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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to     
Commission File Number: 001-39731
CARTER BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia
85-3365661
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1300 Kings Mountain Road
MartinsvilleVirginia24112
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code) (276) 656-1776
NA
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
CARE
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2022 there were 24,577,477 shares of the registrant’s common stock issued and outstanding.
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TABLE OF CONTENTS


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CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS


CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Data)June 30, 2022 (unaudited)December 31, 2021 (audited)
ASSETS
Cash and Due From Banks$43,194 $36,698 
Interest-Bearing Deposits in Other Financial Institutions745 64,905 
Federal Reserve Bank Excess Reserves26,301 176,196 
Total Cash and Cash Equivalents70,240 277,799 
Securities Available-for-Sale, at Fair Value907,034 922,400 
Loans Held-for-Sale— 228 
Portfolio Loans2,997,896 2,812,129 
Allowance for Credit Losses(97,981)(95,939)
Portfolio Loans, net2,899,915 2,716,190 
Bank Premises and Equipment, net73,202 75,297 
Other Real Estate Owned, net8,432 10,916 
Federal Home Loan Bank Stock, at Cost2,067 2,352 
Bank Owned Life Insurance56,046 55,378 
Other Assets106,344 73,186 
Total Assets$4,123,280 $4,133,746 
LIABILITIES
Deposits:
Noninterest-Bearing Demand$704,323 $747,909 
Interest-Bearing Demand499,282 452,644 
Money Market555,621 463,056 
Savings733,704 690,549 
Certificates of Deposit1,260,463 1,344,318 
Total Deposits3,753,393 3,698,476 
Federal Home Loan Bank Borrowings— 7,000 
Other Liabilities35,745 20,674 
Total Liabilities3,789,138 3,726,150 
SHAREHOLDERS’ EQUITY
Common Stock, Par Value $1.00 per share,
Authorized 100,000,000 Shares;
Outstanding shares 24,577,477 at June 30, 2022 and 26,430,919 at December 31, 2021
24,577 26,431 
Additional Paid-in Capital113,975 143,988 
Retained Earnings255,576 235,475 
Accumulated Other Comprehensive (Loss) Income(59,986)1,702 
Total Shareholders’ Equity334,142 407,596 
Total Liabilities and Shareholders’ Equity$4,123,280 $4,133,746 
See accompanying notes to unaudited consolidated financial statements.
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CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except per Share Data)Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
INTEREST INCOME
Loans, including Fees
Taxable$31,323 $28,417 $59,068 $56,562 
Non-Taxable916 1,237 1,868 2,649 
Investment Securities
Taxable4,452 3,138 8,184 6,125 
Non-Taxable187 215 354 541 
Federal Reserve Bank Excess Reserves58 33 95 59 
Interest on Bank Deposits3 23 28 47 
Dividend Income22 31 42 68 
Total Interest Income36,961 33,094 69,639 66,051 
Interest Expense
Interest Expense on Deposits4,412 5,760 8,811 12,055 
Interest Expense on Federal Funds Purchased4 — 4 — 
Interest on Other Borrowings86 131 143 264 
Total Interest Expense4,502 5,891 8,958 12,319 
NET INTEREST INCOME32,459 27,203 60,681 53,732 
Provision for Credit Losses1,814 967 2,444 2,824 
Provision (Recovery) for Unfunded Commitments269 (603)33 (885)
Net Interest Income After Provision for Credit Losses30,376 26,839 58,204 51,793 
NONINTEREST INCOME
Gains on Sales of Securities, net76 1,499 52 5,109 
Service Charges, Commissions and Fees1,749 1,489 3,702 3,298 
Debit Card Interchange Fees1,850 1,874 3,782 3,705 
Insurance Commissions568 378 837 672 
Bank Owned Life Insurance Income334 342 668 682 
(Losses) Gains on Sales and Write-downs of Bank Premises, net(37)— 346 — 
Other Real Estate Owned Income12 4 22 75 
Commercial Loan Swap Fee Income756 742 756 961 
Other296 910 774 1,688 
Total Noninterest Income5,604 7,238 10,939 16,190 
NONINTEREST EXPENSE
Salaries and Employee Benefits12,444 13,686 24,201 26,268 
Occupancy Expense, net3,296 3,451 6,648 6,965 
FDIC Insurance Expense629 657 997 1,300 
Other Taxes819 718 1,623 1,480 
Advertising Expense267 220 506 390 
Telephone Expense454 588 942 1,188 
Professional and Legal Fees1,202 1,440 2,421 2,664 
Data Processing842 954 1,683 1,875 
(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net(60)2,603 99 2,815 
Losses on Sales and Write-downs on Bank Premises, net— 64 — 107 
Debit Card Expense659 713 1,292 1,345 
Tax Credit Amortization615 427 1,230 854 
Other Real Estate Owned Expense141 142 182 196 
Other2,102 2,096 4,097 3,917 
Total Noninterest Expense23,410 27,759 45,921 51,364 
Income Before Income Taxes12,570 6,318 23,222 16,619 
Income Tax Provision1,792 886 3,121 1,812 
Net Income$10,778 $5,432 $20,101 $14,807 
Earnings per Common Share
Basic Earnings per Common Share$0.44 $0.21 $0.80 $0.56 
Diluted Earnings per Common Share$0.44 $0.21 $0.80 $0.56 
Average Shares Outstanding – Basic & Diluted24,490,302 26,344,104 25,111,931 26,314,943 
See accompanying notes to unaudited consolidated financial statements.
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CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)2022202120222021
Net Income $10,778 $5,432 $20,101 $14,807 
Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period(35,002)8,456 (78,034)(2,038)
Reclassification Adjustment for Gains included in Net Income(76)(1,499)(52)(5,109)
Tax Effect7,366 (1,461)16,398 1,501 
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income(27,712)5,496 (61,688)(5,646)
Other Comprehensive (Loss) Income(27,712)5,496 (61,688)(5,646)
Comprehensive (Loss) Income$(16,934)$10,928 $(41,587)$9,161 
See accompanying notes to unaudited consolidated financial statements.

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CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended June 30, 2022
(Dollars in Thousands)Common
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive Loss		Total
Shareholders’
Equity
Balance at March 31, 2022$24,987 $121,045 $244,798 $(32,274)$358,556 
Net Income——10,778 —10,778 
Other Comprehensive Loss, Net of Tax———(27,712)(27,712)
Repurchase of Common Stock (446,436 shares)
(447)(7,342)——(7,789)
Forfeiture of Restricted Stock (961 shares)
(1)1———
Issuance of Restricted Stock (38,148 shares)
38(38)———
Recognition of Restricted Stock Compensation Expense—309——309
Balance at June 30, 2022$24,577$113,975$255,576$(59,986)$334,142
Six Months Ended June 30, 2022
(Dollars in Thousands)Common
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total
Shareholders’
Equity
Balance at December 31, 2021$26,431 $143,988 $235,475 $1,702 $407,596 
Net Income——20,101 —20,101 
Other Comprehensive Loss, Net of Tax———(61,688)(61,688)
Repurchase of Common Stock (1,969,593 shares)
(1,970)(30,445)——(32,415)
Forfeiture of Restricted Stock (10,653 shares)
(11)(145)——(156)
Issuance of Restricted Stock (126,804 shares)
127(127)———
Recognition of Restricted Stock Compensation Expense—704——704
Balance at June 30, 2022$24,577$113,975$255,576$(59,986)$334,142
Three Months Ended June 30, 2021
(Dollars in Thousands)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive IncomeTotal Shareholders’ Equity
Balance March 31, 2021$26,468 $143,582 $213,260 $4,579 $387,889 
Net Income——5,432 —5,432 
Other Comprehensive Income, Net of Tax———5,496 5,496 
Forfeitures of Restricted Stock (783 shares)
(1)1———
Recognition of Restricted Stock Compensation Expense—291——291
Balance at June 30, 2021$26,467$143,874$218,692$10,075$399,108
Six Months Ended June 30, 2021
(Dollars in Thousands)Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income		Total
Shareholders’
Equity
Balance December 31, 2020$26,385 $143,457 $254,611 $15,721 $440,174 
Net Income——14,807 —14,807 
Cumulative Effect for Adoption of Credit Losses——(50,726)— (50,726)
Other Comprehensive Loss, Net of Tax———(5,646)(5,646)
Forfeiture of Restricted Stock (783 shares)
(1)1———
Issuance of Restricted Stock (82,490 shares)
83(83)———
Recognition of Restricted Stock Compensation Expense—499——499
Balance at June 30, 2021$26,467$143,874$218,692$10,075$399,108
See accompanying notes to unaudited consolidated financial statements.
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CARTER BANKSHARES, INC.
PART 1
ITEM 1 – FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Dollars in Thousands)20222021
Net Income $20,101 $14,807 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments2,477 1,939 
Origination of Loans Held-for-Sale(4,955)(414,780)
Proceeds From Loans Held-for-Sale5,302 431,090 
Depreciation/Amortization of Bank Premises and Equipment2,977 3,113 
Provision for Deferred Taxes1,257 1,999 
Net Amortization of Securities3,156 1,879 
Tax Credit Amortization1,230 854 
Gains on Sales of Mortgage Loans Held-for-Sale(119)(184)
Gains on Sales of Securities, net(52)(5,109)
Write-downs of Other Real Estate Owned432 3,211 
Gains on Sales of Other Real Estate Owned, Net(333)(396)
(Gains) Losses on Sales and Write-downs of Bank Premises(346)107 
Commercial Loan Swap Derivative Income(443)(153)
Premiums on Branch Sales— (506)
Increase in the Value of Life Insurance Contracts(668)(682)
Recognition of Restricted Stock Compensation Expense704 499 
Increase in Other Assets(2,040)(10,678)
Decrease in Other Liabilities(1,882)(3,573)
Net Cash Provided By Operating Activities26,798 23,437 
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales19,777 108,300 
Proceeds from Maturities, Redemptions, and Pay-downs50,033 52,183 
Purchases(135,634)(215,175)
Purchase of Bank Premises and Equipment, Net(2,528)(3,248)
Net Cash Paid in Branch Sales— (73,923)
Proceeds from Sales of Bank Premises and Equipment, net408 — 
Redemption of Federal Home Loan Bank Stock, net285 1,878 
Loan (Originations) and Payments, net(186,133)28,891 
Payments Received on Other Real Estate Owned215 230 
Proceeds from Sales and Payments of Other Real Estate Owned3,718 3,440 
Net Cash Used In Investing Activities(249,859)(97,424)
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts138,772 217,745 
Decrease in Certificates of Deposits(83,855)(164,049)
Payments on Federal Home Loan Bank Borrowings, net(7,000)(5,000)
Repurchase of Common Stock(32,415)— 
Net Cash Provided by Financing Activities15,502 48,696 
Net Decrease in Cash and Cash Equivalents(207,559)(25,291)
Cash and Cash Equivalents at Beginning of Period277,799 241,942 
Cash and Cash Equivalents at End of Period$70,240 $216,651 
SUPPLEMENTARY DATA
Cash Interest Paid$9,040 $12,759 
Cash Paid for Income Taxes333 820 
Transfer from Fixed Assets to Other Real Estate Owned1,584 12,013 
Security (Purchases) Settled in Subsequent Period— (14,084)
Right-of-use Asset Recorded in Exchange for Lease Liabilities2,879 2,027 
See accompanying notes to unaudited consolidated financial statements.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION
Principles of Consolidation: The interim Consolidated Financial Statements include the accounts of Carter Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). All significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”), on March 11, 2022. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period.
Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided. Actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including COVID-19 related changes, and changes in the financial condition of borrowers.
Accounting Standards Adopted in 2022
In March 2022, the FASB issued ASU No. 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments - Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan. The amendments in this ASU also required that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in this ASU are effective January 1, 2023, with early adoption permitted. The Company evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU on April 1, 2022 on a prospective basis, effective dated as of January 1, 2022. This change did not have a material effect on our consolidated financial statements. Refer to Note 4, Loans and Loans Held-For-Sale for disclosures for debtors experiencing financial difficulty and Note 5, Allowance for Credit Losses for vintage disclosures related to gross charge-offs by loan segment by year of origination, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information on the adoption of these amendments.
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 restructured loans or charge-off policy.
The Company’s methodology for estimating the ACL includes:
Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly through economic cycles.
Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION – (continued)
quantifiable. Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.
Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”) for quantitative analysis that are part of the Company’s ACL methodology. Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Price Index and Gross Domestic Product. These forecasts are assumed to revert to the long-term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.
Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output following the quantitative analysis. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.
“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 model were underwritten and approved based on standards that are inconsistent with our current underwriting standards. The model for the Other segment was developed with subjective assumptions that may cause volatility driven by the following key factors: prepayment speeds, timing of contractual payments, discount rate, as well as other factors. The discount rate is reflective of the inherent 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.
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
•The value of collateral and probability of successful liquidation; and/or
•The status of adverse proceedings or litigation that may result in collection
Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.
Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early stage delinquencies of 30 to 89 days past due for early identification of potential problem loans.
Loan Restructurings: In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION – (continued)
loan to more affordable terms before their loan reaches nonaccrual status. These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type. These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.
Accounting Standards Issued but Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in U.S. GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022.
Furthermore, the United Kingdom’s Financial Conduct Authority (“FCA”), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to the U.S. dollar LIBOR, the FCA will consider the case to require continued publication of a number of LIBOR settings through June 30, 2023. In a joint statement, Bank regulators urged banks to stop using LIBOR for any new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The Federal Reserve System, (“FRB”), of New York has created a working group called the Alternative Reference Rate Committee (“ARRC”) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S. Congress passed and the U.S. President signed legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the Federal Reserve to identify a replacement benchmark based on SOFR.
In response, we have created an internal team that is managing our transition away from LIBOR. This transition team is a cross-functional group comprised of representatives from the lending lines of business, as well as representatives from loan operations, information technology, finance and other support functions. To date, the transition team has completed an assessment of tasks needed for a successful transition, identified contracts that contain LIBOR language, and documented the risks associated with the transition. The team is currently in the process of: i) reviewing existing contract language for the presence of appropriate fallback rate language, ii) developing loan fallback rate language for when LIBOR is retired if needed, and iii) studying industry best practices. We are considering SOFR and other credit-sensitive alternative indices that may gain market acceptance as potential replacements to LIBOR. The financial impact regarding pricing, valuation and operations of the transition is not expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR.
As of June 30, 2022, approximately 14.3% of our loan portfolio consists of loans whose variable rate index is LIBOR. We ceased originating new LIBOR based variable rate loans by December 31, 2021 per the ARRC’s guidance.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands, except share and per share data)2022202120222021
Numerator for Earnings per Share – Basic and Diluted
Net Income$10,778 $5,432 $20,101 $14,807 
Less: Income allocated to participating shares69 25 110 69 
Net Income Allocated to Common Shareholders - Basic & Diluted$10,709 $5,407 $19,991 $14,738 
Denominator:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities24,647,543 26,466,922 25,250,413 26,437,761 
Less: Average Participating Securities157,241 122,818 138,482 122,818 
Weighted Average Common Shares Outstanding - Basic & Diluted24,490,302 26,344,104 25,111,931 26,314,943 
Earnings per Common Share – Basic$0.44 $0.21 $0.80 $0.56 
Earnings per Common Share – Diluted$0.44 $0.21 $0.80 $0.56 
All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per share calculation.
NOTE 3 - INVESTMENT SECURITIES
The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:
June 30, 2022
(Dollars in Thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
U.S. Treasury Securities$19,281 $— $(1,006)$18,275 
U.S. Government Agency Securities3,504 — (424)3,080 
Residential Mortgage-Backed Securities120,022 2 (9,587)110,437 
Commercial Mortgage-Backed Securities40,980 188 (817)40,351 
Asset Backed Securities85,390 — (2,957)82,433 
Collateralized Mortgage Obligations304,003 7 (19,785)284,225 
Small Business Administration53,365 414 (82)53,697 
States and Political Subdivisions282,671 1 (37,567)245,105 
Corporate Notes73,750 — (4,319)69,431 
Total Debt Securities$982,966 $612 $(76,544)$907,034 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT SECURITIES (continued)
December 31, 2021
(Dollars in Thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
U.S. Treasury Securities$4,442 $— $(29)$4,413 
U.S. Government Agency Securities3,475 3 — 3,478 
Residential Mortgage-Backed Securities112,118 76 (2,181)110,013 
Commercial Mortgage-Backed Securities4,155 53 (40)4,168 
Asset Backed Securities82,119 49 (305)81,863 
Collateralized Mortgage Obligations287,734 2,190 (2,310)287,614 
Small Business Administration108,643 879 (608)108,914 
States and Political Subdivisions257,810 6,344 (1,952)262,202 
Corporate Notes59,750 375 (390)59,735 
Total Debt Securities$920,246 $9,969 $(7,815)$922,400 
The Company did not have securities classified as held-to-maturity at June 30, 2022 or December 31, 2021.
The following table shows the composition of gross and net realized gains and losses for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)2022202120222021
Proceeds from Sales of Securities Available-for-Sale$14,856 $43,430 $19,777 $108,300 
Gross Realized Gains$208 $1,565 $208 $5,194 
Gross Realized Losses(132)(66)(156)(85)
Net Realized Gains76 1,499 52 5,109 
Tax Impact$16 $318 $11 $1,076 
Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized gains above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income. The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income. The tax impact is included in income tax provision in the Consolidated Statements of Income.
The amortized cost and fair value of available-for-sale debt securities are shown below by contractual maturity as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
June 30, 2022
(Dollars in Thousands)Amortized
Cost		Fair
Value
Due in One Year or Less$195 $195 
Due after One Year through Five Years18,382 17,788 
Due after Five Years through Ten Years217,046 202,492 
Due after Ten Years196,948 169,113 
Residential Mortgage-Backed Securities120,022 110,437 
Commercial Mortgage-Backed Securities40,980 40,351 
Collateralized Mortgage Obligations304,003 284,225 
Asset Backed Securities85,390 82,433 
Total Debt Securities$982,966 $907,034 
At June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $178.5 million at June 30, 2022 and $178.6 million at December 31, 2021.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT SECURITIES (continued)
Available-for-sale securities with unrealized losses at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:
June 30, 2022
Less Than 12 Months12 Months or MoreTotal
(Dollars in Thousands)Number
of
Securities		Fair
Value		Unrealized
Losses		Number
of
Securities		Fair
Value		Unrealized
Losses		Number
of
Securities		Fair
Value		Unrealized
Losses
U.S. Treasury Securities5 $18,275 $(1,006)— $— $— 5 $18,275 $(1,006)
U.S. Government Agency Securities2 3,080 (424)— — — 2 3,080 (424)
Residential Mortgage-Backed Securities28 73,800 (5,405)15 36,393 (4,182)43 110,193 (9,587)
Commercial Mortgage-Backed Securities6 10,836 (517)50 15,576 (300)56 26,412 (817)
Asset Backed Securities20 48,011 (1,716)15 32,422 (1,241)35 80,433 (2,957)
Collateralized Mortgage Obligations90 232,098 (16,991)22 49,584 (2,794)112 281,682 (19,785)
Small Business Administration9 15,940 (51)3 4,095 (31)12 20,035 (82)
States and Political Subdivisions150 232,157 (34,607)13 12,052 (2,960)163 244,209 (37,567)
Corporate Notes21 67,016 (4,235)1 2,416 (84)22 69,432 (4,319)
Total Debt Securities331 $701,213 $(64,952)119 $152,538 $(11,592)450 $853,751 $(76,544)
December 31, 2021
Less Than 12 Months12 Months or MoreTotal
(Dollars in Thousands)Number
of
Securities		Fair
Value		Unrealized
Losses		Number
of
Securities		Fair
Value		Unrealized
Losses		Number
of
Securities		Fair
Value		Unrealized
Losses
U.S. Treasury Securities2$4,413 $(29)—$— $— 2$4,413 $(29)
U.S. Government Agency Securities11,733 — —— — 11,733 — 
Residential Mortgage-Backed Securities3095,749 (2,030)78,706 (151)37104,455 (2,181)
Commercial Mortgage-Backed Securities11,987 (40)—— — 11,987 (40)
Asset Backed Securities1744,095 (129)1021,895 (176)2765,990 (305)
Collateralized Mortgage Obligations50157,630 (1,945)1124,849 (365)61182,479 (2,310)
Small Business Administration1118,813 (235)5319,630 (373)6438,443 (608)
States and Political Subdivisions5688,746 (1,503)87,874 (449)6496,620 (1,952)
Corporate Notes1029,683 (317)12,427 (73)1132,110 (390)
Total Debt Securities178$442,849 $(6,228)90$85,381 $(1,587)268$528,230 $(7,815)
The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses (“ACL”) on its investment securities during the quarter ended June 30, 2022 as the Company did not have securities classified as held-to-maturity at June 30, 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.
As of June 30, 2022, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date.

As of June 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit and therefore no allowance for credit losses has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any noncredit loss will be recognized in other comprehensive income. During the three and six months ended June 30, 2022 and 2021, the Company had no credit related net investment impairment losses.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LOANS HELD-FOR-SALE
The composition of the loan portfolio by dollar amount is shown in the table below:
(Dollars in Thousands)
June 30, 2022December 31, 2021
Commercial
Commercial Real Estate
$1,389,117 $1,323,252 
Commercial and Industrial
336,477 345,376 
Total Commercial Loans
1,725,594 1,668,628 
Consumer
Residential Mortgages
559,313 457,988 
Other Consumer
48,033 44,666 
Total Consumer Loans
607,346 502,654 
Construction322,731 282,947 
Other342,225 357,900 
Total Portfolio Loans$2,997,896 $2,812,129 
Loans Held-for-Sale— 228 
Total Loans$2,997,896 $2,812,357 
Loan Restructurings
On April 1, 2022, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2022, which eliminates the recognition and measurement of troubled debt restructurings (TDRs). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.
A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
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CARTER BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)
The following table shows the amortized cost basis as of June 30, 2022 and December 31, 2021 for the loans restructured to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:
Restructured Loans
June 30, 2022December 31, 2021
(Dollars in Thousands)Number of Contracts
Amortized Cost Basis(1)
% of Total Class of Financing ReceivableNumber of Contracts
Amortized Cost Basis(1)
% of Total Class of Financing Receivable
Accruing Restructured Loans
Commercial Real Estate— $— — %— $— — %
Commercial and Industrial— — — %1 14 — %
Residential Mortgages— — — %— — — %
Other Consumer— — — %— — — %
Construction— — — %— — — %
Other— — — %5 78,022 21.80 %
Total Accruing Restructured Loans— $— — %6 $78,036 21.80 %
Nonaccrual Restructured Loans
Commercial Real Estate1 $300 0.02 %1 $2,742 0.21 %
Commercial and Industrial— — — %— — — %
Residential Mortgages— — — %— — — %
Other Consumer— — — %— — — %
Construction— — — %1 808 0.29 %
Other— — — %— — — %
Total Nonaccrual Restructured Loans1 $300 0.02 %2 $3,550 0.23 %
Total Restructured Loans1 $300 0.02 %8 $81,586 20.86 %
(1)Excludes accrued interest receivable of $2.9 thousand at June 30, 2022 and $0.5 million at December 31, 2021.
In the first quarter of 2022 the Bank recognized a loan modification of a commercial real estate loan as a restructured loan. The borrower’s objective was to redevelop the property for a purpose that temporarily lacks feasibility due to the COVID-19 pandemic. In the interim the property is leased, albeit at a lower rate than originally forecasted. The Bank reduced the regularly scheduled principal and interest payments to accommodate the rental income until the property can be redeveloped. This loan is not considered significant and is included in the Bank’s ACL model in the general pool of the CRE segment for reserve purposes.
For the year ended December 31, 2021 the Bank modified six loans to borrowers experiencing financial difficulty. Of these six accruing loans, five are related through common guarantors. The Bank improved economic terms, improved collateral position via cross collateralization and actually shortened the maturity of these loans in connection with a global workout agreement. Payment terms include interest only, there were no modifications to the original rate. These loans are included in the Bank’s ACL model in the “Other” segment for reserve purposes.
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CARTER BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the six months ended June 30, 2022:
Payment Status (Amortized Cost Basis)
(Dollars in Thousands)Current30-89 Days Past Due90+ Days Past Due
Accruing Restructured Loans
Commercial Real Estate$— $— $— 
Commercial and Industrial— — — 
Residential Mortgages— — — 
Other Consumer— — — 
Construction— — — 
Other— — — 
Total Accruing Restructured Loans$— $— $— 
Nonaccrual Restructured Loans
Commercial Real Estate$300 $— $— 
Commercial and Industrial— — — 
Residential Mortgages— — — 
Other Consumer— — — 
Construction— — — 
Other— — — 
Total Nonaccrual Restructured Loans$300 $— $— 
Total Restructured Loans(1)
$300 $— $— 
(1)Excludes accrued interest receivable of $2.9 thousand at June 30, 2022.
As of June 30, 2022, the Company had no commitments to lend any additional funds on restructured loans. As of June 30, 2022 the Company had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification. For purposes of this disclosure, a default occurs when, within 12 months of the original modification, either a full or partial charge-off occurs or the loan becomes 90 days or more past due.
As of June 30, 2022 and December 31, 2021, the Company had $1.0 million and $0.3 million, respectively, of residential real estate loans in the process of foreclosure. We also had $24.0 thousand at June 30, 2022 and $62.0 thousand at December 31, 2021 in residential real estate loans included in OREO.
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES
The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Residential Mortgages, 4) Other Consumer, 5) Construction and 6) Other. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the current expected credit losses (“CECL”) model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.
CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business.
C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local and state municipalities for
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.
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 loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.
Other loans include unique risk attributes considered inconsistent with our current underwriting standards. The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future. These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets. Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.
Our model is based on our best estimate of facts known with the most current information. Certain portions of the CECL model are inherently subjective and include, but are not limited to estimates with respect to: prepayment speeds, the timing of prepayments, potential losses given default, discount rates and the timing of future cash flows. Management utilizes widely published economic forecasts as the basis for the regression analysis used to estimate the probability of default in the baseline model. The peaks and troughs of these forecasts serve as guardrails for potential subjective adjustments. In addition to considering the outcomes based on the range of forecasts, management recognizes that the assumptions used in economic forecasts may not perfectly align with our market area, risk profile or unique attributes of our portfolio along with other important considerations. Severe changes in forecasts can also create significant variability and management must assess not only the absolute balance of reserves but also consider the appropriateness of the velocity of change. Therefore, management developed a framework to assess the tolerance and reasonableness of the CECL modeling process by challenging certain elements of the forecasts, when appropriate. These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
Credit Quality Indicators:
The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to a pass grade until a loan migrates to past due status.
The Company has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: 1) credit quality of the loan portfolio, 2) compliance with the loan policy, 3) adequacy of documentation in credit files and 4) validity of risk ratings. Since 2020 and continuing into 2022, the Company used a five step approach for loan review in the following categories:
•Individual reviews of the top twenty large loan relationships (“LLRs”), which are defined as any individual commercial loan or aggregate commercial relationship totaling $2.0 million or more;
•A sampling of small LLRs, which are defined as individual commercial loans or relationships with aggregate exposure of $2.0 million or more but not included in the top twenty LLRs;
•A sampling review of Credit Risk Committee modifications, including new and existing loans to provide perspective on the appropriateness of the modification in relation to established policies and procedures;
•A sampling review of non-organic commercial loans and those commercial loans approved outside of the Credit Risk Committee; and
•Focus reviews of office and land development to evaluate segment risk rather than individual loan risk. Focus reviews are performed annually on a rotational basis.
The Company’s internally assigned grades are as follows:
Pass – The Company uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality.
Special Mention – Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.
Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Assets with all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
Loss – Assets considered of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.
The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:
June 30, 2022
Risk Rating
(Dollars in Thousands)202220212020201920182017 and PriorRevolvingTotal
Commercial Real Estate
Pass$201,249 $178,791 $152,964 $173,805 $240,312 $394,640 $31,059 $1,372,820 
Special Mention— 223 — — 10,018 2,720 — 12,961 
Substandard— — — 300 2,668 368 — 3,336 
Total Commercial Real Estate$201,249 $179,014 $152,964 $174,105 $252,998 $397,728 $31,059 $1,389,117 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Commercial and Industrial
Pass$21,454 $50,526 $44,896 $10,827 $30,823 $158,283 $11,650 $328,459 
Special Mention— — — — — — — — 
Substandard— 56 — 69 4,954 2,800 139 8,018 
Total Commercial and Industrial$21,454 $50,582 $44,896 $10,896 $35,777 $161,083 $11,789 $336,477 
YTD Gross Charge-offs$— $— $— $— $22 $— $— $22 
Residential Mortgages
Pass$107,475 $172,332 $83,199 $54,059 $73,812 $44,230 $19,923 $555,030 
Special Mention— — — — 434 536 — 970 
Substandard— — — 1,000 645 1,668 — 3,313 
Total Residential Mortgages$107,475 $172,332 $83,199 $55,059 $74,891 $46,434 $19,923 $559,313 
YTD Gross Charge-offs$— $— $— $— $— $23 $— $23 
Other Consumer
Pass$6,963 $6,784 $8,411 $484 $277 $24,696 $349 $47,964 
Special Mention— — — — — — — — 
Substandard— 37 2 3 3 24 — 69 
Total Other Consumer$6,963 $6,821 $8,413 $487 $280 $24,720 $349 $48,033 
YTD Gross Charge-offs$34 $297 $184 $225 $26 $60 $— $826 
Construction
Pass$51,136 $141,951 $68,062 $11,531 $20,843 $17,849 $10,176 $321,548 
Special Mention— — — — — 73 — 73 
Substandard— — 136 — 94 880 — 1,110 
Total Construction$51,136 $141,951 $68,198 $11,531 $20,937 $18,802 $10,176 $322,731 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Other
Pass$— $— $— $— $— $180,792 $— $180,792 
Special Mention— — — — — 3,185 — 3,185 
Substandard— — — — 87,329 70,919 — 158,248 
Total Other Loans$— $— $— $— $87,329 $254,896 $— $342,225 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Total Portfolio Loans
Pass$388,277 $550,384 $357,532 $250,706 $366,067 $820,490 $73,157 $2,806,613 
Special Mention— 223 — — 10,452 6,514 — 17,189 
Substandard— 93 138 1,372 95,693 76,659 139 174,094 
Total Portfolio Loans$388,277 $550,700 $357,670 $252,078 $472,212 $903,663 $73,296 $2,997,896 
Current YTD Period:
YTD Gross Charge-offs$34 $297 $184 $225 $48 $83 $— $871 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2021
Risk Rating
(Dollars in Thousands)202120202019201820172016 and PriorRevolvingTotal
Commercial Real Estate
Pass$195,441 $165,100 $215,575 $292,857 $115,024 $292,197 $38,382 $1,314,576 
Special Mention229 — — — 4,205 826 — 5,260 
Substandard— — 314 2,742 215 145 — 3,416 
Total Commercial Real Estate$195,670 $165,100 $215,889 $295,599 $119,444 $293,168 $38,382 $1,323,252 
YTD Gross Charge-offs$— $— $10,471 $1,424 $6,577 $1,190 $— $19,662 
Commercial and Industrial
Pass$55,173 $50,087 $15,648 $38,298 $23,575 $150,656 $3,857 $337,294 
Special Mention— — — 8 — — — 8 
Substandard14 — 308 4,815 2,798 — 139 8,074 
Total Commercial and Industrial$55,187 $50,087 $15,956 $43,121 $26,373 $150,656 $3,996 $345,376 
YTD Gross Charge-offs$— $109 $261 $3 $— $1 $— $374 
Residential Mortgages
Pass$155,892 $91,023 $63,682 $73,333 $8,640 $48,087 $13,237 $453,894 
Special Mention— — — — — 553 — 553 
Substandard— — 1,008 743 188 1,602 — 3,541 
Total Residential Mortgages$155,892 $91,023 $64,690 $74,076 $8,828 $50,242 $13,237 $457,988 
YTD Gross Charge-offs$— $— $— $172 $— $101 $— $273 
Other Consumer
Pass$9,353 $10,199 $979 $450 $186 $23,048 $339 $44,554 
Special Mention— — — — — — — — 
Substandard11 3 11 57 30 — — 112 
Total Other Consumer$9,364 $10,202 $990 $507 $216 $23,048 $339 $44,666 
YTD Gross Charge-offs$152 $661 $905 $247 $170 $121 $— $2,256 
Construction
Pass$140,639 $82,523 $24,336 $9,739 $5,328 $3,407 $15,269 $281,241 
Special Mention— — 175 — — 429 — 604 
Substandard— 107 809 95 — 91 — 1,102 
Total Construction$140,639 $82,630 $25,320 $9,834 $5,328 $3,927 $15,269 $282,947 
YTD Gross Charge-offs$— $— $1,859 $— $— $— $— $1,859 
Other
Pass$— $— $— $— $122,848 $62,399 $— $185,247 
Special Mention— — — — — 3,281 — 3,281 
Substandard— — — 87,329 40,882 41,161 — 169,372 
Total Other Loans$— $— $— $87,329 $163,730 $106,841 $— $357,900 
YTD Gross Charge-offs$— $— $— $— $— $— $— $— 
Total Portfolio Loans
Pass$556,498 $398,932 $320,220 $414,677 $275,601 $579,794 $71,084 $2,616,806 
Special Mention229 — 175 8 4,205 5,089 — 9,706 
Substandard25 110 2,450 95,781 44,113 42,999 139 185,617 
Total Portfolio Loans$556,752 $399,042 $322,845 $510,466 $323,919 $627,882 $71,223 $2,812,129 
Current YTD Period:
YTD Gross Charge-offs$152 $770 $13,496 $1,846 $6,747 $1,413 $— $24,424 

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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented.
June 30, 2022
(Dollars in Thousands)202220212020201920182017 and PriorRevolvingTotal
Commercial Real Estate
Performing$201,249 $179,014 $152,964 $173,804 $250,330 $397,439 $31,059 $1,385,859 
Nonperforming— — — 301 2,668 289 — 3,258 
Total Commercial Real Estate$201,249 $179,014 $152,964 $174,105 $252,998 $397,728 $31,059 $1,389,117 
Commercial and Industrial
Performing$21,454 $50,536 $44,896 $10,827 $30,823 $161,081 $11,650 $331,267 
Nonperforming— 46 — 69 4,954 2 139 5,210 
Total Commercial and Industrial$21,454 $50,582 $44,896 $10,896 $35,777 $161,083 $11,789 $336,477 
Residential Mortgages
Performing$107,475 $172,332 $83,199 $54,059 $74,474 $45,296 $19,923 $556,758 
Nonperforming— — — 1,000 417 1,138 — 2,555 
Total Residential Mortgages$107,475 $172,332 $83,199 $55,059 $74,891 $46,434 $19,923 $559,313 
Other Consumer
Performing$6,963 $6,821 $8,411 $487 $277 $24,719 $349 $48,027 
Nonperforming— — 2 — 3 1 — 6 
Total Other Consumer$6,963 $6,821 $8,413 $487 $280 $24,720 $349 $48,033 
Construction
Performing$51,136 $141,951 $68,062 $11,531 $20,937 $17,938 $10,176 $321,731 
Nonperforming— — 136 — — 864 — 1,000 
Total Construction$51,136 $141,951 $68,198 $11,531 $20,937 $18,802 $10,176 $322,731 
Other
Performing$— $— $— $— $87,329 $254,896 $— $342,225 
Nonperforming— — — — — — — — 
Total Other Loans$— $— $— $— $87,329 $254,896 $— $342,225 
Total Portfolio Loans
Performing$388,277 $550,654 $357,532 $250,708 $464,170 $901,369 $73,157 $2,985,867 
Nonperforming— 46 138 1,370 8,042 2,294 139 12,029 
Total Portfolio Loans$388,277 $550,700 $357,670 $252,078 $472,212 $903,663 $73,296 $2,997,896 

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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2021
(Dollars in Thousands)202120202019201820172016 and PriorRevolvingTotal
Commercial Real Estate
Performing$195,670 $165,100 $215,575 $292,857 $119,229 $293,102 $38,382 $1,319,915 
Nonperforming— — 314 2,742 215 66 — 3,337 
Total Commercial Real Estate$195,670 $165,100 $215,889 $295,599 $119,444 $293,168 $38,382 $1,323,252 
Commercial and Industrial
Performing$55,187 $50,087 $15,648 $43,117 $26,373 $150,656 $3,857 $344,925 
Nonperforming— — 308 4 — — 139 451 
Total Commercial and Industrial$55,187 $50,087 $15,956 $43,121 $26,373 $150,656 $3,996 $345,376 
Residential Mortgages
Performing$155,892 $91,023 $63,682 $73,564 $8,640 $49,399 $13,237 $455,437 
Nonperforming— — 1,008 512 188 843 — 2,551 
Total Residential Mortgages$155,892 $91,023 $64,690 $74,076 $8,828 $50,242 $13,237 $457,988 
Other Consumer
Performing$9,364 $10,202 $979 $450 $211 $23,048 $339 $44,593 
Nonperforming— — 11 57 5 — — 73 
Total Other Consumer$9,364 $10,202 $990 $507 $216 $23,048 $339 $44,666 
Construction
Performing$140,639 $82,523 $24,511 $9,834 $5,328 $3,858 $15,269 $281,962 
Nonperforming— 107 809 — — 69 — 985 
Total Construction$140,639 $82,630 $25,320 $9,834 $5,328 $3,927 $15,269 $282,947 
Other
Performing$— $— $— $87,329 $163,730 $106,841 $— $357,900 
Nonperforming— — — — — — — 
Total Other Loans$— $— $— $87,329 $163,730 $106,841 $— $357,900 
Total Portfolio Loans
Performing$556,752 $398,935 $320,395 $507,151 $323,511 $626,904 $71,084 $2,804,732 
Nonperforming— 107 2,450 3,315 408 978 139 7,397 
Total Portfolio Loans$556,752 $399,042 $322,845 $510,466 $323,919 $627,882 $71,223 $2,812,129 
The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:
June 30, 2022
(Dollars in Thousands)Current
Loans		Loans
30-59 Days
Past Due		Loans
60-89 Days
Past Due		Total
30-89 Days
Past Due		Nonaccrual
Loans		Total Portfolio
Loans
Commercial Real Estate$1,385,239 $620 $— $620 $3,258 $1,389,117 
Commercial and Industrial331,236 26 5 31 5,210 336,477 
Residential Mortgages555,190 1,568 — 1,568 2,555 559,313 
Other Consumer47,776 139 112 251 6 48,033 
Construction321,643 88 — 88 1,000 322,731 
Other342,225 — — — — 342,225 
Total$2,983,309 $2,441 $117 $2,558 $12,029 $2,997,896 

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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2021
(Dollars in Thousands)Current
Loans		Loans
30-59 Days
Past Due		Loans
60-89 Days
Past Due		Total
30-89 Days
Past Due		Nonaccrual
Loans		Total Portfolio
Loans
Commercial Real Estate$1,319,686 $229 $— $229 $3,337 $1,323,252 
Commercial and Industrial344,628 80 217 297 451 345,376 
Residential Mortgages454,754 683 — 683 2,551 457,988 
Other Consumer44,132 367 94 461 73 44,666 
Construction281,962 — — — 985 282,947 
Other357,900 — — — — 357,900 
Total$2,803,062 $1,359 $311 $1,670 $7,397 $2,812,129 
There were no loans past due 90 days or more and still accruing at June 30, 2022 and December 31, 2021. Loans past due 90 days are automatically transferred to nonaccrual status. Loans past due 30 to 89 days or more and still accruing increased $0.9 million to $2.6 million at June 30, 2022 compared to $1.7 million at December 31, 2021.
There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 2022 or December 31, 2021.
The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan for the periods presented.
June 30, 2022
(Dollars in Thousands)Beginning of
Period
Nonaccrual		End of
Period
Nonaccrual		Nonaccrual
With No
Related
Allowance		Past Due
90+ Days
Still Accruing
Commercial Real Estate$3,337 $3,258 $— $— 
Commercial and Industrial451 5,210 — — 
Residential Mortgages2,551 2,555 — — 
Other Consumer73 6 — — 
Construction985 1,000 — — 
Other— — — — 
Total Portfolio Loans$7,397 $12,029 $— $— 
As of and for the December 31, 2021
(Dollars in Thousands)Beginning of
Period
Nonaccrual		End of
Period
Nonaccrual		Nonaccrual
With No
Related
Allowance		Past Due
90+ Days
Still Accruing
Commercial Real Estate$21,891 $3,337 $— $— 
Commercial and Industrial456 451 — — 
Residential Mortgages4,135 2,551 — — 
Other Consumer184 73 — — 
Construction5,331 985 808 — 
Other— — — — 
Total Portfolio Loans$31,997 $7,397 $808 $— 
A loan is considered to be experiencing financial difficulty when it is transferred to nonaccrual status. Loans experiencing financial difficulty with a commitment of $1.0 million or more are individually evaluated. During the three and six months ended June 30, 2022 and the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented. Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss on loans or a reversal of the provision for credit loss on loans in the period of change.
Type of Collateral
June 30, 2022December 31, 2021
(Dollars in Thousands)Real EstateReal Estate
Commercial Real Estate$2,668 $2,742 
Commercial and Industrial— — 
Residential Mortgages— — 
Other Consumer— — 
Construction— 808 
Other— — 
Total$2,668 $3,550 
The following tables present activity in the ACL for the periods presented:
Three Months Ended June 30, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$17,518$3,583 $4,520$1,470$7,554$61,731$96,376 
Provision for Credit Losses on Loans290 2,127 545 526 (722)(952)1,814 
Charge-offs— (22)(6)(391)— — (419)
Recoveries— — 96 114 — — 210 
Net (Charge-offs) / Recoveries— (22)90 (277)— — (209)
Balance at End of Period$17,808 $5,688 $5,155 $1,719 $6,832 $60,779 $97,981 
Six Months Ended June 30, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$17,297$4,111 $4,368$1,493$6,939$61,731$95,939 
Provision for Credit Losses on Loans511 1,598 714 829 (256)(952)2,444 
Charge-offs— (22)(23)(826)— — (871)
Recoveries— 1 96 223 149 — 469 
Net (Charge-offs) / Recoveries— (21)73 (603)149 — (402)
Balance at End of Period$17,808 $5,688 $5,155 $1,719 $6,832 $60,779 $97,981 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)
Three Months Ended June 30, 2021
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$42,342 $4,905 $5,171 $1,347 $7,106 $56,001 $116,872 
Provision for Credit Losses on Loans(6,103)(185)217 269 1,039 5,730 967 
Charge-offs(8,238)(7)(22)(539)— — (8,806)
Recoveries140 1 1 144 — — 286 
Net (Charge-offs) / Recoveries(8,098)(6)(21)(395)— — (8,520)
Balance at End of Period$28,141 $4,714 $5,367 $1,221 $8,145 $61,731 $109,319 
Six Months Ended June 30, 2021
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Loans
Allowance for Credit Losses on Loans:
Balance at Beginning of Period$36,428 $5,064 $2,099 $2,479 $8,004 $— $54,074 
Impact of CECL Adoption6,587 1,379 3,356 (877)(80)51,277 $61,642 
Provision for Credit Losses on Loans(6,776)(1,723)(38)747 160 10,454 2,824 
Charge-offs(8,238)(8)(217)(1,409)— — (9,872)
Recoveries140 2 167 281 61 — 651 
Net (Charge-offs) / Recoveries(8,098)(6)(50)(1,128)61 — (9,221)
Balance at End of Period$28,141 $4,714 $5,367 $1,221 $8,145 $61,731 $109,319 
The adoption of ASU 2016-13 resulted in an increase to our ACL of $61.6 million on January 1, 2021 and $2.9 million related to the life-of-loss reserve on unfunded loan commitments. The increase primarily included an expected credit loss of $51.3 million established based on a modified discounted cash flow method on expected cash flow changes in the future for the Other segment.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS
We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held-for-sale, individually evaluated loans, OREO, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy.
Derivative Financial Instruments and Hedging Activities: The Company uses derivative instruments such as interest rate swaps for commercial loans with our customers. Upon entering into swaps with the borrower, the Company entered into
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)



offsetting positions with counterparties to minimize risk to the Company. The back-to-back swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with borrower and counterparties and their ability to meet contractual terms. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty, and, therefore, has no risk. Accordingly, interest rate swaps for commercial loans are classified as Level 2.
The Company also enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans to be held-for-sale are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on rate lock commitments due to changes in interest rates.
Nonrecurring Basis
Individually Evaluated Loans: Individually evaluated loans with commitments greater than or equal to $1.0 million are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans with a specific reserve are classified as Level 3 in the fair value hierarchy.
Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first stage of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal.
OREO is evaluated at the time of acquisition and is recorded at fair value as determined by an appraisal or evaluation, less costs to sell. After acquisition, most OREO assets are revalued every twelve months, or more frequently when deemed necessary by management based upon changes in market or collateral conditions. For smaller OREO assets with existing carrying values less than $0.5 million, management may elect to re-value the assets, at minimum, once every twenty-four months based on the size of the exposure. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets marked to fair value are classified as Level 3. At June 30, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)



Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:
June 30, 2022
(Dollars in Thousands)Carrying
Value		Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable Inputs
(Level 3)
Assets
Securities Available-for-Sale:
U.S. Treasury Securities$18,275 $18,275 $— $— 
U.S. Government Agency Securities3,080 — 3,080 — 
Residential Mortgage-Backed Securities110,437 — 110,437 — 
Commercial Mortgage-Backed Securities40,351 — 40,351 — 
Asset Backed Securities82,433 4,996 77,437 — 
Collateralized Mortgage Obligations284,225 2,543 281,682 — 
Small Business Administration53,697 — 53,697 — 
States and Political Subdivisions245,105 — 245,105 — 
Corporate Notes69,431 — 58,440 10,991 
Total Securities Available-for-Sale907,034 25,814 870,229 10,991 
Derivatives17,854 — 17,854 — 
Total$924,888 $25,814 $888,083 $10,991 
Liabilities
Derivatives$17,585 $— $17,585 $— 
Total$17,585 $— $17,585 $— 
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 Securities3,478 — 3,478 — 
Residential Mortgage-Backed Securities110,013 — 110,013 — 
Commercial Mortgage-Backed Securities4,168 — 4,168 — 
Asset Backed Securities81,863 — 81,863 — 
Collateralized Mortgage Obligations287,614 — 287,614 — 
Small Business Administration108,914 — 108,914 — 
States and Political Subdivisions262,202 — 262,202 — 
Corporate Notes59,735 — 51,177 8,558 
Total Securities Available-for-Sale922,400 4,413 909,429 8,558 
Derivatives3,508 — 3,508 — 
Total$925,908 $4,413 $912,937 $8,558 
Liabilities
Derivatives$3,682 $— $3,682 $— 
Total$3,682 $— $3,682 $— 
We have invested in subordinated debt of other financial institutions. We have three securities totaling $11.0 million that are considered to be Level 3 securities at June 30, 2022 and two totaling $8.6 million at December 31, 2021. The change in the fair value of Level 3 securities available-for-sale from $8.6 million at December 31, 2021 to $11.0 million at June 30, 2022 is attributable to a change in the fair value level of an existing security in the amount of $2.9 million, offset by the change in calculated fair value of $0.4 million. The existing security was previously valued by an independent third party based upon a trade desktop evaluation, but is now performed internally using the same approach applied to the other Level 3 securities. The
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)



Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates. The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.
Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:
June 30, 2022
(Dollars in Thousands)Level 1Level 2Level 3Fair Value
OREO$— $— $8,432 $8,432 
Individually Evaluated Loans$— $— $4,144 $4,144 
December 31, 2021
(Dollars in Thousands)Level 1Level 2Level 3Fair Value
OREO$— $— $10,916 $10,916 
Individually Evaluated Loans$— $— $1,777 $1,777 
Individually evaluated loans had a net carrying amount of $4.1 million at June 30, 2022 with a valuation allowance of $3.5 million. Individually evaluated loans had a net carrying amount of $1.8 million at December 31, 2021 with a valuation allowance of $1.0 million.
OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $8.4 million as of June 30, 2022, compared with $10.9 million at December 31, 2021. We had $0.4 million write-downs recorded on OREO for the six months ended June 30, 2022 and $3.2 million for the same period in 2021.
The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:
June 30, 2022
(Dollars in Thousands)Fair
Value		Valuation
Technique		Unobservable
Inputs		Weighted
Range		Average
Assets
Individually Evaluated Loans$1,777 Discounted AppraisalsManagement's Discount & Estimated Selling Costs53.0 %53.0 %
Individually Evaluated Loans2,367  Estimated Enterprise Value Pending Sales agreements from Potential Buyers8.3 %8.3 %
Total Individually Evaluated Loans$4,144 
OREO$7,420 AppraisalsEstimated Selling Costs10.0 %10.0 %
OREO190 Internal Valuations Estimated Selling Costs5.0 %5.0 %
OREO822 Discounted Internal ValuationsManagement's Discount & Estimated Selling Costs
5.1% – 50.7%
26.0 %
Total OREO$8,432 
December 31, 2021
(Dollars in Thousands)Fair
Value		Valuation
Technique		Unobservable
Inputs		Weighted
Range		Average
Assets
Individually Evaluated Loans1,777 Discounted AppraisalsManagement's Discount & Estimated Selling Costs53.0 %53.0 %
Total Individually Evaluated Loans$1,777 
OREO$9,946 AppraisalsEstimated Selling Costs10.0 %10.0 %
OREO190 Internal ValuationsEstimated Selling Costs5.0 %5.0 %
OREO780 Discounted Internal ValuationsManagement’s Discount & Estimated Selling Costs
5.0% - 50.7%
20.3 %
Total OREO$10,916 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – FAIR VALUE MEASUREMENTS (continued)



A baseline discount rate has been established for impairment measurement. This baseline discount rate was back tested against historical OREO sales and therefore represents an average recovery rate based on the transaction sizes and asset types in the population examined. Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgement to adjust the baseline discount rate when appropriate.
The carrying values and estimated fair values of our financial instruments at June 30, 2022 and December 31, 2021 are presented in the following tables. Fair values for June 30, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair Value Measurements at June 30, 2022
(Dollars in Thousands)Carrying ValueLevel 1Level 2Level 3Total
Financial Assets:
Cash and Cash Equivalents$70,240 $43,194 $27,046 $— $70,240 
Securities Available-for-Sale907,034 25,814 870,229 10,991 907,034 
Loans Held-for-Sale— — — — — 
Portfolio Loans, net2,899,915 — — 2,871,562 2,871,562 
Federal Home Loan Bank Stock, at Cost2,067 — — NANA
Other Assets- Interest Rate Derivatives17,854 — 17,854 — 17,854 
Accrued Interest Receivable17,139 89 3,994 13,056 17,139 
Financial Liabilities:
Deposits$3,753,393 $704,323 $1,788,607 $1,283,819 $3,776,749 
Other Liabilities- Interest Rate Derivatives17,585 — 17,585 — 17,585 
FHLB Borrowings— — — — — 
Accrued Interest Payable1,296 — — 1,296 1,296 
 Fair Value Measurements at December 31, 2021
(Dollars in Thousands)Carrying ValueLevel 1Level 2Level 3Total
Financial Assets:
Cash and Cash Equivalents$277,799 $36,698 $241,101 $— $277,799 
Securities Available-for-Sale922,400 4,413 909,429 8,558 922,400 
Loans Held-for-Sale228 — — 228 228 
Portfolio Loans, net2,716,190 — — 2,689,578 2,689,578 
Federal Home Loan Bank Stock, at Cost2,352 — — NANA
Other Assets- Interest Rate Derivatives3,508 — 3,508 — 3,508 
Accrued Interest Receivable17,178 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 Derivatives3,682 — 3,682 — 3,682 
FHLB Borrowings7,000 — — 7,035 7,035 
Accrued Interest Payable1,378 — — 1,378 1,378 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the Consolidated Balance Sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution, or counterparty. In connection with each transaction, the Company originates a floating rate loan to the customer at a notional amount. In turn, the customer contracts with the counterparty to swap the stream of cash flows associated with the floating interest rate loan with the Company for a stream of fixed interest rate cash flows based on the same notional amount as the Company’s loan. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate loan with the Company receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.
Pursuant to agreements with various financial institutions, the Company may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon current positions and related future collateral requirements relating to them, management believes any effect on our cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, the possibility that the Company will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by the Asset and Liability Committee (“ALCO”) and all derivatives with customers are approved by a team of qualified members from senior management who have been trained to understand the risk associated with interest rate swaps and have past industry experience. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings in the Consolidated Statements of Income.
The following table indicates the amounts representing the fair value of derivative assets and derivative liabilities at the dates presented:
Fair Value of Derivative Assets
(Included in Other Assets)
June 30, 2022December 31, 2021
(Dollars in Thousands)Number of TransactionsNotional AmountFair ValueNumber of TransactionsNotional AmountFair Value
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans5$705 $18 —$— $— 
Interest Rate Swap Contracts – Commercial Loans64444,302 17,836 66446,490 3,508 
Total Derivatives not Designated as Hedging Instruments69$445,007 $17,854 66$446,490 $3,508 
Fair Value of Derivative Liabilities
(Included in Other Liabilities)
June 30, 2022December 31, 2021
(Dollars in Thousands)Number of TransactionsNotional AmountFair ValueNumber of TransactionsNotional AmountFair Value
Derivatives not Designated as Hedging Instruments
Forward Sale Contracts – Mortgage Loans5$705 $18 —$— $— 
Interest Rate Swap Contracts – Commercial Loans64444,302 17,567 66446,490 3,682 
Total Derivatives not Designated as Hedging Instruments69$445,007 $17,585 66$446,490 $3,682 
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)
The following table indicates the income (loss) recognized on derivatives for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)2022202120222021
Derivatives not Designated as Hedging Instruments
Interest Rate Lock Commitments – Mortgage Loans$14 $2 $18 $2 
Forward Sale Contracts – Mortgage Loans(14)(2)(18)(2)
Interest Rate Swap Contracts – Commercial Loans139 (276)443 153 
Total Derivative Income (Loss)$139 $(276)$443 $153 
Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.
The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at the dates presented:
Derivative Assets
(Included in Other Assets)		Derivative Liabilities
(Included in Other Liabilities)
(Dollars in Thousands)June 30,
2022		December 31,
2021		June 30,
2022		December 31,
2021
Derivatives not Designated as Hedging Instruments
Gross Amounts Recognized$17,836 $3,508 $17,567 $3,682 
Gross Amounts Offset— — — — 
Net Amounts Presented in the Consolidated Balance Sheets17,836 3,508 17,567 3,682 
Gross Amounts Not Offset (1)
— — — (4,080)
Net Amount$17,836 $3,508 $17,567 $(398)
(1)Amounts represent collateral posted for the periods presented.
NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS
Borrowings serve as an additional source of liquidity for the Company. The Company had no Federal Home Loan Bank (“FHLB”) borrowings at June 30, 2022 and $7.0 million at December 31, 2021. FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans. Total loans pledged as collateral were $1.2 billion at June 30, 2022 and $1.1 billion at December 31, 2021. There were no securities available-for-sale pledged as collateral at both June 30, 2022 and December 31, 2021. The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year. The Company is eligible to borrow up to an additional $773.6 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $1.0 billion, or 25.0% of the Company’s assets, as of June 30, 2022. The Company had the capacity to borrow up to an additional $667.3 million from the FHLB at December 31, 2021.
The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:
(Dollars in Thousands)June 30, 2022December 31, 2021
Long-term Borrowings$— $7,000 
Weighted Average Interest Rate— %1.61 %
During the year ended December 31, 2021 the Company prepaid four FHLB advances totaling $28.0 million with a weighted average cost to borrow of 1.0%. One FHLB advance totaling $3.0 million was repaid at maturity in the fourth quarter of 2021. The remaining FHLB advances totaling $25.0 million were repaid ahead of their scheduled maturity date and had unamortized prepayment fees related to the early repayment of the borrowings totaling $43 thousand at December 31, 2021. The FHLB borrowing of $7.0 million was prepaid in January 2022 outside of its scheduled maturity and had unamortized prepayment fees related to the early repayment of the borrowing of $18 thousand.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Commitments to extend credit represent agreements to lend to customers with fixed expiration dates or other termination clauses. The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs. Lines of credit for construction projects represented 61.3% and 55.3%, of the commitments to extend credit at June 30, 2022 and December 31, 2021, respectively. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements.
The following table sets forth our commitments and letters of credit as of the dates presented:
(Dollars in Thousands)June 30, 2022December 31, 2021
Commitments to Extend Credit$504,476 $513,482 
Standby Letters of Credit25,885 27,083 
Total$530,361 $540,565 
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and unconditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, collateral or other security is required to support financial instruments with credit risk.
Life-of-Loss Reserve on Unfunded Loan Commitments
We maintain a life-of-loss reserve on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The life-of-loss reserve is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.
The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)2022202120222021
Life-of-Loss Reserve on Unfunded Loan Commitments
Balance at Beginning of Period$1,547 $2,770 $1,783 $144 
Impact of Adopting ASU 2016-13— — — 2,908 
Balance after Adoption of ASU 2016-13$1,547 $2,770 $1,783 $3,052 
Provision (Recovery) for Unfunded Commitments269 (603)33 (885)
Total$1,816 $2,167 $1,816 $2,167 
Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments. An expense of $0.3 million was recorded during the period for the provision for unfunded commitments, which resulted in an increase of $0.9 million for both the three and six months ended June 30, 2022 compared to the release of $0.6 million and $0.9 million for the same periods in 2021.
Litigation
In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.
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CARTER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) I    NCOME
The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:
(Dollars in Thousands)Three Months Ended June 30, 2022Three Months Ended June 30, 2021
Pre-Tax AmountTax BenefitNet of Tax AmountPre-Tax AmountTax (Expense) BenefitNet of Tax Amount
Net Unrealized (Losses) Gains Arising during the period$(35,002)$7,350 $(27,652)$8,456 $(1,776)$6,680 
Reclassification Adjustment for Gains included in Net Income(76)16 (60)(1,499)315 (1,184)
Other Comprehensive (Loss) Income $(35,078)$7,366 $(27,712)$6,957 $(1,461)$5,496 

(Dollars in Thousands)Six Months Ended June 30, 2022Six Months Ended June 30, 2021
Pre-Tax AmountTax BenefitNet of Tax AmountPre-Tax AmountTax BenefitNet of Tax Amount
Net Unrealized Losses Arising during the period$(78,034)$16,387 $(61,647)$(2,038)$428 $(1,610)
Reclassification Adjustment for Gains included in Net Income(52)11 (41)(5,109)1,073 (4,036)
Other Comprehensive Loss$(78,086)$16,398 $(61,688)$(7,147)$1,501 $(5,646)
NOTE 11 – STOCK REPURCHASE PLAN
On June 28, 2022, the Company announced that the Board of Directors (“Board”) authorized a common stock repurchase program to purchase an additional 750,000 shares of its common stock in open market transactions, at prices that are accretive to continuing shareholders in the aggregate over a period of 12 months, subject to the non-objection letter from the Federal Reserve Bank of Richmond, which was received on July 26, 2022.
On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months. During the six months ended June 30, 2022, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $32.4 million, or an average price of $16.46 per share. During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $0.5 million, or an average price of $15.22 per share. As of April 28, 2022, the repurchase program to purchase up to 2,000,000 shares of the Company’s common stock was fully executed.
The specific timing, price and quantity of repurchases will be at the Company’s discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance. The repurchase plan does not obligate the Company to repurchase any particular number of shares.






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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2022 and June 30, 2021. The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:
•Important Note Regarding Forward-Looking Statements
•Explanation of Use of Non-GAAP Financial Measures
•Critical Accounting Estimates
•Overview
•Results of Operations and Financial Condition
•Earnings Summary
•Liquidity and Capital Resources
•Regulatory Capital Requirements
•Contractual Obligations
•Off-Balance Sheet Arrangements
Important Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements related to current and future market conditions and interest rates, the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, and other matters regarding or affecting the Company and its future business and operations. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:
•changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”);
•general economic or business conditions, or changes in interest rates;
•technological risks and developments;
•cyber-security threats, attacks or events;
•the Company’s liquidity and capital positions;
•the potential adverse effects of unusual and infrequently occurring events, or the prospect of these events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)
Ukraine) or public health events (such as the current COVID-19 pandemic), and the governmental and societal responses thereto;
•these potential adverse effects may include, without limitation, adverse effects on: (1) the ability of the Company's borrowers to satisfy their obligations to the Company; (2) the value of collateral securing loans; (3) the demand for the Company's loans or its other products and services; (4) incidents of cyberattacks and fraud; (4) the Company’s results of operations, liquidity or capital resources; (5) risks posed by reliance on third-party service providers; (6) other aspects of the Company's business operations; and (7) on financial markets and economic growth;
•the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the COVID-19 pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021;
•potential claims, damages, and fines related to litigation or government actions;
•sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;
•inflation;
•the replacement of LIBOR;
•a change in spreads on interest-earning assets and interest-bearing liabilities;
•regulatory supervision and oversight, including the failure to comply with state and federal banking agency laws and regulations;
•legislative and regulatory changes and requirements affecting the financial services industry as a whole, and the Company, in particular;
•the outcome of pending and future litigation and governmental proceedings;
•increased competition;
•the ability to continue to introduce competitive new products and services at competitive prices and on a timely, cost-effective basis;
•the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team;
•the Company’s strategic branch network optimization plan;
•managing our internal growth and acquisitions;
•the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;
•containing costs and expenses;
•reliance on significant customer relationships;
•credit losses;
•the potential impact of climate change and related government regulation on the Company and its customers;
•deterioration of the housing market and reduced demand for mortgages; and
•deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.
Many of these factors, as well as other factors, are described in this Quarterly Report, as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)
Explanation of Use of Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with generally accepted accounting principles in the United States (“GAAP”), management uses, and this quarterly report references, net interest income on a fully taxable equivalent, or (“FTE”), basis, which is a non-GAAP financial measure. Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry. The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income on an FTE basis (non-GAAP) is reconciled to net interest income (GAAP) in the Net Interest Income section under the heading "Results of Operations and Financial Condition."
Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.
Critical Accounting Estimates
Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.
Overview
Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at June 30, 2022. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is an insured, Virginia state-chartered bank, which operates branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.
The Company earns revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. The Company incurs expenses for the cost of deposits, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.
Our mission is to strive to be the preferred lifetime financial partner for our customers and shareholders, and the employer of choice in the communities the Company is privileged to serve. Our strategic plan focuses on restructuring the balance sheet to provide more diversification and higher yielding assets to increase the net interest margin. Another area of focus is the transformation of the infrastructure of the Company to provide a foundation for operational efficiency and provide new products and services for our customers that will ultimately increase noninterest income.
Our focus continues to be on loan and deposit growth with a shift in the composition of deposits to more low cost core deposits with less dependence in higher cost certificates of deposits (“CDs”), as well as, implementing opportunities to increase fee income while closely monitoring our operating expenses. The Company is focused on executing this strategy to successfully build our brand and grow our business in our markets.

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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Results of Operations and Financial Condition
Earnings Summary
Highlights for the Three Months Ended June 30, 2022
•Net interest income increased $5.3 million, or 19.3%, to $32.5 million for the three months ended June 30, 2022 compared to $27.2 million for the same period in 2021 primarily due an increase of 34 basis points in earning assets due to the rising interest rate environment and a reduction of 21 basis points in funding costs;
•The provision for credit losses increased to $1.8 million for the three months ended June 30, 2022, compared to $1.0 million for the same period in 2021;
•Total noninterest income decreased $1.6 million to $5.6 million for the three months ended June 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;
•Total noninterest expense decreased $4.3 million to $23.4 million for the three months ended June 30, 2022 compared to the same period in 2021; and
•Provision for income taxes increased $0.9 million to $1.8 million for the three months ended June 30, 2022 compared to $0.9 million for the same period in 2021.
Highlights for the Six Months Ended June 30, 2022
•Net interest income increased $6.9 million, or 12.9%, to $60.7 million for the six months ended June 30, 2022 compared to the same period in 2021 due primarily to the ongoing reduction in funding costs;
•The provision for credit losses decreased to $2.4 million for the six months ended June 30, 2022, compared to $2.8 million for the same period in 2021;
•Total noninterest income decreased $5.3 million to $10.9 million for the six months ended June 30, 2022 compared to $16.2 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;
•Total noninterest expense decreased $5.4 million to $45.9 million for the six months ended June 30, 2022 compared the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and reversals of vacation carryover in the first quarter of 2022 as well as lower medical costs in the first half of 2022; and
•Provision for income taxes increased $1.3 million to $3.1 million for the six months ended June 30, 2022 compared to $1.8 million for the same period in 2021.
Balance Sheet Highlights (period-end balances, June 30, 2022 compared to December 31, 2021)
•The securities portfolio decreased $15.4 million and is currently 22.0% of total assets compared to 22.3% of total assets. The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth.
•Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, primarily due to higher loan growth in the first half of 2022;
•The portfolio loans to deposit ratio was 79.9%, compared to 76.0%, as loan growth outpaced deposit growth;
•Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021;
•The ACL to total portfolio loans ratio was 3.27% compared to 3.41%. The ACL on portfolio loans totaled $98.0 million at June 30, 2022, compared to $95.9 million with the increase driven primarily by the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and loan growth partially offset by a decline in the other segment due to principal pay downs;
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
•During the second quarter of 2022, the Company’s Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares of the Company’s common stock, subject to the Federal Reserve’s non-objection letter, which was received on July 26, 2022.
We reported net income of $10.8 million or $0.44 diluted earnings per share for the three months ended June 30, 2022 and $20.1 million, or $0.80 diluted earnings per share, for the six months ended June 30, 2022 compared to net income of $5.4 million, or $0.21 diluted earnings per share and $14.8 million, or $0.56 diluted earnings per share, for the same periods in 2021.

Three Months Ended June 30,Six Months Ended June 30,
PERFORMANCE RATIOS2022202120222021
Return on Average Assets1.04 %0.53 %0.98 %0.72 %
Return on Average Shareholders’ Equity12.51 %5.55 %10.95 %7.62 %
Portfolio Loans to Deposit Ratio79.87 %79.70 %79.87 %79.70 %
Allowance for Credit Losses to Total Portfolio Loans3.27 %3.75 %3.27 %3.75 %
Net Interest Income
Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets, interest-bearing liabilities, as well as changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee (“ALCO”), in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what the Company believes is an acceptable level of net interest income.
Net interest income and the net interest margin are presented on an FTE basis. The FTE basis (non-GAAP) adjusts net interest income and net interest margin for the tax benefit of income on certain tax-exempt loans and securities using the applicable federal statutory tax rate for each period (which was 21% for the periods presented) and the dividend-received deduction for equity securities. The Company believes this FTE basis presentation provides a relevant comparison between taxable and non-taxable sources of interest income. Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.
Total net interest income increased $5.3 million, or 19.3% to $32.5 million and $6.9 million, or 12.9%, to $60.7 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs. Net interest income, on an FTE basis (non-GAAP), increased $5.2 million, or 18.7%, to $32.8 million and $6.7 million, or 12.3% to $61.3 million for the three and six months ended June 30, 2022, respectively, compared to $27.6 million and $54.6 million for the same periods in 2021. The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of $3.8 million and $3.3 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $1.4 million and $3.4 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin increased 49 basis points to 3.24% and 32 basis points to 3.06% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. Net interest margin, on an FTE basis (non-GAAP), increased 48 basis points to 3.27% and 31 basis points to 3.09% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.
The Company continues to focus on the expansion of net interest income and the net interest margin. The second quarter and first six months of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs. The second quarter and first six months of 2022 was also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship. Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)2022202120222021
Interest Income (FTE)(Non-GAAP)
Interest and Dividend Income (GAAP)$36,961 $33,094 $69,639 $66,051 
Tax Equivalent Adjustment293 386 591 848 
Interest and Dividend Income (FTE) (Non-GAAP)37,254 33,480 70,230 66,899 
Average Earning Assets$4,020,589 $3,972,574 $3,997,592 $3,956,282 
Yield on Interest-earning Assets (GAAP)3.69 %3.34 %3.51 %3.37 %
Yield on Interest-earning Assets (FTE) (Non-GAAP)3.72 %3.38 %3.54 %3.41 %
Net Interest Income (GAAP)$32,459 $27,203 $60,681 $53,732 
Tax Equivalent Adjustment293 386 591 848 
Net Interest Income (FTE) (Non-GAAP)32,752 27,589 61,272 54,580 
Average Earning Assets$4,020,589 $3,972,574 $3,997,592 $3,956,282 
Net Interest Margin (GAAP)3.24 %2.75 %3.06 %2.74 %
Net Interest Margin (FTE) (Non-GAAP)3.27 %2.79 %3.09 %2.78 %
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Average Balance Sheet and Net Interest Income Analysis (FTE)
The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:
Three Months Ended June 30, 2022Three Months Ended June 30, 2021
(Dollars in Thousands)Average BalanceIncome/ ExpenseRateAverage BalanceIncome/ ExpenseRate
ASSETS
Interest-Bearing Deposits with Banks$30,606 $61 0.80 %$190,851 $56 0.12 %
Tax-Free Investment Securities(2)
33,873 237 2.81 %33,027 273 3.32 %
Taxable Investment Securities975,352 4,452 1.83 %765,286 3,138 1.64 %
Total Securities1,009,225 4,689 1.86 %798,313 3,411 1.71 %
Tax-Free Loans(1)(2)
147,060 1,159 3.16 %197,393 1,565 3.18 %
Taxable Loans(1)
2,831,384 31,323 4.44 %2,782,802 28,417 4.10 %
Total Loans2,978,444 32,482 4.37 %2,980,195 29,982 4.04 %
Federal Home Loan Bank Stock2,314 22 3.81 %3,215 31 3.87 %
Total Interest-Earning Assets4,020,589 $37,254 3.72 %3,972,574 $33,480 3.38 %
Noninterest Earning Assets120,540 170,885 
Total Assets$4,141,129 $4,143,459 
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand$487,567 $343 0.28 %$404,084 $234 0.23 %
Money Market528,211 310 0.24 %351,820 305 0.35 %
Savings735,438 189 0.10 %657,803 169 0.10 %
Certificates of Deposit1,270,569 3,570 1.13 %1,512,923 5,052 1.34 %
Total Interest-Bearing Deposits3,021,785 4,412 0.59 %2,926,630 5,760 0.79 %
Federal Funds Purchased3,033 4 0.53 %— — — %
Federal Home Loan Bank Borrowings6,594 10 0.61 %30,000 91 1.22 %
Other Borrowings6,205 76 4.91 %3,514 40 4.57 %
Total Borrowings15,832 90 2.28 %33,514 131 1.57 %
Total Interest-Bearing Liabilities3,037,617 4,502 0.59 %2,960,144 5,891 0.80 %
Noninterest-Bearing Liabilities757,831 790,537 
Shareholders' Equity345,681 392,778 
Total Liabilities and Shareholders' Equity$4,141,129 $4,143,459 
Net Interest Income(2)
$32,752 $27,589 
Net Interest Margin(2)
3.27 %2.79 %
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.
(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Six Months Ended June 30, 2022Six Months Ended Six Months Ended June 30, 2021
(Dollars in Thousands)Average
Balance		Income/
Expense		RateAverage
Balance		Income/
Expense		Rate
ASSETS
Interest-Bearing Deposits with Banks$85,040 $123 0.29 %$182,835 $106 0.12 %
Tax-Free Investment Securities(2)
30,246 448 2.99 %42,256 685 3.27 %
Taxable Investment Securities968,039 8,184 1.70 %736,926 6,125 1.68 %
Total Securities998,285 8,632 1.74 %779,182 6,810 1.76 %
Tax-Free Loans(1)(2)
150,569 2,365 3.17 %210,132 3,353 3.22 %
Taxable Loans(1)
2,761,471 59,068 4.31 %2,780,127 56,562 4.10 %
Total Loans2,912,040 61,433 4.25 %2,990,259 59,915 4.04 %
Federal Home Loan Bank Stock2,227 42 3.80 %4,006 68 3.42 %
Total Interest-Earning Assets3,997,592 $70,230 3.54 %3,956,282 $66,899 3.41 %
Noninterest Earning Assets137,661 176,553 
Total Assets$4,135,253 $4,132,835 
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand$475,838 $620 0.26 %$391,555 $449 0.23 %
Money Market519,298 594 0.23 %330,838 570 0.35 %
Savings720,681 367 0.10 %651,340 331 0.10 %
Certificates of Deposit1,289,578 7,230 1.13 %1,566,436 10,705 1.38 %
Total Interest-Bearing Deposits3,005,395 8,811 0.59 %2,940,169 12,055 0.83 %
Federal Funds Purchased1,525 4 0.53 %— — — %
Federal Home Loan Bank Borrowings4,011 16 0.80 %31,934 187 1.18 %
Other Borrowings5,287 127 4.84 %2,914 77 5.33 %
Total Borrowings10,823 147 2.74 %34,848 264 1.53 %
Total Interest-Bearing Liabilities3,016,218 8,958 0.60 %2,975,017 12,319 0.84 %
Noninterest-Bearing Liabilities748,744 765,852 
Shareholders' Equity370,291 391,966 
Total Liabilities and Shareholders' Equity$4,135,253 $4,132,835 
Net Interest Income(2)
$61,272 $54,580 
Net Interest Margin(2)
3.09 %2.78 %
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.
(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.
Interest income increased $3.9 million, or 11.7% and $3.6 million, or 5.4%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Interest income, on an FTE basis (non-GAAP), increased $3.8 million, or 11.3% and $3.3 million, or 5.0% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The change was primarily due to increases in average interest-earning assets of $48.0 million and $41.3 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 34 basis points and 13 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022.
For the three and six months ended June 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $160.2 million and $97.8 million, respectively, and the average rate earned increased 68 and 17 basis points, respectively, as funds were deployed into higher yielding loans and securities. Average loan balances decreased $1.8 million and $78.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to large commercial paydowns in 2021. Average Paycheck Protection Program (“PPP”) loans totaled $0.4 million as of June 30, 2022 compared to $29.8 million as of June 30, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.
The average rate earned on loans increased 33 and 21 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during the first half of 2022. At June 30, 2022, the loan portfolio was comprised of 29.6% floating rate loans which reprice monthly, 39.5% variable rate loans that reprice at least once during the life of the loan and 30.9% fixed rate loans that do not reprice during the life of the loan.
Average investment securities increased $210.9 million and $219.1 million for the three and six months ended June 30, 2022,
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
respectively, compared to the same periods in 2021 and the average rate earned on investment securities increased 15 basis points for the three months ended June 30, 2022 and decreased two basis points for the six months ended June 30, 2022, when compared to the same periods in 2021. The change in investment securities is the result of active balance sheet management to deploy excess cash. Our portfolio has been diversified as to bond types, maturities, and interest rate structures. As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months. Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates. Bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate structure is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities.
Interest expense decreased $1.4 million and $3.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first half of 2022. Interest expense on deposits decreased $1.3 million and $3.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs. 
The average balances on CDs decreased $242.4 million or 16.0% and $276.9 million, or 17.7% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs. The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $176.4 million, $83.5 million and $77.6 million, respectively, for the three months ended June 30, 2022, and by $188.5 million, $84.3 million and $69.3 million, respectively, for the six months ended June 30, 2022, when compared to the same periods in 2021. The average rates paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts, which decreased 11 and 12 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.
The average balances on borrowings decreased $17.7 million and $24.0 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities. As a result, the cost of interest-bearing liabilities decreased 21 and 24 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
Three Months Ended June 30, 2022
Compared to June 30, 2021		Six Months Ended June 30, 2022
Compared to June 30, 2021
(Dollars in Thousands)
Volume(3)
Rate(3)
Increase/
(Decrease)
Volume(3)
RateIncrease/
(Decrease)
Interest Earned on:
Interest-Bearing Deposits with Banks$(82)$87 $5 $(79)$96 $17 
Tax-free Investment Securities(2)
7 (43)(36)(182)(55)(237)
Taxable Investment Securities930 384 1,314 1,952 107 2,059 
Total Securities937 341 1,278 1,770 52 1,822 
Tax-free Loans(1)(2)
(397)(9)(406)(936)(52)(988)
Taxable Loans(1)
503 2,403 2,906 (382)2,888 2,506 
Total Loans106 2,394 2,500 (1,318)2,836 1,518 
Federal Home Loan Bank Stock(9)— (9)(33)7 (26)
Total Interest-Earning Assets$952 $2,822 $3,774 $340 $2,991 $3,331 
Interest Paid on:
Interest-Bearing Demand$53 $56 $109 $105 $66 $171 
Money Market123 (118)5 256 (232)24 
Savings20 — 20 35 1 36 
Certificates of Deposit(745)(737)(1,482)(1,723)(1,752)(3,475)
Total Interest-Bearing Deposits(549)(799)(1,348)(1,327)(1,917)(3,244)
Federal Funds Purchased4 — 4 4 — 4 
Federal Home Loan Bank Borrowings(49)(32)(81)(125)(46)(171)
Other Borrowings33 3 36 58 (8)50 
Total Borrowings(12)(29)(41)(63)(54)(117)
Total Interest-Bearing Liabilities$(561)$(828)$(1,389)$(1,390)$(1,971)$(3,361)
Change in Net Interest Margin$1,513 $3,650 $5,163 $1,730 $4,962 $6,692 
(1)Nonaccruing loans are included in the daily average loan amounts outstanding. 
(2)Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.
(3)Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
Provision for Credit Losses
The Company recognizes provision expense for the allowance for credit losses (“ACL”) based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments. Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments. The Company adopted ASU 2016-03 on January 1, 2021, and increased the ACL by $64.5 million for the Day 1 adjustment which included $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.
The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021. The provision for credit losses increased $0.8 million to $1.8 million for the three months ended June 30, 2022 and decreased $0.4 million to $2.4 million for the six months ended June 30, 2022, when compared to the same periods in 2021. The increase for the three months ended June 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and partially offset by a decline in the other segment due to $15.4 million principal pay-downs. These increases were partially offset by downward pressure on the challenger model’s long-term averages.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 compared to the same periods in 2021 due to increased commitment volume in construction, partially offset by a decrease in the reserve rates.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.
Noninterest Income
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)20222021$ Change% Change20222021$ Change% Change
Gains on Sales of Securities, net$76 $1,499 $(1,423)(94.9)%$52 $5,109 $(5,057)(99.0)%
Service Charges, Commissions and Fees1,749 1,489 260 17.5 %3,702 3,298 404 12.2 %
Debit Card Interchange Fees1,850 1,874 (24)(1.3)%3,782 3,705 77 2.1 %
Insurance Commissions568 378 190 50.3 %837 672 165 24.6 %
Bank Owned Life Insurance Income334 342 (8)(2.3)%668 682 (14)(2.1)%
(Losses) Gains on Sales and Write-downs of Bank Premises, net(37)— (37)NM346 — 346 NM
Other Real Estate Owned Income12 4 8 200.0 %22 75 (53)(70.7)%
Commercial Loan Swap Fee Income756 742 14 1.9 %756 961 (205)(21.3)%
Other296 910 (614)(67.5)%774 1,688 (914)(54.1)%
Total Noninterest Income$5,604 $7,238 $(1,634)(22.6)%$10,939 $16,190 $(5,251)(32.4)%
Total noninterest income decreased $1.6 million, or 22.6%, to $5.6 million for the three months ended June 30, 2022 and decreased $5.3 million, or 32.4%, to $10.9 million for the six months ended June 30, 2022 when compared to the same periods in 2021. These decreases were primarily related to declines in net security gains of $1.4 million and $5.1 million in the three and six months ended June 30, 2022, respectively. The decline in security gains was due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.
Changes in total noninterest income for the three months ended June 30, 2022 also included a decrease of $0.6 million in other noninterest income offset by increases of $0.3 million in services charges, commissions and fees and $0.2 million in insurance commissions. The decrease in other noninterest income for the three months ended June 30, 2022 when compared to the same period in 2021 was also related to a premium of $0.5 million on the sale of four bank branches in the second quarter of 2021. The increase in service charges, commission and fees for the three months ended June 30, 2022 when compared to the same period in 2021 was primarily due to the seasonality of certain fees in the second quarter of 2022 and the higher insurance commissions was due to increased customer activity.
Changes in total noninterest income for the six months ended June 30, 2022 also included decreases of $0.9 million in other noninterest income and $0.2 million in commercial loan swap fee income offset by increases of $0.4 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.2 million in insurance commissions. Similar to the decline during the three month period ended June 30, 2022, the decline in other noninterest income for the six months ended June 30, 2022 was similarly related to premiums on the sale of bank branches; however, the decline in commercial loan swap fee income was related to the timing and demand for this product in the current rising interest rate environment. The increases in service charges, commissions and fees and insurance commission for the six months ended June 30, 2022 compared to the same period in 2021 was driven by seasonality and increased customer activity. The $0.3 million gains on sales and write-downs of bank premises, net for the six months ended June 30, 2022 was due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Noninterest Expense
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands)20222021$ Change% Change20222021$ Change% Change
Salaries and Employee Benefits$12,444 $13,686 $(1,242)(9.1)%$24,201 $26,268 $(2,067)(7.9)%
Occupancy Expense, net3,296 3,451 (155)(4.5)%6,648 6,965 (317)(4.6)%
FDIC Insurance Expense629 657 (28)(4.3)%997 1,300 (303)(23.3)%
Other Taxes819 718 101 14.1 %1,623 1,480 143 9.7 %
Advertising Expense267 220 47 21.4 %506 390 116 29.7 %
Telephone Expense454 588 (134)(22.8)%942 1,188 (246)(20.7)%
Professional and Legal Fees1,202 1,440 (238)(16.5)%2,421 2,664 (243)(9.1)%
Data Processing842 954 (112)(11.7)%1,683 1,875 (192)(10.2)%
(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net(60)2,603 (2,663)(102.3)%99 2,815 (2,716)(96.5)%
Losses on Sales and Write-downs on Bank Premises, net— 64 (64)(100.0)%— 107 (107)(100.0)%
Debit Card Expense659 713 (54)(7.6)%1,292 1,345 (53)(3.9)%
Tax Credit Amortization615 427 188 44.0 %1,230 854 376 44.0 %
Other Real Estate Owned Expense141 142 (1)(0.7)%182 196 (14)(7.1)%
Other2,102 2,096 6 0.3 %4,097 3,917 180 4.6 %
Total Noninterest Expense$23,410 $27,759 $(4,349)(15.7)%$45,921 $51,364 $(5,443)(10.6)%
Total noninterest expense decreased $4.3 million and $5.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. The primary driver for both these decreases was $2.7 million for losses on sales and write-downs of OREO, net. This nonrecurring write-down of $3.0 million was related to the closing of bank branches in the second quarter of 2021 that were transferred to OREO and marketed for sale.
Another driver of the decrease in noninterest expense for the three-month period ended June 30, 2022 when compared to the prior period in 2021 was the $1.2 million decrease in salaries and employee benefits, which was related to lower medical expenses of $0.8 million and a decrease of $0.4 million related to our retail branch optimization project. Decreases of $0.2 million in professional and legal fees and $0.2 million in occupancy expense, net, in the three-month period ended June 30, 2022 when compared to the same period also impacted the decline in noninterest expense for the three months ended June 30, 2022 when compared to the same period in 2021.
The decrease in noninterest expense for the six-month period ended June 30, 2022 when compared to the same period in 2021 was primarily driven by a $2.1 million decline in salaries and employee benefits and lower medical expenses and our retail branch optimization project. Other decreases during the six-months ended June 30, 2022 included a $0.3 million decrease in occupancy expense, net, a $0.3 million decrease in FDIC insurance expense and a $0.2 million decrease in professional and legal fees offset by an increase of $0.4 million in tax credit amortization. The decrease in FDIC expense was due to improved financial metrics of the Bank that are used to perform the assessment. The increase for the tax credit amortization related to a new historic tax credit that began in early 2022.
Provision for Income Taxes
The provision for income taxes increased $0.9 million and $1.3 million to $1.8 million and $3.1 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. Pre-tax income increased $6.3 million and $6.6 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. The effective tax rate was 14.3% and 13.4% for the three and six months ended June 30, 2022, respectively, compared to 14.0% and 10.9% for the same periods in 2021. The increase in the effective tax rate is primarily due to a higher level of pre-tax income and a lower level of tax-exempt interest income. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”), which are relatively consistent regardless of the level of pre-tax income.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Financial Condition
June 30, 2022
Total assets decreased $10.5 million, to $4.1 billion at June 30, 2022 compared to December 31, 2021. Federal Reserve Bank excess reserves decreased $149.9 million to $26.3 million at June 30, 2022 from $176.2 million at December 31, 2021 due to redeploying excess cash into higher yielding loans and securities.
Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to $2.8 billion at December 31, 2021 primarily due to higher loan growth in the first half of 2022. During 2021, loan growth was muted by large commercial loan payoffs and loan sales. The variances in loan segments for portfolio loans related to increases of $101.3 million in residential mortgages, $65.9 million in commercial real estate loans, $39.8 million in construction loans and $3.4 million in other consumer loans offset by decreases of $15.7 million in the other category and $8.9 million in C&I loans.
Other real estate owned, (“OREO”), decreased $2.5 million at June 30, 2022 compared to December 31, 2021 due to our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. Closed retail bank offices have a remaining book value of $1.0 million at June 30, 2022 and December 31, 2021.
The securities portfolio decreased $15.4 million and is currently 22.0% of total assets at June 30, 2022 compared to 22.3% of total assets at December 31, 2021. The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth. At June 30, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses. Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio. The Bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a mix of both fixed and floating rate instruments.
Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021. The increases included $92.6 million in money market accounts, $46.6 million in interest-bearing demand accounts and $43.2 million in savings accounts offset by the intentional decline of $83.9 million in CDs and a decline of $43.6 million in noninterest-bearing demand accounts. At June 30, 2022, noninterest-bearing deposits comprised 18.8% of total deposits compared to 20.2% at December 31, 2021 and 19.7% at June 30, 2021. CDs comprised 33.6%, 36.3% and 39.8% of total deposits at June 30, 2022, December 31, 2021 and June 30, 2021, respectively.
Total capital decreased by $73.5 million to $334.1 million at June 30, 2022 compared to $407.6 million at December 31, 2021. The decrease in equity was primarily due to a $61.7 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of $20.1 million for the six months ended June 30, 2022. The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2022.
The ACL was 3.27% of total portfolio loans at June 30, 2022 compared to 3.41% as of December 31, 2021. General reserves as a percentage of total portfolio loans were 3.15% at June 30, 2022 compared to 3.38% at December 31, 2021. Management believes, the ACL is adequate to absorb expected losses inherent in the loan portfolio.
The Company remains well capitalized. Our Tier 1 capital ratio decreased to 12.70% at June 30, 2022 compared to 14.21% at December 31, 2021. Our leverage ratio was 9.96% at June 30, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 13.96% at June 30, 2022 compared to 15.46% at December 31, 2021.The decrease is related to the aforementioned repurchase of common stock of $32.4 million through June 30, 2022. We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Securities Activity
The following table presents the composition of available-for-sale securities:
(Dollars in Thousands)June 30, 2022December 31, 2021$ Change
U.S. Treasury Securities$18,275 $4,413 $13,862 
U.S. Government Agency Securities3,080 3,478 (398)
Residential Mortgage-Backed Securities110,437 110,013 424 
Commercial Mortgage-Backed Securities40,351 4,168 36,183 
Asset Backed Securities82,433 81,863 570 
Collateralized Mortgage Obligations284,225 287,614 (3,389)
Small Business Administration53,697 108,914 (55,217)
States and Political Subdivisions245,105 262,202 (17,097)
Corporate Notes69,431 59,735 9,696 
Total Debt Securities$907,034 $922,400 $(15,366)
The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.
The securities portfolio decreased by $15.4 million to $907.0 million at June 30, 2022 compared to $922.4 million at December 31, 2021. Securities comprise 22.0% of total assets at June 30, 2022 compared to 22.3% at December 31, 2021. The decrease is a result of redeploying securities maturities into higher yielding loan growth during the second quarter of 2022. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures. As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.
At June 30, 2022 total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses. At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.
The unrealized losses on debt securities were primarily attributable to changes in interest rates, and not related to the credit quality of these securities. The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities). This portion of the Treasury yield curve has moved significantly upward over the past six months, driving unrealized losses on these securities higher. Although the Federal Reserve is in the middle of an aggressive effort to raise short-term interest rates to combat inflation, the Company does not expect higher short-term rates to adversely impact the fair values of the Company’s investment securities to the same extent as increases in longer-term rates. The Company expects that higher short-term rates may improve yields on certain of the Company’s variable rate securities within the next six to twelve months.
At December 31, 2021, the 5-year and 10-year U.S. Treasury yields were 1.26% and 1.52%, respectively. At June 30, 2022, those same bond yields were 3.01% and 2.98%, respectively. Therefore, this increase of 175 and 146 basis points, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range. Note, the effects were greater for longer maturity bonds, such as municipal bonds. On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Federal Reserve interest rate hikes.
Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any noncredit loss will be recognized in other comprehensive income. At June 30, 2022 and December 31, 2021, the Company had no credit related net investment impairment losses.
Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our securities.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Loan Composition
The following table summarizes our loan portfolio for the periods presented:
(Dollars in Thousands)June 30, 2022December 31, 2021
Commercial
Commercial Real Estate$1,389,117 $1,323,252 
Commercial and Industrial336,477 345,376 
Total Commercial Loans1,725,594 1,668,628 
Consumer
Residential Mortgages559,313 457,988 
Other Consumer48,033 44,666 
Total Consumer Loans607,346 502,654 
Construction322,731 282,947 
Other 342,225 357,900 
Total Portfolio Loans2,997,896 2,812,129 
Loans Held-for-Sale— 228 
Total Loans$2,997,896 $2,812,357 
Our loan portfolio represents our most significant source of interest income. The risk that borrowers are unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay. For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios. The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations. At June 30, 2022, the loan portfolio was comprised of 29.6% floating rates which reprice monthly, 39.5% variable rates that reprice at least once during the life of the loan and the remaining 30.9% are fixed rate loans. The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment.
Our exposure to the hospitality industry at June 30, 2022 equated to approximately $380.2 million, or 12.7% of total portfolio loans. These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows. Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic. However, our clients continue to face challenges with respect to labor, which we believe impedes their ability to turnover rooms resulting in occupancy constraints. This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness. Contractual payments have been restored since the expiration of our deferral program on June 30, 2021. These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure. As a result, our financial condition, capital levels and results of operations could be adversely affected.
Aggregate commitments to our top 10 credit relationships were $686.8 million at June 30, 2022. The Other segment represents 49.3% of the top 10 credit relationships.
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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:
Dollars in ThousandsFor the Periods EndingChangeJune 30, 2022June 30, 2022
June 30, 2022December 31, 2021% of Gross Loans% of RBC
1. Hospitality, agriculture & energy$338,790 $350,010 ($11,220)11.30 %73.47 %
2. Retail real estate & food services56,492 56,073 419 1.88 %12.25 %
3. Industrial & retail real estate44,503 45,653 (1,150)1.48 %9.65 %
4. Multifamily development40,000 36,720 3,280 1.33 %8.68 %
5. Retail real estate37,355 38,250 (895)1.25 %8.10 %
6. Hospitality35,234 35,664 (430)1.17 %7.64 %
7. Multifamily & student housing34,675 35,405 (730)1.16 %7.52 %
8. Hospitality34,046 34,463 (417)1.14 %7.38 %
9. Special/limited use33,736 33,736 — 1.13 %7.32 %
 10. Multifamily development31,992 29,389 2,603 1.07 %6.94 %
Top Ten (10) Relationships686,823 695,363 (8,540)22.91 %148.95 %
Total Gross Loans2,997,896 2,812,357 185,539 
% of Total Gross Loans22.91 %24.73 %(1.82)%
Concentration (25% of RBC)$115,277 $120,781 
Unfunded commitments on lines of credit were $430.8 million at June 30, 2022 as compared to $433.1 million at December 31, 2021. The majority of unused commitments are for construction projects that will be drawn as the construction completes. Total utilization was 53.6% at June 30, 2022 and 52.2% at December 31, 2021. Unfunded commitments on commercial operating lines of credit was 54.3% at June 30, 2022 and 51.7% at December 31, 2021.
We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry while actively managing concentrations. When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments. The Company has specific loan segment limits in its loan policy. Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital. Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio. In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods. We also have policy limits on loan-to-cost for construction projects.
Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment. Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage. The repayment capacity of the borrower should exceed the policy and guidelines for secured loans.
Deferred costs and fees included in the portfolio balances above were $6.6 million and $4.5 million at June 30, 2022 and December 31, 2021, respectively. Discounts on purchased 1-4 family loans included in the portfolio balances above were $176.5 thousand and $190.6 thousand at June 30, 2022 and December 31, 2021, respectively.
From time to time, we have mortgage loans held-for-sale derived from two sources. First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors. Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing. We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period. There were no mortgage loans held-for-sale at June 30, 2022 and $0.2 million at December 31, 2021.
Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Credit Quality
On a monthly basis, a Criticized Asset Committee meets to review certain special mention and substandard loans within prescribed policy thresholds. These loans typically represent the highest risk of loss to the Company. Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.
On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter. Annually, this same committee approves credit related policies and policy enhancements as they become available.
Additional credit risk management practices include continuous reviews of trends in our lending footprint and our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing. Our Loan Review department serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities. The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process. Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms. Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.
Nonperforming assets consist of nonaccrual loans and OREO. The following table summarizes nonperforming assets for the dates presented:
(Dollars in Thousands)June 30, 2022December 31, 2021$ Change
Nonperforming Loans
Commercial Real Estate$3,258 $3,337 $(79)
Commercial and Industrial5,210 451 4,759 
Residential Mortgages2,555 2,551 4 
Other Consumer6 73 (67)
Construction1,000 985 15 
Other— — — 
Total Nonperforming Loans12,029 7,397 4,632 
Other Real Estate Owned8,432 10,916 (2,484)
Total Nonperforming Assets$20,461 $18,313 $2,148 
Nonperforming assets increased $2.1 million to $20.5 million at June 30, 2022 compared to December 31, 2021. The increase was primarily due to a $4.6 million increase in nonperforming loans due to the deterioration of a purchased syndicated C&I loan totaling $4.9 million, offset by a $2.5 million decrease in OREO. Closed retail bank offices have a remaining book value of $1.0 million at both June 30, 2022 and December 31, 2021. During the first quarter of 2022, two branch closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency. In addition, two former closed offices were also moved to OREO. During the first six months of 2022, a total of four branch offices were sold.
Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No. 2022-02
Prior to our adoption of ASU No. 2022-02, we accounted for a Troubled Debt Restructuring (“TDRs”) as a loan that we, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower that we would not otherwise grant. The Company strives to identify borrowers in financial difficulty early and work with them to modify terms and conditions before their loan defaults and/or is transferred to nonaccrual status. Modified terms that might have been considered a TDR generally included extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may have been instances of principal forgiveness. Short-term modifications that were considered insignificant were generally not considered a TDR unless there were other concessions granted. On April 1, 2022, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2022. Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to ASU No. 2022-02.
Generally, the Company individually evaluates all loans experiencing financial difficulty, with a commitment greater than or equal to $1.0 million for individually evaluated loan reserves. In addition, the Company may evaluate credits that have complex loan structures for impairment, even if the commitment is less than $1.0 million. Nonaccrual TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Allowance for Credit Losses
The following is the allocation of the ACL balance by segment for the periods presented:
June 30, 2022December 31, 2021
(Dollars in Thousands)Amount% of Loans in each Category to Total Portfolio LoansAmount% of Loans in each Category to Total Portfolio Loans
Commercial Real Estate$17,808 46.3 %$17,297 47.0 %
Commercial & Industrial5,688 11.2 %4,111 12.3 %
Residential Mortgages5,155 18.7 %4,368 16.3 %
Other Consumer1,719 1.6 %1,493 1.6 %
Construction6,832 10.8 %6,939 10.1 %
Other60,779 11.4 %61,731 12.7 %
Balance End of Year$97,981 100.0 %$95,939 100.0 %
The following table summarizes the credit quality ratios and their components as of June 30, 2022 and December 31, 2021:
(Dollars in Thousands)June 30, 2022December 31, 2021
Allowance for Credit Losses to Total Portfolio Loans
Allowance for Credit Losses$97,981 $95,939 
Total Portfolio Loans2,997,896 2,812,129 
Allowance for Credit Losses to Total Portfolio Loans3.27 %3.41 %
Nonperforming Loans to Total Portfolio Loans
Nonperforming Loans$12,029 $7,397 
Total Portfolio Loans2,997,896 2,812,129 
Nonperforming Loans to Total Portfolio Loans0.40 %0.26 %
Allowance for Credit Losses to Nonperforming Loans
Allowance for Credit Losses$97,981 $95,939 
Nonperforming Loans12,029 7,397 
Allowance for Credit Losses to Nonperforming Loans814.54 %1,297.00 %
Net Charge-offs to Average Portfolio Loans
Net Charge-offs (annualized)$811 $23,127 
Average Total Portfolio Loans2,911,872 2,927,083 
Net Charge-offs to Average Portfolio Loans0.03 %0.79 %
See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the table above. The net charge-offs of $23.1 million for the full year 2021 was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved.
The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses increased $0.8 million to $1.8 million for the three months ended June 30, 2022 and decreased $0.4 million to $2.4 million for the six months ended June 30, 2022 compared to the same periods in 2021. The increase for the three months ended June 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and partially offset by a decline in the other segment primarily due to $15.4 million principal pay-downs.
The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 when compared to the same periods in 2021 due to increased commitment volume in construction offset by the reserve rates.
Net charge-offs were $0.2 million and $0.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021. During the three months ended June 30, 2021, we recognized charge-offs of $8.2 million related to the resolution of our two largest nonperforming credits. As a percentage of average total portfolio loans, on an
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
annualized basis, net charge-offs were 0.03% for both the three and six months ended June 30, 2022 compared to 1.15% and 0.63% for the same periods in 2021. At June 30, 2022, nonperforming loans increased $4.6 million, or 62.6%, to $12.0 million since December 31, 2021. Nonperforming loans as a percentage of total portfolio loans were 0.40% and 0.26% as of June 30, 2022 and December 31, 2021, respectively.
The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.
The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:
June 30, 2022
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Portfolio Loans
Pass$1,372,820 $328,459 $555,030 $47,964 $321,548 $180,792 $2,806,613 
Special Mention12,961 — 970 — 73 3,185 17,189 
Substandard3,336 8,018 3,313 69 1,110 158,248 174,094 
Doubtful— — — — — — — 
Loss— — — — — — — 
Total Portfolio Loans$1,389,117 $336,477 $559,313 $48,033 $322,731 $342,225 $2,997,896 
Performing$1,385,859 $331,267 $556,758 $48,027 $321,731 $342,225 $2,985,867 
Nonperforming3,258 5,210 2,555 6 1,000 — 12,029 
Total Portfolio Loans$1,389,117 $336,477 $559,313 $48,033 $322,731 $342,225 $2,997,896 
December 31, 2021
(Dollars in Thousands)Commercial Real EstateCommercial and IndustrialResidential MortgageOther ConsumerConstructionOtherTotal Portfolio Loans
Pass$1,314,576 $337,294 $453,894 $44,554 $281,241 $185,247 $2,616,806 
Special Mention5,260 8 553 — 604 3,281 9,706 
Substandard3,416 8,074 3,541 112 1,102 169,372 185,617 
Doubtful— — — — — — — 
Loss— — — — — — — 
Total Portfolio Loans$1,323,252 $345,376 $457,988 $44,666 $282,947 $357,900 $2,812,129 
Performing$1,319,915 $344,925 $455,437 $44,593 $281,962 $357,900 $2,804,732 
Nonperforming3,337 451 2,551 73 985 — 7,397 
Total Portfolio Loans$1,323,252 $345,376 $457,988 $44,666 $282,947 $357,900 $2,812,129 
Special mention, substandard and doubtful loans at June 30, 2022 decreased $4.0 million to $191.3 million compared to $195.3 million at December 31, 2021. The increase in special mention related to one large CRE loan that downgraded from pass and the decrease in substandard loans related to paydowns in the other loan category during the second quarter of 2022.
Additionally, refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Deposits
The following table presents the composition of deposits for the periods presented:
(Dollars in Thousands)June 30,
2022		December 31,
2021		$ Change% Change
Noninterest-Bearing Demand$704,323 $747,909 $(43,586)(5.8)%
Interest-Bearing Demand499,282 452,644 46,638 10.3 %
Money Market555,621 463,056 92,565 20.0 %
Savings733,704 690,549 43,155 6.2 %
Certificate of Deposits1,260,463 1,344,318 (83,855)(6.2)%
Total Deposits$3,753,393 $3,698,476 $54,917 1.5 %
Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition. Total deposits at June 30, 2022 increased $54.9 million, or 1.5%, from December 31, 2021. The increase in deposits primarily related to an increase in our core deposits of $138.8 million, or 11.9% on an annualized basis. Our core deposits include noninterest-bearing demand accounts, interest-bearing demand deposits, money market accounts and savings accounts. The decrease of $83.9 million, or 6.2% in CDs at June 30, 2022 compared to December 31, 2021 is due to the intentional runoff of higher cost CDs. Noninterest-bearing deposits comprised 18.8% and 20.2% of total deposits at June 30, 2022 and December 31, 2021, respectively.
The following table presents additional information in relation to deposits:
(Dollars in Thousands)June 30,
2022		December 31,
2021
Deposits from the Certificate of Deposit Account Registry Services (CDARS)$922 $139 
Noninterest-Bearing Public Funds Deposits24,129 58,393 
Interest-Bearing Public Funds Deposits165,808 123,968 
Total Deposits not Covered by Deposit Insurance(1)
426,331 396,626 
Certificates of Deposits not Covered by Deposit Insurance137,350 147,134 
Deposits for Certain Directors, Executive Officers and their Affiliates2,866 3,032 
(1) These deposits are presented on an estimated basis. This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.
Maturities of CDs over $250,000 or more not covered by deposit insurance at June 30, 2022 are summarized as follows:
(Dollars in Thousands)AmountPercent
Three Months or Less$11,961 8.7 %
Over Three Months Through Twelve Months57,332 41.7 %
Over Twelve Months Through Three Years44,452 32.4 %
Over Three Years23,605 17.2 %
Total$137,350 100.0 %

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CARTER BANKSHARES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Federal Home Loan Bank Borrowings (“FHLB”)
Borrowings are an additional source of liquidity for the Company. We had no FHLB borrowings at June 30, 2022 and $7.0 million at December 31, 2021.
Information pertaining to FHLB advances is summarized in the following table:
(Dollars in Thousands)June 30, 2022December 31, 2021
Balance at Period End$— $7,000 
Average Balance during the Period$4,011 $25,986 
Average Interest Rate during the Period0.80 %1.20 %
Maximum Month-end Balance during the Period$20,000 $35,000 
Average Interest Rate at Period End— %1.61 %
The Company held FHLB Atlanta stock of $2.1 million and $2.4 million at June 30, 2022 and December 31, 2021, respectively. Dividends recorded on this restricted stock were $22 thousand and $42 thousand for the three and six months ended June 30, 2022 compared to $31 thousand and $68 thousand for the same periods in 2021. The investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Atlanta. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.
Refer to Note 8, Federal Home Loan Bank Borrowings, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to borrowings.
Liquidity and Capital Resources
Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk the Company’s Board has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for the Company. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.
The Company’s primary funding and liquidity source is a stable customer deposit base. Management believes that we have the ability to retain existing deposits and attract new deposits, mitigating any funding dependency on other more volatile sources. Although deposits are the primary source of funds, the Company has identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to the Company include borrowing availability at the FHLB, equal to 25.0% of the Company’s assets approximating $1.0 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 $728.5 million of unpledged available-for-sale investment securities as an additional source of liquidity.
An important component of the Company’s ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At June 30, 2022, the Bank had $755.6 million in highly liquid assets,
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
which consisted of $0.8 million in interest-bearing deposits in other financial institutions, $26.3 million in FRB Excess Reserves and $728.5 million in unpledged securities. This resulted in highly liquid assets to total assets ratio of 18.3% at June 30, 2022.
If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
The following table provides detail of liquidity sources as of the periods presented:
(Dollars in Thousands)June 30, 2022December 31, 2021
Cash and Due From Banks$43,194 $36,698 
Interest-bearing Deposits in Other Financial Institutions745 64,905 
Federal Reserve Bank Excess Reserves26,301 176,196 
Unpledged Investment Securities728,515 743,836 
Excess Pledged Securities22,861 28,417 
FHLB Borrowing Availability773,628 667,307 
Unsecured Lines of Credit145,000 145,000 
Total Liquidity Sources$1,740,244 $1,862,359 
Regulatory Capital Requirements
Total shareholders’ equity decreased by $73.5 million to $334.1 million at June 30, 2022 compared to $407.6 million at December 31, 2021. The decrease in equity was primarily due to a $61.7 million, net of tax, decline in other comprehensive loss due to changes in the fair value of available-for-sale securities due to unrealized losses driven by increases in market interest rates, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of $20.1 million for the six months ended June 30, 2022. The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2022.
The Company and the Bank are subject to various capital requirements administered by the federal banking regulators. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios as shown in the following table.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
At June 30, 2022, the Bank continues to maintain its capital position with a leverage ratio of 9.93% as compared to the regulatory guideline of 5.00% to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.67% compared to the regulatory guideline of 6.50% to be well-capitalized. The Bank’s risk-based Tier 1 and Total Capital ratios were 12.67% and 13.93%, respectively, which places the Bank above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00% and 10.00%, respectively. We believe that we have the ability to raise additional capital, if necessary.
The Basel rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment which reduces the volatility of regulatory capital levels.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Basel III Capital Rules require the Company and the Bank to maintain minimum Common Equity Tier 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank.
The following table summarizes the actual risk-based capital amounts and ratios for the Company and the Bank for the dates presented:
(Dollars in Thousands)Minimum Required Basel III
Well
Capitalized(1)
June 30, 2022December 31, 2021
AmountRatioAmountRatio
Carter Bankshares, Inc.
Leverage Ratio4.00 %NA$419,491 9.96 %$443,940 10.62 %
Common Equity Tier 1 (to Risk-weighted Assets)7.00 %NA419,491 12.70 %443,940 14.21 %
Tier 1 Capital (to Risk-weighted Assets)8.50 %NA419,491 12.70 %443,940 14.21 %
Total Capital (to Risk-weighted Assets)10.50 %NA461,107 13.96 %483,124 15.46 %
Carter Bank & Trust
Leverage Ratio4.00 %5.00 %$418,300 9.93 %$438,533 10.49 %
Common Equity Tier 1 (to Risk-weighted Assets)7.00 %6.50 %418,300 12.67 %438,533 14.04 %
Tier 1 Capital (to Risk-weighted Assets)8.50 %8.00 %418,300 12.67 %438,533 14.04 %
Total Capital (to Risk-weighted Assets)10.50 %10.00 %459,905 13.93 %477,710 15.29 %
(1)To be “well capitalized” under the prompt corrective action provisions in the Basel III framework. “Well capitalized” applies to the Bank only.
In December 2018, the Office of the Comptroller of the Currency, (the “OCC”), the Federal Reserve System, (“FRB”), and the Federal Deposit Insurance Corporation, (“FDIC”), approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the Day 1 adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, the regulators issued interim final rule (“IFR”), “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We adopted CECL effective January 1, 2021 and elected to implement the capital transition relief over the permissible three-year period.
Contractual Obligations
As of June 30, 2022, there have been no material changes outside the ordinary course of business to the information about the Company’s contractual obligations and cash commitments disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Contractual Obligations” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Off-Balance Sheet Arrangements
As of June 30, 2022, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital. For financial institutions, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancement of shareholder value. However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity, and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.
The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk by simulating various rate shock scenarios and analyzing the results of the rate shocks on the Company’s projected net interest income (“NII”) and economic value of equity (“EVE”). The rate shock scenarios used in the ALM span over multiple time horizons and yield curve shapes and include parallel and non-parallel shifts to ensure the ALCO can mitigate future earnings and market value fluctuations due to changes in market interest rates.
Within the context of the ALM, NII rate shock simulations explicitly measure the exposure to earnings from changes in market rates of interest over a defined time horizon. These robust simulations include assumptions of how the balance sheet will react in different rate environments including loan prepayment speeds, the average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in the market rates (betas). Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. Reviewing these various measures provides us with a more comprehensive view of our interest rate risk profile.
NII rate shock simulation results are compared to a base case NII result to provide an estimate of the impact that simulated market rate changes may have on 12 months and 24 months of pretax NII. The base case earnings scenario together with various rate shock earning scenarios are modeled utilizing both a static and growth balance sheet. A static balance sheet is a no-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread over a prescribed index. Parallel rate shock analyses assume an immediate parallel shift in market interest rates across all horizons of the yield curve and also include management’s assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market, and savings) and changes in the prepayment behavior of loans and securities with embedded optionality. Our policy guidelines limit the change in pretax NII over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points. We have temporarily suspended the -200, -300, and -400 basis point rate shock analyses. Due to the rising interest rate environment, we believe the impact to NII income when evaluating the -200, -300, and -400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position.
To monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE rate shock simulations using the same assumptions used in the NII rate shock simulations discussed above. EVE represents the present value of all asset cash flows discounted with related market interest rates minus the present value of all liability cash flows which are also discounted with related market interest rates. The impact of a changing interest rate environment on the Company’s projected EVE is analyzed by shocking market interest rates, then modeling the impact of the rate shock on both the cash flow of assets and liabilities, and the underlying discount rate utilized in the present value calculation of the assets and liabilities. Market rate shock results are then compared to base case simulation results to determine the impact that market rate changes may have on our EVE. As with NII rate shock analyses, EVE rate shock analyses incorporate management’s assumptions regarding prepayment behavior of fixed rate loans and securities with embedded optionality and the behavior and value of non-maturity deposit products. Our policy guidelines limit the change in EVE given changes in rates of +/- 100, 200, 300, and 400 basis points. We have also temporarily suspended the EVE -200, -300, and -400 basis point scenarios in 2022 and 2021 due to the current interest rate environment.
The following tables reflect the net interest income rate shock analyses and EVE analyses results for the periods presented utilizing a forecasted static balance sheet over the next twelve months. All percentage changes presented are within prescribed ranges set by management.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
June 30, 2022December 31, 2021
Change in Interest Rate (basis points)% Change in Pretax Net Interest Income% Change in Economic Value of Equity% Change in Pretax Net Interest Income% Change in Economic Value of Equity
40021.6%3.9%43.6%24.6%
30016.3%4.3%33.1%20.6%
20011.0%3.8%22.5%15.4%
1005.6%2.5%11.4%8.6%
-100(7.1)%(6.3)%(2.4)%(7.0)%
The results from the net interest income rate shock analysis are consistent with having an asset sensitive balance sheet when adjusted for repricing correlations (betas). The above table indicates that in a rising interest rate environment, the Company is positioned to have increased pretax net interest income for the same asset base due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities. Conversely, in a declining interest rate environment, we are positioned to have decreased pretax net interest income for the same reasons discussed above.
Based on the ALM results presented above for the quarters ending June 30, 2022 and December 31, 2021, the Company’s balance sheet is less asset sensitive at June 30, 2022 than it previously was at December 31, 2021. This migration in asset sensitivity is due to 1) lower yielding, floating rate excess cash positions held in federal reserve bank and interest-bearing deposits in other financial institutions that are more sensitive to future market interest rate changes which were deployed into higher yielding, fixed and floating rate securities and portfolio loans that are less sensitive to future market interest rate changes, and 2) the recent shifts in the shape of the yield curve between the two periods presented above.
In addition to rate shocks and EVE analyses, sensitivity analyses are performed to help us identify which model assumptions are critical and cause the greatest impact on pretax NII. Sensitivity analyses include changing prepayment behavior of loans and securities with optionality, repricing correlations, and the impact of interest rate changes on non-maturity deposit products (decay rates).
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2022. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to the Company’s management, including our CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.
Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective, as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II – OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various legal and administrative proceedings and claims. Although the timing and outcome of these legal and administrative proceedings and claims cannot be predicted with certainty, based on information presently available and after consultation with legal counsel, management does not believe that the disposition of such proceedings or claims will have a material adverse effect on our business, consolidated financial position, or results of operations. As of June 30, 2022, no material legal proceedings were pending or threatened against the Company.
ITEM 1A – RISK FACTORS
As of June 30, 2022, there have been no material changes in the risk factors faced by the Company from those disclosed in our 2021 Annual Report on Form 10-K.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common share repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months (the “Program”). The Program authorized the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Program permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The Program was originally authorized through December 9, 2022, did not obligate the Company to purchase any particular number of shares, and was exhausted as of April 28, 2022.
On June 28, 2022, the Company announced that its Board authorized, effective August 1, 2022, a common share repurchase program to purchase up to 750,000 shares of the Company’s common stock in the aggregate over a period of twelve months[, subject to non-objection from the Federal Reserve Bank of Richmond, which was received in July 2022](the “New Program”). The New Program authorizes the purchase of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Exchange Act. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the New Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The New Program is authorized through August 1, 2023, although it may be modified or terminated by the Board at any time. The New Program does not obligate the Company to purchase any particular number of shares
The following table provides information regarding the Company’s purchases of our common stock during the quarter ended June 30, 2022.
Issuer Purchases of Equity Securities
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum number (or approximate dollar value) of Shares that may yet be purchased under the plans or programs(1)
April 1 - April 30, 2022446,436 $17.44 446,436 — 
May 1 - May 31, 2022— — — — 
June 1 - June 30, 2022— — — 750,000 
Total446,436 $— 446,436 
(1)The number shown represents, as of the end of each period, the approximate number of Common Stock shares that may yet be purchased under publicly-announced share repurchase plan authorizations. The shares may be purchased, from time-to-time, depending on market conditions.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
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CARTER BANKSHARES, INC.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibits:
Agreement and Plan of Reorganization by and among Carter Bank & Trust, Cater Bankshares, Inc. and CBT Merger Sub, Inc. dated November 9, 2020 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
Articles of Incorporation of Carter Bankshares, Inc., effective October 7, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
Bylaws of Carter Bankshares, Inc., as adopted October 28, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 23, 2020)
Certification by principal executive officer pursuant to Rule 13a-14(a) (filed herewith)
Certification by principal financial officer pursuant to Rule 13a-14(a) (filed herewith)
Certification by principal executive officer and principal financial officer pursuant to 18 U.S.C. §1350 (filed herewith)
Carter Bank & Trust Non-Qualified Deferred Compensation Plan (for directors and executives) - Virginia Bankers Association Model Nonqualified Supplemental Deferred Compensation Plan Document, adopted on May 19, 2022, effective as of January 1, 2023 (filed herewith).
Carter Bank & Trust Non-Qualified Deferred Compensation Plan (for directors and executives) – Virginia Bankers Association Model Adoption Agreement, adopted on May 19, 2022, effective as of January 1, 2023 (filed herewith).
101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation Linkbase
101.DEFInline XBRL Taxonomy Extension Definition Linkbase
101.LABInline XBRL Taxonomy Extension Label Linkbase
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CARTER BANKSHARES, INC. (Registrant)
Date: August 3, 2022/s/ Litz H. Van Dyke
Litz H. Van Dyke
Chief Executive Officer
(Principal Executive Officer)
Date: August 3, 2022/s/ Wendy S Bell
Wendy S. Bell
Chief Financial Officer
(Principal Financial Officer)
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NONQUALIFIED
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
- PLAN DOCUMENT -
This document and the accompanying adoption agreement have not been approved by the Department of Labor, Internal Revenue Service, Securities Exchange Commission, or any other governmental entity. Employers may not rely on this document or the accompanying adoption agreement to ensure any particular tax consequences with respect to the Employer’s particular situation, nor do these documents constitute legal or tax advice. Pen-Cal and its employees cannot provide legal or tax advice in connection with these documents. Employers must determine the extent to which the Plan is subject to Federal or state securities laws. You should have your attorney review this document and the accompanying adoption agreement before adopting the documents. This document and the accompanying adoption agreement cannot be used in order to avoid penalties that may be imposed on the taxpayer.

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Rev. 11/19/2010
NONQUALIFIED
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
- PLAN DOCUMENT -
SECTION 1 INTRODUCTION
1.1.Adoption of Plan and Purpose
This Plan is an unfunded, nonqualified deferred compensation plan. With the consent of the Employer (as defined in subsection 2.16) the plan may be adopted by executing the Adoption Agreement (as defined in subsection 2.3) in the form attached hereto. The Plan contains certain variable features which the Employer has specified in the Adoption Agreement. Only those variable features specified by the Employer in the Adoption Agreement will be applicable to the Employer.
The purpose of the Plan is to provide certain supplemental benefits under the Plan to a select group of management or highly compensated Employees of the Employer (in accordance with Sections 201, 301 and 401 of ERISA), Members of the Board(s) of the Employer, or Other Service Providers to the Employer (as defined below), and to allow such Employees, Board Members or Other Service Providers the opportunity to defer a portion of their salaries, bonuses and other compensation, subject to the terms of the Plan. Participants (and their Beneficiaries) shall have only those rights to payments as set forth in the Plan and shall be considered general, unsecured creditors of the Employer with respect to any such rights. The Plan is designed to comply with Code Section 409A and all guidance issued in connection with Code Section 409A. It is intended that the Plan be interpreted according to a good faith interpretation of Code Section 409A, and consistent with published IRS guidance, including proposed and final IRS regulations under Code Section 409A. Treatment of amounts in the Plan under any transition rules provided under all IRS and other guidance in connection with Code Section 409A shall be expressly authorized hereunder in accordance with procedures developed by the Administrator. In the event of any inconsistency between the terms of the Plan and Code Section 409A (and regulations thereunder), the terms of Code Section 409A (and the regulations thereunder) shall control. The Plan is intended to constitute an account balance plan (as defined in Treasury Regulation Section 1.409A-1(c)).
By becoming a Participant and making deferrals under this Plan, each Participant agrees to be bound by the provisions of the Plan and the determinations of the Employer and the Administrator hereunder.
1.2.Adoption of the Plan
The Employer may adopt the Plan by completing and signing the Adoption Agreement in the form attached hereto.
1.3.Plan Year
The Plan is administered on the basis of a Plan Year, as defined in subsection 2.27.
1.4.Plan Administration

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The plan shall be administered by a plan administrator (the “Administrator,” as that term is defined in Section 3(16)(A) of ERISA) designated by the Employer in the Adoption Agreement. The Administrator has full discretionary authority to construe and interpret the provisions of the Plan and make factual determinations thereunder, including the power to determine the rights or eligibility of employees or participants and any other persons, and the amounts of their benefits under the plan, and to remedy ambiguities, inconsistencies or omissions, and such determinations shall be binding on all parties. The Administrator from time to time may adopt such rules and regulations as may be necessary or desirable for the proper and efficient administration of the Plan and as are consistent with the terms of the Plan. The administrator may delegate all or any part of its powers, rights, and duties under the Plan to such person or persons as it may deem advisable, and may engage agents to provide certain administrative services with respect to the Plan. Any notice or document relating to the Plan which is to be filed with the Administrator may be delivered, or mailed by registered or certified mail, postage pre-paid, to the Administrator, or to any designated representative of the Administrator, in care of the Employer, at its principal office.
SECTION 2 DEFINITIONS
1.5.Account
“Account” means all notional accounts and subaccounts maintained for a Participant in order to reflect his interest under the Plan, as described in Section 6.
1.6.Administrator
“Administrator” means the individual or individuals (if any) delegated authority by the Employer to administer the Plan, as defined in subsection 1.4.
1.7.Adoption Agreement
“Adoption Agreement” shall mean the form executed by the Employer and attached hereto, which Agreement shall constitute a part of the Plan.
1.8.Beneficiary
“Beneficiary” means the person or persons to whom a deceased Participant’s benefits are payable under subsection 9.5.
1.9.Board
“Board” means the Board of Directors of the Employer (if applicable), as from time to time constituted.
1.10.Board Member
“Board Member” means a member of the Board.
1.11.Bonus
“Bonus” (also referred to herein as a “Non-Performance-Based Bonus”) means an award of cash that is not a Performance-Based Bonus (as defined in subsection 2.25) that is payable to an Employee (or Board Member or Other Service Provider, as applicable) in a given year, with respect to the immediately preceding Bonus performance period, which may or may not be contingent upon the achievement of specified performance goals.
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1.12.Code
“Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section.
1.13.Compensation
“Compensation” shall mean the amount of a Participant’s remuneration from the Employer designated in the Adoption Agreement for the Plan Year (or, as determined in accordance with procedures established by the Employer, for the period during which the Participant remains an Eligible Individual). Notwithstanding the foregoing, the Compensation of an Other Service Provider (as defined in subsection 2.22) shall mean his remuneration from the Employer pursuant to an agreement to provide services to the Employer. With respect to any Participant who is a Member of the Board (if applicable), “Compensation” means all cash remuneration which, absent a deferral election under the Plan, would have otherwise been received by the Board Member in the taxable year, payable to the Board Member for service on the Board and on Board committees, including any cash payable for attendance at Board meetings and Board committee meetings, but not including any amounts constituting reimbursements of expenses to Board Members. To the extent the Employer has designated “401(k) Refunds” in the Adoption Agreement (and to the extent elected by the Participant), an amount equal to the Participant’s “401(k) Refund” shall be deferred from the Participant’s Compensation otherwise payable to the Participant in the next subsequent Compensation pay period (or such later pay period in the same calendar year as the Administrator determines shall be administratively feasible), and shall be credited to the Participant’s Compensation Deferral Account in accordance with subsection 4.1. For purposes of this subsection, “401(k) Refund” means any amount distributed to the applicable Participant from the Employer’s qualified retirement plan intended to comply with Section 401(k) of the Code that is in excess of the maximum deferral for the prior calendar year allowable under such qualified retirement plan. Notwithstanding the foregoing, the definition of compensation for purposes of determining key employees under subsection 9.3 of the Plan shall be determined solely in accordance with subsection 9.3. To the extent not otherwise designated by the Employer in a separate document forming part of the Plan, Compensation payable after December 31 of a given year solely for services performed during the Employer’s final payroll period containing December 31, is treated as Compensation payable for services performed in the subsequent year in which the non-deferred portion of the payroll payment is actually made.
1.14.Compensation Deferrals
“Compensation Deferrals” means the amounts credited to a Participant’s Compensation Deferral Account pursuant to the Participant’s election made in accordance with subsection 4.1.
1.15.Deferral Election
“Deferral Election” means an election by a Participant to make Compensation Deferrals or Performance-Based Bonus Deferrals in accordance with Section 4.
1.16.Disability
“Disability” for purposes of this Plan shall mean the occurrence of an event as a result of which the Participant is considered disabled, as designated by the Employer in the Adoption Agreement.
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1.17.Effective Date
“Effective Date” means the Effective Date of the Plan, as indicated in the Adoption Agreement.
1.18.Eligible Individual
“Eligible Individual” means each Board Member, Other Service Provider, or Employee of an Employer who satisfies the eligibility requirements set forth in the Adoption Agreement, for the period during which he is determined by the Employer to satisfy such requirements.
1.19.Employee
“Employee” means a person who is employed by an Employer and is treated and/or classified by the Employer as a common law employee for purposes of wage withholding for Federal income taxes. If a person is not considered to be an Employee of the Employer in accordance with the preceding sentence, a subsequent determination by the Employer, any governmental agency, or a court that the person is a common law employee of the Employer, even if such determination is applicable to prior years, will not have a retroactive effect for purposes of eligibility to participate in the Plan.
1.20.Employer
“Employer” means the business entity designated in the Adoption Agreement, and its successors and assigns unless otherwise herein provided, or any other corporation or business organization which, with the consent of the Employer, or its successors or assigns, assumes the Employer’s obligations hereunder, and any affiliate or subsidiary of the Employer or other corporation or business organization in the Employer’s “controlled group” (as defined in Subsections 414(b) and (c) of the Code and Section 1.409A-1(h) of the Treasury Regulations), that has adopted the Plan on behalf of its Eligible Individuals with the consent of the Employer.
1.21.Employer Contributions
“Employer Contributions” means the amounts other than Matching Contributions that are credited to a Participant’s Employer Contributions Account under the Plan by the Employer in accordance with subsection 4.4.
1.22.ERISA
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section.
1.23.Fiscal Year Compensation
“Fiscal Year Compensation” means Compensation relating to a period of service coextensive with one or more consecutive non-calendar-year fiscal years of the Employer, where no amount of such Compensation is paid or payable during the service period. For example, a Bonus based upon a service period of two consecutive fiscal years payable after the completion of the second fiscal year would be “Fiscal Year Compensation,” but periodic salary payments or Bonuses based on service periods other than the Employer’s fiscal year would not be Fiscal Year Compensation.
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1.24.Investment Funds
“Investment Funds” means the notional funds or other investment vehicles designated pursuant to subsection 5.1.
1.25.Matching Contributions
“Matching Contributions” means the amounts credited to a Participant’s Employer Contribution Account under the Plan by the Employer that are based on the amount of Participant Deferrals made by the Participant under the Plan, or that are based upon such other formula as designated by the Employer in the Adoption Agreement, in accordance with subsection 4.3.
1.26.Other Service Providers
“Other Service Providers” shall mean independent contractors, consultants, or other similar providers of services to the Employer, other than Employees and Board Members. To the extent that an Other Service Provider is unrelated to the Employer and satisfies the other requirements of Treasury Regulation Section 1.409A-1(f)(2)(i) as described therein and in Code Section 409A and other applicable regulations, guidance, etc. thereunder, the provisions of such guidance shall not apply. To the extent that an Other Service Provider uses an accrual method of accounting for a given taxable year, amounts deferred under the Plan in such taxable year shall not be subject to Code Section 409A and other applicable guidance thereunder, notwithstanding any provision of the Plan to the contrary.
1.27.Participant
“Participant” means an Eligible Individual who meets the requirements of Section 3 and elects to make Compensation Deferrals pursuant to Section 4, or who receives Employer Contributions or Matching Contributions pursuant to subsection 4.3 or 4.4. A Participant shall cease being a Participant in accordance with subsection 3.2 herein.
1.28.Participant Deferrals
“Participant Deferrals” means all amounts deferred by a Participant under this Plan, including Participant Compensation Deferrals and Participant Performance-Based Bonus Deferrals.
1.29.Performance-Based Bonus
“Performance-Based Bonus” generally means Compensation where the amount of, or entitlement to, the compensation is contingent on the satisfaction of previously established organizational or individual performance criteria relating to a performance period of at least 12 consecutive months in which the Eligible Individual performs services, pursuant to rules described in Treasury Regulation Section 1.409A-1(e).
1.30.Performance-Based Bonus Deferrals
“Performance-Based Bonus Deferrals” means the amounts credited to a Participant’s Compensation Deferral Account from the Participant’s Performance-Based Bonus pursuant to the Participant’s election made in accordance with subsection 4.2.
1.31.Plan Year
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“Plan Year” means each 12-month period specified in the Adoption Agreement, on the basis of which the Plan is administered.
1.32.Retirement
“Retirement” for purposes of this Plan means the Participant’s Termination Date, as defined in subsection 2.30, after attaining any age and/or service minimums with respect to Retirement or Early Retirement as designated by the Employer in the Adoption Agreement.
1.33.Spouse
“Spouse” means the person to whom a Participant is legally married under applicable state law at the earlier of the date of the Participant’s death or the date payment of the Participant’s benefits commenced and who is living on the date of the Participant’s death.
1.34.Termination Date
“Termination Date” means (i) with respect to an Employee Participant, the Participant’s separation from service (within the meaning of Section 409A of the Code and the regulations, notices and other guidance thereunder, including death or Disability) with the Employer, and any subsidiary or affiliate of the Employer as defined in Sections 414(b) and (c) of the Code and Section 1.409A-1(h) of the Treasury Regulations; (ii) with respect to a Board Member Participant, the Participant’s resignation or removal from the Board (for any reason, including death or following Disability); and (iii) with respect to any Other Service Provider, the expiration of all agreements to provide services to the Employer (for any reason, including death or following Disability). The date that an Employee’s, Board Member’s, or Other Service Provider’s performance of services for all the Employers is reduced to a level less than 20% of the average level of services performed in the preceding 36-month period, shall be considered a Termination Date, and the performance of services at a level of 50% or more of the average level of services performed in the preceding 36-month period shall not be considered a Termination Date, based on the parties’ reasonable expectations as of the applicable date. A Participant’s Termination Date shall not be deemed to have occurred if the Employee’s, Board Member’s or Other Service Provider’s average level of service performed in the preceding 36-month period drops below 50% but not less than 20%, unless the Employer: (i) has designated in a writing forming part of the Plan that a level between 20% and 50% will be deemed to trigger a Termination Date, and (ii) such writing was in place at or prior to the date required under Code Section 409A and the regulations and other guidance thereunder. If such designation is subsequently changed, the change must comply with the rules regarding subsequent deferrals and the acceleration of payments described in Code Section 409A and the regulations, notices, rulings and other guidance thereunder. If a Participant is both a Board Member Participant and an Employee Participant, “Termination Date” means the date the Participant satisfies both criteria (i) and (ii) above.
1.35.Valuation Date
“Valuation Date” means the last day of each Plan Year and any other date that the Employer, in its sole discretion, designates as a Valuation Date, as of which the value of an Investment Fund is adjusted for notional deferrals, contributions, distributions, gains, losses, or expenses.
1.36.Other Definitions
Other defined terms used in the Plan shall have the meanings given such terms elsewhere in the Plan.
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SECTION 3 ELIGIBILITY AND PARTICIPATION
1.37.Eligibility
Each Eligible Individual on the Effective Date of the Plan shall be eligible to become a Participant by properly making a Deferral Election on a timely basis as described in Section 4, or, if applicable and eligible as designated by the Employer in the Adoption Agreement, by receiving a Matching Contribution or other Employer Contribution under the Plan. Each other Eligible Individual may become a Participant by making a Deferral Election on a timely basis as described in Section 4 or, if applicable and eligible as designated by the Employer in the Adoption Agreement, by receiving a Matching Contribution or other Employer Contribution under the Plan. Each Eligible Individual’s decision to become a Participant by making a Deferral Election shall be entirely voluntary. The Employer may require the Participant to complete any necessary forms or other information as it deems necessary or advisable prior to permitting the Eligible Individual to commence participation in the Plan.
1.38.Cessation of Participation
If a Termination Date occurs with respect to a Participant, or if a Participant otherwise ceases to be an Eligible Individual, no further Compensation Deferrals, Performance-Based Bonus Deferrals, Matching Contributions or other Employer Contributions shall be credited to the Participant’s Accounts after the Participant’s Termination Date or date the Participant ceases to be eligible (or as soon as administratively feasible after the date the Participant ceases to be eligible or, if applicable, the end of the then-current Plan Year or performance period with respect to Performance-Based Bonuses), unless he is again determined to be an Eligible Individual, but the balance credited to his Accounts shall continue to be adjusted for notional investment gains and losses under the terms of the Plan and shall be distributed to him at the time and manner set forth in Section 9. An Employee, Board Member or Other Service Provider shall cease to be a Participant after his Termination Date or other loss of eligibility as soon as his entire Account balance has been distributed.
1.39.Eligibility for Matching or Employer Contributions
An Employee Participant who has satisfied the requirements necessary to become an Eligible Individual with respect to Matching Contributions as specified in the Adoption Agreement, and who has made a Compensation Deferral election pursuant to subsection 4.1 herein or who has satisfied such other criteria as specified in the Adoption Agreement, shall be eligible to receive Matching Contributions described in subsection 4.3. An Employee Participant who has satisfied the requirements necessary to become an Eligible Individual with respect to Employer Contributions other than Matching Contributions as specified in the Adoption Agreement, shall be eligible to receive Employer Contributions described in subsection 4.4.
SECTION 4 DEFERRALS AND CONTRIBUTIONS
1.40.Compensation Deferrals Other Than Performance-Based Bonus Deferrals
Each Plan Year, an Eligible Individual may elect to defer receipt of no less than the minimum and no greater than the maximum percentage or amount selected by the Employer in the Adoption Agreement with respect to each type of Compensation (other than Performance-Based Bonuses) earned with respect to pay periods beginning on and after the effective date of the election; provided, however, that Compensation earned prior to the date the Participant satisfies the eligibility requirements of Section 3 shall not be eligible for deferral under this Plan. Except as otherwise provided in this subsection, a Participant’s Deferral Election for a Plan Year under this subsection must be made not later than December 31 of the preceding Plan Year (or such
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earlier date as determined by the Administrator) with respect to Compensation (other than Performance-Based Bonuses) earned in pay periods beginning on or after the following January 1 in accordance with rules established by the Administrator. An election to defer restricted stock units (RSUs) into the Plan must be made by one of the following deadlines: (i) the end of the calendar year prior to the date of grant of the RSU; (ii) 12 months before the payment date of the RSU (vesting date is treated as the payment date for these purposes), but the election will not take effect for 12 months, and the subsequent payout date must be at least five years later than the original payment date); (iii) within 30 days of the date of grant (but only if the RSU is structured so that vesting is contingent on the Participant performing services for at least an additional 12 months); or (iv) within 6 months of the payment (vesting) date, but only if the RSU is performance-based under Code Section 409A, and only if the performance period must be at least 12 months long and either: (a) the amount of the compensation cannot be reasonably ascertained at the time of the election, or (b) the performance requirement is still not substantially certain to be met at the time of the election. If the Employer allows for deferral of RSUs structured so that a specified portion of the RSU grant vests periodically (for example, an RSU grant over a four-year period vesting 25% annually), then the election to defer may be made separately with respect to each portion of the grant that vests in a given year, if permitted by the Employer. However, each election for each portion of the grant must be made either: (i) within thirty days of the date of grant or each anniversary thereof, and only if the RSU is structured so that vesting is contingent on the employee performing services for at least an additional 12 months subsequent to the election; or (ii) 12 months before the payment date of the RSU (vesting date is treated as the payment date for these purposes), but the election will not take effect for 12 months, and the subsequent payout date must be at least five years later than the previous payment date.
An Employee, Board Member or Other Service Provider who first becomes an Eligible Individual during a Plan Year (by virtue of a promotion, Compensation increase, commencement of employment with the Employer, commencement of Board service, execution of an agreement to provide services to an Employer, or any other reason) shall be provided enrollment documents (including Deferral Election forms) as soon as administratively feasible following such initial notification of eligibility. Such Eligible Individual must make his Deferral Elections within 30 days after first becoming an Eligible Individual, with respect to his Compensation (other than Performance-Based Bonuses) earned on or after the effective date of the Deferral Election (provided, however, that if such Eligible Individual is participating in any other account balance plan maintained by the Employer or any member of the Employer’s “controlled group” (as defined in subsections 414(b) and (c) of the Code), such Eligible Individual must make his Compensation Deferral Election no later than December 31 of the preceding Plan Year (or such earlier date as determined by the Administrator), or he may not elect to make Compensation Deferrals for that initial Plan Year). If an Eligible Individual does not elect to make Compensation Deferrals during that initial 30-day period, he may not later elect to make Compensation Deferrals for that year under this subsection. In the event that an Eligible Individual first becomes eligible during a Plan Year with respect to which Fiscal Year Compensation is payable, such Eligible Individual must make his Fiscal Year Compensation Deferral Election on or before the end of the fiscal year of the Employer immediately preceding the first fiscal year in which any services are performed for which the Fiscal Year Compensation is payable.
In the case of an Employee, Board Member or Other Service Provider who is rehired (or who recommences Board Service or recommences providing services to an Employer as an Other Service Provider) after having previously been an Eligible Individual, the phrase “first becomes an Eligible Individual” in the first sentence of the preceding paragraph shall be interpreted to apply only where the Eligible Individual either (i) previously received payment of his total Account balances under the Plan, or (ii) did not previously receive payment of his total Account balances under the Plan, but is rehired (or recommences Board Service or recommences
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providing services to an Employer as an Other Service Provider) at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such rehired Employee, Board Member or Other Service Provider may not elect to make Compensation Deferrals until the next date determined by the Administrator with respect to Compensation earned after the following January 1. Similarly, in the case of an Employee who recommences status as an Eligible Individual for any other reason after having previously lost his status as an Eligible Individual (due to Compensation fluctuations, transfer from an ineligible location or job classification, or otherwise), the phrase “first becomes an Eligible Individual” shall be interpreted to apply only where the Eligible Individual either: (i) previously received payment of his total Account balances under the Plan, or (ii) did not previously receive payment of his total Account balances under the Plan, but regains his status as an Eligible Individual at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such Re-Eligible Participant may not elect to make Compensation Deferrals until the next date determined by the Administrator with respect to Compensation earned after the following January 1.
An election to make Compensation Deferrals under this subsection 4.1 shall remain in effect through the last pay period commencing in the calendar year to which the election applies (except as provided in subsections 2.9 or 4.5), shall apply with respect to the applicable type of Compensation (other than Performance-Based Bonuses) to which the Deferral Election relates earned for pay periods commencing in the applicable calendar year to which the election applies, and shall be irrevocable (provided, however, that a Participant making a Deferral Election under this subsection may change his election at any time prior to December 31 of the year preceding the year for which the Deferral Election is applicable, subject to rules established by the Administrator). If a Participant fails to make a Compensation Deferral election for a given Plan Year, such Participant’s Compensation Deferral Election for that Plan Year shall be deemed to be zero; provided, however, that if the Employer has elected in the Adoption Agreement that a Participant’s Compensation Deferral Election shall be “evergreen”, then such Participant’s Compensation Deferral Election shall be deemed to be identical to the most recent applicable Deferral Election on file with the Administrator with respect to the applicable type of Compensation; provided, however, that no In-Service Distribution shall be applicable to any amounts deferred in a year in which the Participant fails to make an affirmative election, and payment of such amounts for such year shall be made in accordance with his most recent election on file with the Administrator (if no election is on file, then such amounts shall be paid to him in a single lump sum).
Compensation Deferrals shall be credited to the Participant’s Compensation Deferral Account as soon as administratively feasible after such amounts would have been payable to the Participant.
1.41.Performance-Based Bonus Deferrals
Each Plan Year, an Eligible Individual may elect to defer receipt of no less than the minimum and no greater than the maximum percentage or amount selected by the Employer in the Adoption Agreement with respect to Performance-Based Bonuses earned with respect to the performance period for which the Performance-Based Bonus is earned; provided, however, that the Eligible Individual performed services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date upon which the Eligible Individual makes a Performance-Based Bonus Deferral Election; and further provided that in no event may an election to defer Performance-Based Bonuses be made after such Bonuses have become readily ascertainable. Except as otherwise provided in this subsection, a Participant’s Performance-Based Bonus Deferral Election under this subsection must be made not later than six months (or such earlier date as determined by the Administrator) prior to the end of the performance period.
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An Employee, Board Member or Other Service Provider who first becomes an Eligible Individual during a Plan Year (by virtue of a promotion, Compensation increase, commencement of employment with the Employer, commencement of Board service, execution of an agreement to provide services to an Employer, or any other reason) shall be provided enrollment documents (including Deferral Election forms) as soon as administratively feasible following such initial notification of eligibility. Such Eligible Individual must make his Performance-Based Bonus Deferral Election within 30 days after first becoming an Eligible Individual (provided, however, that if such Eligible Individual is participating in any other account balance plan maintained by the Employer or any member of the Employer’s “controlled group” (as defined in subsections 414(b) and (c) of the Code), such Eligible Individual must perform services continuously from a date no later than the date the performance criteria are established, and must make his Performance-Based Bonus Deferral Election no later than six months (or such earlier date as determined by the Administrator) prior to the end of the performance period, and at a time when the Performance-Based Bonus is not readily ascertainable, or he may not elect to make Performance-Based Bonus Deferrals for such initial Plan Year. In the case of a Deferral Election in the first year of eligibility that is made after the beginning of the Performance-Based Bonus performance period, the Deferral Election will apply to the portion of the Performance-Based Bonus equal to the total amount of the Performance-Based Bonus for the performance period multiplied by the ratio of the number of days remaining in the performance period after the effective date of the Deferral Election over the total number of days in the Performance Period. If an Eligible Individual does not elect to make a Performance-Based Bonus Deferral during that initial 30-day period, he may not later elect to make a Performance-Based Bonus Deferral for that performance period under this subsection. Rules relating to the timing of elections to make a Performance-Based Bonus Deferral with respect to an Employee, Board Member or Other Service Provider who becomes an Eligible Individual (due to rehire or other similar event) after having previously been an Eligible Individual shall be applied in a manner similar to rules described applicable to rehired and other Re-Eligible Participants in subsection 4.1 above.
An election to make Performance-Based Bonus Deferrals under this subsection 4.2 shall remain in effect through the end of the performance period to which the election applies (except as provided in subsection 4.5), and shall be irrevocable (provided, however, that a Participant making a Performance-Based Bonus Deferral Election under this subsection with respect to a Performance-Based Bonus that is not yet readily ascertainable, may change his election at any time prior to the first day of the six-month period ending on the last day of the performance period for which the Performance-Based Bonus Deferral Election is applicable, subject to rules established by the Administrator). If a Participant fails to make a Performance-Based Bonus Deferral Election for a given performance period, such Participant’s Performance-Based Bonus Deferral Election for that performance period shall be deemed to be zero; provided, however, that if the Employer has elected in the Adoption Agreement that a Participant’s Performance-Based Deferral Election shall be “evergreen”, then such Participant’s Performance-Based Bonus Deferral Election shall be deemed to be identical to the most recent applicable Performance-Based Bonus Deferral Election on file with the Administrator; provided, however, that no In-Service Distribution shall be applicable to any amounts deferred in a year in which the Participant fails to make an affirmative election, and payment of such amounts for such year shall be made in accordance with his most recent election on file with the Administrator (if no election is on file, then such amounts shall be paid to him in a single lump sum).
Performance-Based Bonus Deferrals shall be credited to the Participant’s Compensation Deferral Account as soon as administratively feasible after such amounts would have been payable to the Participant.
1.42.Matching Contributions
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Matching Contributions shall be determined in accordance with the formula specified in the Adoption Agreement, and shall be credited to the Employer Contribution Accounts of Participants who have satisfied the eligibility requirements for Matching Contributions specified in the Adoption Agreement. Matching Contributions under this Plan shall be credited to such Participants’ Employer Contribution Accounts as soon as administratively feasible after the Applicable Period selected in the Adoption Agreement, but only with respect to Participants eligible to receive such Matching Contributions as described in the Adoption Agreement.
1.43.Other Employer Contributions
Employer Contributions other than Matching Contributions shall be discretionary from year to year, and shall be credited to the Employer Contribution Accounts of Participants who have satisfied the eligibility requirements for Employer Contributions, all as determined by the Employer and documented in writing, and such writings will form part of the Plan, as specified in the Adoption Agreement. Employer Contributions under this Plan shall be credited to such Participants’ Employer Contributions Accounts as soon as administratively feasible.
1.44.No Election Changes During Plan Year
A Participant shall not be permitted to change or revoke his Deferral Elections (except as otherwise described in subsections 4.1 and 4.2), except that, if a Participant’s status changes such that he becomes ineligible for the Plan, the Participant’s Deferrals under the Plan shall cease as described in subsection 3.2. Notwithstanding the foregoing, in the event the Employer maintains a qualified plan designed to comply with the requirements of Code Section 401(k) that requires the cessation of all deferrals in the event of a hardship withdrawal under such plan, the Participant’s Deferrals under this Plan shall cease as soon as administratively feasible upon notification to the Administrator that the participant has taken such a hardship withdrawal. Notwithstanding the foregoing, if the Employer has elected in the Adoption Agreement to permit Unforeseeable Emergency Withdrawals pursuant to subsection 9.8, the Participant’s Deferrals under this Plan shall cease as soon as administratively feasible upon approval by the Administrator of a Participant’s properly submitted request for an Unforeseeable Emergency Withdrawal under subsection 9.8.
1.45.Crediting of Deferrals
The amount of deferrals pursuant to subsections 4.1 and 4.2 shall be credited to the Participant’s Accounts as of a date determined to be administratively feasible by the Administrator.
1.46.Reduction of Deferrals or Contributions
Any Participant Deferrals or Employer Contributions to be credited to a Participant’s Account under this Section may be reduced by an amount equal to the Federal or state, local or foreign income, payroll, or other taxes required to be withheld on such deferrals or contributions or to satisfy any necessary contributions under an employee welfare benefit plan described under Section 125 of the Code. A Participant shall be entitled only to the net amount of such deferral or contribution (as adjusted from time to time pursuant to the terms of the Plan). The Administrator may notify a Participant of limitations on his Deferral Election if, as a result of any election, a Participant’s Compensation from the Employer would be insufficient to cover taxes, withholding, and other required deductions applicable to the Participant.
SECTION 5 NOTIONAL INVESTMENTS
1.47.Investment Funds
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The Employer may designate, in its discretion, one or more Investment Funds for the notional investment of Participants’ Accounts. The Employer, in its discretion, may from time to time establish new Investment Funds or eliminate existing Investment Funds. The Investment Funds are for recordkeeping purposes only and do not allow Participants to direct any Employer assets (including, if applicable, the assets of any trust related to the Plan). Each Participant’s Accounts shall be adjusted pursuant to the Participant’s notional investment elections made in accordance with this Section 5, except as otherwise determined by the Employer or Administrator in their sole discretion.
1.48.Investment Fund Elections
The Employer shall have full discretion in the direction of notional investments of Participants’ Accounts under the Plan; provided, however, that if the Employer so elects in the Adoption Agreement, each Participant may elect from among the Investment Funds for the notional investment of such of his Accounts as are permitted under the Adoption Agreement from time to time in accordance with procedures established by the Employer. The Administrator, in its discretion, may adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the notional investment of the Participant’s Accounts. Such procedures may differ among Participants or classes of Participants, as determined by the Employer or the Administrator in its discretion. The Employer or Administrator may limit, delay or restrict the notional investment of certain Participants’ Accounts, or restrict allocation or reallocation into specified notional investment options, in accordance with rules established in order to comply with Employer policy and applicable law, to minimize regulated filings and disclosures, or under any other circumstances in the discretion of the Employer. Any deferred amounts subject to a Participant’s investment election that must be so limited, delayed or restricted under such circumstances may be notionally invested in an Investment Fund designated by the Administrator, or may be credited with earnings at a rate determined by the Administrator, which rate may be zero. A Participant’s notional investment election shall remain in effect until later changed in accordance with the rules of the Administrator. If a Participant does not make a notional investment election, all deferrals by the Participant and contributions on his behalf will be deemed to be notionally invested in the Investment Fund designated by the Employer for such purpose, or, at the Employer’s election, may remain uninvested until such time as the Administrator receives proper direction, or may be credited with earnings at a rate determined by the Administrator or Employer, which rate may be zero.
1.49.Investment Fund Transfers
A Participant may elect that all or a part of his notional interest in an Investment Fund shall be transferred to one or more of the other Investment Funds. A Participant may make such notional Investment Fund transfers in accordance with rules established from time to time by the Employer or the Administrator, and in accordance with subsection 5.2.
SECTION 6 ACCOUNTING
1.50.Individual Accounts
Bookkeeping Accounts shall be maintained under the Plan in the name of each Participant, as applicable, along with any subaccounts under such Accounts deemed necessary or advisable from time to time, including a subaccount for each Plan Year that a Participant’s Deferral Election is in effect. Each such subaccount shall reflect (i) the amount of the Participant’s Deferral during that year, any Matching Contributions or Employer Contributions credited during that year, and the notional gains, losses, expenses, appreciation and depreciation attributable thereto.
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Rules and procedures may be established relating to the maintenance, adjustment, and liquidation of Participants’ Accounts, the crediting of deferrals and contributions and the notional gains, losses, expenses, appreciation, and depreciation attributable thereto, as are considered necessary or advisable.
1.51.Adjustment of Accounts
Pursuant to rules established by the Employer, Participants’ Accounts will be adjusted on each Valuation Date, except as provided in Section 9, to reflect the notional value of the various Investment Funds as of such date, including adjustments to reflect any deferrals and contributions, notional transfers between Investment Funds, and notional gains, losses, expenses, appreciation, or depreciation with respect to such Accounts since the previous Valuation Date. The “value” of an Investment Fund at any Valuation Date may be based on the fair market value of the Investment Fund, as determined by the Administrator in its sole discretion.
1.52.Accounting Methods
The accounting methods or formulae to be used under the Plan for purposes of monitoring Participants’ Accounts, including the calculation and crediting of notional gains, losses, expenses, appreciation, or depreciation, shall be determined by the Administrator in its sole discretion. The accounting methods or formulae selected by the Administrator may be revised from time to time.
1.53.Statement of Account
At such times and in such manner as determined by the Administrator, but at least annually, each Participant will be furnished with a statement reflecting the condition of his Accounts.
SECTION 7 VESTING
A Participant shall be fully vested at all times in his Compensation Deferral Account (if applicable). A Participant shall be vested in his Matching Contributions and/or Employer Contributions (if applicable), in accordance with the vesting schedule elected by the Employer under the Adoption Agreement. Vesting Years of Service shall be determined in accordance with the election made by the Employer in the Adoption Agreement. Amounts in a Participant’s Accounts that are not vested upon the Participant’s Termination Date (“forfeitures”) may be used to reinstate amounts previously forfeited by other Participants who are subsequently rehired, or may be returned to the Employer, in the discretion of the Employer or the Administrator.
If a Participant has a Termination Date with the Employer as a result of the Participant’s Misconduct (as defined by the Employer in the Adoption Agreement), or if the Participant engages in Competition with the Employer (as defined by the Employer in the Adoption Agreement), and the Employer has so elected in the Adoption Agreement, the Participant shall forfeit all amounts allocated to his or her Matching Contribution Account and/or Employer Contribution Accounts (if applicable). Such forfeitures shall be returned to the Employer.
Neither the Administrator nor the Employer in any way guarantee the Participant’s Account balance from loss or depreciation. Notwithstanding any provision of the Plan to the contrary, the Participant’s Account balance is subject to Section 8.
Vesting Years of Service in the event of the rehire of a Participant shall be reinstated, and amounts previously forfeited by such Participants may be reinstated from forfeitures made by other Participants, or may be reinstated by the Employer.
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SECTION 8 FUNDING
No Participant or other person shall acquire by reason of the Plan any right in or title to any assets, funds, or property of the Employer whatsoever, including, without limiting the generality of the foregoing, any specific funds, assets, or other property of the Employer. Benefits under the Plan are unfunded and unsecured. A Participant shall have only an unfunded, unsecured right to the amounts, if any, payable hereunder to that Participant. The Employer’s obligations under this Plan are not secured or funded in any manner, even if the Employer elects to establish a trust with respect to the Plan. Even though benefits provided under the Plan are not funded, the Employer may establish a trust to assist in the payment of benefits. All investments under this Plan are notional and do not obligate the Employer (or its delegates) to invest the assets of the Employer or of any such trust in a similar manner.
SECTION 9 DISTRIBUTION OF ACCOUNTS
1.54.Distribution of Accounts
With respect to any Participant who has a Termination Date that precedes his Retirement date, an amount equal to the Participant’s vested Account balances shall be distributed to the Participant (or, in the case of the Participant’s death, to the Participant’s Beneficiary), in the form of a single lump sum payment, or, if subsection 9.2 applies, in the form of installment payments as designated by the Employer in the Adoption Agreement. Subject to subsection 9.3 hereof, distribution of a Participant’s Accounts shall be made or begin within the 90-day period following the Participant’s Termination Date (provided, however, that if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant, the payment will be made as soon as administratively practicable for the Administrator to make such payment). Notwithstanding any provision of the Plan to the contrary, for purposes of this subsection, a Participant’s Accounts shall be valued as of a Valuation Date as soon as administratively feasible preceding the date such distribution is made, in accordance with rules established by the Administrator. A Participant’s Accounts may be offset by any amounts owed by the Participant to the Employer, but such offset shall not occur in excess of or prior to the date distribution of the amount would otherwise be made to the Participant.
Notwithstanding the foregoing, to the extent designated by the Employer in the Adoption Agreement, a Participant may elect, in accordance with this subsection, a distribution date for his Compensation Deferral Accounts and/or his Employer Contributions and Matching Contributions Accounts that is prior to his Termination Date (an “In-Service Distribution”). A Participant’s election of an In-Service Distribution date must: (i) be made at the time of his Deferral Election for a Plan Year; and (ii) apply only to amounts deferred pursuant to that election, and any earnings, gains, losses, appreciation, and depreciation credited thereto or debited therefrom with respect to such amounts. To the extent permitted by the Employer, a Participant may elect an In-Service Distribution date with respect to Performance-Based Bonus Deferrals that is separate from an In-Service Distribution date with respect to Compensation Deferrals other than Performance-Based Bonus Deferrals for the same year, provided that the applicable In-Service Distribution date may not be earlier than the number of years designated by the Employer in the Adoption Agreement following the year in which the applicable Compensation would have been paid absent the deferral, or as further determined or limited in accordance with rules established by the Administrator. Payments made pursuant to an In- Service Distribution election shall be made in a lump sum (or, if elected by the Employer in the Adoption Agreement, any applicable other form of payment to the extent permitted by the Employer and elected by the Participant in accordance with the terms of the Plan). Each such payment shall be made as soon as administratively feasible following January 1 of the calendar year in which the payment was elected to be made, but in no event later than the end of the
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calendar year in which the payment was elected to be made (provided, however, that if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant, the payment will be made as soon as administratively practicable for the Administrator to make such payment). For purposes of such payment, the value of the Participant’s Accounts for the applicable Plan Year shall be determined as of a Valuation Date preceding the date that such distribution is made, in accordance with rules established by the Administrator. In the event a Participant’s Termination Date occurs (or, if elected by the Employer in the Adoption Agreement, in the event a Change in Control of the Employer occurs) prior to the date the Participant had previously elected to have an In-Service Distribution payment made to him, such amount shall be paid to the Participant under the rules applicable for payment on Termination of Employment in accordance with this subsection 9.1 and subsection 9.2. Participants must make an affirmative election with respect to payment of their In-Service Distributions, and no default or evergreen election shall be allowed with respect to In-Service Distributions.
To the extent elected by the Employer in the Adoption Agreement, Participants whose Termination Date has not yet occurred may elect to defer payment of any In-Service Distribution, provided that such election is made in accordance with procedures established by the Administrator, and further provided that any such election must be made no later than 12 calendar months prior to the previously elected In-Service Distribution Date (which for these purposes shall be January 1 of the calendar year in which the payment was elected to be made). Participants may elect any deferred payment date, but such date must be no fewer than five years from the previously elected In-Service Distribution Date (which for these purposes shall be January 1 of the calendar year in which the payment was elected to be made).
1.55.Installment Distributions
To the extent elected by the Employer in the Adoption Agreement, a Participant may elect to receive payments from his Accounts in the form of a single lump sum, as described in Section 9.1, or in annual installments over a period elected by the Employer in the Adoption Agreement. To the extent a Participant fails to make an election, the Participant shall be deemed to have elected to receive his distribution for that Plan Year in the form of a single lump sum. To the extent elected by the Employer in the Adoption Agreement, a Participant may make a separate election with respect to his Performance-Based Bonus Deferrals for each year (as adjusted for gains and losses thereon) that provides for a different method of distribution from the method of distribution he elects with respect to his Compensation Deferrals (as adjusted for gains and losses thereon) for that year. The Participant’s Employer Contributions Account attributable to such year, if any (as adjusted for gains and losses thereon), shall be distributed in the same manner as his Compensation Deferral Account for such year (or in a lump sum upon his Termination Date if no election has been made).
(a)Installment Elections. A Participant will be required to make his distribution election prior to the commencement of each calendar year (or, in the event of an election with respect to Performance-Based Bonuses, prior to six months before the end of the applicable performance period), or such earlier date as determined by the Administrator.
(b)Installment Payments. The first installment payment shall generally be within the 90-day period following the Participant’s Termination Date (provided, however, that if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant, the payment will be made as soon as administratively practicable for the Administrator to make such payment). Succeeding payments shall generally be made by January 1 of each succeeding calendar year, but in no event later than the end of each succeeding calendar year (provided, however, that if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant, the payment
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will be made as soon as administratively practicable for the Administrator to make such payment). The amount to be distributed in each installment payment shall be determined by dividing the value of the Participant’s Accounts being paid in installments as of a Valuation Date preceding the date of each distribution by the number of installment payments remaining to be made, in accordance with rules established by the Administrator. In the event of the death of the Participant prior to the full payment of his Accounts being paid in installments, payments will continue to be made to his Beneficiary in the same manner and at the same time as would have been payable to the Participant.
To the extent elected by the Employer in the Adoption Agreement, Participants who have elected payment in installments may make a subsequent election to elect payment of that amount in the form of a lump sum, if payment of installments with respect to that year’s deferrals has not yet commenced. Such election must be made in accordance with procedures established by the Administrator, and any such election must be made no later than 12 calendar months prior to the originally elected payment date of the first installment. The new payment date for the installment with respect to which such election is made must be deferred to the later of: (i) five years from the date such payment would otherwise have been made, or (ii) the last payment date of the last installment with respect to that year’s deferrals. To the extent elected by the Employer in the Adoption Agreement, Participants who have elected payment in installments may make a subsequent election to change the number of such installment payments so long as no acceleration of distribution payments occurs (but no fewer than the minimum number, and not to exceed the maximum number of installments elected by the Employer in the Adoption Agreement), if payment of installments with respect to that year’s Deferral Elections has not yet commenced. Such election must be made in accordance with procedures established by the Administrator, and any such election must be made no later than 12 calendar months prior to the originally elected payment date of the first installment. The new payment date for any installment with respect to which such election is made must be deferred for a period of not less than five years from the date such payment would otherwise have been made. In the event payment has been elected by the Participant in the form of installments (to the extent elected by the Employer in the Adoption Agreement), each installment payment shall be considered a separately identifiable payment. In the event payment has been elected by the Participant in the form of a lump sum (or in the event payment shall be made to the Participant in the form of a lump sum under the terms of the Plan in the absence of or in lieu of the Participant’s election), then the lump sum form shall be deemed to be a separately identifiable form of payment, and the Participant may make a subsequent deferral election to elect payment of that amount in the form of installments (to the extent elected by the Employer in the Adoption Agreement) in accordance with the procedures described above for changing installment payment elections. Participants will be permitted to make such a change only once with respect to any year’s Deferral Elections.
1.56.Key Employees
Notwithstanding anything herein to the contrary, and subject to Code Section 409A, except in the case of the Participant’s death, payment under the Plan shall not be made or commence as a result of the Participant’s Termination Date to any Participant who is a key employee (defined below) before the date that is not less than six months after the Participant’s Termination Date. For this purpose, a key employee includes a “specified employee” (as defined in Treasury Regulation Section 1.409A-1(i)) during the entire 12-month period determined by the Administrator ending with the annual date upon which key employees are identified by the Administrator, and also including any Employee identified by the Administrator in good faith with respect to any distribution as belonging to the group of identified key employees, to a maximum of 200 such key employees, regardless of whether such Employee is subsequently determined by the Employer, any governmental agency, or a court not to be a key employee. In the event amounts are payable to a key employee in installments in accordance with subsection 9.2, the first installment shall be delayed by six months, with all other installment payments
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payable as originally scheduled. To the extent not otherwise designated by the Employer in a separate document forming a part of the Plan applicable to all its nonqualified deferred compensation plans, the identification date for determining the Employer’s key employees is each December 31 (and the new key employee list is updated and effective each subsequent April 1). To the extent not otherwise designated by the Employer in a separate document forming a part of the Plan, the definition of compensation used to determine key employee status shall be determined under Treasury Regulation Section 1.415(c)-2(a). This subsection 9.3 is applicable only with respect to Employers whose stock is publicly traded on an “established securities market” (as defined in Treasury Regulation Section 1.409A-1(k)), and is not applicable to privately held Employers unless and until such Employers become publicly traded as defined in the Treasury regulations.
1.57.Mandatory Cash-Outs of Small Amounts
If the value of a Participant’s total Accounts at his Termination Date (or his death or other applicable distribution date), or at any time thereafter, together with the value of the Participant’s accounts under any other account balance plan maintained by the Employer or any member of the Employer’s controlled group (as defined in subsections 414(b) and (c) of the Code) is equal to or less than such amount as stated in the Adoption Agreement (which amount shall not exceed the limit described in Section 402(g) of the Code from time to time), the Accounts will be paid to the Participant (or, in the event of his death, his Beneficiary) in a single lump sum, notwithstanding any election by the Participant otherwise. Payments made under this subsection 9.4 on account of the Participant’s Termination Date shall be made within the 90-day period following the Participant’s Termination Date (provided, however, that if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant, the payment will be made as soon as administratively practicable for the Administrator to make such payment).
1.58.Designation of Beneficiary
Each Participant from time to time may designate any individual, trust, charity or other person or persons to whom the value of the Participant’s Accounts (plus any applicable Survivor Benefit, if elected by the Employer in the Adoption Agreement) will be paid in the event the Participant dies before receiving the value of all of his Accounts. A Beneficiary designation must be made in the manner required by the Administrator for this purpose. Primary and secondary Beneficiaries are permitted. A married participant designating a Beneficiary other than his Spouse must obtain the consent of his Spouse to such designation (in accordance with rules determined by the Administrator). Payments to the Participant’s Beneficiary(ies) shall be made in accordance with subsection 9.1, 9.2 or 9.4, as applicable, after the Administrator has received proper notification of the Participant’s death.
A Beneficiary designation will be effective only when the Beneficiary designation is filed with the Administrator while the Participant is alive, and a subsequent Beneficiary designation will cancel all of the Participant’s Beneficiary designations previously filed with the Administrator. Any designation or revocation of a Beneficiary shall be effective as only if it is received by the Administrator. Once received, such designation shall be effective as of the date the designation was executed, but without prejudice to the Administrator on account of any payment made before the change is recorded by the Administrator. If a Beneficiary dies before payment of the Participant’s Accounts have been made, the Participant’s Accounts shall be distributed in accordance with the Participant’s Beneficiary designation and pursuant to rules established by the Administrator. If a deceased Participant failed to designate a Beneficiary, or if the designated Beneficiary predeceases the Participant, the value of the Participant’s Accounts shall be payable to the Participant’s Spouse or, if there is none, to the Participant’s estate, or in accordance with such other equitable procedures as determined by the Administrator.
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1.59.Reemployment
If a former Participant is rehired by an Employer, or any affiliate or subsidiary of the Employer described in Section 414(b) and (c) of the Code and Treasury Regulation Section 1.409A-1(h), regardless of whether he is rehired as an Eligible Individual (with respect to an Employee Participant), or a former Participant returns to service as a Board member, any payments being made to such Participant hereunder by virtue of his previous Termination Date shall continue to be made to him without regard to such rehire. If a former Participant is rehired by the Employer (with respect to an Employee Participant) or returns to service as a Board member, and in either case any payments to be made to the Participant by virtue of his previous Termination Date have not been made or commenced, any payments being made to such Participant hereunder by virtue of his previous Termination Date shall continue to be made to him without regard to such rehire or return to service. See subsections 4.1 and 4.2 of the Plan for special rules applicable to deferral elections for rehired or Re-Eligible Participants.
1.60.Special Distribution Rules
Except as otherwise provided herein and in Section 12, Account balances of Participants in this Plan shall not be distributed earlier than the applicable date or dates described in this Section 9. Notwithstanding the foregoing, in the case of payments: (i) the deduction for which would be limited or eliminated by the application of Section 162(m) of the Code; (ii) that would violate securities or other applicable laws; or (iii) that would jeopardize the ability of the Employer to continue as a going concern in accordance with Code Section 409A and the regulations thereunder, deferral of such payments on a reasonably consistent basis for similarly situated Participants may be made by the Employer at the Employer’s discretion. In the case of a payment described in (i) above, the payment must be deferred either to a date in the first year in which the Employer or Administrator reasonably anticipates that a payment of such amount would not result in a limitation of a deduction with respect to the payment of such amount under Section 162(m), or the year in which the Participant’s Termination Date occurs. In the case of a payment described in (ii) or (iii) above, payment will be made at the earliest date in the first taxable year of the Employer in which the Employer or Administrator reasonably anticipates that the payment would not jeopardize the ability of the Employer to continue as a going concern in accordance with Code Section 409A and the regulations thereunder, or the payment would not result in a violation of securities or other applicable laws. Payments intended to pay employment taxes or payments made as a result of income inclusion of an amount in a Participant’s Accounts as a result of a failure to satisfy Section 409A of the Code shall be permitted at the Employer or Administrator’s discretion at any time and to the extent provided in Treasury Regulations under Section 409A of the Code and IRS Notice 2005-1, Q&A-15, and any applicable subsequent guidance. “Employment taxes” shall include Federal Insurance Contributions Act (FICA) tax imposed under Sections 3101, 3121(a) and 3121(v)(2) of the Code on compensation deferred under the Plan (the “FICA Amount”), the income tax imposed under Section 3401 of the Code or corresponding provisions of applicable state, local or foreign tax laws on the FICA Amount, and to pay the additional income tax under Section 3401 of the Code or corresponding provisions of applicable state, local or foreign tax laws attributable to the pyramiding Section 3401 wages and taxes. A distribution may be accelerated as may be necessary to comply with certain conflict of interest rules in accordance with Treasury Regulation Section 1.409A-3(j)(4)(iii). With respect to a subchapter S corporation, a distribution may be accelerated to avoid a nonallocation year under Code Section 409(p) in the discretion of the Employer or Administrator, provided that the amount distributed does not exceed 125 percent of the minimum amount of distribution necessary to avoid the occurrence of a nonallocation year, in accordance with Treasury Regulation Section 1.409A-3(j)(4)(x).
1.61.Distribution on Account of Unforeseeable Emergency
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If elected by the Employer in the Adoption Agreement, if a Participant or Beneficiary incurs a severe financial hardship of the type described below, he may request an Unforeseeable Emergency Withdrawal, provided that the withdrawal is necessary in light of severe financial needs of the Participant. To the extent elected by the Employer in the Adoption Agreement, the ability to apply for an Unforeseeable Emergency Withdrawal may be restricted to Participants whose Termination Date has not yet occurred. Such a withdrawal shall not exceed the amount required (including anticipated taxes on the withdrawal) to meet the severe financial need and not reasonably available from other resources of the Participant (including reimbursement or compensation by insurance, cessation of deferrals under this Plan for the remainder of the Plan Year, and liquidation of the Participant’s assets, to the extent liquidation itself would not cause severe financial hardship; provided, however, that the Participant is not required to take into account for these purposes any available distribution or loan from a qualified plan or another nonqualified deferred compensation plan). Each such withdrawal election shall be made at such time and in such manner as the Administrator shall determine, and shall be effective in accordance with such rules as the Administrator shall establish and publish from time to time. Severe financial needs are limited to amounts necessary for:
(a)A sudden unexpected illness or accident incurred by the Participant, his Spouse, Beneficiary under the Plan, or dependents (as defined in Code Section 152(a)).
(b)Uninsured casualty loss pertaining to property owned by the Participant.
(c)Other similar extraordinary and unforeseeable circumstances involving an uninsured loss arising from an event outside the control of the Participant.
Withdrawals of amounts under this subsection shall be paid to the Participant in a lump sum as soon as administratively feasible following receipt of the appropriate forms and information required by and acceptable to the Administrator.
1.62.Distribution Upon Change in Control
In the event of the occurrence of a Change in Control of the Employer or a member of the Employer’s controlled group (as designated by the Employer in the Adoption Agreement) to the extent permitted under Section 409A of the Code and the regulations and other guidance thereunder, distributions shall be made to Participants to the extent elected by the Employer in the Adoption Agreement, in the form elected by the Participants as if a Termination Date had occurred with respect to each Participant, or as otherwise specified by the Employer in the Adoption Agreement. The Change in Control shall relate to: (i) the corporation for whom the Participant is performing services at the time of the Change in Control event; (ii) the corporation that is liable for the payment from the Plan to the Participant (or all corporations so liable if more than one corporation is liable); (iii) a corporation that is a majority shareholder of a corporation described in (i) or (ii) above; or (iv) any corporation in a chain of corporations in which each such corporation is a majority shareholder of another corporation in the chain, ending in a corporation described in (i) or (ii) above, as elected by the Employer in the Adoption Agreement. A “majority shareholder” for these purposes is a shareholder owning more than 50% of the total fair market value and total voting power of such corporation. Attribution rules described in section 318(a) of the Code apply to determine stock ownership. Stock underlying a vested option is considered owned by the individual who holds the vested option. Notwithstanding the foregoing, if a vested option is exercisable for stock that is not substantially vested (as defined in section 1.83-3(b) and (j) of the Code), the stock underlying the option is not treated as owned by the individual who holds the option. If plan payments are made on account of a Change in Control and are calculated by reference to the value of the Employer’s stock, such payments shall be completed not later than 5 years after the Change in Control event. To the extent designated by the Employer in the Adoption Agreement, the Change in Control shall occur upon
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the date that: (v) a person or “Group” (as defined in Treasury Regulation Sections 1.409A-3(i)(5)(v)(B) and (vi)(D)) acquires more than 50% of the total fair market value or voting power of stock of the corporation designated in (i) through (iv) above; (vi) a person or Group acquires ownership (“effective control”) of stock of the corporation with at least 30% of the total voting power of the corporation designated in (i) through (iv) above and as further limited by Treasury Regulation Section 1.409A-3(i)(5)(vi)); (vii) a majority of the board of directors of any corporation designated in (i) through (iv) above in which no other corporation is a majority shareholder is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board as constituted prior to the appointment or election; or (viii) a person or Group acquires assets from the corporation designated in (i) through (iv) above having a total fair market value of at least 40% of the value of all assets of the corporation immediately prior to such acquisition; as designated by the Employer in the Adoption Agreement. For purposes of (vi) above, if any one person, or more than one person acting as a Group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation under (vi) above). An increase in the percentage of stock owned by any one person, or persons acting as a Group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this subsection. For purposes of (v) through (viii) above, a Change in Control shall be further limited in accordance with Treasury Regulation Sections 1.409A-3(i)(5)(v), (vi) and (vii). Distributions under this subsection shall be made as soon as administratively feasible following such Change in Control.
1.63.Supplemental Survivor Death Benefit
A supplemental survivor death benefit shall be paid to the Beneficiary of an eligible Participant who has satisfied the following criteria prior to his death:
(a)The Participant is eligible to participate in the Plan and, at the time of his death, had a current Account balance (regardless of whether or not the Participant actually was making Compensation Deferrals at the time of his death);
(b)The Participant was an active Employee with the Employer at the time of his death;
(c)The Participant completed and submitted an insurance application to the Administrator; and
(d)The Employer subsequently purchased an insurance policy on the life of the Participant, with a death benefit payable, which policy is in effect at the time of the Participant’s death.
Notwithstanding any provision of this Plan or any other document to the contrary, the supplemental survivor death benefit payable pursuant to this Subsection 9.10 shall be paid only if an insurance policy has been issued on the Participant’s life and such policy is in force at the time of the Participant’s death and the Employer shall have no obligation with respect to the payment of the supplemental survivor death benefit, or to maintain an insurance policy for any Participants.
SECTION 10 GENERAL PROVISIONS
1.1.Interests Not Transferable
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The interests of persons entitled to benefits under the Plan are not subject to their debts or other obligations and, except as may be required by the tax withholding provisions of the Code or any state’s income tax act, may not be voluntarily or involuntarily sold, transferred, alienated, assigned, or encumbered; provided, however, that a Participant’s interest in the Plan may be transferable pursuant to a qualified domestic relations order, as defined in Section 414(p) of the Code to the extent designated by the Employer in the Adoption Agreement.
1.2.Employment Rights
The Plan does not constitute a contract of employment, and participation in the Plan shall not give any Employee the right to be retained in the employ of an Employer, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. The Employer expressly reserves the right to discharge any Employee at any time.
1.3.Litigation by Participants or Other Persons
If a legal action begun against the Administrator (or any member or former member thereof), an Employer, or any person or persons to whom an Employer or the Administrator has delegated all or part of its duties hereunder, by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the cost to the Administrator (or any member or former member thereof), the Employer or any person or persons to whom the Employer or the Administrator has delegated all or part of its duties hereunder of defending the action may be charged to the extent permitted by law to the sums, if any, which were involved in the action or were payable to the Participant or other person concerned.
1.4.Indemnification
To the extent permitted by law, the Employer shall indemnify each member of the Administrator committee, and any other employee or member of the Board with duties under the Plan, against losses and expenses (including any amount paid in settlement) reasonably incurred by such person in connection with any claims against such person by reason of such person’s conduct in the performance of duties under the Plan, except in relation to matters as to which such person has acted fraudulently or in bad faith in the performance of duties. Notwithstanding the foregoing, the Employer shall not indemnify any person for any expense incurred through any settlement or compromise of any action unless the Employer consents in writing to the settlement or compromise.
1.5.Evidence
Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable, and signed, made, or presented by the proper party or parties.
1.6.Waiver of Notice
Any notice required under the Plan may be waived by the person entitled to such notice.
1.7.Controlling Law
Except to the extent superseded by laws of the United States, the laws of the state indicated by the Employer in the Adoption Agreement shall be controlling in all matters relating to the Plan.
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1.8.Statutory References
Any reference in the Plan to a Code section or a section of ERISA, or to a section of any other Federal law, shall include any comparable section or sections of any future legislation that amends, supplements, or supersedes that section.
1.9.Severability
In case any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provision had never been set forth in the Plan.
1.10.Action By the Employer or the Administrator
Any action required or permitted to be taken by the Employer under the Plan shall be by resolution of its Board of Directors (which term shall include any similar governing body for any Employer that is not a corporation), by resolution or other action of a duly authorized committee of its Board of Directors, or by action of a person or persons authorized by resolution of its Board of Directors or such committee. Any action required or permitted to be taken by the Administrator under the Plan shall be by resolution or other action of the Administrator or by a person or persons duly authorized by the Administrator.
1.11.Headings and Captions
The headings and captions contained in this Plan are inserted only as a matter of convenience and for reference, and in no way define, limit, enlarge, or describe the scope or intent of the Plan, nor in any way shall affect the construction of any provision of the Plan.
1.12.Gender and Number
Where the context permits, words in the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular.
1.13.Examination of Documents
Copies of the Plan and any amendments thereto are on file at the office of the Employer where they may be examined by any Participant or other person entitled to benefits under the Plan during normal business hours.
1.14.Elections
Each election or request required or permitted to be made by a Participant (or a Participant’s Spouse or Beneficiary) shall be made in accordance with the rules and procedures established by the Employer or Administrator and shall be effective as determined by the Administrator. The Administrator’s rules and procedures may address, among other things, the method and timing of any elections or requests required or permitted to be made by a Participant (or a Participant’s Spouse or Beneficiary). All elections under the Plan shall comply with the requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended (“USERRA”).
1.15.Manner of Delivery
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Each notice or statement provided to a Participant shall be delivered in any manner established by the Administrator and in accordance with applicable law, including, but not limited to, electronic delivery.
1.16.Facility of Payment
When a person entitled to benefits under the Plan is a minor, under legal disability, or is in any way incapacitated so as to be unable to manage his financial affairs, the Administrator may cause the benefits to be paid to such person’s guardian or legal representative. If no guardian or legal representative has been appointed, or if the Administrator so determines in its sole discretion, payment may be made to any person as custodian for such individual under any applicable state law, or to the legal representative of such person for such person’s benefit, or the Administrator may direct the application of such benefits for the benefit of such person. Any payment made in accordance with the preceding sentence shall be a full and complete discharge of any liability for such payment under the Plan.
1.17.Missing Persons
The Employer and the Administrator shall not be required to search for or locate a Participant, Spouse, or Beneficiary. Each Participant, Spouse, and Beneficiary must file with the Administrator, from time to time, in writing the Participant’s, Spouse’s, or Beneficiary’s post office address and each change of post office address. Any communication, statement, or notice addressed to a Participant, Spouse, or Beneficiary at the last post office address filed with the Administrator, or if no address is filed with the Administrator, then in the case of a Participant, at the Participant’s last post office address as shown on the Employer’s records, shall be considered a notification for purposes of the Plan and shall be binding on the Participant and the Participant’s Spouse and Beneficiary for all purposes of the Plan.
If the Administrator is unable to locate the Participant, Spouse, or Beneficiary to whom a Participant’s Accounts are payable, the Participant’s Accounts shall be frozen as of the date on which distribution would have been completed under the terms of the Plan, and no further notional investment returns shall be credited thereto.
If a Participant whose Accounts were frozen (or his Beneficiary) files a claim for distribution of the Accounts within 7 years after the date the Accounts are frozen, and if the Administrator or Employer determines that such claim is valid, then the frozen balance that has become payable shall be paid by the Employer to the Participant or Beneficiary in a lump sum cash payment as soon as practicable thereafter. If the Administrator notifies a Participant, Spouse, or Beneficiary of the provisions of this Subsection, and the Participant, Spouse, or Beneficiary fails to claim the Participant’s, Spouse’s, or Beneficiary’s benefits or make such person’s whereabouts known to the Administrator within 7 years after the date the Accounts are frozen, the benefits of the Participant, Spouse, or Beneficiary may be disposed of, to the extent permitted by applicable law, by one or more of the following methods:
(a)By retaining such benefits in the Plan.
(b)By paying such benefits to a court of competent jurisdiction for judicial determination of the right thereto.
(c)By forfeiting such benefits in accordance with procedures established by the Administrator. If a Participant, Spouse, or Beneficiary is subsequently located, such benefits may be restored (without adjustment) to the Participant, Spouse, or Beneficiary under the Plan.
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(d)By any equitable manner permitted by law under rules adopted by the Administrator.
1.1.Recovery of Benefits
In the event a Participant, Spouse, or Beneficiary receives a benefit payment from the Plan that is in excess of the benefit payment that should have been made to such Participant, Spouse, or Beneficiary, or in the event a person other than a Participant, Spouse, or Beneficiary receives an erroneous payment from the Plan, the Administrator or Employer shall have the right, on behalf of the Plan, to recover the amount of the excess or erroneous payment from the recipient. To the extent permitted under applicable law, the Administrator or Employer may, at its option, deduct the amount of such excess or erroneous payment from any future benefits payable to the applicable Participant, Spouse, or Beneficiary.
1.2.Effect on Other Benefits
Except as otherwise specifically provided under the terms of any other employee benefit plan of the Employer, a Participant’s participation in this Plan shall not affect the benefits provided under such other employee benefit plan.
1.3.Tax and Legal Effects
The Employer, the Administrator, and their representatives and delegates do not in any way guarantee the tax treatment of benefits for any Participant, Spouse, or Beneficiary, and the Employer, the Administrator, and their representatives and delegates do not in any way guarantee or assume any responsibility or liability for the legal, tax, or other implications or effects of the Plan. In the event of any legal, tax, or other change that may affect the Plan, the Employer may, in its sole discretion, take any actions it deems necessary or desirable as a result of such change.
SECTION 11 THE ADMINISTRATOR
1.18.Information Required by Administrator
Each person entitled to benefits under the Plan must file with the Administrator from time to time in writing such person’s mailing address and each change of mailing address. Any communication, statement, or notice addressed to any person at the last address filed with the Administrator will be binding upon such person for all purposes of the Plan. Each person entitled to benefits under the Plan also shall furnish the Administrator with such documents, evidence, data, or information as the Administrator considers necessary or desirable for the purposes of administering the Plan. The Employer shall furnish the Administrator with such data and information as the Administrator may deem necessary or desirable in order to administer the Plan. The records of the Employer as to an Employee’s or Participant’s period of employment or membership on the Board, termination of employment or membership and the reason therefor, leave of absence, reemployment, and Compensation will be conclusive on all persons unless determined to the Administrator’s or Employer’s satisfaction to be incorrect.
1.19.Uniform Application of Rules
The Administrator shall administer the Plan on a reasonable basis. Any rules, procedures, or regulations established by the Administrator shall be applied uniformly to all persons similarly situated.
1.20.Review of Benefit Determinations
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Benefits will be paid to Participants and their beneficiaries without the necessity of formal claims. Participants or their beneficiaries, however, may make a written request to the Administrator for any Plan benefits to which they may be entitled. Participants’ written request for Plan benefits will be considered a claim for Plan benefits, and will be subject to a full and fair review. If the claim is wholly or partially denied, the Administrator will furnish the claimant with a written notice of this denial. This written notice will be provided to the claimant within 90 days after the receipt of the claim by the Administrator. If notice of the denial of a claim is not furnished to the claimant in accordance with the above within 90 days, the claim will be deemed denied. The claimant will then be permitted to proceed to the review stage described in the following paragraphs.
Upon the denial of the claim for benefits, the claimant may file a claim for review, in writing, with the Administrator. The claim for review must be filed no later than 60 days after the claimant has received written notification of the denial of the claim for benefits or, if no written denial of the claim was provided, no later than 60 days after the deemed denial of the claim. The claimant may review all pertinent documents relating to the denial of the claim and submit any issues and comments, in writing, to the Administrator. If the claim is denied, the Administrator must provide the claimant with written notice of this denial within 60 days after the Administrator’s receipt of the claimant’s written claim for review. The Administrator’s decision on the claim for review will be communicated to the claimant in writing and will include specific references to the pertinent Plan provisions on which the decision was based. If the Administrator’s decision on review is not furnished to the claimant within the time limitations described above, the claim will be deemed denied on review. If the claim for Plan benefits is finally denied by the Administrator (or deemed denied), then the claimant may bring suit in federal court. The claimant may not commence a suit in a court of law or equity for benefits under the Plan until the Plan’s claim process and appeal rights have been exhausted and the Plan benefits requested in that appeal have been denied in whole or in part. However, the claimant may only bring a suit in court if it is filed within 90 days after the date of the final denial of the claim by the Administrator.
With respect to claims for benefits payable as a result of a Participant being determined to be disabled, the Administrator will provide the claimant with notice of the status of his claim for disability benefits under the Plan within a reasonable period of time after a complete claim has been filed, but no later than 45 days after receipt of the claim for benefits. The Administrator may request an additional 30-day extension if special circumstances warrant by notifying the claimant of the extension before the expiration of the initial 45-day period. If a decision still cannot be made within this 30-day extension period due to circumstances outside the Plan’s control, the time period may be extended for an additional 30 days, in which case the claimant will be notified before the expiration of the original 30-day extension.
If the claimant has not submitted sufficient information to the Administrator to process his disability benefit claim, he will be notified of the incomplete claim and given 45 days to submit additional information. This will extend the time in which the Administrator has to respond to the claim from the date the notice of insufficient information is sent to the claimant until the date the claimant responds to the request. If the claimant does not submit the requested missing information to the Administrator within 45 days of the date of the request, the claim will be denied.
If a disability benefit claim is denied, the claimant will receive a notice which will include: (i) the specific reasons for the denial, (ii) reference to the specific Plan provisions upon which the decision is based, (iii) a description of any additional information the claimant might be required to provide with an explanation of why it is needed, and (iv) an explanation of the Plan’s claims review and appeal procedures, and (v) a statement regarding the claimant’s right to bring a civil action under Section 502(a) of ERISA following a denial on appeal.
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The claimant may appeal a denial of a disability benefit claim by filing a written request with the Administrator within 180 days of the claimant’s receipt of the initial denial notice. In connection with the appeal, the claimant may request that the Plan provide him, free of charge, copies of all documents, records and other information relevant to the claim. The claimant may also submit written comments, records, documents and other information relevant to his appeal, whether or not such documents were submitted in connection with the initial claim. The Administrator may consult with medical or vocational experts in connection with deciding the claimant’s claim for benefits.
The Administrator will conduct a full and fair review of the documents and evidence submitted and will ordinarily render a decision on the disability benefit claim no later than 45 days after receipt of the request for review on appeal. If there are special circumstances, the decision will be made as soon as possible, but not later than 90 days after receipt of the request for review on appeal. If such an extension of time is needed, the claimant will be notified in writing prior to the end of the first 45-day period. The Administrator’s final written decision will set forth: (i) the specific reasons for the decision, (ii) references to the specific Plan provisions on which the decision is based, (iii) a statement that the claimant is entitled to receive, upon request and free of charge, access to and copies of all documents, records and other information relevant to the benefit claim, and (iv) a statement regarding the claimant’s right to bring a civil action under Section 502(a) of ERISA following a denial on appeal. The Administrator’s decision made in good faith will be final and binding.
1.21.Administrator’s Decision Final
Benefits under the Plan will be paid only if the Administrator decides in its sole discretion that a Participant or Beneficiary (or other claimant) is entitled to them. Subject to applicable law, any interpretation of the provisions of the Plan and any decisions on any matter within the discretion of the Administrator made by the Administrator or its delegate in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the Administrator shall make such adjustment on account thereof as it considers equitable and practicable.
SECTION 12 AMENDMENT AND TERMINATION
While the Employer expects and intends to continue the Plan, the Employer and the Administrator each reserve the right to amend the Plan at any time and for any reason, including the right to amend this Section 12 and the Plan termination rules herein; provided, however, that each Participant will be entitled to the amount credited to his Accounts immediately prior to such amendment. The power to amend the Plan includes (without limitation) the power to change the Plan provisions regarding eligibility, contributions, notional investments, vesting, and distribution forms, and timing of payments, including changes applicable to benefits accrued prior to the effective date of any such amendment; provided, however, that amendments to the Plan (other than amendments relating to Plan termination) shall not cause the Plan to provide for acceleration of distributions in violation of Section 409A of the Code and applicable regulations thereunder.
The Employer reserves the right to terminate the Plan at any time and for any reason; provided, however, that each Participant will be entitled to the amount credited to his Accounts immediately prior to such termination (as adjusted for notional income, losses, expenses, appreciation and depreciation occurring from the date of such termination until the date of distribution).
In the event that the Plan is terminated pursuant to this Section 12, the balances in affected Participants’ Accounts shall be distributed at the time and in the manner set forth in
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Section 9. Notwithstanding the foregoing, the Employer and the Administrator reserve the right to make all such distributions within the second twelve-month period commencing with the date of termination of the Plan; provided, however, that no such distribution will be made during the first twelve-month period following such date of Plan termination other than those that would otherwise be payable under Section 9 absent the termination of the Plan. In the event of a Plan termination due to a Change in Control of the Employer, distributions shall be made within 12 months of the date of the termination of the Plan.
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NONQUALIFIED SUPPLEMENTAL
DEFERRED COMPENSATION PLAN
ADOPTION AGREEMENT
This adoption agreement and the accompanying plan document have not been approved by the Department of Labor, Internal Revenue Service, Securities Exchange Commission, or any other governmental entity. Employers may not rely on this document or the accompanying plan document to ensure any particular tax consequences with respect to the Employer’s particular situation, nor do these documents constitute legal or tax advice. Pen-Cal and its employees cannot provide legal or tax advice in connection with these documents. Employers must determine the extent to which the Plan is subject to Federal or state securities laws. You should have your attorney review this document and the accompanying plan document before adopting the documents. This adoption agreement and accompanying plan document cannot be used in order to avoid penalties that may be imposed on the taxpayer.

128470050v1
Rev. 11/19/10
NONQUALIFIED SUPPLEMENTAL
DEFERRED COMPENSATION PLAN
ADOPTION AGREEMENT
ADOPTION OF PLAN -- [Select one]
☐
Adoption - The undersigned ______ (the “Employer”) hereby adopts as a Nonqualified Deferred Compensation Plan for the individuals identified in Item 5 herein the form of Plan known as the Nonqualified Supplemental Deferred Compensation Plan.
☒
Amendment of Previous Nonqualified Deferred Compensation Plan – With “Grand-fathered” Amounts - Carter Bank & Trust (the “Employer”) previously has adopted a Nonqualified Deferred Compensation Plan, known as the Carter Bank & Trust Non-Qualified Deferred Compensation Plan [enter name of previous plan], and the execution of this Adoption Agreement constitutes an amendment to that Plan, effective only for Deferrals, Contributions, earnings, gains, losses, depreciation and appreciation vested and credited thereto or debited therefrom on and after the Effective Date listed in Section 2 below, or, if otherwise determined by the Employer, on and after January 1, 2005 with respect to Plan provisions required under Section 409A of the Internal Revenue Code and the regulations thereunder. All other amounts in the plan shall be subject to the provisions of the previous plan document. This option is appropriate if the previous plan contains grandfathered amounts not subject to Section 409A of the Internal Revenue Code. Grandfathered amounts were contributed to the plan prior to January 1, 2005 under the terms of the plan in effect prior to October 4, 2004, and those plan terms have not since been materially modified. Grandfathered amounts and earnings will be administered under the terms of the prior plan document.
☐
Restatement of Previous Nonqualified Deferred Compensation Plan – ______ (the “Employer”) previously has adopted a Nonqualified Deferred Compensation Plan, known as the ______ [enter name of previous plan], and the execution of this Adoption Agreement constitutes a restatement of that Plan, effective as of the Effective Date listed in Section 2 below for all funds under the Plan. This option is appropriate if the previous plan does not contain “grandfathered” amounts (see description above), or if Employer wishes to apply Section 409A rules to all amounts in the plan (even pre-2005 amounts), or if previous plan has been materially modified and thus become subject to Section 409A.
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NAME OF PLAN
The name of this Plan as adopted by the Employer is the [enter name of Plan] Carter Bank & Trust Non-Qualified Deferred Compensation Plan (the “Plan”).
INDIVIDUALIZED PLAN INFORMATION
With respect to the variable features contained in the Plan, the Employer hereby makes the following selections granted under the provisions of the Plan:
1.Adopting Entity. The Employer adopts the Plan as:
List type of business entity (corporation, partnership, controlled group of corporations,
etc.)                     
List each Employer adopting the Plan and Employer Identification Number (EIN):
Name of Employer:Carter Bank & TrustEIN:20-5539935
Name of Employer:Carter Bankshares, Inc.EIN:85-3365661
Name of Employer:EIN:
Name of Employer:EIN:
Name of Employer:EIN:
(attach additional lists as necessary)
The adopting Employers and the Employer are referred to herein collectively as the “Employer.”
Select state of controlling law (see Section 10.7 of Plan Document):
☒State of incorporation;VA
☐State of domicile

2.Effective Date. The “Effective Date” of the adoption of this Plan, this Plan amendment or this Plan restatement is [enter date] January 1, 2023.
3.Plan Year. The “Plan year” of the Plan shall be [select one]:
☒(a) the calendar year.
☐
(b) the fiscal year or other 12-month period ending on the last day of [specify month].
☐
a short Plan year beginning on , and ending on , ; and thereafter the Plan year shall be as indicated in (a) or (b) above.

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4.Plan Administrator. The “Administrator” of the Plan is Marion Sparks, VP, HR Manager
[fill in the name(s) of the individual(s) or job title(s) or entity (such as a committee) that is (are) responsible for administration of the Plan], and such other person(s) or entity as the Employer shall appoint from time to time.
5.Eligible Individuals. The following shall be eligible to participate in the Plan: [select all that apply – do not list individual names]:
☐A select group of management or highly-compensated Employees as designated by the Employer in separate resolutions or agreements;
☐Employee Board Members;
☒Non-Employee Board Members;
☐Other Service Providers (i.e., independent contractors, consultants, etc.)
☐
Employees or other Service Providers above the following Compensation threshold: [enter dollar amount] $        ;
☒
Employees with the following job titles: [enter job title(s); for example, “Vice President and above”] Executive Management Team
☐
Other: [enter description]                             

6.Eligibility Timing. Eligibility timing selected below shall apply uniformly to all Participant Deferrals (including Performance-Based Bonus Deferrals), as well as Employer Matching Contributions and Other Employer Contributions, unless otherwise indicated. If the Employer wishes to provide for separate eligibility rules for different types of Compensation (for example, Salary vs. Bonus), or for types of Contributions (for
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example, Employer Matching Contributions vs. Participant Deferrals), mark “Other” below and attach exhibits as necessary [select one]:
☐Eligible immediately upon properly completed designation by the Plan administrator or Employer;
☐
Eligible after the following period of employment, Board service, etc. [enter number of days, months or years, for example, 90 days] ;
☒
Other [enter description]: 1st of month following hire date or 1st of the month following appointment as a director.

7.Types and Amounts of Participant Deferrals [select all that apply and enter minimum and maximum percentages in increments of one percent (for example, Salary minimum 0% maximum 100%). Note that no Deferral election can reduce a Participant’s Compensation below the amount necessary to satisfy required withholding for FICA/Medicare/income taxes, required Participant Contributions into another Employer-sponsored benefit plan such as medical insurance, 401(k) loan repayments, etc.]:
☒
Salary [select one]:
☒

☒
percentage [enter minimum 0% and maximum 100%]
    or
fixed dollar amount [enter minimum $____________]
☐
Non-Performance-Based Bonus [select one]:
☐

☐
percentage [enter minimum % and maximum         %]
    or
fixed dollar amount [enter minimum $____________]
☒
Performance-Based Bonus [select one and enter performance period (for ex- ample, 12-month period ending each March 31 ]: performance period from 1/1 to 12/31.
☒

☒
percentage [enter minimum 0% and maximum 100%]
    or
fixed dollar amount [enter minimum $____________]
☐
Commissions [select one]:
☐

☐
percentage [enter minimum % and maximum         %]
    or
fixed dollar amount [enter minimum $____________]
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☒Board of Directors Fees/Retainer (note – should not include expense reimbursements):
☒

☒
percentage [enter minimum 0% and maximum 100%]
    or
fixed dollar amount [enter minimum $____________]
☐Other Service Provider Fees or other earned income from the Employer:
☐

☐
percentage [enter minimum % and maximum         %]
    or
fixed dollar amount [enter minimum $____________]
☐
401(k) Refund (amount deferred from Participant’s regular Compensation equal in value to any refund paid to Participant in that year resulting from excess deferrals in Employer’s 401(k) plan – see Subsection 2.9 of Plan document for definition.)
☐
Social Security Trigger (amount deferred pursuant to an election by the Participant to defer a separate percentage of Compensation only from that portion of Compensation that exceeds the Social Security Taxable Wage Base for the up-coming year).
☐
Other [enter description]:
☐Deferral of restricted stock units.

NOTE: Special Rules for Multi-Year RSU Grants Structured To Provide For Annual Vesting of a Specified Portion of the Total Grant:
☐    Check this box if the Employer wishes to allow for deferral of restricted stock units that are structured so that a specified portion of the RSU grant vests annually (for example, an RSU grant over a four-year period vesting 25% annually). Under this type of grant, the election to defer may be made separately with respect to each portion of the grant that vests in a given year. However, each election for each portion of the grant must be made either: (i) within 30 days of the date of grant or each anniversary thereof, and only if the RSU is structured so that vesting is contingent on the employee performing services for at least an additional 12 months subsequent to the election; or (ii) 12 months before the payment date of the RSU (vesting date is treated as the payment date for these purposes), but the election will not take effect for 12 months, and the subsequent payout date must be at least five years later than the previous payment date).
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8.Definition of Compensation for Purposes of Making Plan Contributions [select one]:
☐Same definition of Compensation as in Employer’s 401(k) or other applicable qualified retirement plan.
☒Participant’s total wages, salary, commissions, overtime, bonus, etc. for a given year which the Employer is required to report on Form W-2 or other appropriate form, (or, in the case of Board members, Board fees and retainer only, but not including expense reimbursements)(or, in the case of Other Service Providers, the Participant’ s total remuneration from the Employer for a given year pursuant to the agreement to provide services to the Employer), earned while the Participant is an Eligible Individual as determined by the Employer.
☐
Other [enter description]:         

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9.Expiration of Participant’s Deferral Elections [select all that apply]:
☒
Renewed Each Year: Participant’s Deferral Elections must be renewed each year during the open enrollment period ending no later than December 31 prior to the effective Plan year (or, in the case of Performance-Based Bonuses, no less than 6 months prior to the end of the applicable performance period).
☒For all types of Compensation Deferrals.
☐For Salary Deferrals only -- other types of Deferrals are “evergreen.”
☐For Performance-Based Bonus only -- other types of Deferrals are “evergreen.”
☐
Other [specify]:         
☐
Evergreen: Participant’s Deferral Elections will be “evergreen” (i.e., will continue indefinitely until the Participant’ s Termination Date unless changed by the Participant - so each year the Participant will be deemed to have the same election in place as the prior year unless actively changed by the Participant during the open enrollment period ending no later than December 31 prior to the effective Plan year or, in the case of Performance-Based Bonuses, no less than 6 months prior to the end of the applicable performance period).
☐For all types of Compensation Deferrals.
☐For Salary Deferrals only -- other types of Deferrals are renewed each year.
☐For Performance-Based Bonus only -- other types of Deferrals are renewed each year.
☐
Other [specify]:         

10.Employer Contributions [select all that apply]:
☒(a)    No Employer Contributions.
☐
(b)    Matching Contributions [enter description of matching formula below and also complete Items 11 and 12]
☐
(c)    Employer Contributions other than Matching Contributions [enter description of Employer Contribution formula below and complete Item 13 ]

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11.Employees Eligible to Receive Employer Matching Contributions. Matching Contributions made for each Plan Year (if applicable) shall be allocated and credited to the Accounts of the following Participants: [Select one if applicable]
☐Participants who were employed by the Employer (or, in the case of non-Employee Board Members, served on the Board) during that Plan Year, or, in the case of Other Service Providers, who provided services to the Employer during that Plan Year.
☐Participants who were employed by the Employer (or, in the case of non-Employee Board Members, served on the Board) on the last day of the Plan Year, or, in the case of Other Service Providers, who provided services to the Employer on the last day of the Plan Year.
☐
Participants who were employed by the Employer (or, in the case of non-Employee Board Members, served on the Board) on the last day of the Plan Year or who retired, died or were Disabled during the Plan Year, or, in the case of Other Service Providers, who provided services to the Employer on the last day of the Plan Year or who died or were Disabled during the Plan Year. [If this option is selected, complete Item 29 -- definition of “Disability”.]

12.Vesting Schedule of Employer Matching Contributions. If Matching Contributions are made to the Plan, select the rate at which such Contributions will vest [select one]:
☐Immediate 100% vesting for all Participants.
☐
“Cliff” vesting (0% up to cliff; 100% after cliff) [select one]:
☐1 year cliff (less than 1 year 0%; 1 or more years 100%)
☐2 year cliff (less than 2 years 0%; 2 or more years 100%)
☐
Other cliff (enter number of years: less than _____ years 0%; _____ or more years 100%)

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☐
“Graded” vesting [enter vesting percentages]:
1 year ___%6 years ___%11 years ___%
2 years ___%7 years ___%12 years ___%
3 years ___%8 years ___%13 years ___%
4 years ___%9 years ___%14 years ___%
5 years ___%10 years ___%15 years ___%
☐
Other vesting schedule: [describe schedule - subject to approval] ________

13.Vesting Schedule of Employer Contributions (Other Than Matching Contributions). If Employer Contributions (other than Matching Contributions) are made to the Plan, select the rate at which such Contributions will vest [select one]:
☐Immediate 100% vesting for all Participants.
☐
“Cliff” vesting (0% up to cliff; 100% after cliff) [select one]:
☐1 year cliff (less than 1 year 0%; 1 or more years 100%)
☐2 year cliff (less than 2 years 0%; 2 or more years 100%)
☐
Other cliff (enter number of years: less than _____ years 0%; _____ or more years 100%)

☐
“Graded” vesting [enter vesting percentages]:
1 year ___%6 years ___%11 years ___%
2 years ___%7 years ___%12 years ___%
3 years ___%8 years ___%13 years ___%
4 years ___%9 years ___%14 years ___%
5 years ___%10 years ___%15 years ___%
☐
Other vesting schedule: [describe schedule - subject to approval] ________
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14.Vesting Years. A “Vesting Year” described above for purposes of determining vesting under the Plan shall be computed in accordance with: [select one - if this is an amendment or restatement of a prior plan, definition from prior plan will override this definition.]
☐Years of service (12-consecutive-month periods) with the Employer since date of hire (or date of commencement of Board service).
☐Years of participation in the Plan (12-consecutive-month period between date Participant enters Plan and anniversary of such date) (if this is an amendment or restatement of a prior Plan, years of participation in prior plan will be included) (additional fees will apply if this item is selected).
☐
Plan Years since each Plan Year’s total Contributions were made (“rolling vesting”) (additional fees will apply if this item is selected). [If this option is selected, select either (a) or (b) below:]
☐
(a)    Vesting will be credited/updated on the last day of the Plan year.
☐
(b)    Vesting will be credited/updated on the anniversary of the date the Contribution is credited.

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15.Full Vesting Upon Occurrence of Specific Event. [select all that apply]
☐
100% vesting upon Normal Retirement [describe criteria such as age (can be partial year), years of service with the Employer (must be whole years of service), or years of participation in the Plan (must be whole years of participation)]
                                        
☐
100% vesting upon Early Retirement [describe criteria such as age (must be whole years), years of service with the Employer (must be whole years of service), or years of participation in the Plan (must be whole years of participation)]
                                        
☐100% vesting upon Death.
☐
100% vesting upon Disability [complete Item 29 - definition of “Disability”].
☐
100% vesting upon Change in Control of the Employer [complete Items 27 and 28 - definition of “Change in Control”]
☐
100% vesting upon occurrence of other event: [describe event]
                                        

16.Service Before Plan’s Establishment Excluded. Years of service earned prior to establishment of the Plan shall be disregarded for purposes of determining vesting under the Plan:
☐Yes (this may be elected only if this is the establishment of a new Plan).
☒No.

17.Forfeitures for Misconduct or Violation of Non-Compete. Participants terminating employment prior to becoming 100% vested will forfeit the forfeitable percentage of their Accounts as indicated in accordance with the vesting schedule selected in Items 12 and/or
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13. Participants may also forfeit 100% of their Matching and Employer Contribution Accounts (if applicable) under the following circumstances: [select any that apply]:
☐
Misconduct (termination for Cause). [enter definition of Misconduct or Cause below]
                                        
☐
Engaging in competition with the Employer. [enter definition of engaging in competition below]
                                        

18.Employer Stock as Deemed Investment Option. If Employer stock will be a deemed investment option, indicate below how shares are to be tracked: [select one]
☐Partial and whole shares.
☐Unitized fund.

19.In-Service Distributions. If the Employer elects below, the Plan will allow distributions of Participant Deferral Contributions to be made to Participants while they are still employed (“In-Service Distributions”), if they elect a fixed distribution date during the regular election period. [Select one]
☒No, In-Service Distributions will not be permitted.
☐
Yes, In-Service Distributions will be permitted. [select one ].
☐For All Participant Deferral Contributions
☐For Participant Compensation Deferral Contributions (other than Performance-Based Bonus) only.
☐For Participant Performance-Based Bonus Deferral Contributions.
☐
For Employer Contributions. [if selected, employer contributions must be 100% vested, and additional fees may apply]. If Employer wishes to limit in-service withdrawals to specific types of Employer Contributions, enter details below:
                                    
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[Note - if “Yes” is elected above and the Plan will allow In-Service Distributions, please indicate if Participant will be permitted to make a “pushback” subsequent election to defer the original distribution date at least five years in accordance with Plan provisions (see subsection 9.1 of Plan document - note that election must be made 12 months prior to original distribution date and election will not take effect for 12 months) ☐ Yes ☐ No ]
Please indicate the number of years a Participant must defer payment(s) until In-Service Distribution(s) may begin:
☐2 Years after the Calendar Year for which the deferral is effective
☐
     Years after the Calendar Year for which the deferral is effective

Please indicate if separate In-Service Distribution Dates are allowed for each Type of Participant Deferral selected in Item 7:
☐No (single distribution date allowed per Plan Year)
☐Yes (requires additional tracked sources per Plan Year)

20.In-Service Distributions - Form and Timing of Payment. In-Service Distributions shall be made to Participants in the following form: [Select one]
☐Lump Sums Only (allows a percentage up to 100% to be elected for distribution)
☐Either 100% in Lump Sums or 100% in Installments.

[Note - if Installments are elected above, please indicate if Participant will be permitted to make a subsequent election to change the installments in accordance with Plan provisions (see subsection 9.2 of Plan document) ☐ Yes ☐ No ]
21.Unforeseeable Emergency Distributions Dates. If the Employer elects below, the Plan will allow distributions to be made to Participants while they are still employed if they meet the criteria for an unforeseeable emergency financial hardship (“Unforeseeable Emergency Distributions”). Both Participant Deferral Contributions and Vested
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Employer Contributions can be distributed in the event of an eligible Unforeseeable Emergency Distribution event. [Select one]
☐No, Unforeseeable Emergency Distributions will not be permitted.
☒
Yes, Unforeseeable Emergency Distributions will be permitted. [select one below].
☐For active Participants only
☒For active Participants, terminated Participants and Beneficiaries.

22.Form of Distributions (at Termination of Employment or Death). Distributions will be made to Participants upon Termination of Employment with the Employer or Death of the Participant as follows [select one]
☐Lump sum only.
☐
Lump sum unless installments elected, but can only receive installments if Participant meets the following criteria [select all that apply- if item not selected below, then Participants in that category will receive lump sum only]:
☐
Retirement [describe criteria such as age (can be partial year), years of service with the Employer (must be whole years of service), or years of participation in the Plan (must be whole years of participation)]
☐
Early Retirement [describe criteria such as age (must be whole years), years of service with the Employer (must be whole years of service), or years of participation in the Plan (must be whole years of participation)]
☐Termination (other than for Misconduct, Cause or Violation of Non-Compete)
☒Lump sum unless installments elected, and Participant may receive installments regardless of reason for Termination of Employment.

[Note - if Installments are elected above, please complete Item 26 and indicate if Participant will be permitted to make a subsequent election to change the number of installments in accordance with Plan provisions (see subsection 9.2 of Plan document)

☒ Yes ☐ No ]

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23.Distribution Upon Disability. If the Employer selects below, the Plan will allow distributions to be made to Participants upon Disability but while they are still employed if they meet the criteria for Disability in Item 29 below. The form of distribution will be the same as for Termination of Employment, or as elected by the Participant.
☐No, distribution upon Disability will not be permitted.
☒
Yes, distributions upon Disability will be permitted. [complete Item 29 - definition of “Disability”].

24.Expiration of Participant’s Distribution Elections [select one]:
☒
Renewed Each Year: Participant’s Distribution Election must be selected each year during the open enrollment period for the following year’s contributions - if no new election is made, that year’s contributions default to payment in the form of a lump sum. In-Service Distribution Elections must be made by participants each year.
☐
Evergreen: Participant’s Distribution Election will be “evergreen” (i.e., will continue indefinitely for each year’ s contributions until the Participant’s Termination Date unless changed by the Participant - so each year the Participant will be deemed to have the same distribution election in place as the prior year unless actively changed by the Participant at open enrollment, and the change will only be applicable to future contributions). In-Service Distribution Elections may not be treated as evergreen.

25.Distributions Upon Change in Control: If Employer elects below, distributions will be made to Participants upon Change in Control of the Employer (without a termination of employment of the Participant), as follows [select one, and complete Items 27 and 28 below (definition of “Change in Control”) ]
☒No, Distributions upon Change in Control will not be permitted.
☐Yes, Distributions upon Change in Control will be permitted, in a lump sum only.
☐Yes, Distributions upon Change in Control will be permitted, in a lump sum or in installments as elected by the Participant.

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26.Length of Installments (if Installment Distributions permitted in Item 20, 22 and/or Item 25 above) [indicate length below]:
Annual installments over no fewer than 2 [enter minimum number of years - must be at least 2] and no more than 15 years at Participant’s election [enter maximum number of years].
27.“Change in Control” - Dates of Distribution. Distributions upon a Change in Control shall occur upon the date that [select all that apply - see Subsection 9.9 of the Plan document for more details]:
☒A person or group acquires more than 50% of the total fair market value or voting power of the stock of the corporation (select definition of “corporation” in Item 28 below).
☒A person or group acquires ownership of stock of the corporation with at least 30% of the total voting power of the corporation (select definition of “corporation” in Item 28 below).
☒A person or group acquires assets from the corporation having a total fair market value of at least 40% of the value of all assets of the corporation immediately prior to such acquisition. (select definition of “corporation” in Item 28 below).
☒A majority of the corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board as constituted prior to the appointment or election (select definition of “corporation” in Item 28 below).

28.“Change in Control” - Which Corporation the Change Relates. Distributions upon a Change in Control shall be made only if the Change in Control relates to the corporation selected below: [select all that apply]:
☐(a)    The corporation for whom the Participant is performing services at the time of the Change In Control event.
☒(b)    The corporation liable for payments from the Plan to the Participant.
☐(c)    A corporation that is a majority shareholder of a corporation described in (a) or (b) above.
☐(d)    Any corporation in the chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation described in (a) or (b) above.

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29.Definition of “Disability.” A Participant shall be considered “Disabled” if [select one]:
☐by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of at least 12 months, the Participant is receiving income replacement benefits for at least 3 months under accident and health plans of the Employer;
☐the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months;
☐the Participant is deemed to be totally disabled by the Social Security Administration;
☒the Participant is determined to be disabled in accordance with a disability insurance program, provided that the definition of disability under such disability insurance program complies with the requirements of one of the three preceding definitions above.

30.Distributions to “Key Employees” -- Investment. In order to comply with Internal Revenue Code Section 409A, distributions to “key employees” (see subsection 9.3 of the Plan Document for definition) of publicly traded companies made due to employment termination cannot be made within 6 months of the employment termination date. If distribution to a key employee must be delayed to comply with this 6-month rule, indicate below how Account balances of such a Participant will be invested during the period of delay [select one]:
☐Valued as of most recent Valuation Date and held at the Employer without allocation of additional gains or losses after such Valuation Date until payment can be made.
☒Remain invested as if termination date had not occurred, then valued as of most recent Valuation Date and distributed.

31.QDRO Distributions. The Employer may elect whether distributions from a Participant’s Account shall be permitted upon receipt by the Plan Administrator of a Qualified Domestic Relations Order relating to a marital dissolution or separation that provides for payment of all or a portion of a Participant’s Accounts to an alternate payee
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(spouse, former spouse, children, etc.). [Indicate below whether QDRO distributions will be permitted]:
☐
No, QDRO Distributions will not be permitted.
☒
Yes, QDRO Distributions will be permitted.

32.Additional Survivor Death Benefit from Life Insurance. In the event that life insurance is utilized as a funding vehicle for the Plan, the Employer may wish to provide additional Survivor Benefit from the following options: [select one]
☒No additional Survivor Benefit offered, but rather Participant’s vested Account balance.
☐Face value of life insurance policy of Participant, if any.
☐Greater of (a) face value of life insurance policy of Participant, if any, or (b) Participant’s vested Account balance.
☐
Other: [enter amount or formula]                 

33.Payment of Plan Expenses. Plan expenses may be paid as follows: [select one]
☐Directly by the Employer.
☒Deducted from the Participant accounts and Plan’s trust or other custodial account (mutual fund plans only, if applicable).

34.“De Minimis” Small Amount Cashouts. If selected by the Employer, Participant account balances that do not exceed a certain threshold amount will be automatically cashed out upon the Participant‘s Termination of Employment or Death, as provided below [select one]
☒
Yes, amounts that do not exceed a threshold dollar amount will automatically be cashed out [IRS 402(g) limit OR $    [enter dollar amount, not to exceed the IRS 402(g) limit for a given year]
☐No, no “de minimis” small amounts will be cashed out.

By signing this Adoption Agreement, the Employer certifies that it has consulted with legal counsel regarding the effects of the Plan, as applicable, on all parties. The Employer further
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certifies that it has and will limit participation in the Plan to a select group of management or highly compensated Employees, Board Members or Other Service Providers, as determined by the Employer in consultation with legal counsel. The Employer further certifies that it is the Employer’s sole responsibility to ensure that each Participant with the right to direct deemed investments under the Plan that are based on securities issued by the Employer or a member of its controlled group (as defined in Code Section 414(b) and (c)) will receive a prospectus for any such deemed investment option based on such Employer securities.
The Employer is solely responsible for its compliance with applicable laws, including Federal and state securities and other applicable laws.
Only those elections that are completed shall be considered as provisions applicable to and forming a part of the Plan.
This Adoption Agreement may only be used in conjunction with the Plan document. All selections in the Adoption Agreement providing for customized or “other” plan provisions are subject to review for administrative feasibility, and may be subject to additional fees.
Terms used in this Adoption Agreement which are defined in the Plan document shall have the meaning given them therein.
The Employer hereby acknowledges that it is adopting this Nonqualified Supplemental Deferred Compensation Plan. Federal legislation or other changes in the law relating to nonqualified deferred compensation or other employee benefit plans may require that the Plan be amended.
***
The undersigned duly authorized owner, or officer of the Employer hereby executes the Plan on behalf of the Employer.
Dated this 19th day of May, 2022.
Carter Bank & Trust            
Employer

By: /s/ Jane Ann Davis            
Its EVP, Chief Administrative Officer
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Exhibit 31.1
CERTIFICATIONS
I, Litz H. Van Dyke, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Carter Bankshares, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 3, 2022/s/ Litz H. Van Dyke
Litz H. Van Dyke
Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2
I, Wendy Bell, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Carter Bankshares, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 3, 2022/s/ Wendy S. Bell
Wendy S. Bell
Chief Financial Officer
(Principal Financial Officer)

Exhibit 32
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
The undersigned, as the principal executive officer and principal financial officer of Carter Bankshares, Inc., respectively, certify that, to the best of their knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2022, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Carter Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.
Dated: August 3, 2022/s/ Litz H. Van Dyke
Litz H. Van Dyke
Chief Executive Officer
(Principal Executive Officer)
Dated: August 3, 2022/s/ Wendy S. Bell
Wendy S. Bell
Chief Financial Officer
(Principal Financial Officer)