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, 2021~~June 30, 2022

☐ 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, 2021~~August 1, 2022 there were ~~26,467,231~~24,577,477 shares of the registrant’s common stock issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION			3
ITEM 1 – FINANCIAL STATEMENTS			3
Consolidated Balance Sheets - ~~March 31, 2021~~June 3 0 , 2022 (unaudited) and December 31, ~~2020~~2021 (audited)			3
Consolidated Statements of Income - Three and Six Months Ended ~~March 31,~~June 30 , 2022 and 2021 ~~and 2020~~ (unaudited)			4
Consolidated Statements of Comprehensive ~~(Loss)~~(Loss ) Income - Three and Six Months Ended ~~March 31,~~June 3 0 , 2022 and 2021 ~~and 2020~~ (unaudited)			5
Consolidated Statements of Changes in Shareholders' Equity - Three and Six Months Ended ~~March 31,~~June 3 0 , 2022 and 2021 ~~and 2020~~ (unaudited)			6
Consolidated Statements of Cash Flows – ~~Three~~ Six Months Ended ~~March 31,~~June 30 , 2022 and 2021 ~~and 2020~~ (unaudited)			7
Notes to Unaudited Consolidated Financial Statements			8
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			3635
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			6259
ITEM 4 - CONTROLS AND PROCEDURES			6360
PART II – OTHER INFORMATION			6461
ITEM 1 - LEGAL PROCEEDINGS			6461
ITEM 1A –- RISK FACTORS			6461
ITEM 2 –- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			6461
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES			6461
ITEM 4 ~~–MINE~~-MINE SAFETY DISCLOSURES			6461
ITEM 5 - OTHER INFORMATION			6462
ITEM 6 - EXHIBITS			6562
SIGNATURES			6663

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)	June 30, 2022 (unaudited)		December 31, 2021 (audited)
ASSETS	ASSETS					ASSETS
Cash and Due From Banks	Cash and Due From Banks	$	42,899	$	38,535	Cash and Due From Banks	$	43,194	$	36,698
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	745		64,905
Federal Reserve Bank Excess Reserves	Federal Reserve Bank Excess Reserves	110,631		163,453		Federal Reserve Bank Excess Reserves	26,301		176,196
Total Cash and Cash Equivalents	Total Cash and Cash Equivalents	219,154		241,942		Total Cash and Cash Equivalents	70,240		277,799
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	907,034		922,400
Loans Held-for-Sale	Loans Held-for-Sale	32,737		25,437		Loans Held-for-Sale	—		228
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value		9,423		9,835

Portfolio Loans	Portfolio Loans	2,971,875		2,947,170		Portfolio Loans	2,997,896		2,812,129
Allowance for Credit Losses	Allowance for Credit Losses	(116,872)		(54,074)		Allowance for Credit Losses	(97,981)		(95,939)
Portfolio Loans, net	Portfolio Loans, net	2,855,003		2,893,096		Portfolio Loans, net	2,899,915		2,716,190
Bank Premises and Equipment, net	Bank Premises and Equipment, net	85,349		85,307		Bank Premises and Equipment, net	73,202		75,297
Bank Premises and Equipment, Held-for-Sale, net		2,273		2,293

Other Real Estate Owned, net	Other Real Estate Owned, net	14,031		15,722		Other Real Estate Owned, net	8,432		10,916
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	2,067		2,352
Bank Owned Life Insurance	Bank Owned Life Insurance	54,337		53,997		Bank Owned Life Insurance	56,046		55,378
Other Assets	Other Assets	86,576		67,778		Other Assets	106,344		73,186
Total Assets	Total Assets	$	4,142,130	$	4,179,179	Total Assets	$	4,123,280	$	4,133,746

LIABILITIES	LIABILITIES					LIABILITIES
Deposits:	Deposits:					Deposits:
Noninterest-Bearing Demand	Noninterest-Bearing Demand	$	733,291	$	699,229	Noninterest-Bearing Demand	$	704,323	$	747,909
Interest-Bearing Demand	Interest-Bearing Demand	384,425		366,201		Interest-Bearing Demand	499,282		452,644
Money Market	Money Market	323,008		294,229		Money Market	555,621		463,056
Savings	Savings	646,722		625,482		Savings	733,704		690,549
Certificates of Deposit	Certificates of Deposit	1,522,510		1,614,770		Certificates of Deposit	1,260,463		1,344,318
Deposits Held-for-Assumption in Connection with Sale of Bank Branches		81,565		84,717

Total Deposits	Total Deposits	3,691,521		3,684,628		Total Deposits	3,753,393		3,698,476
Federal Home Loan Bank Borrowings	Federal Home Loan Bank Borrowings	30,000		35,000		Federal Home Loan Bank Borrowings	—		7,000
Other Liabilities	Other Liabilities	32,720		19,377		Other Liabilities	35,745		20,674
Total Liabilities	Total Liabilities	3,754,241		3,739,005		Total Liabilities	3,789,138		3,726,150

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 shares 24,577,477 at June 30, 2022 and 26,430,919 at December 31, 2021						Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares; Outstanding shares 24,577,477 at June 30, 2022 and 26,430,919 at December 31, 2021	24,577		26,431
Additional Paid-in Capital	Additional Paid-in Capital	143,582		143,457		Additional Paid-in Capital	113,975		143,988
Retained Earnings	Retained Earnings	213,260		254,611		Retained Earnings	255,576		235,475
Accumulated Other Comprehensive Income		4,579		15,721
Accumulated Other Comprehensive (Loss) Income						Accumulated Other Comprehensive (Loss) Income	(59,986)		1,702
Total Shareholders’ Equity	Total Shareholders’ Equity	387,889		440,174		Total Shareholders’ Equity	334,142		407,596
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	4,142,130	$	4,179,179	Total Liabilities and Shareholders’ Equity	$	4,123,280	$	4,133,746

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


(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 June 30,				Six Months Ended June 30,
		2021		2020			2022		2021		2022		2021
INTEREST INCOME	INTEREST INCOME					INTEREST INCOME
Loans, including fees
Loans, including Fees						Loans, including Fees
Taxable	Taxable	$	28,145	$	30,797	Taxable	$	31,323	$	28,417	$	59,068	$	56,562
Non-Taxable	Non-Taxable	1,412		2,102		Non-Taxable	916		1,237		1,868		2,649
Investment Securities	Investment Securities					Investment Securities
Taxable	Taxable	2,987		4,502		Taxable	4,452		3,138		8,184		6,125
Non-Taxable	Non-Taxable	326		161		Non-Taxable	187		215		354		541
FRB Excess Reserves		26		136
Federal Reserve Bank Excess Reserves						Federal Reserve Bank Excess Reserves	58		33		95		59
Interest on Bank Deposits	Interest on Bank Deposits	24		74		Interest on Bank Deposits	3		23		28		47
Dividend Income	Dividend Income	37		64		Dividend Income	22		31		42		68
Total Interest Income	Total Interest Income	32,957		37,836		Total Interest Income	36,961		33,094		69,639		66,051
Interest Expense	Interest Expense					Interest Expense
Interest Expense on Deposits	Interest Expense on Deposits	6,295		10,495		Interest Expense on Deposits	4,412		5,760		8,811		12,055
Interest Expense on Federal Funds Purchased	Interest Expense on Federal Funds Purchased	0		1		Interest Expense on Federal Funds Purchased	4		—		4		—
Interest on Other Borrowings	Interest on Other Borrowings	133		76		Interest on Other Borrowings	86		131		143		264
Total Interest Expense	Total Interest Expense	6,428		10,572		Total Interest Expense	4,502		5,891		8,958		12,319
NET INTEREST INCOME	NET INTEREST INCOME	26,529		27,264		NET INTEREST INCOME	32,459		27,203		60,681		53,732
Provision for Credit Losses	Provision for Credit Losses	1,857		4,798		Provision for Credit Losses	1,814		967		2,444		2,824
Provision for Unfunded Commitments		(282)		0
Provision (Recovery) for Unfunded Commitments						Provision (Recovery) for Unfunded Commitments	269		(603)		33		(885)
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	30,376		26,839		58,204		51,793
NONINTEREST INCOME	NONINTEREST INCOME					NONINTEREST INCOME
Gain on Sales of Securities, net		3,610		1,214
Gains on Sales of Securities, net						Gains on Sales of Securities, net	76		1,499		52		5,109
Service Charges, Commissions and Fees	Service Charges, Commissions and Fees	1,809		1,650		Service Charges, Commissions and Fees	1,749		1,489		3,702		3,298
Debit Card Interchange Fees	Debit Card Interchange Fees	1,831		1,243		Debit Card Interchange Fees	1,850		1,874		3,782		3,705
Insurance Commissions	Insurance Commissions	294		1,309		Insurance Commissions	568		378		837		672
Bank Owned Life Insurance Income	Bank Owned Life Insurance Income	340		353		Bank Owned Life Insurance Income	334		342		668		682
(Losses) Gains on Sales and Write-downs of Bank Premises, net						(Losses) Gains on Sales and Write-downs of Bank Premises, net	(37)		—		346		—
Other Real Estate Owned Income	Other Real Estate Owned Income	71		139		Other Real Estate Owned Income	12		4		22		75
Commercial Loan Swap Fee Income	Commercial Loan Swap Fee Income	219		422		Commercial Loan Swap Fee Income	756		742		756		961
Other	Other	778		622		Other	296		910		774		1,688
Total Noninterest Income	Total Noninterest Income	8,952		6,952		Total Noninterest Income	5,604		7,238		10,939		16,190
NONINTEREST EXPENSE	NONINTEREST EXPENSE					NONINTEREST EXPENSE
Salaries and Employee Benefits	Salaries and Employee Benefits	12,582		13,581		Salaries and Employee Benefits	12,444		13,686		24,201		26,268
Occupancy Expense, net	Occupancy Expense, net	3,514		3,249		Occupancy Expense, net	3,296		3,451		6,648		6,965
FDIC Insurance Expense	FDIC Insurance Expense	643		544		FDIC Insurance Expense	629		657		997		1,300
Other Taxes	Other Taxes	762		746		Other Taxes	819		718		1,623		1,480
Advertising Expense	Advertising Expense	170		612		Advertising Expense	267		220		506		390
Telephone Expense	Telephone Expense	600		574		Telephone Expense	454		588		942		1,188
Professional and Legal Fees	Professional and Legal Fees	1,224		437		Professional and Legal Fees	1,202		1,440		2,421		2,664
Data Processing	Data Processing	921		486		Data Processing	842		954		1,683		1,875
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
(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net						(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net	(60)		2,603		99		2,815
Losses on Sales and Write-downs on Bank Premises, net						Losses on Sales and Write-downs on Bank Premises, net	—		64		—		107
Debit Card Expense	Debit Card Expense	632		554		Debit Card Expense	659		713		1,292		1,345
Tax Credit Amortization	Tax Credit Amortization	427		272		Tax Credit Amortization	615		427		1,230		854
Unfunded Loan Commitment Expense		0		982

Other Real Estate Owned Expense	Other Real Estate Owned Expense	54		140		Other Real Estate Owned Expense	141		142		182		196

Other	Other	1,821		2,370		Other	2,102		2,096		4,097		3,917
Total Noninterest Expense	Total Noninterest Expense	23,605		24,748		Total Noninterest Expense	23,410		27,759		45,921		51,364
Income Before Income Taxes	Income Before Income Taxes	10,301		4,670		Income Before Income Taxes	12,570		6,318		23,222		16,619
Income Tax Provision	Income Tax Provision	926		247		Income Tax Provision	1,792		886		3,121		1,812
Net Income	Net Income	$	9,375	$	4,423	Net Income	$	10,778	$	5,432	$	20,101	$	14,807

Earnings per Common Share	Earnings per Common Share					Earnings per Common Share
Basic Earnings per Common Share	Basic Earnings per Common Share	$	0.36	$	0.17	Basic Earnings per Common Share	$	0.44	$	0.21	$	0.80	$	0.56
Diluted Earnings per Common Share	Diluted Earnings per Common Share	$	0.36	$	0.17	Diluted Earnings per Common Share	$	0.44	$	0.21	$	0.80	$	0.56
Average Shares Outstanding – Basic		26,276,890		26,362,649
Average Shares Outstanding – Diluted		26,408,319		26,460,523
Average Shares Outstanding – Basic & Diluted						Average Shares Outstanding – Basic & Diluted	24,490,302		26,344,104		25,111,931		26,314,943

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 (LOSS) INCOME


		Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2022		2021		2022		2021
Net Income	Net Income	$	9,375	$	4,423	Net Income	$	10,778	$	5,432	$	20,101	$	14,807
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	(35,002)		8,456		(78,034)		(2,038)
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	(76)		(1,499)		(52)		(5,109)
Tax Effect	Tax Effect	2,962		(166)		Tax Effect	7,366		(1,461)		16,398		1,501
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	(27,712)		5,496		(61,688)		(5,646)
Other Comprehensive (Loss) Income	Other Comprehensive (Loss) Income	(11,142)		624		Other Comprehensive (Loss) Income	(27,712)		5,496		(61,688)		(5,646)
Comprehensive (Loss) Income	Comprehensive (Loss) Income	$	(1,767)	$	5,047	Comprehensive (Loss) Income	$	(16,934)	$	10,928	$	(41,587)	$	9,161

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 June 30, 2022
(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 Loss		Total Shareholders’ Equity
Balance at December 31, 2020		$	26,385	$	143,457	$	254,611	$	15,721	$	440,174
Balance at March 31, 2022												Balance at March 31, 2022	$	24,987	$	121,045	$	244,798	$	(32,274)	$	358,556
Net Income	Net Income	—		—		9,375		—		9,375		Net Income	—		—		10,778		—		10,778
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	—		—		—		(27,712)		(27,712)
Repurchase of Common Stock (446,436 shares)												Repurchase of Common Stock (446,436 shares)	(447)		(7,342)		—		—		(7,789)
Forfeiture of Restricted Stock (961 shares)												Forfeiture of Restricted Stock (961 shares)	(1)		1		—		—		—
Issuance of Restricted Stock (38,148 shares)												Issuance of Restricted Stock (38,148 shares)	38		(38)		—		—		—
Recognition of Restricted Stock Compensation Expense	Recognition of Restricted Stock Compensation Expense	—		208		—		—		208		Recognition of Restricted Stock Compensation Expense	—		309		—		—		309
Issuance of Restricted Stock (82,490 shares)		83		(83)		—		—		—
Balance at March 31, 2021		$	26,468	$	143,582	$	213,260	$	4,579	$	387,889
Balance at June 30, 2022												Balance at June 30, 2022	$	24,577	$	113,975	$	255,576	$	(59,986)	$	334,142

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


	Six Months Ended June 30, 2022
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2021	$	26,431	$	143,988	$	235,475	$	1,702	$	407,596
Net Income	—		—		20,101		—		20,101
Other Comprehensive Loss, Net of Tax	—		—		—		(61,688)		(61,688)
Repurchase of Common Stock (1,969,593 shares)	(1,970)		(30,445)		—		—		(32,415)
Forfeiture of Restricted Stock (10,653 shares)	(11)		(145)		—		—		(156)
Issuance of Restricted Stock (126,804 shares)	127		(127)		—		—		—
Recognition of Restricted Stock Compensation Expense	—		704		—		—		704
Balance at June 30, 2022	$	24,577	$	113,975	$	255,576	$	(59,986)	$	334,142


	Three Months Ended June 30, 2021
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance March 31, 2021	$	26,468	$	143,582	$	213,260	$	4,579	$	387,889
Net Income	—		—		5,432		—		5,432

Other Comprehensive Income, Net of Tax	—		—		—		5,496		5,496
Forfeitures of Restricted Stock (783 shares)	(1)		1		—		—		—
Recognition of Restricted Stock Compensation Expense	—		291		—		—		291
Balance at June 30, 2021	$	26,467	$	143,874	$	218,692	$	10,075	$	399,108


	Six Months Ended June 30, 2021
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance December 31, 2020	$	26,385	$	143,457	$	254,611	$	15,721	$	440,174
Net Income	—		—		14,807		—		14,807
Cumulative Effect for Adoption of Credit Losses	—		—		(50,726)		—		(50,726)
Other Comprehensive Loss, Net of Tax	—		—		—		(5,646)		(5,646)
Forfeiture of Restricted Stock (783 shares)	(1)		1		—		—		—
Issuance of Restricted Stock (82,490 shares)	83		(83)		—		—		—
Recognition of Restricted Stock Compensation Expense	—		499		—		—		499
Balance at June 30, 2021	$	26,467	$	143,874	$	218,692	$	10,075	$	399,108

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,					Six Months Ended June 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2022		2021
Net Income	Net Income	$	9,375	$	4,423	Net Income	$	20,101	$	14,807
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities
Provision for Credit Losses		1,575		4,798
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities						Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments						Provision for Credit Losses, including Provision for Unfunded Commitments	2,477		1,939

Origination of Loans Held-for-Sale	Origination of Loans Held-for-Sale	(314,092)		(137,764)		Origination of Loans Held-for-Sale	(4,955)		(414,780)
Proceeds From Loans Held-for-Sale	Proceeds From Loans Held-for-Sale	306,866		127,811		Proceeds From Loans Held-for-Sale	5,302		431,090
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	2,977		3,113
Benefit for Deferred Taxes		0		(623)
Provision for Deferred Taxes						Provision for Deferred Taxes	1,257		1,999
Net Amortization of Securities	Net Amortization of Securities	902		874		Net Amortization of Securities	3,156		1,879
Tax Credit Amortization	Tax Credit Amortization	427		272		Tax Credit Amortization	1,230		854
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	(119)		(184)
Gains on Sales of Securities, net	Gains on Sales of Securities, net	(3,610)		(1,214)		Gains on Sales of Securities, net	(52)		(5,109)
Write-downs of Other Real Estate Owned	Write-downs of Other Real Estate Owned	139		70		Write-downs of Other Real Estate Owned	432		3,211
Losses on Sales of Other Real Estate Owned, Net		73		119
Losses on Sales and Write-downs of Bank Premises		43		12
Gains on Sales of Other Real Estate Owned, Net						Gains on Sales of Other Real Estate Owned, Net	(333)		(396)
(Gains) Losses on Sales and Write-downs of Bank Premises						(Gains) Losses on Sales and Write-downs of Bank Premises	(346)		107
Commercial Loan Swap Derivative Income						Commercial Loan Swap Derivative Income	(443)		(153)
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	(668)		(682)
Recognition of Restricted Stock Compensation Expense	Recognition of Restricted Stock Compensation Expense	208		352		Recognition of Restricted Stock Compensation Expense	704		499
Increase in Other Assets	Increase in Other Assets	(413)		(5,527)		Increase in Other Assets	(2,040)		(10,678)
(Decrease) Increase in Other Liabilities		(2,279)		295
Net Cash Provided By (Used In) Operating Activities		359		(4,997)
Decrease in Other Liabilities						Decrease in Other Liabilities	(1,882)		(3,573)
Net Cash Provided By Operating Activities						Net Cash Provided By Operating Activities	26,798		23,437
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	19,777		108,300
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	50,033		52,183
Purchases	Purchases	(92,014)		(64,433)		Purchases	(135,634)		(215,175)
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	(2,528)		(3,248)
Net Cash Paid in Branch Sales						Net Cash Paid in Branch Sales	—		(73,923)
Proceeds from Sales of Bank Premises and Equipment, net						Proceeds from Sales of Bank Premises and Equipment, net	408		—

Purchase of Federal Home Loan Bank Stock		0		(1,062)
Redemption of Federal Home Loan Bank Stock		1,878		82
Loan Originations and Payments, net		(24,994)		(56,458)
Redemption of Federal Home Loan Bank Stock, net						Redemption of Federal Home Loan Bank Stock, net	285		1,878
Loan (Originations) and Payments, net						Loan (Originations) and Payments, net	(186,133)		28,891

Other Real Estate Owned Improvements		0		(19)
Payments Received on Other Real Estate Owned						Payments Received on Other Real Estate Owned	215		230

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	3,718		3,440
Net Cash Used In Investing Activities	Net Cash Used In Investing Activities	(25,040)		(47,475)		Net Cash Used In Investing Activities	(249,859)		(97,424)
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	138,772		217,745
Decrease in Certificates of Deposits	Decrease in Certificates of Deposits	(96,383)		(72,690)		Decrease in Certificates of Deposits	(83,855)		(164,049)
(Payments) Proceeds from Federal Home Loan Bank Borrowings		(5,000)		25,000
Cash Dividends Paid		0		(3,689)
Net Cash Provided By (Used In) Financing Activities		1,893		(9,939)
Payments on Federal Home Loan Bank Borrowings, net						Payments on Federal Home Loan Bank Borrowings, net	(7,000)		(5,000)

Repurchase of Common Stock						Repurchase of Common Stock	(32,415)		—
Net Cash Provided by Financing Activities						Net Cash Provided by Financing Activities	15,502		48,696
Net Decrease in Cash and Cash Equivalents	Net Decrease in Cash and Cash Equivalents	(22,788)		(62,411)		Net Decrease in Cash and Cash Equivalents	(207,559)		(25,291)
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	277,799		241,942
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	$	70,240	$	216,651

SUPPLEMENTARY DATA	SUPPLEMENTARY DATA					SUPPLEMENTARY DATA
Cash Interest Paid	Cash Interest Paid	$	6,666	$	10,645	Cash Interest Paid	$	9,040	$	12,759
Cash Paid for Income Taxes	Cash Paid for Income Taxes	88		0		Cash Paid for Income Taxes	333		820
Transfer from Loans to Other Real Estate Owned		0		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	1,584		12,013
Security (Purchases) Settled in Subsequent Period						Security (Purchases) Settled in Subsequent Period	—		(14,084)
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	2,879		2,027

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~~subsidiary, 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,~~2021, filed with the Securities and Exchange Commission (“SEC”), on March ~~12, 2021.~~11, 2022. 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, 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:~~ Accounting Standards Adopted in 2022

In ~~response~~March 2022, the FASB issued ASU No. 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the 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. Manyremoval 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. DepartmentTDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the ~~Treasury,~~existing loan. The amendments in this ASU also required that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in this ASU are effective January 1, 2023, with early adoption permitted. The Company evaluated the ~~Federal Deposit Insurance Corporation (the “FDIC”), the Board of Governors~~impact of the ~~Federal Reserve System (“FRB”)~~updated guidance on its Consolidated Financial Statements and ~~other federal bank regulatory authorities, including those with direct supervisory jurisdiction over~~elected to early adopt the ~~Company and the Bank.~~

~~Set forth below is~~amendments in this ASU on April 1, 2022 on a ~~brief overview~~prospective basis, effective dated as 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 couldJanuary 1, 2022. This change did not have a material effect on the Company and the Bank. Many of the requirements called for in the CARES Act and related regulations and supervisory guidance continue to be implemented and most are subject to implementing regulations, many of which continue to be refined by federal banking agencies. The Company and the Bank continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

~~Table of Contents~~

~~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 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.~~

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 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~~ Refer to ~~as Current Expected Credit Loss (“CECL”). The amendments in this ASU, among other things, require the measurement of all expected credit losses~~Note 4, Loans and Loans Held-For-Sale for disclosures for debtors experiencing financial ~~assets held at the reporting date based on historical experience, current conditions,~~difficulty 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)~~

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 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~~vintage disclosures related to gross charge-offs by loan segment by year 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 decreaseorigination, in the Notes to ~~retained earnings~~Consolidated Financial Statements in Item 1 of ~~$50.7 million as of January 1, 2021~~this Quarterly Report on Form 10-Q for ~~the cumulative effect of adopting Topic 326.~~

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

January 1, 2021
(Dollars in Thousands) As Reported Under
Topic 326 Pre
Topic 326 Impact of
Topic 326 Adoption
Assets
Allowance for Credit Losses on Loans
Commercial Real Estate $ 41,458 $ 34,871 $ 6,587
Commercial and Industrial 4,071 2,692 1,379
Obligations of States and Political Subdivisions 951 951 0
Residential Mortgages 5,356 2,000 3,356
Other Consumer 1,602 2,479 (877)
Construction 6,277 6,357 (80)
Other 56,001 4,724 51,277
Allowance for Credit Losses on Loans 115,716 54,074 61,642
Assets:
Total Loans Held for Investments, net 2,831,454 2,893,096 61,642
Net deferred tax asset 21,413 7,589 13,824
Liabilities:
Life-of-loss Reserve on Unfunded Loan Commitments 3,052 144 2,908
Equity:
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”) of $61.6 million and a $2.9 million life-of-loss reserveadditional information 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)~~

these amendments.

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,~~process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of ~~troubled debt restructurings~~restructured loans 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 tothrough 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

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

quantifiable. Individually evaluated loans not specifically analyzed ~~reside in the Quantitative Analysis.~~receive a quantitative and qualitative analysis, as described below.

Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). for quantitative analysis that are part of the Company’s ACL methodology. 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 are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model ~~output.~~output following the quantitative analysis. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective. 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 Day 1 CECL model and the model 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.

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 1 – BASIS OF PRESENTATION – (continued)~~

“Other” Segmented Pool

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

Our charge-off policy for loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. The Company may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the ~~table above.~~loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:

•The status of a bankruptcy proceeding

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

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

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

Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans.

Loan Restructurings: In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

loan to more affordable terms before their loan reaches nonaccrual status. These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type. These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.

Accounting ~~Statements~~Standards Issued but Not Yet ~~Adopted:~~ 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 the U.S. dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023. In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The Federal Reserve System, (“FRB”), of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S. Congress passed and the U.S. President signed legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the Federal Reserve to identify a replacement benchmark based on SOFR.

In response, we have created an internal team that is managing our transition away from LIBOR. This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions. To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition. The team is currently in the process of: i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices. We are ~~evaluating~~considering SOFR and other credit-sensitive alternative indices that may gain market acceptance as potential replacements to LIBOR. The financial impact regarding pricing, valuation and operations of the ~~impacts~~transition is not expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR.

As of ~~this ASU and have not yet determined whether~~June 30, 2022, approximately 14.3% of our loan portfolio consists of loans whose variable rate index is LIBOR. We ceased 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~~allocated to common shareholders by the weighted average number of shares of common ~~shares~~stock 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 June 30,				Six Months Ended June 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)	2022		2021		2022		2021
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	Net Income	$	9,375	$	4,423	Net Income	$	10,778	$	5,432	$	20,101	$	14,807
Less: Income allocated to participating shares	Less: Income allocated to participating shares	46		16		Less: Income allocated to participating shares	69		25		110		69
Net Income Allocated to Common Shareholders		$	9,329	$	4,407
Net Income Allocated to Common Shareholders - Basic & Diluted						Net Income Allocated to Common Shareholders - Basic & Diluted	$	10,709	$	5,407	$	19,991	$	14,738

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	24,647,543		26,466,922		25,250,413		26,437,761
Less: Average Participating Securities	Less: Average Participating Securities	131,429		97,874		Less: Average Participating Securities	157,241		122,818		138,482		122,818
Weighted Average Common Shares Outstanding		26,276,890		26,362,649
Weighted Average Common Shares Outstanding - Basic & Diluted						Weighted Average Common Shares Outstanding - Basic & Diluted	24,490,302		26,344,104		25,111,931		26,314,943

Earnings per Common Share – Basic	Earnings per Common Share – Basic	$	0.36	$	0.17	Earnings per Common Share – Basic	$	0.44	$	0.21	$	0.80	$	0.56
Earnings per Common Share – Diluted	Earnings per Common Share – Diluted	$	0.36	$	0.17	Earnings per Common Share – Diluted	$	0.44	$	0.21	$	0.80	$	0.56

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									June 30, 2022
(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	$	19,281	$	—	$	(1,006)	$	18,275
U.S. Government Agency Securities										U.S. Government Agency Securities	3,504		—		(424)		3,080
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	33,348		304		(198)		33,454		Residential Mortgage-Backed Securities	120,022		2		(9,587)		110,437
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,181		104		0		5,285		Commercial Mortgage-Backed Securities	40,980		188		(817)		40,351
Asset Backed Securities	Asset Backed Securities	136,976		1,093		(570)		137,499		Asset Backed Securities	85,390		—		(2,957)		82,433
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	252,219		3,971		(1,340)		254,850		Collateralized Mortgage Obligations	304,003		7		(19,785)		284,225
Small Business Administration	Small Business Administration	107,320		487		(850)		106,957		Small Business Administration	53,365		414		(82)		53,697
States and Political Subdivisions	States and Political Subdivisions	207,738		4,883		(2,306)		210,315		States and Political Subdivisions	282,671		1		(37,567)		245,105
Corporate Notes	Corporate Notes	29,000		473		(161)		29,312		Corporate Notes	73,750		—		(4,319)		69,431
Total Debt Securities	Total Debt Securities	$	774,236	$	11,315	$	(5,519)	$	780,032	Total Debt Securities	$	982,966	$	612	$	(76,544)	$	907,034

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)


											December 31, 2021
(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
U.S. Treasury Securities										U.S. Treasury Securities	$	4,442	$	—	$	(29)	$	4,413
U.S. Government Agency Securities										U.S. Government Agency Securities	3,475		3		—		3,478
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	$	44,057	$	1,008	$	(341)	$	44,724	Residential Mortgage-Backed Securities	112,118		76		(2,181)		110,013
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,194		253		0		5,447		Commercial Mortgage-Backed Securities	4,155		53		(40)		4,168
Asset Backed Securities	Asset Backed Securities	133,672		884		(999)		133,557		Asset Backed Securities	82,119		49		(305)		81,863
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	212,751		6,007		(399)		218,359		Collateralized Mortgage Obligations	287,734		2,190		(2,310)		287,614
Small Business Administration	Small Business Administration	99,604		346		(805)		99,145		Small Business Administration	108,643		879		(608)		108,914
States and Political Subdivisions	States and Political Subdivisions	239,251		13,490		(119)		252,622		States and Political Subdivisions	257,810		6,344		(1,952)		262,202
Corporate Notes	Corporate Notes	24,250		582		(7)		24,825		Corporate Notes	59,750		375		(390)		59,735
Total Debt Securities	Total Debt Securities	$	758,779	$	22,570	$	(2,670)	$	778,679	Total Debt Securities	$	920,246	$	9,969	$	(7,815)	$	922,400

The Company did 0tnot have securities classified as held-to-maturity at ~~March 31, 2021~~June 30, 2022 or December 31, ~~2020.~~2021.

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 June 30,				Six Months Ended June 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		(Dollars in Thousands)	2022		2021		2022		2021
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	$	14,856	$	43,430	$	19,777	$	108,300

Gross Realized Gains	Gross Realized Gains	$	3,629	$	1,217	Gross Realized Gains	$	208	$	1,565	$	208	$	5,194
Gross Realized Losses	Gross Realized Losses	(19)		(3)		Gross Realized Losses	(132)		(66)		(156)		(85)
Net Realized Gains	Net Realized Gains	3,610		1,214		Net Realized Gains	76		1,499		52		5,109
Tax Impact	Tax Impact	$	758	$	255	Tax Impact	$	16	$	318	$	11	$	1,076

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

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


		March 31, 2021					June 30, 2022
(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	$	195	$	195
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	18,382		17,788
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	217,046		202,492
Due after Ten Years	Due after Ten Years	208,396		210,178		Due after Ten Years	196,948		169,113
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	33,348		33,454		Residential Mortgage-Backed Securities	120,022		110,437
Commercial Mortgage-Backed Securities	Commercial Mortgage-Backed Securities	5,181		5,285		Commercial Mortgage-Backed Securities	40,980		40,351
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	252,219		254,850		Collateralized Mortgage Obligations	304,003		284,225
Asset Backed Securities	Asset Backed Securities	136,976		137,499		Asset Backed Securities	85,390		82,433
Total Securities		$	774,236	$	780,032
Total Debt Securities						Total Debt Securities	$	982,966	$	907,034

At ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was ~~$153.7~~$178.5 million at ~~March 31, 2021~~June 30, 2022 and ~~$146.0~~$178.6 million at December 31, ~~2020.~~2021.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, 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																June 30, 2022
		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. Treasury Securities																	U.S. Treasury Securities	5	$	18,275	$	(1,006)	—	$	—	$	—	5	$	18,275	$	(1,006)
U.S. Government Agency Securities	U.S. Government Agency Securities	1	$	2,360	$	(94)	0	$	0	$	0	1	$	2,360	$	(94)	U.S. Government Agency Securities	2	3,080		(424)		—	—		—		2	3,080		(424)
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	7	20,574		(197)		3	34		(1)		10	20,608		(198)		Residential Mortgage-Backed Securities	28	73,800		(5,405)		15	36,393		(4,182)		43	110,193		(9,587)
Commercial Mortgage-Backed Securities																	Commercial Mortgage-Backed Securities	6	10,836		(517)		50	15,576		(300)		56	26,412		(817)
Asset Backed Securities	Asset Backed Securities	6	13,332		(117)		19	41,825		(453)		25	55,157		(570)		Asset Backed Securities	20	48,011		(1,716)		15	32,422		(1,241)		35	80,433		(2,957)
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	18	65,912		(1,168)		9	21,246		(172)		27	87,158		(1,340)		Collateralized Mortgage Obligations	90	232,098		(16,991)		22	49,584		(2,794)		112	281,682		(19,785)
Small Business Administration	Small Business Administration	6	10,484		(153)		78	51,817		(697)		84	62,301		(850)		Small Business Administration	9	15,940		(51)		3	4,095		(31)		12	20,035		(82)
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	150	232,157		(34,607)		13	12,052		(2,960)		163	244,209		(37,567)
Corporate Notes	Corporate Notes	4	9,590		(161)		0	0		0		4	9,590		(161)		Corporate Notes	21	67,016		(4,235)		1	2,416		(84)		22	69,432		(4,319)
Total Debt Securities	Total Debt Securities	91	$	193,113	$	(4,096)	112	$	116,873	$	(1,423)	203	$	309,986	$	(5,519)	Total Debt Securities	331	$	701,213	$	(64,952)	119	$	152,538	$	(11,592)	450	$	853,751	$	(76,544)


		December 31, 2020																December 31, 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. Treasury Securities																	U.S. Treasury Securities	2	$	4,413	$	(29)	—	$	—	$	—	2	$	4,413	$	(29)
U.S. Government Agency Securities																	U.S. Government Agency Securities	1	1,733		—		—	—		—		1	1,733		—
Residential Mortgage-Backed Securities	Residential Mortgage-Backed Securities	7	$	21,109	$	(339)	3	$	40	$	(2)	10	$	21,149	$	(341)	Residential Mortgage-Backed Securities	30	95,749		(2,030)		7	8,706		(151)		37	104,455		(2,181)
Commercial Mortgage-Backed Securities																	Commercial Mortgage-Backed Securities	1	1,987		(40)		—	—		—		1	1,987		(40)
Asset Backed Securities	Asset Backed Securities	11	23,653		(219)		27	61,599		(780)		38	85,252		(999)		Asset Backed Securities	17	44,095		(129)		10	21,895		(176)		27	65,990		(305)
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	13	48,318		(212)		14	38,615		(187)		27	86,933		(399)		Collateralized Mortgage Obligations	50	157,630		(1,945)		11	24,849		(365)		61	182,479		(2,310)
Small Business Administration	Small Business Administration	7	10,444		(53)		73	47,371		(752)		80	57,815		(805)		Small Business Administration	11	18,813		(235)		53	19,630		(373)		64	38,443		(608)
States and Political Subdivisions	States and Political Subdivisions	12	12,558		(119)		0	0		0		12	12,558		(119)		States and Political Subdivisions	56	88,746		(1,503)		8	7,874		(449)		64	96,620		(1,952)
Corporate Notes	Corporate Notes	1	2,493		(7)		0	0		0		1	2,493		(7)		Corporate Notes	10	29,683		(317)		1	2,427		(73)		11	32,110		(390)
Total Debt Securities	Total Debt Securities	51	$	118,575	$	(949)	117	$	147,625	$	(1,721)	168	$	266,200	$	(2,670)	Total Debt Securities	178	$	442,849	$	(6,228)	90	$	85,381	$	(1,587)	268	$	528,230	$	(7,815)

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did 0tnot record an allowance for credit losses (“ACL”) on its investment securities during the quarter ended ~~March 31, 2021~~June 30, 2022 as the Company did 0tnot have securities classified as held-to-maturity at ~~March 31, 2021.~~ June 30, 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

~~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~~As 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~~June 30, 2022, management does not intend to sell ~~the~~any impaired security ~~or may~~and it is not more than likely that it will be required to sell any impaired security before the ~~security prior to maturity. The Company has reviewed all securities for OTTI.~~

Asrecovery of March 31, 2021 and December 31, 2020, no OTTI has been identified for any investment securities in our portfolio. We do not believe any individual unrealized loss as of March 31, 2021 represents an OTTI. At March 31, 2021, there were 203 securities in an unrealized loss position and at December 31, 2020, there were 168 securities in an unrealized loss position.its amortized cost basis. The unrealized losses on debt securities ~~were~~are primarily ~~attributable~~the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to ~~changes~~recover as the securities approach their maturity date or repricing date.

As of June 30, 2022, management believes the unrealized losses detailed in ~~interest rates and~~the table above are not related to credit and therefore no allowance for credit losses has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit 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 itrelated impairment is ~~not more likely than not that we~~identified, while any noncredit loss will be ~~required to sell any of~~recognized in other comprehensive income. During the ~~securities in an unrealized loss position before recovery of their amortized cost.~~three and six months ended June 30, 2022 and 2021, the Company had no credit related net investment impairment losses.

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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)	June 30, 2022		December 31, 2021
Commercial	Commercial					Commercial
Commercial Real Estate	Commercial Real Estate	$	1,384,541	$	1,453,799	Commercial Real Estate	$	1,389,117	$	1,323,252
Commercial and Industrial	Commercial and Industrial	460,264		557,164		Commercial and Industrial	336,477		345,376
Total Commercial Loans	Total Commercial Loans	1,844,805		2,010,963		Total Commercial Loans	1,725,594		1,668,628
Consumer	Consumer					Consumer
Residential Mortgages	Residential Mortgages	414,507		472,170		Residential Mortgages	559,313		457,988
Other Consumer	Other Consumer	49,516		57,647		Other Consumer	48,033		44,666
Total Consumer Loans	Total Consumer Loans	464,023		529,817		Total Consumer Loans	607,346		502,654
Construction	Construction	289,661		406,390		Construction	322,731		282,947
Other	Other	373,386		0		Other	342,225		357,900
Total Portfolio Loans ~~(1)~~	Total Portfolio Loans ~~(1)~~	$	2,971,875	$	2,947,170	Total Portfolio Loans ~~(1)~~	$	2,997,896	$	2,812,129
Loans Held-for-Sale						Loans Held-for-Sale	—		228

Total Loans						Total Loans	$	2,997,896	$	2,812,357

~~(1)~~ ~~Refer~~Loan Restructurings

On April 1, 2022, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of troubled debt restructurings (TDRs). Due to ~~Note 1, Basis~~the removal of ~~Presentation~~the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for ~~details~~loan modifications to determine if the restructuring results in a new loan or a continuation of ~~reclassification~~the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of ~~our portfolio segments~~contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a restructured loan may be subject to the ~~adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses~~individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on ~~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~~changes in ~~certain segments, this risk is mitigated by reviewing~~ the ~~relevant economic indicators and internal risk rating trends and through stress testing~~discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in 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 exceededNote 6, Fair Value Measurements, in the ~~portfolio. In addition, there are specific limits~~Notes to Consolidated Financial Statements in ~~place for various categories~~Item 1 of ~~real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.~~

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. Unsecured loans are reserved for the best quality customers with well-established businesses, operate with low financial and operating leverage and demonstrate an ability to clear the outstanding balancethis Quarterly Report on lines of credit for at least thirty consecutive days annually. 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 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 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 launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021. For those borrowers who opted into the Part III program, they are 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 of deferrals in the Part III program are principal only deferrals. At the end of the deferral period, for term loans, payments will be applied to accrued interest first 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 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.Form 10-Q.

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CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

~~In connection with our adoption~~The following table shows the amortized cost basis as 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”), CommercialJune 30, 2022 and ~~Industrial, (“C&I”), Construction and Residential Mortgages. At March~~December 31, 2021 ~~other~~for the loans ~~totaled $373.4~~restructured to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:


	Restructured Loans
	June 30, 2022					December 31, 2021
(Dollars in Thousands)	Number of Contracts	Amortized Cost Basis(1)		% of Total Class of Financing Receivable		Number of Contracts	Amortized Cost Basis(1)		% of Total Class of Financing Receivable
Accruing Restructured Loans
Commercial Real Estate	—	$	—	—	%	—	$	—	—	%
Commercial and Industrial	—	—		—	%	1	14		—	%
Residential Mortgages	—	—		—	%	—	—		—	%
Other Consumer	—	—		—	%	—	—		—	%
Construction	—	—		—	%	—	—		—	%
Other	—	—		—	%	5	78,022		21.80	%
Total Accruing Restructured Loans	—	$	—	—	%	6	$	78,036	21.80	%

Nonaccrual Restructured Loans
Commercial Real Estate	1	$	300	0.02	%	1	$	2,742	0.21	%
Commercial and Industrial	—	—		—	%	—	—		—	%
Residential Mortgages	—	—		—	%	—	—		—	%
Other Consumer	—	—		—	%	—	—		—	%
Construction	—	—		—	%	1	808		0.29	%
Other	—	—		—	%	—	—		—	%
Total Nonaccrual Restructured Loans	1	$	300	0.02	%	2	$	3,550	0.23	%
Total Restructured Loans	1	$	300	0.02	%	8	$	81,586	20.86	%

(1)Excludes accrued interest receivable of $2.9 thousand at June 30, 2022 and $0.5 million ~~consisting~~at December 31, 2021.

In the first quarter of ~~loans~~2022 the Bank recognized a loan modification of a commercial real estate loan as a restructured loan. The borrower’s objective was to redevelop the property for a purpose that ~~would otherwise have been~~temporarily lacks feasibility due to the COVID-19 pandemic. In the interim the property is leased, albeit at a lower rate than originally forecasted. The Bank reduced the regularly scheduled principal and interest payments to accommodate the rental income until the property can be redeveloped. This loan is not considered significant and is included in the 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 resulted in an increase in current expected credit losses of $51.3 million.

~~Net deferred costs included~~Bank’s ACL model in the portfolio balances above were $3.2 million and $3.0 million at March 31, 2021 and December 31, 2020, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $212 thousand and $219 thousand at March 31, 2021 and December 31, 2020, respectively.

Mortgage loans held-for-sale were $32.7 million and $25.4 million as of March 31, 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 sale of bank branches at March 31, 2021 and December 31, 2020, respectively, that are expected to close in the second quarter of 2021.

~~Troubled Debt Restructurings (“TDR”)~~

~~The following table summarizes the Company’s TDRs as~~general pool of the ~~dates presented:~~CRE segment for reserve purposes.

March 31, 2021 December 31, 2020
(Dollars in Thousands) Performing
Loans Nonperforming
Loans Total
TDRs Performing
Loans Nonperforming
Loans Total
TDRs
Commercial
Commercial Real Estate $ 6,131 $ 21,306 $ 27,437 $ 6,151 $ 21,667 $ 27,818
Commercial and Industrial 0 0 0 0 0 0
Total Commercial TDRs 6,131 21,306 27,437 6,151 21,667 27,818
Consumer
Residential Mortgages 0 0 0 50,618 0 50,618
Other Consumer 0 0 0 0 0 0
Total Consumer TDRs 0 0 0 50,618 0 50,618
Construction 549 3,319 3,868 52,481 3,319 55,800
Other 99,970 0 99,970 0 0 0
Total TDRs(1)
$ 106,650 $ 24,625 $ 131,275 $ 109,250 $ 24,986 $ 134,236

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

In order to maximize the collection of loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. A loan is a TDR if both of the following 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 will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. As of March 31, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

~~TDRs decreased $3.0 million, or 2.2% to $131.3 million at March 31, 2021 compared to~~year ended December 31, 2020. The Bank received $2.9 million of pay-downs and had 0 new additions for the quarter ended March 31, 2021. TDRs of $24.6 million and $25.0 million were nonaccrual as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021 the Bank modified no6 loans ~~that constituted a TDR that had minimal commitments~~ to ~~lend additional funds.~~borrowers experiencing financial difficulty. Of these 6 accruing loans, 5 are related through common guarantors. The Bank ~~had one consumer automobile loan modified as~~improved economic terms, improved collateral position via cross collateralization and actually shortened the maturity of these loans in connection with a ~~TDR during the three months ended March 31, 2020. The customer was experiencing financial difficulties, but sold the vehicle and the proceeds from that sale~~global workout agreement. Payment terms include interest only, there were ~~applied~~no modifications to the ~~loan balance. The remaining balance was charged-off, but~~original rate. These loans are included in the ~~loan has been re-amortized~~Bank’s ACL model in the “Other” segment for ~~the customer to repay the balance by the end of 2021.~~reserve purposes.

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CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

~~There were 0 TDR payment defaults~~The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the six months ended June 30, 2022:


	Payment Status (Amortized Cost Basis)
(Dollars in Thousands)	Current		30-89 Days Past Due		90+ Days Past Due
Accruing Restructured Loans
Commercial Real Estate	$	—	$	—	$	—
Commercial and Industrial	—		—		—
Residential Mortgages	—		—		—
Other Consumer	—		—		—
Construction	—		—		—
Other	—		—		—
Total Accruing Restructured Loans	$	—	$	—	$	—

Nonaccrual Restructured Loans
Commercial Real Estate	$	300	$	—	$	—
Commercial and Industrial	—		—		—
Residential Mortgages	—		—		—
Other Consumer	—		—		—
Construction	—		—		—
Other	—		—		—
Total Nonaccrual Restructured Loans	$	300	$	—	$	—
Total Restructured Loans(1)	$	300	$	—	$	—

(1)Excludes accrued interest receivable of $2.9 thousand at June 30, 2022.

As of June 30, 2022, the Company had no commitments to lend any additional funds on restructured loans. As of June 30, 2022 the Company had no loans that defaulted during the ~~three months ended March 31, 2021.~~period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification. For purposes of this disclosure, a ~~TDR payment~~ default occurs when, within 12 months of the original ~~TDR~~ modification, either a full or partial charge-off occurs or ~~a TDR~~the loan becomes 90 days or more past due. ~~At March 31, 2021~~

As of June 30, 2022 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,2021, 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, 2021~~had $1.0 million and ~~December 31, 2020.~~

Nonperforming Assets
(Dollars in Thousands) March 31, 2021 December 31, 2020
Nonperforming Assets
Nonaccrual loans $ 7,331 $ 7,018
Nonaccrual TDRs 24,625 24,986
Total Nonaccrual Loans 31,956 32,004
OREO 14,031 15,722
Total Nonperforming Assets $ 45,987 $ 47,726

~~As of March 31, 2021 and December 31, 2020, we had $677 thousand and $67 thousand,~~$0.3 million, respectively, of residential real estate loans in the process of foreclosure. We also had ~~$107~~$24.0 thousand at ~~March 31, 2021~~June 30, 2022 and ~~$109~~$62.0 thousand at December 31, ~~2020~~2021 in residential real estate loans 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~~ expected ~~probable incurred~~credit losses associated with the Company’s financial instruments over the life of ~~loans inherent in the loan portfolio~~those instruments as of the balance sheet date. Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 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~~current expected credit losses (“CECL”) model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

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

C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

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

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

Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.

Our model is based on our best estimate of facts known with the most current information. ~~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.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Credit Quality Indicators:

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

The Company has a loan review policy and annual scope report that details the level of loan review for ~~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 ofThe annual loan review ~~has been broadened since 2019 to include assurance testing~~provides the Credit Risk Committee with ~~respect to the accuracy~~an independent analysis of the ~~underwriting function.~~following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing into ~~2021,~~2022, the Company used a ~~four~~five step approach for loan review in the following categories:

•~~A review~~Individual reviews of the ~~largest twenty pass-rated~~top 20 large loan relationships (“LLRs”), which ~~represents approximately a quarter of total loans;~~are defined as any individual commercial loan or aggregate commercial relationship totaling $2.0 million or more;

•A sampling of ~~new~~small LLRs, which are defined as individual commercial loans ~~originated to include an examination~~or relationships with aggregate exposure of ~~the evidence of appropriate approval, adherence to loan policy and the completeness and accuracy of the analysis contained~~$2.0 million or more but not included in the ~~approval document;~~top twenty LLRs;

•A sampling review of ~~Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $2 million that are not part~~Credit Risk Committee modifications, including new and existing loans to provide perspective on the appropriateness of the ~~top twenty review;~~modification in relation to established policies and procedures;

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~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

•~~Concentration focus~~A sampling review of non-organic commercial loans and those commercial loans approved outside of the Credit Risk Committee; and

•Focus reviews of ~~identified segments that represent concentration~~office and land development to evaluate segment 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.rather than individual loan risk. Focus reviews are performed annually on a rotational basis.

The Company’s internally assigned grades are as follows:

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

Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the ~~institutions~~institution’s 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.

The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.

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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, 2021:~~the periods presented:


																				June 30, 2022
		Risk Rating																Risk Rating
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total			(Dollars in Thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
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	$	201,249	$	178,791	$	152,964	$	173,805	$	240,312	$	394,640	$	31,059	$	1,372,820
Special Mention	Special Mention	0		0		0		8,143		3,070		968		0		12,181			Special Mention	—		223		—		—		10,018		2,720		—		12,961
Substandard	Substandard	236		0		21,633		4,560		34,941		7,329		0		68,699			Substandard	—		—		—		300		2,668		368		—		3,336

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	$	201,249	$	179,014	$	152,964	$	174,105	$	252,998	$	397,728	$	31,059	$	1,389,117
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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	$	21,454	$	50,526	$	44,896	$	10,827	$	30,823	$	158,283	$	11,650	$	328,459
Special Mention	Special Mention	0		17		0		15		0		0		0		32			Special Mention	—		—		—		—		—		—		—		—
Substandard	Substandard	0		253		881		0		0		0		157		1,291			Substandard	—		56		—		69		4,954		2,800		139		8,018

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	$	21,454	$	50,582	$	44,896	$	10,896	$	35,777	$	161,083	$	11,789	$	336,477
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	22	$	—	$	—	$	22

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	$	107,475	$	172,332	$	83,199	$	54,059	$	73,812	$	44,230	$	19,923	$	555,030
Special Mention	Special Mention	0		0		0		0		0		764		0		764			Special Mention	—		—		—		—		434		536		—		970
Substandard	Substandard	0		0		1,085		1,394		228		1,991		0		4,698			Substandard	—		—		—		1,000		645		1,668		—		3,313

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	$	107,475	$	172,332	$	83,199	$	55,059	$	74,891	$	46,434	$	19,923	$	559,313
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	23	$	—	$	23

Other Consumer	Other Consumer																		Other Consumer
Pass	Pass	$	1,684	$	15,626	$	2,450	$	1,032	$	325	$	27,922	$	332	$	49,371		Pass	$	6,963	$	6,784	$	8,411	$	484	$	277	$	24,696	$	349	$	47,964
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	—		37		2		3		3		24		—		69

Total Other Consumer	Total Other Consumer	$	1,684	$	15,630	$	2,478	$	1,105	$	365	$	27,922	$	332	$	49,516		Total Other Consumer	$	6,963	$	6,821	$	8,413	$	487	$	280	$	24,720	$	349	$	48,033
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	34	$	297	$	184	$	225	$	26	$	60	$	—	$	826

Construction	Construction																		Construction
Pass	Pass	$	27,306	$	83,356	$	116,456	$	15,532	$	8,924	$	6,151	$	25,734	$	283,459		Pass	$	51,136	$	141,951	$	68,062	$	11,531	$	20,843	$	17,849	$	10,176	$	321,548
Special Mention	Special Mention	0		0		185		0		0		446		0		631			Special Mention	—		—		—		—		—		73		—		73
Substandard	Substandard	0		108		3,474		98		1,741		150		0		5,571			Substandard	—		—		136		—		94		880		—		1,110

Total Construction	Total Construction	$	27,306	$	83,464	$	120,115	$	15,630	$	10,665	$	6,747	$	25,734	$	289,661		Total Construction	$	51,136	$	141,951	$	68,198	$	11,531	$	20,937	$	18,802	$	10,176	$	322,731
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Other	Other																		Other
Pass	Pass	$	0	$	0	$	0	$	0	$	3,544	$	0	$	1,090	$	4,634		Pass	$	—	$	—	$	—	$	—	$	—	$	180,792	$	—	$	180,792
Special Mention	Special Mention	0		0		0		0		119,389		61,683		0		181,072			Special Mention	—		—		—		—		—		3,185		—		3,185
Substandard	Substandard	0		0		0		89,055		48,524		50,101		0		187,680			Substandard	—		—		—		—		87,329		70,919		—		158,248

Total Other Loans	Total Other Loans	$	0	$	0	$	0	$	89,055	$	171,457	$	111,784	$	1,090	$	373,386		Total Other Loans	$	—	$	—	$	—	$	—	$	87,329	$	254,896	$	—	$	342,225
Total Loans
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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	$	388,277	$	550,384	$	357,532	$	250,706	$	366,067	$	820,490	$	73,157	$	2,806,613
Special Mention	Special Mention	0		17		190		8,158		122,459		63,861		0		194,685			Special Mention	—		223		—		—		10,452		6,514		—		17,189
Substandard	Substandard	236		365		27,096		95,180		85,474		59,571		157		268,079			Substandard	—		93		138		1,372		95,693		76,659		139		174,094

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	$	388,277	$	550,700	$	357,670	$	252,078	$	472,212	$	903,663	$	73,296	$	2,997,896
Current YTD Period:																			Current YTD Period:
YTD Gross Charge-offs																			YTD Gross Charge-offs	$	34	$	297	$	184	$	225	$	48	$	83	$	—	$	871

2119

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)


	December 31, 2021
	Risk Rating
(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial Real Estate
Pass	$	195,441	$	165,100	$	215,575	$	292,857	$	115,024	$	292,197	$	38,382	$	1,314,576
Special Mention	229		—		—		—		4,205		826		—		5,260
Substandard	—		—		314		2,742		215		145		—		3,416

Total Commercial Real Estate	$	195,670	$	165,100	$	215,889	$	295,599	$	119,444	$	293,168	$	38,382	$	1,323,252
YTD Gross Charge-offs	$	—	$	—	$	10,471	$	1,424	$	6,577	$	1,190	$	—	$	19,662

Commercial and Industrial
Pass	$	55,173	$	50,087	$	15,648	$	38,298	$	23,575	$	150,656	$	3,857	$	337,294
Special Mention	—		—		—		8		—		—		—		8
Substandard	14		—		308		4,815		2,798		—		139		8,074

Total Commercial and Industrial	$	55,187	$	50,087	$	15,956	$	43,121	$	26,373	$	150,656	$	3,996	$	345,376
YTD Gross Charge-offs	$	—	$	109	$	261	$	3	$	—	$	1	$	—	$	374

Residential Mortgages
Pass	$	155,892	$	91,023	$	63,682	$	73,333	$	8,640	$	48,087	$	13,237	$	453,894
Special Mention	—		—		—		—		—		553		—		553
Substandard	—		—		1,008		743		188		1,602		—		3,541

Total Residential Mortgages	$	155,892	$	91,023	$	64,690	$	74,076	$	8,828	$	50,242	$	13,237	$	457,988
YTD Gross Charge-offs	$	—	$	—	$	—	$	172	$	—	$	101	$	—	$	273

Other Consumer
Pass	$	9,353	$	10,199	$	979	$	450	$	186	$	23,048	$	339	$	44,554
Special Mention	—		—		—		—		—		—		—		—
Substandard	11		3		11		57		30		—		—		112

Total Other Consumer	$	9,364	$	10,202	$	990	$	507	$	216	$	23,048	$	339	$	44,666
YTD Gross Charge-offs	$	152	$	661	$	905	$	247	$	170	$	121	$	—	$	2,256

Construction
Pass	$	140,639	$	82,523	$	24,336	$	9,739	$	5,328	$	3,407	$	15,269	$	281,241
Special Mention	—		—		175		—		—		429		—		604
Substandard	—		107		809		95		—		91		—		1,102

Total Construction	$	140,639	$	82,630	$	25,320	$	9,834	$	5,328	$	3,927	$	15,269	$	282,947
YTD Gross Charge-offs	$	—	$	—	$	1,859	$	—	$	—	$	—	$	—	$	1,859

Other
Pass	$	—	$	—	$	—	$	—	$	122,848	$	62,399	$	—	$	185,247
Special Mention	—		—		—		—		—		3,281		—		3,281
Substandard	—		—		—		87,329		40,882		41,161		—		169,372

Total Other Loans	$	—	$	—	$	—	$	87,329	$	163,730	$	106,841	$	—	$	357,900
YTD Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total Portfolio Loans
Pass	$	556,498	$	398,932	$	320,220	$	414,677	$	275,601	$	579,794	$	71,084	$	2,616,806
Special Mention	229		—		175		8		4,205		5,089		—		9,706
Substandard	25		110		2,450		95,781		44,113		42,999		139		185,617

Total Portfolio Loans	$	556,752	$	399,042	$	322,845	$	510,466	$	323,919	$	627,882	$	71,223	$	2,812,129
Current YTD Period:
YTD Gross Charge-offs	$	152	$	770	$	13,496	$	1,846	$	6,747	$	1,413	$	—	$	24,424

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, 2021.~~the periods presented.


																			June 30, 2022
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total		(Dollars in Thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
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	$	201,249	$	179,014	$	152,964	$	173,804	$	250,330	$	397,439	$	31,059	$	1,385,859
Nonperforming	Nonperforming	236		0		21,633		0		0		89		0		21,958		Nonperforming	—		—		—		301		2,668		289		—		3,258
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	$	201,249	$	179,014	$	152,964	$	174,105	$	252,998	$	397,728	$	31,059	$	1,389,117
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	$	21,454	$	50,536	$	44,896	$	10,827	$	30,823	$	161,081	$	11,650	$	331,267
Nonperforming	Nonperforming	0		253		408		0		0		0		157		818		Nonperforming	—		46		—		69		4,954		2		139		5,210
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	$	21,454	$	50,582	$	44,896	$	10,896	$	35,777	$	161,083	$	11,789	$	336,477
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	$	107,475	$	172,332	$	83,199	$	54,059	$	74,474	$	45,296	$	19,923	$	556,758
Nonperforming	Nonperforming	0		0		1,084		925		228		1,392		0		3,629		Nonperforming	—		—		—		1,000		417		1,138		—		2,555
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	$	107,475	$	172,332	$	83,199	$	55,059	$	74,891	$	46,434	$	19,923	$	559,313
Other Consumer	Other Consumer																	Other Consumer
Performing	Performing	$	1,684	$	15,629	$	2,457	$	1,034	$	353	$	27,922	$	332	$	49,411	Performing	$	6,963	$	6,821	$	8,411	$	487	$	277	$	24,719	$	349	$	48,027
Nonperforming	Nonperforming	0		1		21		71		12		0		0		105		Nonperforming	—		—		2		—		3		1		—		6
Total Other Consumer	Total Other Consumer	$	1,684	$	15,630	$	2,478	$	1,105	$	365	$	27,922	$	332	$	49,516	Total Other Consumer	$	6,963	$	6,821	$	8,413	$	487	$	280	$	24,720	$	349	$	48,033
Construction	Construction																	Construction
Performing	Performing	$	27,306	$	83,356	$	116,641	$	15,630	$	8,924	$	6,627	$	25,734	$	284,218	Performing	$	51,136	$	141,951	$	68,062	$	11,531	$	20,937	$	17,938	$	10,176	$	321,731
Nonperforming	Nonperforming	0		108		3,474		0		1,741		120		0		5,443		Nonperforming	—		—		136		—		—		864		—		1,000
Total Construction	Total Construction	$	27,306	$	83,464	$	120,115	$	15,630	$	10,665	$	6,747	$	25,734	$	289,661	Total Construction	$	51,136	$	141,951	$	68,198	$	11,531	$	20,937	$	18,802	$	10,176	$	322,731
Other	Other																	Other
Performing	Performing	$	0	$	0	$	0	$	89,055	$	171,457	$	111,784	$	1,090	$	373,386	Performing	$	—	$	—	$	—	$	—	$	87,329	$	254,896	$	—	$	342,225
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	$	254,896	$	—	$	342,225
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	$	388,277	$	550,654	$	357,532	$	250,708	$	464,170	$	901,369	$	73,157	$	2,985,867
Nonperforming	Nonperforming	236		362		26,620		996		1,981		1,601		157		31,953		Nonperforming	—		46		138		1,370		8,042		2,294		139		12,029
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	$	388,277	$	550,700	$	357,670	$	252,078	$	472,212	$	903,663	$	73,296	$	2,997,896

~~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, 2021 and December 31, 2020:~~

March 31, 2021
(Dollars in Thousands) Current
Loans Loans
30-59 Days
Past Due Loans
60-89 Days
Past Due Total
30-89 Days
Past Due Nonaccrual
Loans Total Portfolio
Loans
Commercial Real Estate $ 1,361,963 $ 620 $ 0 $ 620 $ 21,958 $ 1,384,541
Commercial and Industrial 457,569 1,622 255 1,877 818 460,264
Residential Mortgages 410,771 46 61 107 3,629 414,507
Other Consumer 49,074 127 210 337 105 49,516
Construction 284,218 0 0 0 5,443 289,661
Other 369,842 3,544 0 3,544 0 373,386
Total (1)
$ 2,933,437 $ 5,959 $ 526 $ 6,485 $ 31,953 $ 2,971,875

~~(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.

December 31, 2020
(Dollars in Thousands) Current
Loans Loans
30-59 Days
Past Due Loans
60-89 Days
Past Due Total
30-89 Days
Past Due Nonaccrual
Loans Total Portfolio
Loans
Commercial Real Estate $ 1,428,092 $ 3,487 $ 329 $ 3,816 $ 21,891 $ 1,453,799
Commercial and Industrial 556,324 194 190 384 456 557,164
Construction 400,775 193 91 284 5,331 406,390
Residential Mortgages 466,688 1,347 0 1,347 4,135 472,170
Other Consumer 56,890 278 295 573 184 57,647
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, 2021. For the three months ended March 31, 2021, the amount of interest income on nonaccrual loans was immaterial. There were no loans at March 31, 2021 were that were past due more than more than 90 days and still accruing.

March 31, 2021
(Dollars in Thousands) Beginning of
Period
Nonaccrual End of
Period
Nonaccrual Nonaccrual
With No
Related
Allowance Past Due
90+ Days
Still Accruing
Commercial Real Estate $ 21,891 $ 21,958 $ 146 $ 0
Commercial and Industrial 456 818 0 0
Residential Mortgages 4,135 3,629 0 0
Other Consumer 184 105 0 0
Construction 5,331 5,443 3,321 0
Other 0 0 0 0
Total $ 31,997 $ 31,953 $ 3,467 $ 0

2321

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 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, 2021~~
	~~Type of Collateral~~
~~(Dollars in Thousands)~~	~~Real Estate~~
~~Commercial Real Estate~~	$	~~24,220~~
~~Commercial and Industrial~~	0
~~Residential Mortgages~~	0
~~Other Consumer~~	0
~~Construction~~	~~5,060~~
~~Other~~	0
~~Total~~	$	~~29,280~~


	December 31, 2021
(Dollars in Thousands)	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial Real Estate
Performing	$	195,670	$	165,100	$	215,575	$	292,857	$	119,229	$	293,102	$	38,382	$	1,319,915
Nonperforming	—		—		314		2,742		215		66		—		3,337
Total Commercial Real Estate	$	195,670	$	165,100	$	215,889	$	295,599	$	119,444	$	293,168	$	38,382	$	1,323,252
Commercial and Industrial
Performing	$	55,187	$	50,087	$	15,648	$	43,117	$	26,373	$	150,656	$	3,857	$	344,925
Nonperforming	—		—		308		4		—		—		139		451
Total Commercial and Industrial	$	55,187	$	50,087	$	15,956	$	43,121	$	26,373	$	150,656	$	3,996	$	345,376
Residential Mortgages
Performing	$	155,892	$	91,023	$	63,682	$	73,564	$	8,640	$	49,399	$	13,237	$	455,437
Nonperforming	—		—		1,008		512		188		843		—		2,551
Total Residential Mortgages	$	155,892	$	91,023	$	64,690	$	74,076	$	8,828	$	50,242	$	13,237	$	457,988
Other Consumer
Performing	$	9,364	$	10,202	$	979	$	450	$	211	$	23,048	$	339	$	44,593
Nonperforming	—		—		11		57		5		—		—		73
Total Other Consumer	$	9,364	$	10,202	$	990	$	507	$	216	$	23,048	$	339	$	44,666
Construction
Performing	$	140,639	$	82,523	$	24,511	$	9,834	$	5,328	$	3,858	$	15,269	$	281,962
Nonperforming	—		107		809		—		—		69		—		985
Total Construction	$	140,639	$	82,630	$	25,320	$	9,834	$	5,328	$	3,927	$	15,269	$	282,947
Other
Performing	$	—	$	—	$	—	$	87,329	$	163,730	$	106,841	$	—	$	357,900
Nonperforming	—		—		—		0		—		—		—		—
Total Other Loans	$	—	$	—	$	—	$	87,329	$	163,730	$	106,841	$	—	$	357,900
Total Portfolio Loans
Performing	$	556,752	$	398,935	$	320,395	$	507,151	$	323,511	$	626,904	$	71,084	$	2,804,732
Nonperforming	—		107		2,450		3,315		408		978		139		7,397
Total Portfolio Loans	$	556,752	$	399,042	$	322,845	$	510,466	$	323,919	$	627,882	$	71,223	$	2,812,129

The following ~~table presents activity in~~tables include an aging analysis of the ~~ACL and ALL for~~recorded investment of past due portfolio loans as the ~~three months ended March 31, 2021 and March 31, 2020, respectively:~~periods presented:

Three Months Ended March 31, 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 884 (117) (156) 478 768 0 1,857
Charge-offs 0 (1) (195) (870) 0 0 (1,066)
Recoveries 0 1 166 137 61 0 365
Net (Charge-offs) / Recoveries 0 0 (29) (733) 61 0 (701)
Balance at End of Period $ 42,342 $ 4,905 $ 5,171 $ 1,347 $ 7,106 $ 56,001 $ 116,872

~~(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.


	June 30, 2022
(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans
Commercial Real Estate	$	1,385,239	$	620	$	—	$	620	$	3,258	$	1,389,117
Commercial and Industrial	331,236		26		5		31		5,210		336,477
Residential Mortgages	555,190		1,568		—		1,568		2,555		559,313
Other Consumer	47,776		139		112		251		6		48,033
Construction	321,643		88		—		88		1,000		322,731
Other	342,225		—		—		—		—		342,225
Total	$	2,983,309	$	2,441	$	117	$	2,558	$	12,029	$	2,997,896

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

2422

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

~~The adoption of Topic 326 resulted in an increase~~


	December 31, 2021
(Dollars in Thousands)	Current Loans		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Total 30-89 Days Past Due		Nonaccrual Loans		Total Portfolio Loans
Commercial Real Estate	$	1,319,686	$	229	$	—	$	229	$	3,337	$	1,323,252
Commercial and Industrial	344,628		80		217		297		451		345,376
Residential Mortgages	454,754		683		—		683		2,551		457,988
Other Consumer	44,132		367		94		461		73		44,666
Construction	281,962		—		—		—		985		282,947
Other	357,900		—		—		—		—		357,900
Total	$	2,803,062	$	1,359	$	311	$	1,670	$	7,397	$	2,812,129

There were no loans past due 90 days or more and still accruing at June 30, 2022 and December 31, 2021. Loans past due 90 days are automatically transferred to ~~our ACL of $61.6~~nonaccrual status. Loans past due 30 to 89 days or more and still accruing increased $0.9 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~~to $2.6 million at ~~March 31, 2021 and included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied~~June 30, 2022 compared to ~~this pool resulted in an increase in expected credit losses of $51.3 million and is disclosed in the Other line item in the table above.~~

At December 31, 2020, the aforementioned Other line item 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$1.7 million at December 31, ~~2020.~~2021.

For the quarter ended March 31, 2021, 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 subjectThere were no nonaccrual or past due loans related to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. The CECL model was developed with subjective assumptions that is driven by the following key factors: prepayment speeds, timing of prepayments, loss given defaults as well as other factors including the discount rate and ultimately the timing of future cash flows. 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 million to $116.9 million for the three months ended March 31, 2021 compared to $54.1 million~~loans held-for-sale at June 30, 2022 or December 31, 2020 due to the Day 1 adoption of CECL of $61.6 million. In the first quarter 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 loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan for the ~~recorded investment in commercial~~periods presented.


	June 30, 2022
(Dollars in Thousands)	Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual With No Related Allowance		Past Due 90+ Days Still Accruing
Commercial Real Estate	$	3,337	$	3,258	$	—	$	—
Commercial and Industrial	451		5,210		—		—
Residential Mortgages	2,551		2,555		—		—
Other Consumer	73		6		—		—
Construction	985		1,000		—		—
Other	—		—		—		—
Total Portfolio Loans	$	7,397	$	12,029	$	—	$	—


	As of and for the	December 31, 2021
(Dollars in Thousands)		Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual With No Related Allowance		Past Due 90+ Days Still Accruing
Commercial Real Estate		$	21,891	$	3,337	$	—	$	—
Commercial and Industrial		456		451		—		—
Residential Mortgages		4,135		2,551		—		—
Other Consumer		184		73		—		—
Construction		5,331		985		808		—
Other		—		—		—		—
Total Portfolio Loans		$	31,997	$	7,397	$	808	$	—

A loan ~~classes by internally assigned risk ratings~~is considered to be experiencing financial difficulty when it is transferred to nonaccrual status. Loans experiencing financial difficulty with a commitment of $1.0 million or more are individually evaluated. During the three and ~~loan classes by performing~~six months ended June 30, 2022 and ~~nonperforming status~~the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification 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.individually evaluated loans.

2523

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the ~~recorded investment in commercial loan classes by internally assigned risk ratings and loan classes by performing and nonperforming status~~amortized cost basis of collateral-dependent individually evaluated loans as of ~~December 31, 2020:~~the periods presented. Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss on loans or a reversal of the provision for credit loss on loans in the period of change.

December 31, 2020
(Dollars in Thousands) Commercial
Real Estate Commercial
and
Industrial Construction Residential
Mortgage Other
Consumer Total
Portfolio Loans
Pass $ 1,281,106 $ 478,536 $ 289,781 $ 415,773 $ 57,418 $ 2,522,614
Special Mention 126,535 48 58,899 723 6 186,211
Substandard 46,158 78,580 57,710 55,674 223 238,345
Doubtful 0 0 0 0 0 0
Loss 0 0 0 0 0 0
Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170
Performing $ 1,431,908 $ 556,708 $ 401,059 $ 468,035 $ 57,463 $ 2,915,173
Nonperforming 21,891 456 5,331 4,135 184 31,997
Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170


	Type of Collateral
	June 30, 2022		December 31, 2021
(Dollars in Thousands)	Real Estate		Real Estate
Commercial Real Estate	$	2,668	$	2,742
Commercial and Industrial	—		—
Residential Mortgages	—		—
Other Consumer	—		—
Construction	—		808
Other	—		—
Total	$	2,668	$	3,550

The following tables present ~~the balances~~activity in the ~~ALL and~~ACL for the ~~recorded investment in the loan balances based on impairment method as of December 31, 2020:~~periods presented:

December 31, 2020
(Dollars in Thousands) Commercial
Real Estate Commercial
and
Industrial Construction Residential
Mortgage Other
Consumer Total
Allowance for Loan Losses:
Individually Evaluated for Impairment $ 13,773 $ 0 $ 1,477 $ 0 $ 0 $ 15,250
Collectively Evaluated for Impairment 22,655 5,064 6,527 2,099 2,479 38,824
Total Allowance for Loan Losses $ 36,428 $ 5,064 $ 8,004 $ 2,099 $ 2,479 $ 54,074
Total Portfolio Loans:
Individually Evaluated for Impairment $ 27,666 $ 0 $ 56,987 $ 50,618 $ 0 $ 135,271
Collectively Evaluated for Impairment 1,426,133 557,164 349,403 421,552 57,647 2,811,899
Total Portfolio Loans $ 1,453,799 $ 557,164 $ 406,390 $ 472,170 $ 57,647 $ 2,947,170


	Three Months Ended June 30, 2022
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	17,518	$	3,583	$	4,520	$	1,470	$	7,554	$	61,731	$	96,376
Provision for Credit Losses on Loans	290		2,127		545		526		(722)		(952)		1,814
Charge-offs	—		(22)		(6)		(391)		—		—		(419)
Recoveries	—		—		96		114		—		—		210
Net (Charge-offs) / Recoveries	—		(22)		90		(277)		—		—		(209)
Balance at End of Period	$	17,808	$	5,688	$	5,155	$	1,719	$	6,832	$	60,779	$	97,981

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


	Six Months Ended June 30, 2022
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	17,297	$	4,111	$	4,368	$	1,493	$	6,939	$	61,731	$	95,939
Provision for Credit Losses on Loans	511		1,598		714		829		(256)		(952)		2,444
Charge-offs	—		(22)		(23)		(826)		—		—		(871)
Recoveries	—		1		96		223		149		—		469
Net (Charge-offs) / Recoveries	—		(21)		73		(603)		149		—		(402)
Balance at End of Period	$	17,808	$	5,688	$	5,155	$	1,719	$	6,832	$	60,779	$	97,981

2624

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)


	Three Months Ended June 30, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	42,342	$	4,905	$	5,171	$	1,347	$	7,106	$	56,001	$	116,872
Provision for Credit Losses on Loans	(6,103)		(185)		217		269		1,039		5,730		967
Charge-offs	(8,238)		(7)		(22)		(539)		—		—		(8,806)
Recoveries	140		1		1		144		—		—		286
Net (Charge-offs) / Recoveries	(8,098)		(6)		(21)		(395)		—		—		(8,520)
Balance at End of Period	$	28,141	$	4,714	$	5,367	$	1,221	$	8,145	$	61,731	$	109,319


	Six Months Ended June 30, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period	$	36,428	$	5,064	$	2,099	$	2,479	$	8,004	$	—	$	54,074
Impact of CECL Adoption	6,587		1,379		3,356		(877)		(80)		51,277		$	61,642
Provision for Credit Losses on Loans	(6,776)		(1,723)		(38)		747		160		10,454		2,824
Charge-offs	(8,238)		(8)		(217)		(1,409)		—		—		(9,872)
Recoveries	140		2		167		281		61		—		651
Net (Charge-offs) / Recoveries	(8,098)		(6)		(50)		(1,128)		61		—		(9,221)
Balance at End of Period	$	28,141	$	4,714	$	5,367	$	1,221	$	8,145	$	61,731	$	109,319

The ~~following table presents average recorded investment~~adoption of ASU 2016-13 resulted in an increase to our ACL of $61.6 million on January 1, 2021 and ~~interest income recognized~~$2.9 million related to the life-of-loss reserve on ~~individually evaluated loans~~unfunded loan commitments. The increase primarily included an expected credit loss of $51.3 million established based on a modified discounted cash flow method on expected cash flow changes in the future for the ~~three months ended March 31, 2020:~~Other segment.

Three Months Ended March 31, 2020
(Dollars in Thousands) Average
Investment
on Individually Evaluated
Loans Interest
Income
Recognized
Loans without a Specific Valuation Allowance
Commercial Real Estate $ 3,992 $ 32
Construction 58,104 413
Residential Mortgages 52,315 620
Loans with a Specific Valuation Allowance
Commercial Real Estate 28,748 0
Commercial & Industrial 340 0
Construction 870 0
Total by Category
Commercial Real Estate 32,740 32
Commercial & Industrial 340 0
Construction 58,974 413
Residential Mortgages 52,315 620
Total Individually Evaluated Loans $ 144,369 $ 1,065

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets.

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

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

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

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

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

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

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 6 – FAIR VALUE MEASUREMENTS (continued)~~

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

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

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2.

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

Nonrecurring Basis

Individually Evaluated ~~Loans~~

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

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

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

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~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. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At ~~March 31, 2021 our~~June 30, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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


		March 31, 2021									June 30, 2022
(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		$	780,032	$	0	$	769,762	$	10,270
Securities Available-for-Sale:										Securities Available-for-Sale:
U.S. Treasury Securities										U.S. Treasury Securities	$	18,275	$	18,275	$	—	$	—
U.S. Government Agency Securities										U.S. Government Agency Securities	3,080		—		3,080		—
Residential Mortgage-Backed Securities										Residential Mortgage-Backed Securities	110,437		—		110,437		—
Commercial Mortgage-Backed Securities										Commercial Mortgage-Backed Securities	40,351		—		40,351		—
Asset Backed Securities										Asset Backed Securities	82,433		4,996		77,437		—
Collateralized Mortgage Obligations										Collateralized Mortgage Obligations	284,225		2,543		281,682		—
Small Business Administration										Small Business Administration	53,697		—		53,697		—
States and Political Subdivisions										States and Political Subdivisions	245,105		—		245,105		—
Corporate Notes										Corporate Notes	69,431		—		58,440		10,991
Total Securities Available-for-Sale										Total Securities Available-for-Sale	907,034		25,814		870,229		10,991
Derivatives	Derivatives	3,295		0		3,295		0		Derivatives	17,854		—		17,854		—
Total	Total	$	783,327	$	0	$	773,057	$	10,270	Total	$	924,888	$	25,814	$	888,083	$	10,991

Liabilities	Liabilities									Liabilities
Derivatives	Derivatives	$	3,129	$	0	$	3,129	$	0	Derivatives	$	17,585	$	—	$	17,585	$	—
Total	Total	$	3,129	$	0	$	3,129	$	0	Total	$	17,585	$	—	$	17,585	$	—

December 31, 2020
(Dollars in Thousands) Carrying
Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3)
Assets
Securities Available-for-Sale $ 778,679 $ 0 $ 768,316 $ 10,363
Derivatives 4,493 0 4,493 0
Total $ 783,172 $ 0 $ 772,809 $ 10,363
Liabilities
Derivatives $ 4,756 $ 0 $ 4,756 $ 0
Total $ 4,756 $ 0 $ 4,756 $ 0

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


	December 31, 2021
(Dollars in Thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities	$	4,413	$	4,413	$	—	$	—
U.S. Government Agency Securities	3,478		—		3,478		—
Residential Mortgage-Backed Securities	110,013		—		110,013		—
Commercial Mortgage-Backed Securities	4,168		—		4,168		—
Asset Backed Securities	81,863		—		81,863		—
Collateralized Mortgage Obligations	287,614		—		287,614		—
Small Business Administration	108,914		—		108,914		—
States and Political Subdivisions	262,202		—		262,202		—
Corporate Notes	59,735		—		51,177		8,558
Total Securities Available-for-Sale	922,400		4,413		909,429		8,558
Derivatives	3,508		—		3,508		—
Total	$	925,908	$	4,413	$	912,937	$	8,558

Liabilities
Derivatives	$	3,682	$	—	$	3,682	$	—
Total	$	3,682	$	—	$	3,682	$	—

We have invested in subordinated debt of other financial institutions. We have 23 securities ~~of $5.0~~totaling $11.0 million ~~each~~ that are considered to be Level 3 securities at ~~March 31, 2021~~June 30, 2022 and 2 totaling $8.6 million at December 31, ~~2020.~~2021. The change in the fair value of Level 3 securities available-for-sale from ~~$10.4~~$8.6 million at December 31, ~~2020~~2021 to ~~$10.3~~$11.0 million at ~~March 31, 2021~~June 30, 2022 is attributable to ~~the calculated~~a change in the fair value ~~as further detailed below.~~level of an existing security in the amount of $2.9 million, offset by the change in calculated fair value of $0.4 million. The existing security was previously valued by an independent third party based upon a trade desktop evaluation, but is now performed internally using the same approach applied to the other Level 3 securities. The

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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~~off-balance sheet interest rate risk exposures.

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


	June 30, 2022
(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value
OREO	$	—	$	—	$	8,432	$	8,432
Individually Evaluated Loans	$	—	$	—	$	4,144	$	4,144


	December 31, 2021
(Dollars in Thousands)	Level 1		Level 2		Level 3		Fair Value
OREO	$	—	$	—	$	10,916	$	10,916
Individually Evaluated Loans	$	—	$	—	$	1,777	$	1,777

Individually evaluated loans had a net carrying amount of $4.1 million at June 30, 2022 with a valuation allowance of $3.5 million. Individually evaluated loans had a net carrying amount of $1.8 million at December 31, 2021 with a valuation allowance of $1.0 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $8.4 million as of June 30, 2022, compared with $10.9 million at December 31, 2021. We had $0.4 million write-downs recorded on OREO for the six months ended June 30, 2022 and $3.2 million for the same period in 2021.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:


	June 30, 2022
(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Range		Average
Assets
Individually Evaluated Loans	$	1,777	Discounted Appraisals	Management's Discount & Estimated Selling Costs	53.0	%	53.0	%
Individually Evaluated Loans	2,367		Estimated Enterprise Value	Pending Sales agreements from Potential Buyers	8.3	%	8.3	%
Total Individually Evaluated Loans	$	4,144

OREO	$	7,420	Appraisals	Estimated Selling Costs	10.0	%	10.0	%
OREO	190		Internal Valuations	Estimated Selling Costs	5.0	%	5.0	%
OREO	822		Discounted Internal Valuations	Management's Discount & Estimated Selling Costs	5.1% – 50.7%		26.0	%
Total OREO	$	8,432


	December 31, 2021
(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Range		Average
Assets
Individually Evaluated Loans	1,777		Discounted Appraisals	Management's Discount & Estimated Selling Costs	53.0	%	53.0	%
Total Individually Evaluated Loans	$	1,777

OREO	$	9,946	Appraisals	Estimated Selling Costs	10.0	%	10.0	%
OREO	190		Internal Valuations	Estimated Selling Costs	5.0	%	5.0	%
OREO	780		Discounted Internal Valuations	Management’s Discount & Estimated Selling Costs	5.0% - 50.7%		20.3	%
Total OREO	$	10,916

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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

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

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

Individually evaluated loans had a net carrying amount of $10.8 million at March 31, 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. 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.

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

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 6 – FAIR VALUE MEASUREMENTS (continued)~~

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, 2021~~June 30, 2022 and December 31, ~~2020~~2021 are presented in the following tables. Fair values for ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020~~2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

GAAP requires disclosure of fair value information about financial instruments carried at book value on the ~~consolidated balance sheet. in~~Consolidated Balance Sheet. In 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 June 30, 2022
(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	$	70,240	$	43,194	$	27,046	$	—	$	70,240
Securities Available-for-Sale	Securities Available-for-Sale	778,679		0		768,316		10,363		778,679		Securities Available-for-Sale	907,034		25,814		870,229		10,991		907,034
Loans Held-for-Sale	Loans Held-for-Sale	25,437		0		0		25,437		25,437		Loans Held-for-Sale	—		—		—		—		—
Portfolio Loans, net	Portfolio Loans, net	2,893,096		0		0		2,854,244		2,854,244		Portfolio Loans, net	2,899,915		—		—		2,871,562		2,871,562
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	2,067		—		—		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	17,854		—		17,854		—		17,854
Accrued Interest Receivable	Accrued Interest Receivable	32,157		0		2,887		29,270		32,157		Accrued Interest Receivable	17,139		89		3,994		13,056		17,139

Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Deposits	Deposits	$	3,599,911	$	699,229	$	1,285,912	$	1,640,587	$	3,625,728	Deposits	$	3,753,393	$	704,323	$	1,788,607	$	1,283,819	$	3,776,749
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	17,585		—		17,585		—		17,585
FHLB Borrowings	FHLB Borrowings	35,000		0		0		35,461		35,461		FHLB Borrowings	—		—		—		—		—
Accrued Interest Payable	Accrued Interest Payable	2,131		0		0		2,131		2,131		Accrued Interest Payable	1,296		—		—		1,296		1,296


			Fair Value Measurements at December 31, 2021
(Dollars in Thousands)	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Cash Equivalents	$	277,799	$	36,698	$	241,101	$	—	$	277,799
Securities Available-for-Sale	922,400		4,413		909,429		8,558		922,400
Loans Held-for-Sale	228		—		—		228		228
Portfolio Loans, net	2,716,190		—		—		2,689,578		2,689,578

Federal Home Loan Bank Stock, at Cost	2,352		—		—		NA		NA
Other Assets- Interest Rate Derivatives	3,508		—		3,508		—		3,508
Accrued Interest Receivable	17,178		17		3,462		13,699		17,178

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

Other Liabilities- Interest Rate Derivatives	3,682		—		3,682		—		3,682
FHLB Borrowings	7,000		—		—		7,035		7,035
Accrued Interest Payable	1,378		—		—		1,378		1,378

3130

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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

Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of 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~~at the ~~periods~~dates presented:


		Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets)											Fair Value of Derivative Assets (Included in Other Assets)
		March 31, 2021					December 31, 2020						June 30, 2022					December 31, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value		(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value
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	$	0	$	0	1	$	151	$	0	Interest Rate Lock Commitments – Mortgage Loans	5	$	705	$	18	—	$	—	$	—
Interest Rate Swap Contracts – Commercial Loans	Interest Rate Swap Contracts – Commercial Loans	44	268,708		3,295		38	255,572		4,493		Interest Rate Swap Contracts – Commercial Loans	64	444,302		17,836		66	446,490		3,508
Total Derivatives not Designated as Hedging Instruments	Total Derivatives not Designated as Hedging Instruments	44	$	268,708	$	3,295	39	$	255,723	$	4,493	Total Derivatives not Designated as Hedging Instruments	69	$	445,007	$	17,854	66	$	446,490	$	3,508


		Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities)											Fair Value of Derivative Liabilities (Included in Other Liabilities)
		March 31, 2021					December 31, 2020						June 30, 2022					December 31, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value		(Dollars in Thousands)	Number of Transactions	Notional Amount		Fair Value		Number of Transactions	Notional Amount		Fair Value
Derivatives not Designated as Hedging Instruments	Derivatives not Designated as Hedging Instruments											Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans	Forward Sale Contracts – Mortgage Loans	0	$	0	$	0	1	$	151	$	0	Forward Sale Contracts – Mortgage Loans	5	$	705	$	18	—	$	—	$	—
Interest Rate Swap Contracts – Commercial Loans	Interest Rate Swap Contracts – Commercial Loans	44	268,708		3,129		38	255,572		4,756		Interest Rate Swap Contracts – Commercial Loans	64	444,302		17,567		66	446,490		3,682
Total Derivatives not Designated as Hedging Instruments	Total Derivatives not Designated as Hedging Instruments	44	$	268,708	$	3,129	39	$	255,723	$	4,756	Total Derivatives not Designated as Hedging Instruments	69	$	445,007	$	17,585	66	$	446,490	$	3,682

3231

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

For the Three Months Ended March 31,
(Dollars in Thousands) 2021 2020
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans $ 0 $ 11
Forward Sale Contracts – Mortgage Loans 0 (11)
Interest Rate Swap Contracts – Commercial Loans 429 (91)
Total Derivative Income (Loss) $ 429 $ (91)


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in Thousands)	2022		2021		2022		2021
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans	$	14	$	2	$	18	$	2
Forward Sale Contracts – Mortgage Loans	(14)		(2)		(18)		(2)
Interest Rate Swap Contracts – Commercial Loans	139		(276)		443		153
Total Derivative Income (Loss)	$	139	$	(276)	$	443	$	153

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)					Derivative Assets (Included in Other Assets)				Derivative Liabilities (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)	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
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	$	17,836	$	3,508	$	17,567	$	3,682
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	17,836		3,508		17,567		3,682
Gross Amounts Not Offset (1)	Gross Amounts Not Offset (1)	0		0		(3,390)		(5,220)		Gross Amounts Not Offset (1)	—		—		—		(4,080)
Net Amount	Net Amount	$	3,295	$	4,493	$	(261)	$	(464)	Net Amount	$	17,836	$	3,508	$	17,567	$	(398)

(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~~serve as an additional source of liquidity for ~~us.~~the Company. The Company had no Federal Home Loan Bank ~~the~~ (“FHLB”) borrowings ~~were $30.0 million~~at June 30, 2022 and ~~$35.0~~$7.0 million at ~~March 31, 2021 and~~ December 31, ~~2020, respectively.~~2021. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate ~~loans at March 31, 2021 and December 31, 2020.~~loans. Total loans pledged as collateral were ~~$781.3 million~~$1.2 billion at June 30, 2022 and ~~$804.2 million~~$1.1 billion at ~~March 31, 2021 and~~ December 31, ~~2020, respectively.~~2021. There were 0no securities available-for-sale pledged as collateral at both ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020.~~2021. 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~~$773.6 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, 2021.~~June 30, 2022. The Company had the capacity to borrow up to an additional ~~$510.5~~$667.3 million from the FHLB at December 31, ~~2020.~~2021.

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

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


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Long-term Borrowings	$	—		$	7,000
Weighted Average Interest Rate	—		%	1.61		%

~~Scheduled annual maturities and~~During the year ended December 31, 2021 the Company prepaid 4 FHLB advances totaling $28.0 million with a weighted average ~~interest rates for~~cost to borrow of 1.0%. NaN FHLB ~~borrowings for each~~advance totaling $3.0 million was repaid at maturity in the fourth quarter of 2021. The remaining FHLB advances totaling $25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the ~~five years subsequent~~borrowings totaling $43 thousand at December 31, 2021. The FHLB borrowing of $7.0 million was prepaid in January 2022 outside of its scheduled maturity and had unamortized prepayment fees related to ~~March 31, 2021 and thereafter are as follows:~~

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

the early repayment of the borrowing of $18 thousand.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit ~~which amounted to $546.5 million at March 31, 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 million, or 65.1%,~~represented 61.3% and ~~$391.4 million, or 66.2%~~55.3%, of the commitments to extend credit at ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements.

The ~~Company had outstanding~~following table sets forth our commitments and letters of credit ~~totaling $27.8 million at March 31, 2021 and $29.3 million at December 31, 2020.~~as of the dates presented:


(Dollars in Thousands)	June 30, 2022		December 31, 2021
Commitments to Extend Credit	$	504,476	$	513,482
Standby Letters of Credit	25,885		27,083
Total	$	530,361	$	540,565

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

The following table presents activity in the life-of-loss reserve on unfunded loan commitments ~~for~~as of the ~~three months ended March 31, 2021 was as follows:~~dates presented:


~~(Dollars in Thousands)~~	~~Three Months Ended March 31, 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)~~
~~March 31, 2021~~		$	~~2,770~~


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in Thousands)	2022		2021		2022		2021
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at Beginning of Period	$	1,547	$	2,770	$	1,783	$	144
Impact of Adopting ASU 2016-13	—		—		—		2,908
Balance after Adoption of ASU 2016-13	$	1,547	$	2,770	$	1,783	$	3,052
Provision (Recovery) for Unfunded Commitments	269		(603)		33		(885)
Total	$	1,816	$	2,167	$	1,816	$	2,167

~~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~~An expense of $0.3 million was recorded during the period for the provision for unfunded commitments, ~~was a~~which resulted in an increase of $0.9 million for both the three and six months ended June 30, 2022 compared to the release of ~~$0.3~~$0.6 million and $0.9 million for the ~~three months ended March 31,~~same periods in 2021.

Litigation

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. ~~While any type of litigation contains a level of uncertainty, management believes that~~Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of ~~such proceedings~~any legal or ~~claims pending will not have a material adverse effect on our consolidated financial position or results of operations.~~administrative proceeding cannot be predicted with certainty.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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


(Dollars in Thousands)	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
	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	$	(35,002)	$	7,350	$	(27,652)	$	8,456	$	(1,776)	$	6,680
Reclassification Adjustment for Gains included in Net Income	(76)		16		(60)		(1,499)		315		(1,184)
Other Comprehensive (Loss) Income	$	(35,078)	$	7,366	$	(27,712)	$	6,957	$	(1,461)	$	5,496


		Three Months Ended March 31, 2021						Three Months Ended March 31, 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)	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
Net Unrealized (Losses) Gains Arising during the period		$	(10,494)	$	2,204	$	(8,290)	$	2,004	$	(421)	$	1,583
(Dollars in Thousands)														(Dollars in Thousands)	Pre-Tax Amount		Tax Benefit		Net of Tax Amount		Pre-Tax Amount		Tax Benefit		Net of Tax Amount
															$	(78,034)	$	16,387	$	(61,647)	$	(2,038)	$	428	$	(1,610)
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	(52)		11		(41)		(5,109)		1,073		(4,036)
Other Comprehensive (Loss) Income		$	(14,104)	$	2,962	$	(11,142)	$	790	$	(166)	$	624
Other Comprehensive Loss														Other Comprehensive Loss	$	(78,086)	$	16,398	$	(61,688)	$	(7,147)	$	1,501	$	(5,646)

NOTE 11 – STOCK REPURCHASE PLAN

On June 28, 2022, the Company announced that the Board of Directors (“Board”) authorized a common stock repurchase program to purchase an additional 750,000 shares of its common stock in open market transactions, at prices that are accretive to continuing shareholders in the aggregate over a period of 12 months, subject to the non-objection letter from the Federal Reserve Bank of Richmond, which was received on July 26, 2022.

On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months. During the six months ended June 30, 2022, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $32.4 million, or an average price of $16.46 per share. During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $0.5 million, or an average price of $15.22 per share. As of April 28, 2022, the repurchase program to purchase up to 2,000,000 shares of the Company’s common stock was fully executed.

The specific timing, price and quantity of repurchases will be at the Company’s discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance. The repurchase plan does not obligate the Company to repurchase any particular number of shares.

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CARTER BANKSHARES, INC.

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~~is intended to help the reader understand our operations, our present business environment, and 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 six month periods ended ~~March 31, 2021~~June 30, 2022 and ~~2020. Our~~June 30, 2021. The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes ~~thereto.~~thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:

•Important Note Regarding Forward-Looking Statements

•Explanation of Use of Non-GAAP Financial Measures

•Critical Accounting Estimates

•Overview

•Results of Operations and Financial Condition

•Earnings Summary

•Liquidity and Capital Resources

•Regulatory Capital Requirements

•Contractual Obligations

•Off-Balance Sheet Arrangements

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 impact on the Company, its markets and its customers, potential asset quality developments, and the Company’s efficiency initiatives and pending branch sales, 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, 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. Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements related to current and future market conditions and interest rates, 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 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, and other matters regarding or affecting the Company and its future business and operations. 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;~~

•general economic or business conditions, or changes in interest rates;

•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, or the prospect of these events, such as weather-related disasters, terrorist acts, ~~or public health events~~war and other military conflicts (such as the ~~current COVID-19 pandemic),~~ongoing war between Russia and of governmental and societal responses thereto; these potential adverse effects may include, without 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 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; 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”),~~Ukraine) or public health events (such as ~~amended by~~ the ~~Consolidated Appropriations Act, of 2021 (the “CAA”)~~current COVID-19 pandemic), and the governmental and societal responses thereto;

•these potential adverse effects may include, without limitation, adverse effects on: (1) the ability of the Company's borrowers to satisfy their obligations to the Company; (2) the value of collateral securing loans; (3) the demand for the Company's loans or its other ~~legislative~~products and ~~regulatory reactions~~services; (4) incidents of cyberattacks and fraud; (4) the Company’s results of operations, liquidity or capital resources; (5) risks posed by reliance on third-party service providers; (6) other aspects of the Company's business operations; and (7) on financial markets and economic growth;

•the effect of steps the Company takes or has taken in response to the COVID-19 ~~pandemic;~~ pandemic, the severity and duration of the COVID-19 pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021;

•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; actions;

•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;

•inflation;

•the replacement of LIBOR;

•a change in spreads on interest-earning assets and interest-bearing liabilities;

•regulatory supervision and ~~oversight; legislation~~oversight, including the failure to comply with state and federal banking agency laws and regulations;

•legislative and regulatory changes and requirements 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~~

•increased competition;

•the ability to continue to introduce competitive new products and services at competitive prices and on a timely, cost-effective basis;

•the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team;

•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; ~~general economic or business conditions;~~

•credit losses;

•the potential impact of climate change and related government regulation on the Company and its customers;

•deterioration of the housing market and reduced demand for mortgages; and

•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~~in this Quarterly Report, ~~including and~~as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 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 that are expressed in or implied by a forward-looking statement 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.

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CARTER BANKSHARES, INC.

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

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, net interest income on a fully taxable equivalent, or (“FTE”), basis, which is a non-GAAP financial measure. Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income on an FTE basis (non-GAAP) is reconciled to net interest income (GAAP) in the Net Interest Income section under the heading "Results of Operations and Financial Condition."

Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Critical Accounting ~~Policies and~~ Estimates

Our critical accounting ~~policies~~estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of ~~March 31, 2021~~June 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations” except we have updated our allowance for credit losses policy~~Operations,” 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 financial statements included in this Quarterly Report on Form 10-Q.are incorporated herein by reference.

Overview

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at ~~March 31, 2021.~~June 30, 2022. 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.”~~“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.

Our mission is ~~that the Company strives~~to strive 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 focused on executing ~~our~~this strategy to successfully build our brand and grow our business in our markets.

~~COVID-19~~

~~In response~~

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CARTER BANKSHARES, INC.

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

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended June 30, 2022

•Net interest income increased $5.3 million, or 19.3%, to $32.5 million for the three months ended June 30, 2022 compared to $27.2 million for the same period in 2021 primarily due an increase of 34 basis points in earning assets due 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 benefitsrising interest rate environment and a ~~$349 billion loan program administered through~~reduction of 21 basis points in funding costs;

•The provision for credit losses increased to $1.8 million for the ~~Small Business Administration (“SBA”), referred~~three months ended June 30, 2022, compared to as$1.0 million for the ~~Paycheck Protection Program (“PPP”). In addition~~same period in 2021;

•Total noninterest income decreased $1.6 million to $5.6 million for the three months ended June 30, 2022 compared to the ~~general impact~~same period in 2021 due primarily to a reduction in gains on sales of securities;

•Total noninterest expense decreased $4.3 million to $23.4 million for the ~~COVID-19 pandemic has had~~three months ended June 30, 2022 compared to the same period in 2021; and

•Provision for income taxes increased $0.9 million to $1.8 million for the three months ended June 30, 2022 compared to $0.9 million for the same period in 2021.

Highlights for the Six Months Ended June 30, 2022

•Net interest income increased $6.9 million, or 12.9%, to $60.7 million for the six months ended June 30, 2022 compared to the same period in 2021 due primarily to the ongoing reduction in funding costs;

•The provision for credit losses decreased to $2.4 million for the six months ended June 30, 2022, compared to $2.8 million for the same period in 2021;

•Total noninterest income decreased $5.3 million to $10.9 million for the six months ended June 30, 2022 compared to $16.2 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;

•Total noninterest expense decreased $5.4 million to $45.9 million for the ~~Company, certain provisions~~six months ended June 30, 2022 compared the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and reversals of vacation carryover in the ~~CARES Act,~~first quarter of 2022 as well as ~~other legislative~~lower medical costs in the first half of 2022; and ~~regulatory relief efforts, may have a material impact on our operations.~~

•Provision for income taxes increased $1.3 million to $3.1 million for the six months ended June 30, 2022 compared to $1.8 million for the same period in 2021.

Balance Sheet Highlights (period-end balances, June 30, 2022 compared to December 31, 2021)

•The ~~full extent~~securities portfolio decreased $15.4 million and is currently 22.0% of ~~these impacts at the date~~total assets compared to 22.3% of ~~this filing~~total assets. The decrease 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~~due to the ~~COVID-19 pandemic that are applicable~~Company’s strategy of redeploying securities maturities into higher yielding loan growth.

•Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, primarily due 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 forhigher loan growth in the ~~CARES Act and related regulations and supervisory guidance will be implemented over time and most will be subject~~first half of 2022;

•The portfolio loans to ~~implementing regulations over the course of the coming weeks.~~ deposit ratio was 79.9%, compared to 76.0%, as loan growth outpaced deposit growth;

•Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021;

•The ~~Bank will continue~~ACL to ~~assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related~~total portfolio loans ratio was 3.27% compared to ~~the COVID-19 pandemic.~~

~~FRB Reserve Programs and Initiatives~~

3.41%. The ~~CARES Act encourages the FRB, in coordination~~ACL on portfolio loans totaled $98.0 million at June 30, 2022, compared to $95.9 million with the ~~Secretary~~increase driven primarily by the deterioration of ~~the Treasury, to establish or implement various programs to help midsize businesses, nonprofits,~~one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and ~~municipalities, including (i)~~loan growth partially offset by 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 itdecline in the ~~target range set by the FOMC.~~

~~In addition, the FRB has expanded the size and scope of three existing programs~~other segment due 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 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.principal pay downs;

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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~~•During the second quarter of 2022, the Company’s Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares 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~~common stock, subject to the ~~adoption~~Federal Reserve’s non-objection letter, which was received on July 26, 2022.

We reported net income 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 April 28, 2021, all of the Company’s branch lobbies are open. Every opportunity is being taken to protect both customers and employees through enhanced cleaning services, social distancing and personal protective equipment requirements for both. Approximately 20% of the Company’s workforce is working remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the Small Business Administration’s (“SBA”) 7-A loan program. The Company became an approved SBA 7A 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”) 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 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.

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

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

The Company provides 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”). 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 launched the Part III program that offered borrowers in the Part II program an extension of deferrals through June 2021. For those borrowers who opted into the Part III program, they are 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 of deferrals in the Part III program are principal only deferrals. At the end of the deferral period, for term loans, payments will be applied to accrued interest first 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 the program, which continues through June 30, 2021, with an aggregate principal balance of $407.0~~$10.8 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 to the hospitality industry. At the peak of the deferral programs, the company had 958 commercial and consumer customers opt 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 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

~~Table of Contents~~

~~CARTER BANKSHARES, INC.~~

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

Our interest income could be reduced due to the COVID-19 pandemic. In keeping with guidance from regulators, we are actively working borrowers affected by the COVID-10 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 hospitality at March 31, 2021 equated to approximately $501.5 million, or 16.9% of total portfolio loans, of which approximately $320.4 million on 58 loans are on deferral. 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 April 28, 2021, we opened our remaining branch lobbies. 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 employees have been 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. Beginning on July 20, 2020, certain account fees were reinstated. In keeping with guidance from regulators, we are actively working with customers effected by the COVID-10 pandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees. 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.

~~Capital Resources and Liquidity~~

As of March 31, 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 of 2021 and during the second quarter 2021 to date.

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% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which $506.1 million remains available at March 31, 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 million of unpledged available-for-sale securities as an additional source of liquidity at March 31, 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 million, or 112.0%,~~$0.44 diluted earnings per share for the three months ended ~~March 31, 2021 compared to the same period in 2020. Net income for the three months ended March 31, 2021 was $9.4~~June 30, 2022 and $20.1 million, or ~~$0.36~~$0.80 diluted earnings per share, for the six months ended June 30, 2022 compared to net income of ~~$4.4~~$5.4 million, or ~~$0.17~~$0.21 diluted earnings per share and $14.8 million, or $0.56 diluted earnings per share, for the same ~~period~~periods in 2020. The increase in net income was due to a 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 million and an increase in the provision for income taxes of $0.6 million.

Net interest income decreased $0.7 million, or 2.7%, to $26.5 million during the first three months of 2021 compared to the same period of 2020. The net interest margin, on a fully taxable equivalent (“FTE”) basis, which is non-GAAP measure, decreased 23 basis points to 2.78% in the first quarter of 2021 compared to 3.01% 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 offset by a lower cost of funds. The yield on interest-earning assets decreased 71 basis points for the three months ended March 31, 2021, partially offset by a 57 basis point decline in funding costs compared to the same period of 2020. Net interest margin is reconciled to net interest income adjusted to a FTE basis below in the “Net Interest Income” income section of the “Results of Operations - Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 discussion below. Also refer to the “Explanation of Use of Non-GAAP Financial Measures” below for additional discussion of non-GAAP measures.

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 of 2020 due to qualitative adjustments of $2.6 million for the decline in economic and market conditions as a result of COVID-19. The first quarter of 2021 provision for credit losses was primarily driven by adjustments to the CECL model to account for additional expected 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. During the first quarter of 2021, management observed continued deterioration on a loan in deferral with an aggregate principal balance of $8.1 million that was not previously recognized in the Day 1 model. This adjustment resulted in additional reserves of $1.5 million during the first quarter of 2021. ~~Provision expense for the first quarter of 2021was impacted by net charge-offs totaling $0.7 million.~~

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 million at March 31, 2021.

Net charge-offs were $0.7 million in the first three months of 2021 compared to $0.6 million in the same period of 2020. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10% for the three months ended March 31, 2021 and 0.09% for the same period in 2020. At March 31, 2021 and December 31, 2020, nonperforming loans were consistent at $32.0 million. Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

Total noninterest income increased $2.0 million, or 28.8%, to $9.0 million for the three months ended March 31, 2021 compared to $7.0 million for the same period in 2020, primarily due to $3.6 million in net securities gains. Security gains increased by $2.4 million for the three months ended March 31, 2021 to $3.6 million compared to $1.2 million for the same period of 2020 due to the Company taking advantage of market opportunities, and repositioning and diversifying holdings in the securities portfolio. Other key factors that contributed to the increase in total noninterest income during the first quarter of 2021 were higher debit card interchange fees of $0.6 million, 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.

~~Table of Contents~~

~~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 million to $0.9 million for the three months ended March 31, 2021 compared to $0.2 million in the same period in 2020 as a result of an increase in pretax income of $5.6 million. Our effective tax rate increased to 9.0% for the three months ended March 31, 2021 compared to 5.3% for the same period in 2020. The increase in the effective tax rate is primarily due to a higher level of pretax income and a lower level of tax-exempt interest income. 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 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 on a FTE basis, each of which is a non-GAAP financial measure. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates 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 understanding of our business and performance, these non-GAAP financial measure should not be considered an alternative to financial measures determined in accordance with GAAP or considered to be more important than financial measures determined in accordance with GAAP, nor is it necessarily comparable to similar non-GAAP financial measures which may be presented by us or other companies.

The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and 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 in the Net Interest Income section of the "Results of Operations – Three Months Ended March 31, 2021 Compared to Three Months Ended March 31,2020."

~~RESULTS OF OPERATIONS~~

~~Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020~~


	Three Months Ended June 30,				Six Months Ended June 30,
PERFORMANCE RATIOS	2022		2021		2022		2021
Return on Average Assets	1.04	%	0.53	%	0.98	%	0.72	%
Return on Average Shareholders’ Equity	12.51	%	5.55	%	10.95	%	7.62	%
Portfolio Loans to Deposit Ratio	79.87	%	79.70	%	79.87	%	79.70	%
Allowance for Credit Losses to Total Portfolio Loans	3.27	%	3.75	%	3.27	%	3.75	%

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~~as well as 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 regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Total net interest income increased $5.3 million, or 19.3% to $32.5 million and $6.9 million, or 12.9%, to $60.7 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs. Net interest income, on an FTE basis (non-GAAP), increased $5.2 million, or 18.7%, to $32.8 million and $6.7 million, or 12.3% to $61.3 million for the three and six months ended June 30, 2022, respectively, compared to $27.6 million and $54.6 million for the same periods in 2021. The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of ~~non-GAAP measures.~~$3.8 million and $3.3 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $1.4 million and $3.4 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin increased 49 basis points to 3.24% and 32 basis points to 3.06% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin, on an FTE basis (non-GAAP), increased 48 basis points to 3.27% and 31 basis points to 3.09% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The Company continues to focus on the expansion of net interest income and the net interest margin. The second quarter and first six months of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs. The second quarter and first six months of 2022 was also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods.

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CARTER BANKSHARES, INC.

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

The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, 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:


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Thousands)	2022			2021			2022			2021
Interest Income (FTE)(Non-GAAP)
Interest and Dividend Income (GAAP)	$	36,961		$	33,094		$	69,639		$	66,051
Tax Equivalent Adjustment	293			386			591			848
Interest and Dividend Income (FTE) (Non-GAAP)	37,254			33,480			70,230			66,899
Average Earning Assets	$	4,020,589		$	3,972,574		$	3,997,592		$	3,956,282
Yield on Interest-earning Assets (GAAP)	3.69		%	3.34		%	3.51		%	3.37		%
Yield on Interest-earning Assets (FTE) (Non-GAAP)	3.72		%	3.38		%	3.54		%	3.41		%

Net Interest Income (GAAP)	$	32,459		$	27,203		$	60,681		$	53,732
Tax Equivalent Adjustment	293			386			591			848
Net Interest Income (FTE) (Non-GAAP)	32,752			27,589			61,272			54,580
Average Earning Assets	$	4,020,589		$	3,972,574		$	3,997,592		$	3,956,282
Net Interest Margin (GAAP)	3.24		%	2.75		%	3.06		%	2.74		%
Net Interest Margin (FTE) (Non-GAAP)	3.27		%	2.79		%	3.09		%	2.78		%

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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 assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:


	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
(Dollars in Thousands)	Average Balance		Income/ Expense		Rate		Average Balance		Income/ Expense		Rate
ASSETS
Interest-Bearing Deposits with Banks	$	30,606	$	61	0.80	%	$	190,851	$	56	0.12	%
Tax-Free Investment Securities(2)	33,873		237		2.81	%	33,027		273		3.32	%
Taxable Investment Securities	975,352		4,452		1.83	%	765,286		3,138		1.64	%
Total Securities	1,009,225		4,689		1.86	%	798,313		3,411		1.71	%
Tax-Free Loans(1)(2)	147,060		1,159		3.16	%	197,393		1,565		3.18	%
Taxable Loans(1)	2,831,384		31,323		4.44	%	2,782,802		28,417		4.10	%
Total Loans	2,978,444		32,482		4.37	%	2,980,195		29,982		4.04	%
Federal Home Loan Bank Stock	2,314		22		3.81	%	3,215		31		3.87	%
Total Interest-Earning Assets	4,020,589		$	37,254	3.72	%	3,972,574		$	33,480	3.38	%
Noninterest Earning Assets	120,540						170,885
Total Assets	$	4,141,129					$	4,143,459

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand	$	487,567	$	343	0.28	%	$	404,084	$	234	0.23	%
Money Market	528,211		310		0.24	%	351,820		305		0.35	%
Savings	735,438		189		0.10	%	657,803		169		0.10	%
Certificates of Deposit	1,270,569		3,570		1.13	%	1,512,923		5,052		1.34	%
Total Interest-Bearing Deposits	3,021,785		4,412		0.59	%	2,926,630		5,760		0.79	%
Federal Funds Purchased	3,033		4		0.53	%	—		—		—	%
Federal Home Loan Bank Borrowings	6,594		10		0.61	%	30,000		91		1.22	%
Other Borrowings	6,205		76		4.91	%	3,514		40		4.57	%
Total Borrowings	15,832		90		2.28	%	33,514		131		1.57	%
Total Interest-Bearing Liabilities	3,037,617		4,502		0.59	%	2,960,144		5,891		0.80	%
Noninterest-Bearing Liabilities	757,831						790,537
Shareholders' Equity	345,681						392,778
Total Liabilities and Shareholders' Equity	$	4,141,129					$	4,143,459
Net Interest Income(2)			$	32,752					$	27,589
Net Interest Margin(2)					3.27	%					2.79	%

(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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CARTER BANKSHARES, INC.

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


	Six Months Ended June 30, 2022						Six Months Ended	Six Months Ended June 30, 2021
(Dollars in Thousands)	Average Balance		Income/ Expense		Rate			Average Balance		Income/ Expense		Rate
ASSETS
Interest-Bearing Deposits with Banks	$	85,040	$	123	0.29	%		$	182,835	$	106	0.12	%
Tax-Free Investment Securities(2)	30,246		448		2.99	%		42,256		685		3.27	%
Taxable Investment Securities	968,039		8,184		1.70	%		736,926		6,125		1.68	%
Total Securities	998,285		8,632		1.74	%		779,182		6,810		1.76	%
Tax-Free Loans(1)(2)	150,569		2,365		3.17	%		210,132		3,353		3.22	%
Taxable Loans(1)	2,761,471		59,068		4.31	%		2,780,127		56,562		4.10	%
Total Loans	2,912,040		61,433		4.25	%		2,990,259		59,915		4.04	%
Federal Home Loan Bank Stock	2,227		42		3.80	%		4,006		68		3.42	%
Total Interest-Earning Assets	3,997,592		$	70,230	3.54	%		3,956,282		$	66,899	3.41	%
Noninterest Earning Assets	137,661							176,553
Total Assets	$	4,135,253						$	4,132,835

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand	$	475,838	$	620	0.26	%		$	391,555	$	449	0.23	%
Money Market	519,298		594		0.23	%		330,838		570		0.35	%
Savings	720,681		367		0.10	%		651,340		331		0.10	%
Certificates of Deposit	1,289,578		7,230		1.13	%		1,566,436		10,705		1.38	%
Total Interest-Bearing Deposits	3,005,395		8,811		0.59	%		2,940,169		12,055		0.83	%
Federal Funds Purchased	1,525		4		0.53	%		—		—		—	%
Federal Home Loan Bank Borrowings	4,011		16		0.80	%		31,934		187		1.18	%
Other Borrowings	5,287		127		4.84	%		2,914		77		5.33	%
Total Borrowings	10,823		147		2.74	%		34,848		264		1.53	%
Total Interest-Bearing Liabilities	3,016,218		8,958		0.60	%		2,975,017		12,319		0.84	%
Noninterest-Bearing Liabilities	748,744							765,852
Shareholders' Equity	370,291							391,966
Total Liabilities and Shareholders' Equity	$	4,135,253						$	4,132,835
Net Interest Income(2)			$	61,272						$	54,580
Net Interest Margin(2)					3.09	%						2.78	%

(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.

Interest income increased $3.9 million, or 11.7% and $3.6 million, or 5.4%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Interest income, on an FTE basis (non-GAAP), increased $3.8 million, or 11.3% and $3.3 million, or 5.0% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The change was primarily due to increases in average interest-earning assets of $48.0 million and $41.3 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 34 basis points and 13 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022.

For the three and six months ended June 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $160.2 million and $97.8 million, respectively, and the average rate earned increased 68 and 17 basis points, respectively, as funds were deployed into higher yielding loans and securities. Average loan balances decreased $1.8 million and $78.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to large commercial paydowns in 2021. Average Paycheck Protection Program (“PPP”) loans totaled $0.4 million as of June 30, 2022 compared to $29.8 million as of June 30, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.

The average rate earned on loans increased 33 and 21 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during the first half of 2022. At June 30, 2022, the loan portfolio was comprised of 29.6% floating rate loans which reprice monthly, 39.5% variable rate loans that reprice at least once during the life of the loan and 30.9% fixed rate loans that do not reprice during the life of the loan.

Average investment securities increased $210.9 million and $219.1 million for the three and six months ended June 30, 2022,

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CARTER BANKSHARES, INC.

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

respectively, compared to the same periods in 2021 and the average rate earned on investment securities increased 15 basis points for the three months ended June 30, 2022 and decreased two basis points for the six months ended June 30, 2022, when compared to the same periods in 2021. The change in investment securities is the result of active balance sheet management to deploy excess cash. Our portfolio has been diversified as to bond types, maturities, and interest rate structures. As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months. Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates. Bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate structure is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities.

Interest expense decreased $1.4 million and $3.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first half of 2022. Interest expense on deposits decreased $1.3 million and $3.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs.

The average balances on CDs decreased $242.4 million or 16.0% and $276.9 million, or 17.7% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs. The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $176.4 million, $83.5 million and $77.6 million, respectively, for the three months ended June 30, 2022, and by $188.5 million, $84.3 million and $69.3 million, respectively, for the six months ended June 30, 2022, when compared to the same periods in 2021. The average rates paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts, which decreased 11 and 12 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The average balances on borrowings decreased $17.7 million and $24.0 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities. As a result, the cost of interest-bearing liabilities decreased 21 and 24 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

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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 months ended March 31, 2021, compared to $27.3 million for the same period in 2020 primarily due the decline in the interest rate environment, offset by an increase in the volume of interest-earning assets. 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 interest income, partially offset by a $4.1 million decrease in interest expense during the three months ended March 31, 2021 compared to the same period in 2020. The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but are partially offset by a lower cost of funds. Net interest margin decreased 21 basis points to 2.73% in the first quarter of 2021 compared to 2.94% for the same period in 2020 primarily due to the negative impact of lower yields on interest-earning assets, offset by a decline in the cost of interest-bearing liabilities. The net interest margin, on an FTE basis (non-GAAP), decreased 23 basis points to 2.78% in the first three months ended 2021 compared to 3.01% for the same period 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, for the periods presented:

For the Three Months Ended March 31,
(Dollars in Thousands) 2021 2020
Total Interest Income $ 32,957 $ 37,836
Total Interest Expense 6,428 10,572
Net Interest Income per Consolidated Statements of Net Income 26,529 27,264
Adjustment to FTE Basis 462 601
Net Interest Income (FTE)(non-GAAP) $ 26,991 $ 27,865
Net Interest Margin 2.73 % 2.94 %
Adjustment to FTE Basis 0.05 % 0.07 %
Net Interest Income (FTE)(non-GAAP) 2.78 % 3.01 %

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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 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
(Dollars in Thousands)
Average Balance(3)
Income/ Expense Rate Average Balance Income/ Expense Rate
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 %
Taxable Investment Securities 708,250 2,987 1.71 % 712,104 4,502 2.54 %
Tax-free Loans(1)(2)
223,012 1,787 3.25 % 337,857 2,660 3.17 %
Taxable Loans(1)
2,777,423 28,145 4.11 % 2,584,917 30,797 4.79 %
Federal Home Loan Bank Stock 4,805 37 3.12 % 4,418 64 5.83 %
Total Interest-earning Assets $ 3,939,810 $ 33,419 3.44 % $ 3,723,708 $ 38,437 4.15 %
LIABILITIES
Deposits:
Interest-bearing Demand $ 378,886 $ 215 0.23 % $ 297,395 $ 446 0.60 %
Money Market 309,624 266 0.35 % 154,564 271 0.71 %
Savings 644,806 162 0.10 % 562,712 145 0.10 %
Certificates of Deposit 1,620,543 5,652 1.41 % 1,918,841 9,633 2.02 %
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 %
Other Borrowings 2,307 37 6.50 % 1,481 18 4.89 %
Total Borrowings 36,196 133 1.49 % 19,119 77 1.62 %
Total Interest-bearing Liabilities $ 2,990,055 6,428 0.87 % $ 2,952,631 10,572 1.44 %
Net Interest Income(2)
$ 26,991 $ 27,865
Net Interest Margin(2)
2.78 % 3.01 %

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

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

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

Interest income, on an FTE basis (non-GAAP), decreased $5.0 million, or 13.1%, for the three months ended March 31, 2021, compared to the same period in 2020. We are currently maintaining higher liquidity levels as a result of COVID-19. The change was primarily due to an increase in average interest-earning assets of $216.1 million for the three months ended March 31, 2021 offset by lower short-term interest rates compared to the same period in 2020. Average interest-bearing deposits with banks increased $111.8 million and the average rate earned decreased 122 basis points compared to the same period in 2020. Average loan balances increased $77.7 million for the three months ended March 31, 2021 compared to the same period in 2020, which includes PPP loan production that began in second quarter of 2020. Average PPP loans for the three months ended March 31, 2021 totaled $31.2 million. The average rate earned on loans decreased 56 basis points for the first quarter of 2021 compared to the same period in 2020 primarily due to lower short-term interest rates. Average investment securities increased $26.3 million and the average rate earned decreased 77 basis points for the three months ended 2021 compared to the same period 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) decreased 71 basis points for the first quarter of 2021 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 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. Interest expense on interest-bearing deposits decreased $4.2 million for the three months ended March 31, 2021 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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~~CARTER BANKSHARES, INC.~~

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

the average rate paid decreased 13 basis points for the three months ended March 31, 2021 compared to the same period in 2020. Overall, the cost of interest-bearing liabilities decreased 57 basis points for the three months ended March 31, 2021 compared to the same period 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 Months Ended June 30, 2022 Compared to June 30, 2021						Six Months Ended June 30, 2022 Compared to June 30, 2021
(Dollars in Thousands)	(Dollars in Thousands)	Volume(3)		Rate(3)		Increase/ (Decrease)		(Dollars in Thousands)	Volume(3)		Rate(3)		Increase/ (Decrease)		Volume(3)		Rate		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	$	(82)	$	87	$	5	$	(79)	$	96	$	17
Tax-free Investment Securities(2)	Tax-free Investment Securities(2)	244		(35)		209		Tax-free Investment Securities(2)	7		(43)		(36)		(182)		(55)		(237)
Taxable Investment Securities	Taxable Investment Securities	(25)		(1,490)		(1,515)		Taxable Investment Securities	930		384		1,314		1,952		107		2,059
Total Securities								Total Securities	937		341		1,278		1,770		52		1,822
Tax-free Loans(1)(2)	Tax-free Loans(1)(2)	(939)		66		(873)		Tax-free Loans(1)(2)	(397)		(9)		(406)		(936)		(52)		(988)
Taxable Loans(1)	Taxable Loans(1)	2,076		(4,728)		(2,652)		Taxable Loans(1)	503		2,403		2,906		(382)		2,888		2,506
Total Loans								Total Loans	106		2,394		2,500		(1,318)		2,836		1,518
Federal Home Loan Bank Stock	Federal Home Loan Bank Stock	22		(49)		(27)		Federal Home Loan Bank Stock	(9)		—		(9)		(33)		7		(26)
Total Interest-earning Assets		$	1,524	$	(6,542)	$	(5,018)
Total Interest-Earning Assets								Total Interest-Earning Assets	$	952	$	2,822	$	3,774	$	340	$	2,991	$	3,331

LIABILITIES
Deposits:
Interest-bearing Demand		$	97	$	(328)	$	(231)
Interest Paid on:								Interest Paid on:
Interest-Bearing Demand								Interest-Bearing Demand	$	53	$	56	$	109	$	105	$	66	$	171
Money Market	Money Market	177		(182)		(5)		Money Market	123		(118)		5		256		(232)		24
Savings	Savings	20		(3)		17		Savings	20		—		20		35		1		36
Certificates of Deposit	Certificates of Deposit	(1,360)		(2,621)		(3,981)		Certificates of Deposit	(745)		(737)		(1,482)		(1,723)		(1,752)		(3,475)
Total Interest-bearing Deposits		(1,066)		(3,134)		(4,200)
Borrowings:
Total Interest-Bearing Deposits								Total Interest-Bearing Deposits	(549)		(799)		(1,348)		(1,327)		(1,917)		(3,244)
Federal Funds Purchased	Federal Funds Purchased	1		(2)		(1)		Federal Funds Purchased	4		—		4		4		—		4
FHLB Borrowings		48		(10)		38
Federal Home Loan Bank Borrowings								Federal Home Loan Bank Borrowings	(49)		(32)		(81)		(125)		(46)		(171)
Other Borrowings	Other Borrowings	12		7		19		Other Borrowings	33		3		36		58		(8)		50
Total Borrowings	Total Borrowings	61		(5)		56		Total Borrowings	(12)		(29)		(41)		(63)		(54)		(117)
Total Interest-bearing Liabilities		$	(1,005)	$	(3,139)	$	(4,144)
Total Interest-Bearing Liabilities								Total Interest-Bearing Liabilities	$	(561)	$	(828)	$	(1,389)	$	(1,390)	$	(1,971)	$	(3,361)
Change in Net Interest Margin	Change in Net Interest Margin	$	2,529	$	(3,403)	$	(874)	Change in Net Interest Margin	$	1,513	$	3,650	$	5,163	$	1,730	$	4,962	$	6,692

(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 Company recognizes provision expense for ~~credit losses is the amount to be added to~~ the allowance for credit losses (“ACL”)~~, after considering loan charge-offs~~ based on the difference between the existing balance of ACL reserves and ~~recoveries, to bring~~ the ACL reserve balance necessary to ~~a level determined to be appropriate in management's judgment to~~adequately absorb expected credit losses ~~inherent in~~associated with the ~~loan portfolio.~~Company’s financial instruments. Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. 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~~adopted ASU 2016-03 on January 1, 2021, weand increased the ACL by $64.5 million for the Day 1 ~~CECL~~ adjustment which ~~includes~~included $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021. The provision for credit losses ~~decreased $2.9~~increased $0.8 million to ~~$1.9~~$1.8 million for the three months ended ~~March 31, 2021 compared~~June 30, 2022 and decreased $0.4 million to ~~$4.8~~$2.4 million for the six months ended June 30, 2022, when compared to the same ~~period~~periods in ~~2020.~~

2021. The ~~provision for credit losses decreased $2.9 million to $1.9 million~~increase for the three months ended March 31, 2021 compared to $4.8 million for the same period of 2020 due to qualitative adjustments of $2.6 million due to the decline in economic and market conditions as a result of COVID-19. 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. 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 expected credit losses of $11.7 million at March 31, 2021. The Day 1 model recognizedJune 30, 2022 was primarily driven by loan growth, the deterioration of ~~loans with an aggregate principal balance of $42.8 million~~one purchased syndicated C&I loan which resulted in ~~current expected credit losses of~~a $2.6 million specific reserve and partially offset by a decline in the other segment due to $15.4 million principal pay-downs. These increases were partially offset by downward pressure on the challenger model’s long-term averages.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 compared to the same periods in 2021 due to increased commitment volume in construction, partially offset by a decrease in the reserve rates.

4644

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CARTER BANKSHARES, INC.

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

~~$10.2~~Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

Noninterest Income


	Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in Thousands)	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Gains on Sales of Securities, net	$	76	$	1,499	$	(1,423)	(94.9)	%	$	52	$	5,109	$	(5,057)	(99.0)	%
Service Charges, Commissions and Fees	1,749		1,489		260		17.5	%	3,702		3,298		404		12.2	%
Debit Card Interchange Fees	1,850		1,874		(24)		(1.3)	%	3,782		3,705		77		2.1	%
Insurance Commissions	568		378		190		50.3	%	837		672		165		24.6	%
Bank Owned Life Insurance Income	334		342		(8)		(2.3)	%	668		682		(14)		(2.1)	%
(Losses) Gains on Sales and Write-downs of Bank Premises, net	(37)		—		(37)		NM		346		—		346		NM
Other Real Estate Owned Income	12		4		8		200.0	%	22		75		(53)		(70.7)	%
Commercial Loan Swap Fee Income	756		742		14		1.9	%	756		961		(205)		(21.3)	%
Other	296		910		(614)		(67.5)	%	774		1,688		(914)		(54.1)	%
Total Noninterest Income	$	5,604	$	7,238	$	(1,634)	(22.6)	%	$	10,939	$	16,190	$	(5,251)	(32.4)	%

Total noninterest income decreased $1.6 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 expected credit losses of $1.5 million during the three months ended March 31, 2021.

~~Net charge-offs increased by $0.1 million~~or 22.6%, to ~~$0.7~~$5.6 million for the three months ended ~~March 31, 2021~~June 30, 2022 and decreased $5.3 million, or 32.4%, to $10.9 million for the six months ended June 30, 2022 when compared to ~~$0.6~~the same periods in 2021. These decreases were primarily related to declines in net security gains of $1.4 million and $5.1 million in the ~~same period of 2020. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10%~~three and ~~0.09%~~six months ended June 30, 2022, respectively. The decline in security gains was due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.

Changes in total noninterest income for the three months ended ~~March 31, 2021 and 2020, respectively.~~

~~At March 31, 2021, December 31, 2020 and March 31, 2020, nonperforming loans were $32.0~~June 30, 2022 also included a decrease of $0.6 million $32.0 million and $40.5 million, respectively. Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 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, 2021, the adoption of Topic 326 resulted~~ in an increase to our ACL of $62.8 million, to $116.9 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% at March 31, 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~~other noninterest income ~~increased $2.0~~offset by increases of $0.3 million ~~or 28.8%, to $9.0~~in services charges, commissions and fees and $0.2 million in insurance commissions. The decrease in other noninterest income for the three months ended ~~2021~~June 30, 2022 when compared to the same period in ~~2020, primarily driven by~~2021 was also related to a premium of $0.5 million on the ~~impact~~sale of ~~$3.6 million~~four bank branches in ~~net securities gains. Securities gains increased $2.4 million to $3.6 million during~~ the ~~first~~second quarter of 2021. The increase in service charges, commission and fees for the three months ~~of 2021~~ended June 30, 2022 when compared to ~~$1.2 million during~~ the same period in ~~2020~~2021 was primarily due to ~~take advantage~~the seasonality of ~~market opportunities, reposition and diversify holdings~~certain fees in the ~~securities portfolio. Other key factors contributed~~second quarter of 2022 and the higher insurance commissions was due to ~~the increase~~increased customer activity.

Changes in total noninterest income ~~during~~for the ~~first quarter~~six months ended June 30, 2022 also included decreases of ~~2021 were higher debit card interchange fees of $0.6~~$0.9 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~~income and $0.2 million ~~and lower~~in commercial loan swap fee income offset by increases of $0.4 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.2 million in insurance commissions. Similar to the decline during the three month period ended June 30, 2022, the decline in other noninterest income for the six months ended June 30, 2022 was similarly related to premiums on the sale of bank branches; however, the decline in commercial loan swap fee income was related to the timing and demand for this product in the current rising interest rate environment. The increases in service charges, commissions and fees and insurance commission for the six months ended June 30, 2022 compared to the same period in 2021 was driven by seasonality and increased customer activity. The $0.3 million gains on sales and write-downs of bank premises, net for the six months ended June 30, 2022 was due to ~~declines~~a $0.4 million eminent domain settlement on a previously closed branch in ~~our interest rate swap contracts by our commercial customers.~~

the first quarter of 2022.

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CARTER BANKSHARES, INC.

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

Noninterest Expense


		Three Months Ended March 31,									Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		$ Change		% Change		(Dollars in Thousands)	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Salaries and Employee Benefits	Salaries and Employee Benefits	$	12,582	$	13,581	$	(999)	(7.4)	%	Salaries and Employee Benefits	$	12,444	$	13,686	$	(1,242)	(9.1)	%	$	24,201	$	26,268	$	(2,067)	(7.9)	%
Occupancy Expense, net	Occupancy Expense, net	3,514		3,249		265		8.2	%	Occupancy Expense, net	3,296		3,451		(155)		(4.5)	%	6,648		6,965		(317)		(4.6)	%
FDIC Insurance Expense	FDIC Insurance Expense	643		544		99		18.2	%	FDIC Insurance Expense	629		657		(28)		(4.3)	%	997		1,300		(303)		(23.3)	%
Other Taxes	Other Taxes	762		746		16		2.1	%	Other Taxes	819		718		101		14.1	%	1,623		1,480		143		9.7	%
Advertising Expense	Advertising Expense	170		612		(442)		(72.2)	%	Advertising Expense	267		220		47		21.4	%	506		390		116		29.7	%
Telephone Expense	Telephone Expense	600		574		26		4.5	%	Telephone Expense	454		588		(134)		(22.8)	%	942		1,188		(246)		(20.7)	%
Professional and Legal Fees	Professional and Legal Fees	1,224		437		787		180.1	%	Professional and Legal Fees	1,202		1,440		(238)		(16.5)	%	2,421		2,664		(243)		(9.1)	%
Data Processing	Data Processing	921		486		435		89.5	%	Data Processing	842		954		(112)		(11.7)	%	1,683		1,875		(192)		(10.2)	%
Losses on Sales and Write-downs of Other Real Estate Owned, net		212		189		23		12.2	%
Losses on Sales and Write-downs of Bank Premises, net		43		12		31		258.3	%
(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net										(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net	(60)		2,603		(2,663)		(102.3)	%	99		2,815		(2,716)		(96.5)	%
Losses on Sales and Write-downs on Bank Premises, net										Losses on Sales and Write-downs on Bank Premises, net	—		64		(64)		(100.0)	%	—		107		(107)		(100.0)	%
Debit Card Expense	Debit Card Expense	632		554		78		14.1	%	Debit Card Expense	659		713		(54)		(7.6)	%	1,292		1,345		(53)		(3.9)	%
Tax Credit Amortization	Tax Credit Amortization	427		272		155		57.0	%	Tax Credit Amortization	615		427		188		44.0	%	1,230		854		376		44.0	%
Unfunded Loan Commitment Expense		—		982		(982)		(100.0)	%

Other Real Estate Owned Expense	Other Real Estate Owned Expense	54		140		(86)		(61.4)	%	Other Real Estate Owned Expense	141		142		(1)		(0.7)	%	182		196		(14)		(7.1)	%

Other	Other	1,821		2,370		(549)		(23.2)	%	Other	2,102		2,096		6		0.3	%	4,097		3,917		180		4.6	%
Total Noninterest Expense	Total Noninterest Expense	$	23,605	$	24,748	$	(1,143)	(4.6)	%	Total Noninterest Expense	$	23,410	$	27,759	$	(4,349)	(15.7)	%	$	45,921	$	51,364	$	(5,443)	(10.6)	%

Total noninterest expense decreased ~~$1.1~~$4.3 million ~~or 4.6%,~~and $5.4 million for the ~~first~~three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. The primary driver for both these decreases was $2.7 million for losses on sales and write-downs of OREO, net. This nonrecurring write-down of $3.0 million was related to the closing of bank branches in the second quarter of ~~March 31,~~ 2021 that were transferred to ~~$23.6 million~~OREO and marketed for sale.

Another driver of the decrease in noninterest expense for the three-month period ended June 30, 2022 when compared to ~~$24.7~~the prior period in 2021 was the $1.2 million decrease in salaries and employee benefits, which was related to lower medical expenses of $0.8 million and a decrease of $0.4 million related to our retail branch optimization project. Decreases of $0.2 million in professional and legal fees and $0.2 million in occupancy expense, net, in the three-month period ended June 30, 2022 when compared to the same period ~~of 2020.~~ also impacted the decline in noninterest expense for the three months ended June 30, 2022 when compared to the same period in 2021.

The decrease in noninterest expense for the six-month period ended June 30, 2022 when compared to the same period in 2021 was primarily driven by a $2.1 million decline ~~of $1.0 million~~ in salaries and employee benefits ~~primarily attributable to~~and lower medical expenses and our retail branch ~~network~~ optimization ~~project, which was partially offset by normal merit increases, lower unfunded loan commitment expense of $1.0 million primarily due to~~project. Other decreases during the reclassification to the provision for credit losses in 2021 due to the adoption of CECL. Also impacting the decrease was $0.4 million in advertising expenses due to the sunset of our deposit acquisition strategy in the fourth quarter of 2020 andsix-months ended June 30, 2022 included a ~~$0.5~~$0.3 million decrease in ~~other noninterest~~occupancy expense, ~~due to lower postage, travel~~net, a $0.3 million decrease in FDIC insurance expense and ~~business development expenses which were somewhat impacted by COVID-19. Partially offsetting these decreases were higher~~a $0.2 million decrease in professional and legal fees ~~of $0.8 million, increased data processing expenses~~offset by an increase of $0.4 million in tax credit amortization. The decrease in FDIC expense was due to animproved financial metrics of the Bank that are used to perform the assessment. The increase for the tax credit amortization related to a new historic tax credit that began 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.~~early 2022.

Provision for Income Taxes

The provision for income taxes increased ~~$0.7~~$0.9 million and $1.3 million to ~~$0.9~~$1.8 million and $3.1 million for the three and six months ended ~~March 31, 2021~~June 30, 2022, respectively, when compared to ~~$0.2~~the same periods in 2021. Pre-tax income increased $6.3 million and $6.6 million for the three and six months ended June 30, 2022, respectively, when compared to the same ~~period~~periods in ~~2020.~~2021. The ~~increase in pretax income of $5.6 million for the first three months of 2021 was primarily due to higher noninterest income, lower provision for credit losses and lower noninterest expenses. Our~~ effective tax rate ~~increased to 9.0%~~was 14.3% and 13.4% for the three and six months ended ~~March 31, 2021 as~~June 30, 2022, respectively, compared to ~~5.3%~~14.0% and 10.9% for the same ~~period~~periods in ~~2020.~~2021. 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 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,~~bank owned life insurance (“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, 2021~~June 30, 2022

Total assets decreased ~~$39.8~~$10.5 million, to $4.1 billion at ~~March 31, 2021~~June 30, 2022 compared to ~~$4.2 billion at~~ December 31, ~~2020.~~2021. Federal Reserve Bank excess reserves decreased ~~$52.8~~$149.9 million to ~~$110.6~~$26.3 million at ~~March~~June 30, 2022 from $176.2 million at December 31, 2021 ~~compared to December 31, 2020~~ due to ~~active balance sheet management.~~redeploying excess cash into higher yielding loans and securities.

Total portfolio loans increased ~~$24.7~~$185.8 million, or ~~0.8%,~~13.3% on an annualized basis, to $3.0 billion at ~~March~~June 30, 2022 compared to $2.8 billion at December 31, 2021 ~~compared~~primarily due to ~~December 31, 2020.~~higher loan growth in the first half of 2022. During 2021, loan growth was muted by large commercial loan payoffs and loan sales. The variances in loan segments for portfolio loans ~~is primarily~~ related to increases of $101.3 million in residential mortgages, $65.9 million in commercial real estate loans, $39.8 million in construction loans and $3.4 million in other consumer loans offset by decreases of $15.7 million in the ~~adoption of Topic 326. We made changes to our loan portfolio segments to align with the methodology applied~~other category and $8.9 million 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 break-out of Other loans 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 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.loans.

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 $32.0Other real estate owned, (“OREO”), 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, 2021~~June 30, 2022 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~~due 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~~that aligns with our strategic goals to enhance franchise value and improve operating efficiency. Closed retail bank offices have a remaining book value of $1.0 million at June 30, 2022 and December 31, 2021.

The securities portfolio ~~increased $1.4~~decreased $15.4 million ~~at March 31, 2021 from December 31, 2020~~ and ~~comprised 18.8%~~is currently 22.0% of total assets at ~~March 31, 2021~~June 30, 2022 compared to ~~18.6%~~22.3% of total assets at December 31, ~~2020.~~2021. The ~~increase~~decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth. At June 30, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses. Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio. The Bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a ~~result~~mix of ~~active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities~~both fixed and ~~interest~~floating rate ~~structures.~~instruments.

Total deposits increased ~~$6.9~~$54.9 million to ~~$3.7~~$3.8 billion at March 31, 2021 compared to $3.7 billion at December 31, 2020. The increase in deposits primarily related to the growth in all our core deposit categories, which includes noninterest-bearing and interest-bearing demand deposits, money market and savings accounts. Core deposits increased $102.3 million at March 31, 2021, or 5.2%,June 30, 2022 compared to December 31, ~~2020. Offsetting~~2021. The increases included $92.6 million in money market accounts, $46.6 million in interest-bearing demand accounts and $43.2 million in savings accounts offset by the ~~increase~~intentional decline of $83.9 million in ~~core deposits was~~CDs and a decline of ~~$92.3~~$43.6 million in ~~our CDs. This decrease relates to the intentional runoff of higher cost CDs. Noninterest-bearing~~noninterest-bearing demand accounts. At June 30, 2022, noninterest-bearing deposits comprised ~~19.9%~~18.8% of total deposits compared to 20.2% at December 31, 2021 and ~~19.0%~~19.7% at June 30, 2021. CDs comprised 33.6%, 36.3% and 39.8% of total deposits at ~~March~~June 30, 2022, December 31, 2021 and ~~December 31, 2020,~~June 30, 2021, 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~~$73.5 million to ~~$387.9~~$334.1 million at ~~March 31, 2021~~June 30, 2022 compared to ~~$440.2~~$407.6 million at December 31, ~~2020.~~2021. 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~~$61.7 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of ~~$9.4 million.~~$20.1 million for the six months ended June 30, 2022. The remaining difference of $0.5 million is related to stock-based compensation during the ~~three~~six months ended ~~March 31, 2021.~~June 30, 2022.

The ACL was ~~3.93%~~3.27% of total portfolio loans at ~~March 31, 2021~~June 30, 2022 compared to ~~an allowance for loan losses of 1.83%~~3.41% as of December 31, ~~2020.~~2021. General reserves as a percentage of total portfolio loans were ~~3.43%~~3.15% at ~~March 31, 2021~~June 30, 2022 compared to ~~1.32%~~3.38% 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.~~2021. 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 to ~~12.88%~~12.70% at ~~March 31, 2021~~June 30, 2022 compared to ~~13.08%~~14.21% at December 31, ~~2020.~~2021. Our leverage ratio was ~~10.16%~~9.96% at ~~March 31, 2021,~~June 30, 2022, compared to ~~10.26%~~10.62% at December 31, ~~2020~~2021 and total risk-based capital ratio was ~~14.14%~~13.96% at ~~March 31, 2021~~June 30, 2022 compared to ~~14.33%~~15.46% at December 31, ~~2020.~~2021.The decrease is related to the aforementioned repurchase of common stock of $32.4 million through June 30, 2022. 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)	June 30, 2022		December 31, 2021		$ Change
U.S. Treasury Securities								U.S. Treasury Securities	$	18,275	$	4,413	$	13,862
U.S. Government Agency Securities	U.S. Government Agency Securities	$	2,360	$	—	$	2,360	U.S. Government Agency Securities	3,080		3,478		(398)
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	110,437		110,013		424
Commercial Mortgage-Backed Securities								Commercial Mortgage-Backed Securities	40,351		4,168		36,183
Asset Backed Securities	Asset Backed Securities	137,499		133,557		3,942		Asset Backed Securities	82,433		81,863		570
Collateralized Mortgage Obligations	Collateralized Mortgage Obligations	254,850		218,359		36,491		Collateralized Mortgage Obligations	284,225		287,614		(3,389)
Small Business Administration	Small Business Administration	106,957		99,145		7,812		Small Business Administration	53,697		108,914		(55,217)
States and Political Subdivisions	States and Political Subdivisions	210,315		252,622		(42,307)		States and Political Subdivisions	245,105		262,202		(17,097)
Corporate Notes	Corporate Notes	29,312		24,825		4,487		Corporate Notes	69,431		59,735		9,696
Total Debt Securities	Total Debt Securities	$	780,032	$	778,679	$	1,353	Total Debt Securities	$	907,034	$	922,400	$	(15,366)

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~~decreased by ~~$1.4~~$15.4 million to $907.0 million at ~~March 31, 2021 as~~June 30, 2022 compared to $922.4 million at December 31, ~~2020.~~2021. Securities comprise ~~18.8%~~22.0% of total assets at ~~March 31, 2021 as~~June 30, 2022 compared to ~~18.6%~~22.3% at December 31, ~~2020.~~2021. The ~~increase~~decrease is a result of ~~active balance sheet management.~~redeploying securities maturities into higher yielding loan growth during the second quarter of 2022. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures. As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.

At ~~March~~June 30, 2022 total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses. At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were ~~$11.3~~$10.0 million offset by ~~$5.5 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~~$7.8 million of gross unrealized losses.

~~Management evaluates~~The unrealized losses on debt securities were primarily attributable to changes in interest rates, and not related to the credit quality of these securities. The Company’s investment securities ~~portfolio~~with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for ~~other-than-temporary impairment (“OTTI”)~~similar durations (i.e., 5- and 10-year Treasury securities). This portion of the Treasury yield curve has moved significantly upward over the past six months, driving unrealized losses on ~~a quarterly basis.~~ these securities higher. Although the Federal Reserve is in the middle of an aggressive effort to raise short-term interest rates to combat inflation, the Company does not expect higher short-term rates to adversely impact the fair values of the Company’s investment securities to the same extent as increases in longer-term rates. The Company expects that higher short-term rates may improve yields on certain of the Company’s variable rate securities within the next six to twelve months.

At ~~March~~December 31, 2021, the 5-year and 10-year U.S. Treasury yields were 1.26% and 1.52%, respectively. At June 30, 2022, those same bond yields were 3.01% and 2.98%, respectively. Therefore, this increase of 175 and 146 basis points, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range. Note, the effects were greater for longer maturity bonds, such as municipal bonds. On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Federal Reserve interest rate hikes.

Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any noncredit loss will be recognized in other comprehensive income. At June 30, 2022 and December 31, ~~2020,~~2021, the Company ~~did not record any OTTI. The performance~~had no credit related net investment impairment losses.

Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of ~~the debt and equity securities markets could generate impairments in future periods requiring realized losses~~this Quarterly Report on Form 10-Q for additional information related 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
securities.

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CARTER BANKSHARES, INC.

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

Loan Composition

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


(Dollars in Thousands)	June 30, 2022		December 31, 2021
Commercial
Commercial Real Estate	$	1,389,117	$	1,323,252
Commercial and Industrial	336,477		345,376
Total Commercial Loans	1,725,594		1,668,628
Consumer
Residential Mortgages	559,313		457,988
Other Consumer	48,033		44,666
Total Consumer Loans	607,346		502,654
Construction	322,731		282,947
Other	342,225		357,900
Total Portfolio Loans	2,997,896		2,812,129
Loans Held-for-Sale	—		228

Total Loans	$	2,997,896	$	2,812,357

Our loan portfolio represents our most significant source of interest income. The risk that borrowers ~~will be~~are 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.~~2021.

Total portfolio loans increased ~~$24.7~~$185.8 million, or ~~0.8%,~~13.3% on an annualized basis, to $3.0 billion at ~~March 31, 2021~~June 30, 2022 compared to December 31, ~~2020. The variances~~2021 with strong production 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 2021commercial real estate, residential mortgage and was not adjusted to the comparable period, therefore showing fluctuations in all categories. The break-out of Other loans 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 million at both March 31, 2021 and December 31, 2020. OREO decreased $1.7 million at March 31, 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 million at December 31, 2020. We expect that all branch closures and sale transactions part of our network optimization project will be completed during the second quarter of 2021. Aligning with our strategic goals to enhance franchise value and improve operating efficiency.

construction portfolios. 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~~tenant concentrations. At June 30, 2022, the loan portfolio was comprised of 29.6% floating rates which reprice monthly, 39.5% variable rates that reprice at least once during the life of the loan and ~~industries or property types~~the remaining 30.9% are fixed rate loans. The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that ~~are similarly impacted by external factors.~~impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at ~~March 31, 2021~~June 30, 2022 equated to approximately ~~$501.5~~$380.2 million, or ~~16.9%~~12.7% 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~~Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel ~~industry will~~clients following sharp declines as a result of the pandemic. However, our clients continue to ~~operate at~~face challenges with respect to labor, which we believe 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 ~~draw on their existing lines~~operate with lower levels of ~~credit with other financial institutions or other sources of~~ liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. Contractual payments have been restored since the expiration of our deferral program on June 30, 2021. 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~~$686.8 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.June 30, 2022. The ~~other~~Other segment ~~is comprised of~~represents 49.3% of the top 10 credit relationships.

~~Line utilization, unused~~

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CARTER BANKSHARES, INC.

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

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		June 30, 2022		June 30, 2022
	June 30, 2022		December 31, 2021				% of Gross Loans		% of RBC
1. Hospitality, agriculture & energy	$338,790		$350,010		($11,220)		11.30	%	73.47	%
2. Retail real estate & food services	56,492		56,073		419		1.88	%	12.25	%
3. Industrial & retail real estate	44,503		45,653		(1,150)		1.48	%	9.65	%
4. Multifamily development	40,000		36,720		3,280		1.33	%	8.68	%
5. Retail real estate	37,355		38,250		(895)		1.25	%	8.10	%
6. Hospitality	35,234		35,664		(430)		1.17	%	7.64	%
7. Multifamily & student housing	34,675		35,405		(730)		1.16	%	7.52	%
8. Hospitality	34,046		34,463		(417)		1.14	%	7.38	%
9. Special/limited use	33,736		33,736		—		1.13	%	7.32	%
10. Multifamily development	31,992		29,389		2,603		1.07	%	6.94	%
Top Ten (10) Relationships	686,823		695,363		(8,540)		22.91	%	148.95	%
Total Gross Loans	2,997,896		2,812,357		185,539
% of Total Gross Loans	22.91	%	24.73	%	(1.82)	%
Concentration (25% of RBC)	$115,277		$120,781

Unfunded commitments ~~excluding consumer overdraft~~on lines of credit were ~~$387.3~~$430.8 million at ~~March 31, 2021~~June 30, 2022 as compared to ~~$410.7~~$433.1 million at December 31, ~~2020.~~2021. 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%~~53.6% at ~~March 31, 2021, as compared to~~June 30, 2022 and 52.2% at December 31, ~~2020. Commercial line utilization~~2021. Unfunded commitments on commercial operating lines of credit was ~~55.7%~~54.3% at ~~March 31, 2021, as compared to~~June 30, 2022 and 51.7% at December 31, ~~2020.~~2021.

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry while actively managing concentrations. When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments. The Company has specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio. 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. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans.

Deferred costs and fees included in the portfolio balances above were $6.6 million and $4.5 million at June 30, 2022 and December 31, 2021, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $176.5 thousand and $190.6 thousand at June 30, 2022 and December 31, 2021, respectively.

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,~~Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. ~~Mortgage loans held-for-sale~~There were ~~$32.7 million and $25.4 million at March 31, 2021 and December 31, 2020, respectively.~~

~~In addition to~~no mortgage loans held-for-sale ~~the Company had $9.4~~at June 30, 2022 and $0.2 million ~~in loans held-for-sale in connection with sale of Bank branches~~ at ~~March~~December 31, ~~2021 that are expected~~2021.

Refer to ~~close~~Note 4, Loans and Loans Held-for-Sale, in the ~~second quarter~~Notes to Consolidated Financial Statements in Item 1 of ~~2021.~~this Quarterly Report on Form 10-Q for additional information related to our loans.

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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~~Criticized Asset Committee meets to review ~~all~~certain 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.

Unsecured loans pose a higher risk for the Company due to the lack of a well-defined secondary source of repayment. Unsecured loans are reserved for the best quality customers with well-established businesses, 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,~~approve segment limits, approve the adequacy of ACL, and ~~loan review~~ findings from Loan Review identified in the previous quarter. Annually, this same committee ~~reviews~~approves credit related policies and policy enhancements as they become available.

Additional credit risk management practices include ~~periodic review~~continuous reviews of trends in our lending footprint and ~~update of~~ our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and ~~portfolio management through~~annual portfolio stress testing. Our ~~loan review~~Loan Review department 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~~ Consumer unsecured loans and secured loans are evaluated for charge-off after the loan ~~review policy~~becomes 90 days past due. Unsecured loans are fully charged-off and ~~annual scope report that details the level of loan review for commercial~~secured 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~~are charged-off to the ~~underwriting process,~~estimated fair value of the ~~scope~~collateral less the cost to sell.

Nonperforming assets consist of ~~loan review has been broadened since 2019~~nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented:


(Dollars in Thousands)	June 30, 2022		December 31, 2021		$ Change
Nonperforming Loans
Commercial Real Estate	$	3,258	$	3,337	$	(79)
Commercial and Industrial	5,210		451		4,759
Residential Mortgages	2,555		2,551		4
Other Consumer	6		73		(67)
Construction	1,000		985		15
Other	—		—		—
Total Nonperforming Loans	12,029		7,397		4,632
Other Real Estate Owned	8,432		10,916		(2,484)
Total Nonperforming Assets	$	20,461	$	18,313	$	2,148

Nonperforming assets increased $2.1 million to ~~include assurance testing with respect~~$20.5 million at June 30, 2022 compared to December 31, 2021. The increase was primarily due to a $4.6 million increase in nonperforming loans due to the ~~accuracy~~deterioration of a purchased syndicated C&I loan totaling $4.9 million, offset by a $2.5 million decrease in OREO. Closed retail bank offices have a remaining book value of $1.0 million at both June 30, 2022 and December 31, 2021. During 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~~first quarter of 2022, two branch closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. In addition, two former closed offices were also moved to OREO. During the first six months of 2022, a total ~~loans;~~of four branch offices were sold.

•~~A sampling of new~~Closed-end installment loans, ~~originated to include an examination of~~amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the ~~evidence of appropriate approval, adherence to loan policy~~borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and ~~the completeness and accuracy of the analysis contained in the approval document;~~

•~~A sampling of large loan relationships which are defined as loan relationships with aggregate exposure of at least $2 million~~unpaid for 30 days or more. We monitor delinquency on a monthly basis, including loans that are ~~not part of the top 20 review;~~at risk for becoming delinquent and

•~~Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited~~ early stage delinquencies in order to ~~hospitality, multifamily~~identify emerging patterns 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.

potential problem loans.

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

~~Allowance~~Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No. 2022-02

Prior to our adoption of ASU No. 2022-02, we accounted for ~~Credit Losses~~

~~The allowance for credit losses,~~a Troubled Debt Restructuring (“~~ACL”~~TDRs”), 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.~~

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 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 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 Day 1 CECL model and the model ended March 31, 2021, additional current expected losses of $1.5 million were recognized, which resulted in a total current expected loss balance of

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~~CARTER BANKSHARES, INC.~~

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

~~$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.~~

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 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 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, 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. 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 %

*~~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. 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, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards but significantly enhanced these standards in 2018. The analysis applied to this pool resulted in expected credit losses of $51.3 million, at adoption and is disclosed in the Other line item in the table above.

At December 31, 2020, the aforementioned Other line item within the probable incurred loss model included $102.5 million of impaired loans and the remaining $277.5 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 segment. This methodology produced a significantly higher level of reserves from the incurred loss model. The model was developed with subjective assumptions that is driven by the following key factors: prepayment speeds, timing of prepayment, loss given defaults as well as other factors. This methodology resulted in an increase in other reserves totaling $51.3 million.

The ACL increased $62.8 million to $116.9 million for the three months ended March 31, 2021 compared to $54.1 million at December 31, 2020 due to the Day 1 adoption of CECL of $61.6 million. The first quarter 2021 was primarily driven by 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 adjustment resulted in expected 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 $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 expected credit losses of $1.5 million during the three months ended March 31, 2021.

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

Net charge-offs were $0.7 million in the first three months of 2021 compared to $0.6 million in the same period of 2020. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.10% and 0.09% for the three months ended March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, nonperforming loans were consistent at $32.0 million. Nonperforming loans as a percentage of total portfolio loans were 1.08%, 1.09% and 1.38% as of March 31, 2021, December 31, 2020 and March 31, 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 are loans~~ that we, for economic or legal reasons related to a borrower’s financial difficulties, ~~grant~~granted 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 and conditions before their loan ~~reaches~~defaults and/or is transferred to nonaccrual status. ~~These modified~~Modified terms that might have been considered a TDR generally ~~include~~included 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 behave been instances of principal forgiveness. ~~Modifications structured with deferments~~Short-term modifications that were considered insignificant were generally not considered a TDR unless there were other concessions granted. On April 1, 2022, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for ~~significant periods are generally considered TDRs. However,~~all restructurings occurring on or after January 1, 2022. Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to ~~the COVID-19 pandemic, the Bank has 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.~~ASU No. 2022-02.

~~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~~Generally, 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 loans and will be reported as individually evaluated loans for the calendar year they are determined to be a TDR. The Company individually evaluates all ~~individually evaluated~~ loans ~~which includes TDRs,~~experiencing financial difficulty, with a commitment greater than or equal to $1.0 million for ~~a specific reserve unless otherwise accounted~~individually evaluated loan reserves. In addition, the Company may evaluate credits that have complex loan structures for inimpairment, even if the ~~CECL model.~~commitment is less than $1.0 million. Nonaccrual TDRs can be returned to accruing 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~~either immediately before or after 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. 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~~Allowance for Credit Losses

The following is 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 termsallocation of the ~~restructured agreement,~~ACL balance by segment for the ~~loan will be returned to accrual status~~periods presented:


	June 30, 2022				December 31, 2021
(Dollars in Thousands)	Amount		% of Loans in each Category to Total Portfolio Loans		Amount		% of Loans in each Category to Total Portfolio Loans
Commercial Real Estate	$	17,808	46.3	%	$	17,297	47.0	%
Commercial & Industrial	5,688		11.2	%	4,111		12.3	%
Residential Mortgages	5,155		18.7	%	4,368		16.3	%
Other Consumer	1,719		1.6	%	1,493		1.6	%
Construction	6,832		10.8	%	6,939		10.1	%
Other	60,779		11.4	%	61,731		12.7	%
Balance End of Year	$	97,981	100.0	%	$	95,939	100.0	%

The following table summarizes the credit quality ratios and ~~reported~~their components 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 million to $131.3 million at March 31, 2021, compared to $134.2 million at December 31, 2020. The decrease is due to principal pay-downs in the amount of $2.9 million. Total TDRs of $24.6 million and $25.0 million were on nonaccrual at March 31, 2021June 30, 2022 and December 31, ~~2020, respectively. There were minimal commitments to lend additional funds on relationships identified as TDRs~~2021:


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses	$	97,981		$	95,939
Total Portfolio Loans	2,997,896			2,812,129
Allowance for Credit Losses to Total Portfolio Loans	3.27		%	3.41		%

Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans	$	12,029		$	7,397
Total Portfolio Loans	2,997,896			2,812,129
Nonperforming Loans to Total Portfolio Loans	0.40		%	0.26		%

Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses	$	97,981		$	95,939
Nonperforming Loans	12,029			7,397
Allowance for Credit Losses to Nonperforming Loans	814.54		%	1,297.00		%

Net Charge-offs to Average Portfolio Loans
Net Charge-offs (annualized)	$	811		$	23,127
Average Total Portfolio Loans	2,911,872			2,927,083
Net Charge-offs to Average Portfolio Loans	0.03		%	0.79		%

See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ~~amount~~ACL ratios presented in the table above. The net charge-offs of ~~$2.9~~$23.1 million asfor the full year 2021 was primarily attributable to the resolution of ~~March 31, 2021.~~five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved.

~~Our charge-off policy~~The provision for ~~commercial loans requires that~~credit losses, which includes a provision for losses on loans and ~~other obligations that are not collectible be promptly charged-off when~~on unfunded commitments, is a charge to earnings to maintain the ~~loss becomes quantifiable, regardless~~ACL at a level consistent with management's assessment of ~~the delinquency status of the loan. The Bank may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment~~expected losses in the ~~loan. A~~ loan ~~or obligation does not need~~portfolio at the balance sheet date. The provision for credit losses increased $0.8 million to ~~be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral~~$1.8 million for the three months ended June 30, 2022 and decreased $0.4 million to ~~protect~~$2.4 million for the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:

•~~The status of a bankruptcy proceeding~~

•~~The value of collateral and probability of successful liquidation; and/or~~

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

~~Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off~~six months ended June 30, 2022 compared to the ~~estimated fair value~~same periods in 2021. The increase for the three months ended June 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and partially offset by a decline in the ~~collateral less~~other segment primarily due to $15.4 million principal pay-downs.

The provision for unfunded commitments increased $0.9 million for both the ~~cost~~three and six months ended June 30, 2022 when compared to ~~sell.~~the same periods in 2021 due to increased commitment volume in construction offset by the reserve rates.

~~Our policy is~~Net charge-offs were $0.2 million and $0.4 million for the three and six months ended June 30, 2022, respectively, when compared to ~~place~~the same periods in 2021. During the three months ended June 30, 2021, we recognized charge-offs of $8.2 million related to the resolution of our two largest nonperforming credits. As a percentage of average total portfolio 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.~~on an

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CARTER BANKSHARES, INC.

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

annualized basis, net charge-offs were 0.03% for both the three and six months ended June 30, 2022 compared to 1.15% and 0.63% for the same periods in 2021. At June 30, 2022,nonperforming loans increased $4.6 million, or 62.6%, to $12.0 million since December 31, 2021. Nonperforming ~~assets consist~~loans as a percentage of ~~nonaccrual~~total portfolio loans ~~nonaccrual TDRs~~were 0.40% and ~~OREO.~~ 0.26% as of June 30, 2022 and December 31, 2021, respectively.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The following ~~table summarizes nonperforming assets for~~tables represent credit exposures by internally assigned risk ratings as of the ~~dates~~periods presented:

(Dollars in Thousands) March 31, 2021 December 31, 2020 $ Change
Nonperforming Loans
Commercial Real Estate $ 651 $ 224 $ 427
Commercial and Industrial 818 456 362
Construction 2,124 2,012 112
Residential Mortgages 3,629 4,135 (506)
Other Consumer 109 191 (82)
Other — — —
Total Nonperforming Loans 7,331 7,018 313
Nonperforming Troubled Debt Restructurings
Commercial Real Estate 21,306 21,667 (361)
Commercial and Industrial — — —
Construction 3,319 3,319 —
Residential Mortgages — — —
Other Consumer — — —
Other — — —
Total Nonperforming Troubled Debt Restructurings 24,625 24,986 (361)
Total Nonperforming Loans and Troubled Debt Restructurings 31,956 32,004 (48)
Other Real Estate Owned 14,031 15,722 (1,691)
Total Nonperforming Assets $ 45,987 $ 47,726 $ (1,739)


	June 30, 2022
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Portfolio Loans
Pass	$	1,372,820	$	328,459	$	555,030	$	47,964	$	321,548	$	180,792	$	2,806,613
Special Mention	12,961		—		970		—		73		3,185		17,189
Substandard	3,336		8,018		3,313		69		1,110		158,248		174,094
Doubtful	—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—
Total Portfolio Loans	$	1,389,117	$	336,477	$	559,313	$	48,033	$	322,731	$	342,225	$	2,997,896

Performing	$	1,385,859	$	331,267	$	556,758	$	48,027	$	321,731	$	342,225	$	2,985,867
Nonperforming	3,258		5,210		2,555		6		1,000		—		12,029
Total Portfolio Loans	$	1,389,117	$	336,477	$	559,313	$	48,033	$	322,731	$	342,225	$	2,997,896

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


	December 31, 2021
(Dollars in Thousands)	Commercial Real Estate		Commercial and Industrial		Residential Mortgage		Other Consumer		Construction		Other		Total Portfolio Loans
Pass	$	1,314,576	$	337,294	$	453,894	$	44,554	$	281,241	$	185,247	$	2,616,806
Special Mention	5,260		8		553		—		604		3,281		9,706
Substandard	3,416		8,074		3,541		112		1,102		169,372		185,617
Doubtful	—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—
Total Portfolio Loans	$	1,323,252	$	345,376	$	457,988	$	44,666	$	282,947	$	357,900	$	2,812,129

Performing	$	1,319,915	$	344,925	$	455,437	$	44,593	$	281,962	$	357,900	$	2,804,732
Nonperforming	3,337		451		2,551		73		985		—		7,397
Total Portfolio Loans	$	1,323,252	$	345,376	$	457,988	$	44,666	$	282,947	$	357,900	$	2,812,129

~~Nonperforming assets~~Special mention, substandard and doubtful loans at June 30, 2022 decreased ~~$1.7~~$4.0 million to ~~$46.0~~$191.3 million ~~at March 31, 2021~~ compared to ~~$47.7~~$195.3 million at December 31, ~~2020.~~2021. The ~~decrease was primarily~~increase in special mention related to ~~a $1.7 million net~~one large CRE loan that downgraded from pass and the decrease in OREO. The decrease in OREO was primarily due to sales of properties during 2021. Closed retail bank offices have a remaining book value of $1.9 million at March 31, 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 million during the first three months of 2021.

~~As of March 31, 2021, total nonaccrual loans include $3.0 thousand in loans held-for-sale in connection with sale of Bank branches. There were $7 thousand nonaccrual~~substandard loans related to ~~loans held-for-sale at December 31, 2020.~~paydowns in the other loan category during the second quarter of 2022.

~~The CARES Act permits banks~~Additionally, refer to ~~suspend requirements under GAAP~~Note 5, Allowance for ~~loan modifications~~Credit Losses, in the Notes 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~~Consolidated Financial Statements in Item 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 reliefthis Quarterly Report on Form 10-Q for additional information 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.ACL.

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CARTER BANKSHARES, INC.

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

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

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

Loans past due 30 to 89 days or more and still accruing, including held-for-sale loans, increased $0.2 million to $6.6 million at March 31, 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.

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)	June 30, 2022		December 31, 2021		$ 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	$	704,323	$	747,909	$	(43,586)	(5.8)	%
Interest-Bearing Demand										Interest-Bearing Demand	499,282		452,644		46,638		10.3	%
Money Market	Money Market	323,008		294,229		28,779		9.8	%	Money Market	555,621		463,056		92,565		20.0	%
Savings	Savings	646,722		625,482		21,240		3.4	%	Savings	733,704		690,549		43,155		6.2	%
Certificate of Deposits	Certificate of Deposits	1,522,510		1,614,770		(92,260)		(5.7)	%	Certificate of Deposits	1,260,463		1,344,318		(83,855)		(6.2)	%
Deposits Held-for-Assumption in Connection with Sale of Bank Branches		81,565		84,717		(3,152)		(3.7)	%

Total Deposits	Total Deposits	$	3,691,521	$	3,684,628	$	6,893	0.2	%	Total Deposits	$	3,753,393	$	3,698,476	$	54,917	1.5	%

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, 2021~~June 30, 2022 increased ~~$6.9~~$54.9 million, or ~~0.2%~~1.5%, from December 31, ~~2020. Noninterest-bearing~~2021. The increase in deposits ~~increased by $34.1~~primarily related to an increase in our core deposits of $138.8 million, or ~~4.9%, to $733.3 million as of March 31, 2021 as compared to $699.2 million at December 31, 2020. Money~~11.9% on an annualized basis. Our core deposits include noninterest-bearing demand accounts, interest-bearing demand deposits, money market accounts ~~increased $28.8~~and savings accounts. The decrease of $83.9 million, or ~~9.8%, during the first three months of 2021~~6.2% in CDs at June 30, 2022 compared to December 31, ~~2020,~~2021 is due to our deposit acquisition strategy. Savings accounts increased $21.2 million, or 3.4%, at March 31, 2021 compared to December 31, 2020 due to promotions. Interest-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 tothe intentional runoff of ~~these~~ higher cost CDs. Noninterest-bearing deposits comprised ~~19.9%~~18.8% and ~~19.0%~~20.2% of total deposits at ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, respectively. ~~At March 31, 2021, $81.6 million~~

The following table presents additional information in relation to deposits:


(Dollars in Thousands)	June 30, 2022		December 31, 2021
Deposits from the Certificate of Deposit Account Registry Services (CDARS)	$	922	$	139
Noninterest-Bearing Public Funds Deposits	24,129		58,393
Interest-Bearing Public Funds Deposits	165,808		123,968
Total Deposits not Covered by Deposit Insurance(1)	426,331		396,626
Certificates of Deposits not Covered by Deposit Insurance	137,350		147,134
Deposits for Certain Directors, Executive Officers and their Affiliates	2,866		3,032

(1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.

Maturities of ~~deposits were held-for-assumption in connection with the sale of Bank branches that~~CDs over $250,000 or more not covered by deposit insurance at June 30, 2022 are ~~expected to close in the second quarter of 2021.~~summarized as follows:


(Dollars in Thousands)	Amount		Percent
Three Months or Less	$	11,961	8.7	%
Over Three Months Through Twelve Months	57,332		41.7	%
Over Twelve Months Through Three Years	44,452		32.4	%
Over Three Years	23,605		17.2	%
Total	$	137,350	100.0	%

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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. We had no FHLB borrowings ~~were $30.0~~at June 30, 2022 and $7.0 million and $35.0 million at March 31, 2021 and December 31, 2020, respectively. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at March 31, 2021 and December 31, 2020. Total loans pledged as collateral were $781.3 million and $804.2 million at March 31, 2021 and December 31, 2020, respectively. There were no securities available-for-sale pledged as collateral at both March 31, 2021 and December 31, 2020. The Bank continues to methodically pledge additional eligible loans, with the ultimate expectation to have full pledging by year end 2021. The Company is eligible to borrow up to an additional $506.1 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25% of the Company’s assets, as of March 31, 2021. The Company had the capacity to borrow up to an additional $510.5 million from the FHLB at December 31, ~~2020.~~2021.

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


(Dollars in Thousands)	(Dollars in Thousands)	March 31, 2021			December 31, 2020			(Dollars in Thousands)	June 30, 2022			December 31, 2021
Balance at Period End	Balance at Period End	$	30,000		$	35,000		Balance at Period End	$	—		$	7,000
Average Balance during the Period	Average Balance during the Period	$	33,889		$	30,628		Average Balance during the Period	$	4,011		$	25,986
Average Interest Rate during the Period	Average Interest Rate during the Period	1.15		%	1.18		%	Average Interest Rate during the Period	0.80		%	1.20		%
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	$	20,000		$	35,000
Average Interest Rate at Period End	Average Interest Rate at Period End	1.15		%	1.13		%	Average Interest Rate at Period End	—		%	1.61		%

The Company held FHLB Atlanta stock of ~~$3.2~~$2.1 million and ~~$5.1~~$2.4 million at ~~March 31, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, respectively. Dividends recorded on this restricted stock were ~~$37~~$22 thousand and ~~$64~~$42 thousand for the three and six months ended ~~March 31, 2021~~June 30, 2022 compared to $31 thousand and ~~March 31, 2020, respectively.~~$68 thousand for the same periods in 2021. 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 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.

Refer to Note 8, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings.

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~~The Company’s 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~~$728.5 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~~the Company’s 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, 2021,~~June 30, 2022, the Bank had ~~$844.7~~$755.6 million in highly liquid assets,

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CARTER BANKSHARES, INC.

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

which consisted of ~~$65.6~~$0.8 million in interest-bearing deposits in other financial institutions, ~~$110.6~~$26.3 million in FRB Excess Reserves ~~$626.3~~and $728.5 million in unpledged ~~securities, $32.7 million in mortgage loans held-for-sale and $9.4 million in loans held-for-sale in connection with sale of Bank branches.~~securities. This resulted in highly liquid assets to total assets ratio of ~~20.4%~~18.3% at ~~March 31, 2021.~~June 30, 2022.

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)	June 30, 2022		December 31, 2021
Cash and Due From Banks	Cash and Due From Banks	$	48,108	$	38,535	Cash and Due From Banks	$	43,194	$	36,698
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	745		64,905
Federal Reserve Bank Excess Reserves	Federal Reserve Bank Excess Reserves	110,631		163,453		Federal Reserve Bank Excess Reserves	26,301		176,196
Unpledged Investment Securities	Unpledged Investment Securities	626,285		632,724		Unpledged Investment Securities	728,515		743,836
Excess Pledged Securities	Excess Pledged Securities	22,863		7,857		Excess Pledged Securities	22,861		28,417
FHLB Borrowing Availability	FHLB Borrowing Availability	506,105		510,533		FHLB Borrowing Availability	773,628		667,307
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	$	1,740,244	$	1,862,359

Regulatory Capital Requirements

Total shareholders’ equity decreased by ~~$52.3~~$73.5 million to ~~$387.9~~$334.1 million at ~~March 31, 2021~~June 30, 2022 compared to ~~$440.2~~$407.6 million at December 31, ~~2020.~~2021. 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~~$61.7 million, net of tax, ~~decrease~~decline in other comprehensive loss due to changes in the fair value of available-for-sale securities due to unrealized losses driven by increases in market interest rates, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of ~~$9.4 million.~~$20.1 million for the six months ended June 30, 2022. The remaining difference of $0.5 million is related to stock-based compensation during the ~~three~~six months ended ~~March 31, 2021.~~June 30, 2022.

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, 2021~~June 30, 2022 and December 31, ~~2020,~~2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the ~~institutions~~institution’s category.

At ~~March 31, 2021,~~June 30, 2022, the Bank continues to maintain its capital position with a leverage ratio of ~~10.17%~~9.93% 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%~~12.67% 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%~~12.67% and ~~14.14%~~13.93%, 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.

The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.

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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, 2021 and December 31, 2020,Capital Rules require the Company and the Bank ~~met all capital adequacy requirements~~ to ~~which we are subject~~maintain minimum Common Equity Tier 1, Tier 1 and ~~satisfied the applicable~~Total Capital ratios, along with a capital conservation buffer, ~~requirements.~~effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.

The following table summarizes the actual 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)	Minimum Required Basel III		Well Capitalized(1)		June 30, 2022				December 31, 2021
						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		$	419,491	9.96	%	$	443,940	10.62	%
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)	7.00	%	NA		419,491		12.70	%	443,940		14.21	%
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)	8.50	%	NA		419,491		12.70	%	443,940		14.21	%
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)	10.50	%	NA		461,107		13.96	%	483,124		15.46	%

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	%	$	418,300	9.93	%	$	438,533	10.49	%
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)	7.00	%	6.50	%	418,300		12.67	%	438,533		14.04	%
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)	8.50	%	8.00	%	418,300		12.67	%	438,533		14.04	%
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)	10.50	%	10.00	%	459,905		13.93	%	477,710		15.29	%

~~The Company was incorporated on October 7, 2020, by and at~~(1)To be “well capitalized” under the ~~direction of~~prompt corrective action provisions in the ~~Board of Directors of~~Basel III framework. “Well capitalized” applies to 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, and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s common stock was converted into and exchanged for one newly issued share of the Company’s common stock.only.

In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the ~~FRB,~~Federal Reserve System, (“FRB”), and the ~~FDIC~~Federal Deposit Insurance Corporation, (“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 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The ~~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, 2021,~~June 30, 2022, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments 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.~~2021.

Off-Balance Sheet Arrangements

As of ~~March 31, 2021,~~June 30, 2022, 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.~~

2021.

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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~~by simulating various rate shock scenarios and analyzing the results of the rate shocks on the Company’s projected net interest income ~~simulation for various rate shock scenarios~~(“NII”) 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~~NII 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~~prepayment speeds, the average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in the 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~~NII rate shock simulation results are compared to a base case NII result to provide an estimate of the impact that simulated market rate changes may have on 12 months and 24 months of pretax ~~net interest income.~~NII. The base case ~~and~~earnings scenario together with various rate shock ~~analyses~~earning scenarios are ~~performed on~~modeled utilizing both a static and growth balance sheet. A static balance sheet is a ~~no growth~~no-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product ~~spread. Rate~~spread over a prescribed index. Parallel rate shock analyses assume an immediate parallel shift in market interest rates across all horizons of the yield curve and also include ~~management~~management’s 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 embedded optionality. Our policy guidelines limit the change in pretax ~~net interest income~~NII 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~~rising interest rate environment, we believe the impact to ~~net interest~~NII income when evaluating the ~~-100,~~ -200, -300, and -400 basis point rate shock scenarios ~~does~~do not provide meaningful insight into our interest rate risk position.

~~In order to~~To monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE ~~analyses.~~rate shock simulations using the same assumptions used in the NII rate shock simulations discussed above. EVE represents the present value of all asset cash flows discounted with related market interest rates minus the present value of all liability cash ~~flows.~~flows which are also discounted with related market interest rates. The impact of a changing interest rate environment on the Company’s projected EVE is analyzed by shocking market interest rates, then modeling the impact of the rate ~~change~~shock on both the cash flow of assets and liabilities, and the underlying discount rate utilized in the present value calculation of the assets and liabilities. Market rate shock results are then compared to a base case simulation results to determine the impact that market rate changes may have on our EVE. As with NII rate shock ~~analysis,~~analyses, EVE rate shock analyses incorporate ~~management~~management’s assumptions regarding prepayment behavior of fixed rate loans and securities with embedded 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~~2022 and 2021 due to the ~~low~~current interest rate environment.

~~Table of Contents~~

~~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
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 39.8 % 20.4 % 39.6% 20.1%
300 30.8 % 17.3 % 30.7% 17.5%
200 21.4 % 13.4 % 21.1% 13.8%
100 10.7 % 7.6 % 10.7% 8.1%

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CARTER BANKSHARES, INC.

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


	June 30, 2022		December 31, 2021
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	21.6%	3.9%	43.6%	24.6%
300	16.3%	4.3%	33.1%	20.6%
200	11.0%	3.8%	22.5%	15.4%
100	5.6%	2.5%	11.4%	8.6%
-100	(7.1)%	(6.3)%	(2.4)%	(7.0)%

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.

Based on the ALM results presented above for the quarters ending June 30, 2022 and December 31, 2021, the Company’s balance sheet is less asset sensitive at June 30, 2022 than it previously was at December 31, 2021. This migration in asset sensitivity is due to 1) lower yielding, floating rate excess cash positions held in federal reserve bank and interest-bearing deposits in other financial institutions that are more sensitive to future market interest rate changes which were deployed into higher yielding, fixed and floating rate securities and portfolio loans that are less sensitive to future market interest rate changes, and 2) the recent shifts in the shape of the yield curve between the two periods presented 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.~~NII. 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 defined in Rule 13a-15(e) of the Exchange Act) as of ~~March 31, 2021.~~June 30, 2022. 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.

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, 2021~~June 30, 2022 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 the timing and outcome of these legal and administrative proceedings and claims cannot be predicted with certainty, based on information presently available and after consultation with legal counsel, management does not believe that the disposition of such proceedings or claims will have a material adverse effect on our business, consolidated financial position, or results of operations. As of ~~March 31, 2021,~~June 30, 2022, no material legal proceedings were pending or threatened against the Company.

ITEM 1A – RISK FACTORS

As of ~~March 31, 2021,~~June 30, 2022, there have been no material changes in the risk factors faced by the Company from those disclosed in our ~~2020~~ 2021 Annual Report on Form ~~10-K.~~10-K.

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

~~None.~~On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months (the “Program”). The Program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Program permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022.

On June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months[, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022](the “New Program”). The New Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the New Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The New Program is authorized through August 1, 2023, although it may be modified or terminated by the Board at any time. The New Program does not obligate the Company to purchase any particular number of shares

The following table provides information regarding the Company’s purchases of our common stock during the quarter ended June 30, 2022.


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum number (or approximate dollar value) of Shares that may yet be purchased under the plans or programs(1)
April 1 - April 30, 2022	446,436	$	17.44	446,436	—
May 1 - May 31, 2022	—	—		—	—
June 1 - June 30, 2022	—	—		—	750,000
Total	446,436	$	—	446,436

(1)The number shown represents, as of the end of each period, the approximate number of Common Stock shares that may yet be purchased under publicly-announced share repurchase plan authorizations. The shares may be purchased, from time-to-time, depending on market conditions.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

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CARTER BANKSHARES, INC.

ITEM 5 - OTHER INFORMATION

None.

~~Table of Contents~~

~~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)

10.13			Carter Bank & Trust Non-Qualified Deferred Compensation Plan (for directors and executives) - Virginia Bankers Association Model Nonqualified Supplemental Deferred Compensation Plan Document, adopted on May 19, 2022, effective as of January 1, 2023 (filed herewith).

10.13.1			Carter Bank & Trust Non-Qualified Deferred Compensation Plan (for directors and executives) – Virginia Bankers Association Model Adoption Agreement, adopted on May 19, 2022, effective as of January 1, 2023 (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, 2021~~August 3, 2022			/s/ Litz H. Van Dyke
			Litz H. Van Dyke Chief Executive Officer (Principal Executive Officer)

Date: ~~May 7, 2021~~August 3, 2022			/s/ Wendy S Bell
			Wendy S. Bell Chief Financial Officer (Principal Financial Officer)

6663


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


	Nonperforming Assets
(Dollars in Thousands)	March 31, 2021		December 31, 2020
Nonperforming Assets
Nonaccrual loans	$	7,331	$	7,018
Nonaccrual TDRs	24,625		24,986
Total Nonaccrual Loans	31,956		32,004
OREO	14,031		15,722
Total Nonperforming Assets	$	45,987	$	47,726


	Three Months Ended March 31, 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	884		(117)		(156)		478		768		0		1,857
Charge-offs	0		(1)		(195)		(870)		0		0		(1,066)
Recoveries	0		1		166		137		61		0		365
Net (Charge-offs) / Recoveries	0		0		(29)		(733)		61		0		(701)
Balance at End of Period	$	42,342	$	4,905	$	5,171	$	1,347	$	7,106	$	56,001	$	116,872


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


	Three Months Ended March 31, 2020
(Dollars in Thousands)	Average Investment on Individually Evaluated Loans		Interest Income Recognized
Loans without a Specific Valuation Allowance
Commercial Real Estate	$	3,992	$	32
Construction	58,104		413
Residential Mortgages	52,315		620
Loans with a Specific Valuation Allowance
Commercial Real Estate	28,748		0
Commercial & Industrial	340		0
Construction	870		0
Total by Category
Commercial Real Estate	32,740		32
Commercial & Industrial	340		0
Construction	58,974		413
Residential Mortgages	52,315		620
Total Individually Evaluated Loans	$	144,369	$	1,065


			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


	For the Three Months Ended March 31,
(Dollars in Thousands)	2021		2020
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans	$	0	$	11
Forward Sale Contracts – Mortgage Loans	0		(11)
Interest Rate Swap Contracts – Commercial Loans	429		(91)
Total Derivative Income (Loss)	$	429	$	(91)


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


(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


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