Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic and resulting adverse economic conditions have already adversely impacted the Company’s business and results, and could have a more material adverse impact on our business, financial condition and results of operations.

The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. In March 2020, almost all states, including Virginia, where the Company is headquartered, and North Carolina, in which the Company has significant operations, issued “stay-at-home orders” and declared states of emergency. Many state and local governments began implementing phased regulations and guidelines for reopening communities and economies, often with reduced capacity and social distancing restrictions. However, recently, many state and local governments have implemented additional restrictions in light of the significant COVID-19 resurgence.

Although banks have generally been permitted to continue operating, the COVID-19 pandemic has caused disruptions to the Company’s business and could cause material disruptions to our business and operations in the future. Impacts to our business have included decreased operating effectiveness due to additional health and safety precautions we implemented at our branches and the transition of 20% of our workforce to home locations, decreases in customer traffic in our branches and increases in requests for forbearance and loan modifications. Further, loan payment deferment programs that we have implemented and government stimulus programs, like the PPP, may mask credit deterioration in our loan portfolio by making less applicable standard measures of developing financial weakness in a client or portfolio, such as past due monitoring and non-accrual assessments. To the extent that commercial and social restrictions remain in place or increase, the Company’s expenses, delinquencies, charge-offs, foreclosures and credit losses could materially increase, and we could experience reductions in interest and fee income. In addition, we anticipate that potential declines in credit quality could significantly affect the adequacy of our allowance for loan losses, which we expect could lead to increases in the provision for loan losses and related declines in our net income.

Unfavorable economic conditions and increasing unemployment figures may also make it more difficult for the Company to maintain deposit levels and loan origination volume and to obtain additional financing. Furthermore, such conditions have and may continue to cause the value of our Company’s investment portfolio and of collateral associated with our existing loans to decline. In addition, in March 2020, the FRB lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in part as a result of the pandemic. A prolonged period of very low interest rates could reduce the Company’s net interest income and have a material adverse impact on our cash flows and the market value of our investments or the manner in which we redeploy proceeds from maturing investments.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

While we have taken and continue to take precautions to protect the safety and well-being of our employees and customers, no assurance can be given that the steps we’ve taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption to our employees’ ability to provide customer support and service. The continued or renewed spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct the Company’s business, the business and operations of our third-party service providers who perform critical services for the Company’s business, or the businesses of many of our customers and borrowers. If COVID-19 is not successfully contained, we could experience a material adverse effect on its business, financial condition, results of operations and cash flow.

Among the factors outside the Company’s control that are likely to affect the impact the COVID-19 pandemic will ultimately have on the Company’s business are, without limitation:

The ongoing COVID-19 pandemic has resulted in severe volatility in the financial markets and meaningfully lower stock prices for many companies, including the Company’s common stock. Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock may continue to experience volatility and declines.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

The Company continues to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on the Company. However, if the COVID-19 pandemic continues to spread or otherwise result in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows could be materially adversely affected.

The full effects of the COVID-19 pandemic may have a material adverse effect on the Company in numerous ways.

While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates and increased economic and market uncertainty. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk and human capital.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover. It is uncertain how long this recovery will take. As a result, we anticipate our business may be adversely affected during this recovery.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

Risks Related to Credit

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

Allowance for loan losses may be insufficient.

All borrowers carryThe Company’s exposure to commercial real estate construction loans at December 31, 2021 equated to approximately $355.4 million, or 12.6% of total portfolio loans. Construction loans are inherently risky. These risks include, but are not limited to, potential adverse changes in material costs resulting in cost overruns, the potential that the general contractors develop financial stress and are unable to defaultcomplete projects and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowancethe speculative nature of lease up risk. A severe downturn in real estate could affect demand for loan losses,leases, capitalization rates and property valuations, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. Management believes the allowance is adequate to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different than those of management. An increase in the allowance for loan losses results in a decrease in net income or losses, and possibly risk-based capital, and may have a material adverse effect oncould adversely affect our financial condition and results of operations.

The adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, referred to as CECL, will result in a significant change in how the Company recognizes

The Company has elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoptionapplication of the CECL methodology. Themethodology, which the Company was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, we elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020 which was later extended toadopted effective January 1, 2022. The Company intends to adopt in the first quarter of 2021, as allowed under the provisions of the CARES Act.

CECL replacesand which replaced the incurred loss impairment methodology in current GAAP with a methodology that was used by the Company and the Bank under GAAP prior to that date. The CECL methodology reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to forminform credit loss estimates. The measurementAccordingly, the implementation of expectedthe CECL model changed the Company’s current method of providing allowance for credit losses is to be based on historical loss experience, current conditions(“ACL”) and reasonable and supportable forecasts that affectresulted in material changes in the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss mode required under current GAAP, which delays recognition until it is probable a loss has been incurred. Upon origination of a loan, the estimate of expectedCompany’s accounting for credit losses and any subsequent changes to such estimate, will be recorded through provision for loan losses in our Consolidated Statements of (Loss) Income.on financial instruments. The CECL model may create more volatility in the Company’s level of ACL, which, if materially increased, could adversely affect our allowance for loan losses.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

The CECL model permits the use of judgment in determining the approach most appropriate for the Company, based on facts and circumstances. Changes in economic conditions affecting borrowers, new information on our loans, and other factors, both within and outside of our control, may require an increase to the allowance for loan losses. We may underestimate our expected losses and fail to maintain an allowance for loan losses sufficient to account for these losses. We will continue to periodically review and update our CECL methodology, models and the underlying assumptions, estimates and assessments we use to establish our allowance for loan losses under the CECL standard to reflect our view of current conditions and reasonable and supportable forecasts. We will implement further enhancements or changes to our methodology, models and the underlying assumptions, estimates and assessments, as needed. If the assumptions or estimates we use in adopting the new standard are incorrect or we need to change our underlying assumptions and estimates, there may be a material adverse impact on our results of operation and financial condition. For further information on our anticipated adoption of the CECL standard, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

A cyber-attack, information or security breach, or a technology failure of ours or of a third-party could adversely affect the Company’s ability to conduct business or manage exposure to risk, resulting in the disclosure or misuse of confidential or proprietary information, increase costs to maintain and update our operational systems, security systems, and infrastructure, and adversely impact results of operations, liquidity and financial condition, as well as cause reputation harm.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

The Company relies on third-party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service by any third-party could have a material adverse effect on our business.

During the calendar year ending December 31, 2020, the Federal Open Market Committee (“FOMC”) took unprecedented measures to mitigate the potential disruption in the economy due to the COVID-19 pandemic and keep credit markets functioning properly.  On March 3, 2020 and again on March 16, 2020, the FOMC announced two rapid rate decreases in the target federal funds rate of 0.50% and 1.00%, respectively, resulting in a target federal funds rate of 0.00% - 0.25% for the balance of the calendar year. At December 31, 2020, U.S. Treasury yields continued to remain low across shorter maturities of the yield curve with the one-year U.S. Treasury yield at 0.09% and the five-year U.S. Treasury yield at 0.36%. In addition, the summary of economic projections released by the FOMC from their December 2020 meeting indicated the members of the FOMC expect short-term rates to likely remain unchanged through at least 2023.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

During the fourth quarter of 2020, yields on longer term U.S. Treasuries began to rise, indicating the market’s expectation of a potential future recovery. The ten-year U.S. Treasury yield increased from its all-time low of 0.52% at August 4, 2020 to 0.93% at December 31, 2020. On February 25, 2021, the ten-year U.S. Treasury yield continued its ascent closing at 1.54%, which was the highest ten-year U.S. Treasury yield since the onset of the COVID-19 pandemic in mid-March 2020.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Intercontinental Exchange, Inc., the company that administers LIBOR, has stated that it intends to cease the publication of one week and two monthtwo-month LIBOR rates immediately after the LIBOR publication on December 31, 2021, and the remaining LIBOR rates immediately following the LIBOR publication on June 30, 2023, and will consult on such intentions. It is not possible to predict what rate or rates may become accepted alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates, including the Secured Overnight Financing Rate, (“SOFR”), and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

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Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic and resulting adverse economic conditions has adversely impacted the Company’s business and results, and could have a more material adverse impact on our business, financial condition and results of operations.

The ongoing COVID-19 global and national health emergency has caused significant disruptions in the global economies and financial markets. The spread of COVID-19 in the United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reductions in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many state and local governments have implemented and continue to maintain regulations and social guidelines, including social distancing restrictions, in light of the continuing COVID-19 pandemic.

The COVID-19 pandemic has caused disruptions to the Company’s business and could cause material disruptions to our business and operations in the future. Impacts to our business have included decreased operating effectiveness due to additional health and safety precautions we implemented at our branches and the transition of 20% of our workforce to home locations, decreases in customer traffic in our branches and increases in requests for forbearance and loan modifications. Further, loan payment deferment programs that we have implemented and government stimulus programs, like the PPP, may be masking credit deterioration in our loan portfolio by making less applicable standard measures of developing financial weakness in a client or portfolio, such as past due monitoring and non-accrual assessments. To the extent that commercial and social restrictions increase, the Company’s expenses, delinquencies, charge-offs, foreclosures and credit losses could materially increase, and we could experience reductions in interest and fee income. In addition, we anticipate that potential declines in credit quality could significantly affect the adequacy of our allowance for credit losses, which we expect could lead to increases in the provision for credit losses and related declines in our net income.

Unfavorable economic conditions and increasing unemployment figures may also make it more difficult for the Company to maintain deposit levels and loan origination volume and to obtain additional financing. Furthermore, such conditions have and may continue to cause the value of our Company’s investment portfolio and of collateral associated with our existing loans to decline. In addition, in March 2020, the FRB lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, in part, as a result, of the COVID-19 pandemic. Although the FRB has indicated an intention to raise the federal funds rate in 2022, a prolonged period of very low interest rates could reduce the Company’s net interest income and have a material adverse impact on our cash flows and the market value of our investments or the manner in which we redeploy proceeds from maturing investments.

While we have taken and continue to take precautions to protect the safety and well-being of our associates and customers, no assurance can be given that the steps we’ve taken will be adequate or appropriate, nor can we predict the level of disruption to

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ITEM 1A. RISK FACTORS – - (continued)

our associates’ ability to provide customer support and service. The continued or renewed spread of COVID-19 or variants thereof could negatively impact the availability of key personnel necessary to conduct the Company’s business, the business and operations of our third-party service providers who perform critical services for the Company’s business, or the businesses of many of our customers and borrowers. If COVID-19 is not successfully contained, we could experience a material adverse effect on our business, financial condition, results of operations and cash flow.

Among the factors outside the Company’s control that are likely to affect the impact the COVID-19 pandemic will ultimately have on the Company’s business are, without limitation:

•the pandemic’s course and severity;

•the uncertainty regarding new variants of COVID-19 that have emerged or may emerge in the future;

•the speed and efficacy of vaccine and treatment developments;

•the direct and indirect results of the pandemic, such as recessionary or inflationary economic trends, or impacts on employment levels, wages and benefits, commercial activity, the residential housing market, consumer spending and real estate and investment securities market values;

•political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce and banking, such as moratoria and other suspensions of collections, foreclosures, and related obligations;

•the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity;

•effects on the Company’s liquidity position due to changes in customers’ deposit and loan activity in response to the pandemic and its economic effects;

•the timing and availability of direct and indirect governmental support for various financial assets, including mortgage loans;

•the long-term effect of the economic downturn on the Company’s intangible assets such as our deferred tax asset;

•potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties;

•the ability of the Company’s associates to work effectively during the course of the pandemic;

•the ability of the Company’s third-party vendors to maintain a high-quality and effective levels of service;

•the possibility of increased fraud, cybercrime and similar incidents, due to vulnerabilities posed by the significant increases in our associates and customers handling their banking interactions remotely from home, or otherwise;

•required changes to the Company’s internal controls over financial reporting to reflect a rapidly changing work environment;

•potential longer-term shifts toward mobile banking, telecommuting and telecommerce;

•geographic variation in the severity and duration of the COVID-19 pandemic, particularly in Virginia and North Carolina, where the Company operates physically; and

•depending on the extent and duration of the COVID-19 pandemic, the price of our common stock could experience volatility and declines.

The Company continues to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on the Company. However, if the COVID-19 pandemic continues to spread or otherwise result in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows could be materially adversely affected.

The full effects of the COVID-19 pandemic may have a material adverse effect on the Company in numerous ways.

While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, inflation and increased economic and market uncertainty. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in this Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk and human capital.

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ITEM 1A. RISK FACTORS - (continued)

•Our results of operations may continue to be negatively impacted by general economic or business conditions and uncertainty, including the strength of economic conditions in our principal area of operations impacting the demand for our products and services.

•A low interest rate environment will negatively impact our net interest income and net interest margin.

•Credit losses may be higher and our provision for credit losses may continue to increase, due to deterioration in the financial condition of our commercial and consumer loan customers.

•Declining asset and collateral values may necessitate increases in our provision for credit losses and net charge-offs.

•The hospitality industry and portions of our hospitality loan portfolio may continue to suffer the negative effects of reduced travel, which could result in additional credit losses and net charge-offs.

•We may have an interruption or cessation of an important service provided by a third-party provider.

•Our liquidity and regulatory capital could be adversely impacted.

•Investors may have less confidence in the equity markets in general and in financial services industry in particular, which could have a negative impact on our stock price and resulting market valuation.

•The negative economic consequences of the pandemic may last longer in the areas where we do business, which could negatively affect our financial performance.

•We face heightened cyber security risks in connection with our operation in a remote working environment.

Even after the COVID-19 pandemic subsides, we believe the U.S. economy will likely require time to recover. It is uncertain how long this recovery will take. As a result, we anticipate our business may be adversely affected during this recovery.

Risks Related to Our Business Strategy

Our profitability depends significantly on local economic conditions.

Our success depends primarily on the general economic conditions of the geographic markets in which we operate, primarily in Virginia and North Carolina. The local economic conditions in the areas where we operate have a significant impact on our commercial, real estate and construction loans, the ability of our borrowers to repay their loans and the value of the collateral securing these loans and on customer demand for loans, deposits and other bank products. A significant decline in general economic conditions, including a decline caused by the COVID-19 pandemic, inflation, recession, acts of terrorism, outbreak of hostilities (including the military conflict between Russia and Ukraine) or other international or domestic calamities, unemployment or other factors, all of which are beyond our control, could impact these local economic conditions and negatively affect our financial results.

We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business.

We conduct our banking operations primarily in Virginia and North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Christiansburg, Martinsville, Danville, Greensboro, Fayetteville, and Mooresville. Increased competition in these markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs, conduct extensive promotional and advertising campaigns and offer a wider range of products, services and technologies.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end loan

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ITEM 1A. RISK FACTORS - (continued)

production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios or may be required to increase the rates we pay on deposits or lower the rates we offer on loans and results of operations and financial condition may otherwise be adversely affected.

Our customers may increasingly decide not to use the Bank to complete their financial transactions, which would have a material adverse impact on our financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that have historically involved banks. For example, customers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, or general-purpose reloadable prepaid cards. Customers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. We face increasing competition from fintech companies, as trends toward digital financial transactions have accelerated during the COVID-19 pandemic. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – (continued)

Risks Related to Regulatory Compliance and Legal Matters

We are subject to extensive government regulation and supervision.

Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. For example, we currently derive a portion of our noninterest income from consumer overdraft fees, which have recently come under scrutiny by banking regulators and politicians. Such regulators or politicians could act to impose additional restrictions on overdraft fee programs which could reduce our noninterest income, increase our compliance costs, or increase our exposure to regulatory and legal claims related to our overdraft program. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. See “Supervision and Regulation” included in Item 1.1, Business, of this Annual Report on Form 10-K for a more detailed description of the certain regulatory requirements applicable to the Bank.

The Basel III Final Rules require higher levels ofCompany is subject to more stringent capital and liquid assets, which could adversely affect our net income and return on equity.

The Basel III Final Rules are complex and create additional compliance burdens, especially for community banks. The Basel III Final Rules require bank holding companies and their subsidiaries, suchliquidity requirements as us, to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The stricter capital requirements were fully implemented on January 1, 2019. See “Supervision and Regulation” included in Item 1. Business of this Report for a more detailed description of the Basel III Final Rules applicable to us.

As a result of the Basel III Final Rules, many community banksregulatory capital reforms and the Dodd-Frank Act, which could be forcedadversely affect its return on equity and otherwise affect its business.

The Company and the Bank are each subject to limit banking operations, activitiescapital adequacy guidelines and growthother regulatory requirements specifying minimum amounts and types of loan portfolios, in ordercapital, which each must maintain. From time to focus on retention of earningstime, regulators implement changes to improvethese regulatory capital levels. We believe that weadequacy guidelines. In addition, regulators may require the Company to maintain sufficienthigher levels of Tier 1 and Common Equity Tier 1regulatory capital to comply withbased on the Basel III Final Rules. However, we can offer no assurances with regardCompany’s condition, risk profile, or growth plans or conditions in the banking industry or economy. The capital adequacy standards applicable to the ultimate effect ofCompany and the Basel III Final Rules, and satisfying increasedBank impose stricter capital requirements imposed byand leverage limits than the Basel III Final Rules mayrequirements to which the Company and the Bank were subject in the past.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require us to limit our banking operations, raisethe raising of additional capital, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations. In addition, we could be subject toresult in regulatory actions if wethe Company were to be unable to comply with such requirements.

32

Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in the Company having to lengthen the term of its funding, restructure its business models, and/or increase its holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its

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ITEM 1A. RISK FACTORS – - (continued)

business strategy, and could limit the Company’s ability to make distributions, including paying out dividends or buying back shares. If the Company and the Bank fail to meet these minimum capital guidelines and/or other regulatory requirements, the Company’s financial condition would be materially and adversely affected.

Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could have a material adverse effect on our results of operation and financial condition.

Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. We are required to establish and maintain an adequate internal control structure over financial reporting. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal control, we may discover material weaknesses or significant deficiencies in our internal control that require remediation, such as the material weakness related to appraisal requirements that we identified in 2019 and remediated during 2020.remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Our inability to maintain the operating effectiveness of the controls described above could result in a material misstatement to our financial statements or other disclosures, which could have an adverse effect on our business, financial condition or results of operations. In addition, any failure to maintain effective controls or to timely effect any necessary improvement of our internal and disclosure controls could, among other things, require significant investments of management time, funds and other resources in remediation efforts, result in losses from fraud or error or harm to our reputation, or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our results of operation and financial condition.

The Company is a defendant in a variety of litigation and other actions, which may have a material adverse effect on its financial condition, results of operation or business.

The Company may be involved from time to time in a variety of litigation arising out of its business, and the Company operates in a legal and regulatory environment that exposes it to potential significant litigation risk. The Company’s insurance may not cover all claims that may be asserted against it in legal or administrative actions or costs that it may incur defending such actions, and any claims asserted against it, regardless of merit or eventual outcome, may harm the Company’s reputation. Should the ultimate judgments or settlements and/or costs incurred in any litigation exceed any applicable insurance coverage, they could have a material adverse effect on the Company’s financial condition and results of operation for any period.

Our risk management framework may not be effective in mitigating risk and loss.

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report and control the risks we face. These risks include, but are not limited to, interest rate, credit, liquidity, operational, reputation, legal, compliance, economic and litigation risk. Although we assess our risk management program on an ongoing basis and make identified improvements to it, we can offer no assurances that this approach and risk management framework (including related controls) will effectively mitigate the risks listed above or limit losses that we may incur. If our risk management program has flaws or gaps, or if our risk management controls do not function effectively, our results of operations, financial condition or business may be adversely affected.

Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.

The policies of the FRB affect us significantly. The FRB regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine, to a significant extent, our cost of funds for lending and investing.investing, and can significantly impact the levels of inflation in the United States. Changes in those policies are beyond our control and are difficult to predict. FRB policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the FRB could reduce the demand for a borrower's products and services. This could adversely affect the borrower’s earnings and ability to repay a loan, which could have a material adverse effect on our financial condition and results of operations.

33

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – - (continued)

Risks Related to Liquidity

We rely substantially on deposits obtained from customers in our target markets to provide liquidity and support growth.

Our primary funding and liquidity source to support our business strategies is a stable customer deposit base. Deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. If our deposit levels fall, we could lose a relatively low-cost source of funding and our interest expense would likely increase as we obtain alternative funding to replace lost deposits. If local customer deposits are not sufficient to fund our normal operations and growth, we will look to outside sources, such as Fed Fundsfed funds lines with other financial institutions or additional borrowings with the FHLB.FHLB and we have access to the institutional CD market and the brokered deposit market. We may also seek to raise funds through the issuance of shares of our common stock, or other equity or equity-related securities, or debt securities including subordinated notes as additional sources of liquidity. A number of factors, many of which are outside the Company’s control, could make accessing such financing more difficult or more expensive, or could make such financing unavailable altogether, including the financial condition of the Company, rate disruptions in the capital markets, the attractiveness of investing in or lending to financial services companies generally, and competition for funding from other banks, holding companies or similar financial service companies, some of which could be substantially larger or have stronger credit ratings or profiles. If we are unable to access funding sufficient to support our business operations and growth strategies or are only able to access such funding on unattractive terms, we may not be able to implement our business strategies which may negatively affect our financial performance.

Our ability to meet contingency funding needs, in the event of a crisis that causes a disruption to our core deposit base, is dependent on access to wholesale markets, including funds provided by the FHLB of Atlanta.

We own stock in the FHLB of Atlanta, in order to qualify for membership in the FHLB system, which enables us to borrow on our line of credit with the FHLB that is secured by a blanket lien on select commercial loans, multifamily loans, residential mortgages and investment securities available-for-sale and is estimated to be equal to 25% of our assets approximating $1.0 billion, with available borrowing capacity subject to the amount of eligible collateral pledged at any given time. Changes or disruptions to the FHLB or the FHLB system in general may materially impact our ability to meet short and long-term liquidity needs or meet growth plans. Additionally, we cannot be assured that the FHLB will be able to provide funding to us when needed, nor can we be certain that the FHLB will provide funds specifically to us, should our financial condition and/or our regulators prevent access to our line of credit. The inability to access this source of funds could have a materially adverse effect on our ability to meet our customer’s needs. Our financial flexibility could be severely constrained if we were unable to maintain our access to funding or if adequate financing is not available at acceptable interest rates.

Risks Related to Owning Our Stock

The market price of our common stock may fluctuate significantly in response to a number of factors.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing U.S. economic environment and changes in the commercial and residential real estate market, any of which may cause our stock price to fluctuate. If our operating results fall below the expectation of investors or securities analysts, the price of our common stock could decline substantially.

Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

·

volatility of stock market prices and volumes in general;

·

changes in market valuations of similar companies;

·

changes in the conditions of credit markets;

·

changes in accounting policies or procedures as required by the FASB, or other regulatory agencies;

·

legislative and regulatory actions, including the impact of the Dodd-Frank Act and related regulations, that may subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

·

government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the FRB;

·

additions or departures of key members of management;

·

fluctuations in our quarterly or annual operating results; and

·

changes in analysts’ estimates of financial performance.

34

•volatility of stock market prices and volumes in general;

•changes in market valuations of similar companies;

•changes in the conditions of credit markets;

•changes in accounting policies or procedures as required by the FASB, or other regulatory agencies;

•legislative and regulatory actions, including the impact of the Dodd-Frank Act and related regulations, that may subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

•government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the FRB;

•additions or departures of key members of management;

•fluctuations in our quarterly or annual operating results; and

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1A. RISK FACTORS – - (continued)

•changes in analysts’ estimates of financial performance.

Future issuances of the Company’s common stock could adversely affect the market price of the common stock and could be dilutive.

The Company is not restricted from issuing additional shares of common stock, and may issue securities that are convertible into or exchangeable for, or that represent the right to receive, shares of common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, including in connection with acquisitions by the Company, could materially adversely affect the market price of the shares of common stock and could be dilutive to shareholders. Because the Company’s decision to issue equity securities in the future will depend on market conditions and other factors, it cannot predict or estimate the amount, timing, or nature of possible future stock issuances. Accordingly, the Company’s shareholders bear the risk that future stock issuances will reduce market prices and dilute their stock holdings in the Company.

Common stock is equity and is subordinate to the Company’s existing and future indebtedness and effectively subordinated to all the indebtedness and other non-equity claims against the Bank.

Shares of the Company’s common stock are equity interests and do not constitute indebtedness. As such, shares of the common stock will rank junior to all of the Company’s indebtedness and to other non-equity claims against the Company and its assets available to satisfy claims against it, including in the event of the Company’s liquidation. The Company is permitted to incur additional debt. Upon liquidation, lenders and holders of the Company’s debt securities would receive distributions of the Company’s available assets prior to holders of the Company’s common stock. Furthermore, the Company’s right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors, including holders of any depositors of the Bank or any debt issued by the Bank.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments.

Not applicable.

ITEM 2. PROPERTIES

The Company’s principal executive office is located at 1300 Kings Mountain Road in Martinsville, Virginia. There are also two other corporate administrative locations that house its operations center and various other corporate functions. We offer our community banking services through 9269 combined depository locations in Virginia and North Carolina at December 31, 2020. Seventy2021, 56 offices are located in Virginia and twenty-two13 are located in North Carolina. Two of these depository banking locations are held under lease contracts, one of which is held-for-sale in connection with sale of Bank branches. The branch sale is expected to occur in the second quarter of 2021.contracts. In addition, the Bank leases a loan production office and a commercial banking office. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s length bargaining. The leases are described in Note 8, Premises and Equipment, of the Notes to Consolidated Financial Statements.

Statements in Item 8 of this Annual Report on Form 10-K.

ITEM 3. 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. As of December 31, 2020, no2021, the Company is not involved in any material legal proceedings were pending or threatened againstlegal proceedings other than proceedings occurring in the Company.

ordinary course of business.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PART II

Market for Common Stock and Dividends

The Company’s common stock trades on NASDAQ, under the ticker symbol “CARE.” As of the close of business on March 5, 2021,8, 2022, we had 2,4372,379 shareholders of record.

Dividends

On October 14, 2016, prior to the Reorganization, the board of directors of the Bank (the "Bank Board") determined that it was prudent not to declare a quarterly cash dividend on the Bank's common stock beginning in the fourth quarter of 2016. GivenNotwithstanding the Bank’s history of paying a quarterly cash dividend on its common stock, this decision was an extremely difficult one and one that the Bank Board did not take lightly. However, the Bank Board believed this decision was necessary and appropriate as the Bank committed, and now the Company commits, additional resources to assist with regulatory compliance, preserve capital during the COVID-19 pandemic, and makes significant investments in new technology and human resources. While recognizing the importance of dividends to its shareholders, the Board of Directors of the Company (the “Board”) has determined that preservation of capital is of paramount importance at this time.

The Bank Board announced on February 11, 2020 the declaration ofpaid a special one-time cash dividend of $0.14 per share. This dividend was paidshare on March 3, 2020 to shareholders of record as of February 18, 2020. The Bank Board emphasized that thisThis was a one-time dividend and there are no immediate plans to reinstate a quarterly dividend. The amount and timing of future dividends, if any, remainremains subject to the discretion of the Company’s Board and will depend upon a number of factors, including future earnings, financial condition, liquidity and capital requirements of the Company, applicable governmental regulations and other factors deemed relevant by the Board. With respect to the special one-time cash dividend, the Bank Board believed that it was appropriate to return some

Repurchases of Shares of Common Stock

The following table is a summary of our excess capitalpurchases of common stock during the fourth quarter of 2021:

Period						Total number of shares purchased						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)						Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
10/10/2021 - 10/31/2021						—						$—						—						2,000,000
11/1/2021 - 11/30/2021						—						—						—						2,000,000
12/1/2021 - 12/31/2021						30,407						15.22						30,407						1,969,593
Total						30,407						$15.22						30,407						1,969,593

(1) On December 13, 2021, the Company authorized, effective December 10, 2021, a common stock repurchase program to our shareholders since our recent strategypurchase up to two million shares of capital retention has resultedthe Company’s common stock over a period of twelve months. As of December 31, 2021, 30,407 shares of common stock have been repurchased under this program at an average price of $15.22 per share. The program authorizes the purchase of the Company’s common stock in capital levels that are well aboveopen market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the well-capitalized levelsSecurities Exchange Act of federal banking1934, 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 program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory agencies.

36

requirements. The repurchase program is authorized through December 9, 2022, although it may be modified or terminated by the Board at any time. The repurchase program does not obligate the Company to purchase any particular number of shares.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES - (continued)

Five-Year Cumulative Total Return

The following chart compares the cumulative total shareholder return on our common stock with the cumulative total return of the NASDAQ Composite Index and SNL Bank and ThriftS&P U.S. BMI Banks Index, which includes the stocks of banks, thrifts and bank and financial holding companies listed on all major exchanges (NYSE, AMEX, NASDAQ) in the S&P Global Market Intelligence’s coverage universe.

		Period Ending
Index		12/31/15				12/31/16				12/31/17				12/31/18				12/31/19				12/31/20
Carter Bankshares, Inc.(1)			100.00				100.73				133.02				113.69				179.78				81.83
NASDAQ Composite Index			100.00				108.87				141.13				137.12				187.44				271.64
SNL Bank and Thrift Index			100.00				126.25				148.45				123.32				166.67				144.61

^{All SNL indices were retired in 2021, therefore we have replaced that index with the S&P U.S. BMI Banks Index.}

						Period Ending
Index						12/31/16						12/31/17						12/31/18						12/31/19						12/31/20						12/31/21
Carter Bankshares, Inc.(1)						100.00						132.05						112.87						178.48						81.24						116.63
NASDAQ Composite Index						100.00						129.64						125.96						172.18						249.51						304.85
S&P U.S. BMI Banks Index						100.00						118.21						98.75						135.64						118.33						160.89

(1)An investment in Carter Bankshares, Inc. prior to November 2020 represents an investment in Carter Bank & Trust.

Repurchases

33

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Table of Shares of Common Stock

Neither the Company nor the Bank repurchased any shares of its common stock during 2020.

37

Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 6. SELECTED FINANCIAL DATA

The tables below summarize selected consolidated financial data as of the dates or for the periods presented and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and the Consolidated Financial Statements and Supplementary Data in Part II, Item 8 of this Report:

(Dollars in Thousands except per Share Data)		For the Year Ended December 31,
Five-Year Selected Financial Data		2020				2019				2018				2017				2016
Balance Sheet Summary
(At End of Period)
Total Assets		$	4,179,179			$	4,006,108			$	4,039,599			$	4,112,292			$	4,505,529
Securities Available-for-Sale, at Fair Value			778,679				742,617				782,758				947,201				-
Securities Held-to-Maturity, at Cost			-				-				-				-				879,694
Loans Held-for-Sale			25,437				19,714				2,559				517				-
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value			9,835				-				-				-				-
Portfolio Loans			2,947,170				2,884,766				2,703,792				2,684,445				2,731,783
Allowance for Loan Losses			(54,074	)			(38,762	)			(39,199	)			(35,318	)			(34,500	)
Goodwill and Other Intangibles			-				62,192				62,192				63,350				63,261
Noninterest-Bearing Deposits			699,229				554,875				547,773				530,242				534,923
Interest-Bearing Deposits			2,900,682				2,949,370				3,043,408				3,139,373				3,528,916
Deposits Held for Assumption in connection with Sale of Bank Branches			84,717				-				-				-				-
Total Deposits			3,684,628				3,504,245				3,591,181				3,669,615				4,063,839
FHLB Borrowings			35,000				10,000				-				-				-
Other Liabilities			19,377				18,752				12,204				10,551				7,040
Total Liabilities			3,739,005				3,532,997				3,603,385				3,680,166				4,070,879
Retained Earnings			254,611				304,158				277,835				265,930				266,214
Accumulated Other Comprehensive Income (Loss)			15,721				127				(10,066	)			(2,240	)			-
Total Shareholders' Equity			440,174				473,111				436,214				432,126				434,650
Summary of Earnings
Interest Income		$	140,941			$	159,120			$	152,019			$	144,084			$	147,648
Interest Expense			35,826				46,773				38,114				37,111				46,382
Provision for Loan Losses			18,006				3,404				16,870				43,197				17,717
Net Interest Income after Provision for Loan Losses			87,109				108,943				97,035				63,776				83,549
Noninterest Income			26,580				16,870				16,986				12,591				12,494
Noninterest Expense			158,775				98,029				99,713				94,579				78,419
Net (Loss) Income before Taxes			(45,086	)			27,784				14,308				(18,212	)			17,624
Income Tax Provision (Benefit)			772				1,209				2,403				(17,531	)			1,645
Net (Loss) Income		$	(45,858	)		$	26,575			$	11,905			$	(681	)		$	15,979
(Loss) Earnings per Share Basic and Diluted		$	(1.74	)		$	1.01			$	0.45			$	(0.03	)		$	0.61
Cash Dividends Declared per Share		$	0.14			$	-			$	-			$	-			$	0.30
Selected Ratios
Return on average assets			-1.12	%			0.65	%			0.29	%			-0.02	%			0.33	%
Return on average equity			-9.78	%			5.76	%			2.75	%			-0.15	%			3.63	%
Equity to Assets			10.53	%			11.81	%			10.80	%			10.51	%			9.65	%
Total Risk-based capital			14.33	%			14.83	%			15.11	%			14.05	%			13.25	%
Leverage Ratio			10.26	%			10.33	%			9.61	%			9.25	%			8.03	%
Dividend Payout			NM				0.00	%			0.00	%			0.00	%			49.30	%

NM – percentage not meaningful

38

[RESERVED]

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Carter Bankshares, Inc., our operations, and our present business environment. 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 8 of this Annual Report on Form 10-K. The MD&A includes the following sections:

•Explanation of Use of Non-GAAP Financial Measures

•Critical Accounting Policies and Estimates

•Our Business

•Results of Operations and Financial Condition

•Capital Resources

•Contractual Obligations

•Off-Balance Sheet Arrangements

•Liquidity

•Inflation

•Stock Repurchase Program

This section reviews our financial condition for each of the past two years and results of operations for each of the past three years. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. Some tables may include additional time periods to illustrate trends within our Consolidated Financial Statements and notes thereto. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting the Company and its future business and operations. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “believe,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses; technological risks and developments; cyber-security; threats, attacks or events; rapid technological developments and changes; the Company’s liquidity and capital positions; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth; the effect of steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein; legislative or regulatory changes and requirements, including the impact of the CARES Act, as amended by the CAA, and other legislative and regulatory reactions to the COVID-19 pandemic; potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, under the CARES Act, as amended by the CAA; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight; legislation affecting the financial services industry as a whole, and the Company, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the Company’s strategic branch network optimization plan; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated; containing costs and expenses; reliance on significant customer relationships; general economic or business conditions; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described throughout this Report, including Part I, Item 1A, Risk Factors and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

39

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”) in the United States, management uses, and this annual report references, adjusted net income and net interest income on a fully taxable equivalent, or (“FTE”), basis, each of which is a non-GAAP financial measure. Management believes these measures providethis measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. Although management believes that this non-GAAP financial measure enhances an investor’s understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more important 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.

The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income per the Consolidated Statements of Income (Loss) Income is reconciled to net interest income adjusted to an FTE basis in the Net Interest Income section of the "Results of Operations – Year ended December 31, 2020.2021."

The Company

Although management believes the presentation of adjusted net income to exclude the impact of a one-time goodwill impairment charge during 2020 will help an investor compare the resultsthat this non-GAAP financial measure enhances investors’ understanding of our core business operations with our operations for other fiscal years and with the results of operations of other companies in theperformance, this non-GAAP financial services industry. The following table reconciles adjusted net incomemeasure should not be considered an alternative to GAAP net income for the periods presented:

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				2018
Net Income		$	(45,858	)		$	26,575			$	11,905
Less: Goodwill Impairment Expense			62,192				-				-
Adjusted Net Income (non-GAAP)		$	16,334			$	26,575			$	11,905

40

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.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Critical Accounting Policies and Significant Accounting Estimates

The Company’s accounting and reporting policies conform to GAAP and predominant practice in the banking industry. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the periods presented or in future periods. We currently view the determination of the allowance for loancredit losses goodwill and income taxes to be critical, because they areit is made in accordance with GAAP, is highly dependent on subjective or complex judgments, assumptions and estimates made by management.

Allowance for Loan Losses

We account for the credit risk associated with our lending activities through the allowancemanagement and provision for loan losses. The allowance represents management’s best estimate of probable incurred losses that have been incurred in our existing loan portfolio as of the balance sheet date. The provisionhad or is a periodic chargereasonably likely to earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses.

Management determines and reviews with the Board the adequacy of the allowance on a quarterly basis in accordance with the methodology described below:

·

Individual loans are selected for review in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” These are generally large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based on our internal credit-rating process.

·

We assess whether the loans identified for review in step one are “impaired,” which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement, which generally represents loans that management has placed on nonaccrual status.

·

For impaired loans we calculate the estimated fair value of the loans that are selected for review based on observable market prices, discounted cash flows or the value of the underlying collateral less costs to sell and record an allowance if needed. We individually evaluate all impaired loans greater than or equal to $1.0 million for additional impairment. In addition, we evaluate credits, which have complex loan structures, with balances less than $1.0 million for impairment. Impaired loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For collateral dependent loans, the first stage of our impairment analysis involves management’s inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal. In circumstances where we feel confident in its ability to collect and analyze salient information on the subject collateral and its surrounding real estate market, an in-house valuation will be utilized.

·

We then select pools of homogeneous smaller balance loans, having similar risk characteristics, as well as unimpaired larger commercial loans, that have similar risk characteristics, for evaluation collectively under the provisions of the FASB ASC Topic 450, “Contingencies.” These smaller balance loans generally include residential mortgages, consumer loans, installment loans and some commercial loans.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

·

The FASB ASC Topic 450 loans are segmented into groups with similar characteristics and an allowance for loan losses is allocated to each segment based on recent loss history and other relevant information.

·

We then review the results to determine the appropriate balance of the allowance for loan losses. This review includes consideration of additional factors, such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and nonperforming assets, trends in the overall risk profile in the portfolio, trends in delinquencies and nonaccrual loans, and local and national economic information and industry data, including trends in the industries we believe are higher risk.

There are many factors affecting the allowance for loan losses; some are quantitative, while others require qualitative judgment. These factors require the use of estimates related to the amount and timing of expected future cash flows, appraised values on impaired loans, estimated losses for each loan category based on historical loss experience by category, and consideration of current economic trends and conditions, all of which may be susceptible to significant judgment and change. To the extent that actual outcomes differ from estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. The loan portfolio represents the largest asset category on our Consolidated Balance Sheets.

The Company intends to adopt ASU 2016-13, Measurement of Credit Losses, or CECL, in the first quarter of 2021, which will impact the measurement of the Company’s allowance for credit losses (including the allowance for losses on lending-related commitments). CECL replaces the previous incurred loss methodology, discussed above, which delays recognition until such loss is probable, with a methodology that reflects an estimate of lifetime expected credit losses considering current economic condition and forecasts. Though other assets, including investment securities and other receivables, are considered in-scope of the standard and will require a measurement of the allowance for credit loss, the most significant impact of CECL remains within the Company’s loan portfolios and related lending commitments.

Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market, income and cost approaches. 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.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy on the lowest level of input that is significant to the fair value measurement. We used the following methods and significant assumptions to estimate fair value:

Securities: 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.

Impaired Loans: Impaired loans with an outstanding balance equal to or greater than $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 impaired loans with a specific reserve are classified as Level 3 in the fair value hierarchy.

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

Subsequent to the initial impairment date, existing impaired loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For collateral dependent loans, the first stage of our impairment analysis involves management’s 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 either internally evaluate fair value or order a new appraisal. In circumstances where we feel confident in its ability to collect and analyze salient information on the subject collateral and its surrounding real estate market, an in house valuation shall be utilized. Factors which should be considered in an in house valuation are timing of sale, location and neighborhood, size of the structure and land component, age of any improvements, and other attributes as warranted by the Company. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property is located. When we feel we cannot collect and analyze salient information on the subject collateral or the collateral’s real estate market, a full appraisal will be utilized.

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CARTER BANKSHARES, INC. AND SUBSIDIARIE

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

For non-collateral dependent 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.

Other Real Estate Owned (“OREO”): OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market, or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to revalue the assets, at minimum, once every twenty-four months based on the size of the exposure. Write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its carrying value or fair value less cost to sell. Such adjustments can be significant and result in a Level 3 classification of the inputs for determining fair value. At December 31, 2020 our OREO assets were in compliance with our OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Goodwill

Goodwill assets with indefinite useful lives are tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. Intangible assets that have finite useful lives will continue to be amortized over their useful lives and are periodically evaluated for impairment.

The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These triggering events indicated that goodwill related to our single reporting unit may be impaired and we expected to evaluate goodwill for impairment quarterly given the current environment.

During the first quarter of 2020, with the recent volatility in the financial services industry and in our economic environment we determined it prudent to have a full goodwill impairment analysis performed as of March 31, 2020 updated as of June 30, 2020. We performed the goodwill impairment test by determining the fair value of the reporting unit. We engaged a third-party financial advisor to prepare the market and income approaches in order to determine fair value. Their analysis supported the conclusion that the fair value of our common stock at June 30, 2020 was greater than both stated and tangible common book value and therefore no impairment to the goodwill was recorded at June 30, 2020.

As we monitored our performance due to the COVID-19 pandemic and continued to experience declines in our stock price in relation to other bank indices and the length of time that the market value of the reporting unit had been below its book value, we completed another interim quantitative goodwill impairment analysis as of September 30, 2020. Various valuation methodologies were considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which is then compared to its carrying value, including goodwill. Upon completing the quantitative impairment analysis as of September 30, 2020, the analysis estimated fair value of the reporting unit to be less than the carrying value. Therefore, we recorded a goodwill impairment of $62.2 million, which represented the entire amount of goodwill allocated to the reporting unit. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Income Taxes

We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.

Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in the Consolidated Balance Sheets. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management assesses all available positive and negative evidence on a quarterly basis to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The amount of future taxable income used in management’s valuation is based upon management approved forecasts, evaluation of historical earnings levels, proven ability to raise capital to support growth or during times of economic stress and consideration of prudent and feasible potential tax strategies. If future events differ from our current forecasts, a valuation allowance may be required, which could have a material impact on ourthe Company’s financial condition and results of operations.

Accrued taxes payableoperations.

We have identified the following critical accounting estimates:

Allowance for Credit Losses (“ACL”)

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

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

Management believes it uses relevant information available to or due from taxing jurisdictionsmake determinations about the ACL and are reportedthat it has established the existing allowance in other liabilitiesaccordance with GAAP. However, the determination of the ACL requires significant judgment, and other assets, respectively,estimates of expected credit losses in the Consolidated Balance Sheets.loan portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources. Management evaluates the variability of market conditions by examining the peak and assessestrough of economic cycles. These peaks and troughs are used to stress the relative risks andbase case model to develop a range of potential outcomes. Management then determines the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with itsreserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio. For the year ended December 31, 2021 the range of outcomes would produce a 17% reduction or a 27% increase in reserves based on the best and merits. Changesworst case scenarios, respectively.

Refer to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Recent Accounting Pronouncements and Developments

Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, which is included in Part II, Item 8for further detailed descriptions of this Report, discusses new accounting pronouncements that we have adopted during 2020.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptionsour estimation process and improves the consistent application of GAAP by clarifying and amending other existing guidance. The amendments in this ASU will be effective on January 1, 2021 and are not expected to have any impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in US 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 as of March 12, 2020 through December 31, 2022. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

The Company has elected to take advantage of Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provision to temporarily delay adoption of the CECL methodology. The Bank was subject to the adoption of the CECL accounting method under ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Bank elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergencymethodology related to the outbreakACL and Note 6, Allowance for Credit Losses, of COVID-19 ends or December 31, 2020 which was later extended to January 1, 2022. The Company intends to adopt in the first quarter of 2021 as allowed under the provisions of the CARES Act. The Bank’s CECL Committee, which includes members from Credit Administration, Accounting/Finance, Risk Management and Internal Audit, has oversight by the Chief Executive Officer, Chief Financial Officer, and Chief Credit Officer. We engaged a third-party to assist us in developing our CECL model and to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting CECL, management implemented a third-party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components. Annual Report on Form 10-K.

Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables. Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls. Management had a third-party independent consultant review and validate our CECL model.

Parallel runs utilizing data from the current and previous quarters in 2020 and 2019, incorporate elements of our operational procedures and internal controls. Our current parallel run includes the composition, characteristics and quality of our loan portfolio as well as current market economic conditions and forecasts as of the adoption date.

In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities. Based upon the nature and characteristics of our securities portfolio at the adoption date, management does not expect to record any allowance for credit losses on its debt securities as a result of adopting ASU 2016-13.

The ultimate impact of adopting ASU 2016-13, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgments. The transition adjustment to record the allowance for loan losses (“ALL”) will be applied using a cumulative effect adjustment to retained earnings.

46

Business

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Executive Overview

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.2$4.1 billion at December 31, 2020.2021. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is an insured, Virginia state-chartered bank, which operates branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Per the 20192020 Annual Report of the Virginia Bureau of Financial Institutions, our Company continues to be the fourth largest state-chartered bank by assetsasset size at year end 2019.2020. 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 loancredit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

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

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

FRB Reserve Programs and Initiatives

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

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

In addition, the FRB has expanded the size and scope of three existing programs to mitigate the economic impact of the COVID-19 pandemic: (i) the Primary Market Corporate Credit Facility; (ii) the Secondary Market Corporate Credit Facility; and (iii) the Term Asset-Backed Securities Loan Facility. The FRB has also established two new program facilities – the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility – to broaden its support for the flow of credit to households and businesses during COVID-19.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Temporary Regulatory Capital Relief related to Impact of CECL

Concurrent with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule to provide banking organizations that are required to implement CECL before the end of 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.

Temporary Bank Secrecy Act (“BSA”) Reporting Relief

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

The Company’s Response to COVID-19

Lending Operations

The Company elected to take advantage of Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES ActAct”) provision to temporarily delay adoption of the CECL methodology. The Company iswas subject to the adoption of the CECLCurrent Expected Credit Loss (“CECL”) accounting method under the FASBASUFASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, we elected under the CARES Act to defer the implementation of CECL until on January 1, 2020 and has since implemented CECL on January 1, 2021.

Refer to Note 1, Basis of Presentation and Note 6, Allowance for Credit Losses, of the Notes to Consolidated Financial Statements for additional disclosures relating to CECL in this Annual Report on Form 10-K.

The Company quickly responded to the pandemic and the CARES Act, offering the option of payment deferrals, participation in the PPP,Paycheck Protection Program (“PPP”), fee waivers and other relief actions to customers. Banks have been identified as essential servicesIn 2021 and, have remained open duringto date in 2022, we continued to prioritize the order. On October 31, 2020, we opened 3 additional branch lobbiessafety of our associates and as of December 31, 2020, the Company had opened the lobbies of 36 branches. However, the Company continues to serve its customers in the remaining branches through modified hours in both the drive-ins and branch services via appointment. Every opportunity is being takenby taking precautions to protect both customers and employeesassociates through enhanced cleaning services, social distancing and personal protective equipment requirements for both. Approximately 20%A portion of the Company’s workforce is workingcontinues to work remotely.

Under the CARES Act, the PPP is an amendment to a program administered as part of the SBASmall Business Administration’s (“SBA”)’s 7-A loan program. The Bank became an approved SBA 7A7-A lender in November of 2019. The PPP is a guaranteed, unsecured loan program created to fund certain payroll and operating costs of eligible businesses, organizations and self-employed persons during COVID-19.the COVID-19 pandemic. Initially, $349 billion werewas approved and designated for the PPP in order for the SBA to guarantee 100% of collective loans made under the program to eligible small businesses, nonprofits, veteran’s organizations, and tribal businesses. The Company participated in the initial round of funding thoughthrough a referral relationship with a third-party, non-bank lender. When an additional $310 billion in funds were approved and designated for the PPP, we opted to standset up an internal, automated loan process utilizing our core system provider. As of December 31, 2020 we processed either through a third-party or internally 966 PPP loans totaling $57.8 million, represented by $17.9 million and $39.9 million processed in round one and round two, respectively. During 2021 the Company has continued making PPP loans pursuant to the additional PPP authorization that was contained in the December 2020 COVID-19 relief law.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The FRBFederal Reserve Bank (“FRB”) implemented a liquidity facility available to financial institutions participating in the PPP. However, the Companywe opted to fund all PPP loans through our internal liquidity sources. These loans are fully guaranteed by the SBA and do not represent a credit risk. We expect theThe vast majority of these PPP loans will be forgiven based upon a preliminary review of the loans.

have been forgiven.

The Company providesBank provided loan payment deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements onguidance regarding loan modifications, which suspends the requirement to categorize these deferrals as TDRs.modifications. The Bank launched successive deferral programs with short-term expirations. The Part I program was launched inon March 23, 2020 and expired at the end ofon August 31, 2020. The deferrals in Part I typically provided for deferral of bothprincipal and up to the deferral of principal and interest, if requested through the expiry. The Part II program was launched in Julyextended deferrals through December 31, 2020 and expired at the end of December 2020. The deferrals in this program were needs based and requiredsubject to the collection of updated financial information and in certain situations, the validation of need. For these borrowers the Bank requested verification of business and/or guarantor liquidity to supportascertain the business.viability of the business in a post-pandemic environment. Prior to the extension of the CARES Act, the CompanyBank launched the Part III program, thatwhich offered borrowers in the Part II program an extension of deferrals through June 30, 2021. For those borrowersBorrowers who opted into the Part III program they arewere required to provide monthly financial statements and remit payments on a quarterly basis based on excessequal to the lesser of: i) 90% of free cash flows, if any, up to theirflow (EBITDA) or, ii) the otherwise contractual payment. Management expectspayment (“recapture payment”). Following the majority of deferrals in the Part III program to be principal only deferrals. At the endexpiration of the deferral period,programs on June 30, 2021, for term loans, payments will bewere applied to accrued interest first and will resume principal payments once accrued interest is current.current, payments will be applied to principal. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity.

As Cumulative deferred interest totaled $12.0 million as of December 31, 2020, we had 83 total customers opt for deferrals under Part III of the program which continues through June 30, 2021, with an aggregate principal balance of $388.6but declined to $1.8 million with $11.1 million in deferred principal and interest payments. The weighted average deferment period for these loans is 5.9 months. Approximately $313.9 million, comprised of 56 loan modifications, were in the hospitality industry.

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

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The Bank also participated in the PPP established by the CARES Act. During the first round of PPP, we approved 451 loans that were referred to an online small business lender, totaling $17.9 million. Through the second round we had approved 515 loan applications totaling $39.9 million through our internal lending program, of which 498 loans totaling $38.5 million have been fully forgiven by the SBA. The $57.8 million in PPP loans originated during the first two rounds of PPP generated $1.5 million in fees, which have been, or will be, recognized in income as loans are forgiven, or over the remaining life of the loan for any portion that is not forgiven. On December 22, 2020 Congress passed legislation that was signed into law on December 27, 2020, making available a third round of PPP funding. We provided access to the program through our internal lending program for our current business customers. As of December 31, 2021, we had approved 136 loan applications totaling $11.0 million, of which 125 loans totaling $9.8 million have been fully forgiven by the SBA and generated an additional $0.6 million in fees. These loans, as they were forgiven, generated fee income of $0.1 million and $0.2 million, and $1.1 million and $0.3 million, for the three and twelve months ended December 31, 2021 and December 31, 2020, respectively.

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

The Company’s

Our exposure to the hospitality industry at December 31, 20202021 equated to approximately $497.2$418.6 million, or 16.9%14.9% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. However, we anticipate that a significant portion of our borrowers in the hotel industry will continue to operate at occupancy levels at or below breakeven which has caused, or will cause, them to draw on their existing lines of credit with other financial institutions or other sources of liquidity and may adversely affect their ability to repay existing indebtedness. These developments, together with the current economic conditions generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. These risk considerations were factored into qualitative adjustments included in the ACL. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected.

The total balance of allowance for loan losses increased $15.3 million during 2020 which was comprised of an increase in specific reserves of $9.1 million and an increase in general reserves of $6.2 million. The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in the Company’s loss history. The $16.1 million increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions to the Company’s hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic, geo-political and other risk factors determined by management. These qualitative reserves are intended to reflect not only the risks of continued weak economic conditions on our loan portfolio, but also loss estimates identified in loan portfolios deemed to be at risk from the COVID-19 pandemic.

Retail Operations

The Company adjusted qualitative risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

Retail Operations

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

In March 2020,2021 and, to date in 2022, we closed all branch lobbiescontinued to customer activity,prioritize the safety of our associates and customers by offering drive-up and appointment only services. On October 31, 2020, we opened 31 branch lobbies and as of December 31, 2020, we had 36 branch lobbies open.services due to the COVID-19 pandemic. Retail leadership continues to monitor branch traffic and local conditions daily makingand makes adjustments as needed. All branches are equipped with video conferencing and online tools that enable virtual servicing. When we make the decision to open the remainder of our branch lobbies, plans are in place to resume full-service lobby operations augmented with the virtual and online servicing enhancements deployed over the past year.   We continue to pay all employeesassociates according to their normal work schedule, even if their hours have been reduced. No employees have beenwere reduced and no associates were furloughed. EmployeesAssociates whose job responsibilities can be effectively carried out remotely are working from home. EmployeesAssociates whose critical duties require their continued presence on-site are utilizing personal protection equipment and observing social distancing and cleaning protocols.

50

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our fee income for 2020 was negatively impacted due to COVID-19 by approximately $1.5 million. Beginning on July 20, 2020, certain account fees that were waived for customers affected by the COVID-19 pandemic were reinstated. In keeping with guidance from regulators, we are actively workingworked with customers affected by the COVID-19 affected customerspandemic to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees and account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. Beginning on July 20, 2020, certain account fees were reinstated. The breadth of the economic impact is likely to continue to impact our fee income in future periods.

Capital Resources and Liquidity

fees. As of December 31, 2020,2021, we had no fee waivers specific to the COVID-19 pandemic. We believe these reductions in fees were temporary.

Capital Resources and Liquidity

As of December 31, 2021, all of the Company’s capital ratios were in excess of all regulatory requirements. An extendedWe believe the economic recession brought about by the COVID-19 pandemic could adversely impact our reported regulatory capital ratios.

improved during the year ended December 31, 2021.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

We maintain access to multiple sources of liquidity. Funding sources accessible to the Company include borrowing availability at the FHLB,Federal Home Loan Bank (“FHLB”), equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, and of which $667.3 million remained available at December 31, 2021, federal funds unsecured lines with six other correspondent financial institutions in the amount of $145.0 million and access to the institutional CD market through brokered CDs. In addition to the above resources, the Company also has $632.7$743.8 million of unpledged available-for-sale securities as an additional source of liquidity at December 31, 2020.2021. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

The Company is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources. Due

Results of Operations and Financial Condition

Earnings Summary

2021 Highlights

•Net interest income increased $6.1 million, or 5.8%, to $111.2 million for the full year 2021 compared to $105.1 million for the full year 2020 primarily due to the economic uncertainty, we are takingenhanced return on restructured loan assets and collection of significant late fees on those loan assets, as well as a prudent approachdecline in funding costs during 2021.

•The provision for credit losses totaled $3.4 million for the year ended December 31, 2021, compared to capital management and have established access$18.0 million for the full year ended December 31, 2020.

•Total noninterest income increased $2.3 million to $28.9 million for the FRB’s PPP Lending Facility.

Earnings Summary

full year 2021 compared to $26.6 million for the full year 2020.

•Total noninterest expense decreased $56.5 million to $102.3 million for the full year 2021 compared to $158.8 million for the full year 2020.

•Provision for income taxes increased $3.3 million to $4.1 million for the full year 2021 compared to $0.8 million for the full year 2020.

We recognizedreported net income of $31.6 million, or $1.19 diluted earnings per share, for the year ended December 31, 2021 compared to a net loss of $45.9 million, or ($1.74) per share in 2020, resulting in a decrease of $72.4 million, or 272.6% compared to net income of $26.6 million, or $1.01$1.74 per share, for the same period in 2019. The decrease was primarily due to a one-time goodwill impairment charge of $62.2 million that was recorded in the third quarter of 2020. Excluding this one-time charge, adjusted net income was $16.3 million in 2020. Also contributing to the net loss and the decrease in net income and adjusted net income for the year was an increase in the provision for loan losses of $14.6 million. Net income is reconciled to adjusted net income, which is a non-GAAP financial measure, below in the “Explanation of Use of Non-GAAP Financial Measures” section of this MD&A.

Net interest income decreased $7.2 million, or 6.4%, to $105.1 million in 2020 compared to $112.3 million for the same period in 2019. Net interest margin decreased 23 basis points to 2.74% in 2020 compared to 2.97% in 2019. The net interest margin, on a fully taxable equivalent basis, (or “FTE”), decreased 25 basis points to 2.80% in 2020 compared to 3.05% in 2019. The decreases in short-term interest rates had a negative impact on both net interest income and the net interest margin, but are offset by a lower cost of funds. The yield on interest-earning assets decreased 54 basis points in 2020, offset by a 34 basis point decline in funding costs as compared to 2019. Net interest margin is reconciled to net interest income adjusted to an FTE basis, which is a non-GAAP financial measure, below in the “Net Interest Income” section of this MD&A.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The provision for loan losses increased $14.6 million, or 429.0% to $18.0 million during 2020 compared to $3.4 million in 2019. The total balance of reserves increased $15.3 million during 2020 which was comprised of an increase in specific reserves of $9.1 million and an increase in general reserves of $6.2 million. The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in the Company’s loss history. The $16.1 million increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions to the Company’s hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic, geo-political and other risk factors determined by management.

At ended December 31, 2020 nonperforming loans and TDRs were $32.0 million compared to $42.1 million at December 31, 2019, a decrease of $10.1 million, or 24.0%. Net charge-offs were $2.7 million in 2020 compared to $3.8 million in 2019. As a percentage of total portfolio loans, net charge-offs were 0.09% at December 31, 2020 compared to 0.13% at December 31, 2019. Nonperforming loans as a percentage of total portfolio loans was 1.09% and 1.46% as of December 31, 2020 and December 31, 2019, respectively.

Total noninterest income increased $9.7 million, or 57.6%, to $26.6 million for the full year 2020 compared to $16.9 million for the same period in 2019, primarily driven by the impact of a $6.9 million in net securities gains. Securities gains increased $4.7 million to $6.9 million during 2020 compared to $2.2 million during 2019 to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio. Other key factors impacting total noninterest income during 2020 were $4.1 million of commercial loan swap fee income throughout 2020, due to the high demand for this product in the current low interest rate environment and $0.7 million of higher debit card interchange fees, $0.5 million of higher insurance commissions and $0.5 million in other noninterest income. These increases were offset by lower service charges, commissions and fees of $0.3 million due to COVID-19 waivers and OREO income of $0.3 million. OREO income declined due to the sale of several large commercial properties that generated income.

Total noninterest expense increased $60.8 million, or 62.0%, to $158.8 million for the full year 2020 compared to $98.0 million for the same period in 2019, primarily driven by the impact of a $62.2 million one-time goodwill impairment charge during the third quarter of 2020. Other key factors impacting total noninterest expense during 2020 were a $1.6 million increase in occupancy expenses, a $1.0 million increase in FDIC expense due to the $1.1 million one-time credit for eligible institutions available in the third quarter of 2019, a $0.4 million increase in data processing licensing fee and a $0.5 million increase in professional and legal fees. Offsetting these increases were decreases of $3.3 million related to losses on sales and write-downs of OREO due to the write-down of $1.1 million on five closed retail branch offices moved to OREO in the third quarter of 2020, a $1.2 million decrease in tax credit amortization and a decrease of $0.5 million in salaries and employee benefits attributable to our branch network optimization project.

The provision for income taxes decreased $0.4 million to $0.8 million in 2020 compared to $1.2 million in 2019. The decrease in pretax income of $72.9 million for the full year 2020 was primarily due to the full goodwill impairment charge of $62.2 million that was recorded in the third quarter of 2020. Our effective tax rate was (1.7%) for 2020 as compared to 4.4% in 2019. The $62.2 million goodwill impairment charge was the reason for the decreased effective tax rate in 2020. The goodwill impairment charge was not tax deductible. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest and tax credit projects, which are relatively consistent regardless of the level of pretax income.

52

						Years Ended December 31,
PERFORMANCE RATIOS						2021						2020						2019
Return on Average Assets						0.76		%				(1.12)		%				0.65		%
Return on Average Shareholders' Equity						7.92		%				(9.78)		%				5.76		%
Portfolio Loans to Deposit Ratio						76.03		%				79.99		%				82.32		%
Allowance for Credit Losses to Total Portfolio Loans						3.41		%				1.83		%				1.34		%

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS 

Year Ended December 31, 2020

Net Interest Income

Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, and interest-bearing liabilities, andas 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.

The interest income on interest-earning assets and the net interest margin are presented on an FTE basis, which is a non-GAAP measure. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the applicable

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

federal statutory tax rate of 21% for each period (which was 21% for the years ended December 31, 2020, 2019 and 2018) and the dividend-received deduction for equity securities. The Company believes this FTE presentation provides a relevant comparison between taxable and non-taxable sources of interest income.

The following table reconciles net interest income per the Consolidated Statements of Income (Loss) Income to net interest income on an FTE basis for the periods presented:

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				2018
Total Interest Income		$	140,941			$	159,120			$	152,019
Total Interest Expense			35,826				46,773				38,114
Net Interest Income per Consolidated Statements of Net (Loss) Income			105,115				112,347				113,905
Adjustment to FTE Basis			2,375				3,046				3,816
Net Interest Income (FTE) (non-GAAP)		$	107,490			$	115,393			$	117,721
Net Interest Margin			2.74	%			2.97	%			3.00	%
Adjustment to FTE Basis			0.06	%			0.08	%			0.10	%
Net Interest Income (FTE) (non-GAAP)			2.80	%			3.05	%			3.10	%

(Dollars in Thousands)						Years Ended December 31,
						2021						2020						2019
Total Interest Income						$	133,897					$	140,941					$	159,120
Total Interest Expense						22,714						35,826						46,773
Net Interest Income per Consolidated Statements of Net Income (Loss)						111,183						105,115						112,347
Adjustment to FTE Basis						1,492						2,375						3,046
Net Interest Income (FTE) (non-GAAP)						$	112,675					$	107,490					$	115,393
Net Interest Margin						2.80		%				2.74		%				2.97		%
Adjustment to FTE Basis						0.04		%				0.06		%				0.08		%
Net Interest Income (FTE) (non-GAAP)						2.84		%				2.80		%				3.05		%

Average Balance Sheet and Net Interest Income Analysis (FTE)

Total net interest income decreased $7.2increased $6.1 million, or 6.4%5.8%, to $111.2 million in 2021, as compared to $105.1 million in 2020, as compared to $112.3 million in 2019.2020. Net interest income, on an FTE basis (non-GAAP), decreased $7.9increased $5.2 million, or 6.8%4.8%, to $112.7 million in 2021 as compared to $107.5 million in 2020 as compared to $115.4 million in 2019.2020. The decreaseincrease in net interest income, on an FTE basis, is driven by an $18.8$13.1 million decrease in interest expense, offset by a $7.9 million decrease in interest income offset by a $10.9 million decrease in interest expense during 20202021 as compared to 2019.2020. The decreases in short-termlow interest rates hadrate environment and large commercial paydowns during 2021 has a negative impact on both net interest income and the net interest margin, but arecontinues to be offset by a lower cost of funds.funds as well as the positive impact of enhanced pricing on restructured loans and related late fees. Net interest margin decreased 23increased six basis points to 2.80% in 2021 compared to 2.74% in 2020 compared to 2.97% in 2019.2020. The net interest margin, on an FTE basis (non-GAAP), decreased 25increased four basis points to 2.84% in 2021 compared to 2.80% in 2020, compared to 3.05% in 2019, primarily due to the lower interest rate environment. The lower interest rate environmentaforementioned enhanced return on restructured loan assets and the collection of related fees during 2021. The intentional runoff of higher cost CDs helpedcontinues to lowerdrive the decline in the overall cost of funds.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

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 years ended December 31:

(Dollars in Thousands)		2020												2019												2018
ASSETS		Average Balance(3)				Income/ Expense				Rate				Average Balance				Income/ Expense				Rate				Average Balance				Income/ Expense				Rate
Interest-Bearing Deposits with Banks		$	104,526			$	302				0.29	%		$	123,946			$	2,750				2.22	%		$	134,406			$	2,682				2.00	%
Tax-Free Investment Securities (2)			47,364				1,567				3.31	%			63,641				2,352				3.70	%			153,036				5,375				3.51	%
Taxable Investment Securities			697,408				14,264				2.05	%			730,500				17,826				2.44	%			753,023				15,421				2.05	%
Tax-Free Loans (1)(2)			307,023				9,739				3.17	%			379,090				12,154				3.21	%			419,981				12,794				3.05	%
Taxable Loans (1)			2,672,435				117,226				4.39	%			2,489,105				126,940				5.10	%			2,331,165				119,563				5.13	%
Federal Home Loan Bank Stock			4,925				218				4.43	%			2,352				144				6.12	%			-				-				-
Total Interest-Earning Assets		$	3,833,681			$	143,316				3.74	%		$	3,788,634			$	162,166				4.28	%		$	3,791,611			$	155,835				4.11	%
LIABILITIES
Deposits:
Interest-Bearing Demand		$	321,036			$	1,140				0.36	%		$	249,086			$	2,004				0.80	%		$	246,592			$	1,959				0.79	%
Money Market			197,225				924				0.47	%			134,676				1,671				1.24	%			96,068				694				0.72	%
Savings			599,637				632				0.11	%			582,195				1,388				0.24	%			663,801				2,027				0.31	%
Certificates of Deposit			1,818,837				32,695				1.80	%			2,054,077				41,593				2.02	%			2,090,103				33,414				1.60	%
Total Interest-Bearing Deposits			2,936,735				35,391				1.21	%			3,020,034				46,656				1.54	%			3,096,564				38,094				1.23	%
Borrowings:
Federal Funds Purchased			55				1				1.82	%			-				-				-				681				20				2.94	%
FHLB Borrowings			30,628				361				1.18	%			2,329				38				1.63	%			-				-				-
Other Borrowings			1,408				73				5.18	%			1,042				79				7.58	%			-				-				-
Total Borrowings			32,091				435				1.36	%			3,371				117				3.47	%			681				20				2.94	%
Total Interest-Bearing Liabilities		$	2,968,826			$	35,826				1.21	%		$	3,023,405			$	46,773				1.55	%		$	3,097,245			$	38,114				1.23	%
Net Interest Income (2)						$	107,490											$	115,393											$	117,721
Net Interest Margin (2)											2.80	%											3.05	%											3.10	%

(Dollars in Thousands)						2021																		2020																		2019
						Average Balance						Income/ Expense						Yield/Rate						Average Balance(3)						Income/ Expense						Yield/Rate						Average Balance						Income/ Expense						Yield/Rate
ASSETS
Interest-Bearing Deposits with Banks						$	194,492					$	271					0.14		%				$	104,526					$	302					0.29		%				$	123,946					$	2,750					2.22		%
Tax-Free Investment Securities (2)						34,171						1,116						3.27		%				47,364						1,567						3.31		%				63,641						2,352						3.70		%
Taxable Investment Securities						798,672						12,442						1.56		%				697,408						14,264						2.05		%				730,500						17,826						2.44		%
Total Securities						832,843						13,558						1.63		%				744,772						15,831						2.13		%				794,141						20,178						2.54		%
Tax-Free Loans (1)(2)						189,716						5,991						3.16		%				307,023						9,739						3.17		%				379,090						12,154						3.21		%
Taxable Loans (1)						2,751,169						115,448						4.20		%				2,672,435						117,226						4.39		%				2,489,105						126,940						5.10		%
Total Loans						2,940,885						121,439						4.13		%				2,979,458						126,965						4.26		%				2,868,195						139,094						4.85		%
Federal Home Loan Bank Stock						3,420						121						3.54		%				4,925						218						4.43		%				2,352						144						6.12		%
Total Interest-Earning Assets						3,971,640						135,389						3.41		%				3,833,681						143,316						3.74		%				3,788,634						162,166						4.28		%
Noninterest Earning Assets						170,856																		276,473																		289,027
Total Assets						4,142,496																		4,110,154																		4,077,661
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand						413,714						1,007						0.24		%				$	321,036					$	1,140					0.36		%				$	249,086					$	2,004					0.80		%
Money Market						383,391						1,130						0.29		%				197,225						924						0.47		%				134,676						1,671						1.24		%
Savings						663,382						682						0.10		%				599,637						632						0.11		%				582,195						1,388						0.24		%
Certificates of Deposit						1,484,436						19,427						1.31		%				1,818,837						32,695						1.80		%				2,054,077						41,593						2.02		%
Total Interest-Bearing Deposits						2,944,923						22,246						0.76		%				2,936,735						35,391						1.21		%				3,020,034						46,656						1.54		%
Federal Funds Purchased						—						—						—		%				55						1						1.82		%				—						—						—
FHLB Borrowings						25,986						313						1.20		%				30,628						361						1.18		%				2,329						38						1.63		%
Other Borrowings						3,167						155						4.89		%				1,408						73						5.18		%				1,042						79						7.58		%
Total Borrowings						29,153						468						1.61		%				32,091						435						1.36		%				3,371						117						3.47		%
Total Interest-Bearing Liabilities						2,974,076						22,714						0.76		%				2,968,826						35,826						1.21		%				3,023,405						46,773						1.55		%
Noninterest-Bearing Liabilities						769,401																		667,914																		581,496
Shareholders' Equity						399,019																		473,414																		472,760
Total Liabilities and Shareholders' Equity						4,142,496																		4,110,154																		4,077,661
Net Interest Income (2)												$	112,675																	$	107,490																	$	115,393
Net Interest Margin (2)																		2.84		%																2.80		%																3.05		%

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

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

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

Interest income decreased $7.0 million, or 5.0% for 2021 compared to 2020. Interest income, on an FTE basis (non-GAAP), decreased $18.8$7.9 million, or 11.6%5.5%, in 2020for 2021 compared to 2019. The decrease is primarily due to balance sheet repricing driven by the impact of the lower interest rate environment. We are currently maintaining higher liquidity levels as a result of COVID-19.2020. The change was primarily due to an increaseincreases in average interest-earning assets of $45.0$138.0 million for 2021, offset by a lower interest rate yield of 33 basis points compared to 2020. Average interest-bearing deposits with banks increased $90.0 million in 2020 offset by lower short-term interest rates2021, and the average rate paid decreased 15 basis points for 2021 compared to 2019.2020. Average loan balances increased $111.3decreased $38.6 million, in 2020primarily due to large commercial payoffs and loan sales, during 2021 compared to 2019 includes2020, which included PPP loan production whichthat began in the second quarter of 2020. Average PPP loans for the year ended December 31, 2020 totaled $24.7 million.$19.3 million during 2021. The average rate earned on loans decreased 5913 basis points in 2020for 2021 compared to 20192020 primarily due to lower short-term interest rates. Average interest-bearing deposits with banks decreased $19.4investment securities increased $88.1 million and the average rate earned decreased 19350 basis points for 2021 compared to 2019. Average investment securities decreased $49.4 million and the average rate earned decreased 41 basis points in 2020 compared 2019.2020. The change in investment securities is the result of active balance sheet management as our portfolio has been diversified as to bond types, maturities, and interest rate structures. Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 54 basis points in 2020 compared to 2019.

54

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Interest expense decreased $10.9$13.1 million in 2020for 2021 compared to the same periods in 2019.2020. The decrease was primarily due to lower short-term interest rates in 2021 as compared to 2019. Average interest-bearing2020 in addition to the intentional runoff of higher cost CDs. Interest expense on deposits decreased $83.3$13.1 million in 2020for 2021 compared to 20192020 primarily due to the decline in the average balance of CDs offset by increases in all other deposit categories. CDs. The decrease of $334.4 million or 18.4% in the average balance of CDs for 2021 compared to 20192020 was primarily due to the aforementioned intentional runoff of these higher cost deposits. The growth we experienced in all of the other deposit categories wasCDs. Money market and interest-bearing demand accounts increased $186.2 million and $92.7 million, respectively for 2021 compared to 2020 primarily due to our ongoing strategy to attract commercial deposits and customer PPP funds on deposit.deposit acquisition strategy. The average rate paid on interest-bearing deposits decreased 3345 basis points for 2021 compared to 20192020 primarily due to the aforementioned intentional runoff of higher cost CDs and lower short-term interest rates. Average total borrowings increased $28.7 million and the average rate paid decreased 211 basis points in 2020 compared to 2019. Overall, the cost of interest-bearing liabilities decreased 3445 basis points in 2020for 2021 compared to 2019.

2020.

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

		2020 Compared to 2019												2019 Compared to 2018
(Dollars in Thousands)		Increase/ (Decrease)				Rate(3)				Volume(3)				Increase/ (Decrease)				Rate(3)				Volume(3)
ASSETS
Interest-Bearing Deposits with Banks		$	(2,448	)		$	(2,074	)		$	(374	)		$	68			$	287			$	(219	)
Tax-Free Investment Securities (2)			(785	)			(228	)			(557	)			(3,023	)			268				(3,291	)
Taxable Investment Securities			(3,562	)			(2,783	)			(779	)			2,405				2,878				(473	)
Tax-Free Loans (1)(2)			(2,415	)			(128	)			(2,287	)			(640	)			648				(1,288	)
Taxable Loans (1)			(9,714	)			(18,612	)			8,898				7,377				(681	)			8,058
Federal Home Loan Bank Stock			74				(49	)			123				144				-				144
Total Interest-Earning Assets		$	(18,850	)		$	(23,874	)		$	5,024			$	6,331			$	3,400			$	2,931
LIABILITIES
Deposits:
Interest-Bearing Demand		$	(864	)		$	(1,333	)		$	469			$	45			$	25			$	20
Money Market			(747	)			(1,317	)			570				977				626				351
Savings			(756	)			(796	)			40				(639	)			(409	)			(230	)
Certificates of Deposit			(8,898	)			(4,405	)			(4,493	)			8,179				8,764				(585	)
Total Interest-Bearing Deposits			(11,265	)			(7,851	)			(3,414	)			8,562				9,006				(444	)
Borrowings:
Federal Funds Purchased			1				-				1				(20	)			(10	)			(10	)
FHLB Borrowings			323				(13	)			336				38				-				38
Other Borrowings			(6	)			(29	)			23				79				-				79
Total Borrowings			318				(42	)			360				97				(10	)			107
Total Interest-Bearing Liabilities		$	(10,947	)		$	(7,893	)		$	(3,054	)		$	8,659			$	8,996			$	(337	)
Net Interest Income (FTE)		$	(7,903	)		$	(15,981	)		$	8,078			$	(2,328	)		$	(5,596	)		$	3,268

						2021 Compared to 2020																		2020 Compared to 2019
(Dollars in Thousands)						Volume(3)						Rate(3)						Increase/ (Decrease)						Volume(3)						Rate(3)						Increase/ (Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks						$	177					$	(208)					$	(31)					$	(374)					$	(2,074)					$	(2,448)
Tax-Free Investment Securities (2)						(431)						(20)						(451)						(557)						(228)						(785)
Taxable Investment Securities						1,884						(3,706)						(1,822)						(779)						(2,783)						(3,562)
Total Securities						1,453						(3,726)						(2,273)						(1,336)						(3,011)						(4,347)
Tax-Free Loans (1)(2)						(3,705)						(43)						(3,748)						(2,287)						(128)						(2,415)
Taxable Loans (1)						3,393						(5,171)						(1,778)						8,898						(18,612)						(9,714)
Total Loans						(312)						(5,214)						(5,526)						6,611						(18,740)						(12,129)
Federal Home Loan Bank Stock						(58)						(39)						(97)						123						(49)						74
Total Interest-Earning Assets						$	1,260					$	(9,187)					$	(7,927)					$	5,024					$	(23,874)					$	(18,850)
Interest Paid on:
Interest-Bearing Demand						$	280					$	(413)					$	(133)					$	469					$	(1,333)					$	(864)
Money Market						640						(434)						206						570						(1,317)						(747)
Savings						66						(16)						50						40						(796)						(756)
Certificates of Deposit						(5,352)						(7,916)						(13,268)						(4,493)						(4,405)						(8,898)
Total Interest-Bearing Deposits						(4,366)						(8,779)						(13,145)						(3,414)						(7,851)						(11,265)
Federal Funds Purchased						—						(1)						(1)						1						—						1
FHLB Borrowings						(56)						8						(48)						336						(13)						323
Other Borrowings						86						(4)						82						23						(29)						(6)
Total Borrowings						30						3						33						360						(42)						318
Total Interest-Bearing Liabilities						$	(4,336)					$	(8,776)					$	(13,112)					$	(3,054)					$	(7,893)					$	(10,947)
Change in Net Interest Margin						$	5,596					$	(411)					$	5,185					$	8,078					$	(15,981)					$	(7,903)

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

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

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

55

Provision for Credit Losses

The Company recognizes provision expense for ACL based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments. Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. The Company elected to defer its adoption of CECL in accordance with relief provided under the CARES Act and the adoption became effective January 1, 2021. At January 1, 2021, we increased the ACL by $64.5 million, which includes $61.6 million for the Day 1 CECL adjustment and $2.9 million

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Provision for Loan Losses

The following table summarizes the activity in the ALL for the periods presented:

(Dollars in Thousands)		2020				2019				2018				2017				2016
Balance Beginning of Year		$	38,762			$	39,199			$	35,318			$	34,500			$	26,990
Provision for Loan Losses			18,006				3,404				16,870				43,197				17,717
Charge-offs:
Commercial Real Estate			40				69				11,740				26,074				1,232
Commercial and Industrial			66				22				20				32				257
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			-				393				-				16,452				8,454
Residential Mortgages			258				197				184				286				1
Other Consumer			3,991				4,401				2,710				465				510
Consumer Construction			-				-				-				-				-
Total Charge-offs			4,355				5,082				14,654				43,309				10,454
Recoveries:
Commercial Real Estate			707				-				654				10				-
Commercial and Industrial			2				-				-				-				6
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			188				630				692				710				12
Residential Mortgages			27				9				69				-				119
Other Consumer			737				602				250				210				110
Consumer Construction			-				-				-				-				-
Total Recoveries			1,661				1,241				1,665				930				247
Total Net Charge-offs			2,694				3,841				12,989				42,379				10,207
Balance End of Year		$	54,074			$	38,762			$	39,199			$	35,318			$	34,500
Net Charge-offs to Average Loans			0.09	%			0.13	%			0.47	%			1.56	%			0.38	%
Allowance for Loan Losses to Total Portfolio Loans			1.83	%			1.34	%			1.45	%			1.32	%			1.26	%

The provision for loan losses is the amount to be added to the ALL, after considering loan charge-offs and recoveries, to bring the ALL to a level determined to be appropriate in management's judgment to absorb probable incurred losses inherent in the loan portfolio.

We are subject to the adoption of the CECL accounting method under ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, we elected under the CARES Act to defer the implementation of CECL until the earlier of when the national emergency

related to the outbreaklife-of-loan reserve on unfunded loan commitments. The ACL as a percentage of COVID-19 ends ortotal portfolio loans was 3.41% at December 31, 2020, which was later extended to January 1, 2022. We intend to adopt in the first quarter of 2021 as allowed under the provisions of the CARES Act.

The provision for loan losses increasedand 1.83% at December 31, 2020.

Provision expense decreased $14.6 million to $3.4 million for the year ended 2021 compared to $18.0 million for the year ended 2020. The decline in 2020 compared to $3.4 million in 2019. Included in the provision expense during 2020 was an increase inbecause of increased qualitative loss factors as a result of the estimated economic impact of COVID-19 during 2020 and the relatively stable economy and improving COVID-19 conditions from the date of $9.6 million. This represents a 429.0%adoption through December 31, 2021.

During 2021, management observed that $62.2 million of loans that were previously in the deferral program were recovering at rates much lower than peers. Accordingly, management sold all of these loans during the third and fourth quarters of 2021 after workout strategies had been exhausted.

A release of $1.3 million was recorded in 2021 related to the provision for unfunded commitments. Per the guidance related to CECL, unfunded loan commitments are included as part of the provision for credit losses rather than noninterest expense, where it was previously recorded.

Net charge-offs were $23.1 million for the full year 2021 compared to $2.7 million for the full year 2020. The increase in the provision expense as comparednet charge-offs was primarily attributable to the same periodresolution of 2019. The Bank adjusted qualitative risk factors under its incurred loss modelfive problem relationships during 2021, in which the majority of losses were anticipated and previously reserved. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.79% and 0.09% for economic conditions, changes in payment deferral procedures, expected changes in collateral values duethe years ended 2021 and 2020, respectively. See the “Allowance for Credit Losses” section of this MD&A for additional details regarding our charge-offs.

Nonperforming loans (“NPLs”) decreased significantly at December 31, 2021 by $24.6 million, or 76.9% to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers’ ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending. Also contributing to the increase in provision for loan loss expense was higher specific reserves in 2020 of $15.3$7.4 million compared to $6.2 million in 2019.

56

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The increase was comprised of both higher specific reserves of $9.1 million and general reserves of $6.2 million. The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in the Company’s loss history. The $16.1 million increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions to the Company’s hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic, geo-political and other risk factors determined by management. These qualitative reserves are intended to reflect not only the risks of continued weak economic conditions on our loan portfolio, but also loss estimates identified in loan portfolios deemed to be at risk from the COVID-19 pandemic. The Company adjusted qualitative risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

Net charge-offs decreased $1.1 million to $2.7 million in 2020 compared to $3.8 million for 2019. Net loan charge-offs to average loans were 0.09% and 0.13% in 2020 and 2019, respectively. Specific reserves were $15.3$32.0 million at December 31, 2020 and $6.2 million at December 31, 2019.

Nonperforming loans and TDRs decreased at December 31, 2020 by $10.1 million, to $32.0 million as compared to $42.1 million at December 31, 2019,2020. The decrease was primarily due to sale proceeds from two credit relationships. The allowance for loan losses was 169.1%the resolution of nonperforming loans asour largest NPL relationship during 2021 and a significant reduction of December 31, 2020 as compared to 92.0% of nonperforming loans as of December 31, 2019. Management is aggressively taking steps to address problem loan relationships.

The ALL at December 31, 2020 was $54.1 million compared to $38.8 million at December 31, 2019. The ALLour second largest NPL relationship. NPLs as a percentage of total portfolio loans was 1.83%were 0.26% at December 31, 2020 and 1.34%2021 compared to 1.09% at December 31, 2019.

2020. See the “Credit Quality” section of this MD&A for more detail on our NPLs.

Discussion of net interest income for the year ended December 31, 20182019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Net Interest Income” in the Bank’s Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed as Exhibit 99.1 with the SEC on November 23,March 12, 2021, and is incorporated herein by reference.

Noninterest Income

						Years Ended December 31,
(Dollars in Thousands)						2021						2020						$ Change						% Change
Gains on Sales of Securities, net						$	6,869					$	6,882					$	(13)					(0.2)		%
Service Charges, Commissions and Fees						6,662						4,668						1,994						42.7		%
Debit Card Interchange Fees						7,226						5,857						1,369						23.4		%
Insurance Commissions						1,901						1,728						173						10.0		%
Bank Owned Life Insurance Income						1,380						1,400						(20)						(1.4)		%
Other Real Estate Owned Income						90						340						(250)						(73.5)		%
Commercial Loan Swap Fee Income						2,416						4,051						(1,635)						(40.4)		%
Other						2,337						1,654						683						41.3		%
Total Noninterest Income						$	28,881					$	26,580					$	2,301					8.7		%

For the year ended December 31, 2021 compared to December 31, 2020, (and originally filed with the FDIC).

Noninterest Income

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				$ Change				% Change
Gains on Sales of Securities, net		$	6,882			$	2,205			$	4,677				212.1	%
Service Charges, Commissions and Fees			4,668				4,962				(294	)			(5.9	)%
Debit Card Interchange Fees			5,857				5,160				697				13.5	%
Insurance Commissions			1,728				1,225				503				41.1	%
Bank Owned Life Insurance Income			1,400				1,436				(36	)			(2.5	)%
Other Real Estate Owned Income			340				689				(349	)			(50.7	)%
Commercial Loan Swap Fee Income	��		4,051				-				4,051				NM
Other			1,654				1,193				461				38.6	%
Total Noninterest Income		$	26,580			$	16,870			$	9,710				57.6	%
NM - percentage not meaningful

57

increase of $2.3 million in total noninterest income was driven by increases in service charges, commissions and fee accounts of $2.0 million, debit card interchange fees of $1.4 million, $0.7 million increase in other income primarily due to a year-to-date gain of $0.5 million on the sale of four bank branches and higher insurance commissions of $0.2 million. The above increases were offset by lower commercial loan swap fee income of $1.6 million and a decrease in OREO income of $0.3 million. Service charges, commission and fees increased due to reinstating fees that were previously waived during 2020 for customers affected by the COVID-19 pandemic and debit

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Total noninterest income

card interchange fees increased $9.7 million, or 57.6%,due to $26.9 million for the full year 2020 compared to the same period of 2019, primarily driven by the impact of $6.9 millionincreased usage. The fluctuations in net securities gains. Securities gains increased $4.7 million to $6.9 million during 2020 compared to $2.2 million during 2019 to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio. Other key factors impacting total noninterest income during 2020 were $4.1 million commercial loan swap fee income for 2020 compared to 2019,are due primarily to the hightiming and demand for this product in the current low interest rate environment and $0.7 million increase in debit card interchange fees due to higher volumes in demand deposits, $0.5 million in insurance income and $0.5 million in other noninterest income. The increase of $0.5 million in other income primarily relates to higher gains on sales of mortgage loans and tax credit exits. These increases were partially offset by lower service charges, commissions and fees of $0.3 million due to COVID-19 waivers and OREO income of $0.3 million. OREO income declined due to the sale of several large commercial properties that generated income in 2019.

environment.

Discussion of noninterest income for the year ended December 31, 20182019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Income” in the Bank’s Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed as Exhibit 99.1 with the SEC on November 23, 2020 (and originally filed with the FDIC).

March 12, 2021, and is incorporated herein by reference.

Noninterest Expense

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				$ Change				% Change
Salaries and Employee Benefits		$	52,390			$	52,879			$	(489	)			(0.9	)%
Occupancy Expense, net			13,369				11,785				1,584				13.4	%
FDIC Insurance Expense			2,313				1,270				1,043				82.1	%
Other Taxes			3,151				2,847				304				10.7	%
Advertising Expense			1,633				1,445				188				13.0	%
Telephone Expense			2,303				2,202				101				4.6	%
Professional and Legal Fees			5,006				4,507				499				11.1	%
Data Processing			2,648				2,267				381				16.8	%
Losses on Sales and Write-downs of Other Real Estate Owned, net			1,435				4,732				(3,297	)			(69.7	)%
Losses on Sales and Write-downs of Bank Premises, net			99				188				(89	)			(47.3	)%
Debit Card Expense			2,565				2,753				(188	)			(6.8	)%
Tax Credit Amortization			1,088				2,265				(1,177	)			(52.0	)%
Unfunded Loan Commitment Expense			(252	)			121				(373	)			(308.3	)%
Other Real Estate Owned Expense			657				525				132				25.1	%
Goodwill Impairment Expense			62,192				-				62,192				NM
Other			8,178				8,243				(65	)			(0.8	)%
Total Noninterest Expense		$	158,775			$	98,029			$	60,746				62.0	%
NM - percentage not meaningful

(Dollars in Thousands)						Years Ended December 31,
						2021						2020						$ Change						% Change
Salaries and Employee Benefits						$	54,157					$	52,390					$	1,767					3.4		%
Occupancy Expense, net						13,556						13,369						187						1.4		%
FDIC Insurance Expense						2,157						2,313						(156)						(6.7)		%
Other Taxes						3,129						3,151						(22)						(0.7)		%
Advertising Expense						952						1,633						(681)						(41.7)		%
Telephone Expense						2,208						2,303						(95)						(4.1)		%
Professional and Legal Fees						5,255						5,006						249						5.0		%
Data Processing Expense						3,758						2,648						1,110						41.9		%
Losses on Sales and Write-downs of Other Real Estate Owned, net						3,622						1,435						2,187						152.4		%
Losses on Sales and Write-downs of Bank Premises, net						231						99						132						133.3		%
Debit Card Expense						2,777						2,565						212						8.3		%
Tax Credit Amortization						1,708						1,088						620						57.0		%
Unfunded Loan Commitment Expense						—						(252)						252						NM
Other Real Estate Owned Expense						407						657						(250)						(38.1)		%
Goodwill Impairment Expense						—						62,192						(62,192)						NM
Other						8,368						8,178						190						2.3		%
Total Noninterest Expense						$	102,285					$	158,775					$	(56,490)					(35.6)		%

NM - percentage not meaningful

Total noninterest expense increased $60.8decreased $56.5 million or 62.0% to $158.8$102.3 million for the full year 20202021 compared to $98.0$158.8 million incompared to the same period of 2019, primarilyfull year 2020. The decline was driven by the impactone-time charge resulting from goodwill impairment of a $62.2 million one-time goodwill impairment charge duringrecorded in the third quarter of 2020. Other key factors impacting total noninterest expense during 2020Offsetting the decrease were a $1.6increases of $2.2 million increase in occupancy expense resulting from higher depreciation expenselosses on software and equipment for ancillary products and services, an increase of $1.0 million for FDIC expense which related to a one-time credit of $1.1 million received in the third quarter of 2019 for eligible institutions, a $0.4 million increase in data processing licensing fee and a $0.5 million increase in professional and legal fees. The decreases offsetting these increases included lossessales and write-downs of OREO, net primarily due to nonrecurring write-downs related to closed bank branches. There were also increases of $3.3 million, $1.2 million decline in the amortization of tax credits and a $0.5 million decrease in salaries and employee benefits. The losses and write-downs of OREO relate to eight retail offices that were closed as part of our branch optimization project. Five of these branches were moved to OREO and marketed for sale resulting in a $1.1 million write-down. The decline of $1.2 million for the amortization of tax credits relates to tax credits being fully amortized. The net decrease of $0.5$1.8 million in salaries and employee benefits, was comprised of a $0.9$1.1 million increase in salaries offset by a $1.4 million decrease in benefits. Salaries increased primarily due to $0.2 million in merit increases,data processing expense and a $0.6 million decreaseincrease in salary deferral on new loan originationtax credit amortization. The increase in 2020,salaries and $0.2employee benefits was due to increased profit sharing incentives of $1.1 million in hazard bonus paymentsand higher medical expenses of $1.7 million, offset by a reductionlower salaries of overtime expense of $0.1 million. Benefits decreased primarily$1.3 million due to a $0.5 million reductionour branch network optimization project. Higher data processing expenses resulted from increased customer accounts and new modules added to our core processor and the increase in profit sharing and a $0.9 million reduction in medical expense. There have not been any permanent or temporary reductions in employees as a result of COVID-19. tax credit amortization was due to new historic tax credits entered into throughout 2021.

Discussion of noninterest expense for the year ended December 31, 20182019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Expense” in the Bank’s Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed as Exhibit 99.1 with the SEC on November 23, 2020 (originally filed with the FDIC).

58

March 12, 2021, and is incorporated herein by reference.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)

Provision for Income Taxes

The provision for income taxes decreased $0.4increased $3.3 million to $4.1 million for the year ended December 31, 2021 compared to $0.8 million in 2020 compared to $1.2 million in 2019. The decrease in pretaxfor December 31, 2020. Pre-tax income of $72.9increased $80.8 million for the full year 2020 was primarily dueended 2021 compared to the 2020. A full goodwill impairment charge in the amount of $62.2 million that was recorded in the third quarter of 2020. 2020. Our effective tax rate was (1.7%)11.5% for 2020 asthe year ended December 31, 2021 compared to 4.4%negative 1.7% for December 31, 2020. The increase in 2019. The $62.2 millionthe effective tax rate is primarily due to a higher level of pre-tax income and a lower level of tax-exempt interest income for the year ended December 31, 2021 and the nondeductible goodwill impairment charge is the reason for the decreased effective tax rate inyear ended December 31, 2020. The goodwill impairment charge was not tax deductible. 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 andincome, tax credit projects and Bank Owned Life Insurance (“BOLI”), which are relatively consistent regardless of the level of pretaxpre-tax income.

Discussion of provision for income taxes for the year ended December 31, 20182019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Provision for Income Taxes” in the Bank’s Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed as Exhibit 99.1 with the SEC on November 23, 2020 (and originally filed with the FDIC).

March 12, 2021, and is incorporated herein by reference.

Financial Condition

December 31, 2021

Total assets of $4.1 billion decreased $45.4 million, or 1.1%, from December 31, 2020

Total assets increased $173.1 million to $4.2 billion at December 31, 2020 compared to $4.0 billion at December 31, 2019. Federal Reserve Bank excess reserves increased $124.2 million to $163.5 million at December 31, 2020 compared to $39.3 million at December 31, 2019 due to maintaining higher liquidity levels as a result of COVID-19.

. Total portfolio loans increased $62.4at December 31, 2021 were $2.8 billion, decreasing $135.0 million, or 2.2%4.6%, year over year. We experienced a decline in total loans during 2021 primarily due to $2.9 billion at December 31, 2020 compared to December 31, 2019. large commercial loan payoffs of approximately $312.3 million, $62.2 million of loan sales and mortgage refinancing sold in the secondary markets.The increase invariances between loan segments for portfolio loans primarilyare also related to growththe adoption of Topic 326. See the impact of Topic 326 in Note 1, Summary of Significant Accounting Policies, in the commercialNotes to Consolidated Financial Statements in Item 8 of thisAnnual Report on Form 10-K. We made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. The new segmentation breaks out an Other category from the original loan categories, which applies only to the current year 2021 and was not applied to periods during 2020 and prior years, therefore showing fluctuations in all categories. At January 1, 2021, the initial break-out of $118.6Other loans related to the adoption of Topic 326 totaled $379.9 million with increasesconsisting of $94.6$140.8 million in commercial construction, $88.5 million inof Commercial Real Estate, (“CRE”) and $50.0, $78.1 million inof Commercial and Industrial (“C&I”), which includes $35.0$50.8 million of PPPResidential Mortgages and $110.2 million of Construction. This segment of loans, offset by has unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this segment resulted in an expected credit loss of $51.3 million at adoption. Loans held-for-sale were $0.2 million at December 31, 2021 a decrease of $114.5$25.2 million in the obligations of state and political subdivisionsover prior year.

The Company’s investment portfolio compared to increased $143.7 million, or 18.5%, from December 31, 2019. The decline in state and political subdivisions are due to municipalities finding cheaper refinancing alternatives. Consumer loans decreased $56.22020. Deposits increased $13.8 million compared to December 31, 2019 with decreases in all portfolios except consumer construction. The decrease in consumer loans is primarily a result of de-risking the portfolio during the economic downturn. At from December 31, 2020 we had $9.8primarily due to our core deposits offset by the runoff of higher cost CDs and $84.7 million loans held-for-sale of deposits held-for-assumption in connection with the sale of Bankfour bank branches, that is expected to close inwhich were completed during the second quarter of 2021. Nonperforming loans and TDRs decreased $10.12021. Shareholders’ equity at December 31, 2021 was $407.6 million, to $32.0a $32.6 million or 24.0%,7.4% decrease from $440.2 million at December 31, 2020 compared to $42.1 million at December 31, 2019. OREO decreased $2.6 million at December 31, 2020 compared to December 31, 2019. Closed retail bank offices declined $0.5 million with a remaining book value.

44

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Table of $2.5 million at December 31, 2020 compared to $3.0 million at December 31, 2019.

59

Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)

The securities portfolio increased $36.1 million at December 31, 2020 from December 31, 2019 and comprised 18.6% of total assets at December 31, 2020 compared to 18.5% of total assets at December 31, 2019. The increase was a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits increased $180.4 million to $3.7 billion at December 31, 2020 compared to $3.5 billion at December 31, 2019. The increase in deposits primarily related to the growth in all our core deposit categories, which includes noninterest-bearing and interest-bearing demand deposits, money market and savings accounts. Core deposits increased $441.3 million, or 28.6%, compared to December 31, 2019. Offsetting the increase in core deposits was a decline of $345.6 million in our CDs. This decrease relates to the intentional runoff of $289.1 million of higher cost CDs. Noninterest-bearing deposits comprised 19.0% and 15.8% of total deposits at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, $84.7 million of deposits were held for assumption in connection with the sale of Bank branches that is expected to close in the second quarter of 2021.

Total shareholders’ equity decreased by $32.9 million to $440.2 million at December 31, 2020 compared to $473.1 million at December 31, 2019. The decrease was primarily due to a net loss of $45.9 million and a special dividend of $3.7 million paid in March of 2020, both offset by a $15.6 million, net of tax, increase in other comprehensive income due to changes in the fair value of available-for-sale securities. The remaining difference is related to stock-based compensation during the year ended December 31, 2020.

The ALL was 1.83% of total portfolio loans at December 31, 2020 compared to 1.34% as of December 31, 2019. General reserves as a percentage of total portfolio loans were 1.32% at December 31, 2020 compared to 1.13% at December 31, 2019. The ALL was 169.1% of nonperforming loans at December 31, 2020 compared to 92.0% of nonperforming loans at December 31, 2019. Management believes, the allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio.

The Company remains well capitalized. Our Tier 1 capital ratio decreased to 13.08% at December 31, 2020 compared to 13.58% at December 31, 2019. Our leverage ratio was 10.26% at December 31, 2020, compared to 10.33% at December 31, 2019 and total risk-based capital ratio was 14.33% at December 31, 2020 compared to 14.83% at December 31, 2019.

Securities

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

(Dollars in Thousands)		December 31, 2020				December 31, 2019				$ Change
Residential Mortgage-Backed Securities		$	44,724			$	52,644			$	(7,920	)
Commercial Mortgage-Backed Securities			5,447				19,006				(13,559	)
Asset Backed Securities			133,557				109,639				23,918
Collateralized Mortgage Obligations			218,359				292,224				(73,865	)
Small Business Administration			99,145				105,736				(6,591	)
States and Political Subdivisions			252,622				148,480				104,142
Corporate Notes			24,825				14,888				9,937
Total Debt Securities		$	778,679			$	742,617			$	36,062

60

(Dollars in Thousands)						2021						2020						$ Change
U.S. Treasury Securities						$	4,413					$	—					$	4,413
U.S. Government Agency Securities						3,478						—						3,478
Residential Mortgage-Backed Securities						110,013						44,724						65,289
Commercial Mortgage-Backed Securities						4,168						5,447						(1,279)
Asset Backed Securities						81,863						133,557						(51,694)
Collateralized Mortgage Obligations						287,614						218,359						69,255
Small Business Administration						108,914						99,145						9,769
States and Political Subdivisions						262,202						252,622						9,580
Corporate Notes						59,735						24,825						34,910
Total Debt Securities						$	922,400					$	778,679					$	143,721

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)

The balances and average rates of our securities portfolio are presented below as of December 31:

		2020								2019								2018
(Dollars in Thousands)		Balance				Weighted- Average Yield				Balance				Weighted- Average Yield				Balance				Weighted- Average Yield
U.S. Government Agency Securities		$	-				0.00	%		$	-				0.00	%		$	270,388				1.44	%
Residential Mortgage-Backed Securities			44,724				1.86	%			52,644				2.72	%			70,871				2.37	%
Commercial Mortgage-Backed Securities			5,447				2.77	%			19,006				2.53	%			21,792				2.59	%
Asset Backed Securities			133,557				1.47	%			109,639				3.05	%			58,861				3.46	%
Collateralized Mortgage Obligations			218,359				1.38	%			292,224				2.49	%			76,819				2.84	%
Small Business Administration			99,145				1.69	%			105,736				3.23	%			89,238				3.59	%
States and Political Subdivisions			252,622				2.69	%			148,480				2.94	%			167,474				3.45	%
Corporate Notes			24,825				5.42	%			14,888				4.08	%			27,315				3.62	%
Total Securities Available-for-Sale		$	778,679				2.02	%		$	742,617				2.82	%		$	782,758				2.49	%

(Dollars in Thousands)						2021												2020
						Balance						Weighted- Average Yield						Balance						Weighted- Average Yield
U.S. Treasury Securities						$	4,413					1.35		%				$	—					—		%
U.S. Government Agency Securities						3,478						1.73		%				—						—		%
Residential Mortgage-Backed Securities						110,013						0.44		%				44,724						1.86		%
Commercial Mortgage-Backed Securities						4,168						2.02		%				5,447						2.77		%
Asset Backed Securities						81,863						1.58		%				133,557						1.47		%
Collateralized Mortgage Obligations						287,614						1.03		%				218,359						1.38		%
Small Business Administration						108,914						1.47		%				99,145						1.69		%
States and Political Subdivisions						262,202						2.41		%				252,622						2.69		%
Corporate Notes						59,735						4.08		%				24,825						5.42		%
Total Securities Available-for-Sale						$	922,400					1.65		%				$	778,679					2.02		%

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 approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio increased by $36.1$143.7 million at December 31, 2020 as2021 compared to December 31, 2019.2020. Securities comprise 18.6%22.3% of total assets at December 31, 2020 as2021 compared to 18.5%18.6% at December 31, 2019.2020. The increase is a result of active balance sheet management.management and the Company’s excess cash position. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses. At December 31, 2020, total gross unrealized gains in the available-for-sale portfolio were $22.6 million offset by $2.7 million of gross unrealized losses. At December 31, 2019, total gross unrealized gains in the available-for-sale portfolio were $6.2 million offset by $6.0 million of gross unrealized losses.

Management evaluates the securities portfolio for OTTIother-than-temporary impairment (“OTTI”) on a quarterly basis. During the years ended December 31, 20202021 and 2019December 31, 2020 the Company did not record any OTTI. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table sets forth the maturities of securities at December 31, 20202021 and the weighted average yields of such securities. Taxable-equivalent adjustments (using a 21% federal income tax rate) for 2020 have been made in calculating yields on obligations of state and political subdivisions.

Available-for-Sale Securities

		Maturing
										After One But Within								After Five But Within
		Within One Year								Five Years								Ten Years								After Ten Years
(Dollars in Thousands)		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Residential Mortgage-Backed Securities			-				0.00	%			40				2.58	%			-				0.00	%			44,684				1.85	%
Commercial Mortgage-Backed Securities			-				0.00	%			-				0.00	%			3,146				2.97	%			2,301				2.47	%
Asset Backed Securities			-				0.00	%			-				0.00	%			21,442				2.01	%			112,115				1.37	%
Collateralized Mortgage Obligations			-				0.00	%			-				0.00	%			25,626				2.71	%			192,733				1.22	%
Small Business Administration			-				0.00	%			2,686				1.27	%			59,506				1.73	%			36,953				1.66	%
States and Political Subdivisions			394				2.78	%			1,650				3.97	%			33,871				2.53	%			216,707				2.71	%
Corporate Notes			-				0.00	%			-				0.00	%			24,825				5.42	%			-				0.00	%
Total		$	394							$	4,376								168,416							$	605,493
Weighted Average Yield							2.78	%							2.30	%							2.64	%							1.86	%

(Dollars in Thousands)						Maturing
						Within One Year												After One But Within Five Years												After Five But Within Ten Years												After Ten Years
						Amount						Yield						Amount						Yield						Amount						Yield						Amount						Yield
U.S. Treasury Securities						$	—					—		%				$	—					—		%				$	4,413					1.35		%				$	—					—		%
U.S. Government Agency Securities						—						—		%				—						—		%				3,478						1.73		%				—						—		%
Residential Mortgage-Backed Securities(2)						14						2.26		%				—						—		%				—						—		%				109,999						0.44		%
Commercial Mortgage-Backed Securities(2)						—						—		%				—						—		%				4,168						2.02		%				—						—		%
Asset Backed Securities(2)						—						—		%				—						—		%				17,259						2.18		%				64,604						1.42		%
Collateralized Mortgage Obligations(2)						—						—		%				—						—		%				62,132						1.81		%				225,482						0.82		%
Small Business Administration						—						—		%				1,922						1.47		%				63,530						1.47		%				43,462						1.47		%
States and Political Subdivisions						731						4.11		%				963						2.75		%				70,814						2.23		%				189,694						2.47		%
Corporate Notes						—						—		%				—						—		%				59,735						4.08		%				—						—		%
Total						$	745											$	2,885											$	285,529											$	633,241
Weighted Average Yield(1)												4.08		%										1.90		%										2.33		%										1.35		%

(1)Weighted -average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent.

Loan Composition

The following table summarizes

(2) Securities not due at a single maturity date

At December 31, 2021 the Company had no held-to-maturity securities; however, if at a future date we classify securities as held-to-maturity, our loan portfoliodisclosures will show the weighted average yield for each range of maturities.

At December 31, 2021, the Company held 52% fixed rate and 48% floating rate securities.The floating rate securities may have a stated maturity greater than ten years, but the interest rate generally adjusts monthly.Therefore, the duration on these securities is short, generally less than one year, and will therefore not be as sensitive to interest rate changes.

Refer to Note 4, Investment Securities, in the Notes to Consolidated Financial Statements in Item 8 of the periods presented:

		December 31,
(Dollars in Thousands)		2020				2019				2018				2017				2016
Commercial
Commercial Real Estate		$	1,453,799			$	1,365,310			$	1,359,036			$	1,479,765			$	1,527,552
Commercial and Industrial			306,828				256,798				229,468				334,023				372,775
Obligations of State and Political Subdivisions			250,336				364,869				432,402				470,569				462,356
Commercial Construction			387,407				292,827				201,240				118,786				199,551
Total Commercial Loans			2,398,370				2,279,804				2,222,146				2,403,143				2,562,234
Consumer
Residential Mortgages			472,170				514,538				397,280				193,328				138,657
Other Consumer			57,647				73,688				73,058				79,980				20,724
Consumer Construction			18,983				16,736				11,308				7,994				10,168
Total Consumer Loans			548,800				604,962				481,646				281,302				169,549
Total Portfolio Loans			2,947,170				2,884,766				2,703,792				2,684,445				2,731,783
Loans Held-for-Sale			25,437				19,714				2,559				517				-
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value			9,835				-				-				-				-
Total Loans		$	2,982,442			$	2,904,480			$	2,706,351			$	2,684,962			$	2,731,783

62

this Annual Report on Form 10-K for additional information related to our securities.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Loan Composition

The following table summarizes our loan portfolio as of the periods presented:

						December 31,
(Dollars in Thousands)						2021						2020						2019						2018						2017
Commercial
Commercial Real Estate						$	1,323,252					$	1,453,799					$	1,365,310					$	1,359,036					$	1,479,765
Commercial and Industrial						345,376						557,164						621,667						661,870						804,592
Total Commercial Loans						1,668,628						2,010,963						1,986,977						2,020,906						2,284,357
Consumer
Residential Mortgages						457,988						472,170						514,538						397,280						193,328
Other Consumer						44,666						57,647						73,688						73,058						79,980
Total Consumer Loans						502,654						529,817						588,226						470,338						273,308
Construction						282,947						406,390						309,563						212,548						126,780
Other						357,900						—						—						—						—
Total Portfolio Loans						2,812,129						2,947,170						2,884,766						2,703,792						2,684,445
Loans Held-for-Sale						228						25,437						19,714						2,559						517
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value						—						9,835						—						—						—
Total Loans						$	2,812,357					$	2,982,442					$	2,904,480					$	2,706,351					$	2,684,962

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

Total portfolio loans increased $62.4decreased $135.0 million, or 2.2%,4.6% to $2.8 billion at December 31, 20202021 compared to December 31, 2019. Commercial loans increased $118.6 million, or 5.2%, including $35.0 million of PPP loans,offset by a decrease of $114.5 million in the obligations of state and political subdivisions portfolio compared to December 31, 2019. The decline in state and political subdivisions are due to municipalities finding cheaper refinancing alternatives. Consumer loans decreased $56.2 million, or 9.3% in all categories, except consumer construction. The decrease in consumer loans if primarily a result of de-risking the portfolio during the economic downturn.

Total commercial loans represented 81.4% of total portfolio loans$2.9 billion at December 31, 20202020. We experienced a decline in total loans during 2021 primarily due to large commercial loan payoffs, $62.2 million of loan sales and 79.0% of totalmortgage refinancing sold in the secondary markets. The variances between loan segments for portfolio loans at December 31, 2019. Withinalso relates to the adoption of Topic 326 as we adjusted our commercialloan portfolio segments to align with the CRE and Commercial Construction portfolios combined comprised $1.8 billion or 76.8% of total commercial loans and 62.5% of total portfolio loans at December 31, 2020 and comprised $1.7 billion or 72.7% of total commercial loans and 57.5% of total portfolio loans at December 31, 2019. Net deferred costs includedmethodology applied in determining the portfolio balances above were $3.0 million and $5.1 million at December 31, 2020 and 2019, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $219 thousand and $250 thousand at December 31, 2020 and 2019, respectively.

allowance under CECL.

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

tenants.

Our exposure to the hospitality industry at December 31, 20202021 equated to approximately $497.2$418.6 million, or 16.9%14.9% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. However, we anticipate that a significant portion of our borrowersBeginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel industry willclients following sharp declines throughout the pandemic. However, like many service industries our clients continue to operate atface challenges with respect to labor, which impedes their ability to turnover rooms resulting in occupancy levels at or below breakeven whichconstraints. This has caused, or willmay cause, them to draw on their existing linesoperate with lower levels of credit with other financial institutions or other sources of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. Contractual payments have been restored since the expiration of our deferral program on June 30, 2021. These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected.

Portfolio loan balances of

Aggregate commitments to our top 10 credit relationships were $675.9$721.6 million at December 31, 2020, with2021. The Other segment represents 49.6% of the top 10 credit relationships.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table summarizes our top 10 relationships and a total commitment exposuredescription of $727.7 million. These loans are inindustries represented for the hospitality, golf course, agricultural, land holdings, commercial real estate (multi-family and office/retail), energy, land development, and lumber industries.

Line utilization, unusedperiods presented:

Dollars in Thousands						For the Periods Ending
Top Ten (10) Relationships						12/31/2021						12/31/2020						Change						2021 % of Gross Loans						2021 % of RBC
1. Hospitality, agriculture & energy						$	350,010					$	375,990					$	(25,980)					12.45		%				72.45		%
2. Retail real estate & food services						56,073						55,373						700						1.99		%				11.61		%
3. Hospitality						55,634						61,691						(6,057)						1.98		%				11.51		%
4. Industrial & retail real estate						45,653						41,439						4,214						1.62		%				9.45		%
5. Retail real estate						38,250						35,388						2,862						1.36		%				7.92		%
6. Multifamily development						36,720						40,874						(4,154)						1.31		%				7.60		%
7. Hospitality						35,664						37,435						(1,771)						1.27		%				7.38		%
8. Multifamily & student housing						35,405						38,787						(3,382)						1.26		%				7.33		%
9. Hospitality						34,463						36,086						(1,623)						1.22		%				7.13		%
10. Special / limited use						33,736						33,273						463						1.20		%				6.98		%
Top Ten (10) Relationships						721,608						756,336						(34,728)						25.66		%				149.36		%
Total Gross Loans						2,812,357						2,982,442						(170,085)
% of Total Gross Loans						25.66		%				25.36		%				0.30		%
Concentration Threshold (25% of Risk-based Capital ("RBC"))						$	120,781					$	116,300

Unfunded commitments excluding consumer overdrafton lines of credit were $433.1 million at December 31, 2021 as compared to $410.7 million at December 31, 2020 as compared to $355.5 million at December 31, 2019.2020. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization excluding consumer overdraft lines, was 52.2% at December 31, 2021 and 47.8% at December 31, 2020, as compared to 51.1%2020. Unfunded commitments on commercial operating lines of credit was 51.7% at December 31, 2019. Commercial line utilization was2021 and 48.3% at December 31, 2020, as compared to 50.8% at December 31, 2019.

2020.

From time to time, we have mortgage loans held-for-sale derived from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Secondly,Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. Mortgage loans held-for-sale were $25.4$0.2 million and $19.7$25.4 million at December 31, 20202021 and December 31, 2019,2020, respectively.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following tables present the maturity schedule of selectedportfolio loan types at December 31, 2020:

		Maturity
						After One
		Within				But Within				After
(Dollars in Thousands)		One Year				Five Years				Five Years				Total
Fixed interest rates		$	187,635			$	52,829			$	5,870			$	246,334
Variable interest rates			48,707				98,207				13,142				160,056
Total Construction Loans (1)		$	236,342			$	151,036			$	19,012			$	406,390

⁽¹⁾ Totals2021:

						Maturity
(Dollars in Thousands)						Within One Year						After One But Within Five Years						After Five But Within 15 Years						After 15 Years						Total
Fixed interest rates
Commercial Real Estate						$	47,934					$	127,445					$	48,615					$	9,463					$	233,457
Commercial and Industrial						65,704						84,886						167,471						16,648						334,709
Residential Mortgages						4,463						7,680						72,577						29,696						114,416
Other Consumer						1,852						33,350						8,797						—						43,999
Construction						79,497						37,989						4,359						165						122,010
Other						—						—						—						—						—
Portfolio Loans with Fixed Interest Rates						$	199,450					$	291,350					$	301,819					$	55,972					$	848,591
Variable interest rates
Commercial Real Estate						$	46,124					$	74,822					$	570,774					$	398,075					$	1,089,795
Commercial and Industrial						3,274						537						4,793						2,063						10,667
Residential Mortgages						1,380						2,538						19,679						319,975						343,572
Other Consumer						643						24						—						—						667
Construction						47,074						104,067						8,016						1,780						160,937
Other						346,729						—						7,712						3,459						357,900
Portfolio Loans with Variable Interest Rates						$	445,224					$	181,988					$	610,974					$	725,352					$	1,963,538
Total Portfolio Loans						$	644,674					$	473,338					$	912,793					$	781,324					$	2,812,129

Refer to Commercial ConstructionNote 5, Loans and Consumer ConstructionLoans Held-For-Sale, in the loan composition table above.

		Maturity
						After One
		Within				But Within				After
(Dollars in Thousands)		One Year				Five Years				Five Years				Total
Fixed interest rates		$	6,050			$	80,059			$	53,410			$	139,519
Variable interest rates			13,983				99,691				53,635				167,309
Total Commercial, Industrial  & Agricultural (2)		$	20,033			$	179,750			$	107,045			$	306,828

⁽²⁾ TotalsNotes to Commercial & IndustrialConsolidated Financial Statements in the loan composition table above.

Item 8 of this Annual Report on Form 10-K for additional information related to our loans.

Credit Quality

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

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

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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

The Company has a Consumer unsecured loans and secured loans are evaluated for charge-off after the loan review policybecomes 90 days past due. Unsecured loans are fully charged-off and annual scope report that details the level of loan review for commercialsecured loans in a given year. Primary objectives of loan reviews include the identification of unknown risks and patterns that might influence potential future losses. In concert with significant enhancementsare charged-off to the underwriting process, the scope of loan review has been broadened since 2019 to include assurance testing with respect to the accuracyestimated fair value of the underwriting function. During 2020, we used a four-step approach for loan review incollateral less the following segments:

·

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

·

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

·

A sampling of Large Loan Relationships (“LLRs”) which are defined as loan relationships with aggregate exposure of at least $2 million that are not part of the top 20 review; and

·

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

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cost to sell.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Nonperforming assets (“NPAs”) consist of nonaccrual loans, nonaccrual TDRstroubled debt restructurings (“TDRs”) and OREO.other real estate owned (“OREO”). The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands)		December 31,
Nonaccrual Loans		2020				2019				2018				2017				2016
Commercial Real Estate		$	224			$	1,017			$	684			$	39,421			$	45,181
Commercial and Industrial			456				77				606				-				1
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			2,012				3,210				826				11,342				50,604
Residential Mortgages			4,135				2,857				1,779				284				358
Other Consumer			191				267				65				47				1
Consumer Construction			-				-				-				-				-
Total Nonaccrual Loans			7,018				7,428				3,960				51,094				96,145
Nonaccrual Troubled Debt Restructurings
Commercial Real Estate			21,667				30,073				36,369				39,138				11,969
Commercial and Industrial			-				390				-				-				-
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			3,319				4,242				10,130				2,241				11,238
Residential Mortgages			-				-				272				425				112
Other Consumer			-				-				-				-				-
Consumer Construction			-				-				-				-				-
Total Nonaccrual Troubled Debt Restructurings			24,986				34,705				46,771				41,804				23,319
Total Nonaccrual Loans and Troubled Debt Restructurings			32,004				42,133				50,731				92,898				119,464
Other Real Estate Owned			15,722				18,324				33,681				39,793				23,558
Total Nonperforming Assets		$	47,726			$	60,457			$	84,412			$	132,691			$	143,022
Nonaccrual Loans and Troubled Debt Restructurings to Total Portfolio Loans			1.09	%			1.46	%			1.88	%			3.46	%			4.37	%
Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned			1.61	%			2.08	%			3.08	%			4.87	%			5.19	%

Nonperforming assets

(Dollars in Thousands)						December 31,
						2021						2020
Nonperforming Loans
Commercial Real Estate						$	595					$	224
Commercial and Industrial						451						456
Residential Mortgages						2,551						4,135
Other Consumer						73						191
Construction						177						2,012
Other						—						—
Total Nonperforming Loans						3,847						7,018
Nonperforming Troubled Debt Restructurings
Commercial Real Estate						2,742						21,667
Commercial and Industrial						—						—
Residential Mortgages						—						—
Other Consumer						—						—
Construction						808						3,319
Other						—						—
Total Nonperforming Troubled Debt Restructurings						3,550						24,986
Total Nonperforming Loans						7,397						32,004
Other Real Estate Owned						10,916						15,722
Total Nonperforming Assets						$	18,313					$	47,726
Nonperforming Loans to Total Portfolio Loans						0.26		%				1.09		%
Nonperforming Assets to Total Portfolio Loans plus Other Real Estate Owned						0.65		%				1.61		%

NPLs decreased significantly by $24.6 million, or 76.9% compared to $12.7 millionDecember 31, 2020, primarily due to $47.7the resolution of our largest NPL relationship and a significant decrease in the second largest NPL relationship, partly offset by new loans placed on nonaccrual status during 2021. The two largest NPL relationships had an aggregate principal balance of $21.4 million at December 31, 2020 compared2020. We recognized charge-offs totaling $8.2 million related to $60.4these relationships during the second quarter of 2021 resulting in the release of $4.8 million of individually evaluated loan reserves. The $8.2 million in charge-offs consisted of a $6.3 million charge-off triggered by a settlement of the debt and proceeds received while the remaining $1.9 million charge-off was triggered by the sale of the underlying collateral through a purchase agreement approved by the bankruptcy court. Nonperforming construction loans decreased primarily due to paydowns from borrower asset sales on four loans related to one relationship during the fourth quarter of 2021. Paydowns on this relationship totaled $2.4 million and charge-offs totaled $1.9 million leaving a remaining book balance of $0.8 million that is adequately secured by collateral. Offsetting the declines were new NPLs totaling $2.8 million, of which $2.7 million is one loan. NPLs as a percentage of total portfolio loans were 0.26% at December 31, 2019. The decrease was2021 compared to 1.09% at December 31, 2020.

OREO decreased $4.8 million, or 30.6%, at December 31, 2021 compared to December 31, 2020 due to a $10.1 million decline in nonaccrual loansthe sale of 23 branches and a $2.6 million net decrease in OREO. The decrease in nonaccrual loans was primarily due to pay-downs during the 2020, offset by draws on minimal commitments. The gross amount of interest that would have been recorded under original terms, had these loans not been placed on nonaccrual status was $4.7 million during 2020. The decrease insix OREO was primarily due to sales of properties during 2020, offset by transfers into OREO. Eight retail branch banking offices were closed during 2020 as part of our branch optimization project. Five of these branches were moved to OREO in 2020 and marketed for sale resulting in a $1.1 million write-down.2021. Closed retail bank officesoffice carrying values decreased $1.5 million and have a remaining book value of $1.0 million at December 31, 2021 compared to $2.5 million at December 31, 20202020. During 2021, 20 branch closures were completed and $3.0 million16 of these were sold as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

There were no nonaccrual loans related to loans held-for-sale at December 31, 2019.

2021. As of December 31, 2020 total nonaccrual loans include $7 thousand in loans held-for-sale in connection with sale of Bank branches. There were no nonaccrual loans

Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our nonperforming loans held-for-sale in 2019.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlierOREO.

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table summarizes past due loans for the dates presented:

		December 31,
(Dollars in Thousands)		2020				2019				2018				2017				2016
Loans 90 Days or More Past Due and Still Accruing
Commercial
Commercial Real Estate		$	-			$	-			$	-			$	-			$	208
Commercial and Industrial			-				-				-				4				-
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			-				-				-				-				73
Total Commercial Loans			-				-				-				4				281
Consumer
Residential Mortgages			-				-				-				493				311
Other Consumer			-				-				-				59				26
Consumer Construction			-				-				-				-				-
Total Consumer Loans			-				-				-				552				337
Total Loans 90 Days or More Past Due		$	-			$	-			$	-			$	556			$	618

		December 31,
(Dollars in Thousands)		2020				2019				2018				2017				2016
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate		$	3,816			$	1,220			$	1,103			$	3,682			$	7,692
Commercial and Industrial			384				161				62				161				23
Obligations of State and Political Subdivisions			-				236				-				-				-
Commercial Construction			284				228				2,501				109				91
Total Commercial Loans			4,484				1,845				3,666				3,952				7,806
Consumer
Residential Mortgages			1,347				942				2,442				1,652				1,375
Other Consumer			580				1,283				1,510				392				197
Consumer Construction			-				-				-				-				-
Total Consumer Loans			1,927				2,225				3,952				2,044				1,572
Total Loans 30 to 89 Days Past Due		$	6,411			$	4,070			$	7,618			$	5,996			$	9,378

Loans past due 90 days or more and still accruing were zero at December 31, 2020 and 2019. With the implementation of the Company’s new core system,

(Dollars in Thousands)						December 31,
						2021						2020
Loans 30 to 89 Days Past Due
Commercial
Commercial Real Estate						$	229					$	3,816
Commercial and Industrial						297						384
Total Commercial Loans						526						4,200
Consumer
Residential Mortgages						683						1,347
Other Consumer						461						580
Total Consumer Loans						1,144						1,927
Construction						—						284
Other						—						—
Total Loans 30 to 89 Days Past Due						$	1,670					$	6,411

Portfolio loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days or more and still accruing increased $2.3decreased $4.7 million, or 74.0% to $1.7 million at December 31, 2021 compared to $6.4 million at December 31, 2020, compared to $4.1 million atprimarily in the commercial real estate segment. There were no loans during the year ended December 31, 2019.

As of2021 and December 31, 2020 total loansthat were past due 30 to 89more than 90 days include $7 thousand in loans held-for-sale in connection with sale of Bank branches. There were no past due loans related to loans held-for-sale in 2019.

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and still accruing.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

TDRs

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

a TDR unless there are other concessions granted.

An accruing loan that is modified intocharacterized as a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical performance for a reasonable period before the modification. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless thea subsequent restructuring agreement specifiesincludes an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk, and we fully expect that the remaining principal and interest will be collected according to the restructured agreement. Theagreement or the contractual terms of the original loan agreement are restored. Generally, the Company individually evaluates all impaired loans, which includes TDRs, with a commitment greater than or equal to $1.0 million for additional impairment.Individually Evaluated Loan reserves. In addition, the Company evaluatesmay evaluate credits that have complex loan structures for impairment, even if the balance is less than $1.0 million. Nonaccrual TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.

As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate given to the borrower is considered to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the longsignificant extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk. The loan will be reported

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

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

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Allowance for Credit Losses

The following summarizes our allowance for credit loss experience at December 31 for each of the years presented:

(Dollars in Thousands)						2021						2020						2019
Balance Beginning of Year						$	54,074					$	38,762					$	39,199
Impact of CECL Adoption						61,642						—						—
Provision for Credit Losses						3,350						18,006						3,404
Charge-offs:
Commercial Real Estate						19,662						40						69
Commercial and Industrial						374						66						22
Residential Mortgages						273						258						197
Other Consumer						2,256						3,991						4,401
Construction						1,859						—						393
Other						—						—						—
Total Charge-offs						24,424						4,355						5,082
Recoveries:
Commercial Real Estate						159						707						—
Commercial and Industrial						291						2						—
Residential Mortgages						168						27						9
Other Consumer						586						737						602
Construction						93						188						630
Other						—						—						—
Total Recoveries						1,297						1,661						1,241
Total Net Charge-offs						23,127						2,694						3,841
Balance End of Year						$	95,939					$	54,074					$	38,762
Net Charge-offs to Average Portfolio Loans						0.79%						0.09%						0.13%
Allowance for Credit Losses to Total Portfolio Loans						3.41%						1.83%						1.34%

Total net charge-offs increased to $23.1 million for the year ended December 31, 2021 compared to $2.7 million for the year ended December 31, 2020 primarily in the commercial real estate segment. In the quarter ended June 30, 2021, we released $4.8 million of specific reserves in connection with the resolution of our two largest CRE nonperforming relationships and recognized $8.2 million in charge-offs. In the quarter ended September 30, 2021, the Bank sold nine CRE loans within two performing relationships with an unpaid principal balance of $50.2 million, which resulted in charge-offs of $9.2 million and a net release of reserves of $3.1 million. Finally, in the quarter ended December 31, 2021, we sold an additional two notes, which resulted in $2.2 million net charge-offs and added $0.5 million to provision expense. We also recorded a $1.9 million net charge-off for a nonperforming lot development relationship.

52

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Table of Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table summarizes the restructured loans as of the dates presented:

		December 31, 2020												December 31, 2019
		Performing				Nonperforming				Total				Performing				Nonperforming				Total
(Dollars in Thousands)		TDRs				TDRs				TDRs				TDRs				TDRs				TDRs
Commercial
Commercial Real Estate		$	6,151			$	21,667			$	27,818			$	3,183			$	30,073			$	33,256
Commercial and Industrial			-				-				-				-				390				390
Obligations of State and Political Subdivisions			-				-				-				-				-				-
Commercial Construction			52,481				3,319				55,800				53,116				4,242				57,358
Total Commercial TDRs			58,632				24,986				83,618				56,299				34,705				91,004
Consumer
Residential Mortgages			50,618				-				50,618				52,966				-				52,966
Other Consumer			-				-				-				-				-				-
Consumer Construction			-				-				-				-				-				-
Total Consumer TDRs			50,618				-				50,618				52,966				-				52,966
Total TDRs		$	109,250			$	24,986			$	134,236			$	109,265			$	34,705			$	143,970

TDRs decreased $9.7 million, or 6.8%, to $134.2 million at December 31, 2020 compared to December 31, 2019. The Bank received $12.8 million of pay-downs, offset by an addition of $3.1 million. TDRs of $25.0 million and $34.7 million were nonaccrual as of December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 we had one relationship identified as a TDR that had minimal commitments to lend additional funds.

During the twelve months ended December 31, 2020, the Bank modified one loan totaling $3.1 million that constituted a TDR. The loan is part of a $15.7 million relationship. The relationship is collateralized by income producing property and unimproved land that was acquired for future development. The cash flows of the income producing property are insufficient to amortize the $3.1 million loan which matured during the year. The underlying conditions in the immediate submarket make development in the near term unlikely. The Bank renewed the $3.1 million loan and extended interest only terms which management considered a concession. The balance of the relationship continues to amortize as agreed and the cash flows of the income producing property are sufficient to amortize the larger loan and fund interest payments on the $3.1 million loan.

The Bank had one loan modified as a TDR during the twelve months ending December 31, 2019 totaling $0.6 million in post-modified recorded balances. The TDR modification was a result of several key factors. The borrower is experiencing financial difficulties due to negative cash flows and being dependent upon collateral to repay the loan. The most recent appraisal suggests that the borrower would have to sell the lots in this lot development project at a price higher than the appraisal for this project to be profitable. In addition, when comparing the complete value versus the cost to complete, the loan would not currently fit our standards for underwriting a lot development loan. The current rate on the loan is below market rate and there are other terms and conditions that would not be offered to a comparable borrower. There were no TDR payment defaults during the year ended December 31, 2019 for TDRs with outstanding principal balances at year end 2019. For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following tables represent credit exposures by internally assigned grades as of December 31, 2020 and 2019:

								Obligations
(Dollars in Thousands)		Commercial			Commercial			Of States and			Commercial			Residential			Other			Consumer
December 31, 2020		Real Estate			& Industrial			Political Sub.			Construction			Mortgages			Consumer			Construction			Total
Pass		$	1,281,106		$	228,200		$	250,336		$	270,798		$	415,773		$	57,418		$	18,983		$	2,522,614
Special Mention			126,535			48			-			58,899			723			6			-			186,211
Substandard			46,158			78,580			-			57,710			55,674			223			-			238,345
Doubtful			-			-			-			-			-			-			-			-
Loss			-			-			-			-			-			-			-			-
Total Portfolio Loans		$	1,453,799		$	306,828		$	250,336		$	387,407		$	472,170		$	57,647		$	18,983		$	2,947,170
Performing Loans		$	1,431,908		$	306,372		$	250,336		$	382,076		$	468,035		$	57,463		$	18,983		$	2,915,173
Non-Accrual Loans			21,891			456			-			5,331			4,135			184			-			31,997
Total Portfolio Loans		$	1,453,799		$	306,828		$	250,336		$	387,407		$	472,170		$	57,647		$	18,983		$	2,947,170

								Obligations
(Dollars in Thousands)		Commercial			Commercial			Of States and			Commercial			Residential			Other			Consumer
December 31, 2019		Real Estate			& Industrial			Political Sub.			Construction			Mortgages			Consumer			Construction			Total
Pass		$	1,198,269		$	167,326		$	364,869		$	173,176		$	456,859		$	73,345		$	16,736		$	2,450,580
Special Mention			1,368			203			-			1,476			1,178			9			-			4,234
Substandard			165,673			89,269			-			118,175			56,501			334			-			429,952
Doubtful			-			-			-			-			-			-			-			-
Loss			-			-			-			-			-			-			-			-
Total Portfolio Loans		$	1,365,310		$	256,798		$	364,869		$	292,827		$	514,538		$	73,688		$	16,736		$	2,884,766
Performing Loans		$	1,334,220		$	256,331		$	364,869		$	285,375		$	511,681		$	73,421		$	16,736		$	2,842,633
Non-Accrual Loans			31,090			467			-			7,452			2,857			267			-			42,133
Total Portfolio Loans		$	1,365,310		$	256,798		$	364,869		$	292,827		$	514,538		$	73,688		$	16,736		$	2,884,766

Loans held-for-sale in connection with sale of Bank branches at December 31, 2020 include $7 thousand in the substandard category. There were no substandard loans in loans held-for-sale at December 31, 2019.

70

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Special mention, substandard and doubtful loans at December 31, 2020 decreased by $9.6 million to $424.6 million compared to $434.2 million at December 31, 2019, with an increase of $182.0 million in special mention and a decrease of $191.6 million in substandard. During 2020 there was a significant risk rating upgrade due to improvements in underlying operating cash flows of certain credits.

At this time, it is uncertain what impact COVID-19 will have on our current impaired loans or the susceptibility of the loan portfolio to future loan impairment.

Allowance for Loan Losses

The Company maintains an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet date and it is presented as a reserve against loans in the Consolidated Balance Sheets. Determination of an adequate ALL is inherently subjective and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics.

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

• The status of a bankruptcy proceeding

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

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

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following summarizes our allowance for loan loss experience at December 31 for each of the years presented:

(Dollars in Thousands)		2020				2019				2018				2017				2016
Balance Beginning of Year		$	38,762			$	39,199			$	35,318			$	34,500			$	26,990
Provision for Loan Losses			18,006				3,404				16,870				43,197				17,717
Charge-offs:
Commercial Real Estate			40				69				11,740				26,074				1,232
Commercial and Industrial			66				22				20				32				257
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			-				393				-				16,452				8,454
Residential Mortgages			258				197				184				286				1
Other Consumer			3,991				4,401				2,710				465				510
Consumer Construction			-				-				-				-				-
Total Charge-offs			4,355				5,082				14,654				43,309				10,454
Recoveries:
Commercial Real Estate			707				-				654				10				-
Commercial and Industrial			2				-				-				-				6
Obligations of State and Political Subdivisions			-				-				-				-				-
Commercial Construction			188				630				692				710				12
Residential Mortgages			27				9				69				-				119
Other Consumer			737				602				250				210				110
Consumer Construction			-				-				-				-				-
Total Recoveries			1,661				1,241				1,665				930				247
Total Net Charge-offs			2,694				3,841				12,989				42,379				10,207
Balance End of Year		$	54,074			$	38,762			$	39,199			$	35,318			$	34,500
Net Charge-offs to Average Loans			0.09	%			0.13	%			0.47	%			1.56	%			0.38	%
Allowance for Loan Losses to Total Portfolio Loans			1.83	%			1.34	%			1.45	%			1.32	%			1.26	%

The increase in the ALL of $15.3 million was primarily due an increase in specific reserves of $9.1 million and an increase in general reserves of $6.2 million. The $6.2 million increase in general reserves included an increase of $16.1 million in qualitative reserves offset by a decrease of $9.9 million in quantitative reserves due to improvements in our loss history. The $16.1 million increase in qualitative reserves included $9.6 million due to general economic uncertainties and specific concerns regarding disruptions to our hospitality clients caused by the COVID-19 pandemic and an additional $6.5 million based on general economic, geo-political and other risk factors determined by management. These qualitative reserves are intended to reflect not only the risks of continued weak economic conditions on our loan portfolio, but also loss estimates identified in loan portfolios deemed to be at risk from the COVID-19 pandemic. We adjusted qualitative risk factors under our incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

Net charge-offs were $2.7 million in 2020 as compared to $3.8 million in 2019. As a percentage of total portfolio loans net charge-offs were 0.09% and 0.13% for the periods ending December 31, 2020 and 2019, respectively. Nonperforming loans as a percentage of total portfolio loans were 1.09% and 1.46% as of December 31, 2020 and December 31, 2019, respectively.

72

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

An inherent risk to the loan portfolio as a whole is the condition of the economy in our markets. In addition, each loan segment carries with it risks specific to the segment. The Company develops and documents a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Obligations of States and Political Subdivisions, 4) Commercial Construction, 5) Residential Mortgages, 6) Other Consumer, and 7) Consumer Construction. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ALL.

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.

Obligations of States and Political Subdivision loans are made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. This segment of 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 basis 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.

Commercial Construction 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.

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

Consumer loans are made to individuals and may be secured by assets other than 1-4 family residences, as well as unsecured loans. 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.

73

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Consumer Construction 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.

74

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following is the ALLAllocation of the ACL balance by segment as of December 31 for the years presented below:

		2020								2019								2018								2017								2016
						% of								% of								% of								% of								% of
						Loans								Loans								Loans								Loans								Loans
						in each								in each								in each								in each								in each
						Category								Category								Category								Category								Category
						to Total								to Total								to Total								to Total								to Total
(Dollars in Thousands)			Amount			Loans					Amount			Loans					Amount			Loans					Amount			Loans					Amount			Loans
Commercial Real Estate		$	36,428				49.3	%		$	24,706				47.3	%		$	23,897				50.3	%		$	28,471				55.1	%		$	26,445				55.9	%
Commercial & Industrial			4,113				10.4	%			3,236				8.9	%			626				8.5	%			1,210				12.4	%			1,480				13.6	%
Obligations of States and Political Sub.			951				8.5	%			365				12.6	%			432				16.0	%			460				17.5	%			462				16.9	%
Commercial Construction			7,929				13.1	%			5,377				10.2	%			5,214				7.4	%			2,198				4.4	%			3,455				7.3	%
Residential Mortgages			2,099				16.0	%			1,736				17.8	%			6,129				14.7	%			2,543				7.2	%			2,400				5.1	%
Other Consumer			2,479				2.0	%			3,299				2.6	%			2,728				2.7	%			288				3.0	%			82				0.8	%
Consumer Construction			75				0.6	%			43				0.6	%			173				0.4	%			148				0.3	%			176				0.4	%
Balance End of Year		$	54,074				100	%		$	38,762				100	%		$	39,199				100.0	%		$	35,318				100.0	%		$	34,500				100.0	%

Significant

						2021												2020
(Dollars in Thousands)						Amount						% of Loans in each Category to Total Portfolio Loans						Amount						% of Loans in each Category to Total Portfolio Loans
Commercial Real Estate						$	17,297					47.0		%				$	36,428					49.3		%
Commercial & Industrial						4,111						12.3		%				5,064						18.9		%
Residential Mortgages						4,368						16.3		%				2,099						16.0		%
Other Consumer						1,493						1.6		%				2,479						2.0		%
Construction						6,939						10.1		%				8,004						13.8		%
Other						61,731						12.7		%				—						—		%
Balance End of Year						$	95,939					100.0		%				$	54,074					100.0		%

While the variances within the loan segments relate to the Day 1 impact of CECL, our ALL isACL has a higher concentration of commercial loans.loans including CRE, C&I and construction. 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.

The following table summarizes the ALL balancecredit quality ratios and their components as of December 31 for the years presented below:

(Dollars in Thousands)		2020				2019				2018				2017				2016
Collectively Evaluated for Impairment		$	38,824			$	32,593			$	34,000			$	35,286			$	34,256
Individually Evaluated for Impairment			15,250				6,169				5,199				32				244
Total Allowance for Loan Losses		$	54,074			$	38,762			$	39,199			$	35,318			$	34,500

The ALL was $54.1 million, or 1.83%

(Dollars in Thousands)						2021						2020
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses						$	95,939					$	54,074
Total Portfolio Loans						2,812,129						2,947,170
Allowance for Credit Losses to Total Portfolio Loans						3.41		%				1.83		%
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans						$	7,397					$	32,004
Total Portfolio Loans						2,812,129						2,947,170
Nonperforming Loans to Total Portfolio Loans						0.26		%				1.09		%
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses						$	95,939					$	54,074
Nonperforming Loans						7,397						32,004
Allowance for Credit Losses to Nonperforming Loans						1,297.00		%				168.96		%
Net Charge-offs to Average Portfolio Loans
Net Charge-offs						$	23,127					$	2,694
Average Total Portfolio Loans						2,927,083						2,959,376
Net Charge-offs to Average Portfolio Loans						0.79		%				0.09		%

A discussion of total portfoliothe factors that drove the material changes in the ACL ratios presented in the table above, such as the significant reduction in nonperforming loans at December 31, 2020 compared to $38.8 million, or 1.34%and the significant increase in net charge-offs have been communicated in the paragraphs preceding this table within the Credit Quality and Allowance for Credit Losses sections within this MD&A.

53

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Table of total portfolio loans at December 31, 2019.

75

Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Deposits

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

The following table summarizes the ACL balance as of depositsDecember 31, 2020: 

(Dollars in Thousands)						2020
Collectively Evaluated for Impairment						$	38,824
Individually Evaluated for Impairment						15,250
Total Allowance for Credit Losses						$	54,074

The ACL was $95.9 million, or 3.41%, of total portfolio loans at December 31:

(Dollars in Thousands)		2020				2019				$ Change				% Change
Noninterest-Bearing Demand		$	699,229			$	554,875			$	144,354				26.0	%
Interest-Bearing Demand			366,201				286,561				79,640				27.8	%
Money Market			294,229				140,589				153,640				109.3	%
Savings			625,482				561,814				63,668				11.3	%
Certificates of Deposits			1,614,770				1,960,406				(345,636	)			(17.6	)%
Deposits Held for Assumption in Connection with Sale of Bank Branches			84,717				-				84,717				NM
Total		$	3,684,628			$	3,504,245			$	180,383				5.1	%

NM - percentage not meaningful

31, 2021 compared to $54.1 million, or 1.83% December 31, 2020.

Refer to Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our ACL.

Deposits

The daily average balance of deposits and rates paid on deposits are summarized in the following table for the years ended December 31:

		2020								2019								2018
(Dollars in Thousands)		Average Balance				Rate				Average Balance				Rate				Average Balance				Rate
Noninterest-Bearing Demand Deposits		$	634,864				-			$	557,505				-			$	551,124				-
Noninterest-Bearing Demand Deposits Held for Assumption in Connection with Sale of Bank Branches			6,776				-				-				-				-				-
Interest-Bearing Transaction Accounts			317,664				0.36	%			249,086				0.80	%			246,592				0.79	%
Money Market			194,129				0.47	%			134,676				1.24	%			96,068				0.72	%
Savings			591,967				0.11	%			582,195				0.24	%			663,801				0.31	%
Certificates of Deposit			1,765,310				1.79	%			2,054,077				2.02	%			2,090,103				1.60	%
Interest-Bearing Deposits Held for Assumption in Connection with Sale of Bank Branches			67,665				1.52	%			-				-				-				-
Total Interest-Bearing Deposits			2,936,735				1.21	%			3,020,034				1.54	%			3,096,564				1.23	%
Total Deposits		$	3,578,375				0.99	%		$	3,577,539				1.30	%		$	3,647,688				1.04	%

76

						2021												2020
(Dollars in Thousands)						Average Balance						Rate						Average Balance						Rate
Noninterest-Bearing Demand Deposits						$	736,974					—						$	634,864					—
Noninterest-Bearing Demand Deposits Held for Assumption in Connection with Sale of Bank Branches						—						—						6,776						—
Interest-Bearing Demand						413,714						0.24		%				317,664						0.36		%
Money Market						383,391						0.29		%				194,129						0.47		%
Savings						663,382						0.10		%				591,967						0.11		%
Certificates of Deposit						1,484,436						1.31		%				1,765,310						1.79		%
Interest-Bearing Deposits Held for Assumption in Connection with Sale of Bank Branches						—						—		%				67,665						1.52		%
Total Interest-Bearing Deposits						2,944,923						0.76		%				2,936,735						1.21		%
Total Deposits						$	3,681,897					0.60		%				$	3,578,375					0.99		%

The following table presents additional information about our year-end deposits:

(Dollars in Thousands)						2021						2020
Deposits from the Certificate of Deposit Account Registry Services (CDARS)						$	139					$	139
Noninterest-Bearing Public Funds Deposits						58,393						34,457
Interest-Bearing Public Funds Deposits						123,968						139,386
Total Deposits not Covered by Deposit Insurance(1)						396,626						377,398
Certificates of Deposits not Covered by Deposit Insurance						147,134						181,057
Deposits from Certain Directors, Executive Officers and their Affiliates						3,032						6,697

(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.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Deposits are our primary source

Maturities of funds. We believe that ourCDs over $250,000 or more not covered by deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition. Total depositsinsurance at December 31, 2020 increased $180.4 million, or 5.1%, from December 31, 2019. Noninterest-bearing deposits increased by $144.3 million, or 26.0%, to $699.2 million as of December 31, 2020 as compared to $554.9 million at December 31, 2019. Money market accounts increased $153.6 million, or 109.3%, during 2020 compared to 2019, due to recent special rate promotions. Interest-bearing demand deposits increased $79.6 million, or 27.8% to $366.2 million at December 31, 2020 compared to December 31, 2019. Savings accounts increased $63.7 million, or 11.3%, at December 31, 2020 compared to December 31, 2019. Offsetting these increases was a decrease of $345.6 million, or 17.6%, in CDs at December 31, 2020 compared to December 31, 2019 due to intentional runoff of these higher cost deposits. Noninterest-bearing deposits comprised 19.0% and 15.8% of total deposits at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, $84.7 million of deposits were held for assumption in connection with the sale of Bank branches that is expected to close in the second quarter of 2021.

The following table summarizes the maturities of CDs, excluding CDs held-for-assumption:

(Dollars in Thousands)		2020
2021		$	746,635
2022			249,239
2023			293,434
2024			135,306
2025			187,931
Thereafter			2,225
Total		$	1,614,770

Maturities of CDs of $250,000 or more outstanding, excluding CDs held-for-assumption at December 31, 20202021 are summarized as follows:

(Dollars in Thousands)		Amount				Percent
Three Months or Less		$	24,449				13.28	%
Over Three Months Through Twelve Months			70,974				38.54	%
Over Twelve Months Through Three Years			54,721				29.71	%
Over Three Years			34,018				18.47	%
Total		$	184,162				100	%

(Dollars in Thousands)						Amount						Percent
Three Months or Less						$	29,123					19.8		%
Over Three Months Through Twelve Months						38,980						26.5		%
Over Twelve Months Through Three Years						52,850						35.9		%
Over Three Years						26,181						17.8		%
Total						$	147,134					100.0		%

Refer to Note 12, Deposits, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our deposits.

Federal Home Loan Bank (“FHLB”) Borrowings

Borrowings are an additional source of liquidity for the Company. FHLB borrowings were $35.0 million and $10.0 million at December 31, 2020 and December 31, 2019, respectively. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at December 31, 2020. Total loans pledged as collateral were $804.2 million and $284.6 million at December 31, 2020 and December 31, 2019, respectively. There were no securities available-for-sale pledged as collateral at December 31, 2020. The bank continues to methodically pledge additional eligible loans, with the ultimate expectation to have full pledging by year end 2021. Total securities available-for-sale pledged as collateral were $28.6 million at December 31, 2019. The Company is eligible to borrow up to an additional $510.5 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25% of the Company’s assets, as of December 31, 2020. The Company had the capacity to borrow up to an additional $242.2 million from the FHLB at December 31, 2019.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Information pertaining to FHLB advances at December 31 is summarized in the table below:

(Dollars in Thousands)		2020				2019				2018
Balance at Period End		$	35,000			$	10,000			$	-
Average Balance during Period			30,628				2,329				-
Average Interest Rate during the Period			1.18	%			1.63	%			0.00	%
Maximum Month-end Balance during the Period			35,000				10,000				-
Average Interest Rate at Period End			1.13	%			1.63	%			0.00	%

(Dollars in Thousands)						2021						2020						2019
Balance at Period End						$	7,000					$	35,000					$	10,000
Average Balance during Period						25,986						30,628						2,329
Average Interest Rate during the Period						1.20		%				1.18		%				1.63		%
Maximum Month-end Balance during the Period						35,000						35,000						10,000
Average Interest Rate at Period End						1.61		%				1.13		%				1.63		%

The Company held FHLB Atlanta stock of $5.1$2.4 million and $4.1$5.1 million at December 31, 20202021 and December 31, 2019,2020, respectively. Dividends recorded on this restricted stock were $218 thousand, $144$121 thousand and zero$218 thousand for the years ended December 31, 2020, 2019,2021 and 2018,December 31, 2020, respectively. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional 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 13, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our borrowings.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Capital Resources

The following table summarizes ratios for the Company for December 31:

		2020				2019				2018				2017				2016
Common Equity Tier 1			13.08	%			13.58	%			13.86	%			12.82	%			12.12	%
Tier 1 Ratio			13.08	%			13.58	%			13.86	%			12.82	%			12.12	%
Total Risk-Based Capital Ratio			14.33	%			14.83	%			15.11	%			14.05	%			13.25	%
Leverage Ratio			10.26	%			10.33	%			9.61	%			9.25	%			8.03	%

Shareholders’

						2021						2020
Common Equity Tier 1
Carter Bankshares, Inc.						14.21		%				13.08		%
Carter Bank and Trust						14.04		%				13.06		%
Tier 1 Ratio
Carter Bankshares, Inc.						14.21		%				13.08		%
Carter Bank and Trust						14.04		%				13.06		%
Total Risk-Based Capital Ratio
Carter Bankshares, Inc.						15.46		%				14.33		%
Carter Bank and Trust						15.29		%				14.31		%
Leverage Ratio
Carter Bankshares, Inc.						10.62		%				10.26		%
Carter Bank and Trust						10.49		%				10.24		%

Total shareholders’ equity decreased $32.9by $32.6 million or 7.0%,to $407.6 million at December 31, 2021 compared to $440.2 million at December 31, 2020 as compared to $473.1 million at December 31, 2019.2020. The decrease in shareholders’ equity is primarily due to a net loss of $45.9 million in 2020, a special dividend of $3.7 million paid in March of 2020, both offset by an increase in other comprehensive income in the amount of $15.6 million. The change in other comprehensive income of $15.6 million was primarily due to the increase$50.7 million cumulative-effect adjustment related to the adoption of Topic 326, a $14.0 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-

sale securities and $0.5 million related to the repurchase of common stock, partially offset by net unrealized gains on securities available-for-sale driven by a change in interest rates during the period.income of $31.6 million. The remaining difference of $1.0 million is related to stock-based compensation during the year ended December 31, 2020.

2021.

The Company continues to maintain its capital position with a leverage ratio of 10.26%10.62% as compared to the regulatory guideline of 5.0%5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 13.08%14.21% compared to the regulatory guideline of 6.5%6.50% to be well-capitalized. Our risk-based Tier 1 and Total Capital ratios were 13.08%14.21% and 14.33%15.46%, respectively, which places the Company aboutabove the federal bank regulatory agencies’ well-capitalized guidelines of 8.0%8.00% and 10.0%10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary.

In July 2013 the federal banking agencies issued a final rule to implement the Basel III Final Rules and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The final rule established a comprehensive capital framework and went into effect on January 1, 2015 for smaller banking organizations such as the Company. The rule also requires the Company and the Bank to maintain a capital conservation buffer composed of Common Equity Tier 1 capital in an amount greater than 2.50% of total risk-weighted assets beginning in 2019. The capital conservation buffer was phased-in, in equal increments from 2016 through 2019. As a result, starting in 2019, the Company and the Bank were required to maintain a Common Equity Tier I1 risk-based capital ratio greater than 7.0%, a Tier 1 risk-based capital ratio greater than 8.5%, and a Total risk-based capital ratio greater than 10.5%; otherwise, they will be subject to restrictions on capital distributions and discretionary bonus payments.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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

Refer to Note 21, Capital Adequacy, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information related to our capital.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payments. The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents as of December 31, 2020,2021, significant fixed and determinable contractual obligations to third parties by payment date:

		Payments Due In
(Dollars in Thousands)		Less Than One Year				One to Three Years				Three to Five Years				More Than five Years				Total
Deposits without a Stated Maturity (1)		$	1,985,141			$	-			$	-			$	-			$	1,985,141
Certificates of Deposits (1)			746,635				542,673				323,237				2,225				1,614,770
Deposits Held for Assumption in Connection with sale of Bank Branches (1)			84,717				-				-				-				84,717
FHLB Advances			3,000				14,000				18,000				-				35,000
Operating and Capital Leases			241				496				360				725				1,822
Purchase Obligations			4,990				7,987				5,899				7,894				26,770
Total		$	2,824,724			$	565,156			$	347,496			$	10,844			$	3,748,220

						Payments Due In
(Dollars in Thousands)						Less Than One Year						One to Three Years						Three to Five Years						More Than five Years						Total
Deposits without a Stated Maturity (1)						$	2,354,158					$	—					$	—					$	—					$	2,354,158
Certificates of Deposits (1)						565,385						493,445						283,891						1,597						1,344,318
Federal Home Loan Bank Borrowings (2)						7,000						—						—						—						7,000
Operating and Capital Leases						447						1,000						877						7,549						9,873
Purchase Obligations						4,697						6,919						6,769						5,190						23,575
Total						$	2,931,687					$	501,364					$	291,537					$	14,336					$	3,738,924

(1)Excludes Interest

(2) The FHLB borrowing of $7.0 million was prepaid in January 2022 outside of its scheduled maturity.

Lease contracts are described in Note 8, Premises and Equipment, toof the Consolidated Financial Statements included in Part II, Item 8 of this Report.Annual Report on Form 10-K. Purchase obligations primarily represent obligations under agreement with a third-party data processing vendor and communications charges.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Off-Balance Sheet Arrangements

In the normal course of business, the Company offers our customers lines of credit and letters of credit to meet their financing objectives. The undrawn or unfunded portion of these facilities do not represent outstanding balances and therefore are not reflected in our financial statements as loans receivable. The Company provides lines of credit to our clients to memorialize the commitment to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represent $283.9 million, or 55.3% and $391.4 million, or 66.2% and $298.8 or 61.1% of the Commitmentscommitments to Extend Creditextend credit identified in the table below at December 31, 20202021 and 2019,December 31, 2020, respectively. The Company provides letters of credit, generally, for the benefit or our customers to provide assurance to various municipalities that construction projects will be completed according to approved plans and specifications. These instruments involve elements of credit and interest rate risk and our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, could be equal to the contractual amount of the obligation less the value of any collateral. The Company analyzes this risk and calculates a reserve for unfunded commitments. The same credit policies are applied in granting these facilities as those used for underwriting loans. Lines of credit to finance construction projects include a construction end date, at which time the loan is expected to convert to a mini-perm loan. A department independent of our lending group monitors construction commitments of $1$1.0 million or more. Lines of credit to operating companies to finance working capital include a maturity date and may include various financial covenants. Letters of credit include an expiration date unless it is a standby letter of credit which automatically renews but generally provide for a termination clause on an annual basis given sufficient notice to the beneficiary. The Company typically charges an annual fee for the issuance of letters of credit. Because letters of credit are expected to expire without being drawn upon, these commitments do not necessarynecessarily represent future cash requirements of the Company.

The following table sets forth the commitments and letters of credit as of December 31:

(Dollars in Thousands)		2020				2019
Commitments to Extend Credit		$	591,175			$	488,864
Standby Letters of Credit			29,293				39,575
Total		$	620,468			$	528,439

(Dollars in Thousands)						2021						2020
Commitments to Extend Credit						$	513,482					$	591,175
Standby Letters of Credit						27,083						29,293
Total						$	540,565					$	620,468

Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

Our allowance for unfunded commitments is determined using a methodology similar to that used to determine the ALL. Amounts are added to the allowance for unfunded commitments through a charge to current earnings in noninterest expense. The balance in the allowance for unfunded commitments was $0.1 million and $0.4 million at December 31, 2020 and December 31, 2019, respectively.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Liquidity

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25% of the Company’s assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds lines with six other correspondent financial institutions in the amount of $145.0 million, access to the institutional CD market, and the brokered deposit market. In addition to the lines referenced above, the Company also has its$743.8 million of unpledged available-for-sale investment securities portfolio as an additional source of liquidity.

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At December 31, 2020,2021, the Bank had $871.4$985.1 million in highly liquid assets, which consisted of $40.0$64.9 million in interest-bearing deposits in other financial institutions, $163.5$176.2 million in FRB Excess Reserves, $632.7$743.8 million in unpledged securities $25.4and $0.2 million in mortgage loans held-for-sale and $9.8 million in loans held-for-sale in connection with sale of Bank branches.held-for-sale. This resulted in highly liquid assets to total assets ratio of 20.9%23.8% at December 31, 2020.

2021.

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

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

(Dollars in Thousands)		December 31, 2020				December 31, 2019
Cash and Due From Banks		$	38,535			$	41,386
Interest Bearing Deposits in Other Financial Institutions			39,954				45,156
Federal Reserve Bank Excess Reserves			163,453				39,270
Unpledged Investment Securities			632,724				592,065
Excess Pledged Securities			7,857				16,030
FHLB Borrowing Availability			510,533				242,188
Unsecured Lines of Credit			145,000				115,000
Total Liquidity Sources		$	1,538,056			$	1,091,095

December 31:

(Dollars in Thousands)						2021						2020
Cash and Due From Banks						$	36,698					$	38,535
Interest Bearing Deposits in Other Financial Institutions						64,905						39,954
Federal Reserve Bank Excess Reserves						176,196						163,453
Unpledged Investment Securities						743,836						632,724
Excess Pledged Securities						28,417						7,857
FHLB Borrowing Availability						667,307						510,533
Unsecured Lines of Credit						145,000						145,000
Total Liquidity Sources						$	1,862,359					$	1,538,056

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Inflation

Management is aware of the significant effect inflation has on interest rates and can have on financial performance. The Company’s ability to cope with this is best determined by analyzing its capability to respond to changing interest rates and its ability to manage noninterest income and expense. The mix of interest-rate sensitive assets and liabilities is monitored through ALCO in order to reduce the impact of inflation on net interest income. The effects of inflation are controlled by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses.

81

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

Stock Repurchase Plan

On December 13, 2021, the Company authorized, effective December 10, 2021, a common stock repurchase program to purchase up to two million shares of the Company’s common stock in the aggregate over a period of twelve months. As of December 31, 2021, 30,407 shares of common stock had been repurchased under this program at an average price of $15.22 per share.

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

The Stock Repurchase Plan is also described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities, of this Annual Report on Form 10-K.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

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

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

Net interest income rate shock simulation results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static and growth balance sheet. A static balance sheet is a no growthno-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market, and savings) and changes in the prepayment behavior of loans and securities with optionality. Our policy guidelines limit the change in pretax net interest income over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points. We have temporarily suspended the -200, -300, and -400 basis point rate shock analyses. Due to the low interest rate environment, we believe the impact to net interest income when evaluating the -200, -300, and -400 basis point rate shock scenarios doesdo not provide meaningful insight into our interest rate risk position.

In order to

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

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

				December 31, 2020
Change in Interest Rate				% Change in Pretax				% Change in Economic
(basis points)				Net Interest Income				Value of Equity
	400				39.6	%			20.1	%
	300				30.7	%			17.5	%
	200				21.1	%			13.8	%
	100				10.7	%			8.1	%

				December 31, 2019
Change in Interest Rate				% Change in Pretax				% Change in Economic
(basis points)				Net Interest Income				Value of Equity
	400				24.1	%			1.4	%
	300				19.1	%			2.2	%
	200				13.4	%			2.9	%
	100				7.1	%			2.5	%
	(100	)			-8.6	%			-7.0	%
	(200	)			-15.9	%			-14.1	%

						December 31, 2021												December 31, 2020
Change in Interest Rate (basis points)						% Change in Pretax Net Interest Income						% Change in Economic Value of Equity						% Change in Pretax Net Interest Income						% Change in Economic Value of Equity
400						43.6		%				24.6		%				39.6		%				20.1		%
300						33.1		%				20.6		%				30.7		%				17.5		%
200						22.5		%				15.4		%				21.1		%				13.8		%
100						11.4		%				8.6		%				10.7		%				8.1		%
-100						(2.4)		%				(7.0)		%				(2.4)		%				(3.1)		%

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

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

Consolidated Balance Sheets							8563
Consolidated Statements of Income (Loss) Income							8664
Consolidated Statements of Comprehensive Income (Loss) Income							8766
Consolidated Statements of Changes in Shareholders’ Equity							8867
Consolidated Statements of Cash Flows							8968
Notes to Consolidated Financial Statements							9170
Report of Crowe LLP, Independent Registered Public Accounting Firm(PCAOB ID 173), on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting							140116
Report of Yount, Hyde & Barbour, Independent Registered Public Accounting Firm, on Consolidated Financial Statements			144

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands Except Per Share Data)		December 31,				December 31,
ASSETS		2020				2019
Cash and Due From Banks		$	38,535			$	41,386
Interest-Bearing Deposits in Other Financial Institutions			39,954				45,156
Federal Reserve Bank Excess Reserves			163,453				39,270
Total Cash and Cash Equivalents			241,942				125,812
Securities Available-for-Sale, at Fair Value			778,679				742,617
Loans Held-for-Sale			25,437				19,714
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value			9,835				-
Portfolio Loans			2,947,170				2,884,766
Allowance for Loan Losses			(54,074	)			(38,762	)
Portfolio Loans, net			2,893,096				2,846,004
Bank Premises and Equipment, net			85,307				85,942
Bank Premises and Equipment Held-for-Sale, net			2,293				-
Other Real Estate Owned, net			15,722				18,324
Goodwill			-				62,192
Federal Home Loan Bank Stock, at Cost			5,093				4,113
Bank Owned Life Insurance			53,997				52,597
Other Assets			67,778				48,793
Total Assets		$	4,179,179			$	4,006,108
LIABILITIES
Deposits:
Noninterest-Bearing Demand		$	699,229			$	554,875
Interest-Bearing Demand			366,201				286,561
Money Market			294,229				140,589
Savings			625,482				561,814
Certificates of Deposit			1,614,770				1,960,406
Deposits Held for Assumption in Connection with Sale of Bank Branches			84,717				-
Total Deposits			3,684,628				3,504,245
Federal Home Loan Bank Borrowings			35,000				10,000
Other Liabilities			19,377				18,752
Total Liabilities			3,739,005				3,532,997
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share, Authorized 100,000,000 Shares;
26,385,041 Outstanding at December 31, 2020 and 26,334,229 at December 31, 2019			26,385				26,334
Additional Paid-in-Capital			143,457				142,492
Retained Earnings			254,611				304,158
Accumulated Other Comprehensive Income			15,721				127
Total Shareholders' Equity			440,174				473,111
Total Liabilities and Shareholders' Equity		$	4,179,179			$	4,006,108

(Dollars in Thousands Except Per Share Data)						December 31, 2021						December 31, 2020
ASSETS
Cash and Due From Banks						$	36,698					$	38,535
Interest-Bearing Deposits in Other Financial Institutions						64,905						39,954
Federal Reserve Bank Excess Reserves						176,196						163,453
Total Cash and Cash Equivalents						277,799						241,942
Securities Available-for-Sale, at Fair Value						922,400						778,679
Loans Held-for-Sale						228						25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value						—						9,835
Portfolio Loans						2,812,129						2,947,170
Allowance for Credit Losses						(95,939)						(54,074)
Portfolio Loans, net						2,716,190						2,893,096
Bank Premises and Equipment, net						75,297						85,307
Bank Premises and Equipment Held-for-Sale, net						—						2,293
Other Real Estate Owned, net						10,916						15,722
Federal Home Loan Bank Stock, at Cost						2,352						5,093
Bank Owned Life Insurance						55,378						53,997
Other Assets						73,186						67,778
Total Assets						$	4,133,746					$	4,179,179
LIABILITIES
Deposits:
Noninterest-Bearing Demand						$	747,909					$	699,229
Interest-Bearing Demand						452,644						366,201
Money Market						463,056						294,229
Savings						690,549						625,482
Certificates of Deposit						1,344,318						1,614,770
Deposits Held for Assumption in Connection with Sale of Bank Branches						—						84,717
Total Deposits						3,698,476						3,684,628
Federal Home Loan Bank Borrowings						7,000						35,000
Other Liabilities						20,674						19,377
Total Liabilities						3,726,150						3,739,005
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1.00 Per Share, Authorized 100,000,000 Shares;
26,430,919 Outstanding at December 31, 2021 and 26,385,041 at December 31, 2020						26,431						26,385
Additional Paid-in-Capital						143,988						143,457
Retained Earnings						235,475						254,611
Accumulated Other Comprehensive Income						1,702						15,721
Total Shareholders' Equity						407,596						440,174
Total Liabilities and Shareholders' Equity						$	4,133,746					$	4,179,179

See accompanying notes to audited consolidated financial statements.

85

Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF INCOME (LOSS) INCOME

		Years Ended December 31,
(Dollars in Thousands except Per Share Data)		2020				2019				2018
INTEREST INCOME
Loans, including fees
Taxable		$	117,226			$	126,939			$	119,563
Non-Taxable			7,694				9,603				10,107
Investment Securities
Taxable			14,263				17,826				15,421
Non-Taxable			1,238				1,858				4,246
FRB Excess Reserves			224				1,484				1,589
Interest on Bank Deposits			78				1,266				1,093
Dividend Income			218				144				-
Total Interest Income			140,941				159,120				152,019
Interest Expense
Interest Expense on Deposits			35,391				46,656				38,094
Interest Expense on Federal Funds Purchased			1				-				20
Interest on Other Borrowings			434				117				-
Total Interest Expense			35,826				46,773				38,114
NET INTEREST INCOME			105,115				112,347				113,905
Provision for Loan Losses			18,006				3,404				16,870
Net Interest Income After Provision for Loan Losses			87,109				108,943				97,035
NONINTEREST INCOME
Gain on Sales of Securities, net			6,882				2,205				1,271
Service Charges, Commissions and Fees			4,668				4,962				4,081
Debit Card Interchange Fees			5,857				5,160				4,750
Insurance Commissions			1,728				1,225				1,855
Bank Owned Life Insurance Income			1,400				1,436				1,161
Other Real Estate Owned Income			340				689				2,692
Commercial Loan Swap Fee Income			4,051				-				147
Other			1,654				1,193				1,029
Total Noninterest Income			26,580				16,870				16,986
NONINTEREST EXPENSE
Salaries and Employee Benefits			52,390				52,879				49,958
Occupancy Expense, net			13,369				11,785				10,312
FDIC Insurance Expense			2,313				1,270				2,985
Other Taxes			3,151				2,847				2,571
Advertising Expense			1,633				1,445				884
Telephone Expense			2,303				2,202				2,466
Professional and Legal Fees			5,006				4,507				5,288
Data Processing			2,648				2,267				1,505
Losses on Sales and Write-downs of Other Real Estate Owned, net			1,435				4,732				8,201
Losses on Sales and Write-downs of Bank Premises, net			99				188				186
Debit Card Expense			2,565				2,753				2,785
Tax Credit Amortization			1,088				2,265				4,060
Unfunded Loan Commitment Expense			(252	)			121				127
Other Real Estate Owned Expense			657				525				2,216
Goodwill Impairment Expense			62,192				-				-
Other			8,178				8,243				6,169
Total Noninterest Expense			158,775				98,029				99,713
Income (Loss) Before Income Taxes			(45,086	)			27,784				14,308
Income Tax Provision			772				1,209				2,403
Net (Loss) Income		$	(45,858	)		$	26,575			$	11,905
(Loss) Earnings per Common Share
Basic (Loss) Earnings per Common Share		$	(1.74	)		$	1.01			$	0.45
Diluted (Loss) Earnings per Common Share		$	(1.74	)		$	1.01			$	0.45
Average Shares Outstanding-Basic			26,379,774				26,323,899				26,259,223
Average Shares Outstanding-Diluted			26,379,774				26,339,085				26,259,234

See accompanying notes to audited consolidated financial statements.

86

						Years Ended December 31,
(Dollars in Thousands except, Per Share Data)						2021						2020						2019
INTEREST INCOME
Loans, including fees
Taxable						$	115,448					$	117,226					$	126,939
Non-Taxable						4,733						7,694						9,603
Investment Securities
Taxable						12,442						14,263						17,826
Non-Taxable						882						1,238						1,858
FRB Excess Reserves						169						224						1,484
Interest on Bank Deposits						102						78						1,266
Dividend Income						121						218						144
Total Interest Income						133,897						140,941						159,120
Interest Expense
Interest Expense on Deposits						22,246						35,391						46,656
Interest Expense on Federal Funds Purchased						—						1						—
Interest on Other Borrowings						468						434						117
Total Interest Expense						22,714						35,826						46,773
NET INTEREST INCOME						111,183						105,115						112,347
Provision for Credit Losses						3,350						18,006						3,404
Provision for Unfunded Commitments						(1,269)						—						—
Net Interest Income After Provision for Credit Losses						109,102						87,109						108,943
NONINTEREST INCOME
Gain on Sales of Securities, net						6,869						6,882						2,205
Service Charges, Commissions and Fees						6,662						4,668						4,962
Debit Card Interchange Fees						7,226						5,857						5,160
Insurance Commissions						1,901						1,728						1,225
Bank Owned Life Insurance Income						1,380						1,400						1,436
Other Real Estate Owned Income						90						340						689
Commercial Loan Swap Fee Income						2,416						4,051						—
Other						2,337						1,654						1,193
Total Noninterest Income						28,881						26,580						16,870
NONINTEREST EXPENSE
Salaries and Employee Benefits						54,157						52,390						52,879
Occupancy Expense, net						13,556						13,369						11,785
FDIC Insurance Expense						2,157						2,313						1,270
Other Taxes						3,129						3,151						2,847
Advertising Expense						952						1,633						1,445
Telephone Expense						2,208						2,303						2,202
Professional and Legal Fees						5,255						5,006						4,507
Data Processing						3,758						2,648						2,267
Losses on Sales and Write-downs of Other Real Estate Owned, net						3,622						1,435						4,732
Losses on Sales and Write-downs of Bank Premises, net						231						99						188
Debit Card Expense						2,777						2,565						2,753
Tax Credit Amortization						1,708						1,088						2,265
Unfunded Loan Commitment Expense						—						(252)						121
Other Real Estate Owned Expense						407						657						525
Goodwill Impairment Expense						—						62,192						—
Other						8,368						8,178						8,243
Total Noninterest Expense						102,285						158,775						98,029
Income (Loss) Before Income Taxes						35,698						(45,086)						27,784
Income Tax Provision						4,108						772						1,209
Net Income (Loss)						$	31,590					$	(45,858)					$	26,575

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				2018
Net (Loss) Income		$	(45,858	)		$	26,575			$	11,905
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Securities Available-for-Sale:
Net Unrealized Gains (Losses) Arising during the Period			26,621				15,108				(8,636	)
Reclassification Adjustment for Gains included in Net (Loss) Income			(6,882	)			(2,205	)			(1,271	)
Tax Effect			(4,145	)			(2,710	)			2,081
Net Unrealized Gains (Losses) Recognized in Other Comprehensive Income (Loss)			15,594				10,193				(7,826	)
Other Comprehensive Income (Loss):			15,594				10,193				(7,826	)
Comprehensive (Loss) Income		$	(30,264	)		$	36,768			$	4,079

Earnings (Loss) per Common Share:
Basic Earnings (Loss) per Common Share						$	1.19					$	(1.74)					$	1.01
Diluted Earnings (Loss) per Common Share						$	1.19					$	(1.74)					$	1.01
Average Shares Outstanding-Basic						26,342,729						26,379,774						26,258,576
Average Shares Outstanding-Diluted						26,342,729						26,379,774						26,258,576

See accompanying notes to audited consolidated financial statements.

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Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

		Years Ended December 31,
(Dollars in Thousands)		Common Stock				Additional Paid-in-Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholder's Equity
Balance January 1, 2018		$	26,258			$	142,178			$	265,930			$	(2,240	)		$	432,126
Net Income			-				-				11,905				-				11,905
Other Comprehensive Loss, Net of Tax			-				-				-				(7,826	)			(7,826	)
Issuance of Restricted Stock (12,413 shares)			12				(12	)			-				-				-
Recognition of Restricted Stock Compensation Expense			-				9				-				-				9
Balance December 31, 2018		$	26,270			$	142,175			$	277,835			$	(10,066	)		$	436,214
Cumulative Effect of Adopting New Lease Standard											(252	)							(252	)
Balance December 31, 2018 adjusted for Cumulative Effect		$	26,270			$	142,175			$	277,583			$	(10,066	)		$	435,962
Net Income			-				-				26,575				-				26,575
Other Comprehensive Income, Net of Tax			-				-				-				10,193				10,193
Issuance of Restricted Stock (64,458 shares)			64				(64	)			-				-				-
Recognition of Restricted Stock Compensation Expense			-				381				-				-				381
Balance December 31, 2019		$	26,334			$	142,492			$	304,158			$	127			$	473,111
Net Loss			-				-				(45,858	)			-				(45,858	)
Other Comprehensive Income, Net of Tax			-				-				-				15,594				15,594
Dividends Declared ($0.14 per share)			-				-				(3,689	)			-				(3,689	)
Forfeiture of Restricted Stock (4,344 shares)			(4	)			4				-				-				-
Recognition of Restricted Stock Compensation Expense			-				1,016				-				-				1,016
Issuance of Restricted Stock (55,156 shares)			55				(55	)			-				-				-
Balance December 31, 2020		$	26,385			$	143,457			$	254,611			$	15,721			$	440,174

COMPREHENSIVE INCOME (LOSS)

						Years Ended December 31,
(Dollars in Thousands)						2021						2020						2019
Net Income (Loss)						$	31,590					$	(45,858)					$	26,575
Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period						(10,877)						26,621						15,108
Reclassification Adjustment for Gains included in Net Income (Loss)						(6,869)						(6,882)						(2,205)
Tax Effect						3,727						(4,145)						(2,710)
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income						(14,019)						15,594						10,193
Other Comprehensive (Loss) Income:						(14,019)						15,594						10,193
Comprehensive Income (Loss)						$	17,571					$	(30,264)					$	36,768

See accompanying notes to audited consolidated financial statements.

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Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				2018
OPERATING ACTIVITIES
Net (Loss) Income		$	(45,858	)		$	26,575			$	11,905
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities
Provision for Loan Losses			18,006				3,404				16,870
Goodwill Impairment			62,192				-				-
Origination of Loans Held-for-Sale			(800,053	)			(329,932	)			(29,307	)
Proceeds From Loans Held-for-Sale			794,330				312,777				27,265
Depreciation/Amortization of Bank Premises and Equipment			6,142				5,335				3,682
(Benefit) Provision for Deferred Taxes			(1,627	)			(76	)			4,850
Net Amortization of Securities			3,441				3,953				4,704
Tax Credit Amortization			1,088				2,265				4,060
Gains on Sales of Securities, net			(6,882	)			(2,205	)			(1,271	)
Write-downs of Other Real Estate Owned			1,483				4,457				8,714
(Gains) Losses on Sales of Other Real Estate Owned, Net			(48	)			275				(513	)
Losses on Sales and Write-downs of Bank Premises			99				188				186
Increase in the Value of Life Insurance Contracts			(1,400	)			(1,436	)			(1,161	)
Recognition of Restricted Stock Compensation Expense			1,016				381				9
(Increase) Decrease in Other Assets			(22,591	)			10,094				(2,244	)
(Decrease) Increase in Other Liabilities			(1,634	)			2,231				1,653
Net Cash Provided By Operating Activities			7,704				38,286				49,402
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales			188,169				390,548				133,120
Proceeds from Maturities, Redemptions, and Pay-downs			78,852				198,154				219,223
Purchases			(277,644	)			(534,136	)			(201,240	)
Purchase of Bank Premises and Equipment, Net			(10,120	)			(8,453	)			(14,613	)
Proceeds from Sales of Bank Premises and Equipment, net			-				1,135				-
Purchase of Federal Home Loan Bank Stock			(1,062	)			(4,113	)			-
Redemption of Federal Home Loan Bank Stock			82				-				-
Loan Originations and Payments, net			(75,688	)			(185,117	)			(59,655	)
Purchases of Bank Owned Life Insurance			-				-				(50,000	)
Other Real Estate Owned Improvements			(19	)			-				(1,272	)
Proceeds from Sales and Payments of Other Real Estate Owned			4,162				12,621				28,679
Net Cash (Used In) Provided By Investing Activities			(93,268	)			(129,361	)			54,242
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts			469,507				50,459				(121,986	)
(Decrease) Increase in Certificates of Deposits			(289,124	)			(137,395	)			43,552
Proceeds from Federal Home Loan Bank Borrowings			25,000				10,000				-
Cash Dividends Paid			(3,689	)			-				-
Net Cash Provided By (Used In) Financing Activities			201,694				(76,936	)			(78,434	)
Net Increase (Decrease) in Cash and Cash Equivalents			116,130				(168,011	)			25,210
Cash and Cash Equivalents at Beginning of Period			125,812				293,823				268,613
Cash and Cash Equivalents at End of Period		$	241,942			$	125,812			$	293,823

CHANGES IN SHAREHOLDERS’ EQUITY

						Years Ended December 31,
(Dollars in Thousands)						Common Stock						Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Shareholder's Equity
Balance January 1, 2019						$	26,270					$	142,175					$	277,583					$	(10,066)					$	435,962
Net Income						—						—						26,575						—						26,575
Other Comprehensive Income, Net of Tax						—						—						—						10,193						10,193
Issuance of Restricted Stock (64,458 shares)						64						(64)			)			—						—						—
Recognition of Restricted Stock Compensation Expense						—						381						—						—						381
Balance December 31, 2019						$	26,334					$	142,492					$	304,158					$	127					$	473,111
Net Loss						—						—						(45,858)						—						(45,858)
Other Comprehensive Income, Net of Tax						—						—						—						15,594						15,594
Dividends Declared ($0.14 per share)						—						—						(3,689)			)			—						(3,689)
Forfeiture of Restricted Stock (4,344 shares)						(4)			)			4						—						—						—
Issuance of Restricted Stock (55,156 shares)						55						(55)			)			—						—						—
Recognition of Restricted Stock Compensation Expense						—						1,016						—						—						1,016
Balance December 31, 2020						$	26,385					$	143,457					$	254,611					$	15,721					$	440,174
Net Income						—						—						31,590			)			—						31,590
Other Comprehensive Loss, Net of Tax						—						—						—						(14,019)						(14,019)
Cumulative Effect For Adoption of Credit Losses						—						—						(50,726)			)			—						(50,726)
Repurchase of Common Stock (30,407 shares)						(30)						(433)						—						—						(463)
Forfeiture of Restricted Stock (6,205 shares)						(6)			)			6						—						—						—
Issuance of Restricted Stock (82,490 shares)						82						(82)						—						—						—
Recognition of Restricted Stock Compensation Expense						—						1,040						—						—						1,040
Balance December 31, 2021						$	26,431					$	143,988					$	235,475					$	1,702					$	407,596

See accompanying notes to audited consolidated financial statements.

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Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

						Years Ended December 31,
(Dollars in Thousands)						2021						2020						2019
OPERATING ACTIVITIES
Net Income (Loss)						$	31,590					$	(45,858)					$	26,575
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments						2,081						18,006						3,404
Goodwill Impairment						—						62,192						—
Origination of Loans Held-for-Sale						(480,372)						(800,053)						(329,932)
Proceeds From Loans Held-for-Sale						505,946						794,592						312,891
Depreciation/Amortization of Bank Premises and Equipment						6,229						6,142						5,335
Provision (Benefit) for Deferred Taxes						3,114						(1,627)						(76)
Net Amortization of Securities						4,798						3,441						3,953
Tax Credit Amortization						1,708						1,088						2,265
Gains on Sales of Mortgage Loans Held-for-Sale						(365)						(262)						(114)
Gains on Sales of Securities, net						(6,869)						(6,882)						(2,205)
Write-downs of Other Real Estate Owned						3,472						1,483						4,457
Losses (Gains) on Sales of Other Real Estate Owned, Net						150						(48)						275
Losses on Sales and Write-downs of Bank Premises						231						99						188
Premiums on Branch Sales						(506)						—						—
Increase in the Value of Life Insurance Contracts						(1,380)						(1,400)						(1,436)
Recognition of Restricted Stock Compensation Expense						1,040						1,016						381
Decrease (Increase) in Other Assets						9,346						(22,591)						10,094
(Decrease) Increase in Other Liabilities						(2,675)						(1,634)						2,231
Net Cash Provided By Operating Activities						77,538						7,704						38,286
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales						197,056						188,169						390,548
Proceeds from Maturities, Redemptions, and Pay-downs						110,196						78,852						198,154
Purchases						(466,648)						(277,644)						(534,136)
Purchase of Bank Premises and Equipment, Net						(8,484)						(10,120)						(8,453)
Proceeds from Sales of Bank Premises and Equipment, net						—						—						1,135
Net Cash Paid in Branch Sales						(73,923)						—						—
Proceeds from Sale of Portfolio Loans						52,320						—						—
Redemption (Purchase) of Federal Home Loan Bank Stock						2,741						(980)						(4,113)
Loan Originations and Payments, net						67,131						(75,688)						(185,117)
Other Real Estate Owned Improvements						—						(19)						—
Proceeds from Sales and Payments of Other Real Estate Owned						13,256						4,162						12,621
Net Cash Used In Investing Activities						(106,355)						(93,268)						(129,361)
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts						369,730						469,507						50,459
Decrease in Certificates of Deposits						(276,899)						(289,124)						(137,395)
(Repayments) Proceeds from Federal Home Loan Bank Borrowings						(28,000)						25,000						10,000
Stock Repurchase Plan Settlements						(157)						—						—
Cash Dividends Paid						—						(3,689)						—
Net Cash Provided By (Used In) Financing Activities						64,674						201,694						(76,936)
Net Increase (Decrease) in Cash and Cash Equivalents						35,857						116,130						(168,011)
Cash and Cash Equivalents at Beginning of Period						241,942						125,812						293,823
Cash and Cash Equivalents at End of Period						$	277,799					$	241,942					$	125,812

See accompanying notes to audited Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

		Years Ended December 31,
(Dollars in Thousands)		2020				2019				2018
SUPPLEMENTARY DATA
Cash Interest Paid		$	36,696			$	46,170			$	37,918
Cash Paid for Income Taxes			416				220				175
Transfer from Loans to Other Real Estate Owned			755				302				28,212
Loans Provided for Sales of Other Real Estate Owned			-				-				893
Transfer from Fixed Assets to Other Real Estate Owned			2,221				1,694				2,177
Security (Purchases) Sales Settled in Subsequent Period			(2,259	)			(3,270	)			-
Right-of-use Asset Recorded in Exchange for Lease Liabilities			621				1,659				-
Loans Held-for-Sale in Connection with Sale of Bank Branches			9,835				-				-
Bank Premises and Equipment Held-for-Sale			2,293				-				-
Deposits Held for Assumption in Connection with Sale of Bank Branches			84,717				-				-

						Years Ended December 31,
(Dollars in Thousands)						2021						2020						2019
SUPPLEMENTARY DATA
Cash Interest Paid						$	23,467					$	36,696					$	46,170
Cash Paid for Income Taxes						2,720						416						220
Transfer from Loans to Other Real Estate Owned						59						755						302
Transfer from Fixed Assets to Other Real Estate Owned						12,013						2,221						1,694
Security Purchases Settled in Subsequent Period						—						(2,259)						(3,270)
Right-of-use Asset Recorded in Exchange for Lease Liabilities						2,027						621						1,659
Loans Held-for-Sale in Connection with Sale of Bank Branches						—						9,835						—
Bank Premises and Equipment Held-for-Sale						—						2,293						—
Deposits Held for Assumption in Connection with Sale of Bank Branches						—						84,717						—
Stock Repurchases Settled in Subsequent Period						(306)						—						—

See accompanying notes to audited consolidated financial statements.

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Consolidated Financial Statements.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: Carter Bankshares, Inc. (the “Company”) is a holding company headquartered in Martinsville, Virginia. The Company is the parent company of its wholly owned subsidiary of Carter Bank & Trust (the “Bank”). The Bank is an insured, Virginia state-chartered commercial bank which operates branches in Virginia and North Carolina. The Bank is regulated by the FDIC,Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Bank (“FRB”) and State Bureau of Financial Institutions.Institutions of the Virginia State Corporation Commission. The Bank has one1 wholly owned subsidiary, CB&T Investment Company (the “Investment Company”), which was chartered effective April 1, 2019. Formerly, the Bank owned Mortgage Company of Virginia who owned 100% of Bank Services of Virginia and Bank Services Insurance, Inc. Mortgage Company of Virginia was terminated and dissolved on December 11, 2018. Bank Services of Virginia was terminated and dissolved on July 10, 2018. Bank Services Insurance, Inc. was sold in January of 2018.

.

The Company was incorporated on October 7, 2020, by and at the direction of the board of directors of the Bank Board, for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate reorganization transaction (the “Reorganization”). OnThe Reorganization was completed on November 9,20, 2020 the Bank entered intopursuant to an Agreement and Plan of Reorganization (the “Reorganization Agreement”) withamong the Bank, the Company and CBT Merger Sub, Inc.(, and the “Merger Sub”),Bank survived the Reorganization as a wholly-owned subsidiary of the Company, pursuant to whichCompany. In the Reorganization, would be effected. Effective at 7:00 p.m. on November 20, 2020 (the “Effective Time”), under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act (the “VSCA”), the Bank merged with the Merger Sub and survived such merger as a wholly-owned subsidiary of the Company. Prior to the Effective Time, the Company had no material assets and had not conducted any business or operations except for activities related to the Company’s organization and the Reorganization.

At the Effective Time, under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1 of the VSCA, each of the outstanding shares of the Bank’s common stock par value $1.00 per share, formerly held by its shareholders waswere converted into and exchanged for one1 newly issued share of the Company’s common stock, par value $1.00 per share,stock.

Our market coverage is primarily in Virginia and the Bank became the Company’s wholly-owned subsidiary.North Carolina, including Fredericksburg, Charlottesville, Lynchburg, Roanoke, Christiansburg, Martinsville, Danville, Greensboro, Fayetteville, and Mooresville. The sharesCompany provides a full range of the Company’s common stock issued to the Bank’s shareholders were issued without registration under the Securities Act of 1933, as amended (the “Act”), pursuant to the exemption from registration provided by Section 3(a)(12) of the Act. Pursuant to Section 13.1-719.1 of the VSCA, the Reorganization did not require approval of the Bank’s shareholders.

In the Reorganization, each shareholder of the Bank received securities of the same class, having substantially the same designations, rights, powers, preferences, qualifications, limitationsfinancial services with retail, and restrictions, as those that the shareholder held in the Bank,commercial banking products and the Company’s current shareholders own the same percentages of its common stock as they previously owned of the Bank’s common stock.

Prior to the Effective Time, the Bank’s common stock was registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof, it filed annual and quarterly reports, proxy statements and other information with the Federal Deposit Insurance Corporation (“FDIC”). Upon consummation of the Reorganization, the Company’s common stock was deemed to be registered under Section 12(b) of the Exchange Act, pursuant to Rule 12g-3(a) promulgated thereunder, and the Company now files annual reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”).

insurance.

Accounting Policies: Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results could differ from those estimates. Our significant accounting policies are described below.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Principles of Consolidation:Consolidation: The Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. and its wholly owned subsidiary. The Investment Company is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation.

Reclassification:

Reclassification: Amounts in prior years' period financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity.

Use of Estimates: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 statementsConsolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19-related changes, and changes in the financial condition of borrowers.

COVID-19 has adversely impacted various industries in which our customers operate and could still impair their ability to fulfill their financial obligations. The Company’s business is dependent upon the willingness and ability of its associates and customers to conduct banking and other financial transactions. While we believe conditions have improved as of December 31, 2021, if there is a resurgence in the virus, the Company could experience a materialfurther adverse effecteffects on its business, as a resultfinancial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread. It is at least reasonably possible that information which was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change could be material to the financial statements. The extent to which the COVID-19 pandemic will impact our estimateshave on the Company's future operations, the Company continues to communicate with its associates and assumptions is highly uncertaincustomers to understand their challenges, which allows us to respond to their needs and we are unable to make an estimate, at this time.

issues as they arise.

Operating Segments: While theThe chief decision-makers of our operating segments monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one1 as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one1 reportable operating segment.

Cash and Cash Equivalents:Equivalents: The Company considers all cash on hand, amounts due from banks, federal funds sold, and FRB excess reserves as cash equivalents for the purposes of the Consolidated Statements of Cash Flows with all items having

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

original maturities fewer than 90 days. Federal funds are customarily sold for one-day periods. The FRB pays the target fed funds rate on the FRB excess reserves.

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

Loan Commitments and Related Financial Instruments:Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). income. Other comprehensive (loss) income (loss) includes unrealized (losses) gains and losses on securities available-for-sale, net of tax.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Securities:Securities: The Company classifies securities into either the held-to-maturity or available-for-sale categories at the time of purchase. All securities were classified as available-for-sale at December 31, 20202021 and December 31, 2019.2020. Securities classified as available-for-sale include securities, which can be sold for liquidity, investment management, or similar reasons even if there is not a present intention of such a sale. Available-for-sale securities are reported at fair value, with unrealized (losses) gains, or lossesnet of tax included in other comprehensive income (loss), net of tax.

income.

Premium amortization is deducted from, and discount accretion is added to, interest income on securities using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recognized upon the sale of specific identified securities on the completed trade date.

Other-Than-Temporary Impairments of Securities:Securities: Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amountCredit-related impairment is recognized as an ACL on the balance sheet with a corresponding adjustment to provision for credit losses in the Consolidated Statements of Net Income. Both the total OTTI related to the credit loss is determined based upon the difference of the present value of cash flows expected be collectedallowance and the amortized cost basis and is recognized in earnings. The amount of the total OTTI relatedadjustment to other factors is recognized in other comprehensivenet income net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

can be reversed if conditions change.

Loans Held-for-Sale: Loans held-for-sale arise primarily from two2 sources.  First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. These loans are typically held about two weeks.  Second, we originate certainand close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loan types (30-year fixed rate and government) through our internal mortgage department that are targeted for sale intoloans from both sources until funded by the secondary market.investor, typically a two-week period. Gains and losses on sales of mortgage loans held-for-sale are determined using the specific identification method and are included in other noninterest income in the Consolidated Statements of Net Income (Loss) Income.

.

From time to time, certain loans are transferred from the loan portfolio to loans held-for-sale, which are carried at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the allowance for loancredit losses or ALL.(“ACL”). Subsequent declines in fair value are recognized as a charge to noninterest income. The remaining unamortized fees and costs

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of loans held-for-sale are included in other noninterest income in the Consolidated Statements of Net Income (Loss) Income.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Loans and Allowance for Loan Losses:Credit Losses: Loans that management have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, discounts, and an allowance for loancredit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. A performing loan may be considered impaired. The allowance for loan lossesACL related to loans identified as impaired is primarily based on the excess of the loan's current outstanding principal balance compared to the estimated fair value of the related collateral, less cost to sell. For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance exceeds the current estimate of the future cash flows on the loan discounted at the loan's original effective interest rate.

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days based on contractual terms, unless such loans are well-secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual, if repayment in full of principal and/or interest is unlikely. AllAny interest that is accrued, but not received for loans placed on non-accrual statuscollected is reversed against interest income.

income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan.

While a loan is classified as nonaccrual and the probability of collecting the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. Payments collected on a nonaccrual loan are first applied to principal, secondly to any existing charge-offs, thirdly to interest, and lastly to any outstanding fees owed to the Company.

Any interest that is accrued but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

Allowance for Credit Losses

On January 1, 2021, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (“Topic 326”), which replaced the incurred loss impairment model with an expected loss model. As part of adoption our model introduced a segmented pool of “other” loans for discrete analysis. This segmented pool included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this pool resulted in an increase in the Current Expected Credit Losses (“CECL”) and is disclosed in the Other line item in the portfolio loan segments. As a result of the CECL adoption we recorded a transition adjustment of $50.7 million to retained earnings as of January 1, 2021 for the cumulative effect of the adoption of ASU 2016-13.

Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. The CECL model was developed with subjective assumptions that is driven by the following key factors: prepayment speeds, timing of prepayments, loss given defaults as well as other factors including the discount rate based upon the cost of capital and ultimately the timing of future cash flows.

For periods prior to the adoption of the CECL standard, we recognized credit losses for loans that were collectively evaluated for impairment based on an incurred loss approach, which limited our measurement of credit losses to credit events that were estimated to have already occurred. The allowance for loancredit losses isunder the incurred loss model was a valuation allowance for probable incurred losses inherent in the loan portfolio as determinedportfolio. Management made the determination by management taking into consideration historical loan loss experience, diversification of the loan portfolio, amounts of secured and unsecured loans, banking industry

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

standards and averages, and general economic conditions. LoanCredit losses arewere charged against the allowance when management believes the un-collectability of a loan balance is confirmed.was confirmed uncollectible. Subsequent recoveries, if any, arewere credited to the allowance. Ultimate losses may varyvaried from current estimates. TheseThe estimates arewere reviewed periodically and as adjustments become necessary, they arewere reported in earnings in the periods in which they become reasonably estimable.

During

For more details on the impact and adoption of Topic 326 see later in this Note 1, Recent Accounting Pronouncements and Developments, and Note 6 - Allowance for Credit Losses, of this Annual Report on Form 10-K.

Allowance for Credit Losses Policy

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

The Company’s methodology for estimating the ACL includes:

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

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly evaluationgenerally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.

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

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

“Other” Segmented Pool

CECL provides for the flexibility to model loans differently compared to the prior model. With the adoption of CECL management elected to evaluate certain loans based on shared but unique risk attributes. The loans included in the Other segment of the loan portfoliomodel were underwritten and approved based on standards that are also considered. These characteristics are detailed below:

·

Commercial loans not secured by real estate carry risks associated with the successful operation of a business, and the repayments of these loans depend on the profitability and cash flows of the business. Additional risk relates to the value of collateral upon which depreciation occurs and the valuation is less precise.

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inconsistent with our current underwriting standards. The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors: prepayment speeds, timing of contractual payments, discount rate, as well as other factors. The discount rate is reflective of the inherit risk in the Other segment. A substantial change in these assumptions could cause a significant impact to the model causing volatility. Management reviews the model output for appropriateness and subjectively makes adjustments as needed. The analysis applied to this pool resulted in an allowance of $51.3 million upon adoption and is disclosed in the Other segment line item.

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·

Loans secured by commercial real estate also carry risks associated with the success of the business and the ability to generate a positive cash flow sufficient to service debts. Real estate security diminishes risks only to the extent that a market exists for the subject collateral.

·

Residential real estate loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. In instances where construction is in process, these loans carry risks that a project will not be completed as scheduled and budgeted and that the value of the collateral may, at any point be less than the principal amount of the loan. Additional risks may occur if the general contractor, who may not be a loan customer, is unable to finish the project as planned due to financial pressures unrelated to the project.

·

Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral, such as automobiles, which may depreciate more rapidly than other assets. In addition, these loans may be unsecured. Consumer loans are more likely than real estate loans to be immediately affected in an adverse manner by job loss, divorce, illness, or personal bankruptcy. Consumer loans are further segmented into automobile and recreational vehicle loans and other consumer loans.

·

Loans to tax-exempt state and political subdivisions carry risks associated with changes in budget constraints or revenue bases of the particular municipality or entity. These loans are dependent on the cash flow from the tax-exempt entity and often times have collateral upon which depreciation occurs and valuation is less than precise.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans equal to or greater than $1.0 million are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

The general component covers loans that are collectively evaluated for impairment. Large groups of homogeneous loans are collectively evaluated for impairment, and accordingly, they are not included in the separately identified impairment disclosures. The general allowance component also includes loans that are not individually identified for impairment evaluation, such as those loans that fall below the individual evaluation threshold. The general component is based on historical loss experience adjusted for current factors. These factors may include consideration for the following: levels of delinquency and delinquency trends; migration of loans to the classification of special mention, substandard or doubtful; trends in volume and terms of loans; effects of changes in underwriting standards; changes in lending policies, procedures, and practices; national and local economic trends and conditions; industry conditions, and effects of credit concentrations.

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

•The status of a bankruptcy proceeding

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

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

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

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

Refer to the “Credit Quality” and the “Allowance for Credit Losses” sections in the MD&A and Note 6, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for more details.

Troubled Debt Restructurings (“TDRs”): In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”).TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type. These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for impaired loans.

On March 22, 2020, a regulatory interagency statement was issued by our banking regulators that encouraged financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) further provided that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The provisions of the CARES actAct dealing with temporary relief from TDR was extended pursuant to the Consolidated Appropriations Act, of 2021 (the “CAA”), which was signed into law on December 27, 2020. The amendment extended the “applicable”applicable period to the earlier of January 1, 2022 or 60 days after the date on which the national emergency concerning the COVID-19 pandemic terminates.

Concentration of Credit Risk: The majority of the Company's loans, commitments and lines of credit have been granted to customers in the Company's market area. The concentrations of credit by loan classification are set forth in Note 5.

Advertising Costs:Costs: We expense all marketing-related costs, including advertising costs, as incurred. Advertising expense was $1.0 million, $1.6 million, and $1.4 million and $884 thousand for the years ended 2021, 2020, and 2019, and 2018, respectively.

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain executive officers and employees.associates. We receive the cash surrender value of each policy upon its termination or benefits are payable to us upon the death of the insured. Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of Income (Loss) Income.

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Bank Premises and Equipment:Equipment: Bank premises and equipment acquired are stated at cost, less accumulated depreciation. Depreciation is charged to operating expenses over the estimated useful life of the assets by the straight-line method. Land is carried at cost. Costs of maintenance or repairs are charged to expense as incurred and improvements are capitalized. Upon retirement or disposal of an asset, the asset and related allowance account are eliminated. Any gain or loss on such transactions is included in current operations. Depreciation has beenexpense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) Income totaling $6.2 million in 2021, $6.1 million in 2020, and $5.3 million in 2019, and $3.7 million in 2018.2019. The estimated useful life for bank premises ranges from 5 to 40 years and equipment depreciates over a 3 to 10-year period.

Land and Land Improvements						Non-depreciating assets
Buildings						25 years
Furniture and Fixtures						5 years
Computer Equipment and Software						5 years or term of license
Other Equipment						5 years
Vehicles						5 years
Leasehold Improvements						Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise

Federal Home Loan Bank Stock (“FHLB”): Stock: The Company is a member of the FHLB system.FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors such as asset base. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as dividend income onin the Consolidated Statements of Income (Loss) Income.

.

Earnings (Loss) per Share: Basic earnings (loss) per share representis calculated by dividing net income (loss) available to common shareholders divided by the weighted-averageweighted average number of common shares outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participated securities for this calculation. Diluted earnings per share reflect additionalreflects the potential dilution that could occur if securities or other contracts to issue common shares that would have been outstanding if dilutivestock were exercised or converted into common shares had been issued, as well as any adjustment to income resulting from the assumed issuance. Non-vested shares of restricted stock are includedor resulted in the computationissuance of basic and dilutedcommon stock that then shared in the earnings (loss) per share becauseof the holder has voting rights and shares in non-forfeitable dividends during the vesting period.

entity.

Other Real Estate Owned (“OREO”): Real estate properties acquired through or in lieu of loan foreclosure isare initially recorded at fair value less estimated selling cost at the date of foreclosure, which establishes a new cost basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses.ACL. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. In addition, any retail branch locations closed for branch operations and marketed for sale are also moved to OREO from bank premises and equipment. This real estate is initially valued based on recent comparative market values received from a real estate broker and any necessary write-downs are charged to operations. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its carrying value or fair value less cost to sell. OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Operating costs after acquisition are expensed.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating losses, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheetsConsolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements of Income (Loss) Income.

.

The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved new market and historic rehabilitation projects. These investments are included in other assets on the Consolidated Balance Sheets. These partnership investments generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. The investments are accounted for under the equity method, with the expense included within noninterest expense on the Consolidated Statements of Income (Loss) Income.. All of the Company's tax credit investments are evaluated for impairment at the end of each reporting period.

Transfer of Financial Assets:Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the transferee to return specific assets.

Retirement Benefits:Benefits: The Company has established an employee benefit plan as described in Note 14. The Company does not provide any other post-retirement benefits.

Goodwill: Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Long-lived assets are those that provide the Bank with a future economic benefit beyond the current year or operating period. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset is greater than the fair value of the asset. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell.

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”)ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which simplifiessimplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.

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The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These triggering events indicated that goodwill related to our single reporting unit may be impaired and we expected to evaluate goodwill for impairment quarterly given the current environment.

During the first quarter of 2020, with the recent volatility in the financial services industry and in our economic environment we determined it prudent to have a full goodwill impairment analysis performed as of March 31, 2020 updated as of June 30, 2020. We performed the goodwill impairment test by determining the fair value of the reporting unit. We engaged a third-party financial advisor to prepare the market and income approaches in order to determine fair value. Their analysis supported the conclusion that the fair value of our common stock at June 30, 2020 was greater than both stated and tangible common book value and therefore no impairment to the goodwill was recorded at June 30, 2020.

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As we monitored our performance due to the COVID-19 pandemic and continued to experience declines in our stock price in relation to other bank indices and the length of time that the market value of the reporting unit had been below its book value, we completed another interim quantitative goodwill impairment analysis as of September 30, 2020. Various valuation methodologies were considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which is then compared to its carrying value, including goodwill. Upon completing the quantitative impairment analysis as of September 30, 2020, the analysis estimated fair value of the reporting unit to be less than the carrying value. Therefore, we recorded a goodwill impairment of $62.2 million, which represented the entire amount of goodwill allocated to the reporting unit. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

Allowance for Unfunded Commitments: In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The allowance for unfunded commitmentsACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities inon the Company’s Consolidated Balance Sheets Our allowance for unfunded commitments is determined using a methodology similar to that used to determine the ALL. Amounts are added to the allowance for unfunded commitments through a charge to current earnings in noninterest expense.

Sheets.

Stock-Based Compensation:Compensation: Compensation cost is recognized for restricted stock awards issued to employeesassociates and non-employeenon-associate directors, based on the fair value of these awards at the date of the grant. The market price of the Company’s common stock at the date of the grant is the fair value of the award.

Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company recognizes forfeitures as they occur.

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Loss Contingencies:Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements. Legal costs related to loss contingencies are expensed as incurred.

Fair Value Measurements

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

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

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

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

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

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

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

Recurring Basis

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

Derivative Financial Instruments and Hedging Activities:The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into 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 duesdue to changes in interest rates.

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Nonrecurring Basis

Impaired

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

Fair value for collateral dependentindividually 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.

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Subsequent to the initial impairment date, existing impairedindividually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For collateral dependentindividually evaluated loans, the first stage of our impairment analysis involves management’s 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 either internally evaluate fair value or order a new appraisal. In circumstances where the Company feels confident in its ability to collect and analyze salient information on the subject collateral and its surrounding real estate market, an in house valuation shall be utilized.  Factors which should be considered in an in house valuation are timing of sale, location and neighborhood, size of the structure and land component, age of any improvements, and other attributes as warranted by the Company.  This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property is located. When the Company feels it cannot collect and analyze salient information on the subject collateral or the collateral’s real estate market, a full appraisal will be utilized.

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

OREO:OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At December 31, 2020 our2021 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

Financial Instruments

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

Cash

Recent Accounting Pronouncements and Cash Equivalents

The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.

Loans

The fair value of variable rate performing loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk. The fair value of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of fixed rate performing loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of nonperforming loans is the carrying value less any specific reserve on the loan if it is impaired. The carrying amount of accrued interest approximates fair value.

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Bank Owned Life Insurance

Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.

Federal Home Loan Bank Stock

It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.

Deposits

The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.

Borrowings

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

Loan Commitments and Standby Letters of Credit

Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

Newly Adopted Pronouncements in 2020:2021

In August 2016,December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-15, “Statement2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of Cash Flows (Topic 230): ClassificationGAAP by clarifying and amending other existing

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

guidance. The update addresses eight specific cash flow issues with the objective of reducing the existing diversityamendments in practice. This accounting guidancethis ASU became effective on January 1, 2020.2021 and did not have any material impact on our Consolidated Financial Statements.

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

The Company elected to take advantage of Section 4014 of the CARES Act provision to temporarily delay adoption of the CECL methodology. The Company was subject to the adoption of the CECL accounting method under FASB ASU 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326). The CARES Act allowed companies to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020, which was later extended to January 1, 2022 pursuant to the CAA. The Company adopted the CECL accounting method as of January 1, 2021 as allowed under the provisions of the CARES Act. The Bank’s CECL Committee, which includes members from Credit Administration, Accounting/Finance, Risk Management and Internal Audit, has oversight by the Chief Executive Officer, Chief Financial Officer, and Chief Credit Officer. We engaged a third-party to assist us in developing our CECL model and to assist with evaluation of data and methodologies related to this standard.

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

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

The ultimate impact of adopting Topic 326, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our Consolidated Balance Sheets or Consolidatedloans and available-for-sale securities portfolio, along with other management judgments. The Company adopted Topic 326 using the modified retrospective method. Results for reporting periods beginning after January 1, 2021 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities. Accrued interest deemed uncollectible will be written off through interest income.

In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 6, Allowance for Credit Losses, for further discussion of these portfolio segments. Our new segmentation breaks out Other loans from our original loan segments: Commercial Real Estate (“CRE”), Commercial and Industrial (“C&I”), Residential Mortgages and Construction. Other loans include unique risk attributes considered inconsistent with current underwriting standards. The Company recorded a net decrease to retained earnings of $50.7 million as of January 1, 2021 for the cumulative effect of adopting Topic 326.

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

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

Accounting Statements of Comprehensive (Loss) Income.

Issued but Not Yet Adopted

In August 2018,March 2020, the FASB issued ASU 2018-13, “Fair Value MeasurementNo. 2020-04, Reference Rate Reform (Topic 820)848): Disclosure Framework— Changes toFacilitation of the Disclosure Requirements for Fair Value Measurement”. The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted averageEffects of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. We adopted this ASUReference Rate Reform on January 1, 2020.Financial Reporting. The amendments in this ASU did not materially impact our Consolidated Balance Sheetsprovide optional guidance for a limited period of time to ease the potential burden in accounting for or Consolidated Statementsrecognizing the effects of Comprehensive (Loss) Income.

In January 2017,reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The main objective of ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step twoanticipated transition away from the goodwill impairment test.London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022.

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

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

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Table of this ASU on January 1, 2020. During the third quarter of 2020, we recorded an impairment charge of $62.2 million as the estimated fair value of the reporting unit was less than the carrying value.

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As of December 31, 2021, approximately 16.7% of our loan portfolio consists of loans whose variable rate index is LIBOR. We ceased originating new LIBOR based variable rate loans as of December 31, 2021 per the ARRC’s guidance.

NOTE 2 – EARNINGS (LOSS) PER SHARE

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

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

		Years ended December 31,
(Dollars in Thousands, except share and per share data)		2020				2019				2018
Numerator for Earnings (Loss) per Share- Basic:
Net (Loss) Income Allocated to Common Shareholders		$	(45,858	)		$	26,575			$	11,905
Numerator for Earnings (Loss) per Share- Diluted:
Net (Loss) Income Allocated to Common Shareholders		$	(45,858	)		$	26,575			$	11,905
Denominators:
Weighted Average Shares Outstanding- Basic			26,379,774				26,323,899				26,259,223
Add: Average Participating Shares Outstanding			-				15,186				11
Denominator for Two-Class Method-Diluted			26,379,774				26,339,085				26,259,234
(Loss) Earnings per Common Share-Basic		$	(1.74	)		$	1.01			$	0.45
(Loss) Earnings per Common Share-Diluted		$	(1.74	)		$	1.01			$	0.45

						Years ended December 31,
(Dollars in Thousands, except share and per share data)						2021						2020						2019
Numerator for Earnings (Loss) per Share - Basic and Diluted
Net Income (Loss)						$	31,590					$	(45,858)					$	26,575
Less: Income allocated to participating shares						127						—						66
Net Income (Loss) Allocated to Common Shareholders - Basic & Diluted						$	31,463					$	(45,858)					$	26,509
Denominators:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities						26,449,438						26,379,774						26,323,899
Less: Average Participating Securities						106,709						—						65,323
Weighted Average Common Shares Outstanding - Basic & Diluted						$	26,342,729					$	26,379,774					$	26,258,576
Earnings (Loss) per Common Share-Basic						$	1.19					$	(1.74)					$	1.01
Earnings (Loss) per Common Share-Diluted						$	1.19					$	(1.74)					$	1.01

All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation. As a result of the net loss for the full year December 31, 2020, all average participating shares outstanding are considered anti-dilutive to loss per share. There were two shares not included in the average participating shares outstanding because they would be considered to be anti-dilutive for the year ended December 31, 2019. There were no weighted average shares considered anti-dilutive in the calculations for the year ended December 31, 2018.

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Board of Governors of the Federal Reserve System (the “FRB”)FRB imposes certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as an interest-bearing balance with the FRB. The Company had no required reserves for 2021 and averaged $3.7 million for 2020,and $44.3 million for 2020 and 2019, and $42.4 million for 2018.respectively. The average of required reserves declined during 2021 and 2020 as a result of the implementation of a new deposit management tool.

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NOTE 4 - INVESTMENT SECURITIES

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

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

		December 31, 2019
(Dollars in Thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Residential Mortgage-Backed Securities		$	51,600			$	1,136			$	(92	)		$	52,644
Commercial Mortgage-Backed Securities			18,972				147				(113	)			19,006
Asset Backed Securities			110,943				285				(1,589	)			109,639
Collateralized Mortgage Obligations			291,139				2,425				(1,340	)			292,224
Small Business Administration			106,485				347				(1,096	)			105,736
States and Political Subdivisions			148,596				1,669				(1,785	)			148,480
Corporate Notes			14,721				167				-				14,888
Total Debt Securities		$	742,456			$	6,176			$	(6,015	)		$	742,617

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

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

The Company did not have securities classified as held-to-maturity at December 31, 20202021 or December 31, 2019.

2020.

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

		Years ended December 31,
(Dollars in Thousands)		2020				2019				2018
Proceeds from Sales of Securities Available-for-Sale		$	188,169			$	390,548			$	133,120
Gross Realized Gains		$	6,957			$	4,172			$	1,899
Gross Realized Losses			(75	)			(1,967	)			(628	)
Net Realized Gains		$	6,882			$	2,205			$	1,271
Tax Impact		$	1,445			$	463			$	267

						Years ended December 31,
(Dollars in Thousands)						2021						2020						2019
Proceeds from Sales of Securities Available-for-Sale						$	197,056					$	188,169					$	390,548
Gross Realized Gains						$	7,080					$	6,957					$	4,172
Gross Realized Losses						(211)						(75)						(1,967)
Net Realized Gains						$	6,869					$	6,882					$	2,205
Tax Impact						$	1,443					$	1,445					$	463

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity.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.

(Dollars in Thousands)		Amortized				Fair
December 31, 2020		Cost				Value
Due in One Year or Less		$	391			$	394
Due after One Year through Five Years			10,967				11,053
Due after Five Years through Ten Years			131,639				134,475
Due after Ten Years			220,108				230,670
Residential Mortgage-Backed Securities			44,057				44,724
Commercial Mortgage-Backed Securities			5,194				5,447
Collateralized Mortgage Obligations			212,751				218,359
Asset Backed Securities			133,672				133,557
Total Securities		$	758,779			$	778,679

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						December 31, 2021
(Dollars in Thousands)						Amortized Cost						Fair Value
Due in One Year or Less						$	730					$	731
Due after One Year through Five Years						2,856						2,885
Due after Five Years through Ten Years						200,895						201,970
Due after Ten Years						229,639						233,156
Residential Mortgage-Backed Securities						112,118						110,013
Commercial Mortgage-Backed Securities						4,155						4,168
Collateralized Mortgage Obligations						287,734						287,614
Asset Backed Securities						82,119						81,863
Total Securities						$	920,246					$	922,400

At December 31, 20202021 and December 31, 2019,2020, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $178.6 million at December 31, 2021 and $146.0 million at December 31, 2020 and $150.6 million at December 31, 2019.

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Available-for-sale securities with unrealized losses at December 31, 20202021 and 2019,2020, aggregated by investment category and length of time thatthe individual securities have been in a continuous unrealized loss position, were as follows:

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

		December 31, 2019
		Less Than 12 Months												12 Months or More												Total
(Dollars in Thousands)		Number of Securities				Fair Value				Unrealized Losses				Number of Securities				Fair Value				Unrealized Losses				Number of Securities				Fair Value				Unrealized Losses
Residential Mortgage-Backed Securities			5			$	9,972			$	92				1			$	2			$	-				6			$	9,974			$	92
Commercial Mortgage-Backed Securities			3				7,713				113				-				-				-				3				7,713				113
Asset Backed Securities			22				50,530				549				16				39,153				1,040				38				89,683				1,589
Collateralized Mortgage Obligations			37				144,543				1,051				6				18,107				289				43				162,650				1,340
Small Business Administration			13				25,380				91				69				47,616				1,005				82				72,996				1,096
States and Political Subdivisions			37				70,678				1,785				-				-				-				37				70,678				1,785
Total Debt Securities			117			$	308,816			$	3,681				92			$	104,878			$	2,334				209			$	413,694			$	6,015

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

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

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

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

As of December 31, 2021 and December 31, 2020, no OTTI has been identified for any investment securities in the Company’sour portfolio. The Company doesWe do not believe any individual unrealized loss as of December 31, 20202021 represents an OTTI. At December 31, 20202021 there were 168 debt268 securities in an unrealized loss position and at December 31, 20192020 there were 209 debt168 securities in an unrealized loss position. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. The CompanyWe generally doesdo not intend to sell and it is not more likely than not that the Companywe will be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost.

NOTE 5 – LOANS AND LOANS HELD-FOR-SALE

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

		December 31,
(Dollars in Thousands)		2020				2019
Commercial
Commercial Real Estate		$	1,453,799			$	1,365,310
Commercial and Industrial			306,828				256,798
Obligations of State and Political Subdivisions			250,336				364,869
Commercial Construction			387,407				292,827
Total Commercial Loans			2,398,370				2,279,804
Consumer
Residential Mortgages			472,170				514,538
Other Consumer			57,647				73,688
Consumer Construction			18,983				16,736
Total Consumer Loans			548,800				604,962
Total Portfolio Loans		$	2,947,170			$	2,884,766

The Company attempts

						December 31,
(Dollars in Thousands)						2021						2020
Commercial
Commercial Real Estate						$	1,323,252					$	1,453,799
Commercial and Industrial						345,376						557,164
Total Commercial Loans						1,668,628						2,010,963
Consumer
Residential Mortgages						457,988						472,170
Other Consumer						44,666						57,647
Total Consumer Loans						502,654						529,817
Construction						282,947						406,390
Other(1)						357,900						—
Total Portfolio Loans						2,812,129						2,947,170
Loans Held-for-Sale						228						25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value						—						9,835
Total Loans						$	2,812,357					$	2,982,442

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

108

We also have policy limits on loan-to-cost for construction projects.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. UnsecuredCommercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage and demonstrate an ability to clear the outstanding balance on lines of credit for at least thirty consecutive days annually.leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans. If

In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the borrower is unablemethodology applied in determining the allowance under CECL. Our new segmentation breaks out Other loans from our original loan segments: CRE, C&I, Construction and Residential Mortgages. At January 1, 2021 related to complythe adoption of Topic 326, the initial break-out of other loans totaled $379.9 million consisting of loans that would otherwise have been included in the following loan segments: $140.8 million of CRE, $78.1 million of C&I, $50.8 million of Residential Mortgages and $110.2 million of Construction. This segment of loans includes unique risk attributes considered inconsistent with this requirementcurrent underwriting standards. The analysis applied to the Other loans segment, at adoption, resulted in current expected credit losses of $51.3 million.

Deferred costs and the Company is willing to renew the credit facility, the line should be secured and/or begin amortization.

Total commercial loans represented 81.4% of total portfolio loans at December 31, 2020 and 79.0% of total portfolio loans at December 31, 2019. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $1.8 billion or 76.8% of total commercial loans and 62.5% of total portfolio loans at December 31, 2020 and comprised $1.7 billion or 72.7% of total commercial loans and 57.5% of total portfolio loans at December 31, 2019. Net deferred costsfees included in the portfolio balances above were $3.0$4.5 million and $5.1$3.0 million at December 31, 20202021 and 2019,December 31, 2020, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $219$190.6 thousand and $250$219.2 thousand at December 31, 2021 and December 31, 2020, and 2019, respectively.

Mortgage loans held-for-sale were $25.4$0.2 million and $19.7$25.4 million as of December 31, 20202021 and December 31, 2019,2020, respectively. In addition to mortgage loans held-for-sale, the Company had $9.8 million in loans held-for-sale in connection with sale of Bank branches at December 31, 2020 that are expected to closeclosed in the second quarter of 2021.

Troubled Debt Restructurings

The following table summarizes the TDRs as of the dates presented:

		December 31, 2020												December 31, 2019
		Performing				Nonperforming				Total				Performing				Nonperforming				Total
(Dollars in Thousands)		TDRs				TDRs				TDRs				TDRs				TDRs				TDRs
Commercial
Commercial Real Estate		$	6,151			$	21,667			$	27,818			$	3,183			$	30,073			$	33,256
Commercial and Industrial			-				-				-				-				390				390
Obligations of State and Political Subdivisions			-				-				-				-				-				-
Commercial Construction			52,481				3,319				55,800				53,116				4,242				57,358
Total Commercial TDRs			58,632				24,986				83,618				56,299				34,705				91,004
Consumer
Residential Mortgages			50,618				-				50,618				52,966				-				52,966
Other Consumer			-				-				-				-				-				-
Consumer Construction			-				-				-				-				-				-
Total Consumer TDRs			50,618				-				50,618				52,966				-				52,966
Total TDRs		$	109,250			$	24,986			$	134,236			$	109,265			$	34,705			$	143,970

						December 31, 2021																		December 31, 2020
(Dollars in Thousands)						Performing TDRs						Nonperforming TDRs						Total TDRs						Performing TDRs						Nonperforming TDRs						Total TDRs
Commercial
Commercial Real Estate						$	2,679					$	2,742					$	5,421					$	6,151					$	21,667					$	27,818
Commercial and Industrial						14						—						14						—						—						—
Total Commercial TDRs						2,693						2,742						5,435						6,151						21,667						27,818
Consumer
Residential Mortgages						—						—						—						50,618						—						50,618
Other Consumer						—						—						—						—						—						—
Total Consumer TDRs						—						—						—						50,618						—						50,618
Construction						527						808						1,335						52,481						3,319						55,800
Other						169,372						—						169,372						—						—						—
Total TDRs(1)						$	172,592					$	3,550					$	176,142					$	109,250					$	24,986					$	134,236

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

In order to maximize the collection of loan balances, the Company evaluates troubled loan accounts on a case-by-case basis to determine if a loan modification would be appropriate. Loan modifications may be utilized when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. A loan is a TDR if both of the following

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

exist: 1) the debtor is experiencing financial difficulties, and 2) a creditor has granted a concession to the debtor that it would not normally grant. Nonaccrual loans that are modified can be placed back on accrual status when both principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. ThereAs of December 31, 2021, there were minimal commitments to lend additional funds for loans identified as TDRs.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

TDRs decreased from $143.9increased $41.9 million, or 31.2% to $176.1 million at December 31, 20192021 compared to $134.2 million at December 31, 2020. This represents a $9.7The Company had $78.0 million decrease, or 6.8%. The Bank received $12.8new additions, primarily due to the restructured loans related to one large relationship, offset by $26.1 million of principal pay-downs offset by an additionand $10.0 million in charge-offs for the resolution of $3.1our two largest nonperforming credits during the year ended December 31, 2021. During the year ended December 31, 2021, the Company had 6 loans that were modified totaling $78.0 million. These loans were included in the Other category and restructured with enhanced pricing and collateral position of the relationships, during the third and fourth quarters of 2021. TDRs of $25.0$3.6 million and $34.7$25.0 million were nonaccrual as of December 31, 20202021 and December 31, 2019, respectively.2020, respectively, were loans modified as TDRs that experienced a payment default subsequent to the rework date and were classified as nonperforming. During the twelve monthsyear ended December 31, 2021, the Company modified no loans that constituted a TDR that had significant commitments to lend additional funds. During the year ended December 31, 2020, the Bank modified one1 loan totaling $3.1 million that constituted a TDR that had minimal commitments to lend additional funds.

The Company had one loan modified as a TDR during the twelve months ending December 31, 2019 totaling $0.6 million in post-modified recorded balances. The loan was classified as a TDR because there are concessions present that would not be offered to a comparable borrower.

There were no TDR payment defaults during the years ended December 31, 2020, 20192021 and 2018.2020. For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. At December 31, 2020 and 2019 the Company had $25.0 million and $34.7 million, respectively in loans modified as TDR’s in previous years which had experienced a payment default subsequent to the rework date and were classified as nonperforming.

due.

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

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

						Nonperforming Assets
(Dollars in Thousands)						December 31, 2021						December 31, 2020
Nonperforming Assets
Nonaccrual loans						$	3,847					$	7,018
Nonaccrual TDRs						3,550						24,986
Total Nonaccrual Loans						7,397						32,004
Other Real Estate Owned, or (“OREO”)						10,916						15,722
Total Nonperforming Assets						$	18,313					$	47,726

As of December 31, 2021 and December 31, 2020, the Company had $254 thousand and $67 thousand, respectively, of residential real estate in the process of foreclosure. We also had $62 thousand at December 31, 2021 and $109 thousand at December 31, 2020 in residential real estate included in OREO.

Loans to principal officers, directors and their affiliates during 20202021 were as follows:

(Dollars in Thousands)		2020
Beginning Balance		$	39,680
New Loans			11,162
Repayments			(11,637	)
Balance at End of Year (1)		$	39,205

⁽¹⁾ Balance at end

(Dollars in Thousands)						2021
Beginning Balance						$	39,205
Loans Associated with Retired Director and Affiliates						(37,017)
New Loans						768
Repayments						(331)
Balance at End of Year						$	2,625

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Table of year includes $37.0 million in loans to a retired director and affiliates during 2020.

Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 6 - ALLOWANCE FOR LOANCREDIT LOSSES

The Company maintains an ALLACL at a level determined to be adequate to absorb estimated probable incurredexpected credit losses inherent inassociated with the loan portfolioCompany’s financial instruments over the life of those instruments as of the balance sheet date. Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument. The Company develops and documents a systematic ALLACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Obligations of States and Political Subdivisions, 4) Commercial Construction, 5) Residential Mortgages, 6)4) Other Consumer, 5) Construction and 7) Consumer Construction.6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ALL.

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.

110

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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

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

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

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.

Consumer Construction 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.

111

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

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following tables present, by portfolio segment, the

changes in the allowance forfuture. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018. Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the allocationtiming 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 allowance for loan losses forvelocity of change. Therefore, management developed a framework to assess the years ended December 31, 2020, 2019,tolerance and 2018:

		Commercial								Obligations
(Dollars in Thousands)		Real				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31, 2020		Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Allowance for Loan Losses:
Balance: Beginning of Year		$	24,706			$	3,236			$	365			$	5,377			$	1,736			$	3,299			$	43			$	38,762
Provision Charged to Expense			11,055				941				586				2,364				594				2,434				32				18,006
Losses Charged Off			(40	)			(66	)			–				–				(258	)			(3,991	)			–				(4,355	)
Recoveries			707				2				–				188				27				737				–				1,661
Balance, End of Year		$	36,428			$	4,113			$	951			$	7,929			$	2,099			$	2,479			$	75			$	54,074

		Commercial								Obligations
(Dollars in Thousands)		Real				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31, 2019		Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Allowance for Loan Losses:
Balance: Beginning of Year		$	23,897			$	626			$	432			$	5,214			$	6,129			$	2,728			$	173			$	39,199
Provision Charged to Expense			878				2,632				(67	)			(74	)			(4,205	)			4,370				(130	)			3,404
Losses Charged Off			(69	)			(22	)			–				(393	)			(197	)			(4,401	)			–				(5,082	)
Recoveries			–				–				–				630				9				602				–				1,241
Balance, End of Year		$	24,706			$	3,236			$	365			$	5,377			$	1,736			$	3,299			$	43			$	38,762

		Commercial								Obligations
(Dollars in Thousands)		Real				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31, 2018		Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Allowance for Loan Losses:
Balance: Beginning of Year		$	28,471			$	1,210			$	460			$	2,198			$	2,543			$	288			$	148			$	35,318
Provision Charged to Expense			6,512				(564	)			(28	)			2,324				3,701				4,900				25				16,870
Losses Charged Off			(11,740	)			(20	)			–				–				(184	)			(2,710	)			–				(14,654	)
Recoveries			654				–				–				692				69				250				–				1,665
Balance, End of Year		$	23,897			$	626			$	432			$	5,214			$	6,129			$	2,728			$	173			$	39,199

112

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.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Credit Quality Indicators:

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

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

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

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

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

•Concentration focus reviews of identified segments that represent concentration risk, represented by collateral types including but not limited to hospitality, multifamily and retail with the goal of examining patterns of loss history, document exceptions, policy exceptions and emerging trends in risk characteristics.

The Company’s internally assigned grades are as follows:

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

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The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of December 31:

						Risk Rating
(Dollars in Thousands)						2021						2020						2019						2018						2017						2016 and Prior						Revolving												Total
Commercial Real Estate
Pass						$	195,441					$	165,100					$	215,575					$	292,857					$	115,024					$	292,197					$	38,382											$	1,314,576
Special Mention						229						—						—						—						4,205						826						—												5,260
Substandard						—						—						314						2,742						215						145						—												3,416
Doubtful						—						—						—						—						—						—						—												—
Total Commercial Real Estate						$	195,670					$	165,100					$	215,889					$	295,599					$	119,444					$	293,168					$	38,382											$	1,323,252
Commercial and Industrial
Pass						$	55,173					$	50,087					$	15,648					$	38,298					$	23,575					$	150,656					$	3,857											$	337,294
Special Mention						0						—						—						8						—						—						—												8
Substandard						14						—						308						4,815						2,798						—						139												8,074
Doubtful						—						—						—						—						—						—						—												—
Total Commercial and Industrial						$	55,187					$	50,087					$	15,956					$	43,121					$	26,373					$	150,656					$	3,996											$	345,376
Residential Mortgages
Pass						$	155,892					$	91,023					$	63,682					$	73,333					$	8,640					$	48,087					$	13,237											$	453,894
Special Mention						—						—						—						—						—						553						—												553
Substandard						—						—						1,008						743						188						1,602						—												3,541
Doubtful						—						—						—						—						—						—						—												—
Total Residential Mortgages						$	155,892					$	91,023					$	64,690					$	74,076					$	8,828					$	50,242					$	13,237											$	457,988
Other Consumer
Pass						$	9,353					$	10,199					$	979					$	450					$	186					$	23,048					$	339											$	44,554
Special Mention						—						—						—						—						—						—						—												—
Substandard						11						3						11						57						30						—						—												112
Doubtful						—						—						—						—						—						—						—												—
Total Other Consumer						$	9,364					$	10,202					$	990					$	507					$	216					$	23,048					$	339											$	44,666
Construction
Pass						$	140,639					$	82,523					$	24,336					$	9,739					$	5,328					$	3,407					$	15,269											$	281,241
Special Mention						—						—						175						—						—						429						—												604
Substandard						—						107						809						95						—						91						—												1,102
Doubtful						—						—						—						—						—						—						—												—
Total Construction						$	140,639					$	82,630					$	25,320					$	9,834					$	5,328					$	3,927					$	15,269											$	282,947
Other
Pass						$	—					$	—					$	—					$	—					$	122,848					$	62,399					$	—											$	185,247
Special Mention						—						—						—						—						—						3,281						—												3,281
Substandard						—						—						—						87,329						40,882						41,161						—												169,372
Doubtful						—						—						—						—						—						—						—												—
Total Other Loans						$	—					$	—					$	—					$	87,329					$	163,730					$	106,841					$	—											$	357,900
Total Portfolio Loans
Pass						$	556,498					$	398,932					$	320,220					$	414,677					$	275,601					$	579,794					$	71,084											$	2,616,806
Special Mention						229						—						175						8						4,205						5,089						—												9,706
Substandard						25						110						2,450						95,781						44,113						42,999						139												185,617
Doubtful						—						—						—						—						—						—						—												—
Total Portfolio Loans						$	556,752					$	399,042					$	322,845					$	510,466					$	323,919					$	627,882					$	71,223											$	2,812,129

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following tables represent credit exposurestable presents loan balances by internally assigned gradesyear of origination and performing and nonperforming status for our portfolio segments as of December 31, 2020 and 2019:

										Obligations
(Dollars in Thousands)		Commercial				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31, 2020		Real Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Pass		$	1,281,106			$	228,200			$	250,336			$	270,798			$	415,773			$	57,418			$	18,983			$	2,522,614
Special Mention			126,535				48				-				58,899				723				6				-				186,211
Substandard			46,158				78,580				-				57,710				55,674				223				-				238,345
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total Portfolio Loans		$	1,453,799			$	306,828			$	250,336			$	387,407			$	472,170			$	57,647			$	18,983			$	2,947,170
Performing Loans		$	1,431,908			$	306,372			$	250,336			$	382,076			$	468,035			$	57,463			$	18,983			$	2,915,173
Non-Accrual Loans			21,891				456				-				5,331				4,135				184				-				31,997
Total Portfolio Loans		$	1,453,799			$	306,828			$	250,336			$	387,407			$	472,170			$	57,647			$	18,983			$	2,947,170

										Obligations
(Dollars in Thousands)		Commercial				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31, 2019		Real Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Pass		$	1,198,269			$	167,326			$	364,869			$	173,176			$	456,859			$	73,345			$	16,736			$	2,450,580
Special Mention			1,368				203				-				1,476				1,178				9				-				4,234
Substandard			165,673				89,269				-				118,175				56,501				334				-				429,952
Doubtful			-				-				-				-				-				-				-				-
Loss			-				-				-				-				-				-				-				-
Total Portfolio Loans		$	1,365,310			$	256,798			$	364,869			$	292,827			$	514,538			$	73,688			$	16,736			$	2,884,766
Performing Loans		$	1,334,220			$	256,331			$	364,869			$	285,375			$	511,681			$	73,421			$	16,736			$	2,842,633
Non-Accrual Loans			31,090				467				-				7,452				2,857				267				-				42,133
Total Portfolio Loans		$	1,365,310			$	256,798			$	364,869			$	292,827			$	514,538			$	73,688			$	16,736			$	2,884,766

Loans held-for-sale in connection with sale of Bank branches at December 31, 2020 include $7 thousand in the substandard category. There were no substandard loans in loans held-for-sale at December 31, 2019.

114

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company individually evaluates all substandard and nonaccrual loans greater than or equal to $1.0 million for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Our methodology for evaluating whether a loan is impaired includes risk-rating credits on an individual basis and consideration of the borrower’s overall financial condition, payment history and available cash resources. In measuring impairment, the Company primarily utilizes fair market value of the collateral; however, the Company also uses the discounted cash flow method for loans that are not deemed to be collateral dependent at the time of impairment. TDRs whether on accrual or nonaccrual status, are also classified as impaired loans. TDRs are loans where the Company, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that the Company would not otherwise grant. The Company strives to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant.

115

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

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables present the balances in the ALL and the recorded investment in the loan balances based on impairment method as of December 31, 2020 and 2019.

		Commercial								Obligations
(Dollars in Thousands)		Real				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31,  2020		Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Allowance for Loan Losses:
Individually Evaluated for Impairment		$	13,773			$	-			$	-			$	1,477			$	–			$	–			$	–			$	15,250
Collectively Evaluated for Impairment			22,655				4,113				951				6,452				2,099				2,479				75				38,824
Total Allowance for Loan Losses		$	36,428			$	4,113			$	951			$	7,929			$	2,099			$	2,479			$	75			$	54,074
Total Loans:
Individually Evaluated for Impairment		$	27,666			$	-			$	-			$	56,987			$	50,618			$	-			$	-			$	135,271
Collectively Evaluated for Impairment			1,426,133				306,828				250,336				330,420				421,552				57,647				18,983				2,811,899
Total Portfolio Loans		$	1,453,799			$	306,828			$	250,336			$	387,407			$	472,170			$	57,647			$	18,983			$	2,947,170

		Commercial								Obligations
(Dollars in Thousands)		Real				Commercial				Of States and				Commercial				Residential				Other				Consumer
December 31,  2019		Estate				& Industrial				Political Sub.				Construction				Mortgages				Consumer				Construction				Total
Allowance for Loan Losses:
Individually Evaluated for Impairment		$	5,779			$	390			$	-			$	–			$	–			$	–			$	–			$	6,169
Collectively Evaluated for Impairment			18,927				2,846				365				5,377				1,736				3,299				43				32,593
Total Allowance for Loan Losses		$	24,706			$	3,236			$	365			$	5,377			$	1,736			$	3,299			$	43			$	38,762
Total Loans:
Individually Evaluated for Impairment		$	33,256			$	390			$	-			$	59,053			$	52,966			$	-			$	-			$	145,665
Collectively Evaluated for Impairment			1,332,054				256,408				364,869				233,774				461,572				73,688				16,736				2,739,101
Total Portfolio Loans		$	1,365,310			$	256,798			$	364,869			$	292,827			$	514,538			$	73,688			$	16,736			$	2,884,766

The recorded investment in loans excludes accrued interest receivable. Individually evaluated impaired loans do not include certain troubled debt restructured loans which are less than $1.0 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table includes the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020, 2019 and 2018:

(Dollars in Thousands)		Unpaid Principal				Recorded				Specific				Average Investment				Interest Income
December 31, 2020		Balance				Balance				Allowance				in Impaired Loans				Recognized
Loans without a Specific Valuation Allowance:
Commercial Real Estate		$	3,236			$	3,236			$	-			$	4,201			$	128
Commercial Construction			55,248				55,248				-				56,941				1,871
Residential Mortgages			50,618				50,618				-				51,716				1,906
Loans with a Specific Valuation Allowance:
Commercial Real Estate			24,430				24,430				13,773				27,780				163
Commercial and Industrial			-				-				-				184				-
Commercial Construction			1,739				1,739				1,477				1,739				-
Total by Category:
Commercial Real Estate			27,666				27,666				13,773				31,981				291
Commercial and Industrial			-				-				-				184				-
Commercial Construction			56,987				56,987				1,477				58,680				1,871
Residential Mortgages			50,618				50,618				-				51,716				1,906
Total Impaired Loans		$	135,271			$	135,271			$	15,250			$	142,561			$	4,068

(Dollars in Thousands)		Unpaid Principal				Recorded				Specific				Average Investment				Interest Income
December 31, 2019		Balance				Balance				Allowance				in Impaired Loans				Recognized
Loans without a Specific Valuation Allowance:
Commercial Real Estate		$	4,487			$	4,487			$	-			$	5,885			$	131
Commercial Construction			59,053				59,053				-				59,558				3,056
Residential Mortgages			52,966				52,966				-				57,079				5,862
Loans with a Specific Valuation Allowance:
Commercial Real Estate			28,769				28,769				5,779				31,201				-
Commercial and Industrial			390				390				390				434				-
Commercial Construction			-				-				-				1,716				-
Total by Category:
Commercial Real Estate			33,256				33,256				5,779				37,086				131
Commercial and Industrial			390				390				390				434				-
Commercial Construction			59,053				59,053				-				61,274				3,056
Residential Mortgages			52,966				52,966				-				57,079				5,862
Total Impaired Loans		$	145,665			$	145,665			$	6,169			$	155,873			$	9,049

117

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollars in Thousands)		Unpaid Principal				Recorded				Specific				Average Investment				Estimated Interest
December 31, 2018		Balance				Balance				Allowance				in Impaired Loans				Income Recognized
Loans without a Specific Valuation Allowance:
Commercial Real Estate		$	69,739			$	69,739			$	-			$	69,677			$	2,392
Commercial and Industrial			-				-				-				187,978				-
Commercial Construction			61,187				61,187				-				58,623				1,554
Residential Mortgages			272				272				-				394				-
Loans with a Specific Valuation Allowance:
Commercial Construction			30,379				30,379				5,199				23,126				20
Total by Category:
Commercial Real Estate			69,739				69,739				-				69,677				2,392
Commercial and Industrial			-				-				-				187,978				-
Commercial Construction			91,566				91,566				5,199				81,749				1,574
Residential Mortgages			272				272				-				394				-
Total Impaired Loans		$	161,577			$	161,577			$	5,199			$	339,798			$	3,966

For the years ended December 31, 2020, 2019 and 2018, interest income recognized on impaired loans was $4.1 million, $9.0 million, and $4.0 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Age Analysis of Past-Due Loans by Class

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

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

(1) Refer to Note 1, Summary of December 31, 2020 and 2019:

		December 31, 2020
(Dollars in Thousands)		Current Loans				Loans 30-59 Days Past Due				Loans 60-89 Days Past Due				Total 30-89 Days Past Due				Nonaccrual Loans				Total Portfolio Loans
Commercial Real Estate		$	1,428,092			$	3,487			$	329			$	3,816			$	21,891			$	1,453,799
Commercial & Industrial			305,988				194				190				384				456				306,828
Obligations of States and Political Sub.			250,336				-				-				-				-				250,336
Commercial Construction			381,792				193				91				284				5,331				387,407
Residential Mortgages			466,688				1,347				-				1,347				4,135				472,170
Other Consumer			56,890				278				295				573				184				57,647
Consumer Construction			18,983				-				-				-				-				18,983
Total		$	2,908,769			$	5,499			$	905			$	6,404			$	31,997			$	2,947,170

		December 31, 2019
(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		$	1,333,000			$	307			$	913			$	1,220			$	31,090			$	1,365,310
Commercial & Industrial			256,170				146				15				161				467				256,798
Obligations of States and Political Sub.			364,633				236				-				236				-				364,869
Commercial Construction			285,147				58				170				228				7,452				292,827
Residential Mortgages			510,739				937				5				942				2,857				514,538
Other Consumer			72,138				894				389				1,283				267				73,688
Consumer Construction			16,736				-				-				-				-				16,736
Total		$	2,838,563			$	2,578			$	1,492			$	4,070			$	42,133			$	2,884,766

Significant Accounting Policies for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

Loans past due 90 days or more and still accruing were zero at December 31, 20202021 and 2019. With the implementation of the Company’s new core system, loans2020. Loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days or more and still accruing increased $2.3decreased $4.7 million to $1.7 million at December 31, 2021 compared to $6.4 million at December 31, 2020, comparedprimarily in the commercial real estate segment.

There were no nonaccrual or past due loans related to $4.1 million atloans held-for-sale in December 31, 2019.

2021. As of December 31, 2020 loans held-for-sale in connection with sale of Bank branches included $7 thousand in nonaccrual status and $7 thousand that were past due.

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

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

A loan is considered impaired when it is transferred to nonaccrual status, or remains on accrual status, but is considered a TDR. Impaired loans relatedwith a commitment of $1.0 million or more are individually evaluated. During the year ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to loans held-for-sale in 2019.

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their classification as individually evaluated loans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

						December 31, 2021
(Dollars in Thousands)						Real Estate
Commercial Real Estate						$	2,742
Commercial and Industrial						—
Residential Mortgages						—
Other Consumer						—
Construction						808
Other						—
Total						$	3,550

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

						December 31, 2021
(Dollars in Thousands)						Commercial Real Estate						Commercial & Industrial						Residential Mortgages						Other Consumer						Construction						Other(1)						Total
Allowance for Credit Losses on Loans:
Balance, Beginning of Year						$	36,428					$	5,064					$	2,099					$	2,479					$	8,004					$	—					$	54,074
Impact of CECL Adoption						6,587						1,379						3,356						(877)						(80)						51,277						61,642
Provision for Credit Losses on Loans						(6,215)						(2,249)						(982)						1,561						781						10,454						3,350
Charge-offs						(19,662)						(374)						(273)						(2,256)						(1,859)						—						(24,424)
Recoveries						159						291						168						586						93						—						1,297
Net (Charge-offs) / Recoveries						(19,503)						(83)						(105)						(1,670)						(1,766)						—						(23,127)
Balance, End of Year						$	17,297					$	4,111					$	4,368					$	1,493					$	6,939					$	61,731					$	95,939

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

						December 31, 2020
(Dollars in Thousands)						Commercial Real Estate						Commercial & Industrial						Residential Mortgages						Other Consumer						Construction												Total
Allowance for Credit Losses on Loans:
Balance, Beginning of Year						$	24,706					$	3,601					$	1,736					$	3,299					$	5,420											$	38,762
Provision for Credit Losses on Loans						11,055						1,527						594						2,434						2,396												18,006
Charge-offs						(40)						(66)						(258)						(3,991)						—												(4,355)
Recoveries						707						2						27						737						188												1,661
Net (Charge-offs) / Recoveries						667						(64)						(231)						(3,254)						$	188											(2,694)
Balance, End of Year						$	36,428					$	5,064					$	2,099					$	2,479					$	8,004											$	54,074

						December 31, 2019
(Dollars in Thousands)						Commercial Real Estate						Commercial & Industrial						Residential Mortgages						Other Consumer						Construction												Total
Allowance for Credit Losses on Loans:
Balance, Beginning of Year						$	23,897					$	1,058					$	6,129					$	2,728					$	5,387											$	39,199
Provision for Credit Losses on Loans						878						2,565						(4,205)						4,370						(204)												3,404
Charge-offs						(69)						(22)						(197)						(4,401)						(393)												(5,082)
Recoveries						—						—						9						602						630												1,241
Net (Charge-offs) / Recoveries						(69)						(22)						(188)						(3,799)						237												(3,841)
Balance, End of Year						$	24,706					$	3,601					$	1,736					$	3,299					$	5,420											$	38,762

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The adoption of Topic 326 resulted in an increase to our ACL of $61.6 million on January 1, 2021. The Day 1 model introduced a segmented pool of loans for discrete analysis. This segmented pool had an aggregate principal balance of $379.9 million at January 1, 2021, the initial break-out, and included unique risk attributes considered inconsistent with current underwriting standards. The analysis applied to this pool resulted in expected credit losses of $51.3 million, at adoption, and is disclosed in the Other segment in the 2021 tables below.

Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future for the Other segment. A significant population of the Other segment was not impaired under the probable incurred loss model and therefore not subject to a collateral dependent specific reserve analysis. For the population of the Other segment that was impaired under the incurred loss model, based on collateral values, the specific reserves totaled zero. Certain portions of the CECL model are inherently subjective and include, but are not limited to, estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability. An expected credit loss of $51.3 million upon adoption was established based on the discounted cash flow method with a discount rate, which was quantitatively adjusted.

The ACL increased $41.8 million to $95.9 million at December 31, 2021 compared to $54.1 million at December 31, 2020 primarily due to the Day 1 adoption of CECL of $61.6 million. During the year ended December 31, 2021 adjustments to the CECL model were made to account for additional potential deterioration in credit quality with respect to certain loans on deferral. Following the conclusion of the deferral program on June 30, 2021, management observed that $62.2 million of loans that were previously in the deferral program were recovering at rates much lower than peers. Accordingly, management attempted workout strategies with these clients. After workout strategies were exhausted unsatisfactorily, these loans were sold during the third and fourth quarters of 2021. During the third quarter of 2021, $50.2 million of loans were sold related to 9 notes within 2 performing relationships that had been previously reserved and released. During the fourth quarter of 2021, we sold $12.0 million of loans related to 2 notes, which resulted in $2.2 million net charge-offs and added $0.5 million to provision expense.

The ACL was $95.9 million, or 3.41% of total portfolio loans at December 31, 2021, as compared to $54.1 million, or 1.83% of total portfolio loans, at December 31, 2020.

Net charge-offs were $23.1 million in 2021 as compared to $2.7 million in 2020. The increase in charge-offs of $20.4 million was primarily attributable to the resolution of five problem relationships during 2021, in which the majority were previously reserved. As a percentage of average total portfolio loans, net charge-offs were 0.79% and 0.09% for the years ended December 31, 2021 and December 31, 2020, respectively. Nonperforming loans as a percentage of total portfolio loans were 0.26% and 1.09% as of December 31, 2021 and December 31, 2020, respectively.

A release of $1.3 million was recorded in 2021 for the provision for unfunded commitments. Per the guidance related to CECL, unfunded loan commitments are included as part of the provision for credit losses rather than noninterest expense, where it was previously recorded.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following tables represent credit exposures by internally assigned risk ratings as of December 31, 2021 and 2020:

						December 31, 2021
(Dollars in Thousands)						Commercial Real Estate						Commercial & Industrial						Residential Mortgages						Other Consumer						Construction						Other						Total
Pass						$	1,314,576					$	337,294					$	453,894					$	44,554					$	281,241					$	185,247					$	2,616,806
Special Mention						5,260						8						553						—						604						3,281						9,706
Substandard						3,416						8,074						3,541						112						1,102						169,372						185,617
Doubtful						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—
Total Portfolio Loans						$	1,323,252					$	345,376					$	457,988					$	44,666					$	282,947					$	357,900					$	2,812,129
Performing Loans						$	1,319,915					$	344,925					$	455,437					$	44,593					$	281,962					$	357,900					$	2,804,732
Nonaccrual Loans						3,337						451						2,551						73						985						—						7,397
Total Portfolio Loans						$	1,323,252					$	345,376					$	457,988					$	44,666					$	282,947					$	357,900					$	2,812,129

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

Special mention, substandard and doubtful loans at December 31, 2021 decreased $229.2 million to $195.3 million compared to $424.5 million at December 31, 2020, with a decrease of $176.5 million in special mention and a decrease of $52.7 million in substandard. The variances between loan segments for the years ended 2021 and 2020 primarily relates to the Other loan segment breakout due to the adoption of CECL. The special mention decrease between 2021 and 2020 relates primarily to the restructuring of a loan relationship of $177.2 million in connection with the dismissal of a lawsuit disclosed in the second quarter 2021 Form 10-Q and on Form 8-K dated September 8, 2021. The Bank believes that it is fully secured on all loans outstanding related to the lawsuit with an enhanced collateral position, including cross-collateralizations and executed documents reaffirming the legality, validity and binding nature of all loan documents that were executed in favor the the Bank. The decrease in substandard from the year ended December 31, 2020 is primarily due to payoffs and charge-offs totaling $55.7 on 5 large commercial relationships.

At December 31, 2020 $7 thousand of loans with a risk rating of substandard were held-for-sale in connection with the sale of Bank branches.

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

The following tables present the balances in the ACL and the recorded investment in the loan balances based on impairment method as of December 31, 2020 and 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

The recorded investment in loans excludes accrued interest receivable. Individually evaluated impaired loans do not include certain TDR loans which are less than $1.0 million.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance, if applicable, at December 31, 2020 and 2019.

						December 31, 2020
(Dollars in Thousands)						Unpaid Principal Balance						Recorded Balance						Specific Allowance						Average Investment in Impaired Loans						Interest Income Recognized
Loans without a Specific Valuation Allowance:
Commercial Real Estate						$	3,236					$	3,236					$	—					$	4,201					$	128
Construction						55,248						55,248						—						56,941						1,871
Residential Mortgages						50,618						50,618						—						51,716						1,906
Loans with a Specific Valuation Allowance:
Commercial Real Estate						24,430						24,430						13,773						27,780						163
Commercial and Industrial						—						—						—						184						—
Construction						1,739						1,739						1,477						1,739						—
Total by Category:
Commercial Real Estate						27,666						27,666						13,773						31,981						291
Commercial and Industrial						—						—						—						184						—
Construction						56,987						56,987						1,477						58,680						1,871
Residential Mortgages						50,618						50,618						—						51,716						1,906
Total Impaired Loans						$	135,271					$	135,271					$	15,250					$	142,561					$	4,068

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

						December 31, 2019
(Dollars in Thousands)						Unpaid Principal Balance						Recorded Balance						Specific Allowance						Average Investment in Impaired Loans						Interest Income Recognized
Loans without a Specific Valuation Allowance:
Commercial Real Estate						$	4,487					$	4,487					$	—					$	5,885					$	131
Construction						59,053						59,053						—						59,558						3,056
Residential Mortgages						52,966						52,966						—						57,079						5,862
Loans with a Specific Valuation Allowance:
Commercial Real Estate						28,769						28,769						5,779						31,201						—
Commercial and Industrial						390						390						390						434						—
Construction						—						—						—						1,716						—
Total by Category:
Commercial Real Estate						33,256						33,256						5,779						37,086						131
Commercial and Industrial						390						390						390						434						—
Construction						59,053						59,053						—						61,274						3,056
Residential Mortgages						52,966						52,966						—						57,079						5,862
Total Impaired Loans						$	145,665					$	145,665					$	6,169					$	155,873					$	9,049

NOTE 7 - FAIR VALUE MEASUREMENTS

Financial assets measured at fair value on a recurring basis at December 31, 2021 are summarized below:

						December 31, 2021
(Dollars in Thousands)						Carrying Value						Quoted Prices In Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities						$	4,413					$	4,413					$	—					$	—
U.S. Government Agency Securities						3,478						—						3,478						—
Residential Mortgage-Backed Securities						110,013						—						110,013						—
Commercial Mortgage-Backed Securities						4,168						—						4,168						—
Asset Backed Securities						81,863						—						81,863						—
Collateralized Mortgage Obligations						287,614						—						287,614						—
Small Business Administration						108,914						—						108,914						—
States and Political Subdivisions						262,202						—						262,202						—
Corporate Notes						59,735						—						51,177						8,558
Total Securities Available-for-Sale						922,400						4,413						909,429						8,558
Derivatives						3,508						—						3,508						—
Total						$	925,908					$	4,413					$	912,937					$	8,558
Liabilities
Derivatives						$	3,682					$	—					$	3,682					$	—
Total						$	3,682					$	—					$	3,682					$	—

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Financial assets measured at fair value on a recurring basis at December 31, 2020 are summarized below:

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

Financial assets measured at fair value on a recurring basis at December 31, 2019 are summarized below:

						Quoted Prices In								Significant
						Active Markets for				Significant Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
(Dollars in Thousands)		Value				(Level 1)				(Level 2)				(Level 3)
Assets
Securities Available-for-Sale		$	742,617			$	-			$	737,617			$	5,000
Derivatives			626				-				626				-
Total		$	743,243			$	-			$	738,243			$	5,000
Liabilities
Derivatives		$	675			$	-			$	675			$	-
Total		$	675			$	-			$	675			$	-

						December 31, 2020
(Dollars in Thousands)						Carrying Value						Quoted Prices In Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Assets
Securities Available-for-Sale:
Residential Mortgage-Backed Securities						$	44,724					$	—					$	44,724					$	—
Commercial Mortgage-Backed Securities						5,447						—						5,447						—
Asset Backed Securities						133,557						—						133,557						—
Collateralized Mortgage Obligations						218,359						—						218,359						—
Small Business Administration						99,145						—						99,145						—
States and Political Subdivisions						252,622						—						252,622						—
Corporate Notes						24,825						—						14,462						10,363
Total Securities Available-for-Sale						778,679						—						768,316						10,363
Derivatives						4,493						—						4,493						—
Total						$	783,172					$	—					$	772,809					$	10,363
Liabilities
Derivatives						$	4,756					$	—					$	4,756					$	—
Total						$	4,756					$	—					$	4,756					$	—

There were no transfers between Level 1 and Level 2 during 2020the years ended December 31, 2021 or 2019.

December 31, 2020.

We have invested in subordinated debt of other financial institutions. We have two2 securities of $5.0totaling $8.6 million each that are considered to be Level 3 securities at December 31, 2020, an increase of $5.02021 and 2 totaling $10.4 million in one security fromat December 31, 2019.2020. The change in the fair value of Level 3 securities available-for-sale from $10.4 million at December 31, 2020 to $8.6 million at December 31, 2021 is attributable to a new security in the second quarter of 2021 for $3.5 million offset by the calculated change in fair value of $0.3 million and the call of a security totaling $5.0 million. The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, and the institution’s core earnings ability, liquidity management platform and current on and off balanceoff-balance sheet interest rate risk exposures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Financial assets measured at fair value on a nonrecurring basis at December 31, 20202021 and 20192020 are summarized below:

(Dollars in Thousands)
December 31, 2020		Level 1				Level 2				Level 3				Fair Value
OREO		$	–			$	–			$	15,722			$	15,722
Impaired Loans		$	–			$	–			$	10,919			$	10,919
December 31, 2019			Level 1				Level 2				Level 3				Fair Value
OREO		$	–			$	–			$	18,324			$	18,324
Impaired Loans		$	–			$	–			$	22,989			$	22,989

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

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

Individually evaluated loans had a net carrying amount of $1.8 million at December 31, 2021 with a valuation allowance of $1.0 million. Impaired loans had a net carrying amount of $10.9 million at December 31, 2020 with a valuation allowance of $15.3 million, resulting in a $9.1 million increase in provision for loan losses formillion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

OREO, which is measured at the year ended December 31, 2020. Impaired loanslower of carrying or fair value less costs to sell, had a net carrying amount of $23.0 million at December 31, 2019 with a valuation allowance of $6.2 million, resulting in a $1.0 million increase in provision for loan losses for the year ended December 31, 2019.

OREO had a net carrying amount of $15.7$10.9 million as of December 31, 2020,2021, compared with $18.3$15.7 million at December 31, 2019, respectively.2020. Write-downs of $1.5$3.5 million were recorded on OREO for the year ended December 31, 20202021 compared to $4.5$1.5 million for the year ended December 31, 2019, respectively.

2020.

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of December 31, 20202021 and 2019:

(Dollars in Thousands)
December 31, 2020		Fair				Valuation		Unobservable		Weighted
Assets		Value				Technique		Inputs		Range				Average
Impaired Loans		$	1,163			Discounted Appraisals		Estimated Selling Costs			43.0	%			43.0	%
Impaired Loans			9,494			Discounted Appraisals		Estimated Selling Costs & Qualitative Adjustments			12.0 – 50.0	%			33.2	%
Impaired Loans			262			Discounted Appraisals		Estimated Selling Costs			20.9	%			20.9	%
Total Impaired Loans		$	10,919
Other Real Estate Owned		$	11,972			Appraisals		Estimated Selling Costs			6.0 – 10.0	%			6.5	%
Other Real Estate Owned			1,260			Discounted Cash Flow		Discount Rate			6.3	%			6.3	%
Other Real Estate Owned			1,583			Internal Valuations		Estimated Selling Costs			5.0	%			5.0	%
Other Real Estate Owned			907			Discounted Internal Valuations		Management’s Discount & Estimated Selling Costs			33.7 – 73.5	%			55.5	%
Total Other Real Estate Owned		$	15,722

(Dollars in Thousands)
December 31, 2019		Fair				Valuation		Unobservable		Weighted
Assets		Value				Technique		Inputs		Range				Average
Impaired Loans		$	2,700			Purchase Contract		Pending Close of Contract, Net of Closing Costs			25.0	%			25.0	%
Impaired Loans			20,289			Discounted Appraisals		Management’s Disc. & Selling Costs			2.6 – 84.6	%			24.1	%
Total Impaired Loans		$	22,989
Other Real Estate Owned		$	13,596			Appraisals		Selling Costs			6.0 – 10.0	%			6.4	%
Other Real Estate Owned			1,735			Discounted Cash Flow		Discount Rate			6.3	%			6.3	%
Other Real Estate Owned			2,993			Internal Valuations		Selling Costs			5.0	%			5.0	%
Total Other Real Estate Owned		$	18,324

121

2020:

						December 31, 2021
(Dollars in Thousands)						Fair Value						Valuation Technique						Unobservable Inputs						Weighted Range												Average
Assets
Impaired Loans						$	1,777					Discounted Appraisals						Management's Discount & Estimated Selling Costs												53.0		%				53.0		%
Total Impaired Loans						$	1,777
Other Real Estate Owned						$	9,946					Appraisals						Estimated Selling Costs												10.0		%				10.0		%
Other Real Estate Owned						190						Internal Valuations						Estimated Selling Costs												5.0		%				5.0		%
Other Real Estate Owned						780						Discounted Internal Valuations						Management’s Discount & Estimated Selling Costs						5.0		%	—		%	50.7		%				20.3		%
Total Other Real Estate Owned						$	10,916

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

						December 31, 2020
(Dollars in Thousands)						Fair Value						Valuation Technique						Unobservable Inputs						Weighted Range												Average
Assets
Impaired Loans						$	1,163					Discounted Appraisals						Estimated Selling Costs												43.0		%				43.0		%
Impaired Loans						$	9,494					Discounted Appraisals						Estimated Selling Costs & Qualitative Adjustments						12.0		%	—		%	50.0		%				33.2		%
Impaired Loans						262						Discounted Appraisals						Estimated Selling Costs												20.9		%				20.9		%
Total Impaired Loans						$	10,919
Other Real Estate Owned						$	11,972					Appraisals						Estimated Selling Costs						6.0		%	—		%	10.0		%				6.5		%
Other Real Estate Owned						1,260						Discounted Cash Flow						Discount Rate												6.3		%				6.3		%
Other Real Estate Owned						1,583						Internal Valuations						Estimated Selling Costs												5.0		%				5.0		%
Other Real Estate Owned						907						Discounted Internal Valuations						Management’s Discount & Estimated Selling Costs						33.7		%	—		%	73.5		%				55.5		%
Total Other Real Estate Owned						$	15,722

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

The carrying values and estimated fair values of the Company’sour financial instruments at December 31, 20202021 and December 31, 20192020 are presented in the following tables. Fair values for December 31, 20202021 and December 31, 20192020 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

(Dollars in Thousands)						Fair Value Measurements at December 31, 2020
Financial Assets:		Carrying Value				Level 1				Level 2				Level 3				Total
Cash and Cash Equivalents		$	241,942			$	38,535			$	203,407			$	-			$	241,942
Securities Available-for-Sale			778,679				-				768,316				10,363				778,679
Loans Held-for-Sale			25,437				-				-				25,437				25,437
Portfolio Loans, net			2,893,096				-				-				2,854,958				2,854,958
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value			9,835				-				-				9,835				9,835
Federal Home Loan Bank Stock, at Cost			5,093				-				-				NA				NA
Other Assets- Interest Rate Derivatives			4,493				-				4,493				-				4,493
Accrued Interest Receivable			32,157				-				2,887				29,270				32,157
Financial Liabilities:
Deposits		$	3,599,911			$	699,229			$	1,285,912			$	1,640,587			$	3,625,728
Deposits Held for Assumption in Connection with Sale of Banking Branches			84,717				9,506				18,699				56,512				84,717
Other Liabilities- Interest Rate Derivatives			4,756				-				4,756				-				4,756
FHLB Borrowings			35,000				-				-				35,461				35,461
Accrued Interest Payable			2,131				-				-				2,131				2,131

(Dollars in Thousands)						Fair Value Measurements at December 31, 2019
Financial Assets:		Carrying Value				Level 1				Level 2				Level 3				Total
Cash and Cash Equivalents		$	125,812			$	41,386			$	84,426			$	-			$	125,812
Securities Available-for-Sale			742,617				-				737,617				5,000				742,617
Loans Held-for-Sale			19,714				-				-				19,714				19,714
Portfolio Loans, net			2,846,004				-				-				2,819,585				2,819,585
Federal Home Loan Bank Stock, at Cost			4,113				-				-				NA				NA
Other Assets- Interest Rate Derivatives			626				-				626				-				626
Accrued Interest Receivable			13,751				-				3,018				10,733				13,751
Financial Liabilities:
Deposits		$	3,504,245			$	554,875			$	988,964			$	1,967,563			$	3,511,402
Other Liabilities- Interest Rate Derivatives			675				-				675				-				675
FHLB Borrowings			10,000				-				-				9,886				9,886
Accrued Interest Payable			3,001				-				-				3,001				3,001

122

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

												Fair Value Measurements at December 31, 2021
(Dollars in Thousands)						Carrying Value						Level 1						Level 2						Level 3						Total
Financial Assets:
Cash and Cash Equivalents						$	277,799					$	36,698					$	241,101					$	—					$	277,799
Securities Available-for-Sale						922,400						4,413						909,429						8,558						922,400
Loans Held-for-Sale						228						—						—						228						228
Portfolio Loans, net						2,716,190						—						—						2,689,578						2,689,578
Federal Home Loan Bank Stock, at Cost						2,352						—						—						NA						NA
Other Assets- Interest Rate Derivatives						3,508						—						3,508						—						3,508
Accrued Interest Receivable						17,178						17						3,462						13,699						17,178
Financial Liabilities:
Deposits						$	3,698,476					$	747,909					$	1,606,249					$	1,369,228					$	3,723,386
Other Liabilities- Interest Rate Derivatives						3,682						—						3,682						—						3,682
FHLB Borrowings						7,000						—						—						7,035						7,035
Accrued Interest Payable						1,378						—						—						1,378						1,378

												Fair Value Measurements at December 31, 2020
(Dollars in Thousands)						Carrying Value						Level 1						Level 2						Level 3						Total
Financial Assets:
Cash and Cash Equivalents						$	241,942					$	38,535					$	203,407					$	—					$	241,942
Securities Available-for-Sale						778,679						—						768,316						10,363						778,679
Loans Held-for-Sale						25,437						—						—						25,437						25,437
Portfolio Loans, net						2,893,096						—						—						2,854,244						2,854,244
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower cost or fair value						9,835						—						—						9,835						9,835
Federal Home Loan Bank Stock, at Cost						5,093						—						—						NA						NA
Other Assets- Interest Rate Derivatives						4,493						—						4,493						—						4,493
Accrued Interest Receivable						32,157						—						2,887						29,270						32,157
Financial Liabilities:
Deposits						$	3,599,911					$	699,229					$	1,285,912					$	1,640,587					$	3,625,728
Deposits Held for Assumption in Connection with Sale of Bank Branches						84,717						9,506						18,699						56,512						84,717
Other Liabilities- Interest Rate Derivatives						4,756						—						4,756						—						4,756
FHLB Borrowings						35,000						—						—						35,461						35,461
Accrued Interest Payable						2,131						—						—						2,131						2,131

NOTE 8 - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation as follows:

		December 31,
(Dollars in Thousands)		2020				2019
Land		$	27,673			$	28,526
Bank Premises			60,571				59,161
Furniture and Equipment			31,339				28,783
Leasehold Improvements			613				702
			120,196				117,172
Accumulated Depreciation			(34,889	)			(31,230	)
Total		$	85,307			$	85,942

						December 31,
(Dollars in Thousands)						2021						2020
Land						$	20,763					$	27,673
Bank Premises						55,463						60,571
Furniture and Equipment						34,529						31,339
Leasehold Improvements						854						613
Total Premises and Equipment						111,609						120,196
Accumulated Depreciation						(36,312)						(34,889)
Total						$	75,297					$	85,307

At December 31, 2020,2021, we had $2.3 millionno bank premises and equipment held-for-sale.

held-for-sale and $2.3 million at December 31, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Depreciation has beenexpense is included under occupancy expense, net in the Consolidated Statements of Income (Loss) Income totaling $6.2 million in 2021, $6.1 million in 2020, and $5.3 million in 2019, and $3.7 million in 2018.

2019.

Real estate on closed branches was valued based on recent comparative market values received from a real estate broker. Write-downs in the amount of $3.2 million, $1.1 million $0.8 million and $3.5$0.8 million were recognized during 2021, 2020 2019 and 2018,2019, respectively. The net remaining carrying value of $2.5$1.0 million and $3.0$2.5 million is classified as held-for-sale in OREO in the Consolidated Balance Sheets as of December 31, 2021 and 2020, and 2019, respectively.

The Company leases offices from non-related parties under various terms, some of which contain contingent rentals tied to a price index. Rental expense for these leases was $72 thousand in 2021, $99 thousand in 2020, and $37 thousand in 2019, and $211 thousand for 2018.

2019.

The Company currently has two2 depository locations, a loan production office, and a commercial banking office under lease contracts. We have included $1.5$3.3 million and $1.2$1.5 million in right-of-use assets in other assets on its Consolidated Balance Sheets at December 31, 20202021 and 2019,2020, respectively. The Company has included $1.6$3.4 million and $1.5$1.6 million in lease liabilities in other liabilities on its Consolidated Balance Sheets at December 31, 2021 and 2020, and 2019, respectively.

NOTE 9 - OTHER REAL ESTATE OWNED

The following table presents OREO owned activity as of the dates presented:

		Year Ended December 31,
(Dollars in Thousands)		2020				2019				2018
Beginning Balance		$	18,324			$	33,681			$	39,793
Loans Transferred to Other Real Estate Owned			755				302				28,212
Loans to Finance the Sale of Other Real Estate Owned			-				-				(893	)
Transfer of Closed Retail Offices to Other Real Estate Owned			2,221				1,694				2,177
Capitalized Expenditures			19				-				1,272
Direct Write-Downs			(1,483	)			(4,457	)			(8,714	)
Cash Proceeds from Pay-downs			(483	)			(580	)			-
Sales of Other Real Estate Owned			(3,631	)			(12,316	)			(28,166	)
End of Year		$	15,722			$	18,324			$	33,681

123

						Year Ended December 31,
(Dollars in Thousands)						2021						2020						2019
Beginning of Year Balance						$	15,722					$	18,324					$	33,681
Loans Transferred to OREO						59						755						302
Transfer of Closed Retail Offices to OREO						12,013						2,221						1,694
Capitalized Expenditures						—						19						—
Direct Write-Downs						(3,472)						(1,483)						(4,457)
Cash Proceeds from Pay-downs						(452)						(483)						(580)
Sales of OREO						(12,954)						(3,631)						(12,316)
End of Year Balance						$	10,916					$	15,722					$	18,324

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At December 31, 2021, 2020, 2019, and 2018,2019, the balance of OREO includes $9.9 million, $13.2 million, $15.3 million, and $26.9$15.3 million, respectively, of foreclosed properties recorded as a result of obtaining physical possession of the asset. At December 31, 20202021 and 2019,2020, the recorded investment of foreclosed residential real estate was $109$62 thousand and $69$109 thousand, respectively. At December 31, 20202021 and 2019,2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process is $254 thousand and $67 thousand, and $290 thousand, respectively.

Income and expenses applicable to foreclosed assets include the following:

		Year Ended December 31,
(Dollars in Thousands)		2020				2019				2018
Provision for Losses		$	1,483			$	4,457			$	8,714
Operating Expenses, net of rental income			317				(164	)			(476	)
Net (Gain) Loss on Sales			(48	)			275				(513	)
Other Real Estate Owned Expense		$	1,752			$	4,568			$	7,725

						Year Ended December 31,
(Dollars in Thousands)						2021						2020						2019
Provision for Losses						$	3,472					$	1,483					$	4,457
Operating Expenses, net of Rental Income						317						317						(164)
Net Loss (Gain) on Sales						150						(48)						275
OREO Expense						$	3,939					$	1,752					$	4,568

NOTE 10 – GOODWILL

Accounting guidance requires the Companycompanies to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be triggering events that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit.

The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March Throughout 2020 including our stock price. These triggering events indicated that goodwill related to our single reporting unit may be impaired andas we expected to evaluate goodwill for impairment quarterly given the current environment.

During the first quarter of 2020, with the recent volatility in the financial services industry and in our economic environment we determined it prudent to have a full goodwill impairment analysis performed as of March 31, 2020 updated as of June 30, 2020. We performed the goodwill impairment test by determining the fair value of the reporting unit. We engaged a third-party financial advisor to prepare the market and income approaches in order to determine fair value. Their analysis supported the conclusion that the fair value of our common stock at June 30, 2020 was greater than both stated and tangible common book value and therefore no impairment to the goodwill was recorded at June 30, 2020.

As we continued to monitormonitored our performance, due to the COVID-19 pandemic and continued to experienceCompany experienced further declines in ourtheir stock price in relation to other bank indices primarily due to the COVID-19 pandemic. Together with the declines in their stock price and the length of time that the market value of the reporting unit had been below its book value, wethe Company completed another interim quantitative goodwill impairment analysis as of September 30, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Various valuation methodologies were considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which is then compared to its carrying value, including goodwill. Upon completingcompletion of the quantitative impairment analysis as of September 30, 2020, the analysisCompany estimated fair value of the reporting unit to be less than the carrying value. Therefore, weAs such, at September 30, 2020, the Company recorded a goodwill impairment of $62.2 million, which represented the entire amount of goodwill allocated to the reporting unit. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, liquidity position, or our overall financial strength.

124

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents goodwill as of December 31:

(Dollars in Thousands)		2020				2019
Balance as of January 1		$	62,192			$	62,192
Impairment Losses			(62,192	)			-
Balance as of December 31		$	-			$	62,192

NOTE 11 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

125

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at December 31:

		Fair Values of Derivative Instruments
		Asset Derivatives (Included in Other Assets)
(Dollars in Thousands)		2020									2019
		Number of Transactions			Notional Amount			Fair Value			Number of Transactions			Notional Amount			Fair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans			1		$	151		$	-			5		$	937		$	1
Interest Rate Swap Contracts – Commercial Loans			38			255,572			4,493			2			18,773			625
Total Derivatives not Designated as Hedging Instruments			39		$	255,723		$	4,493			7		$	19,710		$	626

		Fair Values of Derivative Instruments
		Liability Derivatives (Included in Other Liabilities)
(Dollars in Thousands)		2020									2019
		Number of Transactions			Notional Amount			Fair Value			Number of Transactions			Notional Amount			Fair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans			1		$	151		$	-			5		$	937		$	1
Interest Rate Swap Contracts – Commercial Loans			38			255,572			4,756			2			18,773			674
Total Derivatives not Designated as Hedging Instruments			39		$	255,723		$	4,756			7		$	19,710		$	675

						Fair Values of Derivative Instruments Asset Derivatives (Included in Other Assets)
(Dollars in Thousands)						2021																		2020
						Number of Transactions						Notional Amount						Fair Value						Number of Transactions						Notional Amount						Fair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans						—						$	—					$	—					1						$	151					$	—
Interest Rate Swap Contracts – Commercial Loans						66						446,490						3,508						38						255,572						4,493
Total Derivatives not Designated as Hedging Instruments						66						$	446,490					$	3,508					39						$	255,723					$	4,493

						Fair Values of Derivative Instruments Liability Derivatives (Included in Other Liabilities)
(Dollars in Thousands)						2021																		2020
						Number of Transactions						Notional Amount						Fair Value						Number of Transactions						Notional Amount						Fair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans						—						$	—					$	—					1						$	151					$	—
Interest Rate Swap Contracts – Commercial Loans						66						446,490						3,682						38						255,572						4,756
Total Derivatives not Designated as Hedging Instruments						66						$	446,490					$	3,682					39						$	255,723					$	4,756

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table indicates the lossincome (loss) recognized in income on derivatives for the years ended December 31:

(Dollars in Thousands)		2020				2019				2018
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans		$	(1	)		$	-			$	1
Forward Sale Contracts – Mortgage Loans			1				-				(1	)
Interest Rate Swap Contracts – Commercial Loans			(214	)			(22	)			(27	)
Total Derivative Loss		$	(214	)		$	(22	)		$	(27	)

(Dollars in Thousands)						2021						2020						2019
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans						$	—					$	(1)					$	—
Forward Sale Contracts – Mortgage Loans						—						1						—
Interest Rate Swap Contracts – Commercial Loans						89						(214)						(22)
Total Derivative Income (Loss)						$	89					$	(214)					$	(22)

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

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

			Asset Derivatives (Included in Other Assets)								Liability Derivatives (Included in Other Liabilities)
(Dollars in Thousands)			2020				2019				2020				2019
Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized		$	4,493			$	625			$	4,756			$	674
Gross Amounts Offset			-				-				-				-
Net Amounts Presented in the Consolidated Balance Sheets			4,493				625				4,756				674
Gross Amounts Not Offset (1)			-				-				(5,220	)			(860	)
Net Amount		$	4,493			$	625			$	(464	)		$	(186	)

						Asset Derivatives (Included in Other Assets)												Liability Derivatives (Included in Other Liabilities)
(Dollars in Thousands)						2021						2020						2021						2020
Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized						$	3,508					$	4,493					$	3,682					$	4,756
Gross Amounts Offset						—						—						—						—
Net Amounts Presented in the Consolidated Balance Sheets						3,508						4,493						3,682						4,756
Gross Amounts Not Offset (1)						—						—						(4,080)						(5,220)
Net Amount						$	3,508					$	4,493					$	(398)					$	(464)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – DEPOSITS

The following table presents the composition of deposits at December 31:

(Dollars in Thousands)		2020				2019				$ Change				% Change
Noninterest-Bearing Demand		$	699,229			$	554,875			$	144,354				26.0	%
Interest-Bearing Demand			366,201				286,561				79,640				27.8	%
Money Market			294,229				140,589				153,640				109.3	%
Savings			625,482				561,814				63,668				11.3	%
Certificates of Deposits			1,614,770				1,960,406				(345,636	)			(17.6	)%
Deposits Held for Assumption in Connection with Sale of Bank Branches			84,717				--				84,717				NM
Total		$	3,684,628			$	3,504,245			$	180,383				5.1	%
NM - percentage not meaningful

(Dollars in Thousands)						2021						2020						$ Change						% Change
Noninterest-Bearing Demand						$	747,909					$	699,229					$	48,680					7.0		%
Interest-Bearing Demand						452,644						366,201						86,443						23.6		%
Money Market						463,056						294,229						168,827						57.4		%
Savings						690,549						625,482						65,067						10.4		%
Certificates of Deposits						1,344,318						1,614,770						(270,452)						(16.7)		%
Deposits Held for Assumption in Connection with Sale of Bank Branches						—						84,717						(84,717)						NM
Total						$	3,698,476					$	3,684,628					$	13,848					0.4		%

NM - percentage not meaningful

Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition. Total deposits at December 31, 2021 increased $13.8 million, or 0.4%, from December 31, 2020. We had increases in all of our core deposits. The increases included $168.8 million in money market accounts due to our deposit acquisition strategy, a $86.4 million increase in interest-bearing demand deposits, a $65.1 million increase in savings accounts due to promotions and an increase of $48.7 million in noninterest-bearing demand accounts. Offsetting these increases was $270.5 million, or 16.7% declines in CDs compared to December 31, 2020 due to the intentional runoff of higher cost CDs. Also impacting the decrease was $84.7 million of deposits held-for-assumption, at December 31, 2020, in connection with the sale of 4 bank branches which were sold during the second quarter of 2021. Noninterest-bearing deposits comprised 20.2% and 19.0% of total deposits at December 31, 2021 and December 31, 2020, respectively.

All deposit accounts are insured by the FDIC up to the maximum amount allowed by law. The Dodd-Frank Act, signed into law on July 21, 2010, makes permanent the $250,000$250,000 limit for federal deposit insurance and the coverage limit applies per depositor, per insured depository institution for each account ownership. Time deposits that meet or exceed the FDIC Insurance limit of $250,000,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

$250,000, excluding deposits held-for-assumption, at year-end 2021 and 2020 and 2019 were $184.2$147.1 million and $195.3$181.1 million, respectively.

Certificates of Deposit excluding deposits held for assumption for pending branch sale transactions, maturing as of December 31:

(Dollars in Thousands)		2020
2021		$	746,635
2022			249,239
2023			293,434
2024			135,306
2025			187,931
Thereafter			2,225
Total		$	1,614,770

(Dollars in Thousands)						2021
2022						$	565,385
2023						344,037
2024						149,408
2025						175,974
2026						107,917
Thereafter						1,597
Total						$	1,344,318

Overdrafts reclassified to loans at December 31, 2020 and 2019 were $0.5 million at both December 31, 2021 and $0.7 million, respectively.

December 31, 2020.

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2021 and 2020, and 2019, respectively, were $6.7$3.0 million and $7.5$6.7 million.

NOTE 13 – FEDERAL HOME LOAN BANK BORROWINGS

Borrowings areserve as an additional source of liquidity for the Company. FHLB Borrowings were $35.0$7.0 million and $10.0$35.0 million at December 31, 20202021 and December 31, 2019,2020, respectively. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans at December 31, 2020.2021. Total loans pledged as collateral were $804.2 million$1.1 billion and $284.6 million$0.8 billion at December 31, 20202021 and December 31, 2019,2020, respectively. There were no securities available-for-sale pledged as collateral at both December 31, 2021 and December 31, 2020. The bankCompany continues to methodically pledge additional eligible loans withand expect continued progress in additional pledging throughout the ultimate expectation to have full pledging by year end 2021. Total securities available-for-sale pledged as collateral were $28.6 million at December 31, 2019.year. The Company is eligible to borrow up to an additional $510.5 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25% of the Company’s assets, as of December 31, 2020.2021. The Company had the capacity to borrow up to an additional $242.2$667.3 million and $510.5 million from the FHLB at December 31, 2019.

127

2021 and December 31, 2020, respectively, based upon calculated collateral values.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

(Dollars in Thousands)		2020				2019				2018
Long-term Borrowings		$	35,000			$	10,000			$	-
Weighted Average Interest Rate			1.13	%			1.63	%			0.00	%
Interest Expense		$	361			$	38			$	-

(Dollars in Thousands)						2021						2020						2019
Long-term Borrowings						$	7,000					$	35,000					$	10,000
Weighted Average Interest Rate						1.61		%				1.13		%				1.63		%
Interest Expense						$	313					$	361					$	38

During the year ending December 31, 2021 the Company retired 4 FHLB advances totaling $28.0 million with a weighted average cost to borrow of 1.0%. NaN FHLB advance totaling $3.0 million was repaid at maturity. The remaining FHLB advances totaling $25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the borrowings totaling $43 thousand at December 31, 2021. The FHLB borrowing of $7.0 million was prepaid in January 2022 outside of its scheduled maturity.

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Scheduled annual maturities and weighted average interest rates for FHLB advancesborrowings for each of the five years subsequent to December 31, 20202021 and thereafter are as follows:

							Weighted
(Dollars in Thousands)			Balance				Average Rate
2021			$	3,000				1.68	%
2022				4,000				1.60	%
2023				10,000				0.88	%
2024				13,000				1.10	%
2025				5,000				1.02	%
Thereafter				-				0.00	%
Total FHLB Advances			$	35,000				1.13	%

(Dollars in Thousands)						Balance						Weighted Average Rate
2022						$	4,000					1.60		%
2023						—						—		%
2024						3,000						1.63		%
2025						—						—		%
2026						—						—		%
Thereafter						—						—		%
Total FHLB Borrowings						$	7,000					1.61		%

NOTE 14 - EMPLOYEE BENEFIT PLANS

The Company has adopted an integrated profit sharing plan, which allows for elective deferrals and non-elective contributions. EmployeesAssociates participate in the profit sharing plan following completion of six (6) months of service and upon reaching the age of twenty years and six months as of January 1. Vesting is based on years of service to the Company, with a year being any year an employee works a minimum of 1,000 hours.

The following table details the vesting schedule based on years of service for participants:

1 Year of Service

0

%0% Vested

2 Years of Service

20

%20% Vested

3 Years of Service

40

%40% Vested

4 Years of Service

60

%60% Vested

5 Years of Service

100

%100% Vested

Any participant who has reached the age of 62 is fully vested regardless of length of service. Each participant in the plan (who has not reached age 62) becomes 100% vested after five (5) years of service. The non-elective contribution to the plan is determined each year by the Company’s Board of Directors (the “Board”) and thus may fluctuate in amount from year to year. The contribution by the Company, which includes contributions to the non-qualifiednonqualified plan discussed below, was $1.8 million in 2021, $1.0 million in 2020 and $1.4 million in 2019 and $1.7 million in 2018.2019. These amounts are included in salaries and employee benefits in the Consolidated Statements of Income (Loss) Income.

.

Beginning in 2019,2020, our integrated profit sharing plan includes a Company match based upon an employee’sassociate’s elective deferral. This elective deferral is subject to dollar limits announced annually by the Internal Revenue Service (“IRS”). Elective deferrals are matched equal to 100% of the first 3% deferred and 50% of the next 2%, producing a maximum 4% match. Expense for this deferral match was $1.3 million, $1.2 million and $1.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. There was no expense for the calendar year ended 2018.

128

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Bank entered into a Nonqualified Profit Sharing Plan originally on December 30, 1996, which was subsequently amended and restated effective December 20, 2007. The purpose of the Nonqualified Profit Sharing Plan was to provide additional benefits to be paid to the executive upon the occurrence of a “Distributable Event,” which is either termination or death. The board of directors of the Bank (the “Bank Board”) approved the amended plan on December 20, 2007. Since its inception, the Bank’s former Chairman and Chief Executive Officer was the only executive who participated in the Nonqualified Profit Sharing Plan. In April 2017, a Distributable Event occurred, in which distributions will occur over 45 quarterly payments. The value of the plan was $1.0$0.9 million as of December 31, 2020,2021, and was solely comprised of cash. The quarterly distributions began on January 1, 2018 and will continue to be paid out in equal quarterly installments approximating $30 thousand.

On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide to provide (i) certain key executives of the Bank (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these employeesassociates under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees. The compensation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants.

participants. The balance in the nonqualified deferred compensation plan at December 31, 2021 and December 31, 2020 was $161 thousand and $12 thousand, respectively.

NOTE 15 – INCENTIVE AND RESTRICTED STOCK PLAN

The Bank Board adopted the Carter Bank & Trust 2018 Omnibus Equity Incentive Plan on March 29, 2018 based on the recommendation of the Bank’s Nominating and Compensation Committee (now, a committee of the Company, the “Committee”), which became effective on June 27, 2018. In connection with the Reorganization, the Company adopted and assumed Carter Bank & Trust 2018 Omnibus Equity Incentive Plan as its own (now the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan, or, for purposes of this discussion, the “Plan”). The Plan reserves a total 2,000,000 shares of common stock for issuance and provides for the grant to key employeesassociates and non-employee directors of the Company and its subsidiaries of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards (collectively, the “awards”). Subject to accelerated vesting under certain circumstances, the Plan requires a minimum vesting period of one year for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals. These minimums are applicable to awards other than those granted as part of a retainer for the service of non-employee directors. The Committee will determine the vesting period on the awards. No awards may be granted under the Plan more than ten years from the effective date of the Plan. For purposes of this Note 15, references to the “Company” mean the “Bank’ with respect to actions prior to the Reorganization.

Restricted Stock

The Company periodically issues restricted stock to non-employee directors, executive officers and employeesassociates pursuant to the Plan. As of December 31, 2020, 132,0272021, 214,517 restricted shares had been granted under the Plan and 4,74710,952 restricted shares had been forfeited.

The Company granted 39,01950,120 and 47,30939,019 restricted shares of common stock to key personnel under the Plan during 20202021 and 2019,2020, respectively. These grants were approved by the Committee as compensation for substantial contributions to the Company’s performance, including contribution during our recent core systems conversion. These key personnel time-based restricted shares vest in one-third annual installments over three years after the grant date. The closing price of our stock was used to determine the fair value on the date of the grant.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

There were 16,13732,370 and 17,14916,137 restricted shares of common stock issued to non-employee directors under the Plan during 20202021 and 2019,2020, respectively. These grants were approved by the Committee as compensation for the Company’s performance. These restricted shares granted in 2019 were originally approved to fully vest three years after the grant date. However, theThe Committee approved accelerated vesting of these non-employee director restricted shares in January 2020 to fully vest one year after the grant date. The restricted shares granted in 20202021 fully vest one year after the grant date. The closing price of our stock was used to determine the fair value on the date of the grant.

If any award granted under the Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the award, or if shares issued pursuant to awards are forfeited, any stock subject to such award again shall be available for future awards under the Plan.

Compensation expense for restricted shares of stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date. The Company recognized compensation expense of $1.0 million, $1.0 million and $381 thousand$0.4 million for 2021, 2020, and 2019, respectively.

As of December 31, 20202021 and 2019,2020, there was $907$844 thousand and $946$907 thousand, respectively, of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 1.64 years and 1.68 years, and 2.13 years, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table provides information about restricted stock granted under the Plan for the years ended December 31:

						Weighted Average
							Grant Date
			Restricted Shares				Fair Value
Non-vested at December 31, 2018			12,413			$	17.86
Granted			64,458				17.39
Vested			(3,995	)			17.86
Forfeited			(403	)			17.86
Non-vested at December 31, 2019			72,473				17.44
Granted			55,156				19.23
Vested			(37,908	)			16.94
Forfeited			(4,344	)			19.06
Non-vested at December 31, 2020			85,377			$	18.73

130

			Restricted Shares						Weighted Average Grant Date Fair Value
Non-vested at December 31, 2019			72,473						$	17.44
Granted			55,156						19.23
Vested			(37,908)						16.94
Forfeited			(4,344)						19.06
Non-vested at December 31, 2020			85,377						18.73
Granted			82,490						12.81
Vested			(48,027)						18.63
Forfeited			(6,205)						12.82
Non-vested at December 31, 2021			113,635						$	14.80

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 - FEDERAL AND STATE INCOME TAXES

The components of the provision (benefit) for income tax expense were as follows:

(Dollars in Thousands)		2020				2019				2018
Current		$	2,399			$	1,285			$	(2,447	)
Deferred			(1,627	)			(76	)			4,850
Income Tax Provision		$	772			$	1,209			$	2,403

(Dollars in Thousands)						2021						2020						2019
Current						$	994					$	2,399					$	1,285
Deferred						3,114						(1,627)						(76)
Income Tax Provision						$	4,108					$	772					$	1,209

The following is a reconciliation of the differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate (21% at December 31, 2020, 2019 and 2018) to income before taxes:

		2020								2019								2018
(Dollars in Thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Federal Income Tax at Statutory Rate		$	(9,468	)			21.0			$	5,835				21.0			$	3,006				21.0
State Income Tax, net of Federal Benefit			455				(1.0	)			220				0.8				190				1.3
Tax-exempt Interest, net of Disallowance			(1,757	)			3.9				(2,128	)			(7.7	)			(2,629	)			(18.4	)
Federal Tax Credits, net of Basis Reduction			(948	)			2.2				(2,032	)			(7.3	)			(1,375	)			(9.6	)
Change in Valuation Allowance (excluding the effect of the Act)			(374	)			0.8				(424	)			(1.5	)			(384	)			(2.7	)
Income from Bank Owned Life Insurance			(294	)			0.7				(302	)			(1.1	)			(244	)			(1.7	)
True-up of Book and Tax Basis Differences			81				(0.2	)			8				-				3,742				26.1
Goodwill Impairment			13,060				(29.1	)
Other			17				-				32				0.2				97				0.8
Income Tax Provision and Effective Income Tax Rate		$	772				(1.7	)		$	1,209				4.4			$	2,403				16.8

						2021												2020												2019
(Dollars in Thousands)						Amount						Percent						Amount						Percent						Amount						Percent
Federal Income Tax at Statutory Rate						$	7,497					21.0						$	(9,468)					21.0						$	5,835					21.0
State Income Tax, net of Federal Benefit						20						0.1						455						(1.0)						220						0.8
Tax-exempt Interest, net of Disallowance						(1,131)						(3.2)						(1,757)						3.9						(2,128)						(7.7)
Federal Tax Credits, net of Basis Reduction						(1,559)						(4.4)						(948)						2.2						(2,032)						(7.3)
Change in Valuation Allowance						(529)						(1.5)						(374)						0.8						(424)						(1.5)
Income from Bank Owned Life Insurance						(290)						(0.8)						(294)						0.7						(302)						(1.1)
Goodwill Impairment						—						—						13,060						(29.1)						—						—
Other						100						0.3						98						(0.2)						40						0.2
Income Tax Provision and Effective Income Tax Rate						$	4,108					11.5						$	772					(1.7)						$	1,209					4.4

Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management recorded a valuation allowance on deferred tax assets related to its equity investments in partnerships that will generate capital losses upon exiting the investments. The Company has not identified prudent and feasible strategies to generate future capital gains to offset the capital losses. Management has determined that it is more likely than not that all other deferred tax assets will be realized in future periods so no additional valuation allowance is necessary at December 31, 20202021 and 2019.

131

2020.

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

(Dollars in Thousands)
Deferred Tax Assets		2020				2019
Allowance for Loan Losses		$	11,580			$	8,301
Valuation Adjustments on Other Real Estate Owned			1,537				1,556
Tax Credit Carryforwards			1,771				5,120
Equity Investment in Partnerships			837				1,212
Accrued Interest on Nonaccrual Loans			1,900				889
Operating Lease Liabilities			349				323
Other			1,057				1,280
Gross Deferred Tax Assets			19,031				18,681
Less: Valuation Allowance			(838	)			(1,212	)
Total Deferred Tax Assets		$	18,193			$	17,469

Deferred Tax Liabilities		2020				2019
Fixed Asset Depreciation		$	(5,512	)		$	(5,715	)
Acquisition-Related Fair Value Adjustments			(4,063	)			(4,386	)
Deferred Loan Income			(649	)			(1,088	)
Operating Lease Right-of-Use Assets			(321	)			(263	)
Net Unrealized Gain on Available-for-Sale Securities			(4,179	)			(34	)
Other			(59	)			(55	)
Total Deferred Tax Liabilities			(14,783	)			(11,541	)
Net Deferred Tax Assets		$	3,410			$	5,928

(Dollars in Thousands)						2021						2020
Deferred Tax Assets
Allowance for Credit Losses						$	20,906					$	11,580
Valuation Adjustments on Other Real Estate Owned						1,392						1,537
Tax Credit Carryforwards						1,781						1,771
Equity Investment in Partnerships						304						837
Accrued Interest on Nonaccrual Loans						843						1,900
Operating Lease Liabilities						736						349
Other						1,765						1,057
Gross Deferred Tax Assets						27,727						19,031
Less: Valuation Allowance						(309)						(838)
Total Deferred Tax Assets						$	27,418					$	18,193

(Dollars in Thousands)						2021						2020
Deferred Tax Liabilities
Fixed Asset Depreciation						$	(4,300)					$	(5,512)
Acquisition-Related Fair Value Adjustments						(3,069)						(4,063)
Deferred Loan Income						(1,005)						(649)
Operating Lease Right-of-Use Assets						(712)						(321)
Net Unrealized Gain on Available-for-Sale Securities						(452)						(4,179)
Other						(98)						(59)
Total Deferred Tax Liabilities						(9,636)						(14,783)
Net Deferred Tax Assets						$	17,782					$	3,410

The Company had federal tax credit carryforwardcarryforwards of $1.8 million at both December 31, 20202021 and $5.1 million at December 31, 2019.2020. The federal tax credits consist primarily of new marketsmarket credits and historic rehabilitation credits that, if not used, will expire from 2038 to 2040.

in 2041.

At December 31, 20202021 and 2019,2020, the Company had no ASC 740-10 unrecognized tax benefits or accrued interest and penalties recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company recognizes interest and penalties on unrecognized tax benefits in income tax expense.

The Company is subject to U.S. federal income tax, as well as, various taxation of other state and local jurisdictions. The Company is generally no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2017.

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2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

The following tables presenttable presents the tax effects of thechange in components of other comprehensive (loss) income (loss) for the years ended December 31:

		Pre-Tax				Tax (Expense)				Net of Tax
(Dollars in Thousands)		Amount				Benefit				Amount
2020
Net Unrealized Gains Arising during the Period		$	26,621			$	(5,590	)		$	21,031
Reclassification Adjustment for Gains included in Net Loss			(6,882	)			1,445				(5,437	)
Other Comprehensive Income		$	19,739			$	(4,145	)		$	15,594
2019
Net Unrealized Gains Arising during the Period		$	15,108			$	(3,173	)		$	11,935
Reclassification Adjustment for Gains included in Net Income			(2,205	)			463				(1,742	)
Other Comprehensive Income		$	12,903			$	(2,710	)		$	10,193
2018
Net Unrealized Losses Arising during the Period		$	(8,636	)		$	1,814			$	(6,822	)
Reclassification Adjustment for Gains included in Net Income			(1,271	)			267				(1,004	)
Other Comprehensive Loss		$	(9,907	)		$	2,081			$	(7,826	)

31, net of tax effects:

(Dollars in Thousands)						Pre-Tax Amount						Tax (Expense) Benefit						Net of Tax Amount
2021
Net Unrealized Losses Arising during the Period						$	(10,877)					$	2,284					$	(8,593)
Reclassification Adjustment for Gains included in Net Income						(6,869)						1,443						(5,426)
Other Comprehensive Loss						$	(17,746)					$	3,727					$	(14,019)
2020
Net Unrealized Gains Arising during the Period						$	26,621					$	(5,590)					$	21,031
Reclassification Adjustment for Gains included in Net Loss						(6,882)						1,445						(5,437)
Other Comprehensive Income						$	19,739					$	(4,145)					$	15,594
2019
Net Unrealized Gains Arising during the Period						$	15,108					$	(3,173)					$	11,935
Reclassification Adjustment for Gains included in Net Income						(2,205)						463						(1,742)
Other Comprehensive Income						$	12,903					$	(2,710)					$	10,193

NOTE 18 – COMMITMENTS AND CONTINGENCIES

Commitments to extend credit, which amounted to $513.5 million at December 31, 2021 and $591.2 million at December 31, 2020, and $488.9 million at December 31, 2019, represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represent $391.4,represented $283.9 million, or 66.2%55.3%, and $298.8,$391.4 million, or 61.1%66.2%, of the commitments to extend credit at December 31, 20202021 and 2019,December 31, 2020, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements. The Company had outstanding letters of credit totaling $27.1 million at December 31, 2021 and $29.3 million in 2020 and $39.5 million in 2019.

at December 31, 2020.

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

Our allowance

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The activity in the life-of-loss reserve on unfunded loan commitments for the year ended December 31, 2021 is as follows:

(Dollars in Thousands)						December 31, 2021
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at beginning of period						$	144
Impact of Adopting ASU 2016-13						2,908
January 1, 2021						3,052
Provision for unfunded commitments						(1,269)
Balance at end of period						$	1,783

Amounts are added to the allowanceprovision for unfunded commitments through a charge to current earnings in noninterest expense.the provision for unfunded commitments. The balance in the allowanceprovision for unfunded commitments was $0.1a release of $1.3 million and $0.4 million atfor the year ended December 31, 2020 and 2019, respectively. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets. The reserve is calculated by applying historical loss rates to our unfunded commitments.

133

2021.

Litigation

CARTER BANKSHARES, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Litigation

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

administrative proceeding cannot be predicted with certainty.

NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions and return on investment. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts: Service charges on deposit accounts consist of overdraft fees, service charges on returned checks, stop payment fees, check chargeback fees, minimum balance fees, and other deposit account related fees. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on returned checks are recognized at the point in time that a check is returned. Transaction-based fees, which include services such as stop payment fees, check chargeback fees, and other deposit account related fees are recognized at the point in time the Company fulfills the customer’s request. Minimum balance fees are system-assessed at the point in time that a customer’s balance is below the required minimum for the product. Service charges on deposits are withdrawn from the customer’s account balance.

Other Fees and Other Income: Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees. These fees are largely transaction-based; therefore, the Company’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered. Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account.

Debit Card Interchange Fees: The Company earns interchange fees from debit cardholder transactions conducted through a card payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Insurance: Commission income is earned based on customer transactions. The commission income is recognized when the transaction is complete. The Company also receives a return on its investment in Bankers Insurance, LLC on an annual basis based on the income of the insurance company and percentage of ownership.

OREO Income: The Company owns properties acquired through foreclosure that are included in other real estate owned, net on the Consolidated Balance Sheet. If the Company rents any of those properties, the resultant income is recognized at the point of receipt since the performance obligation has been satisfied. The rents are generally received monthly.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the years ended December 31:

		Point of Revenue
(Dollars in Thousands)		Recognition		2020				2019				2018
In-Scope Revenue Streams
Service Charges on Deposit Accounts		At  a point in time		$	3,518			$	3,919			$	3,127
Other Fees and Other Income		At  a point in time			2,497				1,789				1,756
Debit Card Interchange Fees		At  a point in time			5,857				5,160				4,750
Commercial Loan Swap Fee Income		At a point in time			4,051				-				-
Insurance
Customer Commissions		At  a point in time			73				120				625
Annual Commission on Investment		Over time			1,366				1,105				1,230
Special Production Payout		Over time			289				-				-
Other Real Estate Owned Income		At  a point in time			340				689				2,692
Gains (Losses) on Sale of Other Real Estate Owned		At  a point in time			***				***				***
Total In-Scope Revenue Streams					13,940				12,782				14,180
Out of Scope Revenue Streams
Gain on Sales of Securities, net					6,882				2,205				1,271
Bank Owned Life Insurance Income					1,400				1,436				1,161
Other					307				447				374
Total Noninterest Income				$	26,580			$	16,870			$	16,986

(Dollars in Thousands)						Point of Revenue Recognition						2021						2020						2019
In-Scope Revenue Streams
Service Charges on Deposit Accounts						At  a point in time						$	5,036					$	3,518					$	3,919
Other Fees and Other Income						At  a point in time						3,233						2,497						1,789
Debit Card Interchange Fees						At  a point in time						7,226						5,857						5,160
Commercial Loan Swap Fee Income						At a point in time						2,416						4,051						—
Insurance
Customer Commissions						At  a point in time						91						73						120
Annual Commission on Investment						Over time						1,681						1,366						1,105
Special Production Payout						Over time						129						289						—
Other Real Estate Owned Income						At  a point in time						90						340						689
Gains (Losses) on Sale of Other Real Estate Owned						At  a point in time						***						***						***
Total In-Scope Revenue Streams												19,902						17,991						12,782
Out of Scope Revenue Streams
Gain on Sales of Securities, net												6,869						6,882						2,205
Bank Owned Life Insurance Income												1,380						1,400						1,436
Other												730						307						447
Total Noninterest Income												$	28,881					$	26,580					$	16,870

***Reported net with Losses on Sales and Write-downs of Other Real Owned in Noninterest Expense

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 20 – PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Balance Sheets

		December 31,
(Dollars in Thousands)		2020				2019
ASSETS
Cash		$	639			$	-
Investment in Bank Subsidiary			439,553				-
Other Assets			-				-
Total Assets		$	440,192			$	-
LIABILITIES
Other Liabilities		$	18			$	-
Total Shareholders’ Equity			440,174				-
Total Liabilities and Shareholders’ Equity		$	440,192			$	-

135

						December 31,
(Dollars in Thousands)						2021						2020
ASSETS
Cash						$	5,142					$	639
Investment in Bank Subsidiary						402,190						439,553
Other Assets						571						—
Total Assets						$	407,903					$	440,192
LIABILITIES
Other Liabilities						$	307					$	18
Total Shareholders’ Equity						407,596						440,174
Total Liabilities and Shareholders’ Equity						$	407,903					$	440,192

Statements of Net Income

						December 31,
(Dollars in Thousands)						2021						2020						2019
Dividends from Subsidiaries						$	6,000					$	1,000					$	—
Total Expenses						(2,238)						(594)						—
Income Before Income Tax Benefit and Undistributed Net Income of Bank Subsidiary						3,762						406						—
Income Tax Benefit						(446)						—						—
Income Before Undistributed Net Income of Bank Subsidiary						4,208						406						—
Equity in Undistributed Net Income (Loss) of Bank Subsidiary						27,382						(46,264)						—
Net Income (Loss)						$	31,590					$	(45,858)					$	—

Statements of Cash Flows

						December 31,
(Dollars in Thousands)						2021						2020						2019
OPERATING ACTIVITIES
Net Income (Loss)						$	31,590					$	(45,858)					$	—
Equity in Undistributed Net (Income) Loss of Bank Subsidiary						(27,382)						46,264						—
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
Operating Activities
Stock Compensation Expense						1,040						215						—
Increase in Other Assets						(571)						—						—
(Decrease) Increase in Intercompany Liability						(17)						18						—
Net Cash Provided by Operating Activities						4,660						639						—
INVESTING ACTIVITIES
Investments in Subsidiaries						—						—						—
Net Cash Used in Investing Activities						—						—						—
FINANCING ACTIVITIES
Stock Repurchase Plan Settlements						(157)						—						—
Cash Dividends Paid to Common Shareholders						—						—						—
Net Cash Used In Financing Activities						(157)						—						—
Net Increase in Cash						4,503						639						—
Cash at Beginning of Year						639						—						—
Cash at End of Year						$	5,142					$	639					$	—

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Statements of Net Income

		December 31,
(Dollars in Thousands)		2020				2019				2018
Dividends from Subsidiaries		$	1,000			$	-			$	-
Total Expenses			(594	)			-				-
Income before income tax and undistributed net loss of bank subsidiary			406				-				-
Income tax benefit			-				-				-
Income before undistributed net loss of bank subsidiary			406				-				-
Equity in undistributed net loss of bank subsidiary			(46,264	)			-				-
Net Loss		$	(45,858	)		$	-			$	-

Statements of Cash Flows

		December 31,
(Dollars in Thousands)		2020				2019				2018
OPERATING ACTIVITIES
Net Loss		$	(45,858	)		$	-			$	-
Equity in undistributed net loss of bank subsidiary			46,264				-				-
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities
Stock Compensation Expense			215				-				-
Increase in Intercompany Liability			18				-				-
Net Cash Provided by Operating Activities			639				-				-
INVESTING ACTIVITIES
Investments in subsidiaries			-				-				-
Net Cash Used in Investing Activities			-				-				-
FINANCING ACTIVITIES
Cash dividends paid to common shareholders			-				-				-
Net Cash Provided by Financing Activities			-				-				-
Net increase in cash			639				-				-
Cash at beginning of year			-				-				-
Cash at end of year		$	639			$	-			$	-

NOTE 21 - CAPITAL ADEQUACY

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, wethe Company 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 aboutin relation to components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (“Basel III rules”) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, we must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in at the rate of 0.625% per year and was 2.5% on January 1, 2019. Management believes as of December 31, 2020, we2021, the Company and the Bank met all capital adequacy requirements to which we are subject.

136

subject and satisfied the applicable capital conservation buffer requirements.

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 year-end 20202021 and 2019,2020, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutionsinstitution’s category.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

		Actual								Minimum Regulatory Capital Requirements								To be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2020
Leverage Ratio
Carter Bankshares, Inc.		$	424,453				10.26	%		$	165,514				4.00	%			NA				NA
Carter Bank & Trust			423,832				10.24	%			165,514				4.00	%		$	206,892				5.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Carter Bankshares, Inc.		$	424,453				13.08	%		$	146,077				4.50	%			NA				NA
Carter Bank & Trust			423,832				13.06	%			146,078				4.50	%		$	211,001				6.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.		$	424,453				13.08	%		$	194,769				6.00	%			NA				NA
Carter Bank & Trust			423,832				13.06	%			194,770				6.00	%		$	259,694				8.00	%
Total Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.		$	465,198				14.33	%		$	259,692				8.00	%			NA				NA
Carter Bank & Trust			464,578				14.31	%			259,694				8.00	%		$	324,617				10.00	%
As of December 31, 2019
Leverage Ratio
Carter Bank & Trust		$	410,793				10.33	%		$	158,993				4.00	%		$	198,741				5.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Carter Bank & Trust		$	410,793				13.58	%		$	136,126				4.50	%		$	196,626				6.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Carter Bank & Trust		$	410,793				13.58	%		$	181,501				6.00	%		$	242,002				8.00	%
Total Capital (to Risk-Weighted Assets)
Carter Bank & Trust		$	448,622				14.83	%		$	242,002				8.00	%		$	302,502				10.00	%

On November 20,

						Actual												Minimum Regulatory Capital Requirements												To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)						Amount						Ratio						Amount						Ratio						Amount						Ratio
As of December 31, 2021
Leverage Ratio
Carter Bankshares, Inc.						$	443,940					10.62		%				$	167,184					4.00		%				NA						NA
Carter Bank & Trust						438,533						10.49		%				167,170						4.00		%				$	208,962					5.00		%
Common Equity Tier 1 (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	443,940					14.21		%				$	140,606					4.50		%				NA						NA
Carter Bank & Trust						438,533						14.04		%				140,580						4.50		%				$	203,061					6.50		%
Tier 1 Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	443,940					14.21		%				$	187,475					6.00		%				NA						NA
Carter Bank & Trust						438,533						14.04		%				187,441						6.00		%				$	249,921					8.00		%
Total Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	483,124					15.46		%				$	249,967					8.00		%				NA						NA
Carter Bank & Trust						477,710						15.29		%				249,921						8.00		%				$	312,401					10.00		%
As of December 31, 2020
Leverage Ratio
Carter Bankshares, Inc.						$	424,453					10.26		%				$	165,514					4.00		%				NA						NA
Carter Bank & Trust						423,832						10.24		%				165,514						4.00		%				$	206,892					5.00		%
Common Equity Tier 1 (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	424,453					13.08		%				$	146,077					4.50		%				NA						NA
Carter Bank & Trust						423,832						13.06		%				146,078						4.50		%				$	211,001					6.50		%
Tier 1 Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	424,453					13.08		%				$	194,769					6.00		%				NA						NA
Carter Bank & Trust						423,832						13.06		%				194,770						6.00		%				$	259,694					8.00		%
Total Capital (to Risk-Weighted Assets)
Carter Bankshares, Inc.						$	465,198					14.33		%				$	259,692					8.00		%				NA						NA
Carter Bank & Trust						464,578						14.31		%				259,694						8.00		%				$	324,617					10.00		%

The Company was incorporated on October 7, 2020 the Company acquired the Bank in a merger and reorganization pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act, and in accordanceconnection with the terms of a Plan of Merger andReorganization. The Reorganization dated November 9, 2020.  Pursuant to the Agreement,was completed on November 20, 2020 at 7:00 p.m. allpursuant to an Agreement and Plan of Reorganization among the Bank, the Company and CBT Merger Sub, Inc., and the Bank survived the Reorganization as a wholly-owned subsidiary of the Company. In the Reorganization, each of the outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one1 newly issued share of the Company’s par value common stock, and the Bank became a subsidiary of the Company.

stock.

In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the FRB, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-oneDay 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. InOn March 27, 2020, the OCC, the FRB, and the FDIC published anregulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to delay the estimated impact on regulatory capital stemmingdisrupted economic activity from the implementationspread of CECL.COVID-19. The interim final ruleIFR 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 planadopted CECL effective January 1, 2021 and elected to adoptimplement the capital transition relief over the permissible three-year period due to our intended adoptionperiod.

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Table of CECL in the first quarter of 2021.

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Contents

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 22 - QUARTERLY FINANCIAL DATA (Unaudited)

The following summarizes the quarterly results of operations for the years ended December 31:

(Dollars in Thousands)		First				Second				Third				Fourth
2020		Quarter				Quarter				Quarter				Quarter
Total Interest Income		$	37,836			$	35,617			$	33,986			$	33,502
Total Interest Expense			10,572				9,355				8,550				7,349
Net Interest Income			27,264				26,262				25,436				26,153
Provision for Loan Losses			4,798				5,473				2,914				4,821
Net Interest Income after Provision for Loan Losses			22,466				20,789				22,522				21,332
Total Noninterest Income			6,952				6,201				7,975				5,589
Total Noninterest Expense			24,748				23,023				87,300				23,841
Income (Loss) Before Income Taxes			4,670				3,967				(56,803	)			3,080
Income Tax Expense (Benefit)			247				(488	)			875				138
Net Income (Loss)		$	4,423			$	4,455			$	(57,678	)		$	2,942
Earnings (Loss) Per Share		$	0.17			$	0.17			$	(2.19	)		$	0.11

(Dollars in Thousands)		First				Second				Third				Fourth
2019		Quarter				Quarter				Quarter				Quarter
Total Interest Income		$	39,139			$	40,068			$	40,154			$	39,759
Total Interest Expense			11,243				12,113				12,084				11,333
Net Interest Income			27,896				27,955				28,070				28,426
Provision for Loan Losses			1,627				1,369				1,390				(982	)
Net Interest Income after Provision for Loan Losses			26,269				26,586				26,680				29,408
Total Noninterest Income			3,804				4,579				4,156				4,509
Total Noninterest Expense			22,110				22,834				22,777				30,486
Income Before Income Taxes			7,963				8,331				8,059				3,431
Income Tax Expense (Benefit)			422				504				458				(175	)
Net Income		$	7,541			$	7,827			$	7,601			$	3,606
Earnings Per Share		$	0.29			$	0.30			$	0.29			$	0.14

(Dollars in Thousands)		First				Second				Third				Fourth
2018		Quarter				Quarter				Quarter				Quarter
Total Interest Income		$	35,588			$	38,362			$	38,207			$	39,862
Total Interest Expense			8,151				9,111				10,079				10,773
Net Interest Income			27,437				29,251				28,128				29,089
Provision for Loan Losses			1,515				1,730				13,743				(118	)
Net Interest Income after Provision for Loan Losses			25,922				27,521				14,385				29,207
Total Noninterest Income			4,731				4,741				4,610				3,832
Total Noninterest Expense			22,559				23,022				25,360				29,700
Income (Loss) Before Income Taxes			8,094				9,240				(6,365	)			3,339
Income Tax (Benefit) Expense			(735	)			2,041				1,164				(67	)
Net Income (Loss)		$	8,829			$	7,199			$	(7,529	)		$	3,406
Earnings (Loss) Per Share		$	0.34			$	0.27			$	(0.29	)		$	0.13

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						2021
(Dollars in Thousands)						First Quarter						Second Quarter						Third Quarter						Fourth Quarter
Total Interest Income						$	32,957					$	33,094					$	34,913					$	32,933
Total Interest Expense						6,428						5,891						5,512						4,883
Net Interest Income						26,529						27,203						29,401						28,050
Provision for Credit Losses						1,857						967						(413)						939
Provision for Unfunded Commitments						(282)						(603)						(60)						(324)
Net Interest Income after Provision for Credit Losses						24,954						26,839						29,874						27,435
Total Noninterest Income						8,952						7,238						6,915						5,776
Total Noninterest Expense						23,605						27,759						24,685						26,236
Income Before Income Taxes						10,301						6,318						12,104						6,975
Income Tax Expense						926						886						931						1,365
Net Income						$	9,375					$	5,432					$	11,173					$	5,610
Earnings Per Share						$	0.36					$	0.21					$	0.42					$	0.21

CARTER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 23 – SUBSEQUENT EVENT

On January 6, 2021, the Company announced that it will be closing 24 Bank branches, throughout its footprint, through the closure or sale

						2020
(Dollars in Thousands)						First Quarter						Second Quarter						Third Quarter						Fourth Quarter
Total Interest Income						$	37,836					$	35,617					$	33,986					$	33,502
Total Interest Expense						10,572						9,355						8,550						7,349
Net Interest Income						27,264						26,262						25,436						26,153
Provision for Credit Losses						4,798						5,473						2,914						4,821
Net Interest Income after Provision for Credit Losses						22,466						20,789						22,522						21,332
Total Noninterest Income						6,952						6,064						7,975						5,589
Total Noninterest Expense						24,748						22,886						87,300						23,841
Income (Loss) Before Income Taxes						4,670						3,967						(56,803)						3,080
Income Tax Expense (Benefit)						247						(488)						875						138
Net Income (Loss)						$	4,423					$	4,455					$	(57,678)					$	2,942
Earnings (Loss) Per Share						$	0.17					$	0.17					$	(2.19)					$	0.11

						2019
(Dollars in Thousands)						First Quarter						Second Quarter						Third Quarter						Fourth Quarter
Total Interest Income						$	39,139					$	40,068					$	40,154					$	39,759
Total Interest Expense						11,243						12,113						12,084						11,333
Net Interest Income						27,896						27,955						28,070						28,426
Provision for Credit Losses						1,627						1,369						1,390						(982)
Net Interest Income after Provision for Credit Losses						26,269						26,586						26,680						29,408
Total Noninterest Income						3,804						4,401						4,156						4,509
Total Noninterest Expense						22,110						22,656						22,777						30,486
Income Before Income Taxes						7,963						8,331						8,059						3,431
Income Tax Expense (Benefit)						422						504						458						(175)
Net Income						$	7,541					$	7,827					$	7,601					$	3,606
Earnings Per Share						$	0.29					$	0.30					$	0.29					$	0.14

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Table of those branches. The branch closures are expected to occur on or about April 16, 2021, as part of a strategic network optimization plan that is being implemented to support the long-term, sustainable growth of the Company. On January 14, 2021, the Company announced that the Bank had agreed to sell three branches in Staunton, Harrisonburg, and Bridgewater, Virginia to Pendleton Community Bank, a subsidiary of Allegheny Bancshares, Inc. On January 27, 2021, the Company announced that the Bank had agreed to sell one branch in Waynesboro, Virginia to F&M Bank, a subsidiary of F&M Bank Corp. As part of the execution of these agreements, the purchasers will acquire loans, assume deposits and acquire bank premises and equipment. The balances as of December 31, 2020 were $9.8 million of combined loans, $84.7 million of combined deposits and book value of $2.3 million of bank premises and equipment. These transactions are subject to customary closing conditions, including regulatory approvals.

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Crowe LLP

Independent Member Crowe Global

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Carter Bankshares, Inc. and Subsidiaries

Martinsville, Virginia

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Carter Bankshares, Inc. and Subsidiaries (formerly Carter Bank & Trust) (the "Company") as of December 31, 20202021 and 2019,2020, the related consolidated statements of (loss) income (loss), comprehensive income (loss) income,, changes in shareholders’ equity, and cash flows for each of the years in the two-yearthree-year period ended December 31, 2020,2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020,2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the years in the two-yearthree-year period ended December 31, 20202021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our auditaudits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included

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performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

Matter

The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (i) relate(1) relates to accounts or disclosures that are material to the financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.

it relates.

Allowance for LoanCredit Losses – Qualitative Factors

As more fully described in Note

In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, and Note 6 to the financial statements, the Company’s allowance for loan losses is a valuation allowance for probable incurred losses inherent in the loan portfolio. The allowance for loan losses consists of a specific component which relates to individually impaired loans and a general component. The general component covers loans that are collectively evaluated for impairment. The general component is based on historical loss experience adjusted for current conditions and qualitative factors. These qualitative factors may include consideration for the following: levels of delinquency and delinquency trends; migration of loans to the classification of special mention, substandard or doubtful; trends in volume and terms of loans; effects of changes in underwriting standards; changes in lending policies, procedures, and practices; national and local economic trends and conditions; industry conditions, and effects of credit concentrations.

We determined that auditing the qualitative factors applied to adjust the historical loss experience within the general component of the allowance for loan losses is a critical audit matter. The principal considerations for our determination are the high degree of subjectivity involved in management’s assessment of the risk of loss associated with each risk factor and the weightings applied to them, and the significant degree of auditor judgment and audit effort.

Our audit procedures to address the critical audit matter included:

·

Testing the effectiveness of controls over management’s review of the reasonableness of the qualitative factors, the amounts and weightings applied to each factor, the underlying documentation used in the calculation, and the accuracy of the mathematical application of the qualitative factors used to adjust the historical loss experience and determine the general component of the allowance for losses calculation.

·

Substantively testing management’s estimate, including evaluating their judgments and assumptions, which included:

o

Evaluating the reliability of the underlying objective data used to derive the qualitative factors. Based on the underlying data, we evaluated the reasonableness of management’s designation of the resulting adjustment to the historical loss experience. We also evaluated the reasonableness of weightings applied to each risk factor and the impact of changes in the factors from prior periods.

141

o

Tested the accuracy of the mathematical application of the qualitative factors used to adjust the historical loss experience within the allowance for loan loss calculation and respective loan segmentation balances the qualitative factors are applied too.

o

Performing analytical review procedures to determine if the general component of the allowance for loan losses balance was consistent with trends in the loan portfolio and economic conditions and methodology was consistently applied.

Allowance for Loan Losses - Fair Value of Collateral Associated with Impaired Loans

As more fully described in Note 1 and Note 6 to the financial statements, the allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified2021 as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. If a loan is impaired, and the loan is collateral dependent, the fair value of collateral is used to measure impairment.

Management obtained a third-party appraisal to estimate the fair value of collateral associated with two collateral-dependent impaired loans. The collateral’s fair value is considered material to the impairment analyses and underlying assumptions used to estimate fair value have a high degree of subjectivity.

We determined that auditing the fair value of the collateral associated with the two collateral-dependent impaired loans is a critical audit matter. The principal considerations for our determination are the high degree of subjectivity associated with the underlying assumptions used by a third-party appraiser in determining the fair value of the collateral and the significant degree of auditor judgment and audit effort.

Our audit procedures to address the critical audit matter included:

·

Testing the effectiveness of management review controls including:

o

Management’s evaluation of the valuation methodologies and critical assumptions used by the Company engaged third-party appraiser and their sensitivity analysis.

o

Management’s review of the accuracy of information utilized within the impairment analysis.

·

Substantively testing management’s estimate of fair value of the collateral which included:

o

Utilization of auditor engaged valuation specialist to evaluate the appropriateness of valuation methodologies and critical assumptions of the Company’s engaged third-party appraiser.

o

Evaluate the relevance and reliability of data used by the auditor engaged specialist.

o

Performed a sensitivity analysis of the significant assumptions.

o

Evaluation of the impairment analysis of the two-collateral dependent impaired loans to determine the application of the fair value was appropriately stated.

Goodwill Impairment Evaluation

As described in Notes 1 and 106 of the consolidated financial statements using the modified retrospective method. Also see explanatory paragraph above. The ASU requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The Company disclosed the impact of adoption of this standard on January 1, 2021 with a $61.6 million increase to the financial statements, goodwillallowance for credit losses and a $50.7 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Provision expense for the year ending December 31, 2021 was $3.4 million and the allowance for credit losses as of December 31, 2021 was $95.9 million.

The Company’s methodology for estimating the allowance for credit losses includes segmentation, quantitative analysis, and qualitative analysis. The Company’s loan portfolio is tested for impairment at the reporting unit level at least annually, or more frequently whenever events or circumstances occursegmented by homogeneous loan types that indicate that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. During 2020, the Company performed impairment testing on a quarterly basis duebehave similarly to the continued decline in the Company stock price primarily related to the economic fallout of COVID-19. A goodwill impairment charge of $62,192,000 was taken in the third quarter based on the Company’s impairment test.

cycles. The quantitative assessment of goodwill for the Company’s single reporting unit was performed utilizinganalysis includes using a discounted cash flow analysis (“income approach”)(DCF) model for determining the allowance for credit losses. Economic forecasts are used in the model to estimate the probability of default and estimates of selected market information (“market approach”) performed by a third-party. The calculation of the goodwill impairment involves significant estimates and subjectiveloss given default through regression. Model assumptions which require a high degree of management judgment. This judgment includes,include, but isare not limited to the selectiondiscount rate, prepayments, and curtailments. The qualitative analysis is determined based on management’s review and analysis of appropriate discount rates,internal, external and model risks, including adjustment made to the identification of relevantmodel output and economic forecast if it is incompatible with known market comparablesconditions based on management’s experience and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.

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perspective.

We identified the goodwill impairment assessment of the Companyallowance for credit losses as a critical audit matter.matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management in the development of the estimate. The principal considerations for thisresulting in our determination wasincluded the degree offollowing:

•Significant audit effort and auditor judgment to evaluate the segmentation, quantitative, and qualitative analysis used in performingthe calculation

The primary procedures over the fair value methodologies and key assumptions used to determine fair value, which included, discount rate, prospective financial information, and weighting allocation to valuation methodologies and the timing of the goodwill impairment charge during 2020.

Our audit proceduresperformed to address thethis critical audit matter include:

Testing the effectiveness of internal controls over:

•The Company’s selection of the DCF model, including evaluation of the segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

•The completeness and accuracy of data used in the model

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•The Company’s review of the allowance for credit loss calculation, including the review of the Company’s judgments used in developing the segmentation, quantitative analysis, and qualitative analysis and the relevance and reliability of data used as the basis for adjustments for the model

Substantively testing management’s estimate, which included:

•Assessing the reasonableness of management’s selection of segmentation, quantitative analysis, and qualitative analysis as part of the adoption of the new accounting standard

•Evaluating management’s judgment for developing the segmentation, quantitative, and qualitative analysis, including assessing the relevance and reliability of data used to develop the model

•Evaluating the mathematical accuracy of the discounted cash flow model, including evaluating the completeness and accuracy of loan data used in the model

·

Testing the effectiveness of controls over management’s goodwill impairment test including:

o

Management’s review of the reasonableness and accuracy of the Company’s prospective financial information used in the discounted cash flow methodology associated with each quarterly impairment analysis.

	o
			Management’s evaluation of key assumptions used by a third-party valuation specialist, including discount rate, terminal growth rate, control premium and allocated weightings incorporated into the methodologies used to determine fair value associated with each quarterly impairment analysis.

·

Substantively testing management’s process, including evaluating their judgements and assumptions, for estimating fair value which included:

o

Evaluation of key financial data for accuracy, including comparison of prospective financial information to the Company’s strategic plan for the second and third quarter analysis.

o

Evaluation of management’s ability to reasonably forecast cash flows by comparing actual results to management’s historical forecasts for the second and third quarter analysis.

o

Utilization of auditor employed valuation specialist to evaluate appropriateness of valuation methodologies, discount rate, control premium, overall reasonableness of the fair value for the second and third quarter’s analysis.

o

Evaluation of management’s weighting allocation to each valuation methodology tested.

	/s/ Crowe LLP
We have served as the Company's auditor since 2019.
Washington, D.C.
March 12, 202111, 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the BoardTable of Directors and Shareholders 

Carter Bankshares, Inc. (as successor to Carter Bank & Trust) 

Martinsville, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of income, comprehensive income (loss), changes in shareholders' equity and cash flows for the year ended December 31, 2018, (collectively, the financial statements) of Carter Bankshares, Inc. and subsidiaries (as successor to Carter Bank & Trust and subsidiaries), the Company. In our opinion, the financial statements present fairly, in all material respects the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Yount, Hyde & Barbour, P.C.

We served as the Company’s auditor from 2012 to 2018.

Roanoke, Virginia 

March 14, 2019

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”)CEO and Chief Financial Officer (“CFO”) (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2020.2021. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process designed by or under the supervision of, our CEO and CFO to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of specific controls or internal control over financial reporting overall to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Based on this assessment, management concludes that, as of December 31, 2020,2021, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013). ”Crowe” Crowe LLP, our independent registered public accounting firm, has issued a report on the effectiveness of Company’s internal control over financial reporting as of December 31, 2020,2021, which is included herein.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 9A. CONTROLS AND PROCEDURES (continued)

Previously Disclosed Material Weakness

As previously disclosed in Part II, Item 9A “Controls and Procedures” of the Bank’s Form 10-K for the period ended December 31, 2019, a material weakness was identified in the Bank’s internal control over financial reporting resulting from ineffective internal controls over the valuation and existence of complex collateral associated with two collateral-dependent impaired loans. We relied on stale appraisal information in order to support the underlying assumptions and methodologies to determine fair value and existence of the complex collateral. The appraisals were incomplete and did not adequately support the valuation and existence of the complex collateral. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Remediation of Previously Disclosed Material Weakness

During the fourth quarter of 2019, management concluded that the controls regarding the completeness and accuracy of the valuation of impaired loans, including calculations and supporting information were not operating effectively. The Bank relied on stale appraisal information to support the underlying assumptions and methodologies to determine fair value and existence of unique, complex collateral in a singular, limited situation. As of December 31, 2020, management had successfully remediated this material weakness. The remediation included obtaining an updated appraisal from an industry expert qualified to support the valuation and existence of the complex collateral associated with the two collateral-dependent impaired loans.

Changes in Internal Control Over Financial Reporting

No other 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 December 31, 20202021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 9B. OTHER INFORMATION

On December 15, 2020, the Bank adopted an unfunded, nonqualified deferred compensation plan, called the Nonqualified Deferred Compensation Plan, to provide (i) key employees

None

ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable

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Table of the Bank, including all of the Company’s named executive officers (beginning after the date of adoption) the opportunity to defer to a later year on a pre-tax basis certain compensation without being subject to the dollar limits that apply to these employees under the Bank’s tax-qualified integrated profit-sharing plan and (ii) the Bank’s non-employee directors (beginning in January 2022) the opportunity to defer to a later year on a pre-tax basis certain director fees.  The compensation and fees (and related earnings) deferred under this plan are held in a grantor trust until paid to the participants and remain subject to the claims of the creditors of the Bank and Company until paid to the participants.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Except as set forth below, the information required by Part III, Item 10 of Form 10-K iswill be incorporated herein from the sections entitled – “Delinquent Section 16(a) Reports”,Reports,” if applicable, “Proposal 1 -- Election of Directors,” “Independence and Committee Memberships,” “Executive Officers of the Registrant,” “Corporate Governance --Audit Committee,” and "Corporate Governance - Director Qualifications and Nominations: Board Diversity"Governance" in our proxy statement relating to our June 23, 2021May 25, 2022 annual meeting of shareholders.

Code of Ethics

The Company has adopted a Code of Conduct (the “Code”) that applies to its directors, executive officers and employees and is available on the Company’s website at www.CBTCares.com under “Investor.“Investor – Corporate Information – Governance Documents.” The Company intends to provide any required disclosure of any amendment to or waiver of the Code that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on www.CBTCares.com under “Investor”“Investor – Corporate Information – Governance Documents” promptly following the amendment or waiver. The Company may elect to disclose any such amendment or waiver in a Current Report on Form 8-K filed with the SEC either in addition to or in lieu of the website disclosure. The information contained on or connected to the Company’s website is not incorporated by reference in this Annual Report on Form 10-K and should not be considered part of this or any other report or document that we file or furnish to the SEC.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by Part III, Item 11 of Form 10-K iswill be incorporated herein from the sections entitled “Compensation Discussion“Executive Compensation” and Analysis,” “Executive Compensation,” “Director Compensation,” “Corporate Governance -- Compensation Committee Interlocks and Insider Participation,” “Corporate Governance - The Company Board’s Role in Risk Oversight” and “Compensation and Benefits Committee Report”Compensation” in our proxy statement relating to our June 23, 2021May 25, 2022 annual meeting of shareholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except as set forth below, the information required by Part III, Item 12 of Form 10-K iswill be incorporated herein from the sections entitled “Principal Beneficial Owners of Carter Bankshares Inc. Common Stock” and “Beneficial Ownership of Carter Bankshares, Inc. Common Stock by Directors and Officers” in our proxy statement relating to our June 23, 2021May 25, 2022 annual meeting of shareholders.

147

CARTER BANKSHARES, INC. AND SUBSIDIARIES

PART III

Equity Compensation Plan Information

The following table provides summary information as of December 31, 20202021 related to the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Plan, the only equity compensation plan under which the Company’s securities are authorized for issuance.

		(a)			(b)			(c)
						(a)						(b)						(c)
						Number of securities to be issued upon exercise of outstanding options, warrants and rights									Weighted average exercise price of outstanding options, warrants and rights								Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Equity compensation plan approved by shareholders						—						$—						1,796,435				1,872,720
Equity compensation plans not approved by shareholders						—						—
Total						—						$—						1,796,435				1,872,720

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Part III, Item 13 of Form 10-K iswill be incorporated herein from the sections entitled “Related Person Transactions” and “Corporate Governance -- Director Independence” in our proxy statement relating to our June 23, 2021May 25, 2022 annual meeting of shareholders.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

PART III

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Part III, Item 14 of Form 10-K iswill be incorporated herein from the section entitled “Proposal 2: Ratification of the Selection of Independent Registered Public Accounting Firm for Fiscal Year 2021” in our proxy statement relating to our June 23, 2021May 25, 2022 annual meeting of shareholders.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

The following documents are filed as part of this Report.

(a)The following documents are filed as part of this Annual Report on Form 10-K and are incorporated by reference and found where noted below.

Consolidated Financial Statements: The following consolidated financial statementsConsolidated Financial Statements are included in Part II, Item 8 of this Report.Annual Report on Form 10-K. No financial statement schedules are being filed because the required information is inapplicable or is presented in the Consolidated Financial Statements or related notes.

Consolidated Balance Sheets			8563
Consolidated Statements of Income (Loss) Income			8664
Consolidated Statements of Comprehensive Income (Loss) Income			8766
Consolidated Statements of Changes in Shareholders’ Equity			8867
Consolidated Statements of Cash Flows			8968
Notes to Consolidated Financial Statements			9170
Report of Crowe LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting			140116
Report of Yount, Hyde & Barbour, Independent Registered Public Accounting Firm, on Consolidated Financial Statements	144

149

(b)Exhibits

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES – (continued)

(b)

Exhibits

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

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

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

4.1			Description of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)

10.1*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Wendy S. Bell (filed herewith)(incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.2*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Litz Van Dyke (filed herewith)(incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES – (continued)

10.3*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Phyllis Q. Karavatakis (filed herewith)(incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.4*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Jane Ann Davis (filed herewith)(incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.5*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Bradford N. Langs (filed herewith)(incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.6*			Amended and Restated Employment Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Matthew M. Speare (filed herewith)(incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.7*			Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan, effective November 20, 2020 (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on December 3, 2020)

10.7.1*			Form of Time-Based Restricted Stock Agreement (for employee) for use after November 20, 2020 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (filed herewith)(incorporated by reference to Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.7.2*			Form of Time-Based Restricted Stock (for non-employee director) for use after November 20, 2020 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (filed herewith)(incorporated by reference to Exhibit 10.7.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

			150
10.7.3*			Form of Time-Based Restricted Stock Agreement (for employee: LTIP) for use after March 2, 2022, under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)

CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES – (continued)

10.7.4*			Form of Performance Unit Agreement (for employee) for use after March 2, 2022 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)
10.7.5*			Form of Time-Based Restricted Stock Agreement (for employee: annual) for use on or after February 17, 2022 under the Carter Bankshares, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2022)
10.8*			Carter Bankshares, Inc. Amended and Restated Annual Incentive Plan as amended and restated February 18, 2021 (filed herewith)(incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.9*			Amended and Restated Change of Control Severance Agreement, dated and effective as of November 20, 2020, by and between Carter Bankshares, Inc., Carter Bank & Trust and Arthur Loran Adams (filed herewith)(incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.10*			Amended and Restated Change of Control Severance Agreement, dated and effective as of November 20, 2020 by and between Carter Bankshares, Inc., Carter Bank & Trust and Tony E. Kallsen (filed herewith)(incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES – (continued)

10.11*			Carter Bank & Trust Nonqualified Deferred Compensation Plan (executive component) - Virginia Bankers Association Model Plan (for executives) as restated as of January 1, 2018 and incorporating all amendments through November 1, 2020 (filed herewith)(incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.11.1*			Adoption Agreement for Virginia Bankers Association Model Plan (for executives) as restated as of January 1, 2018 and updated January 1, 2020, effective as of January 1, 2022 (filed herewith)

10.11.2*			162(m) Amendment to Virginia Bankers Association Model Plan (for executives) adopted November 13, 2020 (filed herewith)(incorporated by reference to Exhibit 10.11.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.12*			Carter Bank & Trust Nonqualified Deferred Compensation Plan (director component) - Virginia Bankers Association Model Plan (for directors) as restated as of January 1, 2018 and incorporating all amendments through November 1, 2020 (filed herewith)(incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021)

10.12.1*			Adoption Agreement for Virginia Bankers Association Model Plan (for directors) as restated as of January 1, 2018 and updated January 1, 2020 (filed, effective as of January 1, 2022 (filed herewith)

21.1			Subsidiaries of Carter Bankshares, Inc. (filedInc.(filed herewith)

23.1			Consent of Crowe LLP (filed herewith)

23.2			Consent of Yount, Hyde & Barbour, P.C. (filed herewith)

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

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

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

32.2			Certification by principal financial officer pursuant to 18 U.S.C. §1350 (filed herewith)
101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			Inline XBRL Taxonomy Extension Schema
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

* Denotes management contract.

ITEM 16. FORM 10-K SUMMARY

None.

151

None.

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)
			By:			/s/ Litz H. Van Dyke
			Name:			Litz H. Van Dyke
			Title:			Chief Executive Officer (Principal Executive Officer)
			Date:			March 12, 202111, 2022
			By:			/s/ Wendy S. Bell
			Name:			Wendy S. Bell
			Title:			Chief Financial Officer (Principal Financial and Accounting Officer)
			Date:			March 12, 202111, 2022

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:

By:

/s/ James W. Haskins

By:

/s/ Litz H. Van Dyke

Name:

James W. Haskins

Name:

Litz H. Van Dyke

Title:

Chairman of the Board

Title:

Director and Chief Executive Officer

Date:

March 12, 202111, 2022

Date:

March 12, 202111, 2022

By:

/s/ Phyllis Q. Karavatakis

By:

/s/ Michael R. Bird

Name:

Phyllis Q. Karavatakis

Name:

Michael R. Bird

Title:

Vice Chairman of the Board

Title:

Director

Date:

March 12, 202111, 2022

Date:

March 12, 202111, 2022

By:

/s/ Kevin S. Bloomfield

By:

/s/ Robert M. Bolton

Name:

Kevin S. Bloomfield

Name:

Robert M. Bolton

Title:

Director

Title:

Director

Date:

March 12, 202111, 2022

Date:

March 12, 202111, 2022

By:

/s/ Robert W. Conner

By:

/s/ Gregory W. Feldmann

Name:

Robert W. Conner

Name:

Gregory W. Feldmann

Title:

Director

Title:

Director

Date:

March 12, 202111, 2022

Date:

March 12, 202111, 2022

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CARTER BANKSHARES, INC. AND SUBSIDIARIES

By:

/s/ Chester A. Gallimore

By:

/s/ Charles E. Hall

Name:By:

Chester A. Gallimore

Name:

Charles E. Hall

Title:

Director

Title:

Director

Date:

March 12, 2021

Date:

March 12, 2021

By:

/s/ Lanny A. Kyle, O.D.

By:

/s/ Elizabeth Lester Walsh

Name:

Lanny A. Kyle, O.D.

Name:

Elizabeth Lester Walsh

Title:

Director

Title:

Director

Date:

March 11, 2022

Date:

March 11, 2022

By:

/s/ Catharine L. Midkiff

By:

/s/ E. Warren Matthews

Name:

Lanny A. Kyle, O.D.Catharine L. Midkiff

Name:

E. Warren Matthews

Title:

Director

Title:

Director

Date:

March 12, 202111, 2022

Date:

March 12, 2021

By:

/s/ Catharine L. Midkiff

By:

/s/ Joseph E. Pigg

Name:

Catharine L. Midkiff

Name:

Joseph E. Pigg

Title:

Director

Title:

Director

Date:

March 12, 2021

Date:

March 12, 2021

By:

/s/ Elizabeth Lester Walsh

Name:

Elizabeth Lester Walsh

Title:

Director

Date:

March 12, 2021

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11, 2022

127