Annual Statements Open main menu

Carter Bankshares, Inc. - Quarter Report: 2023 September (Form 10-Q)

Table of Contents
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 September 30, 2023
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
MartinsvilleVirginia24112
(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 October 23, 2023 there were 22,955,753 shares of the registrant’s common stock issued and outstanding.
1

Table of Contents
TABLE OF CONTENTS


2

Table of Contents
CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS


CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Data)September 30, 2023 (unaudited)December 31, 2022 (audited)
ASSETS
Cash and Due From Banks, including Interest-bearing Deposits of $17,438 at September 30, 2023 and $4,505 at December 31, 2022
$55,398 $46,869 
Total Cash and Cash Equivalents55,398 46,869 
Securities Available-for-Sale, at Fair Value (amortized cost of $912,989 and $945,707, respectively)
793,389 836,273 
Loans Held-for-Sale— — 
Portfolio Loans3,410,940 3,148,913 
Allowance for Credit Losses(94,474)(93,852)
Portfolio Loans, net3,316,466 3,055,061 
Bank Premises and Equipment, net73,932 72,114 
Other Real Estate Owned, net3,765 8,393 
Federal Home Loan Bank Stock, at Cost27,361 9,740 
Bank Owned Life Insurance57,762 56,734 
Other Assets124,095 119,335 
Total Assets$4,452,168 $4,204,519 
LIABILITIES
Deposits:
Noninterest-Bearing Demand$661,454 $703,334 
Interest-Bearing Demand469,904 496,948 
Money Market426,172 484,238 
Savings487,105 684,287 
Certificates of Deposit1,511,554 1,261,526 
Total Deposits3,556,189 3,630,333 
Federal Home Loan Bank Borrowings514,135 180,550 
Federal Funds Purchased— 17,870 
Other Liabilities51,223 47,139 
Total Liabilities4,121,547 3,875,892 
SHAREHOLDERS’ EQUITY
Common Stock, Par Value $1.00 per share,
Authorized 100,000,000 Shares;
Outstanding shares 22,955,753 at September 30, 2023 and 23,956,772 at December 31, 2022
22,956 23,957 
Additional Paid-in Capital90,254 104,693 
Retained Earnings310,971 285,593 
Accumulated Other Comprehensive Loss(93,560)(85,616)
Total Shareholders’ Equity330,621 328,627 
Total Liabilities and Shareholders’ Equity$4,452,168 $4,204,519 
See accompanying notes to unaudited consolidated financial statements.
3

Table of Contents
CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Data)Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
INTEREST INCOME
Loans, including fees
Taxable$39,578 $35,652 $117,235 $94,720 
Non-Taxable768 881 2,403 2,749 
Investment Securities
Taxable7,793 5,466 22,874 13,650 
Non-Taxable160 170 488 524 
Federal Reserve Bank Excess Reserves165 134 553 229 
Interest on Bank Deposits— 33 28 
Dividend Income416 24 971 66 
Total Interest Income48,886 42,327 144,557 111,966 
Interest Expense
Interest Expense on Deposits15,328 4,469 34,629 13,280 
Interest Expense on Federal Funds Purchased107 23 354 27 
Interest on Other Borrowings6,057 110 14,684 253 
Total Interest Expense21,492 4,602 49,667 13,560 
NET INTEREST INCOME27,394 37,725 94,890 98,406 
Provision (Recovery) for Credit Losses1,105 (77)2,605 2,367 
(Recovery) Provision for Unfunded Commitments(130)157 314 190 
Net Interest Income After Provision for Credit Losses26,419 37,645 91,971 95,849 
NONINTEREST INCOME
(Losses) Gains on Sales of Securities, net(1)(4)(10)48 
Service Charges, Commissions and Fees1,783 1,750 5,380 5,452 
Debit Card Interchange Fees1,902 1,788 5,941 5,570 
Insurance Commissions868 876 1,550 1,713 
Bank Owned Life Insurance Income348 341 1,028 1,009 
(Losses) Gains on Sales and Write-downs of Bank Premises, net— (4)— 342 
Commercial Loan Swap Fee Income— 18 114 774 
Other370 470 1,030 1,266 
Total Noninterest Income5,270 5,235 15,033 16,174 
NONINTEREST EXPENSE
Salaries and Employee Benefits13,956 13,520 41,257 37,721 
Occupancy Expense, net3,547 3,412 10,548 10,060 
FDIC Insurance Expense1,368 543 2,711 1,540 
Other Taxes846 848 2,436 2,471 
Advertising Expense363 368 1,133 874 
Telephone Expense500 448 1,339 1,390 
Professional and Legal Fees1,512 1,310 4,005 3,731 
Data Processing1,076 833 2,854 2,516 
Debit Card Expense816 797 2,066 2,089 
Tax Credit Amortization— (764)— 466 
Other3,298 2,148 8,045 6,526 
Total Noninterest Expense27,282 23,463 76,394 69,384 
Income Before Income Taxes4,407 19,417 30,610 42,639 
Income Tax Provision780 5,009 5,338 8,130 
Net Income$3,627 $14,408 $25,272 $34,509 
Earnings per Common Share
Basic Earnings per Common Share$0.16 $0.59 $1.07 $1.38 
Diluted Earnings per Common Share$0.16 $0.59 $1.07 $1.38 
Average Shares Outstanding – Basic & Diluted22,946,179 24,265,075 23,407,071 24,827,143 
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents
CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)2023202220232022
Net Income$3,627 $14,408 $25,272 $34,509 
Other Comprehensive Loss:
Net Unrealized Losses on Securities Available-for-Sale:
Net Unrealized Losses Arising during the Period(14,773)(33,326)(10,176)(111,360)
Reclassification Adjustment for Losses (Gains) included in Net Income10 (48)
Tax Effect3,197 6,998 2,222 23,396 
Net Unrealized Losses Recognized in Other Comprehensive Loss(11,575)(26,324)(7,944)(88,012)
Other Comprehensive Loss(11,575)(26,324)(7,944)(88,012)
Comprehensive (Loss) Income$(7,948)$(11,916)$17,328 $(53,503)
See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents
CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended September 30, 2023
(Dollars in Thousands)Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance at June 30, 2023
$23,372 $95,506 $307,344 $(81,985)$344,237 
Net Income3,627 3,627 
Other Comprehensive Loss, Net of Tax(11,575)(11,575)
1% Excise Tax on Stock Buybacks(60)(60)
Repurchase of Common Stock (416,176 shares)
(416)(5,587)(6,003)
Forfeiture of Restricted Stock (590 shares)
Issuance of Restricted Stock (684 shares)
Recognition of Restricted Stock Compensation Expense395395
Balance at September 30, 2023$22,956$90,254$310,971$(93,560)$330,621
Three Months Ended September 30, 2022
(Dollars in Thousands)Common
Stock
Additional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Shareholders’ Equity
Balance at June 30, 2022
$24,577 $113,975 $255,576 $(59,986)$334,142 
Net Income14,408 14,408 
Other Comprehensive Loss, Net of Tax(26,324)(26,324)
Repurchase of Common Stock (464,208 shares)
(464)(7,252)— (7,716)
Forfeiture of Restricted Stock (2,098 shares)
(2)2— — 
Recognition of Restricted Stock Compensation Expense306306
Balance at September 30, 2022$24,111$107,031$269,984$(86,310)$314,816
Nine Months Ended September 30, 2023
(Dollars in Thousands)Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance at January 1, 2023
$23,957 $104,693 $285,593 $(85,616)$328,627 
Net Income25,272 25,272 
Other Comprehensive Loss, Net of Tax(7,944)(7,944)
Cumulative Effect of the Adoption of ASU 2023-02106106
1% Excise Tax on Stock Buybacks(153)(153)
Repurchase of Common Stock (1,132,232 shares)
(1,132)(15,284)(16,416)
Forfeiture of Restricted Stock (4,284 shares)
(4)(38)(42)
Issuance of Restricted Stock (135,497 shares)
135(135)
Recognition of Restricted Stock Compensation Expense1,1711,171
Balance at September 30, 2023$22,956$90,254$310,971$(93,560)$330,621
Nine Months Ended September 30, 2022
(Dollars in Thousands)Common
Stock
Additional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Shareholders’ Equity
Balance at January 1, 2022
$26,431 $143,988 $235,475 $1,702 $407,596 
Net Income34,509 34,509 
Other Comprehensive Loss, Net of Tax(88,012)(88,012)
Repurchase of Common Stock (2,433,801 shares)
(2,434)(37,697)— (40,131)
Forfeiture of Restricted Stock (12,751 shares)
(13)(143)— (156)
Issuance or Restricted Stock (126,804 shares)
127(127)
Recognition of Restricted Stock Compensation Expense1,0101,010
Balance at September 30, 2022$24,111$107,031$269,984$(86,310)$314,816
See accompanying notes to unaudited consolidated financial statements.
6

Table of Contents
CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Dollars in Thousands)20232022
Net Income$25,272 $34,509 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments2,919 2,557 
Origination of Loans Held-for-Sale(5,524)(7,017)
Proceeds From Loans Held-for-Sale5,614 7,399 
Depreciation/Amortization of Bank Premises and Equipment4,689 4,494 
Provision for Deferred Taxes256 1,697 
Net Amortization of Securities3,696 4,540 
Tax Credit Amortization1,438 466 
Gains on Sales of Mortgage Loans Held-for-Sale(90)(154)
Losses (Gains) on Sales of Securities, net10 (48)
Commercial Loan Swap Derivative Income(90)(738)
Increase in the Value of Life Insurance Contracts(1,028)(1,009)
Recognition of Restricted Stock Compensation Expense1,171 1,010 
(Increase) Decrease in Other Assets(826)694 
Increase (Decrease) in Other Liabilities1,348 (702)
Net Cash Provided By Operating Activities38,855 47,698 
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales15,054 19,777 
Proceeds from Maturities, Redemptions, and Pay-downs38,896 71,146 
Purchases(24,938)(135,634)
Purchase of Bank Premises and Equipment, Net(7,979)(4,191)
Proceeds from Sales of Bank Premises and Equipment, net— 408 
Purchase of Federal Home Loan Bank Stock, net(17,621)(840)
Loan Originations, net(264,010)(224,839)
Payments Received on Other Real Estate Owned299 320 
Proceeds from Sales of Other Real Estate Owned4,818 3,742 
Net Cash Used In Investing Activities(255,481)(270,111)
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts(324,172)123,118 
Increase (Decrease) in Certificates of Deposits250,028 (95,665)
Proceeds on Federal Home Loan Bank Borrowings, net333,585 23,000 
Repayments on Federal Funds Purchased, net(17,870)— 
Repurchase of Common Stock(16,416)(40,131)
Net Cash Provided by Financing Activities225,155 10,322 
Net Increase (Decrease) in Cash and Cash Equivalents8,529 (212,091)
Cash and Cash Equivalents at Beginning of Period46,869 277,799 
Cash and Cash Equivalents at End of Period$55,398 $65,708 
SUPPLEMENTARY DATA
Cash Interest Paid$45,031 $13,698 
Cash Paid for Income Taxes5,658 3,253 
Transfer from Fixed Assets to Other Real Estate Owned1,388 1,584 
Right-of-use Asset Recorded in Exchange for Lease Liabilities— 3,391 
Stock Repurchase Excise Tax Settled in Subsequent Period(153)— 
Loans Transferred to Held-for-Sale— 1,513 
See accompanying notes to unaudited consolidated financial statements.
7

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION
Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), on March 10, 2023. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period.
Reclassification: Amounts in prior periods financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no material effect on prior periods net income or shareholders’ equity.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers.
Accounting Standards Adopted in 2023
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards (“ASU”) No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU expands the use of the proportional amortization method of accounting, previously only allowable for Low Income Tax Housing Credits, (“LITHC”) investments, to equity investments in other tax credit structures that meet certain criteria. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company reviewed its existing tax equity investment portfolios and evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU as of June 30, 2023 on a modified retrospective basis, effective dated as of January 1, 2023. As a result, the Company recorded a transitional adjustment of $0.1 million to retained earnings.
The Company makes equity investments as a limited partner in various partnerships that sponsor historic tax credits (“HTC”) as a strategic tax initiative designed to receive tax credits and other tax benefits, such as deductible flow-through losses. The Company has evaluated all of the proportional amortization method qualifying criteria and has elected to apply the proportional amortization method at the HTC program level. The Company records the investment in the HTC as a component of other assets and uses the proportional amortization method to account for the investments in the HTC partnerships. Amortization related to these HTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income. Prior to the ASU adoption, amortization was recorded as a component of noninterest expense on the Consolidated Statements of Income. The amendments in this ASU did not materially impact our Consolidated Financial Statements.
Accounting Standards Issued but Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of reference rate reform on financial reporting. The ASU also provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative
8

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION – (continued)
contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, and can be adopted at any time during this period. The Company ceased originating new LIBOR based variable rate loans as of December 31, 2021 per the ARRC’s guidance. The Company created an internal team in 2021 to identify and modify loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company has selected one-month term Secured Overnight Financing Rate, (“SOFR”), (published by the CME Group) as the replacement benchmark for LIBOR based loans. The financial impact regarding pricing, valuation and operations of the transition has been evaluated and is not expected to be material in nature. The transition team has fully committed to working within the guidelines established by the United Kingdom’s Financial Conduct Authority and the Federal Reserve System of New York’s Alternative Reference Rate Committee to complete a smooth transition away from LIBOR. For existing LIBOR-based loans, remediation efforts were completed by September 30, 2023.

9

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
The following table reconciles the numerators and denominators of basic and diluted earnings per common share calculations for the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands, except share and per share data)2023202220232022
Numerator for Earnings per Common Share – Basic and Diluted
Net Income$3,627 $14,408 $25,272 $34,509 
Less: Income allocated to participating shares33 92 208 199 
Net Income Allocated to Common Shareholders - Basic & Diluted$3,594 $14,316 $25,064 $34,310 
Denominator:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities23,157,563 24,421,264 23,600,946 24,970,993 
Less: Average Participating Securities211,384 156,189 193,875 143,850 
Weighted Average Common Shares Outstanding - Basic & Diluted22,946,179 24,265,075 23,407,071 24,827,143 
Earnings per Common Share – Basic$0.16 $0.59 $1.07 $1.38 
Earnings per Common Share – Diluted$0.16 $0.59 $1.07 $1.38 
All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation.
NOTE 3 - INVESTMENT SECURITIES
The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:
September 30, 2023
(Dollars in Thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Treasury Securities$14,383 $— $(1,279)$13,104 
U.S. Government Agency Securities48,197 454 (909)47,742 
Residential Mortgage-Backed Securities111,550 — (13,988)97,562 
Commercial Mortgage-Backed Securities33,872 411 (955)33,328 
Other Commercial Mortgage-Backed Securities24,588 — (3,484)21,104 
Asset Backed Securities151,788 — (14,713)137,075 
Collateralized Mortgage Obligations178,559 — (15,253)163,306 
States and Political Subdivisions279,302 — (56,658)222,644 
Corporate Notes70,750 — (13,226)57,524 
Total Debt Securities$912,989 $865 $(120,465)$793,389 
10

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT SECURITIES (continued)
December 31, 2022
(Dollars in Thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Treasury Securities$19,318 $— $(1,452)$17,866 
U.S. Government Agency Securities50,334 218 (788)49,764 
Residential Mortgage-Backed Securities115,694 — (12,009)103,685 
Commercial Mortgage-Backed Securities35,538 73 (936)34,675 
Other Commercial Mortgage-Backed Securities24,987 (2,597)22,399 
Asset Backed Securities156,552 — (15,169)141,383 
Collateralized Mortgage Obligations190,781 — (14,159)176,622 
States and Political Subdivisions281,753 — (53,607)228,146 
Corporate Notes70,750 — (9,017)61,733 
Total Debt Securities$945,707 $300 $(109,734)$836,273 
The Company did not have securities classified as held-to-maturity at September 30, 2023 or December 31, 2022.
The following table shows the composition of gross and net realized gains and losses for the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)2023202220232022
Proceeds from Sales of Securities Available-for-Sale$$$15,054$19,777
Gross Realized Gains$$$129$208
Gross Realized Losses(1)(4)(139)(160)
Net Realized (Losses) Gains(1)(4)(10)48
Tax Impact$$(1)$(2)$10
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) Income. 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.
September 30, 2023
(Dollars in Thousands)Amortized
Cost
Fair
Value
Due in One Year or Less$5,193 $5,126 
Due after One Year through Five Years19,682 17,770 
Due after Five Years through Ten Years256,370 215,337 
Due after Ten Years131,387 102,781 
Residential Mortgage-Backed Securities111,550 97,562 
Commercial Mortgage-Backed Securities33,872 33,328 
Other Commercial Mortgage-Backed Securities24,588 21,104 
Collateralized Mortgage Obligations178,559 163,306 
Asset Backed Securities151,788 137,075 
Total Debt Securities$912,989 $793,389 
At September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $213.0 million at September 30, 2023 and $224.5 million at December 31, 2022.
11

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT SECURITIES (continued)
Available-for-sale securities with unrealized losses at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:
September 30, 2023
Less Than 12 Months12 Months or MoreTotal
(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— $— $— $13,104 $(1,279)$13,104 $(1,279)
U.S. Government Agency Securities5,562 (71)14 16,450 (838)20 22,012 (909)
Residential Mortgage-Backed Securities— — — 43 97,562 (13,988)43 97,562 (13,988)
Commercial Mortgage-Backed Securities846 (4)50 19,192 (951)53 20,038 (955)
Other Commercial Mortgage-Backed Securities1,844 (673)19,260 (2,811)21,104 (3,484)
Asset Backed Securities2,535 (118)52 134,540 (14,595)54 137,075 (14,713)
Collateralized Mortgage Obligations— — — 85 163,306 (15,253)85 163,306 (15,253)
States and Political Subdivisions1,190 (121)160 221,254 (56,537)161 222,444 (56,658)
Corporate Notes— — — 21 57,524 (13,226)21 57,524 (13,226)
Total Debt Securities13 $11,977 $(987)437 $742,192 $(119,478)450 $754,169 $(120,465)
December 31, 2022
Less Than 12 Months12 Months or MoreTotal
(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 Securities3$14,080 $(789)2$3,786 $(663)5$17,866 $(1,452)
U.S. Government Agency Securities65,337 (26)915,576 (762)1520,913 (788)
Residential Mortgage-Backed Securities67,601 (372)3796,084 (11,637)43103,685 (12,009)
Commercial Mortgage-Backed Securities77,843 (307)4915,675 (629)5623,518 (936)
Other Commercial Mortgage-Backed Securities25,302 (617)614,560 (1,980)819,862 (2,597)
Asset Backed Securities1342,173 (2,984)4197,210 (12,185)54139,383 (15,169)
Collateralized Mortgage Obligations3566,362 (4,500)50110,260 (9,659)85176,622 (14,159)
States and Political Subdivisions73112,564 (19,706)91115,382 (33,901)164227,946 (53,607)
Corporate Notes823,285 (2,965)1338,448 (6,052)2161,733 (9,017)
Total Debt Securities153$284,547 $(32,266)298$506,981 $(77,468)451$791,528 $(109,734)
The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended September 30, 2023 or the year ended December 31, 2022. The Company did not have any credit related impairment. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.
As of September 30, 2023, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis. However, management may from time to time consider sales for strategic reasons that would be holistically beneficial to the bank. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date.
12

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT SECURITIES (continued)
As of September 30, 2023, management believes the unrealized losses detailed in the table above are not related to credit; therefore, no ACL has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes. During the three and nine months ended September 30, 2023 and 2022, the Company had no credit related impairment.
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)
September 30, 2023December 31, 2022
Commercial
Commercial Real Estate
$1,688,947 $1,470,562 
Commercial and Industrial
264,329 309,792 
Total Commercial Loans
1,953,276 1,780,354 
Consumer
Residential Mortgages
738,368 657,948 
Other Consumer
36,487 44,562 
Total Consumer Loans
774,855 702,510 
Construction377,576 353,553 
Other305,233 312,496 
Total Portfolio Loans3,410,940 3,148,913 
Loans Held-for-Sale— — 
Total Loans$3,410,940 $3,148,913 
Loan Restructurings
The Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.
A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $1.0 million or greater and/or based on management’s discretion; otherwise, the restructured loan remains in the appropriate segment in the ACL model. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Basis” section in Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
13

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)
The following table shows the amortized cost basis as of September 30, 2022 for the loans restructured during the three and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by portfolio segment:
Restructured Loans
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
(Dollars in Thousands)Number of ContractsAmortized Cost Basis(1)% of Total Class of Financing ReceivableNumber of Contracts
Amortized Cost Basis(1)
% of Total Class of Financing Receivable
Accruing Restructured Loans
Commercial Real Estate— $— — %$326 0.02 %
Commercial and Industrial— — — %— — — %
Residential Mortgages— — — %— — — %
Other Consumer— — — %— — — %
Construction137 0.04 %137 0.04 %
Other— — — %— — — %
Total Accruing Restructured Loans1 $137 0.04 %2 $463 0.03 %
Nonaccrual Restructured Loans
Commercial Real Estate— $— — %— $— — %
Commercial and Industrial— — — %— — — %
Residential Mortgages— — — %— — — %
Other Consumer— — — %— — — %
Construction— — — %— — — %
Other— — — %— — — %
Total Nonaccrual Restructured Loans $  % $  %
Total Restructured Loans1 $137 0.04 %2 $463 0.03 %
(1)Excludes accrued interest receivable of $0.1 thousand and $0.9 thousand at September 30, 2022 for restructured loans during the three and nine months ended September 30, 2022.
The Company had no loans that were restructured during the three and nine months ended September 30, 2023. During the third quarter of 2022 the Bank modified a construction loan and considered it a restructured loan as a result of financial difficulty. The borrower is a single family home builder. The purpose of the loan was to finance the construction of a speculative home. The loan matured and was incomplete. The Bank extended the maturity and completion date for five (5) months in order to provide time to complete and sell the home. However, the Bank became aware of a mechanic’s lien filed by one of the borrower’s subcontractors. This issue was resolved and the loan was restored to accrual status on September 30, 2022. Subsequently, the home was sold and the Bank was paid in full on December 9, 2022. This loan was not considered significant and remained in the general pool of the Bank’s ACL model for reserve purposes until it was paid in full. These loans are not considered significant and are included in the Bank’s ACL model in the general pool of the construction and commercial real estate (“CRE”) segments for reserve purposes.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. During the three and nine months ended September 30, 2023 and September 30, 2022, respectively, the Company had no modifications to borrowers experiencing financial difficulty to report.
At both September 30, 2023 and September 30, 2022, the Bank had no commitments to lend any additional funds on restructured loans. At both September 30, 2023 and September 30, 2022 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.
As of September 30, 2023 and December 31, 2022, the Bank had $1.2 million of residential real estate loans in the process of foreclosure. We also had $20 thousand at September 30, 2023 and $133 thousand at December 31, 2022 in residential real estate loans included in other real estate owned (“OREO”).
14

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES
The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) Commercial and Industrial, (“C&I”), 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.
CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business.
C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.
Residential Mortgages are loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchased money mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Other Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.
Construction loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.
Other loans include unique risk attributes considered inconsistent with our current underwriting standards.
The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land
15

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
acquisition loans without a defined source of amortization, iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets, and v) indirect liabilities of certain guarantees resulting from the nonpayment of a financial obligations. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.
Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.
Credit Quality Indicators:
The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status.
The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing into 2023, the Company used a five step approach for loan review in the following categories:
Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $2.0 million or more;
A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $2.0 million or more but not included in the top twenty LLRs;
A sampling review of Executive Loan 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 Executive Loan Committee; and
Focus reviews of various segments to evaluate emerging risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis.
The Company’s internally assigned grades are as follows:
Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality.
Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.
16

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.
The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.
17

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents portfolio loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:

September 30, 2023
Risk Rating
(Dollars in Thousands)202320222021202020192018 and PriorRevolvingTotal Portfolio Loans
Commercial Real Estate
Pass$224,524 $441,066 $196,432 $148,493 $125,716 $520,018 $30,467 $1,686,716 
Special Mention— — 209 — — 77 — 286 
Substandard— — — — — 1,945 — 1,945 
Total Commercial Real Estate$224,524 $441,066 $196,641 $148,493 $125,716 $522,040 $30,467 $1,688,947 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Commercial and Industrial
Pass$825 $18,601 $39,365 $26,094 $7,089 $143,652 $25,790 $261,416 
Special Mention— — — 2,838 — — — 2,838 
Substandard— — — 25 28 19 75 
Total Commercial and Industrial$825 $18,601 $39,365 $28,957 $7,117 $143,655 $25,809 $264,329 
YTD Gross Charge-offs$— $— $45 $— $$— $— $51 
Residential Mortgages
Pass$47,097 $232,769 $193,959 $79,454 $44,984 $99,337 $36,989 $734,589 
Special Mention— — — — — 527 — 527 
Substandard— — 1,142 — 861 999 250 3,252 
Total Residential Mortgages$47,097 $232,769 $195,101 $79,454 $45,845 $100,863 $37,239 $738,368 
YTD Gross Charge-offs$— $— $136 $— $— $67 $— $203 
Other Consumer
Pass$23,004 $5,419 $2,989 $4,430 $43 $201 $359 $36,445 
Special Mention— — — — — — — — 
Substandard— 15 24 — — — 42 
Total Other Consumer$23,004 $5,434 $3,013 $4,430 $43 $204 $359 $36,487 
YTD Gross Charge-offs$163 $1,092 $574 $63 $118 $29 $— $2,039 
Construction
Pass$63,243 $156,134 $123,455 $13,668 $3,936 $7,232 $6,827 $374,495 
Special Mention— — — — — 62 — 62 
Substandard— 65 — 2,090 — 864 — 3,019 
Total Construction$63,243 $156,199 $123,455 $15,758 $3,936 $8,158 $6,827 $377,576 
YTD Gross Charge-offs$— $— $— $— $— $42 $— $42 
Other
Pass$— $— $— $— $— $3,320 $— $3,320 
Special Mention— — — — — — — — 
Substandard— — — — — 301,913 — 301,913 
Total Other Loans$ $ $ $ $ $305,233 $ $305,233 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Total Portfolio Loans
Pass$358,693 $853,989 $556,200 $272,139 $181,768 $773,760 $100,432 $3,096,981 
Special Mention— — 209 2,838 — 666 — 3,713 
Substandard— 80 1,166 2,115 889 305,727 269 310,246 
Total Portfolio Loans$358,693 $854,069 $557,575 $277,092 $182,657 $1,080,153 $100,701 $3,410,940 
Current YTD Period:
YTD Gross Charge-offs$163 $1,092 $755 $63 $124 $138 $ $2,335 
18

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2022
Risk Rating
(Dollars in Thousands)202220212020201920182017 and PriorRevolvingTotal Portfolio Loans
Commercial Real Estate
Pass$418,939 $186,226 $139,148 $130,521 $215,498 $335,659 $31,349 $1,457,340 
Special Mention— 218 — — 9,919 659 — 10,796 
Substandard— — — — 2,105 321 — 2,426 
Total Commercial Real Estate$418,939 $186,444 $139,148 $130,521 $227,522 $336,639 $31,349 $1,470,562 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Commercial and Industrial
Pass$23,104 $47,137 $35,819 $9,022 $10,639 $154,473 $23,699 $303,893 
Special Mention— — 2,887 — — — — 2,887 
Substandard— 56 — 18 97 2,800 41 3,012 
Total Commercial and Industrial$23,104 $47,193 $38,706 $9,040 $10,736 $157,273 $23,740 $309,792 
YTD Gross Charge-offs$3,432 $— $— $— $$— $— $3,436 
Residential Mortgages
Pass$200,725 $184,718 $81,446 $50,770 $70,659 $39,411 $25,315 $653,044 
Special Mention— — — — 429 520 34 983 
Substandard— 1,212 — 865 444 1,400 — 3,921 
Total Residential Mortgages$200,725 $185,930 $81,446 $51,635 $71,532 $41,331 $25,349 $657,948 
YTD Gross Charge-offs$— $— $— $— $22 $24 $— $46 
Other Consumer
Pass$24,100 $10,006 $7,323 $1,999 $512 $256 $299 $44,495 
Special Mention— — — — — — — — 
Substandard— 45 — 20 — 67 
Total Other Consumer$24,100 $10,051 $7,324 $1,999 $513 $276 $299 $44,562 
YTD Gross Charge-offs$280 $625 $254 $358 $39 $121 $— $1,677 
Construction
Pass$149,535 $117,466 $41,808 $4,938 $25,523 $7,190 $6,056 $352,516 
Special Mention— — — — — 69 — 69 
Substandard— — — — 92 876 — 968 
Total Construction$149,535 $117,466 $41,808 $4,938 $25,615 $8,135 $6,056 $353,553 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Other
Pass$— $— $— $— $— $180,745 $— $180,745 
Special Mention— — — — — — — — 
Substandard— — — — 74,050 57,701 — 131,751 
Total Other Loans$ $ $ $ $74,050 $238,446 $ $312,496 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Total Portfolio Loans
Pass$816,403 $545,553 $305,544 $197,250 $322,831 $717,734 $86,718 $2,992,033 
Special Mention— 218 2,887 — 10,348 1,248 34 14,735 
Substandard— 1,313 883 76,789 63,118 41 142,145 
Total Portfolio Loans$816,403 $547,084 $308,432 $198,133 $409,968 $782,100 $86,793 $3,148,913 
Current YTD Period:
YTD Gross Charge-offs$3,712 $625 $254 $358 $65 $145 $ $5,159 

19

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents portfolio loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented:
September 30, 2023
(Dollars in Thousands)202320222021202020192018 and PriorRevolvingTotal Portfolio Loans
Commercial Real Estate
Performing$224,524 $441,066 $196,641 $148,493 $125,716 $520,775 $30,467 $1,687,682 
Nonperforming— — — — — 1,265 — 1,265 
Total Commercial Real Estate$224,524 $441,066 $196,641 $148,493 $125,716 $522,040 $30,467 $1,688,947 
Commercial and Industrial
Performing$825 $18,601 $39,365 $28,932 $7,094 $143,652 $25,790 $264,259 
Nonperforming— — — 25 23 19 70 
Total Commercial and Industrial$825 $18,601 $39,365 $28,957 $7,117 $143,655 $25,809 $264,329 
Residential Mortgages
Performing$47,097 $232,769 $195,101 $79,454 $44,984 $99,897 $36,989 $736,291 
Nonperforming— — — — 861 966 250 2,077 
Total Residential Mortgages$47,097 $232,769 $195,101 $79,454 $45,845 $100,863 $37,239 $738,368 
Other Consumer
Performing$23,004 $5,419 $3,009 $4,430 $43 $201 $359 $36,465 
Nonperforming— 15 — — — 22 
Total Other Consumer$23,004 $5,434 $3,013 $4,430 $43 $204 $359 $36,487 
Construction
Performing$63,243 $156,199 $123,455 $13,668 $3,936 $7,294 $6,827 $374,622 
Nonperforming— — — 2,090 — 864 — 2,954 
Total Construction$63,243 $156,199 $123,455 $15,758 $3,936 $8,158 $6,827 $377,576 
Other
Performing$— $— $— $— $— $3,320 $— $3,320 
Nonperforming— — — — — 301,913 — 301,913 
Total Other Loans$ $ $ $ $ $305,233 $ $305,233 
Total Portfolio Loans
Performing$358,693 $854,054 $557,571 $274,977 $181,773 $775,139 $100,432 $3,102,639 
Nonperforming— 15 2,115 884 305,014 269 308,301 
Total Portfolio Loans$358,693 $854,069 $557,575 $277,092 $182,657 $1,080,153 $100,701 $3,410,940 

20

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2022
(Dollars in Thousands)202220212020201920182017 and PriorRevolvingTotal Portfolio Loans
Commercial Real Estate
Performing$418,939 $186,444 $139,148 $130,521 $225,416 $336,441 $31,349 $1,468,258 
Nonperforming— — — — 2,106 198 — 2,304 
Total Commercial Real Estate$418,939 $186,444 $139,148 $130,521 $227,522 $336,639 $31,349 $1,470,562 
Commercial and Industrial
Performing$23,104 $47,147 $38,706 $9,022 $10,639 $157,271 $23,699 $309,588 
Nonperforming— 46 — 18 97 41 204 
Total Commercial and Industrial$23,104 $47,193 $38,706 $9,040 $10,736 $157,273 $23,740 $309,792 
Residential Mortgages
Performing$200,725 $184,718 $81,446 $50,770 $71,313 $40,362 $25,349 $654,683 
Nonperforming— 1,212 — 865 219 969 — 3,265 
Total Residential Mortgages$200,725 $185,930 $81,446 $51,635 $71,532 $41,331 $25,349 $657,948 
Other Consumer
Performing$24,100 $10,045 $7,323 $1,999 $512 $276 $299 $44,554 
Nonperforming— — — — 
Total Other Consumer$24,100 $10,051 $7,324 $1,999 $513 $276 $299 $44,562 
Construction
Performing$149,535 $117,466 $41,808 $4,938 $25,615 $7,271 $6,056 $352,689 
Nonperforming— — — — — 864 — 864 
Total Construction$149,535 $117,466 $41,808 $4,938 $25,615 $8,135 $6,056 $353,553 
Other
Performing$— $— $— $— $74,050 $238,446 $— $312,496 
Nonperforming— — — — — — — 
Total Other Loans$ $ $ $ $74,050 $238,446 $ $312,496 
Total Portfolio Loans
Performing$816,403 $545,820 $308,431 $197,250 $407,545 $780,067 $86,752 $3,142,268 
Nonperforming— 1,264 883 2,423 2,033 41 6,645 
Total Portfolio Loans$816,403 $547,084 $308,432 $198,133 $409,968 $782,100 $86,793 $3,148,913 
The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:
September 30, 2023
(Dollars in Thousands)Current
Loans
Loans
30-59 Days
Past Due
Loans
60-89 Days
Past Due
Total
30-89 Days
Past Due
Past Due
90+ Days
Still Accruing
Total Loans Past DueNonaccrual
Loans
Total Portfolio
Loans
Commercial Real Estate$1,686,768 $234 $— $234 $680 $914 $1,265 $1,688,947 
Commercial and Industrial264,197 57 62 — 62 70 264,329 
Residential Mortgages734,012 2,079 200 2,279 — 2,279 2,077 738,368 
Other Consumer36,033 249 183 432 — 432 22 36,487 
Construction374,574 — 48 48 — 48 2,954 377,576 
Other3,320 — — — — — 301,913 305,233 
Total$3,098,904 $2,619 $436 $3,055 $680 $3,735 $308,301 $3,410,940 

21

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2022
(Dollars in Thousands)Current
Loans
Loans
30-59 Days
Past Due
Loans
60-89 Days
Past Due
Total
30-89 Days
Past Due
Nonaccrual
Loans
Total Portfolio
Loans
Commercial Real Estate$1,468,154 $104 $— $104 $2,304 $1,470,562 
Commercial and Industrial309,305 274 283 204 309,792 
Residential Mortgages654,238 445 — 445 3,265 657,948 
Other Consumer44,013 337 204 541 44,562 
Construction349,225 1,321 2,143 3,464 864 353,553 
Other312,496 — — — — 312,496 
Total$3,137,431 $2,481 $2,356 $4,837 $6,645 $3,148,913 
The Company had one loan totaling $0.7 million that was past due 90 days or more and still accruing at September 30, 2023 and none at December 31, 2022. Since this CRE loan was well secured and in process of collection, it was maintained on accrual status and has since been paid in full as of the filing of this Form 10-Q. Otherwise, loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days and still accruing decreased $1.8 million to $3.1 million at September 30, 2023 compared to December 31, 2022 primarily in the construction category related to one $2.1 million residential construction relationship that moved to nonaccrual during the first quarter of 2023 and two credits totaling $1.1 million at December 31, 2022 which moved to current status. Loans past due 30 to 89 days increased $1.8 million in the residential mortgage category primarily due to two credits totaling $1.6 million migrating from current to past due status.
Nonperforming loans increased significantly during the nine months ended September 30, 2023 compared to December 31, 2022 due to $301.9 million commercial loans in the Other segment, related to the Company’s largest lending relationship, transferred to nonaccrual status due to loan maturities and failure to pay in full.
There were no nonaccrual or past due loans related to loans held-for-sale at September 30, 2023 or December 31, 2022.
The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by portfolio segment for the periods presented:
September 30, 2023
(Dollars in Thousands)
Nonaccrual without an Allowance for Credit Losses

Nonaccrual with an Allowance for Credit Losses
Total Nonaccrual LoansPast Due
90+ Days
Still Accruing
Commercial Real Estate$— $1,265 $1,265 $680 
Commercial and Industrial— 70 70 — 
Residential Mortgages— 2,077 2,077 — 
Other Consumer— 22 22 — 
Construction2,090 864 2,954 — 
Other— 301,913 301,913 — 
Total$2,090 $306,211 $308,301 $680 
December 31, 2022
(Dollars in Thousands)Nonaccrual without an Allowance for Credit LossesNonaccrual with an Allowance for Credit LossesTotal Nonaccrual LoansPast Due
90+ Days
Still Accruing
Commercial Real Estate$— $2,304 $2,304 $— 
Commercial and Industrial— 204 204 — 
Residential Mortgages— 3,265 3,265 — 
Other Consumer— — 
Construction— 864 864 — 
Other— — — — 
Total$ $6,645 $6,645 $ 
22

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
A loan is considered nonperforming when we transfer the interest methodology from accrual to nonaccrual. Nonaccrual status recognizes that the collection in full of both principal and interest is unlikely. Without applying additional scrutiny at a granular level, we believe delinquency to be a leading indicator with respect to the likelihood of collection in full of both principal and interest. Accordingly, we automatically transfer loans to nonaccrual status if they are 90 or more days’ delinquent. Management reserves the right to exercise discretion at the individual loan level. For example, we may elect to transfer a loan to nonaccrual regardless of the delinquency status if we believe the collection in full of both principal and interest to be unlikely. We may also elect to retain a loan that is 90 or more days’ delinquent in accrual status if we believe the loan is well secured and in the process of collection. Nonaccrual loans, and loans that have been characterized as Restructured Loans may be individually evaluated for credit losses in the Allowance for Credit Losses model if the loan commitment is $1.0 million or more unless we elect to maintain the loan in the general pool. During the three and nine months ended September 30, 2023 and September 30, 2022, respectively, no material amount of interest income was recognized on nonperforming loans subsequent to their classification as nonperforming loans.
The following table presents the amortized cost basis of individually evaluated loans as of the periods presented. Changes in the fair value of the types of collateral and discounted cash flow modeling for individually evaluated loans are reported as provision for credit loss on loans in the period of change.
September 30, 2023December 31, 2022
(Dollars in Thousands)CollateralDiscounted Cash FlowTotalCollateral
Commercial Real Estate$— $— $— $2,106 
Commercial and Industrial— — — — 
Residential Mortgages— — — 1,212 
Other Consumer— — — — 
Construction2,090 — 2,090 — 
Other— 301,913 301,913  
Total$2,090 $301,913 $304,003 $3,318 
23

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following tables present activity in the ACL for the periods presented:
Three Months Ended September 30, 2023
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$19,144$3,293 $10,386$1,058$6,603$53,660$94,144 
Provision (Recovery) for Credit Losses on Loans346 (256)356 515 144 — 1,105 
Charge-offs— (50)(133)(731)— — (914)
Recoveries— — 10 129 — — 139 
Net (Charge-offs)/Recoveries (50)(123)(602)  (775)
Balance at End of Period$19,490 $2,987 $10,619 $971 $6,747 $53,660 $94,474 
Nine Months Ended September 30, 2023
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$17,992$3,980 $8,891$1,329$6,942$54,718$93,852 
Provision (Recovery) for Credit Losses on Loans1,498 (947)1,919 1,346 (153)(1,058)2,605 
Charge-offs— (51)(203)(2,039)(42)— (2,335)
Recoveries— 12 335 — — 352 
Net (Charge-offs)/Recoveries (46)(191)(1,704)(42) (1,983)
Balance at End of Period$19,490 $2,987 $10,619 $971 $6,747 $53,660 $94,474 
Three Months Ended September 30, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$17,808 $5,688 $5,155 $1,719 $6,832 $60,779 $97,981 
(Recovery) Provision for Credit Losses on Loans(433)1,542 466 206 1,856 (3,714)(77)
Charge-offs— (3,432)— (418)— — (3,850)
Recoveries— — 109 — — 110 
Net (Charge-offs)/Recoveries (3,432)1 (309)  (3,740)
Balance at End of Period$17,375 $3,798 $5,622 $1,616 $8,688 $57,065 $94,164 
Nine Months Ended September 30, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$17,297 $4,111 $4,368 $1,493 $6,939 $61,731 $95,939 
Provision (Recovery) for Credit Losses on Loans78 3,118 1,202 1,035 1,600 (4,666)2,367 
Charge-offs— (3,432)(45)(1,244)— — (4,721)
Recoveries— 97 332 149 — 579 
Net (Charge-offs)/Recoveries (3,431)52 (912)149  (4,142)
Balance at End of Period$17,375 $3,798 $5,622 $1,616 $8,688 $57,065 $94,164 
24

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS
The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy.
Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into
25

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)
offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2.
The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates.
Nonrecurring Basis
Individually Evaluated Loans: Individually evaluated loans with commitments greater than or equal to $1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy.
Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Alternative methodologies utilize various discounted cash flow assumptions in the alternative modeling through a variety of scenarios.
Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal.
For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.
OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At September 30, 2023 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.
26

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)
Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:
September 30, 2023
(Dollars in Thousands)Carrying
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities$13,104 $13,104 $— $— 
U.S. Government Agency Securities47,742 — 47,742 — 
Residential Mortgage-Backed Securities97,562 — 97,562 — 
Commercial Mortgage-Backed Securities33,328 — 33,328 — 
Other Commercial Mortgage-Backed Securities21,104 — 21,104 — 
Asset Backed Securities 137,075 — 137,075 — 
Collateralized Mortgage Obligations163,306 — 163,306 — 
States and Political Subdivisions222,644 — 222,644 — 
Corporate Notes57,524 — 50,113 7,411 
Total Securities Available-for-Sale793,389 13,104 772,874 7,411 
Derivatives25,296 — 25,296 — 
Total$818,685 $13,104 $798,170 $7,411 
Liabilities
Derivatives$24,775 $— $24,775 $— 
Total$24,775 $ $24,775 $ 
December 31, 2022
(Dollars in Thousands)Carrying
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities$17,866 $17,866 $— $— 
U.S. Government Agency Securities49,764 — 49,764 — 
Residential Mortgage-Backed Securities103,685 — 103,685 — 
Commercial Mortgage-Backed Securities34,675 — 34,675 — 
Other Commercial Mortgage-Backed Securities22,399 2,538 19,861 — 
Asset Backed Securities141,383 4,996 136,387 — 
Collateralized Mortgage Obligations176,622 — 176,622 — 
States and Political Subdivisions228,146 — 228,146 — 
Corporate Notes61,733 — 54,216 7,517 
Total Securities Available-for-Sale836,273 25,400 803,356 7,517 
Derivatives22,974 — 22,974 — 
Total$859,247 $25,400 $826,330 $7,517 
Liabilities
Derivatives$22,543 $— $22,543 $— 
Total$22,543 $ $22,543 $ 
We have invested in subordinated debt of other financial institutions. We have two securities totaling $7.4 million that are considered to be Level 3 securities at September 30, 2023 and total $7.5 million at December 31, 2022. The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.
27

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)
Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:
September 30, 2023
(Dollars in Thousands)Level 1Level 2Level 3Fair Value
OREO$— $— $3,765 $3,765 
Individually Evaluated Loans$— $— $— $— 
December 31, 2022
(Dollars in Thousands)Level 1Level 2Level 3Fair Value
OREO$— $— $8,393 $8,393 
Individually Evaluated Loans$— $— $2,649 $2,649 
The Company had no individually evaluated loans measured at fair value on a nonrecurring basis as of September 30, 2023. Individually evaluated loans had a net carrying amount of $2.6 million at December 31, 2022 with a valuation allowance of $0.7 million. The Company’s largest lending relationship is classified as an individually evaluated loan with a net carrying amount totaling $248.3 million. The Company utilized various cash flow assumptions in the alternative modeling, instead of fair value, which resulted in a valuation allowance of $53.6 million at September 30, 2023.
OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $3.8 million as of September 30, 2023, compared with $8.4 million at December 31, 2022, primarily due to sales and payments. There were $0.9 million write-downs recorded on OREO for the nine months ended September 30, 2023 and $0.6 million for the same periods in 2022.
The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:
September 30, 2023
(Dollars in Thousands)Fair
Value
Valuation
Technique
Unobservable
Inputs
Weighted
Range
Average
Assets
OREO$1,683 AppraisalsEstimated Selling Costs10.0 %10.0 %
OREO1,939 Discounted Internal Valuations Management's Subject Discount
0.0% - 23.6%
11.9 %
OREO143 Internal ValuationsEstimated Selling Costs5.0 %5.0 %
Total OREO$3,765 
December 31, 2022
(Dollars in Thousands)Fair
Value
Valuation
Technique
Unobservable
Inputs
Weighted
Range
Average
Assets
Individually Evaluated Loans$858 Discounted Internal ValuationsManagement's Discount & Estimated Selling Costs14.2 %14.2 %
Individually Evaluated Loans$1,791 Discounted AppraisalsEstimated Selling Costs6.0 %6.0 %
Total Individually Evaluated Loans$2,649 
OREO$7,323 AppraisalsEstimated Selling Costs10.0 %10.0 %
OREO143 Internal ValuationsEstimated Selling Costs5.0 %5.0 %
OREO927 Discounted Internal ValuationsManagement’s Discount & Estimated Selling Costs
0.0% - 5.0%
0.7 %
Total OREO$8,393 
A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales, and; therefore, represents an average recovery rate based on the transaction sizes and asset types in the population examined. Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgment to adjust the baseline discount rate when appropriate.
28

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)
The carrying values and estimated fair values of our financial instruments at September 30, 2023 and December 31, 2022 are presented in the following tables. Fair values for September 30, 2023 and December 31, 2022 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair Value Measurements at September 30, 2023
(Dollars in Thousands)Carrying ValueLevel 1Level 2Level 3Total
Financial Assets:
Cash and Cash Equivalents$55,398 $37,960 $17,438 $— $55,398 
Securities Available-for-Sale793,389 13,104 772,874 7,411 793,389 
Portfolio Loans, net3,316,466 — — 3,208,543 3,208,543 
Federal Home Loan Bank Stock, at Cost27,361 — — NANA
Other Assets- Interest Rate Derivatives25,296 — 25,296 — 25,296 
Accrued Interest Receivable17,713 39 5,401 12,273 17,713 
Financial Liabilities:
Deposits$3,556,189 $661,454 $1,383,181 $1,515,311 $3,559,946 
Other Liabilities- Interest Rate Derivatives24,775 — 24,775 — 24,775 
FHLB Borrowings514,135 — — 512,282 512,282 
Accrued Interest Payable6,930 — — 6,930 6,930 
 Fair Value Measurements at December 31, 2022
(Dollars in Thousands)Carrying ValueLevel 1Level 2Level 3Total
Financial Assets:
Cash and Cash Equivalents$46,869 $42,364 $4,505 $— $46,869 
Securities Available-for-Sale836,273 25,400 803,356 7,517 836,273 
Portfolio Loans, net3,055,061 — — 2,955,489 2,955,489 
Federal Home Loan Bank Stock, at Cost9,740 — — NANA
Other Assets- Interest Rate Derivatives22,974 — 22,974 — 22,974 
Accrued Interest Receivable19,346 138 4,903 14,305 19,346 
Financial Liabilities:
Deposits$3,630,333 $703,334 $1,665,473 $1,264,659 $3,633,466 
Other Liabilities- Interest Rate Derivatives22,543 — 22,543 — 22,543 
FHLB Borrowings180,550 — — 180,569 180,569 
Federal Funds Purchased17,870 — 17,870 — 17,870 
Accrued Interest Payable2,294 — — 2,294 2,294 
29

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.
Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income.
The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented:
Fair Value of Derivative Assets
(Included in Other Assets)
September 30, 2023December 31, 2022
(Dollars in Thousands)Number of TransactionsNotional AmountFair ValueNumber of TransactionsNotional AmountFair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans6$899 $1$200 $
Interest Rate Swap Contracts – Commercial Loans58390,408 25,291 62432,984 22,973 
Total Derivatives not Designated as Hedging Instruments64$391,307 $25,296 63$433,184 $22,974 
Fair Value of Derivative Liabilities
(Included in Other Liabilities)
September 30, 2023December 31, 2022
(Dollars in Thousands)Number of TransactionsNotional AmountFair ValueNumber of TransactionsNotional AmountFair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans6$899 $1$200 $
Interest Rate Swap Contracts – Commercial Loans58390,408 24,770 62432,984 22,542 
Total Derivatives not Designated as Hedging Instruments64$391,307 $24,775 63$433,184 $22,543 
30

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)
The following table indicates the income (loss) recognized on derivatives for the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)2023202220232022
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans$(1)$$$20 
Forward Sale Contracts – Mortgage Loans(2)(4)(20)
Interest Rate Swap Contracts – Commercial Loans234 295 90 738 
Total Derivative Income $234 $295 $90 $738 

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.
The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented:
Derivative Assets
(Included in Other Assets)
Derivative Liabilities
(Included in Other Liabilities)
(Dollars in Thousands)September 30,
2023
December 31,
2022
September 30,
2023
December 31,
2022
Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized$25,291 $22,973 $24,770 $22,542 
Gross Amounts Offset— — — — 
Net Amounts Presented in the Consolidated Balance Sheets25,291 22,973 24,770 22,542 
Gross Amounts Not Offset— — — — 
Net Amount$25,291 $22,973 $24,770 $22,542 
NOTE 8 – DEPOSITS
The following table presents the composition of deposits at the dates presented:
(Dollars in Thousands)September 30, 2023December 31, 2022
Noninterest-Bearing Demand$661,454 $703,334 
Interest-Bearing Demand469,904 496,948 
Money Market426,172 484,238 
Savings487,105 684,287 
Certificates of Deposits1,511,554 1,261,526 
Total$3,556,189 $3,630,333 
All deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, made permanent the $250,000 limit for federal deposit insurance and the coverage limit applies per depositor, per insured depository institution for each account ownership. Certificates of deposits that exceed the FDIC Insurance limit at September 30, 2023 and December 31, 2022 were $248.9 million and $159.0 million, respectively.
At September 30, 2023 and December 31, 2022, total brokered deposits (excluding the CDARS and ICS two-way) were $20.0 million and zero, respectively.
Certificates of Deposit maturing as of the date presented:
(Dollars in Thousands)September 30, 2023
3 Months or Less$217,569 
Over 3 Months through 12 Months 765,980 
Over 1 Year Through 3 Years 456,579 
Over 3 Years 71,426 
Total$1,511,554 
31


Overdrafts reclassified to loans were $0.2 million at September 30, 2023 and $0.3 million at December 31, 2022.

NOTE 9 – FEDERAL HOME LOAN BANK BORROWINGS AND FEDERAL FUNDS PURCHASED
Borrowings serve as an additional source of liquidity for the Company. The Company had $514.1 million Federal Home Loan Bank (“FHLB”) borrowings at September 30, 2023 and $180.6 million at December 31, 2022. FHLB borrowings include both fixed rate and variable rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans. Variable rate FHLB borrowings were 21.2% and 33.4% of total borrowings at September 30, 2023 and December 31, 2022, respectively. Total loans pledged as collateral were $1.5 billion at both September 30, 2023 and December 31, 2022, respectively. There were no securities available-for-sale pledged as collateral at both September 30, 2023 and December 31, 2022. The Company is eligible to borrow up to an additional $357.6 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.1 billion, or 25.0% of the Company’s assets, as of September 30, 2023. The Company had the capacity to borrow up to an additional $676.7 million from the FHLB at December 31, 2022.
The Company had no overnight federal funds purchased in September 30, 2023 and $17.9 million in December 31, 2022. The available borrowing capacity under unsecured lines of credit with corresponding banks was $145.0 million and $127.1 million at September 30, 2023 and December 31, 2022, respectively.
The following table represents the balance of FHLB borrowings and the weighted average interest rate as of the periods presented:
(Dollars in Thousands)September 30, 2023December 31, 2022
FHLB Borrowings$514,135 $180,550 
Weighted Average Interest Rate5.29 %4.48 %
FHLB Availability$357,583 $676,746 
The following table represents the balance of federal funds purchased and the weighted average interest rate as of the periods presented:
(Dollars in Thousands)September 30, 2023December 31, 2022
Federal Fund Purchased$— $17,870 
Weighted Average Interest Rate— %4.65 %
Federal Funds Purchased Availability$145,000 $127,130 
Scheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2023 and thereafter are as follows:
(Dollars in Thousands)BalanceWeighted
Average Rate
1 year$444,135 5.49 %
2 years25,000 4.13 %
3 years45,000 3.96 %
4 years— — %
5 years— — %
Thereafter— — %
Total FHLB Borrowings$514,135 5.29 %
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Commitments to extend credit, which amounted to $751.1 million at September 30, 2023 and $630.6 million at December 31, 2022, represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company
32

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)
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 $374.9 million, or 49.9% and $373.2 million, or 59.2%, of the commitments to extend credit at September 30, 2023 and December 31, 2022, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $21.6 million at September 30, 2023 and $25.7 million at December 31, 2022.
The following table sets forth our commitments and letters of credit as of the dates presented:
(Dollars in Thousands)September 30, 2023December 31, 2022
Commitments to Extend Credit$751,113 $630,619 
Standby and Performance Letters of Credit21,611 25,739 
Total$772,724 $656,358 
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk.
Life-of-Loss Reserve on Unfunded Loan Commitments
We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.
The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)2023202220232022
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at Beginning of Period$2,736 $1,816 $2,292 $1,783 
(Recovery) Provision for Unfunded Commitments(130)157 314 190 
Balance at End of Period$2,606 $1,973 $2,606 $1,973 
Amounts are added or subtracted to the provision for unfunded commitments through a charge or credit to current earnings in the provision for unfunded commitments.
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. The Company may enter into settlement discussions in some legal or administrative proceedings, if it believes it is in the Company’s best interests to do so. Other than as set forth below, as of September 30, 2023, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.
The Bank is engaged in a variety of collection proceedings against various related entities that are owned and/or controlled by James C. Justice, II, Cathy L Justice and James C. Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Defendants”). On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Defendants with an aggregate principal balance of approximately $301.9 million. On May 12, 2023 and June 7, 2023, the Defendants filed motions to set aside the confessions of judgment on the basis that the Bank allegedly (i) violated anti-tying provisions of the Bank Holding Company Act of 1956, as amended, (ii) breached contractual
33

Table of Contents
CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – COMMITMENTS AND CONTINGENCIES – (continued)
obligations and fiduciary duties to the Defendants and (iii) tortiously interfered with the Defendants’ business expectancies and relationships, among other allegations.
The Company and the Bank intend to pursue vigorously the confessions of judgment and enforce the promissory notes and related agreements, including release and affirmation agreements, guaranties and indemnification agreements. The Company and the Bank vigorously deny the allegations contained in the Defendants’ motions to set aside the confessions of judgment. Based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in such motions to set aside the confessions of judgment.
Because the collection litigation is in its early stages, the Company can make no prediction as to the ultimate outcome thereof or any related legal proceedings that may commence, and the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter or to estimate the range of any possible gain or loss with respect to this litigation.
NOTE 11 – 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:
(Dollars in Thousands)Three Months Ended September 30, 2023Three Months Ended September 30, 2022
Pre-Tax AmountTax Benefit Net of Tax AmountPre-Tax AmountTax Benefit (Expense)Net of Tax Amount
Net Unrealized Losses Arising during the period$(14,773)$3,197 $(11,576)$(33,326)$6,999 $(26,327)
Reclassification Adjustment for Losses included in Net Income— (1)
Other Comprehensive Loss$(14,772)$3,197 $(11,575)$(33,322)$6,998 $(26,324)
(Dollars in Thousands)Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
Pre-Tax AmountTax Benefit (Expense)Net of Tax AmountPre-Tax AmountTax Benefit Net of Tax Amount
Net Unrealized Losses Arising during the period$(10,176)$2,224 $(7,952)$(111,360)$23,386 $(87,974)
Reclassification Adjustment for Losses (Gains) included in Net Income10 (2)(48)10 (38)
Other Comprehensive Loss$(10,166)$4,615 $2,222 $(7,944)$(111,408)$23,396 $(88,012)
NOTE 12 – STOCK REPURCHASE PLAN
On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months, (the “2023 Program”) subject to receipt of non-objection from the Federal Reserve Bank of Richmond, which was received on April 24, 2023. The 2023 Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the 2023 Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position and applicable legal and regulatory requirements. The 2023 Program is authorized through May 1, 2024, although it may be modified or terminated by the Board at any time. The 2023 Program does not obligate the Company to purchase any particular number of shares, and was exhausted as of August 31, 2023. During the three months ended September 30, 2023, the remainder of 416,176 shares of common stock had been repurchased under this program at a total cost of $6.0 million, or an average price of $14.43 per share.
Previously on June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022 (the “2022 Program”). The 2022 Program authorized the purchase of the Company’s common stock in open market transactions or
34

CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – STOCK REPURCHASE PLAN – (continued)
privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act. The authorization permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The 2022 Program was originally authorized through August 1, 2023, did not obligate the Company to purchase any particular number of shares, and was exhausted as of March 10, 2023.
Previously on December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months (the “2021 Program”). The 2021 Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022.
NOTE 13 – PROVISION FOR INCOME TAXES
The following is a reconciliation of the differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before taxes:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in Thousands)AmountPercentAmountPercentAmountPercentAmountPercent
Federal Income Tax at Statutory Rate$925 21.0 $4,077 21.0 $6,428 21.0 $8,954 21.0 
State Income Tax, net of Federal Benefit48 1.1 208 1.1 468 1.5 470 1.1 
Tax-exempt Interest, net of Disallowance(170)(3.9)(214)(1.1)(548)(1.8)(667)(1.6)
Federal Tax Credits, net of Basis Reduction(556)(12.6)790 4.1 (1,665)(5.4)(317)(0.7)
Tax Credit Investment Amortization, net of Federal Benefit379 8.6 — — 1,136 3.7 — — 
Change in Valuation Allowance— — 219 1.1 — — (61)(0.1)
Income from Bank Owned Life Insurance(73)(1.7)(72)(0.4)(216)(0.7)(212)(0.5)
Interim Period Effective Tax Rate Adjustment321 7.3 — (276)(0.9)(49)(0.1)
Other(94)(2.1)(5)— 11 — 12 — 
Income Tax Provision and Effective Income Tax Rate$780 17.7 $5,009 25.8 $5,338 17.4 $8,130 19.1 
The Company elected to adopt the proportional amortization method of accounting for all qualifying equity investments within the HTC program. The Company makes equity investments as a limited partner in various partnerships that sponsor HTC as a strategic tax initiative designed to receive income tax credits and other income tax benefits, such as deductible flow-through losses. As of September 30, 2023, the Company recognized $2.2 million in HTC equity investments recorded as a component of other assets on the Consolidated Balance Sheets.
The Company records income tax credits and other income tax benefits received from its HTC investments as a component of the provision for income taxes on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows.
Investments accounted for using the proportional amortization method are amortized and recorded as a component of the provision for income taxes on the Consolidated Statements of Income.
The Company records non-income-tax-related activity and other returns received from its HTC investments as a component of other noninterest income on the Consolidated Statements of Income and as a component of operating activities on the Consolidated Statements of Cash Flows. As of September 30, 2023, the Company has not recognized any non-income-tax-related activity from its HTC investments.
35

Table of Contents
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 reader understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2023 and September 30, 2022. 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 Estimates
Overview and Strategy
Results of Operations and Financial Condition
Earnings Summary
Liquidity and Capital Resources
Regulatory Capital Requirements
Contractual Obligations
Off-Balance Sheet Arrangements
Important Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality, including but not limited to statements regarding the interest rate environment, the impact of future changes in interest rates, and the impacts of the Company placing its largest lending relationship on nonaccrual status. 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.
These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company’s control. 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 including, but not limited to the effects of:
market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios;
inflation, market and monetary fluctuations;
changes in trade, monetary and fiscal policies and laws of the U.S. Government, including policies of the Federal Reserve, FDIC and U.S. Department of the Treasury (the “Treasury Department”);
36

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)
changes in accounting policies, practices, or guidance, for example, our adoption of Current Expected Credit Losses (“CECL”) methodology, including potential volatility in the Company’s operating results due to application of the CECL methodology;
cyber-security threats, attacks or events;
rapid technological developments and changes;
our ability to resolve our nonperforming assets, and our ability to secure collateral on loans that have entered nonaccrual status due to loan maturities and failure to pay in full;
changes in the Company’s liquidity and capital positions;
concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral;
an insufficient allowance for credit losses;
the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the war between Israel and Hamas and the ongoing war between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of any governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;
a change in spreads on interest-earning assets and interest-bearing liabilities;
regulatory supervision and oversight, including our relationship with regulators and any actions that may be initiated by our regulators;
legislation affecting the financial services industry as a whole (such as the Inflation Reduction Act of 2022), and the Company and the Bank, in particular;
the outcome of pending and future litigation and/or governmental proceedings;
increasing price and product/service competition;
the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;
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;
the soundness of other financial institutions and any indirect exposure related to the closings of Silicon Valley Bank (“SVB”), Signature Bank, Silvergate Bank and First Republic Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank, Silvergate Bank and First Republic Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;
our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs and marketing programs in the markets we serve, including, but not limited to, the Company’s guiding principles, including our new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership;
material increases in costs and expenses;
reliance on significant customer relationships;
general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth;
significant weakening of the local economies in which we operate;
changes in customer behaviors, including consumer spending, borrowing and saving habits;
37

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)
changes in deposit flows and loan demand;
our failure to attract or retain key employees;
expansions or consolidations in the Company’s branch network, including any anticipated benefits of the Company’s ongoing branch network optimization project are not fully realized in a timely manner or at all;
deterioration of the housing market and reduced demand for mortgages; and
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.
Please also refer to such other factors as discussed throughout Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, and any of our subsequent filings with the Securities and Exchange Commission (“SEC”). All risk factors and uncertainties described herein and therein should be considered in evaluating the Company’s forward-looking statements. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are prepared. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events 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 in the United States (“GAAP”), management uses, and this quarterly report references, interest and dividend income, yield on interest earning assets, net interest income and net interest margin on a fully taxable equivalent, (“FTE”) basis, which are non-GAAP financial measures. Management believes these measures provide information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of interest and dividend income, yield on interest earning assets, net interest income and net interest margin on an FTE basis ensures the comparability of interest and dividend income, yield on interest earning assets, net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest and dividend income (GAAP) per the Consolidated Statements of Income is reconciled to interest and dividend income adjusted on an FTE basis, yield on interest earning assets (GAAP) is reconciled to yield on interest earning assets adjusted on an FTE basis, net interest income (GAAP) is reconciled to net interest income adjusted on an FTE basis and net interest margin (GAAP) is reconciled to net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.
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 September 30, 2023 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.
38

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Overview and Strategy
Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.5 billion at September 30, 2023. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a FDIC insured, Virginia state-chartered bank, which operates 64 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 income tax provision.
For the 2023-2025 fiscal year periods, the Company will focus on refining and enhancing its brand image and position in the markets it serves. To strengthen and further shape the culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company.
The Company’s Board of Directors and management believe that the Bank is at a turning point in its evolution and transformation. The Company’s goal will be to shift from restructuring the balance sheet to pursuing a prudent growth strategy when appropriate. We believe this strategy will be primarily targeted at organic growth, but will also consider opportunistic acquisitions that fit this strategic vision. We believe this initiative is viable given the Bank’s strong capital and liquidity positions. In addition to loan and deposit growth, the Company will seek to increase fee income while closely monitoring operating expenses.
The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter. As part of executing this strategy, the Company continues to dedicate significant resources to resolve the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship at September 30, 2023, in a manner that best protects the Company and its shareholders.

Results of Operations and Financial Condition
Earnings Summary
Highlights for the Three Months Ended September 30, 2023
Net interest income decreased $10.3 million, or 27.4%, to $27.4 million for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to a $9.3 million negative impact on interest income caused by placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023 and by an increase of 194 basis points in funding costs, offset by an increase of 31 basis points in the yield on earning assets due to the rising interest rate environment;
The provision for credit losses increased $1.2 million to $1.1 million for the three months ended September 30, 2023, compared to the same period in 2022;
Total noninterest expense increased $3.8 million to $27.3 million for the three months ended September 30, 2023 compared to the same period in 2022; and
Provision for income taxes decreased $4.2 million to $0.8 million for the three months ended September 30, 2023 compared to $5.0 million for the same period in 2022 was primarily due to the decrease in pre-tax income due to the Company’s largest lending relationship moving into nonaccrual status during the three months ended June 30, 2023.
Highlights for the Nine Months Ended September 30, 2023
39

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Net interest income decreased $3.5 million, or 3.6%, to $94.9 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase of 142 basis points in funding costs, partially offset by an increase of 79 basis points in the yield on earning assets due to the rising interest rate environment and the negative impact of placing the Bank’s largest lending relationship in nonaccrual status during the three months ended June 30, 2023;
The provision for credit losses increased $0.2 million to $2.6 million for the nine months ended September 30, 2023, compared to the same period in 2022;
Total noninterest income decreased $1.1 million to $15.0 million for the nine months ended September 30, 2023 compared to the same period in 2022;
Total noninterest expense increased $7.0 million to $76.4 million for the nine months ended September 30, 2023 compared to the same period in 2022; and
Provision for income taxes decreased $2.8 million to $5.3 million for the nine months ended September 30, 2023 compared to the same period in 2022.
Balance Sheet Highlights (period-end balances, September 30, 2023 compared to December 31, 2022)
The securities portfolio decreased $42.9 million and is currently 17.8% of total assets compared to 19.9% of total assets;
Total portfolio loans increased $262.0 million, or 11.1%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”), residential mortgage and construction segments during the nine months ended September 30, 2023;
The portfolio loans to deposit ratio was 95.9%, compared to 86.7%, due to loan growth;
Nonperforming loans as a percentage of total portfolio loans were 9.04% compared to 0.21%. The significant increase is due to loans contained in the Other segment with an aggregate principal balance of $301.9 million that were placed into nonaccrual status due to loan maturities and failure to pay in full during the second quarter of 2023. These loans comprise 97.9% of nonperforming loans at September 30, 2023;
Total deposits decreased $74.2 million or 2.0% to $3.6 billion at September 30, 2023 due to a decrease of $324.2 million in all deposit categories except CDs, which increased $250.0 million; and
The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.77% compared to 2.98%. The ACL on portfolio loans totaled $94.5 million at September 30, 2023, compared to $93.9 million at December 31, 2022.
The Company reported net income of $3.6 million or $0.16 diluted earnings per common share (“EPS”) for the three months ended September 30, 2023 and $25.3 million, or $1.07 diluted EPS for the nine months ended September 30, 2023 compared to net income of $14.4 million, or $0.59 diluted EPS and $34.5 million, or $1.38 diluted EPS, for the same periods in 2022.
The Company’s financial results for the three and nine months ended September 30, 2023, compared to the same periods in 2022, were significantly impacted by placing commercial loans with an aggregate principal value of $301.9 million in the Other segment of the Bank’s loan portfolio on nonaccrual status due to loan maturities and failure to pay in full. This nonaccrual classification had a $9.3 million and $20.6 million negative impact on interest income recognized by the Company for the three and nine months ended September 30, 2023.
Three Months Ended September 30,Nine Months Ended September 30,
PERFORMANCE RATIOS2023202220232022
Return on Average Assets0.33 %1.38 %0.78 %1.12 %
Return on Average Shareholders’ Equity4.19 %16.75 %9.71 %12.80 %
Portfolio Loans to Deposit Ratio95.92 %81.36 %95.92 %81.36 %
Allowance for Credit Losses to Total Portfolio Loans2.77 %3.11 %2.77 %3.11 %
Nonperforming Loans to Total Portfolio Loans9.04 %0.23 %9.04 %0.23 %
40

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.
Total net interest income decreased $10.3 million to $27.4 million for the three months ended September 30, 2023 and decreased $3.5 million to $94.9 million for the nine months ended September 30, 2023 compared to the same periods in 2022. The decreases for the comparable periods was a result of the higher interest rate environment that benefited earning asset yields given the asset sensitive positioning of the balance sheet. The Company recognized higher yields on new loan originations and investment securities purchases, offset by the $9.3 million and $20.6 million negative impact on interest income related to the Company placing its largest lending relationship on nonaccrual status during the three and nine months ended September 30, 2023. Net interest income, on an FTE basis (non-GAAP), decreased $10.4 million to $27.6 million for the three months ended September 30, 2023 and decreased $3.6 million to $95.7 million for the nine months ended September 30, 2023, compared to $38.0 million and $99.3 million for the same periods in 2022, respectively.
For the three months ended September 30, 2023 the decrease in net interest income, on an FTE basis (non-GAAP) was driven by higher interest income of $6.5 million, offset by higher interest expense of $16.9 million compared to the same period last year. Net interest margin decreased 120 basis points and decreased 30 basis points to 2.52% and 2.98% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Net interest margin, on an FTE basis (non-GAAP), decreased 121 basis points and decreased 31 basis points to 2.54% and 3.00% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively.
The Company’s net interest income and net interest margin will continue to be negatively impacted in future periods, by the Company’s largest lending relationship being placed on nonaccrual status. In addition, rising market interest rates have begun to increase the Company’s funding costs, which we believe will likely continue in future periods and which would negatively impact the Company’s net interest income and net interest margin in future periods.
During the nine months ended September 30, 2023, the Company’s yield on earning assets continued to benefit from the rising interest rate environment. However, during the fourth quarter of 2023, the impacts of rising yields on earning assets may not be sufficient to offset the negative impacts of increased funding costs in the rising rate environment and the negative impacts on interest income related to the Company’s largest lending relationship being placed in nonaccrual status.
Positively impacting the nine months ended September 30, 2023 was the asset sensitivity of our balance sheet. Yields on a large portion of our loan and securities portfolios adjust as rates rise at a quicker rate than the rates our deposits and other funding sources adjust. Yields on our loan portfolio consist of 24.5% floating rates and 41.3% variable rates, while 47.3% of the securities portfolio is floating rate and adjust as interest rates increase. This positively impacts revenue and helps mitigate increased funding costs.
The following table reconciles interest and dividend income (GAAP), yield on interest-earning assets (GAAP), net interest margin (GAAP) and net interest income per the Consolidated Statements of Income to interest and dividend income on an FTE
41

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
basis (non-GAAP), yield on interest-earning assets on an FTE basis (non-GAAP), net interest margin on an FTE basis (non-GAAP) and net interest income on an FTE basis (non-GAAP), respectively, for the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)2023202220232022
Interest Income (FTE)(Non-GAAP)
Interest and Dividend Income (GAAP)$48,886 $42,327 $144,557 $111,966 
Tax Equivalent Adjustment247 279 768 870 
Interest and Dividend Income (FTE) (Non-GAAP)49,133 42,606 145,325 112,836 
Average Earning Assets$4,320,390 $4,024,880 $4,256,560 $4,006,788 
Yield on Interest-earning Assets (GAAP)4.49 %4.17 %4.54 %3.74 %
Yield on Interest-earning Assets (FTE) (Non-GAAP)4.51 %4.20 %4.56 %3.77 %
Net Interest Income (GAAP)$27,394 $37,725 $94,890 $98,406 
Tax Equivalent Adjustment247 279 768 870 
Net Interest Income (FTE) (Non-GAAP)27,641 38,004 95,658 99,276 
Average Earning Assets$4,320,390 $4,024,880 $4,256,560 $4,006,788 
Net Interest Margin (GAAP)2.52 %3.72 %2.98 %3.28 %
Net Interest Margin (FTE) (Non-GAAP)2.54 %3.75 %3.00 %3.31 %
42

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(Dollars in Thousands)Average BalanceIncome/ ExpenseYield/RateAverage BalanceIncome/ ExpenseYield/Rate
ASSETS
Interest-Bearing Deposits with Banks$12,652 $172 5.39 %$25,151 $134 2.11 %
Tax-Free Investment Securities(2)
27,594 203 2.92 %30,073 215 2.84 %
Taxable Investment Securities893,386 7,793 3.46 %942,571 5,466 2.30 %
Total Securities920,980 7,996 3.44 %972,644 5,681 2.32 %
Tax-Free Loans(1)(2)
120,670 972 3.20 %141,082 1,115 3.14 %
Taxable Loans(3)
3,243,663 39,578 4.84 %2,883,790 35,652 4.90 %
Total Loans3,364,333 40,550 4.78 %3,024,872 36,767 4.82 %
Federal Home Loan Bank Stock22,425 415 7.34 %2,213 24 4.30 %
Total Interest-Earning Assets4,320,390 $49,133 4.51 %4,024,880 $42,606 4.20 %
Noninterest Earning Assets88,805 109,307 
Total Assets$4,409,195 $4,134,187 
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand$475,939 $720 0.60 %$500,281 $462 0.37 %
Money Market430,954 2,495 2.30 %552,718 395 0.28 %
Savings504,697 140 0.11 %731,931 192 0.10 %
Certificates of Deposit1,486,165 11,973 3.20 %1,257,907 3,420 1.08 %
Total Interest-Bearing Deposits2,897,755 15,328 2.10 %3,042,837 4,469 0.58 %
Federal Home Loan Bank Borrowings447,287 5,986 5.31 %3,913 31 3.14 %
Federal Funds Purchased7,550 107 5.62 %3,432 23 2.66 %
Other Borrowings6,131 71 4.59 %6,326 79 4.95 %
Total Borrowings460,968 6,164 5.31 %13,671 133 3.86 %
Total Interest-Bearing Liabilities3,358,723 21,492 2.54 %3,056,508 4,602 0.60 %
Noninterest-Bearing Liabilities707,445 736,441 
Shareholders' Equity343,027 341,238 
Total Liabilities and Shareholders' Equity$4,409,195 $4,134,187 
Net Interest Income(2)
$27,641 $38,004 
Net Interest Margin(2)
2.54 %3.75 %
(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) Average loan balances include loans held-for-sale.


43

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(Dollars in Thousands)Average BalanceIncome/ ExpenseYield/RateAverage BalanceIncome/ ExpenseYield/Rate
ASSETS
Interest-Bearing Deposits with Banks$15,550 $587 5.05 %$64,858 $257 0.53 %
Tax-Free Investment Securities(2)
28,189 618 2.93 %30,188 663 2.94 %
Taxable Investment Securities908,670 22,874 3.37 %959,456 13,650 1.90 %
Total Securities936,859 23,492 3.35 %989,644 14,313 1.93 %
Tax-Free Loans(1)(2)
126,578 3,041 3.21 %147,372 3,484 3.16 %
Taxable Loans(3)
3,158,888 117,235 4.96 %2,802,692 94,716 4.52 %
Total Loans3,285,466 120,276 4.89 %2,950,064 98,201 4.45 %
Federal Home Loan Bank Stock18,685 970 6.94 %2,222 66 3.97 %
Total Interest-Earning Assets4,256,560 $145,325 4.56 %4,006,788 $112,836 3.77 %
Noninterest Earning Assets92,613 128,105 
Total Assets$4,349,173 $4,134,893 
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand$485,605 $1,876 0.52 %$484,076 $1,082 0.30 %
Money Market440,700 5,607 1.70 %530,560 989 0.25 %
Savings570,538 456 0.11 %724,472 559 0.10 %
Certificates of Deposit1,388,773 26,690 2.57 %1,278,905 10,650 1.11 %
Total Interest-Bearing Deposits2,885,616 34,629 1.60 %3,018,013 13,280 0.59 %
Federal Home Loan Bank Borrowings380,023 14,461 5.09 %3,978 47 1.58 %
Federal Funds Purchased9,062 354 5.22 %2,168 27 1.67 %
Other Borrowings6,247 223 4.77 %5,637 206 4.89 %
Total Borrowings395,332 15,038 5.09 %11,783 280 3.18 %
Total Interest-Bearing Liabilities3,280,948 49,667 2.02 %3,029,796 13,560 0.60 %
Noninterest-Bearing Liabilities720,181 744,597 
Shareholders' Equity348,044 360,500 
Total Liabilities and Shareholders' Equity$4,349,173 $4,134,893 
Net Interest Income(2)
$95,658 $99,276 
Net Interest Margin(2)
3.00 %3.31 %
(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) Average loan balances include loans held-for-sale.
Interest income increased $6.6 million and $32.6 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Interest income, on an FTE basis (non-GAAP), increased $6.5 million and $32.5 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The change was primarily due to increases in average interest-earning assets of $295.5 million and $249.8 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Also impacting the change was higher interest rate yields on interest-earning assets of 31 basis points and 79 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due to the rising interest rate environment. These changes were offset by the negative impact of $9.3 million and $20.6 million for the three and nine months ended September 30, 2023, respectively, to interest income related to placing the Company’s largest lending relationship on nonaccrual status.
For the three and nine months ended September 30, 2023 compared to the same periods in 2022, average interest-bearing deposits with banks decreased $12.5 million and $49.3 million, respectively, as funds were deployed into higher yielding loans, and the average rate earned increased 328 basis points and 452 basis points, respectively. Average loan balances increased $339.5 million and $335.4 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Loans provide the greatest impact on interest income and the yield on earning assets as they have the largest balance and the highest yield within major earning asset categories. The average rate earned on loans decreased four basis points for the three months ended September 30, 2023 compared to the same period of 2022, primarily due to the negative impact of placing the Company’s largest lending relationship on nonaccrual status, and increased 44 basis points for the nine months ended September 30, 2023 compared to the same period in 2022.
Interest income was negatively impacted by placing the Company’s largest lending relationship on nonaccrual status during the second quarter of 2023, resulting in negative impacts to interest income of by $20.6 million since June 30, 2023, including $9.3
44

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
million in the third quarter of 2023 and $11.3 million in the second quarter of 2023. These negative impacts represented an estimated negative effect on the yield on earning assets of 85 basis points for the three months ended September 30, 2023 and 64 basis points for the nine months ended September 30, 2023.
At September 30, 2023 the loan portfolio was comprised of 24.5% floating rate loans which reprice monthly, 41.3% variable rate loans that reprice at least once during the life of the loan and 34.2% fixed rate loans that do not reprice during the life of the loan.
Average investment securities decreased $51.7 million and $52.8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The average rate earned on investment securities increased 112 basis points and 142 basis points for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The change in investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal payments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of September 30, 2023, the securities portfolio was comprised of 47.3% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months. We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate strategy is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities.
Interest expense increased $16.9 million and $36.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due to increases in the cost of all interest-bearing liability categories, except savings accounts, in the higher rate environment. Also contributing to the increased interest expense is the shift to higher cost deposits and borrowings due to a decline and change in mix of deposits and the Company’s use of higher-cost borrowings to fund growth in the loan portfolio, including $145.1 million and $132.4 million declines in average interest-bearing deposits for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.
The cost of interest-bearing liabilities increased by 194 basis points and 142 basis points to 2.54% and 2.02% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Interest expense on deposits increased $10.9 million and $21.3 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022 primarily due to the rates on these deposits increasing 152 basis points and 101 basis points to 2.10% and 1.60%, respectively. The increases in rates for the three and nine months ended September 30, 2023 compared to the same periods last year included interest-bearing demand deposits up by 23 basis points and 22 basis points, respectively, money market accounts up by 202 basis points and 145 basis points, respectively, and CDs up by 212 basis points and 146 basis points, respectively, in response to competitive pressures from higher market rates compared to the same periods in 2022. The average rates paid on savings accounts increased by one basis point for both the three and nine months ended September 30, 2023 compared to the same periods in 2022.
The average balances on borrowings increased $447.3 million and $383.5 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. The cost of borrowings increased 145 basis points and 191 basis points for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022, largely due to increased balances and the higher interest rate environment.
45

Table of Contents
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 September 30, 2023
Compared to September 30, 2022
Nine Months Ended September 30, 2023
Compared to September 30, 2022
(Dollars in Thousands)
Volume(3)
Rate(3)
Increase/
(Decrease)
Volume(3)
RateIncrease/
(Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks$(92)$130 $38 $(332)$662 $330 
Tax-free Investment Securities(2)
(18)(12)(44)(1)(45)
Taxable Investment Securities(299)2,626 2,327 (758)9,982 9,224 
Total Securities(317)2,632 2,315 (802)9,981 9,179 
Tax-free Loans(1)(2)
(165)22 (143)(499)56 (443)
Taxable Loans(1)
4,397 (471)3,926 12,704 9,815 22,519 
Total Loans4,232 (449)3,783 12,205 9,870 22,075 
Federal Home Loan Bank Stock363 28 391 821 83 904 
Total Interest-Earning Assets$4,186 $2,341 $6,527 $11,892 $20,597 $32,489 
Interest Paid on:
Interest-Bearing Demand$(23)$281 $258 $$791 $794 
Money Market(106)2,206 2,100 (195)4,813 4,618 
Savings(62)10 (52)(122)19 (103)
Certificates of Deposit724 7,829 8,553 989 15,051 16,040 
Total Interest-Bearing Deposits533 10,326 10,859 675 20,674 21,349 
Federal Home Loan Bank Borrowings5,919 36 5,955 14,083 331 14,414 
Federal Funds Purchased44 40 84 196 131 327 
Other Borrowings(2)(6)(8)22 (5)17 
Total Borrowings5,961 70 6,031 14,301 457 14,758 
Total Interest-Bearing Liabilities6,494 10,396 16,890 14,976 21,131 36,107 
Change in Net Interest Margin$(2,308)$(8,055)$(10,363)$(3,084)$(534)$(3,618)
(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 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 ACL to total portfolio loans was 2.77% of total portfolio loans at September 30, 2023, compared to 2.98% of total portfolio loans, at December 31, 2022. The provision for credit losses increased $1.2 million and $0.2 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. The increase for the three and nine months ended September 30, 2023 in the provision for credit losses was primarily driven by loan growth and net charge-offs.
The (recovery) provision for unfunded commitments decreased $0.3 million to a recovery of $0.1 million and increased $0.1 million to a provision of $0.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 related to changes in real estate construction and pressure on the reserve rate.
Net charge-offs were $0.8 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, compared to $3.7 million and $4.1 million for the same periods in 2022. During the three months ended September 30, 2022, the Company charged-down $3.4 million on a $4.9 million purchased syndicated commercial and industrial loan and transferred $1.5 million to held-for-sale. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.09%
46

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
and 0.08% for the three and nine months ended 2023, respectively, and 0.49% and 0.19% for the same periods in 2022, respectively. See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.
Nonperforming loans (“NPLs”) increased at September 30, 2023 by $301.7 million to $308.3 million compared to $6.6 million at December 31, 2022. During the second quarter of 2023, the Company placed commercial loans that reside in the Other segment of the Company’s loan portfolio, relating to a single lending relationship which has an aggregate principal amount of $301.9 million, on nonaccrual status due to loan maturities and failure to pay in full. The Other loan segment resulted in CECL of $51.3 million in connection with our adoption of Topic 326 “Financial Instruments - Credit Losses.” on January 1, 2021. As of September 30, 2023 and December 31, 2022, those Other segment reserves were $53.6 million and $54.7 million, respectively. As of September 30, 2023, the Company utilized discounted cash flow valuation techniques to evaluate the current condition of certain of the borrowers’ operating businesses and those borrowers’ capacity to repay, which resulted in specific reserves related to that single lending relationship. As a result, the classification of these commercial loans in nonaccrual status did not have a significant impact on the Company’s provision for credit losses during the three and nine months ended September 30, 2023. See the “Credit Quality” section of this MD&A for additional information regarding our NPLs and this lending relationship.
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.
Noninterest Income
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in Thousands)20232022$ Change% Change20232022$ Change% Change
(Losses) Gains on Sales of Securities, net$(1)$(4)$75.0 %$(10)$48 $(58)(120.8)%
Service Charges, Commissions and Fees1,783 1,750 33 1.9 %5,380 5,452 (72)(1.3)%
Debit Card Interchange Fees1,902 1,788 114 6.4 %5,941 5,570 371 6.7 %
Insurance Commissions868 876 (8)(0.9)%1,550 1,713 (163)(9.5)%
Bank Owned Life Insurance Income348 341 2.1 %1,028 1,009 19 1.9 %
(Losses) Gains on Sales and Write-downs of Bank Premises, net— (4)100.0 %— 342 (342)(100.0)%
Commercial Loan Swap Fee Income— 18 (18)(100.0)%114 774 (660)(85.3)%
Other370 470 (100)(21.3)%1,030 1,266 (236)(18.6)%
Total Noninterest Income$5,270 $5,235 $35 0.7 %$15,033 $16,174 $(1,141)(7.1)%
Total noninterest income increased slightly to $5.3 million for the three months ended September 30, 2023 and decreased $1.1 million, or 7.1%, to $15.0 million for the nine months ended September 30, 2023 compared to the same periods in 2022. The slight increase for the three months ended September 30, 2023 compared to the same periods in 2022 was primarily related to a $0.1 million increase in debit card interchange fees due to higher interchange fee volume, offset by a $0.1 million decrease within other noninterest income related to a higher fair value adjustment of our interest rate swap contracts with commercial customers in the same quarter of 2022.
For the nine months ended September 30, 2023, the decrease in total noninterest income primarily related to a decrease of $0.7 million in commercial loan swap fee income due to the rising interest rate environment, and a decrease of $0.3 million related to losses on sales and write-downs of bank premises, net due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022. Also impacting the decrease from the year ago period included a decrease of $0.2 million in other noninterest income, $0.2 million decline in insurance commissions, as well as a decline of $0.1 million in service charges, commissions and fees. The decreases in insurance commissions and service charges on deposit accounts were primarily volume driven and the decrease in other noninterest income related to a higher fair value adjustment of our interest rate swap contracts with commercial customers in the first quarter of 2022. These decreases were offset by an increase of $0.4 million in debit card interchange fees due to higher interchange fee volume in the first nine months of 2023.
47

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Noninterest Expense
Three Months Ended September 30, 2023Nine Months Ended September 30,
(Dollars in Thousands)20232022$ Change% Change20232022$ Change% Change
Salaries and Employee Benefits$13,956 $13,520 $436 3.2 %$41,257 $37,721 $3,536 9.4 %
Occupancy Expense, net3,547 3,412 135 4.0 %10,548 10,060 488 4.9 %
FDIC Insurance Expense1,368 543 825 151.9 %2,711 1,540 1,171 76.0 %
Other Taxes846 848 (2)(0.2)%2,436 2,471 (35)(1.4)%
Advertising Expense363 368 (5)(1.4)%1,133 874 259 29.6 %
Telephone Expense500 448 52 11.6 %1,339 1,390 (51)(3.7)%
Professional and Legal Fees1,512 1,310 202 15.4 %4,005 3,731 274 7.3 %
Data Processing1,076 833 243 29.2 %2,854 2,516 338 13.4 %
Debit Card Expense816 797 19 2.4 %2,066 2,089 (23)(1.1)%
Tax Credit Amortization— (764)764 100.0 %— 466 (466)(100.0)%
Other3,298 2,148 1,150 53.5 %8,045 6,526 1,519 23.3 %
Total Noninterest Expense$27,282 $23,463 $3,819 16.3 %$76,394 $69,384 $7,010 10.1 %
During the three and nine months ended September 30, 2023 total noninterest expense increased $3.8 million and $7.0 million, respectively, compared to the same periods in 2022. The most significant variances for the three months ended September 30, 2023 compared to the same period in 2022 related to increases of $1.2 million within other noninterest expense, an increase of $0.8 million in FDIC insurance expense, an increase of $0.8 million in tax credit amortization expense due to the early adoption of ASU 2023-02 Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, an increase of $0.4 million in salaries and employee benefits, an increase of $0.2 million in data processing expenses, an increase of $0.2 million in professional and legal fees, and an increase of $0.1 million in occupancy expenses.
The increase in other noninterest expense related to a $0.6 million write-down on three legacy other real estate owned (“OREO”) properties pending sale, a $0.2 million nonrecurring expense in the third quarter of 2023, and $0.2 million in write-downs on two closed branches marked for sale. FDIC insurance expense increased due to the deterioration in asset quality as a direct result of placing the Bank’s largest lending relationship in nonaccrual status during the quarter ended June 30, 2023, which is a component used to determine the assessment. The decrease in tax credit amortization of $0.8 million is due to the reversal during the third quarter of 2022 as a result of updated information from the developer that extended the in-service date to 2023 for one of the Company’s partnerships. The increase in salaries and employee benefits is primarily related to $1.3 million higher base salaries, and increased FICA expenses of $0.1 million, offset by lower profit sharing and incentives of $0.6 million and $0.3 million, respectively in the three months ended September 30, 2023. The increases in data processing, professional and legal fees and occupancy expenses primarily related to additional seasonal services performed during the third quarter of 2023.
The largest increase for nine months ended September 30, 2023 compared to the same period in 2022 was higher salaries and employee benefits of $3.5 million related to higher salary expense due to retail open positions being filled, job grade assessment increases, normal merit increases, increased medical claims and higher incentive bonuses in 2023. Also impacting the increase was $1.5 million increase in other noninterest expense, a $1.2 million increase in FDIC Insurance expense, an increase of $0.5 million in occupancy expense, a $0.3 million increase in data processing expenses, a $0.3 million increase in professional and legal fees and a $0.3 million increase in advertising expenses. Offsetting these increases, similar to the quarterly variance, was a decline in tax credit amortization of $0.5 million due to the previously mentioned in-service date extension.
The increases in other noninterest expense, FDIC insurance expense, occupancy expense, data processing expenses and professional and legal expense for the nine months ended September 30, 2023 are all similar to the variances mentioned for the three months ended September 30, 2023 above; however, advertising expenses increased due to marketing initiatives and the increase in FDIC expenses also related to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rate schedules uniformly by two basis points on all insured depository institutions, beginning in the first quarterly assessment period of 2023.
48

Table of Contents
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 decreased $4.2 million and $2.8 million to $0.8 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. Pre-tax income decreased $15.0 million and $12.0 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. The effective tax rate was 17.7% and 17.4% for the three and nine months ended September 30, 2023 compared to 25.8% and 19.1% for the same periods in 2022. The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the same periods in 2022 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).
Financial Condition
September 30, 2023
Total assets increased $247.6 million, to $4.5 billion at September 30, 2023 compared to $4.2 billion at December 31, 2022. Total portfolio loans increased $262.0 million, or 11.1% on an annualized basis, to $3.4 billion at September 30, 2023 compared to December 31, 2022 primarily due to loan growth in the CRE, residential mortgage and construction segments during the nine months ended September 30, 2023. The variances in loan segments for portfolio loans related to increases of $218.4 million in commercial real estate loans, $80.4 million in residential mortgages, $24.0 million in construction loans, offset by decreases of $45.5 million in C&I loans, $8.1 million in other consumer loans and $7.2 million in the other category.
The securities portfolio decreased $42.9 million and is currently 17.8% of total assets at September 30, 2023 compared to 19.9% of total assets at December 31, 2022. The decrease is due to $54.0 million in maturities, curtailments and security sales deployed into higher yielding loan growth, offset by $24.9 million in purchases of small business administration bonds during the nine months ended September 30, 2023. As of September 30, 2023, the securities portfolio was comprised of 47.3% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months. At September 30, 2023, total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $120.5 million of gross unrealized losses. Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.
Federal Home Loan Bank (“FHLB”) stock, at cost increased $17.6 million to $27.4 million at September 30, 2023 compared to December 31, 2022. The increase is due to the FHLB requirement to hold a specified level of stock based upon level of borrowings. OREO decreased $4.6 million at September 30, 2023 compared to December 31, 2022 due to the sale of one OREO property in June 2023. During the third quarter of 2023, the Bank closed two retail banking offices and moved $1.1 million at fair value to OREO. These properties are currently being marketed for sale. Closed retail bank offices had a book value of $2.1 million at September 30, 2023 and $1.1 million at December 31, 2022.
Total deposits decreased $74.2 million to $3.6 billion at September 30, 2023 compared to December 31, 2022. The decrease related to a decline of $324.2 million in savings, money market and demand deposits due to customers migrating to higher-yielding CD products driven by rising market interest rates. At September 30, 2023, noninterest-bearing deposits comprised 18.6% of total deposits compared to 19.4% at December 31, 2022 and 19.3% at September 30, 2022. CDs comprised 42.5%, 34.7% and 33.5% of total deposits at September 30, 2023, December 31, 2022 and September 30, 2022, respectively. As of September 30, 2023, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 88.9% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.1% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 79.2% of retail deposits.
Total capital of $330.6 million at September 30, 2023, reflects an increase of $2.0 million compared to $328.6 million at December 31, 2022. The increase in total capital from December 31, 2022 is primarily due to net income of $25.3 million for the nine months ended September 30, 2023, offset by $16.4 million related to the repurchase of common stock, a $7.9 million decrease in other comprehensive (loss) income due to changes in fair value of investment securities, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02. The remaining difference of $1.1 million is related to restricted stock activity for the nine months ended September 30, 2023.
49

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The ACL was 2.77% of total portfolio loans at September 30, 2023 compared to 2.98% as of December 31, 2022. General reserves as a percentage of total portfolio loans were 1.20% at September 30, 2023 compared to 2.96% at December 31, 2022. The decrease in the general reserves as a percentage of total portfolio loans was primarily driven by the largest lending relationships movement from the general pool to the individually evaluated pool due to the transfer to nonaccrual during the second quarter of 2023 offset by loan growth. Management believes the ACL is adequate to absorb expected losses inherent in the loan portfolio. See the sections of this MD&A titled “Provision for Credit Losses,” “Credit Quality” and “Allowance for Credit Losses” for information about the factors that impacted the ACL and the provision for credit losses.
The Company remains well capitalized. The Tier 1 capital ratio decreased to 11.20% at September 30, 2023 compared to 12.61% at December 31, 2022. The leverage ratio was 9.70% at September 30, 2023, compared to 10.29% at December 31, 2022 and the total risk-based capital ratio was 12.46% at September 30, 2023 compared to 13.86% at December 31, 2022. The decrease is related to the aforementioned repurchase of common stock of $16.4 million through September 30, 2023 and loan growth during the nine months ended September 30, 2023. Another significant factor driving the ratios downward was the above mentioned large lending relationship movement to nonaccrual status with the $20.6 million year-to-date negative impact on interest income, combined with the movement of nonaccrual assets to higher risk rating categories.
The Bank also remained well capitalized as of September 30, 2023. The Bank’s Tier 1 Capital ratio was 11.08% at September 30, 2023 compared to 12.42% at December 31, 2022. The Bank’s leverage ratio was 9.59% at September 30, 2023 compared to 10.13% at December 31, 2022. The Bank’s Total Risk-Based Capital ratio was 12.34% at September 30, 2023 compared to 13.68% at December 31, 2022.
Securities Activity
The following table presents the composition of available-for-sale securities:
(Dollars in Thousands)September 30, 2023December 31, 2022$ Change
U.S. Treasury Securities$13,104 $17,866 $(4,762)
U.S. Government Agency Securities47,742 49,764 (2,022)
Residential Mortgage-Backed Securities97,562 103,685 (6,123)
Commercial Mortgage-Backed Securities33,328 34,675 (1,347)
Other Commercial Mortgage-Backed Securities21,104 22,399 (1,295)
Asset Backed Securities137,075 141,383 (4,308)
Collateralized Mortgage Obligations163,306 176,622 (13,316)
States and Political Subdivisions222,644 228,146 (5,502)
Corporate Notes57,524 61,733 (4,209)
Total Debt Securities$793,389 $836,273 $(42,884)
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 decreased $42.9 million to $793.4 million at September 30, 2023 compared to $836.3 million at December 31, 2022. Securities comprise 17.8% of total assets at September 30, 2023 compared to 19.9% at December 31, 2022. The decrease is due to $54.0 million in maturities, curtailments and security sales deployed into higher yielding loan growth, offset by $24.9 million in purchases of small business administration bonds during the nine months ended September 30, 2023. As of September 30, 2023, the securities portfolio was comprised of 47.3% variable rate securities with approximately 99.4% that will reprice at least once over the next 12 months.
At September 30, 2023 total gross unrealized gains in the available-for-sale portfolio were $0.9 million, offset by $120.5 million of gross unrealized losses. At December 31, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.3 million offset by $109.7 million of gross unrealized losses.
50

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The unrealized losses on debt securities are believed to be temporary primarily because these unrealized losses are due to reductions in market value caused by upward movement in interest rates since the securities purchase (as applicable), and not related to the credit quality of these securities. Our portfolio consists of 49.9% of securities issued by United States government sponsored entities and carry an implicit government guarantee. States and political subdivisions comprise 28.1% of the portfolio and are largely general obligations or essential purpose revenue bonds, which have performed very well historically over all business cycles, and are rated AA and AAA. We have the ability to hold these securities to maturity and expect full recovery of the amortized cost. From time to time we may sell securities to take advantage of market opportunities or as part of a strategic initiative.
The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities). This portion of the Treasury yield curve has moved slightly higher over the past three months, driving unrealized losses on these securities higher. Although the Federal Reserve is in the middle of an aggressive effort to raise short-term interest rates to combat inflation, the Company does not expect higher short-term rates to adversely impact the fair values of the Company’s investment securities to the same extent as increases in longer-term rates. The Company expects that higher short-term rates may continue to improve yields on certain of the Company’s variable rate securities over the next several quarters.
At September 30, 2023 the 5-year and 10-year U.S. Treasury yields were 4.60% and 4.59%, respectively. At December 31, 2022, those same bond yields were 3.99% and 3.88%, respectively. The decrease of seven basis points in the 10-year treasury was offset by the increase in the 5-year treasury in the intermediate part of the yield curve which drove the increase in unrealized losses for the first nine months of 2023. The effects were generally greater for longer maturity bonds, such as municipal bonds. On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Federal Reserve interest rate hikes.
Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes. At September 30, 2023 and December 31, 2022, the Company had no credit related impairment.
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.
The Basel rules also permit most banking organizations to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.
51

Table of Contents
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)September 30, 2023December 31, 2022
Commercial
Commercial Real Estate$1,688,947 $1,470,562 
Commercial and Industrial264,329 309,792 
Total Commercial Loans1,953,276 1,780,354 
Consumer
Residential Mortgages738,368 657,948 
Other Consumer36,487 44,562 
Total Consumer Loans774,855 702,510 
Construction377,576 353,553 
Other305,233 312,496 
Total Portfolio Loans3,410,940 3,148,913 
Loans Held-for-Sale— — 
Total Loans$3,410,940 $3,148,913 
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, 2022, and Part II, Item 1A, “Risk Factors,” contained in our Quarterly Report on Form 10-Q for the periods ended March 31, 2023, June 30, 2023 and this Quarterly Report on Form 10-Q.
Total portfolio loans increased $262.0 million, or 11.1%, on an annualized basis, to $3.4 billion at September 30, 2023 compared to December 31, 2022 with strong production primarily in our CRE, residential mortgage and construction portfolios. The CRE portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. Given the continued rising rate environment our mortgage portfolio is experiencing more modest growth in 2023. At September 30, 2023, the loan portfolio was comprised of 24.5% floating rates which reprice monthly, 41.3%, variable rates that reprice at least once during the life of the loan and the remaining 34.2% are fixed rate loans. The Company continues to carefully monitor the loan portfolio during 2023, including in light of market conditions that impact our borrowers and the interest rate environment.
Aggregate commitments to our top 10 credit relationships were $644.8 million at September 30, 2023. The Other segment represents 46.8% of the top 10 credit relationships and $301.9 million has since transferred to nonaccrual during the second quarter of 2023, as described in more detail below under “Credit Quality” in this MD&A.
52

Table of Contents
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 ThousandsFor the Periods EndingChangeSeptember 30, 2023September 30, 2023
September 30, 2023December 31, 2022% of Gross Loans% of RBC
1. Hospitality, agriculture & energy$301,913 $309,107 $(7,194)8.85 %62.12 %
2. Retail real estate & food services53,905 55,625 (1,720)1.58 %11.09 %
3. Industrial & retail real estate40,351 41,725 (1,374)1.18 %8.30 %
4. Multifamily development40,000 40,000 — 1.17 %8.23 %
5. Retail real estate39,448 37,679 1,769 1.16 %8.12 %
6. Hospitality37,633 35,255 2,378 1.10 %7.74 %
7. Non-Owner Occupied/Commercial Real Estate33,903 17,308 16,595 1.00 %6.98 %
8. Multifamily & student housing33,033 33,998 (965)0.97 %6.80 %
9. Hospitality32,661 33,587 (926)0.96 %6.72 %
10. Multifamily / Construction Real Estate 32,000 24,000 8,000 0.94 %6.58 %
Top Ten (10) Relationships$644,847 $628,284 $16,563 18.91 %132.68 %
Total Gross Loans$3,410,940 $3,148,913 $262,027 
% of Total Gross Loans18.91 %19.95 %(1.04)%
Concentration (25% of RBC)$121,508 $120,863 
Unfunded commitments on lines of credit were $595.9 million at September 30, 2023 as compared to $512.7 million at December 31, 2022. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 51.9% at September 30, 2023 and 52.2% at December 31, 2022. Unfunded commitments on commercial operating lines of credit was 51.4% at September 30, 2023 and 51.7% at December 31, 2022.
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 established transaction, relationship and 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 and are based on management’s risk tolerance relative to capital. In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects. Although leverage is important, the Company is also focused on cash flow generation and uses multiple metrics to calculate a supportable loan amount. Supportable loan amounts have generally been more challenging given the increases in commodities pricing.
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. The Company significantly increased the standards for consumer unsecured lending by adjusting upward the required qualifying Fair Isaac Corporation (“FICO”) scores and restricting loan amounts at lower FICO scores.
Deferred costs and fees included in the portfolio balances above were $6.7 million and $8.2 million at September 30, 2023 and December 31, 2022, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $140.0 thousand and $161.2 thousand at September 30, 2023 and December 31, 2022, 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 has 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. There were no mortgage loans held-for-sale at September 30, 2023 and December 31, 2022, respectively.
53

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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.
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain watch, special mention and substandard risk rated 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 policy changes and policy enhancements as they become available.
Additional credit risk management practices include continuous reviews of trends in our lending footprint and 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 independently 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 determining the appropriateness of risk ratings for those loans reviewed and 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.
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.
Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented:
(Dollars in Thousands)September 30, 2023December 31, 2022$ Change
Nonaccrual Loans
Commercial Real Estate$1,265 $2,304 $(1,039)
Commercial and Industrial70 204 (134)
Residential Mortgages2,077 3,265 (1,188)
Other Consumer22 14 
Construction2,954 864 2,090 
Other301,913 — 301,913 
Total Nonperforming Loans308,301 6,645 301,656 
Other Real Estate Owned3,765 8,393 (4,628)
Total Nonperforming Assets$312,066 $15,038 $297,028 
Nonperforming assets increased $297.0 million to $312.1 million at September 30, 2023 compared to December 31, 2022. During the second quarter of 2023, the Company placed commercial loans that resided in the Other segment of the Company’s loan portfolio, relating to the Bank’s largest lending relationship which has an aggregate principal amount of $301.9 million, on nonaccrual status due to loan maturities and failure to pay in full. These nonperforming loans are 97.9% of the Company's total nonperforming loans and 96.7% of the Company's total nonperforming assets.
54

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Based on analyses of the credit relationship and various cash flow assumptions in the alternative modeling the Company established individually evaluated loan reserves with respect to these loans of $53.6 million at September 30, 2023, representing 17.8%, of these loans aggregate principal amount. At September 30, 2023, all of the Bank’s loans related to this lending relationship are on nonaccrual status.
The Company believes it is well secured based on the net carrying value of the credit relationship and appropriately reserved for potential losses with respect to all such loans based on information currently available. The Company utilized various cash flow assumptions in the alternative modeling which resulted in a valuation allowance of $53.6 million at September 30, 2023. As the borrowers on these loans operate in the hospitality, agriculture, and energy sectors, this credit relationship is secured by, among other collateral, commercial real estate properties in these sectors including but not limited to top-tier hospitality properties. When evaluating the net carrying value of this credit relationship at September 30, 2023, the Company utilized discounted cash flow valuation techniques to evaluate the current condition of certain of the borrowers’ operating businesses and those borrowers’ capacity to repay. That evaluation resulted in the Company establishing a valuation allowance of $53.6 million at September 30, 2023.
The following is an analysis of nonperforming loans by loan portfolio segment for the dates presented, and each segment’s relative contribution to total nonperforming loans:
September 30, 2023December 31, 2022
(Dollars in Thousands)
Amount
% of NPLs
Amount
% of NPLs
Commercial Real Estate
$1,265 0.4 %$2,304 34.7 %
Commercial & Industrial
70 — %204 3.1 %
Residential Mortgages
2,077 0.7 %3,265 49.1 %
Other Consumer
22 — %0.1 %
Construction
2,954 1.0 %864 13.0 %
Other
301,913 97.9 %— — %
Balance End of Period
308,301 100.0 %6,645 100.0 %
The Company has initiated collection processes with respect to such loans and intends to explore all alternatives for repayment. However, we cannot give any assurance as to the timing or amount of future payments or collections on such loans or that we will ultimately collect all amounts contractually due under the terms of such loans. For a discussion of collection proceedings with respect to these loans, see Part II, Item 1, “Legal Proceedings” of this Quarterly Report on Form 10-Q.
Closed retail bank offices have a remaining book value of $2.1 million at September 30, 2023 and $1.1 million at December 31, 2022, and are recorded in OREO on the Company’s balance sheet. During the third quarter of 2023, the Bank closed two retail banking offices and moved $1.1 million at fair value to OREO. These properties are currently being marketed for sale.
Past Company legacy underwriting standards relied heavily on loan to value and did not necessarily consider the income characteristics of the borrower or the repayment capacity of collateral with respect to speculative land financing. An overreliance on value as a primary repayment source can become compromised during real estate cycles. As a result, management has worked through these legacy credits and has installed a number of underwriting guardrails that consider the global cash flows and repayment capability of borrowers and/or guarantors, the proportion of speculation, transaction limits and introduced sensitivity analysis in order to determine supportable loan amounts. While these guardrails do not insulate the Company from credit cycles, we believe it should reduce the experience of defaults.
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.
55

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Allowance for Credit Losses
The following is the allocation of the ACL reserves by segment for the periods presented:
September 30, 2023December 31, 2022
(Dollars in Thousands)Amount% of Loans in each Category to Total Portfolio LoansAmount% of Loans in each Category to Total Portfolio Loans
Commercial Real Estate$19,490 49.5 %$17,992 46.7 %
Commercial & Industrial2,987 7.8 %3,980 9.9 %
Residential Mortgages10,619 21.6 %8,891 20.9 %
Other Consumer971 1.1 %1,329 1.4 %
Construction6,747 11.1 %6,942 11.2 %
Other53,660 8.9 %54,718 9.9 %
Balance End of Period$94,474 100.0 %$93,852 100.0 %
The decline in the ACL attributable to the other segment was primarily due to $1.1 million of principal pay-downs during the nine months ended September 30, 2023 that occurred during the first quarter of 2023. The ACL was $94.5 million, or 2.77%, of total portfolio loans at September 30, 2023 compared to $93.9 million, or 2.98%, of total portfolio loans at December 31, 2022.
The following table summarizes the credit quality ratios and their components as of September 30, 2023 and December 31, 2022:
(Dollars in Thousands)September 30, 2023December 31, 2022
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses$94,474 $93,852 
Total Portfolio Loans3,410,940 3,148,913 
Allowance for Credit Losses to Total Portfolio Loans2.77 %2.98 %
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans$308,301 $6,645 
Total Portfolio Loans3,410,940 3,148,913 
Nonperforming Loans to Total Portfolio Loans9.04 %0.21 %
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses$94,474 $93,852 
Nonperforming Loans308,301 6,645 
Allowance for Credit Losses to Nonperforming Loans30.64 %1,412.37 %
Net Charge-offs to Average Portfolio Loans
Net Charge-offs (annualized)$2,651 $4,506 
Average Total Portfolio Loans3,285,380 2,988,785 
Net Charge-offs to Average Portfolio Loans0.08 %0.15 %
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 previous table.
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 increased $1.2 million and $0.2 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. The increase for the three and nine months ended September 30, 2023 in the provision for credit losses was primarily driven by loan growth and net charge-offs, offset by the release of specific reserves on two loans. For more information about the Company’s provision for credit losses, see the discussion above under “Provision for Credit Losses” in this MD&A.
The (recovery) provision for unfunded commitments decreased $0.3 million and increased $0.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 related to changes in real estate
56

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
construction and pressure on the reserve rate. There are three basic factors that influence the reserve rates associated with unfunded commitments for real estate construction loans. First, the reserve rate is extrapolated from the reserve rates calculated for certain commercial real estate funded loans within the ACL model. These reserve rates are influenced by the same factors cited in the ACL model such as economic forecasts, average portfolio life, etc. Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL Policy and the discussion of these factors. Second, since the category of construction is generic, management applies a weighting of the reserve rates associated with certain commercial real estate loans. The proportion of these segments affect the weighting. Third, volume changes impact the total reserve calculation.
Net charge-offs were $0.8 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, compared to $3.7 million and $4.1 million for the same period in 2022. During the three and nine months ended September 30, 2023, net charge-offs were primarily recognized in the other consumer segment. During the three months ended September 30, 2022, the Company charged-down $3.4 million on a $4.9 million purchased syndicated C&I loan and transferred $1.5 million to held-for-sale. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.09% and 0.08% for the three and nine months ended 2023 and 0.49% and 0.19% for the same periods in 2022, respectively.

At September 30, 2023, nonperforming loans increased $301.7 million to $308.3 million since December 31, 2022. Nonperforming loans as a percentage of total portfolio loans were 9.04% and 0.21% as of September 30, 2023 and December 31, 2022, respectively. Nonperforming loans increased during the second quarter of 2023 as the Company placed commercial loans that were in the Other segment of the Company’s loan portfolio, relating to the Bank’s largest lending relationship which has an aggregate principal amount of $301.9 million, on nonaccrual status due to loan maturities and failure to pay in full. For more information about the Company’s nonperforming loans and about this lending relationship, see the discussion above under “Credit Quality” in this MD&A.
The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:
September 30, 2023
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Portfolio Loans
Pass$1,686,716 $261,416 $734,589 $36,445 $374,495 $3,320 $3,096,981 
Special Mention286 2,838 527 — 62 — 3,713 
Substandard1,945 75 3,252 42 3,019 301,913 310,246 
Doubtful— — — — — — — 
Loss— — — — — — — 
Total Portfolio Loans$1,688,947 $264,329 $738,368 $36,487 $377,576 $305,233 $3,410,940 
Performing$1,687,682 $264,259 $736,291 $36,465 $374,622 $3,320 $3,102,639 
Nonperforming1,265 70 2,077 22 2,954 301,913 308,301 
Total Portfolio Loans$1,688,947 $264,329 $738,368 $36,487 $377,576 $305,233 $3,410,940 
December 31, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Portfolio Loans
Pass$1,457,340 $303,893 $653,044 $44,495 $352,516 $180,745 $2,992,033 
Special Mention10,796 2,887 983 — 69 — 14,735 
Substandard2,426 3,012 3,921 67 968 131,751 142,145 
Doubtful— — — — — — — 
Loss— — — — — — — 
Total Portfolio Loans$1,470,562 $309,792 $657,948 $44,562 $353,553 $312,496 $3,148,913 
Performing$1,468,258 $309,588 $654,683 $44,554 $352,689 $312,496 $3,142,268 
Nonperforming2,304 204 3,265 864 — 6,645 
Total Portfolio Loans$1,470,562 $309,792 $657,948 $44,562 $353,553 $312,496 $3,148,913 
57

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Special mention, substandard and doubtful loans at September 30, 2023 increased $157.1 million to $314.0 million compared to $156.9 million at December 31, 2022. The decrease of $11.0 million in special mention is primarily due to the upgrade of a CRE credit totaling $9.8 million to a pass rating. The increase of $168.1 million in substandard loans is primarily related to the above mentioned large nonaccrual lending relationship in the other loan category. The $301.9 million of loans related to the Bank’s largest lending relationship were nonperforming and rated as substandard at September 30, 2023. At December 31, 2022 the largest lending relationship in the other segment loans were all accruing and totaled $309.1 million of which, $177.3 million of those loans were pass-rated and $131.8 million of those loans were substandard-rated.
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 the ACL.
Deposits
The following table presents the composition of deposits for the periods presented:
(Dollars in Thousands)September 30,
2023
December 31,
2022
$ Change% Change
Noninterest-Bearing Demand$661,454 $703,334 $(41,880)(6.0)%
Interest-Bearing Demand469,904 496,948 (27,043)(5.4)%
Money Market426,172 484,238 (58,065)(12.0)%
Savings487,105 684,287 (197,182)(28.8)%
Certificates of Deposit1,511,554 1,261,526 250,028 19.8 %
Total Deposits$3,556,189 $3,630,333 $(74,154)(2.0)%
Deposits are the Company’s primary source of funds. The Company believes that the deposit base is stable and that the Company has the ability to attract new depositors while diversifying the deposit composition. Total deposits at September 30, 2023 decreased $74.2 million, or 2.04%, from December 31, 2022. The decrease related to a decline of $324.2 million in demand, money market and savings deposits, offset by an increase of $250.0 million in CDs, which was primarily due to customers migrating between deposit products as interest rates have risen.
At September 30, 2023, noninterest-bearing deposits comprised 18.6% of total deposits compared to 19.4% at December 31, 2022 and 19.3% at September 30, 2022. CDs comprised 42.5%, 34.7% and 33.5% of total deposits at September 30, 2023, December 31, 2022 and September 30, 2022, respectively. As of September 30, 2023, based on assumptions that the Bank uses to prepare its regulatory call report, approximately 88.9% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.1% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit. The Company’s deposit base is diversified and granular and is comprised of approximately 79.2% of retail deposits. At September 30, 2023 and December 31, 2022, total brokered deposits (excluding the CDARS and ICS two-way) were $20.0 million and zero, respectively.
58

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table presents additional information in relation to deposits:
(Dollars in Thousands)September 30,
2023
December 31,
2022
Deposits from the Certificate of Deposit Account Registry Services ("CDARS")$— $922 
Noninterest-Bearing Public Funds Deposits23,739 27,086 
Interest-Bearing Public Funds Deposits124,812 180,243 
Total Deposits not Covered by Deposit Insurance(1)
396,283 493,013 
Certificates of Deposits not Covered by Deposit Insurance248,924 159,030 
Deposits for Certain Directors, Executive Officers and their Affiliates1,503 2,910 
(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 September 30, 2023 are summarized as follows:
(Dollars in Thousands)AmountPercent
Three Months or Less$31,465 12.6 %
Over Three Months Through Twelve Months136,656 54.9 %
Over Twelve Months Through Three Years58,727 23.6 %
Over Three Years22,076 8.9 %
Total$248,924 100.0 %
Borrowings and Federal Funds Purchased
Borrowings are an additional source of liquidity for the Company. We had $514.1 million FHLB borrowings at September 30, 2023 and $180.6 million at December 31, 2022. The Company had no overnight federal funds purchased at September 30, 2023 and $17.9 million in overnight federal funds purchased at December 31, 2022. The level and composition of borrowed funds fluctuates over time based on many factors including market conditions, loan growth, investment securities, deposits and capital considerations. We manage our borrowed funds to provide a reliable source of liquidity.
Information pertaining to FHLB borrowings and federal funds purchased is summarized in the following table:
(Dollars in Thousands)September 30, 2023December 31, 2022
Balance at Period End
Federal Home Loan Bank Borrowings$514,135 $180,550 
Federal Funds Purchased$— $17,870 
Average Balance during the Period
Federal Home Loan Bank Borrowings$380,023 $29,849 
Federal Funds Purchased$9,062 $5,711 
Average Interest Rate during the Period
Federal Home Loan Bank Borrowings5.09 %3.90 %
Federal Funds Purchased5.22 %3.29 %
Maximum Month-end Balance during the Period
Federal Home Loan Bank Borrowings$514,135 $180,550 
Federal Funds Purchased$46,965 $23,020 
Average Interest Rate at Period End
Federal Home Loan Bank Borrowings5.29 %4.48 %
Federal Funds Purchased— %4.65 %
The Company held FHLB of Atlanta stock of $27.4 million and $9.7 million at September 30, 2023 and December 31, 2022, respectively. The increase in FHLB stock was due to increased borrowings. Dividends recorded on restricted stock were $415.3 thousand and $970.7 thousand for the three and nine months ended September 30, 2023, respectively, compared to $24.5 thousand and $66.2 thousand for the same periods in 2022. 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
59

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 9, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings.
Liquidity and Capital Resources
Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or 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.
The Company’s primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets approximating $1.1 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions with an available 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 $580.4 million of unpledged available-for-sale investment securities that may be sold or pledged as collateral that can serve as an additional source of liquidity. Please refer to the Liquidity Sources table below for available funding with the FHLB and our unsecured lines of credit with correspondent banks. As of September 30, 2023, approximately 88.9% of our total deposits of $3.6 billion were insured under standard FDIC insurance coverage limits, and approximately 11.1% of our total deposits were uninsured deposits over the standard FDIC insurance coverage limit.
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 September 30, 2023, the Bank had $597.8 million in highly liquid assets, which consisted of Federal Reserve Board Excess Reserves and interest-bearing deposits in other financial institutions of $17.4 million, $580.4 million in unpledged securities. This resulted in highly liquid assets to total assets ratio of 13.4% at September 30, 2023. Total available liquidity to uninsured deposits was 306.8% at September 30, 2023.
As of September 30, 2023, the Company has approximately $322.3 million in par value of securities that are eligible to be pledged under the Bank Term Funding Program (“BTFP”), but the Bank has not borrowed under or otherwise accessed the BTFP.
60

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table provides detail of liquidity sources as of the periods presented:
(Dollars in Thousands)September 30, 2023December 31, 2022
Cash and Due From Banks, including Interest-bearing Deposits$55,398 $46,869 
Unpledged Investment Securities580,379 611,845 
Excess Pledged Securities77,400 46,305 
FHLB Borrowing Availability357,583 676,746 
Unsecured Lines of Credit145,000 127,130 
Total Liquidity Sources$1,215,760 $1,508,895 
The following table provides total liquidity sources and ratios as of September 30, 2023:
(Dollars in Thousands)September 30, 2023
Total Liquidity Sources$1,215,760 
Highly Liquid Assets to Total Assets
13.4%
Highly Liquid Assets to Uninsured Deposits150.9 %
Total Available Liquidity to Uninsured Deposits306.8 %
Regulatory Capital Requirements
Total capital of $330.6 million at September 30, 2023, reflects an increase of $2.0 million compared to $328.6 million at December 31, 2022. The increase in total capital from December 31, 2022 is primarily due to net income of $25.3 million for the nine months ended September 30, 2023 offset by $16.4 million related to the repurchase of common stock, a $7.9 million decrease in other comprehensive income due to changes in fair value of investment securities, as well as, the transitional adjustment of $0.1 million, net of tax for the adoption of ASU 2023-02. The remaining difference of $1.1 million is related to restricted stock activity for the nine months ended September 30, 2023.
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.
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 September 30, 2023 and December 31, 2022, 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 September 30, 2023, the Bank continues to maintain its capital position with a leverage ratio of 9.59% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 11.08% compared to the regulatory guideline of 6.50% to be well-capitalized. The Bank’s risk-based Tier 1 and Total Capital ratios were 11.08% and 12.34%, 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.
The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive loss, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.
61

Table of Contents
CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.
The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank for the dates presented:
(Dollars in Thousands)Minimum Required
Basel III
Well
Capitalized(1)
September 30, 2023December 31, 2022
AmountRatioAmountRatio
Carter Bankshares, Inc.
Leverage Ratio4.00 %NA$436,863 9.70 %$439,606 10.29 %
Common Equity Tier 1 (to Risk-weighted Assets)7.00 %NA436,863 11.20 %439,606 12.61 %
Tier 1 Capital (to Risk-weighted Assets)8.50 %NA436,863 11.20 %439,606 12.61 %
Total Capital (to Risk-weighted Assets)10.50 %NA486,032 12.46 %483,450 13.86 %
Carter Bank & Trust
Leverage Ratio4.00 %5.00 %$431,516 9.59 %$432,711 10.13 %
Common Equity Tier 1 (to Risk-weighted Assets)7.00 %6.50 %431,516 11.08 %432,711 12.42 %
Tier 1 Capital (to Risk-weighted Assets)8.50 %8.00 %431,516 11.08 %432,711 12.42 %
Total Capital (to Risk-weighted Assets)10.50 %10.00 %480,617 12.34 %476,496 13.68 %
(1)To be “well capitalized” under the prompt corrective action framework applies to the Bank only.
In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve System, (“FRB”), and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 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 September 30, 2023, 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 of Financial Condition and Results of Operations," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 ( the “2022 Annual Report”).
Off-Balance Sheet Arrangements
As of September 30, 2023, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Off-Balance Sheet Arrangements" in the Company’s 2022 Annual Report.
62

Table of Contents
CARTER BANKSHARES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital. For financial institutions, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancement of shareholder value. However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity, and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.
The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk 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 modeled 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 + 300 and + 400 basis point rate shock analyses. Due to Federal Open Market Committee’s slowing future rate increase projections coupled with the recent increase in the Fed Funds Target Rate of 5.00% since March 17, 2022, we believe the impact to NII income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probably interest rate environment for the foreseeable future.
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’s assumptions regarding prepayment behavior of fixed rate loans and securities with embedded optionality and the behavior and value of non-maturity deposit products. Our policy guidelines limit the change in EVE given changes in rates of +/- 100, 200, 300, and 400 basis points. We have temporarily suspended the + 300 and + 400 basis point rate shock analyses. Due to Federal Open Market Committee’s slowing future rate increase projections coupled with the recent increase in the Fed Funds Target Rate of 5.25% since March 17, 2022. We believe the impact to NII income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probably interest rate environment for the foreseeable future.
63

CARTER BANKSHARES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
The following tables reflect the NII 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.
September 30, 2023December 31, 2022
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
2000.2%(3.6)%7.7%(0.2)%
1000.3%(0.9)%4.1%0.8%
-1001.6%(1.8)%(5.1)%(3.4)%
-2002.1%(5.6)%(10.7)%(8.5)%
-3002.1%(10.6)%(17.3)%(16.0)%
-4001.4%(17.1)%(23.5)%(28.0)%
The results from the net interest income rate shock analysis imply that Company’s balance sheet has shifted from an asset sensitive balance sheet when adjusted for repricing correlations (betas) at December 31, 2022 to a slightly liability sensitive balance sheet when adjusted for repricing correlations (betas) at September 30, 2023. The above table indicates that in a rising interest rate environment, the Company is positioned to have a minimum increase in 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. However, in a declining interest rate environment, we are positioned to have slightly more advantageous increased pretax net interest income for the same reasons discussed above.
Based on the ALM results presented above for the quarters ending September 30, 2023 and December 31, 2022, the Company’s balance sheet is slightly liability sensitive at September 30, 2023 versus assets sensitive at December 31, 2022. This migration in asset sensitivity to liability sensitive 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, 2) the addition of the Company’s largest lending relationship with an aggregate principal amount of $301.9 million being placed on nonaccrual status as of September 30, 2023, 3) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns related to the inverted yield curve, and 4) 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 NII. Sensitivity analyses include changing prepayment behavior of loans and securities with optionality, repricing correlations, and the impact of interest rate changes on non-maturity deposit products (decay rates).

ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2023. 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.
64

Table of Contents
CARTER BANKSHARES, INC.
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 at the reasonable assurance level, 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 September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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. 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. The Company may enter into settlement discussions in some legal or administrative proceedings, if it believes it is in the Company’s best interests to do so. Other than as set forth below, as of the date of this Quarterly Report on Form 10-Q, the Company is not involved in any other material pending legal proceedings other than proceedings occurring in the ordinary course of business.
The Bank is engaged in a variety of collection proceedings against various related entities that are owned and/or controlled by James C. Justice, II, Cathy L. Justice and James C. Justice, III (such entities, the “Justice Entities” and collectively with the individuals, the “Defendants”). On April 20, 2023 and May 15, 2023, the Bank filed in the Circuit Court of the City of Martinsville, Virginia confessions of judgment against the Defendants with respect to amounts owed on matured promissory notes made or guaranteed by the Defendants with an aggregate principal balance of approximately $301 million. On May 12, 2023 and June 7, 2023, the Defendants filed motions to set aside the confessions of judgment on the basis that the Bank allegedly (i) violated anti-tying provisions of the Bank Holding Company Act of 1956, as amended, (ii) breached contractual obligations and fiduciary duties to the Defendants and (iii) tortiously interfered with the Defendants’ business expectancies and relationships, among other allegations.
The Company and the Bank intend to pursue vigorously the confessions of judgment and enforce the promissory notes and related agreements, including release and affirmation agreements, guaranties and indemnification agreements. The Company and the Bank vigorously deny the allegations contained in the Defendants’ motions to set aside the confessions of judgment. Based on consultation with legal counsel, the Company believes that the Bank has meritorious defenses to all allegations contained in such motions to set aside the confessions of judgment. However, because the collection litigation is in its early stages, the Company can make no prediction as to the ultimate outcome thereof or any related legal proceedings that may commence.
ITEM 1A – RISK FACTORS

Other than the risk factors set forth below, there have been no material changes in the risk factors faced by the Company from those disclosed in our 2022 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the period ended March 31, 2023 and June 30, 2023.
An investment in the Company’s securities involves risks. In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the information addressed in this Item 1A and under “Important Note Regarding Forward Looking Statements” in Part I, Item 2 of this Quarterly Report on Form 10-Q, investors in the Company’s securities should carefully consider the factors discussed in our 2022 Annual Report on Form 10-K in Part I, Item 1A, “Risk Factors” and in our Quarterly Report on Form 10-Q for the period ended March 31, 2023 in Part II, Item 1A, “Risk Factors.”
Nonperforming assets can take significant time to resolve and may adversely affect the Company’s results of operations and financial condition, and could result in further losses in the future.
As of September 30, 2023, our nonperforming assets (which at that date consist of nonaccrual loans and OREO) totaled $312.1 million, or 9.1%, of the Company’s loan portfolio plus OREO. The Company’s policy is to place loans in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past
65

Table of Contents
CARTER BANKSHARES, INC.
due based on contractual terms. While the Company generally seeks to reduce or resolve problem assets through, among other methods, loan workouts, restructurings, or sales, decreases in the value of the underlying collateral, decreases in the respective borrowers’ financial condition, profitability, or operating performance may inhibit such reduction or resolution efforts which, in turn, could adversely impact the Company’s business, financial condition and results of operations.
The Company’s nonperforming assets adversely affect its business, financial condition and results of operations in various ways. The Company does not record interest income on nonaccrual loans or OREO; thus nonperforming assets adversely affect the Company’s net income and returns on assets and equity, increase the Company’s loan administration costs and adversely affects the Company’s results of operations and efficiency ratio. The resolution of nonperforming assets requires significant time commitments from management which can adversely impact the Company’s and Bank’s other strategic and operational priorities. If the Bank takes collateral in foreclosure and via a similar proceeding, the Bank is required to mark the collateral to its then-fair market value, which may result in a loss, and the Bank will incur legal and other expenses, which may be significant, in connection with the foreclosure and sale process. Nonperforming loans and OREO can also increase the Company’s and the Bank’s risk profile and the level of regulatory capital that their respective banking regulators believe is appropriate.
During the second quarter of 2023, the Company placed in nonaccrual status certain commercial loans in the Other segment of the Company’s loan portfolio, all relating to the Bank’s largest lending relationship, that have an aggregate principal amount of $301.9 million. Because the Company placed these loans on nonaccrual status, the Company was unable to accrue approximately $20.7 million of interest income related to these loans as of September 30, 2023.
The Company’s level of credit risk is elevated due to relationship exposure to the Company’s largest lending relationship.
As of September 30, 2023, the Company’s largest lending relationship operates in the hospitality, agriculture and energy sectors and had loans outstanding with an aggregate principal amount of $301.9 million. All such loans are classified in Other segment of the Company’s loan portfolio. During the second quarter of 2023, the Company placed these loans on nonaccrual status due to loan maturities and failure to pay in full. This lending relationship comprises 96.1% of the Company’s nonperforming assets and 97.2% of the Company’s nonperforming loans at September 30, 2023.
The Company has initiated collection processes with respect to such loans and intends to explore all alternatives for repayment. Although the Company believes it is well secured based on the net carrying value of the credit relationship and appropriately reserved for potential losses with respect to all such loans based on information currently available, we cannot give any assurance as to the timing or amount of future payments or collections on such loans or that the Company will ultimately collect all amounts contractually due under the terms of such loans.
Further deterioration of this lending relationship, including adverse changes in the financial condition of the respective borrowers or guarantors or adverse changes in the value of collateral that secures this lending relationship, could require the Company to increase its allowance for loan losses or result in significant losses to the Company, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 29, 2023, the Company announced that its Board of Directors (the “Board”) has authorized, effective May 1, 2023, a common share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months, (the “2023 Program”) subject to receipt of non-objection from the Federal Reserve Bank of Richmond, which was received on April 24, 2023. The 2023 Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the 2023 Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, management’s evaluation of the Company’s financial condition and liquidity position and applicable legal and regulatory requirements. The 2023 Program is authorized through May 1, 2024, although it may be modified or terminated by the Board at any time. The 2023 Program does not obligate the Company to purchase any particular number of shares, and was exhausted as of August 31, 2023. During the three months
66

Table of Contents
CARTER BANKSHARES, INC.
ended September 30, 2023, the remainder of 416,176 shares of common stock had been repurchased under the 2023 Program at a total cost of $6.0 million, or an average price of $14.43 per share.
Previously on June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022 (the “2022 Program”). The 2022 Program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act. The authorization permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The 2022 Program was originally authorized through August 1, 2023, did not obligate the Company to purchase any particular number of shares, and was exhausted as of March 10, 2023. All common stock repurchased by the Company during the first quarter of 2023 was purchased pursuant to the 2022 Program.
The following table provides information regarding the Company’s purchases of our common stock during the quarter ended September 30, 2023.
Issuer Purchases of Equity Securities
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal 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)
07/01/2023 - 07/31/202342,312 $14.83 42,312 373,864 
08/01/2023 - 08/31/2023373,864 14.38 373,864 — 
09/01/2023 - 09/30/2023— — — — 
Total416,176 $14.43 416,176 
(1)The number shown represents, as of the end of each period, the approximate number of Common Stock shares that may yet be purchased under publicly-announced share repurchase plan authorizations. The shares may be purchased, from time-to-time, depending on market conditions.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
ITEM 5 - OTHER INFORMATION
During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted, modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
67

Table of Contents
CARTER BANKSHARES, INC.
PART II – OTHER INFORMATION (continued)
ITEM 6 - EXHIBITS
Exhibits:
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)
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)
Certification by principal executive officer pursuant to Rule 13a-14(a) (filed herewith)
Certification by principal financial officer pursuant to Rule 13a-14(a) (filed herewith)
Certification by principal executive officer and principal financial officer pursuant to 18 U.S.C. §1350 (filed herewith)
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation Linkbase
101.DEFInline XBRL Taxonomy Extension Definition Linkbase
101.LABInline XBRL Taxonomy Extension Label Linkbase
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
68

Table of Contents
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: October 27, 2023/s/ Litz H. Van Dyke
Litz H. Van Dyke
Chief Executive Officer
(Principal Executive Officer)
Date: October 27, 2023/s/ Wendy S Bell
Wendy S. Bell
Chief Financial Officer
(Principal Financial Officer)
69