserve Bank Excess Reserves	121,300		163,453
Unpledged Investment Securities	Unpledged Investment Securities	626,285		632,724		Unpledged Investment Securities	724,670		632,724
Excess Pledged Securities	Excess Pledged Securities	22,863		7,857		Excess Pledged Securities	41,623		7,857
FHLB Borrowing Availability	FHLB Borrowing Availability	506,105		510,533		FHLB Borrowing Availability	555,866		510,533
Unsecured Lines of Credit	Unsecured Lines of Credit	145,000		145,000		Unsecured Lines of Credit	145,000		145,000
Total Liquidity Sources	Total Liquidity Sources	$	1,519,407	$	1,538,056	Total Liquidity Sources	$	1,692,955	$	1,538,056

Regulatory Capital Requirements

Total shareholders’ equity decreased by ~~$52.3~~$34.3 million to ~~$387.9~~$405.9 million at ~~March 31,~~September 30, 2021 compared to $440.2 million at December 31, 2020. The decrease was primarily due to the $50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a ~~$11.1~~$10.3 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of ~~available-for-sale~~available-for-

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

sale securities partially offset by net income of ~~$9.4~~$26.0 million. The remaining difference of $0.7 million is related to stock-based compensation during the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

The Company and the Bank are subject to various capital requirements administered by the federal banking regulators. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~March 31,~~September 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the ~~institutions~~institution’s category.

At ~~March 31,~~September 30, 2021, the Bank continues to maintain its capital position with a leverage ratio of ~~10.17%~~10.45% as compared to the regulatory guideline of ~~5.0%~~5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of ~~12.88%~~13.82% compared to the regulatory guideline of ~~6.5%~~6.50% to be well-capitalized. ~~the~~The Bank’s risk-based Tier 1 and Total Capital ratios were ~~12.88%~~13.82% and ~~14.14%~~15.08%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of ~~8.0%~~8.00% and ~~10.0%~~10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (“Basel III rules”) became effective on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, we must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. 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 ~~March 31,~~September 30, 2021 and December 31, 2020, the Company and the Bank met all capital adequacy requirements to which we are subject and satisfied the applicable capital conservation buffer requirements.

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


(Dollars in Thousands)	(Dollars in Thousands)	Adequately Capitalized		Well Capitalized		March 31, 2021			December 31, 2020				(Dollars in Thousands)	Adequately Capitalized		Well Capitalized(1)		September 30, 2021				December 31, 2020
						Amount	Ratio		Amount		Ratio							Amount		Ratio		Amount		Ratio
Carter Bankshares, Inc.	Carter Bankshares, Inc.												Carter Bankshares, Inc.
Leverage Ratio	Leverage Ratio	4.00	%	NA		421,355	10.16	%	$	424,453	10.26	%	Leverage Ratio	4.00	%	NA		$	438,524	10.48	%	$	424,453	10.26	%
Common Equity Tier 1 (to Risk-weighted Assets)	Common Equity Tier 1 (to Risk-weighted Assets)	4.50	%	NA		421,355	12.88	%	424,453		13.08	%	Common Equity Tier 1 (to Risk-weighted Assets)	4.50	%	NA		438,524		13.85	%	424,453		13.08	%
Tier 1 Capital (to Risk-weighted Assets)	Tier 1 Capital (to Risk-weighted Assets)	6.00	%	NA		421,355	12.88	%	424,453		13.08	%	Tier 1 Capital (to Risk-weighted Assets)	6.00	%	NA		438,524		13.85	%	424,453		13.08	%
Total Capital (to Risk-weighted Assets)	Total Capital (to Risk-weighted Assets)	8.00	%	NA		462,617	14.14	%	465,198		14.33	%	Total Capital (to Risk-weighted Assets)	8.00	%	NA		478,261		15.11	%	465,198		14.33	%

Carter Bank & Trust	Carter Bank & Trust												Carter Bank & Trust
Leverage Ratio	Leverage Ratio	4.00	%	5.00	%	421,048	10.15	%	423,832		10.24	%	Leverage Ratio	4.00	%	5.00	%	$	437,496	10.45	%	$	423,832	10.24	%
Common Equity Tier 1 (to Risk-weighted Assets)	Common Equity Tier 1 (to Risk-weighted Assets)	4.50	%	6.50	%	421,048	12.87	%	423,832		13.06	%	Common Equity Tier 1 (to Risk-weighted Assets)	4.50	%	6.50	%	437,496		13.82	%	423,832		13.06	%
Tier 1 Capital (to Risk-weighted Assets)	Tier 1 Capital (to Risk-weighted Assets)	6.00	%	8.00	%	421,048	12.87	%	423,832		13.06	%	Tier 1 Capital (to Risk-weighted Assets)	6.00	%	8.00	%	437,496		13.82	%	423,832		13.06	%
Total Capital (to Risk-weighted Assets)	Total Capital (to Risk-weighted Assets)	8.00	%	10.00	%	462,310	14.13	%	464,578		14.31	%	Total Capital (to Risk-weighted Assets)	8.00	%	10.00	%	477,229		15.08	%	464,578		14.31	%

(1)To be “well capitalized” under the prompt corrective action provisions in the Basel III framework. “Well capitalized” applies to the Bank only.

The Company was incorporated on October 7, 2020, by and at the direction of the Board of Directors of the Bank, 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,~~Inc., and the Bank survived the Reorganization as

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CARTER BANKSHARES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for one newly issued share of the Company’s common stock.

In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the ~~day-one~~day one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The ~~interim final rule~~IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period.

Contractual Obligations

As of ~~March 31,~~September 30, 2021, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

As of ~~March 31,~~September 30, 2021, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading ~~"Off-Balance-Sheet~~"Off-Balance Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

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~~CARTER BANKSHARES, INC.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital. For financial institutions, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancement of shareholder value. However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.

The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk through net interest income simulation for various rate shock scenarios and economic value of equity (“EVE”), simulation for various rate shock scenarios. The rate shock scenarios used in the ALM span over multiple time horizons and yield curve shapes and include parallel and non-parallel shifts to ensure the ALCO can mitigate future earnings and market value fluctuations due to changes in market interest rates.

Within the context of the ALM, net interest income rate shock simulations explicitly measure the exposure to earnings from changes in market rates of interest over a defined time horizon. These robust simulations include assumptions of how the balance sheet will react in different rate environments including loan pre-payment speeds, average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in market rates (betas). Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. Reviewing these various measures provides us with a more comprehensive view of our interest rate risk profile.

Net interest income rate shock simulation results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static and growth balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or

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CARTER BANKSHARES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)

repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. Our policy guidelines limit the change in pretax net interest income over a 12-month horizon using rate shocks of +/- 100, 200, 300 and 400 basis points. We have temporarily suspended the -100, -200, -300 and -400 basis point rate shock analyses. Due to the low interest rate environment, we believe the impact to net interest income when evaluating the -100, -200, -300 and -400 basis point rate shock scenarios does not provide meaningful insight into our interest rate risk position.

In order to monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analysis, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. Our policy guidelines limit the change in EVE given changes in rates of +/- 100, 200, 300 and 400 basis points. We have also temporarily suspended the EVE -100, -200, -300 and -400 basis point scenarios in 2020 and 2021 due to the low interest rate environment.

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~~CARTER BANKSHARES, INC.~~

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)~~

The following tables reflect the net interest income rate shock analyses and EVE analyses results for the periods presented utilizing a forecasted static balance sheet over the next twelve months. All percentage changes presented are within prescribed ranges set by management.


		March 31, 2021				December 31, 2020			September 30, 2021				December 31, 2020
Change in Interest Rate (basis points)	Change in Interest Rate (basis points)	% Change in Pretax Net Interest Income		% Change in Economic Value of Equity		% Change in Pretax Net Interest Income	% Change in Economic Value of Equity	Change in Interest Rate (basis points)	% Change in Pretax Net Interest Income		% Change in Economic Value of Equity		% Change in Pretax Net Interest Income	% Change in Economic Value of Equity
400	400	39.8	%	20.4	%	39.6%	20.1%	400	39.6	%	26.8	%	39.6%	20.1%
300	300	30.8	%	17.3	%	30.7%	17.5%	300	30.2	%	22.3	%	30.7%	17.5%
200	200	21.4	%	13.4	%	21.1%	13.8%	200	20.5	%	16.6	%	21.1%	13.8%
100	100	10.7	%	7.6	%	10.7%	8.1%	100	10.2	%	9.2	%	10.7%	8.1%

The results from the net interest income rate shock analysis are consistent with having an asset sensitive balance sheet, when adjusted for repricing correlations (betas). The above table indicates that in a rising interest rate environment, the Company is positioned to have increased pretax net interest income for the same asset base due to the balance sheet composition, related maturity structures and repricing correlations to market interest rates for assets and liabilities. Conversely, in a declining interest rate environment we are positioned to have decreased pretax net interest income for the same reasons discussed above.

In addition to rate shocks and EVE analyses, sensitivity analyses are performed to help us identify which model assumptions are critical and cause the greatest impact on pretax net interest income. Sensitivity analyses include changing prepayment behavior of loans and securities with optionality, repricing correlations, and the impact of interest rate changes on non-maturity deposit products (decay rates).

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of ~~March 31,~~September 30, 2021. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to the Company’s management, including our CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.

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Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~March 31,~~September 30, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CARTER BANKSHARES, INC.

PART II – OTHER INFORMATION

ITEM 1- LEGAL PROCEEDINGS

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. ~~Although~~Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of ~~these~~any legal ~~and~~or administrative ~~proceedings and claims~~proceeding cannot be predicted with ~~certainty, based~~certainty. As of September 30, 2021, the Company is not involved in any material pending or threatened legal proceedings other than proceedings occurring in the ordinary course of business.

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, the Bank and its directors were named as defendants in a lawsuit filed in the United States District Court for the Southern District of West Virginia (the “District Court”) by James C. Justice, II, Cathy L. Justice, James C. Justice, III and various related entities that he and/or they own and control (such entities, the “Justice Entities” and collectively, the “Justice Parties”). The allegations contained in the lawsuit related to a series of loans (the “Loans”) made by the Bank to certain Justice Entities that are secured by collateral pledged by certain Justice Entities and are backed by personal guarantees from James C. Justice, II and Cathy L. Justice and, in certain cases, by personal guarantees from James C. Justice, III. In July 2021, the Bank filed confessions of judgment against certain of the Justice Parties in Virginia state courts to collect amounts owed on certain of the Loans that were past due and in default.

The Bank believes that it is fully secured on all loans outstanding to the Justice Parties. In connection with the dismissal of the lawsuits and the restructuring of the Loans, the Justice Parties executed documents that waive any and all causes of action of any kind they might claim to have against the Bank, reaffirm the Loans owed to the Bank, and enhance the Bank’s collateral position, including cross-collateralizations, with respect to all loans outstanding to the Justice Parties.

The Company and the Bank denied and continue to deny all allegations contained in the lawsuit filed against the Bank by the Justice Parties. Based on information presently available to the Company and ~~after~~the Bank and based on consultation with legal counsel, ~~management does not believe~~the Company believes that the ~~disposition of such~~legal proceedings ~~or claims~~described above are concluded and will not have a material adverse effect on ~~our business,~~the Company’s consolidated financial ~~position, or results of operations. As of March 31, 2021, no material legal proceedings were pending or threatened against the Company.~~statements as a whole.

ITEM 1A – RISK FACTORS

As of ~~March 31,~~September 30, 2021, there have been no material changes in the risk factors faced by the Company from those disclosed in our 2020 Annual Report on Form ~~10-K.~~10-K as supplemented by the risk factor disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 - OTHER INFORMATION

None.

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CARTER BANKSHARES, INC.

PART II – OTHER INFORMATION (continued)

ITEM 6 - EXHIBITS

Exhibits:


2.1			Agreement and Plan of Reorganization by and among Carter Bank & Trust, Cater Bankshares, Inc. and CBT Merger Sub, Inc. dated November 9, 2020 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)

3.1			Articles of Incorporation of Carter Bankshares, Inc., effective October 7, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)

3.2			Bylaws of Carter Bankshares, Inc., as adopted October 28, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)

~~2.1~~			Agreement and Plan of Reorganization by and among Carter Bank & Trust, Cater Bankshares, Inc. and CBT Merger Sub, Inc. dated November 9, 2020 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)

~~10.8~~			Carter Bankshares, Inc. Amended and Restated Annual Incentive Plan, as amended and restated February 18, 2021 (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

31.1			Certification by principal executive officer pursuant to Rule 13a-14(a) (filed herewith)

31.2			Certification by principal financial officer pursuant to Rule 13a-14(a) (filed herewith)

32			Certification by principal executive officer and principal financial officer pursuant to 18 U.S.C. §1350 (filed herewith)

101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH			Inline XBRL Taxonomy Extension Schema

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase

104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			CARTER BANKSHARES, INC. (Registrant)

Date: ~~May 7,~~November 4, 2021			/s/ Litz H. Van Dyke
			Litz H. Van Dyke Chief Executive Officer (Principal Executive Officer)

Date: ~~May 7,~~November 4, 2021			/s/ Wendy S Bell
			Wendy S. Bell Chief Financial Officer (Principal Financial Officer)

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			Fair Value Measurements at March 31, 2021
(Dollars in Thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Cash Equivalents	$	219,154	$	42,899	$	176,255	$	0	$	219,154
Securities Available-for-Sale	780,032		0		769,762		10,270		780,032
Loans Held-for-Sale	32,737		0		0		32,737		32,737
Portfolio Loans, net	2,855,003		0		0		2,813,058		2,813,058
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value	9,423		0		0		9,423		9,423
Federal Home Loan Bank Stock, at Cost	3,215		0		0		NA		NA
Other Assets- Interest Rate Derivatives	3,295		0		3,295		0		3,295
Accrued Interest Receivable	31,737		0		2,833		28,904		31,737

Financial Liabilities:
Deposits	$	3,609,956	$	733,291	$	1,354,155	$	1,546,852	$	3,634,298
Deposits Held for Assumption in Connection with Sale of Bank Branches	81,565		9,010		20,166		52,389		81,565
Other Liabilities- Interest Rate Derivatives	3,129		0		3,129		0		3,129
FHLB Borrowings	30,000		0		0		30,249		30,249
Accrued Interest Payable	1,893		0		0		1,893		1,893


(Dollars in Thousands)	Number of Loans	Loan Principal		Percent of Outstanding		Weighted Average Deferment Period (months)	Total Deferment
							Principal		Interest
Commercial Real Estate	85	$	399,037	13.43	%	2.90	$	280,451	$	118,586
Commercial and Industrial	1	6,000		0.20	%	2.90	—		6,000
Residential Mortgages	5	1,828		0.06	%	—	1,828		—
Other Consumer	—	—		—	%	—	—		—
Construction	1	163		0.01	%	2.90	163		—
Other	—	—		—	%	—	—		—
Total Aggregate Deferred Payments	92	$	407,028	13.70	%	2.90	$	282,442	$	124,586