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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, 2022

OR

☐ 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.

(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) (276) 656-1776

NA

(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 ☒ 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, 2022 there were 24,578,032 shares of the registrant’s common stock issued and outstanding.

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			3
ITEM 1 – FINANCIAL STATEMENTS			3
Consolidated Balance Sheets - March 31, 2022 (unaudited) and December 31, 2021 (audited)			3
Consolidated Statements of Income - Three Months Ended March 31, 2022 and 2021 (unaudited)			3
Consolidated Statements of Comprehensive Loss - Three Months Ended March 31, 2022 and 2021 (unaudited)			5
Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 2022 and 2021 (unaudited)			6
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021 (unaudited)			7
Notes to Unaudited Consolidated Financial Statements			8
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			52
ITEM 4 - CONTROLS AND PROCEDURES			53
PART II – OTHER INFORMATION			54
ITEM 1 - LEGAL PROCEEDINGS			55
ITEM 1A - RISK FACTORS			55
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			55
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES			55
ITEM 4 - MINE SAFETY DISCLOSURES			55
ITEM 5 - OTHER INFORMATION			55
ITEM 6 - EXHIBITS			56
SIGNATURES			57

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CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands Except per Share Data)						March 31, 2022 (unaudited)						December 31, 2021 (audited)
ASSETS
Cash and Due From Banks						$	38,534					$	36,698
Interest-Bearing Deposits in Other Financial Institutions						26,462						64,905
Federal Reserve Bank Excess Reserves						43,040						176,196
Total Cash and Cash Equivalents						108,036						277,799
Securities Available-for-Sale, at Fair Value						982,041						922,400
Loans Held-for-Sale						196						228
Portfolio Loans						2,894,004						2,812,129
Allowance for Credit Losses						(96,376)						(95,939)
Portfolio Loans, net						2,797,628						2,716,190
Bank Premises and Equipment, net						73,402						75,297
Other Real Estate Owned, net						11,253						10,916
Federal Home Loan Bank Stock, at Cost						2,067						2,352
Bank Owned Life Insurance						55,712						55,378
Other Assets						92,891						73,186
Total Assets						$	4,123,226					$	4,133,746
LIABILITIES
Deposits:
Noninterest-Bearing Demand						$	708,353					$	747,909
Interest-Bearing Demand						480,192						452,644
Money Market						526,838						463,056
Savings						728,425						690,549
Certificates of Deposit						1,284,470						1,344,318
Total Deposits						3,728,278						3,698,476
Federal Home Loan Bank Borrowings						—						7,000
Other Liabilities						36,392						20,674
Total Liabilities						3,764,670						3,726,150
SHAREHOLDERS’ EQUITY
Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares; Outstanding shares 24,986,726 at March 31, 2022 and 26,430,919 at December 31, 2021						24,987						26,431
Additional Paid-in Capital						121,045						143,988
Retained Earnings						244,798						235,475
Accumulated Other Comprehensive (Loss) Income						(32,274)						1,702
Total Shareholders’ Equity						358,556						407,596
Total Liabilities and Shareholders’ Equity						$	4,123,226					$	4,133,746

See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands Except per Share Data)												Three Months Ended March 31,
																		2022						2021
INTEREST INCOME
Loans, including Fees
Taxable																		$	27,745					$	28,145
Non-Taxable																		952						1,412
Investment Securities
Taxable																		3,732						2,987
Non-Taxable																		167						326
Federal Reserve Bank Excess Reserves																		37						26
Interest on Bank Deposits																		25						24
Dividend Income																		20						37
Total Interest Income																		32,678						32,957
Interest Expense
Interest Expense on Deposits																		4,399						6,295
Interest on Other Borrowings																		57						133
Total Interest Expense																		4,456						6,428
NET INTEREST INCOME																		28,222						26,529
Provision for Credit Losses																		630						1,857
Provision for Unfunded Commitments																		(236)						(282)
Net Interest Income After Provision for Credit Losses																		27,828						24,954
NONINTEREST INCOME
(Losses) Gains on Sales of Securities, net																		(24)						3,610
Service Charges, Commissions and Fees																		1,953						1,809
Debit Card Interchange Fees																		1,932						1,831
Insurance Commissions																		269						294
Bank Owned Life Insurance Income																		334						340
Gains on Sales and Write-downs of Bank Premises, net																		383						—
Other Real Estate Owned Income																		10						71
Commercial Loan Swap Fee Income																		—						219
Other																		478						778
Total Noninterest Income																		5,335						8,952
NONINTEREST EXPENSE
Salaries and Employee Benefits																		11,757						12,582
Occupancy Expense, net																		3,352						3,514
FDIC Insurance Expense																		368						643
Other Taxes																		804						762
Advertising Expense																		239						170
Telephone Expense																		488						600
Professional and Legal Fees																		1,219						1,224
Data Processing																		841						921
Losses on Sales and Write-downs of Other Real Estate Owned, net																		159						212
Losses on Sales and Write-downs on Bank Premises, net																		—						43
Debit Card Expense																		633						632
Tax Credit Amortization																		615						427
Other Real Estate Owned Expense																		41						54
Other																		1,995						1,821
Total Noninterest Expense																		22,511						23,605
Income Before Income Taxes																		10,652						10,301
Income Tax Provision																		1,329						926
Net Income																		$	9,323					$	9,375
Earnings per Common Share
Basic Earnings per Common Share																		$	0.36					$	0.36
Diluted Earnings per Common Share																		$	0.36					$	0.36
Average Shares Outstanding – Basic & Diluted																		25,740,636						26,276,890

See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

												Three Months Ended March 31,
(Dollars in Thousands)																		2022						2021
Net Income																		$	9,323					$	9,375
Other Comprehensive Loss:
Net Unrealized Losses on Securities Available-for-Sale:
Net Unrealized Losses Arising during the Period																		(43,032)						(10,494)
Reclassification Adjustment for Losses (Gains) included in Net Income																		24						(3,610)
Tax Effect																		9,032						2,962
Net Unrealized Losses Recognized in Other Comprehensive Loss																		(33,976)						(11,142)
Other Comprehensive Loss																		(33,976)						(11,142)
Comprehensive Loss																		$	(24,653)					$	(1,767)

See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

						Three Months Ended March 31, 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						—						—						9,323						—						9,323
Other Comprehensive Loss, Net of Tax						—						—						—						(33,976)						(33,976)
Repurchase of Common Stock (1,523,157 shares)						(1,523)						(23,103)						—						—						(24,626)
Forfeiture of Restricted Stock (9,692 shares)						(10)						(146)						—						—						(156)
Issuance of Restricted Stock (88,656 shares)						89						(89)						—						—						—
Recognition of Restricted Stock Compensation Expense						—						395						—						—						395
Balance at March 31, 2022						$	24,987					$	121,045					$	244,798					$	(32,274)					$	358,556

						Three Months Ended March 31, 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						—						—						9,375						—						9,375
Cumulative Effect for Adoption of Credit Losses						—						—						(50,726)						—						(50,726)
Other Comprehensive Loss, Net of Tax						—						—						—						(11,142)						(11,142)
Issuance of Restricted Stock (82,490 shares)						83						(83)						—						—						—
Recognition of Restricted Stock Compensation Expense						—						208						—						—						208
Balance at March 31, 2021						$	26,468					$	143,582					$	213,260					$	4,579					$	387,889

See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

						Three Months Ended March 31,
(Dollars in Thousands)						2022						2021
Net Income						$	9,323					$	9,375
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments						394						1,575
Origination of Loans Held-for-Sale						(3,554)						(314,092)
Proceeds From Loans Held-for-Sale						3,672						306,866
Depreciation/Amortization of Bank Premises and Equipment						1,478						1,559
Provision for Deferred Taxes						1,154						—
Net Amortization of Securities						1,634						902
Tax Credit Amortization						615						427
Gains on Sales of Mortgage Loans Held-for-Sale						(86)						(74)
Losses (Gains) on Sales of Securities, net						24						(3,610)
Write-downs of Other Real Estate Owned						131						139
Losses on Sales of Other Real Estate Owned, Net						28						73
(Gains) Losses on Sales and Write-downs of Bank Premises						(383)						43
Increase in the Value of Life Insurance Contracts						(334)						(340)
Recognition of Restricted Stock Compensation Expense						395						208
Increase in Other Assets						(9,563)						(413)
Increase (Decrease) in Other Liabilities						7,542						(2,279)
Net Cash Provided By Operating Activities						12,470						359
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales						4,921						64,870
Proceeds from Maturities, Redemptions, and Pay-downs						26,406						25,365
Purchases						(131,519)						(92,014)
Purchase of Bank Premises and Equipment, Net						(809)						(1,624)
Proceeds from Sales of Bank Premises and Equipment, net						408						—
Redemption of Federal Home Loan Bank Stock, net						285						1,878
Loan Originations and Payments, net						(82,032)						(24,994)
Payments Received on Other Real Estate Owned						108						—
Proceeds from Sales and Payments of Other Real Estate Owned						561						1,479
Net Cash Used In Investing Activities						(181,671)						(25,040)
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts						89,650						103,276
Decrease in Certificates of Deposits						(59,848)						(96,383)
Payments on Federal Home Loan Bank Borrowings						(7,000)						(5,000)
Repurchase of Common Stock						(23,364)						—
Net Cash (Used In) Provided by Financing Activities						(562)						1,893
Net Decrease in Cash and Cash Equivalents						(169,763)						(22,788)
Cash and Cash Equivalents at Beginning of Period						277,799						241,942
Cash and Cash Equivalents at End of Period						$	108,036					$	219,154
SUPPLEMENTARY DATA
Cash Interest Paid						$	4,501					$	6,666
Cash Paid for Income Taxes						—						88
Transfer from Fixed Assets to Other Real Estate Owned						1,201						—
Security (Purchases) Settled in Subsequent Period						(4,115)						(10,970)
Right-of-use Asset Recorded in Exchange for Lease Liabilities						2,879						2,027
Stock Repurchase Settled in Subsequent Period						(1,262)						—

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 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, 2021, filed with the Securities and Exchange Commission (“SEC”), on March 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.

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 Company did not adopt any new accounting standards in the first quarter of 2022 that had a material impact to our financial statements.

Accounting Statements Issued but Not Yet Adopted

In March 2022, the FASB issued ASU No. 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications now will be evaluated to determine if they result in a new loan or a continuation of the existing loan. The amendments in this ASU also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. We are currently evaluating the impact of the updated guidance on our Consolidated Financial Statements and write-offs. The amendments in this ASU are effective January 1, 2023, with early adoption permitted. The Company plans to early adopt this ASU in 2022.

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

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

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

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

As of March 31, 2022, approximately 16.0% of our loan portfolio consists of loans whose variable rate index is LIBOR. We ceased originating new LIBOR 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 allocated to common shareholders by the weighted average number shares of common stock outstanding during the period. 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.

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,
(Dollars in Thousands, except share and per share data)																		2022						2021
Numerator for Earnings per Share – Basic and Diluted
Net Income																		$	9,323					$	9,375
Less: Income allocated to participating shares																		43						46
Net Income Allocated to Common Shareholders - Basic & Diluted																		$	9,280					$	9,329
Denominator:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities																		25,859,982						26,408,319
Less: Average Participating Securities																		119,346						131,429
Weighted Average Common Shares Outstanding - Basic & Diluted																		25,740,636						26,276,890
Earnings per Common Share – Basic																		$	0.36					$	0.36
Earnings per Common Share – Diluted																		$	0.36					$	0.36

All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per 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, 2022
(Dollars in Thousands)						Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
U.S. Treasury Securities						$	19,263					$	—					$	(654)					$	18,609
U.S. Government Agency Securities						3,490						—						(253)						3,237
Residential Mortgage-Backed Securities						122,266						5						(6,549)						115,722
Commercial Mortgage-Backed Securities						44,302						153						(810)						43,645
Asset Backed Securities						86,545						7						(1,112)						85,440
Collateralized Mortgage Obligations						316,798						52						(11,841)						305,009
Small Business Administration						68,233						591						(118)						68,706
States and Political Subdivisions						288,247						477						(17,981)						270,743
Corporate Notes						73,750						51						(2,871)						70,930
Total Debt Securities						$	1,022,894					$	1,336					$	(42,189)					$	982,041

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

						December 31, 2021
(Dollars in Thousands)						Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
U.S. Treasury Securities						$	4,442					$	—					$	(29)					$	4,413
U.S. Government Agency Securities						3,475						3						—						3,478
Residential Mortgage-Backed Securities						112,118						76						(2,181)						110,013
Commercial Mortgage-Backed Securities						4,155						53						(40)						4,168
Asset Backed Securities						82,119						49						(305)						81,863
Collateralized Mortgage Obligations						287,734						2,190						(2,310)						287,614
Small Business Administration						108,643						879						(608)						108,914
States and Political Subdivisions						257,810						6,344						(1,952)						262,202
Corporate Notes						59,750						375						(390)						59,735
Total Debt Securities						$	920,246					$	9,969					$	(7,815)					$	922,400

The Company did not have securities classified as held-to-maturity at March 31, 2022 or December 31, 2021.

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

												Three Months Ended March 31,
(Dollars in Thousands)																		2022						2021
Proceeds from Sales of Securities Available-for-Sale																		$	4,921					$	64,870
Gross Realized Gains																		$	—					$	3,629
Gross Realized Losses																		(24)						(19)
Net Realized (Losses) Gains																		(24)						3,610
Tax Impact																		$	(5)					$	758

Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized (losses) gains above reflect reclassification adjustments in the calculation of Other Comprehensive Loss. The net realized (losses) gains are included in noninterest income as (losses) gains on sales of securities, net in the Consolidated Statements of Income. The tax impact is included in income tax provision in the Consolidated Statements of Income.

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, 2022
(Dollars in Thousands)						Amortized Cost						Fair Value
Due in One Year or Less						$	400					$	401
Due after One Year through Five Years						17,407						17,053
Due after Five Years through Ten Years						221,217						213,602
Due after Ten Years						213,959						201,169
Residential Mortgage-Backed Securities						122,266						115,722
Commercial Mortgage-Backed Securities						44,302						43,645
Collateralized Mortgage Obligations						316,798						305,009
Asset Backed Securities						86,545						85,440
Total Debt Securities						$	1,022,894					$	982,041

At March 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $164.6 million at March 31, 2022 and $178.6 million at December 31, 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, 2022 and December 31, 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, 2022
			Less Than 12 Months												12 Months or More												Total
(Dollars in Thousands)			Number of Securities			Fair Value			Unrealized Losses						Number of Securities			Fair Value			Unrealized Losses						Number of Securities			Fair Value			Unrealized Losses
U.S. Treasury Securities			5			$	18,609		$	(654)					—			$	—		$	—					5			$	18,609		$	(654)
U.S. Government Agency Securities			2			3,237			(253)						—			—			—						2			3,237			(253)
Residential Mortgage-Backed Securities			37			105,273			(5,886)						7			10,137			(663)						44			115,410			(6,549)
Commercial Mortgage-Backed Securities			8			13,340			(467)						51			16,557			(343)						59			29,897			(810)
Asset Backed Securities			26			64,279			(775)						8			17,161			(337)						34			81,440			(1,112)
Collateralized Mortgage Obligations			94			262,649			(11,055)						12			24,932			(786)						106			287,581			(11,841)
Small Business Administration			9			13,725			(66)						3			4,302			(52)						12			18,027			(118)
States and Political Subdivisions			140			231,573			(16,129)						13			13,295			(1,852)						153			244,868			(17,981)
Corporate Notes			20			66,264			(2,736)						1			2,365			(135)						21			68,629			(2,871)
Total Debt Securities			341			$	778,949		$	(38,021)					95			$	88,749		$	(4,168)					436			$	867,698		$	(42,189)

			December 31, 2021
			Less Than 12 Months												12 Months or More												Total
(Dollars in Thousands)			Number of Securities			Fair Value			Unrealized Losses						Number of Securities			Fair Value			Unrealized Losses						Number of Securities			Fair Value			Unrealized Losses
U.S. Treasury Securities			2			$	4,413		$	(29)					—			$	—		$	—					2			$	4,413		$	(29)
U.S. Government Agency Securities			1			1,733			—						—			—			—						1			1,733			—
Residential Mortgage-Backed Securities			30			95,749			(2,030)						7			8,706			(151)						37			104,455			(2,181)
Commercial Mortgage-Backed Securities			1			1,987			(40)						—			—			—						1			1,987			(40)
Asset Backed Securities			17			44,095			(129)						10			21,895			(176)						27			65,990			(305)
Collateralized Mortgage Obligations			50			157,630			(1,945)						11			24,849			(365)						61			182,479			(2,310)
Small Business Administration			11			18,813			(235)						53			19,630			(373)						64			38,443			(608)
States and Political Subdivisions			56			88,746			(1,503)						8			7,874			(449)						64			96,620			(1,952)
Corporate Notes			10			29,683			(317)						1			2,427			(73)						11			32,110			(390)
Total Debt Securities			178			$	442,849		$	(6,228)					90			$	85,381		$	(1,587)					268			$	528,230		$	(7,815)

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended March 31, 2022 as the Company did not have securities classified as held-to-maturity at March 31, 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

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

As of March 31, 2022 and December 31, 2021, no OTTI has been identified for any investment securities in our portfolio. We do not believe any individual unrealized loss as of March 31, 2022 represents an OTTI. At March 31, 2022, there were 436 securities in an unrealized loss position and at December 31, 2021, there were 268 securities in an unrealized loss position. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. We generally do not intend to sell and it is not likely that we will be required to sell any of the securities in an unrealized loss position before recovery of amortized cost.

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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)						March 31, 2022						December 31, 2021
Commercial
Commercial Real Estate						$	1,343,206					$	1,323,252
Commercial and Industrial						345,345						345,376
Total Commercial Loans						1,688,551						1,668,628
Consumer
Residential Mortgages						483,382						457,988
Other Consumer						43,288						44,666
Total Consumer Loans						526,670						502,654
Construction						321,190						282,947
Other						357,593						357,900
Total Portfolio Loans						$	2,894,004					$	2,812,129
Loans Held-for-Sale						196						228
Total Loans						$	2,894,200					$	2,812,357

Troubled Debt Restructurings (“TDR”)

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

						March 31, 2022																		December 31, 2021
(Dollars in Thousands)						Performing TDRs						Nonperforming TDRs						Total TDRs						Performing TDRs						Nonperforming TDRs						Total TDRs
Commercial
Commercial Real Estate						$	2,239					$	3,014					$	5,253					$	2,679					$	2,742					$	5,421
Commercial and Industrial						11						—						11						14						—						14
Total Commercial TDRs						2,250						3,014						5,264						2,693						2,742						5,435
Consumer
Residential Mortgages						—						—						—						—						—						—
Other Consumer						—						—						—						—						—						—
Total Consumer TDRs						—						—						—						—						—						—
Construction						—						808						808						527						808						1,335
Other						169,228						—						169,228						169,372						—						169,372
Total TDRs						$	171,478					$	3,822					$	175,300					$	172,592					$	3,550					$	176,142

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 Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. As of March 31, 2022, there were minimal commitments to lend additional funds for loans identified as TDRs.

TDRs decreased $0.9 million, or 0.5% to $175.3 million at March 31, 2022 compared to December 31, 2021. During the three months ended March 31, 2022, the Company had one new TDR totaling $0.3 million in the commercial real estate segment, offset by $1.2 million of principal pay-downs. This new TDR loan was restructured with enhanced payment terms as a result of a forbearance agreement. TDRs of $3.8 million and $3.6 million as of March 31, 2022 and December 31, 2021, respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming. During the three months ended March 31, 2022, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds.

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CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

There were no TDR payment defaults during the three months ended March 31, 2022 or March 31, 2021. For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.

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

The following table presents nonperforming assets as of the dates presented:

						Nonperforming Assets
(Dollars in Thousands)						March 31, 2022						December 31, 2021
Nonperforming Assets
Nonaccrual loans						$	3,475					$	3,847
Nonaccrual TDRs						3,822						3,550
Total Nonaccrual Loans						7,297						7,397
Other Real Estate Owned, or (“OREO”)						11,253						10,916
Total Nonperforming Assets						$	18,550					$	18,313

As of March 31, 2022 and December 31, 2021, the Company had $854.9 thousand and $254.0 thousand, respectively, of residential real estate in the process of foreclosure. We also had $24.7 thousand at March 31, 2022 and $62.0 thousand at December 31, 2021 in residential real estate included in OREO.

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) 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 current expected credit losses, (“CECL”), model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

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

C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

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. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.

Credit Quality Indicators:

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

The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing into 2022, the Company used a five step approach for loan review in the following categories:

•Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $2.0 million or more;

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

•A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $2.0 million or more but not included in the top twenty LLRs;

•A sampling review of Credit Risk Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures;

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

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

The Company’s internally assigned grades are as follows:

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

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

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the 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 the periods presented:

						March 31, 2022
						Risk Rating
(Dollars in Thousands)						2022						2021						2020						2019						2018						2017 and Prior						Revolving												Total
Commercial Real Estate
Pass						$	57,112					$	201,879					$	161,037					$	206,487					$	262,968					$	408,942					$	36,672											$	1,335,097
Special Mention						—						226						—						—						—						4,526						—												4,752
Substandard						—						—						—						308						2,705						344						—												3,357
Total Commercial Real Estate						$	57,112					$	202,105					$	161,037					$	206,795					$	265,673					$	413,812					$	36,672											$	1,343,206
Commercial and Industrial
Pass						$	18,555					$	50,907					$	47,379					$	17,226					$	32,494					$	165,618					$	5,263											$	337,442
Special Mention						—						—						—						—						6						—						—												6
Substandard						—						10						6						58						4,885						2,800						138												7,897
Total Commercial and Industrial						$	18,555					$	50,917					$	47,385					$	17,284					$	37,385					$	168,418					$	5,401											$	345,345
Residential Mortgages
Pass						$	21,999					$	171,931					$	86,745					$	57,914					$	76,535					$	48,590					$	15,216											$	478,930
Special Mention						—						—						—						—						437						543						—												980
Substandard						—						—						—						1,003						679						1,790						—												3,472
Total Residential Mortgages						$	21,999					$	171,931					$	86,745					$	58,917					$	77,651					$	50,923					$	15,216											$	483,382
Other Consumer
Pass						$	4,570					$	7,981					$	9,240					$	692					$	357					$	20,052					$	339											$	43,231
Special Mention						—						—						—						—						—						—						—												—
Substandard						—						10						2						14						4						27						—												57
Total Other Consumer						$	4,570					$	7,991					$	9,242					$	706					$	361					$	20,079					$	339											$	43,288
Construction
Pass						$	6,853					$	163,951					$	91,596					$	11,854					$	15,822					$	17,730					$	11,890											$	319,696
Special Mention						—						—						—						—						—						74						—												74
Substandard						—						—						440						—						95						885						—												1,420
Total Construction						$	6,853					$	163,951					$	92,036					$	11,854					$	15,917					$	18,689					$	11,890											$	321,190
Other
Pass						$	—					$	—					$	—					$	—					$	—					$	185,132					$	—											$	185,132
Special Mention						—						—						—						—						—						3,233						—												3,233
Substandard						—						—						—						—						87,329						81,899						—												169,228
Total Other Loans						$	—					$	—					$	—					$	—					$	87,329					$	270,264					$	—											$	357,593
Total Portfolio Loans
Pass						$	109,089					$	596,649					$	395,997					$	294,173					$	388,176					$	846,064					$	69,380											$	2,699,528
Special Mention						—						226						—						—						443						8,376						—												9,045
Substandard						—						20						448						1,383						95,697						87,745						138												185,431
Total Portfolio Loans						$	109,089					$	596,895					$	396,445					$	295,556					$	484,316					$	942,185					$	69,518											$	2,894,004

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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
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
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
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
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
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
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

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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 performing and nonperforming status for our portfolio segments as of the periods presented.

						March 31, 2022
(Dollars in Thousands)						2022						2021						2020						2019						2018						2017 and Prior						Revolving												Total
Commercial Real Estate
Performing						$	57,112					$	202,105					$	161,037					$	206,487					$	262,967					$	413,547					$	36,672											$	1,339,927
Nonperforming						—						—						—						308						2,706						265						—												3,279
Total Commercial Real Estate						$	57,112					$	202,105					$	161,037					$	206,795					$	265,673					$	413,812					$	36,672											$	1,343,206
Commercial and Industrial
Performing						$	18,555					$	50,917					$	47,379					$	17,226					$	37,381					$	168,415					$	5,264											$	345,137
Nonperforming						—						—						6						58						4						3						137												208
Total Commercial and Industrial						$	18,555					$	50,917					$	47,385					$	17,284					$	37,385					$	168,418					$	5,401											$	345,345
Residential Mortgages
Performing						$	21,999					$	171,931					$	86,745					$	57,914					$	77,214					$	49,547					$	15,216											$	480,566
Nonperforming						—						—						—						1,003						437						1,376						—												2,816
Total Residential Mortgages						$	21,999					$	171,931					$	86,745					$	58,917					$	77,651					$	50,923					$	15,216											$	483,382
Other Consumer
Performing						$	4,570					$	7,991					$	9,240					$	695					$	357					$	20,076					$	339											$	43,268
Nonperforming						—						—						2						11						4						3						—												20
Total Other Consumer						$	4,570					$	7,991					$	9,242					$	706					$	361					$	20,079					$	339											$	43,288
Construction
Performing						$	6,853					$	163,951					$	91,929					$	11,854					$	15,917					$	17,822					$	11,890											$	320,216
Nonperforming						—						—						107						—						—						867						—												974
Total Construction						$	6,853					$	163,951					$	92,036					$	11,854					$	15,917					$	18,689					$	11,890											$	321,190
Other
Performing						$	—					$	—					$	—					$	—					$	87,329					$	270,264					$	—											$	357,593
Nonperforming						—						—						—						—						—						—						—												—
Total Other Loans						$	—					$	—					$	—					$	—					$	87,329					$	270,264					$	—											$	357,593
Total Portfolio Loans
Performing						$	109,089					$	596,895					$	396,330					$	294,176					$	481,165					$	939,671					$	69,381											$	2,886,707
Nonperforming						—						—						115						1,380						3,151						2,514						137												7,297
Total Portfolio Loans						$	109,089					$	596,895					$	396,445					$	295,556					$	484,316					$	942,185					$	69,518											$	2,894,004

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

						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						—						—						—												—						—						—												—
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

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:

						March 31, 2022
(Dollars in Thousands)						Current Loans						Loans 30-59 Days Past Due						Loans 60-89 Days Past Due						Total 30-89 Days Past Due						Nonaccrual Loans						Total Portfolio Loans
Commercial Real Estate						$	1,339,809					$	118					$	—					$	118					$	3,279					$	1,343,206
Commercial and Industrial						345,030						46						61						107						208						345,345
Residential Mortgages						480,433						133						—						133						2,816						483,382
Other Consumer						42,967						166						135						301						20						43,288
Construction						320,020						196						—						196						974						321,190
Other						357,593						—						—						—						—						357,593
Total						$	2,885,852					$	659					$	196					$	855					$	7,297					$	2,894,004

						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

Loans past due 90 days or more and still accruing were zero at March 31, 2022 and December 31, 2021. Loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days or more and still accruing decreased $0.8 million to $0.9 million at March 31, 2022 compared to $1.7 million at December 31, 2021 in all loan categories except construction, which increased $0.2 million.

There were no nonaccrual or past due loans related to loans held-for-sale at March 31, 2022 or December 31, 2021.

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, 2022. For the three months ended March 31, 2022, the amount of interest income on nonaccrual loans was immaterial.

						March 31, 2022
(Dollars in Thousands)						Beginning of Period Nonaccrual						End of Period Nonaccrual						Nonaccrual With No Related Allowance						Past Due 90+ Days Still Accruing
Commercial Real Estate						$	3,337					$	3,279					$	—					$	—
Commercial and Industrial						451						208						—						—
Residential Mortgages						2,551						2,816						—						—
Other Consumer						73						20						—						—
Construction						985						974						808						—
Other						—						—						—						—
Total Portfolio Loans						$	7,397					$	7,297					$	808					$	—

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status, but is considered a TDR. Impaired loans with a commitment of $1.0 million or more are individually evaluated. During the three months ended March 31, 2022, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented. Changes in the fair value of the types of collateral for individually evaluated loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.

						Type of Collateral
						March 31, 2022						December 31, 2021
(Dollars in Thousands)						Real Estate						Real Estate
Commercial Real Estate						$	2,705					$	2,742
Commercial and Industrial						—						—
Residential Mortgages						—						—
Other Consumer						—						—
Construction						808						808
Other						—						—
Total						$	3,513					$	3,550

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

						Three Months Ended March 31, 2022
(Dollars in Thousands)						Commercial Real Estate						Commercial and Industrial						Residential Mortgage						Other Consumer						Construction						Other						Total Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period						$	17,297					$	4,111					$	4,368					$	1,493					$	6,939					$	61,731					$	95,939
Provision for Credit Losses on Loans						221						(529)						169						303						466						—						630
Charge-offs						—						—						(17)						(435)						—						—						(452)
Recoveries						—						1						—						109						149						—						259
Net (Charge-offs) / Recoveries						—						1						(17)						(326)						149						—						(193)
Balance at End of Period						$	17,518					$	3,583					$	4,520					$	1,470					$	7,554					$	61,731					$	96,376

						Three Months Ended March 31, 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						(673)						(1,538)						(255)						478						(879)						4,724						1,857
Charge-offs						—						(1)						(195)						(870)						—						—						(1,066)
Recoveries						—						1						166						137						61						—						365
Net (Charge-offs) / Recoveries						—						—						(29)						(733)						61						—						(701)
Balance at End of Period						$	42,342					$	4,905					$	5,171					$	1,347					$	7,106					$	56,001					$	116,872

The adoption of ASU 2016-13 resulted in an increase to our ACL of $61.6 million on January 1, 2021 to the ACL and $2.9 million related to the life-of-loss reserve on 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 Other segment.

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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, impaired loans, OREO, and certain other assets.

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

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

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

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

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

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

The following are descriptions of the valuation methodologies that 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

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

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

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

Nonrecurring Basis

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

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

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

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, 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.

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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, 2022
(Dollars in Thousands)						Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities						$	18,609					$	18,609					$	—					$	—
U.S. Government Agency Securities						3,237						—						3,237						—
Residential Mortgage-Backed Securities						115,722						—						115,722						—
Commercial Mortgage-Backed Securities						43,645						—						43,645						—
Asset Backed Securities						85,440						4,996						80,444						—
Collateralized Mortgage Obligations						305,009						7,818						297,191						—
Small Business Administration						68,706						3,296						65,410						—
States and Political Subdivisions						270,743						4,115						266,628						—
Corporate Notes						70,930						—						59,865						11,065
Total Securities Available-for-Sale						982,041						38,834						932,142						11,065
Derivatives						10,781						—						10,781						—
Total						$	992,822					$	38,834					$	942,923					$	11,065
Liabilities
Derivatives						$	10,651					$	—					$	10,651					$	—
Total						$	10,651					$	—					$	10,651					$	—

						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 three securities totaling $11.1 million that are considered to be Level 3 securities at March 31, 2022 and two totaling $8.6 million at December 31, 2021. The change in the fair value of Level 3 securities available-for-sale from $8.6 million at December 31, 2021 to $11.1 million at March 31, 2022 is attributable to a change in the fair value 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

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

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

						March 31, 2022
(Dollars in Thousands)						Level 1						Level 2						Level 3						Fair Value
OREO						$	—					$	—					$	11,253					$	11,253
Individually Evaluated Loans						$	—					$	—					$	1,777					$	1,777

						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 $1.8 million at March 31, 2022 with a valuation allowance of $0.9 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 $11.3 million as of March 31, 2022, compared with $10.9 million at December 31, 2021. We had $0.1 million write-downs recorded on OREO for the three months ended March 31, 2022 and 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:

						March 31, 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		%
Total Individually Evaluated Loans						$	1,777
OREO						$	9,801					Appraisals						Estimated Selling Costs						10.0		%				10.0		%
OREO						627						Executed Sales Agreement						Estimated Selling Costs						5.0		%				5.0		%
OREO						190						Internal Valuations						Estimated Selling Costs						5.0		%				5.0		%
OREO						635						Discounted Internal Valuations						Management’s Discount & Estimated Selling Costs						7.3% – 50.7%						30.5		%
Total OREO						$	11,253

						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

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

GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

												Fair Value Measurements at March 31, 2022
(Dollars in Thousands)						Carrying Value						Level 1						Level 2						Level 3						Total
Financial Assets:
Cash and Cash Equivalents						$	108,036					$	38,534					$	69,502					$	—					$	108,036
Securities Available-for-Sale						982,041						38,834						932,142						11,065						982,041
Loans Held-for-Sale						196						—						—						196						196
Portfolio Loans, net						2,797,628						—						—						2,770,247						2,770,247
Federal Home Loan Bank Stock, at Cost						2,067						—						—						NA						NA
Other Assets- Interest Rate Derivatives						10,781						—						10,781						—						10,781
Accrued Interest Receivable						16,727						34						3,791						12,902						16,727
Financial Liabilities:
Deposits						$	3,728,278					$	708,353					$	1,735,455					$	1,308,271					$	3,752,079
Other Liabilities- Interest Rate Derivatives						10,651						—						10,651						—						10,651
FHLB Borrowings						—						—						—						—						—
Accrued Interest Payable						1,333						—						—						1,333						1,333

												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

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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 at the dates presented:

						Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets)
						March 31, 2022																		December 31, 2021
(Dollars in Thousands)						Number of Transactions						Notional Amount						Fair Value						Number of Transactions						Notional Amount						Fair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans						1						$	122					$	4					—						$	—					$	—
Interest Rate Swap Contracts – Commercial Loans						62						389,910						10,777						66						446,490						3,508
Total Derivatives not Designated as Hedging Instruments						63						$	390,032					$	10,781					66						$	446,490					$	3,508

						Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities)
						March 31, 2022																		December 31, 2021
(Dollars in Thousands)						Number of Transactions						Notional Amount						Fair Value						Number of Transactions						Notional Amount						Fair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans						1						$	122					$	4					—						$	—					$	—
Interest Rate Swap Contracts – Commercial Loans						62						389,910						10,647						66						446,490						3,682
Total Derivatives not Designated as Hedging Instruments						63						$	390,032					$	10,651					66						$	446,490					$	3,682

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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 recognized on derivatives for the periods presented:

												For the Three Months Ended March 31,
(Dollars in Thousands)																		2022						2021
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans																		$	4					$	—
Forward Sale Contracts – Mortgage Loans																		(4)						—
Interest Rate Swap Contracts – Commercial Loans																		304						429
Total Derivative Income																		$	304					$	429

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)
(Dollars in Thousands)						March 31, 2022						December 31, 2021						March 31, 2022						December 31, 2021
Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized						$	10,777					$	3,508					$	10,647					$	3,682
Gross Amounts Offset						—						—						—						—
Net Amounts Presented in the Consolidated Balance Sheets						10,777						3,508						10,647						3,682
Gross Amounts Not Offset (1)						—						—						—						(4,080)
Net Amount						$	10,777					$	3,508					$	10,647					$	(398)

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

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings serve as an additional source of liquidity for the Company. Federal Home Loan Bank, or (“FHLB”) borrowings were zero at March 31, 2022 and $7.0 million at December 31, 2021. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans. Total loans pledged as collateral were $1.1 billion at both March 31, 2022 and December 31, 2021. There were no securities available-for-sale pledged as collateral at both March 31, 2022 and December 31, 2021. The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year. The Company is eligible to borrow up to an additional $693.0 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, 2022. The Company had the capacity to borrow up to an additional $667.3 million from the FHLB at December 31, 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, 2022						December 31, 2021
Long-term Borrowings						$	—					$	7,000
Weighted Average Interest Rate						—		%				1.61		%

During the year ending December 31, 2021 the Company prepaid four FHLB advances totaling $28.0 million with a weighted average cost to borrow of 1.0%. One FHLB advance totaling $3.0 million was repaid at maturity in the fourth quarter of 2021. The remaining FHLB advances totaling $25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the borrowings totaling $43 thousand at December 31, 2021. The FHLB borrowing of $7.0 million was prepaid in January 2022 outside of its scheduled maturity. There were no new FHLB borrowings during the three months ended March 31, 2022.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represented 54.1% and 55.3%, of the commitments to extend credit at March 31, 2022 and December 31, 2021, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements.

The following table sets forth our commitments and letters of credit as of the dates presented:

(Dollars in Thousands)						March 31, 2022						December 31, 2021
Commitments to Extent Credit						$	493,765					$	513,482
Standby Letters of Credit						26,154						27,083
Total						$	519,919					$	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 sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk.

Life-of-Loss Reserve on Unfunded Loan Commitments

We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:

						Three Months Ended March 31,
(Dollars in Thousands)						2022						2021
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at Beginning of Period						$	1,783					$	144
Impact of Adopting ASU 2016-13						—						2,908
Balance after Adoption of ASU 2016-13						$	1,783					$	3,052
Provision for Unfunded Commitments						(236)						(282)
Total						$	1,547					$	2,770

Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments. The provision for unfunded commitments was a release of $0.2 million for the three months ended March 31, 2022 and $0.3 million for the three months ended March 31, 2021.

Litigation

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

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

						Three Months Ended March 31, 2022																		Three Months Ended March 31, 2021
(Dollars in Thousands)						Pre-Tax Amount						Tax Benefit						Net of Tax Amount						Pre-Tax Amount						Tax (Expense) Benefit						Net of Tax Amount
Net Unrealized Losses Arising during the period						$	(43,032)					$	9,037					$	(33,995)					$	(10,494)					$	2,204					$	(8,290)
Reclassification Adjustment for Losses (Gains) included in Net Income						24						(5)						19						(3,610)						758						(2,852)
Other Comprehensive Loss						$	(43,008)					$	9,032					$	(33,976)					$	(14,104)					$	2,962					$	(11,142)

NOTE 11 – STOCK REPURCHASE PLAN

On December 13, 2021, announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months. During the quarter ended March 31, 2022, 1,523,157 shares of common stock had been repurchased under this program at an average price of $16.17 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 of $15.22 per share. As of April 28, 2022, the repurchase program to purchase up to two million 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”), 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 month periods ended March 31, 2022 and March 31, 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 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 Policies and Estimates

•Overview

•Results of Operations and Financial Condition

•Earnings Summary

•Liquidity and Capital Resources

•Regulatory Capital Resources

•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 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,” “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 include, but are not limited to, statements related to the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and 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, litigation to which the Company is or has been a party and the potential impacts thereof, and other matters regarding or affecting the Company and its future business and operations. 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”);

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

•technological risks and developments;

•cyber-security threats, attacks or events;

•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, war and other military conflicts (such as the ongoing war between Russia and Ukraine) or public health events (such as the current COVID-19 pandemic), and the 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

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CARTER BANKSHARES, INC.

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

Company's loans or its other products and services, on incidents of cyberattacks and fraud, on the Company’s results of operations, liquidity or capital resources, 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, 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;

•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, 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;

•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;

•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;

•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 in this Quarterly Report, as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent filings with the 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.

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 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

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CARTER BANKSHARES, INC.

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

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 is reconciled to net interest income to an FTE basis (non-GAAP) in the Net Interest Income section of the "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 Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and 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, 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.”

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 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.

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 this strategy to successfully build our brand and grow our business in our markets.

Results of Operations and Financial Condition

Earnings Summary

Highlights for the Three Months Ended March 31, 2022

•Net interest income increased $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021 due primarily to the ongoing reduction in funding costs;

•The provision for credit losses decreased to $0.6 million for the three months ended March 31, 2022, compared to $1.9 million for the same period in 2021 due to improved qualitative reserves and lower net charge-offs, partialy offset by loan growth;

•Total noninterest income decreased $3.6 million to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021due to a reduction in gains on sales of securities;

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CARTER BANKSHARES, INC.

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

•Total noninterest expense decreased $1.1 million to $22.5 million for the three months ended March 31, 2022 compared to $23.6 million for the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and vacation carryover in the fourth quarter of 2021 as well as lower medical costs in the first three months of 2022; and

•Provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

We reported net income of $9.3 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2022 compared to net income of $9.4 million, or $0.36 diluted earnings per share, for the three months ended March 31, 2021.

						Three Months Ended March 31,
PERFORMANCE RATIOS						2022						2021
Return on Average Assets						0.92		%				0.92		%
Return on Average Shareholders’ Equity						9.57		%				9.72		%
Portfolio Loans to Deposit Ratio						77.62		%				80.51		%
Allowance for Credit Losses to Total Portfolio Loans						3.33		%				3.93		%

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

Total net interest income increased $1.7 million, or 6.4%, to $28.2 million for the three months ended March 31, 2022 compared to $26.5 million for the same period in 2021. This increase was primarily due to the ongoing reduction in funding costs. Net interest income, on an FTE basis (non-GAAP), increased $1.5 million, or 5.7%, to $28.5 million for the three months ended March 31, 2022 compared to $27.0 million for the same period in 2021. For the three months ended March 31, 2022, the increase in net interest income, on an FTE basis (non-GAAP), was driven by lower interest income of $0.4 million and lower interest expense of $1.9 million compared to the same period in 2021. Net interest margin increased 15 basis points to 2.88% for the three months ended March 31, 2022 compared to 2.73% for the same period in 2021. The net interest margin, on an FTE basis (non-GAAP), increased 13 basis points to 2.91% for the three months ended March 31, 2022 compared to 2.78% for the same period in 2021. The Company continues to focus on the expansion of net interest income and the net interest margin.

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

						Three Months Ended March 31,
(Dollars in Thousands)						2022						2021
Total Interest Income						$	32,678					$	32,957
Total Interest Expense						4,456						6,428
Net Interest Income per Consolidated Statements of Net Income						28,222						26,529
Adjustment to FTE Basis						298						462
Net Interest Income (FTE)(non-GAAP)						$	28,520					$	26,991
Net Interest Margin						2.88		%				2.73		%
Adjustment to FTE Basis						0.03		%				0.05		%
Net Interest Margin (FTE)(non-GAAP)						2.91		%				2.78		%

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, 2022																		Three Months Ended March 31, 2021
(Dollars in Thousands)						Average Balance						Income/ Expense						Rate						Average Balance						Income/ Expense						Rate
ASSETS
Interest-Bearing Deposits with Banks						$	140,080					$	62					0.18		%				$	174,731					$	50					0.12		%
Tax-Free Investment Securities(2)						26,579						211						3.22		%				51,589						413						3.25		%
Taxable Investment Securities						960,645						3,732						1.58		%				708,250						2,987						1.71		%
Total Securities						987,224						3,943						1.62		%				759,839						3,400						1.81		%
Tax-Free Loans(1)(2)						154,117						1,206						3.17		%				223,012						1,787						3.25		%
Taxable Loans(1)						2,690,781						27,745						4.18		%				2,777,423						28,145						4.11		%
Total Loans						2,844,898						28,951						4.13		%				3,000,435						29,932						4.05		%
Federal Home Loan Bank Stock						2,139						20						3.79		%				4,805						37						3.12		%
Total Interest-Earning Assets						3,974,341						$	32,976					3.36		%				3,939,810						$	33,419					3.44		%
Noninterest Earning Assets						154,971																		182,283
Total Assets						$	4,129,312																	$	4,122,093
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand						$	463,980					$	277					0.24		%				$	378,886					$	215					0.23		%
Money Market						510,286						284						0.23		%				309,624						266						0.35		%
Savings						705,759						178						0.10		%				644,806						162						0.10		%
Certificates of Deposit						1,308,799						3,660						1.13		%				1,620,543						5,652						1.41		%
Total Interest-Bearing Deposits						2,988,824						4,399						0.60		%				2,953,859						6,295						0.86		%
Federal Home Loan Bank Borrowings						1,400						6						1.74		%				33,889						96						1.15		%
Other Borrowings						4,358						51						4.75		%				2,307						37						6.50		%
Total Borrowings						5,758						57						4.01		%				36,196						133						1.49		%
Total Interest-Bearing Liabilities						2,994,582						4,456						0.60		%				2,990,055						6,428						0.87		%
Noninterest-Bearing Liabilities						739,556																		740,892
Shareholders' Equity						395,174																		391,146
Total Liabilities and Shareholders' Equity						$	4,129,312																	$	4,122,093
Net Interest Income(2)												$	28,520																	$	26,991
Net Interest Margin(2)																		2.91		%																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 decreased $0.3 million, or 0.8%, for the three months ended March 31, 2022 compared to the same period in 2021. Interest income, on an FTE basis (non-GAAP), decreased $0.4 million, or 1.3% for the three months ended March 31, 2022 compared to the same period in 2021. The change was primarily due to increases in average interest-earning assets of $34.5 million for the three months ended March 31, 2022, offset by a lower interest rate yield of eight basis points compared to

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CARTER BANKSHARES, INC.

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

the same period in 2021.

Average interest-bearing deposits with banks decreased $34.7 million and the average rate earned increased six basis points for the three months ended March 31, 2022 compared to the same period in 2021. Average loan balances decreased $155.5 million for the three months ended March 31, 2022 compared to the same periods in 2021 due to large commercial paydowns in 2021. Average Paycheck Protection Program (“PPP”) loans totaled $0.6 million as of March 31, 2022 compared to $31.2 million as of March 31, 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 eight basis points for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the increase in short-term interest rates mid-March 2022. At March 31, 2022, the loan portfolio was comprised of 31.0% floating rates which reprice monthly, 39.0% variable rates that reprice at least once during the life of the loan and the remaining 30.0% are fixed rate loans.

Average investment securities increased $227.4 million and the average rate earned decreased 19 basis points for the three months ended March 31, 2022 compared to the same period 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 March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

Interest expense decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily due to the intentional runoff of higher cost CDs in the first quarter of 2022 and in 2021. Interest expense on deposits decreased $1.9 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on the Company’s CDs. 

The average balances on CDs decreased $311.7 million or 19.2% for the three months ended March 31, 2022 compared to the same period 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 $200.7 million, $85.1 million and $61.0 million, respectively, for the three months ended March 31, 2022 compared to the same periods in 2021. The average rate paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts decreased 12 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

The average balances on borrowings decreased $30.4 million due to prepayments and scheduled maturities. Overall, the cost of interest-bearing liabilities decreased 27 basis points for the three months ended March 31, 2022 compared to the same period in 2021.

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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 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 Months Ended March 31, 2022 Compared to March 31, 2021
(Dollars in Thousands)						Volume(3)						Rate(3)						Increase/ (Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks						$	(11)					$	23					$	12
Tax-free Investment Securities(2)						(199)						(3)						(202)
Taxable Investment Securities						996						(251)						745
Total Securities						797						(254)						543
Tax-free Loans(1)(2)						(540)						(41)						(581)
Taxable Loans(1)						(888)						488						(400)
Total Loans						(1,428)						447						(981)
Federal Home Loan Bank Stock						(24)						7						(17)
Total Interest-Earning Assets						$	(666)					$	223					$	(443)
Interest Paid on:
Interest-Bearing Demand						$	50					$	12					$	62
Money Market						133						(115)						18
Savings						15						1						16
Certificates of Deposit						(981)						(1,011)						(1,992)
Total Interest-Bearing Deposits						(783)						(1,113)						(1,896)
Federal Home Loan Bank Borrowings						(123)						33						(90)
Other Borrowings						26						(12)						14
Total Borrowings						(97)						21						(76)
Total Interest-Bearing Liabilities						$	(880)					$	(1,092)					$	(1,972)
Change in Net Interest Margin						$	214					$	1,315					$	1,529

(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 the allowance for credit losses, (“ACL”), based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the 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 adopted ASU 2016-03 on January 1, 2021, and increased the ACL by $64.5 million for the Day 1 adjustment which 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 3.33% of total portfolio loans at March 31, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses decreased $1.3 million to $0.6 million for the three months ended March 31, 2022 compared to $1.9 million for the same period in 2021. The provision for unfunded commitments included a release of $0.2 million for the three months ended March 31, 2022 and a release of $0.3 million for the same period in 2021. For the three months ended March 31, 2022, the decrease in the provision for credit losses was primarily driven by improved qualitative reserves, lower loan charge-offs, offset by loan growth.

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.

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CARTER BANKSHARES, INC.

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

Noninterest Income

												Three Months Ended March 31,
(Dollars in Thousands)																														2022						2021						$ Change						% Change
(Losses) Gains on Sales of Securities, net																														$	(24)					$	3,610					$	(3,634)					(100.7)		%
Service Charges, Commissions and Fees																														1,953						1,809						144						8.0		%
Debit Card Interchange Fees																														1,932						1,831						101						5.5		%
Insurance Commissions																														269						294						(25)						(8.5)		%
Bank Owned Life Insurance Income																														334						340						(6)						(1.8)		%
Gains on Sales and Write-downs of Bank Premises, net																														383						—						383						NM
Other Real Estate Owned Income																														10						71						(61)						(85.9)		%
Commercial Loan Swap Fee Income																														—						219						(219)						(100.0)		%
Other																														478						778						(300)						(38.6)		%
Total Noninterest Income																														$	5,335					$	8,952					$	(3,617)					(40.4)		%

Total noninterest income decreased $3.6 million, or 40.4%, to $5.3 million for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily related to declines in net security gains of $3.6 million, a decrease in commercial loan swap fee income of $0.2 million and a $0.3 million decrease in other noninterest income. These decreases were partially offset by gains of $0.4 million on sales and write-downs of bank premises, net, a $0.1 million increase in service charges, commissions and fees and a $0.1 million increase in debit card interchange fees. The decline in security gains is due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales. The variances shown in commercial loan swap fee income is related to the timing and demand for this product in the current rising interest rate environment. The increases in service charges on deposit accounts and debit card interchange fees were primarily due to new accounts, incentives and increased account activity. The decrease in other noninterest income was related to the first quarter of 2021 as we had recorded a $0.2 million incentive true-up from a third-party and experienced fair value declines of $0.1 million related to our interest rate swap contracts with commercial customers.

Noninterest Expense

												Three Months Ended March 31,
(Dollars in Thousands)																														2022						2021						$ Change						% Change
Salaries and Employee Benefits																														$	11,757					$	12,582					$	(825)					(6.6)		%
Occupancy Expense, net																														3,352						3,514						(162)						(4.6)		%
FDIC Insurance Expense																														368						643						(275)						(42.8)		%
Other Taxes																														804						762						42						5.5		%
Advertising Expense																														239						170						69						40.6		%
Telephone Expense																														488						600						(112)						(18.7)		%
Professional and Legal Fees																														1,219						1,224						(5)						(0.4)		%
Data Processing																														841						921						(80)						(8.7)		%
Losses on Sales and Write-downs of Other Real Estate Owned, net																														159						212						(53)						(25.0)		%
Losses on Sales and Write-downs on Bank Premises, net																														—						43						(43)						(100.0)		%
Debit Card Expense																														633						632						1						0.2		%
Tax Credit Amortization																														615						427						188						44.0		%
Other Real Estate Owned Expense																														41						54						(13)						(24.1)		%
Other																														1,995						1,821						174						9.6		%
Total Noninterest Expense																														$	22,511					$	23,605					$	(1,094)					(4.6)		%

Total noninterest expense decreased $1.1 million, or 4.6%, for the three months ended March 31, 2022 compared to the same period in 2021. The decrease for the three months ended March 31, 2022 was driven by $0.8 million decrease in salaries and employee benefits and $0.3 million decrease in FDIC insurance expense. The decrease in salaries and employee benefits was primarily related to a decline in salaries as a result of our retail branch optimization project and a decrease in medical costs. The $0.3 million decrease in FDIC assessment resulted from improved financial metrics of the Bank that are used to perform the assessment.

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CARTER BANKSHARES, INC.

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

Provision for Income Taxes

The provision for income taxes increased $0.4 million to $1.3 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021. Pre-tax income increased $0.4 million for the three months ended March 31, 2022 compared to the same period in 2021. Our effective tax rate was 12.5% for the three months ended March 31, 2022 compared to 9.0% for the same period in 2021. The increase in the effective tax rate is primarily due to a higher level of 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, which are relatively consistent regardless of the level of pre-tax income.

Financial Condition

March 31, 2022

Total assets decreased $10.5 million, to $4.1 billion at March 31, 2022 compared to December 31, 2021. Federal Reserve Bank excess reserves decreased $133.2 million to $43.0 million at March 31, 2022 from $176.2 million at December 31, 2021 due to active balance sheet management.

Total portfolio loans increased $81.9 million, or 11.8% on an annualized basis, to $2.9 billion at March 31, 2022 compared to December 31, 2021 primarily due to higher loan growth in the first quarter of 2022. During 2021, loan growth was muted by large commercial loan payoffs and loan sales. The variances in loan segments for portfolio loans related to increases of $38.2 million in construction loans, $25.4 million in residential mortgages and $20.0 million in commercial real estate loans offset by decreases of $1.4 million in other consumer and $0.3 million in the other category.

Other real estate owned, (“OREO”), increased $0.3 million at March 31, 2022 compared to December 31, 2021 due to two branch closures completed in the first three months of 2022. This is part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. Closed retail bank offices increased $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021.

The securities portfolio increased $59.6 million and is currently 23.8% of total assets at March 31, 2022 compared to 22.3% of total assets at December 31, 2021. The increase is due to the bank’s strategy of redeploying excess cash into higher yielding assets, including both loans and bonds. The bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a mix of both fixed and floating rate instruments.

Total deposits increased $29.8 million to $3.7 billion at March 31, 2022 compared to December 31, 2021. The increases included $63.8 million in money market accounts, $37.9 million in savings accounts and $27.5 million in interest-bearing demand accounts, offset by the intentional decline of $59.8 million in CDs and a decline of $39.6 million in noninterest-bearing demand accounts. At March 31, 2022, noninterest-bearing deposits comprised 19.0% compared to 20.2% and 19.9% of total deposits at December 31, 2021 and March 31, 2021, respectively. CDs comprised 34.5%, 36.3% and 41.2% of total deposits at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

Total capital decreased by $49.0 million to $358.6 million at March 31, 2022 compared to $407.6 million at December 31, 2021. The decrease in equity was primarily due to a $34.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $24.6 million decrease related to the repurchase of common stock through March 31, 2022, partially offset by net income of $9.3 million for the three months ended March 31, 2022. The remaining difference of $0.3 million is related to stock-based compensation during the three months ended March 31, 2022.

The ACL was 3.33% of total portfolio loans at March 31, 2022 compared to 3.41% as of December 31, 2021. General reserves as a percentage of total portfolio loans were 3.30% at March 31, 2022 compared to 3.38% at December 31, 2021. Management believes, the ACL is adequate to absorb expected losses inherent in the loan portfolio.

The Company remains well capitalized. Our Tier 1 capital ratio decreased to 12.98% at March 31, 2022 compared to 14.21% at December 31, 2021. Our leverage ratio was 10.00% at March 31, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 14.24% at March 31, 2022 compared to 15.46% at December 31, 2021. 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)						March 31, 2022						December 31, 2021						$ Change
U.S. Treasury Securities						$	18,609					$	4,413					$	14,196
U.S. Government Agency Securities						3,237						3,478						(241)
Residential Mortgage-Backed Securities						115,722						110,013						5,709
Commercial Mortgage-Backed Securities						43,645						4,168						39,477
Asset Backed Securities						85,440						81,863						3,577
Collateralized Mortgage Obligations						305,009						287,614						17,395
Small Business Administration						68,706						108,914						(40,208)
States and Political Subdivisions						270,743						262,202						8,541
Corporate Notes						70,930						59,735						11,195
Total Debt Securities						$	982,041					$	922,400					$	59,641

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

The securities portfolio increased by $59.6 million to $982.0 million at March 31, 2022 compared to $922.4 million at December 31, 2021. Securities comprise 23.8% of total assets at March 31, 2022 compared to 22.3% at December 31, 2021. The increase is a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures. As of March 31, 2022, the securities portfolio was comprised of 47.6% variable rate securities with approximately 40.6% that will reprice at least once over the next 12 months.

At March 31, 2022 total gross unrealized gains in the available-for-sale portfolio were $1.3 million, offset by $42.2 million of gross unrealized losses. At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.

The unrealized losses on debt securities were primarily attributable to changes in interest rates, and not related to the credit quality of these securities. At December 31, 2021, the 5-year and 10-year U.S. Treasury yields were 1.26% and 1.52%, respectively. For the three months ended March 31, 2022, those same bond yields were 2.42% and 2.32%, respectively. Therefore, this increase of 116 bps and 80 bps, 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 Fed interest rate hikes.

Management evaluates the securities portfolio for other-than-temporary impairment (“OTTI”) on a quarterly basis. At March 31, 2022 and December 31, 2021, the Company did not record any OTTI. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.

Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our 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)						March 31, 2022						December 31, 2021
Commercial
Commercial Real Estate						$	1,343,206					$	1,323,252
Commercial and Industrial						345,345						345,376
Total Commercial Loans						1,688,551						1,668,628
Consumer
Residential Mortgages						483,382						457,988
Other Consumer						43,288						44,666
Total Consumer Loans						526,670						502,654
Construction						321,190						282,947
Other						357,593						357,900
Total Portfolio Loans						2,894,004						2,812,129
Loans Held-for-Sale						196						228
Total Loans						$	2,894,200					$	2,812,357

Our loan portfolio represents our most significant source of interest income. The risk that borrowers 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 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, 2021.

Total portfolio loans increased $81.9 million, or 2.9%, to $2.9 billion at March 31, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios. The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. At March 31, 2022, the loan portfolio was comprised of 31.0% floating rates which reprice monthly, 39.0% variable rates that reprice at least once during the life of the loan and the remaining 30.0% are fixed rate loans. The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at March 31, 2022 equated to approximately $406.2 million, or 14.0% 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. Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic. However, our clients continue to face challenges with respect to labor, which we believe impedes their ability to turnover rooms resulting in occupancy constraints. This has caused, or may cause, them to operate with lower levels 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.

Aggregate commitments to our top 10 credit relationships were $717.7 million at March 31, 2022. The Other segment represents 48.7% of the top 10 credit relationships.

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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						March 31, 2022 % of Gross Loans						March 31, 2022 % of RBC
						March 31, 2022						December 31, 2021
1. Hospitality, agriculture & energy						$349,818						$350,010						($192)						12.09		%				76.62		%
2. Retail real estate & food services						57,025						56,073						952						1.97		%				12.49		%
3. Hospitality						55,151						55,634						(483)						1.91		%				12.08		%
4. Industrial & retail real estate						45,176						45,653						(477)						1.56		%				9.89		%
5. Retail real estate						37,799						38,250						(451)						1.31		%				8.28		%
6. Hospitality						35,456						35,664						(208)						1.23		%				7.77		%
7. Multifamily & student housing						35,042						35,405						(363)						1.21		%				7.67		%
8. Hospitality						34,269						34,463						(194)						1.18		%				7.51		%
9. Multifamily development						34,190						36,720						(2,530)						1.18		%				7.49		%
10. Special/limited use						33,736						33,736						—						1.17		%				7.39		%
Top Ten (10) Relationships						717,662						721,608						(3,946)						24.80		%				157.18		%
Total Gross Loans						2,894,200						2,812,357						81,843
% of Total Gross Loans						24.80		%				25.66		%				(0.86)		%
Concentration (25% of RBC)						$114,146						$120,781

Unfunded commitments on lines of credit were $435.1 million at March 31, 2022 as compared to $433.1 million at December 31, 2021. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 54.4% at March 31, 2022 and 52.2% at December 31, 2021. Unfunded commitments on commercial operating lines of credit was 54.6% at March 31, 2022 and 51.7% at December 31, 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 $5.2 million and $4.5 million at March 31, 2022 and December 31, 2021, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $183.6 thousand and $190.6 thousand at March 31, 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. 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 were $0.2 million and $0.2 million at March 31, 2022 and December 31, 2021, respectively.

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

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CARTER BANKSHARES, INC.

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

Credit Quality

On a monthly basis, a Criticized Asset Committee meets to review 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.

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter. Annually, this same committee approves credit related policies and policy enhancements as they become available.

Additional credit risk management practices include continuous reviews of our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing. Our 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 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. 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.

Nonperforming assets consist of nonaccrual loans, nonaccrual troubled debt restructurings, (“TDRs”), and OREO. The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands)						March 31, 2022						December 31, 2021						$ Change
Nonperforming Loans
Commercial Real Estate						$	265					$	595					$	(330)
Commercial and Industrial						208						451						(243)
Residential Mortgages						2,816						2,551						265
Other Consumer						20						73						(53)
Construction						166						177						(11)
Other						—						—						—
Total Nonperforming Loans						3,475						3,847						(372)
Nonperforming Troubled Debt Restructurings
Commercial Real Estate						3,014						2,742						272
Commercial and Industrial						—						—						—
Residential Mortgages						—						—						—
Other Consumer						—						—						—
Construction						808						808						—
Other						—						—						—
Total Nonperforming Troubled Debt Restructurings						3,822						3,550						272
Total Nonperforming Loans and Troubled Debt Restructurings						7,297						7,397						(100)
Other Real Estate Owned						11,253						10,916						337
Total Nonperforming Assets						$	18,550					$	18,313					$	237

Nonperforming assets increased $0.2 million to $18.6 million at March 31, 2022 compared to December 31, 2021. The increase was primarily due to a $0.3 million an increase in OREO, offset by a $0.1 million decline in nonperforming loans. Closed retail bank offices increased $0.5 million and have a remaining book value of $1.5 million at March 31, 2022 compared to $1.0 million at December 31, 2021. During the 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.

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CARTER BANKSHARES, INC.

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

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 loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans.

Troubled Debt Restructuring (“TDRs”) are loans that we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. The Company strives to identify borrowers in financial difficulty early and work with them to modify terms and conditions before their loan defaults and/or is transferred to nonaccrual status. Modified terms that might be considered a TDR generally include extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. Short-term modifications that are considered insignificant are generally not considered a TDR unless there are other concessions granted.

An accruing loan that is characterized as a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period before the modification. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless a subsequent restructuring includes an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk, we fully expect that the remaining principal and interest will be collected according to the restructured agreement or the contractual terms of the original loan agreement are restored. Generally, the Company individually evaluates all impaired loans, which includes TDRs, with a commitment greater than or equal to $1.0 million for individually evaluated loan reserves. In addition, the Company may evaluate credits that have complex loan structures for impairment, even if the 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 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 significant 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 impaired loan. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. The loan will remain an impaired loan for the remaining life of the loan 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.

Allowance for Credit Losses

The following is the allocation of the ACL balance by segment for the periods presented:

						March 31, 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						$	17,518					46.4		%				$	17,297					47.0		%
Commercial & Industrial						3,583						11.9		%				4,111						12.3		%
Residential Mortgages						4,520						16.7		%				4,368						16.3		%
Other Consumer						1,470						1.5		%				1,493						1.6		%
Construction						7,554						11.1		%				6,939						10.1		%
Other						61,731						12.4		%				61,731						12.7		%
Balance End of Year						$	96,376					100.0		%				$	95,939					100.0		%

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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 the credit quality ratios and their components as of March 31, 2022 and December 31, 2021: 

(Dollars in Thousands)						March 31, 2022						December 31, 2021
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses						$	96,376					$	95,939
Total Portfolio Loans						2,894,004						2,812,129
Allowance for Credit Losses to Total Portfolio Loans						3.33		%				3.41		%
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans						$	7,297					$	7,397
Total Portfolio Loans						2,894,004						2,812,129
Nonperforming Loans to Total Portfolio Loans						0.25		%				0.26		%
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses						$	96,376					$	95,939
Nonperforming Loans						7,297						7,397
Allowance for Credit Losses to Nonperforming Loans						1,320.76		%				1,297.00		%
Net Charge-offs to Average Portfolio Loans
Net Charge-offs (annualized)						$	783					$	23,127
Average Total Portfolio Loans						2,844,668						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 ACL ratios presented in the table above. The net charge-offs of $23.1 million for the full year 2021 was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved.

The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses decreased $1.3 million to $0.6 million for the three months ended March 31, 2022 compared to the same period in 2021. The decrease in the provision for credit losses was primarily driven by improved qualitative reserves and net charge-offs totaling $0.2 million, offset by higher loan balances.

The provision for unfunded commitments in the first quarter of 2022 was a release of $0.2 million compared to a release of $0.3 million in the first quarter of 2021.

Net charge-offs were $0.2 million for the three months ended March 31, 2022 compared to $0.7 million for the same period in 2021. As a percentage of average total portfolio loans, on an annualized basis, net charge-offs were 0.03% and 0.10% for the three months ended March 31, 2022 and March 31, 2021, respectively. At March 31, 2022, nonperforming loans declined $0.1 million, or 1.4%, to $7.3 million since December 31, 2021. Nonperforming loans as a percentage of total portfolio loans were 0.25% and 0.26% as of March 31, 2022 and December 31, 2021, respectively.

The ACL was 3.33% of total portfolio loans at March 31, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

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CARTER BANKSHARES, INC.

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

The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:

						March 31, 2022
(Dollars in Thousands)						Commercial Real Estate						Commercial and Industrial						Residential Mortgage						Other Consumer						Construction						Other						Total Portfolio Loans
Pass						$	1,335,097					$	337,442					$	478,930					$	43,231					$	319,696					$	185,132					$	2,699,528
Special Mention						4,752						6						980						—						74						3,233						9,045
Substandard						3,357						7,897						3,472						57						1,420						169,228						185,431
Doubtful						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—
Total Portfolio Loans						$	1,343,206					$	345,345					$	483,382					$	43,288					$	321,190					$	357,593					$	2,894,004
Performing						$	1,339,927					$	345,137					$	480,566					$	43,268					$	320,216					$	357,593					$	2,886,707
Nonperforming						3,279						208						2,816						20						974						—						7,297
Total Portfolio Loans						$	1,343,206					$	345,345					$	483,382					$	43,288					$	321,190					$	357,593					$	2,894,004

						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

Special mention, substandard and doubtful loans at March 31, 2022 decreased $0.8 million to $194.5 million compared to $195.3 million at December 31, 2021, with a decrease of $0.6 million in special mention and a decrease of $0.2 million in substandard.

Additionally, 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.

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CARTER BANKSHARES, INC.

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

Deposits

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

(Dollars in Thousands)						March 31, 2022						December 31, 2021						$ Change						% Change
Noninterest-Bearing Demand						$	708,353					$	747,909					$	(39,556)					(5.3)		%
Interest-Bearing Demand						480,192						452,644						27,548						6.1		%
Money Market						526,838						463,056						63,782						13.8		%
Savings						728,425						690,549						37,876						5.5		%
Certificate of Deposits						1,284,470						1,344,318						(59,848)						(4.5)		%
Total Deposits						$	3,728,278					$	3,698,476					$	29,802					0.8		%

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, 2022 increased $29.8 million, or 0.8%, from December 31, 2021. The increase in deposits primarily related to an increase in our core deposits of $89.7 million, or 15.4% on an annualized basis. Our core deposits include noninterest-bearing demand accounts, interest-bearing demand deposits, money market accounts and savings accounts. The decrease of $59.8 million, or 4.5% in CDs at March 31, 2022 compared to December 31, 2021 is due to the intentional runoff of higher cost CDs. Noninterest-bearing deposits comprised 19.0% and 20.2% of total deposits at March 31, 2022 and December 31, 2021, respectively.

The following table presents additional information about our deposits:

(Dollars in Thousands)						March 31, 2022						December 31, 2021
Deposits from the Certificate of Deposit Account Registry Services (CDARS)						$	139					$	139
Noninterest-Bearing Public Funds Deposits						16,330						58,393
Interest-Bearing Public Funds Deposits						155,813						123,968
Total Deposits not Covered by Deposit Insurance(1)						419,768						396,626
Certificates of Deposits not Covered by Deposit Insurance						132,960						147,134
Deposits for Certain Directors, Executive Officers and their Affiliates						2,497						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 CDs over $250,000 or more not covered by deposit insurance at March 31, 2022 are summarized as follows:

(Dollars in Thousands)						Amount						Percent
Three Months or Less						$	19,350					14.5		%
Over Three Months Through Twelve Months						40,121						30.2		%
Over Twelve Months Through Three Years						53,554						40.3		%
Over Three Years						19,935						15.0		%
Total						$	132,960					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 at March 31, 2022 and $7.0 million at December 31, 2021.

Information pertaining to FHLB advances is summarized in the following table:

(Dollars in Thousands)						March 31, 2022						December 31, 2021
Balance at Period End						$	—					$	7,000
Average Balance during the Period						$	1,400					$	25,986
Average Interest Rate during the Period						1.63		%				1.20		%
Maximum Month-end Balance during the Period						$	—					$	35,000
Average Interest Rate at Period End						—		%				1.61		%

The Company held FHLB Atlanta stock of $2.1 million and $2.4 million at March 31, 2022 and December 31, 2021, respectively. Dividends recorded on this restricted stock were $20 thousand and $37 thousand for the three months ended March 31, 2022 and March 31, 2021, respectively. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional 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 our 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 borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% 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 $817.4 million of unpledged available-for-sale investment securities as an additional source of liquidity.

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At March 31, 2022, the Bank had $887.1 million in highly liquid assets, which consisted of $26.5 million in interest-bearing deposits in other financial institutions, $43.0 million in FRB Excess Reserves, $817.4

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CARTER BANKSHARES, INC.

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

million in unpledged securities and $0.2 million in mortgage loans held-for-sale. This resulted in highly liquid assets to total assets ratio of 21.5% at March 31, 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)						March 31, 2022						December 31, 2021
Cash and Due From Banks						$	38,534					$	36,698
Interest-bearing Deposits in Other Financial Institutions						26,462						64,905
Federal Reserve Bank Excess Reserves						43,040						176,196
Unpledged Investment Securities						817,354						743,836
Excess Pledged Securities						21,450						28,417
FHLB Borrowing Availability						692,964						667,307
Unsecured Lines of Credit						145,000						145,000
Total Liquidity Sources						$	1,784,804					$	1,862,359

Regulatory Capital Requirements

Total shareholders’ equity decreased by $49.0 million to $358.6 million at March 31, 2022 compared to $407.6 million at December 31, 2021. The decrease in shareholders’ equity was primarily due to a $34.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $24.6 million decrease related to the repurchase of common stock through March 31, 2022 and partially offset by net income of $9.3 million for the three months ended March 31, 2022. The remaining difference of $0.3 million is related to stock-based compensation during the three months ended March 31, 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, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

At March 31, 2022, the Bank continues to maintain its capital position with a leverage ratio of 9.91% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.86% compared to the regulatory guideline of 6.50% to be well-capitalized. The Bank’s risk-based Tier 1 and Total Capital ratios were 12.86% and 14.12%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary.

In July 2013 the federal banking agencies issued a final rule to implement the Basel III Final Rules and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The final rule established a comprehensive capital framework and went into effect on January 1, 2015 for smaller banking organizations such as the Company. The rule also requires the Company and the Bank to maintain a capital conservation buffer composed of Common Equity Tier 1 capital in an amount greater than 2.50% of total risk-weighted assets beginning in 2019. The capital conservation buffer was phased-in, in equal

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CARTER BANKSHARES, INC.

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

increments from 2016 through 2019. As a result, starting in 2019, the Company and the Bank were required to maintain a Common Equity Tier 1 risk-based capital ratio greater than 7.0%, a Tier 1 risk-based capital ratio greater than 8.5%, and a Total risk-based capital ratio greater than 10.5%; otherwise, they will be subject to restrictions on capital distributions and discretionary bonus payments.

Federal regulators periodically propose amendments to the regulatory capital rules and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted.

The community bank leverage ratio final rule was effective on January 1, 2020 and allows qualifying community banking organizations to calculate a leverage ratio to measure capital adequacy. Qualifying banking organizations that have less than $10 billion total assets, a leverage ratio of greater than 9%, and meet other criteria such as off-balance sheet exposures and trading assets limits. Banks opting into this framework are not required to calculate or report risk-based capital. We did not adopt this framework; therefore, capital ratios are calculated and reported as detailed above.

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.

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

(Dollars in Thousands)						Adequately Capitalized						Well Capitalized(1)						March 31, 2022												December 31, 2021
																		Amount						Ratio						Amount						Ratio
Carter Bankshares, Inc.
Leverage Ratio						4.00		%				NA						$	416,193					10.00		%				$	443,940					10.62		%
Common Equity Tier 1 (to Risk-weighted Assets)						4.50		%				NA						416,193						12.98		%				443,940						14.21		%
Tier 1 Capital (to Risk-weighted Assets)						6.00		%				NA						416,193						12.98		%				443,940						14.21		%
Total Capital (to Risk-weighted Assets)						8.00		%				NA						456,583						14.24		%				483,124						15.46		%
Carter Bank & Trust
Leverage Ratio						4.00		%				5.00		%				$	412,230					9.91		%				$	438,533					10.49		%
Common Equity Tier 1 (to Risk-weighted Assets)						4.50		%				6.50		%				412,230						12.86		%				438,533						14.04		%
Tier 1 Capital (to Risk-weighted Assets)						6.00		%				8.00		%				412,230						12.86		%				438,533						14.04		%
Total Capital (to Risk-weighted Assets)						8.00		%				10.00		%				452,611						14.12		%				477,710						15.29		%

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

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

Contractual Obligations

As of March 31, 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, 2021.

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CARTER BANKSHARES, INC.

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

Off-Balance Sheet Arrangements

As of March 31, 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 Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021.

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 by simulating various rate shock scenarios and analyzing the results of the rate shocks on the Company’s projected net interest income (“NII”) and economic value of equity (“EVE”). 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, 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 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.

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 NII. The base case earnings scenario together with various rate shock earning scenarios are model utilizing both a static and growth balance sheet. A static balance sheet is a no-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product 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’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 NII over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points. We have temporarily suspended the -200, -300, and -400 basis point rate shock analyses. Due to the low interest rate environment, we believe the impact to NII income when evaluating the -200, -300, and -400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position.

To monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE 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 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 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 base case simulation results to determine the impact that market rate changes may have on our EVE. As with NII rate shock analyses, EVE rate shock analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with embedded optionality and the behavior and value of non-maturity

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CARTER BANKSHARES, INC.

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

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 -200, -300, and -400 basis point scenarios in 2022 and 2021 due to the current interest rate environment.

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, 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						31.6%						7.0%						43.6%						24.6%
300						24.1%						6.7%						33.1%						20.6%
200						16.3%						5.5%						22.5%						15.4%
100						8.3%						3.4%						11.4%						8.6%
-100						(5.3)%						(5.1)%						(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 March 31, 2022 and December 31, 2021, the Company’s balance sheet is less asset sensitive at March 31, 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. 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).

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CARTER BANKSHARES, INC.

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, 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, 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, 2022, no material legal proceedings were pending or threatened against the Company.

ITEM 1A – RISK FACTORS

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

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

On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months (the “Program”). The 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 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The Program 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 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 Program is authorized through December 9, 2022, although it may be modified, terminated or extended by the Board at any time. The 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 March 31, 2022.

Issuer Purchases of Equity Securities
Period						Total Number of Shares Purchased(2)						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)
January 1 - January 31, 2022						292,575						$	15.71					292,575						1,677,018
February 1 - February 28, 2022						381,469						16.05						381,469						1,312,967
March 1 - March 31, 2022						858,805						16.37						858,805						447,419
Total						1,532,849						$	16.17					1,532,849

(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.

(2)For the three months ended March 31, 2022, shares were withheld upon vesting of restricted shares granted to employees of the Company in order to satisfy tax withholding obligations.

As of April 28, 2022, the repurchase program to purchase up to two million shares of the Company’s common stock was fully executed.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 - OTHER INFORMATION

None.

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CARTER BANKSHARES, INC.

PART II – OTHER INFORMATION (continued)

ITEM 6 - EXHIBITS

Exhibits:

2.1			Agreement and Plan of Reorganization by and among Carter Bank & Trust, Cater Bankshares, Inc. and CBT Merger Sub, Inc. dated November 9, 2020 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
3.1			Articles of Incorporation of Carter Bankshares, Inc., effective October 7, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
3.2			Bylaws of Carter Bankshares, Inc., as adopted October 28, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
10.1			Form of Time-Based Restricted Stock Agreement (for employee: LTIP) for use after March 2, 2022 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)
10.2			Form of Performance Unit Agreement (for employee) for use after March 2, 2022 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)
10.3			Form of Time-Based Restricted Stock Agreement (for employee: annual) for use on or after February 17, 2022 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)
10.8			Carter Bankshares, Inc. Amended and Restated Annual Incentive Plan, as amended and restated effective January 1, 2022 (filed herewith)
10.11.1			Adoption Agreement for Virginia Bankers Association Model Plan (for executives) as restated as of January 1, 2018 and updated January 1, 2020, effective as of January 1, 2022 (incorporated by reference to Exhibit 10.11.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022)
10.12.1			Adoption Agreement for Virginia Bankers Association Model Plan (for directors) as restated as of January 1, 2018 and updated January 1, 2020, effective as of January 1, 2022 (incorporated by reference to Exhibit 10.12.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022)
31.1			Certification by principal executive officer pursuant to Rule 13a-14(a) (filed herewith)
31.2			Certification by principal financial officer pursuant to Rule 13a-14(a) (filed herewith)
32			Certification by principal executive officer and principal financial officer pursuant to 18 U.S.C. §1350 (filed herewith)
101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			Inline XBRL Taxonomy Extension Schema
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

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SIGNATURES

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

			CARTER BANKSHARES, INC. (Registrant)
Date: May 5, 2022			/s/ Litz H. Van Dyke
			Litz H. Van Dyke Chief Executive Officer (Principal Executive Officer)
Date: May 5, 2022			/s/ Wendy S Bell
			Wendy S. Bell Chief Financial Officer (Principal Financial Officer)

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